Ball Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; unaudited. Comparisons are with the corresponding 2017 periods unless noted. Ball supplies metal packaging and aerospace products and services.
Financial performance and condition
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $2.946bn | $2.908bn | $8.832bn | $8.236bn |
| Net earnings attributable to Ball | $59m | $48m | $303m | $215m |
| Diluted EPS | $0.17 | $0.13 | $0.86 | $0.60 |
| EBIT | $268m | $124m | $737m | $463m |
| Comparable operating earnings (non-GAAP) | $340m | $313m | $992m | $870m |
Q3 sales rose about 1% and nine-month sales about 7%. GAAP net margin was approximately 2.0% in Q3 (1.7% prior year) and 3.4% for nine months (2.6% prior year). Management attributed improved earnings principally to volume, pricing, manufacturing performance and lower consolidation costs; higher freight and taxes partly offset gains. Comparable diluted EPS, a non-GAAP measure, was $0.56 for Q3 and $1.65 for nine months, versus $0.52 and $1.44.
- Cash flow: Nine-month operating cash flow was $1.027bn, versus $744m. Capital expenditures were $616m, implying free cash flow of about $411m using Ball’s stated definition (operating cash flow less capex), versus about $340m. Working capital used $112m of cash.
- Liquidity and debt: At September 30, cash and equivalents were $598m; current assets were $3.860bn and current liabilities $3.813bn. Total debt, including current maturities, was about $6.673bn, compared with $6.971bn at year-end 2017. About $1.47bn was available on revolving facilities; $142m was drawn on short-term uncommitted facilities. Ball reported covenant compliance and a maximum net-leverage covenant of 4.25x.
- Balance sheet: Total assets were $16.470bn versus $17.169bn at year-end; shareholders’ equity was $3.745bn versus $4.046bn. Cash, cash equivalents and restricted cash totaled $611m.
Material changes and notable items
- On July 31, Ball sold its U.S. steel food and steel aerosol packaging business, receiving approximately $600m cash and a 49% interest in the Ball Metalpack joint venture. The sale generated a $38m loss recorded in business consolidation and other activities; the retained interest is accounted for under the equity method.
- Reported results include the new revenue standard, adopted January 1, 2018, using the modified retrospective method; comparative periods were not restated. Adoption reduced Q3 reported sales by $39m and Ball-attributable earnings by $5m versus prior guidance, and reduced nine-month sales by $48m and earnings by $8m. It accelerated recognition of some packaging sales and shifted amounts from inventory to unbilled receivables.
- The effective tax rate was 72.9% for Q3 and 43.1% for nine months, versus 8.0% and 19.5%. The sale-related goodwill write-off without a tax deduction increased the rates by 37.7 and 14.2 percentage points, respectively; Brazilian deferred-tax-asset revaluation also contributed.
- Q3 comparable operating earnings improved across North and Central America, Europe and aerospace, but declined in South America. For nine months, comparable operating earnings rose in all four reportable segments. Aerospace backlog was $1.76bn at September 30, versus $1.75bn at year-end 2017.
Outlook, risks and contingencies
- Management expected 2018 capital expenditures to exceed $700m, with approximately $327m contractually committed at September 30; full-year pension contributions were estimated at about $66m.
- Ball expected 2018 net share repurchases to exceed $700m. It had repurchased $439m, net of issuances, through September and another $89m in October. The company cited operating cash flow and available borrowings as sources for operating needs, debt service, dividends, capital spending and repurchases.
- Ball expected a material amount of lease assets and liabilities to be recognized on adoption of the new lease standard on January 1, 2019. The filing gave no clear estimate of the amount.
- In October 2018, Ball announced plans to cease production at its San Martino, Italy, beverage packaging plant in December; the financial impact was not yet estimable.
- Key risks include packaging demand and pricing, raw-material and logistics costs, customer and supplier concentration, foreign exchange and tax changes, plant restructuring, aerospace contract funding and timing, and execution of acquisitions, divestitures and joint ventures. Ball noted possible goodwill impairment in its Beverage Asia reporting unit if metal oversupply and pricing pressure persist.
- Environmental liabilities for known and estimable matters were estimated at approximately $31m. Ball described litigation, environmental and tax matters, including Brazilian indirect-tax claims that could produce material reimbursements but could not yet be estimated. Management did not expect the identified matters to materially harm liquidity, results or financial condition.
Important facts for investors to verify
- How much of earnings growth reflects recurring operating improvement versus tax effects, divestiture-related items, restructuring and other adjustments.
- The cash-flow and working-capital effects of revenue-standard adoption, receivables factoring and the Ball Metalpack transaction.
- Progress on planned repurchases and capital spending, and the resulting leverage and covenant headroom.
- The final tax effects of the Tax Cuts and Jobs Act, including the company’s foreign-earnings reinvestment assessment.
- Potential outcomes of Brazilian tax claims, environmental and other contingencies, and the Beverage Asia goodwill impairment risk.