Crown Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarterly and six-month periods ended June 30, 2012, compared with the corresponding 2011 periods. The filing contains unaudited GAAP consolidated financial statements. Crown manufactures beverage cans, food cans, closures, aerosol cans, specialty packaging, and related equipment, with growth focused on international beverage-can markets.
Financial Performance and Position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $2,184 million | $2,281 million | $4,131 million | $4,163 million |
| Gross profit | $340 million | $371 million | $627 million | $663 million |
| Gross margin | 15.6% | 16.3% | 15.2% | 15.9% |
| Net income attributable to Crown | $134 million | $129 million | $203 million | $145 million |
| Net margin attributable to Crown | 6.1% | 5.7% | 4.9% | 3.5% |
| Diluted EPS | $0.89 | $0.83 | $1.35 | $0.93 |
| Income before taxes | $208 million | $210 million | $330 million | $293 million |
| Effective tax rate | 24.5% | 25.7% | 25.2% | 32.4% |
- Cash flow: Operating cash flow was negative $216 million for the first six months, improving from negative $247 million in 2011. Capital expenditures were $139 million versus $184 million, and investing cash outflow was $128 million versus $307 million.
- Liquidity: Cash and equivalents were $230 million at June 30, down from $342 million at December 31, 2011. Approximately $200 million of cash was held outside the United States. Revolving-credit availability was $806 million after $335 million of borrowings and $59 million of standby letters of credit.
- Debt: Total debt, including short-term debt and current maturities, was approximately $3.8 billion at June 30, compared with approximately $3.5 billion at year-end 2011. Long-term debt, excluding current maturities, was $3.493 billion. Floating-rate debt totaled $1.475 billion; a 0.25% rate change would affect annual pretax interest expense by approximately $4 million.
- Working capital: Receivables increased to $1.194 billion from $948 million and inventories increased to $1.272 billion from $1.148 billion, reflecting seasonal sales and inventory patterns.
- Equity: Crown shareholders’ deficit improved to $227 million from $473 million, while total equity improved to $11 million from a deficit of $239 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales declined 4.3%, principally because of a $101 million foreign-currency translation impact. Six-month sales declined 0.8%, as a $137 million currency impact was partly offset by $94 million of higher global unit volumes.
- Six-month net income attributable to Crown increased 40% to $203 million, primarily reflecting the absence of 2011 early-debt-extinguishment losses of $32 million, lower restructuring charges, and a lower effective tax rate. Second-quarter net income increased modestly despite lower sales and gross profit.
- Gross profit declined 8.4% in the second quarter and 5.4% for the six months. Gross margins contracted by approximately 70 basis points in both comparisons.
- Segment performance was mixed. Americas Beverage segment income increased to $78 million from $77 million in the quarter and to $147 million from $140 million for the six months, supported by Brazil volume growth. North America Food segment income also improved. European Beverage, European Food, and European Specialty Packaging declined due to weaker European volumes, lower manufacturing activity, adverse weather, economic uncertainty, and currency effects.
- Non-reportable segment sales increased to $375 million from $345 million in the quarter and to $734 million from $665 million for the six months, driven by Asian beverage-can growth, but segment income was flat for the quarter and lower year to date because of aerosol weakness and start-up costs.
- Other unusual items included a $10 million gain from insurance proceeds related to flood damage at the Thailand beverage-can plant and $3 million of restructuring charges in 2012 versus $25 million in the first half of 2011.
Guidance, Outlook, Commentary, and Risks
- Management expects approximately $325 million of 2012 capital expenditures, excluding rebuilding costs for the Thailand plant that are expected to be reimbursed by insurance. Capital commitments at June 30 were approximately $94 million.
- The company expects continued capacity expansion in Brazil, China, Southeast Asia, Turkey, Cambodia, and Vietnam. Announced projects are expected to add approximately 7.1 billion beverage-can units to year-end 2011 capacity, although timing and completion are not assured.
- Management expects current European Food restructuring actions to be completed in 2012 and other European Specialty Packaging and Aerosols actions to continue into 2013. Additional restructuring charges could be material; the filing does not provide a consolidated full-year earnings guidance figure.
- European Aerosols goodwill totaled $145 million. If operating results deteriorate further or expected restructuring savings are not achieved, an impairment charge of up to $145 million could be recorded.
- Asbestos-related accruals were $239 million, including $186 million for unasserted claims, with estimated probable costs through 2021. The company states that actual losses could exceed the accrual but cannot estimate the possible excess.
- Environmental remediation accruals totaled $14 million. Italian tax assessments related to supplier value-added-tax failures were approximately $51 million, with potential interest and penalties estimated at up to approximately $70 million; the company intends to dispute the assessments.
- Key operating risks include foreign-exchange volatility, steel and aluminum price increases, inability to pass through raw-material costs, European economic weakness, customer credit risk, capacity-expansion execution, litigation, pension obligations, and debt covenant restrictions.
- In July 2012, after the reporting date, the company entered into an accelerated share-repurchase agreement for an aggregate purchase amount of $200 million. As of July 31, $94 million remained available under the existing repurchase authorization.
- Management concluded that disclosure controls and procedures were effective, with no material change in internal control over financial reporting during the period.
Most Important Facts for Investors to Verify
- Whether Asian and Brazilian beverage-can capacity expansions generate the expected volumes and returns while European operations remain pressured.
- Progress, total cost, and cash requirements for restructuring programs and the Thailand plant rebuilding project.
- Operating cash-flow conversion and the effect of seasonal receivables and inventory increases on liquidity.
- Debt maturities, revolving-credit availability, covenant capacity, and sensitivity to floating interest rates.
- Resolution and potential exposure from asbestos litigation, Italian tax assessments, environmental matters, and other contingencies.
- Whether European Aerosols performance improves sufficiently to avoid a potential goodwill impairment of up to $145 million.
- The final number and price of shares repurchased under the July 2012 accelerated repurchase agreement.