Business News

Crown Holdings Announces 2007 Fourth Quarter and Full Year Results

Thursday 31. January 2008 - Crown Holdings, Inc. (NYSE:CCK), today announced its financial results for the fourth quarter and year ended December 31, 2007.

During the fourth quarter of 2007, the Company changed its method of accounting for the cost of inventories in its United States operations from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. All results have been presented on a FIFO basis as if the accounting change had occurred as of January 1, 2006.

Fourth Quarter Results

Net sales in the fourth quarter increased to $1,871 million, an 11.6% increase over the $1,676 million in the fourth quarter of 2006. The increase in sales was attributable to higher sales unit volumes, the pass-through of higher raw material costs and favorable foreign currency translation.

Fourth quarter gross profit rose 7.5% to $214 million over the $199 million in the 2006 fourth quarter. As a percentage of net sales, gross profit was 11.4% in the fourth quarter compared to 11.9% in the same quarter last year. The decline in percentage margin was attributable to the impact of passing through higher raw material costs partially offset by stronger sales unit volumes, increased operating efficiencies and productivity gains. Included within gross profit for the fourth quarter of 2007 is a net charge of $7 million for the settlement of litigation related to retiree medical benefits, as more fully described below, and the settlement of a supplier dispute.

Selling and administrative expense in the fourth quarter was $100 million compared to $84 million in last year’s fourth quarter. The increase reflects a higher accrual for incentive compensation costs, foreign currency translation and general inflationary increases.

Segment income (a non-GAAP measure defined by the Company as gross profit less selling and administrative expense) was $114 million in the fourth quarter after the settlement charges of $7 million referred to above, down $1 million or 0.9% compared to the $115 million in the 2006 fourth quarter. Segment income as a percentage of net sales was 6.1% in the fourth quarter of 2007 compared to 6.9% in the fourth quarter of 2006. Excluding the settlement charges, segment income in the fourth quarter of 2007 was $121 million or 5.2% greater than the fourth quarter of 2006. A reconciliation to segment income from gross profit is provided as a note to the attached unaudited Consolidated Statements of Operations.

Commenting on the results, John W. Conway, Chairman and Chief Executive Officer, stated, “We are very pleased with our overall 2007 performance. Worldwide volumes were good despite the impact of poor weather on our European food can business. Our significant beverage can growth initiatives in emerging markets remained on plan and delivered increasingly positive contributions. Importantly, in 2007, the Company improved gross profit by more than 15% and generated strong free cash flow. Looking ahead, we expect the positive momentum to continue in 2008.”

Interest expense in the fourth quarter was $86 million compared to $76 million in the fourth quarter of 2006. The increase reflects the impact of higher average short-term borrowing rates and foreign currency translation.

Net income from continuing operations in the fourth quarter improved to $343 million, or $2.11 per diluted share, compared to net income from continuing operations of $168 million, or $1.01 per diluted share, in the fourth quarter of 2006.

Included within net income from continuing operations in the 2007 fourth quarter is a net gain of $324 million, or $1.99 per diluted share. The net gain reflects a $479 million benefit related to the reversal of valuation allowances on the Company’s U.S. deferred tax assets partially offset by a net charge of $7 million to settle retiree medical litigation and a supplier dispute, a $29 million net charge for asbestos, a $5 million net charge related to restructuring actions and a $114 million net impairment charge, primarily to write-off goodwill. In the 2006 fourth quarter, the Company recorded a net gain of $146 million, or $0.88 per diluted share, to record gains on sales of assets and the reversal of a tax balance in comprehensive income, partially offset by provisions for asbestos, the remeasurement of foreign currency exposures and an impairment charge recorded in the Company’s plastic bottle joint venture.

Other Fourth Quarter Activity

As mentioned above, the Company recorded a 2007 fourth quarter charge of $7 million ($7 million, net of tax, or $0.04 per diluted share) for the settlement of litigation related to retiree medical benefits and a supplier dispute. As previously disclosed, the Company in prior years had amended retiree medical benefits for several groups of retirees. As a result of the settlement, the Company has reduced its accumulated post-retirement benefit obligation and increased comprehensive income, a separate component of shareholders’ equity, by $101 million. Based on actuarial assumptions, the expense and cash payments related to retiree medical benefits are each expected to be reduced in 2008 and future years by approximately $9 million per year and exclude a one-time cash payment of $14 million to be made in 2008. Separately, a final settlement payment of $6 million has been made in the first quarter of 2008 related to previously closed U.S. manufacturing locations.

The Company recorded a charge in the fourth quarter of $29 million ($29 million, net of tax, or $0.18 per diluted share) to increase its asbestos litigation reserve. The Company estimates that its asbestos liability for pending and future asbestos claims will range between $201 million and $243 million. At December 31, 2006, the reported range was $198 million to $247 million. After the $29 million charge, the Company’s recorded liability at December 31, 2007 was $201 million compared to $198 million at December 31, 2006. Asbestos-related payments totaled $26 million in 2007, including $9 million under existing settlement agreements, consistent with 2006 payments of $26 million, which also included $9 million under existing settlement agreements. Cases filed against the Company declined to 3,600 in 2007 compared to 4,800 in 2006.

In the fourth quarter of 2007, the Company recorded a restructuring charge of $6 million ($5 million, net of tax, or $0.03 per diluted share) and for the full year of 2007 restructuring charges totaled $20 million ($17 million, net of tax, or $0.10 per diluted share). For 2006, restructuring charges totaled $15 million ($12 million, net of tax, or $0.07 per diluted share).

