Ball Corporation — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Unaudited results reflect the June 30 acquisition of Rexam and the simultaneous sale of the Divestment Business to Ardagh; prior segment figures were recast to the current presentation. Dollars are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $2,815 | $2,097 | $6,600 | $6,192 |
| EBIT | $116 | $76 | $283 | $476 |
| Net earnings attributable to Ball | $0, rounded | $45 | $210 | $226 |
| Diluted earnings per share | $0.00, rounded | $0.32 | $1.35 | $1.60 |
| Operating cash flow | Not presented separately for the quarter | $(433) | $597 |
- Q3 sales rose about 34%, primarily from Rexam, partly offset by lower metal input prices. Rexam contributed $1.3 billion of Q3 sales; its earnings contribution was not practicable to separate during integration.
- Reported EBIT margin was about 4.1% in Q3 versus 3.6% a year earlier, but 4.3% for the first nine months versus 7.7%. Q3 cost of sales was 83% of sales versus 81%; nine-month cost of sales was 81% in both periods. Results include significant acquisition and purchase-accounting effects.
- Q3 included $83 million of Rexam inventory step-up costs and $33 million of acquired-intangible amortization. Nine-month results included those same amounts, $319 million of business consolidation and other costs, and $108 million of debt refinancing and other costs.
- Management’s non-GAAP comparable net earnings were $171 million in Q3 versus $155 million, and $407 million for nine months versus $377 million. Comparable diluted EPS was $0.96 versus $1.10 for Q3 and $2.61 versus $2.67 for nine months. These measures exclude specified acquisition, restructuring, inventory step-up, amortization and financing items.
- Operating cash flow was negative $433 million, compared with positive $597 million, reflecting a $1.163 billion working-capital outflow and acquisition-related costs, pension funding and interest. Investing cash flow was positive $880 million, including acquisition and divestiture proceeds; capital expenditures were $398 million.
- Cash was $645 million at September 30, up from $224 million at year-end. Debt was approximately $8.1 billion, versus $5.1 billion at year-end. The company reported about $1.2 billion available under its committed revolver and $502 million of short-term uncommitted facilities, of which $294 million was outstanding and due on demand. It remained in compliance with debt covenants.
- Total assets were $17.1 billion and shareholders’ equity $3.8 billion, both substantially higher than year-end, chiefly reflecting Rexam. Current assets were $4.1 billion and current liabilities $2.9 billion.
Material changes, outlook and risks
- Ball acquired Rexam for approximately $3.8 billion in cash and 32.25 million Ball shares, with additional stock-based compensation consideration. It sold the Divestment Business for $3.42 billion and recognized a $328 million pretax gain, subject to final adjustments. The transaction added 54 manufacturing facilities before divestitures and materially increased goodwill, intangibles, pension obligations and debt.
- Management cited expected long-term benefits from global sourcing, lower overhead, production efficiencies and logistics savings, but gave no quantified synergy target or earnings guidance in the supplied filing text. Integration remained ongoing.
- Management expected 2016 capital expenditures of about $500 million and defined-benefit pension contributions of about $250 million. It expected a full-year effective tax rate of approximately negative 50%, or about 28% before specified unusual costs and tax items.
- The 2017 Ardagh agreement includes a minimum-volume guarantee that could require Ball to pay up to $75 million if sales fall below an agreed threshold. Final Rexam purchase accounting and certain assumed lease and purchase commitments remained under evaluation.
- Debt covenants require a maximum leverage ratio of 5.5, tightening to 5.0 at December 31, 2016, and 4.0 at December 31, 2017. The company identified its ability to integrate Rexam, achieve synergies, manage working capital and service higher debt as important uncertainties.
- After quarter-end, Egypt’s currency devaluation reduced the U.S.-dollar value of Egyptian-pound cash by an estimated $95 million and was expected to cause approximately $20 million of currency losses on net non-Egyptian-pound liabilities; the final impact remained dependent on exchange rates and business activity.
- Other risks include customer and supplier concentration, raw-material and foreign-exchange exposure, aerospace contract timing and funding, environmental and other legal proceedings, and possible noncash goodwill impairment in the Asia beverage-packaging reporting unit if industry oversupply persists. Management said disclosed proceedings were not expected to have a material adverse effect based on information then available.
Important facts for investors to verify
- Whether Rexam integration delivers the anticipated cost, productivity and working-capital benefits, and how much reported growth is attributable to the acquired business versus underlying performance.
- Whether working capital and operating cash flow recover after the unusually large acquisition-related outflow, and whether the $500 million capital-spending and pension-funding expectations are met.
- Debt repayment capacity and covenant headroom as leverage limits tighten, including the effect of interest costs and any refinancing needs.
- The final purchase-price allocation, acquired commitments and pension exposures, and the outcome of the up-to-$75 million Ardagh volume guarantee.
- The realized impact of Egypt’s currency devaluation and developments in the identified environmental, tax and other contingencies.