Crown Holdings, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Amounts are in millions except per-share data. The filing is unaudited and prepared under U.S. GAAP.
Business context
Crown manufactures metal packaging, including beverage, food and aerosol cans, closures, and related products. On April 3, 2018, the Company acquired Signode Industrial Group for $3.9 billion, creating the Transit Packaging segment and broadening its customer base and product offerings. Management identifies global beverage-can growth as the primary organic-growth focus and intends to prioritize deleveraging through 2020.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $3,174 | $2,468 | $8,417 | $6,530 |
| Income from operations | $365 | $328 | $878 | $812 |
| Operating margin | 11.5% | 13.3% | 10.4% | 12.4% |
| Net income attributable to Crown | $164 | $177 | $386 | $412 |
| Net margin attributable to Crown | 5.2% | 7.2% | 4.6% | 6.3% |
| Diluted EPS | $1.23 | $1.32 | $2.88 | $3.02 |
- Revenue: Q3 sales increased 29% and nine-month sales increased 29%, primarily from Signode, higher beverage-can volumes, foreign-exchange translation, and pass-through of higher material costs. Beverage-can volumes increased 3% in Q3 and 4% for the nine-month period.
- Profitability: Operating income increased in absolute dollars, but margins declined because of Signode-related depreciation and amortization, higher raw-material and freight costs, and acquisition-related effects. Nine-month results included a $40 fair-value adjustment for acquired Signode inventory and $22 of Signode transaction costs in restructuring and other.
- Interest and taxes: Interest expense rose to $105 in Q3 and $282 for nine months, compared with $64 and $187, respectively, due to acquisition financing. Effective tax rates increased to 35% in Q3 and 30% for nine months, versus 28% and 27%, partly because of a $24 charge on distributions of previously indefinitely reinvested foreign earnings and a $4 Tax Act adjustment.
- Cash flow: Operating activities used $232 for nine months, an improvement from $270 used in 2017. Investing activities used $3,719, including $3,912 for Signode and $305 of capital expenditures. Financing activities provided $3,902, primarily from acquisition-related borrowings. Cash, cash equivalents and restricted cash declined to $354 from $435 at December 31, 2017.
- Capital expenditures: Management expects approximately $460 of capital expenditures for 2018. Capital commitments were approximately $134 at September 30, 2018.
- Debt and liquidity: Long-term debt, excluding current maturities, increased to $8,928 from $5,217 at year-end 2017. Total principal long-term debt was $9,114. The revolving credit facility had $1,650 of capacity, of which $1,517 was available after borrowings and standby letters of credit. Cash and cash equivalents were $298, of which $248 was held outside the United States.
Material changes versus the prior comparable period
- Signode contributed $585 of Q3 sales and $1,205 of nine-month sales, plus $81 and $175 of segment income, respectively.
- Transit Packaging added significant revenue and increased goodwill by $1,548 and intangible assets by approximately $1,935 at acquisition; purchase-price allocations remained preliminary.
- Depreciation and amortization increased to $127 in Q3 and $305 for nine months, compared with $63 and $183, primarily because of Signode.
- Americas Beverage sales increased, but segment income declined because of higher North American freight costs; management expects elevated freight costs to continue through year-end.
- European Beverage and European Food segment income declined in Q3 because of lower volumes, including weakness in the Middle East and lower European food demand. Asia Pacific segment income increased on higher Southeast Asian volumes and improved cost performance.
- The Company adopted new revenue-recognition guidance in 2018. The filing states that the guidance accelerated nine-month revenue by $83 and is not expected to materially affect full-year revenue, although quarterly timing may vary.
- The Company revised its segment-income definition to exclude intangible amortization and recast prior-period segment data accordingly.
Guidance, outlook, risks and unusual items
- Management expects continued beverage-can demand growth, particularly in Southeast Asia, Mexico and other emerging markets, while food and aerosol volumes remain stable to declining in mature markets.
- Management’s stated capital-allocation priority through 2020 is reducing leverage while continuing business investment.
- Raw-material prices, particularly aluminum and steel, remain volatile. The Company attempts to pass higher costs to customers, but recovery is not assured; recently imposed U.S. tariffs may increase costs.
- Asbestos-related accruals totaled $305 at September 30, 2018, including $254 for unasserted claims. The Company paid $7 during the first nine months and cannot estimate potential losses above the accrual. Adverse rulings concerning state limitations could materially affect results.
- An ongoing European Commission competition-law investigation could result in material fines. Management believes a loss is probable but cannot estimate the amount or range and has recorded no charge.
- Environmental remediation accruals totaled $16, comprising $7 for PRP sites and $9 for Company-owned locations. Potential excess losses cannot be estimated.
- The North America Food reporting unit had estimated fair value 63% above carrying value as of October 1, 2017. A 38% decline in projected Adjusted EBITDA could reduce fair value to carrying value and potentially result in an impairment charge of up to $116.
- The Company had $3.3 billion of floating-rate debt; a 0.25% change in rates would affect annual pretax interest expense by approximately $8.
- Management expects the 2019 lease-accounting adoption to materially affect the balance sheet but not materially affect operations or cash flows.
- Management stated that disclosure controls were effective. The 2018 internal-control assessment will exclude Signode while integration-related controls are evaluated.
Important facts for investors to verify
- Whether Signode delivers expected integration benefits and cash-flow growth while purchase-price allocations remain preliminary.
- Progress in reducing leverage and the effect of higher interest rates on earnings and liquidity.
- Operating cash conversion, working-capital requirements and the sustainability of receivables securitization proceeds.
- Whether higher aluminum, steel, freight and tariff-related costs can be passed through to customers.
- The ultimate outcome and financial exposure from the European Commission competition investigation and asbestos claims.
- Potential impairment risk for the North America Food reporting unit and any additional restructuring charges.
- Final effects of the Tax Act, foreign-earnings repatriation, and the new revenue and lease-accounting standards.