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| CCK > SEC Filings for CCK > Form 10-Q on 5-May-2009 | All Recent SEC Filings |
5-May-2009
Quarterly Report
(in millions)
Introduction
The following discussion presents management's analysis of the results of operations for the three months ended March 31, 2009 compared to the corresponding period in 2008 and the changes in financial condition and liquidity from December 31, 2008. 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, 2008, along with the consolidated financial statements and related notes included in and referred to within this report.
Executive Overview
The Company's principal areas of focus include improving segment income and cash flow from operations and reducing debt. See Note M to the consolidated financial statements for information regarding segment income.
Improving segment income is primarily dependent on the Company's ability to increase revenues and manage costs. Key strategies for expanding sales include targeting geographic markets with strong growth potential, such as the Middle East, Asia, South America and southern and central Europe, improving selling prices in certain product lines and developing innovative packaging products using proprietary technology. The Company's cost control efforts focus on improving operating efficiencies and managing material and labor costs, including pension and other benefit costs.
The reduction of debt remains a principal strategic goal of the Company and is primarily dependent upon the Company's ability to generate cash flow from operations. In addition, the Company may consider divestitures from time to time, the proceeds of which may be used to reduce debt. The Company's total debt of $3,398 at March 31, 2009 decreased $421 from $3,819 at March 31, 2008, including $199 of decrease due to foreign currency translation. The Company's cash balances increased from $282 to $296 during the same period, net of a decrease of $55 due to foreign currency translation.
The Company considers possible transactions such as acquisitions (which, if effected, may increase the Company's indebtedness or involve the issuance of Company securities), dispositions, refinancings or the repurchase of Company common stock pursuant to Board approved repurchase authorizations (under which $467 was available at March 31, 2009), and is considering an acquisition (which, if effected may increase the Company's indebtedness or involve the issuance of Company securities). Such transactions would be subject to compliance with the Company's debt agreements.
The cost of aluminum and steel, the primary raw materials used to manufacture the Company's products, has increased significantly in recent years. The Company attempts to pass-through these increased costs to its customers through provisions that adjust the selling prices to certain customers based on changes in the market price of the applicable raw material, or through surcharges where no such provision exists. The Company recognizes revenue related to its selling price increases when all of the revenue recognition criteria has been met. There can be no assurance that the Company will be able to fully recover from its customers the impact of the increased aluminum and steel costs.
The foreign currency translation impacts referred to below were primarily due to changes in the euro and pound sterling in the European Division operating segments and the Canadian dollar in the Americas Division operating segments.
Item 2. Management's Discussion and Analysis (Continued)
Net Sales
Net sales in the first quarter of 2009 were $1,684, a decrease of $179 or 9.6% compared to net sales of $1,863 for the same period in 2008. The decrease in net sales in 2009 included, among other items, $189 due to foreign currency translation. Global beverage can volumes increased more than 3% from 2008 due to strong demand in North America, the Mediterranean, the Middle East and Southeast Asia. Global food can volumes decreased from 2008 due to de-stocking throughout the supply chain and the impact of fourth quarter 2008 buy-aheads, both due to higher steel costs in 2009. The pass-through to customers of higher steel costs was offset by the pass-through of lower aluminum costs. Sales from U.S. operations accounted for 29.4% and 26.0% of consolidated net sales in the first quarters of 2009 and 2008, respectively. Sales of beverage cans and ends accounted for 49.6% and sales of food cans and ends accounted for 31.7% of consolidated net sales in the first quarter of 2009 compared to 46.9% and 33.0%, respectively, in 2008.
Net sales in the Americas Beverage segment decreased $24 or 5.5% from $433 in the first quarter of 2008 to $409 in the first quarter of 2009, primarily due to $22 from the impact of foreign currency translation. The effect of increased sales unit volumes of 3% across the division was offset by the pass-through to customers of lower aluminum costs.
Net sales in the North America Food segment increased $12 or 6.5% from $185 in the first quarter of 2008 to $197 in the first quarter of 2009. The increase in 2009 was primarily due to the pass-through to customers of higher steel costs, offset by lower sales unit volumes and $8 due to the impact of foreign currency translation. The lower sales unit volumes were the result of de-stocking by customers and some buy-aheads in the fourth quarter of 2008 prior to 2009 price increases.
Net sales in the European Beverage segment decreased $9 or 2.6% from $348 in the first quarter of 2008 to $339 in the first quarter of 2009. The decrease in 2009 was primarily due to $47 from foreign currency translation, offset by increases in sales unit volumes.
