Crown Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
Crown Holdings, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The company manufactures metal packaging, including beverage and food cans, ends, closures, specialty containers, and related equipment. Growth investments focused on Brazil, China, Eastern Europe, Southeast Asia, and other emerging markets, while mature markets emphasized productivity and cost reduction.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $2,281 million vs. $2,010 million | $4,163 million vs. $3,787 million |
| Gross profit | $371 million vs. $335 million | $663 million vs. $585 million |
| Income before taxes | $210 million vs. $201 million | $293 million vs. $307 million |
| Net income attributable to Crown | $129 million vs. $112 million | $145 million vs. $153 million |
| Diluted EPS | $0.83 vs. $0.69 | $0.93 vs. $0.94 |
| Net cash used in operating activities | Not separately provided | $(247) million vs. $(194) million |
- Quarterly gross margin was approximately 16.3%, compared with 16.7% in the prior-year quarter. Six-month gross margin was approximately 15.9%, compared with 15.5%.
- Quarterly net income attributable to Crown increased 15%, aided by higher sales and lower noncontrolling interests. Six-month attributable net income decreased 5%, primarily reflecting higher interest expense, restructuring costs, and debt extinguishment charges.
- Sales growth reflected higher unit volumes, raw-material pass-through, and favorable foreign-currency translation. Approximately 73% of first-half sales were generated outside the United States.
- Cash and cash equivalents were $421 million at June 30, 2011, compared with $463 million at December 31, 2010. Restricted cash was $125 million and was deposited to fund a July 2011 debt redemption.
- Total debt was approximately $4.1 billion, consisting of $272 million of short-term debt, $180 million of current maturities, and $3.424 billion of long-term debt excluding current maturities. The company reported $728 million of available revolving-credit capacity.
- Total assets increased to $8.059 billion from $6.899 billion, primarily reflecting higher receivables, inventories, property and equipment, and goodwill. Crown shareholders’ deficit improved to $(70) million from $(96) million.
Material changes versus the prior comparable period
- Second-quarter sales increased 13.5%; first-half sales increased 9.9%. Segment income increased to $315 million from $295 million in the quarter and to $567 million from $508 million for the first half.
- Second-quarter performance benefited from higher volumes and pricing across most segments, but European Beverage segment income declined because cost increases and major U.K. plant conversions were not fully offset by price increases.
- First-half operating cash use increased by $53 million. Inventory increased to $1.537 billion from $1.060 billion and receivables increased to $1.323 billion from $936 million, reflecting seasonal inventory builds, higher raw-material costs, capacity expansion, and higher sales.
- Capital expenditures increased to $184 million from $104 million for the first half. The company expected approximately $425 million of capital expenditures for 2011, compared with $320 million in 2010.
- The company issued $700 million of 6.25% senior notes due 2021, repurchased and redeemed its 7.75% senior secured notes due 2015, and amended its credit facilities to add $597 million of term loans due 2016. These actions contributed to $32 million of first-half losses from early extinguishment of debt.
- Interest expense rose to $60 million from $45 million in the quarter and to $116 million from $92 million for the first half, driven by higher borrowings, higher rates, and currency effects.
- The company repurchased approximately 9.4 million shares for $362 million during the first half, including a $200 million May accelerated share repurchase. Approximately $394 million remained available under the $600 million authorization.
Guidance, outlook, commentary, risks, and unusual items
- Management expected continued investment in beverage-can capacity, including projects in Brazil, China, Cambodia, Turkey, and Vietnam. Approximately $107 million of capital commitments remained at June 30, 2011.
- Management expected restructuring actions to produce annual pretax savings of approximately $3 million in European Specialty Packaging and $25 million from North America Food actions when fully implemented.
- Raw-material prices for aluminum and steel remained volatile. The company generally seeks to pass these costs through to customers but cautioned that full recovery is not assured and supply interruptions could disrupt operations.
- Asbestos-related accruals were $239 million, including $189 million for unasserted claims, with estimates covering claims through 2020. The company stated that reasonably possible losses could exceed the accrual but could not estimate the excess amount.
- Environmental remediation accruals totaled $15 million. Italian tax assessments were expected to total approximately €40 million, or $58 million at June 30, 2011, plus interest and penalties; the company intends to dispute them.
- European antitrust investigations in Spain and the Netherlands were closed without findings of violations during 2011, although the company noted that authorities could potentially reopen them.
- The company was exposed to foreign-exchange, commodity-price, and interest-rate risk and used derivatives for hedging rather than speculation. Approximately $1.330 billion of debt carried floating rates; a 0.25 percentage-point rate increase would increase annual pretax interest expense by approximately $3 million.
- No material changes to critical accounting policies were reported. Management concluded that disclosure controls and procedures were effective.
Important facts for investors to verify
- Whether operating cash flow improves as seasonal inventory and receivables convert to cash, particularly given the company’s elevated capital-spending program.
- The pace and returns of new beverage-can capacity and the effect of future depreciation and operating costs on margins.
- Debt maturities, floating-rate exposure, covenant headroom, and the company’s ability to reduce leverage while continuing share repurchases.
- The ultimate cost and timing of asbestos claims, environmental remediation, and the disputed Italian tax assessments.
- Whether raw-material pass-through mechanisms fully offset aluminum and steel cost volatility.
- The filing does not provide a full-year earnings or revenue guidance target; investors should verify subsequent disclosures for updated guidance.