================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO _________
COMMISSION FILE NUMBER 1-2227
CROWN CORK & SEAL COMPANY, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1526444
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
One Crown Way, Philadelphia, PA. 19154-4599
(Address of principal executive offices) (Zip Code)
215-698-5100
(Registrant's telephone number, including area code)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
There were 124,410,543 shares of Common Stock outstanding as of July 31, 1998.
================================================================================
<PAGE>
Crown Cork & Seal Company, Inc.
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
(In millions except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Three months ended June 30, 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 2,245.0 $ 2,286.6
----------------- -----------------
Cost, expenses & other income
Cost of products sold, excluding depreciation and amortization 1,727.2 1,786.0
Depreciation and amortization 136.1 138.9
Selling and administrative expense 93.2 104.6
Gain on sale of assets (28.1)
Interest expense 104.1 94.0
Interest income (12.4) (9.4)
Translation and exchange adjustments 5.8 1.7
----------------- -----------------
2,054.0 2,087.7
----------------- -----------------
Income before income taxes 191.0 198.9
Provision for income taxes 64.4 64.1
Minority interest, net of equity earnings (.9) (2.8)
----------------- -----------------
Net income 125.7 132.0
Preferred stock dividends 4.1 5.8
----------------- -----------------
Net income available to common shareholders $ 121.6 $ 126.2
================= =================
Earnings per average common share
Basic $ .98 $ .98
================= =================
Diluted $ .95 $ .94
================= =================
Dividends per common share $ .25 $ .25
================= =================
Weighted average common shares outstanding:
Basic 124,442,024 128,554,649
Diluted 132,826,655 140,553,858
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Certain prior year balances have been reclassified to improve comparability.
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
Crown Cork & Seal Company, Inc.
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
(In millions except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Six months ended June 30, 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 4,137.4 $ 4,223.9
----------------- -----------------
Cost, expenses & other income
Cost of products sold, excluding depreciation and amortization 3,229.4 3,330.4
Depreciation and amortization 272.7 278.2
Selling and administrative expense 190.8 208.5
Gain on sale of assets (34.2)
Interest expense 197.9 186.6
Interest income (19.8) (16.7)
Translation and exchange adjustments 7.5 2.8
----------------- -----------------
3,878.5 3,955.6
----------------- -----------------
Income before income taxes 258.9 268.3
Provision for income taxes 92.3 89.9
Minority interest, net of equity earnings .8 (7.4)
----------------- -----------------
Net income 167.4 171.0
Preferred stock dividends 9.2 11.7
----------------- -----------------
Net income available to common shareholders $ 158.2 $ 159.3
================= =================
Earnings per average common share
Basic $ 1.26 $ 1.24
================= =================
Diluted $ 1.24 $ 1.22
================= =================
Dividends per common share $ .50 $ .50
================= =================
Weighted average common shares outstanding:
Basic 125,763,763 128,517,313
Diluted 135,295,628 140,532,982
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Certain prior year balances have been reclassified to improve comparability.
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
Crown Cork & Seal Company, Inc.
CONSOLIDATED BALANCE SHEETS (Condensed)
(In millions except per share data)
(Unaudited)
- --------------------------------------------------------------------------------
June 30, December 31,
1998 1997
- --------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 214.8 $ 205.6
Receivables 1,727.4 1,353.5
Inventories 1,563.0 1,387.5
Prepaid expenses and other current assets 207.2 200.6
------------ ------------
Total current assets 3,712.4 3,147.2
------------ ------------
Long-term notes and receivables 53.5 65.0
Investments 88.4 89.5
Goodwill, net of amortization 4,547.6 4,625.2
Property, plant and equipment 3,656.8 3,663.9
Other non-current assets 832.4 714.9
------------ ------------
Total $ 12,891.1 $ 12,305.7
============ ============
Liabilities and shareholders' equity
Current liabilities
Short-term debt 2,366.4 $ 1,385.4
Current portion of long-term debt 384.5 399.3
Accounts payable and accrued liabilities 2,206.3 2,236.7
United States and foreign income taxes 75.2 27.9
------------ ------------
Total current liabilities 5,032.4 4,049.3
------------ ------------
Long-term debt, excluding current maturities 3,209.8 3,301.4
Postretirement and pension liabilities 705.6 711.7
Other non-current liabilities 435.1 431.3
Minority interests 279.6 282.8
Shareholders' equity 3,228.6 3,529.2
------------ ------------
Total $ 12,891.1 $ 12,305.7
============ ============
Book value per common share $ 24.37 $ 25.26
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Crown Cork & Seal Company, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Condensed)
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Six months ended June 30, 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 167.4 $ 171.0
Depreciation and amortization 272.7 278.2
Gain on sale of assets (25.0)
Change in assets and liabilities, other than debt, net of
businesses acquired (573.9) (573.1)
--------- ---------
Net cash used in operating activities (133.8) (148.9)
--------- ---------
Cash flows from investing activities
Capital expenditures (237.3) (202.6)
Acquisition of businesses, net of cash acquired (34.2) (10.0)
Proceeds from sale of property, plant and equipment 27.6 25.5
Proceeds from sale of businesses 90.0
Other, net (5.1) ( .4)
--------- ---------
Net cash used in investing activities (249.0) (97.5)
--------- ---------
Cash flows from financing activities
Proceeds from long-term debt 3.9 1.5
Repayment of long-term debt (108.1) (257.2)
Net change in short-term debt 938.8 647.1
Stock repurchased (369.0) (17.2)
Dividends paid (73.2) (76.0)
Common stock issued under various employee benefit plans 5.2 7.3
Minority contributions, net of dividends paid (3.4) (3.4)
--------- ---------
Net cash provided by financing activities 394.2 302.1
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (2.2) (10.3)
--------- ---------
Net change in cash and cash equivalents 9.2 45.4
Cash and cash equivalents at beginning of period 205.6 160.4
--------- ---------
Cash and cash equivalents at end of period $ 214.8 $ 205.8
========= =========
- -----------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------
Schedule of non-cash investing activities:
Acquisition of businesses:
Fair value of assets acquired $ 51.2 $ 70.0
Liabilities assumed (17.0)
Note Payable (60.0)
--------- ---------
Cash Paid $ 34.2 $ 10.0
========= =========
- -----------------------------------------------------------------------------------------
</TABLE>
Certain prior year balances have been reclassified to improve comparability.
