Crown Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
Crown Holdings is a global metal packaging manufacturer serving beverage, food, aerosol and specialty packaging markets. This unaudited Form 10-Q covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. Results are presented under U.S. GAAP in millions, except per-share data.
Financial performance and key metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $2,326 | $2,460 | $6,361 | $6,735 |
| Income from operations | $315 | $281 | $829 | $726 |
| Operating margin | 13.5% | 11.4% | 13.0% | 10.8% |
| Net income attributable to Crown | $183 | $141 | $431 | $327 |
| Net margin attributable to Crown | 7.9% | 5.7% | 6.8% | 4.9% |
| Diluted EPS | $1.31 | $1.01 | $3.09 | $2.35 |
- Net sales declined 5% in both the quarter and nine-month period, primarily from foreign-currency translation and lower material-cost pass-through. Nine-month sales also benefited from an additional six weeks of Empaque results in 2016.
- Operating income increased 12% in the quarter and 14% year to date. Segment income of reportable segments rose to $360 in the quarter from $350 and to $913 year to date from $869.
- Interest expense decreased to $59 in the quarter and $181 year to date, versus $68 and $202, respectively, primarily because of lower average debt.
- The effective tax rate was 19% in the quarter and 24% year to date, compared with 23% and 26% in the prior-year periods. The quarter benefited from a $31 release of the Canadian deferred-tax valuation allowance, partly offset by $8 of Spanish tax-contingency charges and a $5 U.K. tax-credit write-off.
- Cash provided by operating activities was $376 for the first nine months, compared with $315 in 2015. Capital expenditures were $244, compared with $176.
- Cash used in investing activities was $228, compared with $1,374 in 2015, when the company paid $1,207 for the Empaque acquisition. Cash used in financing activities was $328, compared with $611 of cash provided in 2015.
- Cash and cash equivalents were $526 at September 30, down from $717 at December 31, 2015. Approximately $463 was held outside the United States.
- Total debt, including short-term debt and current maturities, was approximately $5.27 billion at September 30, versus $5.53 billion at December 31, 2015. Long-term debt excluding current maturities was $5.10 billion.
- The company had $1,052 of available revolving-credit capacity after borrowings and standby letters of credit and remained in compliance with leverage covenants.
Material changes versus the prior comparable period
- Americas Beverage segment income increased to $119 from $116 in the quarter and to $329 from $300 year to date, supported by higher volumes, Empaque, improved cost performance and lower Brazilian aluminum premiums.
- European Beverage segment income increased to $83 from $74 in the quarter and to $204 from $178 year to date, driven by lower aluminum premiums, volume growth and cost improvements.
- European Food segment income declined slightly in the quarter but increased year to date because of restructuring-related cost improvements.
- North America Food year-to-date segment income fell to $57 from $72, reflecting lower volumes, a lost customer, unfavorable steel-cost timing and inflation in non-steel inputs.
- Asia Pacific segment income was unchanged at $37 in the quarter and $111 year to date. Pricing pressure in China offset higher Southeast Asian volumes.
- Restructuring and other charges declined to $20 in the quarter and $19 year to date, compared with $40 and $57. The 2016 charges included costs associated with closing an Asia Pacific beverage plant and pension settlement charges.
- The company recorded $37 of early debt-extinguishment losses year to date, including costs related to refinancing and retiring prior debt.
- In September 2016, the company issued €600 million of 2.625% senior notes due 2024 and $400 million of 4.25% senior notes due 2026, using the proceeds primarily to repay euro and U.S. dollar term loans.
- Comprehensive income attributable to Crown increased to $143 in the quarter and $310 year to date, compared with $9 and $3, although foreign-currency translation still produced a $170 year-to-date loss in other comprehensive income.
Guidance, outlook, commentary and risks
- Management expects to use 2016 cash flow to reduce leverage while continuing selective capacity investments, potential acquisitions and specialty-can initiatives. No specific earnings or revenue guidance is provided in the filing.
- Capital expenditures for 2016 are expected to be approximately $450. Capital commitments at September 30 were approximately $144, primarily in the Americas and European Beverage segments.
- Planned capacity projects include beverage-can facilities in Nichols, New York; Monterrey, Mexico; and Colombia, as well as expansions in Turkey and France.
- Management expects mature-market beverage volumes to be stable to slightly declining, while emerging-market beverage demand generally grows. Food and aerosol volumes have been stable to declining.
- Steel and aluminum costs remain volatile. The company attempts to pass cost changes through to customers, but recovery is not assured. Foreign exchange, interest-rate and commodity risks are managed with derivatives.
- China has excess beverage-can capacity and pricing pressure. Additional restructuring actions may be required and could be material.
- Asbestos-related accruals were $254 at September 30, including $205 for unasserted claims, covering estimated probable costs through 2025. The company paid $12 for asbestos settlements during the first nine months and states that actual losses could exceed the accrual, although the excess cannot be estimated.
- The German Federal Cartel Office investigation into possible anticompetitive conduct remains ongoing. The company believes a loss is probable but cannot estimate the amount or range of potential additional losses, which could be material.
- Environmental remediation accruals totaled $14. The company also had $6 of defined-limit indemnification exposure and $22 of guarantees related to leased-asset residual values.
- Goodwill impairment sensitivities are significant: potential charges of up to $91 were identified for European Aerosols and Specialty Packaging and up to $115 for North America Food if operating performance deteriorates.
- The company had $1.3 billion of floating-rate debt; a 0.25% rate change would affect annual pretax interest expense by approximately $3.
Most important facts for investors to verify
- Whether improved operating margins and segment income offset continued revenue pressure from currency translation, lower material-cost pass-through and mature-market volumes.
- Progress toward the stated 2016 debt-reduction objective, including the effect of refinancing and required debt maturities.
- Whether the Canadian valuation-allowance release and the 19% quarterly tax rate are sustainable or primarily unusual items.
- Execution, capital requirements and returns from the announced specialty-can capacity projects.
- Developments in the German antitrust investigation and any resulting fines or additional accruals.
- Changes in asbestos claims, settlement costs and the adequacy of the $254 accrual through 2025.
- Potential goodwill impairment in the European Aerosols and Specialty Packaging and North America Food reporting units.
- Cash availability by jurisdiction, given that most cash was held outside the United States and $413 was held by subsidiaries considered indefinitely reinvested.