10-Q 1 cck-6302018xq2.htm Q2 2018 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 June 30, 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 135,186,345 shares of Common Stock outstanding as of July 31, 2018.


Crown Holdings, Inc.


PART I – FINANCIAL INFORMATION

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

 
Three Months Ended
 
Six Months Ended
 
June 30
 
June 30
 
2018
 
2017
 
2018
 
2017
Net sales
$
3,046

 
$
2,161

 
$
5,243

 
$
4,062

Cost of products sold, excluding depreciation and amortization
2,466

 
1,732

 
4,274

 
3,263

Depreciation and amortization
113

 
61

 
178

 
120

Selling and administrative expense
159

 
91

 
249

 
181

Restructuring and other
16

 
18

 
29

 
14

Income from operations
292


259

 
513

 
484

Other pension and postretirement
(17
)
 
(12
)
 
(34
)
 
(24
)
Loss from early extinguishments of debt

 
7

 

 
7

Interest expense
103

 
61

 
177

 
123

Interest income
(5
)
 
(3
)
 
(11
)
 
(6
)
Foreign exchange
10

 
5

 
28

 
4

Income before income taxes
201

 
201

 
353


380

Provision for income taxes
55

 
53

 
94

 
99

Equity earnings in affiliates
1

 

 
1

 

Net income
147

 
148

 
260


281

Net income attributable to noncontrolling interests
(15
)
 
(20
)
 
(38
)
 
(46
)
Net income attributable to Crown Holdings
$
132

 
$
128

 
$
222

 
$
235

 
 
 
 
 
 
 
 
Earnings per common share attributable to Crown Holdings:
 
 
 
 
 
 
 
Basic
$
0.99

 
$
0.95

 
$
1.66

 
$
1.72

Diluted
$
0.99

 
$
0.94

 
$
1.66

 
$
1.71


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
 
Six Months Ended
 
June 30
 
June 30
 
2018
 
2017
 
2018
 
2017
Net income
$
147

 
$
148

 
$
260

 
$
281

 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(144
)
 
99

 
(62
)
 
209

Pension and other postretirement benefits
11

 
8

 
22

 
17

Derivatives qualifying as hedges
14

 
(13
)
 
(18
)
 
8

Total other comprehensive (loss) income
(119
)
 
94

 
(58
)
 
234

 
 
 
 
 
 
 
 
Total comprehensive income
28

 
242

 
202

 
515

Net income attributable to noncontrolling interests
(15
)
 
(20
)
 
(38
)
 
(46
)
Translation adjustments attributable to noncontrolling interests
2

 
(2
)
 
1

 
(2
)
Derivatives qualifying as hedges attributable to noncontrolling interests
1

 
1

 
1

 

Comprehensive income attributable to Crown Holdings
$
16

 
$
221

 
$
166

 
$
467



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


3

Crown Holdings, Inc.


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

 
June 30,
2018
 
December 31,
2017
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
298

 
$
424

Receivables, net
1,790

 
1,041

Inventories
1,737

 
1,385

Prepaid expenses and other current assets
330

 
224

Total current assets
4,155

 
3,074

 
 
 
 
Goodwill
4,443

 
3,046

Intangible assets, net
2,298

 
472

Property, plant and equipment, net
3,688

 
3,239

Other non-current assets
776

 
832

Total
$
15,360

 
$
10,663

 
 
 
 
Liabilities and equity
 
 
 
Current liabilities
 
 
 
Short-term debt
$
31

 
$
62

Current maturities of long-term debt
84

 
64

Accounts payable
2,452

 
2,367

Accrued liabilities
962

 
757

Total current liabilities
3,529

 
3,250

 
 
 
 
Long-term debt, excluding current maturities
9,236

 
5,217

Postretirement and pension liabilities
614

 
588

Other non-current liabilities
844

 
685

Commitments and contingent liabilities ( Note J)

 

Noncontrolling interests
353

 
322

Crown Holdings shareholders’ equity
784

 
601

Total equity
1,137

 
923

Total
$
15,360

 
$
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)
 
