10-Q 1 cck-3312019xq1.htm Q1 2019 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, 2019
 
¨
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.)
 
 
 
770 Township Line Road, Yardley, PA
 
19067
(Address of principal executive offices)
 
(Zip Code)
215-698-5100
(registrant’s telephone number, including area code)
____________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class
Trading Symbols
Name of each exchange on which registered
Common Stock $5.00 Par Value
CCK
New York Stock Exchange
7  3/8% Debentures Due 2026
CCK26
New York Stock Exchange
 1/2% Debentures Due 2096
CCK96
New York Stock Exchange

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 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  
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 135,338,696 shares of Common Stock outstanding as of April 26, 2019.


Crown Holdings, Inc.


PART I – FINANCIAL INFORMATION

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

 
Three Months Ended
 
March 31,
 
2019
 
2018
Net sales
$
2,755

 
$
2,197

Cost of products sold, excluding depreciation and amortization
2,210

 
1,808

Depreciation and amortization
122

 
65

Selling and administrative expense
157

 
90

Restructuring and other
4

 
13

Income from operations
262


221

Loss from early extinguishments of debt
6

 

Other pension and postretirement
(18
)
 
(17
)
Interest expense
98

 
74

Interest income
(3
)
 
(6
)
Foreign exchange
1

 
18

Income before income taxes
178

 
152

Provision for income taxes
48

 
39

Equity earnings in affiliates
1

 

Net income
131

 
113

Net income attributable to noncontrolling interests
(28
)
 
(23
)
Net income attributable to Crown Holdings
$
103

 
$
90

 
 
 
 
Earnings per common share attributable to Crown Holdings:
 
 
 
Basic
$
0.77

 
$
0.67

Diluted
$
0.77

 
$
0.67


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,
 
2019
 
2018
Net income
$
131

 
$
113

 
 
 
 
Other comprehensive income, net of tax:
 
 
 
Foreign currency translation adjustments
59

 
82

Pension and other postretirement benefits
14

 
11

Derivatives qualifying as hedges
12

 
(32
)
Total other comprehensive income
85

 
61

 
 
 
 
Total comprehensive income
216

 
174

Net income attributable to noncontrolling interests
(28
)
 
(23
)
Translation adjustments attributable to noncontrolling interests

 
(1
)
Comprehensive income attributable to Crown Holdings
$
188

 
$
150



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,
2019
 
December 31,
2018
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
301

 
$
607

Receivables, net
1,686

 
1,602

Inventories
1,851

 
1,690

Prepaid expenses and other current assets
186

 
180

Total current assets
4,024

 
4,079

 
 
 
 
Goodwill
4,418

 
4,442

Intangible assets, net
2,136

 
2,193

Property, plant and equipment, net
3,734

 
3,745

Operating lease right-of-use assets, net
213

 

Other non-current assets
832

 
803

Total
$
15,357

 
$
15,262

 
 
 
 
Liabilities and equity
 
 
 
Current liabilities
 
 
 
Short-term debt
$
125

 
$
89

Current maturities of long-term debt
83

 
81

Current portion of operating lease liabilities
47

 

Accounts payable
2,223

 
2,732

Accrued liabilities
864

 
1,011

Total current liabilities
3,342

 
3,913

 
 
 
 
Long-term debt, excluding current maturities
8,814

 
8,493

Non-current portion of operating lease liabilities
167

 

Postretirement and pension liabilities
671

 
683

Other non-current liabilities
861

 
887

Commitments and contingent liabilities ( Note L)

 

Noncontrolling interests
368

 
349

Crown Holdings shareholders’ equity
1,134

 
937

Total equity
1,502

 
1,286

Total
$
15,357

 
$
15,262


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,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net income
$
131

 
$
113

Adjustments to reconcile net income to net cash used for operating activities:
 
 
 
Depreciation and amortization
122

 
65

Restructuring and other
4

 
13

Foreign exchange
1

 
18

Pension (benefit) / expense
(2
)
 
1

Pension contributions
(7
)
 
(5
)
Stock-based compensation
8

 
6

Changes in assets and liabilities:
 
 
 
Receivables
(91
)
 
