================================================================================
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 MARCH 31, 1999
[ ] 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)
Indicate 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 122,350,114 shares of Common Stock outstanding as of April 30, 1999.
================================================================================
<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 March 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 1,793.6 $ 1,892.4
----------- ------------
Cost, expenses & other income
Cost of products sold, excluding depreciation and amortization 1,418.0 1,502.2
Depreciation and amortization 133.0 136.6
Selling and administrative expense 91.0 97.6
Gain on sale of assets (2.4)
Interest expense 93.1 93.8
Interest income (7.5) (7.4)
Translation and exchange adjustments 8.9 1.7
----------- ------------
1,734.1 1,824.5
----------- ------------
Income before income taxes 59.5 67.9
Provision for income taxes 28.4 27.9
Minority interest, net of equity earnings (1.6) 1.7
----------- ------------
Net income 29.5 41.7
Preferred stock dividends 3.9 5.1
----------- ------------
Net income available to common shareholders $ 25.6 $ 36.6
=========== ============
Basic and diluted earnings per average common share $ .21 $ .29
=========== ============
Dividends per common share $ .25 $ .25
=========== ============
Average common shares outstanding:
Basic 122,326,336 127,100,189
Diluted 129,957,939 137,782,068
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
Crown Cork & Seal Company, Inc.
CONSOLIDATED BALANCE SHEETS (Condensed)
(In millions except per share data)
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
March 31, December 31,
1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 276.5 $ 283.9
Receivables 1,527.7 1,359.2
Inventories 1,526.3 1,421.0
Prepaid expenses and other current assets 116.5 103.6
------------ ------------
Total current assets 3,447.0 3,167.7
------------ ------------
Long-term notes and receivables 20.4 44.2
Investments 75.7 90.6
Goodwill, net of amortization 4,382.2 4,565.4
Property, plant and equipment 3,580.4 3,742.5
Other non-current assets 869.7 858.1
------------ ------------
Total $ 12,375.4 $ 12,468.5
============ ============
Liabilities and shareholders' equity
Current liabilities
Short-term debt $ 2,734.4 $ 2,331.0
Current portion of long-term debt 154.3 135.0
Accounts payable and accrued liabilities 1,934.0 2,180.7
United States and foreign income taxes 59.0 62.8
------------ ------------
Total current liabilities 4,881.7 4,709.5
------------ ------------
Long-term debt, excluding current maturities 3,100.8 3,188.5
Postretirement and pension liabilities 698.1 707.0
Other non-current liabilities 595.2 609.0
Minority interests 270.0 279.7
Shareholders' equity 2,829.6 2,974.8
------------ ------------
Total $ 12,375.4 $ 12,468.5
============ ============
Book value per common share $ 21.77 $ 22.89
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
Crown Cork & Seal Company, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Condensed)
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Three months ended March 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income 29.5 41.7
Depreciation and amortization 133.0 136.6
Gain on sale of assets (1.7)
Change in assets and liabilities, other than debt, net of businesses acquired (395.8) (503.4)
--------- ---------
Net cash used in operating activities (235.0) (325.1)
--------- ---------
Cash flows from investing activities
Capital expenditures (82.1) (113.3)
Acquisition of businesses, net of cash acquired (34.2)
Proceeds from sale of property, plant and equipment 11.1 4.6
Other, net (2.1) (4.2)
--------- ---------
Net cash used in investing activities (73.1) (147.1)
--------- ---------
Cash flows from financing activities
Proceeds from long-term debt 4.4 3.9
Payments of long-term debt (49.8) (3.6)
Net change in short-term debt 406.0 893.1
Stock repurchased (1.0) (369.0)
Dividends paid (34.5) (38.0)
Common stock issued - benefit plans .2 3.9
Minority contributions, net of dividends paid (1.9) (1.8)
--------- ---------
Net cash provided by financing activities 323.4 488.5
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (22.7) (1.4)
--------- ---------
Net change in cash and cash equivalents (7.4) 14.9
Cash and cash equivalents at beginning of period 283.9 205.6
--------- ---------
Cash and cash equivalents at end of period $ 276.5 $ 220.5
========= =========
- ---------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------
Schedule of non-cash investing activities:
Acquisition of businesses:
Fair value of assets acquired $ 51.2
Liabilities assumed (17.0)
---------
Cash paid
$ 34.2
=========
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Crown Cork & Seal Company, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive| Preferred Common Paid-In Retained Treasury Comprehensive
Income | Stock Stock Capital Earnings Stock Income/(Loss) Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------|------------------------------------------------------------------------------------
