CROWN HOLDINGS INC - Quarter Report: 2013 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
____________________________________
FORM 10-Q
_____________________________________
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER 0-50189
____________________________________________________
CROWN HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
____________________________________________________
Pennsylvania | 75-3099507 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
One Crown Way, Philadelphia, PA | 19154-4599 | |
(Address of principal executive offices) | (Zip Code) | |
215-698-5100
(registrant’s telephone number, including area code)
____________________________________________________
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). 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 | o (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 140,826,004 shares of Common Stock outstanding as of July 23, 2013.
Crown Holdings, Inc.
PART I – FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions except per share data)
(Unaudited)
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Net sales | $ | 2,223 | $ | 2,184 | $ | 4,196 | $ | 4,131 | |||||||
Cost of products sold, excluding depreciation and amortization | 1,818 | 1,799 | 3,458 | 3,417 | |||||||||||
Depreciation and amortization | 30 | 45 | 64 | 87 | |||||||||||
Gross profit | 375 | 340 | 674 | 627 | |||||||||||
Selling and administrative expense | 102 | 90 | 206 | 196 | |||||||||||
Provision for restructuring | 4 | 3 | 8 | 3 | |||||||||||
Asset impairments and sales | — | (10 | ) | — | (10 | ) | |||||||||
Loss from early extinguishments of debt | — | — | 38 | — | |||||||||||
Interest expense | 61 | 55 | 121 | 113 | |||||||||||
Interest income | (1 | ) | (1 | ) | (3 | ) | (3 | ) | |||||||
Foreign exchange | — | (5 | ) | 2 | (2 | ) | |||||||||
Income before income taxes and equity earnings | 209 | 208 | 302 | 330 | |||||||||||
Provision for income taxes | 55 | 51 | 79 | 83 | |||||||||||
Equity earnings in affiliates | 1 | — | (1 | ) | — | ||||||||||
Net income | 155 | 157 | 222 | 247 | |||||||||||
Net income attributable to noncontrolling interests | (22 | ) | (23 | ) | (48 | ) | (44 | ) | |||||||
Net income attributable to Crown Holdings | $ | 133 | $ | 134 | $ | 174 | $ | 203 | |||||||
Earnings per common share attributable to Crown Holdings: | |||||||||||||||
Basic | $ | 0.94 | $ | 0.91 | $ | 1.23 | $ | 1.37 | |||||||
Diluted | $ | 0.93 | $ | 0.89 | $ | 1.21 | $ | 1.35 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Crown Holdings, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Net income | $ | 155 | $ | 157 | $ | 222 | $ | 247 | |||||||
Other comprehensive income, net of tax | |||||||||||||||
Foreign currency translation adjustments | (4 | ) | (39 | ) | (24 | ) | — | ||||||||
Pension and other postretirement benefits | 30 | 17 | 48 | 33 | |||||||||||
Derivatives qualifying as hedges | (12 | ) | (24 | ) | (30 | ) | (1 | ) | |||||||
Total other comprehensive income / (loss) | 14 | (46 | ) | (6 | ) | 32 | |||||||||
Total comprehensive income | 169 | 111 | 216 | 279 | |||||||||||
Net income attributable to noncontrolling interests | (22 | ) | (23 | ) | (48 | ) | (44 | ) | |||||||
Translation adjustments attributable to noncontrolling interests | 1 | 1 | 1 | 1 | |||||||||||
Derivatives qualifying as hedges attributable to noncontrolling interests | — | 4 | 3 | 1 | |||||||||||
Comprehensive income attributable to Crown Holdings | $ | 148 | $ | 93 | $ | 172 | $ | 237 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Crown Holdings, Inc.
CONSOLIDATED BALANCE SHEETS (Condensed)
(In millions)
(Unaudited)
June 30, 2013 | December 31, 2012 | ||||||
Assets | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 227 | $ | 350 | |||
Receivables, net | 1,302 | 1,057 | |||||
Inventories | 1,424 | 1,166 | |||||
Prepaid expenses and other current assets | 219 | 177 | |||||
Total current assets | 3,172 | 2,750 | |||||
Goodwill | 1,944 | 1,998 | |||||
Property, plant and equipment, net | 2,018 | 1,995 | |||||
Other non-current assets | 735 | 747 | |||||
Total | $ | 7,869 | $ | 7,490 | |||
Liabilities and equity | |||||||
Current liabilities | |||||||
Short-term debt | $ | 286 | $ | 261 | |||
Current maturities of long-term debt | 168 | 115 | |||||
Accounts payable and accrued liabilities | 2,177 | 2,142 | |||||
Total current liabilities | 2,631 | 2,518 | |||||
Long-term debt, excluding current maturities | 3,672 | 3,289 | |||||
Postretirement and pension liabilities | 990 | 1,098 | |||||
Other non-current liabilities | 451 | 462 | |||||
Commitments and contingent liabilities (Note K) | |||||||
Noncontrolling interests | 286 | 285 | |||||
Crown Holdings shareholders’ deficit | (161 | ) | (162 | ) | |||
Total equity | 125 | 123 | |||||
Total | $ | 7,869 | $ | 7,490 | |||
The accompanying notes are an integral part of these consolidated financial statements.
4
Crown Holdings, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Condensed)
(In millions)
(Unaudited)
Six Months Ended | |||||||
June 30, | |||||||
2013 | 2012 | ||||||
Cash flows from operating activities | |||||||
Net income | $ | 222 | $ | 247 | |||
Adjustments to reconcile net income to net cash used for operating activities: | |||||||
Depreciation and amortization | 64 | 87 | |||||
Provision for restructuring | 8 | 3 | |||||
Asset impairments and sales | — | (10 | ) | ||||
Pension expense | 39 | 49 | |||||
Pension contributions | (43 | ) | (51 | ) | |||
Stock-based compensation | 12 | 12 | |||||
Changes in assets and liabilities: | |||||||
Receivables | (281 | ) | (296 | ) | |||
Inventories | (286 | ) | (135 | ) | |||
Accounts payable and accrued liabilities | (10 | ) | (121 | ) | |||
Other, net | 24 | (1 | ) | ||||
Net cash used for operating activities | (251 | ) | (216 | ) | |||
Cash flows from investing activities | |||||||
Capital expenditures | (124 | ) | (139 | ) | |||
Insurance proceeds | 8 | 23 | |||||
Change in restricted cash | (5 | ) | (11 | ) | |||
Proceeds from sale of property, plant and equipment | 5 | 2 | |||||
Other | — | (3 | ) | ||||
Net cash used for investing activities | (116 | ) | (128 | ) | |||
Cash flows from financing activities | |||||||
Proceeds from long-term debt | 1,040 | 42 | |||||
Payments of long-term debt | (984 | ) | (32 | ) | |||
Net change in revolving credit facility and short-term debt | 423 | 274 | |||||
Debt issue costs | (15 | ) | — | ||||
Common stock issued | 13 | 4 | |||||
Common stock repurchased | (194 | ) | (7 | ) | |||
Purchase of noncontrolling interests | (10 | ) | — | ||||
Dividends paid to noncontrolling interests | (35 | ) | (38 | ) | |||
Other | 11 | (5 | ) | ||||
Net cash provided by financing activities | 249 | 238 | |||||
Effect of exchange rate changes on cash and cash equivalents | (5 | ) | (6 | ) | |||
Net change in cash and cash equivalents | (123 | ) | (112 | ) | |||
Cash and cash equivalents at January 1 | 350 | 342 | |||||
Cash and cash equivalents at June 30 | $ | 227 | $ | 230 | |||
The accompanying notes are an integral part of these consolidated financial statements.
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Crown Holdings, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In millions)
(Unaudited)
Crown Holdings, Inc. Shareholders’ Equity | |||||||||||||||||||||||||||||||
Common Stock | Paid-in Capital | Accumulated Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Crown Equity | Noncontrolling Interests | Total | ||||||||||||||||||||||||
Balance at January 1, 2012 | $ | 929 | $ | 863 | $ | 512 | $ | (2,590 | ) | $ | (187 | ) | $ | (473 | ) | $ | 234 | $ | (239 | ) | |||||||||||
Net income | 203 | 203 | 44 | 247 | |||||||||||||||||||||||||||
Other comprehensive income / (loss) | 34 | 34 | (2 | ) | 32 | ||||||||||||||||||||||||||
Dividends paid to noncontrolling interests | (38 | ) | (38 | ) | |||||||||||||||||||||||||||
Restricted stock awarded | (2 | ) | 2 | ||||||||||||||||||||||||||||
Stock-based compensation | 12 | 12 | 12 | ||||||||||||||||||||||||||||
Common stock issued | 3 | 1 | 4 | 4 | |||||||||||||||||||||||||||
Common stock repurchased | (6 | ) | (1 | ) | (7 | ) | (7 | ) | |||||||||||||||||||||||
Balance at June 30, 2012 | $ | 929 | $ | 870 | $ | 715 | $ | (2,556 | ) | $ | (185 | ) | $ | (227 | ) | $ | 238 | $ | 11 | ||||||||||||
Balance at January 1, 2013 | $ | 929 | $ | 668 | $ | 1,069 | $ | (2,614 | ) | $ | (214 | ) | $ | (162 | ) | $ | 285 | $ | 123 | ||||||||||||
Net income | 174 | 174 | 48 | 222 | |||||||||||||||||||||||||||
Other comprehensive income / (loss) | (2 | ) | (2 | ) | (4 | ) | (6 | ) | |||||||||||||||||||||||
Dividends paid to noncontrolling interests | (35 | ) | (35 | ) | |||||||||||||||||||||||||||
Restricted stock awarded | (8 | ) | 8 | ||||||||||||||||||||||||||||
Stock-based compensation | 12 | 12 | 12 | ||||||||||||||||||||||||||||
Common stock issued | 10 | 3 | 13 | 13 | |||||||||||||||||||||||||||
Common stock repurchased | (171 | ) | (23 | ) | (194 | ) | (194 | ) | |||||||||||||||||||||||
Purchase of noncontrolling interests | (2 | ) | (2 | ) | (8 | ) | (10 | ) | |||||||||||||||||||||||
Balance at June 30, 2013 | $ | 929 | $ | 509 | $ | 1,243 | $ | (2,616 | ) | $ | (226 | ) | $ | (161 | ) | $ | 286 | $ | 125 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Crown Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share and statistical data)
(Unaudited)
A. | Statement of Information Furnished |
The consolidated financial statements include the accounts of Crown Holdings, Inc. and its consolidated subsidiaries (the “Company”). The accompanying unaudited interim consolidated financial statements have been prepared in accordance with Form 10-Q instructions. In the opinion of management, these consolidated financial statements contain all adjustments of a normal and recurring nature necessary for a fair statement of the financial position of the Company as of June 30, 2013 and the results of its operations for the three and six months ended June 30, 2013 and 2012 and of its cash flows for the six months ended June 30, 2013 and 2012. The results reported in these consolidated financial statements are not necessarily indicative of the results that may be expected for the entire year. These results have been determined on the basis of accounting principles generally accepted in the United States of America (“GAAP”).
Certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP have been condensed or omitted. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The accompanying consolidated financial statements 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, 2012.
B. | Accounting and Reporting Developments |
Recently Adopted Accounting Standards
In the first quarter of 2013, the Company adopted changes to the disclosure of offsetting assets and liabilities. These changes require an entity to disclose both gross and net information about instruments and transactions subject to an agreement similar to a master netting arrangement and eligible for offset in the statement of financial position. The disclosures are intended to enable users of an entity’s financial statements to understand and evaluate the effect or potential effect of master netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments. Other than disclosure, these changes had no impact on the Company's consolidated financial statements. See Note G for the Company's disclosures.
In the first quarter of 2013, the Company adopted changes to the disclosure of amounts reclassified out of accumulated other comprehensive income. These changes require an entity to present in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. If a component is not required to be reclassified to net income in its entirety, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. Other than disclosure, these changes had no impact on the Company's consolidated financial statements. See Note C for the Company's disclosures.
Change in Depreciable Lives
The Company, with the assistance of a third party appraiser, completed an evaluation of the estimated useful lives of its two-piece and three-piece can-making equipment. As a result, effective January 1, 2013, the company increased the estimated useful lives of its can-making equipment to reflect its current estimate of the useful lives. As a result of this change, for the three months ended June 30, 2013, depreciation and amortization was lower by $14 and net income higher by $11 or $0.08 per diluted share. For the six months ended June 30, 2013, depreciation and amortization was lower by $24 and net income higher by $18 or $0.13 per diluted share.
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Crown Holdings, Inc.
C. | Accumulated Other Comprehensive Income |
The following table provides information about the changes in each component of accumulated other comprehensive income for the six months ended June 30, 2013.
Defined Benefit Plans | Foreign Currency Translation | Gains and Losses on Cash Flow Hedges | Total | |||||||||||||
Balance at December 31, 2012 | $ | (1,954 | ) | $ | (648 | ) | $ | (12 | ) | $ | (2,614 | ) | ||||
Other comprehensive income (loss) before reclassifications | 14 | (23 | ) | (39 | ) | (48 | ) | |||||||||
Amounts reclassified from accumulated other comprehensive income | 34 | — | 12 | 46 | ||||||||||||
Other comprehensive income (loss) | 48 | (23 | ) | (27 | ) | (2 | ) | |||||||||
Balance at June 30, 2013 | $ | (1,906 | ) | $ | (671 | ) | $ | (39 | ) | $ | (2,616 | ) | ||||
Other comprehensive income of $14 for defined benefit plans relates to the elimination of certain non-US post- retirement benefits.
The following table provides information about the amounts reclassified out of accumulated other comprehensive income
in 2013.
Details about Accumulated Other Comprehensive Income Components | Amount Reclassified from Accumulated Other Comprehensive Income | Affected Line Item in the Statement of Operations | ||||
Gains and losses on cash flow hedges | ||||||
Commodities | $ | 18 | Cost of products sold | |||
18 | Total before tax | |||||
(5 | ) | Provision for income taxes | ||||
$ | 13 | Net of tax | ||||
Foreign exchange | $ | 1 | Net sales | |||
(2 | ) | Cost of products sold | ||||
(1 | ) | Total before tax | ||||
— | Provision for income taxes | |||||
$ | (1 | ) | Net of tax | |||
Total gains and losses on cash flow hedges | $ | 12 | ||||
Amortization of defined benefit plan items | ||||||
Actuarial losses | $ | 69 | (a) | |||
Prior service credit | (26 | ) | (a) | |||
43 | Total before tax | |||||
(9 | ) | Provision for income taxes | ||||
$ | 34 | Net of tax | ||||
Total reclassifications for the period | $ | 46 | Net of tax | |||
(a) These accumulated other comprehensive income components are included in the computation of net period pension and postretirement cost. See Note M for further details.
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Crown Holdings, Inc.
D. | Stock-Based Compensation |
In February 2013, the Company awarded shares of restricted stock to certain senior executives consisting of time-vesting awards which vest ratably over three years and performance-based shares which cliff vest at the end of three years. The number of performance-based shares that will ultimately vest is based on the level of market performance achieved, ranging between 0% and 200% of the shares originally awarded, and will be settled in stock. The fair value of the performance-based shares awarded was calculated using a Monte Carlo valuation model.
In April 2013, the Company's shareholders approved the 2013 Stock-Based Incentive Compensation Plan which allows for a total 6.2 million shares to be issued under future awards. In May 2013, the Company awarded 1.2 million shares of time-vesting restricted stock which vest over five years commencing in May 2015.
A summary of restricted stock transactions during the six months ended June 30, 2013 follows:
Number of shares | ||
Non-vested shares outstanding at January 1, 2013 | 898,190 | |
Awarded: | ||
Time-vesting (average grant-date fair value of $41.89) | 1,294,078 | |
Performance-based (average grant-date fair value of $36.75) | 243,251 | |
Performance-based – achieved 141% level (grant-date fair value of $37.91) | 93,755 | |
Released: | ||
Time-vesting shares awarded in 2010 through 2012 | (144,623 | ) |
Performance-based shares awarded in 2010 | (229,624 | ) |
Performance-based awards – achieved 141% level | (93,755 | ) |
Non-vested shares outstanding at June 30, 2013 | 2,061,272 | |
The average grant-date fair value of the 2013 and 2012 awards was $41.89 and $33.75 for time-vested shares and $36.75 and $39.52 for performance-based shares.
The estimated weighted average grant-date fair value of the 243,251 performance-based shares awarded in 2013 was $36.75 using a weighted average stock price volatility of 22.4%, an expected term of three years, and a weighted average risk-free interest rate of 0.34%. The variables used to value the 2012 award included a weighted average stock price volatility of 27.80%, an expected term of three years, and a weighted average risk-free rate of 0.40%.
At June 30, 2013, unrecognized compensation cost related to outstanding restricted stock was $60. The weighted average period over which the expense is expected to be recognized is 4.2 years. The aggregate market value of the shares released and issued on the vesting dates was $18. The Company has assumed an annual forfeiture rate of 5% on the May 2013 award.
E. | Receivables |
June 30, 2013 | December 31, 2012 | ||||||
Accounts receivable | $ | 1,139 | $ | 922 | |||
Less: allowance for doubtful accounts | (43 | ) | (37 | ) | |||
Net trade receivables | 1,096 | 885 | |||||
Miscellaneous receivables | 206 | 172 | |||||
Receivables, net | $ | 1,302 | $ | 1,057 | |||
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Crown Holdings, Inc.
F. | Inventories |
Inventories are stated at the lower of cost or market, with cost for U.S. inventories principally determined under the first-in, first-out (“FIFO”) method. Non-U.S. inventories are principally determined under the FIFO or average cost method.
June 30, 2013 | December 31, 2012 | ||||||
Raw materials and supplies | $ | 655 | $ | 602 | |||
Work in process | 151 | 128 | |||||
Finished goods | 618 | 436 | |||||
$ | 1,424 | $ | 1,166 | ||||
G. | Derivative and Other Financial Instruments |
Fair Value Measurements
Under GAAP a framework exists for measuring fair value, providing a three-tier hierarchy of pricing inputs used to report assets and liabilities that are adjusted to fair value. Level 1 includes inputs such as quoted prices which are available in active markets for identical assets or liabilities as of the report date. Level 2 includes inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 3 includes unobservable pricing inputs that are not corroborated by market data or other objective sources. The Company has no items valued using Level 3 inputs other than certain pension plan assets.
The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities measured at fair value and their placement within the fair value hierarchy.
The Company applies a market approach to value its commodity price hedge contracts. Prices from observable markets are used to develop the fair value of these financial instruments and they are reported under Level 1. The Company uses an income approach to value its foreign exchange forward contracts. These contracts are valued using a discounted cash flow model that calculates the present value of future cash flows under the terms of the contracts using market information as of the reporting date, such as foreign exchange spot and forward rates, and are reported under Level 2 of the fair value hierarchy.
Fair value disclosures for financial assets and liabilities that were accounted for at fair value on a recurring basis are provided later in this note. In addition, see Note I for fair value disclosures related to debt.
Derivative Financial Instruments
In the normal course of business the Company is subject to risk from adverse fluctuations in currency exchange rates, interest rates and commodity prices. The Company manages these risks through a program that includes the use of derivative financial instruments, primarily swaps and forwards. Counter-parties to these contracts are major financial institutions. The Company is exposed to credit loss in the event of nonperformance by these counter-parties. The Company does not use derivative instruments for trading or speculative purposes.
The Company’s objective in managing exposure to market risk is to limit the impact on earnings and cash flow. The extent to which the Company uses such instruments is dependent upon its access to these contracts in the financial markets and its success using other methods, such as netting exposures in the same currencies to mitigate foreign exchange risk and using sales agreements that permit the pass-through of commodity price and foreign exchange rate risk to customers.
For derivative financial instruments accounted for in hedging relationships, the Company formally designates and documents, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective and the manner in which effectiveness will be assessed. The Company formally assesses, both at inception and at least quarterly thereafter, whether the hedging relationships are effective in offsetting changes in fair value or cash flows of the related underlying exposures. Any ineffective portion of the change in fair value of the instruments is recognized immediately in earnings.
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Crown Holdings, Inc.
Cash Flow Hedges
The Company designates certain derivative financial instruments as cash flow hedges. No components of the hedging instruments are excluded from the assessment of hedge effectiveness. Changes in fair value of outstanding derivatives accounted for as cash flow hedges, except any ineffective portion, are recorded in other comprehensive income until earnings are impacted by the hedged transaction. Classification of the gain or loss in the Consolidated Statements of Operations upon reclassification from comprehensive income is the same as that of the underlying exposure. Contracts outstanding at June 30, 2013 mature between one and thirty months.
When the Company discontinues hedge accounting because it is no longer probable that an anticipated transaction will occur in the originally specified period, changes to fair value accumulated in other comprehensive income are recognized immediately in earnings.
The Company uses forward contracts to hedge anticipated purchases of various commodities, including aluminum, fuel oil and natural gas and these exposures are hedged by a central treasury unit.
The Company also designates certain foreign exchange contracts as cash flow hedges of anticipated foreign currency denominated sales or purchases. The Company manages these risks at the operating unit level. Often the hedging of foreign currency risk is performed in concert with related commodity price hedges.
The following table sets forth financial information about the impact on Accumulated Other Comprehensive Income (“AOCI”) and earnings from changes in the fair value of derivative instruments.
Amount of gain/(loss) | Amount of gain/(loss) | ||||||||||||||||
recognized in AOCI | reclassified from AOCI | ||||||||||||||||
(effective portion) | into earnings | ||||||||||||||||
Quarter Ended | Six Months Ended | Quarter Ended | Six Months Ended | ||||||||||||||
Derivatives in cash flow hedges | June 30, 2013 | June 30, 2013 | June 30, 2013 | June 30, 2013 | |||||||||||||
Foreign exchange | $ | — | $ | 1 | $ | — | $ | 1 | (1) | ||||||||
Commodities | (23 | ) | (40 | ) | (11 | ) | (13 | ) | (2) | ||||||||
Total | $ | (23 | ) | $ | (39 | ) | $ | (11 | ) | $ | (12 | ) | |||||
Amount of gain/(loss) recognized in AOCI (effective portion) | Amount of gain/(loss) reclassified from AOCI into earnings | ||||||||||||||||
Quarter Ended | Six Months Ended | Quarter Ended | Six Months Ended | ||||||||||||||
Derivatives in cash flow hedges | June 30, 2012 | June 30, 2012 | June 30, 2012 | June 30, 2012 | |||||||||||||
Foreign exchange contracts | $ | — | $ | 2 | $ | — | $ | (1 | ) | (3) | |||||||
Commodity contracts | (31 | ) | (21 | ) | (11 | ) | (18 | ) | (4) | ||||||||
Total | $ | (31 | ) | $ | (19 | ) | $ | (11 | ) | $ | (19 | ) | |||||
(1) Within the Statement of Operations for the three months ended June 30, 2013, a gain of $1 was recognized in cost of products sold and a loss of $1 was recognized in net sales. During the six months ended June 30, 2013 a gain of
$2 was recognized in cost of products sold and a loss of $1 was recognized in net sales.
(2) Within the Statement of Operations for the three months ended June 30, 2013, a loss of $15 was recognized in cost of products sold and a tax benefit of $4 was recognized in income tax expense. During the six months ended June 30, 2013 a loss of $18 was recognized in cost of products sold and a tax benefit of $5 was recognized in income tax expense.
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Crown Holdings, Inc.
(3) Within the Statement of Operations for the three months ended June 30, 2012 , a gain of $3 was recognized in cost of products sold and a loss of $3 was recognized in net sales. During the six months ended June 30, 2012 , a gain of $6 was recognized in cost of products sold and a loss of $7 was recognized in net sales.
(4) Within the Statement of Operations for the three months ended June 30, 2012 , a loss of $14 was recognized in cost of products sold and a tax benefit of $3 was recognized in income tax expense. During the six months ended June 30, 2012, a loss of $23 was recognized in cost of products sold and a tax benefit of $5 was recognized in income tax expense.
For the twelve month period ending June 30, 2014, a net loss of $52 ($42, net of tax) is expected to be reclassified to earnings. No amounts were reclassified during the six months ended June 30, 2013 and 2012 in connection with anticipated transactions that were no longer considered probable.
Fair Value Hedges and Contracts Not Designated as Hedges
The Company designates certain derivative financial instruments as fair value hedges of recognized foreign-denominated assets and liabilities, generally trade accounts receivable and payable and unrecognized firm commitments. The notional values and maturity dates of the derivative instruments coincide with those of the hedged items. Changes in fair value of the derivative financial instruments, excluding time value, are offset by changes in fair value of the related hedged items.
Other than for firm commitments, amounts related to time value are excluded from the assessment and measurement of hedge effectiveness and are reported in earnings. Less than $1 was reported in earnings for the three and six months ended June 30, 2013.
