================================================================================
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, 2000
[ ] 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 of (I.R.S. Employer Identification No.)
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 125,950,853 shares of Common Stock outstanding as of July 28, 2000.
================================================================================
<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, 2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 1,876 $ 1,997
----------- -----------
Costs, expenses & other income
Cost of products sold, excluding depreciation and amortization 1,493 1,529
Depreciation 95 99
Amortization 30 32
Provision for restructuring and other charges 77
Selling and administrative expense 78 91
Gain on sale of assets ( 2)
Interest expense 97 91
Interest income ( 6) ( 7)
Translation and exchange adjustments 2 1
----------- -----------
1,866 1,834
----------- -----------
Income before income taxes 10 163
Provision for income taxes 8 55
Minority interests, net of equity earnings ( 6) ( 8)
----------- -----------
Net income (loss) ( 4) 100
Preferred stock dividends 4
----------- -----------
Net income (loss) available to common shareholders ($ 4) $ 96
=========== ===========
Earnings (loss) per average common share:
Basic ($ .03) $ .78
=========== ===========
Diluted ($ .03) $ .77
=========== ===========
Dividends per common share $ .25 $ .25
=========== ===========
Weighted average common shares outstanding:
Basic 127,433,082 122,350,114
Diluted 127,433,082 130,040,318
---------------------------------------------------------------------------------------------------
</TABLE>
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, 2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 3,516 $ 3,791
----------- -----------
Costs, expenses & other income
Cost of products sold, excluding depreciation and amortization 2,786 2,947
Depreciation 192 200
Amortization 61 64
Provision for restructuring and other charges 77
Selling and administrative expense 163 182
Gain on sale of assets ( 4)
Interest expense 189 184
Interest income ( 10) ( 15)
Translation and exchange adjustments 2 10
----------- -----------
3,460 3,568
----------- -----------
Income before income taxes 56 223
Provision for income taxes 27 84
Minority interests, net of equity earnings ( 10) ( 10)
----------- -----------
Net income 19 129
Preferred stock dividends 2 8
----------- -----------
Net income available to common shareholders $ 17 $ 121
=========== ===========
Earnings per average common share:
Basic $ .14 $ .99
=========== ===========
Diluted $ .14 $ .99
=========== ===========
Dividends per common share $ .50 $ .50
=========== ===========
Weighted average common shares outstanding:
Basic 125,661,602 122,338,291
Diluted 127,996,659 129,984,457
--------------------------------------------------------------------------------------------------
</TABLE>
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,
2000 1999
--------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 244 $ 267
Receivables 1,263 1,166
Inventories 1,447 1,312
Prepaid expenses and other current assets 110 96
------- -------
Total current assets 3,064 2,841
------- -------
Long-term notes and receivables 25 27
Investments 142 178
Goodwill, net of amortization 4,021 4,228
Property, plant and equipment 3,062 3,255
Other non-current assets 1,063 1,016
------- -------
Total $11,377 $11,545
======= =======
Liabilities and shareholders' equity
Current liabilities
Short-term debt $ 1,685 $ 1,362
Current maturities of long-term debt 65 169
Accounts payable and accrued liabilities 1,791 1,803
United States and foreign income taxes 63 80
------- -------
Total current liabilities 3,604 3,414
------- -------
Long-term debt, excluding current maturities 3,511 3,573
Postretirement and pension liabilities 674 686
Other non-current liabilities 659 686
Minority interests 288 295
Commitments and contingent liabilities
Shareholders' equity 2,641 2,891
------- -------
Total $11,377 $11,545
======= =======
Book value per common share $ 20.89 $ 22.46
--------------------------------------------------------------------------------
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, 2000 1999
----------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 19 $129
Depreciation and amortization 253 264
Provision for restructuring and other charges 55
Gain on sale of assets ( 3)
Change in assets and liabilities, other than debt,
net of businesses acquired ( 392) ( 523)
---- ----
Net cash used in operating activities ( 65) ( 133)
---- ----
Cash flows from investing activities
Capital expenditures ( 116) ( 178)
Acquisition of businesses, net of cash acquired ( 50)
