Crown Holdings, Inc. — 2016 Q2 Form 10-Q Summary
Business context and reporting period
Crown Holdings manufactures metal packaging, including beverage cans and ends, food cans, aerosol cans, specialty packaging, closures, and related tooling. The filing covers the unaudited three and six months ended June 30, 2016, compared with the corresponding 2015 periods. The company operates through Americas Beverage, North America Food, European Beverage, European Food, Asia Pacific, and non-reportable segments.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $2,142 million, versus $2,278 million | $4,035 million, versus $4,275 million |
| Income from operations | $295 million, versus $277 million | $514 million, versus $445 million |
| Net income attributable to Crown Holdings | $169 million, versus $142 million | $248 million, versus $186 million |
| Diluted earnings per share | $1.21, versus $1.02 | $1.78, versus $1.34 |
| Operating margin | 13.8%, versus 12.2% | 12.7%, versus 10.4% |
| Net margin attributable to Crown Holdings | 7.9%, versus 6.2% | 6.1%, versus 4.4% |
| Net cash provided by operating activities | Not separately provided for the quarter | $63 million, versus $15 million used |
- Cash and cash equivalents were $370 million at June 30, 2016, down from $717 million at December 31, 2015; $288 million was held outside the United States.
- Total debt consisted of $37 million of short-term debt, $236 million of current maturities, and $5,011 million of long-term debt excluding current maturities. Total principal debt was approximately $5.34 billion.
- Available revolving-credit capacity was $1.010 billion, after $148 million of borrowings and $42 million of standby letters of credit, under a $1.2 billion facility.
- Capital expenditures were $143 million in the first six months, and management expected approximately $450 million for full-year 2016.
- Inventory increased to $1.419 billion from $1.213 billion at year-end, reflecting seasonal buildup for food and beverage packaging demand.
Material changes versus the prior comparable period
- Second-quarter sales declined 6.0%; first-half sales declined 5.6%. Management attributed the decrease primarily to foreign-currency translation and pass-through of lower aluminum, steel, and other material costs.
- Operating income increased 6.5% in the quarter and 15.5% year to date. Lower material costs, operating improvements, lower corporate costs, and reduced restructuring charges more than offset lower sales.
- Net income attributable to Crown Holdings increased 19.0% in the quarter and 33.3% year to date. Interest expense declined to $58 million from $69 million in the quarter and to $122 million from $134 million year to date.
- Cash flow from operations improved to $63 million provided in the first half from $15 million used in the prior-year period, primarily from working-capital improvements. Inventories consumed $216 million of cash during the first half.
- Investing cash outflows decreased to $125 million from $1.302 billion, primarily because the prior-year period included the $1.207 billion Empaque acquisition.
- Financing used $281 million of cash versus providing $679 million in the prior-year period. The company issued $304 million of long-term debt and repaid $725 million.
- In February 2016, the company redeemed its $700 million 6.25% senior notes due 2021 using additional term loans, revolving borrowings, and cash. It recorded a $27 million loss on early extinguishment of debt.
- Other comprehensive loss was $102 million in the quarter and $78 million for the first half, primarily reflecting foreign-currency translation losses. Comprehensive income attributable to Crown Holdings was $65 million in the quarter and $167 million year to date.
Guidance, outlook, commentary, risks, and unusual items
- Management intended to use 2016 cash flow to reduce leverage while continuing selective capacity investments, potential strategic acquisitions, specialty-can projects, share repurchases, and possible future dividends.
- Planned or announced capacity projects included beverage-can plants in Nichols, New York and Monterrey, Mexico, an expansion in Colombia, a second line in Osmaniye, Turkey, and an additional aluminum line in Custines, France.
- The company expected the Nichols plant to be operational in the first quarter of 2017, Monterrey late in the fourth quarter of 2016, Colombia in the second quarter of 2017, and the Turkey line late in the fourth quarter of 2016.
- China had excess beverage-can capacity, creating pricing pressure and profitability risks. Management was evaluating strategic alternatives, including potentially material future restructuring.
- European Food facility closures were expected to reduce approximately 280 employees. The company had recorded $17 million of related charges and expected $12 million of future charges. Additional restructuring charges remain possible.
- Asbestos-related liabilities were accrued at $259 million, including $213 million for unasserted claims. Approximately 55,000 claims were outstanding at June 30, 2016. The company stated that actual losses could exceed the accrual but could not estimate the excess exposure.
- The German Federal Cartel Office investigation into possible anticompetitive conduct remained ongoing. The company believed a loss was probable but could not estimate the ultimate loss or range of additional losses; any eventual amount could be material.
- Environmental remediation accruals totaled $14 million. Additional losses beyond recorded accruals could not be estimated.
- Raw-material costs, particularly aluminum and steel, remain volatile, and the company may not be able to fully pass cost increases to customers.
- Goodwill impairment risk was concentrated in the European Aerosols and Specialty Packaging reporting unit. A 10% decline in projected Adjusted EBITDA could reduce estimated fair value to approximately carrying value; a potential impairment charge of up to $93 million was disclosed.
- Brexit was identified as a new risk that could affect customers, suppliers, employees, market access, taxation, regulation, and operating results.
- Approximately $2.4 billion of principal floating-rate debt was outstanding; a 0.25 percentage-point change in floating rates would affect annual pretax interest expense by approximately $6 million.
- The company maintained a full valuation allowance of approximately $35 million against Canadian net deferred tax assets.
Most important facts for investors to verify
- Whether operating improvements and lower material costs can offset currency pressure, pricing declines, mature-market volumes, and potential China-related restructuring.
- Progress, spending, and start-up timing for the announced capacity projects, particularly Monterrey, Nichols, Colombia, Turkey, and France.
- Debt reduction, refinancing needs, covenant capacity, floating-rate exposure, and the sustainability of liquidity after the decline in cash.
- The ultimate exposure from asbestos claims, the German cartel investigation, environmental matters, and other contingencies.
- Whether the European Aerosols and Specialty Packaging reporting unit maintains sufficient performance to avoid the disclosed potential goodwill impairment.
- The effect of foreign exchange movements, Brexit-related developments, and the company’s ability to pass aluminum and steel cost changes through to customers.
- Management’s use of the non-GAAP segment-income measure and reconciliation to GAAP operating income.