Crown Holdings, Inc. — 2014 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Crown Holdings is a global producer of beverage, food, aerosol and specialty packaging. This unaudited Form 10-Q covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods. The company completed its acquisition of Mivisa Envases, S.A.U. on April 23, 2014, expanding its European food-can operations.
Financial Performance and Key Metrics
| Metric | Q2 2014 | Q2 2013 | Six Months 2014 | Six Months 2013 |
|---|---|---|---|---|
| Net sales | $2,383 million | $2,223 million | $4,376 million | $4,196 million |
| Gross profit | $376 million | $375 million | $673 million | $674 million |
| Gross margin | 15.8% | 16.9% | 15.4% | 16.1% |
| Net income attributable to Crown | $106 million | $133 million | $130 million | $174 million |
| Net margin attributable to Crown | 4.4% | 6.0% | 3.0% | 4.1% |
| Diluted EPS | $0.76 | $0.93 | $0.94 | $1.21 |
| Restructuring and other charges | $31 million | $4 million | $83 million | $8 million |
| Interest expense | $66 million | $61 million | $124 million | $121 million |
- Sales increased 7.2% in the quarter and 4.3% year to date, primarily from Mivisa and higher global beverage-can volumes. Global beverage-can volumes increased 3% in the quarter and 4% year to date.
- Segment income of reportable segments increased to $305 million from $278 million in the quarter and to $532 million from $501 million year to date. European Food benefited from Mivisa and the absence of a $11 million customer-receivable reserve recorded in 2013.
- Operating performance was offset by higher restructuring charges, Mivisa-related inventory fair-value adjustments, higher corporate costs, increased depreciation and amortization, and higher interest expense.
- Six-month cash flow from operating activities was negative $117 million, improving from negative $251 million in 2013. The improvement primarily reflected changes in the North American receivables securitization program.
- Capital expenditures were $149 million, compared with $124 million in 2013. Cash paid for the Mivisa acquisition was $733 million, net of $28 million of cash acquired; proceeds from divestitures were $22 million.
- Cash provided by financing activities was $528 million, including $1,827 million of long-term debt proceeds and $1,015 million of long-term debt repayments. Cash declined to $244 million from $689 million at December 31, 2013.
Material Changes Versus the Prior Comparable Period
- Total assets increased to $9,895 million from $8,030 million, mainly because of the Mivisa acquisition. Goodwill and intangible assets increased to $3,272 million from $2,016 million.
- Total debt, including short-term debt and current maturities, increased to approximately $5,492 million from $3,842 million. Long-term debt excluding current maturities increased to $5,230 million from $3,469 million.
- Current assets were $3,487 million versus current liabilities of $2,849 million, while cash was $244 million. Revolving-credit availability was $1,064 million under a $1,200 million facility.
- Shareholders’ equity increased to $144 million from $4 million, and total equity increased to $412 million from $289 million. The company repurchased only $2 million of common stock during the first six months, compared with $194 million in 2013.
- Reportable-segment sales increased in European Food, European Beverage, Asia Pacific and Americas Beverage, while North America Food sales and non-reportable-segment income declined.
Guidance, Outlook, Commentary and Risks
- Management expects 2014 capital expenditures of approximately $320 million and has approximately $66 million of additional capital commitments, primarily for capacity expansion in Europe and Brazil.
- The company expects the Mivisa acquisition to be earnings accretive and is integrating Mivisa with its existing European Food business. The purchase-price allocation remained preliminary at June 30, 2014; recorded goodwill was $917 million.
- Management does not presently anticipate share repurchases in 2014, although $507 million remained available under the repurchase authorization at June 30, 2014.
- In July 2014, the company issued €650 million of 4% senior notes due 2022 and used proceeds to tender for and redeem its €500 million of 7.125% notes due 2018. It expects to record an approximately $35 million debt-extinguishment loss in the third quarter.
- Raw-material costs, particularly steel and aluminum, remain volatile. The company seeks to pass cost changes through to customers but may not recover all increases. Middle East conflicts, competitive price compression, manufacturing inefficiencies during capacity expansion, foreign exchange and interest-rate changes may affect results.
- At June 30, 2014, floating-rate debt was approximately $2.5 billion; a 0.25% rate change would affect annual pretax interest expense by approximately $6.2 million.
- Asbestos-related accruals were $244 million, including $203 million for unasserted claims. The company states that actual losses could exceed the accrual and that excess exposure cannot be reasonably estimated.
- Environmental remediation accruals totaled $13 million, excluding a $3 million recovery receivable. The company also had guarantees of $37 million related to leased-asset residual values.
- Recent aluminum-premium volatility produced hedge ineffectiveness, and management indicated that future losses could be material if volatility continues. A European Aerosols and Specialty Packaging reporting unit had estimated fair value 50% above carrying value; a future impairment could be up to $158 million if performance declines.
- Management concluded that disclosure controls and procedures were effective, with no material change in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether Mivisa integration delivers the expected earnings accretion and whether the preliminary purchase-price allocation changes materially.
- The effect of acquisition-related charges, restructuring costs, inventory fair-value adjustments and the expected third-quarter debt-extinguishment loss on reported and adjusted earnings.
- Debt reduction capacity, covenant compliance, refinancing requirements and the effect of the July 2014 notes transaction on interest expense and maturities.
- Operating cash-flow recovery, working-capital trends, receivables securitization activity and the company’s ability to fund capital expenditures and commitments.
- Exposure to steel and aluminum prices, foreign exchange, floating interest rates, competitive pricing and Middle East operating conditions.
- Developments in asbestos litigation and whether actual claims and settlements could exceed the $244 million accrual.