Balance at December 31, 1998 | $350.9 $779.0 $1,340.3 $1,250.4 ($167.3) ($578.5) $2,974.8
Net income $ 29.5 | 29.5 29.5
Translation adjustments ($139.4) | ($139.4) (139.4)
------ |
Comprehensive income/(loss) ($109.9) |
====== |
Dividends declared: |
Common | (30.6) (30.6)
Preferred | (3.9) (3.9)
Stock repurchased | (.9) (.1) (1.0)
Stock issued - benefit plans | .2 .2
- -----------------------------------------------|------------------------------------------------------------------------------------
Balance at March 31, 1999 | $350.9 $779.0 $1,339.4 $1,245.4 ($167.2) ($717.9) $2,829.6
===============================================|====================================================================================
| Accumulated
| Other
Comprehensive| Preferred Common Paid-In Retained Treasury Comprehensive
Income | Stock Stock Capital Earnings Stock Income/(Loss) Total
- -----------------------------------------------|------------------------------------------------------------------------------------
Balance at December 31, 1997 | $520.8 $779.0 $1,560.7 $1,327.2 ($137.0) ($521.5) $3,529.2
Net income $41.7 | 41.7 41.7
Translation adjustments (54.5) | (54.5) (54.5)
----- |
Comprehensive income/(loss) ($12.8) |
===== |
Dividends declared: |
Common | (32.1) (32.1)
Preferred | (5.1) (5.1)
Stock repurchased | (153.3) (195.2) (20.5) (369.0)
Stock issued - benefit plans | 3.2 .7 3.9
|
- -----------------------------------------------|------------------------------------------------------------------------------------
Balance at March 31, 1998 | $367.5 $779.0 $1,368.7 $1,331.7 ($156.8) ($576.0) $3,114.1
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<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
March 31, 1999, and the results of its operations and cash flows for
the periods ended March 31, 1999 and 1998, 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, 1998.
B. Earnings Per Share
------------------
The following table summarizes the basic and diluted earnings per share
computations for the period ended March 31, 1999 and 1998,
respectively:
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
Average Average
Income Shares EPS Income Shares EPS
------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income $29.5 $41.7
Less:
Preferred stock dividends (3.9) (5.1)
----- -----
Basic EPS $25.6 122.3 $.21 $36.6 127.1 $.29
Potentially dilutive securities
Stock options .4
----- ----- ----- -----
Diluted EPS $25.6 122.3 $.21 $36.6 127.5 $.29
===== ===== ===== =====
</TABLE>
Excluded from the computation of diluted earnings per share for the
quarters ended March 31, 1999 and 1998, respectively, were 7.6 and
10.3 common shares resulting from the assumed conversion of preferred
stock. This conversion would have been antidilutive.
C. Inventories
----------
------------------------------------------------------------
March 31, December 31,
1999 1998
------------------------------------------------------------
Finished goods $ 677.1 $ 576.8
Work in process 211.0 204.2
Raw material and supplies 638.2 640.0
-------- --------
$1,526.3 $1,421.0
======== ========
6
<PAGE>
Crown Cork & Seal Company, Inc.
D. Restructuring
-------------
During 1998, the Company provided $179 ($127 after-tax or $.95 per
share) for the costs associated with closing thirteen plants and
reorganizing three additional plants. These actions reflect the
Company's continued commitment to realign its manufacturing facilities
with the objective of enhancing operating efficiencies. Included in the
restructuring charge were costs to provide severance and related
benefits, write-down of assets and other exit costs. The Company
anticipates that this restructuring program will generate after-tax
savings of approximately $64 ($.48 per share) on an annualized basis
when fully implemented.
The cost of providing severance and related benefits is estimated at
$99, is a cash expense, and covers a reduction of approximately 2,900
employees, 1,900 of whom are involved in direct manufacturing
operations. Employee reductions are expected to be completed by the end
of the third quarter of 1999.
Included in this restructuring provision is a charge of $60, reflecting
the impairment of property, plant and equipment principally located in
the Americas Division. This charge has been reflected as a reduction in
the carrying values of the related assets. Write-downs of property,
plant and equipment were made where the carrying values exceeded the
Company's estimate of proceeds from abandonment or disposal. These
estimates were based principally on past experience of comparable asset
disposals. Disposition of assets identified for disposal in the 1998
action, including certain machinery, land and buildings, is expected to
be substantially completed by the end of 1999.
Other non-recurring exit costs are estimated at $20 and are primarily a
cash expense, comprising the costs to effectively close and dispose of
the facilities identified in the 1998 plan. Exit costs include, but are
not limited to, fees related to lease termination and other contract
cancellations, dismantlement costs and brokers' fees for assets to be
sold. These costs are expected to be substantially incurred by the end
of 1999.
