ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in millions, except per share, average settlement cost per asbestos claim, employee, shareholder and statistical data)
INTRODUCTION
The following discussion summarizes the significant factors affecting the results of operations and financial condition of Crown Holdings, Inc. (the "Company") as of and during the three-year period ended December 31, 2021. This discussion should be read in conjunction with the consolidated financial statements included in this Annual Report.
BUSINESS STRATEGY AND TRENDS
The Company's strategy is to deploy capital into its global beverage can operations to expand production capacity to support growing customer demand in alcoholic and non-alcoholic drink categories. Beverage cans are the world’s most sustainable and recycled beverage packaging and continue to gain market share in new beverage product launches. The Company continues to drive brand differentiation by increasing its ability to offer multiple product sizes.
For several years, global industry demand for beverage cans has been growing. In North America, beverage can growth has accelerated in recent years mainly due to the outsized portion of new beverage products being introduced in cans versus other packaging formats. In addition, markets such as Brazil, Europe, Mexico and Southeast Asia have also experienced higher volumes and market expansion.
On August 31, 2021, the Company completed the previously announced sale of its European Tinplate business to KPS Capital Partners, LP. The European Tinplate business comprised the Company's European Food reportable segment and its European Aerosol and Promotional Packaging reporting unit which was previously reported in Other. The Company received pre-tax proceeds of approximately €1.9 billion ($2.3 billion) from the transaction and received a 20% ownership stake in the business.
Proceeds from the sale of the European Tinplate business, along with cash provided by operating activities were used to support the Company's capital allocation strategy to reduce leverage, support beverage can expansion and return capital to shareholders in the form of dividends and the repurchase of Company shares. The Company reduced its leverage ratio and initiated a quarterly dividend in 2021. Additionally, in December 2021, the Board of Directors authorized the repurchase of $3.0 billion in Company common stock through the end of 2024.
The Company continues to actively elevate its industry-leading commitment to sustainability, which is a core value of the Company. In 2020, the Company debuted Twentyby30, a robust program that outlines twenty measurable environmental, social and governance goals to be completed by 2030 or sooner. In September 2021, the Company joined The Climate Pledge, a commitment to be net-zero carbon across business operations by 2040.
In response to the ongoing COVID-19 pandemic, the Company continues to maintain safety measures in its manufacturing facilities to protect its employees and the products they produce. The Company’s products are a vital part of the support system to its customers and consumers. In addition to manufacturing containers that provide protection for beverages and food, the Company also produces closures for baby food, aerosol containers for cleaning and sanitizing products and numerous other products that provide for the safe and secure transportation of goods.
The Company is working to keep its manufacturing facilities around the world operational and equipped with the resources required to meet continually evolving customer demand by delivering high quality products in a safe and timely manner. The Company is actively monitoring and managing supply chain challenges, including coordinating with its suppliers to identify and mitigate potential areas of risk and manage inventories.
RESULTS OF OPERATIONS
The key measure used by the Company in assessing performance is segment income, a non-GAAP measure defined by the Company as income from operations adjusted to exclude intangibles amortization charges, Restructuring and Other and the impact of fair value adjustments to inventory acquired in an acquisition.
The foreign currency translation impacts referred to in the discussion below were primarily due to changes in the Mexican peso in the Company's Americas Beverage segment, the euro and pound sterling in the Company's European Beverage segment, the Chinese renminbi and the Thai baht in the Company's Asia Pacific segment and the euro in the Company's Transit Packaging
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segment. The Company calculates the impactof foreign currency translation by multiplying or dividing, as appropriate, current year U.S. dollar results by the current year average foreign exchange rates and then multiplying or dividing, as appropriate, those amounts by the applicable prior year average exchange rates.
NET SALES AND SEGMENT INCOME
Year ended December 31, 2021 compared to 2020
Net sales increased primarily due to 9% higher sales unit volumes in the Company's beverage can businesses, higher sales unit volumes in the transit packaging business and the pass-through of higher material costs.
Year ended December 31, 2020 compared to 2019
Net sales decreased primarily due to the pass-through of lower raw material costs and $88 from the impact of foreign currency translation, partially offset by 4% higher global beverage can sales unit volumes.
Americas Beverage
The Americas Beverage segment manufactures aluminum beverage cans and ends, steel crowns, glass bottles and aluminum closures and supplies a variety of customers from its operations in the U.S., Brazil, Canada, Colombia and Mexico. The U.S. and Canadian beverage can markets have experienced recent growth due to the introduction of new beverage products in cans versus other packaging formats. To meet volume requirements in these markets, the Company began commercial production on a third line at its Toronto, Ontario plant and on a third line at its Nichols, NY plant in 2020 and on a third line at its Olympia, Washington plant in 2021. The Company also announced construction of a new two-line plant in Martinsville, Virginia which is expected to commence operations late in 2022 and a new two-line plant in Mesquite, Nevada which is expected to commence operations in 2023.
The Company also began commercial production at its new Bowling Green, Kentucky plant during 2021. In December 2021, the plant sustained tornado damage, resulting in curtailment of operations of the plant. The Company has property and business interruption insurance policies for weather related events. The Company expects to resume operations in March 2022.
In Brazil and Mexico, the Company's sales unit volumes have increased in recent years primarily due to market growth driven by increased per capita incomes and consumption, combined with an increased preference for cans over other forms of beverage packaging. To meet volume requirements in these markets, the Company began commercial production on a second line at its Rio Verde, Brazil facility in 2021. The Company has also begun construction of a two-line facility in Uberaba, Brazil which is expected to begin production late in 2022. Additionally, start-up on a second line at the Company's Monterrey, Mexico facility is expected in 2022.
Net sales and segment income in the Americas Beverage segment were as follows:
Year ended December 31, 2021 compared to 2020
Net sales increased primarily due to the pass-through of higher aluminum costs, 8% higher sales unit volumes and $9 from the impact of favorable foreign currency translation.
Segment income increased primarily due to higher sales unit volumes and improved pricing, partially offset by increased depreciation of $15 and start-up costs associated with recent capacity expansion.
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Year ended December 31, 2020 compared to 2019
Net sales increased primarily due to 9% higher sales unit volumes, partially offset by $83 from the impact of unfavorable foreign currency translation.
Segment income increased primarily due to higher sales unit volumes, partially offset by $18 from the impact of unfavorable foreign currency translation.
European Beverage
The Company's European Beverage segment manufactures aluminum beverage cans and ends and supplies a variety of customers from its operations throughout Europe, the Middle East and North Africa. In recent years, the European beverage can market has been growing. In 2020, two lines in the Seville, Spain plant began commercial production of aluminum cans.
Net sales and segment income in the European Beverage segment were as follows:
Year ended December 31, 2021 compared to 2020
Net sales increased primarily due to 12% higher sales unit volumes, the pass-through of higher aluminum costs, and $57 from the impact of favorable foreign currency translation.
Segment income increased primarily due to higher sales unit volumes and $5 from the impact of favorable foreign currency translation, partially offset by other operating costs that were not fully passed through in selling price.
Year ended December 31, 2020 compared to 2019
Net sales decreased primarily due to the pass-through of lower aluminum costs, partially offset by $16 related to the impact of favorable foreign currency translation.
Segment income increased primarily due to improved operational performance and cost savings.
Asia Pacific
The Company's Asia Pacific segment consists of beverage can operations in Cambodia, China, Indonesia, Malaysia, Myanmar, Singapore, Thailand and Vietnam and non-beverage can operations, primarily food cans and specialty packaging. In recent years, the beverage can market in Southeast Asia has been growing. In 2020, however, industry volumes decreased due to the impact of the coronavirus pandemic. In 2021, industry volumes began to recover, however, from time to time the Company was subject to various lockdown and movement control orders in various countries. The Company began commercial production at a one-line beverage can plant in Nong Khae, Thailand in 2020, a new one-line beverage can plant in Vung Tau, Vietnam in 2020 and on a second line in the Hanoi, Vietnam beverage can plant in 2021. Additionally, the Company expects to commercialize production on a third beverage can line in Phnom Penh, Cambodia during 2022.
Net sales and segment income in the Asia Pacific segment were as follows:
Year ended December 31, 2021 compared to 2020
Net sales increased due to 6% higher sales unit volumes, the pass-through of higher aluminum costs, and $13 from the impact of favorable foreign currency translation.
Segment income increased primarily due to higher sales unit volumes, partially offset by higher operating costs that were not fully passed through in selling price.
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Year ended December 31, 2020 compared to 2019
Net sales decreased primarily due to 4% lower beverage can sales unit volumes due to the impact of the coronavirus pandemic and the pass-through of lower aluminum costs.
Segment income decreased due to lower beverage can sales unit volumes, partially offset by cost reduction initiatives.
Transit Packaging
The Transit Packaging segment includes the Company's global industrial and protective solutions and equipment and tools businesses. Industrial and protective solutions includes steel strap, plastic strap and industrial film and other related products that are used in a wide range of industries, and transit protection products used for a wide range of industrial and consumer products. Equipment and tools includes manual, semi-automatic and automatic equipment and tools used in end-of-line operations to apply industrial solutions consumables.
Net sales and segment income in the Transit Packaging segment were as follows:
Year ended December 31, 2021 compared to 2020
Net sales increased due to higher sales unit volumes, the pass-through of higher raw material prices and $36 from the impact of favorable foreign currency translation.
Segment income increased primarily due higher unit volumes and $6 from the impact of favorable foreign currency translation, partially offset by higher operating costs.
Year ended December 31, 2020 compared to 2019
Net sales decreased primarily due to lower sales unit volumes due to the impact of the coronavirus pandemic, the pass-through of lower raw material prices and $10 from the impact of unfavorable foreign currency translation.
Segment income decreased primarily due to lower sales unit volumes, partially offset by the impact of cost reduction initiatives.
