COMMISSION FILE NUMBER 0-50189
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)Large accelerated filer X Accelerated filer __ Non-accelerated filer __
Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes __ No X
There were 159,787,783 shares of Common Stock outstanding as of October 29, 2007.
Crown Holdings, Inc.
FORM 10-QFOR QUARTER ENDED SEPTEMBER 30, 2007
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
The accompanying notes are an integral part of these consolidated financial statements.
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CONDENSED COMBINING STATEMENT OF OPERATIONS
For the three months ended September 30, 2007(in millions)
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For the three months ended September 30, 2006(in millions)
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For the nine months ended September 30, 2007(in millions)
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For the nine months ended September 30, 2006(in millions)
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CONDENSED COMBINING BALANCE SHEET
As of September 30, 2007(in millions)
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As of December 31, 2006(in millions)
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CONDENSED COMBINING STATEMENT OF CASH FLOWS
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PART I - FINANCIAL INFORMATION
Introduction
The following discussion presents management’s analysis of the results of operations for the three and nine months ended September 30, 2007 compared to the corresponding periods in 2006 and the changes in financial condition and liquidity from December 31, 2006. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, along with the consolidated financial statements and related notes included in and referred to within this report.
Executive Overview
As discussed in Note C to the consolidated financial statements, the Company sold its remaining European plastics operations and its Americas health and beauty care operations during 2006. The results of operations for prior periods used in the following discussion have been recast to report the divested businesses as discontinued operations.
The Company’s principal areas of focus include improving segment income and cash flow from operations, reducing debt and reducing asbestos-related costs. See Note O to the consolidated financial statements for information regarding segment income.
Improving segment income is primarily dependent on the Company’s ability to increase revenues and manage costs. Key strategies for expanding revenue include targeting geographic markets with strong growth potential, such as the Middle East, Asia, Latin America and southern and central Europe, improving selling prices in certain product lines and developing innovative packaging products using proprietary technology. The Company’s cost control efforts focus on improving operating efficiencies and managing material and labor costs, including pension and benefit costs.
The reduction of debt remains a principal strategic goal of the Company and is primarily dependent upon the Company’s ability to generate cash flow from operations. In addition, the Company may consider divestitures from time to time, the proceeds of which may be used to reduce debt. The Company’s total debt of $3,763 at September 30, 2007 increased $65 from $3,698 at September 30, 2006, and included $147 of increase due to foreign currency translation.
The Company seeks to reduce its asbestos-related costs through prudent case management. Asbestos-related payments were $26 for the full year of 2006 and $17 for the first nine months of 2007, and the Company expects to pay approximately $25 for the full year of 2007.
Results of Operations
Net Sales
Net sales in the third quarter of 2007 were $2,153, an increase of $152 or 7.6% compared to net sales of $2,001 for the same period in 2006. Net sales in the first nine months of 2007 were $5,856, an increase of $550 or 10.4% compared to net sales of $5,306 for the same period in 2006. Sales from U.S. operations accounted for 27.6% of consolidated net sales in the first nine months of 2007 compared to 28.4% for the same period in 2006. Sales of beverage cans and ends accounted for 46.6% and sales of food cans and ends accounted for 33.3% of consolidated net sales in the first nine months of 2007 compared to 44.7% and 35.2%, respectively, in 2006.
Net sales in the Americas Beverage segment in the third quarter increased 4.1% from $437 in 2006 to $455 in 2007. Net sales in the first nine months of 2007 increased 10.4% from $1,210 in 2006 to $1,336 in 2007. The increases in 2007 were primarily due to the pass-through of increased costs to customers and recovery of sales unit volumes.
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Net sales in the North America Food segment in the third quarter increased 4.0% from $250 in 2006 to $260 in 2007, and in the first nine months increased 3.2% from $630 in 2006 to $650 in 2007, primarily due to the pass-through of increased costs to customers.
Net sales in the European Beverage segment increased 20.8% from $342 in the third quarter of 2006 to $413 in the same period in 2007. Net sales in the first nine months of 2007 increased 19.2% from $919 in 2006 to $1,095 in 2007. The increases in the quarter and first nine months of 2007 were primarily due to increased sales unit volumes and the pass-through of increased costs to customers, and also included $17 of foreign currency translation for the quarter and $51 for the nine months.
