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CCK > SEC Filings for CCK > Form 10-Q on 26-Jul-2013All Recent SEC Filings

Show all filings for CROWN HOLDINGS INC

Form 10-Q for CROWN HOLDINGS INC


26-Jul-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 and six months ended June 30, 2013 compared to 2012 and changes in financial condition and liquidity from December 31, 2012. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012, along with the consolidated financial statements and related notes included in and referred to within this report.

Business Strategy and Trends

The Company's strategy is to grow its businesses in targeted international growth markets, while improving operations and results in more mature markets through disciplined pricing, cost control and careful capital allocation.

In recent years, the Company has expanded its beverage can businesses in Asia, Brazil and Eastern Europe in response to increased unit volume demand driven by increased per capita incomes and consumption, combined with a shift in packaging mix to two-piece aluminum beverage cans from other packages. In the first quarter of 2013, the Company commercialized second beverage can lines in Putian, China and Bangi, Malaysia. In the second quarter of 2013, the Company commercialized new beverage can plants in Danang, Vietnam and Bangkok, Thailand; and in July , the Company began production at its new plant in Sihanoukville, Cambodia. In addition, the Company has begun construction on a new facility in northern Brazil in the city of Teresina and expects to begin commercial shipments in early 2014. There can be no assurance, however, that the Company will be able to implement its expansion plans according to schedule or at all. The Company continuously monitors these markets and, where necessary, may adjust capital deployment based on economic developments and market-by-market conditions.

Beverage can sales unit volumes in the Company's mature markets have been stable to slightly declining in North America and slightly increasing in Europe. Global food and aerosol can sales unit volumes have been stable to declining in recent years primarily due to lower consumer spending. While the opportunity for organic volume growth in the Company's mature markets is not comparable to that in targeted international growth markets, the Company continues to generate strong returns on invested capital and significant cash flow from these businesses. The Company monitors capacity across all of its businesses and, where necessary, may take action such as closing a plant or reducing headcount to better manage its costs. Any or all of these actions may result in additional restructuring charges in the future which may be material. The Company is currently evaluating certain projects which, if approved, may result in additional restructuring charges between $25 and $35.

As part of the Company's efforts to manage cost, it attempts to pass-through increases in the cost of aluminum and steel to its customers. There can be no assurance that the Company will be able to recover from its customers the impact of any such increased costs. Aluminum and steel prices can be subject to significant volatility and there does not appear to be a consistent and predictable trend in pricing.

The Company seeks to increase shareholder value by maximizing operating cash flows which can be reinvested in the business, used for acquisitions, used to repay debt or returned to shareholders through share repurchases or possible future dividends. In assessing the Company's performance, the key performance measure used is segment income, a non-GAAP measure defined by the Company as gross profit less selling and administrative expenses.

Results of Operations

The foreign currency translation impacts referred to below were primarily due to changes in the euro and pound sterling in the Company's European businesses, the Canadian dollar in the Company's Americas segments and the Chinese renminbi and Thai baht in the Company's Asia Pacific segment.


                              Crown Holdings, Inc.


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

Net Sales and Segment Income
                                          Three Months Ended           Six Months Ended
                                               June 30                     June 30
                                           2013         2012           2013        2012
Net sales                              $   2,223      $ 2,184       $  4,196     $ 4,131
Beverage cans and ends as a percentage
of net sales                                  57 %         57 %           57 %        56 %
Food cans and ends as a percentage of
net sales                                     26 %         27 %           26 %        27 %

Three months ended June 30, 2013 compared to 2012

Net sales increased primarily due to increased global beverage and food can volumes partially offset by the pass-through of lower raw material costs.

Six months ended June 30, 2013 compared to 2012

Net sales increased primarily due to increased global beverage can volumes partially offset by the pass-through of lower raw material costs.

Discussion and analysis of net sales and segment income by segment follows.

