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CCK > SEC Filings for CCK > Form 10-Q on 6-Nov-2012All Recent SEC Filings

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Form 10-Q for CROWN HOLDINGS INC


6-Nov-2012

Quarterly Report


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 nine months ended September 30, 2012 compared to the corresponding periods in 2011 and the changes in financial condition and liquidity from December 31, 2011. 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, 2011, 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.

From the beginning of 2011, the Company has commercialized ten new production lines including six new plant startups in Asia, Brazil and Europe. This includes a new plant in Heshan, China which commenced commercial beverage can production in the third quarter of 2012. When fully operational, these facilities are expected to have combined annual production capacity of 8.6 billion beverage cans to meet expected demand. Over the next twelve months, the Company expects to commercialize another 3.6 billion in annual beverage can production capabilities to meet existing demand in still growing markets in Cambodia, China, Malaysia, Thailand and Vietnam. 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 which may result in additional restructuring charges in the future which may be material. The Company is currently evaluating certain plans in its European Food and European Specialty Packaging segments which, if approved, may result in additional restructuring charges of up to $50 in the aggregate.

In addition, as part of the Company's efforts to manage cost, it attempts to pass-through 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. 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 segments, the Canadian dollar in the Company's Americas segments and the Chinese renminbi and Thai baht in the Company's Asian businesses included in non-reportable segments.


                              Crown Holdings, Inc.



Item 2. Management's Discussion and Analysis (Continued)

Net Sales and Segment Income
                                        Three Months Ended             Nine Months Ended
                                           September 30                 September 30
                                         2012         2011            2012          2011
Net sales                            $   2,302      $ 2,423       $    6,433      $ 6,586
Beverage cans and ends as a
percentage of net sales                     52 %         49 %             55 %         52 %
Food cans, ends and metal vacuum
closures as a percentage of net
sales                                       32 %         34 %             29 %         31 %

Three months ended September 30, 2012 compared to 2011

Net sales decreased primarily due to $106 from the impact of foreign currency translation. The increase due to higher global beverage can sales unit volumes was offset by the pass-through of lower aluminum costs.

Nine months ended September 30, 2012 compared to 2011

Net sales decreased primarily due to $243 from the impact of foreign currency translation partially offset by $126 from increased global sales unit volumes. Overall, sales unit volumes in the Company's beverage can businesses were higher than in the prior year offsetting declines in the Company's food can and closures, aerosol can and specialty packaging businesses.

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 North American beverage can market is a mature market which has 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. In 2011, the Company completed construction of a new plant in Ponta Grossa, Brazil and commenced commercial operations of a second line in its plant in Estancia, Brazil.

Net sales and segment income in the Americas Beverage segment are as follows:

                    Three Months Ended               Nine Months Ended
                       September 30                   September 30
                      2012            2011           2012            2011
Net sales      $     574             $ 594    $     1,701          $ 1,697
Segment income        82                77            229              217

Three months ended September 30, 2012 compared to 2011

Net sales decreased primarily due to $20 from the pass-through of lower aluminum costs and $4 from the impact of foreign currency translation partially offset by $4 from increased sales unit volumes. Sales unit volume increases in Brazil offset volume declines in North America. The increase in Brazil is primarily attributable to recent capacity additions in Ponta Grossa and Estancia. Sales unit volumes in Brazil are higher due to various factors, including its growing middle class and increasing disposable income and shift in packaging mix to two-piece aluminum beverage cans from other packages.

Segment income increased primarily due to higher sales unit volumes in Brazil as described above and $3 from lower operating costs including reduced post-employment benefits in the U.S. partly due to post-retirement plan amendments in 2011.


Crown Holdings, Inc.

Item 2. Management's Discussion and Analysis (Continued)

Nine months ended September 30, 2012 compared to 2011

Net sales increased primarily due to $58 from increased sales unit volumes partially offset by $41 from the pass-through of lower aluminum costs and $13 from the impact of foreign currency translation. Sales unit volume increases in Brazil offset volume declines in North America. The increase in Brazil is primarily the result of recent capacity additions in Ponta Grossa and Estancia. Sales unit volumes in Brazil are higher due to various factors, including its growing middle class and increasing disposable income and shift in packaging mix to two-piece aluminum beverage cans from other packages.

