Crown Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. Crown manufactures beverage, food, aerosol and specialty packaging products through operations in the Americas, Europe and Asia Pacific. The company completed its $1.2 billion Empaque acquisition in February 2015 and continued integrating the business.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $2,278 million | $2,383 million | $4,275 million | $4,376 million |
| Gross profit | $373 million | $376 million | $659 million | $673 million |
| Gross margin | 16.4% | 15.8% | 15.4% | 15.4% |
| Income before taxes | $202 million | $177 million | $301 million | $256 million |
| Net income attributable to Crown | $142 million | $106 million | $186 million | $130 million |
| Diluted EPS | $1.02 | $0.76 | $1.34 | $0.94 |
| Operating cash flow | Not separately provided | Not separately provided | $(15) million | $(117) million |
- Q2 sales declined 4.4%, while six-month sales declined 2.3%, primarily because of foreign-currency translation; acquisitions partly offset the decline.
- Q2 net income attributable to Crown increased 34% and diluted EPS increased 34%. Six-month net income increased 43% and diluted EPS increased 43%.
- Q2 net margin attributable to Crown was approximately 6.2%, versus 4.4% in 2014. Six-month net margin was approximately 4.4%, versus 3.0%.
- Operating cash use improved to $15 million from $117 million, primarily through better working-capital performance, but remained negative.
- Capital expenditures were $111 million year-to-date; management expected approximately $350 million of 2015 capital expenditures.
- Cash and equivalents were $288 million at June 30, 2015, down from $965 million at December 31, 2014. Approximately $218 million was held outside the United States.
- Total debt, including short-term debt and current maturities, was approximately $5.9 billion, compared with approximately $5.3 billion at year-end 2014. Revolving-credit availability was $1.053 billion after borrowings and standby letters of credit.
Material changes versus the prior comparable period
- Empaque contributed approximately $173 million of Q2 sales and $248 million of six-month sales. Americas Beverage sales increased to $741 million in Q2 from $594 million, and segment income increased to $99 million from $85 million.
- North America Food sales and segment income declined, primarily because of lost customers and lower volumes; six-month sales volumes decreased 19%.
- European Beverage sales and segment income declined because of a 4% Q2 and 6% six-month volume reduction, Middle East conflicts and currency effects.
- European Food segment income increased to $68 million in Q2 from $63 million and to $110 million for six months from $89 million, reflecting volume growth, Mivisa contributions and improved cost performance.
- Depreciation and amortization increased to $62 million in Q2 from $47 million and to $113 million for six months from $82 million, primarily from acquisition-related assets.
- Interest expense increased to $69 million in Q2 from $66 million and to $134 million for six months from $124 million because of higher average debt.
- The company recorded a $9 million loss on early debt extinguishment after issuing €600 million of 3.375% senior notes due 2025 and repaying a term loan.
- Restructuring and other expense was a $3 million benefit in Q2 and a $17 million expense year-to-date, compared with expenses of $31 million and $83 million, respectively, in 2014.
Outlook, commentary, risks and unusual items
- Management’s 2015 priority after the Empaque acquisition was to use cash flow to reduce leverage; it did not anticipate share repurchases or dividends in 2015.
- Growth initiatives include specialty-can capacity investments and a planned beverage-can plant in Monterrey, Mexico. Management continues to pursue targeted international growth while controlling costs in mature markets.
- Raw-material costs, especially aluminum and steel, remain volatile. The company may not be able to fully pass cost increases to customers, particularly in European Beverage.
- Foreign exchange remains a significant risk. At June 30, 2015, approximately $2.2 billion of debt carried floating interest rates; a 0.25% rate increase would raise annual pretax interest expense by approximately $5.6 million.
- The company accrued $263 million for pending and future asbestos-related claims and legal costs through 2024, including $211 million for unasserted claims. Management stated that actual losses could exceed the accrual but could not estimate the excess.
- The German Federal Cartel Office is investigating suspected anticompetitive agreements in metal packaging. No formal charges had been filed, but potential penalties could be material and the outcome could not be estimated.
- Environmental remediation accruals totaled $13 million, comprising $7 million for PRP sites and $6 million for company-owned locations. The company also had defined-limit indemnifications of $8 million and lease-residual guarantees of $28 million.
- The European Aerosols and Specialty Packaging reporting unit’s estimated fair value exceeded carrying value by 47%; a future decline could result in an impairment charge of up to $108 million.
- Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the period.
Important facts for investors to verify
- Whether Empaque integration, the Monterrey investment and related supply agreements deliver expected volume growth and cash flow.
- Debt reduction progress, leverage, refinancing requirements and compliance with credit arrangements.
- Whether negative operating cash flow reverses and whether working-capital needs remain elevated.
- Exposure to currency movements, floating interest rates, aluminum and steel prices, and the ability to pass costs through to customers.
- The potential financial impact and timing of the asbestos claims, German competition investigation and environmental matters.
- The sustainability of segment results, particularly the North America Food decline and European Beverage weakness.
- The assumptions supporting the $263 million asbestos accrual and the potential $108 million European Aerosols and Specialty Packaging impairment.