Certain derivative financial instruments, including foreign exchange contracts related to intercompany debt, were not designated in hedge relationships; however, they are effective economic hedges as the changes in their fair value, except for time value, are offset by changes in re-measurement of the related hedged items. The Company’s primary use of these derivative instruments is to offset the earnings impact that fluctuations in foreign exchange rates have on certain monetary assets and liabilities denominated in nonfunctional currencies. Changes in fair value of these derivative instruments are immediately recognized in earnings as foreign exchange adjustments.
The impact on earnings from foreign exchange contracts designated as fair value hedges was a gain of $1 and losses of $5 for the three and six months ended June 30, 2013 and a loss of less than $1 and a gain of $1 for the three and six months ended June 30, 2012. The impact on earnings from foreign exchange contracts not designated as hedges was a gain of $10 and a loss of $3 for the three and six months ended June 30, 2013 and losses of $4 and $3 for the same periods in 2012. These adjustments were reported within foreign exchange in the Consolidated Statements of Operations and were offset by changes in the fair values of the related hedged item.
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Crown Holdings, Inc.
Fair Values of Derivative Financial Instruments and Valuation Hierarchy
The following table sets forth the fair value hierarchy for the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2013 and December 31, 2012, respectively.
Balance Sheet Classification | Fair Value Hierarchy | June 30, 2013 | December 31, 2012 | |||||||||
Derivative Assets | ||||||||||||
Derivatives designated as hedges: | ||||||||||||
Foreign exchange | Other current assets | 2 | $ | 23 | $ | 5 | ||||||
Commodities | Other current assets | 1 | — | 5 | ||||||||
Commodities | Other non-current assets | 1 | — | 1 | ||||||||
Derivatives not designated as hedges: | ||||||||||||
Foreign exchange | Other current assets | 2 | 7 | 11 | ||||||||
Total | $ | 30 | $ | 22 | ||||||||
Derivative Liabilities | ||||||||||||
Derivatives designated as hedges: | ||||||||||||
Foreign exchange | Accounts payable and accrued liabilities | 2 | $ | 24 | $ | 6 | ||||||
Commodities | Accounts payable and accrued liabilities | 1 | 44 | 17 | ||||||||
Commodities | Other non-current liabilities | 1 | 6 | 3 | ||||||||
Derivatives not designated as hedges: | ||||||||||||
Foreign exchange | Accounts payable and accrued liabilities | 2 | 4 | 4 | ||||||||
Total | $ | 78 | $ | 30 | ||||||||
Offsetting of Derivative Assets and Liabilities
Certain derivative financial instruments are subject to agreements with counterparties similar to master netting arrangements and are eligible for offset. The Company has made an accounting policy election not to offset the fair values of these instruments within the statement of financial position. In the table below, the aggregate fair values of the the Company's derivative assets and liabilities are presented on both a gross and net basis, where appropriate.
Gross Amounts Recognized in the Balance Sheet | Gross Amounts Offset in the Balance Sheet | Net Amounts Presented in the Balance Sheet | Gross Amounts Not Offset in the Balance Sheet | Net Amount | ||||||
Balance at June 30, 2013 | ||||||||||
Derivative Assets | 30 | — | 30 | 2 | 28 | |||||
Derivative Liabilities | 78 | — | 78 | 2 | 76 | |||||
Balance at December 31, 2012 | ||||||||||
Derivative Assets | 22 | — | 22 | 7 | 15 | |||||
Derivative Liabilities | 30 | — | 30 | 7 | 23 | |||||
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Crown Holdings, Inc.
Notional Values of Outstanding Derivative Instruments
The aggregate U.S. dollar-equivalent notional values of outstanding derivative instruments in the Consolidated Balance Sheets at June 30, 2013 and December 31, 2012 were:
June 30, 2013 | December 31, 2012 | ||||||
Derivatives in cash flow hedges: | |||||||
Foreign exchange | $ | 822 | $ | 471 | |||
Commodities | 456 | 434 | |||||
Derivatives in fair value hedges: | |||||||
Foreign exchange | 97 | 105 | |||||
Derivatives not designated as hedges: | |||||||
Foreign exchange | 650 | 924 | |||||
H. | Restructuring |
The Company recorded restructuring charges as follows:
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
European Division Headquarters | $ | 2 | $ | — | $ | 2 | $ | — | |||||||
North America Food | 1 | 1 | 1 | 1 | |||||||||||
European Food | — | 1 | 1 | 1 | |||||||||||
Asia Pacific | — | — | 1 | — | |||||||||||
Other European operations | 1 | 1 | 3 | 1 | |||||||||||
$ | 4 | $ | 3 | $ | 8 | $ | 3 | ||||||||
Restructuring charges by type are as follows:
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Termination benefits | $ | — | $ | 1 | $ | — | $ | 1 | |||||||
Other exit costs | 4 | 2 | 8 | 2 | |||||||||||
$ | 4 | $ | 3 | $ | 8 | $ | 3 | ||||||||
European Division Headquarters
Through June 30, 2013, the Company incurred costs of $39 which are expected to be the total costs related to the relocation of its European Division headquarters and management to Switzerland in order to benefit from a more centralized management location.
The following table summarizes the restructuring accrual balances and utilization by cost type for the relocation:
Termination benefits | Other exit costs | Total | |||||||||
Balance at January 1, 2013 | $ | — | $ | 22 | $ | 22 | |||||
Provisions | — | 2 | 2 | ||||||||
Payments | — | (7 | ) | (7 | ) | ||||||
Balance at June 30, 2013 | $ | — | $ | 17 | $ | 17 | |||||
Other exit costs represent the estimated employee compensation costs resulting from an intercompany payment related to the relocation. The Company expects to pay these costs over the next 2 years.
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Crown Holdings, Inc.
European Food
Through June 30, 2013, the Company incurred costs of $26 in connection with 2011 and 2012 actions to reduce manufacturing capacity and headcount in its European Food segment. These actions combined are expected to reduce headcount by approximately 285 and to eliminate approximately 7% of the business' capacity. Due to the similar nature of these actions, they have been combined in the rollforward presented below. The Company expects to incur future additional costs of $3 related to the actions which are expected to be completed in 2014 at an estimated aggregate cost of $29. The Company continues to review its supply and demand profile and long-term plans in Europe and it is possible that the Company may record additional restructuring charges in the future.
Termination benefits | Other exit costs | Total | |||||||||
Balance at January 1, 2013 | $ | 18 | $ | — | $ | 18 | |||||
Provisions | — | 1 | 1 | ||||||||
Payments | (3 | ) | (1 | ) | (4 | ) | |||||
Foreign currency translation | (1 | ) | — | (1 | ) | ||||||
Balance at June 30, 2013 | $ | 14 | $ | — | $ | 14 | |||||
Other European operations
Through June 30, 2013, the Company incurred costs of $66 in connection with 2011 and 2012 actions to reduce manufacturing capacity and headcount in its European Aerosol and Specialty Packaging businesses. These actions combined are expected to reduce headcount by approximately 474 and to eliminate approximately 20% of the businesses' capacity. Due to the similar nature of these actions, they have been combined in the rollforward presented below. The Company currently expects to incur future additional costs of $3 related to the actions which are expected to be completed in 2014 at an estimated aggregate cost of $69. The Company continues to review its supply and demand profile and long-term plans in Europe and it is possible that the Company may record additional restructuring charges in the future.
The table below summarizes the restructuring accrual balances and utilization by cost type for this action.
Termination benefits | Other exit costs | Total | |||||||||
Balance at January 1, 2013 | $ | 37 | $ | — | $ | 37 | |||||
Provision | — | 3 | 3 | ||||||||
Payments | (11 | ) | (3 | ) | (14 | ) | |||||
Foreign currency translation | (2 | ) | — | (2 | ) | ||||||
Balance at June 30, 2013 | $ | 24 | $ | — | $ | 24 | |||||
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Crown Holdings, Inc.
I. | Debt |
The Company’s outstanding debt was as follows.
June 30, 2013 | December 31, 2012 | ||||||
Short-term debt | $ | 286 | $ | 261 | |||
Long-term debt | |||||||
Senior secured borrowings: | |||||||
Revolving credit facilities | $ | 433 | $ | 45 | |||
Term loan facilities | |||||||
U.S. dollar at LIBOR plus 1.75% due 2016 | 221 | 550 | |||||
Euro (€110 at June 30, 2013) at EURIBOR plus 1.75% due 2016 | 143 | 362 | |||||
Senior notes and debentures: | |||||||
U.S. dollar 7.625% due 2017 | — | 400 | |||||
Euro (€500 at June 30, 2013) 7.125% due 2018 | 651 | 659 | |||||
U.S. dollar 6.25% due 2021 | 700 | 700 | |||||
U.S. dollar 4.50% due 2023 | 1,000 | — | |||||
U.S. dollar 7.375% due 2026 | 350 | 350 | |||||
U.S. dollar 7.50% due 2096 | 64 | 64 | |||||
Other indebtedness in various currencies | 280 | 283 | |||||
Unamortized discounts | (2 | ) | (9 | ) | |||
Total long-term debt | 3,840 | 3,404 | |||||
Less: current maturities | (168 | ) | (115 | ) | |||
Total long-term debt, less current maturities | $ | 3,672 | $ | 3,289 | |||
The estimated fair value of the Company’s long-term borrowings, using a market approach incorporating level 2 inputs such as quoted market prices for the same or similar issues, was $4,189 at June 30, 2013.
In January 2013, the Company issued $1,000 principal amount of 4.5% senior unsecured notes due 2023. The Company paid $15 in issuance costs that will be amortized over the term of the debt. In connection with the issuance, the Company redeemed all of its outstanding $400 senior notes due 2017 and repaid $500 of indebtedness under its senior secured term loan facilities. The Company recorded a loss from early extinguishment of debt of $38, including $23 for premiums paid, $9 for the write off of deferred financing fees and $6 for the write off of unamortized discounts.
J. | Asbestos-Related Liabilities |
Crown Cork & Seal Company, Inc. (“Crown Cork”) is one of many defendants in a substantial number of lawsuits filed throughout the United States by persons alleging bodily injury as a result of exposure to asbestos. These claims arose from the insulation operations of a U.S. company, the majority of whose stock Crown Cork purchased in 1963. Approximately ninety days after the stock purchase, this U.S. company sold its insulation assets and was later merged into Crown Cork.
Prior to 1998, amounts paid to asbestos claimants were covered by a fund made available to Crown Cork under a 1985 settlement with carriers insuring Crown Cork through 1976, when Crown Cork became self-insured. The fund was depleted in 1998 and the Company has no remaining coverage for asbestos-related costs.
In recent years, the states of Alabama, Arizona, Florida, Georgia, Idaho, Indiana, Michigan, Mississippi, Nebraska, North Dakota, Ohio, South Carolina, South Dakota, Tennessee, Utah, Wisconsin and Wyoming enacted legislation that limits asbestos-related liabilities under state law of companies such as Crown Cork that allegedly incurred these liabilities because they are successors by corporate merger to companies that had been involved with asbestos. The legislation, which applies to future and, with the exception of Georgia, South Carolina, South Dakota and Wyoming, pending claims, caps asbestos-related liabilities at the fair market value of the predecessor's total gross assets adjusted for inflation. Crown Cork has paid significantly more for asbestos-related claims than the total value of its predecessor's
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Crown Holdings, Inc.
assets adjusted for inflation. Crown Cork has integrated the legislation into its claims defense strategy. The Company cautions, however, that the legislation may be challenged and there can be no assurance regarding the ultimate effect of the legislation on Crown Cork.
In June 2003, the state of Texas enacted legislation that limits the asbestos-related liabilities in Texas courts of companies such as Crown Cork that allegedly incurred these liabilities because they are successors by corporate merger to companies that had been involved with asbestos. The Texas legislation, which applies to future claims and pending claims, caps asbestos-related liabilities at the total gross value of the predecessor’s assets adjusted for inflation. Crown Cork has paid significantly more for asbestos-related claims than the total adjusted value of its predecessor’s assets.
On October 22, 2010, the Texas Supreme Court, in a 6-2 decision, reversed a lower court decision, Barbara Robinson v. Crown Cork & Seal Company, Inc., No. 14-04-00658-CV, Fourteenth Court of Appeals, Texas, which had upheld the dismissal of an asbestos-related case against Crown Cork. The Texas Supreme Court held that the Texas legislation was unconstitutional under the Texas Constitution when applied to asbestos-related claims pending against Crown Cork when the legislation was enacted in June 2003. The Company believes that the decision of the Texas Supreme Court is limited to retroactive application of the Texas legislation to asbestos-related cases that were pending against Crown Cork in Texas on June 11, 2003 and therefore, in its accrual, continues to assign no value to claims filed after June 11, 2003.
In December 2001, the Commonwealth of Pennsylvania enacted legislation that limits the asbestos-related liabilities of Pennsylvania corporations that are successors by corporate merger to companies involved with asbestos. The legislation limits the successor’s liability for asbestos to the acquired company’s asset value adjusted for inflation. Crown Cork has paid significantly more for asbestos-related claims than the acquired company’s adjusted asset value. In November 2004, the legislation was amended to address a Pennsylvania Supreme Court decision (Ieropoli v. AC&S Corporation, et. al., No. 117 EM 2002) which held that the statute violated the Pennsylvania Constitution due to retroactive application. The Company cautions that the limitations of the statute, as amended, are subject to litigation and may not be upheld.
In June 2013, the Oklahoma Supreme Court declared the Comprehensive Lawsuit Reform Act of 2009 unconstitutional, which included the Asbestos and Silica Priorities Act.
The Company further cautions that an adverse ruling in any litigation relating to the constitutionality or applicability to Crown Cork of one or more statutes that limits the asbestos-related liability of alleged defendants like Crown Cork could have a material impact on the Company.
During the six months ended June 30, 2013, the Company paid $13 to settle outstanding claims and had claims activity as follows:
Beginning claims | 51,000 | |
New claims | 2,000 | |
Settlements or dismissals | (1,000 | ) |
Ending claims | 52,000 | |
In the fourth quarter of each year, the Company performs an analysis of outstanding claims and categorizes by year of exposure and state filed. As of December 31, 2012, the Company's outstanding claims were:
2012 | ||
Claimants alleging first exposure after 1964 | 15,000 | |
Claimants alleging first exposure before or during 1964 filed in: | ||
Texas | 13,000 | |
Pennsylvania | 2,000 | |
Other states that have enacted asbestos legislation | 6,000 | |
Other states | 15,000 | |
Total claims outstanding | 51,000 | |
The outstanding claims in each period exclude 3,100 pending claims involving plaintiffs who allege that they are, or were, maritime workers subject to exposure to asbestos, but whose claims the Company believes will not have a material effect on the Company’s consolidated results of operations, financial position or cash flow. The outstanding claims also exclude approximately 19,000 inactive claims. Due to the passage of time, the Company considers it unlikely that the
17
Crown Holdings, Inc.
plaintiffs in these cases will pursue further action against the Company. The exclusion of these inactive claims had no effect on the calculation of the Company’s accrual as the claims were filed in states, as described above, where the Company’s liability is limited by statute.
With respect to claimants alleging first exposure to asbestos before or during 1964, the Company does not include in its accrual any amounts for settlements in states where the Company’s liability is limited by statute except for certain pending claims in Texas as described earlier.
With respect to post-1964 claims, regardless of the existence of asbestos legislation, the Company does not include in its accrual any amounts for settlement of these claims because of increased difficulty of establishing identification of relevant insulation products as the cause of injury. Given our settlement experience with post-1964 claims, we do not believe that an adverse ruling in the Texas or Pennsylvania asbestos litigation cases, or in any other state that has enacted asbestos legislation, would have a material impact on the Company with respect to such claims.
As of December 31, the percentage of outstanding claims related to claimants alleging serious diseases (primarily mesothelioma and other malignancies) were as follows:
2012 | 2011 | 2010 | ||||||
Total claims | 19 | % | 18 | % | 18 | % | ||
Pre-1964 claims in states without asbestos legislation | 36 | % | 33 | % | 31 | % | ||
Crown Cork has entered into arrangements with plaintiffs’ counsel in certain jurisdictions with respect to claims which are not yet filed, or asserted, against it. However, Crown Cork expects claims under these arrangements to be filed or asserted against Crown Cork in the future. The projected value of these claims is included in the Company’s estimated liability as of June 30, 2013.
As of June 30, 2013, the Company’s accrual for pending and future asbestos-related claims and related legal costs was $243, including $182 for unasserted claims. The Company’s accrual includes estimated probable costs for claims through the year 2022. The Company’s accrual excludes potential costs for claims beyond 2022 because the Company believes that the key assumptions underlying its accrual are subject to greater uncertainty as the projection period lengthens.
It is reasonably possible that the actual loss could be in excess of the Company’s accrual. The Company is unable to estimate the reasonably possible loss in excess of its accrual due to uncertainty in the following assumptions that underlie the Company’s accrual and the possibility of losses in excess of such accrual: the amount of damages sought by the claimant (which was not specified for approximately 88% of the claims outstanding at the end of 2012), the Company and claimant’s willingness to negotiate a settlement, the terms of settlements of other defendants with asbestos-related liabilities, the bankruptcy filings of other defendants (which may result in additional claims and higher settlements for non-bankrupt defendants), the nature of pending and future claims (including the seriousness of alleged disease, whether claimants allege first exposure to asbestos before or during 1964 and the claimant’s ability to demonstrate the alleged link to Crown Cork), the volatility of the litigation environment, the defense strategies available to the Company, the level of future claims, the rate of receipt of claims, the jurisdiction in which claims are filed, and the effect of state asbestos legislation (including the validity and applicability of the Pennsylvania legislation to non-Pennsylvania jurisdictions, where the substantial majority of the Company’s asbestos cases are filed).
K. | Commitments and Contingent Liabilities |
The Company, along with others in most cases, has been identified by the EPA or a comparable state environmental agency as a Potentially Responsible Party (“PRP”) at a number of sites and has recorded aggregate accruals of $6 for its share of estimated future remediation costs at these sites. The Company has been identified as having either directly or indirectly disposed of commercial or industrial waste at the sites subject to the accrual, and where appropriate and supported by available information, generally has agreed to be responsible for a percentage of future remediation costs based on an estimated volume of materials disposed in proportion to the total materials disposed at each site. The Company has not had monetary sanctions imposed nor has the Company been notified of any potential monetary sanctions at any of the sites.
The Company has also recorded aggregate accruals of $7 for remediation activities at various worldwide locations that are owned by the Company and for which the Company is not a member of a PRP group. In the second quarter of 2013, in connection with a favorable arbitration ruling, the Company recorded a receivable of $3 for the recovery of certain
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Crown Holdings, Inc.
remediation costs from a third party. Although the Company believes its accruals are adequate to cover its portion of future remediation costs, there can be no assurance that the ultimate payments will not exceed the amount of the Company’s accruals and will not have a material effect on its results of operations, financial position and cash flow. Any possible loss or range of potential loss that may be incurred in excess of the recorded accruals cannot be estimated.
The Company's Italian subsidiaries received assessments for value added taxes and related income taxes from the Italian tax authorities resulting from certain third party suppliers' failures to remit required value added tax payments due by those suppliers under Italian law with respect to purchases for resale to the Company. The expected total assessments were approximately €75 ($98 at June 30, 2013) including applicable interest and penalties. Based on discussions with the Italian tax authorities in the second quarter of 2013, the Company expects to settle these matters during the third quarter of 2013 and for the three and six months ended June 30, 2013, the Company recognized pre-tax expense of $14 and $20 ($13 and $14 after-tax) within its Consolidated Statements of Operations to fully provide for this expected settlement. There can be no assurance the Company will be successful in settling these matters or prevailing in judicial proceedings, or that the final amount of any additional taxes and related interest and penalties payable to the Italian tax authorities in such settlement or judicial proceedings will be under the Company's accrual.
In the second quarter of 2013, an arbitrator ruled in favor of the Company over certain environmental indemnification matters related to a prior acquisition. Under the terms of the ruling, the Company received an initial payment of $15 and expects to receive an additional $1 as reimbursement for previously incurred expenses. Accordingly, for the three and six months ended June 30, 2013, the Company recognized a pre-tax gain of $16 ($11 after-tax) within its Consolidated Statements of Operations.
The Company and its subsidiaries are also subject to various other lawsuits and claims with respect to labor, environmental, securities, vendor and other matters arising out of the Company’s normal course of business. While the impact on future financial results is not subject to reasonable estimation because considerable uncertainty exists, management believes that the ultimate liabilities resulting from such lawsuits and claims will not materially affect the Company’s consolidated earnings, financial position or cash flow.
The Company has various commitments to purchase materials, supplies and utilities as part of the ordinary course of business. The Company’s basic raw materials for its products are steel and aluminum, both of which are purchased from multiple sources. The Company is subject to fluctuations in the cost of these raw materials and has periodically adjusted its selling prices to reflect these movements. There can be no assurance, however, that the Company will be able to fully recover any increases or fluctuations in raw material costs from its customers. The Company also has commitments for standby letters of credit and for purchases of capital assets.
At June 30, 2013, the Company was party to certain indemnification agreements covering environmental remediation, lease payments and other potential costs associated with properties sold or businesses divested. For agreements with defined liability limits the maximum potential amount of future liability was $9. The Company accrues for costs related to these items when it is probable that a liability has been incurred and the amount can be reasonably estimated. At June 30, 2013, the Company also had guarantees of $40 related to the residual values of leased assets.
L. | Earnings Per Share |
The following table summarizes the computations of basic and diluted earnings per share attributable to the Company for the three and six months ended June 30, 2013 and 2012, respectively:
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Net income attributable to Crown Holdings | $ | 133 | $ | 134 | $ | 174 | $ | 203 | |||||||
Weighted average shares outstanding: | |||||||||||||||
Basic | 141.2 | 148.0 | 141.8 | 147.9 | |||||||||||
Add: dilutive stock options and restricted stock | 1.3 | 2.5 | 1.5 | 2.4 | |||||||||||
Diluted | 142.5 | 150.5 | 143.3 | 150.3 | |||||||||||
Basic earnings per share | $ | 0.94 | $ | 0.91 | $ | 1.23 | $ | 1.37 | |||||||
Diluted earnings per share | $ | 0.93 | $ | 0.89 | $ | 1.21 | $ | 1.35 | |||||||
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Crown Holdings, Inc.
For the three months ended June 30, 2013 and 2012, 0.8 million and 0.1 million contingently issuable common shares were excluded from the computation of diluted earnings per share because the effect would have been anti-dilutive.
For the six months ended June 30, 2013 and 2012, 0.5 million and 0.2 million contingently issuable common shares were excluded from the computation of diluted earnings per share because the effect would have been anti-dilutive.
M. | Pension and Other Postretirement Benefits |
The components of net periodic pension and other postretirement benefits costs for the three and six months ended June 30 were as follows:
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
Pension Benefits – U.S. Plans | 2013 | 2012 | 2013 | 2012 | |||||||||||
Service cost | $ | 3 | $ | 3 | $ | 7 | $ | 6 | |||||||
Interest cost | 16 | 17 | 31 | 34 | |||||||||||
Expected return on plan assets | (24 | ) | (23 | ) | (49 | ) | (46 | ) | |||||||
Recognized net loss | 14 | 14 | 28 | 28 | |||||||||||
Net periodic cost | $ | 9 | $ | 11 | $ | 17 | $ | 22 | |||||||
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
Pension Benefits – Non-U.S. Plans | 2013 | 2012 | 2013 | 2012 | |||||||||||
Service cost | $ | 6 | $ | 7 | $ | 13 | $ | 14 | |||||||
Interest cost | 31 | 38 | 67 | 76 | |||||||||||
Expected return on plan assets | (40 | ) | (46 | ) | (86 | ) | (92 | ) | |||||||
Recognized prior service credit | (2 | ) | 1 | (6 | ) | 1 | |||||||||
Recognized net loss | 16 | 14 | 34 | 28 | |||||||||||
Net periodic cost | $ | 11 | $ | 14 | $ | 22 | $ | 27 | |||||||
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
Other Postretirement Benefits | 2013 | 2012 | 2013 | 2012 | |||||||||||
Service cost | $ | 1 | $ | 1 | $ | 2 | $ | 2 | |||||||
Interest cost | 4 | 4 | 7 | 8 | |||||||||||
Recognized prior service credit | (10 | ) | (11 | ) | (20 | ) | (22 | ) | |||||||
Recognized net loss | 4 | 4 | 8 | 8 | |||||||||||
Net periodic cost | $ | (1 | ) | $ | (2 | ) | $ | (3 | ) | $ | (4 | ) | |||
N. | Income Taxes |
The provision for income taxes differs from the amount of income tax determined by applying the U.S. statutory federal income tax rate to pre-tax income as a result of the following items:
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
U.S. statutory rate at 35% | $ | 73 | $ | 73 | $ | 106 | $ | 116 | |||||||
Tax on foreign income | (21 | ) | (22 | ) | (31 | ) | (33 | ) | |||||||
Valuation allowance | (1 | ) | 1 | 1 | 3 | ||||||||||
Other items, net | 4 | (1 | ) | 3 | (3 | ) | |||||||||
Income tax provision | $ | 55 | $ | 51 | $ | 79 | $ | 83 | |||||||
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Crown Holdings, Inc.
