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CCK > SEC Filings for CCK > Form 10-Q on 30-Apr-2013All Recent SEC Filings

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Form 10-Q for CROWN HOLDINGS INC


30-Apr-2013

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 months ended March 31, 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 expects to commercialize new beverage can plants in Danang, Vietnam and Bangkok, Thailand; and in the third quarter of 2013, the Company expects to begin 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 $20 and $30.

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.


                              Crown Holdings, Inc.


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

Net Sales and Segment Income
                                                         Three Months Ended
                                                             March 31
                                                        2013           2012
Net sales                                           $    1,973       $ 1,947
Beverage cans and ends as a percentage of net sales         56 %          54 %
Food cans and ends as a percentage of net sales             26 %          28 %

Three months ended March 31, 2013 compared to 2012

Net sales increased primarily due to a 6% increase in global beverage can volumes which offset a 2% decrease in food can volumes and the pass-through of lower 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
                           March 31
                        2013              2012
Net sales      $       552               $ 534
Segment income          76                  69

Three months ended March 31, 2013 compared to 2012

Net sales increased primarily due to $20 from higher sales unit volumes in Brazil and Mexico. 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 $4 from higher sales unit volumes and $3 from lower depreciation resulting from a change in the estimated useful lives of the Company's can-making equipment.

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
                           March 31
                        2013              2012
Net sales      $       197               $ 200
Segment income          31                  32


Crown Holdings, Inc.

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

Three months ended March 31, 2013 compared to 2012

Net sales decreased primarily due to a 2% decline in sales unit volumes.

Segment income decreased primarily due to the decline in sales unit volumes partially offset by $1 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
                           March 31
                        2013              2012
Net sales      $       371               $ 362
Segment income          51                  42

Three months ended March 31, 2013 compared to 2012

Net sales increased primarily due to 4% higher sales unit volumes primarily in France, Turkey and the UK. 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 $7 from higher sales unit volumes and improved cost performance and $2 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.

At March 31, 2013, the Company had a receivable of $42 with a customer in its European Food business who has experienced financial difficulty. Based on the Company's understanding of the customer's present financial condition and terms agreed to with the customer, the Company currently expects the receivable to be fully paid. However, if the customer's financial condition were to deteriorate and the Company's expectations with respect to collectability were to change, the Company may need to record a charge in the future that could be material.

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

Three Months Ended
                           March 31
                        2013              2012
Net sales      $       376               $ 402
Segment income          32                  40


Crown Holdings, Inc.

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

Three months ended March 31, 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 and $12 from lower sales unit volumes including delayed early shipments of seasonal cans which are now expected to occur later in the year.

Segment income decreased primarily due to $6 from competitive price compression and $4 from lower sales unit volumes partially offset by $2 from lower depreciation resulting from a change in the estimated useful lives of the Company's can-making equipment.

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 months ended March 31, 2013, sales of beverage cans and ends accounted for 78% 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 expects to commercialize new beverage can plants in Danang, Vietnam and Bangkok, Thailand; and in the third quarter of 2013, the Company expects to begin production at its new plant in Sihanoukville, Cambodia. However, there can be no assurance that the Company will be able to begin production at these plants according to this schedule or at all.

Net sales and segment income in the Asia Pacific segment are as follows:

Three Months Ended
                           March 31
                        2013              2012
Net sales      $       276               $ 225
Segment income          33                  31

Three months ended March 31, 2013 compared to 2012

Net sales increased primarily due to $26 from higher sales unit volumes, primarily beverage can sales, and $28 from the acquisition of Superior in the fourth quarter of 2012.

Segment income increased primarily due to higher beverage can sales unit volumes partially offset by 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.


                              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
                           March 31
                        2013              2012
Net sales      $       201               $ 224
Segment income          22                  23

Three months ended March 31, 2013 compared to 2012

Net sales decreased primarily due to $8 from lower sales unit volumes in the Company's European Specialty Packaging businesses and $17 from lower beverage equipment sales to can manufacturers partially offset by $5 from increased sales in the Company's aerosol businesses.

Segment income decreased primarily due to $4 from lower beverage equipment sales to can manufacturers partially offset by $3 from improvements in the Company's aerosol businesses including the benefits of recent restructuring.

