Ball Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Ball supplies metal packaging for beverage, food, personal care and household products, and aerospace products and services. Results include Rexam, acquired June 30, 2016; therefore, year-to-date comparisons are materially affected by 2017 including nine months of Rexam operations versus three months in 2016, as well as the 2016 divestiture of certain businesses.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $2.908 billion | $2.752 billion | $8.236 billion | $6.537 billion |
| Net earnings attributable to Ball | $48 million | $31 million | $215 million | $210 million |
| Diluted EPS | $0.13 | $0.09 | $0.60 | $0.67 |
| Comparable operating earnings (non-GAAP) | $313 million | $311 million | $870 million | $718 million |
| Comparable net earnings (non-GAAP) | $188 million | $171 million | $515 million | $407 million |
| Comparable diluted EPS (non-GAAP) | $0.52 | $0.48 | $1.44 | $1.30 |
Q3 net sales rose about 6% and Ball-attributable earnings rose about 55%; year-to-date sales rose about 26% and earnings about 2%, with the latter comparisons affected by the acquisition, divestiture and 2016 unusual items. Reported Q3 diluted EPS increased, while year-to-date diluted EPS declined. Comparable measures exclude specified consolidation, acquisition-related and other items and are not U.S. GAAP measures.
- Q3 comparable operating earnings were nearly flat. South America improved on higher volume; North and Central America declined on product mix, manufacturing performance and hurricane-related freight costs. Europe was broadly stable and aerospace earnings were slightly lower.
- For the first nine months, comparable operating earnings increased. South America and North and Central America improved; Europe was flat and food and aerosol packaging declined. Aerospace sales increased on significant U.S. national defense contracts.
- Cost of sales excluding depreciation and amortization was 80% of sales in both 2017 comparison periods, versus 83% in Q3 2016 and 81% in the first nine months of 2016. Depreciation and amortization rose to $162 million in Q3 and $539 million year to date, largely reflecting acquired Rexam assets and a $34 million year-to-date catch-up adjustment.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $747 million, versus an outflow of $433 million in 2016; management attributed the improvement primarily to working capital. Capital expenditures were $404 million, making operating cash flow less capital expenditures approximately $343 million.
- Investing cash outflow was $370 million and financing cash outflow was $429 million. Cash declined $41 million from year-end 2016 to $556 million.
- At September 30, cash was $556 million; current assets were $3.930 billion and current liabilities $3.778 billion. Total debt was approximately $7.6 billion, including $7.104 billion long-term debt and $452 million short-term debt/current maturities. Debt was approximately unchanged from year-end 2016.
- Approximately $1.2 billion was available under committed revolving credit facilities. Short-term uncommitted facilities totaled approximately $936 million, of which $374 million was outstanding and due on demand. Ball reported compliance with debt covenants; the maximum net-debt-to-EBITDA covenant tightens from 5.0x at September 30 to 4.0x at December 31, 2017.
- Ball sold $646 million of receivables through factoring programs at quarter-end, compared with $596 million at year-end 2016. The programs are accounted for as sales without recourse.
Material changes, outlook and risks
- Q3 business consolidation and other charges were $157 million, versus $63 million a year earlier. These included plant closure costs and a $41 million pension settlement loss. Year-to-date charges were $253 million, versus $302 million in 2016.
- Ball announced closures of three North American beverage facilities and closed its Recklinghausen, Germany facility. It expects approximately $30 million of additional expense related to the Germany closure; most related charges are expected to be paid by the end of 2018.
- After quarter-end regulatory approval of an agreement with Ardagh, Ball expected to record approximately $60 million of additional pretax income in Q4 2017 from settling remaining divestiture items and removing its 2017 minimum-volume guarantee and related penalties. Separately, Ball recorded $34 million of year-to-date charges for tax indemnification claims connected with the divestiture; the estimated indemnity liability was $57 million at September 30, with no stated maximum exposure.
- Management expected a full-year 2017 effective tax rate of approximately 23%, capital expenditures of approximately $550 million (about $450 million contractually committed at quarter-end), and full-year defined-benefit pension contributions of approximately $190 million, plus about $22 million of payments to certain unfunded plans.
- Management said operating cash flow and available borrowing capacity should meet operating needs, debt service, dividends and planned capital expenditures. Major risks include customer and supplier concentration, metal and other input costs, foreign exchange and interest-rate movements, demand and pricing, integration and synergies from Rexam, aerospace contract funding and timing, pension obligations, litigation and environmental matters. Aerospace contracted backlog was $1.2 billion, down from $1.4 billion at both December 31, 2016 and September 30, 2016; management cautioned that backlog is not necessarily indicative of future operations.
- Disclosure controls were concluded to be ineffective because a previously reported material weakness in tax accounting controls remained at September 30. Management reported remediation measures were designed and implemented, but said the weakness would not be considered remediated until controls had operated and been tested effectively.
- Ball disclosed a prior-period revision of 2016 interim results for errors it assessed as immaterial, including revenue and cost-of-sales presentation, divestiture gain and tax items. The 2016 comparative figures in this filing reflect those revisions.
Investor verification priorities
- Separate underlying performance from Rexam acquisition/divestiture timing and from the non-GAAP adjustments; review the reconciliations to GAAP earnings.
- Assess whether working-capital cash flow improvements and receivables factoring are sustainable, and how planned capital spending and pension funding affect free cash flow.
- Track leverage, the year-end covenant threshold, short-term debt due on demand and remaining committed borrowing capacity.
- Verify the timing and amount of the anticipated Q4 divestiture-related gain and monitor the tax indemnity liability and other unquantified guarantees.
- Monitor plant-closure costs, the expected additional Germany charge, and the effect of facility rationalization on production and customer service.
- Confirm progress and testing of the tax-control remediation plan; the filing states that the material weakness remained unresolved at period-end.