O. | Segment Information |
The Company evaluates performance and allocates resources based on segment income. Segment income, which is not a defined term under GAAP, is defined by the Company as gross profit less selling and administrative expenses. Segment income should not be considered in isolation or as a substitute for net income data prepared in accordance with GAAP and may not be comparable to calculations of similarly titled measures by other companies.
The tables below present information about operating segments for the three and six months ended June 30, 2013 and 2012:
External Sales | External Sales | ||||||||||||||
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Americas Beverage | $ | 582 | $ | 593 | $ | 1,134 | $ | 1,127 | |||||||
North America Food | 206 | 213 | 403 | 413 | |||||||||||
European Beverage | 492 | 472 | 863 | 834 | |||||||||||
European Food | 430 | 434 | 806 | 836 | |||||||||||
Asia Pacific | 301 | 249 | 577 | 474 | |||||||||||
Total reportable segments | 2,011 | 1,961 | 3,783 | 3,684 | |||||||||||
Non-reportable segments | 212 | 223 | 413 | 447 | |||||||||||
Total | $ | 2,223 | $ | 2,184 | $ | 4,196 | $ | 4,131 | |||||||
The primary sources of revenue included in non-reportable segments are the Company's aerosol can businesses in North America and Europe, the Company's specialty packaging business in Europe and the Company's tooling and equipment operations in the U.S. and United Kingdom.
Intersegment Sales | Intersegment Sales | ||||||||||||||
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Americas Beverage | $ | 24 | $ | 25 | $ | 38 | $ | 47 | |||||||
North America Food | 3 | 2 | 6 | 6 | |||||||||||
European Beverage | — | 6 | 1 | 12 | |||||||||||
European Food | 20 | 29 | 41 | 55 | |||||||||||
Asia Pacific | — | — | — | — | |||||||||||
Total reportable segments | 47 | 62 | 86 | 120 | |||||||||||
Non-reportable segments | 25 | 23 | 57 | 56 | |||||||||||
Total | $ | 72 | $ | 85 | $ | 143 | $ | 176 | |||||||
Intersegment sales primarily include sales of ends and components used to manufacture cans, such as printed and coated metal, as well as parts and equipment used in the manufacturing process.
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Crown Holdings, Inc.
Segment Income | Segment Income | ||||||||||||||
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Americas Beverage | $ | 85 | $ | 78 | $ | 161 | $ | 147 | |||||||
North America Food | 41 | 41 | 72 | 73 | |||||||||||
European Beverage | 78 | 64 | 129 | 106 | |||||||||||
European Food | 39 | 47 | 71 | 87 | |||||||||||
Asia Pacific | 35 | 35 | 68 | 66 | |||||||||||
Total reportable segments | $ | 278 | $ | 265 | $ | 501 | $ | 479 | |||||||
A reconciliation of segment income of reportable segments to income before income taxes and equity earnings for the three and six months ended June 30, 2013 and 2012 follows:
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Segment income of reportable segments | $ | 278 | $ | 265 | $ | 501 | $ | 479 | |||||||
Segment income of non-reportable segments | 31 | 29 | 53 | 52 | |||||||||||
Corporate and unallocated items | (36 | ) | (44 | ) | (86 | ) | (100 | ) | |||||||
Provision for restructuring | (4 | ) | (3 | ) | (8 | ) | (3 | ) | |||||||
Asset impairments and sales | — | 10 | — | 10 | |||||||||||
Loss from early extinguishments of debt | — | — | (38 | ) | — | ||||||||||
Interest expense | (61 | ) | (55 | ) | (121 | ) | (113 | ) | |||||||
Interest income | 1 | 1 | 3 | 3 | |||||||||||
Translation and foreign exchange | — | 5 | (2 | ) | 2 | ||||||||||
Income before income taxes and equity earnings | $ | 209 | $ | 208 | $ | 302 | $ | 330 | |||||||
For the three months ended June 30, 2013, intercompany profit of $1 was eliminated within segment income of non-reportable segments. For the six months ended June 30, 2013 and 2012, intercompany profit of $3 and $1 was eliminated within segment income of non-reportable segments.
“Corporate and unallocated items” includes corporate and division administrative costs, technology costs, and unallocated items such as the U.S. and U.K. pension plan costs.
22
Crown Holdings, Inc.
P. | Condensed Combining Financial Information |
Crown European Holdings SA (Issuer), a wholly owned subsidiary of the Company, has €500 ($651 at June 30, 2013) principal amount of 7.125% senior notes due 2018 outstanding that are fully and unconditionally guaranteed by Crown Holdings, Inc. (Parent) and certain subsidiaries. The guarantors are wholly owned by the Company and the guarantees are made on a joint and several basis. The guarantor column includes financial information for all subsidiaries in the United States (except for an insurance subsidiary and a receivable securitization subsidiary), substantially all subsidiaries in Belgium, Canada, France, Germany, Mexico, Switzerland and the United Kingdom, and a subsidiary in the Netherlands.
The following condensed combining financial statements:
•statements of comprehensive income for the three and six months ended June 30, 2013 and 2012,
•balance sheets as of June 30, 2013 and December 31, 2012, and
•statements of cash flows for the six months ended June 30, 2013 and 2012
are presented on the following pages to comply with the Company’s requirements under Rule 3-10 of Regulation S-X.
CONDENSED COMBINING STATEMENT OF COMPREHENSIVE INCOME
For the three months ended June 30, 2013
(in millions)
Parent | Issuer | Guarantors | Non- Guarantors | Eliminations | Total Company | ||||||||||||||||||
Net sales | $ | 1,120 | $ | 1,103 | $ | 2,223 | |||||||||||||||||
Cost of products sold, excluding depreciation and amortization | 877 | 941 | 1,818 | ||||||||||||||||||||
Depreciation and amortization | 10 | 20 | 30 | ||||||||||||||||||||
Gross profit | 233 | 142 | 375 | ||||||||||||||||||||
Selling and administrative expense | $ | (2 | ) | 80 | 24 | 102 | |||||||||||||||||
Provision for restructuring | — | 4 | — | 4 | |||||||||||||||||||
Net interest expense | 14 | 32 | 14 | 60 | |||||||||||||||||||
Technology royalty | — | (10 | ) | 10 | — | ||||||||||||||||||
Foreign exchange | — | 1 | (1 | ) | — | ||||||||||||||||||
Income/(loss) before income taxes | (12 | ) | 126 | 95 | 209 | ||||||||||||||||||
Provision for / (benefit from) income taxes | — | 24 | 31 | 55 | |||||||||||||||||||
Equity earnings / (loss) in affiliates | $ | 133 | 39 | 31 | — | $ | (202 | ) | 1 | ||||||||||||||
Net income | 133 | 27 | 133 | 64 | (202 | ) | 155 | ||||||||||||||||
Net income attributable to noncontrolling interests | (22 | ) | (22 | ) | |||||||||||||||||||
Net income attributable to Crown Holdings | $ | 133 | $ | 27 | $ | 133 | $ | 42 | $ | (202 | ) | $ | 133 | ||||||||||
Comprehensive income | $ | 148 | $ | 28 | $ | 148 | $ | 58 | $ | (213 | ) | $ | 169 | ||||||||||
Comprehensive income attributable to noncontrolling interests | (21 | ) | (21 | ) | |||||||||||||||||||
Comprehensive income attributable to Crown Holdings | $ | 148 | $ | 28 | $ | 148 | $ | 37 | $ | (213 | ) | $ | 148 | ||||||||||
23
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF COMPREHENSIVE INCOME
For the three months ended June 30, 2012
(in millions)
Parent | Issuer | Guarantors | Non- Guarantors | Eliminations | Total Company | ||||||||||||||||||
Net sales | $ | 1,188 | $ | 996 | $ | 2,184 | |||||||||||||||||
Cost of products sold, excluding depreciation and amortization | 972 | 827 | 1,799 | ||||||||||||||||||||
Depreciation and amortization | 20 | 25 | 45 | ||||||||||||||||||||
Gross profit | — | 196 | 144 | 340 | |||||||||||||||||||
Selling and administrative expense | $ | (1 | ) | 67 | 24 | 90 | |||||||||||||||||
Provision for restructuring | 2 | 1 | 3 | ||||||||||||||||||||
Asset impairments and sales | (1 | ) | (9 | ) | — | (10 | ) | ||||||||||||||||
Net interest expense | 13 | 32 | 9 | 54 | |||||||||||||||||||
Technology royalty | (12 | ) | 12 | — | |||||||||||||||||||
Foreign exchange | — | — | (2 | ) | (3 | ) | — | (5 | ) | ||||||||||||||
Income/(loss) before income taxes | (12 | ) | 110 | 110 | — | 208 | |||||||||||||||||
Provision for / (benefit from) income taxes | — | — | 36 | 15 | — | 51 | |||||||||||||||||
Equity earnings / (loss) in affiliates | $ | 134 | 65 | 60 | — | $ | (259 | ) | — | ||||||||||||||
Net income | 134 | 53 | 134 | 95 | (259 | ) | 157 | ||||||||||||||||
Net income attributable to noncontrolling interests | — | — | — | (23 | ) | — | (23 | ) | |||||||||||||||
Net income attributable to Crown Holdings | $ | 134 | $ | 53 | $ | 134 | $ | 72 | $ | (259 | ) | $ | 134 | ||||||||||
Comprehensive income | $ | 93 | $ | 6 | $ | 93 | $ | 16 | $ | (97 | ) | $ | 111 | ||||||||||
Comprehensive income attributable to noncontrolling interests | — | — | — | (18 | ) | — | (18 | ) | |||||||||||||||
Comprehensive income attributable to Crown Holdings | $ | 93 | $ | 6 | $ | 93 | $ | (2 | ) | $ | (97 | ) | $ | 93 | |||||||||
24
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF COMPREHENSIVE INCOME
For the six months ended June 30, 2013
(in millions)
Parent | Issuer | Guarantors | Non- Guarantors | Eliminations | Total Company | ||||||||||||||||||
Net sales | $ | 2,128 | $ | 2,068 | $ | 4,196 | |||||||||||||||||
Cost of products sold, excluding depreciation and amortization | 1,705 | 1,753 | 3,458 | ||||||||||||||||||||
Depreciation and amortization | 24 | 40 | 64 | ||||||||||||||||||||
Gross profit | 399 | 275 | 674 | ||||||||||||||||||||
Selling and administrative expense | $ | (2 | ) | 161 | 47 | 206 | |||||||||||||||||
Provision for restructuring | — | 6 | 2 | 8 | |||||||||||||||||||
Loss from early extinguishments of debt | 1 | 37 | 38 | ||||||||||||||||||||
Net interest expense | 27 | 64 | 27 | 118 | |||||||||||||||||||
Technology royalty | — | (18 | ) | 18 | — | ||||||||||||||||||
Foreign exchange | — | 3 | (1 | ) | 2 | ||||||||||||||||||
Income/(loss) before income taxes | (26 | ) | 146 | 182 | 302 | ||||||||||||||||||
Provision for / (benefit from) income taxes | — | 40 | 39 | 79 | |||||||||||||||||||
Equity earnings / (loss) in affiliates | $ | 174 | 61 | 68 | — | $ | (304 | ) | (1 | ) | |||||||||||||
Net income | 174 | 35 | 174 | 143 | (304 | ) | 222 | ||||||||||||||||
Net income attributable to noncontrolling interests | (48 | ) | (48 | ) | |||||||||||||||||||
Net income attributable to Crown Holdings | $ | 174 | $ | 35 | $ | 174 | $ | 95 | $ | (304 | ) | $ | 174 | ||||||||||
Comprehensive income | $ | 172 | $ | 17 | $ | 172 | $ | 107 | $ | (252 | ) | $ | 216 | ||||||||||
Comprehensive income attributable to noncontrolling interests | (44 | ) | (44 | ) | |||||||||||||||||||
Comprehensive income attributable to Crown Holdings | $ | 172 | $ | 17 | $ | 172 | $ | 63 | $ | (252 | ) | $ | 172 | ||||||||||
25
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF COMPREHENSIVE INCOME
For the six months ended June 30, 2012
(in millions)
Parent | Issuer | Guarantors | Non- Guarantors | Eliminations | Total Company | ||||||||||||||||||
Net sales | $ | 2,277 | $ | 1,854 | $ | 4,131 | |||||||||||||||||
Cost of products sold, excluding depreciation and amortization | 1,883 | 1,534 | 3,417 | ||||||||||||||||||||
Depreciation and amortization | 38 | 49 | 87 | ||||||||||||||||||||
Gross profit | — | 356 | 271 | 627 | |||||||||||||||||||
Selling and administrative expense | $ | (1 | ) | 150 | 47 | 196 | |||||||||||||||||
Provision for restructuring | 2 | 1 | 3 | ||||||||||||||||||||
Asset impairments and sales | (1 | ) | (9 | ) | (10 | ) | |||||||||||||||||
Net interest expense | 28 | 63 | 19 | 110 | |||||||||||||||||||
Technology royalty | (19 | ) | 19 | — | |||||||||||||||||||
Foreign exchange | — | — | — | (2 | ) | (2 | ) | ||||||||||||||||
Income/(loss) before income taxes | (27 | ) | 161 | 196 | — | 330 | |||||||||||||||||
Provision for / (benefit from) income taxes | — | — | 54 | 29 | — | 83 | |||||||||||||||||
Equity earnings / (loss) in affiliates | $ | 203 | 114 | 96 | — | (413 | ) | — | |||||||||||||||
Net income | 203 | 87 | 203 | 167 | (413 | ) | 247 | ||||||||||||||||
Net income attributable to noncontrolling interests | — | — | — | (44 | ) | — | (44 | ) | |||||||||||||||
Net income attributable to Crown Holdings | $ | 203 | $ | 87 | $ | 203 | $ | 123 | $ | (413 | ) | $ | 203 | ||||||||||
Comprehensive income | $ | 237 | $ | 104 | $ | 237 | $ | 159 | $ | (458 | ) | $ | 279 | ||||||||||
Comprehensive income attributable to noncontrolling interests | — | — | — | (42 | ) | — | (42 | ) | |||||||||||||||
Comprehensive income attributable to Crown Holdings | $ | 237 | $ | 104 | $ | 237 | $ | 117 | $ | (458 | ) | $ | 237 | ||||||||||
26
Crown Holdings, Inc.
CONDENSED COMBINING BALANCE SHEET
As of June 30, 2013
(in millions)
Parent | Issuer | Guarantors | Non- Guarantors | Eliminations | Total Company | ||||||||||||||||||
Assets | |||||||||||||||||||||||
Current assets | |||||||||||||||||||||||
Cash and cash equivalents | $ | 114 | $ | 113 | $ | 227 | |||||||||||||||||
Receivables, net | 340 | 962 | 1,302 | ||||||||||||||||||||
Intercompany receivables | $ | 2 | 88 | 37 | $ | (127 | ) | ||||||||||||||||
Inventories | 692 | 732 | 1,424 | ||||||||||||||||||||
Prepaid expenses and other current assets | 3 | 16 | 133 | 67 | 219 | ||||||||||||||||||
Total current assets | 3 | 18 | 1,367 | 1,911 | (127 | ) | 3,172 | ||||||||||||||||
Intercompany debt receivables | 1,516 | 3,547 | 533 | (5,596 | ) | ||||||||||||||||||
Investments | $ | 920 | 3,906 | (271 | ) | (4,555 | ) | ||||||||||||||||
Goodwill | 1,382 | 562 | 1,944 | ||||||||||||||||||||
Property, plant and equipment, net | 605 | 1,413 | 2,018 | ||||||||||||||||||||
Other non-current assets | 22 | 630 | 83 | 735 | |||||||||||||||||||
Total | $ | 923 | $ | 5,462 | $ | 7,260 | $ | 4,502 | $ | (10,278 | ) | $ | 7,869 | ||||||||||
Liabilities and equity | |||||||||||||||||||||||
Current liabilities | |||||||||||||||||||||||
Short-term debt | $ | 1 | $ | 10 | $ | 275 | $ | 286 | |||||||||||||||
Current maturities of long-term debt | 36 | 55 | 77 | 168 | |||||||||||||||||||
Accounts payable and accrued liabilities | $ | 11 | 26 | 1,087 | 1,053 | 2,177 | |||||||||||||||||
Intercompany payables | — | 37 | 90 | $ | (127 | ) | |||||||||||||||||
Total current liabilities | 11 | 63 | 1,189 | 1,495 | (127 | ) | 2,631 | ||||||||||||||||
Long-term debt, excluding current maturities | 1,019 | 2,450 | 203 | 3,672 | |||||||||||||||||||
Long-term intercompany debt | 1,073 | 2,206 | 1,454 | 863 | (5,596 | ) | |||||||||||||||||
Postretirement and pension liabilities | 971 | 19 | 990 | ||||||||||||||||||||
Other non-current liabilities | 8 | 276 | 167 | 451 | |||||||||||||||||||
Commitments and contingent liabilities | |||||||||||||||||||||||
Noncontrolling interests | — | 286 | 286 | ||||||||||||||||||||
Crown Holdings shareholders’ equity/(deficit) | (161 | ) | 2,166 | 920 | 1,469 | (4,555 | ) | (161 | ) | ||||||||||||||
Total equity/(deficit) | (161 | ) | 2,166 | 920 | 1,755 | (4,555 | ) | 125 | |||||||||||||||
Total | $ | 923 | $ | 5,462 | $ | 7,260 | $ | 4,502 | $ | (10,278 | ) | $ | 7,869 | ||||||||||
27
Crown Holdings, Inc.
CONDENSED COMBINING BALANCE SHEET
As of December 31, 2012
(in millions)
Parent | Issuer | Guarantors | Non- Guarantors | Eliminations | Total Company | ||||||||||||||||||
Assets | |||||||||||||||||||||||
Current assets | |||||||||||||||||||||||
Cash and cash equivalents | $ | 134 | $ | 216 | $ | 350 | |||||||||||||||||
Receivables, net | 274 | 783 | 1,057 | ||||||||||||||||||||
Intercompany receivables | $ | 2 | 41 | 32 | $ | (75 | ) | ||||||||||||||||
Inventories | 582 | 584 | 1,166 | ||||||||||||||||||||
Prepaid expenses and other current assets | $ | 1 | 14 | 123 | 39 | 177 | |||||||||||||||||
Total current assets | 1 | 16 | 1,154 | 1,654 | (75 | ) | 2,750 | ||||||||||||||||
Intercompany debt receivables | 1,578 | 3,141 | 492 | (5,211 | ) | ||||||||||||||||||
Investments | 749 | 3,839 | (278 | ) | (4,310 | ) | |||||||||||||||||
Goodwill | 1,429 | 569 | 1,998 | ||||||||||||||||||||
Property, plant and equipment, net | 610 | 1,385 | 1,995 | ||||||||||||||||||||
Other non-current assets | 24 | 658 | 65 | 747 | |||||||||||||||||||
Total | $ | 750 | $ | 5,457 | $ | 6,714 | $ | 4,165 | $ | (9,596 | ) | $ | 7,490 | ||||||||||
Liabilities and equity | |||||||||||||||||||||||
Current liabilities | |||||||||||||||||||||||
Short-term debt | $ | 2 | — | $ | 259 | $ | 261 | ||||||||||||||||
Current maturities of long-term debt | 18 | $ | 28 | 69 | 115 | ||||||||||||||||||
Accounts payable and accrued liabilities | $ | 18 | 21 | 1,097 | 1,006 | 2,142 | |||||||||||||||||
Intercompany payables | — | 32 | 43 | $ | (75 | ) | |||||||||||||||||
Total current liabilities | 18 | 41 | 1,157 | 1,377 | (75 | ) | 2,518 | ||||||||||||||||
Long-term debt, excluding current maturities | 1,003 | 2,073 | 213 | 3,289 | |||||||||||||||||||
Long-term intercompany debt | 894 | 2,264 | 1,340 | 713 | (5,211 | ) | |||||||||||||||||
Postretirement and pension liabilities | 1,079 | 19 | 1,098 | ||||||||||||||||||||
Other non-current liabilities | 8 | 316 | 138 | 462 | |||||||||||||||||||
Commitments and contingent liabilities | |||||||||||||||||||||||
Noncontrolling interests | — | 285 | 285 | ||||||||||||||||||||
Crown Holdings shareholders’ equity/(deficit) | (162 | ) | 2,141 | 749 | 1,420 | (4,310 | ) | (162 | ) | ||||||||||||||
Total equity/(deficit) | (162 | ) | 2,141 | 749 | 1,705 | (4,310 | ) | 123 | |||||||||||||||
Total | $ | 750 | $ | 5,457 | $ | 6,714 | $ | 4,165 | $ | (9,596 | ) | $ | 7,490 | ||||||||||
28
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
For the six months ended June 30, 2013
(in millions)
Parent | Issuer | Guarantors | Non- Guarantors | Eliminations | Total Company | ||||||||||||||||||
Net cash provided by/(used for) operating activities | $ | 2 | $ | (21 | ) | $ | (199 | ) | $ | (33 | ) | $ | (251 | ) | |||||||||
Cash flows from investing activities | |||||||||||||||||||||||
Capital expenditures | (29 | ) | (95 | ) | (124 | ) | |||||||||||||||||
Insurance proceeds | 8 | 8 | |||||||||||||||||||||
Change in restricted cash | (5 | ) | (5 | ) | |||||||||||||||||||
Proceeds from sale of property, plant and equipment | 3 | 2 | 5 | ||||||||||||||||||||
Intercompany investing activities | (39 | ) | 50 | $ | (11 | ) | — | ||||||||||||||||
Net cash provided by/(used for) investing activities | — | (39 | ) | 24 | (90 | ) | (11 | ) | (116 | ) | |||||||||||||
Cash flows from financing activities | |||||||||||||||||||||||
Proceeds from long-term debt | 1,000 | 40 | 1,040 | ||||||||||||||||||||
Payments of long-term debt | (217 | ) | (729 | ) | (38 | ) | (984 | ) | |||||||||||||||
Net change in revolving credit facility and short-term debt | 267 | 140 | 16 | 423 | |||||||||||||||||||
Debt issue costs | — | (15 | ) | — | (15 | ) | |||||||||||||||||
Net change in long-term intercompany balances | 179 | 11 | (253 | ) | 63 | — | |||||||||||||||||
Capital contribution | 39 | (39 | ) | — | |||||||||||||||||||
Common stock issued | 13 | 13 | |||||||||||||||||||||
Common stock repurchased | (194 | ) | (194 | ) | |||||||||||||||||||
Dividends paid | — | (50 | ) | 50 | |||||||||||||||||||
Purchase of noncontrolling interests | — | (10 | ) | (10 | ) | ||||||||||||||||||
Dividends paid to noncontrolling interests | (35 | ) | (35 | ) | |||||||||||||||||||
Other | (1 | ) | 12 | — | 11 | ||||||||||||||||||
Net cash provided by/(used for) financing activities | (2 | ) | 60 | 155 | 25 | 11 | 249 | ||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (5 | ) | (5 | ) | |||||||||||||||||||
Net change in cash and cash equivalents | — | — | (20 | ) | (103 | ) | — | (123 | ) | ||||||||||||||
Cash and cash equivalents at January 1 | 134 | 216 | 350 | ||||||||||||||||||||
Cash and cash equivalents at June 30 | $ | — | $ | — | $ | 114 | $ | 113 | $ | — | $ | 227 | |||||||||||
29
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
For the six months ended June 30, 2012
(in millions)
Parent | Issuer | Guarantors | Non- Guarantors | Eliminations | Total Company | ||||||||||||||||||
Net cash provided by/(used for) operating activities | $ | 1 | $ | (26 | ) | $ | (95 | ) | $ | (96 | ) | $ | (216 | ) | |||||||||
Cash flows from investing activities | |||||||||||||||||||||||
Capital expenditures | (29 | ) | (110 | ) | (139 | ) | |||||||||||||||||
Insurance proceeds | 23 | 23 | |||||||||||||||||||||
Change in restricted cash | — | (11 | ) | (11 | ) | ||||||||||||||||||
Proceeds from sale of property, plant and equipment | 2 | 2 | |||||||||||||||||||||
Intercompany investing activities | 34 | 55 | — | $ | (89 | ) | — | ||||||||||||||||
Other | — | (3 | ) | (3 | ) | ||||||||||||||||||
Net cash provided by/(used for) investing activities | 34 | 28 | (101 | ) | (89 | ) | (128 | ) | |||||||||||||||
Cash flows from financing activities | |||||||||||||||||||||||
Proceeds from long-term debt | — | — | 42 | 42 | |||||||||||||||||||
Payments of long-term debt | — | — | (32 | ) | (32 | ) | |||||||||||||||||
Net change in revolving credit facility and short-term debt | 4 | 210 | 60 | 274 | |||||||||||||||||||
Net change in long-term intercompany balances | 2 | (20 | ) | (115 | ) | 133 | — | ||||||||||||||||
Common stock issued | 4 | 4 | |||||||||||||||||||||
Common stock repurchased | (7 | ) | (7 | ) | |||||||||||||||||||
Dividends paid | (34 | ) | (55 | ) | 89 | — | |||||||||||||||||
Dividends paid to noncontrolling interests | (38 | ) | (38 | ) | |||||||||||||||||||
Other | 8 | (13 | ) | — | (5 | ) | |||||||||||||||||
Net cash provided by/(used for) financing activities | (1 | ) | (8 | ) | 48 | 110 | 89 | 238 | |||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (6 | ) | (6 | ) | |||||||||||||||||||
Net change in cash and cash equivalents | — | — | (19 | ) | (93 | ) | — | (112 | ) | ||||||||||||||
Cash and cash equivalents at January 1 | — | 54 | 288 | 342 | |||||||||||||||||||
Cash and cash equivalents at June 30 | $ | — | $ | — | $ | 35 | $ | 195 | $ | — | $ | 230 | |||||||||||
30
Crown Holdings, Inc.
