Crown Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
Crown Holdings manufactures metal packaging, including beverage cans and ends, food cans and ends, closures, aerosol containers and specialty packaging. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Approximately 73% of first-nine-month sales were generated outside the United States.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | First 9 months 2011 | First 9 months 2010 |
|---|---|---|---|---|
| Net sales | $2,423 million | $2,205 million | $6,586 million | $5,992 million |
| Gross profit | $396 million | $377 million | $1,059 million | $962 million |
| Gross margin | 16.3% | 17.1% | 16.1% | 16.1% |
| Income before taxes | $245 million | $208 million | $538 million | $515 million |
| Net income attributable to Crown | $129 million | $126 million | $274 million | $279 million |
| Diluted EPS | $0.84 | $0.78 | $1.77 | $1.71 |
| Net cash from operating activities | Not separately provided | Not separately provided | $(134) million | $39 million |
Q3 sales increased 9.9%, while net income attributable to Crown increased 2.4%. First-nine-month sales increased 9.9%, but net income attributable to Crown declined 1.8%. Diluted EPS increased because average diluted shares declined approximately 4.7%, primarily reflecting share repurchases.
Operating performance benefited from higher selling prices reflecting raw-material pass-through, foreign-exchange translation, organic volume growth and emerging-market expansion. Gross margin was approximately flat for the first nine months but declined in the third quarter as aluminum, tinplate and other input costs increased.
At September 30, 2011, cash and cash equivalents were $479 million, compared with $463 million at December 31, 2010. Current assets were $3.305 billion and current liabilities were $2.382 billion, implying a current ratio of approximately 1.39. Receivables increased to $1.317 billion and inventories to $1.339 billion, substantially consuming operating cash flow.
Total debt was approximately $3.757 billion, consisting of $295 million of short-term debt, $66 million of current maturities and $3.396 billion of long-term debt excluding current maturities. Available revolving-credit capacity was $668 million after borrowings and standby letters of credit. Crown shareholders’ equity remained negative at $(100) million, while total equity was $180 million.
Material changes versus the prior comparable period
- Q3 sales increased by $218 million, driven by $137 million of raw-material pass-through and $92 million of foreign-currency translation, partly offset by $11 million of lower unit volumes.
- First-nine-month sales increased by $594 million, including $300 million of raw-material pass-through, $80 million of higher unit volumes and $224 million of currency translation.
- Reported segment income for reportable segments increased to $285 million in Q3 from $281 million and to $740 million for the first nine months from $697 million. European Beverage segment income declined because higher costs and lower productivity were not fully offset by pricing.
- Q3 selling and administrative expense rose to $96 million from $82 million, primarily because of higher legal and professional fees and currency translation.
- The first nine months included $27 million of restructuring charges, compared with $41 million in 2010, and $32 million of losses from early debt extinguishments, compared with $16 million in 2010.
- Interest expense increased to $174 million for the first nine months from $147 million, reflecting higher borrowings and currency effects.
- The effective tax rate rose to 34% for the first nine months from 28%, primarily because of French tax-law changes and a $20 million tax charge related to relocating European headquarters and management to Switzerland.
- Capital expenditures increased to $273 million from $187 million. Management expected approximately $400 million of 2011 capital expenditures and $325 million in 2012.
Outlook, commentary, risks and unusual items
Management’s strategy emphasizes emerging-market growth projects, productivity improvements in mature markets, cash-flow generation, debt reduction and shareholder returns. Expansion projects in Brazil, China, Eastern Europe and Southeast Asia were expected to increase beverage-can capacity by approximately 27% from year-end 2010 levels when completed. Management expected approximately $91 million of additional capital commitments, primarily for projects in Brazil, Cambodia, China, Turkey and Vietnam.
The company continued a share-repurchase authorization of up to $600 million through 2012. It repurchased $212 million of common stock during the first nine months, leaving approximately $394 million authorized for future purchases. It also purchased additional noncontrolling interests, including the remaining public ownership interests in Hellas Can for $65 million, paid in October 2011.
Key operating risks include volatility in aluminum and steel prices, the possibility that price increases cannot be fully passed to customers, foreign-exchange and interest-rate exposure, demand weakness, execution risk from expansion projects and reliance on external financing. The company had approximately $1.388 billion of floating-rate debt; a 0.25 percentage-point rate increase would increase annual pre-tax interest expense by approximately $3 million.
Asbestos-related liabilities remained material. The company accrued $235 million for pending and future asbestos claims and legal costs through 2020, including $186 million for unasserted claims, and stated that actual losses could exceed the accrual but could not be reasonably estimated. The company paid $14 million to settle asbestos claims during the first nine months.
Environmental remediation accruals totaled $15 million. Italian tax assessments related to suppliers’ value-added-tax obligations were estimated at approximately €40 million, or $54 million at September 30, 2011, plus interest and penalties; the company intends to dispute them.
Subsequent to quarter-end, severe flooding shut down a beverage-can plant in Thailand and temporarily suspended food and aerosol plants in the Bangkok region. The beverage-can plant could remain suspended for up to twelve months. The company was evaluating damage and insurance coverage; the plant had $29 million of net property, plant and equipment, $14 million of inventory and generated $42 million of first-nine-month sales.
Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting. The filing does not provide a formal earnings or revenue forecast.
Important facts for investors to verify
- Whether the Thailand flooding results in material lost sales, repair costs, insurance recoveries or impairment charges.
- The pace of working-capital normalization, particularly the elevated receivables and inventory balances that drove negative operating cash flow.
- Debt covenants, refinancing needs, floating-rate exposure and the sustainability of liquidity given capital spending and share repurchases.
- The ultimate cost and timing of asbestos claims, including potential losses above the $235 million accrual.
- The outcome of the disputed Italian tax assessments and any related interest or penalties.
- Whether raw-material price increases can continue to be passed through without further margin pressure.
- Execution, utilization and returns from the company’s beverage-can capacity expansion projects.
- Whether restructuring savings of approximately $3 million annually in European Specialty Packaging and $25 million in North America Food are realized.