CROWN HOLDINGS, INC. annual report, FY2018

Crown Holdings, Inc. 2018 Form 10-K Summary

Business Context and Reporting Period

Crown Holdings is a global packaging manufacturer serving consumer and industrial markets, including beverage and food cans, closures, aerosol and specialty packaging, glass bottles, and transit-packaging systems. At December 31, 2018, it operated 241 plants in 47 countries and employed approximately 33,000 people. International operations generated approximately 73% of 2018 net sales.

This filing covers the fiscal year ended December 31, 2018, with comparisons to 2017 and 2016. The 2018 results include Signode Industrial Group from its April 3, 2018 acquisition date.

Key Financial Metrics

Metric	2018	2017	Change
Net sales	$11,151 million	$8,698 million	+28%
Income from operations	$1,096 million	$1,024 million	+7%
Net income	$528 million	$428 million	+23%
Net income attributable to Crown Holdings	$439 million	$323 million	+36%
Diluted EPS	$3.28	$2.38	+38%
Net cash from operating activities	$571 million	$(251) million	Improved by $822 million
Capital expenditures	$462 million	$498 million	$(36) million
Cash and cash equivalents	$607 million	$424 million	+$183 million
Total debt	$8,692 million	$5,343 million	+$3,349 million

Approximate margins were 15.2% gross margin, 9.8% operating margin and 3.9% net margin attributable to Crown Holdings. The effective tax rate was 29.2% in 2018 versus 48.4% in 2017, when the company recorded a significant provisional charge related to U.S. tax reform.

2018 segment sales and income included Americas Beverage sales of $3.282 billion and segment income of $454 million; European Beverage sales of $1.489 billion and segment income of $193 million; European Food sales of $1.982 billion and segment income of $257 million; Asia Pacific sales of $1.316 billion and segment income of $186 million; and Transit Packaging sales of $1.8 billion and segment income of $255 million for the period after the Signode acquisition.

Material Changes Versus the Prior Comparable Period

Signode was acquired for approximately $3.9 billion and added $1.8 billion of sales and $255 million of segment income for the nine-month post-acquisition period. The transaction added $1.552 billion of goodwill and materially increased leverage, depreciation, amortization and interest expense.
Net sales growth also reflected higher raw-material pass-throughs, 4% higher global beverage sales volumes, $134 million of favorable foreign-currency translation and $27 million from the new revenue-recognition standard.
Americas Beverage sales rose 12% on 6% higher volumes and aluminum-cost pass-throughs, but segment income declined to $454 million from $470 million due primarily to higher North American freight costs.
European Beverage segment income declined to $193 million from $235 million, mainly because of weaker Middle East sales and startup costs. European Food segment income declined to $257 million from $264 million because of lower volumes associated with poor harvest yields and weather conditions.
Asia Pacific segment income increased to $186 million from $168 million on 13% higher Southeast Asia volumes, despite plant closures in China. Transit Packaging was a new reportable segment in 2018.
Interest expense increased to $384 million from $252 million because of acquisition-related borrowings. Depreciation and amortization increased to $425 million from $247 million, primarily due to Signode.
Operating cash flow improved substantially, while investing cash flow used $3.843 billion, including $3.912 billion for Signode. Financing activities provided $3.533 billion, primarily from acquisition-related debt issuance.
The company adopted new revenue-recognition guidance on a modified retrospective basis. The filing states that the adoption accelerated recognition for certain products and increased 2018 reported sales by $27 million; prior periods were not recast.

Debt, Liquidity and Capital Allocation

Total debt was $8.692 billion at year-end, compared with $5.343 billion in 2017. Approximately $3.0 billion of debt and other obligations carried floating rates.
Available revolving-credit capacity was $1.582 billion, based on total facility capacity of $1.650 billion less $68 million of outstanding letters of credit. The company was in compliance with its debt covenants.
The total net leverage ratio was 4.45x at December 31, 2018, below the applicable covenant maximum of 6.50x. Management identified debt reduction as its primary capital-allocation focus through 2020.
2019 long-term debt maturities were $86 million, followed by $88 million in 2020, $76 million in 2021, $1.711 billion in 2022 and $1.400 billion in 2023. Contractual cash obligations totaled $16.904 billion, including debt, interest, leases, pensions, postretirement obligations and purchase commitments.
Management expected 2019 capital expenditures of $400 million to $425 million and reported approximately $70 million of capital commitments at year-end.
The company had $607 million of cash, of which $465 million was held outside the United States. Receivables securitization and factoring programs were important sources of liquidity.

Guidance, Outlook, Risks and Unusual Items

The filing does not provide formal earnings or revenue guidance. Management expected continued global beverage-can growth, particularly in emerging markets, while emphasizing cost control, pricing, productivity and leverage reduction.
Management stated that Signode integration was progressing as planned, but identified integration, accretion, growth and synergy realization as forward-looking uncertainties.
Raw materials were a major cost exposure: steel represented 21% and aluminum 36% of consolidated cost of products sold, excluding depreciation and amortization. The company attempts to pass through commodity costs but may not fully recover increases or recover them immediately.
Asbestos liabilities totaled $295 million at year-end, including $251 million for unasserted claims. The company paid $21 million in asbestos-related costs in 2018 and expected approximately $25 million of payments in 2019. The filing states that actual losses could exceed the accrual, but no excess range could be estimated.
An ongoing European Commission competition-law investigation followed earlier German Federal Cartel Office activity. Management believed a loss was probable but had not recorded a charge because it could not estimate the amount or range of possible losses. Potential fines could be material.
The company recorded $44 million of restructuring and other charges, including Signode transaction costs, plant-closure and workforce-reduction costs, and other items. It announced or implemented closures and capacity reductions in China and elsewhere.
Pension expense was $45 million in 2018, including $38 million of settlement charges. The company expected 2019 pension expense of approximately $42 million and noted possible additional settlement charges of approximately $50 million.
Other principal risks include foreign-exchange volatility, Brexit, customer concentration, industry overcapacity, competition from alternative packaging, environmental and product-regulation changes, cybersecurity, labor disruptions, interest-rate increases, tax-law changes and potential goodwill impairment.
The company’s goodwill balance was $4.442 billion. No goodwill impairment was recorded in 2018, but management identified potential impairment sensitivity in certain lower-growth reporting units.

Most Important Facts for Investors to Verify

Whether Signode integration delivers expected growth, synergies and cash flow while supporting the company’s planned deleveraging.
Progress toward reducing the 4.45x net leverage ratio and the company’s ability to refinance or repay the large 2022–2025 maturities.
Actual cash conversion after working-capital needs, securitization activity, capital expenditures and acquisition-related costs.
Exposure to steel, aluminum, energy and freight inflation, and the effectiveness and timing of customer pass-through mechanisms.
Developments in the European Commission competition investigation and whether any penalty becomes estimable or recorded.
Changes in asbestos claim frequency, settlement costs and reserve adequacy, including the potential for payments above the $295 million accrual.
Performance of European Beverage, European Food and China operations, including the financial effects of plant closures and restructuring.
2019 pension funding, settlement charges, environmental liabilities, tax contingencies and goodwill-impairment assumptions.
The effect of the new revenue-recognition standard when comparing 2018 results with future periods, because prior-year amounts were not recast.