Proceeds from sale of property, plant and equipment 20 21
Other, net ( 3) ( 4)
---- ----
Net cash used in investing activities ( 99) ( 211)
---- ----
Cash flows from financing activities
Proceeds from long-term debt 3 6
Payments of long-term debt ( 150) ( 176)
Net change in short-term debt 400 536
Stock repurchased ( 36) ( 1)
Dividends paid ( 65) ( 69)
Minority contributions, net of dividends paid ( 2) ( 5)
---- ----
Net cash provided by financing activities 150 291
---- ----
Effect of exchange rate changes on cash and cash equivalents ( 9) ( 28)
---- ----
Net change in cash and cash equivalents ( 23) ( 81)
Cash and cash equivalents at beginning of period 267 284
---- ----
Cash and cash equivalents at end of period $244 $203
==== ====
---------------------------------------------------------------------------------------
Six months ended June 30, 2000 1999
---------------------------------------------------------------------------------------
Schedule of non-cash investing activities:
Acquisition of businesses:
Fair value of assets acquired $68
Liabilities assumed ( 18)
----
Cash Paid $ 50
====
----------------------------------------------------------------------------------------
</TABLE>
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, 1999 | $349 $779 $1,317 $1,295 ($173) ($676) $2,891
Net income (loss) ($ 4) $ 19 | 19 19
Translation adjustments ( 74) ( 168) | ( 168) ( 168)
--- ---- |
Comprehensive income (loss) ($78) ($149) |
=== ==== |
Dividends declared: |
Common | ( 63) ( 63)
Preferred | ( 2) 2)
Stock repurchased | ( 25) ( 11) ( 36)
Preferred stock conversions | ( 349) 1 311 37
------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 | $780 $1,603 $1,249 ($147) ($844) $2,641
====================================================================================================================================
| 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, 1998 | $351 $779 $1,340 $1,250 ($167) ($578) $2,975
Net income $100 $129 | 129 129
Translation adjustments ( 71) ( 210) | ( 210) ( 210)
---- ---- |
Comprehensive income (loss) $ 29 ($ 81) |
==== ==== |
Dividends declared: |
Common | ( 61) ( 61)
Preferred | ( 8) ( 8)
Stock repurchased | ( 1) ( 1)
------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 | $351 $779 $1,339 $1,310 ($167) ($788) $2,824
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Crown Cork & Seal Company, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)
(Unaudited)
A. Statement of Information Furnished
----------------------------------
The accompanying unaudited interim consolidated and condensed financial
statements have been prepared by the Company in accordance with Form
10-Q instructions. In the opinion of management, these consolidated
financial statements contain all adjustments necessary to present
fairly the financial position of Crown Cork & Seal Company, Inc. as of
June 30, 2000, and the results of its operations and cash flows for the
periods ended June 30, 2000 and 1999, respectively. These results have
been determined on the basis of generally accepted accounting
principles and practices consistently applied.
Certain information and footnote disclosures, normally included in
financial statements presented in accordance with generally accepted
accounting principles, have been condensed or omitted. The accompanying
Consolidated Financial Statements should be read in conjunction with
the financial statements and notes thereto incorporated by reference in
the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
B. Earnings Per Share
------------------
The following table summarizes the basic and diluted earnings per
common share computations for the periods ended June 30, 2000 and 1999,
respectively:
<TABLE>
<CAPTION>
2000 1999
------------------------------------- -----------------------------------
Average Average
Quarter Income Shares EPS Income Shares EPS
------- ------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income ($ 4) $100
Less:
Preferred stock dividends ( 4)
--- ----
Basic EPS ( 4) 127.4 ($ .03) 96 122.3 $ .78
Potentially dilutive securities:
Stock options .1
Assumed preferred
stock conversion 4 7.6
---- ----- ---- -----
Diluted EPS ($ 4) 127.4 ($ .03) $100 130.0 $ .77
==== ===== ==== =====
2000 1999
------------------------------------- -------------------------------------
Average Average
Year-to-date Income Shares EPS Income Shares EPS
------------ ------------------------------------- -------------------------------------
Net income $ 19 $129
Less:
Preferred stock dividends ( 2) ( 8)
---- ----
Basic EPS 17 125.7 $ .14 121 122.3 $ .99
Potentially dilutive securities:
Stock options .1
Assumed preferred
stock conversion 8 7.6
---- ----- ---- -----
Diluted EPS $ 17 125.7 $ .14 $129 130.0 $ .99
==== ===== ==== =====
</TABLE>
7
<PAGE>
Crown Cork & Seal Company, Inc.