Net sales in the European Food segment decreased $99 or 20.3% from $488 in the first quarter of 2008 to $389 in the first quarter of 2009. The decrease in 2009 included $77 due to the impact of foreign currency translation. The impact of lower sales unit volumes due to de-stocking and fourth quarter 2008 buy-aheads was partially offset by increases from the pass-through of higher steel costs.
Net sales in the European Specialty Packaging segment decreased $24 or 22.9% from $105 in the first quarter of 2008 to $81 in the first quarter of 2009, primarily due to $15 of foreign currency translation and lower sales unit volumes.
Cost of Products Sold (Excluding Depreciation and Amortization)
Cost of products sold, excluding depreciation and amortization, was $1,392 for the first quarter of 2009, a decrease of $166 compared to $1,558 for the same period in 2008. The decrease included $155 due to the impact of foreign currency translation. Decreases due to lower aluminum costs and sales unit volumes largely offset increases due to higher steel costs and pension expense. Pension expense for the Company's U.S. and U.K. plans is not allocated to specific reportable segments, but is included in segment income as part of "corporate and unallocated items." Cost of products sold for the first quarter of 2009 included an increase of $28 compared to the prior year due to increases in pension expense in the U.S. and U.K. plans, primarily due to lower plan assets as a result of market losses and benefit payments during 2008.
As a percentage of net sales, cost of products sold, excluding depreciation and amortization, was 82.7% for the first quarter of 2009 compared to 83.6% for the same period in 2008.
As a result of steel price increases, the Company has implemented significant price increases to many of its customers. However, there can be no assurance that the Company will be able to fully recover from its customers the impact of price increases or surcharges. In addition, if the Company is unable to purchase steel or aluminum for a significant period of time, the Company's operations would be disrupted.
Item 2. Management's Discussion and Analysis (Continued)
Depreciation and Amortization
Depreciation and amortization was $47 in the first quarter of 2009 compared to $53 in the prior year period, primarily due to a decrease of $5 from the impact of foreign currency translation.
Selling and Administrative Expense
Selling and administrative expense was $89 in the first quarter of 2009 compared to $102 for the same period in 2008. The decrease in 2009 was primarily due to $10 from the impact of foreign currency translation. As a percentage of net sales, selling and administrative expense was 5.3% for the first quarter of 2009 and 5.5% for 2008.
Segment Income
As discussed under Note M to the consolidated financial statements, the Company defines segment income as gross profit less selling and administrative expense. See Note M to the consolidated financial statements for a reconciliation of segment income to income before income taxes and equity earnings.
Segment income in the Americas Beverage segment decreased $2 or 4.7% from $43 in the first quarter of 2008 to $41 in the first quarter of 2009, primarily due to the impact of foreign currency translation.
Segment income in the North America Food segment increased $7 or 63.6% from $11 in the first quarter of 2008 to $18 in the first quarter of 2009. The increase in segment income in 2009 was primarily due to improvements in plant manufacturing performance, including benefits from the integration of a closed food can plant in Canada into the U.S. operations, and inventory holding gains from the sale of inventory on hand at the end of the year.
Segment income in the European Beverage segment increased $8 or 16.3% from $49 in the first quarter of 2008 to $57 in the first quarter of 2009, primarily due to increased sales unit volumes.
Segment income in the European Food segment increased $12 or 30.0% from $40 in the first quarter of 2008 to $52 in the first quarter of 2009. The increase in 2009 was primarily due to cost containment initiatives, including improved manufacturing performance and inventory holding gains from the sale of inventory on hand at the end of the year.
Segment income of $1 in the European Specialty Packaging segment for the first quarter of 2009 was unchanged from the first quarter of 2008.
Interest Expense
Interest expense decreased $16 from $77 in the first quarter of 2008 to $61 in the first quarter of 2009 due to $9 from lower interest rates, $5 from foreign currency translation and $2 from lower average debt outstanding.
Taxes on Income
The first quarter of 2009 included net tax charges of $24 on pre-tax income of $92 for an effective rate of 26.1%. The difference of $8 between the pre-tax income at the U.S. statutory rate of 35% or $32, and the tax charge of $24, was primarily due to benefits from lower tax rates in non-U.S. jurisdictions.