(364
)
Inventories
(171
)
 
(169
)
Accounts payable and accrued liabilities
(612
)
 
(445
)
Other, net
(49
)
 
16

Net cash used for operating activities
(666
)
 
(751
)
Cash flows from investing activities
 
 
 
Capital expenditures
(75
)
 
(92
)
Beneficial interests in transferred receivables

 
175

Proceeds from sale of property, plant and equipment
5

 

Foreign exchange derivatives related to acquisitions

 
(25
)
Net investment hedge
6

 

Net cash (used for) provided by investing activities
(64
)
 
58

Cash flows from financing activities
 
 
 
Proceeds from long-term debt

 
1,912

Payments of long-term debt
(281
)
 
(13
)
Net change in revolving credit facility and short-term debt
731

 
576

Payments of finance leases
(14
)
 

Debt issue costs

 
(29
)
Common stock issued
2

 

Common stock repurchased
(1
)
 
(1
)
Dividends paid to noncontrolling interests
(9
)
 

Foreign exchange derivatives related to debt
(11
)
 
10

Net cash provided by financing activities
417

 
2,455

Effect of exchange rate changes on cash, cash equivalents and restricted cash
2

 
14

Net change in cash, cash equivalents and restricted cash
(311
)
 
1,776

Cash, cash equivalents and restricted cash at January 1
659

 
435

Cash, cash equivalents and restricted cash at March 31
$
348

 
$
2,211


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, 2018
$
929

 
$
167

 
$
3,004

 
$
(3,241
)
 
$
(258
)
 
$
601

 
$
322

 
$
923

Cumulative effect of change in accounting principle
 
 
 
 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2019
$
929

 
$
186

 
$
3,449

 
$
(3,374
)
 
$
(253
)
 
$
937

 
$
349

 
$
1,286

Net income
 
 
 
 
103

 
 
 
 
 
103

 
28

 
131

Other comprehensive income
 
 
 
 
 
 
85

 
 
 
85

 


 
85

Dividends paid to noncontrolling interests
 
 
 
 
 
 
 
 
 
 

 
(9
)
 
(9
)
Restricted stock awarded
 
 
(1
)
 
 
 
 
 
1

 

 
 
 

Stock-based compensation
 
 
8

 
 
 
 
 
 
 
8

 
 
 
8

Common stock issued
 
 
2

 
 
 
 
 


 
2

 
 
 
2

Common stock repurchased
 
 
(1
)
 
 
 
 
 


 
(1
)
 
 
 
(1
)
Balance at March 31, 2019
$
929

 
$
194

 
$
3,552

 
$
(3,289
)
 
$
(252
)
 
$
1,134

 
$
368

 
$
1,502



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, 2019 and the results of its operations for the three months ended March 31, 2019 and 2018 and of its cash flows for the three months ended March 31, 2019 and 2018. 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, 2018.


B.
Accounting and Reporting Developments

Recently Adopted 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 previous guidance; however, all leases with a term longer than one year are recorded on the balance sheet through a right-of-use asset and a corresponding lease liability. The Company adopted the standard on a modified retrospective basis on January 1, 2019. In addition, the Company elected the package of practical expedients, which allowed the Company to carryforward its historical assessments of whether contracts are or contain leases, lease classification and initial direct costs. Adoption of this standard resulted in the recording of operating right-of-use assets and corresponding operating lease liabilities of approximately $220. Finance leases were already recorded on the balance sheet under the previous guidance in current and long-term maturities of long-term debt. Upon adoption of this standard $5 was reclassified to accrued liabilities and $24 was reclassified to other non-current liabilities. The Company reclassified prior period amounts to conform to the current year presentation. See Note C for further information on the Company's lease arrangements.

In February 2018, the FASB issued new accounting guidance to permit the reclassification from accumulated other comprehensive earnings to retained earnings of stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the "Tax Act"). The Company adopted the guidance on January 1, 2019 and elected not to reclassify stranded tax effects resulting from the Tax Act.

