Crown Holdings, Inc. — FY 2014 Form 10-K Summary
Business context and reporting period
Crown Holdings is a global manufacturer of metal packaging, including beverage and food cans, closures, aerosol cans and specialty packaging. For the year ended December 31, 2014, the Company operated 149 plants in 40 countries with approximately 23,000 employees. International operations generated approximately 76% of consolidated sales.
The filing is an annual report for fiscal 2014, not a standalone quarterly filing. Fourth-quarter 2014 results are included in the unaudited quarterly data.
Key financial metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $9,097 million | $8,656 million | +5.1% |
| Gross profit | $1,382 million | $1,342 million | +3.0% |
| Gross margin | 15.2% | 15.5% | Down modestly |
| Net income | $475 million | $428 million | +11.0% |
| Net income attributable to Crown | $387 million | $324 million | +19.4% |
| Diluted EPS | $2.79 | $2.30 | +21.3% |
| Cash flow from operations | $912 million | $885 million | +3.1% |
| Capital expenditures | $328 million | $275 million | +$53 million |
| Cash and equivalents | $965 million | $689 million | +$276 million |
| Total debt | $5,259 million | $3,842 million | +$1,417 million |
The effective tax rate was 7.9%, compared with 25.7% in 2013, primarily because of an $86 million benefit from releasing the valuation allowance against French deferred tax assets and a $16 million benefit from a Spanish tax law change. The lower tax rate materially supported net income.
Fourth-quarter 2014 net sales were $2,127 million, net income attributable to Crown was $13 million and diluted EPS was $0.09, compared with $2,071 million, $49 million and $0.36, respectively, in the fourth quarter of 2013. Fourth-quarter results included $45 million of asbestos charges, $38 million of restructuring and other charges, and tax benefits of $10 million.
Segment performance
- Americas Beverage: Sales of $2,335 million and segment income of $334 million, compared with $2,289 million and $327 million in 2013. Brazil growth and higher raw-material pass-throughs were partly offset by currency effects, lower U.S. volumes and a Puerto Rico plant closure.
- North America Food: Sales declined to $809 million from $845 million, while segment income increased to $127 million from $119 million. The prior year included an $18 million customer receivable reserve.
- European Beverage: Sales declined to $1,708 million from $1,731 million, while segment income increased to $265 million from $257 million due to improved cost performance. Middle East conflicts reduced volumes.
- European Food: Sales increased to $2,197 million from $1,751 million and segment income rose to $221 million from $144 million, primarily reflecting the Mivisa acquisition and stronger volumes.
- Asia Pacific: Sales increased to $1,226 million from $1,189 million and segment income rose to $142 million from $133 million, driven by capacity expansion and volume growth, partly offset by pricing pressure.
- Non-reportable segments: Sales declined to $822 million from $851 million and segment income declined to $92 million from $102 million, reflecting lower aerosol and specialty packaging sales.
Material changes versus the prior comparable period
- The April 2014 acquisition of Mivisa contributed approximately $488 million of sales and $16 million of Crown-attributable net income after acquisition. The transaction added approximately $931 million of goodwill and assumed $977 million of debt.
- Mivisa-related financing and debt refinancing increased leverage and interest expense. Interest expense rose to $253 million from $236 million.
- Restructuring and other charges increased to $129 million from $34 million, including Mivisa-related divestiture and transaction costs, planned European specialty-packaging divestitures, and labor-dispute-related costs.
- The Company issued €650 million of 4% senior notes due 2022 and used proceeds to retire its 2018 notes, resulting in a $34 million early debt-extinguishment loss.
- Operating cash flow improved modestly, but investing cash use increased to $1,021 million, primarily due to the $733 million Mivisa acquisition and higher capital expenditures.
- Net leverage remained high: the Company reported total net debt to capitalization of 91.7%, compared with 91.6% at December 31, 2013. The reported interest coverage ratio was 4.74x and total net leverage was 3.58x, both within applicable covenant limits.
- Other comprehensive income declined by $251 million, largely because of foreign-currency translation losses of $323 million.
Outlook, management commentary, risks and unusual items
Management’s strategy is to invest in targeted international growth markets, expand beverage-can capacity, improve mature-market operations, control costs and allocate cash toward acquisitions, debt reduction or shareholder returns. Following the Empaque acquisition, management stated that its primary 2015 focus would be reducing leverage and that it did not anticipate share repurchases or dividends in 2015.
On February 18, 2015, after year-end, the Company completed the $1.2 billion acquisition of Empaque in Mexico. It financed the transaction with additional Term Loan A and Term Loan B borrowings, existing credit capacity and cash. The acquisition materially increased post-year-end debt and integration risk.
- Debt and liquidity: Approximately $5.3 billion of debt was outstanding at year-end, including approximately $2.1 billion subject to floating rates. A 1% increase in variable interest rates was estimated to increase annual interest expense by approximately $21 million. Available capacity included $1,160 million under revolving facilities, $25 million under the North American securitization facility and $32 million under the European facility.
- Asbestos: The Company accrued $275 million for pending and future asbestos claims and related legal costs through 2024, including $231 million for unasserted claims. Approximately 54,000 claims were outstanding, and 2014 cash payments were $30 million. Actual losses may exceed the accrual, but the Company could not estimate the excess loss.
- Pensions and postretirement obligations: Pension contributions were $81 million in 2014, with approximately $76 million projected for 2015. The Company reported significant unfunded pension and postretirement obligations, including approximately $241 million of unfunded retiree medical obligations.
- Raw materials: Steel and aluminum represented 27% and 37%, respectively, of cost of products sold excluding depreciation and amortization. The Company may be unable to fully pass through increases in metal, energy or freight costs.
- Foreign exchange and international exposure: Currency translation reduced 2014 income before tax by $14 million. A 0.10 movement in the average euro rate was estimated to affect net income by approximately $15 million.
- Restructuring and contingencies: The Company recorded $70 million of asset impairment and disposal charges and expects additional restructuring activity may occur. Environmental remediation accruals totaled $13 million, excluding potentially higher future costs.
- Goodwill: Goodwill totaled $2.671 billion at year-end. No impairment was recorded in 2014, but future declines in operating performance or valuation assumptions could result in an impairment charge.
Important facts investors should verify
- Post-acquisition leverage, debt maturities and covenant compliance after the February 2015 Empaque acquisition and related borrowings.
- Whether Mivisa and Empaque deliver expected volume growth, synergies and cash flow, and whether integration costs remain within expectations.
- The sustainability of 2014 earnings given the unusually low effective tax rate and the tax valuation allowance release.
- Future asbestos claims, settlement costs and the adequacy of the $275 million accrual.
- Exposure to aluminum and steel price volatility, foreign exchange movements, interest rates and pricing pressure.
- Funding requirements for pensions, postretirement benefits, capital expenditures and seasonal working capital.
- Potential restructuring, environmental, labor, litigation and goodwill-impairment charges.
- The availability and accessibility of cash held outside the United States, including $825 million of the $965 million year-end cash balance held internationally.