Six Months Ended
 
June 30
 
2018
 
2017
Cash flows from operating activities
 
 
 
Net income
$
260

 
$
281

Adjustments to reconcile net income to net cash used for operating activities:
 
 
 
Depreciation and amortization
178

 
120

Restructuring and other
29

 
14

Foreign exchange
28

 
4

Pension expense
3

 
11

Pension contributions
(10
)
 
(28
)
Stock-based compensation
11

 
10

Changes in assets and liabilities:
 
 
 
Receivables
(659
)
 
(623
)
Inventories
(230
)
 
(184
)
Accounts payable and accrued liabilities
(112
)
 
(112
)
Other, net
10

 
32

Net cash used for operating activities
(492
)
 
(475
)
Cash flows from investing activities
 
 
 
Capital expenditures
(200
)
 
(200
)
Acquisition of business, net of cash acquired
(3,907
)
 

Beneficial interests in transferred receivables
335

 
507

Proceeds from sale of property, plant and equipment
5

 
5

Foreign exchange derivatives related to acquisitions
(25
)
 

Net cash (used for) provided by investing activities
(3,792
)
 
312

Cash flows from financing activities
 
 
 
Proceeds from long-term debt
4,082

 
1,053

Payments of long-term debt
(37
)
 
(1,103
)
Net change in revolving credit facility and short-term debt
201

 
249

Debt issue costs
(70
)
 
(15
)
Common stock issued
1

 
8

Common stock repurchased
(4
)
 
(277
)
Dividends paid to noncontrolling interests
(6
)
 
(37
)
Foreign exchange derivatives related to debt
(5
)
 
11

Net cash provided by (used for) financing activities
4,162

 
(111
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(6
)
 
11

Net change in cash, cash equivalents and restricted cash
(128
)
 
(263
)
Cash, cash equivalents and restricted cash at January 1
435

 
576

Cash, cash equivalents and restricted cash at June 30
$
307

 
$
313


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 principle
 
 
 
 
60

 
 
 
 
 
60

 
 
 
60

Net income
 
 
 
 
235

 
 
 
 
 
235

 
46

 
281

Other comprehensive income
 
 
 
 
 
 
232

 
 
 
232

 
2

 
234

Dividends paid to noncontrolling interests
 
 
 
 
 
 
 
 
 
 

 
(37
)
 
(37
)
Restricted stock awarded
 
 
(1
)
 
 
 
 
 
1

 

 
 
 

Stock-based compensation
 
 
10

 
 
 
 
 
 
 
10

 
 
 
10

Common stock issued
 
 
6

 
 
 
 
 
2

 
8

 
 
 
8

Common stock repurchased
 
 
(262
)
 
 
 
 
 
(27
)
 
(289
)
 
 
 
(289
)
Balance at June 30, 2017
$
929

 
$
199

 
$
2,916

 
$
(3,168
)
 
$
(254
)
 
$
622

 
$
313

 
$
935

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
222

 
 
 
 
 
222

 
38

 
260

Other comprehensive income
 
 
 
 
 
 
(56
)
 
 
 
(56
)
 
(2
)
 
(58
)
Dividends paid to noncontrolling interests
 
 
 
 
 
 
 
 
 
 

 
(6
)
 
(6
)
Restricted stock awarded
 
 
(5
)
 
 
 
 
 
5

 

 
 
 

Stock-based compensation
 
 
11

 
 
 
 
 
 
 
11

 
 
 
11

Common stock issued
 
 
1

 
 
 
 
 


 
1

 
 
 
1

Common stock repurchased
 
 
(4
)
 
 
 
 
 


 
(4
)
 
 
 
(4
)
Balance at June 30, 2018
$
929

 
$
170

 
$
3,232

 
$
(3,294
)
 
$
(253
)
 
$
784

 
$
353

 
$
1,137



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 June 30, 2018 and the results of its operations for the three and six months ended June 30, 2018 and 2017 and of its cash flows for the six months ended June 30, 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 June 30, 2017, the Company reclassified $507 from net cash used for operating activities to net cash provided by investing activities. Additionally, for the six months ended June 30, 2018 and 2017, beneficial interests obtained in securitized receivables were $407 and $538.

