CROWN HOLDINGS, INC. quarterly report, Q3 FY2015

Crown Holdings, Inc. — Q3 2015 Form 10-Q Summary

Business context and reporting period

This unaudited Form 10-Q covers the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods. Crown manufactures beverage, food, aerosol and specialty packaging through five reportable segments: Americas Beverage, North America Food, European Beverage, European Food and Asia Pacific.

The company’s strategy emphasizes international growth, specialty-can capacity, disciplined pricing and cost control. Following the February 2015 acquisition of Empaque, management’s primary 2015 financial priority was leverage reduction.

Financial performance and key metrics

Metric	Q3 2015	Q3 2014	First nine months 2015	First nine months 2014
Net sales	$2,460 million	$2,594 million	$6,735 million	$6,970 million
Gross profit	$415 million	$422 million	$1,074 million	$1,095 million
Gross margin	16.9%	16.3%	15.9%	15.7%
Income before taxes	$208 million	$225 million	$509 million	$481 million
Net income attributable to Crown	$141 million	$244 million	$327 million	$374 million
Diluted EPS	$1.01	$1.76	$2.35	$2.70
Operating cash flow	Not separately presented	Not separately presented	$315 million	$9 million

Q3 net sales declined 5.2%, while nine-month sales declined 3.4%. Net income attributable to Crown declined 42.2% in Q3 and 12.6% for the first nine months. Net margins were approximately 5.7% and 4.9%, respectively, versus 9.4% and 5.4% in the comparable periods.

Segment income was $375 million in Q3, compared with $369 million in Q3 2014, and $931 million for the first nine months, compared with $947 million.
Americas Beverage benefited from Empaque, higher volumes and improved plant operations; segment income increased to $116 million in Q3 and $300 million for the first nine months.
North America Food segment income declined to $25 million in Q3 and $72 million for the first nine months, primarily because of lower volumes and customer losses.
European Beverage results were pressured by foreign exchange and Middle East weakness. European Food benefited from additional Mivisa contributions and improved cost performance but was adversely affected by currency translation.
Foreign currency translation was a major sales headwind. Sales would have been approximately $281 million higher in Q3 and $694 million higher for the first nine months using 2014 exchange rates.

Cash flow, liquidity and debt

Operating cash flow improved to $315 million from $9 million, primarily because of improved working capital. Trade-receivables days outstanding improved from 41 to 36 days.
Investing cash use increased to $1.374 billion from $912 million, including $1.207 billion for Empaque and $176 million of capital expenditures. Management expected approximately $350 million of capital expenditures for 2015.
Financing activities provided $611 million. Debt proceeds of $1.435 billion were partly offset by $780 million of debt repayments.
Cash and equivalents were $466 million at September 30, 2015, down from $965 million at December 31, 2014. Approximately $425 million was held outside the United States.
Available revolving-credit capacity was $1.114 billion, after $45 million of borrowings and $41 million of standby letters of credit, based on a $1.2 billion facility.
Total debt was approximately $5.811 billion, including $61 million of short-term debt and $5.750 billion of long-term debt, versus approximately $5.259 billion at year-end 2014. Net debt was approximately $5.345 billion at September 30, 2015.
Interest expense increased to $68 million in Q3 and $202 million for the first nine months, primarily because of higher average debt related to the Mivisa and Empaque acquisitions.

Material changes versus the prior comparable period

The February 2015 Empaque acquisition added approximately $153 million of Q3 sales and $401 million of nine-month sales. The transaction cost $1.207 billion and generated preliminary goodwill of $603 million.
Goodwill and intangible assets increased to $3.664 billion from $2.926 billion at year-end 2014, while property, plant and equipment increased to $2.614 billion from $2.437 billion.
Q3 restructuring and other charges increased to $40 million from $8 million. The charges primarily related to European Food facility closures, asset write-downs and termination benefits.
The company announced closures of two European Food facilities expected to reduce approximately 280 employees when completed in 2016; $12 million of additional charges are expected.
In May 2015, the company issued €600 million of 3.375% senior notes due 2025 and repaid a term loan. A $9 million early-debt-extinguishment loss was recognized during the first nine months.
Other comprehensive loss was $135 million in Q3 and $329 million for the first nine months, driven primarily by foreign-currency translation. Comprehensive income attributable to Crown was only $9 million for Q3 and $3 million for the first nine months.
The company amended U.S. retiree medical and life-insurance plans, reducing the postretirement benefit obligation by $54 million.

Outlook, commentary, risks and unusual items

Management did not provide a specific earnings or sales forecast in the filing. It stated that 2015 cash flow would primarily be used to reduce leverage and that it did not presently anticipate share repurchases or dividends in 2015.
Growth investments include a new Monterrey, Mexico beverage-can plant, a second line at the Osmaniye, Turkey plant expected to begin operation in the first quarter of 2017, and a third beverage-can plant in Cambodia expected to begin commercial production in late 2016.
Raw-material costs, particularly aluminum and steel, remain volatile. The company may not be able to fully pass cost increases to customers, especially in European Beverage.
The German Federal Cartel Office is investigating potential anti-competitive conduct involving a German subsidiary. The company found inappropriate conduct by certain employees, submitted a leniency application, believes a loss is probable, and cannot estimate any additional loss; penalties could be material.
Asbestos-related liabilities were accrued at $257 million, including $202 million for unasserted claims. The company paid $12 million to settle claims during the first nine months and states that actual losses could exceed the accrual, although the excess cannot be reasonably estimated.
Environmental remediation accruals totaled $13 million. The company also had defined-limit indemnification exposure of $9 million and guarantees related to leased-asset residual values of $27 million.
The company identified potential goodwill impairment of up to $105 million for its European Aerosols and Specialty Packaging reporting unit if future operating performance declines.
At September 30, 2015, approximately $2.2 billion of debt principal carried floating interest rates; a 0.25% rate change would affect annual pretax interest expense by approximately $6 million.

Important facts for investors to verify

Whether Empaque integration, pricing and volume growth offset currency pressure and the higher debt burden.
Progress toward leverage reduction, cash generation and repayment of current debt maturities.
The final purchase-price allocation for Empaque and any resulting changes to goodwill or intangible assets.
The timing, cash cost and savings from the announced European Food closures and other restructuring actions.
The outcome and potential fines from the German Federal Cartel Office investigation.
The adequacy of the $257 million asbestos accrual and the potential for losses beyond the accrued amount.
Whether European Aerosols and Specialty Packaging performance creates an impairment charge of up to $105 million.
The company’s ability to recover aluminum and steel cost increases and manage foreign-exchange and interest-rate exposure.