Other
Other includes the Company's food can, aerosol can and closures businesses in North America, and beverage tooling and equipment operations in the U.S. and U.K. In 2021, the Company commenced operations at a new food can plant in Dubuque, Iowa and on a new food can line in its Hanover, Pennsylvania plant. Additionally, the Company will add a third two-piece food can line to its Owatonna, Minnesota plant in 2022.
Net sales and segment income in Other were as follows:
Year ended December 31, 2021 compared to 2020
Net sales increased primarily due to higher sales in the Company's beverage can equipment operations and the North America food can business, the pass-through of higher tinplate costs, and $12 from the impact of favorable foreign currency translation.
Segment income increased primarily due to lower tinplate carryover costs in the Company's North America food can business as compared to the year-ended December 31, 2020 and higher sales in the Company's beverage can equipment operations and North America food can business.
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Year ended December 31, 2020 compared to 2019
Net sales increased as higher sales in the Company's beverage can equipment operations and 9% higher sales unit volumes in the Company's North America food can business were partially offset by lower shipments in the Company's North America aerosol can business, the pass-through of lower tinplate costs and $8 from the impact of unfavorable foreign currency translation. The Company's North America food can business benefited from more at-home meal preparation during the coronavirus pandemic.
Segment income decreased primarily due to $16 arising from the carryover of higher tinplate costs from the prior year-end inventory and lower shipments in the Company's North America aerosol can business, partially offset by higher sales in the Company's beverage can equipment operations and higher sales unit volumes in the Company's North America food can business.
Corporate and unallocated
Corporate and unallocated $ (159) $ (170) $ (162)
Corporate and unallocated costs increased from 2019 to 2020 and decreased from 2020 to 2021 primarily due to higher incentive compensation costs in 2020.
OTHER PENSION AND POSTRETIREMENT
Other pension and postretirement increased from $43 in 2020 to $1,515 in 2021 primarily related to the settlement of the Company's U.K. pension plan obligations. The Company entered into a transaction to irrevocably transfer its U.K. pension plan obligations to an insurer in 2021 to eliminate the cash flow and earnings risk associated with the plan. See Note R for more information regarding the settlement of the U.K. pension plan obligation.
INTEREST EXPENSE
Interest expense decreased from $290 in 2020 to $253 in 2021 primarily due to lower outstanding debt balances.
Interest expense decreased from $367 in 2019 to $290 in 2020 primarily due to lower outstanding debt balances and lower interest rates.
TAXES ON INCOME
The Company's effective income tax rates were as follows:
Income before income taxes $ (419) $ 725 $ 631
Provision (benefit) for income taxes (57) 199 136
Effective income tax rate 13.6 % 27.4 % 21.6 %
The effective tax rate in 2021 included tax charges of $42 in continuing operations for reorganizations and other transactions required to prepare the European Tinplate business for sale. Additionally, the Company recorded an income tax charge of $44 to establish a valuation allowance for deferred tax assets related to tax loss carryforwards in France. The Company believes that it is more likely than not that these tax loss carryforwards will not be utilized after the sale of the European Tinplate business. See Note B for more information regarding the sale of the European Tinplate business.
In 2021, the Company also recorded a tax benefit of $18 related to a deferred tax valuation allowance release resulting from improved profitability in a Transit Packaging corporate entity. Additionally, the Company also recorded income tax benefits of $8, primarily related to tax law changes in India, Turkey and the U.K.
The effective tax rate in 2020 included a benefit of $36 related to a deferred tax valuation allowance release resulting from an internal reorganization in Transit Packaging and a benefit of $9 arising from tax law changes in India, partially offset by a charge of $15 to settle a tax contingency in Transit Packaging that arose from a transaction that occurred prior to its acquisition of Signode by the Company in 2018.
For additional information regarding income taxes, see Note S to the consolidated financial statements.
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NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
Net income attributable to noncontrolling interest increased from $108 in 2020 to $148 in 2021 primarily due to higher earnings in the Company's beverage can operations in Brazil, including a favorable court ruling in a lawsuit brought by certain of the Company's Brazilian subsidiaries asserting they were overcharged by local tax authorities for direct and indirect taxes paid in prior years.
Net income attributable to noncontrolling interest decreased from $113 in 2019 to $108 in 2020 primarily due to higher income in Brazil in 2019 related to a favorable court ruling for one of the Company's Brazilian subsidiaries related to indirect taxes.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Cash provided by operating activities decreased from $1,315 in 2020 to $905 in 2021 primarily due to changes in working capital and $236 in pension contributions, primarily related to the contribution required to fully settle the U.K. pension plan obligation. The Company expects $110 of the cash contribution to be repaid as the pension plan sells its remaining illiquid assets during 2022 and 2023. See Note R for more information regarding the settlement of the U.K. pension plan obligation.
Receivables increased from $1,522 at December 31, 2020 to $1,889 at December 31, 2021 primarily due to higher selling price and sales unit volumes. Days sales outstanding for trade receivables, excluding the impact of unbilled receivables, decreased from 38 at December 31, 2020 to 37 at December 31, 2021.
Inventories increased from $1,263 at December 31, 2020 to $1,735 at December 31, 2021 primarily due to inflation and market growth. Inventory turnover was 59 days at December 31, 2020 and December 31, 2021.
Accounts payable increased from $2,141 at December 31, 2020 to $2,901 at December 31, 2021 primarily due to inflation and market growth. Days outstanding for trade payables increased from 100 days at December 31, 2020 to 112 days at December 31, 2021.
INVESTING ACTIVITIES
Investing activities used cash of $535 in 2020 and provided cash of $1,507 in 2021 primarily due to the proceeds received from the sale of the European Tinplate business, partially offset by increased capital expenditures related to capacity expansion projects in the Americas Beverage segment.
The Company currently expects capital expenditures in 2022 to be approximately $1 billion.
At December 31, 2021, the Company had approximately $137 of capital commitments primarily related to its Americas Beverage segment. The Company expects to fund these commitments primarily through cash generated from operations.
FINANCING ACTIVITIES
Cash used for financing activities increased from $239 in 2020 to $2,944 in 2021 primarily due to the early redemption of senior notes due in 2022 and 2023. The Company paid premiums of $64 in connection with the redemptions. See Note M for more information. Additionally, in 2021, the Company repurchased $950 of its shares of common stock and paid dividends to shareholders of $105. In 2021 the Company also had an outflow of $25 from foreign exchange derivatives related to debt compared to an inflow of $43 in 2020.
LIQUIDITY
As of December 31, 2021, $480 of the Company's $531 in cash and cash equivalents was located outside the U.S. The Company is not currently aware of any legal restrictions under foreign law that materially impact its access to cash held outside the U.S. The Company funds its cash needs in the U.S. through a combination of cash flows from operations, dividends from certain foreign subsidiaries, borrowings under its revolving credit facility and the acceleration of cash receipts under its receivable securitization and factoring facilities. Of the cash and cash equivalents located outside the U.S., $438 was held by subsidiaries for which earnings are considered indefinitely reinvested. If such earnings were repatriated the Company may be required to record incremental foreign taxes on the repatriated funds.
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The Company's revolving credit agreements provide capacity of $1,650. As of December 31, 2021, the Company had available capacity of $1,535 under its revolving credit facilities. The Company could have borrowed this amount at December 31, 2021 and still have been in compliance with its leverage ratio covenants.
The ratio of total debt, less cash and cash equivalents, to total capitalization was 71% and 73% at December 31, 2021 and 2020. Total capitalization is defined by the Company as total debt plus total equity, less cash and cash equivalents.
The Company's debt agreements contain covenants that limit the ability of the Company and its subsidiaries to, among other things, incur additional debt, pay dividends or repurchase capital stock, make certain other restricted payments, create liens and engage in sale and leaseback transactions. These restrictions are subject to a number of exceptions, however, which allow the Company to incur additional debt, create liens or make otherwise restricted payments provided that the Company is in compliance with applicable financial and other covenants and meets certain liquidity requirements.
The Company’s revolving credit facilities and term loan facilities also contain a total leverage ratio covenant. The leverage ratio is calculated as total net debt divided by Consolidated EBITDA (as defined in the credit agreement). Total net debt is defined in the credit agreement as total debt less cash and cash equivalents. Consolidated EBITDA is calculated as the sum of, among other things, net income attributable to Crown Holdings, net income attributable to certain of the Company's subsidiaries, income taxes, interest expense, depreciation and amortization, and certain non-cash charges. The Company’s total net leverage ratio of 3.0 to 1.0 at December 31, 2021 was in compliance with the covenant requiring a ratio no greater than 5.0 to 1.0. The ratio is calculated at the end of each quarter using debt and cash balances as of the end of the quarter and Consolidated EBITDA for the most recent twelve months. Failure to meet the financial covenant could result in the acceleration of any outstanding amounts due under the revolving credit facilities and term loan facilities. The required net total leverage ratio under the agreement reduces to 4.5 to 1.0 at December 31, 2022.
In order to reduce leverage and future interest payments, the Company may from time to time repurchase outstanding notes and debentures with cash or seek to refinance its existing credit facilities and other indebtedness. The Company will evaluate any such transactions in light of any required premiums and then existing market conditions and may determine not to pursue such transactions.
The Company’s current sources of liquidity also include a securitization facility with a program limit up to a maximum of $500 that expires in July 2023, a securitization facility with a program limit of $200 that expires in December 2023, and a securitization facility with a program limit of $150 that expires in November 2025. The Company accounts for transfers under these facilities as sales as further discussed in Note D to the consolidated statements.
The Company utilizes its cash flows from operations, borrowings under its revolving credit facilities and the acceleration of cash receipts under its receivables securitization and factoring programs to primarily fund its operations, capital expenditures and financing obligations.
