Crown Holdings plans to continue using cash flow to cut debt

By Paul Deckelman

New York, Feb. 2 - Crown Holdings Inc. reported what its chairman and chief executive officer, John W. Conway, termed "very strong" results for the fourth quarter and full 2004 year on Monday, and said that it would continue using its free cash flow to cut its debt and bring down interest costs.

Crown Holdings, the Philadelphia-based parent company of Crown Cork & Seal Co. Inc., a producer of metal food and beverage cans and other packaging for consumer products, reported that net income for 2004 grew to $51 million (30 cents per share) versus a year-earlier net loss of $32 million (19 cents a share). The company had a net loss of $27 million (16 cents per share) for the fourth quarter ended Dec. 31, an improvement from a year earlier, when the loss was $54 million (33 cents per share).

The latest year's results were impacted by a number of special items, which, among other things, resulted in net charges of 49 cents per share for the quarter and 68 cents per share for the full year, attributable to provisions for asset impairments, asbestos liability and restructuring, as well as a loss on early extinguishments of debt.

During the fourth quarter, the company tendered for its $268.604 million of outstanding 7% notes due 2006. Although most holders elected not to participate in the offer and some $235 million of the bonds remain outstanding, the company did accept for purchase and payment all of the roughly $33 million principal amount of the bonds which had been validly tendered at a purchase price of $1,050 per $1,000 principal amount. Crown recorded an earnings charge of $2 million ($1 million, net of tax, or one cent per share) in the quarter in connection with the tender offer.

The company during the quarter also retired the entire $40 million remaining outstanding 8 3/8% notes that would have come due last month. For the full year, it recorded a charge of $39 million ($34 million net of tax, or 20 cents per share) related to the early extinguishment of debt.

The company's chief financial officer, Alan Rutherford, told analysts on a conference call following the release of the numbers that net debt as of Dec. 31 was $3.4 billion, including $3.872 billion of total outstanding debt, which was partly offset by $471 million of cash or short-term equivalents on the balance sheet. Net debt was less than four times EBITDA at year-end.

That year-end net debt figure was sequentially down from $3.664 billion at the close of the third quarter on Sept. 30, which included $3.959 billion of total debt, and was also down from total debt of $3.538 billion as of the end of 2003, which included $3.939 billion of total debt. Crown Holdings, Rutherford said, was "still on track" to reduce its net debt to $3 billion or less by the end of 2006.

Expects $200 million for 2005 delevering

The CFO noted that the $266 million of free cash flow reported in 2004 was "better than the target, a very satisfactory result for the year." He said that the company estimates that it will have "at least" $200 million of free cash flow available in 2005 to continue de-levering, and "we will attempt to improve on this" figure.

With the last of the January 2005 bonds having been taken out by the company during the fourth quarter, the next debt maturity Crown faces is the remaining 7% notes due on Dec. 15, 2006.

"Obviously, if we have free cash flow - and we will - we probably won't use our revolver facility as much as we would have done" to redeem the notes, Rutherford said. "And things like securitizations, we will obviously use free cash flow and not use these facilities, which, of course, reduces our interest costs."

Looking beyond the 2006 bonds, Crown has no bonds maturing until 2011 when several series of notes are scheduled to come due. However, Rutherford said, $1.5 billion of those bonds become callable in February and March of 2007. Those bonds have an average coupon of 9½%, here again, the CFO said "we have an opportunity to call theses, and yes, pay a premium, but at the same time, if we have the cash, and I think we will, to pay off some part of that and refinance them at lower rates, that could have a big impact on our interest costs."

Interest expense in the fourth quarter was $91 million, down from $99 million in the fourth quarter of 2003. The decrease reflected the impact of lower average debt outstanding than there had been in the previous year's fourth quarter, although this was partially offset by higher average interest rates.

Taking out debt in the fourth quarter lowered the company's total amount of dollar-denominated debt, which declined to 70% of the total debt exposure at year end from 83% a year earlier, while euro-denominated debt increased as a percentage to 28% from 17% earlier. The percentage of euro debt was also increased by the add-on issue in September of €110 million of new 6¼% notes due 2011

Rutherford also said that the company's liquidity as the end of the year was "excellent, with $900 million of availability."

No plans to buy stock, pay dividend

In response to questions from several analysts, Rutherford said that the company has no plans at this time to use its cash flow to repurchase stock, even though "under certain circumstances under our covenants we could do, but only a limited amount."

There are also no plans afoot, the executive said, to institute a dividend for stockholders or engage in any significant acquisition activity. He also ruled out the notion of improving the balance sheet by issuing new equity.

"We're really looking out 24 months from now," he said, "when we have the opportunity to call debt with an average coupon of 9½%, and obviously any cash or funds we have available then could end up paying that down."

Although Crown has not had to seek Chapter 11 protection as have many other companies with asbestos-liability problems, it still must wrestle with the issue.

It recorded a fourth-quarter charge of $35 million (21 cents per share) to increase its asbestos litigation reserve and estimates that its asbestos liability for pending and future asbestos claims will range between $233 million and $351 million, versus a reported range as of the end of 2003 of $239 million and $406 million. After the $35 million charge, the company's reserve at the end of 2004 was $233 million, down from $239 million as of Dec. 31, 2003.

Asbestos-related payments in 2004 totaled $41 million, including $22 million under existing settlement agreements, versus 2003 payments of $68 million, which included $41 million under existing settlement agreements.

Rutherford said that the number of new claims filed against the company in 2004 was 13,000, down from 36,000 the previous year, bringing the total number to 74,000. However, he said, two-thirds of those claims were filed in four states - Texas, Mississippi, Ohio and the company's home turf of Pennsylvania, "which now have laws which effectively extinguish our liability."

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