Recently Issued Accounting Standards

In June 2016, the FASB issued new guidance on the accounting for credit losses on financial instruments. The new standard introduces an approach, based on expected losses, to estimate credit losses on certain types of financial instruments. The new approach to estimating credit losses (referred to as the current expected credit losses model) applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures. This guidance is effective for the Company on January 1, 2020. The Company is currently evaluating the impact of adopting this standard.


7

Crown Holdings, Inc.


C.     Leases

The Company has operating and finance leases for land and buildings related to certain manufacturing facilities, warehouses and corporate offices, vehicle fleets and certain office and manufacturing equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company's lease terms include options to extend the lease when it is reasonably certain that the Company will exercise the option. Variable lease payment amounts that cannot be determined at commencement of the lease, such as increases in index rates, are not included in the measurement of the lease liabilities and corresponding right-of-use assets and are recognized in the period those payments are incurred. The Company separates lease and non-lease components of lease arrangements and allocates contract consideration based on standalone selling prices. Variable consideration is allocated to the lease and non-lease components to which the variable payments specifically relate to. The discount rate implicit within the Company's leases is often not determinable and therefore the Company generally uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of the lease payments. The incremental borrowing rate is determined based on lease term and currency in which lease payments are made. The Company's leases do not contain any material residual value guarantees or material restrictive covenants. At March 31, 2019, the Company does not have material lease commitments that have not commenced.
The components of lease expense were as follows:
 
Three months ended March 31, 2019
Operating lease costs:
 
Operating lease cost
$
13

Short-term lease cost
2

Total operating lease costs
$
15

 
 
Finance lease cost:
 
     Amortization of right-of-use assets
$
1


Variable operating lease costs and interest on finance lease liabilities were less than $1 for the three months ended March 31, 2019.
Supplemental cash flow information related to leases was as follows:
 
Three months ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
     Operating cash flows from operating leases
$
14

     Financing cash flows from finance leases
14

Right-of-use assets obtained in exchange for lease obligations:

     Operating leases
$
5

Operating cash flows from finance leases were less than $1 for the three months ended March 31, 2019.
Supplemental balance sheet information related to leases was as follows:

8

Crown Holdings, Inc.


 
March 31, 2019
Operating Leases:
 
Operating lease right-of-use assets
$
213

 
 
Current portion of operating lease liabilities
$
47

Non-current portion of operating lease liabilities
167

Total operating lease liabilities
$
214

Finance leases:
 
Property, plant and equipment
$
28

Accumulated depreciation
(2
)
Property, plant and equipment, net
$
26

 
 
Accrued liabilities
$
2

Other non-current liabilities
13

Total finance lease liabilities
$
15

 
 
Weighted average remaining lease term:
 
     Operating leases
9.6 years

     Finance leases
7.6 years

Weighted average discount rate:
 
     Operating leases
4.2
%
     Finance leases
3.7
%
Maturities of lease liabilities as of March 31, 2019 were as follows:
 
Operating Leases
 
Finance Leases
2019
$
43

 
$
2

2020
42

 
3

2021
32

 
2

2022
24

 
2

2023
20

 
2

Thereafter
115

 
6

     Total lease payments
276

 
17

Less imputed interest
(62
)
 
(2
)
     Total
$
214

 
$
15

Maturities of lease liabilities as of December 31, 2018 were as follows:
 
Operating Leases
 
Finance Leases
2019
$
54

 
$
5

2020
42

 
5

2021
34

 
5

2022
26

 
4

2023
21

 
4

Thereafter
117

 
6

     Total lease payments
$
294

 
$
29


9

Crown Holdings, Inc.



D.     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 and product offerings. The Company paid a purchase price of $3.9 billion.

The company finalized its purchase accounting for the Signode acquisition in the first quarter of 2019. There were no material adjustments to the preliminary valuation of identifiable assets acquired and liabilities assumed as compared to the amounts disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.