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 conform to the current year presentation.

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

 
June 30, 2018
 
December 31, 2017
Cash and cash equivalents
$
298

 
$
424

Restricted cash included in prepaid expenses and other current assets

 
2

Restricted cash included in other non-current assets
9

 
9

Total cash, cash equivalents and restricted cash
$
307

 
$
435



7

Crown Holdings, Inc.


 
June 30, 2017
 
December 31, 2016
Cash and cash equivalents
$
301

 
$
559

Restricted cash included in prepaid expenses and other current assets
2

 
8

Restricted cash included in other non-current assets
10

 
9

Total cash, cash equivalents and restricted cash
$
313

 
$
576


Amounts included in restricted cash primarily represent amounts required to be set aside by certain of the Company's receivables securitization agreements.

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 the current year presentation. Net benefits of $13 and $25 were 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 three and six months ended June 30, 2017. Additionally, net charges of $1 were reclassified from selling and administrative expense to other pension and postretirement on the Company's Consolidated Statement of Operations for the three and six months ended June 30, 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 for 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


The impact of adoption on the Company’s Consolidated Balance Sheet and Statements of Operations was as follows:
 
As reported
 
Balances
 
June 30
Effects of
without adoption
Consolidated Balance Sheet
2018
change
of new standard
Receivables, net
$
1,790

$
(229
)
$
1,561

Inventories
1,737

197

1,934

Prepaid and other current assets
330

(19
)
311

Total current assets
4,155

(51
)
4,104

Other non-current assets
776

2

778

Total assets
15,360

(49
)
15,311

Accrued liabilities
962

(22
)
940

Total current liabilities
3,529

(22
)
3,507

Other non-current liabilities
844

(9
)
835

Noncontrolling interests
353

(1
)
352

Accumulated earnings
3,232

(17
)
3,215

Crown Holdings shareholders' equity
784

(17
)
767

Total equity
1,137

(18
)
1,119

Total liabilities and equity
15,360

(49
)
15,311


9

Crown Holdings, Inc.


 
As reported For the three months ended
 
 
 
Effects of
Balances without adoption
Statement of Operations
June 30, 2018
change
of new standard
Net sales
$
3,046

$
5

$
3,051

Cost of products sold, excluding depreciation and amortization
2,466

6

2,472

Income from operations
292

(1
)
291

Foreign exchange
10

(3
)
7

Income before income taxes
201

2

203

Net income
147

2

149

Net income attributable to Crown Holdings
132

2

134

Earnings per common share attributable to Crown Holdings:
 
 
 
Basic
$
0.99

$
0.01

$
1.00

Diluted
$
0.99

$
0.01

$
1.00

 
As reported For the six months ended
 
 
 
Effects of
Balances without adoption
Statement of Operations
June 30, 2018
change
of new standard
Net sales
$
5,243

$
(77
)
$
5,166

Cost of products sold, excluding depreciation and amortization
4,274

(63
)
4,211

Income from operations
513

(14
)
499

Foreign exchange
28

(3
)
25

Income before taxes
353

(11
)
342

Provision for income taxes
94

(3
)
91

Net income
260

(8
)
252

Net income attributable to Crown Holdings
222

(8
)
214

Earnings per common share attributable to Crown Holdings:
 
 
 
Basic
$
1.66

$
(0.06
)
$
1.60

Diluted
$
1.66

$
(0.06
)
$
1.60


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

10

Crown Holdings, Inc.


was 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 Company will adopt the guidance on a modified retrospective basis on January 1, 2019. The guidance is not expected to have a material impact on the Company's consolidated statement of operations but is expected to 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, thereby broadening and diversifying its customer base. The Company paid a purchase price of $3.9 billion. The acquisition was undertaken by a subsidiary of Crown European Holdings S.A. See Note L 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 dollar denominated cash portion of the purchase price. On March 29, 2018, the Company settled these contracts for a loss of $25.