Net sales in the European Food segment increased less than one percent from $574 in the third quarter of 2006 to $577 in the same period in 2007, and net sales in the first nine months of 2007 increased 4.0% from $1,435 in 2006 to $1,492 in 2007. The increases were primarily due to $50 of foreign currency translation for the quarter and $121 for the nine months, partially offset by a decline in sales unit volumes, primarily due to weather conditions and a resulting weak harvest.
Net sales in the European Specialty Packaging segment increased 7.5% from $120 in the third quarter of 2006 to $129 in the same period in 2007, and net sales in the first nine months of 2007 increased 11.9% from $312 in 2006 to $349 in 2007. The increases were primarily due to the impact of foreign currency translation.
Cost of Products Sold (Excluding Depreciation and Amortization)
Cost of products sold, excluding depreciation and amortization, was $1,786 and $4,881 for the third quarter and first nine months of 2007, increases of $103 and $436 compared to $1,683 and $4,445 for the same periods in 2006. The increases were primarily due to the impact of higher material costs for aluminum and steel and also included $85 and $211 due to the impact of foreign currency translation for the quarter and nine months.
As a percentage of net sales, cost of products sold, excluding depreciation and amortization, was 83.0% and 83.4% for the third quarter and first nine months of 2007 compared to 84.1% and 83.8% for the same periods in 2006.
As a result of steel and aluminum price increases, the Company has implemented significant price increases to many of its customers. However, there can be no assurance that the Company will be able to fully recover from its customers the impact of price increases. In addition, if the Company is unable to purchase steel or aluminum for a significant period of time, the Company’s operations would be disrupted. The Company continues to monitor its core commodity and other cost inputs in relation to its pricing strategy.
Depreciation and Amortization
Depreciation and amortization was $56 and $168 in the third quarter and first nine months of 2007, compared to $58 and $170, respectively, for the prior year periods. Increases due to the impact of foreign currency translation from the strengthening of the euro and sterling against the U.S. dollar were offset by decreases due to lower capital spending in recent years.
Selling and Administrative Expense
Selling and administrative expense was $97 in the third quarter of 2007 compared to $77 for the same period in 2006. The increase was primarily due to increased incentive compensation costs and $3 of foreign currency translation. As a percentage of net sales, selling and administrative expense was 4.5% in the third quarter of 2007 compared to 3.8% for the same period in 2006.
Selling and administrative expense was $285 in the first nine months of 2007 compared to $232 for the same period in 2006. The increase was primarily due to increased incentive compensation costs and $11 of foreign currency translation. As a percentage of net sales, selling and administrative expense was 4.9% for the first nine months of 2007 compared to 4.4% for the same period in 2006.
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Segment Income
Segment income in the Americas Beverage segment increased $4 from $50 in the third quarter of 2006 to $54 in the third quarter of 2007. Segment income in the first nine months increased $30 from $118 in 2006 to $148 in 2007. The increases in 2007 were primarily due to recovery of sales unit volumes.
Segment income in the North America Food segment increased $2 from $28 in the third quarter of 2006 to $30 in the third quarter of 2007. Segment income in the first nine months increased $6 from $54 in 2006 to $60 in 2007. The increases in 2007 were primarily due to cost reductions.
Segment income in the European Beverage segment increased $27 from $33 in the third quarter of 2006 to $60 in the third quarter of 2007. Segment income in the first nine months increased $50 from $98 in 2006 to $148 in 2007. These increases were primarily due to increased sales unit volumes.
Segment income in the European Food segment of $55 in the third quarter of 2007 was the same as the third quarter of 2006. Segment income in the first nine months decreased $8 from $146 in 2006 to $138 in 2007. The decrease in the nine months was primarily due to a decline in sales unit volumes.
Segment income in the European Specialty Packaging segment increased $2 from $6 in the third quarter of 2006 to $8 in the third quarter of 2007. Segment income in the first nine months decreased $2 from $20 in 2006 to $18 in 2007. The increase in the quarter was primarily due to increased sales unit volumes and the decrease in the first nine months was primarily due to higher costs not recovered in selling prices.
Restructuring
The results for the nine month periods ended September 30, 2007 and 2006 included restructuring charges of $14 in each year. See Note Ito the consolidated financial statements for additional information on these charges.
Interest Expense
Interest expense increased $6 and $22, respectively, for the three and nine months ended September 30, 2007 versus the same periods in 2006. The increases were primarily due to higher short-term borrowing rates and also included $5 of increase due to foreign currency translation for the third quarter and $10 for the first nine months.