E.     Revenue

For the three months ended March 31, 2019 and 2018, the Company recognized revenue of $1,365 and $1,428 over time and $1,390 and $769 at a point in time. See Note S for further disaggregation of the Company's revenue. 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.
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 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 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.
Contract assets and liabilities are reported in a net position on a contract-by-contract basis. Net contract assets were as follows:
 
March 31, 2019
 
December 31, 2018
Contract assets included in prepaid and other current assets
$
20

 
$
16

Contract liabilities included in accrued liabilities
(3
)
 
(3
)
Contract liabilities included in other non-current liabilities
(4
)
 
(5
)
Net contract asset
$
13

 
$
8


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


F.
Receivables

 
March 31, 2019
 
December 31, 2018
Accounts receivable
$
1,330

 
$
1,303

Less: allowance for doubtful accounts
(64
)
 
(65
)
Net trade receivables
1,266

 
1,238

Unbilled receivables
217

 
181

Miscellaneous receivables
203

 
183

Receivables, net
$
1,686

 
$
1,602



10

Crown Holdings, Inc.


G.
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, 2019
 
December 31, 2018
Raw materials and supplies
$
959

 
$
937

Work in process
167

 
144

Finished goods
725

 
609

 
$
1,851

 
$
1,690



H.
Restricted Cash

Restricted cash included in the Company's Consolidated Balance Sheets was as follows:
 
March 31, 2019
 
December 31, 2018
Restricted cash included in prepaid expenses and other current assets
40

 
45

Restricted cash included in other non-current assets
7

 
7

Total restricted cash
$
47

 
$
52


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


I.    Intangible Assets

Gross carrying amounts and accumulated amortization of finite-lived intangible assets by major class were as follows:
    
 
March 31, 2019
 
December 31, 2018
 
Gross
 
Accumulated amortization
 
Net
 
Gross
 
Accumulated amortization
 
Net
Customer relationships
$
1,607

 
$
(236
)
 
$
1,371

 
$
1,615

 
$
(206
)
 
$
1,409

Trade names
541

 
(23
)
 
518

 
547

 
(17
)
 
530

Technology
158

 
(23
)
 
135

 
160

 
(18
)
 
142

Long term supply contracts
146

 
(40
)
 
106

 
143

 
(37
)
 
106

Patents
$
14

 
$
(8
)
 
$
6

 
$
14

 
$
(8
)
 
$
6

 
$
2,466


$
(330
)

$
2,136

 
$
2,479

 
$
(286
)
 
$
2,193


Total amortization expense of intangible assets was $47 and $11 for the three months ended March 31, 2019 and 2018.


J.
Restructuring and Other

The Company recorded restructuring and other charges / (benefits) as follows:
 
Three Months Ended
 
March 31,
 
2019
 
2018
Asset impairments and sales
$
4

 
$
7

Restructuring
9

 
3

Transaction costs

 
3

Other income
(9
)
 

 
$
4

 
$
13



11

Crown Holdings, Inc.


For the three months ended March 31, 2019, asset impairments and sales included an impairment charge of $6 related to a fire at a production facility in Asia and restructuring included a charge of $8 related to headcount reductions across the Company's European Division.

Other income related to a favorable court ruling in a lawsuit brought by one of the Company's Brazilian subsidiaries claiming it was overcharged by the local tax authorities for indirect taxes paid in prior years. Certain other Brazilian subsidiaries of the Company have similar suits pending in other jurisdictions.

At March 31, 2019, the Company had restructuring accruals of $25, primarily related to current and prior year actions to reduce manufacturing capacity and headcount in its European businesses. The Company expects to pay these amounts 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.


K.
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 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.


12

Crown Holdings, Inc.


During the three months ended March 31, 2019, the Company paid $1 to settle outstanding claims and had claims activity as follows:
Beginning claims
56,000

New claims
500

Settlements or dismissals
(500
)
Ending claims
56,000


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, 2018, 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
19,000

Total claims outstanding
56,000


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:
 
2018

 
2017

 
2016

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, 2019.

As of March 31, 2019, the Company’s accrual for pending and future asbestos-related claims and related legal costs was $292, including $244 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 2018), 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,

13

Crown Holdings, Inc.


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).


L.
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 $8 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.
 
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. CBP initially assessed a penalty of $18 and subsequently mitigated to $6. 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.


14

Crown Holdings, Inc.


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 March 31, 2019, 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.


M.
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 N 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.


15

Crown Holdings, Inc.


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, 2019 mature between one and thirty-six 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.