The following table summarizes the consideration transferred to acquire Signode and the preliminary valuation of identifiable assets acquired and liabilities assumed at the acquisition date.
Fair value of consideration transferred
Cash consideration
$
3,907

 
 
Recognized amounts of identifiable assets acquired and liabilities assumed
Receivables, net
374

Inventories
303

Prepaid expenses and other current assets
45

Intangible assets, net
1,935

Property, plant and equipment, net
462

Other non-current assets
41

Short-term debt
(4
)
Accounts payable
(222
)
Accrued liabilities
(168
)
Long-term debt
(4
)
Postretirement and pension liabilities
(51
)
Other non-current liabilities
(307
)
Total identifiable net assets
$
2,404

 
 
Goodwill
$
1,503


Signode will be reported as the Company's Transit Packaging segment. The acquired goodwill was assigned to this segment and is not expected to be deductible for tax purposes.

The acquired property, plant and equipment will be depreciated over the estimated remaining useful lives on a straight-line basis.


11

Crown Holdings, Inc.


The acquired intangible assets will be amortized over the estimated remaining useful lives of the intangible assets, primarily on a straight-line basis. Intangible assets acquired and the weighted average remaining useful lives were as follows:

 
  
Preliminary Fair Value
  
Weighted Average
Estimated
Useful Life
Trade names - Indefinite lived
  
$
535

  
Indefinite
Trade names - Definite lived
  
33

  
8
Technology
  
166

  
7
Customer relationships
  
1,201

  
12
 
  
$
1,935

  
 

The Company has not yet finalized the determination of the fair value of assets acquired and liabilities assumed, including income taxes and contingencies. The Company expects to finalize these amounts within one year of the acquisition date.

Signode's results of operations have been included in the Company's financial statements for the period subsequent to the completion of the acquisition on April 3, 2018. Signode contributed sales of $620 and net income attributable to Crown Holdings of $3 for the three and six months ended June 30, 2018.

The following unaudited supplemental pro forma data presents consolidated information as if the acquisition had been completed on January 1, 2017. These amounts were calculated after adjusting Signode's results to reflect interest expense incurred on the debt to finance the acquisition, additional depreciation and amortization that would have been charged assuming the fair value of property, plant and equipment and intangible assets had been applied from January 1, 2017 and related transaction costs. These adjustments also include an additional charge of $32 in the six months ended June 30, 2017 for the fair value adjustment related to the sale of inventory acquired. Signode's results include foreign exchange losses related to pre-acquisition intercompany debt arrangements of $15 for the six months ended June 30, 2018 and $21 and $24 for the three and six months ended June 30, 2017.

 
Three Months Ended
 
Six Months Ended
 
June 30
 
June 30
 
2018
 
2017
 
2018
 
2017
Pro forma net sales
$
3,046

 
$
2,736

 
$
5,831

 
$
5,163

Pro forma net income attributable to Crown Holdings
176

 
117

 
244

 
184

Earnings per common share attributable to Crown Holdings:
 
 
 
 
 
 
 
Basic
$
1.32

 
$
0.86

 
$
1.83

 
$
1.34

Diluted
$
1.32

 
$
0.86

 
$
1.82

 
$
1.34


The unaudited supplemental pro forma financial information is based on the Company's preliminary assignment of purchase price and therefore subject to adjustment upon finalizing the purchase price assignment. The pro forma data should not be considered indicative of the results that would have occurred if the acquisition and related financing had been consummated on the assumed completion dates, nor are they indicative of future results.

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 from the Company's transit packaging segment are generally derived from individual purchase orders which may include multiple goods and services which are separate performance obligations because they are distinct and separately identifiable.

12

Crown Holdings, Inc.


