10-Q 1 cck-3312018xq1.htm 2018 FIRST QUARTER INTERIM REPORT ON FORM 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
____________________________________

FORM 10-Q
____________________________________

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED March 31, 2018
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM  ____  TO ____

COMMISSION FILE NUMBER 000-50189
____________________________________________________
CROWN HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
____________________________________________________
Pennsylvania
 
75-3099507
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
One Crown Way, Philadelphia, PA
 
19154-4599
(Address of principal executive offices)
 
(Zip Code)
215-698-5100
(registrant’s telephone number, including area code)
____________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer
x
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

There were 134,307,645 shares of Common Stock outstanding as of May 1, 2018.


Crown Holdings, Inc.


PART I – FINANCIAL INFORMATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions except per share data)
(Unaudited)

 
Three Months Ended
 
March 31
 
2018
 
2017
Net sales
$
2,197

 
$
1,901

Cost of products sold, excluding depreciation and amortization
1,808

 
1,531

Depreciation and amortization
65

 
59

Selling and administrative expense
90

 
90

Restructuring and other
13

 
(4
)
Income from operations
221


225

Other pension and postretirement
(17
)
 
(12
)
Interest expense
74

 
62

Interest income
(6
)
 
(3
)
Foreign exchange
18

 
(1
)
Income before income taxes
152

 
179

Provision for income taxes
39

 
46

Net income
113

 
133

Net income attributable to noncontrolling interests
(23
)
 
(26
)
Net income attributable to Crown Holdings
$
90

 
$
107

 
 
 
 
Earnings per common share attributable to Crown Holdings:
 
 
 
Basic
$
0.67

 
$
0.77

Diluted
$
0.67

 
$
0.77


The accompanying notes are an integral part of these consolidated financial statements.


2

Crown Holdings, Inc.



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)

 
Three Months Ended
 
March 31
 
2018
 
2017
Net income
$
113

 
$
133

 
 
 
 
Other comprehensive income, net of tax:
 
 
 
Foreign currency translation adjustments
82

 
110

Pension and other postretirement benefits
11

 
9

Derivatives qualifying as hedges
(32
)
 
21

Total other comprehensive income
61

 
140

 
 
 
 
Total comprehensive income
174

 
273

Net income attributable to noncontrolling interests
(23
)
 
(26
)
Translation adjustments attributable to noncontrolling interests
(1
)
 

Derivatives qualifying as hedges attributable to noncontrolling interests

 
(1
)
Comprehensive income attributable to Crown Holdings
$
150

 
$
246



The accompanying notes are an integral part of these consolidated financial statements.


3

Crown Holdings, Inc.


CONSOLIDATED BALANCE SHEETS (Condensed)
(In millions)
(Unaudited)

 
March 31,
2018
 
December 31,
2017
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
2,201

 
$
424

Receivables, net
1,386

 
1,041

Inventories
1,431

 
1,385

Prepaid expenses and other current assets
243

 
224

Total current assets
5,261

 
3,074

 
 
 
 
Goodwill
3,134

 
3,046

Intangible assets, net
487

 
472

Property, plant and equipment, net
3,322

 
3,239

Other non-current assets
875

 
832

Total
$
13,079

 
$
10,663

 
 
 
 
Liabilities and equity
 
 
 
Current liabilities
 
 
 
Short-term debt
$
32

 
$
62

Current maturities of long-term debt
61

 
64

Accounts payable
2,009

 
2,367

Accrued liabilities
759

 
757

Total current liabilities
2,861

 
3,250

 
 
 
 
Long-term debt, excluding current maturities
7,778

 
5,217

Postretirement and pension liabilities
584

 
588

Other non-current liabilities
744

 
685

Commitments and contingent liabilities (Note I)

 

Noncontrolling interests
347

 
322

Crown Holdings shareholders’ equity
765

 
601

Total equity
1,112

 
923

Total
$
13,079

 
$
10,663


The accompanying notes are an integral part of these consolidated financial statements.


4

Crown Holdings, Inc.


CONSOLIDATED STATEMENTS OF CASH FLOWS (Condensed)
(In millions)
(Unaudited)
 
Three Months Ended
 
March 31
 
2018
 
2017
Cash flows from operating activities
 
 
 
Net income
$
113

 
$
133

Adjustments to reconcile net income to net cash used for operating activities:
 
 
 
Depreciation and amortization
65

 
59

Restructuring and other
13

 
(4
)
Foreign exchange
18

 
(1
)
Pension expense
1

 
5

Pension contributions
(5
)
 
(13
)
Stock-based compensation
6

 
4

Changes in assets and liabilities:
 
 
 
Receivables
(364
)
 
(293
)
Inventories
(169
)
 
(151
)
Accounts payable and accrued liabilities
(445
)
 
(324
)
Other, net
16

 
8

Net cash used for operating activities
(751
)
 
(577
)
Cash flows from investing activities
 
 
 
Capital expenditures
(92
)
 
(107
)
Beneficial interests in transferred receivables
175

 
257

Proceeds from sale of property, plant and equipment

 
3

Foreign exchange derivatives related to an acquisition
(25
)
 

Net cash provided by investing activities
58

 
153

Cash flows from financing activities
 
 
 
Proceeds from long-term debt
1,912

 
4

Payments of long-term debt
(13
)
 
(12
)
Net change in revolving credit facility and short-term debt
576

 
351

Debt issue costs
(29
)
 

Common stock issued

 
7

Common stock repurchased
(1
)
 
(133
)
Dividends paid to noncontrolling interests

 
(13
)
Foreign exchange derivatives related to debt
10

 
(5
)
Net cash provided by financing activities
2,455

 
199

Effect of exchange rate changes on cash, cash equivalents and restricted cash
14

 
4

Net change in cash, cash equivalents and restricted cash
1,776

 
(221
)
Cash, cash equivalents and restricted cash at January 1
435

 
576

Cash, cash equivalents and restricted cash at March 31
$
2,211

 
$
355


The accompanying notes are an integral part of these consolidated financial statements.

5

Crown Holdings, Inc.


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In millions)
(Unaudited)

 
Crown Holdings, Inc. Shareholders’ Equity
 
 
 
 
 
Common Stock
 
Paid-in Capital
 
Accumulated Earnings
 
Accumulated Other Comprehensive Loss
 
Treasury Stock
 
Total Crown Equity
 
Noncontrolling Interests
 
Total
Balance at January 1, 2017
$
929

 
$
446

 
$
2,621

 
$
(3,400
)
 
$
(230
)
 
$
366

 
$
302

 
$
668

Cumulative effect of change in accounting principles
 
 
 
 
60

 
 
 
 
 
60

 
 
 
60

Net income
 
 
 
 
107

 
 
 
 
 
107

 
26

 
133

Other comprehensive income
 
 
 
 
 
 
139

 
 
 
139

 
1

 
140

Dividends paid to noncontrolling interests
 
 
 
 
 
 
 
 
 
 

 
(13
)
 
(13
)
Restricted stock awarded
 
 
(1
)
 
 
 
 
 
1

 

 
 
 

Stock-based compensation
 
 
4

 
 
 
 
 
 
 
4

 
 
 
4

Common stock issued
 
 
6

 
 
 
 
 
1

 
7

 
 
 
7

Common stock repurchased
 
 
(127
)
 
 
 
 
 
(13
)
 
(140
)
 
 
 
(140
)
Balance at March 31, 2017
$
929

 
$
328

 
$
2,788

 
$
(3,261
)
 
$
(241
)
 
$
543

 
$
316

 
$
859

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
$
929

 
$
167

 
$
3,004

 
$
(3,241
)
 
$
(258
)
 
$
601

 
$
322

 
$
923

Cumulative effect of change in accounting principles
 
 
 
 
6

 
3

 
 
 
9

 
1

 
10

Net income
 
 
 
 
90

 
 
 
 
 
90

 
23

 
113

Other comprehensive income
 
 
 
 
 
 
60

 
 
 
60

 
1

 
61

Stock-based compensation
 
 
6

 
 
 
 
 
 
 
6

 
 
 
6

Common stock repurchased
 
 
(1
)
 
 
 
 
 


 
(1
)
 
 
 
(1
)
Balance at March 31, 2018
$
929

 
$
172

 
$
3,100

 
$
(3,178
)
 
$
(258
)
 
$
765

 
$
347

 
$
1,112



The accompanying notes are an integral part of these consolidated financial statements.

