Crown Holdings, Inc. — Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
Crown Holdings is a global supplier of aluminum and steel beverage, food and aerosol cans, as well as transit and protective packaging products, equipment and services. This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. The company operates through Americas Beverage, European Beverage, Asia Pacific, Transit Packaging and Other segments.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $2,974 million | $3,162 million | Down 6% |
| Income from operations | $269 million | $344 million | Down 22% |
| Operating margin | 9.0% | 10.9% | Down 190 bps |
| Net income attributable to Crown | $102 million | $216 million | Down 53% |
| Diluted EPS | $0.85 | $1.74 | Down 51% |
| Net cash used in operating activities | $235 million | $301 million | Improved by $66 million |
| Capital expenditures | $233 million | $117 million | Up $116 million |
Net income attributable to Crown represented approximately 3.4% of sales versus 6.8% in the prior-year quarter. Interest expense increased to $102 million from $54 million, primarily because of higher interest rates and increased borrowings. Equity earnings from affiliates declined to $3 million from $17 million, primarily reflecting lower earnings from the Eviosys investment.
At March 31, 2023, cash and cash equivalents were $403 million, compared with $550 million at December 31, 2022. Total cash, cash equivalents and restricted cash were $502 million. Total debt was approximately $7.3 billion, including short-term debt and current maturities, compared with approximately $7.0 billion at year-end. The company reported $998 million of available revolving-credit capacity and a total net leverage ratio of 3.7x, within the 5.0x covenant limit. The covenant limit reduces to 4.5x at December 31, 2023.
Cash provided by financing activities was $262 million, including a $331 million increase in revolving credit facility and short-term debt, partially offset by debt repayments, dividends and share repurchases. The company paid $29 million in shareholder dividends and repurchased $6 million of common stock.
Material Changes Versus the Prior Comparable Period
- Sales declined $188 million, driven by lower volumes in European Beverage, Asia Pacific and Transit Packaging, approximately $100 million of lower aluminum and steel cost pass-through, and $36 million of unfavorable foreign-currency translation. Americas Beverage sales increased 3% on 6% higher sales unit volumes.
- Americas Beverage segment income increased to $178 million from $164 million, benefiting from higher volumes and inflation-recovery mechanisms. The prior-year period included approximately $20 million of Bowling Green tornado-related costs and lost profits.
- European Beverage segment income declined to $45 million from $53 million, primarily because of lower volumes.
- Asia Pacific segment income declined to $36 million from $53 million, primarily because of lower volumes. The Myanmar plant remained largely idled due to currency restrictions.
- Transit Packaging segment income increased to $78 million from $61 million, helped by headcount reductions, improved mix and pricing, and the absence of a prior-year steel-strap inventory repricing charge.
- Other segment income fell to $27 million from $94 million. The comparison was affected by a $48 million steel repricing gain in Q1 2022 and a $12 million repricing loss in Q1 2023.
- Restructuring and other expense increased to $11 million from a $1 million benefit, primarily due to European Beverage and Other segment reorganization activities.
- Capital expenditures increased substantially as the company continued capacity expansion, primarily in the Americas Beverage business.
Guidance, Outlook, Management Commentary and Risks
- Management expects 2023 capital expenditures of approximately $900 million and had approximately $237 million of contractual capital commitments at March 31, 2023.
- Capacity additions include new or expanded facilities in the United States, Mexico, Brazil, Spain, Italy, the United Kingdom and Southeast Asia. A new two-line plant in Mesquite, Nevada is expected to begin production in 2023.
- Management continues to target a leverage ratio of 3.0x to 3.5x, although reported total net leverage was 3.7x at quarter-end.
- The company is managing supply-chain disruption, inflation, energy and transportation costs, raw-material prices, foreign exchange and interest-rate exposure through contractual pass-through mechanisms, pricing actions and derivatives. There is no assurance that all cost increases can be recovered.
- Approximately $3.2 billion of debt was subject to floating interest rates at March 31, 2023; a 0.25 percentage-point change in floating rates would affect annual pretax interest expense by approximately $11 million.
- A Brazilian beverage-can customer filed for bankruptcy in March 2023. Crown’s exposure was approximately $60 million, with a security interest considered in the allowance for credit losses. The ultimate recovery remains uncertain.
- Earthquakes near the Osmaniye, Turkey plant temporarily disrupted operations, but management reported no material impact on results or cash flow and noted available insurance coverage.
- Asbestos-related liabilities accrued at March 31, 2023 were $216 million, including $172 million for unasserted claims. The company paid $4 million for asbestos settlements and related costs during the quarter and cannot estimate potential losses exceeding the accrual.
- Environmental remediation accruals totaled $20 million. Other contingencies include a European Commission competition-law fine under appeal, an $18 million U.S. Customs penalty dispute, and ongoing French competition proceedings for which the outcome and potential fines cannot be predicted.
- Receivables securitization facilities include programs with limits of $700 million expiring in July 2023, $200 million expiring in December 2023 and $160 million expiring in November 2025.
- Management stated that the Russia-Ukraine war had not had a direct material impact on the business through the filing date. Forward-looking statements remain subject to economic, market, operational, litigation and regulatory risks.
Important Facts for Investors to Verify
- Whether sales volumes, pricing actions and inflation pass-throughs improve sufficiently to offset lower demand and raw-material cost changes.
- The sustainability of liquidity and covenant compliance as debt costs rise, cash flow remains seasonally negative and capital expenditures increase.
- The outcome and recoverability of the approximately $60 million Brazilian customer exposure.
- Progress and returns from the company’s major capacity-expansion program, including the approximately $900 million 2023 capital-expenditure plan.
- The ultimate exposure from asbestos claims, environmental obligations and pending competition-law and customs matters.
- The renewal or replacement of securitization facilities expiring in 2023.
- Eviosys operating performance and the effect of equity-method earnings and distributions on Crown’s cash flow.