ITEM 1B.
UNRESOLVED STAFF COMMENTS
There are no unresolved written comments that were received from the SEC staff 180 days or more before the end of the Company’s fiscal year relating to its periodic or current reports under the Securities Exchange Act of 1934.
As of December 31, 2014, the Company operated 149 manufacturing facilities of which 29 were leased. The Company has three divisions, defined geographically, within which it manufactures and markets its products. The Americas Division had 45 operating facilities of which 10 are leased. Within the Americas Division, 30 facilities operated in the U.S. of which 7 were leased. The European Division had 74 operating facilities of which 14 were leased and the Asia Pacific Division had 30 operating facilities of which 4 were leased. The Company also has canmaking and spare part operations in the U.S. and the U.K., one of which was a leased facility. Certain leases provide renewal or purchase options. The principal manufacturing facilities at December 31, 2014 are listed below and are grouped by product and by division.
The Company’s Americas and Corporate headquarters are in Philadelphia, Pennsylvania, its European headquarters is in Baar, Switzerland and its Asia Pacific headquarters is in Singapore. The Company maintains research facilities in Alsip, Illinois and Wantage, England.
The Company’s manufacturing and support facilities are designed according to the requirements of the products to be manufactured. Therefore, the type of construction may vary from plant to plant. Warehouse space is generally provided at each of the manufacturing locations, although the Company also leases outside warehouses.
Ongoing productivity improvements and cost reduction efforts in recent years have focused on upgrading and modernizing facilities to reduce costs, improve efficiency and productivity and phase out uncompetitive facilities. The Company has also opened new facilities to meet increases in market demand for its products. These actions reflect the Company’s continued commitment to realign manufacturing facilities to maintain its competitive position in its markets. The Company continually reviews its operations and evaluates strategic opportunities. Further discussion of the Company’s recent restructuring actions is contained within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Provision for Restructuring,” and under Note O to the consolidated financial statements.
Utilization of any particular facility varies based upon product demand. While not possible to measure with any degree of certainty or uniformity the productive capacity of these facilities, management believes that, if necessary, production can be increased at several existing facilities through the addition of personnel, capital equipment and, in some facilities, square footage available for production. In addition, the Company may from time to time acquire additional facilities or dispose of existing facilities.
Excluded from the list below are operating facilities in unconsolidated subsidiaries as well as service or support facilities. The service or support facilities include machine shop operations, plant operations dedicated to printing for cans and closures, coil shearing, coil coating and RD&E operations. Some operating facilities produce more than one product but have been presented below under the product with the largest contribution to sales. Also excluded were five plants in Mexico related to the acquisition of Empaque in February 2015.
Included are four specialty packaging plants (Rouen, France; Helsinki Finland; Aesch, Switzerland and Liverpool, UK)
which are expected to be sold in early 2015.
Crown Holdings, Inc.
Americas
Europe
Asia Pacific
Beverage
and
Closures
Lawrence, MA
Worland, WY
Custines, France
Sevilla, Spain
Phnom Penh, Cambodia
Kankakee, IL
Cabreuva, Brazil
Korinthos, Greece
El Agba, Tunisia
Sihanoukville, Cambodia
Crawfordsville, IN
Teresina, Brazil
Patras, Greece
Izmit, Turkey
Beijing, China
Mankato, MN
Estancia, Brazil
Amman, Jordan
Osmaniye, Turkey
Huizhou, China
Batesville, MS
Manaus, Brazil
Dammam, Saudi Arabia
Dubai, UAE
Hangzhou, China
Dayton, OH
Ponta Grossa, Brazil
Jeddah, Saudi Arabia
Botcherby, UK
Heshan, China
Cheraw, SC
Calgary, Canada
Kosice, Slovakia
Braunstone, UK
Putian, China
Conroe, TX
Weston, Canada
Agoncillo, Spain
Shanghai, China
Fort Bend, TX
Santafe de Bogota,
Ziyang, China
Winchester, VA
Colombia
Bangi, Malaysia
Olympia, WA
Guadalajara, Mexico
Singapore
La Crosse, WI
Nong Khae, Thailand
Danang, Vietnam
Dong Nai, Vietnam
Hanoi, Vietnam
Ho Chi Minh City, Vietnam
Winter Garden, FL
Suffolk, VA
Carpentras, France
Agadir, Morocco (2)
Bangpoo, Thailand
Food
and
Closures
Pulaski Park, MD
Seattle, WA
Concarneau, France
Casablanca, Morocco
Haadyai, Thailand
Owatonna, MN
Oshkosh, WI
Laon, France
Pisco, Peru
Samrong, Thailand
Omaha, NE
Chatham, Canada
Nantes, France
Goleniow, Poland
Songkhla, Thailand
Lancaster, OH
Kingston, Jamaica
Outreau, France
Pruszcz, Poland
Massillon, OH
La Villa, Mexico
Perigueux, France
Alcochete, Portugal
Mill Park, OH
Barbados, West Indies
Lubeck, Germany
Novotitarovskaya,
Connellsville, PA
Trinidad, West Indies
Mühldorf, Germany
Russia
Hanover, PA
Seesen, Germany (2)
Timashevsk, Russia
Tema, Ghana
Bellville, South Africa
Thessaloniki, Greece
Aldeanuevra De Ebro, Spain
Kornye, Hungary
Las Torres De Cotillas,
Nagykoros, Hungary
Spain
Athy, Ireland
Llanera, Spain
Aprilia, Italy (2)
Merida, Spain
Battipaglia, Italy
Osuna, Spain
Calerno S. Ilario d’Enza,
Pontavedra, Spain
Italy
Sevilla, Spain
Nocera Superiore, Italy
Karacabey, Turkey
Parma, Italy
Neath, UK
Abidjan, Ivory Coast
Poole, UK
Toamasina, Madagascar
Wisbech, UK
Aerosol
Alsip, IL
Faribault, MN
Spilamberto, Italy
Sutton, UK
Decatur, IL
Spartanburg, SC
Mijdrecht, Netherlands
Specialty
Belcamp, MD
Helsinki, Finland
Aesch, Switzerland
Chengdu, China
Packaging
Chatillon-sur-Seine, France
Liverpool, UK
Huizhou, China
Rouen, France
Carlisle, UK
Kunshan, China
Vourles, France
Mansfield, UK
Langfang, China
Chignolo Po, Italy
Newcastle, UK
Shanghai, China
Hoorn, Netherlands
Tianjin, China
Tongxiang, China
Zhengzhou, China
Singapore
Binh Duong, Vietnam
Canmaking
Norwalk, CT
Shipley, UK
and Spares
Crown Holdings, Inc.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
Crown Cork & Seal Company, Inc., a wholly-owned subsidiary of the Company (“Crown Cork”), is one of many defendants in a substantial number of lawsuits filed throughout the U.S. by persons alleging bodily injury as a result of exposure to asbestos. These claims arose from the insulation operations of a U.S. company, the majority of whose stock Crown Cork purchased in 1963. Approximately ninety days after the stock purchase, this U.S. company sold its insulation assets and was later merged into Crown Cork. At December 31, 2014, the accrual for pending and future asbestos claims and related legal costs that are probable and estimable was $275 million.
The Company has been identified by the Environmental Protection Agency as a potentially responsible party (along with others, in most cases) at a number of sites.
Further information on these matters and other legal proceedings is presented within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the captions “Provision for Asbestos” and “Environmental Matters” and under Note M and Note N to the consolidated financial statements.
ITEM 4.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the principal executive officers of the Company, including their ages and positions, is set forth in “Directors, Executive Officers and Corporate Governance” of this Annual Report.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Registrant’s common stock is listed on the New York Stock Exchange. On February 23, 2015, there were 4,306 registered shareholders of the Registrant’s common stock, including 1,244 participants in the Company’s Employee Stock Purchase Plan. The market price of the Registrant’s common stock at December 31, 2014 is set forth in Part II of this Annual Report under Quarterly Data (unaudited). The foregoing information regarding the number of registered shareholders of common stock does not include persons holding stock through clearinghouse systems. Details regarding the Company’s policy as to payment of cash dividends and repurchase of shares are set forth under Note P to the consolidated financial statements included in this Annual Report. Information with respect to shares of common stock that may be issued under the Company’s equity compensation plans is set forth in “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” of this Annual Report.
Quarterly Stock Prices
Quarterly prices for the Company's common stock, as reported on the New York Stock Exchange composite tape, in 2014 and 2013 were:
Issuer Purchases of Equity Securities
The Company made no purchases of its equity securities as part of publicly announced programs during the year ended December 31, 2014.
Crown Holdings, Inc.
COMPARATIVE STOCK PERFORMANCE (a)
Comparison of Five-Year Cumulative Total Return (b)
Crown Holdings, S&P 500 Index, Dow Jones “U.S. Containers & Packaging” Index (c)
(a)
The preceding Comparative Stock Performance Graph is not deemed filed with the SEC and shall not be incorporated by reference in any of the Company's filings under the Security Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
(b)
Assumes that the value of the investment in Crown Holdings common stock and each index was $100 on December 31, 2009 and that all dividends were reinvested.
(c) Industry index is weighted by market capitalization and is comprised of Crown Holdings, AptarGroup, Avery Dennison, Ball, Bemis, Berry Plastics, Graphic Packaging, Greif, MeadWestvaco, Owens-Illinois, Packaging Corp. of America, RockTenn, Sealed Air, Silgan and Sonoco.
Crown Holdings, Inc.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
(a) Includes the results of the Mivisa acquisition from April 23, 2014 through December 31, 2014.
Crown Holdings, Inc.
ITEM 7.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in millions, except per share, average settlement cost per asbestos claim, employee, shareholder and statistical data)
INTRODUCTION
The following discussion summarizes the significant factors affecting the results of operations and financial condition of Crown Holdings, Inc. (the "Company") as of and during the three-year period ended December 31, 2014. This discussion should be read in conjunction with the consolidated financial statements included in this Annual Report.
BUSINESS STRATEGY AND TRENDS
The Company's strategy is to grow its businesses in targeted international growth markets, while improving operations and results in more mature markets through disciplined pricing, cost control and careful capital allocation.
The Company identifies and evaluates growth opportunities through line additions in existing plants, new plants in developing markets that it already knows and understands, and potential strategic acquisitions in geographic areas and product lines in which it already operates. In response to increasing global customer demand for beverage cans in non-standard sizes, commonly called "specialty cans", the Company will continue to make investments in converting existing capacity or adding new capacity for non-standard can sizes. The Company rigorously evaluates each investment opportunity against a variety of metrics and every approved project is undertaken with an eye toward creating long-term shareholder value. Cash flows generated from the Company's operations may be reinvested in the business, used for acquisitions, used to repay debt or returned to shareholders through share repurchases or possible future dividends. Following the acquisition of Empaque as described below, the Company's primary focus in 2015 will be to utilize cash flow to reduce leverage. The Company does not presently anticipate any share repurchases or dividends in 2015.
In recent years, the Company has continued to develop its beverage can platform in emerging markets with particular focus on Asia, Brazil and Eastern Europe. Beverage can volume growth in these markets has been driven by increased per capita incomes and consumption, combined with an increased preference for cans over other forms of beverage packaging.
In April 2014, the Company completed its acquisition of Mivisa, the largest food can producer in both the Iberian Peninsula and Morocco; primarily serving vegetable, fruit, fish and meat markets. The acquisition significantly increases the Company's presence in Spain, one of Europe's leading agricultural economies. In connection with the acquisition, the Company divested certain Crown and Mivisa operations as a required condition for regulatory approval.
In February 2015, the Company completed its acquisition of Empaque, a leading manufacturer for the beverage industry in Mexico, from Heineken N.V., in a cash transaction valued at $1.2 billion subject to purchase price adjustment. Accompanying the transaction are long-term supply agreements with Heineken affiliates which are expected to provide a stable cash flow base. The addition of Empaque significantly increases the Company's presence in the growing Mexican market and substantially enhances the Company's strategic position in beverage cans, both regionally and globally.
Beverage can sales unit volumes in the Company's mature markets have been stable to slightly declining in North America and slightly increasing in Europe. Global food and aerosol can sales unit volumes have been stable to declining in recent years primarily due to lower consumer spending. While the opportunity for organic volume growth in the Company's mature markets is not comparable to that in targeted international growth markets, the Company continues to generate strong returns on invested capital and significant cash flow from these businesses. The Company monitors capacity across all of its businesses and, where necessary, may take action such as closing a plant or reducing headcount to better manage its costs. Any or all of these actions may result in additional restructuring charges in the future which may be material.
As part of the Company's efforts to manage cost, it attempts to pass-through increases in the cost of aluminum and steel to its customers. In the Americas Beverage segment, the Company has generally been able to pass-through increases in aluminum premium costs to its customers. In the European Beverage segment, the Company has generally been unable to pass-through increases in aluminum premium costs to its customers. There can be no assurance that the Company will be able to recover from its customers the impact of any such increased costs. Aluminum and steel prices can be subject to significant volatility and there has not been a consistent and predictable trend in pricing.
In assessing the Company's performance, the key performance measure used is segment income, a non-GAAP measure generally defined by the Company as gross profit excluding the impact of fair value adjustments related to the sale of inventory acquired in an acquisition and the timing impact of hedge ineffectiveness, less selling and administrative expenses.
Crown Holdings, Inc.
RESULTS OF OPERATIONS
The foreign currency translation impacts referred to in the discussion below were primarily due to changes in the euro and pound sterling in the Company's European segments, the Canadian dollar in the Company's Americas segments and the Chinese renminbi and Thai baht in the Company's Asia Pacific segment.
NET SALES AND SEGMENT INCOME
Year ended December 31, 2014 compared to 2013
Net sales increased primarily due to the impact of the Mivisa acquisition and increased global beverage can volumes, partially offset by $52 of unfavorable currency translation.
Year ended December 31, 2013 compared to 2012
Net sales increased primarily due to increased global beverage can volumes, $124 from the acquisition of Superior in the fourth quarter of 2012 and $54 from the impact of foreign currency translation, partially offset by the pass-through of lower raw material costs.
Discussion and analysis of net sales and segment income by segment follows.
Americas Beverage
The Americas Beverage segment manufactures aluminum beverage cans, ends and steel crowns and supplies a variety of customers from its operations in the U.S., Brazil, Canada, Colombia and Mexico. The U.S. and Canadian beverage can markets are mature markets which have experienced slightly declining volumes in recent years. In Brazil, the Company's sales unit volumes have increased in recent years primarily due to market growth. In April 2014, the Company commenced production at its new facility in Teresina, Brazil. In February 2015, the Company completed its acquisition of Empaque, a leading manufacturer of beverage packaging in Mexico. Empaque will be integrated with the Company's existing Americas Beverage business.
Net sales and segment income in the Americas Beverage segment are as follows:
Year ended December 31, 2014 compared to 2013
Net sales increased primarily due to $52 from increased sales unit volumes and $47 from the pass-through of higher raw material costs, primarily higher aluminum premiums, partially offset by $31 from the impact of foreign currency translation and $22 of lower sales from the closure of a manufacturing facility in Puerto Rico. In 2014, sales unit volumes were up slightly due to increases in Brazil which were partially offset by lower sales in the U.S.
Segment income increased primarily due to $11 from organic growth in Brazil including the impact of the World Cup, partially offset by inefficiencies in plant operations.
Year ended December 31, 2013 compared to 2012
Net sales increased primarily due to $23 from higher sales unit volumes in Brazil, Colombia and Mexico which offset lower volumes in the U.S. and $7 from the impact of foreign currency translation. Sales unit volumes in Brazil were strong due to various factors, including its growing middle class, increasing disposable income and a shift in packaging mix to two-piece aluminum beverage cans from other packages.
Crown Holdings, Inc.
Segment income increased primarily due to $9 from higher sales unit volumes and $11 from lower depreciation, resulting from a change in the estimated useful lives of the Company's canmaking equipment, partially offset by a benefit from reduced post-employment benefits in 2012 that did not recur in 2013.
North America Food
The North America Food segment manufactures steel and aluminum food cans and ends and metal vacuum closures and supplies a variety of customers from its operations in the U.S. and Canada. The North American food can and closures market is a mature market which has experienced stable to slightly declining volumes in recent years.
Net sales and segment income in the North America Food segment are as follows:
Year ended December 31, 2014 compared to 2013
Net sales decreased primarily due to $21 from lower sales unit volumes, $7 from lower customer pricing and $9 from the impact of foreign currency translation.
Segment income increased primarily due to a charge of $18 in 2013 to record a reserve against an outstanding customer receivable balance that did not recur in 2014, partially offset by the impact of competitive price compression.
Year ended December 31, 2013 compared to 2012
Net sales decreased primarily due to a 1% decline in sales unit volumes and unfavorable sales unit volume mix.
Segment income decreased primarily due to a charge of $18 to record a reserve against an outstanding receivable balance from a bankrupt customer and lower sales unit volumes.
European Beverage
The Company's European Beverage segment manufactures steel and aluminum beverage cans and ends and supplies a variety of customers from its operations throughout Europe, the Middle East and Africa. In recent years, the European beverage can market has been growing. In the first quarter of 2014, the Company increased its ownership interest in its operations in Jordan and Tunisia to 100% by purchasing the remaining noncontrolling interests.
Net sales and segment income in the European Beverage segment are as follows:
Year ended December 31, 2014 compared to 2013
Net sales decreased primarily due to a 1% decline in sales unit volumes and $12 from the impact of foreign currency translation. Sales unit volumes were down in the Company's Middle Eastern businesses primarily due to the ongoing conflicts in the region.
Segment income increased primarily due to improved cost performance which more than offset $18 of higher aluminum premiums.
Year ended December 31, 2013 compared to 2012
Net sales increased primarily due to 4% higher sales unit volumes, most notably in Turkey. The increase in Turkey was primarily attributable to the Company's new plant in Osmaniye, Turkey which began commercial operations in the second quarter of 2012.
Crown Holdings, Inc.
Segment income increased primarily due to $12 from higher sales unit volumes, $13 from lower depreciation resulting from a change in the estimated useful lives of the Company's canmaking equipment and from improved cost performance.
European Food
The European Food segment manufactures steel and aluminum food cans, ends and metal vacuum closures, and supplies a variety of customers from its operations throughout Europe and Africa. The European food can market is a mature market which has experienced stable to slightly declining volumes in recent years. In April 2014, the Company completed its acquisition of Mivisa and in June divested certain Crown and Mivisa operations as required for regulatory approval.
Net sales and segment income in the European Food segment are as follows:
Year ended December 31, 2014 compared to 2013
Net sales increased primarily due to a 25% increase in sales unit volumes including the impact of the Mivisa acquisition and strong unit volumes across many countries including France, Germany and Italy.
Segment income increased primarily due to contributions from the Mivisa acquisition, $11 from improved cost performance and a charge of $21 in 2013 to record a reserve against a portion of an outstanding customer receivable balance that did not recur in 2014.