Americas Beverage

The Americas Beverage segment manufactures aluminum beverage cans and ends and steel crowns, commonly referred to as "bottle caps", and supplies a variety of customers from its operations in the U.S., Brazil, Canada, Colombia and Mexico. The U.S. and Canadian beverage can markets are mature markets which have experienced slightly declining volumes in recent years. In Brazil, the Company's sales unit volumes have increased in recent years primarily due to market growth. The Company recently began construction on a new facility in northern Brazil and expects to begin commercial shipments in early 2014.

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

                    Three Months Ended           Six Months Ended
                         June 30                     June 30
                      2013            2012       2013         2012
Net sales      $     582             $ 593    $    1,134    $ 1,127
Segment income        85                78           161        147

Three months ended June 30, 2013 compared to 2012

Net sales decreased primarily due to lower sales unit volumes.

Segment income increased primarily due to efficiency improvements and $3 from lower depreciation resulting from a change in the estimated useful lives of the Company's can-making equipment.

Six months ended June 30, 2013 compared to 2012

Net sales increased primarily due to higher sales unit volumes in Brazil which offset lower sales unit volumes in North America and $8 from the pass-through of lower raw material costs. The increase in Brazil is primarily the result of recent capacity additions in response to the country's growing middle class and increasing disposable income and its shift in packaging mix to two-piece aluminum beverage cans from other packages.

Segment income increased primarily due to the higher sales unit volumes described above, $4 from efficiency improvements and $6 from lower depreciation resulting from a change in the estimated useful lives of the Company's can-making equipment.


                              Crown Holdings, Inc.


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

North America Food

The North America Food segment manufactures steel and aluminum food cans and
ends and metal vacuum closures and supplies a variety of customers from its
operations in the U.S. and Canada. The North American food can and closures
market is a mature market which has experienced stable to slightly declining
volumes in recent years.

Net sales and segment income in the North America Food segment are as follows:
                    Three Months Ended             Six Months Ended
                         June 30                       June 30
                      2013            2012          2013           2012
Net sales      $     206             $ 213    $     403           $ 413
Segment income        41                41           72              73

Three months ended June 30, 2013 compared to 2012

Net sales decreased primarily due to unfavorable sales unit volume mix.

Segment income remained unchanged as the impact of unfavorable sales unit volume mix was offset by efficiency improvements.

Six months ended June 30, 2013 compared to 2012

Net sales decreased primarily due to a 1% decline in sales unit volumes and unfavorable sales unit volume mix.

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

European Beverage

The Company's European Beverage segment manufactures steel and aluminum beverage cans and ends and supplies a variety of customers from its operations throughout Eastern and Western Europe, the Middle East and North Africa. In recent years, the European beverage can market has been growing. In the second quarter of 2012, the Company commenced commercial operations of a new plant in Osmaniye, Turkey which is expected to add annualized capacity of approximately 700 million cans when fully operational.

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

                    Three Months Ended             Six Months Ended
                         June 30                       June 30
                      2013            2012          2013           2012
Net sales      $     492             $ 472    $     863           $ 834
Segment income        78                64          129             106

Three months ended June 30, 2013 compared to 2012

Net sales increased primarily due to 4% higher sales unit volumes primarily in Turkey and throughout the Company's Mediterranean operations. The increase in Turkey is primarily attributable to the Company's new plant in Osmaniye, Turkey which began commercial operations in the second quarter of 2012.

Segment income increased primarily due to higher sales unit volumes, $7 from improved cost performance including operational efficiencies in Slovakia and Turkey and $2 from reduced post-employment benefits, and $4 from lower depreciation resulting from a change in the estimated useful lives of the Company's can-making equipment.


Crown Holdings, Inc.

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

Six months ended June 30, 2013 compared to 2012

Net sales increased primarily due to 4% higher sales unit volumes primarily in Turkey and throughout the Company's Mediterranean operations. The increase in Turkey is primarily attributable to the Company's new plant in Osmaniye, Turkey which began commercial operations in the second quarter of 2012.

