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CCK > SEC Filings for CCK > Form 10-Q on 25-Apr-2014All Recent SEC Filings

Show all filings for CROWN HOLDINGS INC

Form 10-Q for CROWN HOLDINGS INC


25-Apr-2014

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, 2014 compared to 2013 and changes in financial condition and liquidity from December 31, 2013. 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, 2013, 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.

The Company identifies and evaluates growth opportunities through line additions in existing plants, new plants in developing markets that it already knows and understands, and potential strategic acquisitions in geographic areas and product lines in which it already operates. The Company rigorously evaluates each opportunity against a variety of metrics including economic profit, return on invested capital and cash flow generation. Every approved project is undertaken with an eye toward creating long-term shareholder value. Cash flows generated from the Company's operations may be reinvested in the business, used for acquisitions, used to repay debt or returned to shareholders through share repurchases or possible future dividends. In 2014, the Company does not anticipate any share repurchases.

In April 2014, the Company closed its acquisition of Mivisa Envases, SAU, a leading Spanish manufacturer of two- and three-piece food cans and ends. Mivisa is the largest food can producer in both the Iberian Peninsula and Morocco; primarily serving vegetable, fruit, fish and meat markets. In connection with the acquisition, the Company will divest certain Crown and Mivisa operations as a required condition for regulatory approval. The acquisition will significantly build upon the Company's existing position in the strategically important European food can segment and is expected to be earnings accretive.

Over the past five years, the Company has continued to develop its beverage can platform in emerging markets with particular focus on Asia, Brazil and Eastern Europe. In 2013, the Company added capacity in Cambodia, China, Malaysia and Vietnam and in April 2014, commenced production at its new facility in Teresina, Brazil. Beverage can volume growth in these markets has been driven by increased per capita incomes and consumption, combined with an increased preference for cans in the package mix.

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.

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 excluding the timing impact of hedge ineffectiveness, less selling and administrative expenses.


                              Crown Holdings, Inc.


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


                             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.

Net Sales and Segment Income
                                                       Three Months Ended
                                                            March 31
                                                        2014         2013
Net sales                                           $   1,993      $ 1,973
Beverage cans and ends as a percentage of net sales        57 %         56 %
Food cans and ends as a percentage of net sales            25 %         26 %

Three months ended March 31, 2014 compared to 2013

Net sales increased primarily due to a 6% increase in 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 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. In April, 2014, the Company commenced production at its new facility in Teresina, Brazil.

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

Three Months Ended
                         March 31
                      2014            2013
Net sales      $     549             $ 552
Segment income        79                76

Three months ended March 31, 2014 compared to 2013

Net sales decreased primarily due to $10 from the pass-through of lower aluminum costs and $9 from the impact of foreign currency translation, partially offset by $16 from increased sales unit volumes and favorable product mix. The increase in sales unit volumes was primarily in Brazil where demand continues to be strong.

Segment income increased primarily due to higher sales unit volumes.

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.


                              Crown Holdings, Inc.


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

Net sales and segment income in the North America Food segment are as follows:
                    Three Months Ended
                         March 31
                      2014            2013
Net sales      $     179             $ 197
Segment income        29                31

Three months ended March 31, 2014 compared to 2013

Net sales decreased primarily due to $15 from lower sales unit volumes and $3 from the impact of foreign currency translation. The decrease in sales unit volumes was primarily attributable to the cessation of shipments to a customer who declared bankruptcy in the fourth quarter of 2013.

Segment income decreased primarily due to lower sales unit volumes.

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 first quarter of 2014, the Company increased its ownership interests in subsidiaries in Jordan and Tunisia to 100% by purchasing the remaining noncontrolling interests.

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

Three Months Ended
                         March 31
                      2014            2013
Net sales      $     388             $ 371
Segment income        59                51

Three months ended March 31, 2014 compared to 2013

Net sales increased primarily due to a 1.5% increase in sales unit volumes.

Segment income increased primarily due to higher sales unit volumes and improved cost performance.