6

Crown Holdings, Inc.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share and statistical data)
(Unaudited)


A.
Statement of Information Furnished

The consolidated financial statements include the accounts of Crown Holdings, Inc. and its consolidated subsidiaries (the “Company”). The accompanying unaudited interim consolidated financial statements have been prepared in accordance with Form 10-Q instructions. In the opinion of management, these consolidated financial statements contain all adjustments of a normal and recurring nature necessary for a fair statement of the financial position of the Company as of March 31, 2018 and the results of its operations for the three months ended March 31, 2018 and 2017 and of its cash flows for the three months ended March 31, 2018 and 2017. The results reported in these consolidated financial statements are not necessarily indicative of the results that may be expected for the entire year. These results have been determined on the basis of accounting principles generally accepted in the United States of America (“GAAP”).

Certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP have been condensed or omitted. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.


B.
Accounting and Reporting Developments

Recently Adopted Accounting Standards

Statement of Cash Flows

In August 2016, the FASB issued new guidance related to the classification of certain cash receipts and payments on the statement of cash flows. Under the new guidance, cash payments resulting from debt prepayment or extinguishment are classified as cash outflows from financing activities. In addition, beneficial interests obtained in a securitization of financial assets are disclosed as a noncash activity and cash receipts from the beneficial interests are classified as cash inflows from investing activities. Under previous guidance, the Company classified cash receipts from beneficial interests in securitized receivables and cash payments resulting from debt prepayment or extinguishment as cash flows from operating activities. The Company adopted this guidance on January 1, 2018 and recast prior period amounts to conform to the current year presentation. For the period ended March 31, 2017, the Company reclassified $257 from net cash used for operating activities to net cash provided by investing activities. Additionally, for the three months ended March 31, 2018 and 2017, beneficial interests obtained in securitized receivables included in noncash investing activities were $199 and $265.

In November 2016, new accounting guidance was issued that requires the statement of cash flows to explain the change in the total of cash, cash equivalents and restricted cash. In addition, restricted cash is included in a cash reconciliation of beginning-of-period and end-of-period total amounts shown on the statements of cash flows. The Company adopted this guidance on January 1, 2018 and recast prior period amounts to confirm to current year presentation.

Cash, cash equivalents and restricted cash included in the Company's Consolidated Balance Sheets were as follows:

 
March 31, 2018
 
December 31, 2017
Cash and cash equivalents
$
2,201

 
$
424

Restricted cash, included in prepaid expenses and other current assets
1

 
2

Restricted cash, included in other non-current assets
9

 
9

Total cash, cash equivalents and restricted cash
$
2,211

 
$
435



7

Crown Holdings, Inc.


 
March 31, 2017
 
December 31, 2016
Cash and cash equivalents
$
338

 
$
559

Restricted cash, included in prepaid expenses and other current assets
8

 
8

Restricted cash, included in other non-current assets
9

 
9

Total cash, cash equivalents and restricted cash
$
355

 
$
576


Amounts included in restricted cash primarily represent those required to be set aside by the Company's receivables securitization agreement in Europe.

Pension and other postretirement benefit costs

In March 2017, the FASB issued new guidance on the presentation of pension and other postretirement benefit costs. Under the new guidance, only the service cost component of pension and other postretirement benefit costs is presented with other employee compensation costs within income from operations or capitalized in assets. The other components are reported separately outside of income from operations and are not eligible for capitalization. The Company adopted this guidance on January 1, 2018 and recast prior period amounts to conform to current year presentation. A net benefit of $12 was reclassified from cost of products sold, excluding depreciation and amortization, to other pension and postretirement on the Company's Consolidated Statement of Operations for the period ended March 31, 2017.

Revenue recognition

In May 2014, the FASB issued new guidance which outlined a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. Under previous guidance, the Company generally recognized revenue upon shipment or delivery. Under the new guidance, revenue is recognized when a customer obtains control of promised goods or services which is either at a point in time or over time. In addition to accelerating the timing of revenue recognition, an unbilled receivable is recognized with an offsetting decrease to inventory. The new guidance is not expected to have a material impact on the Company's annual income from operations but could impact income from operations in certain quarters as the Company may recognize revenue from certain products as it builds inventory in anticipation of seasonal demands.

On January 1, 2018, the Company adopted the new revenue standard using the modified retrospective method applied to those contracts which were outstanding as of January 1, 2018. The Company recognized the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings. Results from reporting periods beginning after January 1, 2018 are presented under the new revenue standard, while prior period amounts are not adjusted and continue to be reported in accordance with accounting standards in effect for those periods.

The cumulative effect of the changes made to the Company’s Consolidated Balance Sheet as of January 1, 2018 for the adoption of the new revenue standard was as follows:








8

Crown Holdings, Inc.


 
As reported
 
As revised
 
December 31,
 
January 1,
 
2017
Adjustment
2018
Receivables, net
$
1,041

$
154

$
1,195

Inventories
1,385

(144
)
1,241

Prepaid and other current assets
224

26

250

Total current assets
3,074

36

3,110

Other non-current assets
832

1

833

Total assets
10,663

37

10,700

Accrued liabilities
757

17

774

Total current liabilities
3,250

17

3,267

Other non-current liabilities
685

10

695

Noncontrolling interests
322

1

323

Accumulated earnings
3,004

9

3,013

Crown Holdings shareholders' equity
601

9

610

Total equity
923

10

933

Total liabilities and equity
10,663

37

10,700

In accordance with the new revenue standard, the impact of adoption on the Company’s Consolidated Balance Sheet and Statement of Operations was as follows:
 
As reported
 
Balances
 
March 31,
Effects of
without adoption
Consolidated Balance Sheet
2018
Change
of new standard
Receivables, net
$
1,386

$
(245
)
$
1,141

Inventories
1,431

210

1,641

Prepaid and other current assets
243

(20
)
223

Total current assets
5,261

(55
)
5,206

Other non-current assets
875

2

877

Total assets
13,079

(53
)
13,026

Accrued liabilities
759

(22
)
737

Total current liabilities
2,861

(22
)
2,839

Other non-current liabilities
744

(10
)
734

Noncontrolling interests
347

(1
)
346

Accumulated earnings
3,100

(20
)
3,080

Crown Holdings shareholders' equity
765

(20
)
745

Total equity
1,112

(21
)
1,091

Total liabilities and equity
13,079

(53
)
13,026


9

Crown Holdings, Inc.


 
As reported
 
Balances
 
March 31,
Effects of
without adoption
Statement of Operations
2018
Change
of new standard
Net Sales
$
2,197

$
(82
)
$
2,115

Cost of products sold, excluding depreciation and amortization
1,808

(69
)
1,739

Income from operations
221

(13
)
208

Income before taxes
152

(13
)
139

Provision for income taxes
39

(3
)
36

Net income
113

(10
)
103

Net income attributable to Crown Holdings
90

(10
)
80

Earnings per common share attributable to Crown Holdings:
 
 
 
Basic
$
0.67

$
(0.07
)
$
0.60

Diluted
$
0.67

$
(0.07
)
$
0.60


Hedge Accounting

In August 2017, the FASB issued new guidance on hedge accounting. The new guidance allows contractually-specified price components of a commodity purchase or sale to be eligible for hedge accounting. Additionally, the new standard permits qualitative effectiveness assessments for certain hedges after the initial hedge qualification analysis. The Company adopted this guidance on January 1, 2018 using the modified retrospective approach for hedges of contractually-specified price components of commodity purchases and sales that existed on the adoption date. Upon adoption, the Company reclassified a net charge of $3 for the cumulative ineffectiveness of these contracts from retained earnings to accumulated other comprehensive income as a cumulative-effect adjustment.

Intercompany transfers

In October 2016, the FASB issued new guidance related to intercompany transfers of assets other than inventory. Under previous guidance, income tax expense associated with intercompany profits in an intercompany sale or transfer of assets was deferred until the assets left the consolidated group. Similarly, deferred tax assets were not recognized for any increase in tax bases due to the intercompany sale or transfer. The new guidance allows for the recognition of income tax expense and deferred tax benefits on increases in tax bases when an intercompany sale or transfer occurs. Income tax effects of intercompany inventory transactions continue to be deferred until the assets leave the consolidated group. The guidance became effective for the Company on January 1, 2018 and did not have a material impact on the Company's consolidated financial statements.