 
 
 Amount of gain/(loss)
 
 
 
 
recognized in OCI
 
 
 
 
Three Months Ended
 
 
 
 
March 31,
 
 
Derivatives in cash flow hedges
 
2019
 
2018
 
 
Foreign exchange
 
$
(4
)
 
$
(3
)
 
 
Commodities
 
10

 
(23
)
 
 
 
 
$
6

 
$
(26
)
 
 
 
 
 
 
 
 
 
 
 
Amount of gain/
 
 
 
 
(loss) reclassified from
 
 
 
 
AOCI into income
 
 
 
 
Three Months Ended
 
 
 
 
March 31,
 
Affected line items in the
Derivatives in cash flow hedges
 
2019
 
2018
 
Statement of Operations
Foreign exchange
 
$
(1
)
 
$

 
Net sales
Commodities
 
3

 
(2
)
 
Net sales
Foreign exchange
 

 

 
Cost of products sold
Commodities
 
(10
)
 
10

 
Cost of products sold
 
 
(8
)
 
8

 
Income before taxes
 
 
2

 
(2
)
 
Provision for income taxes
 
 
$
(6
)
 
$
6

 
Net Income
    
For the twelve-month period ending March 31, 2020, a net loss of $12 ($10, net of tax) is expected to be reclassified to earnings. No amounts were reclassified during the three months ended March 31, 2019 and 2018 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

16

Crown Holdings, Inc.


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, 2019, the Company recorded a gain of less than $1 from foreign exchange contracts designated as fair value hedges. For the three months ended March 31, 2018, the Company recorded a loss of less than $1 from foreign exchange contracts designated as fair value hedges. These adjustments were reported within foreign exchange in the Consolidated Statements of Operations.

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
 
 
 
 
March 31,
 
Affected line item in the
Derivatives not designated as hedges
 
2019
 
2018
 
Statement of Operations
Foreign exchange
 
$
(1
)
 
$

 
Net sales
Foreign exchange
 
1

 
1

 
Cost of products sold
Foreign exchange
 
(15
)
 
5

 
Foreign exchange
 
 
$
(15
)
 
$
6

 
 

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, 2019 and 2018, the Company recorded a gain of $28 ($28, net of tax) and a loss of $35 ($31, 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, 2019 and December 31, 2018, cumulative losses of $31 and $59 ($8 and $36, net of tax) were recognized in accumulated other comprehensive income related to these net investment hedges. As of March 31, 2019, the carrying amount of the hedged net investment was approximately €1,178 ($1,322 at March 31, 2019).

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

In November 2018, the Company entered into a series of cross-currency swaps with an aggregate notional value of $875 (€768). The swaps are designated as hedges of the Company's net investment in a euro-based subsidiary. Under the cross-currency contracts, the Company receives semi-annual fixed U.S. dollar payments at a rate of 4.75% of the U.S. notional value and pays 1.84% 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 the impact on OCI from changes in the fair value of derivative instruments designated as net investment hedges.

17

Crown Holdings, Inc.


 
 
Amount of gain/(loss)
 
 
recognized in OCI
 
 
Three months ended
 
 
March 31,
Derivatives designated as net investment hedges
 
2019
 
2018
Foreign exchange
 
$
26

 
$
(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.

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, 2019 and December 31, 2018, respectively. The fair values of these financial instruments were reported under Level 2 of the fair value hierarchy.

 
 
Balance Sheet classification
 
March 31,
2019
 
December 31, 2018
 
Balance Sheet classification
 
March 31,
2019
 
December 31, 2018
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts cash flow
 
Other current assets
 
$
7

 
$
6

 
Accrued liabilities
 
$
10

 
$
5

 
 
Other non-current assets
 
1

 
3

 
Other non-current liabilities
 

 
1

Foreign exchange contracts fair value
 
Other current assets
 
1

 
1

 
Accrued liabilities
 

 
1

Commodities contracts cash flow
 
Other current assets
 
14

 
16

 
Accrued liabilities
 
23

 
42

 
 
Other non-current assets
 
2

 
2

 
Other non-current liabilities
 
2

 
6

Net investment hedge
 
Other non-current assets
 
34

 
15

 
Other non-current liabilities
 

 

 
 
$
59

 
$
43

 
 
 
$
35

 
$
55

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Other current assets
 
$
5

 
$
4

 
Accrued liabilities
 
$
9

 
$
4

 
 
Other non-current assets
 
2

 

 
Other non-current liabilities
 
1

 

 
 
$
7

 
$
4

 
 
 
$
10

 
$
4

 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivatives
 
 
 
$
66

 
$
47

 
 
 
$
45

 
$
59


    









18

Crown Holdings, Inc.


