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, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)Large accelerated filer X Accelerated filer __ Non-accelerated filer __ (Do not check if a smaller reporting company)Smaller reporting company __
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes __ No X
There were 160,510,324 shares of Common Stock outstanding as of May 5, 2008.
Crown Holdings, Inc.
FORM 10-QFOR QUARTER ENDED MARCH 31, 2008
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 March 31, 2008(in millions)
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For the three months ended March 31, 2007(in millions)
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CONDENSED COMBINING BALANCE SHEET
As of March 31, 2008(in millions)
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As of December 31, 2007(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 months ended March 31, 2008 compared to the corresponding period in 2007 and the changes in financial condition and liquidity from December 31, 2007. 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, 2007, along with the consolidated financial statements and related notes included in and referred to within this report.
Executive Overview
The Company’s principal areas of focus include improving segment income and cash flow from operations and reducing debt. See Note N 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 $3,819 at March 31, 2008 increased $110 from $3,709 at March 31, 2007, including $199 of increase due to foreign currency translation.
Results of Operations
The foreign currency translation impacts referred to below were primarily due to changes in the euro and pound sterling in the European Division operating segments and the Canadian dollar in the Americas Division operating segments.
Net Sales
Net sales in the first quarter of 2008 were $1,863, an increase of $150 or 8.8% compared to net sales of $1,713 for the same period in 2007. The increase in net sales in 2008 included, among other items, $119 due to foreign currency translation and $30 due to increased selling prices from the pass-through of increased raw material costs to customers. Overall volumes were up slightly as increased beverage can unit volume sales in emerging markets were offset by $39 of lower volumes in the North America Food and European Food segments. The Company expects to see continued strong sales in the emerging markets and expects an improvement in food can volumes in the remaining nine months of 2008. Sales from U.S. operations accounted for 26.0% and 28.2% of consolidated net sales in the first quarters of 2008 and 2007, respectively. Sales of beverage cans and ends accounted for 46.9% and sales of food cans and ends accounted for 33.0% of consolidated net sales in the first quarter of 2008 compared to 44.6% and 33.6%, respectively, in 2007.
Net sales in the Americas Beverage segment increased $24 or 6.1% from $393 in the first quarter of 2007 to $417 in the first quarter of 2008. The increase in net sales in 2008 was primarily due to $11 from increased sales unit volumes due to increased customer demand, and $10 from the impact of foreign currency translation.
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Net sales in the North America Food segment decreased $6 or 3.1% from $191 in the first quarter of 2007 to $185 in the first quarter of 2008. The decrease in net sales in 2008 was primarily due to $19 from lower sales unit volumes, partially offset by $7 of increased steel and other costs passed through in the form of higher selling prices, and $5 of foreign currency translation.
Net sales in the European Beverage segment increased $67 or 23.8% from $281 in the first quarter of 2007 to $348 in the first quarter of 2008. The increase in net sales in 2008 was primarily due to $44 from increased sales unit volumes and $19 from foreign currency translation. Increased customer demand was notable throughout the segment, including an improvement in the Middle East volumes in the first quarter of 2008 after unseasonably cool weather in the first quarter of 2007.
Net sales in the European Food segment increased $42 or 9.4% from $446 in the first quarter of 2007 to $488 in the first quarter of 2008. The increase in net sales in 2008 was primarily due to $55 of foreign currency translation, partially offset by a $20 decrease from lower sales unit volumes. The sales unit volume decrease reflects lower customer demand in the segment’s lowest volume season.
Net sales in the European Specialty Packaging segment increased $8 or 8.2% from $97 in the first quarter of 2007 to $105 in the first quarter of 2008. The increase in net sales in 2008 was primarily due to $12 of foreign currency translation, partially offset by $6 due to a decrease in sales unit volumes. The sales unit volume decrease reflects lower customer demand.