Recently Issued Accounting Standards

In February 2016, the FASB issued new guidance on lease accounting. Under the new guidance, lease classification criteria and income statement recognition are similar to current guidance; however, all leases with a term longer than one year will be recorded on the balance sheet through a right-of-use asset and a corresponding lease liability. The guidance will be effective for the Company on January 1, 2019. The Company is currently evaluating the impact of adopting this guidance, which may have a material impact on its financial position.



C.     Acquisition of Signode

On April 3, 2018, the Company completed its acquisition of Signode Industrial Group Holdings (Bermuda) Ltd. (“Signode”), a leading global provider of transit packaging systems and solutions. The Company paid a purchase price of $3.9 billion, including debt and certain other liabilities assumed, subject to customary closing adjustments. The acquisition was undertaken by a subsidiary of Crown European Holdings S.A.


10

Crown Holdings, Inc.


The consideration paid by the Company was financed using available cash on hand, the proceeds of the January 2018 issuances of €335 2.250% senior unsecured notes due 2023, €500 2.875% senior unsecured notes due 2026 and $875 4.750% senior unsecured notes due 2026 and borrowings of $100 additional Dollar Term A Loans, $1,150 Dollar Term B Loans and €750 Euro Term B Loans under its credit agreement. See Note K for further details about the acquisition financing.

Additionally, the Company entered into forward contracts to partially mitigate its currency exchange rate risk associated with the euro denominated cash portion of the purchase price. On March 29, 2018, the Company settled these contracts with notional amounts that totaled approximately €1,585 ($1,956 at January 19, 2018) for a loss of $25.


D.     Revenue

The majority of the Company’s revenues from metal packaging products are derived from multi-year requirement contracts with leading manufacturers and marketers of packaged consumer products for can sets, comprising a can and an end. As requirement contracts do not typically include fixed volumes, customers often purchase products pursuant to purchase orders or other communications which are short-term in nature. The can and the end are considered separate performance obligations because they are distinct and separately identifiable. Revenues are recognized when control of the promised products is transferred to customers. The Company manufactures certain products that have no alternative use to the Company once they are printed or manufactured to customer specifications. If the Company has an enforceable right to payment for custom products at all times in the manufacturing process, revenue is recognized over time. In each of the Company’s geographic markets, revenue from beverage cans is primarily recognized over time using the units produced output method as beverage cans are generally printed for a specific customer in a continuous production process. The timing of revenue recognition for the Company’s other products, including beverage ends and three-piece products, which includes food cans and ends and aerosol cans and ends, may vary as these products may be printed or customized depending upon customer preferences which can vary by geographic market. Revenue that is recognized over time for the Company’s three-piece products and equipment business is generally recognized using the cost-to-cost input method as these products involve an intermediary step that results in customized work-in-progress inventory. For products that follow a point in time model, revenue is generally recognized when title and risk of loss transfer.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Standalone selling prices for each performance obligation are generally stated in the contract. When the Company offers variable consideration in the form of volume rebates to customers, it estimates the most likely amount of revenue to which it is expected to be entitled and includes the estimate in the transaction price, limited to the amount which is probable will not result in reversal of cumulative revenue recognized when the variable consideration is resolved. When the Company offers customers options to purchase additional product at discounted prices, judgment is required to determine if the discounted prices represent material rights. If so, the transaction price allocated to the discount is based on its relative standalone price and is recognized upon purchase of the additional product. Customer payment terms are typically less than one year and as such, the Company has applied the practical expedient to exclude consideration of significant financing components from the determination of transaction price.
Taxes collected from customers and remitted to governmental authorities are excluded from net sales. Shipping and handling fees and costs from product sales are reported as cost of products sold and are accrued when the Company recognizes revenue over time before the shipping and handling activities occur. Costs to obtain a contract are generally immaterial but the Company has elected the practical expedient to expense these costs as incurred if the duration of the contract is one year or less.
For the three months ended March 31, 2018, the Company recognized revenue of $1,428 over time and $769 point in time. See Note Q for further disaggregation of the Company's revenue for the three months ended March 31, 2018. We have applied the practical expedient to exclude disclosure of remaining performance obligations as our contracts typically have a term of one year or less.

Unbilled Receivables

Unbilled receivables are recorded for revenue recognized over time when the Company has determined that control has passed to the customer but the customer has not yet been invoiced because the Company does not have present right to payment. The Company generally has a present right to payment when title of product transfers. Unbilled receivables

11

Crown Holdings, Inc.


are reflected in receivables in the Consolidated Balance Sheet. When the Company records an unbilled receivable there is an offsetting decrease to inventory.
Contract Assets and Contract Liabilities
Contract assets are recorded for revenue recognized over time when the Company has determined that control for a performance obligation has passed to the customer, but the right to invoice the customer is contingent upon the completion of the performance obligations included in the contract. Contract assets are classified as current as they are expected to be invoiced within one year and may not exceed their net realizable value.
Contract liabilities are established if the Company must defer the recognition of a portion of consideration received because it has to satisfy a future obligation. Contract liabilities are classified as current or noncurrent based on when the Company expects to recognize revenue.
Contract assets are typically recognized for work in process related to the Company's three-piece printed products. The Company's equipment business may record contract assets or contract liabilities for contracts depending on the timing of satisfaction of performance obligations and receipt of consideration from the customer. These equipment contracts, including payment terms, are typically less than one year in duration.
Contract assets and liabilities are reported in a net position on a contract-by-contract basis.
Net contract assets were as follows:
 
March 31, 2018
 
January 1, 2017
Contract assets, included in prepaid and other current assets
$
20

 
$
26

Contract liabilities, included in accrued liabilities
(1
)
 
(1
)
Contract liabilities, included in other non-current liabilities
(7
)
 
(7
)
Net contract asset
$
12

 
$
18


For the three months ended March 31, 2018, the Company recognized revenue of less than $1 related to contract liabilities at January 1, 2018 for performance obligations satisfied during the period.

E.
Receivables

 
March 31, 2018
 
December 31, 2017
Accounts receivable
$
969

 
$
894

Less: allowance for doubtful accounts
(72
)
 
(71
)
Net trade receivables
897

 
823

Unbilled receivables
245

 

Miscellaneous receivables
244

 
218

Receivables, net
$
1,386

 
$
1,041



F.
Inventories
Inventories are stated at the lower of cost or market, with cost for U.S. inventories principally determined under the first-in, first-out (“FIFO”) method. Non-U.S. inventories are principally determined under the FIFO or average cost method.
 
March 31, 2018
 
December 31, 2017
Raw materials and supplies
760

 
$
737

Work in process
157

 
139

Finished goods
514

 
509

 
$
1,431

 
$
1,385




12

Crown Holdings, Inc.


G.
Restructuring and Other

The Company recorded restructuring and other charges / (benefits) as follows:
 
Three Months Ended
 
March 31
 
2018
 
2017
Asset impairments and sales
$
7

 
$
(6
)
Restructuring
3

 
2

Transaction costs
3

 

 
$
13

 
$
(4
)


At March 31, 2018, the Company had restructuring accruals of $19 primarily related to the closure of a promotional packaging facility in Europe which was announced in 2017 and prior actions to reduce manufacturing capacity and headcount in its European businesses. The Company expects to pay the majority of this liability over the next twelve months. The Company continues to review its supply and demand profile and long-term plans in its businesses, and it is possible that the Company may record additional restructuring charges in the future.


H.
Asbestos-Related Liabilities

Crown Cork & Seal Company, Inc. (“Crown Cork”) is one of many defendants in a substantial number of lawsuits filed throughout the U.S. by persons alleging bodily injury as a result of exposure to asbestos. These claims arose from the insulation operations of a U.S. company, the majority of whose stock Crown Cork purchased in 1963. Approximately ninety days after the stock purchase, this U.S. company sold its insulation assets and was later merged into Crown Cork.

Prior to 1998, amounts paid to asbestos claimants were covered by a fund made available to Crown Cork under a 1985 settlement with carriers insuring Crown Cork through 1976, when Crown Cork became self-insured. The fund was depleted in 1998 and the Company has no remaining coverage for asbestos-related costs.

