Crown Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
Crown Holdings is a global packaging manufacturer focused primarily on beverage cans and ends, food cans and closures, aerosol cans, and specialty packaging. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. Results are presented in millions of dollars except per-share data.
Management’s strategy emphasizes international beverage-can expansion, particularly in Asia, Brazil, and Eastern Europe, while improving mature-market operations through pricing, cost control, capacity management, and capital allocation.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $2,302 | $2,423 | $6,433 | $6,586 |
| Gross profit | $369 | $396 | $996 | $1,059 |
| Gross margin | 16.0% | 16.3% | 15.5% | 16.1% |
| Income before taxes and equity earnings | $231 | $245 | $561 | $538 |
| Net income attributable to Crown | $325 | $129 | $528 | $274 |
| Diluted EPS | $2.20 | $0.84 | $3.53 | $1.77 |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(117) | $(134) |
The quarterly and nine-month effective tax rates were negative 48.1% and negative 5.0%, respectively, versus 35.5% and 33.8% in the comparable 2011 periods. The reported benefit primarily reflected a $169 tax benefit, net of valuation allowance, related to recognition of previously unrecognized U.S. foreign tax credits.
- Cash and cash equivalents were $240 at September 30, 2012, down from $342 at December 31, 2011; $215 was held outside the United States.
- Receivables were $1,397 and inventories were $1,207, compared with $948 and $1,148, respectively, at year-end 2011.
- Total debt was approximately $4, -? million? The filing reports short-term debt of $297, current maturities of $104, and long-term debt of $3,596 excluding current maturities; total reported debt was approximately $3,997 including current debt and current maturities.
- Available revolving-credit capacity was $720, based on a $1,200 facility, $421 of borrowings, and $59 of standby letters of credit.
- Shareholders’ deficit improved to $(25) from $(473) at December 31, 2011, while total equity, including noncontrolling interests, was $227 versus $(239).
- Capital expenditures were $214 for the first nine months, and management expected approximately $300 for 2012, excluding rebuilding costs for the flood-damaged Thailand facility that management expected to be reimbursed by insurance.
Material changes versus the prior comparable period
- Third-quarter sales declined 5.0%, and nine-month sales declined 2.3%. Foreign-currency translation reduced sales by approximately $106 in the quarter and $243 year to date; higher beverage-can volumes partly offset the effect.
- Gross profit declined 6.8% in the quarter and 5.9% year to date, with gross margin narrowing by approximately 30 basis points and 60 basis points, respectively.
- Net income attributable to Crown increased by $196 in the quarter and $254 year to date, largely because of the unusual tax benefit and the absence of the $32 early-debt-extinguishment loss recorded in 2011.
- Reportable-segment income declined to $267 from $285 in the quarter and to $691 from $740 for nine months. Americas Beverage improved, while European Food, European Specialty Packaging, and non-reportable aerosol operations weakened.
- European Food sales declined 12.2% for the quarter and 11.0% year to date, primarily from lower volumes, economic uncertainty, adverse weather, foreign exchange, and weaker pricing.
- Non-reportable segment sales increased, driven by beverage-can growth in Cambodia, China, Malaysia, and Vietnam, but segment income declined because of weaker aerosol operations and start-up costs.
- The company repurchased approximately $207 of common stock during the first nine months, including a $200 accelerated share-repurchase transaction in July. Approximately $94 remained available under the repurchase authorization at September 30.
- Operating cash flow remained negative at $(117), despite improvement from $(134) in the prior-year period. Receivables consumed $489 of cash, reflecting seasonality and business mix.
Guidance, outlook, management commentary, risks, and unusual items
- Management planned approximately $3 billion? The filing states expected 2012 capital expenditures of approximately $300 million and approximately $83 million of capital commitments at September 30, primarily for Asian expansion and rebuilding Thailand capacity.
- Over the following twelve months, the company expected to commercialize approximately 3.6 billion additional annual beverage-can production capacity in Cambodia, China, Malaysia, Thailand, and Vietnam. It postponed certain China plant plans indefinitely in response to market conditions.
- The company was evaluating European Food and European Specialty Packaging actions that could generate additional restructuring charges of up to $50 in aggregate. Existing European restructuring programs included expected future charges and headcount reductions.
- Insurance proceeds related to the 2011 Thailand flooding generated asset-related gains of $14 in the quarter and $24 year to date; the company also recognized $5 and $12 of insurance-related income in non-reportable operations for the quarter and nine months.
- Goodwill at the European Aerosols reporting unit had estimated fair value 35% above carrying value at year-end 2011. If impairment indicators worsen, a goodwill impairment charge of up to $149 could be recorded.
- The company’s asbestos-related accrual was $235, including $179 for unasserted claims and estimated costs through 2021. The company paid $14 to settle claims during the first nine months and reported 51,000 ending claims. Actual losses could exceed the accrual, but the excess could not be reasonably estimated.
- Italian subsidiaries faced potential value-added-tax and related assessments of approximately $51, plus interest and penalties estimated at up to approximately $71. The company is contesting the assessments and reported mixed lower-court rulings.
- Environmental accruals totaled $13, consisting of $6 for PRP sites and $7 for company-owned locations. Other indemnification obligations had defined maximum potential liability of $11, and lease-related residual-value guarantees totaled $41.
- The company is exposed to foreign-exchange, commodity-price, and interest-rate risk. Approximately $1.7 billion of principal floating-rate debt was outstanding; a 25-basis-point rate increase would increase annual pretax interest expense by approximately $4.
- Subsequent to the quarter, the company established a joint venture to acquire Superior Multi-Packaging and paid $38 for a beverage-can and end-production business in Vietnam. The tender offer had not closed at the filing date.
Most important facts for investors to verify
- Whether operating cash flow turns positive in the fourth quarter as seasonal receivables are collected and whether liquidity remains adequate despite negative year-to-date operating cash flow.
- The sustainability of reported earnings excluding the $169 foreign-tax-credit benefit, insurance-related gains, and other unusual items.
- Progress, utilization, and returns from the company’s substantial new beverage-can capacity in Asia, Brazil, Turkey, and other growth markets.
- Whether European Food and European Specialty Packaging restructuring plans are approved and whether additional charges approach the disclosed potential amount of $50.
- Developments in asbestos litigation, Italian tax assessments, environmental matters, and the potential for losses above recorded accruals.
- Debt reduction, revolver availability, covenant compliance, and sensitivity to floating interest rates.
- Whether the European Aerosols reporting unit maintains sufficient fair value cushion to avoid a potential goodwill impairment of up to $149.