The Company recorded a non-cash asset impairment charge of $114 million ($114 million, net of tax, or $0.70 per diluted share) in the 2007 fourth quarter primarily to write-down the carrying value of goodwill in its European metal vacuum closures business. For the full year, the provision for asset impairments net of gains on sales of assets was $100 million ($103 million, net of tax, or $0.62 per diluted share). The Company recorded a gain on sales of assets of $62 million ($51 million, net of tax, or $0.31 per diluted share) in the fourth quarter of 2006 primarily related to the sale of property in Europe.

The Company recorded a loss on the translation of foreign currency exposures in the fourth quarter of 2006 of $14 million ($14 million, net of tax, or $0.08 per diluted share) and for the year 2006, the loss was $6 million ($6 million, net of tax, or $0.04 per diluted share).

During the fourth quarter of 2007, the Company determined that it considered it more likely than not that the majority of its U.S. deferred tax assets would be realized through future income from operations. Accordingly, an income tax benefit of $479 million ($2.94 per diluted share) was recorded for the reversal of previously established valuation allowances. The reversal of the valuation allowance has no impact on taxes paid. In the 2006 fourth quarter, the Company recorded an income tax benefit of $121 million ($0.73 per diluted share) related to the reversal of a previously established adjustment to accumulated comprehensive income arising from the Company’s U.S. minimum pension liability.

Net debt (a non-GAAP measure defined by the Company as total debt less cash) decreased by $435 million from September 30, primarily as a result of the reduction in working capital during the fourth quarter. Net debt at December 31, 2007 was $2,980 million, $154 million lower than the December 31, 2006 level as free cash flow (a non-GAAP measure defined by the Company as net cash provided by operating activities less capital expenditures) for 2007 more than offset common share repurchases of $118 million (representing approximately 5 million shares) and foreign exchange translation on net debt of $89 million.

For the twelve months ended December 31, 2007, the table below reconciles net cash provided by operating activities to free cash flow from ongoing operations (a non-GAAP measure). In 2007 and 2006, the Company sold two properties in Spain and realized gross proceeds of $89 million as reflected on the Consolidated Statements of Cash Flows. Proceeds from sales of property do not reflect taxes paid which totaled $28 million in 2007 as shown below.

Twelve months ended December 31, 2007
Net cash provided by operating activities $509
Capital expenditures (156)
Free cash flow 353
Taxes related to property sales 28
Increased accounts receivable securitization (21)
Free cash flow from ongoing operations $360

Debt and cash amounts were:

December 31, September 30, December 31,
2007 2007 2006

Total debt $3,437 $3,763 $3,541
Cash 457 348 407
Net debt $2,980 $3,415 $3,134

Receivables securitization $272 $328 $240


Full Year Results


For 2007, net sales rose to $7,727 million, up 10.7% over the $6,982 million in 2006. The increase reflects higher sales unit volumes, the pass- through of higher raw material costs and foreign currency translation. Approximately, 73% of net sales were from outside the United States in 2007 compared to 72% in 2006.

Gross profit for the year of $1,027 million, or 13.3% of net sales, increased 15.1% compared to $892 million of gross profit, or 12.8% of net sales for 2006. The increase was driven by stronger sales unit volumes, increased operating efficiencies and productivity gains.

Selling and administrative expense for 2007 was $385 million compared to $316 million in 2006. The increase is attributable to a higher accrual for incentive compensation costs, foreign currency translation and general inflationary increases.

Segment income in 2007, after the $7 million charge to settle retiree medical benefits and a supplier dispute, increased 11.5% to $642 million over the $576 million in 2006. Segment income as a percentage of net sales was 8.3% in 2007 compared to 8.2% in 2006. Excluding the settlement charges, segment income for 2007 grew to $649 million and was 12.7% over 2006 segment income.

Interest expense was $318 million in 2007 compared to $286 million in 2006. The increase reflects higher average short-term borrowing rates and foreign currency translation in 2007 compared to 2006.

For 2007, the Company reported net income from continuing operations of $545 million, or $3.29 per diluted share, compared to net income from continuing operations of $342 million, or $2.01 per diluted share in 2006.

Included within 2007 net income from continuing operations, the Company recorded a net gain of $323 million, or $1.95 per diluted share, reflecting a $479 million benefit related to the reversal of valuation allowances on deferred tax assets partially offset by a net charge of $7 million to settle retiree medical litigation and a supplier dispute, a $29 million net charge for asbestos, a $17 million net charge for restructuring actions and a $103 million net charge for asset impairments net of asset sale gains. In 2006, the Company recorded a net gain to net income from continuing operations of $144 million, or $0.84 per diluted share, to record gains on sales of assets and the reversal of a tax balance in comprehensive income partially offset by provisions for asbestos, restructuring, the remeasurement of foreign currency exposures, and an impairment charge recorded in the Company’s plastic bottle joint venture.

Non-GAAP Measures

Segment income, free cash flow and net debt are not defined terms under U.S. generally accepted accounting principles (non-GAAP measures). Non-GAAP measures should not be considered in isolation or as a substitute for net income, cash flow or total debt data prepared in accordance with GAAP and may not be comparable to calculations of similarly titled measures by other companies.

The Company views segment income and free cash flow as the principal measures of performance of its operations and for the allocation of resources. The Company believes net debt is a useful measure of the Company’s debt levels. Segment income, free cash flow and net debt are derived from the Company’s Consolidated Statements of Operations and Cash Flows and Consolidated Balance Sheets, respectively, and reconciliations to segment income, free cash flow and net debt can be found within this release.