In December 2001, the Commonwealth of Pennsylvania enacted legislation that limits the asbestos-related liabilities of Pennsylvania corporations that are successors by corporate merger to companies involved with asbestos. The legislation limits the successor’s liability for asbestos to the acquired company’s asset value adjusted for inflation. Crown Cork has paid significantly more for asbestos-related claims than the acquired company’s adjusted asset value. In November 2004, the legislation was amended to address a Pennsylvania Supreme Court decision (Ieropoli v. AC&S Corporation, et. al., No. 117 EM 2002) which held that the statute violated the Pennsylvania Constitution due to retroactive application. The Company cautions that the limitations of the statute, as amended, are subject to litigation and may not be upheld.

In June 2003, the state of Texas enacted legislation that limits the asbestos-related liabilities in Texas courts of companies such as Crown Cork that allegedly incurred these liabilities because they are successors by corporate merger to companies that had been involved with asbestos. The Texas legislation, which applies to future claims and pending claims, caps asbestos-related liabilities at the total gross value of the predecessor’s assets adjusted for inflation. Crown Cork has paid significantly more for asbestos-related claims than the total adjusted value of its predecessor’s assets.

In October 2010, the Texas Supreme Court, in a 6-2 decision, reversed a lower court decision, Barbara Robinson v. Crown Cork & Seal Company, Inc., No. 14-04-00658-CV, Fourteenth Court of Appeals, Texas, which had upheld the dismissal of an asbestos-related case against Crown Cork. The Texas Supreme Court held that the Texas legislation was unconstitutional under the Texas Constitution when applied to asbestos-related claims pending against Crown Cork when the legislation was enacted in June 2003. The Company believes that the decision of the Texas Supreme Court is limited to retroactive application of the Texas legislation to asbestos-related cases that were pending against Crown Cork in Texas on June 11, 2003 and therefore, in its accrual, continues to assign no value to claims filed after June 11, 2003.

In recent years, the states of Alabama, Arizona, Arkansas, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Michigan, Mississippi, Nebraska, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Utah, West Virginia, Wisconsin and Wyoming enacted legislation that limits asbestos-related liabilities under state law of companies such as Crown Cork that allegedly incurred these liabilities because they are successors by corporate merger to companies that had been involved with asbestos. The legislation, which applies to future and, with the exception of

13

Crown Holdings, Inc.


Arkansas, Georgia, South Carolina, South Dakota, West Virginia and Wyoming, pending claims, caps asbestos-related liabilities at the fair market value of the predecessor's total gross assets adjusted for inflation. Crown Cork has paid significantly more for asbestos-related claims than the total value of its predecessor's assets adjusted for inflation. Crown Cork has integrated the legislation into its claims defense strategy.

The Company further cautions that an adverse ruling in any litigation relating to the constitutionality or applicability to Crown Cork of one or more statutes that limits the asbestos-related liability of alleged defendants like Crown Cork could have a material impact on the Company.

During the three months ended March 31, 2018, the Company paid $1 to settle outstanding claims and had claims activity as follows:
Beginning claims
55,500

New claims
500

Settlements or dismissals
(500
)
Ending claims
55,500


In the fourth quarter of each year, the Company performs an analysis of outstanding claims and categorizes these claims by year of exposure and state filed. As of December 31, 2017, the Company's outstanding claims were:

Claimants alleging first exposure after 1964
16,500

Claimants alleging first exposure before or during 1964 filed in:
 
Texas
13,000

Pennsylvania
1,500

Other states that have enacted asbestos legislation
6,000

Other states
18,500

Total claims outstanding
55,500


The outstanding claims in each period exclude approximately 19,000 inactive claims. Due to the passage of time, the Company considers it unlikely that the plaintiffs in these cases will pursue further action against the Company. The exclusion of these inactive claims had no effect on the calculation of the Company’s accrual as the claims were filed in states, as described above, where the Company’s liability is limited by statute.

With respect to claimants alleging first exposure to asbestos before or during 1964, the Company does not include in its accrual any amounts for settlements in states where the Company’s liability is limited by statute except for certain pending claims in Texas as described earlier.

With respect to post-1964 claims, regardless of the existence of asbestos legislation, the Company does not include in its accrual any amounts for settlement of these claims because of increased difficulty of establishing identification of relevant insulation products as the cause of injury. Given the Company's settlement experience with post-1964 claims, it does not believe that an adverse ruling in the Texas or Pennsylvania asbestos litigation cases, or in any other state that has enacted asbestos legislation, would have a material impact on the Company with respect to such claims.

As of December 31, the percentage of outstanding claims related to claimants alleging serious diseases (primarily mesothelioma and other malignancies) were as follows:
 
2017

 
2016

 
2015

Total claims
22
%
 
22
%
 
22
%
Pre-1964 claims in states without asbestos legislation
41
%
 
41
%
 
41
%

Crown Cork has entered into arrangements with plaintiffs’ counsel in certain jurisdictions with respect to claims which are not yet filed, or asserted, against it. However, Crown Cork expects claims under these arrangements to be filed or asserted against Crown Cork in the future. The projected value of these claims is included in the Company’s estimated liability as of March 31, 2018.


14

Crown Holdings, Inc.


As of March 31, 2018, the Company’s accrual for pending and future asbestos-related claims and related legal costs was $313, including $266 for unasserted claims. The Company determines its accrual without limitation to a specific time period.

It is reasonably possible that the actual loss could be in excess of the Company’s accrual. However, the Company is unable to estimate the reasonably possible loss in excess of its accrual due to uncertainty in the following assumptions that underlie the Company’s accrual and the possibility of losses in excess of such accrual: the amount of damages sought by the claimant (which was not specified for approximately 81% of the claims outstanding at the end of 2017), the Company and claimant’s willingness to negotiate a settlement, the terms of settlements of other defendants with asbestos-related liabilities, the bankruptcy filings of other defendants (which may result in additional claims and higher settlements for non-bankrupt defendants), the nature of pending and future claims (including the seriousness of alleged disease,
whether claimants allege first exposure to asbestos before or during 1964 and the claimant’s ability to demonstrate the alleged link to Crown Cork), the volatility of the litigation environment, the defense strategies available to the Company, the level of future claims, the rate of receipt of claims, the jurisdiction in which claims are filed, and the effect of state asbestos legislation (including the validity and applicability of the Pennsylvania legislation to non-Pennsylvania jurisdictions, where the substantial majority of the Company’s asbestos cases are filed).


I.
Commitments and Contingent Liabilities

The Company, along with others in most cases, has been identified by the EPA or a comparable state environmental agency as a Potentially Responsible Party (“PRP”) at a number of sites and has recorded aggregate accruals of $7 for its share of estimated future remediation costs at these sites. The Company has been identified as having either directly or indirectly disposed of commercial or industrial waste at the sites subject to the accrual, and where appropriate and supported by available information, generally has agreed to be responsible for a percentage of future remediation costs based on an estimated volume of materials disposed in proportion to the total materials disposed at each site. The Company has not had monetary sanctions imposed nor has the Company been notified of any potential monetary sanctions at any of the sites.

The Company has also recorded aggregate accruals of $9 for remediation activities at various worldwide locations that are owned by the Company and for which the Company is not a member of a PRP group. Although the Company believes
its accruals are adequate to cover its portion of future remediation costs, there can be no assurance that the ultimate payments will not exceed the amount of the Company’s accruals and will not have a material effect on its results of operations, financial position and cash flow. Any possible loss or range of potential loss that may be incurred in excess of the recorded accruals cannot be estimated.