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Crown Cork & Seal Company, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
| Accumulated
| Other
Comprehensive Income |Preferred Common Paid-In Retained Treasury Comprehensive
Quarter Year-To-Date | Stock Stock Capital Earnings Stock Income Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 | $520.8 $779.0 $1,560.7 $1,327.2 ($137.0) ($521.5) $3,529.2
Net income $125.7 $167.4 | 167.4 167.4
Translation adjustments 22.7 (31.8) | (31.8) (31.8)
------ ------ |
Comprehensive income $148.4 $135.6 |
====== ====== |
|
Dividends declared: |
Common | (63.2) (63.2)
Preferred | (9.2) (9.2)
Stock repurchased | (153.3) (195.2) (20.5) (369.0)
Common stock issued under |
employee benefit plans | 4.4 .8 5.2
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 | $367.5 $779.0 $1,369.9 $1,422.2 ($156.7) ($553.3) $3,228.6
===================================================================================================================================
|
| Accumulated
| Other
Comprehensive Income |Preferred Common Paid-In Retained Treasury Comprehensive
Quarter Year-To-Date | Stock Stock Capital Earnings Stock Income Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 | $520.8 $779.0 $1,567.3 $1,185.0 ($136.9) ($351.9) $3,563.3
Net income $132.0 $171.0 | 171.0 171.0
Translation adjustments (83.5) (137.2) | (137.2) (137.2)
------ ------ |
Comprehensive income $48.5 $33.8 |
====== ====== |
|
Dividends declared: |
Common | (64.3) (64.3)
Preferred | (11.7) (11.7)
Stock repurchased | (15.6) (1.6) (17.2)
Common stock issued under |
employee benefit plans | 6.1 1.2 7.3
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 | $520.8 $779.0 $1,557.8 $1,280.0 ($137.3) ($489.1) $3,511.2
===================================================================================================================================
</TABLE>
Certain prior year balances have been reclassified to improve comparability.
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Crown Cork & Seal Company, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)
(Unaudited)
A. Statement of Information Furnished
The accompanying unaudited interim consolidated and condensed financial
statements have been prepared by the Company in accordance with Form 10-Q
instructions. In the opinion of management, these consolidated financial
statements contain all adjustments necessary to present fairly the
financial position of Crown Cork & Seal Company, Inc. as of June 30, 1998,
and the results of its operations and cash flows for the periods ended June
30, 1998 and 1997, respectively. These results have been determined on the
basis of generally accepted accounting principles and practices
consistently applied.
Certain information and footnote disclosures, normally included in
financial statements presented in accordance with generally accepted
accounting principles, have been condensed or omitted. The accompanying
Consolidated Financial Statements should be read in conjunction with the
financial statements and notes thereto incorporated by reference in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
B. Earnings Per Share
The following table summarizes the basic and diluted earnings per common
share computations for the periods ended June 30, 1998 and 1997,
respectively:
<TABLE>
<CAPTION>
1998 1997
---------------------------- -----------------------------
Average Average
Quarter Income Shares EPS Income Shares EPS
- ------- ---------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $125.7 $132.0
Less:
Preference dividends (4.1) (5.8)
------ ------
Basic EPS 121.6 124.4 $ .98 126.2 128.6 $ .98
Potentially dilutive securities:
Stock options .4 .7
Assumed preferred stock
conversion 4.1 8.0 5.8 11.3
------ ----- ------ -----
Diluted EPS $125.7 132.8 $ .95 $132.0 140.6 $ .94
====== ===== ====== =====
1998 1997
---------------------------- -----------------------------
Average Average
Year-to-date Income Shares EPS Income Shares EPS
- ------------ ---------------------------- -----------------------------
Net income $167.4 $171.0
Less:
Preference dividends (9.2) (11.7)
------ ------
Basic EPS 158.2 125.8 $1.26 159.3 128.5 $1.24
Potentially dilutive securities:
Stock options .4 .7
Assumed preferred
stock conversion 9.2 9.1 11.7 11.3
------ ----- ------ -----
Diluted EPS $167.4 135.3 $1.24 $171.0 140.5 $1.22
====== ===== ====== =====
</TABLE>
7
<PAGE>
Crown Cork & Seal Company, Inc.
