CROWN HOLDINGS, INC. quarterly report, Q2 FY2022

Crown Holdings, Inc. — Q2 2022 Form 10-Q Summary

Business context and reporting period

Crown Holdings manufactures metal packaging, including beverage cans, food and aerosol cans, closures, transit-protection products, equipment and tools. This unaudited filing covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.

Management’s strategy emphasizes expanding global beverage-can capacity, recovering inflationary raw-material costs through pricing, maintaining leverage and returning capital through dividends and share repurchases. The company also continues its sustainability initiatives and monitors COVID-19, supply-chain and geopolitical risks.

Key financial metrics

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Net sales	$3,510 million	$2,856 million	$6,672 million	$5,420 million
Income from operations	$466 million	$385 million	$810 million	$712 million
Operating margin	13.3%	13.5%	12.1%	13.1%
Net income attributable to Crown	$295 million	$128 million	$511 million	$339 million
Diluted EPS	$2.43	$0.95	$4.15	$2.52
Net cash from operating activities	Not separately provided for the quarter	$196 million	$169 million

Q2 sales increased 22.9%, while six-month sales increased 23.1%. Q2 operating income increased 21.0%; six-month operating income increased 13.8%. Net income attributable to Crown increased 130.5% in Q2 and 50.7% for the six-month period. The comparisons benefited from 2021 tax charges associated with the European Tinplate divestiture and from the 2022 Kiwiplan sale gain.

Cash flow, liquidity and debt

Six-month operating cash flow was $196 million, versus $169 million in 2021. Working-capital changes and other items used $601 million.
Capital expenditures were $310 million through June 30; management expects approximately $1.0 billion of capital expenditures for 2022. Capital commitments at June 30 were approximately $219 million.
Investing cash use was $130 million, including $310 million of capital expenditures, $182 million of net proceeds from business sales and $31 million for acquisitions.
Financing activities used $38 million, including $600 million of share repurchases and $53 million of shareholder dividends. The company issued $500 million of 5.25% senior unsecured notes due 2030.
Cash and cash equivalents were $438 million at June 30, down from $531 million at December 31, 2021. Including restricted cash, total cash was $526 million.
Total debt carrying value was approximately $6.63 billion, including $1.09 billion of current maturities. The company had $1.43 billion of available revolving-credit capacity.
The net total leverage ratio was 3.0x at June 30, versus a covenant maximum of 5.0x. The covenant maximum reduces to 4.5x on December 31, 2022. Management expects sufficient liquidity to refinance or repay the $927 million of euro-denominated senior notes due in February 2023.

Material changes versus the prior comparable period

Sales growth primarily reflected pass-through of higher aluminum, tinplate and other material costs, higher beverage-can volumes and favorable pricing actions. Unfavorable foreign-currency translation reduced Q2 sales by $104 million and six-month sales by $153 million.
Global beverage-can sales unit volumes increased 4% in Q2. Asia Pacific volumes increased 12% in Q2 and 9% year to date; European Beverage volumes increased 6% for both periods.
Segment income for reportable segments declined to $401 million from $404 million in Q2 and to $732 million from $776 million for the six months. European Beverage and Transit Packaging declined because of energy, operating-cost inflation, foreign exchange, the Kiwiplan divestiture and higher-cost inventory. Asia Pacific improved, while Americas Beverage was mixed.
Restructuring and other provided a $73 million benefit in Q2 and $74 million year to date, compared with $31 million benefits in each 2021 period. The 2022 amounts primarily include a $113 million pretax gain on the Kiwiplan sale, partly offset by $29 million of Transit Packaging restructuring charges.
The company initiated an overhead-reduction program expected to eliminate approximately 600 positions and produce approximately $60 million of annual pretax savings, although realization is not assured.
The Bowling Green, Kentucky plant resumed operations in March after tornado damage. Final repairs and an expected shutdown in the second half of 2022 may continue to create freight, warehousing and other incremental costs. The plant is expected to be fully operational by the end of Q4 2022.
The Yangon, Myanmar beverage-can plant was temporarily idled in June because of economic conditions and government restrictions on foreign-currency transactions. Its Q2 sales and segment income were $8 million and $1 million, respectively.
The company repurchased $600 million of common stock during the first six months under a $3.0 billion authorization running through the end of 2024. A $0.22-per-share dividend was declared and paid for Q2, and another $0.22 dividend was declared for payment in August 2022.

Guidance, outlook, risks and unusual items

Management expects 2022 capital expenditures of approximately $1 billion and continued investment in beverage-can capacity, including facilities and lines in the U.S., Brazil, Mexico, Europe and Southeast Asia.
Management cited inflation in energy, transportation and raw materials, supply-chain constraints, foreign-exchange volatility and the ability to recover costs through customer pricing as key operating uncertainties.
The Russia-Ukraine war had not produced a direct material impact through the filing date, but indirect effects could include further inflation, shortages and currency volatility.
The company received $30 million of business-interruption insurance proceeds and $15 million for property damage related to the Bowling Green tornado, and recorded a $25 million receivable for expected reimbursement of incremental costs.
Asbestos-related accruals were $227 million at June 30, including $186 million for unasserted claims. Approximately 57,000 claims were outstanding; management stated that actual losses could exceed the accrual but could not estimate the excess exposure.
Environmental remediation accruals totaled $20 million, comprising $12 million for PRP sites and $8 million for company-owned locations. The company also faces unresolved competition-related proceedings in France and a U.S. Customs penalty dispute. In July 2022, it agreed to pay an $8 million European Commission fine.
The company uses derivatives to manage foreign-exchange, interest-rate and commodity-price exposure. At June 30, floating-rate debt totaled approximately $1.5 billion; a 0.25% change in floating rates would affect annual pretax interest expense by approximately $4 million.
Management stated that disclosure controls were effective and that no material change had affected internal control over financial reporting.

Most important facts for investors to verify

Whether pricing actions fully offset continuing aluminum, steel, energy, freight and labor inflation, particularly in European Beverage and Transit Packaging.
The timing and cost of Bowling Green’s final repairs, insurance recoveries and the expected Q3/Q4 shutdown.
Progress toward the approximately $60 million annual savings target and the cash cost of the 600-position restructuring program.
Liquidity available to refinance or repay the $927 million of senior notes due in February 2023, together with compliance with the tighter year-end leverage covenant.
The pace and return profile of the approximately $1 billion 2022 capital-expenditure program and new beverage-can capacity.
Potential exposure from asbestos claims, environmental remediation, French competition proceedings and other contingent liabilities beyond recorded accruals.
The effect of the $600 million share-repurchase program on leverage, liquidity and per-share results.