CROWN HOLDINGS, INC. annual report, FY2017

Crown Holdings, Inc. 2017 Form 10-K Summary

Business Context and Reporting Period

Crown Holdings, Inc. is a global packaging manufacturer producing metal and glass beverage containers, food cans, closures, aerosol cans, specialty packaging and canmaking equipment. The filing covers the fiscal year ended December 31, 2017. The Company operated 143 plants in 36 countries with approximately 24,000 employees; 78% of 2017 net sales were generated outside the United States.

Reportable segments include Americas Beverage, North America Food, European Beverage, European Food and Asia Pacific. Beverage cans and ends represented 58% of consolidated net sales, and food cans and ends represented 27%.

Financial Performance and Key Metrics

Metric	2017	2016	Change
Net sales	$8,698 million	$8,284 million	+5.0%
Income from operations	$1,077 million	$1,021 million	+5.5%
Income before income taxes	$829 million	$769 million	+7.8%
Net income	$428 million	$583 million	-26.6%
Net income attributable to Crown Holdings	$323 million	$496 million	-34.9%
Diluted EPS	$2.38	$3.56	-33.1%
Cash flow from operations	$760 million	$930 million	-18.3%
Capital expenditures	$498 million	$473 million	+5.3%

Cost of products sold, excluding depreciation and amortization, increased to $6,952 million from $6,583 million. This represented approximately 80% of sales versus 79% in 2016. Income from operations was approximately 12.4% of sales, compared with 12.3% in 2016. The effective income tax rate increased to 48.4% from 24.1%, primarily because of a provisional $177 million charge related to the U.S. Tax Cuts and Jobs Act.

Segment income was $1,199 million for reportable segments, compared with $1,164 million in 2016. Americas Beverage income increased to $474 million from $456 million; North America Food increased to $71 million from $69 million; European Beverage declined to $239 million from $243 million; European Food increased to $247 million from $244 million; and Asia Pacific increased to $168 million from $152 million.

At December 31, 2017, cash and cash equivalents were $424 million, including $347 million held outside the United States. Total debt was $5,343 million, compared with $4,911 million at year-end 2016. Available revolving credit capacity was $1,236 million. The total net leverage ratio was 3.55 to 1.0, within the 4.50 to 1.0 covenant limit. Net debt to total capitalization was 84.2%, compared with 86.7% in 2016.

Working capital was negative $176 million, compared with negative $55 million in 2016. Receivables increased to $1,041 million and inventories increased to $1,385 million, while accounts payable and accrued liabilities increased to $3,124 million. The Company securitized or factored $964 million of receivables as sales during 2017.

Material Changes Versus the Prior Comparable Period

Sales increased primarily from higher raw-material pass-through, higher global beverage and food can volumes, and favorable foreign-currency translation. Using 2016 exchange rates, 2017 sales would have been $19 million lower.
Operating income improved despite higher raw-material costs and restructuring charges. Americas Beverage benefited from a 3% volume increase, while Asia Pacific benefited from an 11% volume increase in Southeast Asia.
Net income attributable to Crown Holdings declined substantially because of the $177 million provisional tax-reform charge, higher interest expense, and increased noncontrolling interests.
Operating cash flow declined by $170 million, primarily because of higher pension contributions, including a voluntary U.K. pension contribution, and lower working-capital contributions.
Capital expenditures increased to $498 million. New or expanded capacity became operational in Mexico, New York, Colombia, Indonesia and Vietnam.
The Company repurchased $339 million of common stock and had $669 million remaining under its $1 billion repurchase authorization at year-end.
Debt increased partly in connection with refinancing and increased borrowings. Interest expense rose to $252 million from $243 million.

Guidance, Outlook, Commentary and Unusual Items

Management’s strategy is to expand in targeted international growth markets while improving mature-market operations through pricing, cost control and capital allocation. Through 2020, the primary capital allocation focus is debt reduction.
The Company expects approximately $425 million of capital expenditures in 2018 and had $130 million of capital commitments at year-end 2017.
Management announced plans to close a U.S. beverage can facility and a European promotional packaging facility in 2018. Expected annual pre-tax savings are approximately $10 million and $5 million, respectively, although realization is not assured.
The Company entered into an agreement in December 2017 to acquire Signode Industrial Group for cash consideration of approximately $3.91 billion, subject to adjustment and regulatory and other closing conditions. The acquisition had not closed as of year-end.
Subsequent to year-end, the Company issued approximately €835 million of euro-denominated notes and $875 million of U.S. dollar notes to help finance the Signode acquisition. The notes are subject to special mandatory redemption if the acquisition does not close by August 15, 2018.
Asbestos-related liabilities were accrued at $315 million, including $272 million for unasserted claims. The Company made $30 million of asbestos-related payments in 2017 and expected approximately $30 million of payments in 2018.
The German Federal Cartel Office investigation into suspected anti-competitive conduct remained ongoing. The Company believed a loss was probable but could not estimate the amount or range of additional losses.
The Company recorded $48 million of restructuring and other charges, including plant-closure costs, a $19 million Mivisa-related litigation settlement, and Signode transaction costs.
The Company recorded no goodwill impairment. Goodwill was $3,046 million, and management identified North America Food as the reporting unit with the greatest sensitivity to adverse operating changes.

Principal Risks and Contingencies

High leverage, significant debt maturities, restrictive covenants and refinancing requirements could constrain financial flexibility. Approximately $1.3 billion of debt and other obligations carried floating interest rates; a 1% increase in variable rates was estimated to increase annual interest expense by approximately $13 million.
Steel and aluminum represented approximately 21% and 42%, respectively, of consolidated cost of products sold excluding depreciation and amortization. The Company may be unable to fully pass through increases in raw-material, energy or freight costs.
International operations create exposure to foreign exchange, political instability, trade restrictions, economic weakness, repatriation limitations and changing regulations. A 0.10 movement in the average euro rate was estimated to affect annual net income by approximately $17 million.
Customer concentration, intense competition, industry overcapacity, substitution by plastic, glass or other packaging, and seasonal demand could pressure volumes, pricing and margins.
Asbestos litigation, environmental remediation, the German competition investigation, pension obligations and other legal claims could require cash payments exceeding recorded accruals.
The Signode acquisition could be delayed, fail to close, require substantial additional debt, or generate integration and operational risks.
The 2017 tax provision includes provisional Tax Act estimates that were subject to further analysis. The filing states that the Company expected to complete its analysis during the fourth quarter of 2018.
The Company is exposed to cybersecurity, information-technology, labor, supply-chain, climate, environmental and regulatory risks.

Investor Verification Checklist

Verify the final purchase price, financing, closing status and post-acquisition leverage related to Signode.
Reconcile reported net income and EPS to the provisional $177 million Tax Act charge and determine the normalized tax rate.
Review debt maturities, covenant headroom, refinancing plans and the effect of variable interest rates.
Assess whether operating cash flow can fund capital expenditures, pension contributions, asbestos payments, restructuring costs and debt reduction.
Monitor steel and aluminum prices, pass-through mechanisms, volume trends and margin performance by segment.
Track the outcome and potential financial exposure from asbestos litigation and the German Federal Cartel Office investigation.
Evaluate the execution and realized savings from announced plant closures and capacity expansions.
Review the filing’s subsequent events and accounting changes, including revenue recognition, pension-cost presentation and cash-flow classification standards.