CROWN HOLDINGS, INC. quarterly report, Q3 FY2010

Crown Holdings, Inc. — 2010 Q3 Form 10-Q Summary

Business context and reporting period

Crown Holdings is a global packaging manufacturer serving beverage, food and specialty packaging markets. Reported segments include Americas Beverage, North America Food, European Beverage, European Food and European Specialty Packaging. This unaudited Form 10-Q covers the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods.

Financial performance and liquidity

Metric	Q3 2010	Q3 2009	9M 2010	9M 2009
Net sales	$2,205 million	$2,282 million	$5,992 million	$6,021 million
Gross profit	$377 million	$365 million	$962 million	$943 million
Income before taxes	$208 million	$144 million	$515 million	$418 million
Net income attributable to Crown	$126 million	$108 million	$279 million	$253 million
Diluted EPS	$0.78	$0.67	$1.71	$1.56
Net cash from operations	Not separately reported for the quarter	Not separately reported for the quarter	$39 million	$180 million

Q3 gross margin increased to approximately 17.1% from 16.0%; nine-month gross margin increased to approximately 16.1% from 15.7%.
Q3 net margin attributable to Crown was approximately 5.7%, compared with 4.7% in 2009; nine-month net margin was approximately 4.7%, compared with 4.2%.
Operating cash flow fell to $39 million from $180 million, primarily because of working-capital usage, including a $246 million accounting-related impact from securitization and factoring facilities.
Capital expenditures were $187 million in the first nine months, compared with $108 million in 2009. Cash used in investing activities was $164 million.
Cash and cash equivalents were $415 million at September 30, 2010, versus $459 million at December 31, 2009. Current assets were $2,879 million and current liabilities were $2,429 million.
Total debt was $3,229 million at September 30, 2010, including $299 million of short-term debt, $156 million of current maturities and $2,774 million of long-term debt excluding current maturities. Approximate debt less cash was $2,814 million.
Revolving-credit facilities had aggregate capacity of $1.2 billion, borrowings of $323 million, outstanding letters of credit of $73 million and available capacity of $804 million.

Material changes versus the prior comparable period

Sales declined 3.4% in Q3 and 0.5% for the first nine months, primarily from passing through lower steel and aluminum costs and foreign-currency translation, partly offset by higher global volumes.
Q3 sales volumes increased in Americas Beverage by 11%; nine-month Americas Beverage volumes increased 9%. European Beverage volumes increased 4% for the nine months, while North America Food volumes decreased 2%.
Q3 and nine-month gross profit improved despite lower sales, reflecting lower raw-material costs, currency effects and operating improvements. Selling and administrative expense declined to $82 million from $95 million in Q3 and to $256 million from $274 million for the nine months.
Interest expense declined to $55 million from $66 million in Q3 and to $147 million from $189 million for the nine months, primarily due to lower average debt.
Segment income increased in Americas Beverage but declined in North America Food, European Beverage and European Food; European Specialty Packaging improved.
Crown adopted new accounting guidance requiring certain receivables securitization and factoring arrangements to be reported as secured borrowings. At September 30, 2010, this increased reported receivables and short-term debt by $246 million and did not materially affect earnings.
The company acquired additional noncontrolling interests in joint ventures in China, Vietnam, Greece and other locations for an aggregate reported purchase price of $168 million.
The company repurchased 3.18 million shares initially for $100 million under an accelerated share repurchase agreement; $367 million remained available under the repurchase authorization at September 30, 2010.

Guidance, outlook, risks and unusual items

Management expected approximately $300 million of capital expenditures for 2010, focused particularly on beverage-can capacity expansion in Asia and Brazil, compared with $180 million in 2009. No clear consolidated earnings guidance was provided.
Management’s stated priorities were improving segment income and operating cash flow, expanding sales in growth markets, controlling costs and reducing leverage. The company was considering a potential acquisition and additional share repurchases, subject to debt-agreement restrictions.
The company recorded a $15 million asbestos provision in Q3 following a Texas Supreme Court ruling. The asbestos accrual was $231 million at September 30, 2010, covering estimated claims and legal costs through 2019; additional projected costs of $38 million beyond 2019 were excluded.
Restructuring provisions totaled $41 million for the first nine months. The company expected approximately $21 million of additional charges related to a Canadian plant closure and approximately $38 million related to prior Canadian restructuring actions, subject to regulatory approvals and settlement timing.
The company recorded a $16 million loss from early extinguishment of debt, primarily from redemption premiums and deferred financing-fee write-offs.
A $20 million net one-time legal settlement received in January 2010 reduced selling and administrative expense and benefited first-quarter results.
European antitrust investigations in Spain and the Netherlands remained unresolved. The company could not predict the outcome or potential financial impact of the investigations.
Key operating risks include volatile steel and aluminum prices, the ability to pass raw-material costs to customers, foreign-exchange exposure, interest-rate risk, asbestos litigation, environmental remediation, pension obligations and substantial leverage.
The company had approximately $871 million of floating-rate debt; a 0.25 percentage-point change in applicable rates would affect annual pretax interest expense by approximately $2.2 million.
In October 2010, the company amended its prescription-drug benefits plan. Effective January 1, 2011, Medicare-eligible retirees would no longer receive that coverage, reducing the postretirement benefit liability by approximately $100 million; the benefit would be amortized through future earnings.

Important facts for investors to verify

Whether operating cash flow improves after separating the $246 million securitization-accounting impact from recurring working-capital requirements.
The timing and cash cost of Canadian restructuring actions and related pension settlements.
Future asbestos claims, settlement costs, court rulings and the adequacy of the $231 million accrual.
Compliance with debt covenants, near-term maturities and the availability of the stated $804 million revolving-credit capacity.
Whether the planned approximately $300 million capital-expenditure program produces the expected capacity and volume growth.
The final settlement cost and share count under the accelerated share repurchase agreement.
The outcomes and potential penalties associated with the Spanish and Netherlands antitrust investigations.
The sustainability of margin improvement given raw-material pricing, currency movements and lower reported sales.