Crown Holdings, Inc. 10-Q Summary
Business context and reporting period
Crown Holdings, Inc. is a global packaging manufacturer focused on beverage cans, food cans, closures, aerosol packaging, transit packaging, and related equipment. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. Management identified the coronavirus pandemic as a significant source of operational and demand uncertainty.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Net sales | $2,689 million | $3,035 million | $5,446 million | $5,790 million |
| Income from operations | $275 million | $383 million | $521 million | $645 million |
| Net income attributable to Crown | $126 million | $137 million | $214 million | $240 million |
| Diluted EPS | $0.94 | $1.02 | $1.59 | $1.78 |
| Operating margin | 10.2% | 12.6% | 9.6% | 11.1% |
- Q2 net sales declined 11.4%; six-month sales declined 5.9%. Management attributed the decreases primarily to lower pandemic-related volumes, lower raw-material pass-through, and foreign-currency translation impacts of $73 million in Q2 and $113 million for the first half.
- Q2 operating income decreased 28.2%, and six-month operating income decreased 19.2%. Reported Q2 operating income included $3 million of restructuring and other charges, compared with a $45 million benefit in the prior-year quarter.
- Q2 net income attributable to Crown fell 8.0%, while first-half net income fell 10.8%. Lower interest expense, lower taxes, and reduced noncontrolling-interest income partly offset weaker operating results.
- Interest expense declined to $76 million in Q2 and $156 million for the first half, from $97 million and $195 million, respectively, due to lower average debt and interest rates.
- Cash used in operating activities was $238 million for the first half, compared with $227 million used in 2019. Capital expenditures were $199 million versus $154 million, resulting in $184 million of investing cash outflow.
- Financing activities provided $196 million, primarily reflecting increased borrowings. Cash, cash equivalents, and restricted cash totaled $427 million at June 30, 2020, down from $663 million at year-end 2019; unrestricted cash and cash equivalents were $366 million.
- Total debt was approximately $8.26 billion, comprising $131 million of short-term debt and $8.13 billion of long-term debt, including current maturities. Net total leverage was 4.69-to-1.00 versus a covenant maximum of 5.75-to-1.00.
- The company had $1.464 billion of available revolving-credit capacity after borrowings and standby letters of credit. Approximately $313 million of cash and cash equivalents was held outside the United States.
Material changes versus the prior comparable period
- Americas Beverage Q2 sales declined to $777 million from $890 million, primarily due to lower pandemic-related volumes in Brazil and Mexico and lower aluminum pass-through, partly offset by 16% higher U.S. and Canadian volumes. Segment income declined to $129 million from $139 million.
- European Beverage sales declined to $330 million from $410 million and segment income to $37 million from $60 million, primarily because of lower pandemic-related volumes.
- European Food sales increased to $499 million from $483 million and segment income to $68 million from $62 million, supported by 10% higher volumes and improved cost performance.
- Asia Pacific sales declined to $270 million from $319 million and segment income to $39 million from $51 million due mainly to lower volumes.
- Transit Packaging sales declined to $462 million from $592 million and segment income to $51 million from $80 million due mainly to lower pandemic-related volumes, partly offset by favorable mix and cost performance.
- Cash and cash equivalents declined $241 million from December 31, 2019, while inventories increased $121 million to $1.747 billion and receivables increased $76 million to $1.604 billion.
- Restructuring and other changed from a $45 million benefit in Q2 2019 to a $3 million charge in Q2 2020. The prior-year benefit primarily reflected favorable Brazilian indirect-tax court rulings.
Guidance, outlook, commentary, risks, and unusual items
- The company expects 2020 capital expenditures of approximately $600 million and had approximately $95 million of capital commitments at June 30, 2020.
- No specific earnings or revenue guidance is provided. Management stated that full-year results are not necessarily indicated by interim results and that the pandemic’s impact cannot be determined at this time.
- Management expects beverage-can demand to grow over the longer term, but near-term demand may weaken in certain markets. Transit Packaging demand is expected to be lower in several served industries.
- The company is maintaining manufacturing operations, enhancing employee safety measures, monitoring supply-chain risks, and managing inventories in response to COVID-19.
- Asbestos-related accruals totaled $264 million at June 30, 2020, including $221 million for unasserted claims. The company paid $5 million to settle claims during the first half. Actual losses could exceed the accrual, but the company cannot estimate the excess reasonably possible loss.
- The company had $15 million of restructuring accruals, primarily for European manufacturing-capacity and headcount actions, expected to be paid over the next twelve months. Additional charges remain possible.
- Environmental remediation accruals totaled $15 million. A European Commission investigation into potential competition-law violations remains ongoing; management believes a loss is probable but has not recorded a charge because the amount or range cannot be estimated. Potential fines could be material.
- Goodwill impairment risk increased for Transit Packaging reporting units because of lower expected near-term demand. No impairment was recorded, but material charges could result if operating performance declines for an extended period.
- The company had approximately $2.5 billion of floating-rate debt. A 0.25 percentage-point change in floating rates would affect annual pretax interest expense by approximately $6 million. LIBOR-related contracts may require modification as LIBOR is discontinued.
- Foreign exchange, commodity-price, interest-rate, raw-material-cost, tariff, liquidity, leverage, litigation, environmental, and supply-chain risks remain material.
Important facts for investors to verify
- Whether COVID-19-related volume weakness persists or spreads to beverage, food, and transit-packaging markets.
- Progress toward the $600 million 2020 capital-expenditure plan and the company’s ability to generate positive operating cash flow after capital spending.
- Leverage covenant compliance, debt maturities, refinancing needs, and the reduction of the maximum leverage ratio to 5.0-to-1.0 at December 31, 2020.
- The ultimate outcome and potential cost of the European Commission competition investigation and asbestos litigation.
- Whether Transit Packaging results trigger goodwill impairment charges.
- Recovery of steel and aluminum cost increases, tariff impacts, and the effectiveness of related pricing and hedging actions.
- Any formal changes to capital allocation, share repurchases, dividends, portfolio-review actions, or earnings guidance.