The balance of the 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
components of the restructuring reserve and movements within these
components during the first quarter of 1999 were as follows:
Employee Other Exit
(in millions) Severance Costs Total
--------- ---------- -----
Opening balance............ $96.9 $30.8 $127.7
Payments made.............. (9.5) (4.4) (13.9)
Other movements *.......... .7 2.1 2.8
----- ----- ------
Closing balance............ $88.1 $28.5 $116.6
===== ===== ======
* includes translation adjustments
During the first quarter of 1999, payments of $9.5 were made related to
the termination of approximately 500 employees, 320 of whom were
involved in direct manufacturing operations. Payments of $4.4 were
made for other exit costs, including dismantlement costs, equipment
removal and various contractual obligations.
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
7
<PAGE>
Crown Cork & Seal Company, Inc.
may be significantly more or less favorable than as set forth above and
are subject to the considerations described under "Forward-Looking
Statements" within "Management's Discussion and Analysis of Financial
Condition and Results of Operations." 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. Supplemental Cash Flow Information
----------------------------------
Cash payments for interest, net of amounts capitalized ($0.4 for 1999
and $1.1 for 1998), were $76.0 and $65.7 during the three months ended
March 31, 1999 and 1998, respectively. Cash payments for income taxes
amounted to $14.9 and $7.6 during the three months ended March 31, 1999
and 1998, respectively.
F. Segment Information
-------------------
The Company maintains three operating segments, defined
geographically: Americas, Europe and Asia-Pacific. Each reportable
segment is an operating division within the Company and has a President
reporting directly to the Chief Executive Officer and the Chief
Operating Officer. "Other" represents "Corporate" which includes
research, development and engineering and administrative costs for the
U. S. Corporate headquarters. Divisional headquarter costs are
maintained within the operating segments. The interim segment
information is as follows:
<TABLE>
<CAPTION>
Quarter ended March 31,
-----------------------
1999 Americas Europe Asia-Pacific Other Total
---- -------- ------ ------------ ----- -----
<S> <C> <C> <C> <C> <C>
External sales $870.6 $835.2 $87.8 $1,793.6
Segment income 75.4 86.3 8.6 ($18.7) 151.6
1998
----
External sales 926.8 890.4 75.1 .1 1,892.4
Segment income 69.9 108.7 1.1 (23.7) 156.0
</TABLE>
The following table reconciles the Company's measure of segment income
to consolidated pre-tax income:
Three Months Ended March 31,
----------------------------
INCOME 1999 1998
----------------------------
Total segment income $151.6 $156.0
Interest expense 93.1 93.8
Interest income (7.5) (7.4)
Gain on sale of assets (2.4)
Translation & exchange adjustments 8.9 1.7
------ ------
Consolidated pre-tax income $ 59.5 $ 67.9
====== ======
8
<PAGE>
Crown Cork & Seal Company, Inc.
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 those pertaining to environmental, product liabiity,
asbestos and safety and health matters. The ultimate liability
cannot presently be determined as considerable uncertainties exist.
It is possible that results of operations in a particular period
could be materially affected by certain contingencies. Management
believes that based on current available information and after
consultation with counsel that the ultimate disposition of matters
that are pending or asserted will not have a material adverse effect
on the consolidated results, liquidity or financial position of the
Company.
9
<PAGE>
Crown Cork & Seal Company, Inc.
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(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 months ended March 31, 1999, compared to
the corresponding period in 1998 and the changes in financial condition
and liquidity from December 31, 1998. 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, 1998, along with the consolidated financial
statements and related notes included in and referred to within this
report.
Results of Operations
---------------------
Net Income and Earnings Per Share
---------------------------------
Net income available to common shareholders for the quarter ended March
31, 1999 was $25.6, a decrease of $11.0 or 30.1% when compared to the
respective prior year amount of $36.6. Earnings per common share
decreased $.08 or 27.6% to $.21 from $.29 a year earlier and also
reflects a 3.8% decline in average common shares outstanding, resulting
primarily from the March 1998 repurchase of shares from Compagnie
Generale d'Industrie et de Participations (CGIP). A major currency
devaluation in Brazil resulted in a reduction of approximately $.05 per
common share in first quarter 1999 earnings.