Year ended December 31, 2013 compared to 2012
Net sales decreased primarily due to $59 from lower selling prices reflecting the pass-through of lower material costs and the impact of competitive price compression and $24 from unfavorable sales unit volumes and mix. These decreases were partially offset by $41 from the impact of foreign currency translation.
Segment income decreased primarily due to the impact of competitive price compression, $14 from unfavorable sales unit volumes and mix and a charge of $21 to record a reserve against a portion of an outstanding customer receivable balance, partially offset by improved cost performance and $11 from lower depreciation resulting from a change in the estimated useful lives of the Company's canmaking equipment.
Asia Pacific
The Company's Asia Pacific segment primarily consists of beverage can operations in Cambodia, China, Malaysia, Singapore, Thailand and Vietnam and also includes the Company's non-beverage can operations, primarily food cans and specialty packaging in China, Singapore, Thailand and Vietnam. In recent years, the Company's beverage can operations in Asia have experienced significant growth.
In 2013, the Company began production on second beverage can lines at its facilities in Putian, China and Bangi, Malaysia. In 2013, the Company also began production at new beverage can plants in Sihanoukville, Cambodia, Danang, Vietnam and Nong Khae, Thailand.
Net sales and segment income in the Asia Pacific segment are as follows:
Year ended December 31, 2014 compared to 2013
Net sales increased primarily due to $110 from increased sales unit volumes due to recent capacity expansion and market growth partially offset by $56 from lower selling prices primarily due to the pass-through of lower raw material costs and the impact of competitive price compression and $17 from the impact of foreign currency translation.
Crown Holdings, Inc.
Segment income increased primarily due to $17 from increased sales unit volumes, partially offset by $7 from the impact of competitive price compression.
Year ended December 31, 2013 compared to 2012
Net sales increased primarily due to a 19% increase in beverage can sales unit volumes and $124 from the acquisition of Superior in the fourth quarter of 2012 as discussed in Note B, partially offset by lower selling prices primarily due to the pass-through of lower raw material costs and the impact of competitive price compression.
Segment income decreased as the impact of higher beverage can sales unit volumes was offset by lower manufacturing efficiencies associated with recent capacity expansion and the impact of competitive price compression.
Non-reportable Segments
The Company's non-reportable segments include its European aerosol and specialty packaging business, its North American aerosol can business and its tooling and equipment operations in the U.S. and U.K. In recent years, the Company's aerosol and specialty packaging businesses have experienced slightly declining volumes. The Company expects to complete the sale of four of its European industrial specialty packaging plants in early 2015.
Net sales and segment income in non-reportable segments are as follows:
Year ended December 31, 2014 compared to 2013
Net sales decreased primarily due to $40 from lower sales in the Company's aerosol and specialty packaging businesses, partially offset by $10 from the impact of foreign currency translation.
Segment income decreased primarily due to $8 from lower sales in the Company's aerosol and specialty packaging businesses.
Year ended December 31, 2013 compared to 2012
Net sales decreased primarily due to lower sales in the Company's European specialty packaging and aerosol can businesses.
Segment income increased as the impact of lower sales in the Company's European specialty packaging and aerosol businesses was offset by the benefits of recent restructuring actions.
Corporate and Unallocated Expense
Corporate and unallocated costs increased in 2014 compared to 2013 due to higher general corporate costs including technology and incentive compensation, higher hedge ineffectiveness and a charge of $19 related to the impact of fair value adjustments for the sale of inventory acquired in the acquisition of Mivisa.
Corporate and unallocated costs decreased in 2013 compared to 2012 primarily due to $22 from lower pension expense, $7 from lower technology costs and a net benefit of $1 from legal matters. Additionally, in 2013, the Company recorded a benefit of $16 for a legal settlement related to the recovery of environmental remediation costs, partially offset by a charge of $15 for certain Italian valued added tax assessments.
Crown Holdings, Inc.
COST OF PRODUCTS SOLD (EXCLUDING DEPRECIATION AND AMORTIZATION)
Cost of products sold (excluding depreciation and amortization) increased from $7,180 in 2013 to $7,525 in 2014 primarily due to the acquisition of Mivisa and increased global beverage can volumes, partially offset by $49 of foreign currency translation.
Cost of products sold (excluding depreciation and amortization) increased from $7,013 in 2012 to $7,180 in 2013 primarily due to increased global beverage can volumes partially offset by the pass-through of lower raw material costs.
Cost of products sold (excluding depreciation and amortization) as a percentage of net sales was 83% in 2014, 2013 and 2012.
DEPRECIATION AND AMORTIZATION
For the year ended December 31, 2014 compared to 2013, depreciation and amortization increased from $134 to $190 primarily due to the depreciation and amortization of fixed assets and intangible assets recorded in connection with the Company's acquisition of Mivisa.
For the year ended December 31, 2013 compared to 2012, depreciation and amortization decreased from $180 to $134 primarily due to $49 from a change in the estimated useful lives of the Company's two-piece and three-piece canmaking equipment. The Company, with the assistance of a third party appraiser, completed an evaluation of the estimated useful lives of its two-piece and three-piece canmaking equipment. As a result, effective January 1, 2013, the Company adjusted the estimated useful lives of its canmaking equipment to reflect its current estimates of the useful lives.
SELLING AND ADMINISTRATIVE EXPENSE
Selling and administrative expense decreased from $425 in 2013 to $398 in 2014, primarily due to charges of $39 in 2013 to record reserves against two customer receivable balances that did not recur in 2014, partially offset by higher incentive compensation costs and the impact of the Mivisa acquisition.
Selling and administrative expense increased from $382 in 2012 to $425 in 2013 primarily due to charges of $39 related to reserves provided against outstanding receivable balances due from a European food can customer and a North American food can customer and $4 from the impact of foreign currency translation.
PROVISION FOR ASBESTOS
Crown Cork & Seal Company, Inc. is one of many defendants in a substantial number of lawsuits filed throughout the U.S. by persons alleging bodily injury as a result of exposure to asbestos. During 2014, 2013 and 2012 the Company recorded charges of $45, $32 and $35 to increase its accrual for asbestos-related costs and made asbestos-related payments of $30 in 2014 and $28 in 2013 and 2012. The Company currently expects 2015 payments to be approximately $30. See Note M to the consolidated financial statements for additional information regarding the provision for asbestos-related costs. Also see the Critical Accounting Policies section of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of the Company’s policies with respect to asbestos liabilities.
INTEREST EXPENSE
Interest expense increased from $236 in 2013 to $253 in 2014 primarily reflecting higher average debt outstanding from the Mivisa acquisition.
Interest expense increased from $226 in 2012 to $236 in 2013 primarily due to higher average debt outstanding and $5 of expense related to the settlement of a value added tax assessment with the Italian tax authority.
TAXES ON INCOME
The Company's effective income tax rates are as follows:
Crown Holdings, Inc.
The low effective tax rate in 2014 was primarily due to a benefit of $86 to fully release the valuation allowance against the Company's net deferred tax assets in France and a benefit of $16 related to a tax law change in Spain.
The tax benefit in 2012 was primarily due to a net benefit of $175 related to the recognition of previously unrecognized U.S. foreign tax credits and a benefit of $10 from the receipt of non-taxable insurance proceeds related to flooding in Thailand.
For additional information regarding income taxes, see Note W to the consolidated financial statements and the Critical Accounting Policies section of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of the Company’s policies with respect to valuation allowances.
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
Net income attributable to noncontrolling interests decreased from $104 in 2013 to $88 in 2014 primarily due to the acquisition of additional ownership interests in subsidiaries in Jordan and Tunisia and lower earnings in certain beverage can operations in the Middle East, partially offset by higher earnings in the Company's beverage can operations in Brazil.
Net income attributable to noncontrolling interests decreased from $105 in 2012 to $104 in 2013 as increased earnings in the Company's beverage can operations in Brazil and the Middle East in 2013 were offset by $11 of bargain purchase gain allocated to the Company's joint venture partner related to the acquisition of Superior in 2012.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Cash provided by operating activities increased from $885 in 2013 to $912 in 2014 primarily due to higher income and working capital improvements, partially offset by higher interest payments.
Receivables decreased from $1,064 in 2013 to $1,031 in 2014 primarily due to a change in the Company's North American and European securitization facilities which resulted in receivables transactions being accounted for as sales and the impact of foreign currency translation, partially offset by the impact of the Mivisa acquisition. Receivables provided cash of $45 in 2014 compared to used cash of $51 in 2013 primarily due to the change in securitization facilities.
In connection with the securitization facilities, the Company derecognizes receivables sold and recognizes any deferred purchase price in prepaid expenses and other current assets in the Company’s Consolidated Balance Sheet. The deferred purchase price receivable is reduced as collections of the underlying receivables occur; however, as this is a revolving program, the sale of new receivables will result in an increase in the deferred purchase price receivable. For the year ended December 31, 2014, $76 of deferred purchase price receivable was reflected in the receivables line item on the Company’s Consolidated Statement of Cash Flows.
Days sales outstanding for trade receivables improved from 38 in 2013 to 36 in 2014.
Inventories increased from $1,213 in 2013 to $1,324 in 2014 primarily due to the acquisition of Mivisa, partially offset by the impact of foreign currency translation. Inventories used cash of $62 in 2014 compared to $45 in 2013.
Accounts payable and accrued liabilities increased from $2,547 in 2013 to $2,651 in 2014 primarily due to the acquisition of Mivisa and extended supplier payment terms, partially offset by the impact of foreign currency translation. Accounts payable and accrued liabilities provided cash of $219 in 2014 compared to $246 in 2013.
INVESTING ACTIVITIES
Cash used for investing activities increased from $246 in 2013 to $1,021 in 2014 primarily due to $733 paid to acquire Mivisa and $53 of higher capital expenditures, partially offset by $22 of proceeds from divesting certain Crown and Mivisa operations as required for regulatory approval of the acquisition. The Company currently expects capital expenditures in 2015 of approximately $350. In February 2015, the Company completed its acquisition of Empaque for $1.2 billion subject to purchase price adjustment.
Cash used for investing activities decreased from $362 in 2012 to $246 in 2013 primarily due to lower capital expenditures and cash used for business acquisitions.
Crown Holdings, Inc.
At December 31, 2014, the Company had $59 of capital commitments, primarily related to its operations in Europe. The Company expects to fund these commitments primarily through cash flows generated from operations.
FINANCING ACTIVITIES
In 2014, financing activities were a source of cash of $445 compared to uses of cash of $306 and $254 in 2013 and 2012. Financing activities were higher in 2014 primarily to fund the acquisition of Mivisa and repay certain of Mivisa's existing debt.
In 2013 and 2012, cash used for financing activities was primarily to repurchase shares of the Company’s common stock.
Other financing activities, in each year, is primarily cash settlements of foreign currency derivatives used to hedge intercompany debt obligations.
LIQUIDITY
As of December 31, 2014, $825 of the Company's $965 in cash and cash equivalents was located outside the U.S. The Company is not currently aware of any legal restrictions under foreign law that materially impact its access to cash held outside the U.S.
The Company funds its cash needs in the U.S. through a combination of cash flows from operations in the U.S., dividends from certain foreign subsidiaries, borrowings under its revolving credit facility and the acceleration of cash receipts under its receivable securitization and factoring facilities. The Company records current or deferred U.S. taxes for the earnings of these foreign subsidiaries. For certain other foreign subsidiaries, the Company considers earnings indefinitely reinvested and has not recorded any U.S. taxes. Of the cash and cash equivalents located outside the U.S., $664 was held by subsidiaries for which earnings are considered indefinitely reinvested. While based on current operating plans the Company does not foresee a need to repatriate these funds, if such earnings were repatriated the Company may be required to record incremental U.S. taxes on the repatriated funds.
The Company funds its worldwide cash needs through a combination of cash flows from operations, borrowings under its revolving credit facilities and the acceleration of cash receipts under its receivables securitization and factoring facilities. As of December 31, 2014, the Company has available capacity of $25 under its North American securitization facility, $32 under its European securitization facility and $1,160 under its revolving credit facilities. The Company has current maturities of long-term debt of $177 due in 2015 and is not required to refinance or renegotiate any of its current sources of liquidity in 2015 other than its North American securitization facility.
The Company has substantial debt outstanding. The ratio of total debt, less cash and cash equivalents, to total capitalization was 91.7% and 91.6% at December 31, 2014 and 2013. Total capitalization is defined by the Company as total debt plus total equity, less cash and cash equivalents.
The Company's debt agreements contain covenants that limit the ability of the Company and its subsidiaries to, among other things, incur additional debt, pay dividends or repurchase capital stock, make certain other restricted payments, create liens and engage in sale and leaseback transactions. These restrictions are subject to a number of exceptions, however, which allow the Company to incur additional debt, create liens or make otherwise restricted payments. The amount of restricted payments permitted to be made, including dividends and repurchases of the Company's common stock, may be limited to the cumulative excess of $200 plus 50% of adjusted net income plus proceeds from the exercise of employee stock options over the aggregate of restricted payments made since July 2004. Adjustments to net income may include, but are not limited to, items such as asset impairments, gains and losses from asset sales and early extinguishments of debt.
The Company’s revolving credit facility and term loans also contain various financial covenants. The interest coverage ratio is calculated as Adjusted EBITDA divided by interest expense. Adjusted EBITDA is calculated as the sum of net income attributable to Crown Holdings, net income attributable to noncontrolling interests, income taxes, interest expense, depreciation and amortization, and certain non-cash charges. The Company’s interest coverage ratio of 4.74 to 1.0 at December 31, 2014 was in compliance with the covenant requiring a ratio of at least 2.85 to 1.0. The total net leverage ratio is calculated as total net debt divided by Adjusted EBITDA, as defined above. Total net debt is defined in the credit agreement as total debt less cash and cash equivalents. The Company’s total net leverage ratio of 3.58 to 1.0 at December 31, 2014 was in compliance with the covenant requiring a ratio no greater than 4.75 to 1.0. The ratios are calculated at the end of each quarter using debt and cash balances as of the end of the quarter and Adjusted EBITDA and interest expense for the most recent twelve months. Failure to meet the financial
covenants could result in the acceleration of any outstanding amounts due under the revolving credit facilities, term loan facilities and farm credit facility.
Crown Holdings, Inc.
The Company’s current sources of liquidity and borrowings expire or mature as follows: its $200 North American securitization facility in December 2015; its €130 ($157 at December 31, 2014) European securitization facility in December 2019; its $1,200 revolving credit facilities in December 2018; its $700 6.25% senior notes in February 2021; its €650 ($786 at December 31, 2014) 4.0% senior notes in July 2022; its $1,000 4.50% senior notes in January 2023; its $350 7.375% senior notes in December 2026; its $64 7.5% senior notes in December 2096; and $356 of other indebtedness in various currencies at various dates through 2020. In addition, the Company's term loan and farm credit facilities mature as follows: $86 in December 2015, $168 in December 2016, $251 in December 2017, $1,156 in December 2018 and $344 in December 2019.
CONTRACTUAL OBLIGATIONS
Contractual obligations as of December 31, 2014 are summarized in the table below.
All amounts due in foreign currencies are translated at exchange rates as of December 31, 2014.
The Company expects to fund its obligations through a combination of cash flows from operations, borrowings under its revolving credit facilities and the acceleration of cash receipts under its receivables securitization and factoring programs.
Interest on long-term debt is presented through 2020 only and represents the interest that will accrue by year based on debt outstanding and interest rates in effect as of December 31, 2014.
Projected pension contributions represent the Company's expected funding contributions for the next five years. Postretirement obligations represent expected payments to retirees for medical and life insurance coverage for the next ten years. These projections require the use of numerous estimates and assumptions such as discount rates, rates of return on plan assets, compensation increases, health care cost increases, mortality and employee turnover and have therefore been provided for only five years for pension and ten years for postretirement.
Purchase obligations include commitments for raw materials and utilities at December 31, 2014. These commitments specify significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable pricing provisions; and the approximate timing of transactions.
The table above excludes $26 of liabilities for unrecognized tax benefits because the Company is unable to estimate when these amounts may be paid, if at all. See Note W to the consolidated financial statements for additional information on the Company’s unrecognized tax benefits.
In addition, the table above excludes the incremental debt incurred in 2015 related to the Company's acquisition of Empaque as discussed in Note B to the consolidated financial statements.
In order to reduce leverage and future interest payments, the Company may from time to time repurchase outstanding notes and debentures with cash, exchange shares of its common stock for the Company’s outstanding notes and debentures, or seek to refinance its existing credit facilities and other indebtedness. The Company will evaluate any such transactions in light of then existing market conditions and may determine not to pursue such transactions.
Crown Holdings, Inc.
MARKET RISK
In the normal course of business the Company is subject to risk from adverse fluctuations in foreign exchange rates, interest rates and commodity prices. The Company manages these risks through a program that includes the use of derivative financial instruments, primarily swaps and forwards. Counterparties to these contracts are major financial institutions. These instruments are viewed as risk management tools, involve little complexity, and are not used for trading or speculative purposes. The extent to which the Company uses such instruments is dependent upon its access to them in the financial markets and its use of other methods, such as netting exposures for foreign exchange risk and establishing sales arrangements that permit the pass-through to customers of changes in commodity prices and foreign exchange rates, to effectively achieve its goal of risk reduction. The Company’s objective in managing its exposure to market risk is to limit the impact on earnings and cash flow.
The Company manages foreign currency exposures at the operating unit level. Exposures that cannot be naturally offset within an operating unit may be hedged with derivative financial instruments where possible and cost effective in the Company’s judgment. Foreign exchange contracts generally mature within twelve months.
The table below provides information in U.S. dollars as of December 31, 2014 about the Company’s forward currency exchange contracts. The contracts primarily hedge anticipated transactions, unrecognized firm commitments and intercompany debt. The contracts with no amounts in the fair value column have a fair value of less than $1.
At December 31, 2014, the Company had additional contracts with an aggregate notional value of approximately $300 to purchase or sell other currencies, primarily Asian currencies, including the Malaysian Ringgit, the Thai Baht, and the Chinese Renminbi; European currencies, including the Hungarian Florint; and African currencies, including the Moroccan Dirham and the Tunisian Dinar; and the Canadian Dollar. The aggregate fair value of these contracts was a loss of less than $1.
The Company, from time to time, may manage its interest rate risk associated with fluctuations in variable interest rates through interest rate swaps. The use of interest rate swaps and other methods of mitigating interest rate risk may increase overall interest expense.
The table below presents principal cash flows and related interest rates by year of maturity for the Company’s debt obligations as of December 31, 2014. Variable interest rates disclosed represent the weighted average rates at December 31, 2014.
Total future payments at December 31, 2014 include $3,570 of U.S. dollar-denominated debt, $1,653 of euro-denominated debt and $38 of debt denominated in other currencies.
Crown Holdings, Inc.
The Company uses various raw materials, such as steel and aluminum in its manufacturing operations, which expose it to risk from adverse fluctuations in commodity prices. In 2014, consumption of steel and aluminum represented 27% and 37%, respectively, of the Company’s consolidated cost of products sold, excluding depreciation and amortization. The Company primarily manages its risk to adverse commodity price fluctuations and surcharges through contracts that pass through raw material costs to customers.