Crown Cork & Seal Company, Inc. (Issuer), a wholly owned subsidiary, has $350 principal amount of 7.375% senior notes due 2026 and $64 principal amount of 7.5% senior notes due 2096 outstanding that are fully and unconditionally guaranteed by Crown Holdings, Inc. (Parent). No other subsidiary guarantees the debt.
The following condensed combining financial statements:
•statements of comprehensive income for the three and six months ended June 30, 2013 and 2012,
•balance sheets as of June 30, 2013 and December 31, 2012, and
•statements of cash flows for the six months ended June 30, 2013 and 2012
are presented on the following pages to comply with the Company’s requirements under Rule 3-10 of Regulation S-X.
CONDENSED COMBINING STATEMENT OF COMPREHENSIVE INCOME
For the three months ended June 30, 2013
(in millions)
Parent | Issuer | Non- Guarantors | Eliminations | Total Company | |||||||||||||||
Net sales | $ | 2,223 | $ | 2,223 | |||||||||||||||
Cost of products sold, excluding depreciation and amortization | (16 | ) | 1,834 | 1,818 | |||||||||||||||
Depreciation and amortization | 30 | 30 | |||||||||||||||||
Gross profit | 16 | 359 | 375 | ||||||||||||||||
Selling and administrative expense | — | (2 | ) | 104 | 102 | ||||||||||||||
Provision for restructuring | — | 4 | 4 | ||||||||||||||||
Net interest expense | 25 | 35 | 60 | ||||||||||||||||
Income/(loss) before income taxes | (7 | ) | 216 | — | 209 | ||||||||||||||
Provision for / (benefit from) income taxes | (3 | ) | 58 | 55 | |||||||||||||||
Equity earnings / (loss) in affiliates | $ | 133 | 137 | — | $ | (269 | ) | 1 | |||||||||||
Net income | 133 | 133 | 158 | (269 | ) | 155 | |||||||||||||
Net income attributable to noncontrolling interests | (22 | ) | (22 | ) | |||||||||||||||
Net income attributable to Crown Holdings | $ | 133 | $ | 133 | $ | 136 | $ | (269 | ) | $ | 133 | ||||||||
Comprehensive income | $ | 148 | $ | 148 | $ | 172 | $ | (299 | ) | $ | 169 | ||||||||
Comprehensive income attributable to noncontrolling interests | (21 | ) | (21 | ) | |||||||||||||||
Comprehensive income attributable to Crown Holdings | $ | 148 | $ | 148 | $ | 151 | $ | (299 | ) | $ | 148 | ||||||||
31
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF COMPREHENSIVE INCOME
For the three months ended June 30, 2012
(in millions)
Parent | Issuer | Non- Guarantors | Eliminations | Total Company | |||||||||||||||
Net sales | $ | 2,184 | $ | 2,184 | |||||||||||||||
Cost of products sold, excluding depreciation and amortization | 1,799 | 1,799 | |||||||||||||||||
Depreciation and amortization | 45 | 45 | |||||||||||||||||
Gross profit | 340 | 340 | |||||||||||||||||
Selling and administrative expense | $ | 2 | 88 | 90 | |||||||||||||||
Provision for restructuring | 3 | 3 | |||||||||||||||||
Asset impairments and sales | (10 | ) | (10 | ) | |||||||||||||||
Net interest expense | 22 | 32 | 54 | ||||||||||||||||
Foreign exchange | (5 | ) | (5 | ) | |||||||||||||||
Income/(loss) before income taxes | (24 | ) | 232 | 208 | |||||||||||||||
Provision for / (benefit from) income taxes | (3 | ) | 54 | 51 | |||||||||||||||
Equity earnings / (loss) in affiliates | $ | 134 | 155 | — | $ | (289 | ) | — | |||||||||||
Net income | 134 | 134 | 178 | (289 | ) | 157 | |||||||||||||
Net income attributable to noncontrolling interests | (23 | ) | (23 | ) | |||||||||||||||
Net income attributable to Crown Holdings | $ | 134 | $ | 134 | $ | 155 | $ | (289 | ) | $ | 134 | ||||||||
Comprehensive income | $ | 93 | $ | 93 | $ | 133 | $ | (208 | ) | $ | 111 | ||||||||
Comprehensive income attributable to noncontrolling interests | (18 | ) | (18 | ) | |||||||||||||||
Comprehensive income attributable to Crown Holdings | $ | 93 | $ | 93 | $ | 115 | $ | (208 | ) | $ | 93 | ||||||||
32
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF COMPREHENSIVE INCOME
For the six months ended June 30, 2013
(in millions)
Parent | Issuer | Non- Guarantors | Eliminations | Total Company | |||||||||||||||
Net sales | $ | 4,196 | $ | 4,196 | |||||||||||||||
Cost of products sold, excluding depreciation and amortization | (16 | ) | 3,474 | 3,458 | |||||||||||||||
Depreciation and amortization | 64 | 64 | |||||||||||||||||
Gross profit | — | 16 | 658 | — | 674 | ||||||||||||||
Selling and administrative expense | — | 1 | 205 | 206 | |||||||||||||||
Provision for restructuring | 8 | 8 | |||||||||||||||||
Loss from early extinguishment of debt | 38 | 38 | |||||||||||||||||
Net interest expense | 51 | 67 | 118 | ||||||||||||||||
Foreign exchange | 2 | 2 | |||||||||||||||||
Income/(loss) before income taxes | (36 | ) | 338 | 302 | |||||||||||||||
Provision for / (benefit from) income taxes | (1 | ) | 80 | 79 | |||||||||||||||
Equity earnings / (loss) in affiliates | $ | 174 | 209 | — | $ | (384 | ) | (1 | ) | ||||||||||
Net income | 174 | 174 | 258 | (384 | ) | 222 | |||||||||||||
Net income attributable to noncontrolling interests | (48 | ) | (48 | ) | |||||||||||||||
Net income attributable to Crown Holdings | $ | 174 | $ | 174 | $ | 210 | $ | (384 | ) | $ | 174 | ||||||||
Comprehensive income | $ | 172 | $ | 172 | $ | 252 | $ | (380 | ) | $ | 216 | ||||||||
Comprehensive income attributable to noncontrolling interests | (44 | ) | (44 | ) | |||||||||||||||
Comprehensive income attributable to Crown Holdings | $ | 172 | $ | 172 | $ | 208 | $ | (380 | ) | $ | 172 | ||||||||
33
Crown Holdings, Inc.
CONDENSED CO\MBINING STATEMENT OF COMPREHENSIVE INCOME
For the six months ended June 30, 2012
(in millions)
Parent | Issuer | Non- Guarantors | Eliminations | Total Company | |||||||||||||||
Net Sales | $ | 4,131 | $ | 4,131 | |||||||||||||||
Cost of products sold, excluding depreciation and amortization | 3,417 | 3,417 | |||||||||||||||||
Depreciation and amortization | 87 | 87 | |||||||||||||||||
Gross profit | 627 | 627 | |||||||||||||||||
Selling and administrative expense | $ | 5 | 191 | 196 | |||||||||||||||
Provision for restructuring | 3 | 3 | |||||||||||||||||
Asset impairments and sales | (10 | ) | (10 | ) | |||||||||||||||
Net interest expense | 45 | 65 | 110 | ||||||||||||||||
Foreign exchange | (2 | ) | (2 | ) | |||||||||||||||
Income/(loss) before income taxes | (50 | ) | 380 | 330 | |||||||||||||||
Provision for / (benefit from) income taxes | (7 | ) | 90 | 83 | |||||||||||||||
Equity earnings / (loss) in affiliates | $ | 203 | 246 | — | $ | (449 | ) | — | |||||||||||
Net income | 203 | 203 | 290 | (449 | ) | 247 | |||||||||||||
Net income attributable to noncontrolling interests | (44 | ) | (44 | ) | |||||||||||||||
Net income attributable to Crown Holdings | $ | 203 | $ | 203 | $ | 246 | $ | (449 | ) | $ | 203 | ||||||||
Comprehensive income | $ | 237 | $ | 237 | $ | 323 | $ | (518 | ) | $ | 279 | ||||||||
Comprehensive income attributable to noncontrolling interests | (42 | ) | (42 | ) | |||||||||||||||
Comprehensive income attributable to Crown Holdings | $ | 237 | $ | 237 | $ | 281 | $ | (518 | ) | $ | 237 | ||||||||
34
Crown Holdings, Inc.
CONDENSED COMBINING BALANCE SHEET
As of June 30, 2013
(in millions)
Parent | Issuer | Non- Guarantors | Eliminations | Total Company | |||||||||||||||
Assets | |||||||||||||||||||
Current assets | |||||||||||||||||||
Cash and cash equivalents | $ | 227 | $ | 227 | |||||||||||||||
Receivables, net | $ | 9 | 1,293 | 1,302 | |||||||||||||||
Inventories | 1,424 | 1,424 | |||||||||||||||||
Prepaid expenses and other current assets | $ | 3 | 83 | 133 | 219 | ||||||||||||||
Total current assets | 3 | 92 | 3,077 | 3,172 | |||||||||||||||
Intercompany debt receivables | 1,963 | $ | (1,963 | ) | |||||||||||||||
Investments | 920 | 1,927 | (2,847 | ) | |||||||||||||||
Goodwill | 1,944 | 1,944 | |||||||||||||||||
Property, plant and equipment, net | 2,018 | 2,018 | |||||||||||||||||
Other non-current assets | 502 | 233 | 735 | ||||||||||||||||
Total | $ | 923 | $ | 2,521 | $ | 9,235 | $ | (4,810 | ) | $ | 7,869 | ||||||||
Liabilities and equity | |||||||||||||||||||
Current liabilities | |||||||||||||||||||
Short-term debt | $ | 286 | $ | 286 | |||||||||||||||
Current maturities of long-term debt | 168 | 168 | |||||||||||||||||
Accounts payable and accrued liabilities | $ | 11 | $ | 26 | 2,140 | 2,177 | |||||||||||||
Total current liabilities | 11 | 26 | 2,594 | 2,631 | |||||||||||||||
Long-term debt, excluding current maturities | 412 | 3,260 | 3,672 | ||||||||||||||||
Long-term intercompany debt | 1,073 | 890 | $ | (1,963 | ) | ||||||||||||||
Postretirement and pension liabilities | — | 990 | 990 | ||||||||||||||||
Other non-current liabilities | — | 273 | 178 | 451 | |||||||||||||||
Commitments and contingent liabilities | |||||||||||||||||||
Noncontrolling interests | 286 | 286 | |||||||||||||||||
Crown Holdings shareholders’ equity/(deficit) | (161 | ) | 920 | 1,927 | (2,847 | ) | (161 | ) | |||||||||||
Total equity/(deficit) | (161 | ) | 920 | 2,213 | (2,847 | ) | 125 | ||||||||||||
Total | $ | 923 | $ | 2,521 | $ | 9,235 | $ | (4,810 | ) | $ | 7,869 | ||||||||
35
Crown Holdings, Inc.
CONDENSED COMBINING BALANCE SHEET
As of December 31, 2012
(in millions)
Parent | Issuer | Non- Guarantors | Eliminations | Total Company | |||||||||||||||
Assets | |||||||||||||||||||
Current assets | |||||||||||||||||||
Cash and cash equivalents | $ | 350 | $ | 350 | |||||||||||||||
Receivables, net | 1,057 | 1,057 | |||||||||||||||||
Inventories | 1,166 | 1,166 | |||||||||||||||||
Prepaid expenses and other current assets | $ | 1 | $ | 83 | 93 | 177 | |||||||||||||
Total current assets | 1 | 83 | 2,666 | 2,750 | |||||||||||||||
Intercompany debt receivables | 1,769 | $ | (1,769 | ) | |||||||||||||||
Investments | 749 | 1,768 | (2,517 | ) | |||||||||||||||
Goodwill | 1,998 | 1,998 | |||||||||||||||||
Property, plant and equipment, net | 1,995 | 1,995 | |||||||||||||||||
Other non-current assets | 504 | 243 | 747 | ||||||||||||||||
Total | $ | 750 | $ | 2,355 | $ | 8,671 | $ | (4,286 | ) | $ | 7,490 | ||||||||
Liabilities and equity | |||||||||||||||||||
Current liabilities | |||||||||||||||||||
Short-term debt | $ | 261 | $ | 261 | |||||||||||||||
Current maturities of long-term debt | 115 | 115 | |||||||||||||||||
Accounts payable and accrued liabilities | $ | 18 | $ | 34 | 2,090 | 2,142 | |||||||||||||
Total current liabilities | 18 | 34 | 2,466 | 2,518 | |||||||||||||||
Long-term debt, excluding current maturities | 412 | 2,877 | 3,289 | ||||||||||||||||
Long-term intercompany debt | 894 | 875 | $ | (1,769 | ) | ||||||||||||||
Postretirement and pension liabilities | 1,098 | 1,098 | |||||||||||||||||
Other non-current liabilities | 285 | 177 | 462 | ||||||||||||||||
Commitments and contingent liabilities | |||||||||||||||||||
Noncontrolling interests | 285 | 285 | |||||||||||||||||
Crown Holdings shareholders’ equity/(deficit) | (162 | ) | 749 | 1,768 | (2,517 | ) | (162 | ) | |||||||||||
Total equity/(deficit) | (162 | ) | 749 | 2,053 | (2,517 | ) | 123 | ||||||||||||
Total | $ | 750 | $ | 2,355 | $ | 8,671 | $ | (4,286 | ) | $ | 7,490 | ||||||||
36
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
For the six months ended June 30, 2013
(in millions)
Parent | Issuer | Non- Guarantors | Eliminations | Total Company | |||||||||||||||
Net cash provide by/(used for) operating activities | $ | 2 | $ | (63 | ) | $ | (190 | ) | $ | (251 | ) | ||||||||
Cash flows from investing activities | |||||||||||||||||||
Capital expenditures | (124 | ) | (124 | ) | |||||||||||||||
Insurance proceeds | 8 | 8 | |||||||||||||||||
Change in restricted cash | (5 | ) | (5 | ) | |||||||||||||||
Proceeds from sale of property, plant and equipment | 5 | 5 | |||||||||||||||||
Intercompany investing activities | 47 | — | $ | (47 | ) | — | |||||||||||||
Net cash provided by/(used for) investing activities | — | 47 | (116 | ) | (47 | ) | (116 | ) | |||||||||||
Cash flows from financing activities | |||||||||||||||||||
Proceeds from long-term debt | 1,040 | 1,040 | |||||||||||||||||
Payments of long-term debt | (984 | ) | (984 | ) | |||||||||||||||
Net change in revolving credit facility and short-term debt | 423 | 423 | |||||||||||||||||
Debt issue costs | (15 | ) | (15 | ) | |||||||||||||||
Net change in long-term intercompany balances | 179 | 16 | (195 | ) | — | ||||||||||||||
Common stock issued | 13 | — | 13 | ||||||||||||||||
Common stock repurchased | (194 | ) | — | (194 | ) | ||||||||||||||
Dividends paid | (47 | ) | 47 | ||||||||||||||||
Purchase of noncontrollling interests | — | (10 | ) | (10 | ) | ||||||||||||||
Dividend paid to noncontrolling interests | (35 | ) | (35 | ) | |||||||||||||||
Other | 11 | 11 | |||||||||||||||||
Net cash provided by/(used for) financing activities | (2 | ) | 16 | 188 | 47 | 249 | |||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (5 | ) | (5 | ) | |||||||||||||||
Net change in cash and cash equivalents | — | — | (123 | ) | — | (123 | ) | ||||||||||||
Cash and cash equivalents at January 1 | — | — | 350 | — | 350 | ||||||||||||||
Cash and cash equivalents at June 30 | $ | — | $ | — | $ | 227 | $ | — | $ | 227 | |||||||||
37
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
For the six months ended June 30, 2012
(in millions)
Parent | Issuer | Non- Guarantors | Eliminations | Total Company | |||||||||||||||
Net cash provided by/(used for) operating activities | $ | 1 | $ | (51 | ) | $ | (166 | ) | $ | (216 | ) | ||||||||
Cash flows from investing activities | |||||||||||||||||||
Capital expenditures | (139 | ) | (139 | ) | |||||||||||||||
Insurance proceeds | 23 | 23 | |||||||||||||||||
Change in restricted cash | (11 | ) | (11 | ) | |||||||||||||||
Proceeds from sale of property, plant and equipment | 2 | 2 | |||||||||||||||||
Intercompany investing activities | 43 | $ | (43 | ) | — | ||||||||||||||
Other | (3 | ) | (3 | ) | |||||||||||||||
Net cash provided by/(used for) investing activities | 43 | (128 | ) | (43 | ) | (128 | ) | ||||||||||||
Cash flows from financing activities | |||||||||||||||||||
Proceeds from long-term debt | 42 | 42 | |||||||||||||||||
Payments of long-term debt | (32 | ) | (32 | ) | |||||||||||||||
Net change in revolving credit facility and short-term debt | 274 | 274 | |||||||||||||||||
Net change in long-term intercompany balances | 2 | 8 | (10 | ) | — | ||||||||||||||
Common stock issued | 4 | — | — | 4 | |||||||||||||||
Common stock repurchased | (7 | ) | (7 | ) | |||||||||||||||
Dividends paid | (43 | ) | 43 | — | |||||||||||||||
Dividend paid to noncontrolling interests | (38 | ) | (38 | ) | |||||||||||||||
Other | (5 | ) | (5 | ) | |||||||||||||||
Net cash provided by/(used for) financing activities | (1 | ) | 8 | 188 | 43 | 238 | |||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (6 | ) | (6 | ) | |||||||||||||||
Net change in cash and cash equivalents | — | — | (112 | ) | — | (112 | ) | ||||||||||||
Cash and cash equivalents at January 1 | 342 | 342 | |||||||||||||||||
Cash and cash equivalents at June 30 | $ | — | $ | — | $ | 230 | $ | — | $ | 230 | |||||||||
38
Crown Holdings, Inc.
Crown Americas, LLC, Crown Americas Capital Corp. II and Crown Americas Capital Corp. III (collectively, the Issuers), wholly owned subsidiaries of the Company, have outstanding $700 principal amount of 6.25% senior notes due 2021 and $1,000 principal amount of 4.5% senior notes due 2023, which are fully and unconditionally guaranteed by Crown Holdings, Inc. (Parent) and substantially all subsidiaries in the United States. The guarantors are wholly owned by the Company and the guarantees are made on a joint and several basis.
The following condensed combining financial statements:
• | statements of comprehensive income for the three and six months ended June 30, 2013 and 2012, |
• | balance sheets as of June 30, 2013 and December 31, 2012, and |
• | statements of cash flows for the six months ended June 30, 2013 and 2012 |
are presented on the following pages to comply with the Company’s requirements under Rule 3-10 of Regulation S-X.
CONDENSED COMBINING STATEMENT OF COMPREHENSIVE INCOME
For the three months ended June 30, 2013
(in millions)
Parent | Issuer | Guarantors | Non- Guarantors | Eliminations | Total Company | ||||||||||||||||||
Net sales | $ | 580 | $ | 1,643 | $ | 2,223 | |||||||||||||||||
Cost of products sold, excluding depreciation and amortization | — | 434 | 1,384 | 1,818 | |||||||||||||||||||
Depreciation and amortization | 6 | 24 | 30 | ||||||||||||||||||||
Gross profit | 140 | 235 | 375 | ||||||||||||||||||||
Selling and administrative expense | $ | 1 | 34 | 67 | 102 | ||||||||||||||||||
Provision for restructuring | — | 4 | 4 | ||||||||||||||||||||
Net interest expense | 11 | 23 | 26 | 60 | |||||||||||||||||||
Technology royalty | (13 | ) | 13 | ||||||||||||||||||||
Income/(loss) before income taxes | (12 | ) | 96 | 125 | 209 | ||||||||||||||||||
Provision for / (benefit from) income taxes | (5 | ) | 39 | 21 | 55 | ||||||||||||||||||
Equity earnings / (loss) in affiliates | $ | 133 | 72 | 76 | — | $ | (280 | ) | 1 | ||||||||||||||
Net income | 133 | 65 | 133 | 104 | (280 | ) | 155 | ||||||||||||||||
Net income attributable to noncontrolling interests | (22 | ) | (22 | ) | |||||||||||||||||||
Net income attributable to Crown Holdings | $ | 133 | $ | 65 | $ | 133 | $ | 82 | $ | (280 | ) | $ | 133 | ||||||||||
Comprehensive income | $ | 148 | $ | 67 | $ | 148 | $ | 116 | $ | (310 | ) | $ | 169 | ||||||||||
Comprehensive income attributable to noncontrolling interests | (21 | ) | (21 | ) | |||||||||||||||||||
Comprehensive income attributable to Crown Holdings | $ | 148 | $ | 67 | $ | 148 | $ | 95 | $ | (310 | ) | $ | 148 | ||||||||||
39
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF COMPREHENSIVE INCOME
For the three months ended June 30, 2012
(in millions)
Parent | Issuer | Guarantors | Non- Guarantors | Eliminations | Total Company | ||||||||||||||||||
Net sales | $ | 600 | $ | 1,584 | $ | 2,184 | |||||||||||||||||
Cost of products sold, excluding depreciation and amortization | 473 | 1,326 | 1,799 | ||||||||||||||||||||
Depreciation and amortization | 10 | 35 | 45 | ||||||||||||||||||||
Gross profit | 117 | 223 | 340 | ||||||||||||||||||||
Selling and administrative expense | $ | 1 | 32 | 57 | 90 | ||||||||||||||||||
Provision for restructuring | 1 | 2 | 3 | ||||||||||||||||||||
Asset impairments and sales | — | (1 | ) | (9 | ) | (10 | ) | ||||||||||||||||
Net interest expense | 13 | 23 | 18 | 54 | |||||||||||||||||||
Technology royalty | — | (10 | ) | 10 | |||||||||||||||||||
Foreign exchange | — | — | (5 | ) | (5 | ) | |||||||||||||||||
Income/(loss) before income taxes | (14 | ) | 72 | 150 | 208 | ||||||||||||||||||
Provision for / (benefit from) income taxes | — | (5 | ) | 34 | 22 | — | 51 | ||||||||||||||||
Equity earnings / (loss) in affiliates | $ | 134 | 61 | 96 | — | $ | (291 | ) | — | ||||||||||||||
Net income | 134 | 52 | 134 | 128 | (291 | ) | 157 | ||||||||||||||||
Net income attributable to noncontrolling interests | — | (23 | ) | (23 | ) | ||||||||||||||||||
Net income attributable to Crown Holdings | $ | 134 | $ | 52 | $ | 134 | $ | 105 | $ | (291 | ) | $ | 134 | ||||||||||
Comprehensive income | $ | 93 | $ | 59 | $ | 93 | $ | 75 | $ | (209 | ) | $ | 111 | ||||||||||
Comprehensive income attributable to noncontrolling interests | — | — | — | (18 | ) | — | (18 | ) | |||||||||||||||
Comprehensive income attributable to Crown Holdings | $ | 93 | $ | 59 | $ | 93 | $ | 57 | $ | (209 | ) | $ | 93 | ||||||||||
40
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF COMPREHENSIVE INCOME
For the six months ended June 30, 2013
(in millions)
Parent | Issuer | Guarantors | Non- Guarantors | Eliminations | Total Company | ||||||||||||||||||
Net sales | $ | 1,114 | $ | 3,082 | $ | 4,196 | |||||||||||||||||
Cost of products sold, excluding depreciation and amortization | — | 863 | 2,595 | 3,458 | |||||||||||||||||||
Depreciation and amortization | 13 | 51 | 64 | ||||||||||||||||||||
Gross profit | 238 | 436 | 674 | ||||||||||||||||||||
Selling and administrative expense | $ | 4 | 71 | 131 | 206 | ||||||||||||||||||
Provision for restructuring | 4 | 4 | 8 | ||||||||||||||||||||
Loss from early extinguishment of debt | 37 | 1 | 38 | ||||||||||||||||||||
Net interest expense | 24 | 46 | 48 | 118 | |||||||||||||||||||
Technology royalty | (22 | ) | 22 | ||||||||||||||||||||
Foreign exchange | 2 | 2 | |||||||||||||||||||||
Income/(loss) before income taxes | (65 | ) | 139 | 228 | 302 | ||||||||||||||||||
Provision for / (benefit from) income taxes | (25 | ) | 67 | 37 | 79 | ||||||||||||||||||
Equity earnings / (loss) in affiliates | $ | 174 | 124 | 102 | $ | (401 | ) | (1 | ) | ||||||||||||||
Net income | 174 | 84 | 174 | 191 | (401 | ) | 222 | ||||||||||||||||
Net income attributable to noncontrolling interests | (48 | ) | (48 | ) | |||||||||||||||||||
Net income attributable to Crown Holdings | $ | 174 | $ | 84 | $ | 174 | $ | 143 | $ | (401 | ) | $ | 174 | ||||||||||
Comprehensive income | $ | 172 | $ | 91 | $ | 172 | $ | 178 | $ | (397 | ) | $ | 216 | ||||||||||
Comprehensive income attributable to noncontrolling interests | (44 | ) | (44 | ) | |||||||||||||||||||
Comprehensive income attributable to Crown Holdings | $ | 172 | $ | 91 | $ | 172 | $ | 134 | $ | (397 | ) | $ | 172 | ||||||||||
41
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF COMPREHENSIVE INCOME
For the six months ended June 30, 2012
(in millions)
Parent | Issuer | Guarantors | Non- Guarantors | Eliminations | Total Company | ||||||||||||||||||
Net sales | $ | 1,140 | $ | 2,991 | $ | 4,131 | |||||||||||||||||
Cost of products sold, excluding depreciation and amortization | 913 | 2,504 | 3,417 | ||||||||||||||||||||
Depreciation and amortization | 20 | 67 | 87 | ||||||||||||||||||||
Gross profit | 207 | 420 | 627 | ||||||||||||||||||||
Selling and administrative expense | $ | 3 | 71 | 122 | 196 | ||||||||||||||||||
Provision for restructuring | 1 | 2 | 3 | ||||||||||||||||||||
Asset impairments and sales | — | (1 | ) | (9 | ) | (10 | ) | ||||||||||||||||
Net interest expense | 26 | 45 | 39 | 110 | |||||||||||||||||||
Technology royalty | — | (20 | ) | 20 | |||||||||||||||||||
Foreign exchange | — | — | (2 | ) | (2 | ) | |||||||||||||||||
Income/(loss) before income taxes | (29 | ) | 111 | 248 | 330 | ||||||||||||||||||
Provision for / (benefit from) income taxes | — | (11 | ) | 55 | 39 | — | 83 | ||||||||||||||||
Equity earnings / (loss) in affiliates | $ | 203 | 116 | 147 | — | $ | (466 | ) | — | ||||||||||||||
Net income | 203 | 98 | 203 | 209 | (466 | ) | 247 | ||||||||||||||||
Net income attributable to noncontrolling interests | — | (44 | ) | (44 | ) | ||||||||||||||||||
Net income attributable to Crown Holdings | $ | 203 | $ | 98 | $ | 203 | $ | 165 | $ | (466 | ) | $ | 203 | ||||||||||
Comprehensive income | $ | 237 | $ | 105 | $ | 237 | $ | 234 | $ | (534 | ) | $ | 279 | ||||||||||
Comprehensive income attributable to noncontrolling interests | — | — | — | (42 | ) | — | (42 | ) | |||||||||||||||
Comprehensive income attributable to Crown Holdings | $ | 237 | $ | 105 | $ | 237 | $ | 192 | $ | (534 | ) | $ | 237 | ||||||||||
42
Crown Holdings, Inc.
