Crown Holdings, Inc. — Q1 2014 Form 10-Q Summary
Business context and reporting period
Crown Holdings manufactures beverage cans and ends, food cans and ends, aerosol cans, specialty packaging, and related tooling and equipment. This unaudited Form 10-Q covers the three months ended March 31, 2014, compared with the same period in 2013. The company had 138.6 million common shares outstanding as of April 23, 2014.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $1,993 million | $1,973 million | +1.0% |
| Gross profit | $297 million | $299 million | -0.7% |
| Gross margin | 14.9% | 15.2% | Down 30 bps |
| Income before taxes | $79 million | $93 million | -15.1% |
| Net income | $46 million | $67 million | -31.3% |
| Net income attributable to Crown | $24 million | $41 million | -41.5% |
| Diluted EPS | $0.17 | $0.28 | -39.3% |
| Cash used in operations | $495 million | $432 million | Use increased $63 million |
| Capital expenditures | $84 million | $63 million | +$21 million |
| Cash and equivalents | $267 million | $304 million | Down from $689 million at Dec. 31, 2013 |
Segment income increased to $251 million from $245 million, including reportable-segment income of $227 million versus $223 million. Segment income rose in Americas Beverage, European Beverage, Asia Pacific and non-reportable businesses, but declined in North America Food and European Food. The company reported 6% global beverage-can volume growth.
Debt totaled approximately $4.1 billion, consisting of $252 million of short-term debt, $87 million of current maturities and $3.765 billion of long-term debt excluding current maturities. Revolving-credit availability was $810 million after $350 million of borrowings and $40 million of standby letters of credit. Shareholders’ equity was $3 million and total equity, including noncontrolling interests, was $258 million.
Material changes versus the prior comparable period
- Sales increased modestly because of higher global beverage-can volumes, partly offset by lower selling prices reflecting raw-material pass-through.
- Gross profit declined despite higher sales, and the gross margin narrowed because of volume, pricing and hedge-related effects.
- Restructuring and other charges increased to $52 million from $4 million, including a $42 million impairment associated with operations planned for divestment in connection with the Mivisa acquisition.
- The 2013 period included a $38 million loss from early extinguishment of debt; there was no comparable charge in 2014.
- The effective tax rate increased to 41.8% from 25.8%, primarily because the Mivisa-related impairment was nondeductible.
- Operating cash outflow worsened to $495 million, driven principally by working-capital outflows, including $157 million from receivables and $281 million from accounts payable and accrued liabilities.
- Financing provided $147 million, including $218 million from changes in revolving credit and short-term debt. The company also paid $93 million to acquire additional noncontrolling interests in subsidiaries in Jordan and Tunisia.
- Noncontrolling interests declined to $255 million from $285 million, while Crown shareholders’ equity declined to $3 million from $4 million.
Guidance, outlook, commentary and unusual items
- Management expects 2014 capital expenditures of approximately $285 million to $310 million and had approximately $53 million of capital commitments at March 31.
- The company does not anticipate share repurchases in 2014, although $507 million remained available under the existing repurchase authorization.
- Management expects the Mivisa acquisition to be earnings accretive and plans to integrate it into the European Food business. The acquisition closed April 23, 2014, after the reporting date, for approximately €550 million plus €700 million of assumed debt and transaction costs. Financing included a $580 million delayed-draw term loan, a €590 million delayed-draw euro facility and a $362 million Farm Credit facility.
- Regulatory approval required divestiture of certain Crown and Mivisa operations. Related assets of $63 million and liabilities of $57 million were classified as held for sale at March 31.
- The company commenced production at its new Teresina, Brazil facility in April 2014. Recent capacity expansion in Asia and Brazil is expected to support growth but has contributed to lower manufacturing efficiencies during ramp-up.
- Commodity, foreign-exchange and interest-rate risks remain material. Hedge ineffectiveness produced a $5 million net loss in the quarter, and additional losses could be material if aluminum metal-premium volatility continues. Approximately $1.1 billion of debt carried floating interest rates; a 25-basis-point rate increase would raise annual pretax interest expense by approximately $2.8 million.
- Asbestos-related accruals were $250 million, including $211 million for unasserted claims. The company paid $7 million to settle claims during the quarter and stated that actual losses could exceed the accrual, although the excess cannot be reasonably estimated.
- Environmental remediation accruals totaled $13 million, and the company had defined-limit indemnifications of $7 million and guarantees related to leased-asset residual values of $38 million.
- Management identified potential goodwill impairment risk of up to $155 million for the European Aerosols and Specialty Packaging reporting unit if future results deteriorate.
Most important facts for investors to verify
- Whether Mivisa integration, divestitures and acquisition financing deliver the expected earnings accretion and leverage profile.
- Post-acquisition total debt, interest expense, covenant compliance and available revolving-credit capacity.
- Conversion of seasonal working-capital investment into operating cash flow during the remainder of 2014.
- The sustainability of global beverage-can volume growth and the effect of pricing pressure and raw-material pass-through on margins.
- Potential additional restructuring, impairment, hedge-ineffectiveness and pension-settlement charges.
- Developments in asbestos litigation and the adequacy of the $250 million accrual, including challenges to liability-limiting statutes.
- Exposure to aluminum and steel prices, foreign-exchange movements and floating interest rates.
- The company’s stated 2014 capital-expenditure range and decision not to anticipate share repurchases.