Segment income increased primarily due to higher sales unit volumes, $11 from improved cost performance including operational efficiencies in Slovakia and Turkey and $2 from reduced post-employment benefits, and $6 from lower depreciation resulting from a change in the estimated useful lives of the Company's can-making equipment.

European Food

The European Food segment manufactures steel and aluminum food cans and ends, and metal vacuum closures and supplies a variety of customers from its operations throughout Europe and Africa. The European food can market is a mature market which has experienced stable to slightly declining volumes in recent years. In 2011 and 2012, the Company initiated restructuring actions in its European Food segment to reduce manufacturing capacity and headcount. The Company expects these actions to result in annual cost savings of approximately $16. However, there can be no assurance that any such pre-tax savings will be realized.

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

                    Three Months Ended             Six Months Ended
                         June 30                       June 30
                      2013            2012          2013           2012
Net sales      $     430             $ 434    $     806           $ 836
Segment income        39                47           71              87

Three months ended June 30, 2013 compared to 2012

Net sales decreased primarily due to $14 from lower selling prices reflecting the pass-through of lower material costs and the impact of competitive price compression, partially offset by $6 from higher sales unit volumes and $4 from the impact of foreign currency translation.

Segment income decreased primarily due to a charge of $11 to record a reserve against a portion of an outstanding customer receivable balance, partially offset by $2 from reduced post-employment benefits and $3 from lower depreciation resulting from a change in the estimated useful lives of the Company's can-making equipment. The reserve was triggered by the customer filing for bankruptcy protection during the quarter. As of June 30, 2013, the Company's net receivable from the customer was $34. If the Company's expectations with respect to collectability were to change, the Company may need to record an additional charge in the future that could be material.

Six months ended June 30, 2013 compared to 2012

Net sales decreased primarily due to $28 from lower selling prices reflecting the pass-through of lower material costs and the impact of competitive price compression.

Segment income decreased primarily due to the impact of competitive price compression, $7 from unfavorable sales unit volume mix and a charge of $11 to record a reserve against a portion of an outstanding customer receivable balance described above, partially offset by $5 from lower depreciation resulting from a change in the estimated useful lives of the Company's can-making equipment and $2 from reduced post-employment benefits.


Crown Holdings, Inc.

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

Asia Pacific

The Company's Asia Pacific segment consists of beverage and non-beverage can operations, primarily food cans and specialty packaging. In recent years, the Company's beverage can businesses in Asia have experienced significant growth. For the three and six months ended June 30, 2013, sales of beverage cans and ends accounted for 76% of Asia Pacific's sales.

In 2012, the Company commercialized new beverage can plants in Putian, Ziyang and Heshan, China and expanded capacity at its plant in Ho Chi Minh City, Vietnam. In the fourth quarter of 2012, the Company acquired an aluminum beverage can and end production facility in Vietnam and also acquired a controlling interest in Superior Multi-Packaging Ltd. ("Superior"), a listed company on the Singapore Exchange. Superior primarily produces specialty packaging containers for consumer products companies at its facilities in China, Singapore and Vietnam. The acquisition of the controlling interest in Superior was made by an indirect 55% owned subsidiary of the Company.

In the first quarter of 2013, the Company commercialized second beverage can lines in Putian, China and Bangi, Malaysia. In the second quarter of 2013, the Company commercialized new beverage can plants in Danang, Vietnam and Bangkok, Thailand; and in July, the Company began production at its new plant in Sihanoukville, Cambodia.

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

                    Three Months Ended             Six Months Ended
                         June 30                       June 30
                      2013            2012          2013           2012
Net sales      $     301             $ 249    $     577           $ 474
Segment income        35                35           68              66

Three months ended June 30, 2013 compared to 2012

Net sales increased primarily due to $20 from higher sales unit volumes, primarily beverage can sales, and $36 from the acquisition of Superior in the fourth quarter of 2012 partially offset by lower selling prices due to the pass-through of lower raw material costs.

Segment income remained unchanged as the impact of higher beverage can sales unit volumes was offset by higher start-up costs associated with recent capacity expansion.