Corporate and Unallocated Expense
                                       Three Months Ended
                                           March 31
                                      2013           2012
Corporate and unallocated expense $     (50 )     $     (56 )

For the three months ended March 31, 2013 compared to 2012, corporate and unallocated expense decreased primarily due to lower pension expense.

Cost of Products Sold (Excluding Depreciation and Amortization)

For the three months ended March 31, 2013 compared to 2012, cost of products sold (excluding depreciation and amortization) increased from $1,618 to $1,640 primarily due to higher global beverage can volumes partially offset by the pass-through of lower material costs.

Depreciation and Amortization

For the three months ended March 31, 2013 compared to 2012, depreciation and amortization expense decreased from $42 to $34 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, recently 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, depreciation and amortization was lower by $10 and net income higher by $7 or $0.05 per diluted share for the three months ended March 31, 2013.

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 months ended March 31, 2013 compared to 2012, selling and administrative expense decreased from $106 to $104 primarily due to lower incentive compensation costs.

At March 31, 2013, the Company had a receivable of $42 with a customer in its European Food business who has experienced financial difficulty. Based on the Company's understanding of the customer's present financial condition and terms agreed to with the customer, the Company currently expects the receivable to be fully paid. However, if the customer's financial condition were to deteriorate and the Company's expectations with respect to collectability were to change, the Company may need to record a charge in the future that could be material.


Crown Holdings, Inc.

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

Interest Expense

For the three months ended March 31, 2013 compared to 2012, interest expense increased from $58 to $60 primarily due to higher average debt outstanding.

Taxes on Income

The Company's effective income tax rate was as follows:
                              Three Months Ended
                                   March 31
                              2013          2012
Income before income taxes $    93       $     122
Provision for income taxes      24              32
Effective income tax rate     25.8 %          26.2 %

Net Income Attributable to Noncontrolling Interests

For the three months ended March 31, 2013 compared to 2012 net income attributable to noncontrolling interests increased from $21 to $26 primarily due to increased earnings in the Americas Beverage segment primarily in Brazil where the noncontrolling investor has a 50% ownership interest.

Liquidity and Capital Resources

Cash from Operations

Cash used for operating activities increased from $389 for the three months ended March 31, 2012 to $432 in 2013 primarily due to higher net working capital and $23 of premiums paid to redeem all of the Company's outstanding $400 senior notes due 2017.

Receivables increased from $1,057 at December 31, 2012 to $1,175 at March 31, 2013 and used cash of $114 for the three months ended March 31, 2012 compared to $118 in 2013. Sales in March 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 43 for three months ended March 31, 2012 to 45 in 2013.

Inventories increased from $1,166 at December 31, 2012 to $1,352 at March 31, 2013 and used cash of $140 for the three months ended March 31, 2012 compared to $205 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 $48 for the three months ended March 31, 2012 to $52 in 2013 primarily due to lower insurance proceeds received in 2013 compared to 2012 related to flooding at the Company's beverage can plant in Thailand.

Financing Activities

Cash provided by financing activities increased from $338 for the three months ended March 31, 2012 to $439 in 2013. The increase is primarily because the Company issued $1,000 principal amount of 4.5% senior unsecured notes due 2023 and used the proceeds to redeem all of its outstanding $400 senior notes due 2017, to repay $500 of indebtedness under its senior secured term loan facilities, to pay related premiums and fees and for general corporate purposes.


Crown Holdings, Inc.

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

Other financing activities, in each year, represent cash settlements of foreign currency derivatives used to hedge intercompany debt obligations.

Liquidity

As of March 31, 2013, $273 of the Company's $304 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., $143 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 March 31, 2013, the Company had $758 of borrowing capacity available under its revolving credit facility, equal to the total facility of $1,200 less $398 of borrowings and $44 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 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 March 31, 2013, the Company has approximately $74 of capital commitments primarily related to capacity expansion in its Asia Pacific segment. 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 three 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.

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.


Crown Holdings, Inc.

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

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 three 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. Based on current projections, the Company continues to believe that the estimated fair value of its European Aerosols 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 $143 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 . . .

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