Segment income increased primarily due to $20 from higher sales unit volumes in Brazil as described above. In addition, segment income increased due to lower operating costs including reduced post-employment benefits in the U.S. partly due to post-retirement plan amendments which were offset by lower selling prices primarily due to competitive pricing pressure.

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                Nine Months Ended
                       September 30                    September 30
                      2012            2011             2012             2011
Net sales      $     259             $ 271    $       672              $ 676
Segment income        44                49            117                115

Three months ended September 30, 2012 compared to 2011

Net sales decreased primarily due to $14 from lower sales unit volumes which were partly impacted by poor weather conditions in the U.S.

Segment income decreased primarily due to $8 from lower sales unit volumes and unfavorable product mix partially offset by $3 from lower operating costs including improved manufacturing performance and reduced post-employment benefits in the U.S. partly due to post-retirement plan amendments in 2011.

Nine months ended September 30, 2012 compared to 2011

Net sales decreased primarily due to $4 from the impact of foreign currency translation. The impact from lower sales unit volumes was offset by the pass-through of higher costs.

Segment income increased primarily due to $14 from lower operating costs including improved manufacturing performance and reduced post-employment benefits in the U.S. partly due to post-retirement plan amendments in 2011 partially offset by $7 from lower sales unit volumes and unfavorable product mix and $5 from inventory holding gains in 2011 that did not recur in 2012.

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 full annualized capacity of approximately 700 million cans.


                              Crown Holdings, Inc.



Item 2. Management's Discussion and Analysis (Continued)

Net sales and segment income in the European Beverage segment are as follows:
                    Three Months Ended               Nine Months Ended
                       September 30                   September 30
                      2012            2011           2012            2011
Net sales      $     451             $ 451    $     1,285          $ 1,291
Segment income        68                61            174              176

Three months ended September 30, 2012 compared to 2011

Net sales remained at $451 as the impact of increased sales unit volumes primarily in Greece, Saudi Arabia, Slovakia and Turkey offset $27 from the impact of foreign currency translation. The increase in sales unit volumes in Slovakia and Turkey is primarily from recent capacity additions.

Segment income increased primarily due to increased sales unit volumes as described above partially offset by $3 from the impact of foreign currency translation.

Nine months ended September 30, 2012 compared to 2011

Net sales decreased primarily due to $68 from the impact of foreign currency translation partially offset by $50 from increased sales unit volumes primarily in Saudi Arabia, Slovakia, Turkey and the UK and $12 from the pass-through of higher costs.

Segment income decreased primarily due to $6 from the impact of foreign currency translation partially offset by higher sales unit volumes as described above.

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. The Company is currently evaluating certain plans which, if approved, may result in additional restructuring charges in its European Food segment which could be material.

Net sales and segment income in the European Food segment are as follows:

                    Three Months Ended               Nine Months Ended
                       September 30                   September 30
                      2012            2011           2012            2011
Net sales      $     547             $ 623    $     1,383          $ 1,554
Segment income        64                87            151              202

Three months ended September 30, 2012 compared to 2011

Net sales decreased primarily due to $58 from the impact of foreign currency translation and $18 from lower sales unit volumes in France and the UK due to unseasonably cold and wet weather and drought conditions in Italy.

Segment income decreased primarily due to lower sales unit volumes in France, Italy and the UK and $7 from the impact of foreign currency translation. In addition, segment income was impacted by lower selling prices as a result of weakened demand.


Crown Holdings, Inc.

Item 2. Management's Discussion and Analysis (Continued)

Nine months ended September 30, 2012 compared to 2011

Net sales decreased primarily due to lower sales unit volumes due to ongoing economic uncertainty in Europe and adverse weather conditions and $123 from the impact of foreign currency translation.

Segment income decreased primarily due to lower sales unit volumes in France, Italy and the UK, $5 from inventory holding gains in 2011 that did not recur in 2012 and $13 from the impact of foreign currency translation.

European Specialty Packaging

The European Specialty Packaging segment manufactures a wide variety of
specialty containers, with numerous lid and closure variations and supplies a
variety of customers throughout Europe. The Company is currently evaluating
certain plans which, if approved, may result in additional restructuring charges
in its European Specialty Packaging segment which could be material.

