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CCK > SEC Filings for CCK > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for CROWN HOLDINGS INC

Form 10-K for CROWN HOLDINGS INC


3-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(in millions, except per share, average settlement cost per asbestos claim, employee, shareholder and statistical data)

INTRODUCTION

The following discussion summarizes the significant factors affecting the results of operations and financial condition of Crown Holdings, Inc. (the "Company") as of and during the three-year period ended December 31, 2013. This discussion should be read in conjunction with the consolidated financial statements included in this Annual 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 2013, the Company commercialized second beverage can lines in Putian, China and Bangi, Malaysia and commercialized new beverage can plants in Sihanoukville, Cambodia, Danang, Vietnam and Bangkok, Thailand. 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 the first half of 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.

In October 2013, the Company entered into an agreement to acquire Mivisa Envases, S.A.U. ("Mivisa"), a leading Spanish manufacturer of two- and three-piece food cans in a cash transaction valued at 1.2 billion ($1.7 billion at December 31, 2013), including debt assumed. The acquisition, which is subject to review by the European Commission and other competition authorities, is expected to close during 2014. The acquisition of Mivisa will significantly build upon the Company's existing position in the strategically important European food can segment by substantially increasing the Company's presence in Spain, one of Europe's leading agricultural economies and is expected to be earnings accretive.

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.

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 has not been 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 in the discussion 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 Asia Pacific segment.


                              Crown Holdings, Inc.


NET SALES AND SEGMENT INCOME
                                                      2013        2012        2011
Net sales                                           $ 8,656     $ 8,470     $ 8,644
Beverage cans and ends as a percentage of net sales      56 %        55 %        52 %
Food cans and ends as a percentage of net sales          27 %        29 %        30 %

Year ended December 31, 2013 compared to 2012

Net sales increased primarily due to increased global beverage can volumes, $124 from the acquisition of Superior in the fourth quarter of 2012 and $54 from the impact of foreign currency translation, partially offset by the pass-through of lower raw material costs.

Year ended December 31, 2012 compared to 2011

Net sales decreased primarily due to $243 from the impact of foreign currency translation and $65 from lower selling prices, including the pass through of lower material costs, partially offset by $133 from higher sales unit volumes primarily due to organic growth and increased customer demand for beverage cans.

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 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 the first half of 2014.

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

                 2013       2012       2011
Net sales      $ 2,289    $ 2,274    $ 2,273
Segment income     327        311        302

Year ended December 31, 2013 compared to 2012

Net sales increased primarily due to $23 from higher sales unit volumes in Brazil, Colombia and Mexico which offset lower volumes in North America and $7 from the impact of foreign currency translation. Sales unit volumes in Brazil remain strong due to various factors, including its growing middle class, increasing disposable income and shift in packaging mix to two-piece aluminum beverage cans from other packages.

Segment income increased primarily due to $9 from higher sales unit volumes and $11 from lower depreciation, resulting from a change in the estimated useful lives of the Company's can-making equipment, partially offset by a benefit from reduced post-employment benefits in 2012 that did not recur in 2013.

Year ended December 31, 2012 compared to 2011

Net sales did not change significantly as $51 from increased sales unit volumes was offset by $42 from the pass-through of lower aluminum costs and $8 from the impact of foreign currency translation. Sales unit volume increases in Brazil offset volume declines in North America. The increase in Brazil was primarily the result of recent capacity additions in Ponta Grossa and Estancia.

Segment income increased primarily due to $19 from higher sales unit volumes in Brazil as described above and lower operating costs, including $12 from reduced post-employment benefits in the U.S. partly due to post-retirement plan amendments, partially offset by lower selling prices primarily due to competitive pricing pressure.


                              Crown Holdings, Inc.


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:
                2013     2012     2011
Net sales      $ 845    $ 876    $ 889
Segment income   119      146      146

Year ended December 31, 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 a charge of $18 to record a reserve against an outstanding receivable balance from a bankrupt customer and lower sales unit volumes.

Year ended December 31, 2012 compared to 2011

Net sales decreased primarily due to $25 from lower sales unit volumes partially offset by $13 from the pass-through of higher raw material costs.