Six months ended June 30, 2013 compared to 2012

Net sales increased primarily due to $46 from higher sales unit volumes, primarily beverage can sales, and $64 from the acquisition of Superior in the fourth quarter of 2012 partially offset by lower selling prices due to the pass-through of lower raw material costs.

Segment income increased primarily due to higher beverage can sales unit volumes and $2 from lower depreciation resulting from a change in the estimated useful lives of the Company's can-making equipment, partially offset by competitive price compression and start-up costs associated with recent capacity expansion.

Non-reportable Segments

The Company's non-reportable segments include its aerosol can businesses in North America and Europe, its specialty packaging business in Europe and its tooling and equipment operations in the U.S. and United Kingdom. In recent years, the Company's specialty packaging business has experienced stable to slightly declining volumes and its aerosol can businesses have experienced slightly declining volumes. In 2011 and 2012, the Company initiated restructuring actions in its European Aerosol and European Specialty Packaging businesses to reduce manufacturing capacity and headcount. The Company expects these actions to result in annual cost savings of approximately $30. However, there can be no assurance that any such pre-tax savings will be realized.


                              Crown Holdings, Inc.


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

Net sales and segment income in non-reportable segments are as follows:
                    Three Months Ended             Six Months Ended
                         June 30                       June 30
                      2013            2012          2013           2012
Net sales      $     212             $ 223    $     413           $ 447
Segment income        31                29           53              52

Three months ended June 30, 2013 compared to 2012

Net sales decreased primarily due to $13 from lower sales in the Company's European specialty packaging and aerosol businesses partially offset by higher beverage equipment sales to can manufacturers.

Segment income increased primarily due to higher beverage equipment sales to can manufacturers and $3 from reduced post-employment benefits, partially offset by lower sales in the Company's European specialty packaging and aerosol businesses.

Six months ended June 30, 2013 compared to 2012

Net sales decreased primarily due to $24 from lower sales in the Company's European specialty packaging and aerosol businesses and $9 from lower beverage equipment sales to can manufacturers.

Segment income increased primarily due to $5 from improvements in the Company's European aerosol business including the benefits of recent restructuring and $3 from reduced post-employment benefits and $3 from lower depreciation resulting from a change in the estimated useful lives of the Company's can-making equipment, partially offset by lower sales in the Company's European specialty packaging and aerosol businesses.

Corporate and Unallocated Expense
                                     Three Months Ended          Six Months Ended
                                           June 30                   June 30
                                     2013           2012         2013         2012
Corporate and unallocated expense $    (36 )     $    (44 )   $   (86 )     $ (100 )

For the three months ended June 30, 2013 compared to 2012, corporate and unallocated expense decreased primarily due to $6 from lower pension expense and a net benefit of $5 from legal matters, partially offset by higher legal and incentive compensation costs. As further described in Note K to the consolidated financial statements, the Company recorded a benefit of $16 for a legal settlement related to environmental remediation costs partially offset by a charge of $11 for certain Italian valued added tax assessments.

For the six months ended June 30, 2013 compared to 2012, corporate and unallocated expense decreased primarily due to $11 from lower pension expense and a net benefit of $1 from legal matters. As further described in Note K to the consolidated financial statements, the Company recorded a benefit of $16 for a legal settlement related to environmental remediation costs partially offset by a charge of $15 for certain Italian valued added tax assessments.

Cost of Products Sold (Excluding Depreciation and Amortization)

For the three months ended June 30, 2013 compared to 2012, cost of products sold (excluding depreciation and amortization) increased from $1,799 to $1,818 primarily due to increased global beverage and food can volumes partially offset by the pass-through of lower raw material costs.

For the six months ended June 30, 2013 compared to 2012, cost of products sold (excluding depreciation and amortization) increased from $3,417 to $3,458 primarily due to increased global beverage can volumes partially offset by the pass-through of lower raw material costs.


Crown Holdings, Inc.