Cash payments required for purchase obligations, long-term debt maturities and interest payments and projected pension contributions in effect at December 31, 2021, are summarized in the following table.
Payments Due by Period
All amounts due in foreign currencies are translated at exchange rates as of December 31, 2021.
(1) These purchase commitments specify significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable pricing
provisions; and the approximate timing of transactions.
(2) Interest on long-term debt represents the interest that will accrue by year based on debt outstanding and interest rates in effect as of December 31, 2021.
(3) Pension projections require the use of numerous estimates and assumptions such as discount rates, rates of return on plan assets, compensation increases,
health care cost increases, mortality and employee turnover and therefore projected contributions been provided for only five years.
Long-term debt payments due in 2023 include the Company's €335 ($381) 2.25% senior notes in February 2023 and its €550 ($626) 0.75% senior notes in February 2023. The Company expects to have sufficient liquidity to refinance the senior notes or repay them at maturity.
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The Company also has certain guarantees and indemnification agreements that could require the payment of cash upon the occurrence of certain events. The guarantees and agreements are further discussed under Note P to the consolidated financial statements.
Supplemental Guarantor Financial Information
As disclosed in Note M, the Company and certain of its 100% directly or indirectly owned subsidiaries provide guarantees of senior notes and debentures issued by other 100% directly or indirectly owned subsidiaries. These senior notes and debentures are fully and unconditionally guaranteed by the Company and substantially all of its subsidiaries in the U.S., except in the case of the Company’s outstanding senior notes issued by Crown Cork & Seal Company, Inc., which are fully and unconditionally guaranteed by Crown Holdings, Inc. (Parent). No other subsidiary guarantees the debt and the guarantees are made on a joint and several basis.
The senior notes and guarantees are senior unsecured obligations of the issuers and the guarantors, and are:
•effectively subordinated to all existing and future secured indebtedness of the issuers and the guarantors to the extent of the value of the assets securing such indebtedness, including any borrowings under the Company’s senior secured credit facilities, to the extent of the value of the assets securing such indebtedness;
•structurally subordinated to all indebtedness of the Company’s non-guarantor subsidiaries, which include all of the Company’s foreign subsidiaries and any U.S. subsidiaries that are neither obligors nor guarantors of the Company’s senior secured credit facilities;
•ranked equal in right of payment to any existing or future senior indebtedness of the issuers and the guarantors; and
•ranked senior in right of payment to all existing and future subordinated indebtedness of the issuers and the guarantors.
Each guarantee of a guarantor is limited to an amount not to exceed the maximum amount that can be guaranteed that will not (after giving effect to all other contingent and fixed liabilities of such guarantor and after giving effect to any collections from, rights to receive contribution from or payments made by or on behalf of all other guarantors in respect of the obligations of such other guarantors under their respective guarantees of the guaranteed obligations) render the guarantee, as it relates to such guarantor, voidable under applicable law relating to fraudulent conveyances or fraudulent transfers.
A guarantee of a guarantor other than the Parent will be unconditionally released and discharged upon any of the following:
•any transfer (including, without limitation, by way of consolidation or merger) by the Parent or any subsidiary of the Parent to any person or entity that is not the Parent or a subsidiary of the Parent of (1) all of the equity interests of, or all or substantially all of the properties and assets of, such guarantor; or (2) equity interests of such guarantor or any issuance by such guarantor of its equity interests, such that such guarantor ceases to be a subsidiary of the Parent; provided that such guarantor is also released from all of its obligations in respect of indebtedness under the Company’s senior secured credit facilities;
•the release of such guarantor from all obligations of such guarantor in respect of indebtedness under the Company’s senior secured credit facilities, except to the extent such guarantor is otherwise required to provide a guarantee; or
•upon the contemporaneous release or discharge of all guarantees by such guarantor which would have required such guarantor to provide a guarantee under the applicable indenture.
The following tables present summarized financial information related to the senior notes issued by the Company’s subsidiary debt issuers and guarantors on a combined basis for each issuer and its guarantors (together, an “obligor group”) after elimination of (i) intercompany transactions and balances among the Parent and the guarantors and (ii) equity in earnings from and investments in any subsidiary that is a non-guarantor. Crown Cork Obligor group consists of Crown Cork & Seal Company, Inc. and the Parent. Crown Americas Obligor group consists of Crown Americas LLC, Crown Americas Capital Corp. V, Crown Americas Capital Corp. VI, the Parent, and substantially all of the Company’s subsidiaries in the U.S.
Crown Cork Obligor Group
Net sales $ —
Gross Profit —
Income from operations (9)
Net income from continuing operations1 (83)
Net income attributable to Crown Holdings2 (109)
(1) Includes $35 of expense related to intercompany interest with non-guarantor subsidiaries.
(2) Includes $26 of expense for discontinued operations
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Current assets $ 7
Non-current assets 27
Current liabilities 72
Non-current liabilities1 5,286
(1) Includes payables of $4,560 due to non-guarantor subsidiaries
Crown Americas Obligor Group
Income from operations2 274
Net income from continuing operations3 124
Net income attributable to Crown Holdings4 86
(1) Includes $458 of sales to non-guarantor subsidiaries
(2) Includes $46 of gross profit related to sales to non-guarantor subsidiaries
(3) Includes $27 of income related to intercompany interest and technology royalties with non-guarantor subsidiaries
(4) Includes $38 of expense for discontinued operations
Current liabilities3 1,330
Non-current liabilities4 4,761
(1) Includes receivables of $48 due from non-guarantor subsidiaries
(2) Includes receivables of $180 due from non-guarantor subsidiaries
(3) Includes payables of $35 due to non-guarantor subsidiaries
(4) Includes payables of $1,397 due to non-guarantor subsidiaries
The senior notes are structurally subordinated to all indebtedness of the Company’s non-guarantor subsidiaries. The non-guarantors are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the senior notes, or to make any funds available therefore, whether by dividends, loans, distributions or other payments. Any right that the Company or the guarantors have to receive any assets of any of the non-guarantors upon the liquidation or reorganization of any non-guarantor, and the consequent rights of holders of senior notes to realize proceeds from the sale of any of a non-guarantor’s assets, would be effectively subordinated to the claims of such non-guarantor’s creditors, including trade creditors and holders of preferred equity interests, if any, of such non-guarantor. Accordingly, in the event of a bankruptcy, liquidation or reorganization of any of the non-guarantors, the non-guarantors will pay the holders of their debts, holders of preferred equity interests, if any, and their trade creditors before they will be able to distribute any of their assets to the Company or any of the guarantors.
Under U.S. federal bankruptcy laws or comparable provisions of state fraudulent transfer laws, the issuance of the senior note guarantees by the guarantors could be voided, or claims in respect of such obligations could be subordinated to all of their other debts and other liabilities, if, among other things, at the time the guarantors issued the related senior note guarantees, the Company or the applicable guarantor intended to hinder, delay or defraud any present or future creditor, or received less than reasonably equivalent value or fair consideration for the incurrence of such indebtedness and either:
•was insolvent or rendered insolvent by reason of such incurrence;
•was engaged in a business or transaction for which the Company’s or such guarantor’s remaining assets constituted unreasonably small capital; or
•intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature.
Each guarantee provided by a guarantor includes a provision intended to limit the guarantor’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent transfer or conveyance. This provision may not be effective to protect those guarantees from being avoided under fraudulent transfer or conveyance law, or it may reduce that guarantor’s obligation to an amount that effectively makes its guarantee worthless, and we cannot predict whether a court will ultimately find it to be effective.
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MARKET RISK
In the normal course of business the Company is subject to risk from adverse fluctuations in foreign exchange rates, interest rates and commodity prices. The Company manages these risks through a program that includes the use of derivative financial instruments, primarily swaps and forwards. Counterparties to these contracts are major financial institutions. These instruments are viewed as risk management tools, involve little complexity, and are not used for trading or speculative purposes. The extent to which the Company uses such instruments is dependent upon its access to them in the financial markets and its use of other methods, such as netting exposures for foreign exchange risk and establishing sales arrangements that permit the pass-through to customers of changes in commodity prices and foreign exchange rates, to effectively achieve its goal of risk reduction. The Company’s objective in managing its exposure to market risk is to limit the impact on earnings and cash flow.
The Company manages foreign currency exposures at the operating unit level. Exposures that cannot be naturally offset within an operating unit may be hedged with derivative financial instruments where possible and cost effective in the Company’s judgment. Foreign exchange contracts generally mature within twelve months.
The table below provides information in U.S. dollars as of December 31, 2021 about the Company’s forward currency exchange contracts. The contracts primarily hedge anticipated transactions, unrecognized firm commitments and intercompany debt. The contracts with no amounts in the fair value column have a fair value of less than $1.
U.S. dollars/Brazilian real 97 (1) 0.18
Singapore dollars/U.S. dollars 92 1 1.36
Euro/Swiss francs 88 — 0.97
Euro/Swedish krona 44 — 0.10
Euro/Danish krone 42 — 0.13
Sterling/U.S. dollars 33 — 0.74
U.S. dollars/Thai baht 31 — 0.03
Turkish lira/U.S. dollars 22 (5) 10.35
Euro/Polish zloty 21 — 0.21
At December 31, 2021, the Company had additional contracts with an aggregate notional value of $44 to purchase or sell other currencies, primarily Asian currencies, including the Malaysian ringgit, Indonesian rupiah, and Hong Kong dollar; European currencies, including the Hungarian florint; the Australian dollar; and the New Zealand dollar. The aggregate fair value of these contracts was a gain of $1.
At December 31, 2021, the Company had cross-currency swaps with an aggregate notional values of $875. The swaps are designated as hedges of the Company's net investment in a euro-based subsidiary and mature in 2026. The fair value of these contracts at December 31, 2021 was a net gain of $49.
