Crown Holdings, Inc. 2019 Q3 Form 10-Q Summary
Business context and reporting period
Crown Holdings is a global packaging company operating in beverage, food, specialty and transit packaging. The filing covers the unaudited three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. The Transit Packaging segment reflects the April 2018 acquisition of Signode Industrial Group for approximately $3.9 billion.
Financial performance and key metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $3,084 million | $3,174 million | $8,874 million | $8,417 million |
| Income from operations | $352 million | $365 million | $997 million | $878 million |
| Net income attributable to Crown | $183 million | $164 million | $423 million | $386 million |
| Diluted EPS | $1.36 | $1.23 | $3.14 | $2.88 |
| Operating margin | 11.4% | 11.5% | 11.2% | 10.4% |
| Net margin attributable to Crown | 5.9% | 5.2% | 4.8% | 4.6% |
- Cash flow: Operating activities provided $201 million during the first nine months of 2019, compared with $232 million used in 2018. Capital expenditures were $242 million, and investing activities used $216 million.
- Liquidity: Cash and cash equivalents were $339 million at September 30, 2019, with total cash, cash equivalents and restricted cash of $398 million. Approximately $304 million of cash was held outside the United States.
- Revolver capacity: The company reported $1.518 billion of available borrowing capacity under its $1.650 billion revolving credit facility, after $66 million of borrowings and $66 million of standby letters of credit.
- Debt: Total debt consisted of $134 million of short-term debt, $87 million of current maturities and $8.042 billion of long-term debt excluding current maturities. Reported debt declined from $8.582 billion at December 31, 2018 to approximately $8.263 billion at September 30, 2019, excluding the short-term/current portions consistently shown in the filing.
- Balance sheet: Total assets were $15.337 billion and total equity was $2.021 billion at September 30, 2019. Operating lease liabilities of $204 million were recognized following adoption of the new lease standard.
Material changes versus the prior comparable period
- Third-quarter sales decreased 2.8%, primarily because of lower aluminum pass-through pricing and a $64 million unfavorable foreign-currency translation impact.
- Nine-month sales increased 5.4%, primarily from $569 million of additional Signode sales, partly offset by lower aluminum pass-through pricing and a $244 million currency impact.
- Nine-month operating income increased 13.6%, while attributable net income increased 9.6% and diluted EPS increased 9.0%.
- Q3 income from operations declined modestly, but lower interest expense, a substantially lower effective tax rate and lower noncontrolling-interest earnings supported higher attributable net income.
- The nine-month effective tax rate decreased to 27% from 30%. The 2019 rate included a $15 million charge related to settlement of a pre-acquisition Signode tax contingency; the 2018 rate included $28 million of Tax Act and foreign-earnings tax charges.
- Transit Packaging nine-month sales increased to $1.725 billion from $1.205 billion and segment income increased to $227 million from $175 million, principally due to the additional quarter of Signode ownership.
- Americas Beverage segment income increased to $386 million from $336 million for the first nine months, while European Food segment income declined to $189 million from $231 million. European Beverage segment income declined to $163 million from $180 million.
- Restructuring and other produced a $41 million nine-month benefit, compared with a $28 million charge in 2018. The 2019 amount included $50 million of gains from favorable Brazilian indirect-tax court rulings, partly offset by restructuring and asset-related charges.
Guidance, outlook, commentary and risks
- Management expects 2019 capital expenditures of approximately $450 million. Capital commitments at September 30, 2019 were approximately $128 million.
- Through 2020, management identified reducing leverage as the primary capital-allocation priority while continuing investment in strategic growth projects.
- Growth initiatives include beverage-can capacity additions in New York, Ontario, Brazil, Spain and Italy. The Nichols, New York line was expected to begin production in the second quarter of 2020, and the Rio Verde, Brazil facility was expected to begin operations in November 2019.
- Management continues to monitor capacity and may close plants or reduce headcount. Restructuring accruals were $20 million at September 30, 2019, primarily for European manufacturing and headcount actions, with payment expected over the following twelve months.
- Raw-material exposure remains significant. Aluminum and steel prices, tariffs and the ability to pass cost increases through to customers may affect margins and cash flow.
- The company had $2.7 billion of floating-rate debt; a 0.25% change in floating rates was estimated to affect annual pretax interest expense by approximately $7 million. The company also has LIBOR-linked contracts and is evaluating the transition from LIBOR.
- Asbestos-related accruals were $284 million, including $229 million for unasserted claims. The company states that reasonably possible losses in excess of the accrual cannot be estimated and that adverse legal rulings could have a material effect.
- The European Commission competition investigation remains ongoing. Management believes a loss is probable but has not recorded a charge because the ultimate loss or range of losses cannot be estimated; potential fines could be material.
- Environmental remediation accruals totaled $15 million. The company also disputes a $6 million U.S. Customs penalty assessment.
- Goodwill impairment remains a risk in certain low-growth reporting units. Potential impairment charges identified by management could be up to $87 million for European Aerosols and Specialty Packaging and $114 million for North America Food if projected performance deteriorates sufficiently.
- In October 2019, after quarter-end, the company issued €550 million of 0.75% senior unsecured notes due 2023 and used the proceeds to repay part of the 2025 Euro term loan. Management expected an $8 million loss from early extinguishment of debt.
Important facts for investors to verify
- Reconcile reported debt, cash and available revolver capacity after the October 2019 refinancing and assess leverage reduction progress.
- Evaluate whether Signode's revenue and margin contribution is sustainable after the acquisition-related comparison benefit lapses.
- Monitor European Beverage start-up costs, European Food cost recovery, raw-material pass-through and foreign-exchange effects.
- Review the status and possible financial exposure of the European Commission competition investigation and asbestos litigation.
- Assess goodwill impairment sensitivity and the effect of future restructuring or plant-closure actions.
- Confirm the timing, cost and expected returns of announced beverage-can capacity expansions and the approximately $450 million 2019 capital-expenditure plan.