Market Overview

Crown Holdings Beats on Q2 Earnings as Can Volumes Rise

Crown Holdings, Inc.'s (NYSE: CCK) second-quarter 2014 adjusted earnings grew 5.2% year over year to $1.01 per share, while surpassing the Zacks Consensus Estimate by a penny. 
On a reported basis, earnings came in at 76 cents per share, compared with 93 cents in the prior-year quarter. In the reported quarter, Crown Holdings recorded income of $3 million ($2 million net of tax) in cost of products sold related to hedge ineffectiveness caused primarily by volatility in the metal premium component of aluminum prices. The company also recorded a charge of $15 million ($10 million net of tax) in cost of products sold for fair value adjustments related to the sale of  inventory acquired in the Mivisa acquisition during second-quarter 2014, Both the quarters' earnings include restructuring charges.
Operational Update
Net sales increased 7.2% year over year to $2.38 billion and ahead of the Zacks Consensus Estimate of $2.35 billion. The year-over-year rise was attributable to the impact of the Mivisa acquisition and increased global beverage can unit sales. Global beverage can volumes went up 3% in the quarter led by strong shipments in Brazil, Southeast Asia and Turkey. Beginning of commercial production at the new facility in Teresina, Brazil during the quarter also benefited Crown Holdings.
Cost of products sold increased 7.8% year over year to $1.96 billion. Gross profit increased 3.5% year over year to an adjusted $388 million. Gross margin decreased 60 basis points to 16.3% in the quarter.
Selling, general and administrative expenses inched up 1% year over year to $103 million. Adjusted operating profit increased 4.4% to $285 million from the year-ago quarter and operating margin increased 30 basis points to 12%.


Segment Performance

Net sales from the Americas Beverage segment were $594 million, up 2% from $584 million in the year-ago quarter. Segment operating profit remained flat year over year at $85 million.
The North America Food segment sales went up 3.4% year over year to $213 million. Operating earnings however decreased 7.3% year over year to $38 million.
The European Beverage segment sales inched up 0.8% year over year to $496 million. Consequently, operating income grew 6.4% year over year to $83 million.
Revenues in the European Food segment increased 29.1% year over year to $555 million. Segment operating profit rose 61.5% to $63 million from $39 million in the year-ago quarter.
Revenues in the Asia Pacific segment increased 5% year over year to $316 million. Operating profit also rose 2.9% to $36 million from the year-ago quarter.
Financial Update
Crown ended the quarter with cash and cash equivalents of $244 million, up from $227 million at the prior-year quarter-end. Cash used in operating activities for the period of six months ended Jun 30, 2014 was $117 million compared with $251 million in the year-ago period. Total debt of the company increased to $5.5 billion as of Jun 30, 2014 compared with $4.2 billion as of Jun 30, 2013.
Our Take
Crown Holdings will benefit from the Mivisa acquisition. The acquisition will significantly enhance Crown Holdings position in the European food can segment. The buyout will boost margins and is expected to be accretive to earnings in 2014.
Crown Holdings has embarked on a cost-reduction initiative to better align costs primarily in its food, aerosol and specialty packaging businesses, as a result of which approximately 235 employees will be laid off, in 2014. This will lead to annual cost savings of approximately $25 million.
Philadelphia-based Crown is a leading supplier of packaging products to consumer marketing companies. The company manufactures aluminum beverage cans, food cans, aerosol cans and other packaging products.
Crown Holdings currently holds a Zacks Rank #2 (Buy). Some other stocks worth considering in the sector include Ball Corporation (NYSE: BLL), Graphic Packaging Holding Company (NYSE: GPK) and MeadWestvaco Corporation (NYSE: MWV). All these stocks carry a Zacks Rank #2 (Buy).

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