C. Inventories
----------------------------------------------------------
June 30, December 31,
1998 1997
----------------------------------------------------------
Finished goods $ 464.4 $ 560.5
Work in progress 227.6 187.3
Raw materials 668.9 467.6
Supplies and repair parts 202.1 172.1
---------- ----------
$ 1,563.0 $ 1,387.5
========== ==========
D. Restructuring
During the third quarter of 1997, the Company provided $66.6 ($43.3 after
taxes or $.31 per diluted share) for the costs associated with a plan to
improve the structure of its polyethylene terephthalate ("PET") plastic
beverage container business in the United States by closing and
reorganizing six manufacturing locations in its CONSTAR subsidiary along
with other, non-PET, restructuring activities, primarily in Europe. Annual
savings relating to these actions, when fully implemented, are expected to
be approximately $20.0 ($.14 per diluted share). The Company expects to
maintain its existing manufacturing capacity, and by relocating equipment
among its remaining larger facilities, meet all current and prospective
volume requirements. The Company records restructuring charges against
operations and provides a reserve based on the best information available
at the time that the decision is made to restructure. The balance of
restructuring reserves (excluding the write-down of assets which is
reflected as a reduction of the related asset account) is included within
accounts payable and accrued liabilities.
The Company has incurred restructuring and exit costs relative to the
acquisition of CMB. Affected by the plan of restructuring were forty plants
and regional administrative offices which were closed and an additional
fifty-two plants which were reorganized. Since commencement of the plan of
restructuring, the Company determined alternative sites for manufacture and
qualified the new manufacturing sites with customers. The Company accrued
approximately $534 for the costs associated with restructuring CMB
operations and allocated such costs to the purchase price of CMB in
accordance with purchase accounting requirements. These costs comprised;
severance pay and benefits, write-down of assets, lease termination and
other exit costs. The cost of providing severance pay and benefits for the
reduction of approximately 6,500 employees was approximately $257 and was
primarily a cash expense. Employees terminated included most, if not all,
employees at each plant or office which was closed and selected employees
at those plants which were reorganized, including salaried employees and
employees of the respective unions represented at each plant site. The
write-down of assets (principally property, plant and equipment) was
approximately $217 and has been reflected as a reduction in the carrying
value of the Company's assets. Lease termination and other exit costs,
primarily repayments of government grants and subsidies, were approximately
$60 and were primarily cash expenses. The restructuring costs recorded in
connection with the CMB acquisition included a $95 restructuring charge
announced in 1996 by CarnaudMetalbox Asia, Ltd., a subsidiary of the
Company.
The plan of restructuring CMB operations will generate annual cost savings
of approximately $160 ($105 after-tax) on a full year basis. Capital
expenditures of approximately $100 were made to expand and upgrade other
facilities to minimize the adverse effects of the restructuring on existing
business and customer relationships.
8
<PAGE>
Crown Cork & Seal Company, Inc.
Remaining balances in the restructuring reserve primarily relate to
employee termination agreements. Such agreements are made with the
respective union or with the local governmental body, whereby a portion of
the employee severance is paid when the employee is terminated and the
remaining portion is paid out over an agreed period of time. The components
of the restructuring reserve are as follows:
---------------------------------------------------------------------------
Balance Balance
at 1998 at
December 31, activity June 30,
1997 1998
---------------------------------------------------------------------------
Employee costs $ 119.5 ($ 87.9) $ 31.6
Lease termination and
other exit costs 35.8 (21.7) 14.1
-------- -------- -------
$ 155.3 ($ 109.6) $ 45.7
======== ======== =======
The foregoing restructuring charges and related cost savings represent the
Company's best estimates, but necessarily make numerous assumptions with
respect to industry performance, general business and economic conditions,
raw materials and product pricing levels, the timing of implementation of
the restructuring and related employee reductions and facility closings and
other matters, many of which are outside the Company's control. The
Company's estimates of cost savings, which are unaudited, are not
necessarily indicative of future performance, which may be significantly
more or less favorable than as set forth above and is subject to the
considerations described herein on page 13 under "Forward-Looking
Statements" within Item 2 - Management's Discussion and Analysis of Results
of Operations and Financial Condition". Shareholders are cautioned not to
place undue reliance on the estimates or the underlying assumptions and
should appreciate that such information may not necessarily be updated to
reflect circumstances existing after the date hereof or to reflect the
occurrence of unanticipated events.
E. New Reporting and Disclosure Requirement
Commencing January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income",
issued in June 1997. SFAS No.130 establishes a standard for reporting and
displaying comprehensive income and its components within the financial
statements. Comprehensive income includes charges and credits to equity
that are not the result of transactions with shareholders. Comprehensive
income is composed of two subsets - "net income" and "other comprehensive
income". Included in comprehensive income, for the Company, are net income,
cumulative translation adjustments required under SFAS No. 52 and minimum
pension liability adjustments required under SFAS No. 87. The adjustments
for translation and minimum pension represent "other comprehensive income"
and are accumulated within the Statement of Shareholders' Equity under the
caption "Accumulated Other Comprehensive Income".
