CROWN HOLDINGS, INC. quarterly report, Q1 FY2015

Crown Holdings, Inc. — 2015 Q1 Form 10-Q Summary

Business context and reporting period

Crown Holdings manufactures metal packaging, including beverage, food, aerosol and specialty packaging. The filing covers the three months ended March 31, 2015, compared with the first quarter of 2014. Results are unaudited and presented under U.S. GAAP.

The company completed its $1.2 billion acquisition of Empaque in Mexico on February 18, 2015. Empaque contributed approximately $75 million of sales and $2 million of net income attributable to Crown Holdings during the quarter. The company is emphasizing leverage reduction following the acquisition.

Financial performance and key metrics

Metric	Q1 2015	Q1 2014	Change
Net sales	$1,997 million	$1,993 million	Up $4 million
Gross profit	$286 million	$297 million	Down $11 million
Gross margin	14.3%	14.9%	Down 0.6 percentage points
Income before taxes	$99 million	$79 million	Up $20 million
Net income	$62 million	$46 million	Up $16 million
Net income attributable to Crown	$44 million	$24 million	Up $20 million
Diluted EPS	$0.32	$0.17	Up $0.15
Effective tax rate	37.4%	41.8%	Down 4.4 percentage points

Gross profit declined despite stable sales, primarily reflecting higher depreciation and amortization from the Mivisa and Empaque acquisitions, foreign exchange effects and segment mix. Selling and administrative expense declined to $98 million from $104 million. Restructuring and other charges declined to $20 million from $52 million, while interest expense increased to $65 million from $58 million due primarily to higher debt.

Segment income was $241 million, compared with $251 million in the prior-year quarter. Americas Beverage and European Food improved, while North America Food, European Beverage and non-reportable businesses declined. European Beverage was affected by lower Middle East volumes, foreign exchange and $9 million of higher aluminum premiums.

Cash flow, liquidity and capital structure

Operating cash flow was negative $287 million, an improvement from negative $495 million in Q1 2014, primarily due to improved working capital.
Investing cash flow was negative $1.246 billion, including $1.206 billion for the Empaque acquisition and $52 million of capital expenditures.
Financing cash flow was positive $886 million, principally reflecting $750 million of long-term borrowings and increased revolving and short-term debt.
Cash and cash equivalents were $280 million at March 31, 2015, down from $965 million at December 31, 2014. Approximately $239 million was held outside the United States.
Total debt was approximately $5.99 billion, consisting of $72 million of short-term debt and $5.918 billion of long-term debt before current maturities. Net debt was approximately $5.71 billion based on reported cash.
The company reported $952 million of available revolving-credit capacity after $208 million of borrowings and $40 million of standby letters of credit.
Shareholders’ equity attributable to Crown declined to a deficit of $27 million from equity of $119 million at year-end, primarily due to a $200 million other comprehensive loss attributable to foreign currency translation.

Material changes versus the prior comparable period

Reported sales were essentially flat, but acquisitions increased revenue while unfavorable currency translation reduced reported results. Management stated that sales would have been $172 million higher using prior-year exchange rates.
Americas Beverage sales increased to $617 million from $549 million, aided by Empaque and an 8.6% increase in sales unit volumes.
European Food sales increased to $431 million from $373 million, primarily due to Mivisa and a 32% increase in sales unit volumes.
European Beverage sales fell to $324 million from $388 million, with unit volumes down 8.5%, primarily because of Middle East conditions and currency effects.
North America Food sales declined to $160 million from $179 million, primarily because of lower volumes and the loss of a customer.
Restructuring and other charges decreased by $32 million year over year. The 2015 amount included $14 million of Empaque transaction costs and a $6 million loss on the sale of European Specialty Packaging operations.
Depreciation and amortization increased to $51 million from $35 million due to acquired assets and intangibles.

Guidance, outlook, commentary and risks

Management expects 2015 capital expenditures of approximately $350 million and plans to use cash flow primarily to reduce leverage. It does not presently anticipate share repurchases or dividends in 2015.
The company expects approximately $52 million of capital commitments, primarily in Europe, to be funded from operating cash flow and, if necessary, external borrowings.
Management expects to pay remaining liabilities related to several European restructuring actions in 2015 and does not expect additional charges for those specific actions, although further European restructuring charges remain possible.
In May 2015, the company issued €600 million, or approximately $651 million at March 31 exchange rates, of 3.375% senior notes due 2025 and used the proceeds to repay its February 2022 U.S. dollar term loan. The company expects an approximately $9 million pretax loss from early debt extinguishment.
Asbestos-related accruals were $268 million, including $221 million for unasserted claims. The company paid $5 million to settle claims during the quarter and stated that actual losses could exceed the accrual, although the excess cannot be estimated.
The German Federal Cartel Office inspected a company subsidiary in March 2015 in an ongoing investigation of possible anti-competitive agreements. No charges had been filed, but potential fines could be material and the potential loss cannot currently be estimated.
Environmental remediation accruals totaled $13 million. Other litigation, labor, tax, environmental and indemnification matters could require additional cash payments.
Foreign exchange remains a major risk: the company reported a $211 million foreign currency translation loss in other comprehensive income. The business also faces aluminum and steel price volatility, with limited ability to pass through aluminum premium increases in Europe.
Approximately $3.0 billion of debt carried floating interest rates at March 31, 2015; a 0.25% rate increase would raise annual pretax interest expense by approximately $7.5 million.
The European Aerosols and Specialty Packaging reporting unit had estimated fair value 47% above carrying value at year-end; deterioration could result in an impairment charge of up to $103 million.

Important facts for investors to verify

Whether Empaque integration, the Monterrey plant and long-term Heineken supply agreements deliver the expected volume, cash flow and leverage benefits.
The pace of debt reduction, covenant compliance and available liquidity following the acquisition and subsequent refinancing.
The sustainability of earnings improvement after excluding lower restructuring charges, acquisition-related effects, foreign exchange and other unusual items.
Exposure to further currency translation losses, Middle East disruption, European aluminum premiums and raw-material cost pass-through limitations.
The outcome and potential financial impact of the German cartel investigation and asbestos litigation.
Whether the European Aerosols and Specialty Packaging reporting unit remains above its carrying value and avoids a potential goodwill impairment.