CROWN HOLDINGS, INC. quarterly report, Q1 FY2012

Crown Holdings, Inc. — 2012 Q1 Form 10-Q Summary

Business context and reporting period

Crown Holdings manufactures beverage and food cans, ends, closures, aerosol containers, specialty packaging, and related equipment. The filing covers the unaudited three months ended March 31, 2012, compared with the three months ended March 31, 2011. Management’s strategy emphasizes international beverage-can growth, pricing and cost control in mature markets, and disciplined capital allocation.

Key financial metrics

Metric	Q1 2012	Q1 2011	Change
Net sales	$1,947 million	$1,882 million	+3.5%
Gross profit	$287 million	$292 million	-1.7%
Gross margin	14.7%	15.5%	Down approximately 80 bps
Income before taxes	$122 million	$83 million	+47%
Net income attributable to Crown Holdings	$69 million	$16 million	+331%
Diluted EPS	$0.46	$0.10	+$0.36
Comprehensive income attributable to Crown Holdings	$144 million	$82 million	+76%
Cash used in operating activities	$389 million	$317 million	Use increased $72 million
Capital expenditures	$62 million	$103 million	Down $41 million

Sales growth reflected $74 million of higher global unit volumes and $28 million from passing through higher raw-material costs, partly offset by a $36 million foreign-currency translation impact. Beverage cans and ends represented 54% of consolidated sales, compared with 52% in the prior-year quarter.

Net income benefited materially from the absence of 2011 unusual charges: Q1 2011 included a $25 million restructuring provision, a $30 million loss on early extinguishment of debt, and a $17 million tax charge related to the European headquarters relocation. The effective tax rate declined to 26.2% from 49.4%.

Segments and operating performance

Americas Beverage: Sales increased to $534 million from $512 million and segment income increased to $69 million from $63 million, primarily due to higher Brazilian volumes.
North America Food: Sales rose to $200 million from $188 million and segment income to $32 million from $28 million, supported by higher volumes and lower operating costs.
European Beverage: Sales increased to $362 million from $340 million, but segment income declined to $42 million from $45 million because competitive pricing and higher costs offset volume gains.
European Food: Sales declined to $402 million from $422 million and segment income to $40 million from $52 million, reflecting lower volumes, weaker consumer demand, currency effects, and the absence of prior-year inventory holding gains.
European Specialty Packaging: Sales declined to $90 million from $100 million and segment income to $1 million from $7 million.
Non-reportable segments: Sales increased to $359 million from $320 million, driven by beverage-can growth in Cambodia, China, Malaysia, and Vietnam; segment income declined to $53 million from $57 million.

Balance sheet, debt, and liquidity

Cash and cash equivalents were $250 million at March 31, 2012, down from $342 million at December 31, 2011 and $409 million at March 31, 2011.
Receivables increased to $1,066 million from $948 million at year-end, and inventories increased to $1,313 million from $1,148 million, reflecting seasonal working-capital needs.
Total debt, including short-term debt and current maturities, was approximately $3,915 million, compared with approximately $3,532 million at December 31, 2011. Long-term debt excluding current maturities was $3,685 million.
Borrowings under revolving credit facilities increased to $422 million from $119 million. Available revolving-credit capacity was $720 million after borrowings and $58 million of standby letters of credit.
Current assets were $2,824 million versus current liabilities of $2,093 million. Crown Holdings shareholders’ deficit improved to $324 million from $473 million, but total equity remained negative at $82 million.
Approximately $216 million of cash was held outside the United States. Management stated that it was not aware of foreign-law restrictions materially limiting access to this cash.

Cash flow and capital allocation

Operating cash flow was negative $389 million, primarily because of working-capital increases and higher interest payments. Cash used for investing activities was $48 million, including $62 million of capital expenditures and $23 million of insurance proceeds related to flooding at the Thailand beverage-can plant. Financing activities provided $338 million, principally from increased revolving-credit and short-term borrowings.

Management expected 2012 capital expenditures of approximately $325 million, excluding the cost to rebuild Thailand capacity, which it expected to be reimbursed by insurance. Capital commitments at March 31, 2012 were approximately $91 million, primarily for expansion in Brazil, China, Malaysia, Turkey, and Vietnam.

Outlook, unusual items, and risks

The company expected to add approximately 8.5 billion units of beverage-can capacity relative to year-end 2011 levels as announced expansion projects are completed.
New or expanded beverage-can capacity was planned or under development in China, Vietnam, Malaysia, Turkey, and other Asian markets. The Thailand flood-damaged capacity was expected to be rebuilt by 2013.
European restructuring actions were expected to generate additional charges of approximately $10 million in aggregate: $2 million for European Food and $8 million for other European operations. Certain actions were expected to continue through 2013.
Management warned that steel and aluminum price volatility may not be fully recoverable through customer pricing. Competitive pricing pressure, lower consumer spending, foreign-exchange movements, execution of international expansions, and demand weakness in mature markets remain key operating risks.
The company had a $27 million receivable from a financially troubled European Food customer and stated that it was currently considered recoverable; further deterioration could result in a future charge.
Asbestos-related liabilities were accrued at $246 million, including $192 million for unasserted claims, with estimated probable costs through 2021. The company stated that actual losses could exceed the accrual but could not estimate the excess. Approximately 50,000 outstanding claims were reported, and $3 million was paid during the quarter.
Environmental remediation accruals totaled $14 million. Italian tax assessments related to suppliers’ value-added-tax failures were estimated at approximately €40 million, or $53 million, plus interest and penalties; the company intended to dispute the assessments.
The company had $1,550 million of floating-rate debt. Management estimated that a 0.25 percentage-point change in floating rates would change annual pretax interest expense by approximately $4 million.
The company repurchased $100 million of stock under an accelerated share-repurchase agreement initiated in December 2011. Approximately $294 million remained available under the broader repurchase authorization at March 31, 2012.

Most important facts for investors to verify

Whether international beverage-can expansions achieve expected volumes, margins, and returns on invested capital.
Whether higher steel and aluminum costs can continue to be passed through without further margin compression.
The sustainability of liquidity as operating cash flow is seasonally negative and debt has increased.
The amount and timing of insurance recoveries and rebuilding costs related to the Thailand flooding.
Progress and final costs of European restructuring actions, including potential pension-settlement charges.
Developments in asbestos litigation, environmental matters, and Italian tax assessments, including exposures beyond recorded accruals.
The collectability of the $27 million European Food receivable from the financially distressed customer.
Debt covenant compliance, refinancing requirements, floating-rate exposure, and the implications of continued share repurchases while shareholders’ equity remains negative.