The Company may, however, be unable to increase its prices to offset increases in raw material costs without suffering reductions in unit volume, revenue and operating income, and any price increases may take effect after related cost increases, reducing operating income in the near term.
In addition, the Company's manufacturing facilities are dependent, in varying degrees, upon the availability of water and processed energy, such as natural gas and electricity.
Aluminum, a basic raw material used by the Company, is subject to the risk of significant price fluctuations which may be hedged by the Company through forward commodity contracts. Current contracts involve aluminum forwards with a notional value of $213 and a fair value loss of $8. The maturities of the commodity contracts closely correlate to the anticipated purchases of those commodities. These contracts are used in combination with commercial supply contracts with customers to manage exposure to price volatility.
See Note S to the consolidated financial statements for further information on the Company’s derivative financial instruments.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has certain guarantees and indemnification agreements that could require the payment of cash upon the occurrence of certain events. The guarantees and agreements are further discussed under Note N to the consolidated financial statements. The Company also utilizes receivables securitization and factoring facilities and derivative financial instruments as further discussed under Note E and Note S, respectively, to the consolidated financial statements.
ENVIRONMENTAL MATTERS
Compliance with the Company’s Environmental Protection Policy is mandatory and the responsibility of each employee of the Company. The Company is committed to the protection of human health and the environment and is operating within the increasingly complex laws and regulations of national, state, and local environmental agencies or is taking action to achieve compliance with such laws and regulations. Environmental considerations are among the criteria by which the Company evaluates projects, products, processes and purchases.
The Company is dedicated to a long-term environmental protection program and has initiated and implemented many pollution prevention programs with an emphasis on source reduction. The Company continues to reduce the amount of metal used in the manufacture of steel and aluminum containers through “lightweighting” programs. The Company recycles nearly 100% of scrap aluminum, steel and copper used in its manufacturing processes. Many of the Company’s programs for pollution prevention reduce operating costs and improve operating efficiencies.
The potential impact on the Company’s operations of climate change and potential future climate change regulation in the jurisdictions in which the Company operates is highly uncertain. See the risk factor entitled “The Company is subject to costs and liabilities related to stringent environmental and health and safety standards” in Part I, Item 1A of this Annual Report.
See Note N to the consolidated financial statements for additional information on environmental matters including the Company's accrual for environmental remediation costs.
INFLATION
Inflation has not had a significant impact on the Company over the past three years and the Company does not expect it to have a significant impact on the results of operations or financial condition in the foreseeable future.
CRITICAL ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America which require that management make numerous estimates and assumptions. Actual results could differ from those estimates and assumptions, impacting the reported results of operations and financial position of the Company. The Company’s significant accounting policies are more fully described under Note A to the consolidated financial statements. Certain accounting policies, however, are considered to be critical in that (i) they are most important to the depiction
Crown Holdings, Inc.
of the Company’s financial condition and results of operations and (ii) their application requires management’s most subjective judgment in making estimates about the effect of matters that are inherently uncertain.
Asbestos Liabilities
The Company’s potential liability for asbestos cases is highly uncertain due to the difficulty of forecasting many factors, including the level of future claims, the rate of receipt of claims, the jurisdiction in which claims are filed, the nature of future claims (including the seriousness of alleged disease, whether claimants allege first exposure to asbestos before or during 1964 and the alleged link to Crown Cork), the terms of settlements of other defendants with asbestos-related liabilities, bankruptcy filings of other defendants (which may result in additional claims and higher settlement demands for non-bankrupt defendants), potential liabilities for claims filed after the Company’s ten-year projection period and the effect of state asbestos legislation (including the validity and applicability of the Pennsylvania legislation to non-Pennsylvania jurisdictions, where the substantial majority of the Company’s asbestos cases are filed). See Note M to the consolidated financial statements for additional information regarding the provision for asbestos-related costs.
At the end of each quarter, the Company considers whether there have been any material developments that would cause it to update its asbestos accrual calculations. Absent any significant developments in the asbestos litigation environment in general or with respect to the Company specifically, the Company updates its accrual calculations in the fourth quarter of each year. The Company’s asbestos accrual is an estimate of the amounts expected to be paid over the next ten years including outstanding claims, projected future claims and legal costs. Outstanding claims used in the accrual calculation are adjusted for factors such as claims filed in those states where the Company’s liability is limited by statute, claims alleging first exposure to asbestos after 1964 which are assumed to have no value and claims which are projected will never be paid which are assumed to have a reduced or nominal value based on the length of time outstanding. Projected future claims are calculated based on actual data for the most recent five years and are adjusted to account for the expectation that a percentage of these claims will never be paid. Outstanding and projected claims are multiplied by the average settlement cost of those claims for the most recent five years.
Because the Company’s asbestos liability is an estimate of the amounts expected to be paid over the next ten years, the Company expects to record a charge each year to account for projected claims in the new tenth year. As claims are not submitted or settled evenly throughout the year, it is difficult to predict at any time during the year whether the number of claims or average settlement cost over the five year period ending December 31 of such year will increase compared to the prior five year period.
In 2014, the Company recorded a charge of $45 to increase its asbestos liability compared to charges of $32 in 2013 and $35 in 2012. As described above, each year's charge includes the impact of an additional year of settlement and legal costs in the Company’s projection period. The charge increased in 2014 primarily due to Crown Cork's recent settlement experience which has been to settle a higher percentage of claims alleging serious disease (primarily mesothelioma) at higher dollar amounts. In addition, because a higher percentage of claims filed in recent years allege serious disease, a higher percentage of claims projected into the future also relate to serious diseases and are therefore valued at higher dollar amounts. For example, of the projected claims related to claimants alleging first exposure to asbestos before or during 1964 and filed in states that have not enacted asbestos legislation, 57%, 56% and 54% in 2014, 2013 and 2012 relate to claims alleging serious diseases such as mesothelioma.
In 2014, 2013 and 2012, the five year average settlement cost per claim was $12,800, $12,100 and $10,600. If the recent trend of settling a higher percentage of claims alleging serious disease (primarily mesothelioma) which are settled for higher amounts continues, average settlement costs per claim are likely to increase and, if not offset by a reduction in overall claims and settlements, the Company will record additional charges in the future. A 10% change in either the average cost per claim or the number of projected claims would increase or decrease the estimated liability at December 31, 2014 by $28 for the following ten-year period. A 10% increase in these two factors at the same time would increase the estimated liability at December 31, 2014 by $58 for the following ten-year period. A 10% decrease in these two factors at the same time would decrease the estimated liability at December 31, 2014 by $52 for the following ten-year period.
Goodwill Impairment
The Company performs a goodwill impairment review in the fourth quarter of each year or when facts and circumstances indicate goodwill may be impaired. In accordance with the accounting guidance, the Company may first perform a qualitative assessment on none, some, or all of its reporting units to determine whether further quantitative impairment testing is necessary. Factors that the Company may consider in its qualitative assessment include, but are not limited to, general economic conditions, changes in the markets in which the Company operates, changes in input costs that may affect earnings and cash flows, trends over multiple
periods and the difference between the reporting unit's fair value and carrying amount as determined in the most recent fair value calculation.
Crown Holdings, Inc.
The quantitative impairment test involves a number of assumptions and judgments, including the calculation of fair value for the Company’s identified reporting units. The Company determines the estimated fair value for each reporting unit based on the average of the estimated fair values calculated using market values for comparable businesses and discounted cash flow projections. The Company uses an average of the two methods in estimating fair value because it believes they provide an equal probability of yielding an appropriate fair value for the reporting unit. The Company’s estimates of future cash flows include assumptions concerning future operating performance and economic conditions and may differ from actual future cash flows. Under the first method of calculating estimated fair value, the Company obtains available information regarding multiples used in recent transactions, if any, involving transfers of controlling interests in the packaging industry. The Company also reviews publicly available trading multiples based on the enterprise value of companies in the packaging industry whose shares are publicly traded. The appropriate multiple is applied to the forecasted Adjusted EBITDA (a non-GAAP item defined by the Company as net customer sales, less cost of products sold excluding depreciation and amortization, less selling and administrative expenses) of the reporting unit to obtain an estimated fair value. Under the second method, fair value is calculated as the sum of the projected discounted cash flows of the reporting unit over the next five years and the terminal value at the end of those five years. The projected cash flows generally include a no growth assumption unless there has recently been a material change in the business or a material change is forecasted. The discount rate used is based on the average weighted-average cost of capital of companies in the packaging industry, which information is available through various sources.
The terminal value at the end of five years is the product of forecasted Adjusted EBITDA at the end of the five year period and the trading multiple. The Company used an EBITDA multiple of 8.0 times in its 2014 review which increased from 7.5 times in 2013 due to recent transactions in the industry. The Company used a discount rate of 6.8% in its 2014 review which is consistent with the discount rate used in the 2013 review and is supported by the weighted average cost of capital of companies in the packaging industry.
The Company completed its annual review for 2014 and determined that no adjustments to the carrying value of goodwill were necessary. Although no goodwill impairment was recorded, there can be no assurances that future goodwill impairments will not occur. Based upon the Company’s qualitative and quantitative assessment including consideration of the sensitivity of the assumptions made and methods used to determine fair value, industry trends and other relevant factors, the Company did not have any reporting unit at the end of 2014 whose fair value did not materially exceed its carrying value.
As of December 31, 2014, the estimated fair value of the European Aerosols and Specialty Packaging reporting unit, using the methods and assumptions described above, was 47% higher than its carrying value, and the reporting unit had $127 of goodwill. The maximum potential effect of weighting the two valuation methods other than equally would have been to increase or decrease the estimated fair value by $2. Assuming all other factors remain the same, a $1 change in forecasted annual Adjusted EBITDA changes the excess of estimated fair value over carrying value by $8; a change of 0.5 in the assumed EBITDA multiple changes the excess of estimated fair value over carrying value by $12; and an increase in the discount rate from 6.8% to 7.8% changes the excess of estimated fair value over carrying value by $4. Under each of these scenarios, the reporting unit's fair value exceeded its carrying value. If future operating results were to decline causing the estimated fair value to fall below its carrying value, it is possible that an impairment charge of up to $127 could be recorded.
In addition, the estimated fair value of the Company’s European Food reporting unit was 40% higher than its carrying value. The reporting unit includes Mivisa which was acquired in April 2014. At the date of acquisition, the fair value of Mivisa equaled its carrying value. In connection with the acquisition, the Company recorded $931 of goodwill.
Long-lived Assets Impairment
The Company performs an impairment review of its long-lived assets, including definite-lived intangible assets and property, plant and equipment, when facts and circumstances indicate the carrying value may not be recoverable from its undiscounted cash flows. Any impairment loss is measured by comparing the carrying amount of the asset to its fair value. The Company’s estimates of future cash flows involve assumptions concerning future operating performance, economic conditions and technological changes that may affect the future useful lives of the assets. These estimates may differ from actual cash flows or useful lives.
Tax Valuation Allowance
The Company records a valuation allowance to reduce its deferred tax assets when it is more likely than not that a portion of the tax assets will not be realized. The estimate of the amount that will not be realized requires the use of assumptions concerning the Company’s future taxable income. These estimates are projected through the life of the related deferred tax assets based on assumptions that management believes are reasonable. The Company considers all sources of taxable income in estimating its
valuation allowances, including taxable income in any available carry back period; the reversal of taxable temporary differences; tax-planning strategies; and taxable income expected to be generated in the future other than from reversing temporary differences.
Crown Holdings, Inc.
Should the Company change its estimate of the amount of deferred tax assets that it would be able to realize, an adjustment to the valuation allowance would result in an increase or decrease in tax expense in the period such a change in estimate was made. See Note W to the consolidated financial statements for additional information on the Company’s valuation allowances.
Pension and Postretirement Benefits
Accounting for pensions and postretirement benefit plans requires the use of estimates and assumptions regarding numerous factors, including discount rates, rates of return on plan assets, compensation increases, health care cost increases, future rates of inflation, mortality and employee turnover. Actual results may differ from the Company’s actuarial assumptions, which may have an impact on the amount of reported expense or liability for pensions or postretirement benefits. The Company recorded pension expense of $56 in 2014 and currently projects its 2015 pension expense to be $42 using foreign currency exchange rates in effect at December 31, 2014.
The rate of return assumptions are reviewed at each measurement date based on the pension plans’ investment policies, current asset allocations and an analysis of the historical returns of the capital markets.
The U.S. plan’s assumed rate of return was 8.0 % in 2014 and is 8.0% in 2015. The U.K. plan’s assumed rate of return was 6.25% in 2014 and is 5.0% in 2015. The assumed rate of return for 2015 was calculated on a similar basis to 2014 as described in Note V to the consolidated financial statements. A 0.25% change in the expected rates of return would change 2015 pension expense by approximately $12.
Discount rates were selected using a method that matches projected payouts from the plans with zero-coupon AA bond yield curves in the respective currencies. The yield curves were constructed from the underlying bond price and yield data collected as of the plans’ measurement date and are represented by a series of annualized, individual discount rates with durations ranging from six months to thirty years. Each discount rate in the curve was derived from an equal weighting of the AA bond universe, apportioned into distinct maturity groups. These individual discount rates were then converted into a single equivalent discount rate. To assure that the resulting rates can be achieved by the plan, only bonds with sufficient capacity that satisfy certain criteria and are expected to remain available through the period of maturity of the plan benefits were used to develop the discount rate. A 0.25% change in the discount rates from those used at December 31, 2014 would change 2015 pension expense by approximately $3 and postretirement expense by approximately $1. A 0.25% change in the discount rates from those used at December 31, 2014 would have changed the pension benefit obligation by approximately $177 and the postretirement benefit obligation by $4 as of December 31, 2014. See Note V to the consolidated financial statements for additional information on pension and postretirement benefit obligations and assumptions.
As of December 31, 2014, the Company had pre-tax unrecognized net losses in other comprehensive income of $2,423 related to its pension plans and a net loss of $69 related to its other postretirement benefit plans. Unrecognized gains and losses arise each year primarily due to changes in discount rates, differences in actual plan asset returns compared to expected returns, and changes in actuarial assumptions such as mortality. For example, the unrecognized net loss in the Company’s pension plans included a current year gain of $379 due to actual asset returns higher than expected returns and a loss of $553 primarily due to lower discount
rates at the end of 2014 compared to 2013. Unrecognized gains and losses are accumulated in other comprehensive income and the portion in each plan that exceeds 10% of the greater of that plan’s assets or projected benefit obligation is amortized to income over future periods. The Company’s pension expense for the year ended December 31, 2014 included charges of $114 for the amortization of unrecognized net losses, and the Company estimates charges of $103 in 2015. The unrecognized net losses in the pension plans as of December 31, 2014 include $1,293 in the U.K. defined benefit plan, $964 in the U.S defined benefit plans and $144 in the Canadian defined benefit plans. Amortizable losses in the U.K. plan are being recognized over 21 years, representing the average expected life of inactive employees as over 90% of the plan participants are inactive and the fund is closed to new participants. Amortizable losses in the U.S. and Canadian plans are being recognized over either the average expected life of inactive employees or the remaining service life of active participants depending on the status of the individual plans. The weighted average amortization period for the U.S. plans is 16 years. The weighted average amortization period for the Canadian plans is 14 years.
An increase of 10% in the number of years used to amortize unrecognized losses in each plan would decrease estimated charges for 2015 by $9. A decrease of 10% in the number of years would increase the estimated 2015 charge by $12.
Unrecognized net losses of $69 in the Company’s other postretirement benefit plans as of December 31, 2014, primarily include $68 in the U.S. plans, with the amortizable portion being recognized over the average remaining service life of active participants of 10 years. The Company’s other postretirement benefits expense for the year ended December 31, 2014 included a loss of $6 for the amortization of unrecognized net losses, and the Company estimates losses of $5 in 2015. An increase of 10% in the number of years used to amortize the unrecognized losses in each plan would decrease the estimated charge for 2015 by $1. A decrease of 10% in the number of years would increase the estimated charge for 2015 by $1.
Crown Holdings, Inc.
RECENT ACCOUNTING GUIDANCE
In April 2014, the FASB issued changes to the definition of a discontinued operation to include only disposals that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The guidance, which will be effective for the Company on January 1, 2015, applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date.
In May 2014, the FASB issued new guidance related to how an entity should recognize revenue. The guidance specifies that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In addition, the guidance expands the required disclosures related to revenue and cash flows from contracts with customers. The guidance is effective for the Company beginning in the first quarter of 2017. Early adoption is not permitted and retrospective application is permitted, but not required. The Company is currently evaluating the impact of adopting this guidance on its financial position and results of operations.
See Note A to the consolidated financial statements for information on recently adopted accounting guidance.
FORWARD LOOKING STATEMENTS
Statements in this Annual Report, including those in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the discussions of the provision for asbestos under Note M and other contingencies under Note N to the consolidated financial statements included in this Annual Report and in discussions incorporated by reference into this Annual Report (including, but not limited to, those in “Compensation Discussion and Analysis” in the Company’s Proxy Statement), 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.” Forward-looking statements can be identified by words, such as “believes,” “estimates,” “anticipates,” “expects” and other words of similar meaning in connection with a discussion of future operating or financial performance. These may include, among others, statements relating to (i) the Company’s plans or objectives for future operations, products or financial performance, (ii) the Company’s indebtedness and other contractual obligations, (iii) the impact of an economic downturn or growth in particular regions, (iv) anticipated uses of cash, (v) cost reduction efforts and expected savings, (vi) the Company’s policies with respect to executive compensation and (vii) the expected outcome of contingencies, including with respect to asbestos-related litigation and pension and postretirement liabilities.
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.
