CROWN HOLDINGS, INC. quarterly report, Q2 FY2018

Crown Holdings, Inc. — 2018 Q2 Form 10-Q Summary

Business context and reporting period

Quarterly report for the three and six months ended June 30, 2018. Crown manufactures metal packaging products, including beverage, food and aerosol cans, and began reporting Transit Packaging following its April 3, 2018 acquisition of Signode Industrial Group. Results include Signode from the acquisition date.

Financial performance and position

Metric	Three months ended June 30, 2018	Three months ended June 30, 2017	Six months ended June 30, 2018	Six months ended June 30, 2017
Net sales	$3,046 million	$2,161 million	$5,243 million	$4,062 million
Income from operations	$292 million	$259 million	$513 million	$484 million
Net income attributable to Crown	$132 million	$128 million	$222 million	$235 million
Diluted EPS	$0.99	$0.94	$1.66	$1.71

Three-month sales increased 41%; six-month sales increased 29%, primarily from Signode, higher beverage-can volumes, material-cost pass-through and favorable foreign currency translation.
Operating margins were approximately 9.6% in the quarter and 9.8% year to date, compared with 12.0% and 11.9%, respectively, in the prior-year periods.
Net margins attributable to Crown were approximately 4.3% in the quarter and 4.2% year to date, compared with 5.9% and 5.8%, respectively.
Interest expense rose to $103 million from $61 million in the quarter and to $177 million from $123 million year to date, primarily because of acquisition-related borrowings.
Cash used in operating activities was $492 million for the six months, compared with $475 million in 2017. Capital expenditures were $200 million; management expected approximately $460 million of capital expenditures for full-year 2018.
Cash and cash equivalents were $298 million at June 30, 2018, compared with $424 million at December 31, 2017. Total cash, cash equivalents and restricted cash were $307 million.
At June 30, total debt included $31 million of short-term debt, $84 million of current maturities and $9,236 million of long-term debt excluding current maturities.
The revolving credit facility had $1.252 billion of available borrowing capacity, after $344 million of borrowings and $54 million of standby letters of credit. The filing states the company remained in compliance with leverage covenants.

Material changes versus the prior comparable period

Signode was acquired for $3.9 billion in cash. The acquisition added $620 million of second-quarter sales and $94 million of segment income; it also added $1.503 billion of preliminary goodwill and $1.935 billion of identifiable intangible assets.
The acquisition was financed with substantial new debt. Long-term debt excluding current maturities increased from $5.217 billion at December 31, 2017 to $9.236 billion at June 30, 2018.
Second-quarter net income attributable to Crown increased modestly, but year-to-date net income and EPS declined because of higher interest, depreciation and amortization, acquisition-related items and other costs.
Second-quarter results included a $40 million fair-value adjustment related to the sale of Signode inventory and $19 million of Signode transaction costs. Year-to-date restructuring and other charges were $29 million.
Revenue-recognition guidance adopted January 1, 2018 accelerated or deferred the timing of revenue for certain products. Management does not expect a material full-year revenue impact, but quarterly comparisons may be affected.
Foreign currency translation increased year-to-date sales by approximately $198 million. Other comprehensive income was a loss of $58 million year to date, largely reflecting foreign currency translation.

Guidance, outlook, commentary, risks and unusual items

Management’s stated capital-allocation priority through 2020 is to reduce leverage while continuing to invest in the business.
Management expects global beverage-can demand to remain a principal organic growth driver, particularly in emerging markets. Food and aerosol can volumes have been stable to declining in recent years.
Elevated North American freight costs were expected to continue through the remainder of 2018. Aluminum and steel price volatility, including recently imposed tariffs, could pressure margins if costs cannot be passed through to customers.
The company had approximately $134 million of capital commitments, primarily in European Beverage, and expected to fund them mainly through operating cash flow.
Asbestos-related accruals were $309 million at June 30, 2018, including $259 million for unasserted claims. The company states that actual losses could exceed the accrual but cannot estimate the excess exposure.
An investigation by the European Commission into potential competition-law violations was ongoing. Management believed a loss was probable but had not recorded a charge because the outcome and loss range could not be estimated; potential fines could materially affect results and cash flows.
Environmental remediation accruals totaled $16 million. Other litigation and claims were not expected by management to materially affect consolidated results, although outcomes remain uncertain.
The North America Food reporting unit’s estimated fair value exceeded carrying value by 63% at October 1, 2017. A 38% decline in projected Adjusted EBITDA could reduce fair value to carrying value and could result in an impairment charge of up to $115 million.
Approximately $3.5 billion of principal floating-rate debt was outstanding. A 0.25 percentage-point change in floating interest rates would affect annual pretax interest expense by approximately $9 million.

Most important facts for investors to verify

Progress integrating Signode, its sustainable contribution to sales and cash flow, and whether preliminary purchase accounting will change.
Debt reduction, leverage covenant headroom, refinancing requirements and the effect of higher interest rates on earnings and liquidity.
Conversion of negative operating cash flow into positive cash generation after acquisition-related working-capital needs and capital expenditures.
Ability to pass through aluminum, steel, freight and tariff-related cost increases without further margin deterioration.
Developments in the European Commission competition investigation and the potential magnitude and timing of any penalties.
Changes in asbestos claims, accrual adequacy and the legal enforceability of statutory liability limitations.
Potential impairment risk for the North America Food reporting unit and the finalization of Signode’s asset, liability and contingency valuations.