Excluded from the computation of diluted earnings per share for the
six months ended June 30, 2000 were 2.3 common share equivalents
resulting from the assumed conversion of weighted average outstanding
preferred stock. The conversion would have been anti-dilutive.
Common shares contingently issuable upon the exercise of stock
options, amounting to 7.8 and 5.1 shares for the quarters ended June
30, 2000 and 1999 and 7.9 and 5.1 shares for the six months ended June
30, 2000 and 1999, respectively, were excluded from the computation of
diluted earnings per share because the grant price of the then
outstanding options was above the average market price for the related
period.
C. Receivables
-----------
Included in the caption "Cost of products sold, excluding depreciation
and amortization," the Company has provided $20 million ($13 after-tax
or $.10 per diluted share) against a receivable from a U.S. food can
customer that has filed a voluntary Chapter 11 bankruptcy petition. The
Company believes that its net receivable is recorded at its recoverable
value, but its ultimate realization is dependent upon the outcome
of the bankruptcy proceedings.
During the second quarter of 2000, the Company entered into a
receivables securitization agreement on behalf of its North American
operations. The agreement provides for the accelerated receipt of up to
$220 of cash on available receivables. The securitization transactions
have been accounted for as a sale in accordance with SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Accordingly, accounts receivable sold
under this securitization program have been reflected as a reduction in
receivables in the accompanying consolidated balance sheet. At June 30,
2000 net proceeds received under this program were $105.
D. Inventories
-----------
-----------------------------------------------------------
June 30, December 31,
2000 1999
-----------------------------------------------------------
Finished goods $ 620 $ 503
Work in process 186 174
Raw materials and supplies 641 635
------ ------
$1,447 $1,312
====== ======
E. Restructuring
-------------
During the second quarter the Company provided $51 ($36 after-tax or
$.28 per diluted share) for the costs associated with (i) overhead
structure modifications in Europe resulting in the termination of
approximately 700 employees and (ii) the closure of three Americas
Division plants resulting in the termination of approximately 350
employees. These costs included 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
1,050 employees was $45 and is primarily a cash expense. The cost
associated with the write-down of assets was $2. Lease termination and
other exit costs were $4.
8
<PAGE>
Crown Cork & Seal Company, Inc.
During 1998, the Company provided $179 for the costs associated with a
plan to close thirteen plants and reorganize three additional plants
During 1999, management decided not to close one of the plants
identified in the 1998 provision and, accordingly, reversed the reserve
previously established to income. Also in 1999, the Company closed one
plant in Europe and reorganized certain research and development
functions worldwide. The impact of this 1999 activity was a net credit
to income of $7, of which $6 covered reduced severance costs and
employee benefits and $1 was for lower exit costs.
Balances remaining in the reserves represent new provisions as well as
contracts or agreements whereby payments from prior restructuring
actions are extended over time. This includes agreements with unions
and governmental agencies related to employees as well as with
landlords in lease arrangements. The balance of the restructuring
reserves (excluding 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 six
months of 2000 were as follows:
Termination Other Exit Asset
Benefits Costs Write-down Total
-------- ----- ---------- -----
January 1.................... $14 $7 $21
Provision.................... 45 4 2 51
Payments..................... ( 9) ( 2) ( 11)
Transfer against assets...... ( 2) ( 2)
Other *...................... ( 3) ( 1) ( 4)
--- -- --- ---
Total.............. $47 $8 $55
=== === === ===
* includes translation adjustments
During the first six months of 2000, payments of $9 were made related
to the termination of approximately 150 employees, 106 of whom were
involved in direct manufacturing operations. Payments of $2 were made
for other exit costs, including dismantlement costs, equipment removal
and various contractual obligations.
The foregoing restructuring charges 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 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.
F. Asset Impairments
-----------------
Included in the caption "Provision for restructuring and other
charges" within the Consolidated Statements of Income, the Company
recorded a charge of $26 ($19 after-tax or $.15 per diluted share) in
the second quarter to write-off a minority interest in a machinery
company and an investment in Eastern Europe due to uncertainty
regarding the ultimate recovery of these investments. The events which
caused the Company to review its investments for impairment were a
Chapter 11 bankruptcy petition filed by the machinery company and the
politically unstable environment in which the Company's investment in
Eastern Europe operates.