Cost of Products Sold (Excluding Depreciation and Amortization)
Cost of products sold, excluding depreciation and amortization, was $1,554 for the first quarter of 2008, an increase of $111 compared to $1,443 for the same period in 2007. The increase was primarily due to higher costs for steel and aluminum, and also included $101 of foreign currency translation.
As a percentage of net sales, cost of products sold, excluding depreciation and amortization, was 83.4% for the first quarter of 2008 compared to 84.2% for the same period in 2007.
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 or surcharges. 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 $53 in the first quarter of 2008 compared to $55 in the prior year period. The decrease was primarily due to lower capital spending in recent years and was net of $3 of increase due to foreign currency translation.
Selling and Administrative Expense
Selling and administrative expense was $102 in the first quarter of 2008 compared to $95 for the same period in 2007. The increase was primarily due to foreign currency translation of $6 as salary inflation increases were offset by lower headcount. As a percentage of net sales, selling and administrative expense was 5.5% for the first quarter of both 2008 and 2007.
Segment Income
Segment income in the Americas Beverage segment increased $5 or 13.5% from $37 in the first quarter of 2007 to $42 in the first quarter of 2008, primarily due to increased sales unit volumes due to increased customer demand.
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Segment income in the North America Food segment increased $1 or 10.0% from $10 in the first quarter of 2007 to $11 in the first quarter of 2008. The increase in segment income in 2008 was primarily due to $3 from improved manufacturing performance, partially offset by a decrease of $2 due to lower sales unit volumes.
Segment income in the European Beverage segment increased $21 or 70% from $30 in the first quarter of 2007 to $51 in the first quarter of 2008. The increase in segment income in 2008 was primarily due to $15 from increased sales unit volumes, $3 from lower depreciation and $2 from foreign currency translation.
Segment income in the European Food segment increased $3 or 7.9% from $38 in the first quarter of 2007 to $41 in the first quarter of 2008. The increase in segment income in 2008 was primarily due to $6 of foreign currency translation and $2 of lower depreciation, partially offset by $6 from lower sales unit volumes.
Segment income of $1 in the European Specialty Packaging segment for the first quarter of 2008 was unchanged from the first quarter of 2007.
Interest Expense
Interest expense increased $1 from $76 in the first quarter of 2007 to $77 in the first quarter of 2008, primarily due to $4 of foreign currency translation offset by lower interest rates.
Taxes on Income
The effective tax rate of 35.1% for the first quarter of 2008 approximates the U.S. statutory rate of 35.0% as charges of $9 for valuation allowance adjustments, primarily due to losses in France and Canada, and $2 for withholding taxes, were offset by benefits from lower tax rates in certain non-U.S. jurisdictions. The Company expects its effective tax rate to be approximately 29% for the year.
The first quarter of 2007 included a tax charge of $18 on pre-tax income of $48. The difference of $1 between the pre-tax income at the U.S. statutory rate of 35% or a charge of $17, and the actual charge of $18 was primarily due to (i) charges of $6 for valuation allowance adjustments, primarily due to losses in France and Canada, and $2 for withholding taxes, offset by (ii) benefits from lower tax rates in certain non-U.S. jurisdictions.
Minority Interests and Equity Earnings
The charge for minority interests, net of equity earnings, increased $9 in the first quarter of 2008 compared to the same period of 2007. The increase for the first quarter of 2008 was primarily due to increased profits in the Company’s beverage can operations in the Middle East, South America and China due to higher sales unit volumes in these emerging markets.
Liquidity and Capital Resources
Cash from Operations
Cash of $443 was used by operating activities in the first quarter of 2008 compared to $234 used by operating activities during the same period in 2007. The increase of $209 in cash used by operating activities was primarily due to increases of $60 in receivables primarily due to the timing of the securitization of receivables, $37 in incentive compensation payments in 2008 due to higher accruals at the end of 2007 compared to 2006, $43 from the translation of foreign currency cash flows at higher exchange rates in 2008 due to the weakening of the U.S. dollar, and the payment in 2008 of additional raw material purchases from the end of 2007.