Net sales and segment income in the European Specialty Packaging segment are as
follows:
                    Three Months Ended                Nine Months Ended
                       September 30                    September 30
                      2012            2011             2012             2011
Net sales      $     102             $ 122    $       289              $ 341
Segment income         9                11             20                 30

Three months ended September 30, 2012 compared to 2011

Net sales decreased primarily due to $10 from lower sales activity reflecting ongoing economic uncertainty in Europe and $10 from the impact of foreign currency translation.

Segment income decreased primarily due to lower sales unit volumes and $1 from the impact of foreign currency translation.

Nine months ended September 30, 2012 compared to 2011

Net sales decreased primarily due to $30 from lower sales unit volumes reflecting ongoing economic uncertainty in Europe and $23 from the impact of foreign currency translation.

Segment income decreased primarily due to lower sales unit volumes, $2 from inventory holding gains in 2011 that did not recur in 2012 and $2 from the impact of foreign currency translation.

Non-reportable Segments

The Company's non-reportable segments include its aerosol can businesses in North America, Europe and Thailand, its beverage can businesses in Cambodia, China, Malaysia, Singapore, Thailand and Vietnam, its food can and closures business in Thailand and its tooling and equipment operations in the U.S. and United Kingdom. In recent years, the Company's businesses in Asia have experienced significant growth whereas its aerosol can businesses have experienced slightly declining volumes.

In the first quarter of 2012, the Company commenced commercial operations at its new beverage can plant in Putian, China. In the second quarter of 2012, the Company commenced commercial operations at its new beverage can plant in Ziyang, China, completed capacity expansion at its plant in Ho Chi Minh City, Vietnam and began commercial production of beverage can ends at its new plant in Heshan, China. In the third quarter of 2012, the Company began commercial production of beverage cans in Heshan, China.


Crown Holdings, Inc.

Item 2. Management's Discussion and Analysis (Continued)

In 2013, the Company has announced plans to complete new beverage can plants in Sihanoukville, Cambodia, Bangkok, Thailand and Danang, Vietnam and to expand capacity in Malaysia and Putian. The additional capacity in Thailand and Malaysia is replacing capacity lost as a result of the 2011 flooding in Thailand. Once the projects are complete, the Company expects to have added 3.6 billion units of annualized capacity. In response to changing market conditions, the Company has indefinitely postponed plans for new beverage can plants in Changchun, Nanning, and XinXiang, China.

Net sales and segment income in non-reportable segments are as follows:

                    Three Months Ended               Nine Months Ended
                       September 30                   September 30
                      2012            2011           2012            2011
Net sales      $     369             $ 362    $     1,103          $ 1,027
Segment income        59                62            166              174

Three months ended September 30, 2012 compared to 2011

Net sales increased primarily due to $26 from increased beverage can sales in Cambodia, China, Malaysia and Vietnam as a result of increased regional demand driven by macroeconomic factors such as GDP growth and increased consumer spending. The increase was partially offset by $10 from lower sales in the Company's North American and European aerosol businesses primarily due to lower consumer spending partly due to ongoing economic uncertainty in Europe and $6 from the impact of foreign currency translation.

Segment income decreased primarily due to $8 from the Company's North American and European aerosol businesses. Segment income increased $8 due to increased beverage can sales in Cambodia, China, Malaysia, Thailand and Vietnam partially offset by $3 of start-up costs from recent capacity additions.

The Company recognized income of $5 from insurance proceeds covering incremental costs and lost profits associated with the 2011 flooding in Thailand.

Nine months ended September 30, 2012 compared to 2011

Net sales increased primarily due to $96 from increased beverage can sales in Cambodia, China, Malaysia and Vietnam as a result of increased regional demand driven by macroeconomic factors such as GDP growth and increased consumer spending. In addition, net sales increased due to $19 from increased beverage equipment sales to can manufacturers partially offset by $26 from lower sales in the Company's North American and European aerosol businesses primarily due to lower consumer spending partly due to ongoing economic uncertainty in Europe and $12 from the impact of foreign currency translation.

Segment income decreased primarily due to $23 from the Company's North American and European aerosol businesses including $5 of inventory holding gains in 2011 that did not recur in 2012. The decrease was partially offset by $5 from increased beverage equipment sales to can manufacturers. In addition, segment income increased $21 due to increased beverage can sales in Cambodia, China, Malaysia, Thailand and Vietnam partially offset by $8 of start-up costs from recent capacity additions.

