CROWN HOLDINGS, INC. quarterly report, Q2 FY2023

Crown Holdings, Inc. — 2023 Q2 Form 10-Q Summary

Business context and reporting period

Crown Holdings is a global supplier of aluminum and steel beverage, food and aerosol cans, closures, transit packaging, protective solutions, and related equipment and services. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023, compared with the corresponding 2022 periods.

Financial performance and liquidity

Metric	Three months ended June 30, 2023	Three months ended June 30, 2022	Six months ended June 30, 2023	Six months ended June 30, 2022
Net sales	$3,109 million	$3,510 million	$6,083 million	$6,672 million
Income from operations	$367 million	$466 million	$636 million	$810 million
Net income attributable to Crown	$157 million	$295 million	$259 million	$511 million
Diluted EPS	$1.31	$2.43	$2.16	$4.15
Cash flow from operations	Not separately provided	Not separately provided	$293 million	$196 million

Second-quarter sales declined 11.4% and six-month sales declined 8.8%, primarily because lower aluminum, steel and other commodity costs were passed through to customers and volumes declined in several segments.
Second-quarter operating margin was approximately 11.8%, versus 13.3% in 2022; six-month operating margin was approximately 10.5%, versus 12.1%. Attributable net margin was approximately 5.1% for the quarter and 4.3% for the six months, compared with 8.4% and 7.7%, respectively, in the prior-year periods.
Operating cash flow increased to $293 million for the six months, principally from working-capital improvements despite lower earnings. Capital expenditures were $454 million, compared with $310 million in 2022, producing negative free cash flow of approximately $161 million before other investing items.
Cash and cash equivalents were $547 million at June 30, 2023, compared with $550 million at year-end 2022. Cash, cash equivalents and restricted cash totaled $643 million.
Total debt comprised $106 million of short-term debt, $140 million of current maturities and $6,986 million of long-term debt excluding current maturities. The company issued €500 million of 5.0% senior unsecured notes due 2028 in May 2023.
Available revolving-credit capacity was $1,584 million under total commitments of $1,650 million. Net total leverage was 3.8x at June 30, 2023, below the 5.0x covenant threshold; the required threshold declines to 4.5x at December 31, 2023.
Approximately $464 million of cash was held outside the United States, including $390 million at subsidiaries whose earnings were considered indefinitely reinvested.

Material changes versus the prior comparable period

Net income attributable to Crown declined 47% in the second quarter and 49% for the six months. Higher interest expense, lower equity earnings, unfavorable business mix and the absence of significant 2022 gains were key factors.
Interest expense rose to $110 million in the quarter and $212 million for the six months, from $64 million and $118 million, respectively, due to higher debt balances and interest rates.
Restructuring and other expense was $6 million in the quarter and $17 million for the six months, compared with gains of $73 million and $74 million in 2022, primarily because 2022 included a $113 million gain on the sale of the Kiwiplan business.
Segment income for reportable segments increased to $412 million in the quarter and $749 million for the six months, from $401 million and $732 million. European Beverage and Transit Packaging improved, while Asia Pacific and Other declined; Americas Beverage was lower in the quarter but higher for the six months.
Six-month segment income in Other was affected by a $48 million steel repricing gain in 2022 versus a $12 million repricing loss in 2023.
Cash used in investing activities increased to $378 million from $130 million, primarily because of higher capital spending and the absence of 2022 proceeds from the Kiwiplan sale.
The company repurchased $11 million of common stock during the six months, compared with $600 million in the prior-year period. Remaining repurchase authorization was $2.3 billion at June 30, 2023.

Guidance, outlook, commentary and risks

Management expects 2023 capital expenditures of approximately $900 million and had approximately $206 million of capital commitments at June 30, primarily related to Americas Beverage.
The company expects to commence production at a new two-line plant in Mesquite, Nevada, in the second half of 2023. Additional capacity projects are underway in the United States, Mexico, Brazil, Europe and Asia.
Management continues to cite supply-chain disruption, inflation, energy and transportation costs, raw-material prices, foreign-exchange movements and higher interest rates as operating risks. Aluminum and steel costs are managed through contractual pass-through mechanisms, indexed price adjustments and commodity derivatives, but recovery may be incomplete or delayed.
A Brazilian beverage-can customer filed for bankruptcy in March 2023. Crown reported approximately $77 million of exposure at June 30 and has a security interest considered in its credit-loss allowance.
The Myanmar beverage-can plant resumed limited production after currency restrictions had idled it in 2022. Six-month 2023 sales were $6 million, and management continues to evaluate local economic conditions and potential alternative uses for the plant’s $53 million of property, plant and equipment.
Asbestos-related accruals were $213 million, including $165 million for unasserted claims. Approximately 57,900 claims were outstanding at June 30, 2023. The company states that actual losses could exceed the accrual but cannot estimate the reasonably possible excess loss.
Environmental remediation accruals totaled $20 million. Other legal matters include a European Commission competition settlement with an $8 million fine, an appeal of that decision, a disputed $18 million U.S. Customs penalty, and ongoing French competition proceedings for which the outcome and potential fines cannot be predicted.
The company states that the Russia-Ukraine war had not had a direct material impact through the filing date. A 0.25% change in floating interest rates would affect annual pretax interest expense by approximately $9 million.
In July 2023, a receivables securitization agreement was extended through July 2025 and its limit increased from $700 million to $800 million. Other securitization facilities have limits of $200 million and $160 million and expire in December 2023 and November 2025, respectively.
The board declared a quarterly dividend of $0.24 per share payable August 24, 2023. Management reported effective disclosure controls and no material change in internal control over financial reporting.

Important facts for investors to verify

Whether volume trends, particularly in Asia Pacific, European Beverage, Transit Packaging and Other, improve enough to offset lower commodity pass-through revenue.
Progress and returns from the capacity expansions, including Mesquite, Nevada, and the effect of related start-up and depreciation costs.
Debt refinancing needs, interest-rate exposure, compliance with the 4.5x leverage covenant effective December 31, 2023, and availability under revolving and securitization facilities.
Whether operating cash flow can fund approximately $900 million of 2023 capital expenditures while maintaining dividends and potential share repurchases.
Credit exposure arising from the Brazilian customer bankruptcy and the adequacy of the related allowance.
Potential changes in asbestos liabilities, environmental remediation costs, competition proceedings and the disputed U.S. Customs penalty.
The company’s ability to recover aluminum, steel, energy, labor and transportation inflation through contractual pricing mechanisms.