Important factors that could cause the actual results of operations or financial condition of the Company to differ include, but are not necessarily limited to, the ability of the Company to expand successfully in international and emerging markets; whether the acquisition of Empaque will be accretive to the Company’s earnings; whether sales and profits of Empaque will continue to grow; whether the combination of the Company and Empaque will provide benefits to customers and shareholders; whether the operations of Empaque can be successfully integrated into the Company’s operations; the ability of the Company to repay, refinance or restructure its short and long-term indebtedness on adequate terms and to comply with the terms of its agreements relating to debt; the impact of the recent European Sovereign debt crisis; the Company’s ability to generate significant cash to meet its obligations and invest in its business and to maintain appropriate debt levels; restrictions on the Company’s use of available cash under its debt agreements; changes or differences in U.S. or international economic or political conditions, such as inflation or fluctuations in interest or foreign exchange rates (and the effectiveness of any currency or interest rate hedges), tax rates and tax laws (including with respect to taxation of unrepatriated non-U.S. earnings or as a result of the depletion of net loss or foreign tax credit carryforwards); the impact of health care reform in the U.S.; the impact of foreign trade laws and practices; the collectability of receivables; war or acts of terrorism that may disrupt the Company’s production or the supply or pricing of raw materials, including in the Company’s Middle East operations, impact the financial condition of customers or adversely affect the Company’s ability to refinance or restructure its remaining indebtedness; changes in the availability and pricing of raw materials(including aluminum can sheet, steel tinplate, energy, water, inks and coatings) and the Company’s ability to pass raw material, energy and freight price increases and surcharges through to its customers or to otherwise manage these commodity pricing risks; the Company’s ability to obtain and maintain adequate pricing for its products, including the impact on the Company’s revenue, margins and market share and the ongoing impact of price increases; energy and natural resource costs; the cost and other effects of legal and administrative cases and proceedings, settlements and investigations; the outcome of asbestos-related litigation (including the number and size of future claims and the terms of settlements, and the impact of bankruptcy filings by other companies with asbestos-related liabilities, any of which could increase Crown Cork’s asbestos-related costs over time, the adequacy of reserves established for asbestos-related liabilities, Crown Cork’s ability to obtain resolution without payment of asbestos-related claims
Crown Holdings, Inc.
by persons alleging first exposure to asbestos after 1964, and the impact of state legislation dealing with asbestos liabilities and any litigation challenging that legislation and any future state or federal legislation dealing with asbestos liabilities); the Company’s ability to realize deferred tax benefits; changes in the Company’s critical or other accounting policies or the assumptions underlying those policies; labor relations and workforce and social costs, including the Company’s pension and postretirement obligations and other employee or retiree costs; investment performance of the Company’s pension plans; costs and difficulties related to the acquisition of a business and integration of acquired businesses; the impact of any potential dispositions, acquisitions or other strategic realignments, which may impact the Company’s operations, financial profile, investments or levels of indebtedness; the Company’s ability to realize efficient capacity utilization and inventory levels and to innovate new designs and technologies for its products in a cost-effective manner; competitive pressures, including new product developments, industry overcapacity, or changes in competitors’ pricing for products; the Company’s ability to achieve high capacity utilization rates for its equipment; the Company’s ability to maintain, develop and capitalize on competitive technologies for the design and manufacture of products and to withstand competitive and legal challenges to the proprietary nature of such technology; the Company’s ability to protect its information technology systems from attacks or catastrophic failure; the strength of the Company’s cyber-security; the Company’s ability to generate sufficient production capacity; the Company’s ability to improve and expand its existing product and product lines; the impact of overcapacity on the end-markets the Company serves; loss of customers, including the loss of any significant customers; changes in consumer preferences for different packaging products; the financial condition of the Company’s vendors and customers; weather conditions, including their effect on demand for beverages and on crop yields for fruits and vegetables stored in food containers; the impact of natural disasters, including in emerging markets; changes in governmental regulations or enforcement practices, including with respect to environmental, health and safety matters and restrictions as to foreign investment or operation; the impact of increased governmental regulation on the Company and its products, including the regulation or restriction of the use of bisphenol-A; the impact of the Company’s recent initiatives to generate additional cash, including the reduction of working capital levels and capital spending; the ability of the Company to realize cost savings from its restructuring programs; the Company’s ability to maintain adequate sources of capital and liquidity; costs and payments to certain of the Company’s executive officers in connection with any termination of such executive officers or a change in control of the Company; the impact of existing and future legislation regarding refundable mandatory deposit laws in Europe for non-refillable beverage containers and the implementation of an effective return system; and changes in the Company’s strategic areas of focus, which may impact the Company’s operations, financial profile or levels of indebtedness.
Some of the factors noted above are discussed elsewhere in this Annual Report and prior Company filings with the Securities and Exchange Commission (“SEC”), including within Part I, Item 1A, “Risk Factors” in this Annual Report. In addition, other factors have been or may be discussed from time to time in the Company’s SEC filings.
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 SEC, the Company does not intend to review or revise any particular forward-looking statement in light of future events.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Market Risk” in this Annual Report is incorporated herein by reference.
Crown Holdings, Inc.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Crown Holdings, Inc.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). The Company’s system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of the inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013). Based on its assessment, management has concluded that, as of December 31, 2014, the Company’s internal control over financial reporting was effective based on those criteria.
The scope of management's assessment of the effectiveness of internal control over financial reporting includes all of the Company's consolidated operations except for the operations of Mivisa, which the Company acquired through a purchase business combination during the year ended December 31, 2014. Mivisa represents approximately 5% of the Company's consolidated revenues for the year ended December 31, 2014 and 11% of the Company's consolidated total assets as of December 31, 2014.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2014 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Crown Holdings, Inc.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Crown Holdings, Inc:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Crown Holdings, Inc. and its subsidiaries at December 31, 2014 and December 31, 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management's Report on Internal Control over Financial Reporting, management has excluded Mivisa Envases, S.A.U. ("Mivisa") from its assessment of internal control over financial reporting as of December 31, 2014 because it was acquired by the Company in a purchase business combination during 2014. We have also excluded Mivisa from our audit of internal control over financial reporting. Mivisa is a wholly-owned subsidiary whose total assets and total revenues represent $1.1 billion and $488 million, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2014.
/s/ PricewaterhouseCoopers LLP
Philadelphia, PA
March 2, 2015
Crown Holdings, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
The accompanying notes are an integral part of these consolidated financial statements.
Crown Holdings, Inc.
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
Crown Holdings, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
The accompanying notes are an integral part of these consolidated financial statements.
Crown Holdings, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in millions)
The accompanying notes are an integral part of these consolidated financial statements.
Crown Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share, per share, employee and statistical data)
A.
Summary of Significant Accounting Policies
Business and Principles of Consolidation. The consolidated financial statements include the accounts of Crown Holdings, Inc. (the “Company”) and its consolidated subsidiary companies (where the context requires, the “Company” shall include reference to the Company and its consolidated subsidiary companies).
The Company manufactures and sells metal containers, metal closures, and canmaking equipment. These products are manufactured in the Company’s plants both within and outside the U.S. and are sold through the Company’s sales organization to the soft drink, food, citrus, brewing, household products, personal care and various other industries. The financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and reflect management’s estimates and assumptions. Actual results could differ from those estimates, impacting reported results of operations and financial position. All intercompany accounts and transactions are eliminated in consolidation. In deciding which entities should be reported on a consolidated basis, the Company first determines whether the entity is a variable interest entity (“VIE”). If an entity is a VIE, the Company determines whether it is the primary beneficiary. If an entity is not a VIE, the Company consolidates those entities in which it has control, including certain subsidiaries that are not majority-owned. Certain of the Company’s agreements with noncontrolling interests contain provisions in which the Company would surrender certain decision-making rights upon a change in control of the Company. Accordingly, consolidation of these operations may no longer be appropriate subsequent to a change in control of the Company, as defined in the agreements. Investments in companies in which the Company does not have control, but has the ability to exercise significant influence over operating and financial policies, are accounted for by the equity method. Investments in securities where the Company does not have the ability to exercise significant influence over operating and financial policies, and whose fair value is readily determinable such as those listed on a securities exchange, are referred to as “available for sale securities” and reported at their fair value with unrealized gains and losses reported in accumulated other comprehensive income in equity. Other investments are carried at cost.
Foreign Currency Translation. For non-U.S. subsidiaries which operate in a local currency environment, assets and liabilities are translated into U.S. dollars at year-end exchange rates. Income, expense and cash flow items are translated at average exchange rates prevailing during the year. Translation adjustments for these subsidiaries are accumulated as a separate component of accumulated other comprehensive income in equity. For non-U.S. subsidiaries that use a U.S. dollar functional currency, local currency inventories and property, plant and equipment are translated into U.S. dollars at approximate rates prevailing when acquired; all other assets and liabilities are translated at year-end exchange rates. Inventories charged to cost of sales and depreciation are remeasured at historical rates; all other income and expense items are translated at average exchange rates prevailing during the year. Gains and losses which result from remeasurement are included in earnings.
Revenue Recognition. Revenue is recognized from product sales when the goods are shipped and the title and risk of loss pass to the customer. Provisions for discounts and rebates to customers, returns, and other adjustments are estimated and provided for in the period that the related sales are recorded. Taxes collected from customers and remitted to governmental authorities are excluded from net sales. Shipping and handling fees and costs from product sales are reported as cost of products sold.
Stock-Based Compensation. The Company has stock-based employee compensation plans that are currently comprised of fixed stock option grants and restricted and deferred stock awards. Compensation expense is recognized over the vesting period on a straight-line basis using the grant date fair value of the award and the estimated number of awards that are expected to vest. The Company’s plans provide for stock awards which may include accelerated vesting upon retirement, disability, or death of eligible employees. The Company considers a stock-based award to be vested when the service period is no longer contingent on the employee providing future service. Accordingly, the related compensation cost is recognized immediately for awards granted to retirement-eligible individuals or over the period from the grant date to the date that retirement eligibility is achieved, if less than the stated vesting period.
Cash and Cash Equivalents. Cash equivalents represent investments with maturities of three months or less from the time of purchase and are carried at cost, which approximates fair value because of the short maturity of those instruments. Outstanding checks in excess of funds on deposit are included in accounts payable.
Crown Holdings, Inc.
Accounts Receivable and Allowance for Doubtful Accounts. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the best estimate of the amount of probable credit losses in the existing accounts receivable. The allowance is determined based on a review of individual accounts for collectability, generally focusing on those accounts that are past due or experiencing financial difficulties. The current year expense to adjust the allowance for doubtful accounts is recorded within selling and administrative expense in the consolidated statements of operations.
The Company uses receivables securitization facilities in the normal course of business as part of managing its cash flows. The Company derecognizes receivables sold and recognizes any deferred purchase price in prepaid expenses and other current assets in the Company’s Consolidated Balance Sheet. The deferred purchase price receivable is reduced as collections of the underlying receivables occur; however, as this is a revolving program, the sale of new receivables will result in an increase in the deferred purchase price receivable. The net change in the deferred purchase price receivable is reflected in the receivables line item on the Company’s Consolidated Statement of Cash Flows. This activity is reflected as an operating cash flow because the related customer receivables are the result of an operating activity with an insignificant, short-term interest rate risk.
Collections from customers on securitized or factored receivables and related fees and costs are included in operating activities in the Consolidated Statements of Cash Flows. Proceeds and repayments related to securitization or factoring transactions that do not qualify for sale accounting are included in financing activities in the Consolidated Statements of Cash Flows.
Inventory Valuation. Inventories are stated at the lower of cost or market, with cost for U.S. inventories principally determined under the first-in, first-out (“FIFO”) method and for non-U.S. inventories under the FIFO or average cost method.
Property, Plant and Equipment. Property, plant and equipment (“PP&E”) is carried at cost less accumulated depreciation and includes expenditures for new facilities and equipment and those costs which substantially increase the useful lives or capacity of existing PP&E. Cost of constructed assets includes capitalized interest incurred during the construction and development period. Maintenance and repairs, including labor and material costs for planned major maintenance such as annual production line overhauls, are expensed as incurred. When PP&E is retired or otherwise disposed, the net carrying amount is eliminated with any gain or loss on disposition recognized in earnings at that time.
Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the assets described below (in years). The Company periodically reviews the estimated useful lives of its PP&E and, where appropriate, changes are made prospectively.
The Company, with the assistance of a third party appraiser, completed an evaluation of the estimated useful lives of its two-piece and three-piece canmaking equipment. As a result, effective January 1, 2013, the company adjusted the estimated useful lives of its canmaking equipment to reflect its current estimate of the useful lives. As a result of this change, for the year ended December 31, 2013, depreciation and amortization was lower by $49 and net income higher by $36 or $0.26 per diluted share compared to 2012.
Goodwill and Intangible Assets. Goodwill is carried at cost and reviewed for impairment in the fourth quarter of each year or when facts and circumstances indicate goodwill may be impaired. Goodwill was allocated to the reporting units at the time of the acquisition based on the relative fair values of the reporting units. In assessing goodwill for impairment, the Company may first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that an impairment is more likely than not, it will perform the two-step quantitative impairment test using a combination of market values for comparable businesses and discounted cash flow projections compared to the reporting unit's carrying value including goodwill. If the carrying value of a reporting unit exceeds its fair value, any impairment loss is measured by comparing the carrying value of the reporting unit’s goodwill to its implied fair value.
Definite-lived intangible assets are tested for impairment,when facts and circumstances indicate the carrying value may not be recoverable from its undiscounted cash flows. If impaired, are written down to fair value based on either discounted cash flows or appraised values.
Crown Holdings, Inc.
Impairment or Disposal of Long-Lived Assets. In the event that facts and circumstances indicate that the carrying value of long-lived assets, primarily PP&E and certain identifiable intangible assets with finite lives, may be impaired, the Company performs a recoverability evaluation. If the evaluation indicates that the carrying value of an asset is not recoverable from its undiscounted cash flows, an impairment loss is measured by comparing the carrying value of the asset to its fair value, based on discounted cash flows. Long-lived assets classified as held for sale are presented in the balance sheet at the lower of their carrying value or fair value less cost to sell.
Taxes on Income. The provision for income taxes is determined using the asset and liability approach. Deferred taxes represent the future expected tax consequences of differences between the financial reporting and tax bases of assets and liabilities based upon enacted tax rates and laws. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Investment tax credits are accounted for using the deferral method.
The with-and-without approach is used to account for utilization of windfall tax benefits arising from the Company’s stock-based compensation plans and only the direct impact of awards is considered when calculating the amount of windfalls or shortfalls. Income tax-related interest is reported as interest expense and penalties are reported as income tax expense.
Derivatives and Hedging. All outstanding derivative financial instruments are recognized in the balance sheet at their fair values. The impact on earnings from recognizing the fair values of these instruments depends on their intended use, their hedge designation and their effectiveness in offsetting changes in the fair values of the exposures they are hedging. Changes in the fair values of instruments designated to reduce or eliminate adverse fluctuations in the fair values of recognized assets and liabilities are reported currently in earnings along with changes in the fair values of the hedged items. Changes in the effective portions of the fair values of instruments used to reduce or eliminate adverse fluctuations in cash flows of anticipated or forecasted transactions are reported in equity as a component of accumulated other comprehensive income. Amounts in accumulated other comprehensive income are reclassified to earnings when the related hedged items impact earnings or the anticipated transactions are no longer probable. Changes in the fair values of derivative instruments that are not designated as hedges or do not qualify for hedge accounting treatment are reported currently in earnings. Amounts reported in earnings are classified consistent with the item being hedged.
The effectiveness of derivative instruments in reducing risks associated with the hedged exposures is assessed at inception and on an ongoing basis. Any amounts excluded from the assessment of hedge effectiveness, and any ineffective portion of designated hedges, are reported currently in earnings. Time value, a component of an instrument’s fair value, is excluded in assessing effectiveness for fair value hedges, except hedges of firm commitments, and included for cash flow hedges.
Hedge accounting is discontinued prospectively when (i) the instrument is no longer effective in offsetting changes in fair value or cash flows of the underlying hedged item, (ii) the instrument expires, is sold, terminated or exercised, or (iii) designating the instrument as a hedge is no longer appropriate.
The Company formally documents all relationships between its hedging instruments and hedged items at inception, including its risk management objective and strategy for establishing various hedge relationships. Cash flows from hedging instruments are classified in the Consolidated Statements of Cash Flows consistent with the items being hedged.
Treasury Stock. Treasury stock is reported at par value. The excess of fair value over par value is first charged to paid-in capital, if any, and then to retained earnings.
Research and Development. Research, development and engineering costs of $39, $36 and $43 in 2014, 2013 and 2012 were expensed as incurred and reported in selling and administrative expense in the Consolidated Statements of Operations. Substantially all engineering and development costs are related to developing new products or designing significant improvements to existing products or processes. Costs primarily include employee salaries and benefits and facility costs.
Reclassifications. Certain reclassifications of prior years’ data have been made to conform to the current year presentation.
Recent Accounting and Reporting Pronouncements.
Recently Adopted Accounting Standards
In the first quarter of 2014, the Company adopted changes to the guidance on a parent’s accounting for cumulative translation adjustments upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. The changes primarily clarified existing guidance regarding when cumulative translation adjustments should be released into earnings upon the occurrence of various events. The change did not impact the Company's financial statements in 2014.
Crown Holdings, Inc.
Recently Issued Accounting Standards
In April 2014, the FASB issued changes to the definition of a discontinued operation to include only disposals that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The guidance, which will be effective for the Company on January 1, 2015, applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date.
In May 2014, the FASB issued new guidance related to how an entity should recognize revenue. The guidance specifies that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In addition, the guidance expands the required disclosures related to revenue and cash flows from contracts with customers. The guidance is effective for the Company beginning in the first quarter of 2017. Early adoption is not permitted and retrospective application is permitted, but not required. The Company is currently evaluating the impact of adopting this guidance on its financial position and results of operations.
B. Acquisitions
Mivisa
On April 23, 2014 , the Company completed its previously announced acquisition of the sole shareholder of Mivisa Envases, S.A.U. (“Mivisa”) for $733, net of $28 in cash acquired, plus $977 of debt assumed. Mivisa, based in Murcia, Spain, primarily serves the vegetable, fruit, fish and meat markets and is the largest food can producer in both the Iberian Peninsula and Morocco. The acquisition is expected to significantly build upon the Company's existing position in the strategically important European food can market by substantially increasing the Company's presence in Spain, one of Europe's leading agricultural economies.
The following table summarizes the consideration transferred to acquire Mivisa and the identifiable assets acquired and liabilities assumed at the acquisition date.
All of the goodwill was assigned to the Company's European Food segment and is not expected to be deductible for tax purposes.
The fair value of the assets acquired includes receivables of $205. The gross contractual amount due is $227 of which $22 is expected to be uncollectible.
The acquired property, plant and equipment will be depreciated on a straight-line basis over the estimated remaining useful lives of the equipment in accordance with the Company's existing policies and procedures.
Intangible assets include $14 of acquired trademarks that were fully amortized in 2014 and $281 of customer relationships that will be amortized over 13 years.
The Company has not finalized its valuation of the assets acquired and as a result has not yet finalized the determination of the fair value of assets acquired and liabilities assumed. The Company expects to finalize its purchase accounting within one year of the acquisition date.
Crown Holdings, Inc.
Mivisa’s results of operations have been included in the Company’s financial statements for the period subsequent to the completion of the acquisition on April 23, 2014. Mivisa contributed sales of approximately $488 and net income attributable to Crown Holdings of $16 for the period from the completion of the acquisition through December 31, 2014.
The following unaudited supplemental pro-forma data presents consolidated information as if the acquisition had been completed on January 1, 2013. These amounts were calculated after conversion to US GAAP, applying the Company's accounting policies and adjusting Mivisa's results to reflect the additional depreciation and amortization that would have been charged assuming the fair value of property, plant and equipment, inventory and intangible assets had been applied from January 1, 2013, together with the consequential tax effects. These adjustments also reflect interest expense incurred on the debt to finance the acquisition and related transaction costs.
The unaudited supplemental pro-forma financial information is based on the Company's preliminary assignment of purchase price and therefore subject to adjustment upon finalizing the purchase price assignment. Pro-forma results excludes the potential realization of cost savings relating to the integration of the two companies and the impact of divestitures required to obtain regulatory approval for the transaction. Further, the pro-forma data should not be considered indicative of the results that would have occurred if the acquisition and related financing had been consummated on January 1, 2013, nor are they indicative of future results.