Net Sales
---------
Net sales in the quarter decreased $98.8 or 5.2% to $1,793.6 from
$1,892.4 in 1998 due primarily to the pass-through of lower raw
material costs, foreign exchange translation, a business divestiture
and lower overall volumes in food and aerosol cans. Excluding the
effects of lower raw material costs, foreign exchange translation and
the business divestiture, net sales would have been 1.7% lower than
in the first quarter of 1998. Sales from U.S. operations decreased
by 6.2% and those in non-U.S. markets decreased 4.6%. U.S. sales
accounted for approximately 40% of consolidated net sales in the first
quarter of 1999 and 1998. Sales of beverage cans and ends as a
percentage of consolidated net sales increased to 29.4% from 28.3% and
sales of food cans and ends increased in the first quarter to 31.3%
from 30.5% compared to the first quarter of 1998.
An analysis of comparative net sales by operating division follows:
Net Sales
--------------------------------------------------
First Quarter Increase / (Decrease)
--------------------- ----------------------
Division: 1999 1998 $ %
-------- -------- ------- -----
Americas $ 870.6 $ 926.8 ($56.2) (6.1)
Europe 835.2 890.4 (55.2) (6.2)
Asia-Pacific 87.8 75.1 12.7 16.9
Other .1 (.1)
-------- -------- -----
$1,793.6 $1,892.4 ($98.8) (5.2)
======== ======== =====
The decrease in 1999 Americas Division net sales is primarily due to
the pass-through of certain lower raw material costs which amounted
to $26 and unfavorable foreign exchange adjustments amounting to $23.
The economic slowdown in Brazil, including the significant devaluation
of the country's local currency against the U.S. dollar since the start
of the year, coupled with soft food can volumes, down 5.8% compared to
10
<PAGE>
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
the first quarter of 1998, offset strong unit volume performances in
plastic bottles and plastic closures. Beverage can volume was up
modestly in the first quarter despite the economic weakness in Brazil
and the Company's decision to selectively prune its account base
following restructuring activities.
Net sales in the European Division decreased compared to 1998 as a
result of the pass-through of certain lower raw material costs
amounting to $11, the divestiture of the non-personal care HDPE
plastic container business which accounted for $17 of first quarter
1998 net sales, decreased sales unit volumes in aerosol and specialty
cans and competitive pricing throughout the European business
environment. Beer and beverage can volumes were up 3.5% with strong
performances in Greece and Spain. Food can volumes were essentially
flat as unit volume growth in Benelux, Germany and Italy was offset by
continued weakness in Eastern Europe.
Net sales in the Asia-Pacific Division increased in 1999 as compared to
1998 as a result of a 24% increase in food can unit volumes, a 24%
increase in plastic closure unit volumes and an 11% increase in
beverage can unit volumes, offsetting a 20% unit volume decline in
plastic containers and continued price pressure throughout the
division in beverage cans. In Thailand, unit volume increases were
noted in beverage cans, food cans and plastic closures, while in China,
increased sales unit volumes of beverage cans and plastic closures
offset plastic container shortfalls.
Cost of Products Sold
---------------------
Cost of products sold, excluding depreciation and amortization, was
$1,418.0 for the quarter ended March 31, 1999, a decrease of $84.2 or
5.6% compared to $1,502.2 for the same period in 1998. The decrease
reflects (i) cost savings from restructuring programs and (ii) lower
raw material costs.
As a percentage to net sales, cost of products sold was 79.1% compared
to 79.4% for the first quarter of 1998. The improvement in gross margin
as a percentage to net sales is due primarily to the benefits derived
from the Company's continuing cost containment and restructuring
programs, offset to some extent by competitive influences on selling
prices across many product lines.
Selling and Administrative
--------------------------
Selling and administrative expenses for the quarter ended March 31,
1999 were $91.0, a decrease of $6.6 or 6.8% from the first quarter of
1998. As a percentage to net sales, selling and administrative
expenses, excluding depreciation, were 5.1% in the first quarter as
compared to 5.2% for the same period of 1998. The decrease in 1999
costs is directly related to the continuing rationalization of these
costs throughout the Company.
Operating Income
----------------
For the quarter ended March 31, 1999, consolidated operating income
decreased $4.4 to $151.6 from $156.0 at March 31, 1998. Operating
income as a percentage to net sales was 8.5% for the first quarter of
1999 as compared to 8.2% in 1998. An analysis of operating income by
operating division follows:
Operating Income
--------------------------------------------------
First Quarter Increase / (Decrease)
------------------- ----------------------
Division: 1999 1998 $ %
---- ---- ----- -----
Americas $ 75.4 $ 69.9 $ 5.5 7.9
Europe 86.3 108.7 (22.4) (20.6)
Asia-Pacific 8.6 1.1 7.5 681.8
Other (18.7) (23.7) 5.0 21.1
------ ------ -----
$151.6 $156.0 ($4.4) (2.8)
====== ====== ====
11
<PAGE>
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
As a percentage of net sales, Americas Division operating income was
8.7% in the first quarter of 1999 as compared to 7.5% for the same
period in 1998. The increase in first quarter 1999 operating margin was
primarily due to (i) cost savings from the 1998 restructuring program
and (ii) unit volume gains in plastic bottles and plastic closures
which offset (i) the effects of the currency devaluation in Brazil and
(ii) sales unit volume declines of food cans.
