Ball Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; figures are unaudited and, unless stated otherwise, in U.S. dollars. Ball supplies aluminum packaging and aerospace products and services.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $2.785 billion | $2.785 billion | Flat |
| EBIT | $155 million | $221 million | Down $66 million |
| Net earnings attributable to Ball | $23 million | $117 million | Down $94 million |
| Diluted EPS, reported | $0.07 | $0.34 | Down $0.27 |
| Comparable operating earnings (non-GAAP) | $307 million | $275 million | Up $32 million |
| Comparable diluted EPS (non-GAAP) | $0.61 | $0.49 | Up $0.12 |
| Net margin | 1% | 4% | Down 3 percentage points |
| Operating cash flow | $(708) million | $(129) million | Greater outflow |
| Capital expenditures | $213 million | $154 million | Up $59 million |
Sales were flat as higher beverage volumes and aerospace sales were offset by the China beverage business divestiture, lower aluminum pass-through pricing and unfavorable currency movements. Aerospace sales rose $104 million, primarily on U.S. national defense contracts. North and Central America beverage packaging comparable operating earnings increased $28 million; EMEA and South America each declined.
Reported earnings were burdened by $115 million of business consolidation and other charges (versus $14 million), including a $62 million noncash goodwill impairment, a $23 million reduction in potential China sale consideration and a $15 million adjustment to the selling price of the former steel food and aerosol business. Debt refinancing and other costs were $40 million versus $4 million. The 2020 effective tax rate was negative 9.1%, compared with 7.1%; tax benefits included share-based compensation and equity affiliate losses, partly offset by foreign-currency-related deferred tax revaluation and the nondeductible goodwill impairment.
Balance sheet, cash flow and liquidity
- At March 31, cash and cash equivalents were $801 million, total assets $16.545 billion, current liabilities $4.003 billion and total equity $2.700 billion. Cash was down from $1.798 billion at year-end 2019.
- Total interest-bearing debt was approximately $8.0 billion, compared with $7.8 billion at December 31, 2019. Long-term debt was $7.476 billion and current debt $522 million. Ball had $555 million available on committed revolvers and $1.1 billion of short-term uncommitted facilities, of which $517 million was outstanding and due on demand.
- Operating cash outflow included a $1.037 billion working-capital outflow, attributed mainly to seasonal buildup and timing of metal payments. Days sales outstanding rose to 46 from 38 a year earlier; days payable outstanding fell to 102 from 118.
- Investing cash outflow was $234 million. Financing cash inflow was $25 million; the company redeemed $1 billion of dollar senior notes and €400 million of euro notes in January. The redemptions generated $40 million of extinguishment costs.
- Ball reported compliance with debt covenants, including the maximum 4.5x leverage covenant; the filing does not provide the actual covenant leverage ratio. Management described liquidity as strong and said no debt maturities were due until 2022.
Outlook, commentary and risks
- Management said COVID-19 had not significantly disrupted first-quarter operations, which were designated essential, but anticipated temporary second-quarter demand declines in South America due to closures of smaller retail outlets and in EMEA due to travel restrictions. The company said it could not reasonably estimate the pandemic’s full future financial impact.
- Ball expected 2020 capital expenditures of approximately $800 million; $566 million was contractually committed at quarter-end. Full-year defined-benefit pension contributions were estimated at approximately $90 million, subject to change.
- In April 2020, after quarter-end, Ball completed a purchase of group annuity contracts for certain U.S. pension obligations; settlement losses of approximately $100 million were expected to be recorded in business consolidation and other activities.
- Aerospace contracted backlog was $2.3 billion at March 31, down from $2.5 billion at December 31, 2019. Ball cautioned backlog comparisons may not indicate future operations because of delivery schedules, program funding and contract-award timing.
- Key risks include COVID-19-related changes in customer demand, supply disruptions, asset impairments, liquidity and pension pressures; customer and supplier concentration; commodity, foreign exchange and interest-rate exposure; and litigation and environmental matters. Ball estimated known environmental liabilities at approximately $28 million and said currently identified matters were not expected to materially adversely affect its financial condition, results or liquidity.
- In March, Ball agreed to acquire a Brazilian aluminum aerosol packaging business for initial cash consideration of $80 million, plus potential additional consideration up to $30 million; closing was expected in the third quarter of 2020.
Most important facts for investors to verify
- Whether COVID-19 caused the forecast second-quarter regional demand declines to deepen or spread, and the resulting effects on volumes, earnings and cash generation.
- Whether working capital reverses after the unusually large first-quarter outflow and whether receivables collection and payment timing normalize.
- Whether goodwill, receivables, inventory and other estimates require further impairment or valuation adjustments as economic conditions evolve.
- Debt and liquidity capacity, including short-term borrowings due on demand, available revolver capacity and covenant headroom; the filing does not state the actual leverage ratio.
- Actual capital spending versus the approximately $800 million outlook, and the timing and amount of the expected pension settlement loss and contributions.
- Reported versus non-GAAP results: comparable operating earnings and comparable EPS exclude specified costs and are not substitutes for GAAP measures.