Ball Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Ball manufactures metal beverage, food and household packaging and provides aerospace and technology products and services. Amounts are in U.S. dollars unless noted.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $1.756 billion | $1.923 billion |
| EBIT | $(110) million | $126 million |
| Net earnings attributable to Ball | $(127) million | $21 million |
| Diluted EPS | $(0.90) | $0.15 |
| Operating cash flow | $(386) million | $(181) million |
- Sales declined 8.7% year over year. Cost of sales excluding depreciation and amortization was 81% of sales in both periods; depreciation and amortization was 4% of sales in both periods.
- Business consolidation and other charges were $267 million, versus $52 million, and debt refinancing and other costs were $61 million, versus $60 million. Management’s non-GAAP comparable net earnings were $86 million, or $0.59 per diluted share, compared with $97 million, or $0.69, in Q1 2015. Comparable EBIT was $157 million versus $178 million.
- Working capital changes used $561 million of cash, compared with $314 million in Q1 2015. Management cited higher days sales outstanding (47 days versus 43 a year earlier) and lower days payable outstanding (78 days versus 91 in Q4 2015). Capital expenditures were $138 million; financing activities provided $572 million.
- At March 31, cash was $205 million, restricted cash was $2.099 billion, and total debt was approximately $5.8 billion. Shareholders’ equity was $1.078 billion. The current portion of debt and short-term debt was $391 million; long-term debt was $5.408 billion.
- Approximately $1.1 billion was available under the committed revolving facility and $578 million under short-term uncommitted facilities; $223 million of the latter was outstanding and due on demand. Ball reported compliance with debt covenants. Restricted cash is primarily linked to the proposed Rexam transaction and is not equivalent to available operating cash.
Material changes and segment results
- Management attributed lower consolidated sales mainly to $76 million of lower metal input-cost pass-through, lower China pricing, foreign-exchange effects in Europe, and completion of two U.S. government programs; higher beverage volumes partly offset these items.
- Metal beverage packaging, Americas and Asia: sales $937 million versus $1.023 billion; segment earnings before consolidation charges $102 million versus $125 million. China pricing reduced earnings by $20 million; Ball expects lower China prices to continue in the short term.
- Metal beverage packaging, Europe: sales $356 million versus $379 million; segment earnings $39 million versus $29 million, supported mainly by lower metal premiums.
- Metal food and household products packaging: sales $284 million versus $308 million; segment earnings before consolidation charges $20 million versus $30 million. The Weirton, West Virginia, facility is expected to cease production in early 2017.
- Aerospace and technologies: sales $180 million versus $215 million and segment earnings $18 million versus $20 million, primarily reflecting two government contracts nearing completion. Contracted backlog was $733 million at quarter-end, compared with $617 million at December 31, 2015.
- The net loss included substantial transaction-related foreign-exchange and derivative losses associated with Rexam: $96 million from revaluation of restricted cash and debt, $88 million from acquisition currency contracts, and $36 million from cross-currency swaps. The tax benefit was $83 million; the reported effective tax rate was 39.7%.
Outlook, transactions and risks
- Ball expected a full-year 2016 effective tax rate of approximately 8.4%, capital expenditures of approximately $400 million, and defined-benefit pension contributions of approximately $40 million, excluding payments for unfunded German plans.
- Ball expected to complete its proposed Rexam acquisition and related divestitures in late June 2016, subject to shareholder, regulatory and other closing conditions; completion by that date or at all was not assured. In April 2016, Ball agreed to sell a beverage-packaging business, including selected Rexam assets, for approximately $3.42 billion, subject to adjustments and approvals, to meet regulatory requirements.
- The December 2015 senior notes held in escrow must be redeemed if the Rexam acquisition is not completed by November 15, 2016. Ball disclosed a potential £302 million break payment in specified circumstances. The March 2016 refinancing established five-year term loan facilities and a $1.5 billion revolving facility.
- Ball warned that metal-container oversupply in China is pressuring prices and profitability; extended oversupply could trigger impairment of some or all of $78 million of Beverage Asia goodwill. Other cited risks include raw-material availability and pricing, customer and supplier concentration, contract timing and funding, foreign exchange and interest rates, regulatory approvals, and litigation and environmental matters.
- Management said it believed operating cash flows and available borrowing capacity would meet ongoing requirements, debt service, dividends, capital spending and the proposed acquisition. It cautioned that quarterly results may be affected by packaging seasonality and irregular aerospace contract revenues.
Investor verification priorities
- Track Rexam closing conditions, the regulatory divestiture and sale proceeds, transaction funding, and the November 15, 2016 note-redemption condition.
- Assess operating cash generation and working-capital trends, alongside the availability and intended use of restricted cash.
- Separate recurring segment performance from acquisition-related foreign-exchange, derivative, consolidation and refinancing charges; review the assumptions behind comparable earnings.
- Monitor China pricing and utilization, the possible Beverage Asia goodwill impairment, and the effects of the Weirton closure and facility start-up costs.
- Review debt levels, liquidity availability, covenant headroom, and the company’s stated $400 million capital-spending outlook.
- Review the status and potential exposure of disclosed environmental, patent, tax and other legal matters; the filing says management did not expect the described matters to have a material adverse effect, but outcomes are uncertain.