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| CCK > SEC Filings for CCK > Form 10-Q on 30-Oct-2009 | All Recent SEC Filings |
30-Oct-2009
Quarterly Report
Introduction
The following discussion presents management's analysis of the results of operations for the three and nine months ended September 30, 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 Current Report on Form 8-K filed May 5, 2009, along with the consolidated financial statements and related notes included in and referred to within this report.
Executive Overview
The Company's principal areas of focus include improving segment income and cash flow from operations and reducing debt. See Note N to the consolidated financial statements for information regarding segment income.
Improving segment income is primarily dependent on the Company's ability to increase revenues and manage costs. Key strategies for expanding 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 $3,225 at September 30, 2009 decreased $308 from $3,533 at September 30, 2008, net of $57 of increase due to foreign currency translation. The Company's cash balances increased from $332 to $438 during the same period, net of a decrease of $12 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 September 30, 2009). 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 fluctuated significantly in recent years. The Company attempts to pass-through increased costs resulting from such fluctuations 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 any increases in 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 third quarter of 2009 were $2,282, a decrease of $87 or 3.7% compared to net sales of $2,369 for the same period in 2008. Net sales in the first nine months of 2009 were $6,021, a decrease of $407 or 6.3% compared to net sales of $6,428 for the same period in 2008. The decrease in net sales for the third quarter and first nine months of 2009 included, among other items, $129 and $523, respectively, due to foreign currency translation. Global beverage can volumes in the first nine months increased approximately 1% from 2008. Global food can volumes decreased from 2008 due to destocking by customers, lower end user demand and the impact of fourth quarter 2008 buy-ahead primarily due to higher steel costs and selling prices in 2009. The pass-through to customers of higher steel costs in the form of increased selling prices was offset by the pass-through of lower aluminum costs. Sales from U.S. operations accounted for 28.2% and 25.8% of consolidated net sales in the first nine months of 2009 and 2008, respectively. Sales of beverage cans and ends accounted for 47.8% and sales of food cans and ends accounted for 34.3% of consolidated net sales in the first nine months of 2009 compared to 47.1% and 34.0%, respectively, in 2008.
Net sales in the Americas Beverage segment decreased $36 or 6.9% from $519 in the third quarter of 2008 to $483 in the third quarter of 2009. Net sales in the first nine months decreased $101 or 6.9% from $1,471 in 2008 to $1,370 in 2009. The decreases in the quarter and first nine months of 2009 were primarily due to the pass-through of lower aluminum costs to customers in the form of decreased selling prices, and $13 from foreign currency translation in the quarter and $56 in the nine months. Sales unit volumes for the quarter and nine months were generally level to the corresponding periods in the prior year.
Net sales in the North America Food segment increased $43 or 15.9% from $270 in the third quarter of 2008 to $313 in the third quarter of 2009. Net sales in the first nine months increased $85 or 12.6% from $675 in 2008 to $760 in 2009. The increases in 2009 were primarily due to the pass-through to customers of higher steel costs, offset by lower sales unit volumes and $6 of foreign currency translation in the quarter and $21 for the nine months. The lower sales unit volumes were primarily due to destocking by customers, lower end user demand and some buy-ahead in the fourth quarter of 2008 prior to 2009 price increases.
Net sales in the European Beverage segment decreased $27 or 5.9% from $454 in the third quarter of 2008 to $427 in the third quarter of 2009 including $29 from the impact of foreign currency translation. Increases due to the pass-through of increased material costs to customers in the form of higher selling prices were offset by lower sales unit volumes. Net sales in the first nine months decreased $59 or 4.6% from $1,278 in 2008 to $1,219 in 2009. The decrease in 2009 included $129 from the impact of foreign currency translation, offset by the pass-through of increased material costs to customers. Sales unit volumes for the nine months were largely unchanged from 2008.
Net sales in the European Food segment decreased $38 or 5.5% from $685 in the third quarter of 2008 to $647 in the third quarter of 2009. The decrease in 2009 was primarily due to $54 from the impact of foreign currency translation, as higher selling prices from the pass-through of increased steel costs to customers were offset by lower sales unit volumes. Net sales in the first nine months decreased $228 or 13.2% from $1,730 in 2008 to $1,502 in 2009. The decrease in 2009 included $212 from the impact of foreign currency translation and an additional $16 from sales volume decreases in excess of selling price increases. The volume decreases in the quarter and first nine months of 2009 were primarily due to destocking by customers, lower end user demand and some buy-ahead in the fourth quarter of 2008 prior to 2009 selling price increases.
