CROWN HOLDINGS, INC. quarterly report, Q1 FY2016

Business Context and Reporting Period

Crown Holdings, Inc. filed an unaudited Form 10-Q for the three months ended March 31, 2016. The company manufactures beverage cans and ends, food cans, closures, aerosol cans and specialty packaging across the Americas, Europe and Asia Pacific. Management’s strategy emphasizes international growth, cost control, pricing discipline, capacity optimization and leverage reduction.

Financial Performance and Position

Metric	Q1 2016	Q1 2015	Change
Net sales	$1,893 million	$1,997 million	Down 5%
Income from operations	$219 million	$168 million	Up 30%
Operating margin	Approximately 11.6%	Approximately 8.4%	Up approximately 3.2 percentage points
Net income	$99 million	$62 million	Up 60%
Net income attributable to Crown	$79 million	$44 million	Up 80%
Diluted EPS	$0.57	$0.32	Up 78%
Net cash used in operating activities	$408 million	$287 million	Greater use of cash
Capital expenditures	$51 million	$52 million	Approximately flat

Cost of products sold declined to $1,521 million from $1,660 million, while selling and administrative expense declined to $91 million from $98 million. Depreciation and amortization increased to $60 million from $51 million.
Results included a $27 million loss from early extinguishment of debt related to the redemption of $700 million of 6.25% senior notes due 2021.
Income taxes were $38 million, compared with $37 million, producing an effective tax rate of approximately 28% in 2016 versus approximately 37% in 2015.
Cash and cash equivalents were $257 million at March 31, 2016, down from $717 million at December 31, 2015. The company had $789 million of available revolving-credit capacity after borrowings and standby letters of credit.
Total debt was approximately $5.9 billion, including $67 million of short-term debt, $239 million of current maturities and $5,293 million of long-term debt excluding current maturities.
Total equity increased to $553 million from $435 million at year-end 2015; Crown shareholders’ equity increased to $249 million from $144 million.

Material Changes Versus the Prior Comparable Period

Sales declined primarily because of foreign-currency translation, lower raw-material pass-through pricing and a 5% decline in global food-can volumes. These effects were partly offset by a 7% increase in global beverage-can volumes, including an additional six weeks of Empaque activity.
Segment income increased to $259 million, including reportable-segment income of $246 million versus $224 million. Americas Beverage increased to $104 million from $85 million, European Beverage increased to $46 million from $38 million, and European Food increased to $49 million from $42 million.
North America Food segment income declined to $12 million from $24 million. Asia Pacific segment income remained $35 million despite lower pricing and competitive pressure.
Corporate and unallocated expense improved to $38 million from $53 million, primarily because of lower stock-based compensation and pension expense and the absence of a prior-year Empaque inventory fair-value adjustment.
Operating cash flow deteriorated principally because of increases in receivables, inventories and accounts payable and accrued liabilities. Investing cash use fell substantially because Q1 2015 included the $1.2 billion Empaque acquisition.
In February 2016, the company amended its credit agreement, borrowed an additional $300 million of term loans and used borrowings and cash to redeem the $700 million senior notes due 2021.
Foreign-currency translation produced a $9 million gain in other comprehensive income in Q1 2016 versus a $211 million loss in Q1 2015, causing comprehensive income attributable to Crown to improve to $102 million from a $156 million loss.

Guidance, Outlook, Risks and Unusual Items

Management expects 2016 capital expenditures of approximately $400 million and intends to use cash flow to reduce leverage. The company may also invest in capacity, pursue acquisitions, repurchase shares or pay future dividends.
Planned capacity projects include beverage-can plants in Nichols, New York and Monterrey, Mexico, a second line at the Osmaniye, Turkey facility and a third beverage-can plant in Cambodia. Expected operating dates range from Q2 2016 to Q1 2017.
Management expects approximately $12 million of future restructuring charges related to the closure of two European Food facilities, with approximately 280 employees expected to be affected. Additional restructuring charges remain possible.
The company faces exposure to aluminum and steel prices, foreign-exchange movements, interest rates and competitive pricing. Approximately $2.7 billion of principal floating-rate debt was outstanding; a 0.25 percentage-point rate change would affect annual pretax interest expense by approximately $7 million.
European Food facility closures, market overcapacity in China, declining food and aerosol volumes, customer losses and the ability to pass through raw-material cost changes may affect future results.
The European Aerosol and Specialty Packaging reporting unit remains subject to goodwill impairment risk. Based on current projections, management believes fair value exceeds carrying value, but a future impairment charge of up to $99 million is possible if results decline.
Asbestos-related claims totaled approximately 55,000 at March 31, 2016. The company accrued $266 million for pending and future claims and related legal costs through 2025, but stated that actual losses could exceed the accrual and that the excess cannot currently be estimated.
An ongoing German Federal Cartel Office investigation concerns suspected anticompetitive conduct involving a German subsidiary. The company identified inappropriate conduct by certain employees, submitted a leniency application and believes a loss is probable, but cannot predict the ultimate amount; additional losses could be material.
Environmental remediation accruals totaled $14 million, and the company reported defined-limit indemnifications of $7 million and guarantees related to leased-asset residual values of $23 million.
The filing states that disclosure controls and procedures were effective and that no material change occurred in internal control over financial reporting during the quarter.

Important Facts for Investors to Verify

Reconcile the sharp improvement in operating income and EPS with the 5% sales decline, including the effects of Empaque, foreign exchange, raw-material pricing and segment mix.
Monitor operating cash flow, working-capital requirements and the reduction of cash from $717 million to $257 million during the quarter.
Review debt maturities, floating-rate exposure, revolving-credit availability and management’s stated plan to reduce leverage.
Assess the potential magnitude and timing of asbestos liabilities, including claims beyond the 2025 accrual projection period.
Follow the German antitrust investigation and any resulting fines, settlements or additional accruals.
Evaluate the risk of the potential $99 million goodwill impairment and the expected costs and benefits of European facility closures.
Track execution, capital requirements and returns from the Nichols, Monterrey, Osmaniye and Cambodia capacity projects.