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CCK > SEC Filings for CCK > Form 10-Q on 30-Jul-2014All Recent SEC Filings

Show all filings for CROWN HOLDINGS INC

Form 10-Q for CROWN HOLDINGS INC


30-Jul-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 and six months ended June 30, 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. The Company is considering, and in the future may pursue, acquisitions to grow its existing business. The Company does not presently anticipate any share repurchases in 2014.

In April 2014, the Company closed its acquisition of Mivisa, 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 divested certain Crown and Mivisa operations as a required condition for regulatory approval. The acquisition is expected to 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 impact of fair value adjustments related to the sale of inventory acquired in an acquisition and 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               Six Months Ended
                                                 June 30                        June 30
                                           2014           2013             2014          2013
Net sales                              $    2,383      $   2,223       $    4,376     $   4,196
Beverage cans and ends as a percentage
of net sales                                   55 %           57 %             56 %          57 %
Food cans and ends as a percentage of
net sales                                      29 %           26 %             27 %          26 %

Three months ended June 30, 2014 compared to 2013

Net sales increased primarily due to the impact of the Mivisa acquisition and a 3% increase in global beverage can volumes, partially offset by the pass-through of lower raw material costs.

Six months ended June 30, 2014 compared to 2013

Net sales increased primarily due to the impact of the Mivisa acquisition and a 4% 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           Six Months Ended
                         June 30                     June 30
                      2014            2013       2014         2013
Net sales      $     594             $ 582    $    1,143    $ 1,134
Segment income        85                85           164        161

Three months ended June 30, 2014 compared to 2013

Net sales increased primarily due to strong unit volumes in Brazil which offset lower volumes in North America, $8 of lower sales from the closure of a manufacturing facility in Puerto Rico and $7 from the impact of foreign currency translation. Increased sales in Brazil were attributable to continued strong demand including World Cup promotional activity and the commencement of production at the Company's facility in Teresina, Brazil.

Segment income was unchanged as $5 from increased sales unit volumes in Brazil was offset by lower production levels in North America.


Crown Holdings, Inc.

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

Six months ended June 30, 2014 compared to 2013

Net sales increased primarily due to strong unit volumes in Brazil which offset lower volumes in North America, $16 of lower sales from the closure of a manufacturing facility in Puerto Rico and $16 from the impact of foreign currency translation.

Segment income increased primarily due to the impact of higher sales unit volumes in Brazil.

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
                      2014            2013          2014           2013
Net sales      $     213             $ 206    $     392           $ 403
Segment income        38                41           67              72

Three months ended June 30, 2014 compared to 2013

Net sales increased primarily due to $15 from increased sales unit volumes, partially offset by the impact of competitive price compression and $2 from the impact of foreign currency translation.

Segment income decreased primarily due to the impact of lower pricing.

Six months ended June 30, 2014 compared to 2013

Net sales decreased primarily due to the impact of competitive price compression and $5 from the impact of foreign currency translation.

Segment income decreased primarily due to the impact of lower pricing.

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             Six Months Ended
                         June 30                       June 30
                      2014            2013          2014           2013
Net sales      $     496             $ 492    $     884           $ 863
Segment income        83                78          142             129

Three months ended June 30, 2014 compared to 2013

Net sales increased primarily due to $9 from the impact of foreign currency translation, partially offset by unfavorable sales mix as increased unit volumes in the U.K. and Turkey were offset by volume declines in the Company's Middle


Crown Holdings, Inc.

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

Eastern businesses from the ongoing conflicts in the region. If the conflicts in the Middle East continue, net sales and segment income in the European Beverage segment may be negatively impacted.

Segment income increased primarily due to improved cost performance partially offset by higher metal premiums.

Six months ended June 30, 2014 compared to 2013

Net sales increased primarily due $12 from increased sales unit volumes and $10 from the impact of foreign currency translation.

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 in June divested certain Crown and Mivisa operations as required for regulatory approval. Mivisa is being integrated with the Company's existing European Food business.

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

                    Three Months Ended             Six Months Ended
                         June 30                       June 30
                      2014            2013          2014           2013
Net sales      $     555             $ 430    $     928           $ 806
Segment income        63                39           89              71

Three months ended June 30, 2014 compared to 2013

Net sales increased primarily due to the impact of the acquisition of Mivisa in April 2014.