Total future payments of long-term debt obligations at December 31, 2021 include $2,905 of U.S. dollar-denominated debt, $3,287 of euro-denominated debt and $29 of debt denominated in other currencies.
The Company, from time to time, may manage its interest rate risk associated with fluctuations in variable interest rates through interest rate swaps. The use of interest rate swaps and other methods of mitigating interest rate risk may increase overall interest expense. As of December 31, 2021, the Company had $1.4 billion principal floating interest rate debt. A change of 0.25% in these floating interest rates would change annual interest expense by approximately $4 million before tax
The Company uses various raw materials, such as aluminum and steel in its manufacturing operations, which expose it to risk from adverse fluctuations in commodity prices. In 2021, consumption of aluminum and steel represented 43% and 8% of the Company’s consolidated cost of products sold, excluding depreciation and amortization. The Company primarily manages its risk to adverse commodity price fluctuations and surcharges through contracts that pass through raw material costs to customers. The Company may, however, be unable to increase its prices to offset increases in raw material costs without suffering reductions in unit volume, revenue and operating income, and any price increases may take effect after related cost
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increases, reducing operating income in the near term. As of December 31, 2021, the Company had forward commodity contracts to hedge aluminum price fluctuations with a notional value of $261 and a net gain of $38. The maturities of the commodity contracts closely correlate to the anticipated purchases of those commodities.
In addition, the Company's manufacturing facilities are dependent, to varying degrees, upon the availability of water and processed energy, such as natural gas and electricity.
See Note N to the consolidated financial statements for further information on the Company’s derivative financial instruments.
ENVIRONMENTAL MATTERS
Compliance with the Company’s Environmental Protection Policy is mandatory and the responsibility of each employee of the Company. The Company is committed to the protection of human health and the environment and is operating within the increasingly complex laws and regulations of national, state, and local environmental agencies or is taking action to achieve compliance with such laws and regulations. Environmental considerations are among the criteria by which the Company evaluates projects, products, processes and purchases.
The Company is dedicated to a long-term environmental protection program and has initiated and implemented many pollution prevention programs with an emphasis on source reduction. The Company continues to reduce the amount of metal used in the manufacture of steel and aluminum containers through “lightweighting” programs. The Company recycles nearly 100% of scrap aluminum, steel and copper used in its manufacturing processes. Many of the Company’s programs for pollution prevention reduce operating costs and improve operating efficiencies.
The potential impact on the Company’s operations of climate change and potential future climate change regulation in the jurisdictions in which the Company operates is highly uncertain. See the risk factor entitled “The Company is subject to costs and liabilities related to stringent environmental and health and safety standards” in Part I, Item 1A of this Annual Report.
See Note P to the consolidated financial statements for additional information on environmental matters including the Company's accrual for environmental remediation costs.
CRITICAL ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America which require that management make numerous estimates and assumptions. Actual results could differ from those estimates and assumptions, impacting the reported results of operations and financial position of the Company. The Company’s significant accounting policies are more fully described under Note A to the consolidated financial statements. Certain accounting policies, however, are considered to be critical in that (i) they are most important to the depiction of the Company’s financial condition and results of operations and (ii) their application requires management’s most subjective judgment in making estimates about the effect of matters that are inherently uncertain.
Asbestos Liabilities
The Company’s potential liability for asbestos cases is uncertain due to the difficulty of forecasting many factors, including the level of future claims, the rate of receipt of claims, the jurisdiction in which claims are filed, the nature of future claims (including the seriousness of alleged disease, whether claimants allege first exposure to asbestos before or during 1964 and the alleged link to Crown Cork), the terms of settlements of other defendants with asbestos-related liabilities, bankruptcy filings of other defendants (which may result in additional claims and higher settlement demands for non-bankrupt defendants) and the effect of state asbestos legislation (including the validity and applicability of the Pennsylvania legislation to non-Pennsylvania jurisdictions, where the substantial majority of the Company’s asbestos cases are filed). See Note O to the consolidated financial statements for additional information regarding the provision for asbestos-related costs.
At the end of each quarter, the Company considers whether there have been any material developments that would cause it to update its asbestos accrual calculations. Absent any significant developments in the asbestos litigation environment in general or with respect to the Company specifically, the Company updates its accrual calculations in the fourth quarter of each year. The Company estimates its liability without limitation to a specified time period and provides for the estimated amounts expected to be paid related to outstanding claims, projected future claims and legal costs.
Outstanding claims used in the accrual calculation are adjusted for factors such as claims filed in those states where the Company’s liability is limited by statute, claims alleging first exposure to asbestos after 1964 which are assumed to have no
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value and claims which are unlikely to ever be paid and are assumed to have a reduced or nominal value based on the length of time outstanding. Projected future claims are calculated based on actual data for the most recent five years and are adjusted to account for the expectation that a percentage of these claims will never be paid. Outstanding and projected claims are multiplied by the average settlement cost of claims for the most recent five years. As claims are not submitted or settled evenly throughout the year, it is difficult to predict at any time during the year whether the number of claims or average settlement cost over the five year period ending December 31 of such year will increase compared to the prior five year period.
In recent years, a higher percentage of Crown Cork’s settlements have related to claims alleging serious disease (primarily mesothelioma) which are settled at higher dollar amounts. Accordingly, a higher percentage of claims projected into the future relate to serious diseases and are therefore valued at higher dollar amounts. As of December 31, 2021, more than 90% of the projected future claims in the Company’s accrual calculation relate to claims alleging serious diseases such as mesothelioma.
The five year average settlement cost per claim was $14,400 in 2019, $13,100 in 2020 and $13,000 in 2021. Although the five year average settlement cost per claim decreased in 2021, if Crown Cork continues to settle a high percentage of claims alleging serious disease at higher dollar amounts, average settlement costs per claim are likely to increase and, if not offset by a reduction in overall claims and settlements, the Company may record additional charges in the future. A 10% change in either the average cost per claim or the number of projected claims would increase or decrease the estimated liability at December 31, 2021 by $24. A 10% increase in these two factors at the same time would increase the estimated liability at December 31, 2021 by $50. A 10% decrease in these two factors at the same time would decrease the estimated liability at December 31, 2021 by $45.
Goodwill Impairment
The Company performs a goodwill impairment review in the fourth quarter of each year or when facts and circumstances indicate goodwill may be impaired. In accordance with the accounting guidance, the Company may first perform a qualitative assessment on none, some, or all of its reporting units to determine whether further quantitative impairment testing is necessary. Factors that the Company may consider in its qualitative assessment include, but are not limited to, general economic conditions, changes in the markets in which the Company operates and changes in input costs that may affect revenue growth, gross margin percentages and cash flow trends over multiple periods.
The quantitative impairment test involves a number of assumptions and judgments, including the calculation of fair value for the Company’s identified reporting units. The Company determines the estimated fair value for each reporting unit based on an average of the estimated fair values calculated using both market and income approaches. The Company uses an average of the two methods in estimating fair value because it believes they both provide an appropriate fair value for the reporting units. The Company’s estimates of future cash flows include assumptions concerning future operating performance and economic conditions and may differ from actual future cash flows. Under the market approach, the Company utilizes significant assumptions relating to EBITDA multiples used in recent similar transactions, if any, and EBITDA multiples of similar type and size public companies. The appropriate multiple is applied to the respective financial results of the reporting unit to obtain an estimated fair value.
Under the income approach, fair value is calculated as the sum of the projected discounted cash flows of the reporting unit over the next five years and the terminal value at the end of those five years. The projected cash flows generally include moderate to no growth assumptions, depending on the reporting unit, unless there has recently been a material change in the business or a material change is forecasted. The discount rate used is based on the average weighted-average cost of capital of companies in the consumer and industrial packaging industries, which information is available through various sources, adjusted for specific risk premiums for each reporting unit.
The Company completed its annual review for 2021 and determined that no adjustments to the carrying value of goodwill were necessary. Although no goodwill impairment was recorded, there can be no assurances that future goodwill impairments will not occur.
Long-lived Assets Impairment
The Company performs an impairment review of its long-lived assets, including definite-lived intangible assets and property, plant and equipment, when facts and circumstances indicate the carrying value may not be recoverable from its undiscounted cash flows. Any impairment loss is measured by comparing the carrying amount of the asset to its fair value. The Company’s estimates of future cash flows involve assumptions concerning future operating performance, economic conditions and technological changes that may affect the future useful lives of the assets. These estimates may differ from actual cash flows or useful lives.
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Pension and Postretirement Benefits
Accounting for pensions and postretirement benefit plans requires the use of estimates and assumptions regarding numerous factors, including discount rates, rates of return on plan assets, compensation increases, health care cost increases, future rates of inflation, mortality and employee turnover. Actual results may differ from the Company’s actuarial assumptions, which may have an impact on the amount of reported expense or liability for pensions or postretirement benefits. The Company recorded pension expense of $1,567, including settlement and curtailment charges of $1,520 and expense of $4 recorded in Net income from discontinued operations, in 2021 and currently projects its 2022 pension expense to be $31, using foreign currency exchange rates in effect at December 31, 2021. The Company uses the spot yield curve approach to estimate the service and interest cost components of pension and postretirement benefits expense by applying the specific spot rates along the yield curve used to determine the benefit plan obligations to relevant projected cash outflows. The expected long-term rate of return on plan assets is determined by taking into consideration expected long-term returns associated with each major asset class based on long-term historical ranges, projected future outlook of each asset class, inflation assumptions and the expected net value from active management of the assets based on actual results.
The U.S. plan’s assumed rate of return was 5.7 % in 2021 and is 6.6 % for 2022. A 0.25% change in the expected rates of return would change 2022 pension expense by approximately $4.
