Crown Holdings, Inc. — Q1 2021 Form 10-Q Summary
Business Context and Reporting Period
Crown Holdings is a global metal packaging manufacturer serving beverage, food, transit packaging, aerosol and related markets. This filing covers the unaudited three months ended March 31, 2021, compared with the three months ended March 31, 2020. The company reported five principal segments: Americas Beverage, European Beverage, European Food, Asia Pacific and Transit Packaging.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $3,078 million | $2,757 million | +12% |
| Income from operations | $384 million | $246 million | +56% |
| Income before taxes | $318 million | $151 million | +111% |
| Net income | $245 million | $114 million | +115% |
| Net income attributable to Crown | $211 million | $88 million | +140% |
| Diluted EPS | $1.57 | $0.65 | +$0.92 |
| Cash used in operating activities | $385 million | $607 million | Improved by $222 million |
| Capital expenditures | $135 million | $110 million | +$25 million |
Sales growth reflected higher unit volumes across all businesses, $92 million of favorable foreign currency translation and pass-through of higher aluminum and other raw material costs. Segment income increased to $472 million, including $435 million from reportable segments and $37 million from other segments, versus $336 million in the prior-year quarter.
Operating margin was approximately 12.5% in Q1 2021 versus 8.9% in Q1 2020. Net margin attributable to Crown was approximately 6.9% versus 3.2%. Interest expense declined to $71 million from $80 million due to lower interest rates and lower outstanding debt. The effective tax rate was approximately 23.6% in 2021 versus 25.2% in 2020.
Segment Performance
| Segment | Q1 2021 Sales | Q1 2021 Segment Income | Prior-Year Segment Income |
|---|---|---|---|
| Americas Beverage | $993 million | $188 million | $134 million |
| European Beverage | $389 million | $62 million | $39 million |
| European Food | $460 million | $63 million | $33 million |
| Asia Pacific | $331 million | $52 million | $45 million |
| Transit Packaging | $557 million | $70 million | $66 million |
Americas Beverage sales unit volumes increased 9%; European Beverage and European Food volumes each increased 6%; and Asia Pacific volumes increased 8%. European Food benefited from the absence of $18 million of prior-year charges related to higher tinplate costs. The company reported higher volumes, improved pricing and improved cost performance across multiple segments.
Cash Flow, Liquidity and Debt
- Cash, cash equivalents and restricted cash totaled $667 million at March 31, 2021, down from $1,238 million at December 31, 2020. Cash and cash equivalents alone declined to $588 million from $1,173 million.
- Working capital changes were a $777 million use of operating cash, partly reflecting normal seasonality and inventory build ahead of peak food and beverage demand.
- Total debt comprised $80 million of short-term debt, $82 million of current long-term maturities and $7,875 million of long-term debt excluding current maturities. Principal long-term debt was $8,003 million.
- The company had $1,561 million of available borrowing capacity under its $1,650 million revolving credit facility after borrowings and standby letters of credit.
- The net total leverage ratio was 3.71 to 1.0, below the covenant maximum of 5.0 to 1.0. The required maximum declines to 4.5 to 1.0 at December 31, 2022.
- Management expects approximately $900 million of capital expenditures in 2021 and had approximately $215 million of capital commitments at March 31, 2021.
- The company paid $27 million of shareholder dividends and repurchased $12 million of common stock during the quarter. The board authorized a $1.5 billion share repurchase program through the end of 2023.
Material Changes Versus the Prior Comparable Period
- Sales, operating income, net income and diluted EPS increased substantially, driven primarily by volume growth, pricing and foreign exchange.
- Operating performance benefited from the absence of certain 2020 tinplate-related costs and a $37 million non-U.S. pension settlement charge recorded in Q1 2020.
- Cash used in operations improved, but the company remained a significant user of cash in the seasonally weaker first quarter.
- Capital spending increased as the company expanded beverage-can capacity in North America and other growth markets.
- Long-term debt declined modestly from $8,023 million at December 31, 2020 to $7,875 million excluding current maturities at March 31, 2021.
Guidance, Outlook and Unusual Items
- Management continues to identify global beverage cans as a strategic growth focus and is investing in new capacity in Kentucky, New York, Washington, Virginia, Brazil, Vietnam and other markets. Expected production start dates range from Q2 2021 through Q4 2022.
- On April 8, 2021, the company agreed to sell its European Tinplate business to Kouti B.V., an affiliate of KPS Capital Partners, for expected pre-tax proceeds of approximately €1.9 billion, or $2.2 billion at March 31, 2021. Crown expects to retain a 20% minority interest.
- The transaction is subject to regulatory and other conditions and was expected to close in Q3 2021, although the filing states there is no assurance of timing or completion. Beginning in Q2 2021, the business is expected to be classified as held for sale and reported as discontinued operations. Additional transaction-related charges could be material.
- Management expects to use net sale proceeds, after taxes, working-capital adjustments and transaction costs, to reduce debt, fund capital projects and repurchase shares.
- The company continues to manage COVID-19 safety measures and supply-chain challenges, including raw material availability and inventory management.
- Steel and aluminum costs remain subject to volatility, tariffs and potential inability to fully pass cost increases through to customers.
Risks, Contingencies and Other Matters
- Asbestos-related accruals totaled $249 million at March 31, 2021, including $207 million for unasserted claims. The company paid $2 million for asbestos claims and related costs during the quarter and reported approximately 56,400 ending claims. Actual losses could exceed the accrual, but the excess exposure cannot be reasonably estimated.
- The European Commission investigation into possible competition-law violations involving metal packaging manufacturers remains ongoing. Management believes a loss is probable but has not recorded a charge because the amount or range of loss cannot be estimated; potential fines could be material.
- Environmental remediation accruals totaled $8 million for PRP sites and $7 million for company-owned locations. Future costs could exceed recorded accruals.
- Foreign exchange, interest-rate and commodity-price risks are managed primarily through swaps and forwards. The company had approximately $1.5 billion of floating-rate debt; a 0.25% change in rates would affect annual pre-tax interest expense by approximately $4 million.
- The company is exposed to execution, regulatory, tax and valuation risks associated with the European Tinplate transaction and to potential changes in discontinued-operations presentation.
- Management concluded that disclosure controls and procedures were effective and reported no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the European Tinplate transaction receives required antitrust approvals and closes on the anticipated timetable.
- The final proceeds, taxes, transaction costs, retained 20% interest valuation and any additional charges from the divestiture.
- Progress, cost and utilization of the company’s extensive beverage-can capacity expansion program.
- Whether raw material inflation, tariffs and supply-chain constraints can be passed through to customers without compressing margins.
- Cash conversion and working-capital trends as seasonal inventory builds unwind later in 2021.
- Debt reduction, leverage and the balance between capital expenditures, dividends and the authorized share repurchase program.
- Developments in the asbestos litigation and the European Commission competition investigation, including any potential liability beyond recorded accruals.