Segment income increased primarily due to the impact of the acquisition of Mivisa in April 2014 and a charge of $11 in the second quarter of 2013 to record a reserve against a portion of an outstanding customer receivable balance that did not recur in 2014.

Six months ended June 30, 2014 compared to 2013

Net sales increased primarily due to the impact of the acquisition of Mivisa in April 2014.

Segment income increased primarily due to the impact of the acquisition of Mivisa in April 2014 and a charge of $11 in the second quarter of 2013 to record a reserve against a portion of an outstanding customer receivable balance that did not recur in 2014.

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.


                              Crown Holdings, Inc.


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

Net sales and segment income in the Asia Pacific segment are as follows:
                    Three Months Ended             Six Months Ended
                         June 30                       June 30
                      2014            2013          2014           2013
Net sales      $     316             $ 301    $     614           $ 577
Segment income        36                35           70              68

Three months ended June 30, 2014 compared to 2013

Net sales increased primarily due to $39 from increased sales unit volumes due to recent capacity expansion partially offset by $17 from lower selling prices primarily due to the pass-through of lower raw material costs and the impact of competitive price compression and $7 from the impact of foreign currency translation.

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

Six months ended June 30, 2014 compared to 2013

Net sales increased primarily due to $79 from increased sales unit volumes due to recent capacity expansion partially offset by $30 from lower selling prices primarily due to the pass-through of lower raw material costs and the impact of competitive price compression and $12 from the impact of foreign currency translation.

Segment income increased primarily due to $11 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             Six Months Ended
                         June 30                       June 30
                      2014            2013          2014           2013
Net sales      $     209             $ 212    $     415           $ 413
Segment income        22                31           46              53

Three months ended June 30, 2014 compared to 2013

Net sales decreased primarily due to lower sales in the Company's aerosol and specialty packaging businesses and lower equipment sales partially offset by $8 from the impact of foreign currency translation.

Segment income decreased primarily due to lower sales in the Company's aerosol and specialty packaging businesses, lower equipment sales and a benefit of $3 from reduced post-employment benefits in 2013 that did not recur in 2014.

Six months ended June 30, 2014 compared to 2013

Net sales increased primarily due to $14 from the impact of foreign currency translation, partially offset by lower sales in the Company's aerosol and specialty packaging businesses and lower equipment sales.

Segment income decreased primarily due to lower sales in the Company's aerosol and specialty packaging businesses, lower equipment sales and a benefit of $3 from reduced post-employment benefits in 2013 that did not recur in 2014.


                              Crown Holdings, Inc.


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

Corporate and Unallocated Expense
                                     Three Months Ended          Six Months Ended
                                           June 30                   June 30
                                     2014           2013          2014        2013
Corporate and unallocated expense $    (54 )     $    (36 )   $    (112 )    $ (86 )

For the three months ended June 30, 2014 compared to 2013, corporate and unallocated expense increased primarily due to a charge of $15 related to the impact of fair value adjustments for the sale of inventory acquired in the acquisition of Mivisa and a benefit of $5 in 2013 from legal matters that did not recur in 2014, partially offset by a credit of $3 related to hedge ineffectiveness caused primarily by volatility in the metal premium component of aluminum prices.

For the six months ended June 30, 2014 compared to 2013, corporate and unallocated expense increased primarily due to a charge of $15 related to the impact of fair value adjustments for the sale of inventory acquired in the acquisition of Mivisa, $4 related to hedge ineffectiveness caused primarily by volatility in the metal premium component of aluminum prices and higher general corporate costs.

Cost of Products Sold (Excluding Depreciation and Amortization)

For the three and six months ended June 30, 2014 compared to 2013, cost of products sold (excluding depreciation and amortization) increased from $1,818 to $1,960 and from $3,458 to $3,621 primarily due to increased global beverage can volumes and the acquisition of Mivisa.

Depreciation and Amortization

For the three and six months ended June 30, 2014 compared to 2013, depreciation and amortization expense increased primarily due to the acquisition of Mivisa including the impact of amortizing fair value adjustments recorded in connection with the Company's preliminary purchase price allocation.

Selling and Administrative Expense

For the three months ended June 30, 2014 compared to 2013, selling and administrative expense increased from $102 to $103 primarily due to the impact of the acquisition of Mivisa, higher corporate costs and $3 from the impact of foreign currency translation, partially offset by a charge of $11 in 2013 to record a reserve against a portion of an outstanding customer receivable balance that did not recur in 2014.