As of June 30, 1998 and June 30, 1997, accumulated other comprehensive
income (loss), as reflected in the consolidated statements of changes in
shareholders' equity, comprised the following:
June 30, June 30,
1998 1997
--------- ---------
Minimum pension liability adjustments ($ 16.9) ($ 14.8)
Cumulative translation adjustments ( 536.4) ( 474.3)
-------- --------
($ 553.3) ($ 489.1)
======== ========
9
<PAGE>
Crown Cork & Seal Company, Inc.
F. Supplemental Cash Flow Information
Cash payments for interest, net of amounts capitalized ($2.7 for 1998 and
1997), were $189.3 and $198.2 during the six months ended June 30, 1998 and
1997, respectively. Cash payments for income taxes amounted to $22.5 and
$40.0 during the six months ended June 30, 1998 and 1997, respectively.
G. Commitments and Contingent Liabilities
The Company has various commitments to purchase materials and supplies as
part of the ordinary conduct of business. Such commitments are not at
prices in excess of current market.
The Company's basic raw materials for its products are tinplate, aluminum
and resins, all of which are purchased from multiple sources. The Company
is subject to material fluctuations in the cost of these raw materials and
has previously adjusted its selling prices to reflect these movements.
There can be no assurance, however, that the Company will be able to
recover fully any increases or fluctuations in raw material costs from its
customers.
The Company is subject to various lawsuits and claims with respect to
matters such as governmental regulations and other actions arising out of
the normal course of business. While the impact on future financial results
is not subject to reasonable estimation because considerable uncertainty
exists, management believes, after consulting with counsel, that the
ultimate liabilities resulting from such lawsuits and claims will not
materially affect the consolidated results or financial position of the
Company.
10
<PAGE>
Crown Cork & Seal Company, Inc.
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
(in millions, except share, per share, employee, shareholder and
statistical data)
Introduction
The following discussion presents management's analysis of the results
of operations for the three and six months ended June 30, 1998,
compared to the corresponding periods in 1997 and the changes in
financial condition and liquidity from December 31, 1997. 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, 1997, along
with the consolidated financial statements and related notes included
in and referred to within this report.
All per share information is computed using average common shares
outstanding, assuming dilution.
Results of Operations
Net Income and Earnings Per Share
Net income available to common shareholders for the quarter ended June
30, 1998 was $121.6, a decrease of 3.6% when compared to the
respective prior year amount of $126.2. Earnings per common share
increased by 1.1% to $.95 from $.94 a year earlier and reflects a 5.5%
decline in diluted average common shares outstanding, primarily
resulting from the March 1998 repurchase of shares from Compagnie
Generale d' Industrie et de Participations (CGIP). Further details of
this transaction are presented under Liquidity and Capital Resources
as provided later in this discussion. The effects of a stronger U.S.
dollar reduced net income by approximately $.02 per share in the
second quarter of 1998.
For the six months ended June 30, 1998, net income available to common
shareholders was $158.2 or $1.24 per common share compared with net
income of $159.3 or $1.22 per common share for the same period in
1997.
Net Sales
Net sales in the quarter decreased 1.8% from $2,286.6 in 1997 to
$2,245.0 in 1998. Net sales for the first six months of 1998 were
$4,137.4, a decrease of $86.5 or 2.0% from net sales of $4,223.9 for
the same period in 1997. Excluding the effects of foreign exchange
translation and the divestiture of the Crown-Simplimatic machinery
operations (disposed of in May of 1997), net sales would have been .8%
higher for the quarter and 2.1% higher for the six months. The
strengthening of the U.S. dollar against other currencies, primarily
those within Europe, reduced consolidated net sales by $48.6 in the
second quarter as compared to 1997. In the quarter, sales from U. S.
operations increased by 1.1% and those in non-U.S. markets decreased
by 3.7%. U.S. sales, in the second quarter, accounted for
approximately 40.7% of consolidated net sales in 1998 and 39.5% in
1997. Sales of beverage cans and ends as a percentage of consolidated
net sales have increased in the second quarter from 30.9% to 32.7% and
sales of food cans and ends have increased from 28.2% to 28.4%
compared to the prior year second quarter. North American beverage can
and end sales represented 20.2% and 18.9%, respectively, of
consolidated net sales for the quarter and six months ended June 30,
1998 as compared to 18.4% and 17.2% for the comparable periods in
1997.
11
<PAGE>
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
An analysis of comparative net sales by operating division follows:
<TABLE>
<CAPTION>
Net Sales Percentage Change
-------------------------------------------------- -----------------------
Second Quarter Six Months Ended Second Six
-------------- ---------------- ------ ---
1998 1997 1998 1997 Quarter Months
---- ---- ---- ---- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Divisions:
Americas $ 1,068.1 $ 1,012.6 $ 1,969.6 $ 1,864.1 5.5% 5.7%
Europe 1,054.2 1,103.7 1,944.7 2,026.3 (4.5%) ( 4.0%)
Asia-Pacific 91.7 104.2 166.8 201.6 (12.0%) (17.3%)
Other 31.0 66.1 56.3 131.9 (53.1%) (57.3%)
---------- ---------- ---------- ----------
$ 2,245.0 $ 2,286.6 $ 4,137.4 $ 4,223.9 (1.8%) (2.0%)
========== ========== ========== ==========
</TABLE>
Net sales in the Americas Division increased by $55.5 or 5.5% and
$105.5 or 5.7% for the three and six months ended June 30, 1998 as
compared to the same periods in 1997. The increase in the quarter was
primarily due to sales unit volume increases in (i) U. S. aerosol cans
and beverage cans and ends, (ii) U. S. PET beverage containers,
primarily single serve 20 ounce bottles and beverage preforms, (iii)
U. S. plastic beverage closures and (iv) beverage cans and ends at the
Company's new beverage can and end plants in Brazil partially offset
by (i) lower U. S. food can volumes, (ii) lower Canadian beverage can
volumes and (iii) decreased aluminum prices which forced decreases in
selling prices in aluminum beverage cans and ends.