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 and, therefore, the customer obtains value as each unit is produced. 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-process 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 and six months ended June 30, 2018, the Company recognized revenue of $1,507 and $2,935 over time and $1,539 and $2,308 at a point in time. See Note R for further disaggregation of the Company's revenue for the three and six months ended June 30, 2018. The Company has applied the practical expedient to exclude disclosure of remaining performance obligations as its binding orders 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 are reflected in receivables in the Consolidated Balance Sheet with 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 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.

13

Crown Holdings, Inc.


Net contract assets were as follows:
 
June 30, 2018
 
January 1, 2018
Contract assets included in prepaid and other current assets
$
19

 
$
26

Contract liabilities included in accrued liabilities
(2
)
 
(1
)
Contract liabilities included in other non-current liabilities
(6
)
 
(7
)
Net contract asset
$
11

 
$
18



E.
Receivables

 
June 30, 2018
 
December 31, 2017
Accounts receivable
$
1,396

 
$
894

Less: allowance for doubtful accounts
(75
)
 
(71
)
Net trade receivables
1,321

 
823

Unbilled receivables
229

 

Miscellaneous receivables
240

 
218

Receivables, net
$
1,790

 
$
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.
 
June 30, 2018
 
December 31, 2017
Raw materials and supplies
896

 
$
737

Work in process
174

 
139

Finished goods
667

 
509

 
$
1,737

 
$
1,385


G.    Intangible Assets

Gross carrying amounts and accumulated amortization of finite-lived intangible assets by major class were as follows:
    
 
June 30, 2018
 
December 31, 2017
 
Gross
 
Accumulated amortization
 
Net
 
Gross
 
Accumulated amortization
 
Net
Customer relationships
$
1,623

 
$
(144
)
 
$
1,479

 
$
461

 
$
(108
)
 
$
353

Technology
161

 
(6
)
 
155

 

 

 

Long term supply contracts
142

 
(32
)
 
110

 
143

 
(27
)
 
116

Trade names
32

 
(1
)
 
31

 

 

 

 
$
1,958


$
(183
)

$
1,775

 
$
604

 
$
(135
)
 
$
469


The table above excludes indefinite-lived trade names acquired with Signode of $520 at June 30, 2018 and other finite-lived intangible assets with net balances of $3 at both June 30, 2018 and December 31, 2017. See Note C for additional information about the intangible assets acquired with Signode.

Total amortization expense of intangible assets was $41 and $52 and $10 and $20 for the three and six months ended June 30, 2018 and 2017.





14

Crown Holdings, Inc.


H.
Restructuring and Other

The Company recorded restructuring and other charges / (benefits) as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30
 
June 30
 
2018
 
2017
 
2018
 
2017
Asset impairments and sales
$

 
$

 
$
7

 
$
(6
)
Restructuring
3

 
2

 
6

 
4

Transaction costs
19

 

 
22

 

Other costs
(6
)
 
16

 
(6
)
 
16

 
$
16

 
$
18

 
$
29

 
$
14


For the three and six months ended June 30, 2018, transaction costs relate to the Signode acquisition.

For the three and six months ended June 30, 2017, other costs included a charge of $16 due to a litigation matter related to Mivisa that arose prior to acquisition by the Company in 2014. The Company recorded a benefit due to favorable settlement of this matter during the three and six months ended June 30, 2018.

For the six months ended June 30, 2017, asset impairments and sales included a benefit of $5 due to the expiration of an environmental indemnification related to the sale of certain operations in the Company's European Specialty Packaging business in 2015.

At June 30, 2018, the Company had restructuring accruals of $17 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 charges in the future.


I.
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.


15

Crown Holdings, Inc.


In October 2010, 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 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 six months ended June 30, 2018, the Company paid $4 to settle outstanding claims and had claims activity as follows:
Beginning claims
55,500

New claims
1,000

Settlements or dismissals
(1,000
)
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.

16

Crown Holdings, Inc.


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 June 30, 2018.

As of June 30, 2018, the Company’s accrual for pending and future asbestos-related claims and related legal costs was $309, including $259 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).


J.
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 German 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 discontinued its national investigation and referred the matter to the European Commission (the “Commission”). Following the referral, Commission officials conducted unannounced inspections of the premises of several metal packaging manufacturers, including Company subsidiaries in Germany, France and the United Kingdom. 

