CROWN HOLDINGS, INC. quarterly report, Q1 FY2017

Crown Holdings, Inc. — 2017 First-Quarter Form 10-Q

Business context and reporting period

Crown Holdings manufactures metal packaging, including beverage, food, aerosol and specialty packaging products. The filing covers the unaudited three months ended March 31, 2017, compared with the three months ended March 31, 2016. The company’s strategy emphasizes global beverage-can growth, targeted international expansion, cost control and disciplined capital allocation.

Key financial metrics

Metric	Q1 2017	Q1 2016	Change
Net sales	$1,901 million	$1,893 million	Up $8 million
Income from operations	$237 million	$219 million	Up $18 million
Operating margin	12.5%	11.6%	Up 0.9 percentage points
Net income	$133 million	$99 million	Up $34 million
Net income attributable to Crown	$107 million	$79 million	Up $28 million
Diluted EPS	$0.77	$0.57	Up $0.20
Effective tax rate	26%	28%	Down 2 percentage points
Net cash used in operating activities	$320 million	$408 million	Improved by $88 million
Capital expenditures	$107 million	$51 million	Up $56 million

Sales reflected higher unit volumes and the pass-through of higher material costs, partly offset by foreign-currency translation. At 2016 exchange rates, management estimates sales would have been $54 million higher. Segment income increased to $273 million from $259 million, including reportable-segment income of $258 million versus $246 million.

Segment performance was mixed: Americas Beverage sales increased to $674 million and segment income to $105 million; North America Food sales increased to $153 million and segment income to $16 million; European Beverage segment income rose to $51 million despite lower translated sales; European Food sales and income declined to $379 million and $47 million; Asia Pacific income increased to $39 million; and non-reportable segment income increased to $15 million.

Balance sheet, debt and liquidity

Cash and cash equivalents were $338 million at March 31, 2017, down from $559 million at December 31, 2016. Approximately $244 million was held outside the United States.
Total debt, including short-term debt and current maturities, was approximately $5.30 billion at March 31, 2017, compared with approximately $4.91 billion at year-end 2016. The increase primarily reflected $354 million drawn under revolving credit facilities.
Available revolving-credit capacity was $804 million, based on a $1.2 billion facility, $354 million of borrowings and $42 million of standby letters of credit. The company stated it remained compliant with leverage covenants.
Total current assets were $2.89 billion and current liabilities were $2.50 billion. Inventories increased to $1.42 billion from $1.25 billion, partly reflecting seasonal buildup ahead of peak food and beverage demand.
Shareholders’ equity increased to $543 million from $366 million, substantially aided by net income and $139 million of other comprehensive income attributable to Crown, including foreign-currency translation gains.

Material changes versus the prior comparable period

Operating income improved by $18 million, helped by lower restructuring and other costs, which were a $4 million benefit in 2017 versus $2 million of expense in 2016.
Q1 2016 included a $27 million loss from early extinguishment of debt; there was no comparable charge in Q1 2017.
Interest expense declined to $62 million from $64 million, primarily due to lower average debt outstanding, while foreign-exchange expense improved to a $1 million benefit from a $6 million benefit in 2016.
Operating cash use improved but remained negative because of seasonal working-capital requirements, including a $151 million inventory investment and a $324 million decrease in accounts payable and accrued liabilities.
The company repurchased approximately 2.59 million shares for $133 million during the quarter. Approximately $862 million remained available under the $1 billion repurchase authorization.
Cash provided by financing activities was $199 million, principally reflecting revolving-credit borrowings, compared with cash used of $4 million in the prior-year quarter.
Adoption of share-based-payment guidance produced a $60 million cumulative-effect increase to retained earnings through recognition of previously unrecognized deferred tax assets.

Guidance, outlook, commentary and unusual items

Management expects 2017 capital expenditures of approximately $450 million and had approximately $118 million of capital commitments at March 31, 2017.
The company expects to use the majority of 2017 free cash flow for common-stock repurchases while continuing selected capacity additions and evaluating complementary acquisitions.
Growth projects include beverage-can capacity in Mexico, New York, Colombia, Indonesia, Vietnam and Myanmar, plus a planned glass-bottle facility in Mexico. Start-up costs affected Q1 Americas Beverage results.
In April 2017, the company amended its credit agreement to provide a $1.4 billion revolving facility, a $750 million Term A Facility and a €275 million Term Euro Facility, generally maturing in April 2022. The company expected an approximately $8 million second-quarter 2017 loss from early extinguishment of debt.
Restructuring actions include European Food facility closures expected to reduce approximately 280 employees by completion in 2017. Management stated that additional restructuring charges remain possible.
The company recorded a $5 million benefit from expiration of an environmental indemnification related to a divested European business.
Asbestos-related claims remained a significant contingency. The accrual for pending and future claims and related legal costs was $337 million, including $287 million for unasserted claims. Management stated actual losses could exceed the accrual but could not estimate the excess.
An ongoing German Federal Cartel Office investigation concerns alleged anticompetitive conduct. Management considered a loss probable but could not estimate the amount or range of additional losses, which could be material.
U.S. Customs and Border Protection assessed an $18 million penalty for alleged intentional import misclassification. The company paid approximately $1 million of related duties, disputed the penalty and recorded no liability because a loss was not considered probable.
Goodwill impairment sensitivity was significant for two reporting units: potential charges of up to $88 million for European Aerosols and Specialty Packaging and $114 million for North America Food if future performance declines sufficiently.
The company identified foreign-exchange, interest-rate, commodity-price, raw-material pass-through, tax-law and market-demand risks. A 0.25 percentage-point change in floating interest rates would affect annual pretax interest expense by approximately $4 million.

Important facts for investors to verify

Whether higher beverage-can volumes and new capacity investments translate into sustained segment-income growth after start-up costs.
Cash generation after seasonal working-capital needs, planned capital expenditures of approximately $450 million and continued share repurchases.
Debt reduction prospects and covenant headroom following the April 2017 refinancing and increased revolving-credit borrowings.
The ultimate financial impact and timing of the German competition investigation, asbestos claims and the disputed Customs penalty.
Potential goodwill impairment at the European Aerosols and Specialty Packaging and North America Food reporting units.
The effect of foreign-currency movements, steel and aluminum prices, and the company’s ability to pass higher costs through to customers.
The expected impact of the revenue-recognition standard scheduled for adoption in the first quarter of 2018 and other pending accounting standards.