Other Acquisitions
In 2013, the Company paid $16 to acquire a food can production business in Turkey with $13 of the purchase price allocated to fixed assets and $3 to goodwill.
In 2012, the Company completed the following acquisitions:
The Company established and consolidated a joint venture to acquire shares of Superior Multi-Packaging, Ltd., (“Superior”) a listed company on the Singapore exchange with operations in China, Singapore and Vietnam through a tender offer. The Company's partner in the joint venture contributed its existing shares in Superior to the joint venture and the Company paid $20 to acquire additional shares.
Although the price paid to acquire the public shares of Superior was at a premium to its then trading price, the fair value of the assets acquired and liabilities assumed exceeded the fair value of the consideration transferred. As a result, the Company recognized a bargain purchase gain of $20 included in restructuring and other in the consolidated statements of operations. Net income attributable to noncontrolling interests included $11 of bargain purchase gain allocated to the Company's joint venture partner.
The Company believes that the acquisition resulted in a gain because Superior has underperformed in recent years. Consequently, the Company reassessed the recognition and measurement of the assets acquired and liabilities assumed and concluded that its purchase price allocation was appropriate.
The Company paid $38 to acquire a beverage can and end production business in Vietnam. The purchase price was allocated entirely to fixed assets.
The Company paid $29 to acquire a food can production business in the U.S. The purchase price was allocated $25 to customer contracts, $3 to fixed assets and $1 to inventory.
C. Subsequent Event
On February 18, 2015, the Company completed its acquisition of Empaque, a leading manufacturer of beverage packaging in Mexico, from Heineken N.V., in a cash transaction valued at $1.2 billion, subject to adjustment. Empaque, headquartered in Monterrey, Mexico, currently operates two beverage can plants, a plant that manufacturers beverage can ends, aluminum closures and bottle caps, a glass bottle plant, a glass service facility and a sand mine in Mexico.
Crown Holdings, Inc.
To finance the acquisition, the Company borrowed $75 of additional Term Loan A and $675 of Term Loan B. The remaining financing came from borrowings under the Company's existing credit facility and cash on hand. The interest rate on the Term Loan A facility is LIBOR plus 1.75% and the maturity is in December 2018. The interest rate on the Term Loan B facility is LIBOR plus 3.25% , with a LIBOR floor of 0.75%, and the maturity is in October 2021.
D. Accumulated Other Comprehensive Loss Attributable to Crown Holdings
The following table provides information about the changes in each component of accumulated other comprehensive income for the years ended December 31, 2014 and 2013.
The following table provides information about the amounts reclassified out of accumulated other comprehensive income in 2014 and 2013.
Crown Holdings, Inc.
(a) These accumulated other comprehensive income components are included in the computation of net period pension and postretirement cost. See Note V for further details.
E. Receivables
The Company uses receivables securitization facilities in the normal course of business as part of managing its cash flows. In North America, the Company has a $200 securitization facility that matures in December 2015. In Europe, the Company has a €130 ($157 at December 31, 2014) securitization facility that matures in December 2019. During 2014, the Company amended its securitization facilities to provide for the sale of certain customer receivables without recourse on a revolving basis. The Company determined that prior to these amendments transactions under these facilities did not qualify for sale accounting and had therefore accounted for these transactions as secured borrowings with the receivables and associated liabilities recognized in the Company's Consolidated Balance Sheet.
Crown Holdings, Inc.
In addition, the Company uses receivables factoring arrangements in the normal course of business as part of managing its cash flows. Under these arrangements, the Company sells its entire interest in specified receivables to various third parties. Where the Company has surrendered control over factored receivables, the Company has accounted for the transfers as sales.
The Company’s continuing involvement in factored receivables accounted for as sales is limited to servicing the receivables. The Company receives adequate compensation for servicing the receivables and no servicing asset or liability is recorded.
At December 31, amounts securitized or factored are as follows:
As of December 31, 2014, the Company recognized a deferred purchase price of $76 which was included in prepaid expenses and other current assets in the Company’s Consolidated Balance Sheet related to receivables sold under its North America securitization facility.
In 2014, 2013 and 2012, the Company recorded expenses related to securitization and factoring facilities of $12, $10 and $8 as interest expense.
F. Inventories
G. Goodwill and intangible assets
Changes in the carrying amount of goodwill by reportable segment for the years ended December 31, 2014 and 2013 are as follows:
In 2014, goodwill acquired relates to the acquisition of Mivisa as discussed in Note B. Disposals primarily relate to amounts allocated to the portion of the Company's European Specialty Packaging business which was classified as held for sale at December 31, 2014. See Note O for more information.
The carrying amount of goodwill at December 31, 2014, 2013 and 2012 was net of the following accumulated amortization:
Crown Holdings, Inc.
Gross carrying amounts and accumulated amortization of finite-lived intangible assets by major class at December 31 are:
The table above excludes other intangible assets with a net balance of $2 at December 31, 2014 and December 31, 2013.
Amortization expense for the years ended December 31, 2014, 2013, and 2012 was $31, $3 and $1.
Annual amortization expense for each of the five years subsequent to 2014 is estimated to be $21.
H. Property, Plant and Equipment
I. Other Non-Current Assets
J. Accounts Payable and Accrued Liabilities
Crown Holdings, Inc.
K. Other Non-Current Liabilities
Income taxes payable includes uncertain tax positions as discussed in Note W.
L. Lease Commitments
The Company leases manufacturing, warehouse and office facilities and certain equipment. Certain of the leases contain renewal or purchase options, but the leases do not contain significant contingent rental payments, escalation clauses, rent holidays, rent concessions or leasehold improvement incentives. Under long-term operating leases, minimum annual rentals are $50 in 2014, $38 in 2015, $27 in 2016, $13 in 2017, $7 in 2018 and $47 thereafter. Such rental commitments have been reduced by minimum sublease rentals of $9 due under non-cancelable subleases. Rental expense (net of sublease rental income) was $60, $65 and $63 in 2014, 2013 and 2012. The Company did not have any significant capital leases at December 31, 2014.
M.
Asbestos-Related Liabilities
Crown Cork & Seal Company, Inc. (“Crown Cork”) is one of many defendants in a substantial number of lawsuits filed throughout the United States by persons alleging bodily injury as a result of exposure to asbestos. These claims arose from the insulation operations of a U.S. company, the majority of whose stock Crown Cork purchased in 1963. Approximately ninety days after the stock purchase, this U.S. company sold its insulation assets and was later merged into Crown Cork.
Prior to 1998, amounts paid to asbestos claimants were covered by a fund made available to Crown Cork under a 1985 settlement with carriers insuring Crown Cork through 1976, when Crown Cork became self-insured. The fund was depleted in 1998 and the Company has no remaining coverage for asbestos-related costs.
In recent years, the states of Alabama, Arizona, Florida, Georgia, Idaho, Indiana, Kansas, Michigan, Mississippi, Nebraska, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Utah, Wisconsin and Wyoming enacted legislation that limits asbestos-related liabilities under state law of companies such as Crown Cork that allegedly incurred these liabilities because they are successors by corporate merger to companies that had been involved with asbestos. The legislation, which applies to future and, with the exception of Georgia, South Carolina, South Dakota and Wyoming, pending claims at the time of enactment, caps asbestos-related liabilities at the fair market value of the predecessor's total gross assets adjusted for inflation. Crown Cork has paid significantly more for asbestos-related claims than the total value of its predecessor's assets adjusted for inflation. Crown Cork has integrated the legislation into its claims defense strategy. The Company cautions, however, that the legislation may be challenged and there can be no assurance regarding the ultimate effect of the legislation on Crown Cork.
In June 2003, the State of Texas enacted legislation that limits the asbestos-related liabilities in Texas courts of companies such as Crown Cork that allegedly incurred these liabilities because they are successors by corporate merger to companies that had been involved with asbestos. The Texas legislation, which applies to future claims and pending claims, caps asbestos-related liabilities at the total gross value of the predecessor’s assets adjusted for inflation. Crown Cork has paid significantly more for asbestos-related claims than the total adjusted value of its predecessor’s assets.
On October 22, 2010, the Texas Supreme Court, in a 6-2 decision, reversed a lower court decision, Barbara Robinson v. Crown Cork & Seal Company, Inc., No. 14-04-00658-CV, Fourteenth Court of Appeals, Texas, which had upheld the dismissal of an asbestos-related case against Crown Cork. The Texas Supreme Court held that the Texas legislation was unconstitutional under the Texas Constitution when applied to asbestos-related claims pending against Crown Cork when the legislation was enacted in June of 2003. The Company believes that the decision of the Texas Supreme Court is limited to retroactive application of the Texas
Crown Holdings, Inc.
legislation to asbestos-related cases that were pending against Crown Cork in Texas on June 11, 2003 and therefore, in its accrual, continues to assign no value to claims filed after June 11, 2003.
In December 2001, the Commonwealth of Pennsylvania enacted legislation that limits the asbestos-related liabilities of Pennsylvania corporations that are successors by corporate merger to companies involved with asbestos. The legislation limits the successor’s liability for asbestos to the acquired company’s asset value adjusted for inflation. Crown Cork has paid significantly more for asbestos-related claims than the acquired company’s adjusted asset value. In November 2004, the legislation was amended to address a Pennsylvania Supreme Court decision (Ieropoli v. AC&S Corporation, et. al., No. 117 EM 2002) which held that the statute violated the Pennsylvania Constitution due to retroactive application. The Company cautions that the limitations of the statute, as amended, are subject to litigation and may not be upheld.
The Company further cautions that an adverse ruling in any litigation relating to the constitutionality or applicability to Crown Cork of one or more statutes that limits the asbestos-related liability of alleged defendants like Crown Cork could have a material impact on the Company.
The Company's approximate claims activity for the years ended 2014, 2013 and 2012 was as follows:
The Company's cash payments during the years ended 2014, 2013, and 2012 were as follows:
In the fourth quarter of each year, the Company performs an analysis of outstanding claims and categorizes by year of exposure and state filed. As of December 31, 2014 and December 31, 2013, the Company's outstanding claims are:
The outstanding claims in each period exclude approximately 19,000 inactive claims. Due to the passage of time, the Company considers it unlikely that the plaintiffs in these cases will pursue further action against the Company. The exclusion of these inactive claims had no effect on the calculation of the Company’s accrual as the claims were filed in states, as described above, where the Company’s liability is limited by statute.
With respect to claimants alleging first exposure to asbestos before or during 1964, the Company does not include in its accrual any amounts for settlements in states where the Company’s liability is limited by statute except for certain pending claims in Texas as described earlier.
With respect to post-1964 claims, regardless of the existence of asbestos legislation, the Company does not include in its accrual any amounts for settlement of these claims because of increased difficulty of establishing identification of relevant insulation products as the cause of injury. Given its settlement experience with post-1964 claims, the Company does not believe that an adverse ruling in the Texas or Pennsylvania asbestos litigation cases, or in any other state that has enacted asbestos legislation, would have a material impact on the Company with respect to such claims.
Crown Holdings, Inc.
As of December 31, the percentage of outstanding claims related to claimants alleging serious diseases (primarily mesothelioma and other malignancies) are as follows:
Crown Cork has entered into arrangements with plaintiffs’ counsel in certain jurisdictions with respect to claims which are not yet filed, or asserted, against it. However, Crown Cork expects claims under these arrangements to be filed or asserted against Crown Cork in the future. The projected value of these claims is included in the Company’s estimated liability as of December 31, 2014.
As of December 31, 2014, the Company’s accrual for pending and future asbestos-related claims and related legal costs was $275, including $231 for unasserted claims. The Company’s accrual includes estimated probable costs for claims through the year 2024. The Company’s accrual excludes potential costs for claims beyond 2024 because the Company believes that the key assumptions underlying its accrual are subject to greater uncertainty as the projection period lengthens.
Approximately 88% of the claims outstanding at the end of 2014 were filed by plaintiffs who do not claim a specific amount of damages or claim a minimum amount as established by court rules relating to jurisdiction; approximately 11% were filed by plaintiffs who claim damages of less than $5; approximately 1% were filed by plaintiffs who claim damages from $5 to less than $100 (86% of whom claim damages less than $25) and 3 were filed by plaintiffs who claim damages in excess of $100.
It is reasonably possible that the actual loss could be in excess of the Company’s accrual. However, the Company is unable to estimate the reasonably possible loss in excess of its accrual due to uncertainty in the following assumptions that underlie the Company’s accrual and the possibility of losses in excess of such accrual: the amount of damages sought by the claimant, the Company and claimant’s willingness to negotiate a settlement, the terms of settlements of other defendants with asbestos-related liabilities, the bankruptcy filings of other defendants (which may result in additional claims and higher settlements for non-bankrupt defendants), the nature of pending and future claims (including the seriousness of alleged disease, whether claimants allege first exposure to asbestos before or during 1964 and the claimant’s ability to demonstrate the alleged link to Crown Cork), the volatility of the litigation environment, the defense strategies available to the Company, the level of future claims, the rate of receipt of claims, the jurisdiction in which claims are filed, and the effect of state asbestos legislation (including the validity and applicability of the Pennsylvania legislation to non-Pennsylvania jurisdictions, where the substantial majority of the Company’s asbestos cases are filed).
N.
Commitments and Contingent Liabilities
The Company, along with others in most cases, has been identified by the EPA or a comparable state environmental agency as a Potentially Responsible Party (“PRP”) at a number of sites and has recorded aggregate accruals of $7 for its share of estimated future remediation costs at these sites. The Company has been identified as having either directly or indirectly disposed of commercial or industrial waste at the sites subject to the accrual, and where appropriate and supported by available information, generally has agreed to be responsible for a percentage of future remediation costs based on an estimated volume of materials disposed in proportion to the total materials disposed at each site. The Company has not had monetary sanctions imposed nor has the Company been notified of any potential monetary sanctions at any of the sites.
The Company has also recorded aggregate accruals of $6 for remediation activities at various worldwide locations that are owned by the Company and for which the Company is not a member of a PRP group. Although the Company believes its accruals are adequate to cover its portion of future remediation costs, there can be no assurance that the ultimate payments will not exceed the amount of the Company’s accruals and will not have a material effect on its results of operations, financial position and cash flow. Any possible loss or range of potential loss that may be incurred in excess of the recorded accruals cannot be estimated.
The Company and its subsidiaries are also subject to various other lawsuits and claims with respect to labor, environmental, securities, vendor and other matters arising out of the Company’s normal course of business. While the impact on future financial results is not subject to reasonable estimation because considerable uncertainty exists, management believes that the ultimate liabilities resulting from such lawsuits and claims will not materially affect the Company’s consolidated earnings, financial position or cash flow.
Crown Holdings, Inc.
The Company has various commitments to purchase materials, supplies and utilities as part of the ordinary conduct of business. The Company’s basic raw materials for its products are steel and aluminum, both of which are purchased from multiple sources. The Company is subject to fluctuations in the cost of these raw materials and has periodically adjusted its selling prices to reflect these movements. There can be no assurance, however, that the Company will be able to fully recover any increases or fluctuations in raw material costs from its customers. The Company also has commitments for standby letters of credit and for purchases of capital assets.
At December 31, 2014, the Company was party to certain indemnification agreements covering environmental remediation, lease payments and other potential costs associated with properties sold or businesses divested. For agreements with defined liability limits the maximum potential amount of future liability was $5. The Company accrues for costs related to these items when it is probable that a liability has been incurred and the amount can be reasonably estimated. At December 31, 2014, the Company also had guarantees of $31 related to the residual values of leased assets.
O.
Restructuring and Other
The Company recorded restructuring and other charges as follows:
In 2014, asset impairments and sales included $44 related to the divestment of certain operations in connection with the Company's acquisition of Mivisa and $24 related to the planned divestment of certain operations in the Company's European Specialty Packaging business, which is expected to close in early 2015 . Transaction costs included costs in connection with the Company's acquisitions of Mivisa and Empaque. Other costs primarily included incremental costs associated with the temporary relocation of production due to an ongoing labor dispute in the Company's Americas Beverage segment.
In 2013, asset impairments and sales included a gain of $9 related to the sale of land and a building in Belgium.
In 2012, asset impairments and sales included gains of $31 related to insurance proceeds received for property damage incurred in the 2011 flooding of the Company's beverage can plant in Thailand and $20 related to the acquisition of Superior Multi-Packaging, Ltd., as described in Note B.
The components of the assets and liabilities classified as held for sale at December 31, 2014 related to the European Specialty Packaging business discussed above are as follows:
Crown Holdings, Inc.
Restructuring charges by segment are as follows:
Restructuring charges by type are as follows:
In 2014, other exit costs include $8 of pension settlements charges in connection with prior restructuring actions in the Company's North America Food segment. Termination benefits of $8 relate to severance costs in the Company's European Food segment as further described below.
2011 European Division Headquarters Relocation
As of December 31, 2014, the Company incurred costs of $40 which are expected to be the total costs related to the relocation of its European Division headquarters and management to Switzerland in order to benefit from a more centralized management location.
The following table summarizes the restructuring accrual balances and utilization by cost type for the relocation:
Other exit costs represent employee compensation costs resulting from an intercompany payment related to the relocation. The Company expects to pay the remaining costs in 2015.
2011 and 2012 European Division Actions
Through December 31, 2014, the Company incurred costs of $69 in connection with actions taken in 2011 and 2012 to reduce manufacturing capacity and headcount in its European Aerosol and Specialty Packaging business. These actions combined are expected to reduce headcount by approximately 474 and to eliminate approximately 20% of the business' capacity. Due to the similar nature of these actions, the Company has combined them in the rollforward presented below. The Company currently expects to incur future additional charges of $2 related to the actions which are expected to be completed in 2015 at an estimated aggregate cost of $71. The Company expects to pay the liability through 2024 as certain employees have elected to receive payment as a fixed monthly sum over 11 years. The Company continues to review its supply and demand profile and long-term plans in Europe and it is possible that the Company may record additional restructuring charges in the future. The table below summarizes the restructuring accrual balances and utilization by cost type for this action.
Crown Holdings, Inc.
2013 European Division Actions
Through December 31, 2014, the Company incurred costs of $31 related to a cost-reduction initiative to better align costs with ongoing market conditions in its European operations, primarily in its Food, Aerosol and Specialty Packaging businesses. The action is expected to result in the reduction of approximately 205 employees. The Company expects to pay the remaining liability in 2015 and does not expect to incur any additional charges related to this action.
The table below summarizes the restructuring accrual balances and utilization by cost type for this action.
2014 European Division Actions
In 2014, the Company recorded a charge of $8 related to severance costs in connection with the planned closure of a manufacturing facility in its European Food segment. The action is expected to result in the reduction of approximately 100 employees when completed in 2015. The Company does not expect to incur any additional charges related to this action.
P.