Net sales in the European Specialty Packaging segment decreased $11 or 8.7% from $127 in the third quarter of 2008 to $116 in the third quarter of 2009 was primarily due to $10 from the impact of foreign currency translation. Higher selling prices from the pass-through of increased steel costs to customers were offset by lower sales unit volumes. Net sales in the first nine months decreased $52 or 14.6% from $357 in 2008 to $305 in 2009, including $43 due to currency translation.
Cost of products sold, excluding depreciation and amortization, was $1,868 and $4,936 for the third quarter and first nine months of 2009, decreases of $70 and $349 compared to $1,938 and $5,285 for the same periods in 2008. The decreases included $108 and $429 due to the impact of foreign currency translation for the quarter and first nine months. Decreases due to lower aluminum costs and sales unit volumes largely offset increases due to higher steel costs and pension expense. The increases in pension expense were primarily due to the lower market value of plan assets at the end of 2008 compared to the end of 2007. 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."
Item 2. Management's Discussion and Analysis (Continued)
As a percentage of net sales, cost of products sold, excluding depreciation and amortization, was 81.9% and 82.0% for the third quarter and first nine months of 2009 compared to 81.8% and 82.2% for the same periods 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.
Depreciation and Amortization
Depreciation and amortization was $49 and $142 in the third quarter and first nine months of 2009, compared to $56 and $165 for the prior year periods. The decreases in 2009 were primarily due to $2 and $12 of foreign currency translation impact for the quarter and nine months and lower capital spending in recent years.
Selling and Administrative Expense
Selling and administrative expense was $95 in the third quarter of 2009 compared to $102 for the same period in 2008. The decrease in 2009 was primarily due to $5 from the impact of foreign currency translation. As a percentage of net sales, selling and administrative expense was 4.2% for the third quarter of 2009 and 4.3% for 2008.
Selling and administrative expense was $274 in the first nine months of 2009 compared to $309 for the same period in 2008. The decrease in 2009 was primarily due to $27 from the impact of foreign currency translation. As a percentage of net sales, selling and administrative expense was 4.6% and 4.8% for the first nine months of 2009 and 2008.
Segment Income
As discussed under Note N to the consolidated financial statements, the Company defines segment income as gross profit less selling and administrative expense. See Note N to the consolidated financial statements for a reconciliation of segment income to income before income taxes and equity earnings.
Segment income decreased $3 or 1.1% from $273 in the third quarter of 2008 to $270 in the third quarter of 2009, including decreases of $14 due to foreign currency translation and $29 due to increased pension expense, and lower overall sales unit volumes. Pension expense is primarily recorded in "corporate and unallocated items" within the Company's segment reporting. These decreases were partially offset by improvements due to inventory holding gains from the sale of lower cost inventory on hand at the end of the year, selling price increases and ongoing cost reduction and efficiency improvement programs. Segment income for the first nine months of 2009 was unchanged from $669 in 2008 as increases from inventory holding gains, selling price increases and cost reductions were offset by decreases of $55 due to foreign currency translation, $83 due to increased pension expense, and lower overall sales unit volumes.
Segment income in the Americas Beverage segment was unchanged from the third quarter of the prior year. Segment income for the nine months decreased $2 or 1.2% from $164 in 2008 to $162 in 2009. Sales unit volumes were within 1% of prior year volumes for both the quarter and first nine months. Foreign currency translation reduced segment income by $1 and $5 for the quarter and nine months, respectively.
Item 2. Management's Discussion and Analysis (Continued)
Segment income in the North America Food segment increased $18 or 52.9% from $34 in the third quarter of 2008 to $52 in the third quarter of 2009. Segment income in the first nine months increased $34 or 52.3% from $65 in 2008 to $99 in 2009. The increases in segment income in 2009 were primarily due to inventory holding gains from the sale of lower cost inventory on hand at the end of the year and improvements in plant manufacturing performance, including benefits from the integration of a closed food can plant in Canada into the U.S. operations, which offset lower sales unit volumes.
Segment income of $74 in the European Beverage segment was unchanged from the third quarter of 2008 as improvements due to costs savings and operating efficiencies were offset by a decrease of $2 due to foreign currency translation. Segment income in the first nine months increased from $207 in 2008 to $219 in 2009 primarily due to cost savings, partially offset by a decrease of $18 due to foreign currency translation.
Segment income in the European Food segment decreased $4 or 4.5% from $89 in the third quarter of 2008 to $85 in the third quarter of 2009, primarily due to lower sales unit volumes and foreign currency translation of $8, offset by selling price increases. Segment income for the nine months increased $16 or 8.3% from $192 in 2008 to $208 in 2009 primarily due to inventory holding gains from the sale of lower cost inventory on hand at the end of the year, partially offset by lower sales unit volumes and foreign currency translation of $22. Segment income also included charges of $7 and $8 for the quarter and nine months, respectively, for provisions against trade receivables, including $5 for one customer recorded in the third quarter.