In March 2015, the Bundeskartellamt, or German Federal Cartel Office (“FCO”), conducted unannounced inspections of the premises of several metal packaging manufacturers, including a German subsidiary of the Company. The local court order authorizing the inspection cited FCO suspicions of anti-competitive agreements in the market for the supply of metal packaging products. The Company conducted an internal investigation into the matter and discovered instances of inappropriate conduct by certain employees of German subsidiaries of the Company. The Company cooperated with the FCO and submitted a leniency application with the FCO which disclosed the findings of its internal investigation to date. In April 2018, the FCO announced that it referred its cartel investigation concerning metal packaging to the European Commission (the “Commission”) due to its believe that there is evidence of competition law violations in several EU member states and that the FCO was no longer continuing its national investigation. Also in April 2018, Commission officials conducted unannounced inspections of the premises of several metal packaging manufacturers, including Company subsidiaries in Germany, France and the United Kingdom. The Commission's decision authorizing the inspections cited indications of anti-competitive agreements and practices in the market for the supply of metal packaging products over several years. The Commission's investigation is ongoing and, to date, the Commission has not officially charged the Company or any of its subsidiaries with violations of competition law. The Company is cooperating with the Commission and submitted a leniency application which disclosed the findings of the internal investigation referenced above. This application may lead to the reduction of possible future penalties. If the Commission finds that the Company or any of its subsidiaries violated competition law, it has the power to levy fines. At this stage of the investigation the Company believes that a loss is probable. However, the Company is unable to predict the ultimate outcome of the Commission’s investigation and is unable to estimate the loss or possible range of any additional losses that could be incurred, and has therefore not recorded a charge in connection with the actions by the Commission. If the Commission finds that the Company or any of its subsidiaries violated competition law, fines levied by the Commission could be material to the Company's operating results and cash flows for the periods in which they are resolved or become reasonably estimable.

15

Crown Holdings, Inc.


In March 2017, U.S. Customs and Border Protection (“CBP”) at the Port of Milwaukee issued a penalty notification alleging that certain of the Company’s subsidiaries intentionally misclassified the importation of certain goods into the U.S. during the period 2004-2009 and assessed a penalty of $8. The Company has acknowledged to CBP that the goods were misclassified and has paid all related duties, which were approximately $1. The Company has asserted that the misclassification was unintentional and disputes the penalty assessment. The Company cannot predict the ultimate outcome of this matter and has not accrued a liability with respect to the assessed penalty. At the present time, based on the information available, the Company does not believe that a loss for the alleged intentional misclassification is probable. There can be no assurance the Company will be successful in contesting the assessed penalty.

The Company and its subsidiaries are also subject to various other lawsuits and claims with respect to governmental, labor, environmental, securities, vendor and other matters arising out of the Company’s normal course of business. While the impact on future financial results is not subject to reasonable estimation because considerable uncertainty exists, management believes that the ultimate liabilities resulting from such lawsuits and claims will not materially affect the Company’s consolidated earnings, financial position or cash flow.

The Company has various commitments to purchase materials, supplies and utilities as part of the ordinary course of business. The Company’s basic raw materials for its products are steel and aluminum, both of which are purchased from multiple sources. The Company is subject to fluctuations in the cost of these raw materials (including in connection with tariffs recently imposed in the U.S., which may increase costs) and has periodically adjusted its selling prices to reflect these movements. There can be no assurance, however, that the Company will be able to fully recover any increases or fluctuations in raw material costs from its customers. The Company also has commitments for standby letters of credit and for purchases of capital assets.

At March 31, 2018, the Company was party to certain indemnification agreements covering environmental remediation, lease payments and other potential costs associated with properties sold or businesses divested. The Company accrues for costs related to these items when it is probable that a liability has been incurred and the amount can be reasonably estimated.

J.
Derivative and Other Financial Instruments

Fair Value Measurements

Under GAAP a framework exists for measuring fair value, providing a three-tier hierarchy of pricing inputs used to report assets and liabilities that are adjusted to fair value. Level 1 includes inputs such as quoted prices which are available in active markets for identical assets or liabilities as of the report date. Level 2 includes inputs other than those available in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 3
includes unobservable pricing inputs that are not corroborated by market data or other objective sources. The Company has no recurring items valued using Level 3 inputs other than certain pension plan assets.

The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities measured at fair value and their placement within the fair value hierarchy.

The Company applies a market approach to value its commodity price hedge contracts. Prices from observable markets are used to develop the fair value of these financial instruments and they are reported under Level 2. The Company uses an income approach to value its foreign exchange forward contracts. These contracts are valued using a discounted cash flow model that calculates the present value of future cash flows under the terms of the contracts using market information as of the reporting date, such as foreign exchange spot and forward rates, and are reported under Level 2 of the fair value hierarchy.

Fair value disclosures for financial assets and liabilities that were accounted for at fair value on a recurring basis are provided later in this note. In addition, see Note K for fair value disclosures related to debt.

Derivative Financial Instruments

In the normal course of business the Company is subject to risk from adverse fluctuations in currency exchange rates, interest rates and commodity prices. The Company manages these risks through a program that includes the use of derivative financial instruments, primarily swaps and forwards. Counterparties to these contracts are major financial

16

Crown Holdings, Inc.


institutions. The Company is exposed to credit loss in the event of nonperformance by these counterparties. The Company does not use derivative instruments for trading or speculative purposes.

The Company’s objective in managing exposure to market risk is to limit the impact on earnings and cash flow. The extent to which the Company uses such instruments is dependent upon its access to these contracts in the financial markets and its success using other methods, such as netting exposures in the same currencies to mitigate foreign exchange risk and using sales agreements that permit the pass-through of commodity price and foreign exchange rate risk to customers.

For derivative financial instruments accounted for in hedging relationships, the Company formally designates and documents, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management
objective and the manner in which effectiveness will be assessed. The Company formally assesses, both at inception and at least quarterly thereafter, whether the hedging relationships are effective in offsetting changes in fair value or cash
flows of the related underlying exposures. When a hedge no longer qualifies for hedge accounting, the change in fair value from the date of the last effectiveness test is recognized in earnings. Any gain or loss which has accumulated in other comprehensive income at the date of the last effectiveness test is reclassified into earnings at the same time of the underlying exposure.

Cash Flow Hedges

The Company designates certain derivative financial instruments as cash flow hedges. No components of the hedging instruments are excluded from the assessment of hedge effectiveness. Changes in fair value of outstanding derivatives accounted for as cash flow hedges are recorded in other comprehensive income until earnings are impacted by the hedged transaction. Classification of the gain or loss in the Consolidated Statements of Operations upon reclassification from comprehensive income is the same as that of the underlying exposure. Contracts outstanding at March 31, 2018 mature between one and thirty-one months.

When the Company discontinues hedge accounting because it is no longer probable that an anticipated transaction will occur in the originally specified period, changes to fair value accumulated in other comprehensive income are recognized immediately in earnings.

The Company uses forward contracts to hedge anticipated purchases of various commodities, including aluminum, fuel oil and natural gas and these exposures are hedged by a central treasury unit.

The Company also designates certain foreign exchange contracts as cash flow hedges of anticipated foreign currency denominated sales or purchases. The Company manages these risks at the operating unit level. Often, foreign currency risk is hedged together with the related commodity price risk.

The following tables set forth financial information about impact on other comprehensive income ("OCI"), accumulated other comprehensive income (“AOCI”) and earnings from changes in the fair value of derivative instruments.


17

Crown Holdings, Inc.


 
 
 Amount of gain/(loss)
 
 
 
 
recognized in OCI
 
 
 
 
Three Months Ended
 
Three Months Ended
 
 
 
 
March 31, 2018
 
March 31, 2017
 
 
Derivatives in cash flow hedges
 
 
 
 
Foreign exchange
 
$
(3
)
 
$
(2
)
 
 
Commodities
 
(23
)
 
23

 
 
 
 
$
(26
)
 
$
21

 
 
 
 
 
 
 
 
 
 
 
 Pre-tax amount of gain/(loss)
 
 
 
 
reclassified from AOCI into
 
 
 
 
income
 
 
 
 
Three Months Ended
 
Three Months Ended
 
 
 
 
March 31, 2018
 
March 31, 2017
 
Affected line item in the
Derivatives in cash flow hedges
 
 
 
statement of operations
Foreign exchange
 
$

 
$
(3
)
 
Net sales
Commodities
 
(2
)
 

 
Net sales
Foreign exchange
 

 
1

 
Cost of products sold
Commodities
 
10

 
4

 
Cost of products sold
 
 
$
8

 
$
2

 
 
    
For the three months ended March 31, 2017, only the effective portion of cash flow hedges was recognized in other comprehensive income. For the three months ended March 31, 2017, the Company recognized a gain of $2 ($1, net of tax) in earnings related to hedge ineffectiveness caused by volatility in the metal premium component of aluminum prices. There is no ineffectiveness in the current year as the Company has hedged variability in cash flows for contractually specified components of its aluminum purchases.