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Investing Activities
Investing activities used cash of $40 during the first quarter of 2008 compared to cash used of $46 in the prior year period. Primary investing activities were capital expenditures of $33 in the first quarter of 2008 and $44 in the same period of 2007. The Company expects its full year capital expenditures to be approximately $170 in 2008 compared to $156 in 2007, with the difference primarily due to foreign currency translation.
Financing Activities
Financing activities provided cash of $292 during the first quarter of 2008 compared to cash provided of $146 during the same period in 2007. Cash provided by financing activities in the first quarters of 2008 and 2007 was primarily from short-term borrowings and was used to fund operating and investing activities.
As of March 31, 2008, the Company had $398 of borrowing capacity available under its revolving credit facility, equal to the total facility of $800 less $326 of borrowings and $76 of outstanding standby letters of credit.
Contractual Obligations
During the first quarter of 2008, purchase obligations covering new agreements for raw materials and other consumables increased by $241 for 2008, $305 for 2009 and $66 for 2010 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, 2007.
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 J, entitled “Commitments and Contingent Liabilities,” to the consolidated financial statements, which information is incorporated herein by reference.
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, 2007 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 three months of 2008.
The discussion below repeats and expands the discussion from the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 with respect to goodwill impairment and deferred tax valuation allowances. The discussion also includes additional disclosure with respect to the calculation of the Company’s asbestos-related liability accrual and the accounting for unrecognized gains and losses for the Company’s pension and postretirement benefit plans. The discussion below should be read in conjunction with 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, 2007.
Goodwill Impairment
The Company performs a goodwill impairment review in the fourth quarter of each year or when facts and circumstances indicate goodwill may be impaired. The impairment review involves a number of assumptions and judgments, including the calculation of fair value for the Company’s identified reporting units. The Company determines the estimated fair value for each reporting unit based on the average of the estimated fair values calculated using market values for comparable businesses and discounted cash flow projections. The Company’s estimates of future cash flows include assumptions concerning future operating performance, economic conditions, and technological changes and may differ from actual future cash flows. Under the first method of calculating estimated fair value, the Company obtains publicly available trading multiples based on the enterprise value of companies in the packaging industry whose shares are publicly traded. The Company also reviews available information regarding the multiples used in recent transactions, if any, involving transfers of controlling interests in the packaging industry. The appropriate multiple is applied to the forecasted EBITDA (defined by the Company as net customer sales, less cost of products sold excluding depreciation and amortization, less selling and administrative expenses) of the reporting unit to obtain an estimated fair value. Under the second method, fair value is calculated as the sum of the projected discounted cash flows of the reporting unit over the next five years and the terminal value at the end of those five years. The projected cash flows generally include no growth assumption unless there has recently been a material change in the business or a material change is forecasted. The discount rate used is based on the average weighted-average cost of capital of companies in the packaging industry, which information is available through various sources. The terminal value at the end of the five years is the product of the projected EBITDA at the end of the five year period and the trading multiple.
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The North America Food segment includes the North America Food and North America Closures reporting units. As of December 31, 2007, the estimated fair value of the North America Closures reporting unit was $24 higher than its carrying value, and the reporting unit had $68 of goodwill. The fair value of the North America Closures reporting unit was estimated based on the average of the fair values calculated using market values for comparable businesses and discounted cash flow projections, as described above. The Company used an average of the two methods in estimating fair value because it believes they provide an equal probability of yielding an appropriate fair value for the reporting unit. The maximum potential effect of weighting the two methods other than equally would have been to increase or decrease the estimated fair value at December 31, 2007 by $2 as the two methods provided values that were within $4 of the other. The Company assumed an EBITDA multiple of 8.0 times for the market value method. For its discounted cash flow projections the Company assumed a five-year projection of revenue and operating margins consistent with current results, a discount rate of 8.75%, and a terminal value of 8.0 times EBITDA at the end of the five years. Assuming all other factors remain the same, a $1 change in projected annual EBITDA changes the excess of estimated fair value over carrying value by $8; a change of 0.5 in the assumed EBITDA multiple changes the excess of estimated fair value over carrying varying value by $8; and a change in the discount rate to 7.75% or 9.75% changes the excess of estimated fair value over carrying value by $3.