9
<PAGE>
Crown Cork & Seal Company, Inc.
G. Supplemental Cash Flow Information
----------------------------------
Cash payments for interest, net of amounts capitalized, were $186 and
$204 during the six months ended June 30, 2000 and 1999, respectively.
Cash payments for income taxes amounted to $27 and $40 during the six
months ended June 30, 2000 and 1999, respectively.
H. 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 June 30,
----------------------
2000 Americas Europe Asia-Pacific Other Total
---- -------- ------ ------------ ------ -----
<S> <C> <C> <C> <C> <C>
External sales $ 972 $ 825 $ 79 $1,876
Restructuring and
other charges 10 47 $20 77
Segment income 76 57 6 ( 36) 103
1999
----
External sales 981 930 86 1,997
Segment income 103 154 11 ( 22) 246
Six months ended June 30,
-------------------------
2000 Americas Europe Asia-Pacific Other Total
---- -------- ------ ------------ ----- -----
External sales $1,802 $1,565 $149 $3,516
Restructuring and
other charges 10 47 $20 77
Segment income 151 133 12 ( 59) 237
1999
External sales 1,852 1,765 174 3,791
Segment income 179 240 19 ( 40) 398
</TABLE>
The following table reconciles the Company's segment income to
consolidated pre-tax income:
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
June 30, June 30,
-------------------- ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total segment income $103 $246 $237 $398
Interest expense 97 91 189 184
Interest income ( 6) ( 7) ( 10) ( 15)
Gain on sale of assets ( 2) ( 4)
Translation and exchange adjustments 2 1 2 10
---- ---- ---- ----
Consolidated pre-tax income $ 10 $163 $ 56 $223
==== ==== ==== ====
</TABLE>
10
<PAGE>
Crown Cork & Seal Company, Inc.
I. 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 one of over 100 defendants in a substantial number of
lawsuits filed by persons alleging bodily injury as a result of
exposure to asbestos. This litigation arose from the insulation
operations of a U.S. company, the majority of whose stock the Company
purchased in 1963. Within approximately three months of this stock
purchase, this U.S. company sold its insulation operations.
The accrual recorded for asbestos claims constitutes management's best
estimate of such costs for pending and future claims. The Company
cautions, however, that inherent in its estimate of liabilities are
expected trends in claim severity, frequency and other factors which
may vary as claims are filed and settled or otherwise disposed of.
Accordingly, these matters, if resolved in a manner different from the
estimate, could have a material effect on the operating results or cash
flows in future periods. While it is not possible to predict with
certainty the ultimate outcome of these lawsuits and contingencies, the
Company believes, after consultation with counsel, that resolution of
these matters is not expected to have a material adverse effect on the
Company's financial position or liquidity.
The Company is also subject to various lawsuits and claims with respect
to matters such as governmental and environmental 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, liquidity or financial position of the Company.
J. Recent Accounting Pronouncements
--------------------------------
In June 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 138, an
amendment to SFAS No. 133. This statement is effective concurrently
with SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB statement No. 133,
an amendment of FASB statement No. 133." SFAS No. 137 deferred the
effective date of the accounting and reporting requirements of SFAS No.
133 to fiscal years beginning after June 15, 2000. These statements
establish accounting and reporting standards for derivative instruments
and hedging activities. These statements require that a company
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. The accounting for changes in the fair value of a derivative
instrument depends on its intended use and the resulting designation.
The Company continues to evaluate the requirements of these statements
and to prepare an implementation plan.
In December 1999, the U.S. Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 101. SAB No. 101 provides guidance
on the recognition, presentation and disclosure of revenue in the
financial statements. Adoption of SAB No. 101, as amended by SAB Nos.
101A and 101B, issued during 2000, is required by the fourth quarter
of 2000. The Company continues to evaluate the guidelines of this SAB.
11
<PAGE>
Crown Cork & Seal Company, Inc.
