CROWN HOLDINGS, INC. quarterly report, Q3 FY2014

Crown Holdings, Inc. — Form 10-Q Summary

Business context and reporting period

Crown Holdings manufactures metal packaging, including beverage cans and ends, food cans, closures, aerosol cans and specialty packaging. This unaudited filing covers the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods. The company’s strategy emphasizes international growth, operating improvements in mature markets, acquisitions and disciplined capital allocation.

Key financial metrics

Metric	Q3 2014	Q3 2013	9M 2014	9M 2013
Net sales	$2,594 million	$2,389 million	$6,970 million	$6,585 million
Gross profit	$422 million	$394 million	$1,095 million	$1,068 million
Income before taxes	$225 million	$195 million	$481 million	$497 million
Net income attributable to Crown	$244 million	$101 million	$374 million	$275 million
Diluted EPS	$1.76	$0.73	$2.70	$1.94
Operating cash flow	Not separately provided	Not separately provided	$9 million	$(124) million

Q3 sales increased 8.6%; nine-month sales increased 5.8%.
Gross margin was approximately 16.3% in Q3 2014 versus 16.5% in Q3 2013, and 15.7% for the first nine months versus 16.2% in the prior-year period.
Net income attributable to Crown rose 141.6% in Q3 and 36.0% for the first nine months. Results benefited materially from a $90 million French deferred-tax valuation allowance release, including a $90 million tax benefit recognized in the third quarter.
Q3 and nine-month results included $34 million of losses from early debt extinguishment, compared with none in Q3 2013 and $38 million in the first nine months of 2013.
Segment income for reportable segments increased to $343 million in Q3 from $286 million and to $875 million for nine months from $787 million. European Food was the largest contributor to the increase, primarily due to the Mivisa acquisition.

Liquidity, cash flow and debt

Cash and cash equivalents were $380 million at September 30, 2014, down from $689 million at December 31, 2013. Approximately $330 million was held outside the United States.
Nine-month cash flow from operations was $9 million, compared with an operating cash outflow of $124 million in 2013. Management attributed the improvement primarily to a North American receivables securitization facility, which accounted for receivable transactions as sales in 2014.
Investing cash outflow was $912 million, including $733 million for the Mivisa acquisition and $212 million of capital expenditures.
Financing cash inflow was $606 million, primarily reflecting debt raised to fund Mivisa and refinance existing debt.
Total debt, including short-term debt and current maturities, was approximately $5.45 billion at September 30, 2014, versus approximately $3.84 billion at year-end 2013. Long-term debt excluding current maturities was $5.20 billion.
The company had $1.16 billion of available revolving-credit capacity, after $40 million of standby letters of credit, and no outstanding revolver borrowings.
Capital commitments were approximately $79 million, primarily related to European operations. The company stated that it did not anticipate share repurchases or dividends in 2014 or 2015.

Material changes versus the prior comparable period

The April 2014 acquisition of Mivisa for $733 million, plus $977 million of assumed debt, expanded the European Food business. The preliminary purchase accounting included $924 million of goodwill and $336 million of intangible assets.
European Food sales increased 45.0% in Q3 and 27.1% for the first nine months, while segment income increased 69.8% and 46.3%, respectively, primarily from Mivisa and stronger volumes.
Asia Pacific sales and segment income increased due to capacity additions and higher volumes, although lower selling prices and competitive price compression offset part of the sales benefit.
Americas Beverage performance declined because of lower U.S. volumes, Puerto Rico facility closure effects and plant inefficiencies. European Beverage was affected in Q3 by lower Middle East volumes associated with regional conflicts.
Selling and administrative expense declined, partly because $29 million of 2013 customer receivable reserves did not recur. Depreciation and amortization increased due to Mivisa-related assets and purchase-accounting adjustments.
Other comprehensive income was a loss of $124 million in Q3 and $79 million for nine months, primarily reflecting foreign-currency translation losses.

Guidance, outlook, commentary and risks

Management described Mivisa and the proposed Empaque acquisition as expected to be earnings accretive, but provided no formal quantitative earnings or revenue guidance.
On August 31, 2014, Crown agreed to acquire Empaque from Heineken for approximately $1.225 billion, subject to adjustment and regulatory approval. The transaction had not closed as of the filing date. October amendments established a potential $675 million Term Loan B and $75 million Additional Term Loan A facility contingent on closing.
Management expects growth in targeted international beverage-can markets, including Asia, Brazil and Eastern Europe, while mature-market volumes are stable to declining. Additional plant closures, capacity reductions or headcount actions could result in material restructuring charges.
Steel and aluminum costs remain volatile, and the company may not be able to fully pass cost increases to customers. Foreign exchange, interest rates and commodity prices are managed with derivatives; approximately $2.3 billion of debt carried floating interest rates, with a 0.25 percentage-point rate change estimated to affect annual pretax interest expense by approximately $5.8 million.
Ongoing labor disputes caused production-relocation costs in the Americas Beverage segment. The company also identified potential future hedge-ineffectiveness losses if aluminum-premium volatility continues.
Asbestos-related accruals were $239 million at September 30, 2014, including $195 million for unasserted claims and estimated probable costs through 2023. The company stated that reasonably possible losses could exceed the accrual but could not be estimated.
Environmental remediation accruals totaled $13 million, and other guarantees included $33 million related to leased-asset residual values. The company also disclosed a potential goodwill impairment charge of up to $148 million for the European Aerosols and Specialty Packaging reporting unit if operating results deteriorate.
The company adopted translation-adjustment guidance without an impact and was evaluating the effect of new revenue-recognition guidance effective in 2017.

Most important facts for investors to verify

Whether Empaque closes, receives regulatory approval and is financed under the contemplated incremental credit facilities.
The sustainability of earnings excluding the $90 million French tax valuation allowance release and other unusual items.
Post-Mivisa integration results, purchase-accounting finalization, goodwill valuation and expected synergies.
Debt reduction capacity, refinancing needs, covenant compliance and sensitivity to floating interest rates.
Operating cash-flow conversion, including the recurring effects and liquidity implications of receivables securitization.
Exposure to asbestos claims beyond the $239 million accrual, environmental liabilities and potential goodwill impairment.
Effects of aluminum and steel prices, foreign exchange, regional conflicts, labor disputes and mature-market volume declines.