For the six months ended June 30, 2014 compared to 2013, selling and administrative expense increased from $206 to $207 primarily due to the impact of the acquisition of Mivisa, higher corporate costs and $5 from the impact of foreign currency translation, partially offset by a charge of $11 in 2013 to record a reserve against a portion of an outstanding customer receivable balance that did not recur in 2014.

Restructuring and Other

For the three and six months ended June 30, 2014, the Company recorded restructuring and other charges of $31 and $83 as described in Note I to the Company's consolidated financial statements. In connection with prior restructuring actions in the Company's North American Food segment, the Company may incur future pension settlement charges of up to $11 as employees elect to receive lump sum distributions. The timing and amount of the charge may be impacted by the number of employees who elect to receive lump sum distributions.

For three and six months ended June 30, 2013 the Company recorded restructuring and other charges of $4 and $8 related to other exit costs associated with prior restructuring actions.


Crown Holdings, Inc.

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

Loss from Early Extinguishment of Debt

For the six months ended June 30, 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 June 30, 2014 compared to 2013, interest expense increased from $61 to $66 primarily due to higher average debt outstanding primarily due to the acquisition of Mivisa, partially offset by $3 of expense in 2013 related to Italian value added tax assessments that did not recur in 2014.

For the six months ended June 30, 2014 compared to 2013, interest expense increased from $121 to $124 primarily due to higher average debt outstanding primarily due to the acquisition of Mivisa, partially offset by $5 of expense in 2013 related to Italian value added tax assessments that did not recur in 2014.

Taxes on Income

The Company's effective income tax rate was as follows:
                              Three Months Ended          Six Months Ended
                                    June 30                   June 30
                              2014           2013         2014         2013
Income before income taxes $    177       $    209     $    256       $ 302
Provision for income taxes       50             55           83          79
Effective income tax rate        28 %           26 %         32 %        26 %

For the three and six months ended June 30, 2014 compared to 2013, the Company's effective income tax rate was higher primarily due to non-deductible transaction costs incurred in connection with the Company's acquisition of Mivisa and higher losses in jurisdictions that are not currently expected to realize the related tax benefit. For the six months ended June 30, 2014 compared to 2013, the Company's effective income tax rate was also higher due to non-deductible impairment charges related to the divestment of certain operations in connection with the Company's acquisition of Mivisa.

Net Income Attributable to Noncontrolling Interests

For the three and six months ended June 30, 2014 compared to 2013, net income attributable to noncontrolling interests decreased from $22 to $21 and from $48 to $43 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 decreased from $251 for the six months ended June 30, 2013 to $117 in 2014 primarily due to $120 from a change in the Company's North American receivables securitization facility which resulted in receivables transactions being accounted for as sales in 2014 compared to secured borrowings in 2013.

Investing Activities

Cash used for investing activities increased from $116 for the six months ended June 30, 2013 to $854 in 2014 primarily due to $754 paid to acquire Mivisa and higher capital expenditures, partially offset by $22 of proceeds from divesting certain Crown and Mivisa operations as required for regulatory approval of the acquisition. The Company currently expects capital expenditures for 2014 to be approximately $320.


Crown Holdings, Inc.

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

Financing Activities

Cash provided by financing activities increased from $249 for the six months ended June 30, 2013 to $528 in 2014 primarily due to higher net borrowings in 2014 to fund the acquisition of Mivisa and payoff certain of Mivisa's existing debt. For the six months ended June 30, 2014, financing activities also included $93 paid to increase the Company's ownership interest in subsidiaries in Jordan and Tunisa to 100%. For the six months ended June 30, 2013, financing activities included $194 to repurchase the Company's common stock compared to $2 in 2014.

In July 2014, the Company issued 650 ($890 at June 30, 2014) principal amount of 4% senior unsecured notes due 2022. The Company used a portion of the proceeds to purchase through a tender offer and to redeem all of its 500 ($685 at June 30, 2014) 7.125% senior unsecured notes due 2018.

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

Liquidity

As of June 30, 2014, $203 of the Company's $244 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.

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., $126 was held by subsidiaries
for which earnings are considered indefinitely reinvested. While based on . . .

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