K. Foreign Currency Risk
---------------------
The Company manages its risk to adverse fluctuations in foreign
exchange rates through the use of a netting strategy which matches
foreign currency assets and liabilities whenever possible and the use
of financial instruments. These financial instruments are foreign
currency contracts, such as swaps and forwards. At June 30, 2000, the
Company had outstanding contracts, primarily in European currencies,
Singapore dollars, Canadian dollars and U.S. dollars (both buy and
sell) for an aggregate notional amount of approximately $1,290 compared
to $1,336 at December 31, 1999. Based on exchange rates at June 30,
2000 and the maturity dates of the various contracts, the fair value of
these items at June 30, 2000 was the same as the contract notional
value. Gains and losses resulting from contracts that are designated
and effective as hedges are recognized in the same period as the
underlying hedged transaction.
12
<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 six months ended June 30, 2000, compared to the
corresponding period in 1999 and the changes in financial condition and
liquidity from December 31, 1999. 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, 1999, along with the consolidated financial
statements and related notes included in and referred to within this
report.
Restructuring and Other Charges
-------------------------------
During the second quarter, the Company provided $51 ($36 after-tax or
$.28 per share) for the costs associated with structure modifications
in Europe resulting in the termination of approximately 700 employees
and the closure of three Americas Division plants resulting in the
termination of approximately 350 employees. The cash impact of the
restructuring plan this year is currently estimated at $5, when
completed. The Company anticipates that the restructuring actions will
generate after-tax savings of approximately $30 ($.24 per diluted
share) on an annualized basis when fully implemented. Additional
details about the restructuring activities are provided in Note E to
the Consolidated Financial Statements included in Item 1 of this
Quarterly Report on Form 10-Q.
During the second quarter, the Company also provided $26 ($19 after-tax
or $.15 per share) for asset impairments. Additional details about the
asset impairment charges are provided in Note F to the Consolidated
Financial Statements included in Item 1 of this Quarterly Report on
Form 10-Q.
Results of Operations
---------------------
Net Income and Earnings Per Share
---------------------------------
Net income available to common shareholders for the quarter ended June
30, 2000 was a loss of $4, a decrease of $100 when compared to
prior year income of $96. Earnings per diluted share was a loss of $.03
in the quarter compared to a gain of $.77 a year earlier. The decline
in earnings includes the impact of after-tax charges of $55, or $.43
per diluted share for restructuring and other charges identified
above, and $13 or $.10 per diluted share for a bad debt provision for a
U.S. food can customer. Excluding the charges noted above as well as
gains on sale of assets, earnings per diluted share was $.50, a
decrease of $.26 or approximately 34% from $.76 a year earlier.
The decrease is due primarily to lower U.S. beverage and food can
volumes, lower European food can volumes, higher resin costs,
competitive pressures on pricing across several products, and rising
interest rates, all of which management expects will continue in the
near-term.
For the six months ended June 30, 2000, net income available to common
shareholders was $17 or $.14 per common share compared to net income of
$121 or $.99 per common share for the same period in 1999. Excluding
the effects of the charges noted above as well as any gain on sale of
assets in 2000 and 1999, net income available to common shareholders
was $85 or $.68 per common share as compared with $118 or $.97 per
common share for the same period in 1999.
13
<PAGE>
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
Net Sales
---------
Net sales in the second quarter of $1,876 decreased $121 or 6.1%
compared to 1999 sales of $1,997, due to (i) currency translation from
the continuing strength of the U.S. dollar against most European
currencies, (ii) lower sales unit volumes of beverage cans in the U.S.
and food cans in the U.S. and Europe, and (iii) business divestitures,
offset by the partial pass-through of higher aluminum and resin costs.
Net sales for the six months ended June 30, 2000 decreased $275 or 7.3%
compared to 1999. Foreign currency translation reduced net sales by $87
in the second quarter of 2000 as compared to the same period in 1999.
Divested operations also accounted for $23 of the decrease in sales
compared to the second quarter of 1999. Sales from U.S. operations
decreased 4.6% and those in non-U.S. operations decreased 7.1%,
with U.S. sales accounting for approximately 41% of total net sales in
the second quarter of both years. Sales of beverage cans and ends
increased to 34.0% from 32.4% of total net sales, while food cans and
ends represented 27.4% in 2000 as compared to 29.5% in the second
quarter of 1999.