Net sales in the European Division decreased $49.5 or 4.5% and $81.6
or 4.0% for the three and six months ended June 30, 1998, due
primarily to the general weakening of most European currencies against
the U. S. dollar. The impact of translation on sales resulted in a net
sales reduction of $32.1 in the quarter. Excluding the impact from
translation, net sales would have been down 1.6% in the quarter and up
.1% for the six months as compared to the prior year periods. Second
quarter local sales decreased primarily due to lower sales unit
volumes of food, aerosol and beverage cans, partially offset by
increased sales unit volumes in (i) beverage ends, (ii) plastic
closures and (iii) PET beverage bottles. Competition has remained very
aggressive throughout the division in most product lines.
Net sales in the Asia-Pacific Division have decreased $12.5 or 12.0%
and $34.8 or 17.3% for the three and six months ended June 30, 1998
from a year earlier due to (i) weakening Asian currencies resulting in
a U. S. dollar sales loss of $6.1 and (ii) the general economic
slowdown in the region. Excluding the impact from translation, local
sales would have been lower by 6.1% in the quarter and 11.2% for the
six months compared to the same periods in 1997. The decline in local
sales is due primarily to (ii) lower food can sales unit volumes
primarily reflecting the restructuring of operations in Malaysia and
Singapore in 1997 and (ii) competitive pricing throughout the region;
partially offset by increased beverage can volumes resulting from full
production at the Company's new plant in Singapore along with
increased demand in both China and Vietnam
Net sales for Other operating units are lower for the three and six
months ended June 30, 1998 compared to the prior year periods due
primarily to the May 1997 divestiture of the Company's
Crown-Simplimatic machinery operations and lower sales at the
Company's Golden Aluminum facilities.
12
<PAGE>
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
Cost of Products Sold
Cost of products sold, excluding depreciation and amortization, was
$1,727.2 for the quarter and $3,229.4 for the six months ended June
30, 1998, a decrease of 3.3% and 3.0%, respectively, as compared to
the same periods in 1997. The decrease reflects (i) cost savings from
restructuring programs, (ii) decreased aluminum costs and (iii) the
appreciation of the U.S. dollar against most foreign currencies;
offset by increased sales unit volumes in many product lines.
As a percentage of net sales, cost of products sold was 76.9% and
78.1% for the quarter and six months ended June 30, 1998, as compared
to 78.1% and 78.8% in the same periods of 1997. The improvement has
resulted from (i) increased U. S. sales unit volumes, (ii) benefits
derived from the Company's continuing cost containment and
restructuring programs and (iii) the effect of decreases in raw
material costs.
Selling and Administrative
Selling and administrative expenses for the quarter ended June 30,
1998 were $93.2, a decrease of $11.4 or 10.9% from the second quarter
of 1997. As a percentage of net sales, selling and administrative
expenses, excluding depreciation, were 4.2% in the second quarter as
compared to 4.6% for the same period of 1997. For the six months ended
June 30, 1998, these expenses have decreased $17.7 or 8.5% from a year
earlier and, as a percentage of net sales, decreased from 4.9% in 1997
to 4.6% in 1998. The decrease in 1998 costs is directly related to the
restructuring of activities within acquired CarnaudMetalbox (CMB)
operations.
Operating Income
For the quarter ended June 30, 1998, consolidated operating income
increased $31.4 or 12.2% compared to the same period in 1997. For the
six months ended June 30, 1998, consolidated operating income
increased $37.7 or 9.3% from the same period a year earlier. Operating
income as a percentage of net sales was 12.9% and 10.7% for the
quarter and six months ended June 30, 1998 as compared to 11.2% and
9.6% for the same periods in 1997. An analysis of operating income by
operating division follows:
Operating Income Percentage Change
-------------------------------------------- -------------------
Second Quarter Six Months Ended Second Six
-------------- ---------------- ------ ---
1998 1997 1998 1997 Quarter Months
---- ---- ---- ---- ------- ------
Divisions:
Americas $ 89.4 $ 90.2 $ 144.1 $ 147.4 (.9%) ( 2.2%)
Europe 195.8 158.2 293.5 247.4 23.8% 18.6%
Asia-Pacific .6 8.6 1.7 8.8 (93.0%) (80.7%)
Other 2.7 .1 5.2 3.2 62.5%
-------- -------- -------- --------
$ 288.5 $ 257.1 $ 444.5 $ 406.8 12.2% 9.3%
======== ======== ======== ========
As a percentage of net sales, operating income for the Americas
Division was 8.4% in the second quarter and 7.3% for the first six
months of 1998 as compared to 8.9% and 7.9% for the same periods in
1997. The decrease in second quarter 1998 operating margin was
primarily due to (i) continued U.S. pricing pressures in both metal
and plastic beverage containers, (ii) lower beverage can pricing in
Argentina and Brazil and (iii) production inefficiencies at the
Company's new beverage can and end plants in Brazil; partially offset
by sales unit volume increases in most product lines.