For the twelve month period ending March 31, 2018, a net loss of $7 ($5, net of tax) is expected to be reclassified to earnings. No amounts were reclassified during the three months ended March 31, 2018 and 2017 in connection with anticipated transactions that were no longer considered probable.

Fair Value Hedges and Contracts Not Designated as Hedges

The Company designates certain derivative financial instruments as fair value hedges of recognized foreign-denominated assets and liabilities, generally trade accounts receivable and payable and unrecognized firm commitments. The notional values and maturity dates of the derivative instruments coincide with those of the hedged items. Changes in fair value of the derivative financial instruments, excluding time value, are offset by changes in fair value of the related hedged items.

Certain derivative financial instruments, including foreign exchange contracts related to intercompany debt, were not designated in hedge relationships; however, they are effective economic hedges as the changes in their fair value, except for time value, are offset by changes arising from re-measurement of the related hedged items. The Company’s primary use of these derivative instruments is to offset the earnings impact that fluctuations in foreign exchange rates have on certain monetary assets and liabilities denominated in currencies other than the entity's functional currency.

For the three months ended March 31, 2018 and 2017, the Company recorded losses of less than $1 from foreign exchange contracts designated as fair value hedges. These adjustments were reported within foreign exchange in the Consolidated Statement of Operations.








18

Crown Holdings, Inc.


The following table sets forth the impact on earnings from derivatives not designated as hedges.
 
 
 Pre-tax amount of gain/(loss)
 
 
 
 
recognized in income on
 
 
 
 
derivative
 
 
 
 
Three Months Ended
 
Three Months Ended
 
 
 
 
March 31, 2018
 
March 31, 2017
 
Affected line item in the
Derivatives not designated as hedges
 
 
 
statement of operations
Foreign exchange
 
$

 
$
1

 
Net sales
Foreign exchange
 
1

 
(1
)
 
Cost of products sold
Foreign exchange
 
5

 

 
Foreign exchange
Commodities
 

 
(7
)
 
Cost of products sold
 
 
$
6

 
$
(7
)
 
 

For the three months ended March 31, 2017, certain commodity hedges did not meet the criteria for hedge accounting and therefore the change in their fair value during the quarter was recognized in earnings.

Net Investment Hedges

The Company designates certain debt and derivative instruments as net investment hedges to manage foreign currency risk relating to net investments in subsidiaries denominated in foreign currencies and reduce the variability in the functional currency equivalent cash flows.

During the three months ended March 31, 2018 and 2017, the Company recorded losses of $35 ($31, net of tax) and $15 ($12, net of tax) in other comprehensive income for certain debt instruments that are designated as hedges of its net investment in a euro-based subsidiary. As of March 31, 2018 and December 31, 2017, cumulative losses of $141 and $106 ($118 and $88, net of tax) were recognized in accumulated other comprehensive income related to these net investment hedges. As of March 31, 2018 and December 31, 2017, the carrying amount of the hedged net investment was approximately €907 and €1,150 ($1,117 and $1,417 at March 31, 2018 and December 31, 2017).

In January 2018, the Company entered into a series of cross-currency swaps with an aggregate notional of $875 (€718). The swaps are designated as a hedge of net investment for financial reporting purposes. Under the cross-currency interest rate contracts, the Company will receive semi-annual fixed U.S. dollar payments at a rate of 4.75% of the U.S. notional value and pay 2.50% on the euro notional value.

Gains or losses on net investment hedges remain in accumulated other comprehensive income until disposal of the underlying assets.

The following tables set forth financial information about the impact on OCI from changes in the fair value of derivative instruments.
 
 
Amount of gain/(loss)
 
 
recognized in OCI
 
 
Three Months Ended
 
Three Months Ended
Derivatives designated as net investment hedges
 
March 31, 2018
 
March 31, 2017
 
 
Foreign exchange
 
$
(28
)
 
$


Gains and losses representing components excluded from the assessment of effectiveness on derivatives designated as net investment hedges are recognized in accumulated other comprehensive income.






19

Crown Holdings, Inc.


Fair Values of Derivative Financial Instruments and Valuation Hierarchy

The following table sets forth the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2018 and December 31, 2017, respectively. The fair values of these financial instruments were reported under Level 2 of the fair value hierarchy.

 
 
Balance Sheet classification
 
March 31,
2018
 
December 31,
2017
Derivative assets
 
 
 
 
 
 
Cash flow derivatives designated as hedges:
 
 
 
 
Foreign exchange
 
Other current assets
 
$
7

 
$
5

Commodities
 
Other current assets
 
17

 
25

Commodities
 
Other non-current assets
 
1

 
4

Cash flow derivatives not designated as hedges:
 
 
 
 
Foreign exchange
 
Other current assets
 
1

 
1

Commodities
 
Other current assets
 

 
22

Fair value derivatives designated as hedges:
 
 
 
 
Foreign exchange
 
Other current assets
 
1

 
1

Fair value derivatives not designated as hedges:
 
 
 
 
Foreign exchange
 
Other current assets
 
1

 
5

 
 
Total
 
$
28

 
$
63

 
 
 
 
 
 
 
Derivative liabilities
 
 
 
 
 
 
Cash flow derivatives designated as hedges:
 
 
 
 
Foreign exchange
 
Accrued liabilities
 
$
11

 
$
6

Commodities
 
Accrued liabilities
 
21

 

Foreign exchange
 
Other non-current liabilities
 
1

 

Commodities
 
Other non-current liabilities
 
4

 

Cash flow derivatives not designated as hedges:
 
 
 
 
Foreign exchange
 
Accrued liabilities
 
1

 
1

Commodities
 
Accrued liabilities
 

 
15

Fair value derivatives designated as hedges:
 
 
 
 
Foreign exchange
 
Accrued liabilities
 
1

 
1

Fair value derivatives not designated as hedges:
 
 
 
 
Foreign exchange
 
Accrued liabilities
 
2

 

Net investment derivatives designated as hedges:
 
 
 
 
Foreign exchange
 
Other non-current liabilities
 
37

 

 
 
Total
 
$
78

 
$
23


Fair Value Hedge Carrying Amounts

 
 
 
 
 
 
Cumulative amount of fair value
 
 
 
 
hedging adjustment included in the
 
 
Carrying amount of the hedged
 
carrying amount of the hedged
Line item in the statement of
 
assets/(liabilities)
 
assets/(liabilities)
financial position in which the
 
March 31,
2018
 
December 31,
2017
 
March 31,
2018
 
December 31,
2017
hedge item is included
 
 
 
 
Cash and cash equivalents
 
$
6

 
$
1

 
$

 
$

Receivables, net
 
14

 
15

 

 

Accrued liabilities

 
(22
)
 
(12
)
 

 






20

Crown Holdings, Inc.


Offsetting of Derivative Assets and Liabilities

Certain derivative financial instruments are subject to agreements with counterparties similar to master netting arrangements and are eligible for offset. The Company has made an accounting policy election not to offset the fair values of these instruments within the statement of financial position. In the table below, the aggregate fair values of the Company's derivative assets and liabilities are presented on both a gross and net basis, where appropriate.

 
Gross amounts recognized in the Balance Sheet
Gross amounts not offset in the Balance Sheet
Net amount
Balance at March 31, 2018
 
 
 
Derivative assets
$28
$17
$11
Derivative liabilities
78
17
61
 
 
 
 
Balance at December 31, 2017
 
 
 
Derivative assets
63
17
46
Derivative liabilities
23
17
6
    
    
Notional Values of Outstanding Derivative Instruments

The aggregate U.S. dollar-equivalent notional values of outstanding derivative instruments in the Consolidated Balance Sheets at March 31, 2018 and December 31, 2017 were:
 
March 31, 2018
 
December 31, 2017
Derivatives in cash flow hedges:
 
 
 
Foreign exchange
$
839

 
$
864

Commodities
335

 
276

Derivatives in fair value hedges:

 

Foreign exchange
70

 
60

Derivatives not designated as hedges:
 
 
 
Foreign exchange
586

 
575

Commodities

 
40



21

Crown Holdings, Inc.