An analysis of comparative net sales by operating division follows:
Net Sales Percentage Change
--------------------------------- -----------------
Second Quarter Six Months Ended Second Six
2000 1999 2000 1999 Quarter Months
---- ---- ---- ---- ------- ------
Divisions:
Americas $ 972 $ 981 $1,802 $1,852 ( 1%) ( 3%)
Europe 825 930 1,565 1,765 (11%) (11%)
Asia-Pacific 79 86 149 174 ( 8%) (14%)
Other
------ ------ ------ ------
$1,876 $1,997 $3,516 $3,791 ( 6%) ( 7%)
====== ====== ====== ======
Net sales in the Americas Division decreased $9 and $50 for the three
and six months ended June 30, 2000, compared with the same periods in
1999. The decrease in the second quarter was primarily due to $23 of
divested operations and to lower U.S. beverage can volumes, offset by
the partial pass-through of increased aluminum and resin costs.
Beverage can volumes decreased 2.4% as increases in Latin America
were offset by lower U.S. volumes. The improvement in Latin America
reflects the recovery of these markets from the slowdown caused by the
devaluation of the Brazilian currency in early 1999. Aerosol can
volumes increased 2.1% while division food can volumes decreased 1.2%.
U.S. food can volumes for the remainder of the year may be affected by
the customer currently in Chapter 11. U.S. plastic beverage closure
volumes have increased 2.5% while PET beverage container volumes
decreased 2.5%.
Net sales in the European Division decreased $105 and $200 for the
three and six months ended June 30, 2000, compared to the same periods
in 1999. The decrease in the quarter was largely due to the effect of
currency translation ($85)from the continued strength of the U.S dollar
against most European currencies. Excluding the effects of currency
translation, net sales in the second quarter would have decreased
2.2% versus 1999, primarily due to sales unit volume losses in the U.K.
and Italy. These losses were offset by volume gains of 4.8% in
beer and beverage cans, and gains throughout the plastics operations.
Net sales in the Asia-Pacific Division decreased $7 and $25 for the
three and six months ended June 30, 2000 compared to the same periods
in 1999. The decrease in the second quarter was primarily due to lower
volumes and prices in the Chinese beverage can market. Overall
second quarter beverage can volumes were within 1% of 1999 levels, as
the losses in China were offset by stronger demand in most of
Southeast Asia. Demand for plastic beverage closures remained strong
in China and Thailand while food can volumes were at the same level
as 1999.
14
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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
$1,493 for the quarter, a decrease of $36 or 2.4% as compared to $1,529
for the same period of 1999. Cost of products sold for the six months
ended June 30, 2000 was $2,786, a decrease of 5.5% compared to the same
period of 1999. The decrease was primarily due to lower net sales
and currency translation as described above.
As a percentage to net sales, cost of products sold was 79.6% for the
second quarter compared to 76.6% for the same period in 1999. For the
six months ended June 30, 2000, cost of products sold was 79.2%
compared to 77.7% in 1999. Excluding the bad debt charge for a U.S.
food can customer as noted above, cost of products sold was 78.5% and
78.7% for the three and six months ended June 30, 2000.
Selling and Administrative
--------------------------
Selling and administrative expenses, excluding depreciation, were $78
for the second quarter, a decrease of $13 or 14.3% compared to 1999. As
a percentage to net sales, selling and administrative expenses were
4.2% compared to 4.6% in the second quarter of 1999. The decrease in
the current year is due to prior years' restructuring efforts and the
appreciation of the U.S. dollar against most European currencies.
Operating Income
----------------
For the quarter ended June 30, 2000 operating income decreased to $103
from $246 in the second quarter of 1999. For the first six months
operating income decreased to $237 from $398 in the prior year. The
2000 operating income included $77 related to restructuring and other
charges as described in Notes E and F to the Consolidated Financial
Statements included in Item 1 of this Quarterly Report on Form 10-Q.
