CROWN HOLDINGS, INC. quarterly report, Q3 FY2017

Crown Holdings, Inc. — Form 10-Q Summary

Business context and reporting period

Crown Holdings manufactures metal packaging, including beverage cans and ends, food cans, aerosol cans, closures, specialty packaging, glass bottles and related equipment. The company’s strategic focus is global beverage-can growth, supported by capacity additions in Mexico, the United States, Colombia, Europe and Asia. This unaudited filing covers the three and nine months ended September 30, 2017, compared with the comparable 2016 periods.

Financial results and key metrics

Metric	Q3 2017	Q3 2016	9M 2017	9M 2016
Net sales	$2,468 million	$2,326 million	$6,530 million	$6,361 million
Income from operations	$347 million	$315 million	$855 million	$829 million
Operating margin	14.1%	13.5%	13.1%	13.0%
Net income attributable to Crown	$177 million	$183 million	$412 million	$431 million
Diluted EPS	$1.32	$1.31	$3.02	$3.09
Net cash from operating activities	Not separately provided	Not separately provided	$488 million	$376 million

Third-quarter sales increased 6.1%, while nine-month sales increased 2.7%. Growth primarily reflected pass-through of higher raw-material costs and higher beverage, food and aerosol can volumes.
Third-quarter operating income increased 10.2%; nine-month operating income increased 3.1%. Operating margin improved modestly despite higher material costs.
Net income attributable to Crown declined 3.3% in the quarter and 4.4% year to date. Diluted EPS increased slightly in the quarter because of the lower share count but declined year to date.
Net income was $208 million in the quarter and $489 million year to date, including $31 million and $77 million, respectively, attributable to noncontrolling interests.
Cash provided by operations increased to $488 million from $376 million, primarily because of higher operating income and lower pension contributions. Capital expenditures were $282 million versus $244 million.
Cash and equivalents were $374 million at September 30, 2017, down from $559 million at December 31, 2016. Approximately $311 million was held outside the United States.
Total debt consisted of $50 million of short-term debt and $5.23 billion of long-term debt principal, including $68 million of current maturities. The carrying amount of long-term debt, excluding current maturities, was $5.114 billion.
The company reported $1.310 billion of available revolving-credit capacity after borrowings and standby letters of credit, and stated it remained in compliance with leverage covenants.

Material changes versus the prior comparable period

Americas Beverage sales increased to $763 million from $719 million and segment income increased to $131 million from $119 million in the quarter. Growth reflected 2% higher volume and $26 million of aluminum-cost pass-through, partly offset by start-up costs at the Nichols, New York plant.
Asia Pacific sales increased to $300 million from $281 million and segment income increased to $40 million from $37 million in the quarter. Southeast Asian volumes increased 12%, while closures in Shanghai and Beijing reduced volumes but improved cost performance.
European Beverage segment income declined to $78 million from $83 million in the quarter, primarily because of lower Middle East sales.
North America Food segment income declined to $23 million from $25 million in the quarter because of product mix; nine-month segment income increased to $61 million from $57 million.
Interest expense increased to $64 million from $59 million in the quarter and to $187 million from $181 million year to date, primarily because of higher average borrowing rates.
The effective tax rate increased to 28% from 19% in the quarter and to 27% from 24% year to date. The 2016 rate benefited from a $31 million Canadian valuation-allowance release.
Restructuring and other charges were $12 million in the quarter and $26 million year to date, compared with $20 million and $19 million, respectively, in 2016. The 2017 year-to-date amount included a $19 million Mivisa-related litigation settlement charge and a $4 million pension curtailment benefit.
The company repurchased $339 million of common stock during the first nine months, compared with $8 million in the prior-year period. The remaining authorization was $669 million at September 30, 2017.
In April 2017, the company amended its credit agreement and recorded a $7 million loss from early extinguishment of debt. The 2016 comparable period included $37 million of such losses.
Foreign currency translation generated $226 million of other comprehensive income in the first nine months of 2017 versus a $170 million loss in 2016, materially increasing comprehensive income.

Guidance, outlook, risks and unusual items

Management expects 2017 capital expenditures of approximately $450 million. Capital commitments outstanding at September 30 were approximately $113 million.
Management expects continued global beverage-can demand, particularly in Southeast Asia, Mexico and other growth markets. Planned or developing projects include facilities or expansions in Mexico, Spain, Myanmar, Indonesia and Vietnam; a Chihuahua, Mexico glass-bottle facility is expected to be operational in the first half of 2018.
Food and aerosol can volumes remain stable to declining in several mature markets. The company continues to evaluate capacity reductions, plant closures and headcount actions, which could result in additional material restructuring charges.
Steel and aluminum prices are volatile. Although the company seeks to pass cost increases to customers, it may be unable to recover all raw-material and aluminum-premium increases.
Asbestos-related accruals were $327 million at September 30, including $270 million for unasserted claims. The company had 55,500 outstanding claims and paid $10 million to settle claims during the first nine months. Actual losses could exceed the accrual, but the company cannot estimate the reasonably possible excess loss.
The German Federal Cartel Office investigation into alleged anticompetitive conduct remains ongoing. Management believes a loss is probable but cannot estimate the amount or range of any additional loss; the outcome could materially affect operating results and cash flows.
U.S. Customs assessed an $18 million penalty for alleged intentional import misclassification. The company paid approximately $1 million of related duties, disputes the penalty and has not accrued a liability because a loss was not considered probable.
Environmental remediation accruals totaled $16 million, consisting of $9 million for PRP sites and $7 million for company-owned locations. Potential excess losses cannot be estimated.
Two reporting units had estimated fair values only 25% and 26% above carrying values at October 1, 2016. A sufficient decline in projected Adjusted EBITDA could result in potential goodwill impairment charges of up to $95 million and $118 million, respectively.
The company is preparing for revenue-recognition adoption in the first quarter of 2018 and expects a material timing impact for certain products manufactured to customer specifications. Lease accounting adoption in 2019 may materially affect the balance sheet.

Important facts for investors to verify

Whether volume growth and new-plant ramp-ups offset commodity inflation, start-up costs and mature-market weakness.
The company’s debt reduction, refinancing needs, interest-rate exposure and compliance with leverage covenants; $1.2 billion of debt was floating-rate at quarter end.
The ultimate exposure from asbestos claims, the German cartel investigation and the disputed customs penalty.
Progress toward the approximately $450 million 2017 capital-expenditure plan and the funding of approximately $113 million of capital commitments.
The sustainability of operating margins after excluding restructuring, litigation, pension and other unusual items.
The effect of the 2018 revenue-recognition adoption and future lease-accounting adoption on reported revenue, assets, liabilities and operating income.
Whether continued share repurchases are consistent with debt reduction and liquidity objectives, given cash declined to $374 million.