Crown Holdings, Inc. — 2010 Form 10-K Summary
Business context and reporting period
Crown Holdings, Inc. designs, manufactures and sells metal packaging, including steel and aluminum beverage and food cans, closures, caps, aerosol containers, specialty packaging and canmaking equipment. The filing covers the fiscal year ended December 31, 2010; the “2010 Q4” reference corresponds to the fourth-quarter period within this annual filing, not a standalone Form 10-Q.
At year-end, Crown operated 135 plants and sales or service facilities in 41 countries and employed approximately 20,500 people. Approximately 72% of 2010 sales were generated outside the United States. Reportable segments were Americas Beverage, North America Food, European Beverage, European Food and European Specialty Packaging.
Key financial metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales | $7,941 million | $7,938 million | Flat |
| Gross profit | $1,250 million | $1,193 million | +$57 million |
| Gross margin | 15.7% | 15.0% | +0.7 percentage points |
| Income before taxes and equity earnings | $614 million | $459 million | +$155 million |
| Net income | $452 million | $450 million | +$2 million |
| Net income attributable to Crown Holdings | $324 million | $334 million | -$10 million |
| Diluted EPS | $2.00 | $2.06 | -$0.06 |
| Cash flow from operations | $590 million | $756 million | -$166 million |
| Capital expenditures | $320 million | $180 million | +$140 million |
| Cash and cash equivalents | $463 million | $459 million | +$4 million |
| Total debt | $3,048 million | $2,798 million | +$250 million |
| Total equity | $229 million | $383 million | -$154 million |
Attributable net income represented approximately 4.1% of sales, compared with approximately 4.2% in 2009. The company’s earnings-to-fixed-charges ratio was 3.8 times. Net debt to total capitalization was 91.9%, compared with 85.9% in 2009.
Segment income was $885 million for reportable segments, compared with $865 million in 2009. Americas Beverage income increased to $275 million from $207 million, while North America Food declined to $120 million from $140 million. European Beverage declined to $244 million from $262 million, and European Food declined to $224 million from $238 million.
Material changes versus the prior comparable period
- Sales were essentially unchanged because higher global unit volumes offset lower raw-material pass-through revenue and a $42 million unfavorable foreign-currency translation impact.
- Beverage-can sales increased to 51.2% of consolidated sales from 47.6%, while food-can and end sales declined to 31.2% from 34.0%.
- Cost of products sold declined by $32 million, depreciation and amortization declined by $22 million, and selling and administrative expense declined by $21 million. Selling and administrative expense included a $20 million gain from settlement of a legal dispute unrelated to ongoing operations.
- Income before taxes increased substantially, primarily reflecting improved gross profit, lower interest expense and lower asbestos and restructuring charges. However, the higher 2010 tax provision of $165 million versus $7 million in 2009, together with higher income attributable to noncontrolling interests, reduced Crown-attributable net income and diluted EPS.
- Cash from operations declined due principally to the adoption of new securitization accounting guidance, which reduced reported operating cash flow by $208 million, higher tax payments and increased working capital investment in receivables and inventories.
- Capital expenditures rose to $320 million, primarily for beverage-can capacity expansion, including $122 million in Brazil and $27 million for a new beverage-can plant in Slovakia.
- Total debt increased primarily because $208 million of receivables securitization and factoring facilities were reclassified as secured borrowings under new accounting guidance. The adoption did not affect earnings.
- The company repurchased 7.96 million shares for $255 million, compared with 0.18 million shares for $4 million in 2009, and reduced shares outstanding to approximately 155.3 million from 161.5 million.
Guidance, outlook, commentary and unusual items
- Management expects continued growth from beverage-can capacity additions and from markets including Asia, South America, Eastern Europe and the Middle East. It also plans to pursue productivity, cost reduction, innovation and leverage-reduction initiatives.
- Management expected 2011 pension expense of approximately $96 million, compared with $112 million in 2010, and projected 2011 pension funding of approximately $75 million. The aggregate funded status of pension plans worsened to an underfunding of $752 million at year-end from $548 million.
- The company expected 2011 asbestos payments to be similar to prior years and had accrued $249 million for pending and future asbestos claims and related legal costs. The accrual includes estimated claims through 2020 but excludes an estimated $30 million of potential costs beyond 2020.
- Restructuring charges were $42 million in 2010. The Canadian plant closure was expected to generate approximately $15 million of annual pre-tax savings when fully implemented, with approximately $13 million of future cash costs. Prior Canadian restructuring actions were expected to generate approximately $25 million of annual savings when fully implemented.
- The company recorded an $18 million net gain from asset sales and impairments, a $16 million loss from early debt extinguishments and a $46 million asbestos provision.
- In January 2011, Crown issued $700 million of 6.25% senior unsecured notes due 2021. Approximately 90% of the $600 million of 7.75% senior secured notes due 2015 were repurchased, and the remaining notes were redeemed on February 17, 2011.
- Liquidity included $463 million of cash, $943 million of available revolving-credit capacity after borrowings and letters of credit, and $158 million of current debt maturities in 2011. The European securitization facility was scheduled to mature in November 2011.
Risks and contingencies
- High leverage, restrictive debt covenants, refinancing requirements and floating-rate exposure remain significant risks. Approximately $755 million of debt was subject to floating rates; a 1% increase in variable rates was estimated to increase annual adjusted interest expense by approximately $7.5 million.
- Steel and aluminum represented approximately 27% and 35%, respectively, of cost of products sold excluding depreciation and amortization. Steel prices declined approximately 9% in 2010, while aluminum ingot prices increased approximately 29%. The company may be unable to fully pass these costs through to customers.
- Foreign exchange risk is material because approximately 72% of sales were generated in foreign currencies. A specified 0.10 movement in the euro was estimated to reduce annual net income by approximately $9 million.
- Asbestos litigation remains uncertain. Crown Cork had approximately 50,000 outstanding claims at year-end and paid $27 million in asbestos-related claims during 2010.
- Pension and postretirement obligations are significant, including approximately $446 million of unfunded accumulated postretirement medical obligations and substantial unrecognized pension losses.
- Other contingencies include European antitrust investigations, with estimated potential Spanish losses of €8 million to €12 million, disputed Italian tax assessments of approximately €40 million plus interest and penalties, and environmental remediation accruals totaling $14 million.
- Additional risks include customer concentration, industry overcapacity, competition from plastic, glass and paper packaging, seasonal demand, labor disruptions, environmental and bisphenol-A regulation, goodwill impairment, information-technology disruption and adverse geopolitical conditions.
Most important facts for investors to verify
- Whether reported debt growth from the securitization accounting change is properly distinguished from incremental borrowing and how it affects leverage comparisons.
- The sustainability of 2010 margin improvement after excluding the $20 million legal-settlement gain, asset-sale gains, restructuring effects and other unusual items.
- Whether beverage-can capacity additions generate the expected volume and return on invested capital.
- The adequacy of the $249 million asbestos reserve and the potential effect of adverse court decisions or claim severity.
- Compliance with debt covenants, the timing and cost of refinancing maturities, and the post-year-end effect of the 2021 notes issuance and 2015 notes redemption.
- The cash impact of pension funding, restructuring, capital commitments and the $600 million share-repurchase authorization.
- Exposure to aluminum, steel, energy, freight and foreign-currency movements, including the effectiveness and counterparty risk of hedging programs.
- Potential liabilities from Spanish antitrust proceedings, Dutch competition matters, Italian tax assessments and environmental remediation.