Translation and Exchange Adjustments
The results for the three and nine month periods ended September 30, 2007 included net foreign exchange gains of $5 and $13, respectively, for certain subsidiaries that have unhedged currency exposures. These currency exposures may continue to result in future foreign exchange gains or losses. The Company may hedge or mitigate a portion of these exposures in the future through derivative instruments.
Taxes on Income
The third quarter of 2007 included net tax charges of $22 on pre-tax income of $137 for an effective rate of 16.1%. The difference of $26 between the pre-tax income at the U.S. statutory rate of 35% or $48, and the tax charges of $22, was primarily due to benefits of (i) $19 from lower tax rates in certain non-U.S. jurisdictions, (ii) $4 from enacted tax rate changes, primarily in the U.K., and (iii) $3 from valuation allowance adjustments.
The first nine months of 2007 included net tax charges of $62 on pre-tax income of $312 for an effective rate of 19.9%. The difference of $47 between the pre-tax income at the U.S. statutory rate of 35% or $109, and the tax charges of $62, was primarily due to (i) benefits of $39 from lower tax rates in certain non-U.S. jurisdictions, (ii) $6 from valuation allowance adjustments, and (iii) $4 from enacted tax rate changes, primarily in the U.K. These benefits, totaling $49, were partially offset by other net charges of $2, including withholding taxes.
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The third quarter of 2006 included net tax charges of $16 on pre-tax income of $114 for an effective rate of 14.0%. The difference of $24 between the pre-tax income at the U.S. statutory rate of 35% or $40, and the tax charges of $16, was primarily due to benefits of $21 from valuation allowance adjustments, and $5 to reduce a provision for a European tax contingency due to a settlement with the tax authorities, partially offset by other charges of $2, including $5 for withholding taxes.
The first nine months of 2006 included net tax charges of $42 on pre-tax income of $255 for an effective rate of 16.5%. The difference of $47 between the pre-tax income at the statutory rate of 35% or $89, and the tax charges of $42, was primarily due to benefits of (i) $26 from lower non-U.S. tax rates in certain jurisdictions, (ii) $22 from valuation allowance adjustments, (iii) $5 to reduce a provision for a European tax contingency due to a settlement with the tax authorities, and (iv) $4 to reduce a provision for U.S. state tax contingencies due to the completion of an audit with a minor assessment. These benefits, totaling $57, were partially offset by other net charges of $10, including $8 for withholding taxes.
Minority Interests, Net of Equity Earnings
The charge for minority interests, net of equity earnings, increased $11 and $13 in the third quarter and first nine months of 2007, respectively, compared to the same periods in 2006. These increases were primarily due to increased profits in the Middle East beverage can operations.
Liquidity and Capital Resources
Cash from Operations
Cash of $29 was used for operating activities in the first nine months of 2007 compared to cash provided of $14 during the same period in 2006. The increase of $43 in cash used for operating activities was primarily due to an increase in working capital from higher material costs in 2007.
Investing Activities
Investing activities used cash of $49 during the first nine months of 2007 compared to cash used of $122 in the prior year period. Primary investing activities were capital expenditures of $105 in the first nine months of 2007 and $136 in the same period of 2006. In 2007, the Company received $63 of proceeds from asset sales, primarily land and buildings, including $39 from the sale of a note receivable from property sold in 2006.
Financing Activities
Financing activities used cash of $1 during the first nine months of 2007 compared to cash provided of $89 during the same period in 2006. The net cash used for financing activities in 2007 was primarily related to the repurchase of common stock using funds provided by short-term borrowings. The cash provided by financing activities in 2006 was primarily from long-term borrowings and was primarily used to repurchase common stock. Dividends paid to minority interests were $19 in 2006 and $17 in 2007.
As of September 30, 2007, the Company had $416 of borrowing capacity available under its revolving credit facility, equal to the total facility of $800 less $319 of borrowings and $65 of outstanding standby letters of credit.
Contractual Obligations
During the first nine months of 2007, purchase obligations covering new agreements for raw materials and other consumables increased by $304 for 2007, $170 for 2008, $27 for 2009 and $41 for periods beyond 2009, above amounts provided within Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including, but not limited to, in the “Liquidity and Capital Resources” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. As discussed in Note N to the consolidated financial statements, the Company has $34 of contractual obligations for reserves for potential liabilities related to uncertain tax positions. As discussed in Note H to the consolidated financial statements, the Company may also be obligated to make future payments to settle derivative instruments.
