Crown Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Crown Holdings is a global metal packaging company focused primarily on beverage cans and ends, food cans, aerosol cans, closures, and related packaging products. The filing covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods. Results are unaudited and presented in millions except per-share data.
Key Financial Metrics
| Metric | Q2 2017 | Q2 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Net sales | $2,161 | $2,142 | $4,062 | $4,035 |
| Income from operations | $271 | $295 | $508 | $514 |
| Net income attributable to Crown | $128 | $169 | $235 | $248 |
| Diluted EPS | $0.94 | $1.21 | $1.71 | $1.78 |
| Operating margin | 12.5% | 13.8% | 12.5% | 12.7% |
| Net margin attributable to Crown | 5.9% | 7.9% | 5.8% | 6.1% |
- Net sales increased approximately 0.9% in the quarter and 0.7% year to date. Management attributed the increase primarily to 2% higher global beverage-can volumes and pass-through of higher raw-material costs, partly offset by foreign-currency translation.
- Operating income declined 8% in the quarter and 1% year to date. Q2 included $18 of restructuring and other charges, including a $16 litigation settlement related to Mivisa.
- Interest expense increased to $61 in Q2 and $123 year to date, reflecting higher average borrowing rates. The company also recorded a $7 loss from early extinguishment of debt in Q2.
- The effective tax rate was 26% for both the quarter and year to date, compared with 26% and 27%, respectively, in the prior-year periods.
- Six-month cash flow from operations was $32, down from $63. Working-capital use included increases of $116 in receivables and $184 in inventories.
- Capital expenditures were $200 year to date versus $143 in the prior-year period. Management expects approximately $450 of capital expenditures for 2017.
- Cash and cash equivalents were $301 at June 30, 2017, down from $559 at December 31, 2016. Approximately $249 was held outside the United States.
- Cash used in financing activities was $111 year to date, including $277 of common-stock repurchases, $1,053 of long-term debt proceeds, and $1,103 of long-term debt repayments.
- Total debt based on reported carrying amounts was approximately $5,359, consisting of $39 of short-term debt, $58 of current maturities, and $5,262 of long-term debt excluding current maturities. The company had $1,083 of available revolving-credit capacity.
Material Changes Versus the Prior Comparable Period
- Americas Beverage sales increased to $729 in Q2 and $1,403 year to date; segment income increased to $109 and $214, respectively, supported by volume, geographic mix, and higher aluminum pass-through.
- Asia Pacific was the strongest segment-growth contributor, with Q2 segment income rising to $45 from $39 and year-to-date income rising to $84 from $74, driven by higher Southeast Asian volumes and improved costs following the Shanghai facility closure.
- European Beverage Q2 segment income declined to $72 from $75 due principally to weaker Middle East sales, although year-to-date segment income increased to $123 from $121.
- European Food year-to-date sales and segment income declined to $838 and $114 from $860 and $116, primarily due to currency translation and product mix.
- Non-reportable segment sales declined to $117 in Q2 and $231 year to date, reflecting lower aerosol volumes and currency effects.
- Shareholders’ equity increased to $622 from $366 at year-end, primarily due to comprehensive income and a $60 cumulative-effect accounting adjustment, partly offset by share repurchases.
- Foreign-currency translation produced a $209 year-to-date benefit in other comprehensive income, compared with a $125 loss in the prior-year period.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects global beverage-can demand to remain the primary organic-growth opportunity, particularly in emerging markets, while food and aerosol volumes remain stable to declining in some mature markets.
- The company expects to use the majority of 2017 free cash flow for share repurchases. Its $1 billion repurchase authorization had $720 remaining at June 30, 2017.
- Capacity additions and expansions were underway or recently completed in Mexico, New York, Colombia, France, Indonesia, Vietnam, and other markets. A new glass-bottle facility in Chihuahua, Mexico, is expected to operate in the first half of 2018; other announced facilities are scheduled for 2017 or 2018 start-up.
- Steel and aluminum prices remain volatile. The company may not be able to fully pass higher costs to customers, and its ability to pass through aluminum premium costs varies by market.
- Asbestos-related claims remained a significant contingency. The company reported 56,000 ending claims, paid $7 during the first six months, and maintained an accrual of $331, including $279 for unasserted claims. The company cannot estimate reasonably possible losses above the accrual.
- The German Federal Cartel Office investigation into potential anticompetitive conduct remains ongoing. Management believes a loss is probable but cannot estimate the ultimate loss or range of additional losses; the impact could be material.
- U.S. Customs and Border Protection assessed an $18 penalty for alleged intentional import misclassification. The company disputes the penalty, has paid approximately $1 of related duties, and has not accrued the penalty because a loss was not considered probable.
- Environmental remediation accruals totaled $16, and the company reported $135 of capital commitments, primarily in Americas Beverage.
- Goodwill impairment sensitivity was notable: a sufficient decline in adjusted EBITDA could result in potential impairment charges of up to $92 for European Aerosols and Specialty Packaging and $115 for North America Food.
- The company adopted several accounting standards in 2017, including share-based payment guidance that increased retained earnings by $60. Revenue-recognition and lease-accounting standards remain pending and could materially affect future presentation or financial position.
Investor Verification Checklist
- Verify the sustainability of cash generation, particularly the decline in operating cash flow and the working-capital build in receivables and inventories.
- Reconcile total debt, revolving-facility utilization, leverage covenants, interest-rate exposure, and the effects of the April 2017 credit-agreement amendment.
- Assess whether volume growth and raw-material pass-through can offset currency movements, start-up costs, and commodity-price volatility.
- Monitor asbestos claims and accrual adequacy, the German antitrust investigation, the customs penalty, and other litigation or environmental contingencies.
- Evaluate the planned $450 of 2017 capital expenditures and the company’s intention to direct most free cash flow toward share repurchases.
- Review goodwill impairment headroom in the European Aerosols and Specialty Packaging and North America Food reporting units.