Crown Holdings, Inc. — 2013 Q3 Form 10-Q Summary
Business context and reporting period
Crown Holdings manufactures metal packaging, including beverage cans and ends, food cans, aerosol cans, specialty packaging, and related equipment. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods.
Management’s strategy emphasizes growth in international beverage-can markets, operating improvements and cost control in mature markets, disciplined capital allocation, and the pass-through of steel and aluminum costs where possible.
Financial performance and key metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $2,389 million | $2,302 million | $6,585 million | $6,433 million |
| Gross profit | $394 million | $369 million | $1,068 million | $996 million |
| Gross margin | 16.5% | 16.0% | 16.2% | 15.5% |
| Income before taxes | $195 million | $231 million | $497 million | $561 million |
| Net income attributable to Crown | $101 million | $325 million | $275 million | $528 million |
| Diluted EPS | $0.73 | $2.20 | $1.94 | $3.53 |
| Effective tax rate | 34.4% | (48.1%) | 29.4% | (5.0%) |
Net sales increased 3.8% in the quarter and 2.4% year to date, primarily from higher global beverage-can volumes and favorable foreign-currency translation, partly offset by lower selling prices reflecting raw-material cost pass-through. Gross margin improved, but reported earnings declined sharply because of higher taxes, restructuring charges, customer receivable reserves, and the prior-year tax benefit.
Segment income was $317 million in the quarter and $871 million year to date, compared with $326 million and $857 million, respectively, in the 2012 periods. European Beverage and Americas Beverage improved, while North America Food, European Food and Asia Pacific faced pressure from customer issues, competitive pricing, and capacity-expansion start-up costs.
Cash flow, balance sheet, debt and liquidity
- Operating cash flow was negative $124 million for the first nine months of 2013, compared with negative $117 million in 2012. Seasonal inventory build, higher receivables and capacity expansion contributed to the outflow.
- Investing cash flow was negative $178 million, including $181 million of capital expenditures, versus negative $205 million in 2012.
- Financing cash flow was positive $187 million, including $1.063 billion of long-term debt proceeds, $998 million of long-term debt repayments, $484 million of increased revolving and short-term debt, and $300 million of share repurchases.
- Cash and cash equivalents declined to $236 million at September 30, 2013, from $350 million at December 31, 2012. Approximately $206 million was held outside the United States.
- Total debt was approximately $4.253 billion, comprising $363 million of short-term debt, $172 million of current maturities and $3.718 billion of long-term debt excluding current maturities. Debt increased from approximately $3.665 billion at year-end 2012.
- The company had $724 million of available revolving-credit capacity after $436 million of borrowings and $40 million of standby letters of credit. Debt agreements contain restrictions on additional debt, dividends, repurchases, liens and other transactions.
- Capital commitments were approximately $68 million, primarily for capacity expansion in Asia and Brazil. Shareholders’ equity attributable to Crown remained negative at $106 million, although total equity was $175 million.
Material changes versus the prior comparable period
- Depreciation and amortization declined by $12 million in the quarter and $35 million year to date because the company increased the estimated useful lives of its can-making equipment. Management estimated approximately $50 million of full-year 2013 depreciation savings; the change increased year-to-date net income by $28 million, or $0.20 per diluted share.
- Restructuring charges increased to $33 million in Q3 and $41 million year to date, compared with $7 million and $10 million, respectively, in 2012. The Q3 charge primarily related to European cost reductions expected to eliminate approximately 235 positions and generate estimated annual savings of approximately $25 million.
- The company recorded an $18 million reserve for a North American Food customer receivable following the customer’s October 2013 bankruptcy filing, and an $11 million reserve in Q2 for a European Food customer receivable.
- The company recorded a $38 million loss on early extinguishment of debt in Q1 after issuing $1.0 billion of 4.5% senior notes due 2023 and redeeming $400 million of 2017 notes and repaying $500 million of term-loan debt.
- The prior-year period included a net tax benefit of approximately $169 million, primarily from recognition of previously unrecognized U.S. foreign tax credits. In contrast, 2013 included $18 million of tax-law-related charges, including U.K. deferred-tax-asset remeasurement and a Greek tax reserve.
- The company repurchased $300 million of common stock during the first nine months, with $507 million remaining under the authorized program at September 30, 2013.
Guidance, outlook, risks and unusual items
The filing does not provide formal earnings guidance. Management expects continued growth from beverage-can capacity in Brazil and Asia, including new or expanded facilities in China, Malaysia, Vietnam, Thailand and Cambodia, and expects commercial shipments from a new northern Brazil plant in the first quarter of 2014. Execution, market conditions and customer demand could alter these plans.
On October 30, 2013, Crown agreed to acquire Mivisa Envases for approximately €1.2 billion, or $1.6 billion at September 30 exchange rates. The transaction was subject to regulatory approval and was expected to close during 2014. Mivisa reported approximately €555 million of sales for its fiscal year ended June 30, 2013.
- Raw-material prices, especially steel and aluminum, are volatile, and the company may not fully recover cost increases through customer pricing.
- Mature-market volumes are stable to declining in several food, aerosol and North American beverage businesses; competitive price compression affected European Food.
- Recent capacity expansions may generate start-up costs and lower manufacturing efficiencies before reaching targeted utilization.
- Asbestos-related accruals totaled $237 million at September 30, 2013, including $175 million for unasserted claims. The company paid $19 million to settle claims during the first nine months and stated that actual losses could exceed the accrual, although the excess could not be estimated.
- Environmental remediation accruals totaled $13 million, and the company reported $40 million of guarantees related to residual values of leased assets. Potential losses beyond recorded environmental accruals could not be estimated.
- European Aerosols goodwill had an estimated potential impairment exposure of up to $152 million if future operating results decline sufficiently.
- The company uses derivatives to manage currency, interest-rate and commodity risks. Approximately $1.3 billion of debt carried floating interest rates; a 0.25% rate change would affect annual pre-tax interest expense by approximately $3.3 million.
Most important facts for investors to verify
- Whether the Mivisa acquisition closed on the expected timetable and its final purchase price, financing structure and regulatory conditions.
- Progress toward the stated European restructuring savings and whether additional restructuring charges are incurred.
- Recoverability of the $35 million net European customer receivable and the impact of the North American customer bankruptcy beyond the $18 million reserve.
- Operating cash-flow recovery, inventory and receivables normalization, and the company’s ability to fund capital commitments while reducing leverage.
- Developments in asbestos litigation, applicable liability-limitation statutes and potential losses beyond the $237 million accrual.
- Whether European Aerosols and Specialty Packaging results support the goodwill valuation and avoid the potential impairment of up to $152 million.
- Execution and utilization of new capacity in Asia and Brazil, including the expected 2014 northern Brazil launch.