Capital Stock
A summary of common share activity for the years ended December 31 is as follows (in shares):
Crown Holdings, Inc.
The Board of Directors has the authority to issue, at any time or from time to time, up to 30 million shares of preferred stock and has authority to fix the designations, number and voting rights, preferences, privileges, limitations, restrictions, conversion rights and other special or relative rights, if any, of any class or series of any class of preferred stock that may be desired, provided the shares of any such class or series of preferred stock shall not be entitled to more than one vote per share when voting as a class with holders of the Company's common stock.
The Company’s ability to pay dividends and repurchase its common stock is limited by certain restrictions in its debt agreements. These restrictions are subject to a number of exceptions, however, allowing the Company to make otherwise restricted payments. The amount of restricted payments permitted to be made, including dividends and repurchases of the Company’s common stock, may be limited to the cumulative excess of $200 plus 50% of adjusted net income plus proceeds from the exercise of employee stock options over the aggregate of restricted payments made since July 2004. Adjustments to net income may include, but are not limited to, items such as asset impairments, and gains and losses from asset sales and early extinguishments of debt.
Q. Stock-Based Compensation
The Company’s shareholder-approved stock-based incentive compensation plans provide for the granting of awards in the form of stock options, deferred stock, restricted stock or stock appreciation rights (“SARs”). The awards may be subject to the achievement of certain performance goals, generally based on market conditions, as determined by the Plan Committee designated by the Company’s Board of Directors. There have been no awards of SARs. At December 31, 2014, there were 4.9 million authorized shares available for future awards.
Stock-based compensation expense was as follows:
Stock Options
At December 31, 2014 and 2013 there were 944,622 and 1,695,053 options outstanding with a weighted average exercise price of $24.98 and $21.20. There were no stock options granted in 2014, 2013 and 2012. The aggregate intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012 was $12, $17 and $27.
At December 31, 2014 options outstanding had an aggregate intrinsic value of $24 and a weighted-average remaining contractual term of 2.5 years. At December 31, 2014, there was approximately $1 of unrecognized compensation expense.
The Company has assumed an annual forfeiture rate of 5.5%.
Restricted and Deferred Stock
Annually the Company awards shares of restricted stock to certain senior executives in the form of time-vested restricted stock and performance-based shares. The time-vested restricted stock vests ratably over three years. The performance-based shares cliff vest at the end of three years. The number of performance-based shares that will ultimately vest is based on the level of performance achieved, ranging between 0% and 200% of the shares originally awarded and will be settled in shares of common stock. The market performance criteria is the Company’s Total Shareholder Return (“TSR”), which includes share price appreciation and dividends paid, during the three-year term of the award measured against the TSR of a peer group of companies. Participants who terminate employment because of retirement, disability or death receive accelerated vesting of their time-vested awards to the date of termination. However, restrictions will lapse on performance-based awards, if at all, on the original vesting date.
The Company also issue shares of time-vesting restricted stock and deferred stock to U.S. and non-U.S. employees which vest ratably up to four years commencing one year after the grant date.
Crown Holdings, Inc.
A summary of restricted and deferred stock activity follows:
The average grant-date fair value of restricted stock awarded in 2014, 2013 and 2012 follows:
The fair values of the performance-based shares awarded were calculated using a Monte Carlo valuation model and the following weighted average assumptions:
At December 31, 2014, unrecognized compensation cost related to outstanding restricted and deferred stock was $42. The weighted average period over which the expense is expected to be recognized is 2.6 years for restricted stock and 3.4 years for deferred stock. The aggregate market value of the shares released and issued on the vesting dates was $5.
The Company maintains a Stock-Based Compensation Plan for Non-Employee Directors. Under the plan a portion of the non-employee directors' quarterly compensation is provided in the form of restricted stock. During 2014, $1 of stock-based compensation was recognized under this plan.
Crown Holdings, Inc.
R.
Debt
.
The estimated fair value of the Company’s long-term borrowings, using a market approach incorporating level 2 inputs such as quoted market prices for the same or similar issues, was $5,346 at December 31, 2014 and $3,645 at December 31, 2013.
The revolving credit facilities include provisions for letters of credit up to $210 that reduce the amount of borrowing capacity otherwise available. At December 31, 2014, the Company’s available borrowing capacity under the credit facilities was $1,160, equal to the facilities’ aggregate capacity of $1,200 less $40 of outstanding letters of credit. The interest rate on the facilities can vary from LIBOR or EURIBOR plus a margin of 1.50% up to 2.00% based on the Company's total net leverage ratio. The term loans bear interest of LIBOR or EURIBOR plus 1.75% and the farm credit facility bears interest of LIBOR plus 2.00%. The revolving credit facilities and term loans contain financial covenants including an interest coverage ratio and a total net leverage ratio.
The weighted average interest rates were as follows:
Aggregate maturities of long-term debt for the five years subsequent to 2014, excluding unamortized discounts, are $177, $231, $295, $1,188 and $363, respectively. Cash payments for interest during 2014, 2013 and 2012 were $231, $199 and $205.
2014 Activity
In April 2014, to fund the acquisition of Mivisa as described in Note B, repay certain of Mivisa's existing debt and pay transaction costs, the Company borrowed $580 under its U.S. dollar term loan facility, €590 ($714 at December 31, 2014) under its euro term loan facility and $362 under a farm credit facility.
Crown Holdings, Inc.
In July 2014, the Company issued €650 ($786 at December 31, 2014) principal amount of 4% senior unsecured notes due 2022. The notes were issued at par by Crown European Holdings S.A., a subsidiary of the Company, and are unconditionally guaranteed by the Company and certain of its subsidiaries. The Company used a portion of the proceeds to purchase through a tender offer and to redeem all of its outstanding senior notes due 2018. In connection with the repurchase and redemption of the 2018 notes, the Company recorded a loss from early extinguishment of debt of approximately $34 including $28 for premiums paid and $6 for the write off of deferred financing fees.
2013 Activity
In January 2013, the Company issued $1,000 principal amount of 4.5% senior unsecured notes due 2023. In connection with the issuance, the Company redeemed all of its outstanding $400 senior notes due 2017 and repaid $500 of indebtedness under its senior secured term loan facilities.
In December 2013, the Company entered into a new credit agreement to provide financing for its acquisition of Mivisa as described in Note B.
In connection with the above transactions, the Company recorded a loss from early extinguishment of debt of $41, including $23 for premiums paid, $12 for the write off of deferred financing fees and $6 for the write off of unamortized discounts.
S. Derivative and Other Financial Instruments
Fair Value Measurements
Under US GAAP a framework exists for measuring fair value, providing a three-tier hierarchy of pricing inputs used to report assets and liabilities that are adjusted to fair value. Level 1 includes inputs such as quoted prices which are available in active markets for identical assets or liabilities as of the report date. Level 2 includes inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 3 includes unobservable pricing inputs that are not corroborated by market data or other objective sources. The Company has no items valued using Level 3 inputs other than certain pension plan assets.
The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities measured at fair value and their placement within the fair value hierarchy.
The Company applies a market approach to value its commodity price hedge contracts. Prices from observable markets are used to develop the fair value of these financial instruments and they are reported under Level 1. The Company uses an income approach to value its foreign exchange forward contracts. These contracts are valued using a discounted cash flow model that calculates the present value of future cash flows under the terms of the contracts using market information as of the reporting date, such as foreign exchange spot and forward rates, and are reported under Level 2 of the fair value hierarchy.
Fair value disclosures for financial assets and liabilities that were accounted for at fair value on a recurring basis are provided later in this note. In addition, see Note R for fair value disclosures related to debt.
Derivative Financial Instruments
In the normal course of business the Company is subject to risk from adverse fluctuations in currency exchange rates, interest rates and commodity prices. The Company manages these risks through a program that includes the use of derivative financial instruments, primarily swaps and forwards. Counterparties to these contracts are major financial institutions. The Company is exposed to credit loss in the event of nonperformance by these counterparties. The Company does not use derivative instruments for trading or speculative purposes.
The Company’s objective in managing exposure to market risk is to limit the impact on earnings and cash flow. The extent to which the Company uses such instruments is dependent upon its access to these contracts in the financial markets and its success using other methods, such as netting exposures in the same currencies to mitigate foreign exchange risk and using sales agreements that permit the pass-through of commodity price and foreign exchange rate risk to customers.
For derivative financial instruments accounted for in hedging relationships, the Company formally designates and documents, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective and the manner
Crown Holdings, Inc.
in which effectiveness will be assessed. The Company formally assesses, both at inception and at least quarterly thereafter, whether the hedging relationships are effective in offsetting changes in fair value or cash flows of the related underlying exposures. Any ineffective portion of the change in fair value of the instruments is recognized immediately in earnings.
Cash Flow Hedges
The Company designates certain derivative financial instruments as cash flow hedges. No components of the hedging instruments are excluded from the assessment of hedge effectiveness. Changes in fair value of outstanding derivatives accounted for as cash flow hedges, except any ineffective portion, are recorded in other comprehensive income until earnings are impacted by the hedged transaction. Classification of the gain or loss in the Consolidated Statements of Operations upon release from comprehensive income is the same as that of the underlying exposure. Contracts outstanding at December 31, 2014 mature between one and twenty-two months.
When the Company discontinues hedge accounting because it is no longer probable that an anticipated transaction will occur in the originally specified period, changes to fair value accumulated in other comprehensive income are recognized immediately in earnings.
The Company uses commodity forwards to hedge anticipated purchases of various commodities, including aluminum, fuel oil and natural gas and these exposures are hedged by a central treasury unit.
The Company also designates certain foreign exchange contracts as cash flow hedges of anticipated foreign currency denominated sales or purchases. The Company manages these risks at the operating unit level. Often the hedging of foreign currency risk is performed in concert with related commodity price hedges.
The following table sets forth financial information about the impact on Accumulated Other Comprehensive Income (“AOCI”) and earnings from changes in fair value related to derivative instruments.
(1) In 2014, a loss of $4 was recognized in cost of products sold and a gain of $2 was recognized in net sales. In 2013, a gain of $7 was recognized in cost of products sold and a loss of $9 was recognized in net sales.
(2) In 2014, a loss of $21, including $1 of ineffectiveness, was recognized in cost of products sold and a tax benefit of $6 was recognized in income tax expense. In 2013, a loss of $43, including $2 of ineffectiveness, was recognized in cost of products sold and a tax benefit of $11 was recognized in income tax expense.
For the twelve-month period ending December 31, 2015, a net loss of $8 ($6, net of tax) is expected to be reclassified to earnings. No amounts were reclassified during the twelve months ended December 31, 2014 and 2013 in connection with anticipated transactions that were no longer considered probable.
Fair Value Hedges and Contracts Not Designated as Hedges
The Company designates certain derivative financial instruments as fair value hedges of recognized foreign-denominated assets and liabilities, generally trade accounts receivable and payable and unrecognized firm commitments. The notional values and maturity dates of the derivative instruments coincide with those of the hedged items. Changes in fair value of the derivative financial instruments, excluding time value, are offset by changes in fair value of the related hedged items.
Other than for firm commitments, amounts related to time value are excluded from the assessment and measurement of hedge effectiveness and are reported in earnings. Less than $1 was reported in earnings for the twelve months ended December 31, 2014 .
Crown Holdings, Inc.
Certain derivative financial instruments, including foreign exchange contracts related to intercompany debt, were not designated or did not qualify for hedge accounting; however, they are effective economic hedges as the changes in their fair value, except for time value, are offset by changes in re-measurement of the related hedged items. The Company’s primary use of these derivative instruments is to offset the earnings impact that fluctuations in foreign exchange rates have on certain monetary assets and liabilities denominated in nonfunctional currencies. Changes in fair value of these derivative instruments are immediately recognized in earnings as foreign exchange adjustments.
The impact on earnings from foreign exchange contracts designated as fair value hedges was a loss of $7 for the twelve months ended December 31, 2014 and a gain of less than $1 for the twelve months ended December 31, 2013 . The impact on earnings from foreign exchange contracts not designated as hedges was a loss of $53 for the twelve months ended December 31, 2014 and a gain of $4 for the same period in 2013. These adjustments were reported within translation and foreign exchange in the Consolidated Statements of Operations and were offset by changes in the fair values of the related hedged item.
Fair Values of Derivative Financial Instruments and Valuation Hierarchy
The following table sets forth the fair value hierarchy for the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2014 and December 31, 2013.
Offsetting of Derivative Assets and Liabilities
Certain derivative financial instruments are subject to agreements with counterparties similar to master netting arrangements and are eligible for offset. The Company has made an accounting policy election not to offset the fair values of these instruments within the statement of financial position. In the table below, the aggregate fair values of the the Company's derivative assets and liabilities are presented on both a gross and net basis, where appropriate.
Crown Holdings, Inc.
Notional Values of Outstanding Derivative Instruments
The aggregate U.S. dollar-equivalent notional values of outstanding derivative instruments in the Consolidated Balance Sheets at December 31, 2014 and December 31, 2013 are:
T.
Noncontrolling interests
In 2014, the Company paid an aggregate of $93 to buyout the ownership interests of its partner in certain non-wholly owned subsidiaries in the Middle East.
In 2013, the Company paid an aggregate of $16 to increase its ownership interests in certain non-wholly owned subsidiaries in Asia.
The accounting guidance requires changes in noncontrolling interests that do not result in a change of control and where there is a difference between fair value and carrying value to be accounted for as equity transactions. The effect on net income attributable to the Company had the purchases of noncontrolling interests been recorded through net income is as follows:
U.
Earnings Per Share
The following table summarizes the basic and diluted earnings per share (EPS) attributable to Crown Holdings. Basic EPS excludes all potentially dilutive securities and is computed by dividing net income attributable to Crown Holdings by the weighted average number of common shares outstanding during the period. Diluted EPS includes the effect of stock options and restricted stock as calculated under the treasury stock method.
For purposes of calculating assumed proceeds under the treasury stock method when determining the diluted weighted average shares outstanding, the Company excludes the impact of windfall tax benefits unless the deduction reduces taxes payable.
Crown Holdings, Inc.
V.
Pension and Other Postretirement Benefits
Pensions. The Company sponsors various pension plans covering certain U.S. and non-U.S. employees, and participates in certain multi-employer pension plans. The benefits under the Company plans are based primarily on years of service and either the employees’ remuneration near retirement or a fixed dollar multiple.
A measurement date of December 31 was used for all plans presented below.
The components of pension expense were as follows:
The non-U.S. pension expense excludes $8 of cost attributable to plan curtailments and settlements that was recorded in restructuring expense in 2014, partially offset by $2 related to the divestment of certain operations in connection with the Company's acquisition of Mivisa.
Additional pension expense of $5 was recognized in each of 2014, 2013 and 2012 for multi-employer plans.
Crown Holdings, Inc.
The projected benefit obligations, accumulated benefit obligations, plan assets and funded status of the Company's U.S. and non-U.S. plans is as follows:
Information for pension plans with accumulated benefit obligations in excess of plan assets is as follows:
The Company’s investment strategy in its U.S. plan is designed to generate returns that are consistent with providing benefits to plan participants within the risk tolerance of the plan. Asset allocation is the primary determinant of return levels and investment risk exposure. The assets of the plan are broadly diversified in terms of securities and security types in order to limit the potential of large losses from any one security.
Crown Holdings, Inc.
The strategic ranges for asset allocation in the U.S. plan are as follows:
The Company’s investment strategy in its U.K. plan, the largest non-U.S. plan, is designed to achieve a funding level of 100% within the next 15 years by targeting an expected return of 2.0% annually in excess of the expected growth in the liabilities. The Company seeks to achieve this return with a risk level commensurate with a 5% chance of the funding level falling between 5% and 9% in any one year. The strategic ranges for asset allocation in the U.K. plan are as follows:
Pension assets are classified into three levels. Level 1 asset values are derived from quoted prices which are available in active markets as of the report date. Level 2 asset values are derived from other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the report date. Level 3 asset values are derived from unobservable pricing inputs that are not corroborated by market data or other objective sources.
Equity securities are valued at the latest quoted prices taken from the primary exchange on which the security trades. Mutual funds are valued at the net asset value (NAV) of shares held at year-end. Fixed income securities, including government issued debt, corporate debt and asset-backed and structured debt securities are valued using market inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and other reference data including market research publications. Derivatives, which consist mainly of interest rate swaps, are valued using a discounted cash flow pricing model based on observable market data. Investment funds, hedge funds and private equity funds are valued at the NAV at year-end. The values assigned to private equity funds are based upon assessments of each underlying investment, incorporating valuations that consider the evaluation of financing and sale transactions with third parties, expected cash flows and market-based information, including comparable transactions, and performance multiples among other factors. Real estate investments are based on third party appraisals.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair value. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in different fair value measurements at the reporting date.
The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and their placement within the fair value hierarchy.
Crown Holdings, Inc.
The levels assigned to the defined benefit plan assets as of December 31, 2014 and 2013 are summarized in the tables below:
Crown Holdings, Inc.
Accrued income excluded from the table above is as follows:
Plan assets include $171 and $150 of the Company’s common stock at December 31, 2014 and 2013.
The following tables reconcile the beginning and ending balances of plan assets measured using significant unobservable inputs (Level 3).
Crown Holdings, Inc.
Pension assets and liabilities included in the Consolidated Balance Sheets are:
The Company’s current liability at December 31, 2014, represents the expected required payments to be made for unfunded plans over the next twelve months. Total estimated 2015 employer contributions are $76 for the Company’s pension plans.
Changes in the net loss and prior service cost/(credit) for the Company’s pension plans were:
The estimated portions of the net losses and net prior service that are expected to be recognized as components of net periodic benefit cost / (credit) in 2015 are $103 and $(14).
Expected future benefit payments as of December 31, 2014 are:
The weighted average actuarial assumptions used to calculate the benefit obligations at December 31 are:
The weighted average actuarial assumptions used to calculate pension expense for each year were:
Crown Holdings, Inc.
The expected long-term rates of return are determined at each measurement date based on a review of the actual plan assets, the target allocation, and the historical returns of the capital markets.
The U.S. plan’s 2014 assumed asset rate of return was based on a calculation using underlying assumed rates of return of 10.3% for equity securities and alternative investments, and 4.8% for debt securities and real estate. The rate of return used for equity securities and alternative investments was based on the total return of the S&P 500 for the 25 year period ended December 31, 2013. The Company believes that the equity securities included in the S&P 500 are representative of the equity securities and alternative investments held by its U.S. plan, and that this period provides a sufficient time horizon as a basis for estimating future returns. The rate of return used for debt securities is consistent with the U.S. plan discount rate and the return on AA corporate bonds with duration equal to the plan’s liabilities. The underlying debt securities in the plan are primarily invested in various corporate and government agency securities and are benchmarked against returns on AA corporate bonds.