Discount rates were selected using a method that matches projected payouts from the plans to an actuarial determined yield curve based on market observable AA bond yields in the respective plan jurisdictions and currencies. In certain jurisdictions, government securities were used along with corporate bonds to develop country-specific yield curves to the extent that the underlying markets were not deemed sufficiently developed. A 0.25% change in the discount rates from those used at December 31, 2021 would change 2022 pension expense by approximately $2 and postretirement expense by less than $1. A 0.25% change in the discount rates from those used at December 31, 2021 would have changed the pension benefit obligation by approximately $50 and the postretirement benefit obligation by approximately $3 as of December 31, 2021. See Note R to the consolidated financial statements for additional information on pension and postretirement benefit obligations and assumptions.
As of December 31, 2021, the Company had pre-tax unrecognized net losses in other comprehensive income of $814 related to its pension plans and $21 related to its other postretirement benefit plans. Unrecognized gains and losses arise each year primarily due to changes in discount rates, differences in actual plan asset returns compared to expected returns, and changes in actuarial assumptions such as mortality. Unrecognized gains and losses are accumulated in other comprehensive income and the portion in each plan that exceeds 10% of the greater of that plan’s assets or projected benefit obligation is amortized to income over future periods. The Company’s pension expense for the year ended December 31, 2021 included charges of $91 for the amortization of unrecognized net losses, and the Company estimates charges of $52 in 2022. Amortizable losses are being recognized over either the average expected life of inactive employees or the remaining service life of active participants depending on the status of the individual plans. The weighted average amortization periods range between 6 - 16 years. An increase of 10% in the number of years used to amortize unrecognized losses in each plan would decrease estimated charges for 2022 by $6. A decrease of 10% in the number of years would increase the estimated 2022 charge by $7.
RECENT ACCOUNTING GUIDANCE
On January 1, 2021, the Company adopted new guidance to simplify the accounting for income taxes by, among other things, reducing complexity in the interim-period accounting for year-to-date loss limitations and changes in tax laws. The guidance did not have a material impact on the Company's consolidated financial statements.
See Note A to the consolidated financial statements for information on recently adopted accounting guidance.
FORWARD LOOKING STATEMENTS
Statements in this Annual Report, including those in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the discussions of the provision for asbestos under Note O and other contingencies under Note P to the consolidated financial statements included in this Annual Report and in discussions incorporated by reference into this Annual Report (including, but not limited to, those in the section titled “Compensation Discussion and Analysis” in the Company’s Proxy Statement), which are not historical facts (including any statements concerning plans and objectives of management for future operations or economic performance, or assumptions related thereto), are “forward-looking statements,” within the meaning of the federal securities laws. In addition, the Company and its representatives may from time to time make other oral or written statements which are also “forward-looking statements.” Forward-looking statements can be identified by words, such as “believes,” “estimates,” “anticipates,” “expects” and other words of similar meaning in connection with a
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discussion of future operating or financial performance. These may include, among others, statements relating to (i) the Company’s plans or objectives for future operations, products or financial performance, (ii) the Company’s indebtedness and other contractual obligations, (iii) the impact of an economic downturn or growth in particular regions, (iv) anticipated uses of cash, (v) cost reduction efforts and expected savings, (vi) the Company’s policies with respect to executive compensation and (vii) the expected outcome of contingencies, including with respect to asbestos-related litigation and pension and postretirement liabilities.
These forward-looking statements are made based upon management’s expectations and beliefs concerning future events impacting the Company and, therefore, involve a number of risks and uncertainties. Management cautions that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.
Important factors that could cause the actual results of operations or financial condition of the Company to differ include, but are not necessarily limited to, the ability of the Company to expand successfully in international and emerging markets; the ability of the Company to repay, refinance or restructure its short and long-term indebtedness on adequate terms and to comply with the terms of its agreements relating to debt; the impact of Brexit; the Company’s ability to generate significant cash to meet its obligations and invest in its business and to maintain appropriate debt levels; restrictions on the Company’s use of available cash under its debt agreements; changes or differences in U.S. or international economic or political conditions, such as inflation or fluctuations in interest or foreign exchange rates (and the effectiveness of any currency or interest rate hedges), tax rates, and applicable tax laws (including with respect to taxation of unrepatriated non-U.S. earnings or as a result of the depletion of net loss or foreign tax credit carryforwards); the impact of foreign trade laws and practices; the collectability of receivables; war or acts of terrorism that may disrupt the Company’s production or the supply or pricing of raw materials impact the financial condition of customers or adversely affect the Company’s ability to refinance or restructure its remaining indebtedness; changes in the availability and pricing of raw materials (including aluminum can sheet, steel tinplate, energy, water, inks and coatings) and the Company’s ability to pass raw material, energy and freight price increases and surcharges through to its customers or to otherwise manage these commodity pricing risks; the Company’s ability to obtain and maintain adequate pricing for its products, including the impact on the Company’s revenue, margins and market share and the ongoing impact of price increases; energy and natural resource costs; the cost and other effects of legal and administrative cases and proceedings, settlements and investigations; the outcome of asbestos-related litigation (including the number and size of future claims and the terms of settlements, and the impact of bankruptcy filings by other companies with asbestos-related liabilities, any of which could increase Crown Cork’s asbestos-related costs over time, the adequacy of reserves established for asbestos-related liabilities, Crown Cork’s ability to obtain resolution without payment of asbestos-related claims by persons alleging first exposure to asbestos after 1964, and the impact of state legislation dealing with asbestos liabilities and any litigation challenging that legislation and any future state or federal legislation dealing with asbestos liabilities); the Company’s ability to realize deferred tax benefits; changes in the Company’s critical or other accounting policies or the assumptions underlying those policies; labor relations and workforce and social costs, including the Company’s pension and postretirement obligations and other employee or retiree costs; investment performance of the Company’s pension plans; costs and difficulties related to the acquisition of a business and integration of acquired businesses; the impact of any actual or potential dispositions, acquisitions or other strategic realignments (such as the Company's recently completed divestiture of its European Tinplate business), which may impact the Company’s operations, financial profile, investments or levels of indebtedness; the Company’s ability to realize efficient capacity utilization and inventory levels and to innovate new designs and technologies for its products in a cost-effective manner; competitive pressures, including new product developments, industry overcapacity, or changes in competitors’ pricing for products; the Company’s ability to achieve high capacity utilization rates for its equipment; the Company’s ability to maintain, develop and capitalize on competitive technologies for the design and manufacture of products and to withstand competitive and legal challenges to the proprietary nature of such technology; the Company’s ability to protect its information technology systems from attacks or catastrophic failure; the strength of the Company’s cyber-security (including with respect to human vulnerabilities associated with cyber-security risks); the Company’s ability to generate sufficient production capacity; the Company’s ability to improve and expand its existing product and product lines; the impact of overcapacity on the end-markets the Company serves; loss of customers, including the loss of any significant customers; changes in consumer preferences for different packaging products; the financial condition of the Company’s vendors and customers; weather conditions, including their effect on demand for beverages and on crop yields for fruits and vegetables stored in food containers; the impact of natural disasters, including in emerging markets; the impact of the COVID-19 pandemic, as well as the quarantines and other governmental and non-governmental restrictions which have been imposed throughout the world in an effort to contain, mitigate, or vaccinate against it; changes in governmental regulations or enforcement practices, including with respect to environmental, health and safety matters and restrictions as to foreign investment or operation; the impact of increased governmental regulation on the Company and its products, including the regulation or restriction of the use of bisphenol-A; the impact of the Company’s recent initiatives to generate additional cash, including the reduction of working capital levels and capital spending; the impact of the Company's comprehensive Board-led review of its portfolio and capital allocation/return; the ability of the Company to realize cost savings from its restructuring
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programs; the Company’s ability to maintain adequate sources of capital and liquidity; costs and payments to certain of the Company’s executive officers in connection with any termination of such executive officers or a change in control of the Company; the impact of existing and future legislation regarding refundable mandatory deposit laws in Europe for non-refillable beverage containers and the implementation of an effective return system; the impact of existing and future legislation regarding the taxation of sugar-sweetened beverages or energy drinks, the impact of tariffs and potential limits on steel supply in the U.S. from certain foreign countries; and changes in the Company’s strategic areas of focus, which may impact the Company’s operations, financial profile or levels of indebtedness.
Some of the factors noted above are discussed elsewhere in this Annual Report and prior Company filings with the SEC, including within Part I, Item 1A, “Risk Factors” in this Annual Report. In addition, other factors have been or may be discussed from time to time in the Company’s SEC filings.
While the Company periodically reassesses material trends and uncertainties affecting the Company’s results of operations and financial condition in connection with the preparation of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and certain other sections contained in the Company’s quarterly, annual or other reports filed with the SEC, the Company does not intend to review or revise any particular forward-looking statement in light of future events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the captions “Market Risk” and "Forward Looking Statements" in this Annual Report is incorporated herein by reference.
In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intended to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rate Committee has announced the replacement of U.S. dollar LIBOR rates with a new index calculated by short-term repurchase agreements backed by U.S. Treasury securities called the Secured Overnight Financing Rate (SOFR). The first publication of SOFR was released in April 2018. In March 2021, the Financial Conduct Authority, and administrator, ICE Benchmark Administration, Limited, announced that the publication of the one-week and two-month USD LIBOR maturities and non-USD LIBOR maturities will cease immediately after December 31, 2021, with the remaining USD LIBOR maturities ceasing immediately after June 30, 2023. At December 31, 2021, the Company does have contracts that are indexed to LIBOR, including certain of its term loan facilities, and continues to monitor this activity and evaluate the related risks. The LIBOR to SOFR transition is not expected to have a material impact on the Company's consolidated financial statements.