It is possible that an impairment charge of up to $68 could be recorded for the North America Closures reporting unit if its estimated fair value were to fall below its carrying value.
During the fourth quarter of 2007, the Company recorded a goodwill impairment charge of $103 in its European metal vacuum food closures business due to a decrease in projected operating results. The European metal vacuum food closures business is included within the Company’s European Food segment. The segment income of the business was $6, $14 and $17 for the years ended December 31, 2007, 2006 and 2005, respectively, and as of the end of 2006, the Company was projecting 2007 segment income of $16.
The decrease in 2007 segment income, compared to 2006 results and the Company’s 2007 projections, was primarily due to lower sales unit volumes, an inability to recover cost increases through increased selling prices, and, to a lesser extent, increased costs due to a temporary disruption from the relocation of certain operations during the first half of 2007. The relocation of operations is complete and the related excess costs incurred in 2007 are not expected to recur in future years.
In its projections for the European metal vacuum food closures business for 2007, the Company expected to see some pressure on selling prices based on preliminary discussions with its customers, but believed it could compensate for these losses through increased sales unit volumes that could be obtained from existing or new customers throughout the year. However, due to aggressive pricing by certain of the Company’s competitors (an effort to maintain or increase their sales unit volumes), the Company was unable to increase volumes for 2007 as allocations were finalized during the first two quarters. In addition to the effect on the Company sales unit volumes, the competitive situation also depressed selling prices throughout the year beyond the Company’s expectations. The aggressive pricing policies evident in 2007 were unexpected in a business that had consistent segment income and relatively stable selling prices in recent years. As of October 31, 2007, it was management’s judgment that the adverse competitive situation was temporary based on its understanding of the competitive market at that time. However, at the conclusion of the 2008 budget process, which occurred at the end of 2007 only after initial discussions with existing and potential customers related to 2008 pricing and volumes, management concluded that the depressed selling prices and competition for sales volume would likely continue, and that 2008 segment income was unlikely to improve. Due to this second consecutive year of reduced segment income, and absent any evidence to the contrary, the Company determined that it was appropriate to assume similar results for its projections used to calculate the estimated fair value of the reporting unit at the end of 2007. As of December 31, 2007, the European metal vacuum food closures business had $68 of remaining carrying value including $19 of goodwill.
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The Company believes segment income in the European metal vacuum food closures business will improve only when, and if, selling prices in the market increase or the Company is able to significantly increase its current sales unit volumes. The Company is attempting to reduce costs in the business through manufacturing efficiencies and manpower reductions, while also seeking to improve sales price and volume by supplying a quality product and technical support in a competitive market environment. The Company is unable to predict at this time whether these initiatives will be successful or whether and to what extent such initiatives will reduce costs and improve sales volumes and pricing.
Estimated fair value for the European metal vacuum food closures business was calculated in the fourth quarters of 2007 and 2006 using the methodology outlined above. The results achieved using the market value and discounted cash flow projections were weighted evenly as the Company believes they have an equal probability of providing an appropriate fair value. Weighting the two methods in any other proportion would not have had any effect on the 2006 impairment review as any combination would have resulted in an estimated fair value in excess of carrying value. For the 2007 impairment review, the maximum potential effect of weighting the two methods other than equally would have been to increase or decrease the impairment charge by $5. The primary assumptions used included EBITDA multiples of 8.0 times and 7.5 times, and discount rates of 8.75% and 7.0%, as of December 31, 2007 and 2006, respectively. The increases in the EBITDA multiple and discount rate used in 2007 compared to 2006 were due to increases in the market values and weighted average cost of capital of companies in the packaging industry from 2006 to 2007. The primary cause of the impairment charge in 2007 was a decrease in projected operating results as described above, as the net effect of the assumed multiple and discount rate changes was not significant.