13
<PAGE>
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
Operating income as a percentage of net sales for the European
Division was 18.6% in the second quarter and 15.1% for the first six
months of 1998 as compared to 14.3% and 12.2% for the comparable
periods in 1997. The increased margin is directly attributable to (i)
the benefits realized from the closure or reorganization of
inefficient plants, removal of products with negative contribution and
the elimination of excess administrative overheads as part of the cost
reduction programs initiated with the acquisition of CMB and (ii)
increased sales unit volumes in PET beverage bottles and plastic
closures; offsetting the (i) appreciation of the U.S. dollar against
most European currencies and (ii) decreased sales unit volumes for
food and beverage cans. Competitive pricing, especially in certain
food can markets, continues to restrain profit growth.
Operating income in the Asia-Pacific Division as a percentage of net
sales was .7% in the second quarter and 1.0% for the first six months
of 1998 versus 8.3% and 4.4% in the same periods of 1997. The decrease
in 1998 operating margins is due primarily to (i) the appreciation of
the U. S. dollar against most Asian currencies, (ii) weak demand due
to the general economic slowdown in the region and (iii) competitive
pricing throughout the region.
Operating income for Other operating units was 8.7% of net sales in
the quarter and 9.2% for the six months ended June 30, 1998 as
compared to .2% and 2.4% for the same periods in 1997. The improvement
in the operating margin is directly attributable to the May 1997
divestiture of the Company's Crown-Simplimatic machinery operations.
Net Interest Expense / Income
Net interest expense for the second quarter and six months ended June
30, 1998 was $91.7 and $178.1, respectively, as compared to $84.6 and
$169.9 for the comparable periods in 1997. The increase in net
interest expense is due primarily to cash requirements for
restructuring programs and the March 1998 stock repurchase from CGIP.
Taxes on Income
The effective tax rate for the six months ended June 30, 1998 was
35.7% as compared to 33.5% for the same period of 1997. The effective
tax rate of 35.7% exceeds the U. S. statutory rate of 35% due
primarily to provisions for state taxes and non-deductible
amortization of goodwill and other intangibles offset partially by
income derived from non-U. S. operations which are taxed at lower
rates than the U. S. statutory rate.
Minority Interests, Net of Equity in Earnings of Affiliates
Minority interests, net of equity earnings, improved in the quarter by
$1.9 and $8.2 for the first six months compared to the prior year
periods due primarily to (i) increased operating results in the
Company's unconsolidated joint ventures in Brazil and Venezuela, (ii)
decreased profits in the Company's consolidated joint ventures in
China and (iii) no further losses being recognized in the Company's
unconsolidated joint venture in Korea as the investment has been
reduced to zero and the Company does not plan nor is required to
inject capital in the future.
14
<PAGE>
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
Liquidity and Capital Resources
Cash from Operations
Net cash of $133.8 was used by operating activities during the six
months ended June 30, 1998, as compared to cash used of $148.9 for the
same period in 1997. The improvement in cash used by operating
activities is related to increased profits from continuing operations
(income before gain on sale of assets). Due to higher sales volumes in
the second and third quarters, it is customary for large working
capital buildups in the first six months.
Investing Activities
Investing activities used cash of $249.0 during the six months ended
June 30, 1998 compared with cash used of $97.5 for the same period in
1997. The increase in cash used in investing activities is primarily
due to (i) the 1997 divestiture of the Crown-Simplimatic machinery
operations which resulted in cash proceeds of $90 in 1997, (ii)
capital expenditures for the six months ended June 30, 1998 of $237.3,
an increase of $34.7 as compared to capital expenditures of $202.6
during the same period of 1997 and (iii) expenditures for the
acquisition of businesses, net of cash acquired, of $34.2 as compared
to $10.0 for the same period in 1997.
Financing Activities
Financing activities provided cash of $394.2 during the six months
ended June 30, 1998 compared with $302.1 for the prior year period.
On March 2, 1998, the Company completed the repurchase of
approximately 4.1 million shares of its common stock at $49.00 per
share and approximately 3.7 million shares of its acquisition
preferred at $46.00 per share from CGIP. The repurchased shares
represented approximately 5.3% of the Company's then outstanding
voting securities and leaves CGIP with 4.99% voting power in the
Company. The repurchased shares include all of CGIP's acquisition
preferred position which represented approximately 30% of the then
outstanding shares of acquisition preferred. The transaction includes
an agreement to terminate the Shareholders Agreement dated February
22, 1996 between the Company and CGIP. Among other changes, CGIP will
no longer retain the right to designate Company directors. The
transaction value of $369 was financed through an increase in
short-term indebtedness.