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Crown Holdings, Inc.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Financial Statements
Management’s Report on Internal Control Over Financial Reporting 41
Consolidated Balance Sheets as of December 31, 2021 and 2020 46
Notes to Consolidated Financial Statements 49
Financial Statement Schedule
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Crown Holdings, Inc.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). The Company’s system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of the inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013). Based on its assessment, management has concluded that, as of December 31, 2021, the Company’s internal control over financial reporting was effective based on those criteria.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
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Crown Holdings, Inc.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Crown Holdings, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Crown Holdings, Inc. and its subsidiaries(the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, of comprehensive income, of changes in shareholders' equity and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 2021in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Crown Holdings, Inc.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessments - North America Food and Transit Reporting Units
As described in Notes A and F to the consolidated financial statements, the Company’s consolidated goodwill balance was $3.0 billion as of December 31, 2021, a portion of which relates to the North America Food and Transit reporting units. Management performs a goodwill impairment review in the fourth quarter of each year or when facts and circumstances indicate goodwill may be impaired. Management determines the estimated fair value of the reporting unit based on an average of the estimated fair values using an income and a market approach. The income approach utilizes significant assumptions relating to revenue and Adjusted EBITDA (defined by the Company as net customer sales, less cost of products sold excluding depreciation and amortization, less selling and administrative expenses) margin growth rates, discount rates, and terminal year exit multiples. As disclosed by management, under the market approach, management utilizes significant assumptions relating to EBITDA multiples used in recent similar transactions, if any, and EBITDA multiples of similar type and size public companies.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessments of the North America Food and Transit reporting units is a critical audit matter are (i) the significant judgment by management when determining the fair value of the North America Food and Transit reporting units; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to revenue and Adjusted EBITDA margin growth rates, discount rates, terminal year exit multiple and EBITDA multiples; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessments, including controls over the determination of the fair value of the North American Food and Transit reporting units. These procedures also included, among others (i) testing management’s process for determining the fair value of the North America Food and Transit reporting units; (ii) evaluating the appropriateness of the income and market approaches; (iii) testing the completeness and accuracy of the underlying data used in the income and market approaches; and (iv) evaluating the reasonableness of the aforementioned significant assumptions used by management. Evaluating management’s significant assumptions related to revenue and Adjusted EBITDA margin growth rates involved evaluating whether the significant assumptions used by management were reasonable considering (i) the current and past performance of the reporting units; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the Company’s income and market approaches and the evaluation of the reasonableness of the discount rate, terminal year exit multiple and EBITDA multiple significant assumptions.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 28, 2022
We have served as the Company’s auditor since 1928.
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Crown Holdings, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions except per share data)
Cost of products sold, excluding depreciation and amortization 9,029 7,359 7,575
Selling and administrative expense 583 533 556
Restructuring and other (28) 30 (30)
Loss from early extinguishments of debt 68 — 27
Other pension and postretirement 1,515 43 10
Interest income (9) (8) (15)
Foreign exchange (45) (2) 7
(Benefit from) / provision for income taxes (57) 199 136
Equity in net earnings of affiliates 3 6 5
Net (loss) / income from continuing operations (359) 532 500
Net (loss) / income from discontinued operations (52) 156 125
Net (loss) / income attributable to Crown Holdings $ (560) $ 579 $ 510
Net (loss) / income attributable to Crown Holdings $ (560) $ 579 $ 510
Earnings per common share attributable to Crown Holdings:
The accompanying notes are an integral part of these consolidated financial statements.
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Crown Holdings, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
Other comprehensive income / (loss), net of tax
Foreign currency translation adjustments 601 (88) 150
Pension and other postretirement benefits 696 (15) 84
Derivatives qualifying as hedges (2) 46 11
Total other comprehensive income / (loss) 1,295 (57) 245
Net income attributable to noncontrolling interests 149 109 115
Translation adjustments attributable to noncontrolling interests (1) 3 1
Derivatives qualifying as hedges attributable to noncontrolling interests 1 2 1
Comprehensive income attributable to Crown Holdings $ 735 $ 517 $ 753
The accompanying notes are an integral part of these consolidated financial statements.
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Crown Holdings, Inc.
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
Assets
Current assets
Cash and cash equivalents $ 531 $ 1,173
Prepaid expenses and other current assets 243 202
Current assets held for sale 97 743
Property, plant and equipment, net 4,036 3,652
Operating lease right-of-use assets, net 191 171
Other non-current assets 604 885
Non-current assets held for sale — 2,179
Liabilities and equity
Current liabilities
Short-term debt $ 75 $ 104
Current maturities of long-term debt 135 67
Current portion of operating lease liabilities 42 43
Current liabilities held for sale 14 981
Long-term debt, excluding current maturities 6,052 8,023
Postretirement and pension liabilities 497 685
Non-current portion of operating lease liabilities 150 132
Other non-current liabilities 696 766
Non-current liabilities held for sale — 199
Commitments and contingent liabilities (Note P)
Equity
Noncontrolling interests 418 406
Preferred stock, authorized: 30,000,000; none issued (Note T) — —
Common stock, par value: $5.00; authorized: 500,000,000 shares; issued:
Additional paid-in capital — 179
Accumulated other comprehensive loss (1,898) (3,193)
Crown Holdings shareholders’ equity 1,912 2,198
The accompanying notes are an integral part of these consolidated financial statements.
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Crown Holdings, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Cash flows from operating activities
Restructuring and other (26) 34 (26)
Loss from disposal of discontinued operations 101 — —
Goodwill impairment — — 25
Pension contributions (236) (27) (23)
Stock-based compensation 33 32 29
Loss from early extinguishments of debt 68 — 27
Changes in assets and liabilities:
Accounts payable and accrued liabilities 873 121 (87)
Net cash provided by operating activities 905 1,315 1,163
Cash flows from investing activities
Proceeds from sale of discontinued operations, net of cash disposed 2,255 — —
Proceeds from sale of property, plant and equipment 44 16 39
Net cash provided by / (used for) investing activities 1,507 (535) (374)
Cash flows from financing activities
Net change in revolving credit facility and short-term debt 12 29 (10)
Premiums paid to retire debt (64) — —
Debt issuance costs — — (18)
Foreign exchange derivatives related to debt (25) 43 (16)
Finance lease payments (2) (3) (15)
Dividends paid to noncontrolling interests (122) (87) (101)
Contribution from noncontrolling interests — 2 6
Dividends paid to shareholders (105) — —
Common stock issued 2 2 4
Common stock repurchased (950) (66) (7)
Net cash used for financing activities (2,944) (239) (786)
Net change in cash, cash equivalents and restricted cash (645) 575 4
Cash, cash equivalents and restricted cash at January 1 1,238 663 659
Cash, cash equivalents and restricted cash at December 31 $ 593 $ 1,238 $ 663
The accompanying notes are an integral part of these consolidated financial statements.
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Crown Holdings, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in millions)
Crown Holdings, Inc. Shareholders’ Equity
Dividends paid to noncontrolling interests — (101) (101)
Contribution from noncontrolling interests — 10 10
Sale of noncontrolling interests (3) (3) 4 1
Restricted stock awarded (2) 2 — —
Stock-based compensation 29 29 29
Common stock issued 4 4 4
Common stock repurchased (7) (7) (7)
Other comprehensive (loss) / income (62) (62) 5 (57)
Dividends paid to noncontrolling interests — (87) (87)
Restricted stock awarded (2) 2 — —
Stock-based compensation 32 32 32
Common stock issued 2 2 2
Common stock repurchased (60) (6) (66) (66)
Dividends paid to shareholders (105) (105) (105)
Dividends paid to noncontrolling interests — (122) (122)
Restricted stock awarded (3) — 2 (1) (1)
Common stock issued 2 2 2
Disposition of subsidiary with noncontrolling interests(1) — (15) (15)
(1) Relates to the sale of the European Tinplate business. See Note B for further details.
The accompanying notes are an integral part of these consolidated financial statements.
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Crown Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except share, per share, employee and statistical data)
A.Summary of Significant Accounting Policies
Business and Principles of Consolidation. The consolidated financial statements include the accounts of Crown Holdings, Inc. (the “Company”) and its consolidated subsidiary companies (where the context requires, the “Company” shall include reference to the Company and its consolidated subsidiary companies).
The Company is a worldwide leader in the design, manufacture and sale of packaging products for consumer goods and industrial products. The Company's consumer packaging solutions primarily support the beverage and food industries through the sale of aluminum and steel cans. The Company's packaging for industrial products includes steel and plastic consumables and equipment, paper-based protective packaging, and plastic film consumables and equipment, which are sold into the metals, food and beverage, construction, agricultural, corrugated and general industries.
The financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and reflect management’s estimates and assumptions. Actual results could differ from those estimates, impacting reported results of operations and financial position. All intercompany accounts and transactions are eliminated in consolidation. In deciding which entities should be reported on a consolidated basis, the Company first determines whether the entity is a variable interest entity (“VIE”). If an entity is a VIE, the Company determines whether it is the primary beneficiary and therefore, should consolidate the VIE. If an entity is not a VIE, the Company consolidates those entities in which it has control, including certain subsidiaries that are not majority-owned. Certain of the Company’s agreements with noncontrolling interests contain provisions in which the Company would surrender certain decision-making rights upon a change in control of the Company. Accordingly, consolidation of these operations may no longer be appropriate subsequent to a change in control of the Company, as defined in the agreements.
Investments in companies in which the Company does not have control, but has the ability to exercise significant influence over operating and financial policies, are accounted for by the equity method. The proportionate share of the net income / (loss) resulting from these investments is reported in Equity in net earnings of affiliates in the Consolidated Statement of Operations. The carrying value of the Company's equity method investments are reported in Other non-current assets in the Consolidated Balance Sheets. Equity method investments are reported at cost and adjusted each period for the Company's share of the investee's income or loss and dividends paid, if any. The Company assess investments for impairment whenever events or changes in circumstances indicate that the carrying value of an investment may not be recoverable. Other investments are carried at cost.
