Crown Holdings, Inc. — Q1 2013 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2013, compared with the three months ended March 31, 2012. Crown manufactures beverage, food, aerosol and specialty packaging products through operations in the Americas, Europe and Asia Pacific. Management’s strategy emphasizes international beverage-can growth, disciplined pricing and cost control in mature markets.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $1,973 million | $1,947 million | +1.3% |
| Gross profit | $299 million | $287 million | +4.2% |
| Gross margin | 15.2% | 14.7% | +50 bps |
| Income before taxes and equity earnings | $93 million | $122 million | -23.8% |
| Net income | $67 million | $90 million | -25.6% |
| Net income attributable to Crown | $41 million | $69 million | -40.6% |
| Diluted EPS | $0.28 | $0.46 | -39.1% |
| Cash used in operating activities | $432 million | $389 million | Use increased $43 million |
| Capital expenditures | $63 million | $62 million | Comparable |
| Cash and equivalents at March 31 | $304 million | $250 million | +22% |
Gross margin improved, but attributable net margin declined to approximately 2.1% from 3.5%, primarily because of the $38 million loss on early extinguishment of debt, $4 million of restructuring charges, higher interest expense and increased income attributable to noncontrolling interests. The company reported $47 million of total comprehensive income versus $168 million in the prior-year quarter, reflecting foreign currency and hedge-related losses.
Balance sheet, debt and liquidity
- Total assets were $7,701 million at March 31, 2013, versus $7,490 million at December 31, 2012.
- Total debt, including short-term debt and current maturities, was approximately $4,104 million; cash was $304 million, implying net debt of approximately $3,800 million.
- Long-term debt excluding current maturities increased to $3,708 million from $3,289 million. Shareholders’ deficit improved to $(128) million from $(162) million, while total equity was $164 million.
- Current assets were $3,024 million and current liabilities were $2,326 million, producing a current ratio of approximately 1.30 versus 1.09 at year-end.
- Revolving credit availability was $758 million under a $1.2 billion facility after borrowings of $398 million and standby letters of credit of $44 million.
- Approximately $273 million of cash was held outside the United States, including $143 million at subsidiaries whose earnings were considered indefinitely reinvested.
Material changes versus the prior comparable period
- Global beverage-can volumes increased 6%, while food-can volumes declined 2%. Sales benefited from beverage growth and acquisitions, partly offset by lower material-cost pass-throughs and pricing pressure.
- Americas Beverage sales increased to $552 million and segment income to $76 million. European Beverage sales increased to $371 million and segment income to $51 million.
- European Food sales declined to $376 million and segment income to $32 million, primarily due to competitive price compression, lower volumes and delayed seasonal shipments.
- Asia Pacific sales increased to $276 million, primarily from higher beverage-can volumes and the Superior acquisition; segment income increased to $33 million despite capacity start-up costs.
- Depreciation and amortization declined to $34 million from $42 million after the company extended the estimated useful lives of can-making equipment. Management reported a $10 million quarterly reduction in depreciation, a $7 million increase in net income and a $0.05 diluted EPS benefit; expected full-year depreciation reduction was approximately $50 million.
- Operating cash use increased because of working-capital needs, particularly a $205 million inventory build and a $118 million receivables increase. Seasonal inventory accumulation and capacity expansion contributed to the cash usage.
- The company issued $1.0 billion of 4.5% senior notes due 2023, redeemed $400 million of 2017 notes and repaid $500 million of term loans. The refinancing generated a $38 million early-extinguishment loss and $15 million of debt issuance costs.
Outlook, commentary, risks and unusual items
- The company commercialized additional beverage-can lines in China and Malaysia and expected new facilities in Vietnam and Thailand during Q2, a Cambodia facility during Q3, and commercial shipments from a new northern Brazil facility in early 2014. Timing and completion remain subject to market and execution risks.
- Approximately $74 million of capital commitments remained, primarily for Asia Pacific capacity expansion, with funding expected from operating cash flow and external borrowings as needed.
- Management was evaluating projects that could result in an additional $20 million to $30 million of restructuring charges. Existing European restructuring programs were expected to produce annual pre-tax savings of approximately $16 million in European Food and $30 million in European Aerosol and Specialty Packaging, although savings were not assured.
- Raw-material costs, especially aluminum and steel, remain volatile. The company seeks to pass increases through to customers but may not fully recover cost increases.
- A European Food customer receivable of $42 million was considered collectible based on current information; deterioration in the customer’s financial condition could produce a material charge.
- Asbestos-related accruals were $249 million, including $193 million for unasserted claims. The company paid $7 million to settle claims during the quarter and stated that actual losses could exceed the accrual, although the excess could not be reasonably estimated.
- Italian tax assessments totaled approximately $33 million, with possible penalties of up to $56 million; $13 million was accrued. The company was contesting remaining assessments and could incur losses above the accrual.
- Environmental remediation accruals totaled $13 million. The company also had $37 million of guarantees related to leased-asset residual values and potential indemnification liabilities with defined limits of $9 million.
- European Aerosols goodwill had estimated fair value 22% above carrying value; a decline in operating results could lead to an impairment charge of up to $143 million.
- The company’s $800 million share-repurchase authorization remained available at March 31, 2013, but no purchases were made under publicly announced programs during the quarter.
- Approximately $1.2 billion of debt carried floating interest rates; a 25-basis-point rate increase would raise annual pre-tax interest expense by approximately $3 million.
Investor verification points
- Verify whether beverage-can volume growth and new international capacity translate into sustainable segment-income growth after start-up costs.
- Monitor working-capital normalization, inventory levels and the company’s ability to return to positive operating cash flow.
- Review leverage, refinancing needs, debt covenants and available revolver capacity following the 2023 notes issuance.
- Assess the collectability of the $42 million European Food receivable and potential exposure from Italian tax assessments.
- Track asbestos claims, accrual adequacy and legal challenges to successor-liability statutes.
- Evaluate the effect of the useful-life change on reported earnings and whether expected depreciation savings represent an economic improvement or primarily an accounting estimate change.
- Monitor potential $20 million to $30 million of additional restructuring charges and the realization of projected cost savings.