K.
Debt

The Company's outstanding debt was as follows:
 
March 31, 2018
 
December 31, 2017
 
Principal
 
Carrying
 
Principal
 
Carrying
 
outstanding
 
amount
 
outstanding
 
amount
Short-term debt
$
32

 
$
32

 
$
62

 
$
62

 

 

 
 
 
 
Long-term debt

 

 
 
 
 
Senior secured borrowings:

 

 
 
 
 
Revolving credit facilities
$
749

 
$
749

 
$
122

 
$
122

Term loan facilities

 


 
 
 
 
U.S. dollar at LIBOR + 1.50% due 2022
736

 
730

 
741

 
735

Euro at EURIBOR + 1.50% due 20221
330

 
330

 
324

 
324

Senior notes and debentures:

 

 
 
 
 
€650 at 4.0% due 2022
801

 
795

 
781

 
774

U. S. dollar at 4.50% due 2023
1,000

 
992

 
1,000

 
992

€335 at 2.250% due 2023

413

 
407

 

 

€600 at 2.625% due 2024
739

 
732

 
720

 
713

€600 at 3.375% due 2025
739

 
730

 
720

 
711

U.S. dollar at 4.25% due 2026
400

 
393

 
400

 
393

U.S. dollar at 4.75% due 2026

875

 
863

 

 

U.S. dollar at 7.375% due 2026
350

 
347

 
350

 
347

€500 at 2.875% due 2026

616

 
608

 

 

U.S. dollar at 7.50% due 2096
40

 
40

 
40

 
40

Other indebtedness in various currencies
94

 
94

 
101

 
101

Capital lease obligations
29

 
29

 
29

 
29

Total long-term debt
7,911

 
7,839

 
5,328

 
5,281

Less current maturities
(61
)
 
(61
)
 
(64
)
 
(64
)
Total long-term debt, less current maturities
$
7,850

 
$
7,778

 
$
5,264

 
$
5,217


(1) €268 and €270 at March 31, 2018 and December 31, 2017.

The estimated fair value of the Company’s long-term borrowings, using a market approach incorporating Level 2 inputs such as quoted market prices for the same or similar issues, was $7,993 at March 31, 2018 and $5,562 at December 31, 2017.

In January 2018, the Company amended its revolving credit agreements, effective as of April 2018, to provide capacity of $1,650 under the revolving credit facility upon completion of the Signode acquisition and extend the timetable for compliance with total leverage ratios.

In January 2018, the Company issued $875 principal amount of 4.750% senior unsecured notes due 2026. The notes were issued at par by Crown Americas LLC, a subsidiary of the Company, and are unconditionally guaranteed by the Company and certain of its subsidiaries.

In January 2018, the Company also issued €500 ($616 at March 31, 2018) principal amount of 2.875% senior unsecured notes due 2026 and €335 ($413 at March 31, 2018) principal amount of 2.250% senior unsecured notes due 2023. The notes were issued at par by Crown European Holdings S.A., a subsidiary of the Company and are unconditionally guaranteed by the Company and certain of its subsidiaries.

In April 2018, the Company borrowed $100 Term A loans and $1,150 Term B loans under its U.S. dollar term loan facility and €750 ($924 at March 31, 2018) additional Term B loans under its European term loan facility. The Term B loans mature on April 3, 2025 and interest rates are based on LIBOR or EURIBOR plus a margin of 1.00% up to 2.375%.

22

Crown Holdings, Inc.


L.
Pension and Other Postretirement Benefits

The components of net periodic pension and other postretirement benefits costs for the three months ended March 31, 2018 and 2017 were as follows:
 
Three Months Ended
 
March 31
Pension benefits – U.S. plans
2018
 
2017
Service cost
$
4

 
$
3

Interest cost
12

 
12

Expected return on plan assets
(21
)
 
(20
)
Recognized net loss
12

 
13

Net periodic cost
$
7

 
$
8

 
Three Months Ended
 
March 31
Pension benefits – Non-U.S. plans
2018
 
2017
Service cost
$
7

 
$
6

Interest cost
19

 
19

Expected return on plan assets
(40
)
 
(35
)
Recognized prior service credit
(3
)
 
(3
)
Recognized net loss
11

 
10

Net periodic benefit
$
(6
)
 
$
(3
)

 
Three Months Ended
 
March 31
Other postretirement benefits
2018
 
2017
Service cost
$

 
$

Interest cost
1

 
1

Recognized prior service credit
(9
)
 
(10
)
Recognized net loss
1

 
1

Net periodic benefit
$
(7
)
 
$
(8
)


The components of net periodic cost / (benefit) other than the service cost component are included in other pension and postretirement in the Consolidated Statement of Operations.

M.
Income Taxes

The Company's accounting for the Tax Cuts and Jobs Act (H.R. 1), (the "Tax Act") is provisional. As of December 31, 2017, the Company recorded a gross provisional obligation of $113 for the one-time tax imposed on the unremitted earnings of non-U.S. subsidiaries. The Company expects to be able to use foreign tax credit carryforwards to satisfy this obligation. The Company has not made any additional measurement-period adjustments related to these items during the first quarter of 2018. The Company continues to review the technical interpretations of the Tax Act and other applicable laws, monitor legislative changes, review U.S. state guidance as issued and obtain the information necessary to complete the calculations and expects to complete its analysis during the fourth quarter of 2018.

As of March 31, 2018, the Company had a valuation allowance of $207 related to the portion of U.S. state tax loss carryforwards that the Company does not believe are more likely than not to be utilized prior to their expiration. The Company has not yet been able to make a reasonable estimate of the impact of the Tax Act on state taxable income and any related impact on this valuation allowance.


23

Crown Holdings, Inc.


N.
Accumulated Other Comprehensive Income

The following table provides information about the changes in each component of accumulated other comprehensive income.
 
 
Defined benefit plans
 
Foreign currency translation
 
Gains and losses on cash flow hedges
 
Total
Balance at January 1, 2017
 
$
(1,524
)
 
$
(1,879
)
 
$
3

 
$
(3,400
)
Other comprehensive income before reclassifications


 
110

 
21

 
131

Amounts reclassified from accumulated other comprehensive income
9

 


 
(1
)
 
8

Other comprehensive income
 
9

 
110

 
20

 
139

Balance at March 31, 2017
 
$
(1,515
)
 
$
(1,769
)
 
$
23

 
$
(3,261
)
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
 
$
(1,583
)
 
$
(1,681
)
 
$
23

 
$
(3,241
)
Cumulative effect of change in accounting principle
 


 


 
3

 
3

Other comprehensive income before reclassifications


 
81

 
(26
)
 
55

Amounts reclassified from accumulated other comprehensive income
11

 


 
(6
)
 
5

Other comprehensive income (loss)
 
11

 
81

 
(29
)
 
63

Balance at March 31, 2018
 
$
(1,572
)
 
$
(1,600
)
 
$
(6
)
 
$
(3,178
)

The following table provides information about amounts reclassified from accumulated other comprehensive income.
 
 
Three Months Ended
 
 
Details about accumulated other
 
March 31
 
Affected line item in the
comprehensive income components
 
2018
 
2017
 
statement of operations
(Gains) losses on cash flow hedges
 
 
 
 
 
 
    Commodities
 
$
2

 
$

 
Net sales
 
 
(10
)
 
(4
)
 
Cost of products sold
 
 
(8
)
 
(4
)
 
Income before taxes
 
 
2

 
1

 
Provision for income taxes
 
 
$
(6
)
 
$
(3
)
 
Net income
 
 
 
 
 
 
 
    Foreign exchange
 
$

 
$
3

 
Net sales
 
 

 
(1
)
 
Cost of products sold
 
 

 
2

 
Income before taxes
 
 

 

 
Provision for income taxes
 
 
$

 
$
2

 
Net income
 
 
 
 
 
 
 
Total gains on cash flow hedges
$
(6
)
 
$
(1
)
 
 
 
 
 
 
 
 
 
Amortization of defined benefit plan items
 
 
 
 
 
    Actuarial losses (a)
 
$
24

 
$
24

 
Other pension and postretirement
    Prior service credit (a)
 
(12
)
 
(13
)
 
Other pension and postretirement
 
 
12

 
11

 
Income before taxes
 
 
(1
)
 
(2
)
 
Provision for income taxes
 
 
$
11

 
$
9

 
Net income
 
 
 
 
 
 
 
Total reclassifications for the period
$
5

 
$
8

 
 
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension and postretirement costs. See Note L for further details.

