Crown Holdings, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2020, compared with the three months ended March 31, 2019. Results are unaudited and include the early effects of the COVID-19 pandemic.
Business Context
Crown Holdings manufactures metal packaging, including beverage and food cans, closures, aerosol containers, transit packaging, and related equipment. Management identifies global beverage cans as a primary growth focus, while transit packaging and other industrial businesses are more exposed to economic activity. The company continued operating manufacturing facilities while implementing employee safety, remote-work, and supply-chain measures in response to COVID-19.
Financial Performance and Liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $2,757 million | $2,755 million | Flat |
| Income from operations | $246 million | $262 million | Down $16 million |
| Operating margin | 8.9% | 9.5% | Down 60 bps |
| Income before taxes | $151 million | $178 million | Down $27 million |
| Net income attributable to Crown | $88 million | $103 million | Down $15 million |
| Diluted EPS | $0.65 | $0.77 | Down $0.12 |
| Cash used in operating activities | $607 million | $666 million | Improved by $59 million |
| Capital expenditures | $110 million | $75 million | Up $35 million |
Net sales were essentially unchanged because 10% higher beverage-can unit volumes were offset by lower aluminum pass-through pricing and $40 million of unfavorable foreign-currency translation. Segment income for reportable segments was $317 million versus $318 million.
Profitability declined primarily because of lower results in European Food, Transit Packaging, and non-reportable businesses, higher other pension and postretirement expense, and restructuring charges. Interest expense decreased to $80 million from $98 million due to lower average debt and interest rates. The effective tax rate was 25%, compared with 27%, including a $4 million benefit from an Indian tax-law change.
Cash, cash equivalents, and restricted cash totaled $821 million at March 31, 2020, including $765 million of cash and cash equivalents, compared with $663 million at December 31, 2019. Cash from financing activities was $882 million, primarily reflecting higher borrowings. The company repurchased $57 million of common stock during the quarter, but its $250 million repurchase authorization was canceled in March 2020.
Total debt was approximately $8.97 billion at March 31, 2020, including $8.77 billion of long-term debt principal and $100 million of short-term debt. The company had $757 million of available revolving-credit capacity after borrowings and standby letters of credit. Its net total leverage ratio was 4.47 to 1.0, below the 5.75 to 1.0 covenant limit applicable at quarter-end. Approximately $391 million of cash was held outside the United States.
Material Changes Versus the Prior Comparable Period
- Americas Beverage sales increased to $871 million from $788 million and segment income increased to $134 million from $113 million, supported by 15% higher unit volumes and improved North American pricing.
- European Beverage sales increased modestly to $346 million, while segment income remained $39 million; volume growth was offset by cost inflation.
- European Food sales declined to $402 million from $423 million and segment income fell to $33 million from $48 million, principally due to foreign exchange, lower volumes, lower raw-material pass-through, and a $18 million adverse carryover of tinplate costs.
- Asia Pacific sales declined to $301 million from $321 million, while segment income remained $45 million. Lower China volumes and aluminum pricing offset higher Southeast Asian volumes.
- Transit Packaging sales declined to $522 million from $569 million and segment income fell to $66 million from $73 million because of lower economic activity, lower volumes, raw-material pricing, and foreign exchange.
- Other pension and postretirement expense changed to $31 million of expense from an $18 million benefit, including a $37 million settlement loss related to non-U.S. pension obligations.
- Other comprehensive income changed from $85 million of income to a $96 million loss, primarily due to a $319 million foreign-currency translation loss, partly offset by a $257 million pension-related gain.
Outlook, Risks, Contingencies, and Unusual Items
Management expects COVID-19 to weaken near-term demand in certain beverage-can markets, including Brazil, Mexico, and Southeast Asia, and to reduce demand in transit packaging. The company cannot reasonably estimate the duration, severity, or overall financial impact of the pandemic. Risks include customer demand reductions, supply-chain disruption, facility or workforce interruptions, collection risk, capital-market access, pension funding requirements, and potential asset impairments.
The company had approximately $96 million of capital commitments, primarily for beverage-can capacity expansions. Projects included new or expanded facilities and lines in the Americas, Europe, and Thailand. Management’s primary capital-allocation focus is reducing leverage; a previously announced portfolio and capital-allocation review remained ongoing.
Goodwill impairment testing indicated that fair value exceeded carrying value for all reporting units as of March 31, 2020. However, prolonged deterioration in the Equipment and Tools or Industrial Solutions businesses could result in a material impairment charge. These reporting units had goodwill of $771 million and $717 million, respectively.
Asbestos-related accruals were $270 million, including $227 million for unasserted claims. The company paid $1 million to settle claims during the quarter and reported 56,000 ending claims. Management stated that actual losses could exceed the accrual but could not estimate the reasonably possible excess loss.
The European Commission’s competition-law investigation 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 $14 million. The company also faces raw-material cost volatility, tariffs, foreign-exchange, interest-rate, commodity, and LIBOR-transition risks.
Important Facts for Investors to Verify
- Assess the duration and financial effects of COVID-19 on beverage-can, transit-packaging, customer, supplier, and facility activity.
- Monitor leverage against the covenant thresholds, debt maturities, refinancing access, and available revolver capacity.
- Verify whether operating cash flow improves after the first-quarter seasonal working-capital outflow of $607 million.
- Track pension settlement costs, pension-asset performance, and potential future funding requirements.
- Follow asbestos claims, accrual adequacy, and litigation involving the validity or application of liability-limiting statutes.
- Monitor the European Commission competition investigation and any eventual penalty or settlement.
- Evaluate goodwill impairment risk if transit-packaging results weaken for an extended period.
- Confirm the timing, cost, and demand support for announced beverage-can capacity expansions.