Tax Valuation Allowances
The Company records a valuation allowance to reduce its deferred tax assets when it is more likely than not that a portion of the tax assets will not be realized. The estimate of the amount that will not be realized requires the use of assumptions concerning the Company’s future taxable income. The Company considers all sources of taxable income in estimating its valuation allowances, including taxable income in any available carry back period; the reversal of taxable temporary differences; tax-planning strategies; and taxable income expected to be generated in the future other than reversing temporary differences. Should the Company change its estimate of the amount of its deferred tax assets that it would be able to realize, an adjustment to the valuation allowance will result in an increase or decrease in tax expense in the period such a change in estimate is made.
At December 31, 2007, the Company reversed a portion of its U.S. valuation allowances and had approximately $360 of U.S. net deferred tax assets. The reversal of the valuation allowance was made based on management’s determination that it was more likely than not that a portion of its deferred tax benefits would be realized through future income. In forming this conclusion, the Company considered the fact that it no longer had cumulative losses in the U.S. over the past three years. The Company’s U.S. pre-tax book income/(loss) from continuing operations, as reported in Note X of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, was $4, $39 and ($60) for the years ended December 31, 2007, 2006 and 2005, respectively. However, these amounts represent the U.S. book income only and exclude additional U.S. taxable income from dividends and other foreign source income. Foreign source income in 2007 was $40 and the Company has included similar amounts in its projections of future taxable income. In addition, the loss of $60 in 2005 included charges of $53 related to early extinguishments of debt, and the Company has not included similar charges in its projections of future income.
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The Company’s methodology for determining the realizability of its deferred tax assets involves estimates of future taxable income. These estimates are projected through the life of the related deferred tax assets based on assumptions which management believes to be reasonable and consistent with current operating results. Future realization of the Company’s U.S. net deferred tax assets as of December 31, 2007 will require approximately $900 of aggregate future U.S. taxable income.
Asbestos-Related Liabilities
At the end of each quarter, the Company considers whether there have been any material developments that would cause it to update its asbestos liability accrual calculations. Absent any significant developments in the asbestos litigation environment in general or with respect to the Company specifically, the Company updates its accrual calculations in the fourth quarter of each year. The Company’s asbestos liability accrual is calculated in the fourth quarter of each year as the sum of its outstanding and expected future claims, multiplied by the expected average settlement cost of those claims, plus estimated legal fees. The expected number of claims, and the expected average settlement cost per claim, are calculated using projections based on the actual data for the most recent five years. Because claims are not submitted or settled evenly throughout the year, it is difficult to predict at any time during the year whether the number of claims or average settlement cost over the five year period ending December 31 of such year will increase compared to the prior five year period. The five year average settlement cost at the end of 2007 was higher than at the end of 2006. The effect of this increase in the expected average settlement cost per claim was partially mitigated by a decrease in the expected number of future claims. The combination of these two factors in 2007 resulted in a charge of $29 in 2007 compared to charges of $10 in each of the preceding two years. A 10% change in either the number of projected claims or the average cost per claim would increase or decrease the estimated liability at December 31, 2007 by $20. A 10% increase or decrease in these two factors at the same time would increase or decrease the estimated liability at December 31, 2007 by $42 and $38, respectively.