Foreign Currency Translation. For non-U.S. subsidiaries which operate in a local currency environment, assets and liabilities are translated into U.S. dollars at year-end exchange rates. Income, expense and cash flow items are translated at average exchange rates prevailing during the year. Translation adjustments for these subsidiaries are accumulated as a separate component of accumulated other comprehensive income in equity. For non-U.S. subsidiaries that use a U.S. dollar functional currency, local currency inventories and property, plant and equipment are translated into U.S. dollars at rates prevailing when acquired; all other assets and liabilities are translated at year-end exchange rates. Inventories charged to cost of sales and depreciation are remeasured at historical rates; all other income and expense items are translated at average exchange rates prevailing during the year. Gains and losses which result from remeasurement are included in earnings.
Revenue Recognition. The majority of the Company’s revenues from metal packaging products are derived from multi-year requirement contracts with leading manufacturers and marketers of packaged consumer products for can sets, comprising a can and an end. As requirement contracts do not typically include fixed volumes, customers often purchase products pursuant to purchase orders or other communications which are short-term in nature. The can and the end are considered separate performance obligations because they are distinct and separately identifiable. Revenues from Transit Packaging are generally derived from individual purchase orders which may include multiple goods and services which are separate performance obligations because they are distinct and separately identifiable.
The Company manufactures certain products that have no alternative use to the Company once they are printed or manufactured to customer specifications. If the Company has an enforceable right to payment for custom products at all times in the manufacturing process, revenue is recognized over time. In each of the Company’s geographic markets, revenue from beverage cans is primarily recognized over time using the units produced output method as beverage cans are generally printed for a specific customer in a continuous production process. The timing of revenue recognition for the Company’s other products, including beverage ends and three-piece products, which includes food cans and ends and aerosol cans and ends, may vary as these products may be printed or customized depending upon customer preferences which can vary by geographic market. Revenue that is recognized over time for the Company’s three-piece products and equipment business is generally recognized
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Crown Holdings, Inc.
using the cost-to-cost input method as these products involve an intermediary step that results in customized work-in-process inventory. For products that follow a point in time model, revenue is generally recognized when title and risk of loss transfer.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Standalone selling prices for each performance obligation are generally stated in the contract. When the Company offers variable consideration in the form of volume rebates to customers, it estimates the most likely amount of revenue to which it is expected to be entitled and includes the estimate in the transaction price, limited to the amount which is probable will not result in reversal of cumulative revenue recognized when the variable consideration is resolved. When the Company offers customers options to purchase additional product at discounted prices, judgment is required to determine if the discounted prices represent material rights. If so, the transaction price allocated to the discount is based on its relative standalone price and is recognized upon purchase of the additional product. Customer payment terms are typically less than one year and as such, the Company has applied the practical expedient to exclude consideration of significant financing components from the determination of transaction price.
Taxes collected from customers and remitted to governmental authorities are excluded from net sales. Shipping and handling fees and costs from product sales are reported as cost of products sold and are accrued when the Company recognizes revenue over time before the shipping and handling activities occur. Costs to obtain a contract are generally immaterial but the Company has elected the practical expedient to expense these costs as incurred if the duration of the contract is one year or less.
Unbilled receivables are recorded for revenue recognized over time when the Company has determined that control has passed to the customer but the customer has not yet been invoiced because the Company does not have present right to payment. The Company generally has a present right to payment when title of product transfers. Unbilled receivables are included in receivables in the Consolidated Balance Sheet with a corresponding decrease to inventory.
Contract assets are recorded for revenue recognized over time when the Company has determined that control for a performance obligation has passed to the customer, but the right to invoice the customer is contingent upon the completion of the performance obligations included in the contract. Contract assets are classified as current as they are expected to be invoiced within one year and may not exceed their net realizable value.
Contract liabilities are established if the Company must defer the recognition of a portion of consideration received because it has to satisfy a future obligation. Contract liabilities are classified as current or noncurrent based on when the Company expects to recognize revenue.
Stock-Based Compensation. For awards with a service or market condition, compensation expense is recognized over the vesting period on a straight-line basis using the grant date fair value of the award and the estimated number of awards that are expected to vest. For awards with a performance condition, the Company assesses the probability of vesting at each reporting period and adjusts compensation cost based on its probability assessment. The Company’s plans provide for stock awards which may include accelerated vesting upon retirement, disability, or death of eligible employees. The Company considers a stock-based award to be vested when the service period is no longer contingent on the employee providing future service. Accordingly, the related compensation cost is recognized immediately for awards granted to retirement-eligible individuals, or over the period from the grant date to the date that retirement eligibility is achieved if less than the stated vesting period.
Cash, Cash Equivalents and Restricted Cash. Cash equivalents represent investments with maturities of three months or less from the time of purchase and are carried at cost, which approximates fair value because of the short maturity of those instruments. Outstanding checks in excess of funds on deposit are included in accounts payable.The Company generally classifies any cash that is legally restricted as to withdrawal or usage as restricted cash.
Accounts Receivable and Allowance for Credit Losses. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The measurement of expected credit losses is based on past events, historical experience, current conditions and forecasts that affect the collectability of accounts receivable.
Inventory Valuation. Inventories are stated at the lower of cost or net realizable value, with cost principally determined under the first-in, first-out (“FIFO”) or average cost method.
Property, Plant and Equipment. Property, plant and equipment (“PP&E”) is carried at cost less accumulated depreciation and includes expenditures for new facilities and equipment and those costs which substantially increase the useful lives or capacity of existing PP&E. Cost of constructed assets includes capitalized interest incurred during the construction and development period. Maintenance and repairs, including labor and material costs for planned major maintenance such as annual production line overhauls, are expensed as incurred. When PP&E is retired or otherwise disposed, the net carrying amount is eliminated with any gain or loss on disposition recognized in earnings at that time.
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Depreciation is provided on a straight-line basis over the estimated useful lives of the assets described below (in years). The Company periodically reviews the estimated useful lives of its PP&E and, where appropriate, changes are made prospectively.
Land improvements 25
Buildings and building improvements 25 – 40
Machinery and equipment 3– 18
Goodwill and Intangible Assets. Assets and liabilities of acquired businesses are recorded under the acquisition method of accounting at their estimated fair values at the dates of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying identifiable net assets of acquired businesses. Goodwill is carried at cost and reviewed for impairment annually in the fourth quarter of each year or when facts and circumstances indicate goodwill may be impaired. Goodwill is allocated to the reporting units at the time of each acquisition based on the relative fair values of the reporting units. In assessing goodwill for impairment, the Company may first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Further quantitative assessment may then be required. The quantitative assessment involves a number of assumptions and judgments, including the calculation of fair value for the Company’s identified reporting units. The Company determines the estimated fair value of each reporting unit based on an average of the estimated fair values using an income and a market approach. The income approach utilizes significant assumptions, including revenue and Adjusted EBITDA (a non-GAAP item defined by the Company as net customer sales, less cost of products sold excluding depreciation and amortization, less selling and administrative expenses) margin growth rates, discount rates and terminal year exit multiples. If the carrying value of a reporting unit exceeds its fair value, any impairment loss is measured by comparing the carrying value of the reporting unit to its fair value, not to exceed the carrying amount of goodwill.
Definite-lived intangible assets are carried at cost less accumulated amortization. Definite-lived intangibles are amortized on a straight-line basis over their estimated useful lives described below (in years). Definite-lived intangible assets are tested for impairment when facts and circumstances indicate the carrying value may not be recoverable from their undiscounted cash flows. If impaired, the assets are written down to fair value based on either discounted cash flows or appraised values.
Customer relationships 11 - 18
Trade names 8 - 27
Technology 6 - 8
Long-term supply contracts 15
Patents 8
Impairment or Disposal of Long-Lived Assets. In the event that facts and circumstances indicate that the carrying value of long-lived assets, primarily PP&E, may be impaired, the Company performs a recoverability evaluation. If the evaluation indicates that the carrying value of an asset is not recoverable from its undiscounted cash flows, an impairment loss is measured by comparing the carrying value of the asset to its fair value, based on discounted cash flows. Long-lived assets classified as held for sale are presented in the balance sheet at the lower of their carrying value or fair value less cost to sell.
Leases. The Company has operating and finance leases for land and buildings related to certain manufacturing facilities, warehouses and corporate offices, vehicle fleets and certain office and manufacturing equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company's lease terms include options to extend the lease when it is reasonably certain that the Company will exercise the option. Variable lease payment amounts that cannot be determined at commencement of the lease, such as increases in index rates, are not included in the measurement of the lease liabilities and corresponding right-of-use assets and are recognized in the period those payments are incurred. The Company separates lease and non-lease components of lease arrangements and allocates contract consideration based on standalone selling prices. Variable consideration is allocated to the lease and non-lease components to which the variable payments specifically relate. The discount rate implicit within the Company's leases is often not determinable and therefore the Company generally uses its incremental borrowing rate based on the information available at the commencement date of the lease in determining the present value of the lease payments. The incremental borrowing rate is determined based on lease term and the currency in which lease payments are made. The Company's leases do not contain any material residual value guarantees or material restrictive covenants.
Taxes on Income. The provision for income taxes is determined using the asset and liability approach. Deferred taxes represent the future expected tax consequences of differences between the financial reporting and tax bases of assets and liabilities based
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upon enacted tax rates and laws. The Company has made an accounting policy election to treat taxes due on future U.S. inclusions of certain intangible income of foreign subsidiaries as a current period expense when incurred.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Investment tax credits are accounted for using the deferral method. Income tax-related interest and penalties are reported as income tax expense.