The Company recognized income of $12 from insurance proceeds covering incremental costs and lost profits associated with the 2011 flooding in Thailand.

Corporate and Unallocated Expense
                                     Three Months Ended            Nine Months Ended
                                        September 30                September 30
                                     2012           2011          2012          2011
Corporate and unallocated expense $    (49 )     $    (47 )   $    (149 )     $  (153 )


Crown Holdings, Inc.

Item 2. Management's Discussion and Analysis (Continued)

For the three months ended September 30, 2012 compared to 2011, corporate and unallocated expense did not change significantly. For the nine months ended September 30, 2012 compared to 2011, corporate and unallocated expense decreased primarily due to insurance costs related to a fire at a Company warehouse in 2011.

Cost of Products Sold (Excluding Depreciation and Amortization)

For the three months ended September 30, 2012 compared to 2011, cost of products sold (excluding depreciation and amortization) decreased from $1,980 to $1,887 primarily due to $89 from the impact of foreign currency translation.

For the nine months ended September 30, 2012 compared to 2011, cost of products sold (excluding depreciation and amortization) decreased from $5,395 to $5,304 primarily due to $205 from the impact of foreign currency translation partially offset by the impact of increased global beverage can sales unit volumes.

Depreciation and Amortization

For the three months ended September 30, 2012 compared to 2011, depreciation and amortization decreased from $47 to $46 primarily due to the impact of foreign currency translation.

For the nine months ended September 30, 2012 compared to 2011, depreciation and amortization increased from $132 to $133 primarily due to the impact of recent capacity expansion which offset the impact of foreign currency translation.

Selling and Administrative Expense

For the three months ended September 30, 2012 compared to 2011, selling and administrative expense decreased from $96 to $92 primarily due to $4 from the impact of foreign currency translation.

For the nine months ended September 30, 2012 compared to 2011, selling and administrative expense decreased from $298 to $288 primarily due to $10 from the impact of foreign currency translation.

Interest Expense

For the three months ended September 30, 2012 compared to 2011, interest expense decreased from $58 to $57 primarily due to $2 from the impact of foreign currency translation.

For the nine months ended September 30, 2012 compared to 2011, interest expense decreased from $174 to $170 primarily due to $4 from the impact of foreign currency translation.

Taxes on Income

The Company's effective income tax rate was as follows:

                                    Three Months Ended                  Nine Months Ended
                                       September 30                      September 30
                                   2012             2011              2012            2011
Income before income taxes     $     231         $     245       $     561         $     538
Provision for / (benefit from)
income taxes                        (111 )              87             (28 )             182
Effective income tax rate          (48.1 )%           35.5 %          (5.0 )%           33.8 %

The effective income tax rate for the three and nine months ended September 30, 2012 includes an income tax benefit of $169, net of valuation allowance as described below, primarily related to the recognition of previously unrecognized U.S. foreign tax credits.


Crown Holdings, Inc.


Crown Holdings, Inc.

Item 2. Management's Discussion and Analysis (Continued)

In the third quarter, the Company committed to a formal repatriation plan, including certain steps that were completed in September with the filing of its 2011 U.S. income tax return, which will allow it to claim these credits on its 2012 income tax return. The Company's plan involved finalization of earnings and profits in certain foreign subsidiaries, evaluation of expiring US tax law provisions and anticipated utilization of existing net operating loss and foreign tax credit carryforwards. The Company has been utilizing existing net operating losses which will be fully utilized this year and will begin to utilize existing foreign tax credits in 2013. Once the Company claims these credits on its tax return, it has ten years to utilize the credits.

In connection with its plan, the Company determined that it will amend its 2003 U.S. income tax return to claim foreign taxes paid as a credit rather than as a tax deduction. The Company recorded a valuation allowance of $47 against certain of these credits that expire in 2013 which, at this time, the Company does not believe are more likely than not to be realized prior to expiration. The Company will continue to search for and evaluate tax planning strategies which may allow it to accelerate taxable income into 2013 in order to use the credits. If the Company is able to identify a feasible tax planning strategy, it is possible that it will release a portion of the valuation allowance in the future.

Realization of the foreign tax credits recognized in the quarter is dependent upon the amount and timing of future taxable income. If actual results are different than the Company's projections, it is possible that the Company may record additional valuation allowance in the future.

Net Income Attributable to Noncontrolling Interests

. . .

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