Segment income in the European Specialty Packaging segment increased $2 or 25.0% from $8 in the third quarter of 2008 to $10 in the third quarter of 2009. Segment income in the first nine months decreased $1 or 5.0% from $20 in 2008 to $19 in 2009. The impact of foreign currency translation reduced segment income by $1 and $3 for the quarter and first nine months, respectively.
Restructuring
During the second quarter of 2009, the Company incurred maintenance and closing costs of $2 for a Canadian food can plant that ceased operations in 2008.
During the third quarter of 2009, the Company recorded restructuring charges of $40, including $20 related to the closure of two food can plants and an aerosol plant in Canada, $19 for severance costs to reduce headcount in the Company's European division and $1 for costs related to a prior restructuring action in Canada. The charge of $20 in Canada included $12 for pension and postretirement benefit plan curtailment charges, $6 for severance costs and $2 for asset writedowns. Also related to the Canadian plants, the Company expects to incur future additional charges of approximately $15 for pension settlements, including $5 in the fourth quarter of 2009 and $10 in 2010, and $5 for plant maintenance and strip and clean costs related to the closed plants. The total cash cost for these restructuring actions is expected to be approximately $33, including $25 for severance costs and $8 for pension plan settlements. The Company expects to save $25 on an annual basis when the actions are fully implemented.
Interest Expense
Interest expense decreased $10 from $76 in the third quarter of 2008 to $66 in the third quarter of 2009 due to $14 from lower interest rates and $2 from foreign currency translation, offset by an increase of $6 due to higher average debt outstanding. Interest expense for the nine months decreased $43 from $232 in 2008 to $189 in 2009 due to $32 from lower interest rates and $11 from foreign currency translation. While the Company experienced lower interest rates during the first nine months of 2009 compared to similar periods in 2008, there can be no assurances the Company's prevailing interest rates and interest expense will not increase in future periods, whether as a result of fluctuations in the interest rates of the Company's variable indebtedness, marginal increases in interest rates from the Company's recent refinancing activities, future refinancings of the Company's indebtedness or other factors. See the discussion under the heading " Liquidity and Capital Resources-Liquidity " below for further detail.
Item 2. Management's Discussion and Analysis (Continued)
Taxes on Income
The third quarter of 2009 included net tax charges of $3 on pre-tax income of $144. The difference of $47 between pre-tax income at the U.S. statutory rate of 35% or $50, and the tax charge of $3, was primarily due to benefits of $21 from lower tax rates in certain non-U.S. jurisdictions and $37 for valuation allowance adjustments, partially offset by charges of $11 for withholding taxes, state taxes and other items. The valuation allowance adjustments of $37 included a credit of $40 for the release of valuation allowances in France based on the Company's estimate of future profits.
The first nine months of 2009 included net tax charges of $71 on pre-tax income of $418 for an effective rate of 17.0%. The difference of $75 between pre-tax income at the U.S. statutory rate of 35% or $146, and the tax charge of $71, was primarily due to benefits of $52 from lower tax rates in certain non-U.S. jurisdictions and $50 from valuation allowance adjustments, partially offset by charges of $27 for withholding taxes, state taxes and other items. The valuation allowance adjustments of $50 included a credit of $40 for the release of valuation allowances in France based on the Company's estimate of future profits.
The third quarter of 2008 included net tax charges of $45 on pre-tax income of $190 for an effective rate of 23.7%. The difference of $22 between the pre-tax income at the U.S. statutory rate of 35% or $67, and the tax charges of $45, was primarily due to benefits of $15 from lower tax rates in certain non-U.S. jurisdictions, $5 from an adjustment to deferred taxes due to a change in the U.K. tax law regarding depreciation, and $3 for provision reversals, partially offset by other net charges of $1, including withholding taxes.
The first nine months of 2008 included net tax charges of $113 on pre-tax income of $433 for an effective rate of 26.1%. The difference of $39 between the pre-tax income at the U.S. statutory rate of 35% or $152, and the tax charges of $113, was primarily due to benefits of $44 from lower tax rates in certain non-U.S. jurisdictions, $5 from an adjustment to deferred taxes due to a change in the U.K. tax law regarding depreciation and $3 for provision reversals. These benefits were partially offset by charges of $6 for withholding taxes, $5 for valuation allowance adjustments and $2 of other items.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests increased from $29 and $81 in the third quarter and first nine months of 2008 to $33 and $90 in the third quarter and first nine months of 2009, primarily due to increased profits in the Company's Middle East operations.