Pension and Postretirement Benefit Plans – Unrecognized Losses
As of December 31, 2007, the Company had unrecognized net losses in other comprehensive income of $1,480 related to its pension plans and $131 related to its other postretirement benefit plans. Unrecognized gains and losses arise each year primarily due to changes in discount rates, differences in actual plan asset returns compared to assumed returns, and changes in actuarial assumptions such as mortality. Unrecognized gains and losses are accumulated in other comprehensive income and the portion in each plan that exceeds 10% of the greater of that plan’s assets or projected benefit obligation is amortized to income over future periods. The Company’s pension expense for the year ended December 31, 2007 included charges of $78 for the amortization of unrecognized net losses, and the Company estimates charges of $74 in 2008. Unrecognized net losses of $1,480 in the pension plans as of December 31, 2007 include $861 in the U.K. defined benefit plan, $446 in the U.S defined benefit plan, $157 in the Canadian defined benefit plans, and $16 in other plans. The amortizable losses in the U.K. plan are being recognized over 21 years, representing the average expected life of inactive employees as over 90% of the plan participants are inactive and the fund is closed to new participants. The amortizable losses in the U.S. plan are being recognized over the average remaining service life of active participants of 11 years. The amortizable losses in the Canadian plans are being recognized over the average remaining service life of active participants of 11 years. An increase of 10% in the number of years used to amortize the unrecognized losses in each plan would decrease the estimated charges for 2008 by 9.1% or $7. A decrease of 10% in the number of years would increase the estimated charge for 2008 by 11.1% or $8.
Unrecognized net losses in the Company’s other postretirement benefit plans as of December 31, 2007, primarily include $117 in the U.S. plans, with the amortizable portion being recognized over the average remaining service life of active participants of 9 years. The Company’s other postretirement benefits expense for the year ended December 31, 2007 included charges of $10 for the amortization of unrecognized net losses, and the Company estimates charges of $9 in 2008. An increase of 10% in the number of years used to amortize the unrecognized losses in each plan would decrease the estimated charge for 2008 by 9.1% or $1. A decrease of 10% in the number of years would increase the estimated charge for 2008 by 11.1% or $1.
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Recent Accounting Pronouncements
In March 2008, the FASB issued SFAS No. 161 (“FAS 161”), “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.” FAS 161 amends and expands the disclosure requirements of SFAS No. 133 (“FAS 133”), “Accounting for Derivative Instruments and Hedging Activities” with the intent to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for under FAS 133 and its related interpretations; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. FAS 161 is effective for the Company as of January 1, 2009 and the Company is currently evaluating the disclosure implications of this statement.
In December 2007, the FASB issued SFAS No. 141 (revised 2007) (“FAS 141(R)”) “Business Combinations,” which replaces FAS 141. FAS 141(R) retains the requirement of FAS 141 that business combinations be accounted for at fair value using the acquisition method, but changes the accounting for acquisitions in certain areas. Under FAS 141(R) acquisition costs will be expensed as incurred; noncontrolling (minority) interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. FAS 141(R) is effective for the Company for all business combinations for which the acquisition date is on or after January 1, 2009, and the Company does not expect its adoption will have a material impact on the Company’s financial statements at the date of adoption.
In December 2007, the FASB issued SFAS No. 160 (“FAS 160”), “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.” FAS 160 requires the recognition of noncontrolling (minority) interests as equity in the consolidated financial statements, but separate from the parent’s equity. The statement also requires that the amount of net income attributable to minority interests be included in consolidated net income on the face of the income statement. Assuming FAS 160 was adopted as of December 31, 2007, and using the amounts included in the Company’s financial statements as of that date, the adoption of FAS 160 would increase the Company’s shareholders’ equity from $15 to $338 due to the inclusion of minority interests of $323 in shareholders’ equity. The effect on the income statement for the year ended December 31, 2007 would be to increase the Company’s consolidated net income from $528 to $601 with the inclusion of $73 of net income attributable to minority interests, and the Company would separately disclose $73 of consolidated net income attributable to minority interests. FAS 160 also includes expanded disclosure requirements regarding interests of the parent and noncontrolling interests, and amends certain consolidation procedures of ARB No. 51 for consistency with the requirements of FAS 141(R). FAS 160 is effective for the Company as of January 1, 2009.
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 I and commitments and contingencies inNote J 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, 2007, 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.”
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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, 2007 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.
As of March 31, 2008, 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.
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: May 9, 2008
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