Total debt, net of cash and cash equivalents, at June 30, 1998 was
$5,745.9 and represents an increase of $865.4 above the December 31,
1997 level of $4,880.5. Total debt, net of cash and cash equivalents,
as a percentage of total capitalization was 62.1% at June 30, 1998 as
compared to 56.1% at December 31, 1997. Total capitalization is
defined by the Company as total debt, minority interests and
shareholders' equity.
The increase in total debt, net of cash and cash equivalents, from
December 31, 1997 is due primarily to (i) the repurchase of shares
from CGIP, (ii) the funding of the Company's restructuring activities
and (iii) the funding of working capital requirements on a short-term
basis through the issuance of commercial paper.
The Company funds its working capital requirements on a short-term
basis primarily through issuances of commercial paper. The commercial
paper program is supported by a $2,500 multi-currency credit agreement
which matures in February 2002 with interest at market rates. The
Company's use of the facility is not restricted. At June 30, 1998 and
1997, $200.5 and $407.9, respectively, was drawn against this
facility. At December 31, 1997, $355.2 was drawn against this
facility. Based on the Company's
15
<PAGE>
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
intention and ability to maintain its credit facility beyond 1999 and
1998, respectively, $700 of commercial paper borrowings were
classified as long-term at both June 30, 1998 and 1997. There was
$2,494.2 and $1,554.6 in commercial paper outstanding at June 30, 1998
and 1997, respectively, and $1,248.0 outstanding at December 31, 1997
Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This accounting standard is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. This
statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. The statement
requires that all derivatives are recognized as either assets or
liabilities in the statement of financial position and are measured at
their fair values. The Company is currently evaluating the
requirements of this standard to determine its impact on the
consolidated financial statements.
The Company, in the fourth quarter, will adopt SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information",
issued in June 1997, and SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits", issued in February 1998.
Neither standard will have an adverse effect on the Company's
financial position, cash flows or results of operations. SFAS No. 131
requires the disclosure of segment information on the same basis that
is used internally for evaluating performance and for allocating
resources. SFAS No. 132 revises the disclosures required about pension
and other postretirement benefit plans.
Market Risk
In the normal course of business, the Company is exposed to
fluctuations in currency values, interest rates, commodity prices and
other market risks. The Company addresses these risks through a
program that includes the use of financial instruments. The Company
controls the credit risks associated with these financial instruments
through credit approval, investment limits and centralized monitoring
procedures and systems. The Company uses only liquid investments from
creditworthy institutions and does not enter into leveraged, tiered or
illiquid contracts. Further, the Company does not enter into financial
instruments for trading purposes.
There have been no material changes in the Company's exposure to
market risk since December 31, 1997.
Year 2000
The Company has substantially completed an inventory of critical
information systems, manufacturing equipment and facilities worldwide
in support of its Year 2000 (Y2K) global assessment. In addition to
addressing these internal Y2K risks, the Company has also initiated
global reviews of the Y2K compliance of the Company's critical
vendors, customers, and other third parties to assess the Company's
external Y2K risks. These assessment efforts are expected to be
substantially completed during the fourth quarter of 1998.
The Company is currently remediating (or in the process of launching
remediation of ) its important systems within each of its divisions.
The targeted completion date for all critical modifications is
mid-1999; however, additional refinement and system testing may
continue through the end of 1999.
16
<PAGE>
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
Meaningful cost estimates will not be available until the completion
of the Company's internal Y2K assessment effort. However, at the
present time, management does not expect these costs to have a
material adverse effect on the Company's financial position, cash
flows or results of operations.
The foregoing timetable and initial assessment of cost exposure to
correct Y2K issues reflects management's best estimates. These
estimates are based upon many assumptions, including assumptions about
the ultimate results of its internal Y2K assessment efforts and the
availability and capability of resources to remediate and modify
affected systems. The Company, however, cannot reasonably estimate the
potential impact on its financial condition and operations if critical
vendors, customers or key third parties, including governments, do not
become Y2K capable on a timely basis. As noted previously, the Company
is currently assessing the Y2K compliance of critical third parties.
In order to mitigate such external risks, the Company has begun
contingency planning to address potential disruptions in electrical,
telecommunications, transportation and distribution services. The
Company can give no assurance that all critical third parties will
become compliant; and, accordingly, management is developing
strategies to minimize the effect, if any, on the Company from such
failures by third parties to be Y2K compliant.
Forward Looking Statements
Statements included herein in "Management's Discussion and Analysis of
Results of Operations and Financial Condition", and in the discussion
of the restructuring plans in Note D 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, 1997, which
are not historical facts (including any statements concerning plans
and objectives of management for 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 other 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 Results of Operations and Financial
Condition and certain other sections contained in the Company's
quarterly, annual or other reports filed with the 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, 1997 within Part II, Item 7;
"Management's Discussion and Analysis of Results of Operations and
Financial Condition" 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 Securities and Exchange Commission ("SEC"). In addition,
other factors have been or may be discussed from time to time in the
Company's SEC filings.
17
<PAGE>
Crown Cork & Seal Company, Inc.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on April 23,
1998. The matters voted upon and the results thereof are set forth in
Part II, Item 4 of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998 and such Item 4 is incorporated herein by
reference.
Item 5. Other Information
Any shareholder proposal submitted outside the processes of Rule 14a-8
under the Securities Exchange Act of 1934 intended to be presented for
action at the Company's 1999 Annual Meeting of Shareholders will be
considered untimely for purposes of Rules 14a-4 and 14a-5 if notice
thereof is received by the Company earlier than January 23, 1999 or
later than February 22, 1999.
