Crown Holdings, Inc. — Q1 2018 Form 10-Q Summary
Business Context and Reporting Period
Unaudited results for the three months ended March 31, 2018, compared with the three months ended March 31, 2017. Crown is a global metal-packaging manufacturer, with beverage cans and ends representing 61% of sales and food cans and ends representing 24% in the quarter.
On April 3, 2018, after quarter-end, Crown completed the $3.9 billion acquisition of Signode Industrial Group, a global transit-packaging provider. The transaction was financed with cash, new senior notes and additional term loans.
Financial Performance and Key Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $2,197 million | $1,901 million | 15.6% increase |
| Income from operations | $221 million | $225 million | 2% decrease |
| Operating margin | 10.1% | 11.8% | Down 170 bps |
| Net income | $113 million | $133 million | 15% decrease |
| Net income attributable to Crown | $90 million | $107 million | 16% decrease |
| Diluted EPS | $0.67 | $0.77 | 13% decrease |
| Effective tax rate | 26% | 26% | Comparable |
| Cash used in operating activities | $751 million | $577 million | Higher use of $174 million |
| Capital expenditures | $92 million | $107 million | Lower by $15 million |
Sales growth reflected higher beverage-can volumes, pass-through of higher material costs, $121 million of favorable foreign-currency translation and $82 million of accelerated revenue recognition under the new revenue standard. The company stated that the accounting change is not expected to materially affect full-year revenue, but may shift revenue between quarters.
Operating income declined despite higher sales because of higher raw-material costs, operating costs, freight, utilities and start-up costs at the new Mexico glass-bottle facility. Interest expense increased to $74 million from $62 million, primarily because of acquisition-related borrowings. Foreign exchange expense was $18 million versus a $1 million benefit in the prior-year quarter.
Segments and Material Changes
- Americas Beverage: Sales increased to $758 million from $674 million, supported by 4% higher volumes, material-cost pass-through and currency translation. Segment income declined to $98 million from $104 million due primarily to higher operating and start-up costs.
- European Beverage: Sales increased to $371 million from $303 million and segment income to $55 million from $50 million, driven by higher volumes, currency translation and improved cost performance.
- European Food: Sales increased to $428 million from $379 million despite 9% lower volumes; segment income rose to $56 million from $51 million due to improved cost performance.
- Asia Pacific: Sales increased to $337 million from $278 million, with 7% higher volumes; segment income rose to $44 million from $39 million.
- Non-reportable segments: Sales increased to $303 million from $267 million and segment income to $31 million from $28 million.
Reportable-segment income increased to $253 million from $244 million. However, restructuring and other charges were $13 million versus a $4 million benefit in the prior-year quarter, and the company recorded a $13 million transaction-cost component related to the Signode acquisition.
Balance Sheet, Debt, Liquidity and Cash Flow
- Cash and cash equivalents were $2.201 billion at March 31, 2018, compared with $424 million at December 31, 2017. Approximately $1.499 billion was held outside the United States.
- Total debt carrying value was approximately $7.871 billion, including $7.778 billion of long-term debt excluding current maturities, $61 million of current maturities and $32 million of short-term debt, versus approximately $5.343 billion at year-end 2017.
- Net debt, using cash and total debt above, was approximately $5.670 billion at March 31, 2018.
- Shareholders’ equity increased to $765 million from $601 million, while total equity increased to $1.112 billion from $923 million.
- Operating cash flow was negative $751 million, primarily because of seasonal and acquisition-related working-capital needs, higher material costs, foreign-exchange effects and the revenue-standard transition.
- Investing activities provided $58 million, including $175 million from beneficial interests in transferred receivables, offset partly by $92 million of capital expenditures and a $25 million settlement loss on foreign-exchange contracts related to Signode.
- Financing activities provided $2.455 billion, primarily from $1.912 billion of long-term debt proceeds and a $576 million increase in revolving-credit and short-term debt.
- At March 31, 2018, $607 million was available under the $1.4 billion revolving credit facility after borrowings and standby letters of credit. The facility was amended to provide $1.65 billion of capacity after completion of the Signode acquisition.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2018 capital expenditures of approximately $460 million and had approximately $125 million of capital commitments at March 31, 2018.
- Management identified reducing leverage through 2020 as a primary capital-allocation objective following the Signode acquisition.
- The company expects approximately $10 million of annual pre-tax savings from closing and consolidating a U.S. beverage-can facility, although realization is not assured.
- Management expects continued beverage-can demand growth, particularly in emerging markets, while food and aerosol-can volumes are stable to declining in some mature markets.
- Steel and aluminum price volatility, including recently imposed U.S. tariffs, may increase costs. The company may not be able to fully pass cost increases through to customers.
- The company accrued $313 million for pending and future asbestos-related claims and legal costs, including $266 million for unasserted claims. Actual losses could exceed the accrual, but the excess cannot currently be estimated.
- A European Commission investigation into possible anticompetitive conduct in the metal-packaging industry is ongoing. Management believes a loss is probable but has not recorded a charge because it cannot estimate the amount or range of potential loss; any eventual fines could be material.
- The company identified potential goodwill impairment exposure of up to $116 million for its North America Food reporting unit if operating performance deteriorates sufficiently.
- The Tax Cuts and Jobs Act accounting remains provisional. The company had a $207 million valuation allowance related to certain U.S. state tax-loss carryforwards and may record additional allowances as the Signode acquisition’s tax effects are evaluated.
- The company adopted new revenue, cash-flow presentation, pension-cost presentation and hedge-accounting guidance in 2018. The revenue standard increased reported first-quarter sales by approximately $82 million and Crown-attributable net income by approximately $10 million compared with amounts that would have been reported without adoption.
Most Important Facts for Investors to Verify
- Post-acquisition leverage, debt maturities, interest costs and covenant compliance after the Signode financing is fully reflected.
- Signode’s contribution to revenue, cash flow, margins and integration costs beginning in the second quarter of 2018.
- Whether the company achieves the projected $10 million annual savings from the U.S. facility closure and the approximately $460 million 2018 capital-expenditure plan.
- The sustainability of operating margins amid raw-material inflation, tariffs, freight and start-up costs.
- The outcome and potential financial exposure from the European Commission cartel investigation.
- Developments in asbestos claims and whether the $313 million accrual remains adequate.
- The final accounting effects of the Tax Act, revenue-standard adoption and the Signode acquisition.