An analysis of operating income by division, excluding restructuring
and other charges of $77, follows:
Operating Income Percentage Change
--------------------------------- -----------------
Second Quarter Six Months Ended Second Six
2000 1999 2000 1999 Quarter Months
---- ---- ---- ---- ------- ------
Divisions:
Americas $ 86 $103 $161 $179 (17%) (10%)
Europe 104 154 180 240 (32%) (25%)
Asia-Pacific 6 11 12 19 (45%) (37%)
Other ( 16) ( 22) ( 39) ( 40) 27% 3%
---- ---- ---- ----
$180 $246 $314 $398 (27%) (21%)
==== ==== ==== ====
Americas Division operating income was $86 or 8.8% of net sales in the
second quarter compared to $103 or 10.8% in the same period of 1999.
Excluding the charge of $20 taken for the write-off of a bad debt as
discussed in Note C to the Consolidated Financial Statements included
in Item 1 of this Quarterly Report on Form 10-Q, second quarter 2000
operating income was $106 or 10.9% of net sales. The increase in 2000
operating margins was due to prior years' cost reduction programs and
to strong performances in Latin American beverage can operations,
partially offset by lower beverage and food can volumes in North
America, and significant increases in resin costs which were not
completely passed through to customers.
15
<PAGE>
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
European Division operating income of $104 or 12.6% of net sales
decreased from $154 and 16.6% in the second quarter of 1999. The
decrease of $50 was primarily due to (i) food can sales unit volume
decreases, (ii) foreign exchange translation due to the strong U.S.
dollar, (iii) increased resin costs, and (iv) competitive pricing
across several products lines, all of which more than offset unit
volume gains in (i) beer and beverage cans, (ii) plastic beverage and
specialty closures, and (iii) health and beauty care packaging
products.
Asia-Pacific Division operating margin was 7.6% for the three months
ended June 30, 2000 compared to 12.8% in the same period of 1999. The
decrease in 2000 operating income and margins was due primarily to
lower sales unit volumes and very competitive pricing for beverage cans
in China.
Net Interest Expense / Income
-----------------------------
Net interest expense of $91 in the second quarter was $7 or 8.3% higher
than 1999. The increase was due to higher interest rates, which offset
the effects of lower net debt and foreign currency translation.
Gain on Sale of Assets
----------------------
During the second quarter the Company realized gains of $4, primarily
from the sale of U.S. real estate and recognized losses of $4 on other
property and equipment.
Taxes on Income
---------------
The effective tax rate in the second quarter was 80.0% compared to
33.7% in the same period of 1999. The higher rate in 2000 was largely
due to lower pre-tax income, which increased the impact of
non-deductible goodwill and other permanent differences on the
effective tax rate. During the second quarter of 2000 the Company
reduced a previously established valuation allowance of $4, due to the
realization of net operating loss carryforwards in Mexico.
Minority Interests, Net of Equity in Earnings of Affiliates
-----------------------------------------------------------
The charge for minority interests, net of equity earnings, decreased by
$2 in the second quarter of 2000 compared to 1999 due to lower profits
in Chinese beverage can operations, partially offset by improved
results in the Latin American beverage can operations.
Liquidity and Capital Resources
-------------------------------
Cash from Operations
--------------------
Cash of $65 was used by operations in the six months ended June 30,
2000 compared to $133 in the second quarter of 1999. Current year cash
included $105 from a North American receivables securitization
program entered into during the second quarter, as discussed in Note C
to the Consolidated Financial Statements included in Item 1 of this
Quarterly Report on Form 10-Q. Excluding the cash received from the
sale of these receivables, cash used by operations increased by $37
from the same quarter in 1999 primarily due to lower operating income.
16
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Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
Investing Activities
--------------------
Investing activities used cash of $99 in the first six months of 2000
compared to cash used of $211 in 1999. The improvement was primarily
due lower capital expenditures in 2000, and business acquisitions in
1999. The Company intends to limit its capital spending to no more
than $250 in 2000, but will continue to evaluate projects that provide
growth opportunities or develop new technologies.
Financing Activities
--------------------
Financing activities provided cash of $150 in the first six months of
2000 compared to $291 in 1999, primarily due lower cash used by
operating and financing activities, offset by increased stock
repurchases.
Total debt, net of cash and cash equivalents, was $5,017 at June 30,
2000 and represented an increase of $180 from the balance of $4,837 at
December 31, 1999. Total debt, net of cash and cash equivalents, as a
percentage to total capitalization was 63.1% at June 30, 2000 and 60.3%
at December 31, 1999. Total capitalization is defined by the Company as
total net debt, minority interests and shareholders' equity.
