Crown Holdings, Inc. — FY2013 Form 10-K Summary
Business context and reporting period
Crown Holdings designs and manufactures metal packaging, including steel and aluminum beverage and food cans, closures, aerosol cans, specialty packaging and canmaking equipment. The filing covers the fiscal year ended December 31, 2013, rather than a standalone fourth quarter. The Company operated 147 plants in 40 countries, employed approximately 21,300 people and generated 74% of sales outside the United States.
Reportable operations comprise Americas Beverage, North America Food, European Beverage, European Food and Asia Pacific. Beverage cans and ends represented 56% of sales and food cans and ends represented 27%.
Financial performance and position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $8,656 million | $8,470 million | +2.2% |
| Gross profit | $1,342 million | $1,277 million | +5.1% |
| Gross margin | 15.5% | 15.1% | +0.4 percentage points |
| Income before taxes | $576 million | $642 million | -10.3% |
| Net income attributable to Crown | $324 million | $559 million | -42.0% |
| Diluted EPS | $2.30 | $3.77 | -39.0% |
| Net cash from operating activities | $885 million | $621 million | +$264 million |
| Capital expenditures | $275 million | $324 million | -$49 million |
| Cash and equivalents | $689 million | $350 million | +$339 million |
| Total debt | $3,842 million | $3,665 million | +$177 million |
Net income attributable to Crown had a 3.7% sales margin versus 6.6% in 2012. The effective tax rate was 25.7%, compared with a 2.6% benefit rate in 2012, when the Company recognized a significant benefit related primarily to previously unrecognized U.S. foreign tax credits. Interest expense was $236 million, up from $226 million.
Working capital was $260 million at year-end, compared with $228 million in 2012. Total equity increased to $289 million from $129 million. The Company reported a net leverage ratio of 2.7 times and an interest coverage ratio of 4.5 times at December 31, 2013, both within applicable covenant limits.
Material changes versus the prior comparable period
- Sales increased primarily from higher global beverage-can volumes, $124 million from the 2012 Superior acquisition and $54 million of favorable foreign-currency translation, partly offset by lower raw-material pass-through pricing.
- European Beverage sales increased 4% in volume and segment income rose to $257 million from $217 million. Americas Beverage segment income increased to $327 million from $311 million.
- Asia Pacific sales rose to $1,189 million from $979 million, including a 19% increase in beverage-can volumes and the contribution from Superior; segment income declined to $133 million from $137 million because of start-up costs, lower manufacturing efficiency and pricing pressure.
- European Food sales declined to $1,751 million from $1,793 million and segment income fell to $144 million from $180 million because of competitive price compression, unfavorable volume and mix, and a $21 million receivable reserve.
- North America Food segment income declined to $119 million from $146 million, including an $18 million reserve against a receivable from a bankrupt customer.
- Depreciation and amortization decreased by $46 million to $134 million after the Company extended the estimated useful lives of canmaking equipment. The change increased 2013 net income by $36 million, or $0.26 per diluted share.
- Selling and administrative expense increased by $43 million, including $39 million of reserves for customer receivables.
- Operating cash flow improved substantially because of working-capital management, particularly a $246 million increase in accounts payable and accrued liabilities associated primarily with extended supplier payment terms.
- The Company repurchased approximately $300 million of common stock and 6.9 million shares during 2013. Approximately $507 million remained available under the repurchase authorization at year-end.
Guidance, outlook, management commentary, risks and unusual items
- Management’s strategy is to expand in targeted international markets while improving mature-market returns through pricing discipline, cost control and capital allocation. New or expanded beverage-can capacity was commercialized in China, Malaysia, Cambodia, Vietnam and Thailand, and a new northern Brazil facility was expected to begin commercial shipments in the first half of 2014.
- The Company agreed to acquire Mivisa Envases for approximately €1.2 billion, including assumed debt, subject to regulatory approval and expected closing in 2014. The transaction was expected to be earnings accretive but would materially increase leverage. Failure to close under specified circumstances could require a €41 million payment.
- A 2013 European restructuring charge of $31 million is expected to reduce approximately 235 employees and generate approximately $25 million of annual pre-tax savings, although the Company cautioned that the savings may not be realized. Total restructuring charges were $46 million.
- The Company recorded $32 million of asbestos charges and paid $28 million for asbestos-related claims and legal costs. The year-end asbestos accrual was $260 million, including $221 million for unasserted claims and projected costs through 2023. Actual losses could exceed the accrual, but the Company could not estimate the excess.
- Other unusual items included a $41 million loss from early debt extinguishment, a $20 million pre-tax settlement charge for Italian tax assessments and a $16 million pre-tax environmental indemnification gain.
- Major risks include substantial indebtedness, variable-rate debt, refinancing and covenant constraints, commodity-price volatility, inability to pass through steel and aluminum costs, foreign-exchange exposure, international and emerging-market risks, customer concentration, industry overcapacity, seasonal demand, pension funding, environmental regulation, asbestos litigation, tax uncertainty, cybersecurity and execution of acquisitions and capacity expansions.
- Approximately $850 million of debt and other obligations carried floating rates at year-end; a 1% increase in variable rates was estimated to increase annual interest expense by approximately $8.5 million.
- Steel and aluminum represented 25% and 39%, respectively, of cost of products sold excluding depreciation and amortization. The Company uses customer pass-through provisions and derivatives but cannot assure full recovery of cost increases.
Most important facts for investors to verify
- Whether the Mivisa acquisition closed as planned, the final purchase price and the resulting increase in debt and leverage.
- Whether European restructuring actions deliver the expected $25 million of annual savings and whether further restructuring charges are required.
- Receivable collectability, particularly the $25 million net European Food exposure and the North American bankrupt-customer exposure.
- Trends in beverage-can volumes, pricing, capacity utilization and start-up costs in Asia, Brazil and Europe.
- Future asbestos claims, settlement costs and any legal developments affecting the $260 million accrual.
- Compliance with debt covenants and refinancing needs, including maturities beginning in 2015 and the 2018 maturities.
- The sustainability of operating cash flow, given the large 2013 benefit from extended supplier payment terms and the Company’s substantial purchase obligations.
- Future pension contributions, postretirement obligations, commodity costs, foreign-exchange effects and potential goodwill impairment.