CONDENSED COMBINING BALANCE SHEET
As of June 30, 2013
(in millions)
Parent | Issuer | Guarantors | Non- Guarantors | Eliminations | Total Company | ||||||||||||||||||
Assets | |||||||||||||||||||||||
Current assets | |||||||||||||||||||||||
Cash and cash equivalents | $ | 21 | — | $ | 206 | $ | 227 | ||||||||||||||||
Receivables, net | — | $ | 18 | 1,284 | 1,302 | ||||||||||||||||||
Intercompany receivables | 41 | 20 | $ | (61 | ) | ||||||||||||||||||
Inventories | 328 | 1,096 | 1,424 | ||||||||||||||||||||
Prepaid expenses and other current assets | $ | 3 | 1 | 95 | 120 | 219 | |||||||||||||||||
Total current assets | 3 | 22 | 482 | 2,726 | (61 | ) | 3,172 | ||||||||||||||||
Intercompany debt receivables | 1,673 | 1,720 | 14 | (3,407 | ) | ||||||||||||||||||
Investments | 920 | 1,690 | 652 | (3,262 | ) | ||||||||||||||||||
Goodwill | 453 | 1,491 | 1,944 | ||||||||||||||||||||
Property, plant and equipment, net | 1 | 306 | 1,711 | 2,018 | |||||||||||||||||||
Other non-current assets | 30 | 495 | 210 | 735 | |||||||||||||||||||
Total | $ | 923 | $ | 3,416 | $ | 4,108 | $ | 6,152 | $ | (6,730 | ) | $ | 7,869 | ||||||||||
Liabilities and equity | |||||||||||||||||||||||
Current liabilities | |||||||||||||||||||||||
Short-term debt | $ | 286 | $ | 286 | |||||||||||||||||||
Current maturities of long-term debt | $ | 55 | — | 113 | 168 | ||||||||||||||||||
Accounts payable and accrued liabilities | $ | 11 | 50 | $ | 373 | 1,743 | 2,177 | ||||||||||||||||
Intercompany payables | 20 | 41 | $ | (61 | ) | ||||||||||||||||||
Total current liabilities | 11 | 105 | 393 | 2,183 | (61 | ) | 2,631 | ||||||||||||||||
Long-term debt, excluding current maturities | 1,996 | 412 | 1,264 | 3,672 | |||||||||||||||||||
Long-term intercompany debt | 1,073 | 510 | 1,582 | 242 | (3,407 | ) | |||||||||||||||||
Postretirement and pension liabilities | 526 | 464 | 990 | ||||||||||||||||||||
Other non-current liabilities | 275 | 176 | 451 | ||||||||||||||||||||
Commitments and contingent liabilities | |||||||||||||||||||||||
Noncontrolling interests | 286 | 286 | |||||||||||||||||||||
Crown Holdings shareholders’ equity/(deficit) | (161 | ) | 805 | 920 | 1,537 | (3,262 | ) | (161 | ) | ||||||||||||||
Total equity/(deficit) | (161 | ) | 805 | 920 | 1,823 | (3,262 | ) | 125 | |||||||||||||||
Total | $ | 923 | $ | 3,416 | $ | 4,108 | $ | 6,152 | $ | (6,730 | ) | $ | 7,869 | ||||||||||
43
Crown Holdings, Inc.
CONDENSED COMBINING BALANCE SHEET
As of December 31, 2012
(in millions)
Parent | Issuer | Guarantors | Non- Guarantors | Eliminations | Total Company | ||||||||||||||||||
Assets | |||||||||||||||||||||||
Current assets | |||||||||||||||||||||||
Cash and cash equivalents | $ | 27 | $ | 1 | $ | 322 | $ | 350 | |||||||||||||||
Receivables, net | 2 | 14 | 1,041 | 1,057 | |||||||||||||||||||
Intercompany receivables | 7 | 17 | $ | (24 | ) | ||||||||||||||||||
Inventories | 282 | 884 | 1,166 | ||||||||||||||||||||
Prepaid expenses and other current assets | $ | 1 | 1 | 92 | 83 | 177 | |||||||||||||||||
Total current assets | 1 | 30 | 396 | 2,347 | (24 | ) | 2,750 | ||||||||||||||||
Intercompany debt receivables | 1,530 | 1,483 | 279 | (3,292 | ) | ||||||||||||||||||
Investments | 749 | 1,560 | 606 | (2,915 | ) | ||||||||||||||||||
Goodwill | 453 | 1,545 | 1,998 | ||||||||||||||||||||
Property, plant and equipment, net | 1 | 308 | 1,686 | 1,995 | |||||||||||||||||||
Other non-current assets | 26 | 529 | 192 | 747 | |||||||||||||||||||
Total | $ | 750 | $ | 3,147 | $ | 3,775 | $ | 6,049 | $ | (6,231 | ) | $ | 7,490 | ||||||||||
Liabilities and equity | |||||||||||||||||||||||
Current liabilities | |||||||||||||||||||||||
Short-term debt | $ | 261 | $ | 261 | |||||||||||||||||||
Current maturities of long-term debt | $ | 28 | — | 87 | 115 | ||||||||||||||||||
Accounts payable and accrued liabilities | $ | 18 | 33 | $ | 317 | 1,774 | 2,142 | ||||||||||||||||
Intercompany payables | 17 | 7 | $ | (24 | ) | ||||||||||||||||||
Total current liabilities | 18 | 61 | 334 | 2,129 | (24 | ) | 2,518 | ||||||||||||||||
Long-term debt, excluding current maturities | 1,616 | 412 | 1,261 | 3,289 | |||||||||||||||||||
Long-term intercompany debt | 894 | 756 | 1,447 | 195 | (3,292 | ) | — | ||||||||||||||||
Postretirement and pension liabilities | 545 | 553 | 1,098 | ||||||||||||||||||||
Other non-current liabilities | 288 | 174 | 462 | ||||||||||||||||||||
Commitments and contingent liabilities | |||||||||||||||||||||||
Noncontrolling interests | 285 | 285 | |||||||||||||||||||||
Crown Holdings shareholders’ equity/(deficit) | (162 | ) | 714 | 749 | 1,452 | (2,915 | ) | (162 | ) | ||||||||||||||
Total equity/(deficit) | (162 | ) | 714 | 749 | 1,737 | (2,915 | ) | 123 | |||||||||||||||
Total | $ | 750 | $ | 3,147 | $ | 3,775 | $ | 6,049 | $ | (6,231 | ) | $ | 7,490 | ||||||||||
44
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
For the six months ended June 30, 2013
(in millions)
Parent | Issuer | Guarantors | Non- Guarantors | Eliminations | Total Company | ||||||||||||||||||
Net provided by/(used for) operating activities | $ | 2 | $ | (5 | ) | $ | 65 | $ | (313 | ) | $ | (251 | ) | ||||||||||
Cash flows from investing activities | |||||||||||||||||||||||
Capital expenditures | (13 | ) | (111 | ) | (124 | ) | |||||||||||||||||
Insurance proceeds | 8 | 8 | |||||||||||||||||||||
Change in restricted cash | (5 | ) | (5 | ) | |||||||||||||||||||
Proceeds from sale of property, plant and equipment | 3 | 2 | 5 | ||||||||||||||||||||
Intercompany investing activities | 2 | 46 | $ | (48 | ) | ||||||||||||||||||
Net cash provided by/(used for) investing activities | 2 | 36 | (106 | ) | (48 | ) | (116 | ) | |||||||||||||||
Cash flows from financing activities | |||||||||||||||||||||||
Proceeds from long-term debt | 1,000 | 40 | 1,040 | ||||||||||||||||||||
Payments of long-term debt | (729 | ) | (255 | ) | (984 | ) | |||||||||||||||||
Net change in revolving credit facility and short-term debt | 130 | 293 | 423 | ||||||||||||||||||||
Debt issue costs | (15 | ) | — | (15 | ) | ||||||||||||||||||
Net change in long-term intercompany balances | 179 | (389 | ) | (102 | ) | 312 | |||||||||||||||||
Common stock issued | 13 | 13 | |||||||||||||||||||||
Common stock repurchased | (194 | ) | (194 | ) | |||||||||||||||||||
Dividends paid | (48 | ) | 48 | ||||||||||||||||||||
Purchase of noncontrolling interests | — | (10 | ) | (10 | ) | ||||||||||||||||||
Dividends paid to noncontrolling interests | (35 | ) | (35 | ) | |||||||||||||||||||
Other | 11 | 11 | |||||||||||||||||||||
Net cash provided by/(used for) financing activities | (2 | ) | (3 | ) | (102 | ) | 308 | 48 | 249 | ||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (5 | ) | (5 | ) | |||||||||||||||||||
Net change in cash and cash equivalents | — | (6 | ) | (1 | ) | (116 | ) | — | (123 | ) | |||||||||||||
Cash and cash equivalents at January 1 | 27 | 1 | 322 | 350 | |||||||||||||||||||
Cash and cash equivalents at June 30 | $ | — | $ | 21 | $ | — | $ | 206 | $ | — | $ | 227 | |||||||||||
45
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
For the six months ended June 30, 2012
(in millions)
Parent | Issuer | Guarantors | Non- Guarantors | Eliminations | Total Company | ||||||||||||||||||
Net provided by/(used for) operating activities | $ | 1 | $ | (15 | ) | $ | 69 | $ | (271 | ) | $ | (216 | ) | ||||||||||
Cash flows from investing activities | |||||||||||||||||||||||
Capital expenditures | (13 | ) | (126 | ) | (139 | ) | |||||||||||||||||
Insurance Proceeds | 23 | 23 | |||||||||||||||||||||
Change in restricted cash | — | — | (11 | ) | — | (11 | ) | ||||||||||||||||
Proceeds from sale of property, plant and equipment | 1 | 1 | 2 | ||||||||||||||||||||
Intercompany investing activities | 7 | 43 | — | $ | (50 | ) | — | ||||||||||||||||
Other | — | (3 | ) | (3 | ) | ||||||||||||||||||
Net cash provided by/(used for) investing activities | — | 7 | 31 | (116 | ) | (50 | ) | (128 | ) | ||||||||||||||
Cash flows from financing activities | |||||||||||||||||||||||
Proceeds from long-term debt | — | 42 | 42 | ||||||||||||||||||||
Payments of long-term debt | — | — | (32 | ) | (32 | ) | |||||||||||||||||
Net change in revolving credit facility and short-term debt | 191 | 83 | 274 | ||||||||||||||||||||
Net change in long-term intercompany balances | 2 | (179 | ) | (100 | ) | 277 | — | ||||||||||||||||
Common stock issued | 4 | 4 | |||||||||||||||||||||
Common stock repurchased | (7 | ) | — | — | (7 | ) | |||||||||||||||||
Dividends paid | — | (50 | ) | 50 | |||||||||||||||||||
Dividends paid to noncontrolling interests | (38 | ) | (38 | ) | |||||||||||||||||||
Other | — | — | — | (5 | ) | — | (5 | ) | |||||||||||||||
Net cash provided by/(used for) financing activities | (1 | ) | 12 | (100 | ) | 277 | 50 | 238 | |||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | — | (6 | ) | — | (6 | ) | |||||||||||||||
Net change in cash and cash equivalents | — | 4 | — | (116 | ) | — | (112 | ) | |||||||||||||||
Cash and cash equivalents at January 1 | — | 21 | 1 | 320 | — | 342 | |||||||||||||||||
Cash and cash equivalents at June 30 | $ | — | $ | 25 | $ | 1 | $ | 204 | $ | — | $ | 230 | |||||||||||
46
Crown Holdings, Inc.
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
(dollars in millions)
Introduction
The following discussion presents management's analysis of the results of operations for the three and six months ended June 30, 2013 compared to 2012 and changes in financial condition and liquidity from December 31, 2012. 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, 2012, along with the consolidated financial statements and related notes included in and referred to within this report.
Business Strategy and Trends
The Company's strategy is to grow its businesses in targeted international growth markets, while improving operations and results in more mature markets through disciplined pricing, cost control and careful capital allocation.
In recent years, the Company has expanded its beverage can businesses in Asia, Brazil and Eastern Europe in response to increased unit volume demand driven by increased per capita incomes and consumption, combined with a shift in packaging mix to two-piece aluminum beverage cans from other packages. In the first quarter of 2013, the Company commercialized second beverage can lines in Putian, China and Bangi, Malaysia. In the second quarter of 2013, the Company commercialized new beverage can plants in Danang, Vietnam and Bangkok, Thailand; and in July , the Company began production at its new plant in Sihanoukville, Cambodia. In addition, the Company has begun construction on a new facility in northern Brazil in the city of Teresina and expects to begin commercial shipments in early 2014. There can be no assurance, however, that the Company will be able to implement its expansion plans according to schedule or at all. The Company continuously monitors these markets and, where necessary, may adjust capital deployment based on economic developments and market-by-market conditions.
Beverage can sales unit volumes in the Company's mature markets have been stable to slightly declining in North America and slightly increasing in Europe. Global food and aerosol can sales unit volumes have been stable to declining in recent years primarily due to lower consumer spending. While the opportunity for organic volume growth in the Company's mature markets is not comparable to that in targeted international growth markets, the Company continues to generate strong returns on invested capital and significant cash flow from these businesses. The Company monitors capacity across all of its businesses and, where necessary, may take action such as closing a plant or reducing headcount to better manage its costs. Any or all of these actions may result in additional restructuring charges in the future which may be material. The Company is currently evaluating certain projects which, if approved, may result in additional restructuring charges between $25 and $35.
As part of the Company's efforts to manage cost, it attempts to pass-through increases in the cost of aluminum and steel to its customers. There can be no assurance that the Company will be able to recover from its customers the impact of any such increased costs. Aluminum and steel prices can be subject to significant volatility and there does not appear to be a consistent and predictable trend in pricing.
The Company seeks to increase shareholder value by maximizing operating cash flows which can be reinvested in the business, used for acquisitions, used to repay debt or returned to shareholders through share repurchases or possible future dividends. In assessing the Company's performance, the key performance measure used is segment income, a non-GAAP measure defined by the Company as gross profit less selling and administrative expenses.
Results of Operations
The foreign currency translation impacts referred to below were primarily due to changes in the euro and pound sterling in the Company's European businesses, the Canadian dollar in the Company's Americas segments and the Chinese renminbi and Thai baht in the Company's Asia Pacific segment.
47
Crown Holdings, Inc.
Item 2. Management's Discussion and Analysis (Continued)
Net Sales and Segment Income
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Net sales | $ | 2,223 | $ | 2,184 | $ | 4,196 | $ | 4,131 | |||||||
Beverage cans and ends as a percentage of net sales | 57 | % | 57 | % | 57 | % | 56 | % | |||||||
Food cans and ends as a percentage of net sales | 26 | % | 27 | % | 26 | % | 27 | % | |||||||
Three months ended June 30, 2013 compared to 2012
Net sales increased primarily due to increased global beverage and food can volumes partially offset by the pass-through of lower raw material costs.
Six months ended June 30, 2013 compared to 2012
Net sales increased primarily due to increased global beverage can volumes partially offset by the pass-through of lower raw material costs.
Discussion and analysis of net sales and segment income by segment follows.
Americas Beverage
The Americas Beverage segment manufactures aluminum beverage cans and ends and steel crowns, commonly referred to as “bottle caps”, and supplies a variety of customers from its operations in the U.S., Brazil, Canada, Colombia and Mexico. The U.S. and Canadian beverage can markets are mature markets which have experienced slightly declining volumes in recent years. In Brazil, the Company's sales unit volumes have increased in recent years primarily due to market growth. The Company recently began construction on a new facility in northern Brazil and expects to begin commercial shipments in early 2014.
Net sales and segment income in the Americas Beverage segment are as follows:
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Net sales | $ | 582 | $ | 593 | $ | 1,134 | $ | 1,127 | |||||||
Segment income | 85 | 78 | 161 | 147 | |||||||||||
Three months ended June 30, 2013 compared to 2012
Net sales decreased primarily due to lower sales unit volumes.
Segment income increased primarily due to efficiency improvements and $3 from lower depreciation resulting from a change in the estimated useful lives of the Company's can-making equipment.
Six months ended June 30, 2013 compared to 2012
Net sales increased primarily due to higher sales unit volumes in Brazil which offset lower sales unit volumes in North America and $8 from the pass-through of lower raw material costs. The increase in Brazil is primarily the result of recent capacity additions in response to the country's growing middle class and increasing disposable income and its shift in packaging mix to two-piece aluminum beverage cans from other packages.
Segment income increased primarily due to the higher sales unit volumes described above, $4 from efficiency improvements and $6 from lower depreciation resulting from a change in the estimated useful lives of the Company's can-making equipment.
48
Crown Holdings, Inc.
Item 2. Management's Discussion and Analysis (Continued)
North America Food
The North America Food segment manufactures steel and aluminum food cans and ends and metal vacuum closures and supplies a variety of customers from its operations in the U.S. and Canada. The North American food can and closures market is a mature market which has experienced stable to slightly declining volumes in recent years.
Net sales and segment income in the North America Food segment are as follows:
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Net sales | $ | 206 | $ | 213 | $ | 403 | $ | 413 | |||||||
Segment income | 41 | 41 | 72 | 73 | |||||||||||
Three months ended June 30, 2013 compared to 2012
Net sales decreased primarily due to unfavorable sales unit volume mix.
Segment income remained unchanged as the impact of unfavorable sales unit volume mix was offset by efficiency improvements.
Six months ended June 30, 2013 compared to 2012
Net sales decreased primarily due to a 1% decline in sales unit volumes and unfavorable sales unit volume mix.
Segment income decreased primarily due to lower sales unit volumes, partially offset by efficiency improvements and $2 from lower depreciation resulting from a change in the estimated useful lives of the Company's can-making equipment.
European Beverage
The Company's European Beverage segment manufactures steel and aluminum beverage cans and ends and supplies a variety of customers from its operations throughout Eastern and Western Europe, the Middle East and North Africa. In recent years, the European beverage can market has been growing. In the second quarter of 2012, the Company commenced commercial operations of a new plant in Osmaniye, Turkey which is expected to add annualized capacity of approximately 700 million cans when fully operational.
Net sales and segment income in the European Beverage segment are as follows:
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Net sales | $ | 492 | $ | 472 | $ | 863 | $ | 834 | |||||||
Segment income | 78 | 64 | 129 | 106 | |||||||||||
Three months ended June 30, 2013 compared to 2012
Net sales increased primarily due to 4% higher sales unit volumes primarily in Turkey and throughout the Company's Mediterranean operations. The increase in Turkey is primarily attributable to the Company's new plant in Osmaniye, Turkey which began commercial operations in the second quarter of 2012.
Segment income increased primarily due to higher sales unit volumes, $7 from improved cost performance including operational efficiencies in Slovakia and Turkey and $2 from reduced post-employment benefits, and $4 from lower depreciation resulting from a change in the estimated useful lives of the Company's can-making equipment.
49
Crown Holdings, Inc.
Item 2. Management's Discussion and Analysis (Continued)
Six months ended June 30, 2013 compared to 2012
Net sales increased primarily due to 4% higher sales unit volumes primarily in Turkey and throughout the Company's Mediterranean operations. The increase in Turkey is primarily attributable to the Company's new plant in Osmaniye, Turkey which began commercial operations in the second quarter of 2012.
Segment income increased primarily due to higher sales unit volumes, $11 from improved cost performance including operational efficiencies in Slovakia and Turkey and $2 from reduced post-employment benefits, and $6 from lower depreciation resulting from a change in the estimated useful lives of the Company's can-making equipment.
European Food
The European Food segment manufactures steel and aluminum food cans and ends, and metal vacuum closures and supplies a variety of customers from its operations throughout Europe and Africa. The European food can market is a mature market which has experienced stable to slightly declining volumes in recent years. In 2011 and 2012, the Company initiated restructuring actions in its European Food segment to reduce manufacturing capacity and headcount. The Company expects these actions to result in annual cost savings of approximately $16. However, there can be no assurance that any such pre-tax savings will be realized.
Net sales and segment income in the European Food segment are as follows:
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Net sales | $ | 430 | $ | 434 | $ | 806 | $ | 836 | |||||||
Segment income | 39 | 47 | 71 | 87 | |||||||||||
Three months ended June 30, 2013 compared to 2012
Net sales decreased primarily due to $14 from lower selling prices reflecting the pass-through of lower material costs and the impact of competitive price compression, partially offset by $6 from higher sales unit volumes and $4 from the impact of foreign currency translation.
Segment income decreased primarily due to a charge of $11 to record a reserve against a portion of an outstanding customer receivable balance, partially offset by $2 from reduced post-employment benefits and $3 from lower depreciation resulting from a change in the estimated useful lives of the Company's can-making equipment. The reserve was triggered by the customer filing for bankruptcy protection during the quarter. As of June 30, 2013, the Company's net receivable from the customer was $34. If the Company's expectations with respect to collectability were to change, the Company may need to record an additional charge in the future that could be material.
Six months ended June 30, 2013 compared to 2012
Net sales decreased primarily due to $28 from lower selling prices reflecting the pass-through of lower material costs and the impact of competitive price compression.
