Crown Holdings, Inc. — 2013 Q2 Form 10-Q Summary
Business context and reporting period
Crown Holdings manufactures metal packaging, including beverage cans and ends, food cans, aerosol cans, closures, specialty packaging, and related equipment. The filing covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods. The interim financial statements are unaudited and prepared under U.S. GAAP.
Management’s strategy emphasizes expansion in international growth markets, particularly Asia, Brazil and Eastern Europe, while improving efficiency and returns in mature markets. Approximately 73% of six-month 2013 sales were generated outside the United States, Canada and Western Europe.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $2,223 million | $2,184 million | $4,196 million | $4,131 million |
| Gross profit | $375 million | $340 million | $674 million | $627 million |
| Gross margin | 16.9% | 15.6% | 16.1% | 15.2% |
| Net income attributable to Crown | $133 million | $134 million | $174 million | $203 million |
| Net margin attributable to Crown | 6.0% | 6.1% | 4.1% | 4.9% |
| Diluted EPS | $0.93 | $0.89 | $1.21 | $1.35 |
| Segment income of reportable segments | $278 million | $265 million | $501 million | $479 million |
| Net cash used in operating activities | Not provided for quarter | Not provided for quarter | $(251) million | $(216) million |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $(124) million | $(139) million |
Cash and cash equivalents were $227 million at June 30, 2013, compared with $350 million at December 31, 2012. Total debt, including short-term debt and current maturities, was approximately $4.1 billion. Long-term debt excluding current maturities was $3.672 billion. The company reported shareholders’ deficit of $161 million and total equity of $125 million.
The company had $727 million of available borrowing capacity under its $1.2 billion revolving credit facility after borrowings and standby letters of credit. Approximately $198 million of cash was held outside the United States, including $122 million at subsidiaries whose earnings were considered indefinitely reinvested.
Material changes versus the prior comparable period
- Second-quarter sales increased 1.8%, while six-month sales increased 1.6%, primarily from higher global beverage can volumes, partly offset by lower selling prices reflecting raw-material cost pass-through.
- Gross profit increased $35 million in the quarter and $47 million year to date. Gross margin improved by approximately 130 basis points in the quarter and 90 basis points year to date.
- Segment income of reportable segments increased 5% in the quarter and 5% year to date. European Beverage and Americas Beverage were the principal contributors, while European Food declined.
- Net income attributable to Crown was approximately flat in the quarter but declined 14% for the six-month period, primarily because 2013 included a $38 million loss from early extinguishment of debt and certain unusual tax and customer-related charges.
- Depreciation and amortization declined by $15 million in the quarter and $23 million year to date following an increase in the estimated useful lives of can-making equipment. Management estimated the full-year 2013 reduction at approximately $50 million; the change increased six-month net income by $18 million, or $0.13 per diluted share.
- Operating cash use increased to $251 million from $216 million, reflecting working-capital needs, seasonal inventory building, higher cash taxes and debt-refinancing-related payments. Receivables increased to $1.302 billion and inventories to $1.424 billion.
- In January 2013, 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. Revolving-credit and short-term borrowings increased by $423 million during the first six months.
- The company repurchased $194 million of common stock during the first six months. At June 30, $613 million remained available under the $800 million repurchase authorization.
Outlook, management commentary, risks and unusual items
- The company commercialized or expanded beverage-can capacity in China, Malaysia, Vietnam and Thailand, began production in Cambodia in July, and expected commercial shipments from a new northern Brazil facility in early 2014. Approximately $78 million of capital commitments primarily related to Asia and Brazil capacity expansion remained outstanding.
- Management was evaluating projects that could generate additional restructuring charges of $25 million to $35 million. Existing European restructuring programs were expected to produce annual cost savings of approximately $16 million in European Food and $30 million in European Aerosol and Specialty Packaging, although savings were not guaranteed.
- European Food segment income was affected by an $11 million reserve against a customer receivable after the customer filed for bankruptcy protection. The remaining net receivable was $34 million, and an additional material charge could be required if collectability deteriorates.
- Italian tax assessments related to supplier VAT issues totaled approximately $98 million, including interest and penalties. The company recorded $20 million of pre-tax expense year to date and expected to settle the matter in the third quarter of 2013; the final amount could exceed the accrual.
- The company recorded a $16 million pre-tax gain from an arbitration ruling involving environmental indemnification matters and received an initial $15 million payment.
- Asbestos-related claims totaled approximately 52,000 at June 30, 2013. The accrual for pending and future claims and related legal costs was $243 million, including $182 million for unasserted claims. The company stated that actual losses could exceed the accrual but could not estimate the excess.
- Environmental remediation accruals totaled $13 million. The company also had guarantees of $40 million related to leased-asset residual values and defined-limit indemnification exposure of $9 million.
- Goodwill was $1.944 billion. No impairment was identified for the European Aerosol reporting unit, but a future impairment charge of up to $142 million was possible if projected operating results declined.
- Approximately $1.2 billion of debt was subject to floating interest rates. A 0.25 percentage-point change in those rates was estimated to affect annual pre-tax interest expense by approximately $3 million.
- Major risks include international and emerging-market exposure, foreign-exchange movements, raw-material and energy prices, competitive pricing and overcapacity, substantial leverage and debt covenants, asbestos and other litigation, pension funding, customer credit, environmental regulation and execution of expansion projects.
- Management stated that disclosure controls and procedures were effective and that no material change had affected internal control over financial reporting.
Important facts for investors to verify
- Reconcile reported earnings with the $38 million debt-extinguishment loss, the Italian tax accrual, the European Food receivable reserve and the environmental arbitration gain.
- Assess whether negative operating cash flow, higher receivables and inventories, and increased revolver borrowings are seasonal or indicate sustained working-capital pressure.
- Review debt maturities, covenant capacity, securitization facilities and the ability to refinance or reduce approximately $4.1 billion of indebtedness.
- Monitor execution, returns and potential additional borrowing associated with Asian and Brazilian capacity expansion.
- Evaluate the collectability of the $34 million European Food customer receivable and any further bankruptcy-related exposure.
- Track developments in asbestos litigation, including challenges to liability-limiting statutes and potential losses beyond the $243 million accrual.
- Test the sensitivity of goodwill, pension obligations, margins and cash flow to operating performance, foreign exchange, interest rates and commodity prices.
- Confirm the final outcome and payment timing of the Italian tax assessments and any future restructuring charges.