European Division operating income as a percentage of net sales was
10.3% in the first quarter of 1999 as compared to 12.2% for the
comparable period of 1998. The decrease in first quarter 1999 operating
margins was primarily due to (i) sales unit volume decreases of aerosol
and specialty cans, (ii) continued weakness in Eastern Europe and (iii)
the effect of competitive pricing across many product lines, which
offset sales unit volume gains of (i) beer and beverage cans throughout
the division and (ii) food cans in Benelux, Germany and Italy.
In the first quarter of 1999, operating income in the Asia-Pacific
Division was 9.8% of net sales as compared to 1.5% for the same period
in 1998. The increase in 1999 margins was due primarily to sales unit
volume increases of food and beverage cans throughout the division.
Net Interest Expense / Income
-----------------------------
Net interest expense was $85.6 in the first quarter, a decrease of $.8
or .9% compared to first quarter 1998 net interest expense of $86.4.
The decrease in net interest expense is due primarily to generally
lower interest rates and lower raw material costs which have helped
to reduce the early season build-up of working capital.
Taxes on Income
---------------
The effective tax rate in the first quarter of 1999 was 47.7% as
compared to 41.1% for the same period of 1998. The increase in the
effective rate is due to lower pre-tax income whereby the taxable
effect of non-deductible goodwill amortization is proportionately
greater. Additionally, pre-tax income in the Company's European
operations was lower in the first quarter of 1999 compared to 1998. The
Company's blended European tax rate is lower than the U.S. statutory
rate of 35%.
Minority Interests, Net of Equity in Earnings of Affiliates
-----------------------------------------------------------
The charge for minority interests, net of equity earnings, increased by
$3.3 in the first quarter of 1999 over 1998. This increase was due to
improved results in the Company's consolidated joint ventures in China,
Greece and Thailand, offset somewhat by unfavorable results in Brazil,
a result of the first quarter 1999 currency devaluation.
12
<PAGE>
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
Liquidity and Capital Resources
-------------------------------
Cash from Operations
--------------------
Net cash of $235.0 was used by operating activities during the three
months ended March 31, 1999 as compared to cash used of $325.1 for the
same period in 1998. The $90.1 improvement is due to lower working
capital employed, a result of the lower raw material costs in 1999
compared to 1998 as well as better working capital management.
Investing Activities
--------------------
Investing activities used cash of $73.1 during the quarter ended March
31, 1999 compared with cash used of $147.1 for the same period of 1998.
Capital expenditures for the first quarter of 1999 were $82.1, a
decrease of $31.2 as compared to capital expenditures of $113.3 during
the same period of 1998. The Company intends to limit 1999 capital
spending to $300.0 in 1999 as compared to 1998 capital expenditures of
$487.0.
Financing Activities
--------------------
Financing activities provided cash of $323.4 in the first quarter
compared with cash provided of $488.5 in the first quarter of 1998.
Lower raw material costs have held down the cost of pre-season working
capital build-ups in 1999 and, as such, the increase in commercial
paper borrowings in the first quarter of 1999 is lower than in the
first quarter of 1998.
Total debt, net of cash and cash equivalents, at March 31, 1999 was
$5,713.0 and represents an increase of $342.4 above the December 31,
1998 level of $5,370.6. Total debt, net of cash and cash equivalents,
as a percentage to total capitalization was 64.8% at March 31, 1999 as
compared to 62.3% at December 31, 1998. 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, 1998 is due primarily to the funding of working capital
requirements on a short-term basis through the issuance of commercial
paper. The increase in total debt as a percentage to total
capitalization was also impacted by a reduction in shareholders' equity
due to negative currency translation adjustments in the first quarter
of 1999.
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 continues to evaluate the requirements of this standard to
determine its impact on the consolidated financial statements.
Market Risk
-----------
Since December 31, 1998, the notional value of outstanding foreign
exchange contracts has been reduced by more than 25%. This decrease
is due primarily to the introduction of the Euro.
13
<PAGE>
Crown Cork & Seal Company, Inc.