Segment income decreased primarily due to the impact of competitive price compression, $7 from unfavorable sales unit volume mix and a charge of $11 to record a reserve against a portion of an outstanding customer receivable balance described above, partially offset by $5 from lower depreciation resulting from a change in the estimated useful lives of the Company's can-making equipment and $2 from reduced post-employment benefits.
50
Crown Holdings, Inc.
Item 2. Management's Discussion and Analysis (Continued)
Asia Pacific
The Company's Asia Pacific segment consists of beverage and non-beverage can operations, primarily food cans and specialty packaging. In recent years, the Company's beverage can businesses in Asia have experienced significant growth. For the three and six months ended June 30, 2013, sales of beverage cans and ends accounted for 76% of Asia Pacific's sales.
In 2012, the Company commercialized new beverage can plants in Putian, Ziyang and Heshan, China and expanded capacity at its plant in Ho Chi Minh City, Vietnam. In the fourth quarter of 2012, the Company acquired an aluminum beverage can and end production facility in Vietnam and also acquired a controlling interest in Superior Multi-Packaging Ltd. (“Superior”), a listed company on the Singapore Exchange. Superior primarily produces specialty packaging containers for consumer products companies at its facilities in China, Singapore and Vietnam. The acquisition of the controlling interest in Superior was made by an indirect 55% owned subsidiary of the Company.
In the first quarter of 2013, the Company commercialized second beverage can lines in Putian, China and Bangi, Malaysia. In the second quarter of 2013, the Company commercialized new beverage can plants in Danang, Vietnam and Bangkok, Thailand; and in July, the Company began production at its new plant in Sihanoukville, Cambodia.
Net sales and segment income in the Asia Pacific segment are as follows:
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Net sales | $ | 301 | $ | 249 | $ | 577 | $ | 474 | |||||||
Segment income | 35 | 35 | 68 | 66 | |||||||||||
Three months ended June 30, 2013 compared to 2012
Net sales increased primarily due to $20 from higher sales unit volumes, primarily beverage can sales, and $36 from the acquisition of Superior in the fourth quarter of 2012 partially offset by lower selling prices due to the pass-through of lower raw material costs.
Segment income remained unchanged as the impact of higher beverage can sales unit volumes was offset by higher start-up costs associated with recent capacity expansion.
Six months ended June 30, 2013 compared to 2012
Net sales increased primarily due to $46 from higher sales unit volumes, primarily beverage can sales, and $64 from the acquisition of Superior in the fourth quarter of 2012 partially offset by lower selling prices due to the pass-through of lower raw material costs.
Segment income increased primarily due to higher beverage can sales unit volumes and $2 from lower depreciation resulting from a change in the estimated useful lives of the Company's can-making equipment, partially offset by competitive price compression and start-up costs associated with recent capacity expansion.
Non-reportable Segments
The Company's non-reportable segments include its aerosol can businesses in North America and Europe, its specialty packaging business in Europe and its tooling and equipment operations in the U.S. and United Kingdom. In recent years, the Company's specialty packaging business has experienced stable to slightly declining volumes and its aerosol can businesses have experienced slightly declining volumes. In 2011 and 2012, the Company initiated restructuring actions in its European Aerosol and European Specialty Packaging businesses to reduce manufacturing capacity and headcount. The Company expects these actions to result in annual cost savings of approximately $30. However, there can be no assurance that any such pre-tax savings will be realized.
51
Crown Holdings, Inc.
Item 2. Management's Discussion and Analysis (Continued)
Net sales and segment income in non-reportable segments are as follows:
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Net sales | $ | 212 | $ | 223 | $ | 413 | $ | 447 | |||||||
Segment income | 31 | 29 | 53 | 52 | |||||||||||
Three months ended June 30, 2013 compared to 2012
Net sales decreased primarily due to $13 from lower sales in the Company's European specialty packaging and aerosol businesses partially offset by higher beverage equipment sales to can manufacturers.
Segment income increased primarily due to higher beverage equipment sales to can manufacturers and $3 from reduced post-employment benefits, partially offset by lower sales in the Company's European specialty packaging and aerosol businesses.
Six months ended June 30, 2013 compared to 2012
Net sales decreased primarily due to $24 from lower sales in the Company's European specialty packaging and aerosol businesses and $9 from lower beverage equipment sales to can manufacturers.
Segment income increased primarily due to $5 from improvements in the Company's European aerosol business including the benefits of recent restructuring and $3 from reduced post-employment benefits and $3 from lower depreciation resulting from a change in the estimated useful lives of the Company's can-making equipment, partially offset by lower sales in the Company's European specialty packaging and aerosol businesses.
Corporate and Unallocated Expense
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Corporate and unallocated expense | $ | (36 | ) | $ | (44 | ) | $ | (86 | ) | $ | (100 | ) | |||
For the three months ended June 30, 2013 compared to 2012, corporate and unallocated expense decreased primarily due to $6 from lower pension expense and a net benefit of $5 from legal matters, partially offset by higher legal and incentive compensation costs. As further described in Note K to the consolidated financial statements, the Company recorded a benefit of $16 for a legal settlement related to environmental remediation costs partially offset by a charge of $11 for certain Italian valued added tax assessments.
For the six months ended June 30, 2013 compared to 2012, corporate and unallocated expense decreased primarily due to $11 from lower pension expense and a net benefit of $1 from legal matters. As further described in Note K to the consolidated financial statements, the Company recorded a benefit of $16 for a legal settlement related to environmental remediation costs partially offset by a charge of $15 for certain Italian valued added tax assessments.
Cost of Products Sold (Excluding Depreciation and Amortization)
For the three months ended June 30, 2013 compared to 2012, cost of products sold (excluding depreciation and amortization) increased from $1,799 to $1,818 primarily due to increased global beverage and food can volumes partially offset by the pass-through of lower raw material costs.
For the six months ended June 30, 2013 compared to 2012, cost of products sold (excluding depreciation and amortization) increased from $3,417 to $3,458 primarily due to increased global beverage can volumes partially offset by the pass-through of lower raw material costs.
52
Crown Holdings, Inc.
Item 2. Management's Discussion and Analysis (Continued)
Depreciation and Amortization
For the three and six months ended June 30, 2013 compared to 2012, depreciation and amortization expense decreased from $45 to $30 and from $87 to $64 primarily due to a change in the estimated useful lives of the Company's two-piece and three-piece can-making equipment.
The Company, with the assistance of a third party appraiser, completed an evaluation of the estimated useful lives of its two-piece and three-piece can-making equipment. As a result, effective January 1, 2013, the company increased the estimated useful lives of its can-making equipment to reflect its current estimates of the useful lives. As a result of this change, for the three and six months ended June 30, 2013 compared to 2012, depreciation and amortization was lower by $14 and $24.
Currently, the Company expects the full year impact of the change to result in lower depreciation and amortization of approximately $50 for the year ended December 31, 2013.
Selling and Administrative Expense
For the three and six months ended June 30, 2013 compared to 2012, selling and administrative expense increased from $90 to $102 and from $196 to $206 primarily due to a charge of $11 to record a reserve against a portion of the outstanding receivable balance due from a European food can customer.
Interest Expense
For the three months ended June 30, 2013 compared to 2012, interest expense increased from $55 to $61 primarily due to higher average debt outstanding and included $3 of expense related to the Italian value added tax assessments described in Note K to the consolidated financial statements.
For the six months ended June 30, 2013 compared to 2012, interest expense increased from $113 to $121 primarily due to higher average debt outstanding and included $5 of expense related to the Italian value added tax assessments described in Note K to the consolidated financial statements.
Taxes on Income
The Company's effective income tax rate was as follows:
Three Months Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Income before income taxes | $ | 209 | $ | 208 | $ | 302 | $ | 330 | |||||||
Provision for income taxes | 55 | 51 | 79 | 83 | |||||||||||
Effective income tax rate | 26.3 | % | 24.5 | % | 26.2 | % | 25.2 | % | |||||||
Net Income Attributable to Noncontrolling Interests
For the three months ended June 30, 2013 compared to 2012 net income attributable to noncontrolling interests decreased from $23 to $22. For the six months ended June 30, 2013 compared to 2012 net income attributable to noncontrolling interests increased from $44 to $48 primarily due to increased earnings in Brazil where the noncontrolling investor has a 50% ownership interest.
53
Crown Holdings, Inc.
Item 2. Management's Discussion and Analysis (Continued)
Liquidity and Capital Resources
Cash from Operations
Cash used for operating activities increased from $216 for the six months ended June 30, 2012 to $251 in 2013 primarily due to $23 of premiums paid to redeem all of the Company's outstanding $400 senior notes due 2017 and higher cash taxes paid.
Receivables increased from $1,057 at December 31, 2012 to $1,302 at June 30, 2013 and used cash of $296 for the six months ended June 30, 2012 compared to $281 in 2013. Sales in June 2013 were higher than in December 2012 as sales generally increase each month of the year until peaking in the third quarter. In addition, payment terms for certain of the company's food can operations result in receivables increasing throughout the year and being paid down in the fourth quarter. As a result, receivables generally increase through the third quarter of each year. Days sales outstanding for trade receivables increased from 42 for three months ended June 30, 2012 to 44 in 2013.
Inventories increased from $1,166 at December 31, 2012 to $1,424 at June 30, 2013 and used cash of $135 for the six months ended June 30, 2012 compared to $286 in 2013. Inventory levels typically increase each month of the year until peaking in the third quarter due to seasonal build primarily in the Company's food can businesses. Cash used in 2013 was higher than in 2012 due to capacity expansion and the Company's efforts to manage lower levels of inventory at December 31, 2012 which resulted in higher cash used in 2013 for seasonal build.
Investing Activities
Cash used for investing activities increased from $128 for the six months ended June 30, 2012 to $116 in 2013 primarily due to lower capital expenditures.
Financing Activities
Cash provided by financing activities increased from $238 for the six months ended June 30, 2012 to $249 in 2013 primarily due to increased borrowings that were used, in part, to repurchase shares of the Company's common stock.
Other financing activities, in each year, represent cash settlements of foreign currency derivatives used to hedge intercompany debt obligations.
Liquidity
As of June 30, 2013, $198 of the Company's $227 of cash and cash equivalents was located outside the U.S. The Company is not currently aware of any legal restrictions under foreign law that materially impact its access to cash held outside the U.S.
The Company funds its cash needs in the U.S. through a combination of cash flows from operations in the U.S., dividends from certain foreign subsidiaries, borrowings under its revolving credit facility and the acceleration of cash receipts under its receivable securitization facilities. The Company records current and/or deferred U.S. taxes for the earnings of these foreign subsidiaries. For certain other foreign subsidiaries, the Company considers earnings indefinitely reinvested and has not recorded any U.S. taxes. Of the cash and cash equivalents located outside the U.S., $122 was held by subsidiaries for which earnings are considered indefinitely reinvested. While based on current operating plans the Company does not foresee a need to repatriate these funds, if such earnings were repatriated the Company would be required to record any incremental U.S. taxes on the repatriated funds.
As of June 30, 2013, the Company had $727 of borrowing capacity available under its revolving credit facility, equal to the total facility of $1,200 less $433 of borrowings and $40 of outstanding standby letters of credit.
The Company's debt agreements contain covenants that limit the ability of the Company and its subsidiaries to, among other things, incur additional debt, pay dividends or repurchase capital stock, make certain other restricted payments, create liens and engage in sale and leaseback transactions. These restrictions are subject to a number of exceptions, however, which allow the Company to incur additional debt, create liens or make otherwise restricted payments. The amount of restricted payments permitted to be made, including dividends and repurchases of the Company's common
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Item 2. Management's Discussion and Analysis (Continued)
stock, is generally limited to the cumulative excess of $200 plus 50% of adjusted net income plus proceeds from the exercise of employee stock options over the aggregate of restricted payments made since July 2004. Adjustments to net income may include, but are not limited to, items such as asset impairments, gains and losses from asset sales and early extinguishments of debt.
Capital Resources
As of June 30, 2013, the company has approximately $78 of capital commitments primarily related to capacity expansion in Asia and Brazil. The Company expects to fund these commitments primarily through cash flows generated from operations and to fund any excess needs over available cash through external borrowings.
Contractual Obligations
During the first six months of 2013 there were no material changes to the Company's contractual obligations reported in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of the Company's Annual Report on Form 10-K for the year ended December 31, 2012, which information is incorporated herein by reference, except for the January 2013 debt issuance and repayments described in Note I, entitled "Debt," to the consolidated financial statements,
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, 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, 2012 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 six months of 2013. The discussion below supplements the discussion from the Company's Annual Report on Form 10-K for the year ended December 31, 2012 with respect to goodwill.
Goodwill Impairment
As disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2012, the estimated fair value of the Company's European Aerosols reporting unit was 22% higher than its carrying value. In the second quarter of 2013, the Company announced plans to combine the operations of its European Aerosols and Specialty Packaging businesses. Prior to the combination, the Company performed a review of its European Aerosols reporting unit and determined that there was no goodwill impairment. Based on current projections, the Company believes that the estimated fair value of the new reporting unit exceeds its carrying value. If future operating results were to decline causing the estimated fair value to fall below its carrying value, it is possible that an impairment charge of up to $142 could be recorded.
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
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Item 2. Management's Discussion and Analysis (Continued)
31, 2012, which are not historical facts (including any statements concerning plans and objectives of management for capacity additions, share repurchases, dividends, 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, 2012 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.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
In the normal course of business the Company is subject to risk from adverse fluctuations in foreign exchange and interest rates and commodity prices. The Company manages these risks through a program that includes the use of derivative financial instruments, primarily swaps and forwards. Counterparties to these contracts are major financial institutions. The Company is exposed to credit loss in the event of nonperformance by the counterparties. These instruments are not used for trading or speculative purposes. The extent to which the Company uses such instruments is dependent upon its access to these contracts in the financial markets and its success in using other methods, such as netting exposures in the same currencies to mitigate foreign exchange risk and using sales arrangements that permit the pass-through of commodity prices and foreign exchange rate risks to customers. The Company's objective in managing its exposure to market risk is to limit the impact on earnings and cash flow. For further discussion of the Company's use of derivative instruments and their fair values at June 30, 2013, see Note G to the consolidated financial statements included in this Quarterly Report on Form 10-Q.
As of June 30, 2013, the Company had $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 million before tax.
Item 4. | Controls and Procedures |
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 ensure 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
Item 1. Legal Proceedings
For information regarding the Company's potential asbestos-related liabilities and other litigation, see Note J entitled “Asbestos-Related Liabilities” and Note K entitled “Commitments and Contingent Liabilities,” respectively, to the consolidated financial statements within Item 1 of this Quarterly Report on Form 10-Q, which information is incorporated herein by reference.
Item 1A. Risk Factors
In addition to factors discussed elsewhere in this quarterly report and in “Management's Discussion and Analysis of Financial Condition and Results of Operations,” the following are some of the important factors that could materially and adversely affect the Company's business, financial condition and results of operations.
The Company's international operations, which generated approximately 73% of its consolidated net sales in 2012, are subject to various risks that may lead to decreases in its financial results.
The Company is an international company, and the risks associated with operating in foreign countries may have a negative impact on the Company's liquidity and net income. The Company's international operations generated approximately 73%, 73%, 72% and 73% of its consolidated net sales in the years ended 2012, 2011, 2010 and the six-month period ended June 30, 2013, respectively. In addition, the Company's business strategy includes continued expansion of international activities, including within developing markets and areas, such as Asia, Eastern Europe, the Middle East and South America, that may pose greater risk of political or economic instability. Approximately 32%, 30%, 28% and 33% of the Company's consolidated net sales in the years ended 2012, 2011 and 2010 and the six-month period ended June 30, 2013, respectively, were generated outside of the developed markets in Western Europe, the United States and Canada. Furthermore, if the current European sovereign debt crisis continues or further deteriorates, there will likely be a negative effect on the Company's European business, as well as the businesses of the Company's European customers and suppliers. If this crisis ultimately leads to a significant devaluation of the euro, the value of the Company's financial assets that are denominated in euros would be significantly reduced when translated to U.S. dollars for financial reporting purposes. Any of these conditions could ultimately harm the Company's overall business, prospects, operating results, financial condition and cash flows and such harm may be more pronounced if the Company expands in Western Europe through potential acquisitions or otherwise.
Emerging markets are a focus of the Company's international growth strategy. The developing nature of these markets and the nature of the Company's international operations generally are subject to various risks, including:
•foreign government's restrictive trade policies;
• | inconsistent product regulation or policy changes by foreign agencies or governments; |
• | duties, taxes or government royalties, including the imposition or increase of withholding and other taxes on remittances and other payments by non-U.S. subsidiaries; |
• | customs, import/export and other trade compliance regulations; |
• | foreign exchange rate risks; |
• | difficulty in collecting international accounts receivable and potentially longer payment cycles; |
• | increased costs in maintaining international manufacturing and marketing efforts; |
• | non-tariff barriers and higher duty rates; |
• | difficulties associated with expatriating cash generated or held abroad in a tax-efficient manner and changes in tax laws; |
• | difficulties in enforcement of contractual obligations and intellectual property rights and difficulties in protecting intellectual property or sensitive commercial and operations data or information technology systems generally; |
• | exchange controls; |
• | national and regional labor strikes; |
• | the geographic, language and cultural differences between personnel in different areas of the world; |
• | high social benefit costs for labor, including costs associated with restructurings; |
• | civil unrest or political, social, legal and economic instability, such as recent political turmoil in the Middle East; |
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• | product boycotts, including with respect to the products of the Company's multi-national customers; |
• |
• | customer, supplier, and investor concerns regarding operations in areas such as the Middle East; |
• | taking of property by nationalization or expropriation without fair compensation; |
• | imposition of limitations on conversions of foreign currencies into dollars or payment of dividends and other payments by non-U.S. subsidiaries; |
• | hyperinflation and currency devaluation in certain foreign countries where such currency devaluation could affect the amount of cash generated by operations in those countries and thereby affect the Company's ability to satisfy its obligations; |
• | war, civil disturbance, global or regional catastrophic events, natural disasters, such as flooding in Southeast Asia, widespread outbreaks of infectious diseases, including in emerging markets, and acts of terrorism; |
• | geographical concentration of the Company's factories and operations and regional shifts in its customer base; |
• | periodic health epidemic concerns; and |
• | the complexity of managing global operations. |
There can be no guarantee that a deterioration of economic conditions in countries in which the Company operates or may seek to operate in the future would not have a material impact on the Company's results of operations.
As the Company seeks to expand its business globally, growth opportunities may be impacted by greater political, economic and social uncertainty and the continuing and accelerating globalization of businesses could significantly change the dynamics of the Company's competition, customer base and product offerings.
The Company's efforts to grow its businesses depend to a large extent upon access to, and its success in developing market share and operating profitably in, additional geographic markets including but not limited to Asia, Eastern Europe, the Middle East and South America. In some cases, countries in these regions have greater political and economic volatility, greater vulnerability to infrastructure and labor disruptions and differing local customer product preferences and requirements than the Company's other markets. Operating and seeking to expand business in a number of different regions and countries exposes the Company to multiple and potentially conflicting cultural practices, business practices and legal and regulatory requirements that are subject to change, including those related to tariffs and trade barriers, investments, property ownership rights, taxation and repatriation of earnings and advanced technologies. Such expansion efforts may also use capital and other resources of the Company that could be invested in other areas. Expanding business operations globally also increases exposure to currency fluctuations which can materially affect the Company's financial results. As these emerging geographic markets become more important to the Company, its competitors are also seeking to expand their production capacities and sales in these same markets, which may lead to industry overcapacity that could adversely affect pricing, volumes and financial results in such markets. Although the Company is taking measures to adapt to these changing circumstances, the Company's reputation and/or business results could be negatively affected should these efforts prove unsuccessful.
The Company may not be able to manage its anticipated growth, and it may experience constraints or inefficiencies caused by unanticipated acceleration and deceleration of customer demand.
Unanticipated acceleration and deceleration of customer demand for the Company's products may result in constraints or inefficiencies related to the Company's manufacturing, sales force, implementation resources and administrative infrastructure, particularly in emerging markets where the Company is seeking to expand production. Such constraints or inefficiencies may adversely affect the Company as a result of delays, lost potential product sales or loss of current or potential customers due to their dissatisfaction. Similarly, over-expansion, including as a result of overcapacity due to expansion by the Company's competitors, or investments in anticipation of growth that does not materialize, or develops more slowly than the Company expects, could harm the Company's financial results and result in overcapacity.
To manage the Company's anticipated future growth effectively, the Company must continue to enhance its manufacturing capabilities and operations, information technology infrastructure, and financial and accounting systems and controls. Organizational growth and scale-up of operations could strain its existing managerial, operational, financial and other resources. The Company's growth requires significant capital expenditures and may divert financial resources from other projects, such as the development of new products or enhancements of existing products or reduction of the Company's outstanding indebtedness. If the Company's management is unable to effectively manage the Company's growth, its expenses may increase more than expected, its revenue could grow more slowly than expected and it may not be able to achieve its research and development and production goals. The Company's failure to manage its anticipated growth effectively could have a material effect on its business, operating results or financial condition.
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The Company's profits will decline if the price of raw materials or energy rises and it cannot increase the price of its products, and the Company's financial results could be adversely affected if the Company was not able to obtain sufficient quantities of raw materials.
The Company uses various raw materials, such as steel, aluminum, tin, water, natural gas, electricity and other processed energy, in its manufacturing operations. Sufficient quantities of these raw materials may not be available in the future or may be available only at increased prices. The Company's raw material supply contracts vary as to terms and duration, with steel contracts typically one year in duration with fixed prices and aluminum contracts typically multi-year in duration with fluctuating prices based on aluminum ingot costs. The availability of various raw materials and their prices depends on global and local supply and demand forces, governmental regulations (including tariffs), level of production, resource availability, transportation, and other factors, including natural disasters such as floods and earthquakes. In particular, in recent years the consolidation of steel suppliers, shortage of raw materials affecting the production of steel and the increased global demand for steel, including in China and other developing countries, have contributed to an overall tighter supply for steel, resulting in increased steel prices and, in some cases, special surcharges and allocated cut backs of products by steel suppliers. In addition, future steel supply contracts may provide for prices that fluctuate or adjust rather than provide a fixed price during a one-year period. As a result of continuing global supply and demand pressures, other commodity-related costs affecting its business may increase as well, including natural gas, electricity and freight-related costs.
The prices of certain raw materials used by the Company, such as steel, aluminum and processed energy, have historically been subject to volatility. In 2012, consumption of steel and aluminum represented 26% and 38%, respectively, of the Company's consolidated cost of products sold, excluding depreciation and amortization. While certain, but not all, of the Company's contracts pass through raw material costs to customers, the Company may be unable to increase its prices to offset increases in raw material costs without suffering reductions in unit volume, revenue and operating income. In addition, any price increases may take effect after related cost increases, reducing operating income in the near term. Significant increases in raw material costs may increase the Company's working capital requirements, which may increase the Company's average outstanding indebtedness and interest expense and may exceed the amounts available under the Company's senior secured credit facilities and other sources of liquidity. In addition, the Company hedges raw material costs on behalf of certain customers and may suffer losses if such customers are unable to satisfy their purchase obligations.
If the Company is unable to purchase steel, aluminum or other raw materials for a significant period of time, the Company's operations would be disrupted and any such disruption may adversely affect the Company's financial results. If customers believe that the Company's competitors have greater access to raw materials, perceived certainty of supply at the Company's competitors may put the Company at a competitive disadvantage regarding pricing and product volumes.
The substantial indebtedness of the Company could prevent it from fulfilling its obligations under its indebtedness.
The Company has substantial outstanding indebtedness. As a result of the Company's substantial indebtedness, a significant portion of the Company's cash flow will be required to pay interest and principal on its outstanding indebtedness, and the Company may not generate sufficient cash flow from operations, or have future borrowings available under its senior secured credit facilities, to enable it to repay its indebtedness or to fund other liquidity needs. As of June 30, 2013, the Company and its subsidiaries had approximately $4.1 billion of indebtedness. The Company's ratio of earnings to fixed charges was 3.4 times for the fiscal year ended December 31, 2011, 3.5 times for the fiscal year ended December 31, 2012 and 3.3 times for the six months ended June 30, 2013. The Company's current sources of liquidity and borrowings expire or mature as follows - its $200 million North American securitization facility, of which $125 million was outstanding at June 30, 2013, in December 2015; its $144 million European securitization facility, of which $97 million was outstanding at June 30, 2013, in July 2017; its $1,200 million senior secured revolving credit facilities in June 2015; its €500 million ($651 million at June 30, 2013) 7.125% senior notes in August 2018; its $700 million 6.25% senior notes in February 2021; its $1 billion 4.5% senior notes in January 2023; its $350 million 7.375% senior notes in December 2026; its $64 million 7.5% senior notes in December 2096; and $280 million of other indebtedness in various currencies at various dates through 2019. In addition, the Company's term loan facilities mature as follows: $91 million in June 2014, $137 million in June 2015 and $138 million in June 2016.