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. In April 2014, the Company closed its acquisition of Mivisa and has reached agreements to divest certain Crown and Mivisa operations as required for regulatory approval. The Company plans to integrate Mivisa with its existing European Food business.

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

Three Months Ended
                         March 31
                      2014            2013
Net sales      $     373             $ 376
Segment income        26                32


Crown Holdings, Inc.

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

Three months ended March 31, 2014 compared to 2013

Net sales decreased primarily due to $10 from unfavorable sales unit volumes and mix and $6 from lower selling prices reflecting the pass-through of lower material costs and the impact of competitive price compression, partially offset by $13 from the impact of foreign currency translation.

Segment income decreased primarily due to unfavorable sales unit volumes and mix, partially offset by improved cost performance.

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 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 the third quarter of 2013, 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
                         March 31
                      2014            2013
Net sales      $     298             $ 276
Segment income        34                33

Three months ended March 31, 2014 compared to 2013

Net sales increased primarily due to $40 from increased sales unit volumes due to recent capacity expansion partially offset by $13 from lower selling prices primarily due to the pass-through of lower raw material costs and the impact of competitive price compression and $5 from the impact of foreign currency translation.

Segment income increased primarily due to $6 from increased sales unit volumes partially offset by lower manufacturing efficiencies associated with recent capacity expansion and the impact of competitive price compression.

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:
                    Three Months Ended
                         March 31
                      2014            2013
Net sales      $     206             $ 201
Segment income        24                22


Crown Holdings, Inc.

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

Three months ended March 31, 2014 compared to 2013

Net sales increased primarily due to $6 from the impact of foreign currency translation.

Segment income increased primarily due to lower operating costs resulting from recent restructuring actions.

Corporate and Unallocated Expense
                                     Three Months Ended
                                          March 31
                                     2014           2013
Corporate and unallocated expense $    (58 )     $    (50 )

For the three months ended March 31, 2014 compared to 2013, corporate and unallocated expense increased primarily due to a charge of $7 related to hedge ineffectiveness caused primarily by volatility in the metal premium component of aluminum prices.

Cost of Products Sold (Excluding Depreciation and Amortization)

For the three months ended March 31, 2014 compared to 2013, cost of products sold (excluding depreciation and amortization) increased from $1,640 to $1,661 primarily due to increased global beverage can volumes partially offset by the pass-through of lower raw material costs.

Depreciation and Amortization

For the three months ended March 31, 2014 compared to 2013, depreciation and amortization expense increased from $34 to $35 primarily due to the impact of recent capacity expansion.

Selling and Administrative Expense

For the three months ended March 31, 2014 compared to 2013, selling and administrative expense remained at $104.

Loss from Early Extinguishment of Debt

For the three months ended March 31, 2013, the Company recorded a loss from early extinguishment of debt of $38 in connection with the redemption of its $400 senior notes due 2017 and the repayment of $500 of indebtedness under its senior secured term loan facilities.

Interest Expense

For the three months ended March 31, 2014 compared to 2013, interest expense decreased from $60 to $58 primarily due to lower interest rates and lower average debt outstanding.

Taxes on Income

The Company's effective income tax rate was as follows:
                              Three Months Ended
                                   March 31
                              2014          2013
Income before income taxes $    79       $    93
Provision for income taxes      33            24
Effective income tax rate     41.8 %        25.8 %


Crown Holdings, Inc.

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

For the three months ended March 31, 2014 compared to 2013, the Company's effective income tax rate was higher primarily due to non-deductible impairment charges related to the planned divestment of certain operations in connection with the Company's acquisition of Mivisa.

Net Income Attributable to Noncontrolling Interests

For the three months ended March 31, 2014 compared to 2013, net income attributable to noncontrolling interests decreased from $26 to $22 primarily due to the acquisition of additional ownership interests in subsidiaries in Jordan and Tunisia and lower earnings in certain beverage can operations in the Middle East.

