Ball Corporation (NYSE: BLL) — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; unaudited. Ball manufactures metal packaging, primarily beverage containers, and provides aerospace products and services. Comparisons below are with the corresponding 2018 periods unless otherwise noted. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $2,953 | $2,946 | $8,755 | $8,832 |
| EBIT | $198 | $268 | $726 | $737 |
| Net earnings attributable to Ball | $92 | $59 | $406 | $303 |
| Diluted EPS | $0.27 | $0.17 | $1.19 | $0.86 |
| Comparable diluted EPS (non-GAAP) | $0.70 | $0.56 | $1.82 | $1.65 |
- Q3 sales were nearly flat, while net earnings rose 56%. EBIT fell 26%; the filing attributes the contrast chiefly to $133 million of business consolidation and other charges versus $32 million a year earlier, alongside lower tax expense.
- Q3 net margin was approximately 3.1% versus 2.0%; EBIT margin was approximately 6.7% versus 9.1%. For the nine-month period, net margin was approximately 4.6% versus 3.4%, while EBIT margin was approximately 8.3% in both years.
- Nine-month comparable operating earnings were $991 million versus $992 million; comparable net earnings were $623 million versus $584 million. These are company-defined non-GAAP measures.
- Cash provided by operating activities was $656 million for the first nine months, down from $1.027 billion. Capital expenditures were $425 million, implying approximate free cash flow of $231 million using Ball’s stated definition of operating cash flow less capex, versus $411 million in 2018.
Segments and notable period changes
- North and Central America beverage packaging: Nine-month sales increased to $3.647 billion from $3.513 billion, but comparable operating earnings declined to $416 million from $423 million. Q3 earnings improved modestly; management cited higher volume, offset by unfavorable aluminum scrap rates and peak-season manufacturing inefficiencies.
- South America beverage packaging: Nine-month sales declined to $1.210 billion from $1.229 billion and comparable operating earnings to $193 million from $235 million. The company cited the end of Rexam-related end-sales, regional price/mix and currency effects; higher volumes partly offset these factors.
- Europe beverage packaging: Nine-month sales rose to $2.052 billion from $1.995 billion and comparable operating earnings to $241 million from $219 million, supported by volume and operational efficiencies, partly offset by unfavorable exchange rates.
- Aerospace: Nine-month sales increased to $1.081 billion from $837 million and comparable operating earnings to $103 million from $75 million, primarily on higher sales from significant U.S. national defense contracts. Backlog was $2.2 billion at both September 30, 2019 and December 31, 2018.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $483 million; current assets were $3.829 billion and current liabilities $3.773 billion. The resulting current ratio was approximately 1.01.
- Interest-bearing debt was approximately $7.0 billion, versus $6.7 billion at year-end 2018. Long-term debt was $6.623 billion; current debt and current maturities were $361 million. Debt covenants required a net leverage ratio no greater than 4.5x; Ball reported compliance.
- Following a March 2019 refinancing, revolving credit facilities totaling up to $1.75 billion mature in March 2024; approximately $1.5 billion was available at quarter-end after letters of credit. The filing also reports short-term uncommitted facilities, but the amount is inconsistent: the debt note says approximately $978 million, while MD&A says “$978 billion.” Verify the correct figure in the filed document.
- Operating cash flow was pressured by a $423 million working-capital outflow and higher pension contributions. Days sales outstanding increased to 49 from 42; days payable outstanding decreased to 104 from 112.
- Ball contributed $154 million to pension plans in the first nine months and expected approximately $168 million for full-year 2019. It expected 2019 capital expenditures to exceed $600 million, with approximately $430 million contractually committed at quarter-end.
Unusual items, outlook and risks
- Ball completed the sale of its China metal beverage packaging business in September for approximately $213 million of upfront consideration, expected to be received in Q4, plus potential future consideration. It recorded a $45 million disposal loss.
- The Argentina steel aerosol business was classified as held for sale at September 30 and the sale closed in October. Ball recorded a $7 million valuation charge and a $45 million charge for accumulated currency translation adjustments.
- A $56 million gain from prior-period Brazilian indirect-tax claims was recorded after management concluded the amounts were estimable and realizable. Additional potential claims were not estimable; future recoveries could be material.
- The nine-month effective tax rate was 15.1%, compared with 43.1% in 2018; the Q3 rates were 26.9% and 72.9%, respectively. The company cited the prior-year U.S. packaging-business sale, share-based compensation benefits and tax planning, among other factors.
- No specific full-year earnings or EPS guidance is stated in the supplied filing text. Management said operating cash flows and borrowing capacity were expected to meet operating, debt-service, dividend, repurchase and capital-spending needs. Ball cautioned that results are seasonal and aerospace contract sales vary.
- Risks include raw-material and supplier/customer concentration, manufacturing execution and new-facility ramp-up, foreign exchange and geopolitical exposures, aerospace contract timing and funding, and litigation/environmental matters. Ball estimated known and estimable environmental liabilities at approximately $28 million and said currently identified matters were not expected to have a material adverse effect. It also warned that continued weakness in Saudi Arabia could lead to impairment of up to some or all of $102 million of AMEA goodwill.
- Ball repurchased $614 million of treasury stock and paid $133 million in dividends during the first nine months. A January 2019 authorization permits repurchases of up to 50 million shares. Management reported disclosure controls were effective and no material third-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Resolve the short-term credit-facility disclosure discrepancy: $978 million in the debt note versus “$978 billion” in MD&A; confirm the outstanding and unused portions.
- Assess whether the Q3 and year-to-date earnings improvement is sustainable apart from tax effects and the $56 million Brazil tax gain, and account for the $133 million of Q3 special charges.
- Track working-capital conversion, pension funding and capital expenditures against cash generation, as operating cash flow and free cash flow declined year over year.
- Monitor South America segment earnings, North American manufacturing efficiency, aerospace contract funding and delivery timing, and the Saudi Arabia goodwill impairment risk.
- Review the completed China sale proceeds and any contingent consideration, the October Argentina disposal, and the status and recoverability of additional Brazilian tax claims.