Crown Holdings, Inc. 2019 Form 10-K Summary
Business context and reporting period
Crown Holdings is a global packaging manufacturer serving consumer and industrial markets. Products include metal beverage and food cans, closures, aerosol and specialty packaging, glass bottles, and transit-packaging consumables and equipment. The company operated 239 plants in 47 countries with approximately 33,000 employees at December 31, 2019; approximately 70% of 2019 sales were generated outside the United States.
This filing is the annual report for the fiscal year ended December 31, 2019, filed February 28, 2020. The requested “2019 Q4” period is covered only through the filing’s unaudited quarterly data; the principal financial statements are for the full year.
Reportable segments were Americas Beverage, European Beverage, European Food, Asia Pacific and Transit Packaging. Transit Packaging includes the Signode business acquired on April 3, 2018 for approximately $3.9 billion.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $11,665 million | $11,151 million | +4.6% |
| Income from operations | $1,196 million | $1,096 million | +9.1% |
| Net income attributable to Crown Holdings | $510 million | $439 million | +16.2% |
| Diluted EPS | $3.78 | $3.28 | +15.2% |
| Cash provided by operating activities | $1,163 million | $571 million | +$592 million |
| Capital expenditures | $432 million | $462 million | -$30 million |
| Cash used for investing activities | $374 million | $3,843 million | Improved primarily because 2018 included Signode acquisition spending |
| Cash used for financing activities | $786 million | Cash provided of $3,533 million | 2019 primarily reflected debt repayment |
Net sales increased primarily from an additional three months of Signode operations and 3% higher global beverage sales volumes, partly offset by foreign-currency translation. Cost of products sold was 80% of sales in 2019 versus 81% in 2018, implying an approximately 20% gross margin before depreciation and amortization. Income from operations was approximately 10.2% of sales, compared with 9.8% in 2018; net income attributable to Crown Holdings was approximately 4.4% of sales, compared with 3.9%.
The effective income tax rate declined to 21.1% from 29.2%, primarily because of a $36 million deferred-tax valuation allowance release in Luxembourg and a $9 million benefit from Indian tax-law changes, partly offset by a $15 million charge related to a pre-acquisition Signode tax contingency.
Segment performance
| Segment | 2019 sales | 2019 segment income | Key year-over-year factor |
|---|---|---|---|
| Americas Beverage | $3,369 million | $534 million | Higher volumes, lower freight costs and improved North American pricing |
| European Beverage | $1,497 million | $190 million | Volumes increased, but expansion-related depreciation and foreign exchange reduced income |
| European Food | $1,887 million | $205 million | Lower sales and income from foreign exchange, unfavorable mix and unrecovered costs |
| Asia Pacific | $1,290 million | $194 million | Lower sales from China plant closures, offset by 12% higher Southeast Asia volumes |
| Transit Packaging | $2,274 million | $290 million | Additional quarter of Signode ownership increased sales and income; volumes weakened in several global markets |
Financial position, debt and liquidity
- Cash and cash equivalents were $607 million at December 31, 2019, unchanged from 2018; total cash, cash equivalents and restricted cash were $663 million.
- Total debt declined to $7,955 million from $8,663 million. Net debt to total capitalization improved to 77.8% from 86.2%.
- Available capacity under revolving credit facilities was $1,586 million out of $1,650 million. The total net leverage ratio was 4.1x, below the 5.75x covenant limit, and the company reported compliance with all debt covenants.
- Approximately $1.6 billion of debt and other obligations carried floating interest rates. A 0.25 percentage-point increase in variable rates was estimated to increase annual pre-tax interest expense by approximately $4 million.
- Receivables and inventories declined to $1,528 million and $1,626 million, respectively. The company used receivables securitization and factoring programs; $1,318 million of receivables were accounted for as sales at year-end.
- The company expects approximately $600 million of 2020 capital expenditures and had $86 million of capital commitments at year-end.
- Contractual cash obligations totaled $15,779 million, including $7,944 million of long-term debt, $1,327 million of interest, $5,834 million of purchase obligations and $294 million of projected pension contributions.
Material changes and unusual items
- Operating cash flow more than doubled, primarily due to higher earnings and favorable working-capital changes.
- The company repaid approximately $2.8 billion of long-term debt while issuing approximately $2.2 billion, including €550 million of 0.75% senior notes due 2023 and new term loans used to refinance existing facilities.
- A $25 million goodwill impairment was recorded for the European Aerosol and Promotional Packaging reporting unit. The company reported $4.4 billion of total goodwill, with other sensitive reporting units having only modest headroom over carrying value.
- Restructuring and other items produced a $26 million benefit, including $50 million of gains from favorable Brazilian indirect-tax court rulings, partly offset by $22 million of restructuring charges and a $7 million Signode-related litigation settlement.
- Pension expense was $66 million, including $44 million of settlement charges and a $14 million curtailment gain. The company expects 2020 pension expense of approximately $22 million and may incur approximately $30 million of additional settlement charges.
- Adoption of lease accounting standards added approximately $220 million of operating lease right-of-use assets and corresponding liabilities to the balance sheet.
- In November 2019, the board initiated a review of the company’s portfolio and capital allocation. Management identified leverage reduction as the primary capital-allocation priority, followed by returning capital to shareholders.
Guidance, outlook, commentary and risks
The filing does not provide a specific 2020 earnings or revenue guidance range. Management expects continued global beverage-can growth, particularly in North America, Brazil, Europe and Southeast Asia, and expects beverage-can capacity expansions in the United States, Canada, Spain, Brazil and Thailand. The company expects 2020 capital expenditures of approximately $600 million.
- Key operating risks include steel and aluminum price volatility, energy and freight costs, supply interruptions and the ability to pass cost increases through to customers.
- International operations, foreign-exchange movements, emerging-market instability, Brexit and the coronavirus outbreak in China were identified as risks.
- Customer concentration remains relevant: the ten largest global customers represented approximately 28% of 2019 sales, although no single customer exceeded 10%.
- Asbestos liabilities were accrued at $273 million, including $232 million for unasserted claims. Approximately 56,000 claims were outstanding at year-end, and 2019 asbestos-related cash payments were $22 million. Actual losses could exceed the accrual, but the company could not estimate the excess.
- The European Commission’s competition-law investigation remains ongoing. Management believes a loss is probable but has not recorded a charge because the outcome and potential loss range cannot be estimated.
- Environmental remediation accruals totaled $15 million, comprising $8 million for sites involving potentially responsible parties and $7 million for company-owned locations.
- High leverage, restrictive debt covenants, refinancing needs and substantial maturities in 2023 and 2024 remain central financial risks.
Most important facts for an investor to verify
- Whether the company can sustain strong operating cash flow and continue reducing debt while funding approximately $600 million of 2020 capital expenditures.
- The pace and profitability of beverage-can capacity additions and the recovery of European Beverage margins after expansion-related depreciation.
- Signode’s normalized organic growth and the effect of slowing manufacturing activity on Transit Packaging.
- Potential additional goodwill impairment, especially for Protective Packaging and Equipment & Tools, where reported fair value exceeded carrying value by only 6% and 9%, respectively.
- The ultimate cost and timing of asbestos claims, pension funding and the European Commission competition investigation.
- Compliance with the 5.75x leverage covenant and the company’s ability to refinance debt maturities beginning in 2022 and accelerating in 2023–2024.
- Exposure to steel, aluminum, foreign exchange and interest-rate movements, including the effectiveness of pass-through provisions and hedging programs.