Crown Holdings, Inc. — 2020 Q3 Form 10-Q Summary
Business context and reporting period
Crown Holdings, Inc. is a global packaging company with operations in beverage cans, food cans, specialty packaging, transit packaging, closures, and related equipment. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. Results were affected by the coronavirus pandemic, foreign currency movements, lower raw-material costs passed through to customers, and related changes in demand.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $3,167 million | $3,084 million | $8,613 million | $8,874 million |
| Income from operations | $406 million | $352 million | $927 million | $997 million |
| Net income attributable to Crown | $214 million | $183 million | $428 million | $423 million |
| Diluted EPS | $1.59 | $1.36 | $3.18 | $3.14 |
| Cash flow from operations | Not separately provided | Not separately provided | $309 million | $201 million |
Q3 net sales increased 2.7%, while nine-month sales declined 2.9%. Operating margin was approximately 12.8% in Q3 2020 versus 11.4% in Q3 2019, and approximately 10.8% for the first nine months versus 11.2% in the prior-year period. Net income attributable to Crown increased 16.9% in Q3 and 1.2% for the nine-month period.
- Q3 segment income increased to $508 million from $432 million, including reportable segment income of $472 million versus $398 million.
- Q3 segment income benefited from higher beverage and food can shipments, improved pricing, cost reductions, and favorable operating performance.
- Interest expense declined to $72 million in Q3 and $228 million for nine months, from $95 million and $290 million, respectively, due to lower average debt and interest rates.
- The effective tax rate was 27% for both the nine-month 2020 and 2019 periods; Q3 2020 included an $8 million charge related to a U.K. tax-law change and the nine-month period included a $4 million benefit from an India tax-law change.
- Cash, cash equivalents, and restricted cash totaled $688 million at September 30, 2020, compared with $663 million at December 31, 2019. Cash and cash equivalents alone were $613 million.
- Capital expenditures were $333 million for the first nine months, compared with $242 million in 2019. The company expects approximately $600 million of capital expenditures for full-year 2020.
- Total debt was approximately $8.24 billion, including $132 million of short-term debt and $8.11 billion of long-term debt. Long-term debt carrying value increased from $7.88 billion at year-end 2019.
- The company had $1.585 billion of available revolving-credit capacity and no borrowings under the revolving facility at September 30, 2020. Its net total leverage ratio was 4.38x, below the 5.75x covenant limit.
Material changes versus the prior comparable period
- Americas Beverage: Q3 sales increased to $960 million from $835 million and segment income to $193 million from $134 million, supported by 17% higher beverage-can shipments, pricing, and lower freight costs. Nine-month shipments increased 9%.
- European Beverage: Q3 segment income increased to $76 million from $64 million, but nine-month sales and segment income declined because of lower shipments and pandemic effects.
- European Food: Q3 sales increased 7.2% and segment income increased to $90 million from $79 million, supported by 10% higher food-can shipments. Nine-month segment income was broadly comparable because of higher prior-year-end tinplate costs.
- Asia Pacific: Q3 and nine-month sales and segment income declined because of lower beverage-can shipments related to the pandemic.
- Transit Packaging: Nine-month sales declined to $1.495 billion from $1.725 billion and segment income to $189 million from $227 million, primarily due to lower volumes and pandemic-related demand pressure.
- Restructuring and other charges were $10 million in Q3 and $20 million for nine months, compared with zero and a $41 million benefit, respectively, in the prior-year periods. The 2020 charges primarily related to Transit Packaging reorganizations and headcount reductions.
- Other pension and postretirement expense was $43 million for nine months, versus $12 million in 2019, including non-U.S. pension settlement charges.
- Other comprehensive loss was $197 million for nine months, principally reflecting a $293 million unfavorable foreign-currency translation adjustment, partially offset by pension-related items.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects long-term beverage-can demand to remain favorable, but warns that the pandemic could weaken near-term demand in certain markets. Transit Packaging demand is expected to remain lower in several served industries.
- The company is continuing capacity expansion, including beverage-can facilities and lines in Kentucky, Washington, Brazil, and other locations. Several projects are scheduled to begin production in 2021.
- In October 2020, the company announced its intention to initiate regular quarterly dividends and a share-repurchase program in 2021. Timing and amounts remain subject to Board approval.
- Management continues to monitor employee safety, manufacturing operations, supply-chain constraints, customer demand, and inventory levels in response to COVID-19.
- Asbestos-related accruals were $261 million at September 30, 2020, including $215 million for unasserted claims. The company paid $7 million to settle claims during the first nine months. Management states that actual losses could exceed the accrual but cannot estimate the excess exposure.
- The company had $8 million of environmental remediation accruals for PRP sites and $7 million for company-owned locations. Potential costs above recorded amounts cannot be estimated.
- An ongoing European Commission investigation into alleged anti-competitive conduct remains unresolved. Management believes a loss is probable but has not recorded a charge because it cannot estimate the amount or range of loss. Potential fines could materially affect future results and cash flows.
- The company disputes a U.S. Customs penalty assessment that was reduced from $18 million to $6 million and believes a loss is not probable based on available information.
- Transit Packaging goodwill remains exposed to impairment risk because certain reporting units had fair values only 9% and 15% above carrying values as of October 1, 2019. Management concluded at September 30, 2020 that impairment was not more likely than not, but sustained deterioration could result in a material charge.
- The company has approximately $1.7 billion of floating-rate debt. A 0.25 percentage-point change in floating rates would affect annual pretax interest expense by approximately $4 million. LIBOR discontinuation could affect borrowing costs and hedge arrangements.
- Raw-material costs, including steel and aluminum, tariffs, foreign exchange, interest rates, pandemic-related demand, restructuring, litigation, and pension costs remain key risks.
Most important facts for investors to verify
- Whether pandemic-related volume trends, particularly in European Beverage, Asia Pacific, and Transit Packaging, persist or improve.
- Progress, cost, and demand support for the announced 2021 beverage-can capacity additions and the approximately $600 million 2020 capital-expenditure plan.
- Debt reduction, covenant headroom, refinancing requirements, and the effect of floating rates and LIBOR transition on interest expense.
- The final outcome and potential financial exposure from the European Commission competition investigation.
- Whether asbestos claims, environmental obligations, or other contingencies exceed recorded accruals.
- Whether the planned 2021 dividends and share repurchases are approved, funded, and consistent with the company’s leverage-reduction objectives.
- Potential goodwill impairment in Transit Packaging if operating performance weakens further.