Derivatives and Hedging. All outstanding derivative financial instruments are recognized in the balance sheet at their fair values. The impact on earnings from recognizing the fair values of these instruments depends on their intended use, their hedge designation and their effectiveness in offsetting changes in the fair values of the exposures they are hedging. Changes in the fair values of instruments designated to reduce or eliminate adverse fluctuations in the fair values of recognized assets and liabilities are reported currently in earnings along with changes in the fair values of the hedged items. Changes in the effective portions of the fair values of instruments used to reduce or eliminate adverse fluctuations in cash flows of anticipated or forecasted transactions are reported in equity as a component of accumulated other comprehensive income. Amounts in accumulated other comprehensive income are reclassified to earnings when the related hedged items impact earnings or the forecasted transactions become probable of not occurring. Changes in the fair values of derivative instruments that are not designated as hedges or do not qualify for hedge accounting treatment are reported currently in earnings. Amounts reported in earnings are classified consistent with the item being hedged.
The effectiveness of derivative instruments in reducing risks associated with the hedged exposures is assessed at inception and on an ongoing basis. Time value, a component of an instrument’s fair value, is excluded in assessing effectiveness for fair value hedges, except hedges of firm commitments, and included for cash flow hedges.
Hedge accounting is discontinued prospectively when (i) the instrument is no longer effective in offsetting changes in fair value or cash flows of the underlying hedged item, (ii) the instrument expires, is sold, terminated or exercised, or (iii) designating the instrument as a hedge is no longer appropriate.
The Company formally documents all relationships between its hedging instruments and hedged items at inception, including its risk management objective and strategy for establishing various hedge relationships. Cash flows from hedging instruments are classified in the Consolidated Statements of Cash Flows consistent with the items being hedged.
Treasury Stock. Treasury stock is reported at par value. The excess of fair value over par value is first charged to paid-in capital, if any, and then to retained earnings.
Research and Development. Research, development and engineering costs of $47 in 2021, $48 in 2020, and $50 in 2019 were expensed as incurred and reported in selling and administrative expense in the Consolidated Statements of Operations. Substantially all engineering and development costs are related to developing new products or designing significant improvements to existing products or processes. Costs primarily include employee salaries and benefits and facility costs.
Reclassifications. Certain reclassifications of prior years’ data have been made to conform to the current year presentation.
Recent Accounting and Reporting Pronouncements.
Recently Adopted Accounting Standards
On January 1, 2021, the Company adopted new guidance to simplify the accounting for income taxes by, among other things, reducing complexity in the interim-period accounting for year-to-date loss limitations and changes in tax laws. The guidance did not have a material impact on the Company's consolidated financial statements.
B. Divestitures
On August 31, 2021, the Company completed the sale (the “Transaction”) of its European Tinplate business (the “Business”) to Kouti B.V., an affiliate of KPS Capital Partners LP. The Business comprised the Company’s European Food segment and its European Aerosol and Promotional Packaging reporting unit which was previously reported in Other. The Company received pre-tax proceeds of approximately €1.9 billion ($2.3 billion) from the Transaction and received a 20% minority interest in the Business. Proceeds from the Transaction, along with cash provided by operating activities, were used to fund capital projects, repurchase Company stock and to redeem certain of the Company's senior notes as further described in Note M.
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The Company recorded a pre-tax loss of $101, including $553 of currency translation adjustments which were reclassified from accumulated other comprehensive income upon completion of the sale. The Company also recorded income tax charges of $81 related to taxable gains on the sale of the Business.
Major components of net (loss) / income from discontinued operations were as follows:
Cost of products sold, excluding depreciation and amortization 1,301 1,823 1,774
Depreciation and amortization 16 59 59
Selling and administrative expense 60 81 75
Restructuring and other 2 4 4
Goodwill impairment — — 25
Other pension and postretirement 1 2 3
Interest income — — (2)
Foreign exchange — 3 2
Loss on sale of discontinued businesses 101 — —
Transaction costs 34 — —
Income from discontinued operations before tax 64 201 155
Provision for income taxes 116 45 30
Net (loss) / income from discontinued operations (52) 156 125
Major classes of assets and liabilities of the Business classified as held for sale at December 31, 2020 were as follows:
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Crown Holdings, Inc.
Receivables, net $ 281
Prepaid expenses and other current assets 30
Total current assets held for sale $ 721
Intangible assets, net 125
Property, plant and equipment, net 546
Operating lease right-of-use assets, net 43
Other non-current assets 17
Total non-current assets held for sale $ 2,178
Short-term debt $ 17
Current portion of operating lease liabilities 12
Accounts payable 725
Accrued liabilities 227
Total current liabilities held for sale $ 981
Postretirement and pension liabilities $ 77
Non-current portion of operating lease liabilities 32
Other non-current liabilities 90
Total non-current liabilities held for sale $ 199
The table above excludes assets held for sale unrelated to the Business that are not material for disclosure.
The capital expenditures of the Business were as follows:
Capital expenditures $ 29 $ 33 $ 41
The Company accounted for the minority interest received in the Business under the equity method. The Company's share of income of the Business was a loss of $8 for the year ended December 31, 2021.
In October 2021, the Company signed an agreement to sell a Transit Packaging business for approximately $180. The transaction is subject to customary regulatory approvals and is expected to close in the second quarter of 2022. The Company expects to record an after tax gain of approximately $100 related to the transaction. The assets and liabilities of this business are classified as held for sale as of December 31, 2021. The transaction will not represent a strategic shift that will have a major effect on the Company's operations and financial results, and therefore does not qualify for reporting as a discontinued operation.
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Crown Holdings, Inc.
C. Cash, Cash Equivalents, and Restricted Cash
Cash, cash equivalents, and restricted cash included in the Company's Consolidated Balance Sheets and Statements of Cash Flows were as follows:
Cash and cash equivalents $ 531 $ 1,173
Restricted cash included in prepaid expenses and other current assets 61 64
Restricted cash included in other non-current assets 1 1
Total restricted cash 62 65
Total cash, cash equivalents and restricted cash $ 593 $ 1,238
Amounts included in restricted cash primarily represent amounts required to be segregated by certain of the Company's receivables securitization agreements.
D. Receivables
Less: allowance for credit losses (20) (20)
Miscellaneous receivables 295 210
The Company uses receivables securitization and factoring facilities in the normal course of business as part of managing its cash flows. The Company primarily accounts for transfers under these facilities as sales because it has met the criteria for control of the receivables to be considered transferred. The Company’s continuing involvement in the transfers is limited to servicing the receivables. The Company receives adequate compensation for servicing the receivables and no servicing asset or liability is recorded.
As of December 31, 2021 and 2020, the Company derecognized receivables of $1,011 and $852 related to the facilities.
The Company recorded expenses related to the facilities for the years ended December 31, 2021, 2020 and 2019 of $13 as interest expense.
E. Inventories
Raw materials and supplies $ 1,094 $ 800
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Crown Holdings, Inc.
F. Goodwill
Changes in the carrying amount of goodwill by reportable segment for the years ended December 31, 2021 and 2020 were as follows:
Americas Beverage European Beverage Transit Packaging Other Total
Held for sale reclassification — — (58) — (58)
Foreign currency translation (14) (25) (42) — (81)
Goodwill reclassified to current assets held for sale during 2021 related to the expected sale of a Transit Packaging business. See Note B for more information.
The carrying amount of goodwill at December 31, 2021 and 2020 was net of the following accumulated impairments:
Americas Beverage European Beverage Other Total
G. Intangible Assets
Gross carrying amounts and accumulated amortization of finite-lived intangible assets by major class were as follows:
Gross Accumulated amortization Net Gross Accumulated amortization Net
Amortization expense for the years ended December 31, 2021, 2020, and 2019 was $165, $162 and $169.
During the year-ended December 31, 2021, $13 of intangible assets related to the expected sale of a Transit Packaging business were reclassified to current assets held for sale. See Note B for more information.
Annual amortization expense is estimated to be $165 for 2022 and 2023, $154 for 2024, $147 for 2025, and $138 for 2026.
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Crown Holdings, Inc.
H. Property, Plant and Equipment
Buildings and improvements $ 1,226 $ 1,137
Construction in progress 612 483
Less: accumulated depreciation and amortization (3,382) (3,156)
I. Leases
The components of lease expense for the years ended December 31, 2021, 2020 and 2019 were as follows:
Operating lease costs:
Operating lease cost $ 48 $ 39 $ 36
Short-term lease cost 3 5 4
Total operating lease costs $ 51 $ 44 $ 40
Finance lease cost:
Amortization of right-of-use assets $ 1 $ 1 $ 1
Total finance lease costs $ 1 $ 1 $ 1
Variable operating lease costs were $3 for each of the years ended December 31, 2021, 2020, and 2019. Interest on finance lease liabilities was less than $1 for each of the years ended December 31, 2021, 2020, and 2019.
Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 51 $ 44 $ 38
Financing cash flows from finance leases 2 3 15
Right-of-use assets obtained in exchange for lease obligations:
Operating leases $ 73 $ 42 $ 22
Supplemental balance sheet information related to finance leases was as follows:
Finance leases:
Property, plant and equipment $ 26 $ 28
Accumulated depreciation (2) (2)
Property, plant and equipment, net $ 24 $ 26
Accrued liabilities $ 2 $ 2
Other non-current liabilities 8 10
Total finance lease liabilities $ 10 $ 12
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Crown Holdings, Inc.
The weighted average remaining lease term and weighted average discount rates for each year were as follows:
Weighted average remaining lease term (years):
Finance leases 5.7 6.6
Weighted average discount rate:
Operating leases 4.3 % 4.4 %
Finance leases 3.2 % 3.4 %
Maturities of lease liabilities as of December 31, 2021 were as follows:
Operating Leases Finance Leases
Total lease payments 253 11
Less imputed interest (61) (1)
At December 31, 2021, the Company did not have material lease commitments that had not commenced.
J. Other Non-Current Assets
Fair value of derivatives 51 11
K. Accrued Liabilities