Fair Value Hedge Carrying Amounts

 
 
Carrying amount of the hedged
 
 
assets/(liabilities)
 
 
March 31,
2019
 
December 31,
2018
Line item in the Balance Sheet in which the hedged item is included
 
 
Cash and cash equivalents
 
$
6

 
$
1

Receivables, net
 
13

 
15

Accounts payable
 
(64
)
 
(13
)

As of March 31, 2019, the cumulative amounts of fair value hedging adjustments included in the carrying amount of the hedge assets and liabilities were a gain of $1. As of December 31, 2018, the cumulative amounts of fair value hedging adjustments included in the carrying amount of the hedge assets and liabilities were less than $1.

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, 2019
 
 
 
Derivative assets
$66
$17
$49
Derivative liabilities
45
17
28
 
 
 
 
Balance at December 31, 2018
 
 
 
Derivative assets
47
19
28
Derivative liabilities
59
19
40
    
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, 2019 and December 31, 2018 were:
 
March 31, 2019
 
December 31, 2018
Derivatives in cash flow hedges:
 
 
 
Foreign exchange
$
686

 
$
820

Commodities
416

 
428

Derivatives in fair value hedges:

 

Foreign exchange
115

 
74

Derivatives not designated as hedges:
 
 
 
Foreign exchange
745

 
796



19

Crown Holdings, Inc.


N.
Debt

The Company's outstanding debt was as follows:
 
March 31, 2019
 
December 31, 2018
 
Principal
 
Carrying
 
Principal
 
Carrying
 
outstanding
 
amount
 
outstanding
 
amount
Short-term debt
$
125

 
$
125

 
$
89

 
$
89

 

 

 
 
 
 
Long-term debt

 

 
 
 
 
Senior secured borrowings:

 

 
 
 
 
Revolving credit facilities
687

 
687

 

 

Term loan facilities

 


 
 
 
 
U.S. dollar at LIBOR + 1.75% due 2022
810

 
806

 
815

 
810

U.S. dollar at LIBOR + 2.00% due 2025
617

 
607

 
887

 
864

Euro at EURIBOR + 1.75% due 20221
293

 
293

 
301

 
301

Euro at EURIBOR + 2.375% due 20252
835

 
823

 
855

 
846

Senior notes and debentures:

 

 
 
 
 
€650 at 4.0% due 2022
729

 
724

 
745

 
740

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

 
994

 
1,000

 
993

€335 at 2.25% due 2023
376

 
371

 
384

 
380

€600 at 2.625% due 2024
673

 
667

 
688

 
682

€600 at 3.375% due 2025
673

 
667

 
688

 
681

U.S. dollar at 4.25% due 2026
400

 
394

 
400

 
394

U.S. dollar at 4.75% due 2026
875

 
863

 
875

 
863

U.S. dollar at 7.375% due 2026
350

 
348

 
350

 
348

€500 at 2.875% due 2026
561

 
553

 
573

 
566

U.S. dollar at 7.50% due 2096
40

 
40

 
40

 
40

Other indebtedness in various currencies
60

 
60

 
66

 
66

Total long-term debt
8,979

 
8,897

 
8,667

 
8,574

Less current maturities
(83
)
 
(83
)
 
(81
)
 
(81
)
Total long-term debt, less current maturities
$
8,896

 
$
8,814

 
$
8,586

 
$
8,493


(1) €261 and €263 at March 31, 2019 and December 31, 2018
(2) €744 and €746 at March 31, 2019 and December 31, 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 $9,299 at March 31, 2019 and $8,735 at December 31, 2018.