The substantial indebtedness of the Company could:
• | increase the Company's vulnerability to general adverse economic and industry conditions, including rising interest rates; |
• | restrict the Company from making strategic acquisitions or exploiting business opportunities, including any planned expansion in emerging markets; |
• | limit the Company's ability to make capital expenditures both domestically and internationally in order to grow the Company's business or maintain manufacturing plants in good working order and repair; |
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• | limit, along with the financial and other restrictive covenants under the Company's indebtedness, the Company's ability to obtain additional financing, dispose of assets or pay cash dividends; |
• | require the Company to dedicate a substantial portion of its cash flow from operations to service its indebtedness, thereby reducing the availability of its cash flow to fund future working capital, capital expenditures, research and development expenditures and other general corporate requirements; |
• | require the Company to sell assets used in its business; |
• | limit the Company's ability to refinance its existing indebtedness, particularly during periods of adverse credit market conditions when refinancing indebtedness may not be available under interest rates and other terms acceptable to the Company or at all; |
• | increase the Company's cost of borrowing; |
• | limit the Company's flexibility in planning for, or reacting to, changes in its business and the industry in which it operates; and |
• | place the Company at a competitive disadvantage compared to its competitors that have less debt. |
If its financial condition, operating results and liquidity deteriorate, the Company's creditors may restrict its ability to obtain future financing and its suppliers could require prepayment or cash on delivery rather than extend credit which could further diminish the Company's ability to generate cash flows from operations sufficient to service its debt obligations. In addition, the Company's ability to make payments on and refinance its debt and to fund its operations will depend on the Company's ability to generate cash in the future.
Some of the Company's indebtedness is subject to floating interest rates, which would result in the Company's interest expense increasing if interest rates rise.
As of June 30, 2013, approximately $1.2 billion of the Company's $4.1 billion of total indebtedness and other outstanding obligations were subject to floating interest rates. Changes in economic conditions could result in higher interest rates, thereby increasing the Company's interest expense and reducing funds available for operations or other purposes. The Company's annual interest expense was $226 million, $232 million and $203 million for 2012, 2011 and 2010, respectively. Based on the amount of variable rate debt outstanding at June 30, 2013, a 1% increase in variable interest rates would increase its annual adjusted interest expense by $12.2 million. Accordingly, the Company may experience economic losses and a negative impact on earnings as a result of interest rate fluctuation. The actual effect of a 1% increase could be more than $12.2 million as the Company's average borrowings on its variable rate debt may be higher during the year than the amount at June 30, 2013. In addition, the cost of the Company's securitization facilities would also increase with an increase in floating interest rates. Although the Company may use interest rate protection agreements from time to time to reduce its exposure to interest rate fluctuations in some cases, it may not elect or have the ability to implement hedges or, if it does implement them, there can be no assurance that such agreements will achieve the desired effect. See “Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Market Risk” in the Company's Annual Report on Form 10-K for the year ended December 31, 2012, and “Quantitative and Qualitative Disclosures About Market Risk” in this report.
Notwithstanding the Company's current indebtedness levels and restrictive covenants, the Company may still be able to incur substantial additional debt or make certain restricted payments, which could exacerbate the risks described above.
The Company may be able to incur additional debt in the future, including in connection with acquisitions or joint ventures. Although the Company's senior secured credit facilities and indentures governing its outstanding notes contain restrictions on the Company's ability to incur indebtedness, those restrictions are subject to a number of exceptions, and, under certain circumstances, indebtedness incurred in compliance with these restrictions could be substantial. The Company may also consider investments in joint ventures or acquisitions or increased capital expenditures, which may increase the Company's indebtedness. Moreover, although the Company's senior secured credit facilities and indentures governing its outstanding notes contain restrictions on the Company's ability to make restricted payments, including the declaration and payment of dividends and the repurchase of the Company's common stock, the Company is able to make such restricted payments under certain circumstances which may increase indebtedness, and the Company may in the future establish a regular dividend on the Company common stock. Adding new debt to current debt levels or making otherwise restricted payments could intensify the related risks that the Company and its subsidiaries now face.
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Restrictive covenants in the debt agreements governing the Company's current or future indebtedness could restrict the Company's operating flexibility.
The indentures and agreements governing the Company's senior secured credit facilities and outstanding notes contain affirmative and negative covenants that limit the ability of the Company and its subsidiaries to take certain actions. These restrictions may limit the Company's ability to operate its businesses and may prohibit or limit its ability to enhance its operations or take advantage of potential business opportunities as they arise. The Company's senior secured credit facilities require the Company to maintain specified financial ratios and satisfy other financial conditions. The agreements or indentures governing the Company's senior secured credit facilities and outstanding notes restrict, among other things, the ability of the Company and the ability of all or substantially all of its subsidiaries to:
• | incur additional debt; |
• | pay dividends or make other distributions, repurchase capital stock, repurchase subordinated debt and make certain investments or loans; |
• | create liens and engage in sale and leaseback transactions; |
• | create restrictions on the payment of dividends and other amounts to the Company from subsidiaries; |
• | make loans, investments and capital expenditures; |
• | change accounting treatment and reporting practices; |
• | enter into agreements restricting the ability of a subsidiary to pay dividends to, make or repay loans to, transfer property to, or guarantee indebtedness of, the Company or any of its subsidiaries; |
• | sell or acquire assets, enter into leaseback transactions and merge or consolidate with or into other companies; and |
• | engage in transactions with affiliates. |
In addition, the indentures and agreements governing the Company's outstanding notes limit, among other things, the ability of the Company to enter into certain transactions, such as mergers, consolidations, joint ventures, asset sales, sale and leaseback transactions and the pledging of assets. Furthermore, if the Company or certain of its subsidiaries experience specific kinds of changes of control, the Company's senior secured credit facilities will be due and payable and the Company will be required to offer to repurchase outstanding notes.
The breach of any of these covenants by the Company or the failure by the Company to meet any of these ratios or conditions could result in a default under any or all of such indebtedness. If a default occurs under any such indebtedness, all of the outstanding obligations thereunder could become immediately due and payable, which could result in a default under the Company's other outstanding debt and could lead to an acceleration of obligations related to the notes and other outstanding debt. The ability of the Company to comply with these covenants or indentures governing other indebtedness it may incur in the future and its outstanding notes can be affected by events beyond its control and, therefore, it may be unable to meet these ratios and conditions.
The Company is subject to the effects of fluctuations in foreign exchange rates, which may reduce its net sales and cash flow.
The Company is exposed to fluctuations in foreign currencies as a significant portion of its consolidated net sales, its costs, assets and liabilities, are denominated in currencies other than the U.S. dollar. For the fiscal years ended December 31, 2012, 2011 and 2010 and the six months ended June 30, 2013, the Company derived approximately 73%, 73%, 72% and 73%, respectively, of its consolidated net sales from sales in foreign currencies. In its consolidated financial statements, the Company translates local currency financial results into U.S. dollars based on average exchange rates prevailing during a reporting period. During times of a strengthening U.S. dollar, its reported international revenue and earnings will be reduced because the local currency will translate into fewer U.S. dollars. Conversely, a weakening U.S. dollar will effectively increase the dollar-equivalent of the Company's expenses and liabilities denominated in foreign currencies. The Company's translation and exchange adjustments increased reported income before tax by $1 million in 2012 and $4 million in 2010 and reduced reported income before tax by $2 million in 2011. See “Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Market Risk” in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 and “Quantitative and Qualitative Disclosures About Market Risk” in this report. Although the Company may use financial instruments such as foreign currency forwards from time to time to reduce its exposure to currency exchange rate fluctuations in some cases, it may not elect or have the ability to implement hedges or, if it does implement them, there can be no assurance that such agreements will achieve the desired effect.
For the year-ended December 31, 2012, a 0.10 movement in the average Euro rate (e.g., from 1.29 USD = 1 Euro to 1.19 USD = 1 Euro) would have reduced net income by $11 million.
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Pending and future asbestos litigation and payments to settle asbestos-related claims could reduce the Company's cash flow and negatively impact its financial condition.
Crown Cork, a wholly-owned subsidiary of the Company, is one of many defendants in a substantial number of lawsuits filed throughout the United States by persons alleging bodily injury as a result of exposure to asbestos. In 1963, Crown Cork acquired a subsidiary that had two operating businesses, one of which is alleged to have manufactured asbestos-containing insulation products. Crown Cork believes that the business ceased manufacturing such products in 1963.
The Company recorded pre-tax charges of $35 million, $28 million and $46 million to increase its accrual for asbestos-related liabilities in 2012, 2011 and 2010, respectively. As of June 30, 2013, Crown Cork's accrual for pending and future asbestos-related claims and related legal costs was $243 million, including $182 million for unasserted claims. Crown Cork's accrual includes estimated probable costs for claims through the year 2022. Crown Cork's accrual excludes potential costs for claims beyond 2022 because the Company believes that the key assumptions underlying its accrual are subject to greater uncertainty as the projection period lengthens. Assumptions underlying the accrual include that claims for exposure to asbestos that occurred after the sale of the subsidiary's insulation business in 1964 would not be entitled to settlement payouts and that state statutes described under Note K to the Company's audited consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 and Note J to the Company's unaudited consolidated financial statements included in this report, including Texas and Pennsylvania statutes, are expected to have a highly favorable impact on Crown Cork's ability to settle or defend against asbestos-related claims in those states and other states where Pennsylvania law may apply.
Crown Cork had approximately 51,000 asbestos-related claims outstanding at December 31, 2012. Of these claims, approximately 15,000 claims relate to claimants alleging first exposure to asbestos after 1964 and approximately 36,000 relate to claimants alleging first exposure to asbestos before or during 1964, of which approximately 13,000 were filed in Texas, 2,000 were filed in Pennsylvania, 6,000 were filed in other states that have enacted asbestos legislation and 15,000 were filed in other states. The outstanding claims at December 31, 2012 exclude 3,100 pending claims involving plaintiffs who allege that they are, or were, maritime workers subject to exposure to asbestos, but whose claims the Company believes will not have a material effect on the Company's consolidated results of operations, financial position or cash flow. The outstanding claims at December 31, 2012 also exclude approximately 19,000 inactive claims. Due to the passage of time, the Company considers it unlikely that the plaintiffs in these cases will pursue further action. The exclusion of these inactive claims had no effect on the calculation of the Company's accrual as the claims were filed in states where the Company's liability is limited by statute. The Company devotes significant time and expense to defend against these various claims, complaints and proceedings, and there can be no assurance that the expenses or distractions from operating the Company's businesses arising from these defenses will not increase materially.
During the six months ended June 30, 2013, Crown Cork received approximately 2,000 new claims, settled or dismissed approximately 1,000 claims, and had approximately 52,000 claims outstanding at the end of the period.
On October 22, 2010, the Texas Supreme Court, in a 6-2 decision, reversed a lower court decision, Barbara Robinson v. Crown Cork & Seal Company, Inc., No. 14-04-00658-CV, Fourteenth Court of Appeals, Texas, which had upheld the dismissal of an asbestos-related case against Crown Cork. The Texas Supreme Court held that the Texas legislation was unconstitutional under the Texas Constitution when applied to asbestos-related claims pending against Crown Cork when the legislation was enacted in June of 2003. The Company believes that the decision of the Texas Supreme Court is limited to retroactive application of the Texas legislation to asbestos-related cases that were pending against Crown Cork in Texas on June 11, 2003 and therefore continues to assign no value to claims filed after June 11, 2003.
Crown Cork made cash payments of $28 million, $28 million, $27 million and $13 million in 2012, 2011, 2010 and for the six months ended June 30, 2013, respectively, for asbestos-related claims including settlement payments and legal fees. These payments have reduced and any such future payments will reduce the cash flow available to Crown Cork for its business operations and debt payments.
Asbestos-related payments including defense costs may be significantly higher than those estimated by Crown Cork because the outcome of this type of litigation (and, therefore, Crown Cork's reserve) is subject to a number of assumptions and uncertainties, such as the number or size of asbestos-related claims or settlements, the number of financially viable responsible parties, the extent to which state statutes relating to asbestos liability are upheld and/or applied by the courts, Crown Cork's ability to obtain resolution without payment of asbestos-related claims by persons alleging first exposure
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to asbestos after 1964, and the potential impact of any pending or future asbestos-related legislation. Accordingly, Crown Cork may be required to make payments for claims substantially in excess of its accrual, which could reduce the Company's cash flow and impair its ability to satisfy its obligations. As a result of the uncertainties regarding its asbestos-related liabilities and its reduced cash flow, the ability of the Company to raise new money in the capital markets is more difficult and more costly, and the Company may not be able to access the capital markets in the future. Further information regarding Crown's Cork's asbestos-related liabilities is presented within “Management's Discussion and Analysis of Financial Condition and Results of Operations” under the headings, “Provision for Asbestos” and “Critical Accounting Policies”and under Note K to the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 and under Note J to the Company's unaudited consolidated financial statements included in this report.
The Company has significant pension plan obligations worldwide and significant unfunded postretirement obligations, which could reduce its cash flow and negatively impact its results of operations and its financial condition.
The Company sponsors various pension plans worldwide, with the largest funded plans in the U.K., U.S. and Canada. In 2012, 2011 and 2010, the Company contributed $102 million, $404 million and $79 million, respectively, to its pension plans and currently anticipates its 2013 funding to be approximately $82 million. Pension expense was $97 million in 2012 and is expected to be $79 million in 2013. A 0.25% change in the 2013 expected rate of return assumptions would change 2013 pension expense by approximately $11 million. A 0.25% change in the discount rates assumptions as of December 31, 2012 would change 2013 pension expense by approximately $4 million. The Company may be required to accelerate the timing of its contributions under its pension plans. The actual impact of any accelerated funding will depend upon the interest rates required for determining the plan liabilities and the investment performance of plan assets. An acceleration in the timing of pension plan contributions could decrease the Company's cash available to pay its outstanding obligations and its net income and increase the Company's outstanding indebtedness.
Based on current assumptions, the Company expects to make pension contributions of $82 million in 2013, $81 million in 2014, $130 million in 2015, $117 million in 2016 and $141 million in 2017 including its supplemental executive retirement plan.
The difference between pension plan obligations and assets, or the funded status of the plans, significantly affects the net periodic benefit costs of the Company's pension plans and the ongoing funding requirements of those plans. Among other factors, significant volatility in the equity markets and in the value of illiquid alternative investments, changes in discount rates, investment returns and the market value of plan assets can substantially increase the Company's future pension plan funding requirements and could have a negative impact on the Company's results of operations and profitability. See Note V to the Company's audited consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2012. While its U.S. funded pension plan continues in effect, the Company continues to incur additional pension obligations. The Company's pension plan assets consist primarily of common stocks and fixed income securities and also include alternative investments such as interests in private equity and hedge funds. If the performance of plan assets does not meet the Company's assumptions or discount rates continue to decline, the underfunding of the pension plan may increase and the Company may have to contribute additional funds to the pension plan, and its pension expense may increase. In addition, the Company's supplemental executive retirement plan and retiree medical plans are unfunded.
The Company's U.S. funded pension plan is subject to the Employee Retirement Income Security Act of 1974, or ERISA. Under ERISA, the Pension Benefit Guaranty Corporation, or PBGC, has the authority to terminate an underfunded plan under certain circumstances. In the event its U.S. pension plan is terminated for any reason while the plan is underfunded, the Company will incur a liability to the PBGC that may be equal to the entire amount of the underfunding, which under certain circumstances may be senior to the notes. In addition, as of December 31, 2012 the unfunded accumulated postretirement benefit obligation, as calculated in accordance with U.S. generally accepted accounting principles, for retiree medical benefits was approximately $352 million, based on assumptions set forth under Note V to the Company's audited consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.
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Acquisitions or investments that the Company is considering or may pursue could be unsuccessful, consume significant resources and require the incurrence of additional indebtedness.
The Company is considering, and in the future may pursue acquisitions and investments that complement its existing business. These possible acquisitions and investments involve or may involve significant cash expenditures, debt incurrence (including the incurrence of additional indebtedness under the Company's senior secured revolving credit facilities or other secured or unsecured debt), operating losses and expenses that could have a material effect on the Company's financial condition and operating results.
In particular, if the Company incurs additional debt, the Company's liquidity and financial stability could be impaired as a result of using a significant portion of available cash or borrowing capacity to finance an acquisition. Moreover, the Company may face an increase in interest expense or financial leverage if additional debt is incurred to finance an acquisition, which may, among other things, adversely affect the Company's various financial ratios and the Company's compliance with the conditions of its existing indebtedness. In addition, such additional indebtedness may be incurred under the Company's senior secured credit facilities or otherwise secured by liens on the Company's assets.
Acquisitions involve numerous other risks, including:
• | diversion of management time and attention; |
• | failures to identify material problems and liabilities of acquisition targets or to obtain sufficient indemnification rights to fully offset possible liabilities related to the acquired businesses; |
• | difficulties integrating the operations, technologies and personnel of the acquired businesses; |
• | inefficiencies and complexities that may arise due to unfamiliarity with new assets, businesses or markets; |
• | disruptions to the Company's ongoing business; |
• | inaccurate estimates of fair value made in the accounting for acquisitions and amortization of acquired intangible assets which would reduce future reported earnings; |
• | the inability to obtain required financing for the new acquisition or investment opportunities and the Company's existing business; |
• | potential loss of key employees, contractual relationships, suppliers or customers of the acquired businesses or of the Company; and |
• | inability to obtain required regulatory approvals. |
To the extent the Company pursues an acquisition that causes it to incur unexpected costs or that fails to generate expected returns, the Company's financial position, results of operations and cash flows may be adversely affected, and the Company's ability to service its indebtedness may be negatively impacted.
Anti-takeover provisions in our organizational documents and under Pennsylvania law could prevent or delay a change in control of our company.
Provisions of Pennsylvania law and of the Company's Articles of Incorporation and By-Laws could make it more difficult for a third party to acquire control of the Company or have the effect of discouraging a third party from attempting to acquire control of the Company. The Company's Articles of Incorporation and By-Laws and Pennsylvania law include certain provisions which may be considered to be “anti-takeover” in nature because they may have the effect of discouraging or making more difficult the acquisition of control over the Company by means of a hostile tender offer, exchange offer, proxy contest or similar transaction. For example, the Company's Articles and By-Laws or Pennsylvania law:
• | provide that shareholders may not act by written consent in lieu of a shareholder meeting; |
• | do not permit shareholders to call a special meeting of shareholders; |
• | limit the ability of shareholders to modify the authority of the Company's Board of Directors or create a committee on the Board of Directors by amending the By-Laws; |
• | limit the size of the Company's Board of Directors; |
• | require advance notice for shareholder business and nominations at a shareholder meeting; |
• | do not provide for cumulative voting by shareholders; |
• | authorize the issuance of “blank check” preferred shares by the Company's Board of Directors; |
• | impose certain requirements on business combinations that could delay for five years and impose conditions upon business combinations between an interested shareholder and the Company, unless the transaction is approved by the Company's Board of Directors; |
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• | include a statute regarding disgorgement of profits arising from the sale of Company common stock by certain controlling shareholders following attempts to acquire control; and |
• | require disinterested shareholder approval of certain business combinations with interested shareholders. |
These provisions are intended to protect the Company's shareholders by providing a measure of assurance that the Company's shareholders will be treated fairly in the event of an unsolicited takeover bid and by preventing a successful takeover bidder from exercising its voting control to the detriment of the other shareholders. To the extent that these provisions actually discourage a transaction, holders of the Company's common stock may not have an opportunity to dispose of part or all of their stock at a higher price than that prevailing in the market. In addition, some of these provisions make it more difficult to remove the Company's incumbent directors and officers, even if their removal would be regarded by some shareholders as desirable.
The Company has authorized and unissued approximately 359 million shares of common stock, including treasury shares, and 30 million shares of preferred stock. The shares of preferred stock may be issued at any time or from time to time and the board of directors has authority to fix the designations, number and voting rights, preferences, privileges, limitations, restrictions, conversion rights and other special or relative rights, if any, of any class or series of any class of preferred stock that may be desired, provided the shares of any such class or series of preferred stock shall not be entitled to more than one vote per share when voting as a class with holders of the Company's common stock. The Company no longer has a policy limiting the issuance of the preferred stock for certain corporate purposes such as corporate financings or acquisitions.
One of the effects of the existence of authorized but unissued shares of our common stock or preferred stock may be to enable our board of directors to render it more difficult or to discourage an attempt to obtain control of us and thereby protect the continuity of our management, which may adversely affect the market price of our common stock. If in the due exercise of its fiduciary obligations, for example, our board of directors were to determine that a takeover proposal were not in our best interests, such shares could be issued by the board of directors without stockholder approval in one or more private placements or other transactions that might prevent, render more difficult or make more costly the completion of any attempted takeover transaction by diluting voting or other rights of the proposed acquirer or insurgent stockholder group, by creating a substantial voting bloc in institutional or other hands that might support the position of the incumbent board of directors, by effecting an acquisition that might complicate or preclude the takeover, or otherwise.
The Company's principal markets may be subject to overcapacity and intense competition, which could reduce the Company's net sales and net income.
Food and beverage cans are standardized products, allowing for relatively little differentiation among competitors. This could lead to overcapacity and price competition among food and beverage can producers, if capacity growth outpaced the growth in demand for food and beverage cans and overall manufacturing capacity exceeded demand. These market conditions could reduce product prices and contribute to declining revenue and net income and increasing debt balances. As a result of industry overcapacity and price competition, the Company may not be able to increase prices sufficiently to offset higher costs or to generate sufficient cash flow. The North American and Western Europe food and beverage can markets, in particular, are considered to be mature markets, characterized by slow growth and a sophisticated distribution system.
Competitive pricing pressures, overcapacity, the failure to develop new product designs and technologies for products, as well as other factors could cause the Company to lose existing business or opportunities to generate new business and could result in decreased cash flow and net income.
The Company is subject to competition from substitute products and decreases in demand for its products, which could result in lower profits and reduced cash flows.
The Company is subject to substantial competition from producers of alternative packaging made from glass, paper, flexible materials and plastic. The Company's sales depend heavily on the volumes of sales by the Company's customers in the food and beverage markets. Changes in preferences for products and packaging by consumers of prepackaged food and beverage cans significantly influence the Company's sales. Changes in packaging by the Company's customers may require the Company to re-tool manufacturing operations, which could require material expenditures. In addition, a decrease in the costs of, or a further increase in consumer demand for, alternative packaging could result in lower profits and reduced cash flows for the Company. For example, increases in the price of aluminum and steel and decreases in the price of plastic resin, which is a petrochemical product and may fluctuate with prices in the oil and gas market, may
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increase substitution of plastic food and beverage containers for metal containers or increases in the price of steel may increase substitution of aluminum packaging for aerosol products. Moreover, due to its high percentage of fixed costs, the Company may be unable to maintain its gross margin at past levels if it is not able to achieve high capacity utilization
rates for its production equipment. In periods of low world-wide demand for its products, the Company experiences relatively low capacity utilization rates in its operations, which can lead to reduced margins during that period and can have an adverse effect on the Company's business.
The Company's business results depend on its ability to understand its customers' specific preferences and requirements, and to develop, manufacture and market products that meet customer demand.
The Company's ability to develop new product offerings for a diverse group of global customers with differing preferences, while maintaining functionality and spurring innovation, is critical to its success. This requires a thorough understanding of the Company's existing and potential customers on a global basis, particularly in potential high growth emerging markets, including the Middle East, South America, Eastern Europe and Asia. Failure to deliver quality products that meet customer needs ahead of competitors could have a significant adverse effect on the Company's business.
The loss of a major customer and/or customer consolidation could reduce the Company's net sales and profitability.
Many of the Company's largest customers have acquired companies with similar or complementary product lines. This consolidation has increased the concentration of the Company's business with its largest customers. In many cases, such consolidation has been accompanied by pressure from customers for lower prices, reflecting the increase in the total volume of product purchased or the elimination of a price differential between the acquiring customer and the company acquired. Increased pricing pressures from the Company's customers may reduce the Company's net sales and net income.
The majority of the Company's sales are to companies that have leading market positions in the sale of packaged food, beverages and household products to consumers. Although no one customer accounted for more than 10% of its net sales in the years ended 2012, 2011 or 2010 and the six-month period ended June 30, 2013, the loss of any of its major customers, a reduction in the purchasing levels of these customers or an adverse change in the terms of supply agreements with these customers could reduce the Company's net sales and net income. A continued consolidation of the Company's customers could exacerbate any such loss.
The Company's business is seasonal and weather conditions could reduce the Company's net sales.
The Company manufactures packaging primarily for the food and beverage can market. Its sales can be affected by weather conditions. Due principally to the seasonal nature of the soft drink, brewing, iced tea and other beverage industries, in which demand is stronger during the summer months, sales of the Company's products have varied and are expected to vary by quarter. Shipments in the U.S. and Europe are typically greater in the second and third quarters of the year. Unseasonably cool weather can reduce consumer demand for certain beverages packaged in its containers. In addition, poor weather conditions that reduce crop yields of packaged foods can decrease customer demand for its food containers.
