Crown Holdings, Inc. — 2011 First-Quarter Form 10-Q
Business context and reporting period
Crown Holdings is a global metal packaging manufacturer serving beverage, food, specialty packaging and related markets. This unaudited Form 10-Q covers the three months ended March 31, 2011, compared with the three months ended March 31, 2010. Amounts are in millions except per-share and share data.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $1,882 | $1,777 | +$105, or 5.9% |
| Gross profit | $292 | $250 | +$42 |
| Gross margin | 15.5% | 14.1% | +1.4 percentage points |
| Income before taxes | $83 | $106 | -$23 |
| Net income attributable to Crown | $16 | $41 | -$25 |
| Diluted EPS | $0.10 | $0.25 | -$0.15 |
| Net cash used in operating activities | $(317) | $(416) | Improved by $99 |
| Capital expenditures | $103 | $32 | +$71 |
- Sales growth primarily reflected higher global unit volumes and a $13 foreign-currency translation benefit. Beverage cans and ends represented 52.2% of sales, while food cans, ends and metal vacuum closures represented 33.9%.
- Selling and administrative expense rose to $102 from $79, partly because Q1 2010 included a $20 gain from settling an unrelated legal dispute.
- Q1 2011 included $25 of restructuring expense, a $30 loss on early extinguishment of debt and $56 of interest expense. The effective tax rate increased to 49.4% from 36.8%, primarily due to tax charges related to the European headquarters relocation and higher valuation allowances.
- Cash and cash equivalents were $409 at March 31, 2011, versus $463 at December 31, 2010. Receivables increased to $1,104 from $936 and inventories increased to $1,353 from $1,060, contributing to negative operating cash flow.
- Total debt was approximately $3,473, comprising $413 of short-term debt, $176 of current maturities and $2,884 of long-term debt excluding current maturities. The company reported $748 of available revolving-credit capacity after borrowings and standby letters of credit.
- Crown shareholders’ deficit improved to $(7) from $(96), while total equity increased to $339 from $229, primarily reflecting comprehensive income and currency translation adjustments.
Material changes versus the prior comparable period
- Reportable segment sales increased to $1,562 from $1,486 and reportable segment income increased to $195 from $168. Americas Beverage, North America Food, European Food and European Specialty Packaging improved; European Beverage declined because of margin compression and lower activity at a U.K. plant.
- Sales-unit volumes increased 2% in Americas Beverage, 8% in European Beverage, 3% in European Food and generally increased in European Specialty Packaging. North America Food volumes declined 7%, partly offset by steel-cost pass-through.
- In January 2011, the company issued $700 of 6.25% senior unsecured notes due 2021. It repurchased approximately 90% of its $600 of 7.75% senior secured notes due 2015 and redeemed the remainder in February, recording a $30 early-extinguishment loss.
- Capital expenditures increased substantially to support capacity expansion, particularly in Asia and Americas Beverage.
- The company used $150 to initially purchase 4.35 million shares under an accelerated share-repurchase program entered into in December 2010; a further $6 adjustment was paid in April 2011.
Outlook, commentary, risks and unusual items
- Management expected approximately $425 of 2011 capital expenditures, compared with $320 in 2010, focused on beverage-can capacity expansion in Asia and the Americas.
- No earnings or revenue guidance was provided in the filing. Management’s stated priorities were improving segment income, operating efficiencies and cash flow, while expanding sales in growth markets and developing innovative packaging products.
- Steel and aluminum costs remain volatile. The company seeks to pass higher costs through to customers, but may not recover all increases; supply interruptions could disrupt operations.
- Asbestos-related liabilities remained a significant contingency. The accrual at March 31, 2011 was $243, including $192 for unasserted claims and estimates through 2020. Approximately 50,000 claims were outstanding; the company cautioned that adverse litigation developments could materially affect results, financial position or cash flow.
- Environmental remediation accruals totaled $14. A Spanish antitrust investigation carried an estimated possible loss range of €8 million to €12 million, although management believed the allegations were without merit. An Italian tax dispute involved expected assessments of approximately €40 million plus interest and penalties.
- The company had derivative exposures related to foreign exchange, interest rates and commodities. Approximately $966 of debt carried floating interest rates; a 0.25% rate change was estimated to affect annual pretax interest expense by approximately $2.
- Restructuring reserves increased to $41 at March 31, 2011. The company expected to pay the $19 charge related to relocating its European headquarters and management to Switzerland over the next one to three years.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether volume growth and pricing actions offset continuing steel and aluminum inflation and the European Beverage margin pressure.
- The company’s ability to convert earnings into cash as receivables and inventories remain elevated and operating cash flow is negative.
- Debt maturities, revolving-credit availability, financial-covenant compliance and the effect of refinancing activity on interest expense.
- The ultimate cost and duration of asbestos claims, including potential amounts beyond the $243 accrual and the excluded estimated $30 of potential costs after 2020.
- Outcomes of the Spanish antitrust investigation and Italian tax assessments, together with any additional environmental or litigation exposure.
- Whether the planned $425 of 2011 capital expenditures produces the anticipated capacity and volume benefits without further leverage pressure.
- The scale and timing of share repurchases, including the subsequent $200 accelerated-repurchase authorization and remaining $394 authorization reported as of May 4, 2011.