20

Crown Holdings, Inc.


O.
Pension and Other Postretirement Benefits

The components of net periodic pension and other postretirement benefits costs for the three months ended March 31, 2019 and 2018 were as follows:
 
Three Months Ended
 
March 31,
Pension benefits – U.S. plans
2019
 
2018
Service cost
$
5

 
$
4

Interest cost
13

 
12

Expected return on plan assets
(18
)
 
(21
)
Recognized net loss
14

 
12

Net periodic cost
$
14

 
$
7

 
Three Months Ended
 
March 31,
Pension benefits – Non-U.S. plans
2019
 
2018
Service cost
$
4

 
$
7

Interest cost
19

 
19

Expected return on plan assets
(35
)
 
(40
)
Curtailment gain
(14
)
 

Recognized prior service credit

 
(3
)
Recognized net loss
10

 
11

Net periodic benefit
$
(16
)
 
$
(6
)

 
Three Months Ended
 
March 31,
Other postretirement benefits
2019
 
2018
Service cost
$

 
$

Interest cost
1

 
1

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

 
1

Net periodic benefit
$
(7
)
 
$
(7
)

In the three months ended March 31, 2019, the Company recorded a curtailment gain to recognize prior service credits that were previously recorded in accumulated other comprehensive income in connection with the closure of a non-U.S. defined benefit pension plan. Additionally, the Company may incur future settlement charges in 2019 related to the payment of lump sum buy-outs to settle certain pension obligations using plan assets.

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.













21

Crown Holdings, Inc.


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
 
2019
 
2018
statement of operations
    Actuarial losses
 
$
25

 
$
24

Other pension and postretirement
    Prior service credit
 
(23
)
 
(12
)
Other pension and postretirement
 
 
2

 
12

Income before taxes
 
 
(1
)
 
(1
)
Provision for income taxes
Total reclassified
 
$
1

 
$
11

Net income


P.
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, 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
)
 
 
 
 
 
 
 
 
 
Balance at January 1, 2019
 
$
(1,533
)
 
$
(1,817
)
 
$
(24
)
 
$
(3,374
)
Other comprehensive income before reclassifications
13

 
59

 
6

 
78

Amounts reclassified from accumulated other comprehensive income
1

 

 
6

 
7

Other comprehensive income
 
14

 
59

 
12

 
85

Balance at March 31, 2019
 
$
(1,519
)
 
$
(1,758
)
 
$
(12
)
 
$
(3,289
)

See Note M and Note O for further details of amounts reclassified from accumulated other comprehensive income related to cash flow hedges and defined benefit plans.


22

Crown Holdings, Inc.


Q.
Stock-Based Compensation

A summary of restricted and deferred stock transactions during the three months ended March 31, 2019 is as follows:

 
Number of shares
Non-vested stock awards outstanding at January 1, 2019
2,142,743

Awarded:

Time-vesting shares
108,525

Performance-based shares
202,876

Released:

Time-vesting shares
(68,923
)
Forfeitures:
 
       Time-vesting shares
(12,000
)
Performance-based shares
(129,207
)
Non-vested stock awards outstanding at March 31, 2019
2,244,014


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, 2019 were $43.07 for the time-vesting stock awards and $46.08 for the performance-based stock awards.

The fair value of the performance-based shares subject to a market condition awarded in 2019 was calculated using a Monte Carlo valuation model, including a weighted average stock price volatility of 21.4%, an expected term of three years, and a weighted average risk-free interest rate of 2.45%.

As of March 31, 2019, unrecognized compensation cost related to outstanding non-vested stock awards was $76. The weighted average period over which the expense is expected to be recognized is 3.3 years. The aggregate market value of the shares released on the vesting dates was $3 for the three months ended March 31, 2019.


23

Crown Holdings, Inc.


R.
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,
 
2019
 
2018
Net income attributable to Crown Holdings
$
103

 
$
90

Weighted average shares outstanding:
 
 
 
Basic
133.8

 
133.5

Dilutive stock options and restricted stock
0.6

 
0.3

Diluted
134.4

 
133.8

Basic earnings per share
$
0.77

 
$
0.67

Diluted earnings per share
$
0.77

 
$
0.67


For the three months ended March 31, 2019, and 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.