Item 2. Managemen's Discussion and Analysis (Continued)
The following discussions related to the Year 2000 and Euro Conversion
are updated from the discussions included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
YEAR 2000
---------
Computers and computer dependent equipment are used throughout the
Company's operations. Certain computerized systems in use today were
designed using two digits rather than four digits to define the
applicable year, which could result in the systems recognizing a date
containing "00" as the year 1900 rather than the year 2000. This could
lead to miscalculations or system failures and is generally referred to
as the "Year 2000" or "Y2K" issue.
In order to address the Y2K issue, the Company established a steering
committee that reports to senior executive management and the Board of
Directors of the Company. The steering committee is responsible for the
formulation of the Company's Y2K global plan and oversight of strategy,
risk assessment, coordination and reporting. Project offices have also
been established within each division to roll out, monitor and manage
implementation of the Company's global plan.
The Company's global plan is divided into several major phases:
Inventory and Assessment, Remediation Analysis, Implementation, and
Contingency Planning.
Inventory and Assessment - The inventory phase was substantially
completed in June 1998 including the identification of internal
mission-critical business systems and vendor and other third party
relationships. The Company substantially completed its internal risk
assessment of potentially Y2K impacted information technology (IT) and
non-IT equipment and facilities during October 1998. In that regard,
the Company has identified Y2K issues with various mid-range IT
systems, personal computers and servers, telephone systems and embedded
systems in manufacturing and related equipment. The assessment of the
Company's third-party risks involves the identification of critical
vendors, Y2K confirmation correspondence, evaluations and selected
vendor reviews. The Company has completed the identification of its
vendor relationships and has received approximately 70% of its
requested Y2K confirmation letters. Certain top-critical vendors are
being subjected to follow-up including interviews, on-site visits and
other available means. In addition, the Company currently has an
inadequate Y2K survey response from utility suppliers and is in the
process of evaluating its risk profile with respect to utility service.
Accordingly, the Company has initiated alternate follow-up procedures
and strategies to support its risk evaluation and contingency planning
efforts. These assessments and reviews are expected to be ongoing
through June 1999. Despite these efforts, the Company can provide no
assurance that critical suppliers of important goods and services
(including, but not limited to, utility service and communications)
will complete their Y2K compliance plans in a timely manner.
Remediation Analysis - The Company substantially completed this project
phase in February 1999. During this stage of the project, remediation
strategies were evaluated and planned to correct identified Y2K
non-compliance. Correction strategies include vendor-supported
upgrades, system or asset replacements, and correction of non-compliant
code and systems consolidation.
Implementation - This phase involves the correction and testing of
identified internal Y2K risks in accordance with the remediation
analysis phase. The Company's implementation plan established
priorities for remediation or replacement. The business systems
considered most critical to ongoing operations have been given the
highest priority. Such mission-critical systems include business and
operating systems such as sales order billing, production planning,
procurement and disbursements, logistics and embedded systems in
manufacturing and related equipment that, if shutdown or interrupted,
could have a material adverse impact on the Company. All other systems
include business support systems such as personal computer technology,
internal data transmission and voice communication that, if shutdown
or interrupted, may have a less material impact on the Company's
operations.
14
<PAGE>
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
Mission Critical IT Systems - Approximately 90% of the Company's
locations that contain mission-critical IT systems require some form of
correction. As of March 31, 1999, approximately 40% of mission-critical
business systems have been remediated, 51% are currently being
remediated and 9% are to be initiated by June 1999. The Company
anticipates that approximately 75% of identified non-compliant
locations will be remediated by June 30, 1999. Accordingly, we expect
Y2K-capable mission-critical systems to cover approximately 80% of the
Company's operation revenues by that date. The Company anticipates that
the remaining mission-critical implementations will be completed during
the second half of 1999. Certain of these projects have been delayed
awaiting the release of Y2K compliant software upgrades or have
modestly extended project timelines to maximize the use of internal
resources.
The Company's mission-critical system testing methods include obtaining
hardware and software certifications from critical vendors and
consultants and performing Y2K compliance tests including data
exchange with critical vendors and customers. Testing of critical
systems is expected to be completed on an ongoing basis during the
second half of the year.
Embedded Systems - During 1998, the Company performed a comprehensive
evaluation of embedded systems within its manufacturing and facilities
infrastructure. This evaluation covered approximately 27,000
inventoried systems and over 1,000 machinery and systems manufacturers.
Assessment results indicate a very low non-compliant rate. Accordingly,
while the Company cannot rule out some potential impact, overall risk
in this area is believed to be low. Unit replacements or reprogramming
will occur as part of the Company's normal maintenance program in
1999. Such costs are not expected to be significant. The Company
anticipates completing detailed testing of certain manufacturing
processes during the second quarter of 1999 to validate its current
risk assessment.
