Crown Holdings, Inc. — 2019 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Crown Holdings, Inc. is a global packaging company serving beverage, food, transit-packaging and other markets. This unaudited Form 10-Q covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. The results include the Signode Industrial Group acquisition, completed April 3, 2018, which added the Transit Packaging segment and was purchased for approximately $3.9 billion.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $2,755 million | $2,197 million | +25% |
| Income from operations | $262 million | $221 million | +19% |
| Operating margin | 9.5% | 10.1% | Down 0.6 percentage points |
| Net income | $131 million | $113 million | +16% |
| Net income attributable to Crown | $103 million | $90 million | +14% |
| Net margin attributable to Crown | 3.7% | 4.1% | Down 0.4 percentage points |
| Diluted EPS | $0.77 | $0.67 | +15% |
| Net cash used in operating activities | $(666) million | $(751) million | Use decreased by $85 million |
| Capital expenditures | $75 million | $92 million | Down $17 million |
Revenue growth primarily reflected $569 million of Signode revenue and increased beverage and food-can volumes, partly offset by a $75 million unfavorable foreign-currency translation effect. Segment income increased to $318 million from $253 million for reportable segments, including $73 million contributed by Transit Packaging.
Interest expense increased to $98 million from $74 million because of borrowings used to finance the Signode acquisition. The effective tax rate was 27%, compared with 26% in the prior-year quarter.
Financial Position, Debt and Liquidity
- Cash and cash equivalents were $301 million at March 31, 2019, down from $607 million at December 31, 2018. Cash, cash equivalents and restricted cash totaled $348 million.
- Total debt carrying amounts were approximately $9.0 billion, consisting of $125 million of short-term debt, $83 million of current long-term maturities and $8.814 billion of long-term debt excluding current maturities, versus approximately $8.7 billion at year-end 2018.
- The company had $897 million of available borrowing capacity under its $1.65 billion revolving credit facility after $687 million of borrowings and $66 million of standby letters of credit.
- Current assets were $4.024 billion and current liabilities were $3.342 billion. Operating lease right-of-use assets and liabilities of approximately $213 million and $214 million, respectively, were recognized following adoption of the new lease standard.
- Accounts receivable increased to $1.686 billion and inventories increased to $1.851 billion from $1.602 billion and $1.690 billion, respectively, at December 31, 2018.
Material Changes Versus the Prior Comparable Period
- Signode added $569 million of quarterly sales and $73 million of segment income; its acquisition also increased depreciation, amortization, selling and administrative expense and interest expense.
- Operating income benefited from higher volumes, but operating margin declined because of the acquisition-related cost structure and higher amortization.
- Americas Beverage segment income rose to $113 million from $98 million, primarily due to higher volumes and the absence of prior-year start-up costs.
- European Beverage segment income declined to $39 million from $55 million due to new-plant costs, lower Middle East volumes and currency effects.
- European Food segment income declined to $48 million from $56 million because of higher energy and labor costs and currency effects.
- Asia Pacific segment income was broadly unchanged at $45 million, despite facility closures in China and stronger Southeast Asian volumes.
- Operating cash use improved but remained negative, largely because of seasonal working-capital needs. Accounts payable and accrued liabilities decreased by $612 million during the quarter, while inventories increased by $171 million.
Guidance, Outlook, Commentary and Unusual Items
- Management identified leverage reduction as the primary capital-allocation focus through 2020.
- 2019 capital expenditures are expected to be approximately $400 million to $425 million.
- Management expects a new one-line beverage-can plant in Rio Verde, Brazil, to begin operations during the fourth quarter of 2019. New or expanded facilities also began operations in Spain, Italy, Myanmar and Cambodia.
- Restructuring and other charges were $4 million, including a $6 million impairment related to a fire at an Asian production facility and an $8 million charge for European headcount reductions, partly offset by $9 million of income from a favorable Brazilian tax-related court ruling. Restructuring accruals were $25 million and were expected to be paid over the following twelve months.
- The company recorded a $6 million loss from early extinguishment of debt and benefited from pension and postretirement items, including an $18 million operating-statement benefit.
- Asbestos-related liabilities accrued at March 31, 2019 were $292 million, including $244 million for unasserted claims. The company stated that actual losses could exceed the accrual but that the excess could not be reasonably estimated.
- An ongoing European Commission competition-law investigation may result in material fines. Management considers a loss probable but has not recorded a charge because the outcome and potential range of loss cannot be estimated.
- Steel and aluminum cost volatility, tariffs and the ability to pass cost increases through to customers remain important operating risks.
- The company had approximately $3.4 billion of floating-rate debt; a 0.25 percentage-point change in floating rates would affect annual pretax interest expense by approximately $8 million.
Most Important Facts for Investors to Verify
- Whether Signode integration and expected synergies offset the higher interest, amortization and operating costs associated with the acquisition.
- Progress toward management’s stated objective of reducing leverage through 2020, including revolving-facility borrowings and debt maturities.
- Conversion of seasonal working-capital investment into operating cash flow during the remaining quarters of 2019.
- Actual 2019 capital expenditures compared with the $400 million to $425 million expectation and the progress of new beverage-can facilities.
- Developments in the European Commission competition investigation and the potential effect of any penalties.
- Changes in asbestos claims, accruals and litigation outcomes, particularly challenges to statutory liability limits.
- The company’s ability to recover steel, aluminum, energy and tariff-related cost increases through pricing.