S.
Segment Information

The Company evaluates performance and allocates resources based on segment income, which is not a defined term under GAAP. The Company defines segment income as income from operations adjusted to exclude intangibles amortization charges, provisions for asbestos and restructuring and other and the impact of fair value adjustments related to the sale of inventory acquired in an acquisition.

Segment income should not be considered in isolation or as a substitute for net income 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,
 
2019
 
2018
Americas Beverage
$
788

 
$
758

European Beverage
339

 
371

European Food
423

 
428

Asia Pacific
321

 
337

Transit Packaging
569

 

Total reportable segments
2,440

 
1,894

Non-reportable segments
315

 
303

Total
$
2,755

 
$
2,197


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


24

Crown Holdings, Inc.


 
Intersegment Sales
 
Three Months Ended
 
March 31,
 
2019
 
2018
Americas Beverage
$
4

 
$
10

European Beverage
1

 

European Food
18

 
22

Transit Packaging
3

 

Total reportable segments
26


32

Non-reportable segments
26

 
27

Total
$
52

 
$
59


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,
 
2019
 
2018
Americas Beverage
$
113

 
$
98

European Beverage
39

 
55

European Food
48

 
56

Asia Pacific
45

 
44

Transit Packaging
73

 

Total reportable segments
$
318


$
253


A reconciliation of segment income of reportable segments to income before income taxes is as follows:
 
Three Months Ended
 
March 31,
 
2019

2018
Segment income of reportable segments
$
318

 
$
253

Segment income of non-reportable segments
36

 
31

Corporate and unallocated items
(39
)
 
(39
)
Restructuring and other
(4
)
 
(13
)
Amortization of intangibles
(47
)
 
(11
)
Accelerated depreciation
(2
)
 

Other pension and postretirement
18

 
17

Loss from early extinguishments of debt
(6
)
 

Interest expense
(98
)
 
(74
)
Interest income
3

 
6

Foreign exchange
(1
)
 
(18
)
Income before income taxes
$
178


$
152


For the three months ended March 31, 2019, and 2018, intercompany profits of $1 were 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.



25

Crown Holdings, Inc.


T.
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, 2019 and 2018,
balance sheets as of March 31, 2019 and December 31, 2018, and
statements of cash flows for the three months ended March 31, 2019 and 2018
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, 2019
(in millions)

 
Parent
 
Issuer
 
Non-
Guarantors
 
Eliminations
 
Total
Company
Net sales

 

 
$
2,755

 

 
$
2,755

Cost of products sold, excluding depreciation and amortization

 

 
2,210

 

 
2,210

Depreciation and amortization

 

 
122

 

 
122

Selling and administrative expense

 
$
1

 
156

 

 
157

Restructuring and other

 

 
4

 

 
4

Income from operations

 
(1
)
 
263

 
 
 
262

Loss from early extinguishments of debt

 

 
6

 

 
6

Other pension and postretirement

 
2

 
(20
)
 

 
(18
)
Net interest expense

 
18

 
77

 

 
95

Foreign exchange

 

 
1

 

 
1

Income/(loss) before income taxes

 
(21
)
 
199

 

 
178

Provision for / (benefit from) income taxes

 
(4
)
 
52

 

 
48

Equity earnings / (loss) in affiliates
$
103

 
104

 
1

 
$
(207
)
 
1

Net income
103

 
87

 
148

 
(207
)
 
131

Net income attributable to noncontrolling interests

 

 
(28
)
 

 
(28
)
Net income attributable to Crown Holdings
$
103

 
$
87

 
$
120

 
$
(207
)
 
$
103

 
 
 
 
 
 
 
 
 
 
Total comprehensive income
$
188

 
$
170

 
$
233

 
$
(375
)
 
$
216

Comprehensive income attributable to noncontrolling interests

 

 
(28
)
 

 
(28
)
Comprehensive income attributable to Crown Holdings
$
188

 
$
170

 
$
205

 
$
(375
)
 
$
188



26

Crown Holdings, Inc.




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