The U.K. plan’s 2014 assumed asset rate of return was based on a calculation using underlying assumed rates of return of 10.0% for equity securities and alternative investments, and 4.4% for debt securities and real estate. Equity securities in the U.K. plan as of December 31, 2014 were allocated approximately 42% to U.S. securities, 34% to securities in developed European countries, and 24% to securities in emerging markets. The assumed rate of return for equity securities and alternative investments represents the weighted average 25 year return of equity securities in these markets. The Company believes that the equity securities included in the related market indexes are representative of the equity securities and alternative investments held by its U.K. plan, and that this period provides a sufficient time horizon as a basis for estimating future returns.
Other Postretirement Benefit Plans. The Company sponsors unfunded plans to provide health care and life insurance benefits to pensioners and survivors. Generally, the medical plans pay a stated percentage of medical expenses reduced by deductibles and other coverages. Life insurance benefits are generally provided by insurance contracts. The Company reserves the right, subject to existing agreements, to change, modify or discontinue the plans. A measurement date of December 31 was used for the plans presented below.
The components of net postretirement benefits cost are as follows:
Changes in the benefit obligations were:
Crown Holdings, Inc.
Changes in the net loss and prior service credit for the Company’s postretirement benefit plans were:
The estimated portions of the net losses and prior service credits that are expected to be recognized as components of net periodic benefit cost/(credit) in 2015 are $5 and $(34).
In 2013, a non-U.S. plan was amended to eliminate certain health coverage benefits.
Expected future benefit payments, as of December 31, 2014, net of expected Medicare Part D subsidies of $5 in the aggregate are:
The assumed health care cost trend rates at December 31, 2014 are as follows:
A one-percentage-point change in assumed health care cost trend rates would have the following effects:
Weighted average discount rates used to calculate the benefit obligations at the end of each year and the cost for each year are presented below.
Employee Savings Plan. The Company sponsors the Savings Investment Plan which covers substantially all domestic salaried employees who are at least 21 years of age. The Company matches up to 50% of 3% of a participant’s compensation and the total Company contributions were $2 in each of the last three years.
Employee Stock Purchase Plan. The Company sponsors an Employee Stock Purchase Plan which covers all domestic employees with one or more years of service who are non-officers and non-highly compensated as defined by the Internal Revenue Code. Eligible participants contribute 85% of the quarter-ending market price towards the purchase of each common share. The Company’s contribution is equivalent to 15% of the quarter-ending market price. Total shares purchased under the plan in 2014 and 2013 were 25,351 and 26,777 and the Company’s contributions were less than $1 in both years.
Crown Holdings, Inc.
W.
Income Taxes
The components of income before income taxes and equity earnings were as follows:
The provision for income taxes consisted of the following:
The provision for income taxes differs from the amount of income tax determined by applying the U.S. statutory federal income tax rate to pre-tax income as a result of the following items:
The other items caption in 2012 includes a benefit of $213 related to the recognition of previously unrecognized U.S. foreign tax credits and a benefit of $10 from the receipt of non-taxable insurance proceeds related to a 2011 flood in Thailand.
The Company has certain income tax incentives in Brazil which allow it pay reduced income taxes. The tax incentives expire at various dates beginning in 2018. These incentives increased net income attributable to the Company by $12 in 2014 and $11 in both 2013 and 2012.
The Company paid taxes of $109, $114 and $92 in 2014, 2013 and 2012.
Crown Holdings, Inc.
The components of deferred taxes at December 31 are:
At December 31, 2014 and 2013, $99 and $123 of deferred tax assets were included in prepaid expenses and other current assets.
Tax loss and credit carryforwards expire as follows:
Tax loss and credit carryforwards expiring after 2019 include $168 of U.S. state tax loss carryforwards and $130 of U.S. federal foreign tax credits. The unlimited category includes $85 of French tax loss carryforwards. The carryforwards presented above exclude $59 of U.S. windfall tax benefits that will be recorded in additional paid-in capital when realized.
Realization of any portion of the Company’s deferred tax assets is dependent upon the availability of taxable income in the relevant jurisdictions. The Company considers all sources of taxable income, including (i) taxable income in any available carry back period, (ii) the reversal of taxable temporary differences, (iii) tax-planning strategies, and (iv) taxable income expected to be generated in the future other than from reversing temporary differences. The Company also considers whether there have been cumulative losses in recent years. The Company records a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company’s valuation allowances at December 31, 2014 include $170 related to U.S. state loss carryforwards and $53 in Canada.
The Company continues to maintain a valuation allowance against the portion of U.S. state tax loss carryforwards that the Company does not believe are more likely than not to be utilized prior to their expiration. The Company’s ability to utilize state tax loss carryforwards is impacted by several factors including taxable income, expiration dates, limitations imposed by certain states on the amount of loss carryforwards that can be used in a given year to offset taxable income and whether the state permits the Company to file a combined return.
The Company continues to maintain a full valuation allowance against its net deferred tax assets in Canada because the Company does not believe at this time that it is more likely than not that it will realize any deferred tax benefits in Canada. The Company’s Canadian operations incurred a loss in 2014 and remain in a three year cumulative loss position.
In 2014, the Company recognized an income tax benefit of $86 to fully release the valuation allowance against its net deferred tax assets in France. In recent years, the Company's operating profits in France were offset by interest expense. In the third quarter of 2014, the Company refinanced its bonds issued by a French subsidiary resulting in significant interest savings. The impact of the refinancing and current low interest rate environment has significantly lowered the Company's interest expense in France. As
Crown Holdings, Inc.
the Company is currently generating taxable income in France and is projecting future taxable income in France, the Company has fully released its valuation allowance. Due to the Company's high level of debt in France, a significant increase in interest rates could cause the Company to incur losses which may result in recording additional valuation allowance in the future. The Company's loss carryforwards in France do not expire.
Management’s estimates of the appropriate valuation allowance in any jurisdiction involve a number of assumptions and judgments, including the amount and timing of future taxable income. Should future results differ from management’s estimates, it is possible there could be future adjustments to the valuation allowances that would result in an increase or decrease in tax expense in the period such changes in estimates are made.
The Company has not provided deferred taxes on $774 of earnings in certain non-U.S. subsidiaries because such earnings are indefinitely reinvested in its international operations. Upon distribution of such earnings in the form of dividends or otherwise, the Company would be subject to incremental tax. It is not practicable to estimate the amount of tax that might be payable.
A reconciliation of unrecognized tax benefits follows.
The Company’s reserves as presented primarily include potential liabilities related to transfer pricing, foreign withholding taxes, and non-deductibility of expenses and exclude $1 of penalties as of December 31, 2014. The total interest and penalties recorded in the statement of operations was less than $1 in each of the last three years. As of December 31, 2014, unrecognized tax benefits of $26, if recognized, would affect the Company's effective tax rate.
The Company’s unrecognized tax benefits are not expected to increase over the next twelve months and are expected to decrease as open tax years lapse or claims are settled. The Company is unable to estimate a range of reasonably possible changes in its unrecognized tax benefits in the next twelve months as it is unable to predict when, or if, the tax authorities will commence their audits, the time needed for the audits, and the audit findings that will require settlement with the applicable tax authorities, if any.
The tax years that remained subject to examination by major tax jurisdiction as of December 31, 2014 were 2005 and subsequent years for France; 2006 and subsequent years for Spain and the U.K.; 2010 and subsequent years for Brazil, Germany and Italy; and 2011 and subsequent years for the U.S. and Canada. In addition, tax authorities in certain jurisdictions, including the U.S., may examine earlier years when tax carryforwards that were generated in those years are subsequently utilized.
X.
Segment Information
The Company’s business is organized geographically within three divisions, Americas, Europe and Asia Pacific. Within the Americas and European divisions, the Company has determined that it has the following reportable segments organized along a combination of product lines and geographic areas: Americas Beverage and North America Food within the Americas, and European Beverage and European Food within Europe. Within the Asia Pacific division, the Company has aggregated its beverage and non-beverage operations into a single reportable segment based on similar economic and qualitative characteristics.
Non-reportable segments include the Company’s aerosol can businesses in North America and Europe, the Company’s specialty packaging business in Europe and the Company’s tooling and equipment operations in the U.S. and United Kingdom.
The Company evaluates performance and allocates resources based on segment income. Segment income, which is not a defined term under GAAP, is defined by the Company as gross profit excluding the impact of fair value adjustments related to the sale of inventory acquired in an acquisition and the timing impact of hedge ineffectiveness, less selling and administrative expenses.
Segment income should not be considered in isolation or as a substitute for net income data prepared in accordance with GAAP and may not be comparable to calculations of similarly titled measures by other companies.
Crown Holdings, Inc.
The tables below present information about operating segments for the three years ended December 31, 2014, 2013 and 2012:
Intersegment sales primarily include sales of ends and components used to manufacture cans, such as printed and coated metal, as well as parts and equipment used in the manufacturing process.
Corporate and unallocated items include corporate and division administrative costs, technology costs, and unallocated items such as the U.S. and U.K. pension plan costs.
Crown Holdings, Inc.
A reconciliation of segment income of reportable segments to income before income taxes and equity earnings for the three years ended December 31, 2014, 2013 and 2012 follows:
For the three years ended December 31, 2014, 2013 and 2012, intercompany profit of $4, $2 and $5 was eliminated within segment income of non-reportable segments.
For the three years ended December 31, 2014, 2013 and 2012, no one customer accounted for more than 10% of the Company's consolidated net sales.
Sales by major product are:
Sales and long-lived assets for the major countries in which the Company operates are:
Crown Holdings, Inc.
Y.
Condensed Combining Financial Information
Crown Cork & Seal Company, Inc. (Issuer), a wholly owned subsidiary, has $350 principal amount of 7.375% senior notes due 2026 and $64 principal amount of 7.5% senior notes due 2096 outstanding that are fully and unconditionally guaranteed by Crown Holdings, Inc. (Parent). No other subsidiary guarantees the debt. The following condensed combining financial statements:
•statements of comprehensive income and cash flows for the years ended December 31, 2014, 2013, 2012, and
•balance sheets as of December 31, 2014 and December 31, 2013
are presented on the following pages to comply with the Company’s requirements under Rule 3-10 of Regulation S-X.
Crown Holdings, Inc.
Crown Holdings, Inc.
Crown Holdings, Inc.
CONDENSED COMBINING BALANCE SHEET
As of December 31, 2014
(in millions)
Crown Holdings, Inc.
CONDENSED COMBINING BALANCE SHEET
As of December 31, 2013
(in millions)
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
For the year ended December 31, 2014
(in millions)
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
For the year ended December 31, 2013
(in millions)
Crown Holdings, Inc.
Crown Holdings, Inc.
Crown Americas, LLC, Crown Americas Capital Corp. II and Crown Americas Capital Corp. III (collectively, the Issuers), wholly owned subsidiaries of the Company, have outstanding $700 principal amount of 6.25% senior notes due 2021 and $1,000 principal amount of 4.5% senior notes due 2023, which are fully and unconditionally guaranteed by Crown Holdings, Inc. (Parent) and substantially all subsidiaries in the United States. The guarantors are wholly owned by the Company and the guarantees are made on a joint and several basis. The following condensed combining financial statements:
•
statements of comprehensive income and cash flows for the years ended December 31, 2014, 2013, 2012, and
•
balance sheets as of December 31, 2014 and December 31, 2013
are presented on the following pages to comply with the Company’s requirements under Rule 3-10 of Regulation S-X.
Crown Holdings, Inc.
Crown Holdings, Inc.
Crown Holdings, Inc.
CONDENSED COMBINING BALANCE SHEET
As of December 31, 2014
(in millions)
Crown Holdings, Inc.
CONDENSED COMBINING BALANCE SHEET
As of December 31, 2013
(in millions)
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
For the year ended December 31, 2014
(in millions)
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
For the year ended December 31, 2013
(in millions)
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
For the year ended December 31, 2012
(in millions)
Crown Holdings, Inc.
Quarterly Data (unaudited)
* The Company defines gross profit as net sales less cost of products sold and depreciation and amortization.
** Source: New York Stock Exchange - Composite Transactions
Notes:
(1)
Includes pre-tax charges of $52 for restructuring and other and $7 for hedge ineffectiveness.
(2)
Includes pre-tax charges of $31 for restructuring and other and $15 for fair value adjustments in inventory and a pre-tax benefit of $3 for hedge ineffectiveness.
(3)
Includes pre-tax charges of $34 for loss from early extinguishment of debt, $8 for restructuring and other and $4 for fair value adjustments in inventory, a pre-tax benefit of $4 for hedge ineffectiveness and an income tax benefit of $90 for the reversal of a tax valuation allowance.
(4)
Includes pre-tax charges of $45 for asbestos claims and $38 for restructuring and other and an income tax benefit of $10 for a tax law change and changes in valuation allowance.
(5)
Includes pre-tax charges of $38 for loss from early debt extinguishment and $4 for restructuring and other.
(6)
Includes pre-tax charge of $4 for restructuring and other.
(7)
Includes a net pre-tax charge of $31 for restructuring and other and an income tax charge of $18 for tax law changes.
(8)
Includes pre-tax charges of $32 for asbestos claims and $3 for loss from early extinguishment of debt, a net pre-tax benefit of $5 for restructuring and other and an income tax benefit of $7 for tax law changes.
Crown Holdings, Inc.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In millions)
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
As of the end of the period covered by this Annual Report on Form 10-K, management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures. Based upon that evaluation and as of the end of the period for which this report is made, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information to be disclosed in reports that the Company files and submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and terms of the Securities and Exchange Commission, and to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Crown Holdings, Inc.
The Company’s report on internal control over financial reporting is included in Part II, Item 8 of this Annual Report on Form 10-K.
There has been no change in internal control over financial reporting that occurred during the quarter ended December 31, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
On February 26, 2015, the Company entered into an employment agreement with Djalma Novaes, Jr., who will serve as the Company’s President - Americas Division. The agreement sets forth the terms and conditions of Mr. Novaes’s compensation and benefits and includes, among other things, certain termination and severance provisions and confidentiality, non-competition and other restrictive covenants. In addition, on February 26, 2015, the Company entered into a senior executive retirement agreement with Mr. Novaes, pursuant to which Mr. Novaes will participate in the Crown Senior Executive Retirement Plan. Mr. Novaes’s employment agreement and senior executive retirement agreement are attached as exhibits to this Annual Report on Form 10-K and are incorporated herein by reference.
On February 26, 2015, the Company amended its employment agreement with Raymond L. McGowan, Jr. in order to extend the period during which Mr. McGowan is prohibited from competing with the Company and to provide for post-employment vesting of certain equity grants previously made to Mr. McGowan. The amendment to Mr. McGowan’s employment agreement is attached as an exhibit to this Annual Report on Form 10-K and is incorporated herein by reference.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is set forth in the Company’s Proxy Statement within the sections entitled “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance” and is incorporated herein by reference.
The following table sets forth certain information concerning the principal executive officers of the Company, including their ages and positions.
All of the principal executive officers, except Mr. Novaes whose current service with the Company began in March 2014, have been employed by the Company for the past five years.
The information required by this Item is set forth in the Company’s Proxy Statement within the sections entitled “Executive Compensation,” “Compensation Discussion and Analysis” and “Corporate Governance” and is incorporated herein by reference.
Crown Holdings, Inc.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Certain information required by this Item is set forth in the Company’s Proxy Statement within the sections entitled “Proxy Statement - Meeting, April 23, 2015” and “Common Stock Ownership of Certain Beneficial Owners, Directors and Executive Officers” and is incorporated herein by reference.
The following table provides information as of December 31, 2014 with respect to shares of the Company’s Common Stock that may be issued under its equity compensation plans:
(1)
Includes the 2004, 2006 and 2013 Stock-Based Incentive Compensation Plans.
(2)
Includes 515,100 shares of deferred stock awarded from the 2013 Stock-Based Incentive Compensation Plan in 2014 and 2013. The shares are time-vesting and will be issued over 4 years commencing May 2015. The
weighted-average exercise price in the table does not include these shares.
(3) Includes 4,927,040, 882,104 and 207,280 shares available for issuance at December 31, 2014 under the 2013 Stock Based Incentive Compensation Plan, the Company’s Employee Stock Purchase Plan and the Stock Compensation Plan for Non-Employee Directors, respectively.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is set forth in the Company’s Proxy Statement within the sections entitled “Election of Directors,” “Corporate Governance” and “Executive Compensation” and is incorporated herein by reference.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is set forth in the Company’s Proxy Statement within the sections entitled “Principal Accounting Fees and Services” and is incorporated herein by reference.
Crown Holdings, Inc.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a)
The following documents are filed as part of this report:
(1)
All Financial Statements (see Part II, Item 8)
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
Supplementary Information
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts and Reserves
All other schedules have been omitted because they are not applicable or the required information is included in the Consolidated Financial Statements.
(3)
Exhibits
2.a
Share Purchase Agreement, dated October 30, 2013, between Lata Lux Holding Parent S.à r.l and Crown Holdings, Inc. (incorporated by reference to Exhibit 2 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2013 (File No. 000-50189)).
2.b
Stock Purchase Agreement, dated as of August 31, 2014, by and among Heineken International B.V., Heineken Mexico Holding, S.A. de C.V., Cuauhtémoc Moctezuma Holding, S.A. de C.V., Crown Holdings, Inc., Crown Packaging Lux III S.à r.l., Fábricas Monterrey, S.A. de C.V., Cierres Herméticos, S.A. de C.V., Terrestratégicos, S.A. de C.V., Prolatamex, S.A. de C.V., Sílices de Veracruz, S.A. de C.V., Glass & Silice, S.A. de C.V. and Sílice del Istmo, S.A. de C.V. (incorporated by reference to Exhibit 2 of the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (File No. 000-50189)).
3.a
Articles of Incorporation of Crown Holdings, Inc., as amended (incorporated by reference to Exhibit 3.a of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 000-50189)).
3.b
Amended and Restated By-Laws of Crown Holdings, Inc. (incorporated by reference to Exhibit 3.b of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2013 (File No. 000-50189)).
4.a
Specimen certificate of Registrant’s Common Stock (incorporated by reference to Exhibit 4.a of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 1-2227)).
4.b
Indenture, dated December 17, 1996, among Crown Cork & Seal Company, Inc., Crown Cork & Seal Finance PLC, Crown Cork & Seal Finance S.A. and the Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K dated December 17, 1996 (File No. 1-2227)).
Crown Holdings, Inc.
4.c
Form of the Registrant's 7-3/8% Debentures Due 2026 (incorporated by reference to Exhibit 99.1 of the Registrant's Current Report on Form 8-K dated December 17, 1996 (File No. 1-2227)).
4.d
Officers' Certificate for 7-3/8% Debentures Due 2026 (incorporated by reference to Exhibit 99.6 of the Registrant's Current Report on Form 8-K dated December 17, 1996 (File No. 1-2227)).
4.e
Form of the Registrant's 7-1/2% Debentures Due 2096 (incorporated by reference to Exhibit 99.2 of the Registrant's Current Report on Form 8-K dated December 17, 1996 (File No. 1-2227)).
4.f
Officers' Certificate for 7-1/2% Debentures Due 2096 (incorporated by reference to Exhibit 99.7 of the Registrant's Current Report on From 8-K dated December 17, 1996 (File No. 1-2227)).
