Ball Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Ball manufactures metal packaging for beverage, food, personal care and household products and provides aerospace products and services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $2,785 | $2,473 | +12.6% |
| EBIT | $226 | $152 | +48.7% |
| Net earnings attributable to Ball | $125 | $68 | +83.8% |
| Diluted EPS | $0.35 | $0.19 | +$0.16 |
| Operating cash flow | $(74) | $(401) | $327 improvement |
| Capital expenditures | $242 | $125 | +$117 |
- Reported EBIT margin was approximately 8.1%, versus 6.1% a year earlier; net margin attributable to Ball was approximately 4.5%, versus 2.7%. Cost of sales excluding depreciation and amortization was 80% of sales in both periods.
- Cash flow after capital expenditures was approximately negative $316 million, compared with negative $526 million in Q1 2017. Working-capital outflows were $420 million, versus $680 million; the filing attributes the year-over-year cash-flow improvement primarily to lower working-capital outflows.
- At March 31, cash and cash equivalents were $477 million ($486 million including restricted cash). Total assets were $17.7 billion and shareholders’ equity was $4.1 billion. Current assets of $4.16 billion compared with current liabilities of $3.91 billion.
- Debt was approximately $7.5 billion, compared with $7.0 billion at December 31, 2017. Ball issued $750 million of 4.875% senior notes in March and used proceeds in part to repay credit-facility and short-term borrowings. It reported $1.1 billion available under revolving credit facilities and $880 million in short-term uncommitted facilities, of which $328 million was outstanding.
- Interest expense was $74 million, up from $68 million. The effective tax rate was 22.4%, compared with 26.2%.
Material changes and segment results
- Sales growth reflected higher volumes in South America and Europe, favorable South American product mix, and higher aerospace sales. Ball-attributable earnings also benefited from increased South American earnings, lower corporate costs and $25 million less in business consolidation and other activities; higher depreciation and amortization and tax expense partly offset the gains.
- Comparable operating earnings, a non-GAAP measure, were $300 million versus $239 million. This measure excludes business consolidation and other activities and acquired Rexam intangible amortization; it should not be confused with reported EBIT of $226 million.
- South America: sales $459 million versus $371 million; comparable operating earnings $98 million versus $58 million, driven mainly by higher volumes, product mix and manufacturing performance, partly offset by pricing pressure.
- Europe: sales $609 million versus $508 million; comparable operating earnings $60 million versus $47 million, supported by volume, currency and operating efficiencies.
- North and Central America: sales $1.035 billion versus $949 million, but comparable operating earnings fell to $113 million from $123 million, reflecting lower volumes, freight and network-optimization start-up costs.
- Food and aerosol: sales were $275 million versus $272 million; comparable operating earnings were $23 million versus $21 million. Aerospace: sales were $264 million versus $236 million and comparable operating earnings were $25 million versus $21 million, largely from U.S. national defense contracts. Aerospace backlog was $1.7 billion, compared with $1.75 billion at year-end.
Outlook, commentary and risks
- Management expected 2018 capital expenditures of approximately $600 million; about $500 million was contractually committed at quarter-end. The filing does not provide a consolidated earnings or revenue forecast.
- Ball said available operating cash flow and borrowing facilities were expected to meet operating, debt-service, dividend and investment needs. It was in compliance with debt covenants, including a maximum net leverage ratio of 4.25 times.
- Plant plans included expected production starts at Goodyear, Arizona, in Q2 2018 and near Madrid, Spain, in mid-2018; the Paraguay facility was expected to begin production in the second half of 2019. Birmingham and Longview closures were expected by the end of Q2 2018, and Chatsworth by the end of Q3 2018.
- Adoption of the new revenue standard on January 1, 2018 increased reported Q1 sales by $33 million and Ball-attributable earnings by $2 million versus the amounts that would have been reported under prior guidance. It accelerated recognition for certain packaging sales; 2017 comparative results were not restated.
- Business consolidation charges were $30 million versus $55 million. Q1 2018 included costs related to plant closures and Rexam-related compensation arrangements. The company also reported $44 million of acquired Rexam intangible amortization.
- Risks include packaging demand, metal and other input costs, pricing competition, customer and supplier concentration, foreign exchange, interest rates, government aerospace funding and contract timing, and execution of restructuring and integration plans. Management noted excess metal-can supply and pricing pressure in China; continued oversupply could lead to impairment of up to $78 million of Beverage Asia goodwill.
- Environmental liabilities for known and estimable matters were estimated at $37 million. The filing discusses environmental sites, patent litigation and Brazilian tax disputes; management did not expect the described matters to materially affect the company, although the outcome of a Brazilian indirect-tax appeal could result in a reimbursement whose amount was not estimable.
- Tax estimates under the 2017 U.S. tax legislation remained provisional. Ball was assessing its foreign-earnings reinvestment position and expected to complete related determinations and record any required adjustments no later than December 2018.
Important facts for investors to verify
- How much reported sales and earnings growth reflects underlying volume, pricing and mix versus the $33 million revenue-standard adoption benefit.
- Whether working-capital outflows and negative operating cash flow improve, and how the planned $600 million of capital spending is funded.
- Debt levels, borrowing costs, covenant headroom and the effect of the March note issuance on leverage and interest expense.
- Whether North American volume and earnings recover, and whether South American pricing pressure or China’s can oversupply worsens.
- Potential changes to provisional tax estimates, environmental and legal exposures, and any impairment assessment for Beverage Asia goodwill.