Personal Computer Technology - The Company is currently implementing
replacement or correction methods to address Y2K non-compliance in both
hardware and software. Modest portions of these corrections pertain to
mission-critical systems. Due to recent advances in networking
technology which could offer significant on-going savings in personal
desktop computer operating costs, the Company is considering new
remediation alternatives which will delay completion of some
mission-critical personal computer projects to the third quarter of
1999. The Company considers its overall risk in this area to be low.
Telephone Exchange Systems - The Company has substantially completed
its assessment of telephone exchange systems within its facilities.
Approximately 20% of these systems will be remediated during 1999.
Notwithstanding these efforts, the Company believes that certain
countries in which it operates may be subject to broader regional
communication system failures. Accordingly, an extended assessment of
this risk is in process to both evaluate the reliability of the initial
assessment and identify contingency options including the possible
utilization of satellite phones.
Contingency Planning - The Company is developing contingency plans to
address potential disruptions that may result from unresolved Y2K
issues. Because Y2K is a date-driven risk, the Company is actively
identifying practicable prevention plans for its core operations to
mitigate disruption, especially in January 2000. Prevention plans may
include temporary deactivation of certain systems and equipment just
prior to January 1, 2000, targeted supply-chain management measures to
ensure supply of certain key commodities as well as customer supply
initiatives. For instance, facility and manufacturing supplies may be
procured in 1999 to support production requirements in early 2000.
Additionally, in order to address any isolated or wide spread
disruptions, the Company is considering help-desk and manufacturing
support options as part of its planning scenarios. Risks of a less
15
<PAGE>
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
controllable nature, such as utility service outages and communication
system failure are being addressed in contingency planning. Alternate
site manufacturing scenarios, alternative vendors and other scenarios
are under current consideration. The Company intends to complete most
of its prevention and contingency plan development and design by June
1999. The rollout of the contingency plan was initiated in the first
quarter of 1999. The Company is also considering potential seasonality
effects of Year 2000 on consumer demand and operating and working
capital, particularly in the fourth quarter of 1999 and first quarter
of Year 2000.
The Company's Y2K global plan could be adversely affected if any of the
Company's factors or assumptions are incorrect or if its ongoing review
discovers unanticipated problems. The Company cannot give assurance
that its global plan will be completed on schedule or that it will not
uncover Y2K issues that could create a material impact on its
performance.
The Company believes that the most reasonably likely worst-case
scenario for the Company with respect to the Y2K problem is the failure
of a critical vendor, such as a utility supplier, to provide required
goods or services after December 31, 1999. Such a failure could result
in temporary production outages and lost sales and profits. The Company
believes that because of the high degree of geographic dispersion of
its operations (with approximately 223 plants in 49 countries), it is
unlikely an isolated third-party failure would have a material adverse
effect on the Company's results of operations, financial condition, or
cash flow. The Company also believes that the formulation of
contingency plans should reduce the severity and length of any such
possible disruptions and losses. Nevertheless, because the Company's
Y2K compliance is dependent upon key third party Y2K readiness, there
can be no assurance that the Company's Y2K compliance efforts will
prevent a Y2K problem outside its direct control from adversely
affecting the results of its operations, financial condition or
cash flow. In addition, although not anticipated, any failure by
the Company to correct critical internal computer systems before Year
2000 could have such an adverse affect.
The Company estimates that it will spend approximately $25-$30
(pre-tax) for its Y2K compliance efforts. To date, the Company has
spent approximately $12, of which $5 has been expensed. The Company
anticipates that funding for its Y2K compliance program will be from
operating cash flows. These cost estimates do not include labor costs
of employees allocated to the Y2K compliance effort, as it is not
practicable to accumulate such costs. The Company's total Y2K project
cost estimate is based on presently available information and does not
necessarily include all potential costs related to ongoing assessment
and remediation or any execution of contingency plans brought about by
internal or external Y2K issues or cost estimate changes related to
replacement systems or code remediation efforts. Actual results could
differ from these estimates.
EURO CONVERSION
---------------
On January 1, 1999, eleven of the fifteen member nations ("the
participating countries") of the European Union ("EU") established
fixed conversion rates between their existing sovereign currencies
(the "legacy currencies") and the Euro. For a period of three years,
the transition period, both the Euro and the individual participants'
currencies will remain in circulation. Parties may pay for goods and
services using either the Euro or the participating country's sovereign
currency. Conversion rates will be computed through a "triangulation"
process which will convert one sovereign currency into an amount
denominated in the Euro and then convert the Euro-denominated amount
into the second legacy currency. After January 1, 2002, the Euro will
be the sole legal tender for these countries. During the transition
period, the adoption of the Euro will affect a multitude of financial
systems and business applications as the commerce of these nations will
be transacted in the Euro and the legacy currencies.