24

Crown Holdings, Inc.




O.
Stock-Based Compensation

A summary of restricted stock transactions during the three months ended March 31, 2018 follows:

 
Number of shares
Non-vested stock awards outstanding at January 1, 2018
1,053,842

Awarded:

Time-vesting shares
73,173

Performance-based shares
142,154

Released:

Time-vesting shares
(59,035
)
Forfeitures:
 
       Time-vesting shares
(4,575
)
Performance-based shares
(159,738
)
Non-vested stock awards outstanding at March 31, 2018
1,045,821


The performance-based share awards are subject to either a market condition or a performance condition. For awards subject to a market condition, the performance metric is the Company's total shareholder return, which includes share price appreciation and dividends paid during the three-year term of the award, measured against a peer group of companies. These awards cliff vest at the end of three years. The number of performance-based shares that will ultimately vest is based on the level of market performance achieved, ranging between 0% and 200% of the shares originally awarded, and are settled in stock.

For awards subject to a performance condition, the performance metric is the Company's average return on invested capital, over the three-year term. These awards cliff vest at the end of three years. The number of performance-based shares that will ultimately vest is based on the level of performance achieved, ranging between 0% and 200% of the shares originally awarded, and are settled in stock.

The time-vesting restricted and deferred stock awards vest ratably over three to five years.

The weighted average grant-date fair values of awards issued during the three months ended March 31, 2018 were $57.09 for the time-vesting stock awards and $58.77 for the performance-based stock awards.

The fair value of the performance-based shares subject to a market condition awarded in 2018 was calculated using a Monte Carlo valuation model, including a weighted average stock price volatility of 19.9%, an expected term of three years, and a weighted average risk-free interest rate of 2.01%.

As of March 31, 2018, unrecognized compensation cost related to outstanding non-vested stock awards was $32. The weighted average period over which the expense is expected to be recognized is 1.7 years. The aggregate market value of the shares released on the vesting dates was $3 for the three months ended March 31, 2018.















25

Crown Holdings, Inc.


P.
Earnings Per Share

The following table summarizes the computations of basic and diluted earnings per share attributable to the Company.

 
Three Months Ended
 
March 31
 
2018
 
2017
Net income attributable to Crown Holdings
$
90

 
$
107

Weighted average shares outstanding:
 
 
 
Basic
133.5

 
138.5

Dilutive stock options and restricted stock
0.3

 
0.5

Diluted
133.8

 
139.0

Basic earnings per share
$
0.67

 
$
0.77

Diluted earnings per share
$
0.67

 
$
0.77


For the three months ended March 31, 2018, there were 0.2 million contingently issuable common shares excluded from the computation of diluted earnings per share because the effect would be anti-dilutive.


Q.
Segment Information

The Company evaluates performance and allocates resources based on segment income, which is not a defined term under GAAP. Previously, the Company defined segment income as income from operations adjusted to exclude provisions for asbestos and restructuring and other, the impact of fair value adjustments related to the sale of inventory acquired in an acquisition and the timing impact of hedge ineffectiveness. During the first quarter of 2018, the Company updated its definition of segment income to also exclude intangibles amortization charges. Prior period segment income amounts below have been recast to conform to current year presentation of intangible amortization charges and the new guidance related to presentation of pension and other postretirement benefit costs discussed in Note B.

Segment income should not be considered in isolation or as a substitute for net income data prepared in accordance with GAAP and may not be comparable to calculations of similarly titled measures by other companies.     

The tables below present information about the Company's operating segments.

 
External Sales
 
Three Months Ended
 
March 31
 
2018
 
2017
Americas Beverage
$
758

 
$
674

European Beverage
371

 
303

European Food
428

 
379

Asia Pacific
337

 
278

Total reportable segments
1,894

 
1,634

Non-reportable segments
303

 
267

Total
$
2,197

 
$
1,901



The primary sources of revenue included in non-reportable segments are the Company's aerosol can businesses in North America and Europe, its food can business in North America, its promotional packaging business in Europe and its tooling and equipment operations in the U.S. and U.K.


26

Crown Holdings, Inc.


 
Intersegment Sales
 
Three Months Ended
 
March 31
 
2018
 
2017
Americas Beverage
$
10

 
$
6

European Beverage

 
1

European Food
22

 
16

Asia Pacific

 

Total reportable segments
32

 
23

Non-reportable segments
27

 
35

Total
$
59

 
$
58



Intersegment sales primarily include sales of ends and components used to manufacture cans, such as printed and coated metal, as well as parts and equipment used in the manufacturing process.

 
Segment Income
 
Three Months Ended
 
March 31
 
2018
 
2017
Americas Beverage
$
98

 
$
104

European Beverage
55

 
50

European Food
56

 
51

Asia Pacific
44

 
39

Total reportable segments
$
253

 
$
244



A reconciliation of segment income of reportable segments to income before income taxes is as follows:

 
Three Months Ended
 
March 31
 
2018

2017
Segment income of reportable segments
$
253

 
$
244

Segment income of non-reportable segments
31

 
28

Corporate and unallocated items
(39
)
 
(41
)
Restructuring and other
(13
)
 
4

Amortization of intangibles
(11
)
 
(10
)
Other pension and postretirement
17

 
12

Interest expense
(74
)
 
(62
)
Interest income
6

 
3

Foreign exchange
(18
)
 
1

Income before income taxes
$
152

 
$
179


For the three months ended March 31, 2018 and 2017, intercompany profit of $1 and $3 was eliminated within segment income of non-reportable segments.
 
Corporate and unallocated items includes corporate and division administrative costs, technology costs and fair value adjustments for the sale of inventory acquired in an acquisition and the timing impact of hedge ineffectiveness.

27

Crown Holdings, Inc.


R.
Condensed Combining Financial Information

Crown Cork & Seal Company, Inc. (Issuer), a 100% owned subsidiary of the Company, has $350 principal amount of 7.375% senior notes due 2026 and $40 principal amount of 7.5% senior notes due 2096 outstanding that are fully and unconditionally guaranteed by Crown Holdings, Inc. (Parent). No other subsidiary guarantees the debt and the guarantees are made on a joint and several basis.

The following condensed combining financial statements:
statements of comprehensive income for the three months ended March 31, 2018 and 2017,
balance sheets as of March 31, 2018 and December 31, 2017, and
statements of cash flows for the three months ended March 31, 2018 and 2017
are presented on the following pages to comply with the Company’s requirements under Rule 3-10 of Regulation S-X.


CONDENSED COMBINING STATEMENT OF COMPREHENSIVE INCOME
For the three months ended March 31, 2018
(in millions)

 
Parent
 
Issuer
 
Non-
Guarantors
 
Eliminations
 
Total
Company
Net sales

 

 
$
2,197

 

 
$
2,197

Cost of products sold, excluding depreciation and amortization

 

 
1,808

 

 
1,808

Depreciation and amortization

 

 
65

 

 
65

Selling and administrative expense

 
$
2

 
88

 

 
90

Restructuring and other

 

 
13

 

 
13

Income from operations
 
 
(2
)
 
223

 
 
 
221

Other pension and postretirement

 

 
(17
)
 

 
(17
)
Net interest expense

 
19

 
49

 

 
68

Foreign exchange

 

 
18

 

 
18

Income/(loss) before income taxes
 
 
(21
)
 
173

 
 
 
152

Provision for / (benefit from) income taxes

 
(4
)
 
43

 

 
39

Equity earnings / (loss) in affiliates
$
90

 
95

 

 
$
(185
)
 

Net income
90

 
78

 
130

 
(185
)
 
113

Net income attributable to noncontrolling interests

 

 
(23
)
 

 
(23
)
Net income attributable to Crown Holdings
$
90

 
$
78

 
$
107

 
$
(185
)
 
$
90

 
 
 
 
 
 
 
 
 
 
Total comprehensive income
$
150

 
$
47

 
$
191

 
$
(214
)
 
$
174

Comprehensive income attributable to noncontrolling interests

 

 
(24
)
 

 
(24
)
Comprehensive income attributable to Crown Holdings
$
150

 
$
47

 
$
167

 
$
(214
)