The effective tax rate of 35.1% for the first quarter of 2008 approximates the U.S. statutory rate of 35.0% as charges of $9 for valuation allowance adjustments, primarily due to losses in France and Canada, and $2 for withholding taxes, were offset by benefits from lower tax rates in certain non-U.S. jurisdictions.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests increased from $21 in the first quarter of 2008 to $23 in the first quarter of 2009, primarily due to increased profits in the Company's Middle East operations.
Item 2. Management's Discussion and Analysis (Continued)
Cash from Operations
Cash of $345 was used by operating activities in the first quarter of 2009 compared to $443 used by operating activities during the same period in 2008. The decrease of $98 in cash used by operating activities was primarily due to an improvement in receivables of $93 in 2009 compared to 2008. The improvement in receivables was primarily due to the collection of receivables from strong fourth quarter 2008 sales.
Investing Activities
Investing activities used cash of $50 during the first quarter of 2009 compared to cash used of $40 in the prior year period. Primary investing activities were capital expenditures of $50 in the first quarter of 2009 and $33 in 2008. The Company expects its full year capital expenditures to be approximately $150 compared to $174 in 2008, with the difference primarily due to foreign currency translation.
Financing Activities
Financing activities provided cash of $114 during the first quarter of 2009 compared to cash provided of $292 during the same period in 2008. Cash provided by financing activities in the first quarters of 2009 and 2008 was primarily from short-term borrowings and was used to fund operating and investing activities. Other financing activities of $19 in 2009 and $18 in 2008 represent payments received related to the settlement of foreign currency derivatives used to hedge intercompany debt obligations.
Liquidity
As of March 31, 2009, the Company had $552 of borrowing capacity available under its revolving credit facility, equal to the total facility of $758 less $123 of borrowings and $83 of outstanding standby letters of credit.
The Company's debt agreements contain covenants that provide limits on 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, allowing the Company to incur additional debt or make otherwise restricted payments. The Company's revolving credit facility and first priority term loans also contain various financial covenants.
Contractual Obligations
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, 2008 during the first three months of 2009.
Commitments and Contingent Liabilities
Information regarding the Company's commitments and contingent liabilities appears in Part I within Item 1 of this report under Note J, entitled "Commitments and Contingent Liabilities," to the consolidated financial statements, which information is incorporated herein by reference.
Critical Accounting Policies
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States which require that management make numerous estimates and assumptions. Actual results could differ from these estimates and assumptions, impacting the reported results of operations and financial condition of the Company. Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note A to the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2008 describe the significant accounting estimates and policies used in the preparation of the consolidated financial statements. There have been no significant changes in the Company's critical accounting policies during the first three months of 2009.
Item 2. Management's Discussion and Analysis (Continued)
The discussion below supplements the discussion from the Company's Annual Report on Form 10-K for the year ended December 31, 2008 with respect to U.S. deferred tax valuation allowance and pension plan asset return assumptions. The discussion below should be read in conjunction with Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note A to the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2008.
Tax Valuation Allowances
As of December 31, 2008, the Company had a valuation allowance of $246 against
certain U.S. deferred tax assets that management believes will not be realized.
The Company expects to realize a significant portion of its U.S. deferred tax
assets but does not believe, after considering all sources of potential future
income that it is more likely than not that it will have sufficient taxable
income to use certain of its deferred tax assets before they expire. The
valuation allowance of $246 includes $161 for benefits from state tax loss
carryforwards, $54 for foreign tax credits, $26 for capital loss carryforwards,
and $5 for research credits. The state tax loss carryforwards expire as follows:
$7 in 2009 through 2015, $56 in 2016 through 2020, and $98 in 2021 through
2026. The foreign tax credits expire in 2016 through 2018, the capital loss
carryforwards expire in 2012 and 2013, and the research credits expire in 2014
through 2019.
Asset Return Assumptions
The U.S. plan's 2009 assumed asset rate of return of 8.75% was based on a calculation using underlying assumed rates of return of 9.8% for equity securities and alternative investments, and 6.7% for debt securities and real estate. An assumed rate of 9.8% was used for equity securities and alternative investments based on the total return of the S&P 500 for the 25 year period ended December 31, 2008. The Company believes that the equity securities included in the S&P 500 are representative of the equity securities and alternative investments held by its U.S. plan, and that 25 years provides a sufficient time horizon as a basis for estimating future returns. Included in the S&P 500 total return of 9.8% for the 25 year period was a loss of 37.0% in 2008. The Company used a 6.7% assumed return for debt securities, consistent with the U.S. plan discount rate and the return on AA corporate bonds with duration equal to the plan's liabilities. The underlying debt securities in the plan are primarily invested in various corporate and government agency securities, have an aggregate yield of approximately 10% based on their fair values at December 31, 2008, and are benchmarked against returns on AA corporate bonds.