Cash from Operations
Cash of $180 was provided by operating activities in the first nine months of 2009 compared to $146 used for operating activities during the same period in 2008. The improvement of $326 in cash from operating activities included an improvement in receivables of $142 in 2009 compared to 2008, primarily due to the collection of receivables from strong fourth quarter 2008 sales, and $23 of increased securitization. Segment income, as defined in Note N to the consolidated financial statements, was unchanged in the first nine months of 2009 compared to the same period in 2008, but included $83 of additional pension expense in 2009, while cash contributions to the company's pension plans decreased from $59 in 2008 to $42 in 2009. Interest payments decreased from $185 in the first nine months of 2008 to $153 in the same period in 2009 primarily due to lower interest rates.
Investing Activities
Investing activities used cash of $110 during the first nine months of 2009 compared to cash used of $128 in the prior year period. Primary investing activities were capital expenditures of $108 in the first nine months of 2009 and $114 in 2008. The Company expects its full year capital expenditures to be approximately $185 compared to $174 in 2008. Other investing activities of $24 in 2008 included payments of $13 to repurchase a portion of the outstanding shares from minority shareholders in the Company's operations in Greece.
Item 2. Management's Discussion and Analysis (Continued)
Financing Activities
Financing activities used cash of $236 during the first nine months of 2009 compared to cash provided of $149 during the same period in 2008. Proceeds from long-term debt of $399 in 2009 included $388 from notes issued in May 2009 as discussed under "Liquidity" below. Payments of long-term debt of $577 in 2009 included $362 (€246) of notes purchased in a tender offer and $200 of debt satisfied through an irrevocable deposit with a trustee, also discussed under the heading "Liquidity" below. Other financing activities of $40 in 2008 represents payments received related to the settlement of foreign currency derivatives used to hedge intercompany debt obligations.
Liquidity
In May 2009, the Company sold $400 principal amount of 7.625% senior unsecured notes due 2017 in a private placement. The notes were priced at 97.092% to yield 8.125% and the Company received proceeds of $388. The notes were issued by Crown Americas LLC and Crown Americas Capital Corp. II. The notes are senior obligations of the issuers, ranking senior in right of payment to all subordinated indebtedness of Crown Americas LLC and Crown Americas Capital Corp. II, and are unconditionally guaranteed on a senior basis by the Company and substantially all of its U.S. subsidiaries.
In September 2009, the Company purchased through a tender offer €246 of the €460 6.25% senior secured notes of Crown European Holdings SA due 2011. In addition to the principal of €246, the total purchase price of €258 also included €11 for a redemption premium of 4.5% of the principal amount tendered and subsequently purchased and €1 for accrued and unpaid interest. Notes purchased in the tender offer were cancelled.
Also in September 2009, the Company made an irrevocable deposit of $212 with a trustee to satisfy and discharge all of the outstanding indebtedness with respect to the 8.0% debentures of Crown Cork & Seal Company, Inc. due 2023. The payment of $212 included $200 for the principal amount of the debentures, $9 for accrued and unpaid interest to the redemption date of October 30, 2009, and $3 for a redemption premium of 1.525% of the principal amount redeemed.
As of September 30, 2009, the Company had $668 of borrowing capacity available under its revolving credit facility, equal to the total facility of $758 less $71 of outstanding standby letters of credit and $19 of borrowings.
The Company's current sources of liquidity and borrowings expire or mature as follows - its $225 North American securitization facility in March 2010; its €120 European securitization facility in June 2010; its $758 revolving credit facility in May 2011; its €214 first priority senior secured notes in September 2011; its $742 first priority term loans in November 2012; its $500 7.625% senior notes in November 2013; its $600 7.75% senior notes in November 2015; and its $400 7.625% senior notes in May 2017.
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 debt agreements also contain various financial covenants.
Contractual Obligations
At September 30, 2009, purchase obligations covering new agreements for raw materials and other consumables increased $128 for 2010, $355 for 2011 and $244 for 2012 above amounts provided within Part I, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," including, but not limited to, in the "Liquidity and Capital Resources" section of the Company's Annual Report on Form 10-K for the year ended December 31, 2008.
Item 2. Management's Discussion and Analysis (Continued)
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 I , 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 nine months of 2009.
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 the U.S. deferred tax 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 Exhibit 99 to the Company's Current Report on Form 8-K filed with the SEC on May 5, 2009.
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 . . .
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