4.g
Terms Agreement, dated December 12, 1996 (incorporated by reference to Exhibit 1.1 of the Registrant's Current Report on Form 8-K dated December 17, 1996 (File No. 1-2227)).
4.h
Form of Bearer Security Depositary Agreement (incorporated by reference to Exhibit 4.2 of the Registrant's Registration Statement on Form S-3, dated November 26, 1996, amended December 5 and 10, 1996 (File No. 333-16869)).
4.i
Supplemental Indenture to Indenture dated April 1, 1993, dated as of February 25, 2003, between Crown Cork & Seal Company, Inc., as Issuer, Crown Holdings, Inc., as Guarantor and Bank One Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.3 of the Registrant’s Current Report on Form 8-K dated February 26, 2003 (File No. 000-50189)).
4.j
Supplemental Indenture to Indenture dated December 17, 1996, dated as of February 25, 2003, between Crown Cork & Seal Company, Inc., as Issuer and Guarantor, Crown Cork & Seal Finance PLC, as Issuer, Crown Cork & Seal Finance S.A., as Issuer, Crown Holdings, Inc., as Additional Guarantor and Bank One Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.5 of the Registrant’s Current Report on Form 8-K dated February 26, 2003 (File No. 000-50189)).
4.k
Indenture, dated as of January 31, 2011, by and among Crown Americas LLC, Crown Americas Capital Corp. III, as Issuers, the Guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the 6 1/4% Senior Notes due 2021. (incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form 8-K dated January 31, 2011 (File No. 000-05189)).
4.l
Form of 6 1/4% Senior Notes due 2021 (included in Exhibit 4.k).
4.m
Registration Rights Agreement, dated as of January 9, 2013, by and among the Company, Crown Americas LLC and Crown Americas Capital Corp. IV, Deutsche Bank Securities Inc., as Representative of the several Initial Purchasers named therein and the Guarantors (as defined therein), relating to the $800 million 4 1/2% Senior Notes due 2023 (incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K dated January 9, 2013 (File No. 000-50189)).
4.n
Indenture, dated as of January 9, 2013, by and among Crown Americas LLC and Crown Americas Capital Corp. IV, as Issuers, the Guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the 4 1/2% Senior Notes due 2023 (incorporated by reference to Exhibit 4.2 of the Registrant's Current Report on Form 8-K dated January 9, 2013 (File No. 000-50189)).
4.o
Form of 4 ½% Senior Notes due 2023 (included in Exhibit 4.n).
4.p
Registration Rights Agreement, dated as of January 15, 2013, by and among the Company, Crown Americas LLC and Crown Americas Capital Corp. IV, Deutsche Bank Securities Inc., as the Initial Purchaser, and the Guarantors (as defined therein), relating to the $200 million 4 1/2% Senior Notes due 2023 (incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K dated January 15, 2013 (File No. 000-50189)).
Crown Holdings, Inc.
4.q Credit Agreement, dated as of December 19, 2013, among Crown Americas LLC, as U.S. Borrower, Crown European Holdings SA, as European Borrower, CROWN Metal Packaging Canada LP, as Canadian Borrower, the Subsidiary Borrowers named therein, the Company, Crown International Holdings, Inc. and Crown Cork & Seal Company, Inc., as Parent Guarantors, Deutsche Bank AG New York Branch, as Administrative Agent, Deutsche Bank AG London Branch, a U.K. Administrative Agent, Deutsche Bank AG Canada Branch, as Canadian Administrative Agent, and various Lending Institutions (incorporated by reference to Exhibit 4 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (File No. 000-50189)).
4.r
First Amendment to Credit Agreement, among Crown Americas LLC, as U.S. Borrower, Crown European Holdings SA, as European Borrower, CROWN Metal Packaging Canada LP, as Canadian Borrower, the Subsidiary Borrowers named therein, Crown Holdings, Inc., Crown International Holdings, Inc. and Crown Cork & Seal Company, Inc., as Parent Guarantors, Deutsche Bank AG New York Branch, as Administrative Agent, Deutsche Bank AG London Branch, a U.K. Administrative Agent, Deutsche Bank AG Canada Branch, as Canadian Administrative Agent, and various Lending Institutions referred to therein (incorporated by reference to Exhibit 4.1 of the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (File No. 000-50189)).
4.s
Indenture, dated as of July 8, 2014, by and among Crown European Holdings S.A., as Issuer, the Guarantors named therein, U.S. Bank National Association, as Trustee, and the other parties thereto, relating to the €650 million 4% Senior Notes due 2022 (incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K dated July 11, 2014 (File No. 000-50189)).
4.t
Form of 4% Senior Notes due 2022 (included in Exhibit 4.s).
4.u
Incremental Amendment No. 1, among Crown Americas LLC, as U.S. Borrower, Deutsche Bank AG New York Branch, as administrative agent for the Term A Lenders, TD Bank, N.A., The Bank of Nova Scotia and The Bank of Tokyo-Mitsubishi UFJ, Ltd., to that certain Credit Agreement, dated as of December 19, 2013, as amended.
4.v
Incremental Amendment No. 2, among Crown Americas LLC, as U.S. Borrower, Deutsche Bank AG New York Branch, as administrative agent for certain Term Lenders, and the Term Loan B Lenders party thereto, to that certain Credit Agreement, dated as of December 19, 2013, as amended.
Other long-term agreements of the Registrant are not filed pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, and the Registrant agrees to furnish copies of such agreements to the Securities and Exchange Commission upon its request.
10.a
Purchase Agreement, dated as of January 3, 2013, by and among the Company, Crown Americas LLC, Crown Americas Capital Corp. IV, Deutsche Bank Securities Inc. as Representative, the Initial Purchasers (as defined therein) and the Guarantors (as defined therein) (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K dated January 3, 2013 (File No. 000-50189)).
10.b
Purchase Agreement, dated as of January 9, 2013, by and among the Company, Crown Americas LLC, Crown Americas Capital Corp. IV, Deutsche Bank Securities Inc., as the Initial Purchaser, and the Guarantors (as defined therein) (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K dated January 9, 2013 (File No. 000-50189)).
10.c
Employment Contracts:
(1) Employment contract between Crown Holdings, Inc. and John W. Conway, dated May 3, 2007 (incorporated by reference to Exhibit 10.1(a) of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 (File No. 000-50189)).
(2)
Second amendment to employment contract, dated May 3, 2007, between Crown Holdings, Inc. and John W. Conway, dated as of December 11, 2013 (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K dated December 17, 2013 (File No. 000-50189)).
(3) Second amendment to the employment contract, dated May 3, 2007, between Crown Holdings, Inc. and Timothy J. Donahue, dated as of December 11, 2008 (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K dated December 11, 2008 (File No. 000-50189)).
Crown Holdings, Inc.
(4) Employment contract between Crown Holdings, Inc. and Timothy J. Donahue, dated May 3, 2007 (incorporated by reference to Exhibit 10.1(e) of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 (File No. 000-50189)).
(5) Employment contract between Crown Holdings, Inc. and Raymond L. McGowan, Jr., dated May 3, 2007 (incorporated by reference to Exhibit 10.h(7) of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 000-50189)).
(6)
Second Amendment to the employment contract, effective May 3, 2007, between Crown Holdings, Inc. and Raymond L. McGowan Jr., dated as of February 26, 2015.
(7)
First amendment to the employment contract, effective June 1, 2012, between Crown Holdings, Inc. and Gerard Gifford, dated as of July 24, 2013 (incorporated by reference to Exhibit 10.3 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 (File No 000-50189)).
(8)
Executive Employment Agreement, effective June 1, 2012, between Crown Holdings, Inc. and Gerard Gifford (incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 (File No 000-50189)).
(9)
Employment contract between Crown Holdings, Inc. and Thomas A. Kelly, dated July 24, 2013 (incorporated by reference to Exhibit 10 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 (File No. 000-50189)).
(10)
Employment contract between Crown Holdings, Inc. and Jozef Salaerts, dated November 5, 2012 (incorporated by reference to Exhibit 10 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 (File No 000-50189)).
(11)
Employment contract between Crown Holdings, Inc. and Djalma Novaes Jr., dated February 26, 2015.
10.d
Crown Holdings, Inc. Economic Profit Incentive Plan, effective as of January 1, 2007 (incorporated by reference to Exhibit 10.i of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 000-50189)).
10.e
Crown Holdings, Inc. Senior Executive Retirement Plan, as amended and restated as of January 1, 2008 (incorporated by reference to Exhibit 10.l of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 000-50189)).
10.f
Senior Executive Retirement Agreements:
(1) Senior Executive Retirement Agreement between Crown Holdings, Inc. and John W. Conway, dated May 3, 2007 (incorporated by reference to Exhibit 10.4(a) of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 (File No. 000-50189)).
(2) Senior Executive Retirement Agreement between Crown Holdings, Inc. and Timothy J. Donahue, dated May 3, 2007 (incorporated by reference to Exhibit 10.4(e) of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 (File No. 000-50189)).
(3) Senior Executive Retirement Agreement between Crown Holdings, Inc. and Christopher C. Homfray, effective January 1, 2008 (incorporated by reference to Exhibit 10.m(6) of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 000-50189)).
(4) Senior Executive Retirement Agreement between Crown Holdings, Inc. and Raymond L. McGowan, Jr., dated May 3, 2007 (incorporated by reference to Exhibit 10.m(7) of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 000-50189)).
(5)
Senior Executive Retirement Agreement between Crown Holdings, Inc. and Jozef Salaerts, effective January 1, 2008 (incorporated by reference to Exhibit 10.m(8) of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 000-50189)).
Crown Holdings, Inc.
(6)
Senior Executive Retirement Agreement, effective June 1, 2012, between Crown Holdings, Inc. and Gerard Gifford (incorporated by reference to Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 (File No 000-50189)).
(7)
Amendment No. 1 to the Senior Executive Retirement Agreement, effective June 1, 2012, between Crown Holdings, Inc. and Gerard Gifford dated December 28, 2012 (incorporated by reference to Exhibit 10.m(7) of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 (File No. 000-50189)).
(8)
Senior Executive Retirement Agreement, effective July 24, 2013, between Crown Holdings, Inc. and Thomas A. Kelly (incorporated by reference to Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 (File No 000-50189)).
(9)
Senior Executive Retirement Agreement between Crown Holdings, Inc. and Djalma Novaes Jr., dated February 26, 2015.
10.g
Form of Agreement for Restricted Stock Awards under Crown Holdings, Inc. 2004 Stock-Based Incentive Compensation Plan (incorporated by reference to Exhibit 10.x of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 000-50189)).
10.h
Form of Agreement for Restricted Stock Awards under Crown Holdings, Inc. 2006 Stock-Based Incentive Compensation Plan (incorporated by reference to Exhibit 10.dd of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 000-50189)).
10.i
Crown Holdings, Inc. 2004 Stock-Based Incentive Compensation Plan, dated as of April 22, 2004 (incorporated by reference to the Registrant’s Definitive Proxy Statement on Schedule 14A, filed with the Securities and Exchange Commission on March 19, 2004 (File No. 000-50189)).
10.j
Amendment No. 1, effective December 14, 2006, to the Crown Holdings, Inc. 2004 Stock-Based Incentive Compensation Plan (incorporated by reference to Exhibit 10.ff of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 000-50189)).
10.k
Form of Agreement for Non-Qualified Stock Option Awards under Crown Holdings, Inc. 2004 Stock-Based Incentive Compensation Plan (incorporated by reference to Exhibit 10.6 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (File No. 000-51089)).
10.l
Crown Holdings, Inc. Deferred Compensation Plan for Directors, as Amended and Restated, effective January 1, 2008 (incorporated by reference to Exhibit 10.w of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 000-50189)).
10.m
Crown Holdings, Inc. Stock Compensation Plan for Non-Employee Directors, dated as of April 22, 2004 (incorporated by reference to the Registrant’s Definitive Proxy Statement on Schedule 14A, filed with the Securities and Exchange Commission on March 19, 2004 (File No. 000-50189)).
10.n
Crown Cork & Seal Company, Inc. Pension Plan for Outside Directors, dated as of October 27, 1994 (incorporated by reference to Exhibit 10.c of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 (File No. 1-2227)).
10.o
Amendment No. 1, effective April 1, 2005, to the Crown Holdings, Inc. Stock Compensation Plan for Non-Employee Directors, dated as of April 22, 2004 (incorporated by reference to Exhibit 10 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 (File No. 000-50189)).
10.p
Master Definitions Agreement, dated June 21, 2005, between France Titrisation, as Management Company, BNP Paribas, as Custodian Calculation Agent, FCC Account Bank, Liquidity Facility Provider and Swap Counterparty, Eliopée Limited, as Eliopée, GE Factofrance, as Back-up Servicer, Crown European Holdings, as Parent Company, the Entities listed in Schedule, as Sellers or Servicers, CROWN Emballage France SAS, as French Administrative Agent and CROWN Packaging UK PLC, as English Administrative Agent (incorporated by reference to Exhibit 10.a to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 (File No. 000-50189)).
Crown Holdings, Inc.
10.q
Master Receivables Transfer and Servicing Agreement, dated June 21, 2005, between France Titrisation, as Management Company, BNP Paribas, as Custodian, the Entities listed in Schedule 1 of Appendix 1, as Sellers or Servicers, CROWN Emballage France SAS, as French Administrative Agent and CROWN Packaging UK PLC, as English Administrative Agent (incorporated by reference to Exhibit 10.b to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 (File No. 000-50189)).
10.r
Crown Holdings, Inc. 2006 Stock-Based Incentive Compensation Plan (incorporated by reference to the Registrant’s Definitive Proxy Statement on Schedule 14A, filed with the Securities and Exchange Commission on March 24, 2006 (File No. 000-50189)).
10.s
Amendment No. 1, effective December 14, 2006, to the Crown Holdings, Inc. 2006 Stock-Based Incentive Compensation Plan (incorporated by reference to Exhibit 10.pp of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 000-50189)).
10.t
Amendment No. 2, effective July 28, 2010, to the Crown Holdings, Inc. 2006 Stock-Based Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 (File No. 000-50189)).
10.u
Form of Agreement for Non-Qualified Stock Option Awards under Crown Holdings, Inc. 2006 Stock-Based Incentive Compensation Plan (incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 (File No. 000-50189)).
10.v
Crown Holdings, Inc. 2013 Stock-Based Incentive Compensation Plan (incorporated by reference to the Registrant's Definitive Proxy Statement on Schedule 14A, filed with the Securities and Exchange Commission on March 18, 2013 (File No. 000-50189)).
10.w
Form of Agreement for Restricted Stock Awards under Crown Holdings, Inc. 2013 Stock-Based Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 (File No. 000-50189)).
10.x
Form of Agreement for Deferred Stock Awards under Crown Holdings, Inc. 2013 Stock-Based Incentive Compensation Plan (incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 (File No. 000-50189)).
10.y
Crown Cork & Seal Company, Inc. Restoration Plan, dated July 28, 2010 (incorporated by reference to Exhibit 10.3 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 (File No. 000-50189)).
10.z
Amendment No. 1, effective July 1, 2011, to the Crown Cork & Seal Company, Inc. Restoration Plan (incorporated by reference to Exhibit 10.4 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 (File No. 000-50189)).
10.aa
Receivables Purchase Agreement, dated as of March 9, 2010, among Crown Cork & Seal Receivables (DE) Corporation, as the seller, Crown Cork & Seal USA, Inc., as the servicer, Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. "Rabobank Nederland", New York Branch, as administrative agent, and the conduit purchasers, alternate purchasers, facility agents party thereto from time to time (incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (File No. 000-50189)).
10.bb
Parent Undertaking Agreement, dated as of March 9, 2010, made by Crown Holdings, Inc., Crown Cork & Seal Company, Inc. and Crown International Holdings, Inc. in favor of the purchasers, the facility agents and Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. "Rabobank Nederland", New York Branch, as administrative agent (incorporated by reference to Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (File No. 000-50189)).
10.cc
Third Amended and Restated Receivables Sale Agreement, dated as of March 9, 2010, among Crown Cork and Seal USA, Inc., as a seller and the servicer, CROWN Metal packaging Canada LP, as a seller, and Crown Cork & Seal Receivables (DE) Corporation, as the buyer (incorporated by reference to Exhibit 10.3 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (File No. 000-50189)).
Crown Holdings, Inc.
10.dd
Purchase Agreement, dated as of June 26, 2014, by and among Crown Holdings, Inc., Crown European Holdings S.A., BNP Paribas and the Royal Bank of Scotland plc as Representatives, the Initial Purchasers (as defined therein) and the Guarantors (as defined therein) (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K dated July 2, 2014 (File No. 000-50189)).
Exhibits 10.c through 10.z, with the exception of 10.p and 10.q are management contracts or compensatory plans or arrangements required to be filed as exhibits pursuant to Item 14(c) of this Report.
Computation of ratio of earnings to fixed charges.
Subsidiaries of Registrant.
Consent of Independent Registered Public Accounting Firm.
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by John W. Conway, Chairman of the Board and Chief Executive Officer of Crown Holdings, Inc. and Thomas A. Kelly, Senior Vice President and Chief Financial Officer of Crown Holdings, Inc.
The following financial information from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations for the twelve months ended December 31, 2014, 2013 and 2012, (ii) Consolidated Statements of Comprehensive Income for the twelve months ended December 31, 2014, 2013 and 2012; (iii) Consolidated Balance Sheets as of December 31, 2014 and December 31, 2013, (iv) Consolidated Statements of Cash Flows for the twelve months ended December 31, 2014, 2013 and 2012, (v) Consolidated Statements of Changes in Shareholders' Equity for the twelve months ended December 31, 2014, 2013 and 2012 and (vi) Notes to Consolidated Financial Statements.
Crown Holdings, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 Holdings, Inc.
Registrant
By:
/s/ Kevin C. Clothier
Kevin C. Clothier
Vice President and Corporate Controller
Date: March 2, 2015
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John W. Conway, Timothy J. Donahue and William T. Gallagher, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign any and all amendments to the Annual Report on Form 10-K for the Company’s 2014 fiscal year, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their or his substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated above.
SIGNATURE
TITLE
/s/ John W. Conway
John W. Conway
Chairman of the Board and Chief Executive Officer
/s/ Thomas A. Kelly
Thomas A. Kelly
Senior Vice President and Chief Financial Officer
/s/ Kevin C. Clothier
Kevin C. Clothier
Vice President and Corporate Controller
SIGNATURE
DIRECTORS
/s/ Jenne K. Britell
/s/ Josef M. Müller
Jenne K. Britell
Josef M. Müller
/s/ Thomas A. Ralph
Arnold W. Donald
Thomas A. Ralph
/s/ William G. Little
/s/ Caesar F. Sweitzer
William G. Little
Caesar F. Sweitzer
/s/ Hans J. Löliger
/s/ Jim L. Turner
Hans J. Löliger
Jim L. Turner
/s/ William S. Urkiel
James H. Miller
William S. Urkiel