16
<PAGE>
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
The Company is currently addressing Euro-related issues and their
impact on information systems, currency exchange rate risk, employment
and benefits, taxation, contracts, competition and pricing. Under the
action plan developed by the Company, teams have been formed to address
selling prices and costs, personnel and communications, finance,
administration and information technology ("IT").
The Company has incurred and expects to continue to incur expenses for
the internal technology and operations staff to implement its Euro
conversion plan. These costs, although not expected to be material,
will be incurred through 2003 to cover the costs of preparing for and
making operational changes to accommodate the introduction of the Euro.
The costs for this conversion involve updated technology and are being
addressed in conjunction with Year 2000 remediation.
At March 31, 1999, approximately 41% of the contract notional value on
outstanding foreign exchange contracts involve the Euro, primarily with
sterling. Conversion to the Euro has reduced the amount of the
Company's exposure to exchange rate risk, due to the netting effect of
having assets and liabilities denominated in a single currency as
opposed to the various legacy currencies. The number of contracts
outstanding at the end of the quarter as compared to the end of the
year has been reduced by approximately 9% with a corresponding
reduction in notional value of approximately $760. The Company's
foreign exchange hedging costs have been reduced. Conversely, because
there will be less diversity in the Company's exposure to foreign
currencies, movements of the Euro's value in U.S. dollars could have a
more pronounced effect, whether positive or negative.
Although, all key suppliers have committed that they will be
Euro-compliant, the Company can give no assurance that third parties on
whom it depends, will have the systems necessary to process
Euro-denominated transactions. Moreover, disruption of activity in the
European markets because of the conversion could adversely impact the
Company's businesses in those markets, resulting in lost revenues and
increased costs.
As part of the conversion process, the Company is developing
contingency plans. The contingency plans will provide mechanisms to
assess and communicate the impact of any delays. These plans will also
address likely problems in the aftermath of conversion with a view to
maximizing the Company's ability to avoid any disruption.
The Company does not expect the conversion to the Euro to have a
material adverse effect upon its results of operations, financial
condition or cash flow. However, the Company cannot guarantee that,
with respect to the Euro conversion, all problems, including long-term
competitive implications of the conversion, will be foreseen and
corrected, that no material disruption of the Company's business will
occur, or that there will be no delays in the dates targeted by the
Company for the Euro conversion process.
17
<PAGE>
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
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 "Year 2000" and "Euro Conversion" sections, 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, 1998, 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 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, 1998 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.
18
<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 April 22, 1999.
The matters voted upon and the results of the votes are as follows:
- - - VOTES - - -
---------------------------------
Election of the Board of Directors
For Withheld
--- --------
William J. Avery 105,002,438 3,165,348
Henry E. Butwel 104,901,869 3,265,917
Charles F. Casey 105,499,607 2,668,179
John W. Conway 105,019,892 3,147,894
Francis X. Dalton 105,155,068 3,012,718
Tommy H. Karlsson 105,018,021 3,149,765
Josephine C. Mandeville 105,641,271 2,526,515
Michael J. Mc Kenna 104,920,811 3,246,975
Thomas A. Ralph 105,015,999 3,151,787
Jean-Pierre Rosso 105,527,342 2,640,444
Alan W. Rutherford 105,013,707 3,154,079
Harold A. Sorgenti 105,618,542 2,549,244
Guy de Wouters 105,542,784 2,625,002
The shareholder proposal described in the Company's 1999 Annual Meeting
Proxy Statement with respect to certain management compensation matters
was not presented by the shareholder or his agent at the Annual
Meeting, and therefore was not submitted to a shareholder vote.
19
<PAGE>
Crown Cork & Seal Company, Inc.
Item 5. Other Information
(1) On March 4, 1999, 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 May 20, 1999 to shareholders of record on May
4, 1999.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
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.
20
<PAGE>
Crown Cork & Seal Company, Inc.
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: May 14, 1999
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDUEL CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, CONSOLIDATED STATEMENTS OF INCOME AND THE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ON PAGES 2 THROUGH 9 OF THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-END> MAR-31-1999
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<INVENTORY> 1526
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0
351
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<FN>
<F1>The EPS-Primary amount represents Basic Earnings Per Share and the EPS-
Diluted amount represents Diluted Earnings Per Share in accordance with
the Statement of Financial Accounting Standards No. 128, Earnings Per Share.
<F2>First quarter 1999 Diluted EPS is the same as Basic EPS due to the
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</FN>
</TABLE>
