Crown Holdings, Inc. 2019 Q2 Form 10-Q Summary
Business context and reporting period
Crown Holdings, Inc. is a global packaging company with reportable segments in beverage packaging, food packaging, Asia Pacific operations and Transit Packaging. The filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. Results include the Signode transit-packaging acquisition, completed April 3, 2018, for approximately $3.9 billion.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $3,035 million | $3,046 million | $5,790 million | $5,243 million |
| Income from operations | $383 million | $292 million | $645 million | $513 million |
| Operating margin | 12.6% | 9.6% | 11.1% | 9.8% |
| Net income attributable to Crown | $137 million | $132 million | $240 million | $222 million |
| Diluted EPS | $1.02 | $0.99 | $1.78 | $1.66 |
| Cash used in operating activities | Not provided for the quarter | Not provided for the quarter | $(227) million | $(492) million |
| Capital expenditures | Not provided for the quarter | Not provided for the quarter | $(154) million | $(200) million |
Q2 net income attributable to Crown increased 4% and diluted EPS increased 3%. Six-month net income attributable to Crown increased 8%, while diluted EPS increased 7%. The effective tax rate was 34% in Q2 and 31% for the six months, versus 27% in both 2018 periods.
At June 30, 2019, cash and cash equivalents were $342 million, or $397 million including restricted cash, compared with $607 million and $659 million, respectively, at December 31, 2018. Receivables were $1.83 billion and inventories were $1.84 billion.
Total debt consisted of $135 million of short-term debt, $88 million of current maturities and $8.55 billion of long-term debt excluding current maturities. The company had $1.199 billion of available revolving-credit capacity after borrowings and standby letters of credit, and stated that it remained in compliance with leverage-ratio covenants.
Material changes versus the prior comparable period
- Q2 sales were essentially flat, as 5% higher beverage-can unit volumes were offset primarily by an $80 million foreign-currency translation impact.
- Six-month sales increased 10%, primarily because 2019 included an additional three months of Signode sales, contributing approximately $569 million, partly offset by a $180 million foreign-currency impact.
- Operating income improved by $91 million in Q2 and $132 million for the six months. The improvement included favorable restructuring and other items, lower foreign-exchange losses and the absence of the $40 million Signode inventory fair-value adjustment recorded in the 2018 six-month period.
- Q2 segment income increased in Americas Beverage and Asia Pacific, was broadly stable in European Beverage, and declined in European Food and Transit Packaging. European Food was affected by unfavorable product mix and higher energy and labor costs; Transit Packaging reflected lower volumes and unfavorable mix.
- Cash used in operations improved to $227 million from $492 million, but operating cash flow remained negative. Working-capital uses included increases in receivables and inventories and reductions in accounts payable and accrued liabilities.
- Depreciation and amortization increased to $245 million for the six months from $178 million, primarily due to Signode-related assets and intangible assets.
Guidance, outlook and management commentary
- Management identified global beverage-can growth, particularly in targeted international markets, as a strategic opportunity and expects industry demand to continue growing.
- Through 2020, the primary capital-allocation focus is to reduce leverage while continuing strategic growth investments.
- 2019 capital expenditures were expected to be approximately $440 million. Capital commitments at June 30, 2019 were approximately $131 million.
- Capacity projects include beverage-can expansion in New York, Ontario, Brazil, Spain and Italy. The company expects a new Rio Verde, Brazil, beverage-can plant to begin operations in the fourth quarter of 2019.
- Management expects additional non-U.S. pension settlement charges in the third quarter of 2019 and stated that additional restructuring charges are possible as it reviews capacity and headcount.
Risks, contingencies and unusual items
- Q2 restructuring and other income was $45 million, including $41 million of gains from favorable Brazilian tax-court rulings, partly offset by restructuring charges and a fire-related charge. Six-month restructuring and other income was $41 million.
- The tax provision included a $15 million charge related to settlement of a pre-acquisition Signode tax contingency.
- The company had an asbestos-related accrual of $288 million, including $236 million for unasserted claims. Management stated that actual losses could exceed the accrual but could not estimate the excess exposure.
- The European Commission is investigating potential anti-competitive conduct involving metal-packaging manufacturers, including company subsidiaries. Management believes a loss is probable but has not recorded a charge because the outcome and loss range cannot be estimated; potential fines could be material.
- Environmental remediation accruals totaled $15 million, comprising $7 million for PRP sites and $8 million for company-owned locations. Additional losses could exceed recorded amounts.
- Steel and aluminum prices, tariffs, foreign currency, energy and labor costs may pressure margins. The company may not be able to pass all raw-material cost increases to customers.
- Approximately $3.1 billion of principal floating-rate debt was outstanding. A 25-basis-point change in floating rates would affect annual pre-tax interest expense by approximately $8 million. Certain debt and derivatives reference LIBOR, whose future replacement remains uncertain.
- The company adopted the lease-accounting standard on January 1, 2019, recording approximately $220 million of operating lease assets and liabilities. Operating lease liabilities totaled $212 million at June 30, 2019.
Most important facts for investors to verify
- Whether negative operating cash flow reverses as seasonal food and beverage-can working capital converts to cash.
- Progress on leverage reduction, debt maturities, refinancing needs and compliance with credit-facility covenants.
- Whether Signode volumes, mix and profitability recover after the Q2 decline.
- The timing, cost and ramp-up of beverage-can capacity expansions and the approximately $440 million 2019 capital-expenditure plan.
- Potential financial exposure from the European Commission competition investigation and asbestos claims beyond the $288 million accrual.
- The sustainability of Q2 operating performance excluding Brazilian litigation-related gains, pension effects, restructuring items and other unusual benefits.