Crown Holdings, Inc. — Q2 2010 Form 10-Q Summary
Business Context and Reporting Period
Crown Holdings is a global metal packaging manufacturer serving beverage, food and specialty packaging markets. The filing covers the unaudited three and six months ended June 30, 2010, compared with the corresponding 2009 periods. Reportable operations include Americas Beverage, North America Food, European Beverage, European Food and European Specialty Packaging.
Key Financial Metrics
| Metric | Q2 2010 | Q2 2009 | Six Months 2010 | Six Months 2009 |
|---|---|---|---|---|
| Net sales | $2,010 million | $2,055 million | $3,787 million | $3,739 million |
| Gross profit | $335 million | $333 million | $585 million | $578 million |
| Gross margin | 16.7% | 16.2% | 15.4% | 15.5% |
| Income before taxes and equity earnings | $201 million | $182 million | $307 million | $274 million |
| Net income attributable to Crown | $112 million | $105 million | $153 million | $145 million |
| Diluted EPS | $0.69 | $0.65 | $0.94 | $0.90 |
| Net cash used in operating activities | Not presented for quarter | $(194) million | $(163) million |
Q2 net income attributable to Crown increased 6.7%, while diluted EPS increased 6.2%. The effective tax rate was 28.4% in Q2 and 31.3% for the first six months, compared with 24.2% and 24.8%, respectively, in the prior-year periods.
At June 30, 2010, cash and cash equivalents were $412 million, down from $459 million at December 31, 2009 and $706 million at June 30, 2009. Total current assets were $2,705 million and current liabilities were $2,091 million.
Total debt was approximately $2,979 million at June 30, 2010, comprising $234 million of short-term debt, $38 million of current maturities and $2,707 million of long-term debt excluding current maturities. Revolving credit borrowings were $562 million; available revolving capacity was $566 million after borrowings and standby letters of credit.
Material Changes Versus Prior Comparable Period
- Q2 sales declined 2.2%, primarily because lower raw-material costs were passed through to customers and foreign currency translation reduced sales by $17 million. Higher global sales volumes partially offset these effects.
- Six-month sales increased 1.3%, supported by higher global volumes and a $62 million favorable currency effect, partly offset by lower raw-material pass-through revenue.
- Americas Beverage was the strongest major segment: Q2 sales rose 14.9% and segment income rose from $62 million to $73 million. Six-month segment income increased from $103 million to $130 million.
- European Beverage and European Food segment income declined because of operating inefficiencies, the Slovakia start-up, a Spanish labor strike, and the nonrecurrence of 2009 inventory holding gains.
- Q2 interest expense fell $17 million to $45 million; six-month interest expense fell $31 million to $92 million, primarily because of lower average debt.
- Operating cash use increased to $194 million, driven substantially by working-capital needs and the adoption of new receivables accounting guidance. The guidance increased receivables and short-term debt by $215 million and increased both operating cash use and financing cash provided by $215 million without materially affecting earnings.
- Cash used for investing activities was $85 million, including $104 million of capital expenditures, versus $78 million in the prior-year period.
- Shareholders’ equity attributable to Crown improved from a $6 million deficit at December 31, 2009 to $105 million at June 30, 2010.
Guidance, Outlook, Risks and Unusual Items
- Management expected approximately $300 million of 2010 capital expenditures, focused particularly on capacity expansion in Asia and Brazil, versus $180 million in 2009.
- Restructuring charges were $24 million in the first six months, including Canadian plant closure costs, asset writedowns, pension and postretirement curtailment charges, and severance. Management expected approximately $21 million of additional charges for the Canadian closure and approximately $38 million for prior Canadian restructuring actions. Expected annual savings from the 2010 actions were approximately $15 million once fully implemented.
- The company received a $20 million net one-time payment in January 2010 from the resolution of a legacy dispute, recorded as a gain in the first quarter.
- In June, revolving facilities were amended to increase aggregate capacity from $800 million to $1.2 billion and extend new revolving maturities to June 15, 2015. Existing term loans mature November 15, 2012, while certain remaining existing revolver commitments mature May 15, 2011.
- After quarter-end, the company issued €500 million of 7.125% senior notes due 2018, announced redemption of $200 million of 7.625% senior notes due 2013, and launched a tender offer for €150 million of senior secured notes due 2011.
- After quarter-end, the company initially repurchased 3,182,461 shares for $100 million under an accelerated share repurchase program. The final share count and cost depend on the program’s volume-weighted average stock price.
- Key operating risks include volatility in steel and aluminum costs, the ability to recover those costs through pricing, foreign exchange, interest-rate and commodity exposure, and potential supply interruptions.
- Asbestos-related claims remained a significant contingency. The recorded accrual was $222 million at June 30, 2010, based on projected costs through 2019; approximately 50,000 claims were outstanding. The company stated that adverse litigation developments could require a material increase in the accrual.
- Environmental remediation accruals totaled $18 million. The company also faced European antitrust investigations in Spain and the Netherlands; potential fines and ultimate outcomes were not estimable from the filing.
- No separate earnings or revenue guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
Investor Verification Items
- Reconcile operating cash flow with reported earnings, particularly the effects of receivables securitization accounting and increases in receivables and inventory.
- Monitor debt refinancing, the use of the new €500 million notes, the 2013 note redemption, the 2011 note tender offer and compliance with credit agreement covenants.
- Assess whether Canadian restructuring charges and projected $15 million annual savings occur as described.
- Track European Beverage and European Food margins as Slovakia start-up issues, the Spanish labor disruption and inventory effects normalize.
- Evaluate exposure to steel and aluminum prices, currency movements and approximately $1.1 billion of floating-rate debt.
- Review developments in asbestos litigation, environmental matters and European antitrust investigations, including any impact beyond recorded accruals.
- Verify the final settlement and total cost of the accelerated share repurchase program and its effect on share count, leverage and liquidity.