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

Depreciation and Amortization

For the three and six months ended June 30, 2013 compared to 2012, depreciation and amortization expense decreased from $45 to $30 and from $87 to $64 primarily due to a change in the estimated useful lives of the Company's two-piece and three-piece can-making equipment.

The Company, with the assistance of a third party appraiser, completed an evaluation of the estimated useful lives of its two-piece and three-piece can-making equipment. As a result, effective January 1, 2013, the company increased the estimated useful lives of its can-making equipment to reflect its current estimates of the useful lives. As a result of this change, for the three and six months ended June 30, 2013 compared to 2012, depreciation and amortization was lower by $14 and $24.

Currently, the Company expects the full year impact of the change to result in lower depreciation and amortization of approximately $50 for the year ended December 31, 2013.

Selling and Administrative Expense

For the three and six months ended June 30, 2013 compared to 2012, selling and administrative expense increased from $90 to $102 and from $196 to $206 primarily due to a charge of $11 to record a reserve against a portion of the outstanding receivable balance due from a European food can customer.

Interest Expense

For the three months ended June 30, 2013 compared to 2012, interest expense increased from $55 to $61 primarily due to higher average debt outstanding and included $3 of expense related to the Italian value added tax assessments described in Note K to the consolidated financial statements.

For the six months ended June 30, 2013 compared to 2012, interest expense increased from $113 to $121 primarily due to higher average debt outstanding and included $5 of expense related to the Italian value added tax assessments described in Note K to the consolidated financial statements.

Taxes on Income

The Company's effective income tax rate was as follows:
                              Three Months Ended          Six Months Ended
                                    June 30                   June 30
                              2013           2012         2013         2012
Income before income taxes $    209       $    208     $    302       $ 330
Provision for income taxes       55             51           79          83
Effective income tax rate      26.3 %         24.5 %       26.2 %      25.2 %

Net Income Attributable to Noncontrolling Interests

For the three months ended June 30, 2013 compared to 2012 net income attributable to noncontrolling interests decreased from $23 to $22. For the six months ended June 30, 2013 compared to 2012 net income attributable to noncontrolling interests increased from $44 to $48 primarily due to increased earnings in Brazil where the noncontrolling investor has a 50% ownership interest.


Crown Holdings, Inc.

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

Liquidity and Capital Resources

Cash from Operations

Cash used for operating activities increased from $216 for the six months ended June 30, 2012 to $251 in 2013 primarily due to $23 of premiums paid to redeem all of the Company's outstanding $400 senior notes due 2017 and higher cash taxes paid.

Receivables increased from $1,057 at December 31, 2012 to $1,302 at June 30, 2013 and used cash of $296 for the six months ended June 30, 2012 compared to $281 in 2013. Sales in June 2013 were higher than in December 2012 as sales generally increase each month of the year until peaking in the third quarter. In addition, payment terms for certain of the company's food can operations result in receivables increasing throughout the year and being paid down in the fourth quarter. As a result, receivables generally increase through the third quarter of each year. Days sales outstanding for trade receivables increased from 42 for three months ended June 30, 2012 to 44 in 2013.

Inventories increased from $1,166 at December 31, 2012 to $1,424 at June 30, 2013 and used cash of $135 for the six months ended June 30, 2012 compared to $286 in 2013. Inventory levels typically increase each month of the year until peaking in the third quarter due to seasonal build primarily in the Company's food can businesses. Cash used in 2013 was higher than in 2012 due to capacity expansion and the Company's efforts to manage lower levels of inventory at December 31, 2012 which resulted in higher cash used in 2013 for seasonal build.

Investing Activities

Cash used for investing activities increased from $128 for the six months ended June 30, 2012 to $116 in 2013 primarily due to lower capital expenditures.

Financing Activities

Cash provided by financing activities increased from $238 for the six months ended June 30, 2012 to $249 in 2013 primarily due to increased borrowings that were used, in part, to repurchase shares of the Company's common stock.

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

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