Segment income did not change as $9 from the impact of lower sales unit volumes and $5 from inventory holding gains in 2011 that did not recur in 2012 were offset by $8 from improved cost performance and $6 from reduced post-employment benefits in the U.S. partly due to post-retirement plan amendments in 2011.

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.

Net sales and segment income in the European Beverage segment are as follows:
                 2013       2012       2011
Net sales      $ 1,731    $ 1,653    $ 1,669
Segment income     257        217        210

Year ended December 31, 2013 compared to 2012

Net sales increased primarily due to 4% higher sales unit volumes, most notably in Turkey. 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 $12 from higher sales unit volumes, $13 from lower depreciation resulting from a change in the estimated useful lives of the Company's can-making equipment and from improved cost performance.

Year ended December 31, 2012 compared to 2011

Net sales decreased primarily due to $70 from the impact of foreign currency translation partially offset by $38 from increased sales unit volumes primarily in Greece, Saudi Arabia, Slovakia and Turkey, which offset lower sales unit volumes in France and Spain and $16 from increased selling prices. The increase in Turkey was primarily the result of recent capacity additions.

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


                              Crown Holdings, Inc.


European Food

The European Food segment manufactures steel and aluminum food cans, 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.

Net sales and segment income in the European Food segment are as follows:
                 2013       2012       2011
Net sales      $ 1,751    $ 1,793    $ 1,999
Segment income     144        180        239

Year ended December 31, 2013 compared to 2012

Net sales decreased primarily due to $59 from lower selling prices reflecting the pass-through of lower material costs and the impact of competitive price compression and $24 from unfavorable sales unit volumes and mix. The decreases were partially offset by $41 from the impact of foreign currency translation.

Segment income decreased primarily due to the impact of competitive price compression, $14 from unfavorable sales unit volumes and mix and a charge of $21 to record a reserve against a portion of an outstanding customer receivable balance, partially offset by improved cost performance and $11 from lower depreciation resulting from a change in the estimated useful lives of the Company's can-making equipment. As of December 31, 2013, the Company's net receivable from the customer was $25. If the Company's expectations with respect to collectability change, the Company may need to record an additional charge in the future that could be material.

Year ended December 31, 2012 compared to 2011

Net sales decreased primarily due to lower sales unit volumes, due in part to ongoing economic uncertainty in Europe and adverse weather conditions, and $130 from the impact of foreign currency translation.

Segment income decreased primarily due to $41 split between unfavorable sale unit volume and mix and the impact of competitive price compression, $5 from inventory holding gains in 2011 that did not recur in 2012 and $13 from the impact of foreign currency translation.

Asia Pacific

The Company's Asia Pacific segment primarily consists of beverage can operations in Cambodia, China, Malaysia, Singapore, Thailand and Vietnam and also includes the Company's non-beverage can operations, primarily food cans and specialty packaging in China, Singapore, Thailand and Vietnam. In recent years, the Company's beverage can businesses in Asia have experienced significant growth.

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.

In the first quarter of 2013, the Company commercialized second beverage can lines at its facilities 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:

                 2013      2012     2011
Net sales      $ 1,189    $ 979    $ 861
Segment income     133      137      125


Crown Holdings, Inc.

Year ended December 31, 2013 compared to 2012

Net sales increased primarily due to a 19% increase in beverage can sales unit volumes and $124 from the acquisition of Superior in the fourth quarter of 2012, partially offset by lower selling prices primarily due to the pass-through of lower raw material costs and the impact of competitive price compression.

Segment income decreased as the impact of higher beverage can sales unit volumes was offset by higher start-up costs, lower manufacturing efficiencies associated with recent capacity expansion and the impact of competitive price compression.

Year ended December 31, 2012 compared to 2011

Net sales increased primarily due to $129 from increased beverage can sales unit volumes in Cambodia, China, Singapore and Vietnam and food can volumes in Thailand, partially offset by $21 from the pass-through of lower aluminum costs and a competitive pricing environment in China. The increase in sales unit volumes was primarily due to increased regional demand driven by macroeconomic factors such as GDP growth and increased consumer spending.