17

Crown Holdings, Inc.


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 with the Commission with respect to the findings of the investigation in Germany referenced above.  This application may lead to the reduction of possible future penalties. At this stage of the investigation the Company believes that a loss is probable but is unable to predict the ultimate outcome of the Commission’s investigation and is unable to estimate the loss or possible range of 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.

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. The Company has asserted that the misclassification was unintentional and disputes the penalty assessment. 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 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 June 30, 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.

K.
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.


18

Crown Holdings, Inc.


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 L 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 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 June 30, 2018 mature between one and twenty-eight 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 the 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 the impact on other comprehensive income ("OCI"), accumulated other comprehensive income (“AOCI”) and earnings from changes in the fair value of derivative instruments.


19

Crown Holdings, Inc.


 
 
 Amount of gain/(loss)
 
 Amount of gain/(loss)
 
 
 
 
recognized in OCI
 
recognized in OCI
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
Derivatives in cash flow hedges
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
 
 
 
 
 
 
 
Foreign exchange
 
$

 
$
5

 
$
(3
)
 
$
3

 
 
Commodities
 
22

 
(8
)
 
(2
)
 
15

 
 
 
 
$
22

 
$
(3
)
 
$
(5
)
 
$
18

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gain/
 
Amount of gain/
 
 
 
 
(loss) reclassified from
 
(loss) reclassified from
 
 
 
 
AOCI into income
 
AOCI into income
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
Derivatives in cash flow hedges
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
Affected line item in the
 
 
 
 
 
statement of operations
Foreign exchange
 
$
(1
)
 
$
6

 
$
(1
)
 
$
3

 
Net sales
Commodities
 
(3
)
 

 
(5
)
 

 
Net sales
Foreign exchange
 
(1
)
 
(4
)
 
(1
)
 
(3
)
 
Cost of products sold
Commodities
 
14

 
11

 
24

 
15

 
Cost of products sold
 
 
9

 
13

 
17

 
15

 
Income before taxes
 
 
(3
)
 
(4
)
 
(5
)
 
(5
)
 
Provision for income taxes
 
 
$
6

 
$
9

 
$
12

 
$
10

 
Net Income
    

For the three and six months ended June 30, 2017, the Company recognized a gain of $1 ( less than $1, net of tax) and a loss of $1 ($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 June 30, 2019, a net gain of $6 ($5, net of tax) is expected to be reclassified to earnings. No amounts were reclassified during the six months ended June 30, 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 and six months ended June 30, 2018, the Company recorded losses of less than $1 from foreign exchange contracts designated as fair value hedges. For the three and six months ended June 30, 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.




20

Crown Holdings, Inc.


The following table sets forth the impact on earnings from derivatives not designated as hedges.
 
 
 Pre-tax amount of gain/
 
 Pre-tax amount of gain/
 
 
 
 
(loss) recognized in income
 
(loss) recognized in income
 
 
 
 
on derivative
 
on derivative
 
 
 
 
Three Months Ended
 
Three Months Ended
 
Six Months Ended
 
Six Months Ended
 
 
Derivatives not designated as hedges
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
Affected line item in the
 
 
 
 
 
statement of operations
Foreign exchange
 
$
3

 
$

 
$
3

 
$
1

 
Net sales
Foreign exchange
 
(3
)
 
2

 
(2
)
 
1

 
Cost of products sold
Foreign exchange
 
(14
)
 
18

 
(9
)
 
18

 
Foreign exchange
Commodities
 

 
(9
)
 

 
(2
)
 
Cost of products sold
 
 
$
(14
)
 
$
11

 
$
(8
)
 
$
18

 
 

For the three and six months ended June 30, 2017, certain commodity hedges did not meet the criteria for hedge accounting and therefore the changes in their fair value were 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 and six months ended June 30, 2018, the Company recorded a gain of $48 ($48, net of tax) and a gain of $13 ($17, 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. For the three and six months ended June 30, 2017, the Company recorded losses of $81 ($65, net of tax) and $96 ($77, net of tax) in other comprehensive income for these net investment hedges. As of June 30, 2018 and December 31, 2017, cumulative losses of $93 and $106 ($71 and $88, net of tax) were recognized in accumulated other comprehensive income related to these net investment hedges. As of June 30, 2018 the carrying amount of the hedged net investment was approximately €1,124 ($1,311 at June 30, 2018).

