Shares of Crown Holdings, Inc. (CCK) gained over 2% after the company’s third-quarter 2014 earnings increased 31% year over year to $1.36 per share, aided by strong demand for beverage cans. Earnings also surpassed the Zacks Consensus Estimate of $1.21 per share, a positive earnings surprise of 12.4%. On a reported basis, earnings came in at $1.76 per share, compared with 73 cents in the prior-year quarter.
Operational Update
Net sales increased 8.6% year over year to $2.59 billion and ahead of the Zacks Consensus Estimate of $2.58 billion. The year-over-year rise was attributable to the positive impact of the Mivisa acquisition. Strong European food can demand and robust demand for beverage cans in developing markets, particularly in Southeast Asia and Turkey, also boosted growth.
Cost of products sold increased 8% year over year to $2.12 billion. Gross profit increased 6.9% year over year to an adjusted $421 million. Gross margin decreased 30 basis points to 16.2% in the quarter.
Selling, general and administrative expenses declined 16% year over year to $95 million. Adjusted operating profit increased 16% to $326 million from the year-ago quarter and operating margin increased 80 basis points to 12.6%.
Segment Performance
Net sales from the Americas Beverage segment were $570 million, down 2.2% from $583 million in the year-ago quarter. Segment operating profit also declined year over year to $77 million from $83 million.
The North America Food segment sales went down 5.2% year over year to $236 million. However, operating earnings increased 53.8% year over year to $40 million.
The European Beverage segment sales dropped 1.5% year over year to $474 million. Consequently, operating income decreased 1.2% year over year to $81 million.
Revenues in the European Food segment increased 44.9% year over year to $787 million. Segment operating profit rose 69.8% to $107 million from $63 million in the year-ago quarter.
Revenues in the Asia Pacific segment increased 3.3% year over year to $310 million. Operating profit also rose 18.8% to $38 million from the year-ago quarter.
Financial Update
Crown Holdings ended the quarter with cash and cash equivalents of $380 million, up from $236 million at the prior-year quarter-end. Cash flow from operations was $9 million for the period of nine months ended Sep 30, 2014, compared with cash usage of $124 million in the year-ago period. Total debt of the company increased to $5.4 billion as of Sep 30, 2014 compared with $4.3 billion as of Sep 30, 2013.
On Aug 31, 2014, Crown entered into an agreement to acquire Dutch brewer Heineken’s Mexican packaging business, EMPAQUE for $1.225 billion. The acquisition will help Crown to expand its presence in the growing Mexican market and to fortify its global beverage packaging business. Moreover, it is expected to contribute between 15 cents to 20 cents per share to Crown's 2015 earnings before synergies, but including estimated amortization and depreciation for purchase accounting adjustments. The acquisition is expected to close by the end of this year, pursuant to customary closing conditions, including competition authority approval.
Our Take
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. Moreover, the company will benefit from acquisitions.
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 #3 (Hold). Some other stocks worth considering in the sector include AO Smith Corp. (AOS), Advanced Emissions Solutions, Inc. (ADES) and Allegion plc Ordinary Shares (ALLE). All these stocks carry a Zacks Rank #2 (Buy).
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