Crown Holdings, Inc. — FY2012 Form 10-K Summary
Business context and reporting period
Crown Holdings designs, manufactures and sells 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, 2012, with comparisons to 2011 and 2010. The Company operated 149 plants in 41 countries and had approximately 21,900 employees. International operations generated approximately 73% of 2012 net sales.
Reportable segments were Americas Beverage, North America Food, European Beverage, European Food and, beginning in the fourth quarter of 2012, Asia Pacific. The Company acquired a Vietnamese beverage-can facility and a controlling interest in Superior Multi-Packaging Ltd. during the fourth quarter.
Financial performance and key metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $8,470 million | $8,644 million | Down $174 million, approximately 2.0% |
| Gross profit | $1,277 million | $1,348 million | Down $71 million |
| Gross margin | 15.1% | 15.6% | Down approximately 50 basis points |
| Income before taxes and equity earnings | $636 million | $587 million | Up $49 million |
| Net income | $658 million | $396 million | Up $262 million |
| Net income attributable to Crown Holdings | $557 million | $282 million | Up $275 million |
| Diluted EPS | $3.75 | $1.83 | Up $1.92 |
| Cash flow from operations | $621 million | $379 million | Up $242 million |
| Capital expenditures | $324 million | $401 million | Down $77 million |
| Cash and cash equivalents | $350 million | $342 million | Up $8 million |
| Total debt | $3,665 million | $3,532 million | Up $133 million |
| Total equity | $123 million | $(239) million | Improved by $362 million |
Net income benefited materially from a $175 million net tax benefit related primarily to recognition of previously unrecognized U.S. foreign tax credits, a $42 million net gain on asset impairments and sales, including insurance proceeds and an acquisition-related bargain purchase gain, and the absence of 2011 debt-extinguishment losses. The reported 2012 effective tax rate was negative 2.7%, compared with 33.0% in 2011, so reported earnings growth was not representative of underlying operating growth.
Operating cash flow increased primarily because pension contributions declined to $102 million from $404 million in 2011. Investing cash outflow was $362 million, including $324 million of capital expenditures and $78 million for acquisitions, partly offset by $48 million of insurance proceeds. Financing cash outflow was $254 million, including $257 million of common-stock repurchases and $79 million of dividends paid to noncontrolling interests.
Segment performance
| Segment | 2012 sales | 2012 segment income | Key change versus 2011 |
|---|---|---|---|
| Americas Beverage | $2,274 million | $311 million | Income up $9 million; Brazil volume growth offset North American declines. |
| North America Food | $876 million | $146 million | Sales down $13 million; income unchanged. |
| European Beverage | $1,653 million | $217 million | Sales down $16 million due mainly to currency translation; income up $7 million. |
| European Food | $1,793 million | $180 million | Sales down $206 million and income down $59 million amid lower volumes, economic uncertainty and price compression. |
| Asia Pacific | $979 million | $137 million | Sales up $118 million and income up $12 million, driven by beverage-can volume growth; included an $18 million insurance-related benefit. |
| Non-reportable segments | $895 million | $98 million | Sales down $58 million and income down $41 million, mainly in European specialty packaging and aerosol operations. |
Material changes versus the prior comparable period
- Sales declined despite higher unit volumes, primarily because foreign-currency translation reduced sales by $243 million and lower selling prices reduced sales by $65 million.
- Beverage-can volumes increased, particularly in Asia, Brazil and selected European markets, while mature-market food, aerosol and specialty-packaging volumes were generally stable to declining.
- Asia Pacific became a separately reported segment. The Company opened or expanded facilities in China and Vietnam and added capacity in other Asian markets.
- The Company recorded $48 million of restructuring charges, down from $77 million in 2011. European restructuring actions are expected to reduce headcount and capacity and generate approximately $46 million of annual savings when fully implemented in 2014, although realization is not assured.
- Share repurchases totaled approximately $257 million in cash, and the Board authorized up to $800 million of additional repurchases through the end of 2014, subject to debt covenants and market conditions.
- Total equity returned to a positive $123 million from a $239 million deficit, principally because of $557 million of net income attributable to Crown Holdings.
- Following year-end, the Company issued $1.0 billion of 4.5% senior unsecured notes due 2023, redeemed $400 million of 2017 notes and repaid $500 million of term-loan debt. A first-quarter 2013 early-extinguishment charge of approximately $32 million was expected.
Guidance, outlook, risks and unusual items
- Management planned continued expansion in emerging markets. Approximately 3.6 billion cans of additional annual capacity were expected to be commercialized in 2013 in Cambodia, China, Malaysia, Thailand and Vietnam, subject to market conditions and execution.
- 2013 capital expenditures were expected to be approximately $230 million, funded primarily from operating cash flow. Capital commitments at year-end were $67 million.
- The Company expected 2013 depreciation and amortization of approximately $150 million after increasing the estimated useful lives of canmaking equipment to 18 years.
- Liquidity included $350 million of cash, $100 million of available North American receivables-securitization capacity, $41 million of available European securitization capacity and $1.104 billion of available revolving-credit capacity. The Company reported compliance with its interest-coverage and net-leverage covenants.
- Leverage remains a central risk: total debt was $3.665 billion, and the debt-less-cash-to-total-capitalization ratio was 96.4%. Approximately $1.3 billion of debt was floating-rate at year-end; a 1% increase in variable rates was estimated to increase annual interest expense by approximately $8 million.
- Asbestos liabilities were accrued at $256 million through 2022, including $204 million for unasserted claims. Approximately 51,000 claims were outstanding, and 2012 asbestos payments were $28 million. Actual losses may exceed the accrual, and the Company cannot estimate the potential excess.
- Pension and postretirement obligations remain significant. Pension contributions were expected to be approximately $85 million in 2013, while unfunded retiree medical obligations were $352 million at year-end.
- Other risks include aluminum and steel price volatility, foreign exchange exposure, European economic weakness, customer concentration, competition and industry overcapacity, environmental and product-regulation changes including bisphenol-A restrictions, labor disruptions, acquisitions, tax matters and information-technology failures.
- The Company reported $14 million accrued for Italian tax assessments, while total potential assessments plus interest and penalties could be materially higher. Environmental remediation accruals totaled $13 million, excluding potentially greater future costs.
- No goodwill impairment was recorded, but the European Aerosols reporting unit had only a 22% estimated fair-value cushion over carrying value; its $151 million of goodwill could be exposed if operating results deteriorate.
Important facts for investors to verify
- Separate recurring operating performance from the $175 million tax benefit, insurance proceeds, bargain purchase gain and other unusual items included in 2012 earnings.
- Confirm the post-year-end debt refinancing, the resulting maturity profile, interest costs and effect on covenant headroom.
- Assess whether Asian capacity additions generate sufficient volume, pricing and returns, particularly amid competitive pressure and potential overcapacity.
- Review the adequacy and sensitivity of the $256 million asbestos accrual and the potential impact of adverse asbestos-law or litigation developments.
- Monitor European Food and other European restructuring savings, additional charges and the risk of goodwill impairment.
- Evaluate pension funding requirements, discount-rate sensitivity and the substantial unrecognized pension losses recorded in accumulated other comprehensive income.
- Verify the sustainability of cash flow after capital expenditures, acquisitions, share repurchases, debt service and seasonal working-capital requirements.