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)
 
Amount of gain/(loss)
 
 
recognized in OCI
 
recognized in OCI
 
 
Three Months Ended
 
Three Months Ended
 
Six Months Ended
 
Six Months Ended
Derivatives designated as net investment hedges
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
 
 
 
Foreign exchange
 
$
36

 
$

 
$
8

 
$


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.


21

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 June 30, 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
 
June 30,
2018
 
December 31, 2017
 
Balance Sheet classification
 
June 30,
2018
 
December 31, 2017
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts cash flow
 
Other current assets
 
$
9

 
$
5

 
Accrued liabilities
 
$
11

 
$
6

 
 
Other non-current assets
 
1

 

 
Other non-current liabilities
 

 

Foreign exchange contracts fair value
 
Other current assets
 
2

 
1

 
Accrued liabilities
 
2

 
1

Commodities contracts cash flow
 
Other current assets
 
17

 
25

 
Accrued liabilities
 
10

 

 
 
Other non-current assets
 
1

 
4

 
Other non-current liabilities
 

 

Net investment hedge
 
Other non-current assets
 
11

 

 
Other non-current liabilities
 

 

Total derivatives designated as hedging instruments
 
$
41

 
$
35

 
 
 
$
23

 
$
7

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts cash flow
 
Other current assets
 
$

 
$
1

 
Accrued liabilities
 
$

 
$
1

Foreign exchange contracts fair value
 
Other current assets
 
3

 
5

 
Accrued liabilities
 
2

 

Commodities contracts cash flow
 
Other current assets
 

 
22

 
Accrued liabilities
 

 
15

Total derivatives not designated as hedging instruments
 
$
3

 
$
28

 
 
 
$
2

 
$
16

 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivatives
 
 
 
$
44

 
$
63

 
 
 
$
25

 
$
23



Fair Value Hedge Carrying Amounts

 
 
 
 
 
 
 
 
 
 
Carrying amount of the hedged
Line item in the statement of
 
assets/(liabilities)
financial position in which the
 
June 30,
2018
 
December 31,
2017
hedge item is included
 
 
Cash and cash equivalents
 
$
1

 
$
1

Receivables, net
 
20

 
15

Accrued liabilities
 
(18
)
 
(12
)

As of June 30, 2018 and December 31, 2017, the cumulative amounts of fair value hedging adjustment included in the carrying amount of the hedge assets and liabilities were less than $1.


22

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 June 30, 2018
 
 
 
Derivative assets
$44
$8
$36
Derivative liabilities
25
8
17
 
 
 
 
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 June 30, 2018 and December 31, 2017 were:
 
June 30, 2018
 
December 31, 2017
Derivatives in cash flow hedges:
 
 
 
Foreign exchange
$
694

 
$
864

Commodities
247

 
276

Derivatives in fair value hedges:

 

Foreign exchange
72

 
60

Derivatives not designated as hedges:
 
 
 
Foreign exchange
742

 
575

Commodities

 
40



23

Crown Holdings, Inc.