Segment income increased primarily due to $29 from increased sales unit volumes partially offset by competitive pricing pressure in China and $8 of incremental start-up costs from recent capacity additions. During 2012, the Company recognized income of $18 from insurance proceeds covering incremental costs and lost profits associated with the 2011 flooding in Thailand.

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 U.K. In recent years, the
Company's specialty packaging and aerosol can businesses have experienced
slightly declining volumes.

Net sales and segment income in non-reportable segments are as follows:
                2013     2012     2011
Net sales      $ 851    $ 895    $ 953
Segment income   102       98      139

Year ended December 31, 2013 compared to 2012

Net sales decreased primarily due to lower sales in the Company's European specialty packaging and aerosol can businesses.

Segment income increased as the impact of lower sales in the Company's European specialty packaging and aerosol businesses was offset by the benefits of recent restructuring actions.

Year ended December 31, 2012 compared to 2011

Net sales decreased primarily due to $33 from lower sales unit volumes in the Company's European specialty packaging business reflecting ongoing economic uncertainty in Europe, $22 from lower sales in the Company's North American and European aerosol can businesses, primarily due to lower consumer spending partly due to ongoing economic uncertainty in Europe, and $36 from the impact of foreign currency translation, partially offset by $35 from increased beverage can equipment sales.

Segment income decreased primarily due to $17 from lower sales unit volumes in the Company's European specialty packaging business, $20 from lower sales in the Company's North American and European aerosol can businesses and $7 from inventory holding gains in 2011 that did not recur in 2012.

Corporate and Unallocated Expense
                                   2013     2012     2011
Corporate and unallocated expense $ 165    $ 194    $ 208

Corporate and unallocated costs decreased in 2013 compared to 2012 primarily due to $22 from lower pension expense, $7 from lower technology costs and a net benefit of $1 from legal matters. As further described in Note L to the consolidated financial


Crown Holdings, Inc.

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.

Corporate and unallocated costs decreased in 2012 compared to 2011 primarily due to lower professional fees, lower pension costs and lower insurance costs, primarily due to a fire at a Company warehouse in 2011, partially offset by $6 from legal matters.

COST OF PRODUCTS SOLD (EXCLUDING DEPRECIATION AND AMORTIZATION)

Cost of products sold (excluding depreciation and amortization) increased from $7,013 in 2012 to $7,180 in 2013 primarily due to increased global beverage can volumes partially offset by the pass-through of lower raw material costs.

Cost of products sold (excluding depreciation and amortization) decreased from $7,120 in 2011 to $7,013 in 2012 primarily due to $207 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 year ended December 31, 2013 compared to 2012, depreciation and amortization decreased from $180 to $134 primarily due to $49 from 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 adjusted the estimated useful lives of its can-making equipment to reflect its current estimates of the useful lives.

For the year ended December 31, 2012 compared to 2011, depreciation and amortization increased from $176 to $180 primarily due to the impact of recent capacity expansion which offset the impact of foreign currency translation.

SELLING AND ADMINISTRATIVE EXPENSE

Selling and administrative expense increased from $382 in 2012 to $425 in 2013 primarily due to charges of $39 related to reserves provided against outstanding receivable balances due from a European food can customer and a North American food can customer and $4 from the impact of foreign currency translation. Selling and administrative expense decreased from $395 in 2011 to $382 in 2012 primarily due $11 from the impact of foreign currency translation.
PROVISION FOR ASBESTOS

Crown Cork & Seal Company, Inc. is one of many defendants in a substantial number of lawsuits filed throughout the U.S. by persons alleging bodily injury as a result of exposure to asbestos. During 2013, 2012 and 2011 the Company recorded charges of $32, $35 and $28, respectively, to increase its accrual for asbestos-related costs and made asbestos-related payments of $28 in each year. The Company expects 2014 payments to be generally consistent with prior years' levels. See Note K to the consolidated financial statements for additional information regarding the provision for asbestos-related costs. Also see the Critical Accounting Policies section of this "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of the Company's policies with respect to asbestos liabilities.