Liquidity and Capital Resources

Cash from Operations

Cash used for operating activities increased from $432 for the three months ended March 31, 2013 to $495 in 2014 primarily due to changes in working capital as higher cash outflows associated with receivables and accounts payable and accrued liabilities were partially offset by lower cash outflows associated with inventory and $21 from higher interest payments.

Receivables used cash of $157 for the three months ended March 31, 2014 compared to $118 in 2013 partly due to higher sales in March 2014 than in March 2013. Days sales outstanding for trade receivables increased from 45 days for the three months ended March 31, 2013 to 46 days in 2014.

Inventories used cash of $154 for the three months ended March 31, 2014 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 2014 primarily due to the Company's efforts to manage lower levels of inventory at December 31, 2012 which resulted in higher cash used in 2013 for seasonal inventory build.

Accounts payable and accrued liabilities used cash of $281 for the three months ended March 31, 2014 compared to $208 in 2013 primarily due to timing of supplier payments.

Investing Activities

Cash used for investing activities increased from $52 for the three months ended March 31, 2013 to $73 in 2014 due to higher capital expenditures primarily related to construction of the Company's plant in Tersina, Brazil which commenced commercial operations in April 2014. The Company does not currently have any major projects under construction and expects capital expenditures for 2014 to be approximately $285 - $310.

Financing Activities

Cash provided by financing activities decreased from $439 for the three months ended March 31, 2013 to $147 in 2014 partly due to $93 paid in 2014 to increase the Company's ownership interest in subsidiaries in Jordan and Tunisa to 100% and $15 of higher dividends paid to the noncontrolling interest in Jordan in connection with the buyout.

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

Liquidity

As of March 31, 2014, $220 of the Company's $267 of 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.


Crown Holdings, Inc.

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

The Company funds its cash needs in the U.S. through a combination of cash flows from operations in the U.S., distributions 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., $125 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, 2014, the Company had $810 of borrowing capacity available under its revolving credit facility, equal to the total facility of $1,200 less $350 of borrowings and $40 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, 2014, the Company has approximately $53 of capital commitments primarily related to capacity expansion in Asia and Brazil. 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 2014 there were no material changes to the Company's contractual obligations provided within 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, 2013, which information is incorporated herein by reference.

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.

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, 2013 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 2014. The discussion below supplements the discussion from the Company's Annual Report on Form 10-K for the year ended December 31, 2013 with respect to goodwill.


Crown Holdings, Inc.

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

Goodwill Impairment

As disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2013, the estimated fair value of the Company's European Aerosols and Specialty Packaging reporting unit was 50% higher than its carrying value. The Company continues to believe that the estimated fair value of the 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 $155 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 discussions of asbestos in Note J and commitments and contingencies in Note K to the consolidated financial statements included in this Quarterly Report on Form 10-Q and also in Part I, Item 1: "Business" and Item 3: "Legal Proceedings" and in Part II, Item 7: "Management's Discussion and Analysis of Financial Condition and Results of Operations," within the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013, which are not historical facts (including any statements concerning plans and objectives of management for capacity additions, share repurchases, dividends, future operations or economic performance, or assumptions related thereto), are "forward-looking statements" within the meaning of the federal securities laws. In addition, the Company and its representatives may, from time to time, make oral or written statements which are also "forward-looking statements."

These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the Company and, therefore, involve a number of risks and uncertainties. Management cautions that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.

While the Company periodically reassesses material trends and uncertainties affecting the Company's results of operations and financial condition in connection with the preparation of "Management's Discussion and Analysis of Financial Condition and Results of Operations" and certain other sections contained in the Company's quarterly, annual or other reports filed with the Securities and Exchange Commission ("SEC"), the Company does not intend to review or revise any particular forward-looking statement in light of future events.

A discussion of important factors that could cause the actual results of operations or financial condition of the Company to differ from expectations has been set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 within Part II, Item 7: "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the caption "Forward Looking Statements" and is incorporated herein by reference. Some of the factors are also discussed elsewhere in this Form 10-Q and in prior Company filings with the SEC. In addition, other factors have been or may be discussed from time to time in the Company's SEC filings.

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