CROWN HOLDINGS, INC. quarterly report, Q3 FY2022

Crown Holdings, Inc. — Q3 2022 Form 10-Q Summary

Business context and reporting period

Crown Holdings is a global packaging company focused primarily on beverage cans, food and specialty packaging, and transit packaging. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. Results exclude the European Tinplate business, which was sold in August 2021 and is reported as discontinued operations in the prior-year comparison.

Key financial metrics

Metric	Q3 2022	Q3 2021	9M 2022	9M 2021
Net sales	$3,259 million	$2,920 million	$9,931 million	$8,340 million
Income from operations	$297 million	$348 million	$1,107 million	$1,060 million
Operating margin	9.1%	11.9%	11.1%	12.7%
Net income attributable to Crown	$127 million	$102 million	$638 million	$441 million
Diluted EPS	$1.06	$0.79	$5.23	$3.32
Cash flow from operations	Not separately provided	Not separately provided	$134 million	$245 million

Q3 sales increased 12%; nine-month sales increased 19%. Growth primarily reflected higher material-cost pass-through and beverage-can volume increases, partly offset by unfavorable foreign exchange of $127 million in Q3 and $280 million for the nine months.
Q3 operating income declined 15%, while nine-month operating income increased 4%. Operating margin contracted because of inflation, energy costs, unfavorable foreign exchange, volume pressures, and higher depreciation from capacity additions.
Q3 and nine-month net income attributable to Crown benefited from the absence of the prior-year discontinued-operations loss of $85 million and $44 million, respectively.
Interest expense was $76 million in Q3 versus $66 million in the prior year, but decreased to $194 million for the nine months from $203 million because lower average debt partly offset higher interest rates.
Cash and cash equivalents were $368 million at September 30, 2022, versus $531 million at December 31, 2021. Cash, cash equivalents and restricted cash totaled $452 million versus $593 million.
Operating cash flow fell to $134 million, primarily because of working-capital increases. Inventory rose to $2,184 million from $1,735 million at year-end 2021.
Capital expenditures were $607 million through nine months, and 2022 capital expenditures are expected to be approximately $850 million.
Total debt comprised $83 million of short-term debt and $6,803 million of long-term debt before current maturities. Long-term debt, excluding current maturities, was $6,709 million versus $6,052 million at year-end.
The company had $1,159 million of available revolving-credit capacity after borrowings and standby letters of credit. Its net total leverage ratio was 3.2x, compared with a covenant limit of 5.0x.

Material changes versus the prior comparable period

Global beverage-can sales volumes increased 6% in Q3 and 4% for the nine months. Asia Pacific benefited from recovery in Vietnam, while North American volumes declined in Q3 and Brazil and North America declined for the nine months.
European Beverage segment income fell to $20 million from $76 million in Q3 and to $129 million from $216 million for the nine months. Drivers included energy costs exceeding contractual pass-throughs, aluminum pass-through timing mismatches, inventory effects, and foreign exchange.
Americas Beverage segment income declined to $185 million from $190 million in Q3 and to $565 million from $575 million for the nine months, primarily due to weaker North American and Brazilian volumes and increased depreciation.
Asia Pacific segment income increased to $35 million from $32 million in Q3 and to $143 million from $131 million for the nine months, supported by higher volumes.
Transit Packaging segment income declined to $75 million from $83 million in Q3 and to $210 million from $235 million for the nine months, reflecting lower volumes, foreign exchange, and higher-cost inventory effects.
Other segment income increased to $50 million from $39 million in Q3 and to $206 million from $111 million for the nine months, supported by pricing, food-can volumes, and lower-cost inventory benefits.
The company sold the Kiwiplan business in April 2022 for $180 million and recorded a $113 million pretax gain, included in restructuring and other income.
The company incurred an $11 million loss on early extinguishment of debt in Q3 after refinancing its credit facilities and redeeming euro-denominated notes due in 2023.
Share repurchases totaled $722 million for the nine months, and the company had $2,299 million remaining under its $3.0 billion repurchase authorization at September 30, 2022.

Guidance, outlook, management commentary, risks and unusual items

Management continues to prioritize investment in global beverage-can capacity and targets a leverage ratio of approximately 3.0x to 3.5x.
New or expanded beverage-can capacity is planned or under construction in the United States, Mexico, Brazil, the United Kingdom, Spain, Italy, Vietnam, Cambodia, and elsewhere. The Bowling Green, Kentucky plant was expected to be fully operational by year-end 2022 after tornado damage and a planned temporary shutdown for final repairs.
The Transit Packaging overhead-reduction program is expected to eliminate approximately 600 positions and produce approximately $60 million of annual pretax savings, although management cautioned that the savings may not be fully realized.
The company continues to face supply-chain disruptions, inflation in raw materials, energy and transportation, aluminum and steel price volatility, foreign exchange pressure, and higher interest rates. Pass-through provisions and derivatives may not fully offset these exposures.
The Yangon, Myanmar beverage-can plant was temporarily idled in June 2022 because of currency restrictions. Management continues to evaluate economic conditions and potential alternative uses for the facility.
The company received $60 million of business-interruption insurance proceeds and $17 million for property damage related to the Bowling Green tornado. A $40 million insurance receivable for expected reimbursement of incremental costs was recorded at September 30, 2022.
Asbestos-related accruals were $221 million, including $180 million for unasserted claims. The company paid $16 million for asbestos settlements and related costs during the nine months. Actual losses could exceed the accrual, but the excess cannot be reasonably estimated.
Environmental remediation accruals totaled $20 million. The company also faces ongoing competition-law, customs, and other legal matters; a European Commission settlement resulted in an $8 million fine in July 2022, while a French competition investigation remains unresolved.
The company had approximately $2.9 billion of floating-rate debt; a 0.25 percentage-point change in floating rates would affect annual pretax interest expense by approximately $7 million.
Management stated that the Russia-Ukraine war had not had a direct material impact on the company through the filing date.

Important facts for investors to verify

Whether pricing actions and contractual pass-through provisions can offset continuing energy, aluminum, steel, transportation, and labor inflation.
The pace and returns of global beverage-can capacity additions, including the impact of higher depreciation and startup costs.
Working-capital requirements, inventory levels, operating cash conversion, and the ability to fund approximately $850 million of 2022 capital expenditures.
Interest-rate sensitivity, refinancing needs, debt maturities, and compliance with leverage covenants.
Progress and realized savings from the Transit Packaging cost-reduction program.
Potential additional asbestos, environmental, competition-law, customs, and other litigation costs beyond recorded accruals.
The financial and operational consequences of the Myanmar plant idling and the remaining Bowling Green repair work.
The effect of foreign exchange movements on reported sales, earnings, comprehensive income, and debt-related metrics.