On July 23, 1998, the Company's Board of Directors declared cash
dividends of $.25 per share on the Company's common stock and $.4712
per share on the Company's 4.5% convertible preferred stock. Both
dividends are payable on August 20, 1998 to shareholders of record on
August 6, 1998.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
2. Letter Agreement, dated July 9, 1998, between Compagnie
Generale d'Industrie et de Participations and Crown Cork &
Seal Company, Inc.
27. Financial Data Schedule
b) Reports on Form 8-K
There were no reports on Form 8-K filed by Crown Cork & Seal
Company, Inc., during the quarter for which this report is filed.
18
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Crown Cork & Seal Company, Inc.
Registrant
By: /s/ Timothy J. Donahue
Timothy J. Donahue
Senior Vice President and
Corporate Controller
Date: August 13, 1998
19
[Crown Cork & Seal letterhead]
July 9, 1998
Compagnie Generale
d'Industrie et de Participations
89, rue Taitbout
75009 Paris
Attention: Michel Renault
Dear Mr. Renault:
We refer to Section 3.1 of the Stock Purchase Agreement, dated as of
February 3, 1998, between Crown Cork & Seal Company, Inc. ("Crown") and
Compagnie Generale d'Industrie et de Participations ("CGIP"). At CGIP's request,
solely for purposes of said Section 3.1, Crown hereby consents to the
Disposition by CGIP of CGIP's shares of Crown Common Stock, par value $5.00 per
share (the "Crown Shares"), to Morgan Guaranty Trust Company of New York or any
of its affiliates ("Morgan") in connection with a total return swap (the "Swap")
between CGIP and Morgan, as counterparty, and to any sales of Crown Shares by
Morgan in connection with such Swap (including short sales to hedge Morgan's
exposure under such Swap and sales of Crown Shares in the event of the physical
settlement of such Swap), provided that any such sales by Morgan shall not be
made to any Purchasing Person who or which would immediately thereafter, to the
best knowledge of CGIP, any of its Controlled Affiliates, or Morgan beneficially
own Voting Securities representing three and one-half percent (3.5%) or more of
the Total Voting Power (the "Total Voting Power Threshold") and provided,
further, that the restrictions contained in this paragraph shall not prohibit
Morgan from transferring Crown Shares obtained in the event of a physical
settlement of such Swap to the extent that such transfer is in settlement of
stock loans in connection with short sales by Morgan.
Our consent is further conditioned on the understanding that CGIP will
retain sole voting power over the Crown Shares which are covered by the Swap
until the termination of such Swap, and if after such termination Morgan
beneficially owns
<PAGE>
Voting Securities representing at least the Total Voting Power Threshold, Morgan
shall in an orderly fashion dispose of such number of Voting Securities in the
manner provided above as shall be necessary to reduce Morgan's beneficial
ownership of Voting Securities to an amount less than the Total Voting Power
Threshold.
This consent shall be effective upon the execution of the confirmation
relating to the Swap (the "Swap Agreement")(which shall be executed
substantially simultaneously with this consent), a draft of which confirmation
has been previously provided to Crown, and shall remain in effect until the
termination of the Swap Agreement in accordance with its terms.
Capitalized terms used in these paragraphs and not defined herein shall
have the meanings that were assigned thereto in the Shareholders Agreement
between CGIP and Crown dated February 22, 1996.
Sincerely,
/s/ Craig R. L. Calle
Craig R. L. Calle
Senior Vice President - Finance
and Treasurer
CRLC/ljj
cc: W. Avery
A. Rutherford
W. Lawlor - Dechert Price & Rhodes
A. Chapin - Sullivan & Cromwell
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
consolidated Balance Sheets, consolidated Statements of Income and Notes
to the consolidated financial statements on pages through of the
Company's Quarterly Report on Form 10-Q for the period ended June 30, 1998
and is qualified in its entirety by reference to such financial statments.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 215
<SECURITIES> 0
<RECEIVABLES> 1,765
<ALLOWANCES> 38
<INVENTORY> 1,563
<CURRENT-ASSETS> 3,712
<PP&E> 5,902
<DEPRECIATION> 2,245
<TOTAL-ASSETS> 12,891
<CURRENT-LIABILITIES> 5,032
<BONDS> 3,210
0
368
<COMMON> 779
<OTHER-SE> 2,082
<TOTAL-LIABILITY-AND-EQUITY> 12,891
<SALES> 4,137
<TOTAL-REVENUES> 4,137
<CGS> 3,229
<TOTAL-COSTS> 3,502
<OTHER-EXPENSES> 8
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 198
<INCOME-PRETAX> 259
<INCOME-TAX> 92
<INCOME-CONTINUING> 167
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 167
<EPS-PRIMARY> 1.26<F1>
<EPS-DILUTED> 1.24<F1>
<FN>
<F1>The(EPS-PRIMARY) amount represents BASIC earnings per share and the
(EPS-DILUTED) amount represents DILUTED earnings per share in accordance
with Statement of Financial Accounting Standards No. 128, Earnings Per
Share.
</FN>
</TABLE>
