Ball Corporation (BLL) — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Ball supplies aluminum packaging and aerospace products and services. Amounts below are in U.S. dollars; financial figures are in millions except per-share data.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $3,093 | $2,953 | $8,679 | $8,755 |
| Net earnings attributable to Ball | $241 | $92 | $358 | $406 |
| Diluted EPS | $0.72 | $0.27 | $1.08 | $1.19 |
| Comparable diluted EPS (non-GAAP) | $0.89 | $0.70 | $2.15 | $1.82 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $345 | $656 |
Q3 sales rose about 5% year over year and Ball-attributable earnings increased to $241 million. For the first nine months, sales declined about 1% and reported earnings fell about 12%. Management attributed the Q3 earnings improvement mainly to higher volumes, lower consolidation costs, lower interest expense and a lower effective tax rate; the nine-month decline reflected higher consolidation and debt-refinancing costs and a higher effective tax rate, partly offset by stronger comparable segment earnings.
Q3 cost of sales excluding depreciation and amortization was 79% of sales, versus 80% a year earlier. Reported net margin was approximately 7.8% in Q3 and 4.1% for the nine-month period. Comparable operating earnings were $419 million for Q3 versus $369 million, and $1,053 million for nine months versus $991 million.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $345 million, down $311 million year over year, mainly reflecting working-capital outflows of $728 million versus $423 million. Management cited seasonal working-capital investment and timing of metal payments; days sales outstanding increased to 44 from 38, while days payable outstanding decreased to 107 from 118.
- Capital expenditures were $683 million versus $425 million. Investing cash outflow was $751 million; financing cash outflow was $521 million. Operating cash flow less capital expenditures was approximately negative $338 million.
- At September 30, cash and cash equivalents were $771 million, current assets $4,025 million and current liabilities $3,764 million. Total debt was approximately $7.7 billion, comprising $31 million of short-term/current debt and $7.679 billion of long-term debt. Total debt was approximately $7.8 billion at year-end 2019.
- Ball had $1.7 billion available under committed revolving credit facilities and approximately $990 million of short-term uncommitted facilities, with $30 million outstanding under the latter. Management said liquidity was strong and expected operating cash flow and available borrowing capacity to meet requirements. The company reported covenant compliance.
Segments and material changes
- North and Central America beverage packaging: Q3 sales were $1,327 million and comparable operating earnings $209 million, up from $1,230 million and $157 million. Nine-month comparable earnings increased to $544 million from $416 million, supported by volume, customer contractual terms and operating performance.
- EMEA beverage packaging: Q3 sales were $809 million and comparable earnings $117 million, up from $763 million and $105 million. Nine-month comparable earnings declined to $248 million from $277 million, with lower volumes, warehousing costs and production downtime cited.
- South America beverage packaging: Q3 sales were $432 million and comparable earnings $64 million, versus $392 million and $60 million. Nine-month comparable earnings declined to $173 million from $193 million, reflecting downtime, startup costs and regional pricing, among other factors.
- Aerospace: Q3 sales were $451 million and comparable earnings $44 million, versus $374 million and $35 million. Nine-month sales grew to $1,321 million from $1,081 million, primarily on increased U.S. national-defense contract sales. Contracted backlog was $2.4 billion at September 30, 2020, versus $2.5 billion at year-end 2019.
Outlook, risks and unusual items
- Management expected 2020 capital expenditures to likely exceed $900 million; approximately $1 billion was contractually committed at September 30. It expected full-year pension contributions of approximately $100 million. No specific earnings guidance was provided in the supplied filing text.
- COVID-19 had a material effect on the global business environment, although Ball’s operations were designated essential and continued operating. The company said it could not reasonably estimate the outbreak’s full financial impact. Risks include demand and customer credit, supply disruptions, currencies, asset impairment, pension funding and capital-market access. Management identified estimates potentially affected, including receivable and inventory recoverability, impairment assumptions and hedge-accounting forecasts.
- Q3 business consolidation and other costs were $8 million, compared with $133 million in Q3 2019. Nine-month costs were $235 million versus $147 million, including a $102 million non-cash pension settlement loss, a $62 million non-cash goodwill impairment, a $23 million write-down of potential China-sale consideration and a $15 million adjustment to the selling price of a former steel business.
- Ball issued $1.3 billion of 2.875% senior notes due 2030 in Q3. It redeemed $1 billion of notes due 2020 and €400 million of euro notes in Q1 and recorded $41 million of debt extinguishment costs for the nine-month period. The amended leverage covenant required a ratio no greater than 5.0 times at September 30, 2020, tightening to 4.5 times at December 31, 2022.
- Known environmental liabilities were estimated at approximately $28 million. Ball described various litigation, tax and environmental matters, but said the identified matters were not expected to have a material adverse effect. Potential future Brazilian indirect-tax recoveries were not estimable; additional gains could be recorded if amounts become estimable and realizable.
Important facts for investors to verify
- Whether working-capital investment and the sharp decline in operating cash flow reverse, and how cash generation compares with elevated capital spending.
- COVID-19 effects on customer demand, receivable collection, supply availability and management’s impairment and hedge assumptions.
- Debt maturities, covenant headroom and the effect of the 2030 note issuance and covenant amendment; actual leverage ratio is not stated in the supplied filing text.
- Underlying segment trends, particularly nine-month earnings declines in EMEA and South America, and the sustainability of North American and aerospace growth.
- Potential further pension, goodwill, China-sale consideration or legal and tax charges or recoveries, including Brazilian tax claims.