L.
Debt

The Company's outstanding debt was as follows:
 
June 30, 2018
 
December 31, 2017
 
Principal
 
Carrying
 
Principal
 
Carrying
 
outstanding
 
amount
 
outstanding
 
amount
Short-term debt
$
31

 
$
31

 
$
62

 
$
62

 

 

 
 
 
 
Long-term debt

 

 
 
 
 
Senior secured borrowings:

 

 
 
 
 
Revolving credit facilities
344

 
344

 
$
122

 
$
122

Term loan facilities

 


 
 
 
 
U.S. dollar at LIBOR + 1.75% due 2022
826

 
821

 
741

 
735

U.S. dollar at LIBOR + 2.00% due 2027
1,150

 
1,126

 

 

Euro at EURIBOR + 1.75% due 20221
311

 
311

 
324

 
324

Euro at EURIBOR + 2.375% due 20252
875

 
866

 

 

Senior notes and debentures:

 

 
 
 
 
€650 at 4.0% due 2022
758

 
752

 
781

 
774

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

 
992

 
1,000

 
992

€335 at 2.250% due 2023
391

 
386

 

 

€600 at 2.625% due 2024
700

 
693

 
720

 
713

€600 at 3.375% due 2025
700

 
693

 
720

 
711

U.S. dollar at 4.25% due 2026
400

 
394

 
400

 
393

U.S. dollar at 4.75% due 2026
875

 
862

 

 

U.S. dollar at 7.375% due 2026
350

 
347

 
350

 
347

€500 at 2.875% due 2026
583

 
575

 

 

U.S. dollar at 7.50% due 2096
40

 
40

 
40

 
40

Other indebtedness in various currencies
87

 
87

 
101

 
101

Capital lease obligations
31

 
31

 
29

 
29

Total long-term debt
9,421

 
9,320

 
5,328

 
5,281

Less current maturities
(84
)
 
(84
)
 
(64
)
 
(64
)
Total long-term debt, less current maturities
$
9,337

 
$
9,236

 
$
5,264

 
$
5,217


(1) €266 and €270 at June 30, 2018 and December 31, 2017
(2) €750 at June 30, 2018
 

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 $9,368 at June 30, 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, increase total leverage ratios 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.


24

Crown Holdings, Inc.


In January 2018, the Company also issued €500 ($583 at June 30, 2018) principal amount of 2.875% senior unsecured notes due 2026 and €335 ($391 at June 30, 2018) principal amount of 2.25% 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 ($875 at June 30, 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%.

M.
Pension and Other Postretirement Benefits

The components of net periodic pension and other postretirement benefits costs for the three and six months ended June 30, 2018 and 2017 were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30
 
June 30
Pension benefits – U.S. plans
2018
 
2017
 
2018
 
2017
Service cost
$
5

 
$
4

 
$
9

 
$
7

Interest cost
11

 
13

 
23

 
25

Expected return on plan assets
(21
)
 
(21
)
 
(42
)
 
(41
)
Recognized net loss
12

 
13

 
24

 
26

Net periodic cost
$
7

 
$
9

 
$
14

 
$
17

 
Three Months Ended
 
Six Months Ended
 
June 30
 
June 30
Pension benefits – Non-U.S. plans
2018
 
2017
 
2018
 
2017
Service cost
$
7

 
$
6

 
$
14

 
$
12

Interest cost
20

 
19

 
39

 
38

Expected return on plan assets
(40
)
 
(36
)
 
(80
)
 
(71
)
Recognized prior service credit
(3
)
 
(3
)
 
(6
)
 
(6
)
Recognized net loss
11

 
11

 
22

 
21

Net periodic benefit
$
(5
)
 
$
(3
)
 
$
(11
)
 
$
(6
)

 
Three Months Ended
 
Six Months Ended
 
June 30
 
June 30
Other postretirement benefits
2018
 
2017
 
2018
 
2017
Service cost
$

 
$

 
$

 
$

Interest cost
1

 
1

 
2

 
2

Recognized prior service credit
(10
)
 
(10
)
 
(19
)
 
(20
)
Recognized net loss
1

 
1

 
2

 
2

Net periodic benefit
$
(8
)
 
$
(8
)
 
$
(15
)
 
$
(16
)

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.











25

Crown Holdings, Inc.


The following table provides information about amounts reclassified from accumulated other comprehensive income.

 
 
Three Months Ended
 
Six Months Ended
 
 
Details about accumulated other
 
June 30
 
June 30
 
Affected line item in the
comprehensive income components
 
2018
 
2017