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Commitments and Contingent Liabilities
Information regarding the Company’s commitments and contingent liabilities appears in Part I within Item 1 of this report under Note K, entitled “Commitments and Contingent Liabilities,” to the consolidated financial statements.
Critical Accounting Policies
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States which require that management make numerous estimates and assumptions. Actual results could differ from these estimates and assumptions, impacting the reported results of operations and financial condition of the Company. Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note A to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 describe the significant accounting estimates and policies used in the preparation of the consolidated financial statements. There have been no significant changes in the Company’s critical accounting policies during the first nine months of 2007 other than as discussed below.
As required, the Company adopted FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109,” effective January 1, 2007. In accordance with FIN 48, the Company records the benefit of uncertain tax positions when, in the Company’s opinion, it is more likely than not, based on the technical merits, that the position will be sustained upon examination by the taxing authorities. A tax position that meets the more-likely-than-not recognition threshold is measured as the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether a position meets the more-likely-than-not criteria may involve significant judgment based on the Company’s review and interpretation of available evidence including published tax law, opinions from qualified experts, results of prior tax examinations, and legal precedent. The measurement of an uncertain tax position also involves significant judgment in assigning probabilities to various potential outcomes, including the assessment of interest and penalties. Final settlement of uncertain tax positions for amounts different than the recorded amounts could affect the Company’s results of operations, financial position, and cash flows. See Note N to the consolidated financial statements for additional information on the Company’s unrecognized tax benefits.
Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159 (“FAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment to FASB Statement No. 115.” FAS 159 permits the measurement of many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the fair value option). FAS 159 is effective for the Company on January 1, 2008. Management is currently evaluating the potential impact the adoption of this new standard will have on the Company’s consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157 (“FAS 157”), “Fair Value Measurements.” FAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. Expanded disclosures include a tabular presentation of the fair value of a company’s outstanding financial instruments according to a fair value hierarchy (i.e., levels 1, 2, 3 and 4, as defined) as well as enhanced disclosures regarding instruments in the level 3 category, including a reconciliation of the beginning and ending balances for each major category of assets and liabilities. FAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and states that a fair value measurement should be determined based on assumptions that market participants would use in pricing the asset or liability. FAS 157 is effective for the Company as of January 1, 2008. The Company is currently evaluating the impact that FAS 157 may have on its financial statements.
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Forward Looking Statements
Statements included herein in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including, but not limited to, in the discussions of asbestos in Note J and commitments and contingencies in Note K to the consolidated financial statements included in this Quarterly Report on Form 10-Q and also in Part I, Item 1: “Business” and Item 3: “Legal Proceedings” and in Part II, Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” within the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, which are not historical facts (including any statements concerning plans and objectives of management for future operations or economic performance, or assumptions related thereto), are “forward-looking statements” within the meaning of the federal securities laws. In addition, the Company and its representatives may from time to time, make oral or written statements which are also “forward-looking statements.”
These forward-looking statements are made based upon management’s expectations and beliefs concerning future events impacting the Company and, therefore, involve a number of risks and uncertainties. Management cautions that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.
While the Company periodically reassesses material trends and uncertainties affecting the Company’s results of operations and financial condition in connection with the preparation of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and certain other sections contained in the Company’s quarterly, annual or other reports filed with the Securities and Exchange Commission (“SEC”), the Company does not intend to review or revise any particular forward-looking statement in light of future events.
A discussion of important factors that could cause the actual results of operations or financial condition of the Company to differ from expectations has been set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 within Part II, Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Forward Looking Statements” and is incorporated herein by reference. Some of the factors are also discussed elsewhere in this Form 10-Q and in prior Company filings with the SEC. In addition, other factors have been or may be discussed from time to time in the Company’s SEC filings.
The Company has foreign currency exposure related to certain intercompany debt obligations, primarily between the U.S. and Canada, which may result in future foreign exchange adjustments to earnings. The Company may hedge or mitigate a portion of these exposures in the future through derivative instruments.
As of September 30, 2007, the Company had approximately $1.2 billion principal floating interest rate debt. A change of 0.25% in these floating interest rates would change annual interest expense by approximately $3 before tax.
As of the end of the period covered by this Quarterly Report on Form 10-Q, management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures. Based upon that evaluation and as of the end of the quarter for which this report is made, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective. Disclosure controls and procedures ensure that information to be disclosed in reports that the Company files and submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and terms of the Securities and Exchange Commission, and ensures that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
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There has been no change in internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: October 31, 2007
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