The increase in total debt, net of cash and cash equivalents, from
December 31, 1999 was 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 of total
capitalization was also affected by a reduction in shareholders' equity
due to negative currency translation adjustments in the first six
months of 2000.
On July 26, 2000, Standard & Poor's, a rating agency, lowered its long-
and short-term ratings on the Company's indebtedness to BBB- and A-3,
respectively, from BBB and A-2, respectively. In addition, on June 27,
2000, Moody's Investor Service, another rating agency, placed its long-
and short-term ratings of the Company's indebtedness which are
currently Baa2 and P-2, respectively, on review for possible downgrade.
Recent Accounting Pronouncements
--------------------------------
The Company is currently reviewing the guidelines of the following
accounting and reporting pronouncements: SFAS No. 133 (as amended by
SFAS No. 138), "Accounting for Derivative Instruments and Hedging
Activities," issued by the FASB in June 1998 and SAB No. 101, "Revenue
Recognition in Financial Statements," issued by the SEC in December
1999. Details of these pronouncements are contained in Note J to the
Consolidated Financial Statements included in Item 1 of this Quarterly
Report on Form 10-Q. Management expects that SAB 101 will not have a
significant impact on the Company's financial condition and results of
operations.
The Company continues to review SFAS No. 133 along with the recent
amendment to determine the extent of its impact on the Company's
financial condition and results of operations.
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 currencies (the "legacy
currencies") and one common currency, the Euro. At that time the Euro
began trading on currency exchanges and was available for financial
transactions. Beginning in January 2002, new Euro-denominated currency
(bills and coins) will be issued, and legacy currencies will be
withdrawn from circulation.
17
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Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
The largest non-participating country is the United Kingdom ("U.K.")
which provides approximately 12% of the Company's revenues and is a
major trading partner with the participating countries. Due to the
non-participation of the U.K. in the Euro, the competitive position of
the Company's U.K. operations is subject to, among other things,
fluctuations in the exchange rate between Euro and sterling. Price
competition may arise from imports into the U.K. or from the U.K.
operations exporting to the European continent. At June 30, 2000,
approximately 67% of the contract notional value of outstanding foreign
exchange contracts involve the Euro, primarily with sterling.
With the convergence of short-term interest rates within the EU, the
foreign exchange exposure between the currencies of participating
countries has diminished considerably, and the Company has benefitted
from reduced hedging costs.
The Company believes it has identified and substantially addressed the
significant issues that may have resulted or will result from the Euro
conversion. These issues include increased competitive pressures from
greater price transparency, changes in information systems to
accommodate various aspects of the new currency and exposure to market
risk with respect to financial instruments. The conversion to the Euro,
including the costs of implementation, has not been and is not expected
to be material. 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 and that no material disruption of the Company's business
will occur.
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 "Restructuring and other Charges" and "Euro
Conversion" sections, and in the discussions of receivables in Note C,
the restructuring plans in Note E and asbestos claims in Note I to
the Consolidated Financial Statements included in Item 1 of 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, 1999, 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.
18
<PAGE>
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
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, 1999 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of June 30, 2000 there have been no material changes in the
Company's market risk exposure as described in Management's
Discussion and Analysis contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
19
<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 27,
2000. 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, 2000 and such Item 4 is incorporated herein by
reference.
Item 5. Other Information
a) On July 27, 2000, the Company's Board of Directors declared cash
dividends of $.25 per share on the Company's common stock.
Dividends are payable on August 21, 2000 to shareholders of
record on August 7, 2000.
b) On July 28, 2000, the Company announced that Dr. Jenne K. Britell
was elected to its Board of Directors.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
4. Amended and Restated Rights Agreement dated as of
May 25, 2000, between Crown Cork & Seal Company, Inc. and
First Chicago Trust Company of New York (incorporated by
reference to Exhibit 1 to Amendment No. 1 to the
Registrant's Registration Statement on Form 8-A, dated
May 30, 2000 (File No. 1-2227)).
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/ Thomas A. Kelly
----------------------
Thomas A. Kelly
Vice President and Corporate Controller
Date: August 2, 2000
--------------
21
