Crown Holdings, Inc. — 2015 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2015; the filing is not a quarterly report, although it includes unaudited fourth-quarter data. Crown designs and manufactures metal and glass packaging, closures and canmaking equipment. It operated 147 plants in 37 countries with approximately 24,000 employees. International operations generated approximately 77% of 2015 net sales.
Reportable segments comprise Americas Beverage, North America Food, European Beverage, European Food and Asia Pacific. Empaque was acquired on February 18, 2015 for $1.207 billion and contributed $560 million of sales and $52 million of net income attributable to Crown for the post-acquisition period.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $8.762 billion | $9.097 billion | Down 3.7% |
| Income from operations | $927 million | $810 million | Up 14.4% |
| Net income | $461 million | $475 million | Down 2.9% |
| Net income attributable to Crown | $393 million | $387 million | Up 1.6% |
| Diluted EPS | $2.82 | $2.79 | Up 1.1% |
| Operating cash flow | $956 million | $912 million | Up 4.8% |
| Capital expenditures | $354 million | $328 million | Up 7.9% |
| Cash and equivalents | $717 million | $965 million | Down $248 million |
| Total debt | $5.518 billion | $5.194 billion | Up $324 million |
Reported gross profit was approximately $1.409 billion, or 16.1% of sales. Income from operations was 10.6% of sales, and net income attributable to Crown was 4.5% of sales. Cost of products sold excluding depreciation and amortization declined to 81% of sales from 83% in each of 2014 and 2013.
Working capital was $141 million at year-end versus $695 million in 2014. Total equity was $435 million, and debt less cash represented 90.9% of total capitalization. Available liquidity included $1.157 billion under revolving credit facilities and $124 million under securitization facilities. The company reported covenant compliance with a 4.71x interest coverage ratio versus a 2.85x minimum and a 3.74x total net leverage ratio versus a 4.75x maximum.
Material changes versus the prior comparable period
- Sales declined primarily because of unfavorable foreign-currency translation, partly offset by Empaque and the prior-year Mivisa acquisition. At 2014 exchange rates, 2015 sales would have been $855 million higher.
- Americas Beverage sales increased to $2.771 billion from $2.335 billion and segment income increased to $427 million from $334 million, primarily due to Empaque and higher volumes.
- North America Food sales fell to $680 million from $809 million; volumes declined 18%, largely because of the loss of a customer. Segment income fell to $86 million from $127 million.
- European Beverage sales and segment income declined to $1.504 billion and $228 million, respectively, reflecting currency effects, a 1% volume decline and Middle East conflicts.
- European Food segment income increased to $246 million from $221 million, helped by the additional four months of Mivisa and improved cost performance, despite currency-related sales pressure.
- Asia Pacific segment income increased to $145 million from $142 million as beverage-can volumes rose 8%, partially offset by pricing pressure and Chinese overcapacity.
- Restructuring and other charges decreased to $66 million from $129 million. The company closed or announced closures of two North American food plants and two European food facilities.
- Depreciation and amortization increased to $237 million from $190 million, primarily because of acquisitions. Interest expense increased to $270 million from $253 million.
- The effective tax rate increased to 27.9% from 7.9%; 2014 benefited from an $86 million release of a French deferred-tax valuation allowance and a $16 million Spanish tax-law benefit.
- Operating cash flow increased to $956 million, but investing cash use rose to $1.548 billion, including the $1.207 billion Empaque acquisition. Financing activities provided $406 million.
Guidance, outlook, commentary, risks and unusual items
Management expects to use 2016 cash flow to reduce leverage, while continuing selected capacity additions, specialty-can investments and potential strategic acquisitions. Planned projects included beverage-can plants in Monterrey, Mexico and Nichols, New York, a second line in Osmaniye, Turkey, and a third beverage-can plant in Cambodia. The company expects approximately $400 million of 2016 capital expenditures and approximately $30 million of asbestos payments.
In February 2016, after year-end, the company added $300 million of Term A borrowings and used those funds, revolver borrowings and cash on hand to redeem its $700 million 6.25% senior notes due 2021. It expects an approximately $28 million loss from the early extinguishment.
- Asbestos: the accrual was $271 million, including $231 million for unasserted claims and projected costs through 2025. Approximately 54,500 claims were outstanding; actual losses could exceed the accrual, but the excess could not be estimated.
- Competition-law investigation: the German Federal Cartel Office investigation remained ongoing. The company reported inappropriate conduct by certain employees, submitted a leniency application and stated that a loss was probable; potential additional losses could be material.
- Leverage and refinancing: total indebtedness was approximately $5.5 billion, including approximately $1.9 billion subject to floating rates. A 1% increase in variable rates would increase annual interest expense by approximately $19 million.
- Raw materials: steel and aluminum represented 23% and 41%, respectively, of cost of products sold excluding depreciation and amortization. The company may not fully pass through price increases or avoid supply disruptions.
- Pensions and postretirement benefits: projected 2016 pension contributions were $112 million; unfunded retiree medical obligations were approximately $151 million. Pension assumptions and asset performance create cash-flow and earnings sensitivity.
- Other risks include foreign-exchange volatility, emerging-market and geopolitical exposure, customer concentration, industry overcapacity, seasonal demand, environmental and product-regulation changes, cybersecurity, labor disruptions, goodwill impairment and tax-law changes.
Goodwill was $3.003 billion at year-end. No goodwill impairment was recorded in 2015, but the European Aerosols and Specialty Packaging reporting unit had only 23% excess fair value over carrying value and could incur up to a $100 million impairment if operating results deteriorate.
Most important facts for investors to verify
- Whether Empaque delivers the expected volume, earnings and integration benefits and whether acquisition-related leverage declines as planned.
- The outcome and potential financial exposure from the German cartel investigation and the adequacy of the $271 million asbestos accrual.
- Debt maturities, covenant headroom, floating-rate exposure and the effect of the February 2016 refinancing and note redemption.
- Whether restructuring actions generate the expected approximately $14 million of annual European savings by 2017.
- Trends in foreign-exchange rates, aluminum and steel costs, Chinese overcapacity, Middle East demand and North American food-can volumes.
- Future pension contributions, postretirement obligations, goodwill impairment sensitivity and the realization of deferred-tax assets.
- Management’s planned 2016 capital spending, capacity additions and stated priority of leverage reduction.