The U.K. plan's 2009 assumed asset rate of return of 6.75% was based on a calculation using underlying assumed rates of return of 8.75% for equity securities and alternative investments, and 5.7% for debt securities and real estate. Equity securities in the U.K. plan as of December 31, 2008 were allocated approximately 50% to U.S. securities, 16% to U.K. securities, 19% to securities in European countries other than the U.K., and 15% to securities in other countries. The assumed rate of 8.75% for equity securities and alternative investments represents the weighted average 25 year return of equity securities in these markets. The Company believes that the equity securities included in the related market indexes are representative of the equity securities and alternative investments held by its U.K. plan, and that 25 years provides a sufficient time horizon as a basis for estimating future returns. Included in the total return of 8.75% for the 25 year period were 2008 losses of, for example, 37.0% in the S&P 500 and 29.9% in the UK FTSE All Share Index. The U.K. plan's debt securities investments at December 31 2008 were approximately one-third in U.K. gilts with an assumed return of 3.8%, and two-thirds in corporate debt securities with an assumed return of 6.75%, consistent with the U.K. plan discount rate and the return on AA corporate bonds with duration equal to the plan's liabilities.
Item 2. Management's Discussion and Analysis (Continued)
Recent Accounting and Reporting Pronouncements
In December 2008, the FASB issued FSP 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets" ("FSP 132(R)-1"). The FSP amends FAS 132(R), "Employers' Disclosures about Pensions and Other Postretirement Benefits." The FSP provides guidance on an employer's disclosures about plan assets of a defined benefit pension or other postretirement plan, on investment policies and strategies, major categories of plan assets, inputs and valuation techniques used to measure the fair value of plan assets and significant concentration of risk within plan assets. FSP 132(R)-1 is effective for the Company as of December 31, 2009. Upon initial application, the provisions of this FSP are not required for earlier periods that are presented for comparative purposes. The Company is currently evaluating the disclosure requirements of this FSP.
In April 2009, the FASB issued the following FSPs:
FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly." The FSP amends FAS 157 and provides additional guidance for estimating fair value in accordance with FAS 157 when the volume and level of activity for the asset or liability have significantly decreased and also includes guidance on identifying circumstances that indicate a transaction is not orderly for fair value measurements. The FSP is to be applied prospectively.
FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments," which amends FAS 115, "Accounting for Certain Investments in Debt and Equity Securities," FAS 124, "Accounting for Certain Investments Held by Not-for-Profit Organizations," and EITF No. 99-20, "Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets," to make the existing other-than-temporary impairments guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. The FSP provides increased disclosure about the credit and noncredit components of impaired debt securities that are not expected to be sold and also requires increased and more frequent disclosures regarding expected cash flows, credit losses, and an aging of unrealized losses related to the securities.
FSP FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments," which amends FAS 107, "Disclosures about Fair Value of Financial Instruments," to require disclosures about fair value of financial instruments not measured on the balance sheet at fair value in interim financial statements as well as annual financial statements. The FSP applies to all financial instruments within the scope of FAS 107 and requires all entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments. The FSP requires comparative disclosures only for periods ending after initial adoption.
The April FSPs described above are effective for the Company as of June 30, 2009. The Company is currently evaluating these FSPs, but does not believe that they will have a significant impact on the determination or reporting of its financial results.
Forward Looking Statements
Statements included herein in "Management's Discussion and Analysis of Financial Condition and Results of Operations," including, but not limited to, in the discussions of asbestos in Note I and commitments and contingencies in Note J to the consolidated financial statements included in this Quarterly Report on Form 10-Q and also in Part I, Item 1: "Business" and Item 3: "Legal Proceedings" and in Part II, Item 7: "Management's Discussion and Analysis of Financial Condition and Results of Operations," within the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008, which are not historical facts (including any statements concerning plans and objectives of management for future operations or economic performance, or assumptions related thereto), are "forward-looking statements" within the meaning of the federal securities laws. In addition, the Company and its representatives may, from time to time, make oral or written statements which are also "forward-looking statements."
Item 2. Management's Discussion and Analysis (Continued)
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, 2008 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.
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