Crown Holdings, Inc. — 2021 Q2 Form 10-Q Summary
Business context and reporting period
Crown Holdings manufactures metal packaging, including beverage cans, food and aerosol cans, closures, transit packaging, and related equipment. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with the same periods in 2020.
Beginning in the second quarter, the European Tinplate business was classified as held for sale and its results were reported as discontinued operations.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $2,856 million | $2,137 million | $5,420 million | $4,443 million |
| Income from operations | $385 million | $208 million | $712 million | $426 million |
| Operating margin | 13.5% | 9.7% | 13.1% | 9.6% |
| Net income attributable to Crown | $128 million | $126 million | $339 million | $214 million |
| Diluted EPS | $0.95 | $0.94 | $2.52 | $1.59 |
| Net income from continuing operations attributable to Crown | $131 million | $76 million | $298 million | $143 million |
Revenue increased 34% in the quarter and 22% year to date, driven by higher sales volumes, pass-through of higher aluminum and other raw-material costs, and favorable foreign-currency translation. Reportable-segment income increased to $404 million from $256 million in the quarter and to $776 million from $540 million year to date.
- Americas Beverage sales increased 41% in Q2, with sales-unit volumes up 21%; segment income rose to $197 million from $129 million.
- European Beverage sales increased 45%, with volumes up 25%; segment income rose to $78 million from $37 million.
- Asia Pacific sales increased 22%, with volumes up 17%; segment income rose to $47 million from $39 million.
- Transit Packaging sales increased 38%; segment income rose to $82 million from $51 million.
Six-month operating cash flow was $169 million, compared with cash used of $238 million in the prior-year period. Capital expenditures were $325 million, and management expects approximately $900 million of capital expenditures for full-year 2021. Financing activities used $423 million, including $297 million of share repurchases and $53 million of shareholder dividends.
At June 30, 2021, cash and cash equivalents were $566 million, while total cash, cash equivalents, and restricted cash were $664 million. Approximately $494 million of cash was held outside the United States. Available revolving-credit capacity was $1.583 billion, after borrowings and standby letters of credit.
Total debt consisted of $76 million of short-term debt, $94 million of current maturities, and $7.879 billion of long-term debt excluding current maturities. The net total leverage ratio was 3.4-to-1.0 versus a covenant maximum of 5.0-to-1.0. Interest expense declined to $68 million in Q2 and $137 million year to date, primarily because of lower outstanding debt.
Material changes versus the prior comparable period
- Continuing-operations income attributable to Crown increased 72% in Q2 and 108% year to date.
- Reported net income was affected by the European Tinplate disposal classification: discontinued operations produced a $3 million attributable loss in Q2 2021 versus $50 million of income in Q2 2020, and $41 million of income year to date versus $71 million in 2020.
- The Company recorded a $70 million loss on classifying the European Tinplate business as held for sale, primarily reflecting $600 million of accumulated currency-translation adjustments expected to be reclassified upon closing.
- Restructuring and other income was $31 million in Q2 and year to date, including $30 million of gains from favorable Brazilian tax litigation rulings.
- Income taxes increased substantially, including $31 million of charges related to preparing the European Tinplate business for sale and a $40 million valuation allowance for French tax-loss carryforwards.
- Cash declined from $1.173 billion at December 31, 2020 to $566 million at June 30, 2021, while receivables and inventories increased to $1.766 billion and $1.492 billion, respectively.
Outlook, management commentary, risks, and unusual items
The Company expects to receive approximately €1.9 billion, or $2.2 billion at June 30, 2021, of pre-tax proceeds from the sale of the European Tinplate business and retain a 20% minority interest. Closing was expected in the third quarter of 2021 but remained subject to antitrust approvals and other conditions, with no assurance of timely or eventual completion. Net proceeds were expected to support debt reduction, capital projects, and share repurchases under the $1.5 billion program authorized through the end of 2023.
Capacity expansion continues across the beverage-can network, including projects in Kentucky, Washington, Virginia, Brazil, Vietnam, and the U.S. Southwest. The Company continues to monitor COVID-19 effects, supply-chain constraints, raw-material costs, customer demand, foreign-exchange exposure, interest rates, and commodity prices. Management uses derivatives to hedge these exposures and does not use derivatives for speculative trading.
Important contingencies include asbestos litigation, environmental remediation, a continuing European Commission competition-law investigation, and a disputed $6 million U.S. Customs penalty. The asbestos accrual was $245 million at June 30, 2021, including $199 million for unasserted claims; the Company stated that reasonably possible losses above the accrual could not be estimated. The European Commission investigation could result in material fines, but no charge was recorded because the amount could not be estimated.
The Company was negotiating a possible transfer of a non-U.S. pension plan to an insurer. If completed, a material pension settlement charge would be recorded. The filing also states that a 0.25% change in floating interest rates would affect annual pretax interest expense by approximately $4 million.
Facts investors should verify
- Whether the European Tinplate transaction closed on the expected timetable, the final proceeds, taxes, transaction costs, pension charges, and retained minority interest.
- Whether the planned sale proceeds were used for debt reduction, capital expenditures, and share repurchases as described.
- Progress, spending, and start-up timing for the numerous beverage-can capacity expansion projects.
- The sustainability of volume growth and the Company’s ability to pass higher aluminum, steel, and other input costs through to customers.
- Developments in the European Commission competition investigation and the potential financial impact of asbestos and environmental claims.
- Liquidity after capital expenditures, dividends, repurchases, and any debt maturities, including the concentration of cash held outside the United States.
- Potential one-time tax, pension, currency-translation, and discontinued-operations effects when assessing future earnings.