The Company is subject to certain restrictions that may limit its ability to make payments on its debt out of the cash reserves shown on the Company's consolidated financial statements.
The ability of the Company's subsidiaries and joint ventures to pay dividends, make distributions, provide loans or make other payments to the Company may be restricted by applicable state and foreign laws, potentially adverse tax consequences and their agreements, including agreements governing their debt.
In addition, the equity interests of the Company's joint venture partners or other shareholders in the Company's non-wholly owned subsidiaries in any dividend or other distribution made by these entities would need to be satisfied on a proportionate basis with the Company. As a result, the Company may not be able to access their cash flow to service the Company's debt and the Company cannot assure you that the amount of cash and cash flow reflected on the Company's financial statements will be fully available to the Company.
The Company is subject to costs and liabilities related to stringent environmental and health and safety standards.
Laws and regulations relating to environmental protection and health and safety may increase the Company's costs of operating and reduce its profitability. The Company's operations are subject to numerous U.S. federal and state and non-U.S. laws and regulations governing the protection of the environment, including those relating to treatment, storage and disposal of waste, the use of chemicals in the Company's products and manufacturing process, discharges into water, emissions into the atmosphere, remediation of soil and groundwater contamination and protection of employee health
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and safety. Future regulations may impose stricter environmental or employee safety requirements affecting the Company's operations or may impose additional requirements regarding consumer health and safety, such as potential restrictions on the use of bisphenol-A, a starting material used to produce internal and external coatings for some food, beverage, and aerosol containers and metal closures. Although the U.S. FDA currently permits the use of bisphenol-A in food packaging materials and confirmed in a January 2010 update that studies employing standardized toxicity tests have supported the safety of current low levels of human exposure to bisphenol-A, the FDA in that January 2010 update noted that more research was needed, and further suggested reasonable steps to reduce exposure to bisphenol-A. The FDA subsequently entered into a consent decree under which it agreed to issue, by March 31, 2012, a final decision on a citizen's petition requesting the agency take further regulatory steps with regard to bisphenol-A. On March 30, 2012, the FDA denied the request, responding, in part, that the appropriate course of action was to continue scientific study and review of all new evidence regarding the safety of bisphenol-A. In March 2010, the EPA issued an action plan for bisphenol-A, which includes, among other things, consideration of whether to add bisphenol-A to the chemical concern list on the basis of potential environmental effects and use of the EPA's Design for the Environment program to encourage reductions in bisphenol-A manufacturing and use. Moreover, certain U.S. Congressional bodies, states and municipalities, as well as certain foreign nations and some member states of the European Union, have considered, proposed or already passed, such as Denmark, Belgium and France, legislation banning or suspending the use of bisphenol-A in certain products or requiring warnings regarding bisphenol-A. In July 2012, the FDA banned the use of bisphenol-A in baby bottles and children's drinking cups, and in July 2013, the FDA banned the use of bisphenol-A in epoxy resins that coat infant formula cans. In the fourth quarter of 2012, the French Parliament passed a law suspending the use of bisphenol-A in food packaging beginning in 2013 for food intended for children under 3 and in 2015 for all other foods. The law also includes certain product labeling requirements. Further, the U.S. or additional international, federal, state or other regulatory authorities could restrict or prohibit the use of bisphenol-A in the future. For example, on April 11, 2013, the State of California declared bisphenol-A a reproductive system hazard. However, this declaration was enjoined on April 19, 2013 pending the resolution of a suit challenging the classification. If the injunction is lifted, it would trigger a requirement to include warning labels on consumer items containing bisphenol-A in excess of certain levels. In addition, recent public reports, litigation and other allegations regarding the potential health hazards of bisphenol-A could contribute to a perceived safety risk about the Company's products and adversely impact sales or otherwise disrupt the Company's business. While the Company is exploring various alternatives to the use of bisphenol-A and conversion to alternatives is underway in some applications, there can be no assurance the Company will be completely successful in its efforts or that the alternatives will not be more costly to the Company.
Also, for example, future restrictions in some jurisdictions on air emissions of volatile organic compounds and the use of certain paint and lacquering ingredients may require the Company to employ additional control equipment or process modifications. The Company's operations and properties, both in the U.S. and abroad, must comply with these laws and regulations. In addition, a number of governmental authorities in the U.S. and abroad have introduced or are contemplating enacting legal requirements, including emissions limitations, cap and trade systems or mandated changes in energy consumption, in response to the potential impacts of climate change. Given the wide range of potential future climate change regulations in the jurisdictions in which the Company operates, the potential impact to the Company's operations is uncertain. In addition, the potential impact of climate change on the Company's operations is highly uncertain. The impact of climate change may vary by geographic location and other circumstances, including weather patterns and any impact to natural resources such as water.
A number of governmental authorities both in the U.S. and abroad also have enacted, or are considering, legal requirements relating to product stewardship, including mandating recycling, the use of recycled materials and/or limitations on certain kinds of packaging materials such as plastics. In addition, some companies with packaging needs have responded to such developments, and/or to perceived environmental concerns of consumers, by using containers made in whole or in part of recycled materials. Such developments may reduce the demand for some of the Company's products, and/or increase its costs. See “Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Environmental Matters” in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.
The Company has written down a significant amount of goodwill, and a further write down of goodwill would result in lower reported net income and a reduction of its net worth.
Impairment of the Company's goodwill would require write down of goodwill, which would reduce the Company's net income in the period of any such write down. At June 30, 2013, the carrying value of the Company's goodwill was approximately $1.9 billion. The Company is required to evaluate goodwill reflected on its balance sheet at least annually, or when circumstances indicate a potential impairment. If it determines that the goodwill is impaired, the Company would be required to write off a portion or all of the goodwill.
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If the Company fails to retain key management and personnel, the Company may be unable to implement its business plan.
Members of the Company's senior management have extensive industry experience, and it might be difficult to find new personnel with comparable experience. Because the Company's business is highly specialized, the Company believes that it would also be difficult to replace its key technical personnel. The Company believes that its future success depends, in large part, on its experienced senior management team. Losing the services of key members of its management team could limit the Company's ability to implement its business plan. In addition, under the Company's unfunded Senior Executive Retirement Plan certain members of senior management are entitled to lump sum payments upon retirement or other termination of employment and a lump sum death benefit of five times the annual retirement benefit.
A significant portion of the Company's workforce is unionized and labor disruptions could increase the Company's costs and prevent the Company from supplying its customers.
A significant portion of the Company's workforce is unionized and a prolonged work stoppage or strike at any facility with unionized employees could increase its costs and prevent the Company from supplying its customers. In addition, upon the expiration of existing collective bargaining agreements, the Company may not reach new agreements without union action and any such new agreements may not be on terms satisfactory to the Company. Moreover, additional groups of currently non-unionized employees may seek union representation in the future. If the Company is unable to negotiate acceptable collective bargaining agreements, it may become subject to union-initiated work stoppages, including strikes. The National Labor Relations Board (“NLRB”) has adopted new regulations concerning the procedures for conducting employee representation elections that, if implemented, could make it significantly easier for labor organizations to prevail in elections. The regulations became effective on April 30, 2012; however, in May 2012, a federal district court found that the regulations were not properly adopted by the NLRB. The NLRB responded to the decision by suspending implementation of the regulations and has not announced if or when the regulations will again go into effect.
Failure by the Company's joint venture partners to observe their obligations could adversely affect the business and operations of the joint ventures and, in turn, the business and operations of the Company.
A portion of the Company's operations, including certain joint venture beverage can operations in Asia, the Middle East and South America, is conducted through certain joint ventures. The Company participates in these ventures with third parties. In the event that the Company's joint venture partners do not observe their obligations or are unable to commit additional capital to the joint ventures, it is possible that the affected joint venture would not be able to operate in accordance with its business plans or that the Company would have to increase its level of commitment to the joint venture.
If the Company fails to maintain an effective system of internal control, the Company may not be able to accurately report financial results or prevent fraud.
Effective internal controls are necessary to provide reliable financial reports and to assist in the effective prevention of fraud. Any inability to provide reliable financial reports or prevent fraud could harm the Company's business. The Company must annually evaluate its internal procedures to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires management and auditors to assess the effectiveness of internal controls. If the Company fails to remedy or maintain the adequacy of its internal controls, as such standards are modified, supplemented or amended from time to time, the Company could be subject to regulatory scrutiny, civil or criminal penalties or shareholder litigation.
In addition, failure to maintain adequate internal controls could result in financial statements that do not accurately reflect the Company's financial condition. There can be no assurance that the Company will be able to complete the work necessary to fully comply with the requirements of the Sarbanes-Oxley Act or that the Company's management and external auditors will continue to conclude that the Company's internal controls are effective.
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The Company is subject to litigation risks which could negatively impact its operations and net income.
The Company is subject to various lawsuits and claims with respect to matters such as governmental, environmental and employee benefits laws and regulations, securities, labor, and actions arising out of the normal course of business, in addition to asbestos-related litigation described under the risk factor titled “Pending and future asbestos litigation and payments to settle asbestos-related claims could reduce the Company's cash flow and negatively impact its financial condition.” The Company is currently unable to determine the total expense or possible loss, if any, that may ultimately be incurred in the resolution of such legal proceedings. Regardless of the ultimate outcome of such legal proceedings, they could result in significant diversion of time by the Company's management. The results of the Company's pending legal proceedings, including any potential settlements, are uncertain and the outcome of these disputes may decrease its cash available for operations and investment, restrict its operations or otherwise negatively impact its business, operating results, financial condition and cash flow.
The Company's Italian subsidiaries received assessments for value added taxes and related income taxes from the Italian tax authorities resulting from certain third party suppliers' failures to remit required value added tax payments due by those suppliers under Italian law with respect to purchases for resale to the Company. The expected total assessments were approximately €75 ($98 at June 30, 2013) including applicable interest and penalties. Based on discussions with the Italian tax authorities in the second quarter of 2013, the Company expects to settle these matters during the third quarter of 2013 and for the three and six months ended June 30, 2013, the Company recognized pre-tax expense of $14 and $20 ($13 and $14 after-tax) within its Consolidated Statements of Operations to fully provide for this expected settlement. There can be no assurance the Company will be successful in settling these matters or prevailing in judicial proceedings, or that the final amount of any additional taxes and related interest and penalties payable to the Italian tax authorities in such settlement or judicial proceedings will be under the Company's accrual.
The recent global credit and financial crisis could have adverse effects on the Company.
The recent global credit and financial crisis could have significant adverse effects on the Company's operations, including as a result of any the following:
• | downturns in the business or financial condition of any of the Company's key customers or suppliers, potentially resulting in customers' inability to pay the Company's invoices as they become due or at all or suppliers' failure to fulfill their commitments; |
• | potential losses associated with hedging activity by the Company for the benefit of the Company's customers including counterparty risk associated with such hedging activity, or cost impacts of changing suppliers; |
• | a decline in the fair value of the Company's pension assets or a decline in discount rates used to measure the Company's pension obligations, potentially requiring the Company to make significant additional contributions to its pension plans to meet prescribed funding levels; |
• | the deterioration of any of the lending parties under the Company's senior secured revolving credit facilities or the creditworthiness of the counterparties to the Company's derivative transactions, which could result in such parties' failure to satisfy their obligations under their arrangements with the Company; |
• | noncompliance with the covenants under the Company's indebtedness as a result of a weakening of the Company's financial position or results of operations; and |
• | the lack of currently available funding sources, which could have a negative impact upon the liquidity of the Company as well as that of its customers and suppliers. |
The Company could also be adversely affected by the negative impact on economic growth resulting from the combination of federal income tax increases and government spending restrictions that recently came into effect in the U.S.
The Company relies on its information technology and the failure or disruption of its information technology could disrupt its operations and adversely affect its results of operations.
The Company's business increasingly relies on the successful and uninterrupted functioning of its information technology systems to process, transmit, and store electronic information. A significant portion of the communication between the Company's personnel around the world, customers, and suppliers depends on information technology. As with all large systems, the Company's information technology systems may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, computer viruses, attacks by computer hackers, telecommunication failures, user errors or catastrophic events. In addition, security breaches could result in unauthorized disclosure of confidential information.
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Crown Holdings, Inc.
The concentration of processes in shared services centers means that any disruption could impact a large portion of the Company's business within the operating zones served by the affected service center. If the Company does not allocate, and effectively manage, the resources necessary to build, sustain and protect the proper technology infrastructure, the Company could be subject to transaction errors, processing inefficiencies, loss of customers, business disruptions, the loss of or damage to intellectual property through security breach, as well as potential civil liability and fines under various states' laws in which the Company does business. The Company's information technology system could also be penetrated by outside parties intent on extracting information, corrupting information or disrupting business processes. In addition, if the Company's information technology systems suffer severe damage, disruption or shutdown and the Company's business continuity plans do not effectively resolve the issues in a timely manner, the Company may lose revenue and profits as a result of its inability to timely manufacture, distribute, invoice and collect payments from its customers, and could experience delays in reporting its financial results, including with respect to the Company's operations in emerging markets. Furthermore, if the Company is unable to prevent security breaches, it may suffer financial and reputational damage because of lost or misappropriated confidential information belonging to the Company or to its customers or suppliers. Failure or disruption of these systems, or the back-up systems, for any reason could disrupt the Company's operations and negatively impact the Company's cash flows or financial condition.
Potential U.S. tax law changes could increase the Company's U.S. tax expense on its overseas earnings which could have a negative impact on its after-tax income and cash flow.
Legislative proposals may be made to reform the deferral of U.S. taxes on non-U.S. earnings, potentially significantly changing the timing and extent of taxation on the Company's unrepatriated non-U.S earnings. These reforms include, among other items, a proposal to further limit foreign tax credits and a proposal to defer interest expense deductions allocable to non-U.S earnings until earnings are repatriated. The proposal to defer interest expense deductions and other deductions for expenses could result in the Company not being able to currently deduct a significant portion of its interest expense. The proposal to defer tax deductions allocable to unrepatriated non-U.S. earnings has been set out in various draft Congressional legislative proposals in recent years which were not enacted, and at this juncture it is unclear whether these proposed tax revisions will be enacted or reintroduced by Congress, or, if enacted, what the precise scope of the revisions will be. However, depending on their content, such proposals could have a material adverse effect on the Company's after-tax income and cash flow.
Changes in accounting standards, taxation requirements and other law could negatively affect the Company's financial results.
New accounting standards or pronouncements that may become applicable to the Company from time to time, or changes in the interpretation of existing standards and pronouncements, could have a significant effect on the Company's reported results for the affected periods. The Company is also subject to income tax in the numerous jurisdictions in which the Company operates. Increases in income tax rates or other changes to tax laws could reduce the Company's after-tax income from affected jurisdictions or otherwise affect the Company's tax liability. In addition, the Company's products are subject to import and excise duties and/or sales or value-added taxes in many jurisdictions in which it operates. Increases in indirect taxes could affect the Company's products' affordability and therefore reduce demand for its products.
The Company may experience significant negative effects to its business as a result of new federal, state or local taxes, increases to current taxes or other governmental regulations specifically targeted to decrease the consumption of certain types of beverages.
Public health officials and government officials have become increasingly concerned about the public health consequences associated with over-consumption of certain types of beverages, such as sugar beverages and including those sold by certain of the Company's significant customers. Possible new federal, state or local taxes, increases to current taxes or other governmental regulations specifically targeted to decrease the consumption of these beverages may significantly reduce demand for the beverages of the Company's customers, which could in turn affect demand of the Company's customers for the Company's products. For example, members of the U.S. Congress recently raised the possibility of a federal tax on the sale of certain beverages, including non-diet soft drinks, fruit drinks, teas and flavored waters. Some state governments are also considering similar taxes. If enacted, such taxes could materially adversely affect the Company's business and financial results.
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Crown Holdings, Inc.
The Company's senior secured credit facilities provide that certain change of control events constitute an event of default. In the event of a change of control, the Company may not be able to satisfy all of its obligations under the senior secured credit facilities or other indebtedness.
The Company may not have sufficient assets or be able to obtain sufficient third-party financing on favorable terms to satisfy all of its obligations under the Company's senior secured credit facilities or other indebtedness in the event of a change of control. The Company's senior secured credit facilities provide that certain change of control events constitute an event of default under the senior secured credit facilities. Such an event of default entitles the lenders thereunder to, among other things, cause all outstanding debt obligations under the senior secured credit facilities to become due and payable and to proceed against the collateral securing the senior secured credit facilities. Any event of default or acceleration of the senior secured credit facilities will likely also cause a default under the terms of other indebtedness of the Company.
The loss of the Company's intellectual property rights may negatively impact its ability to compete.
If the Company is unable to maintain the proprietary nature of its technologies, its competitors may use its technologies to compete with it. The Company has a number of patents covering various aspects of its products, including its SuperEnd® beverage can end, whose primary patent expires in 2016, Easylift™ full aperture steel food can ends, PeelSeam™ flexible lidding and Ideal™ product line. The Company's patents may not withstand challenge in litigation, and patents do not ensure that competitors will not develop competing products or infringe upon the Company's patents. Moreover, the costs of litigation to defend the Company's patents could be substantial and may outweigh the benefits of enforcing its rights under its patents. The Company markets its products internationally and the patent laws of foreign countries may offer less protection than the patent laws of the United States. Not all of the Company's domestic patents have been registered in other countries. The Company also relies on trade secrets, know-how and other unpatented proprietary technology, and others may independently develop the same or similar technology or otherwise obtain access to the Company's unpatented technology. In addition, the Company has from time to time received letters from third parties suggesting that it may be infringing on their intellectual property rights, and third parties may bring infringement suits against the Company, which could result in the Company needing to seek licenses from these third parties or refraining altogether from use of the claimed technology.
Demand for the Company's products could be affected by changes in laws and regulations applicable to food and beverages and changes in consumer preferences.
The Company manufactures and sells packaging primarily for the food and beverage can market. As a result, many of the Company's products come into direct contact with food and beverages. Accordingly, the Company's products must comply with various laws and regulations for food and beverages applicable to its customers. Changes in such laws and regulations could negatively impact customers' demand for the Company's products as they comply with such changes and/or require the Company to make changes to its products. Such changes to the Company's products could include modifications to the coatings and compounds that the Company uses, possibly resulting in the incurrence of additional costs. Additionally, because many of the Company's products are used to package consumer goods, the Company is subject to a variety of risks that could influence consumer behavior and negatively impact demand for the Company's products, including changes in consumer preferences driven by various health-related concerns and perceptions.
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Crown Holdings, Inc.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
The following table provides information about the Company's purchase of equity securities during the six months ended June 30, 2013. The table excludes 170,362 shares repurchased by the Company in connection with the surrender of shares to cover taxes on the vesting of restricted stock.
Total Number of Shares Purchased | Average Price Per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs | Approximate Dollar Value of Shares that May Yet Be Purchased under the Programs As of the end of the period (millions of dollars) | |
April | 377,600 | $41.74 | 377,600 | $784 |
May | 2,701,582 | $43.07 | 2,701,582 | $668 |
June | 1,296,119 | $42.54 | 1,296,119 | $613 |
Total | 4,375,301 | $42.79 | 4,375,301 | $613 |
The shares were repurchased pursuant to the December 2012 authorization of the Company's Board of Directors which authorized the repurchase of an aggregate amount of $800 million of the Company's common stock through the end of 2014. This authorization supersedes the previous authorization. Share repurchases under the Company's programs may be made in the open market or through privately negotiated transactions, and at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements and other market conditions. As of June 30, 2013, $613 million of the Company’s outstanding common stock may be repurchased under the program.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
On July 25, 2013, following approval by the Board of Directors, the Company amended and restated its By-Laws, in their entirety. The amendments include the following:
1. | The elimination of (i) the default meeting date and time for the date of the annual meeting date of shareholders and (ii) the limitations on the period of time for which a meeting of shareholders may be adjourned. |
2. | Changes to the judges of election By-Law to provide that judges of election may be appointed by the chairman of the meeting in certain circumstances. |
3. | Changes to the advance notice provisions of the By-Laws to (i) provide that the submission of a Director nomination by a shareholder will not limit the ability of the Board of Directors to change the date of the annual meeting of shareholders, (ii) require, if the date of the annual meeting of shareholders is changed, the resubmission of Director nominations within the later of 10 days from the announcement of the rescheduled meeting date and between 120 and 150 days prior to the rescheduled annual meeting of shareholders and (iii) require certain additional information in the advance notice submitted by a shareholder in connection with a Director nomination or the submission of shareholder business, including, information regarding derivative positions, hedged positions and other economic and/or voting interests in the Company, any other disclosure that may be material to a reasonable shareholder's understanding of the independence of a nominee, an agreement by nominees to comply with all corporate governance, conflict of interest, confidentiality, stock ownership and trading and other policies and guidelines of the Company applicable to Directors and, with respect to shareholder business, to require disclosure of any undisclosed arrangements or understandings regarding such shareholder business. |
4. | The addition of a requirement that each nominee for election to the Board of Directors must deliver a written representation and agreement regarding voting commitments, compensation for service as a Director and compliance with all corporate governance, conflict of interest, confidentiality, stock ownership and trading and other policies and guidelines of the Company applicable to Directors. |
5. | The removal of the ability of the Vice President to call special meetings of the Board of Directors. |
6. | The modernization of the By-Law regarding conference calls to explicitly allow for the use of similar electronic technology. |
7. | The removal of the separate independent Director requirements (which deviated from and duplicated the subsequently added independence requirements of the New York Stock Exchange applicable to the Company). |
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Crown Holdings, Inc.
8. | Changes to clarify that a record date will apply to any adjournment of a meeting of shareholders, unless the Board of Directors sets a new record date, and that if the record date for a dividend or dividend payment falls on a Saturday, Sunday or legal holiday, then the next date that is not a Saturday, Sunday or legal holiday will be used as such record or payment date. |
9. | The addition of a By-Law that provides that the state courts of the Commonwealth of Pennsylvania in and for Philadelphia County or the federal courts of the Eastern District of Pennsylvania shall be the sole and exclusive forum, unless waived by the Company, for (i) any derivative action or proceeding brought on behalf of the Company; (ii) any action asserting a claim of a breach of fiduciary duty owed by any Director, officer or employee of the Company to the Company or the Company's shareholders; (iii) any action asserting a claim against the Company arising pursuant to any provision of the Pennsylvania Associations Code, the Business Corporation Law of the Commonwealth of Pennsylvania, the Articles of Incorporation of the Company or these By-Laws; (iv) any action seeking to interpret, apply, enforce or determine the validity of the Certificate of Incorporation or the By-Laws of the Company; or (v) any action asserting a claim against the Company governed by the internal affairs doctrine. |
10. | The removal of references to Subsection (d) through (f) of Section 511, Subsection (e) through (g) of Section 1721 and Subchapter H of Chapter 25. As a result of these changes, the Company shall be subject to Section 1715 of the Business Corporation Law governing the exercise of the powers of the Board of Directors and Subchapter H of Chapter 25 of the Business Corporation Law providing for the disgorgement of profits arising from the sale of Company common stock by certain controlling shareholders following attempts to acquire control. |
The foregoing summary description is qualified in its entirety by reference to the “Crown Holdings, Inc. By-Laws, Amended and Restated as of July 25, 2013” a copy of which is attached hereto as Exhibit 3.2 and incorporated herein by reference.
The Board of Directors revoked the Company's prior policy regarding issuance of preferred stock. See Part II, Item 1A. Risk Factors, Anti-takeover provisions in our organizational documents and under Pennsylvania law could prevent or delay a change in control of our company, included in this Quarterly Report on Form 10-Q.
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Crown Holdings, Inc.
Item 6. | Exhibits |
3.2 | Crown Holdings, Inc. By-Laws, Amended and Restated as of July 25, 2013. |
10 | Employment contract between Crown Holdings, Inc. and Thomas A. Kelly, dated July 24, 2013. |
10.2 | Senior Executive Retirement Agreement between Crown Holdings, Inc. and Thomas A. Kelly, dated July 24, 2013. |
10.3 | First Amendment to Executive Employment Agreement between Crown Holdings, Inc. and Gerard Gifford, dated July 24, 2013. |
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by John W. Conway, Chairman of the Board, President and Chief Executive Officer of Crown Holdings, Inc. and Thomas A. Kelly, Senior Vice President and Chief Financial Officer of Crown Holdings, Inc. |
101 | The following financial information from the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012, (ii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013 and 2012, (iii) Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012, (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012, (v) Consolidated Statements of Changes in Equity for the six months ended June 30, 2013 and 2012 and (vi) Notes to Consolidated Financial Statements. |
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Crown Holdings, Inc.
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.
Crown Holdings, Inc. Registrant | ||
By: | /s/ Kevin C. Clothier | |
Kevin C. Clothier | ||
Vice President and Corporate Controller | ||
Date: July 26, 2013
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