PROVISION FOR RESTRUCTURING

The Company recorded restructuring charges of $46, $48 and $77 in 2013, 2012 and 2011, respectively. The 2013 charge includes $31 related to a cost-reduction initiative to better align costs with ongoing market conditions in the Company's European operations, primarily in its food, aerosol and specialty packaging businesses. The action is expected to result in the reduction of approximately 235 employees when completed in 2014. The Company expects this action to result in annual cost savings of approximately $25. However, there can be no assurance that any such pre-tax savings will be realized.

See Note M to the consolidated financial statements for additional information on these charges.
INTEREST EXPENSE
Interest expense increased from $226 in 2012 to $236 in 2013 primarily due to higher average debt outstanding and $5 of expense related to the Italian value added tax assessments described in Note L to the consolidated financial statements.


Crown Holdings, Inc.

Interest expense decreased from $232 in 2011 to $226 in 2012 primarily due to $4 from the impact of foreign currency translation.

TAXES ON INCOME

The Company's effective income tax rate was as follows:
                                             2013       2012      2011
Income before income taxes                  $ 576     $ 642      $ 587
Provision for / (benefit from) income taxes   148       (17 )      194
Effective income tax rate                    25.7 %    (2.6 )%    33.0 %

The low effective income tax rate in 2012 was primarily due to a benefit of $175, net of valuation allowance, related to the recognition of previously unrecognized U.S. foreign tax credits and a benefit of $10 from the receipt of non-taxable insurance proceeds related to flooding in Thailand.

For additional information regarding income taxes, see Note W to the consolidated financial statements and the Critical Accounting Policies section of this "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of the Company's policies with respect to valuation allowances.

NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

Net income attributable to noncontrolling interests decreased from $105 in 2012 to $104 in 2013 as increased earnings in the Company's beverage can operations in Brazil and the Middle East in 2013 were offset by $11 of bargain purchase gain allocated to the Company's joint venture partner related to the acquisition of Superior in 2012.

Net income attributable to noncontrolling interests decreased from $114 in 2011 to $105 in 2012 primarily due to the acquisition of additional ownership interests in certain operations in China, Dubai, Greece, Jordan, Tunisia and Vietnam in the second half of 2011.

LIQUIDITY AND CAPITAL RESOURCES

OPERATING ACTIVITIES

Cash provided by operating activities increased from $621 in 2012 to $885 in 2013 primarily due to working capital improvements.

Receivables increased from $1,057 in 2012 to $1,064 in 2013 and used cash of $51 in 2013 compared to $113 in 2012. Days sales outstanding for trade receivables improved from 39 in 2012 to 38 in 2013.

Inventories increased from $1,166 in 2012 to $1,213 in 2013 and used cash of $45 in 2013 compared to provided cash of $21 in 2012. In 2013, inventories increased primarily to support recent capacity expansion.

Accounts payable and accrued liabilities increased from $2,146 in 2012 to $2,547 in 2013 and provided cash of $246 in 2013 compared to used cash of $6 in 2012. The improvement in accounts payables is primarily due to the Company's initiatives to extend supplier payment terms.

INVESTING ACTIVITIES

Cash used for investing activities decreased from $362 in 2012 to $246 in 2013 primarily due to lower capital expenditures and cash used for business acquisitions.

Cash used for investing activities decreased from $372 in 2011 to $362 in 2012. Capital expenditures, net of insurance proceeds related to flooding at the Company's beverage can plant in Thailand, decreased by $125. The decrease was partially offset by $78 in cash payments for business acquisitions, net of cash acquired, $23 in lower proceeds from sales of property, plant and equipment in 2012 and $8 from an increase in restricted cash.

At December 31, 2013, the Company had $88 of capital commitments primarily related to capacity expansion in Brazil and various other projects in the U.S., Europe and Asia. 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.


Crown Holdings, Inc.

FINANCING ACTIVITIES

Cash used for financing activities was $306, $254 and $129 in 2013, 2012 and 2011, respectively.

In 2013, 2012 and 2011, cash used for financing activities was primarily to repurchase shares of the Company's common stock as described in Note O to . . .

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