Ball Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Ball supplies metal packaging for beverage, food, personal-care and household products, and provides aerospace products and services. The quarter reflects the Rexam acquisition, completed June 30, 2016, and the concurrent sale of the Divestment Business; reported year-over-year comparisons are therefore not fully like-for-like.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $2.473 billion | $1.756 billion |
| Operating earnings (loss) before interest and taxes | $152 million | $(110) million |
| Net earnings (loss) attributable to Ball | $68 million | $(127) million |
| Diluted EPS | $0.38 | $(0.90) |
| Cash from operating activities | $(398) million | $(386) million |
| Capital expenditures | $(125) million | $(138) million |
- Sales rose about 41%, mainly reflecting Rexam-related sales (net of legacy Ball sales divested) and higher aerospace sales. Cost of sales was 80% of sales versus 81%; reported net margin attributable to Ball was approximately 3%.
- Management’s non-GAAP comparable operating earnings were $239 million versus $157 million; comparable net earnings were $136 million versus $86 million, and comparable diluted EPS was $0.76 versus $0.59. These measures exclude specified items and should be considered alongside GAAP results.
- Reported business consolidation and other costs fell to $55 million from $267 million. Q1 2017 included a $15 million plant-sale gain, a $27 million charge for tax indemnities related to the Divestment Business sale, and other acquisition-related and compensation costs. Q1 2016 included substantial acquisition-related currency and derivative losses.
- Interest expense was $68 million versus $38 million, while the 2016 total interest expense included $61 million of debt-refinancing and other costs; accordingly, total reported interest expense was $68 million versus $99 million. Higher average debt after Rexam contributed to the increase in underlying interest expense.
Segments
- North and Central America beverage packaging: sales $949 million; comparable operating earnings $123 million.
- South America beverage packaging: sales $371 million; comparable operating earnings $58 million.
- Europe beverage packaging: sales $508 million; comparable operating earnings $47 million.
- Food and aerosol packaging: sales $272 million; comparable operating earnings $21 million; lower food-can volumes weighed on sales.
- Aerospace: sales $236 million and comparable operating earnings $21 million. Sales growth was primarily tied to significant U.S. national defense contracts; backlog was $1.4 billion at quarter-end.
Cash, debt and liquidity
- Operating cash outflow of $398 million was driven chiefly by a $680 million working-capital outflow. Management cited higher days sales outstanding (49 versus 47) and inventory days on hand (67 versus 59), partly offset by higher days payable outstanding (79 versus 78).
- Cash and equivalents were $458 million at March 31, down from $597 million at year-end. Total debt was approximately $8.0 billion, compared with $7.5 billion at year-end; balance-sheet short- and long-term debt totaled $7.973 billion.
- Available long-term revolving credit was approximately $1.1 billion. Short-term uncommitted facilities totaled about $902 million, with $418 million outstanding and due on demand. The company reported compliance with debt covenants; the most restrictive leverage covenant tightens to 4x at December 31, 2017.
- Current assets were $3.907 billion and current liabilities $3.018 billion. The company said available cash, operating flows and borrowing facilities should meet operating and debt-service needs.
Outlook, risks and notable items
- Management expected a full-year 2017 effective tax rate of approximately 27%, capital expenditures of about $500 million, and defined-benefit pension contributions of approximately $190 million, excluding specified unfunded plans. About $245 million of capex was contractually committed at quarter-end. No full-year earnings guidance was provided in the supplied filing text.
- Ball expects the new revenue standard, planned for adoption January 1, 2018 using the modified retrospective method, to accelerate recognition for many metal-packaging contracts, with corresponding shifts from inventory to unbilled receivables. Aerospace treatment was not expected to change materially overall, subject to contract terms.
- Management identified risks including raw-material costs and availability, customer and supplier concentration, competition and packaging substitution, foreign-exchange volatility, acquisition integration and synergy delivery, aerospace contract funding and timing, litigation, environmental matters, and pension performance. Egyptian-pound volatility remained a concern following the currency’s 2016 devaluation.
- Environmental liabilities for known and estimable matters were about $45 million. The company recorded a $50 million liability for indemnification of uncertain tax positions from the Divestment Business sale; the filing says maximum potential payments under those indemnities are not limited and exposure cannot be reasonably estimated.
- Disclosure controls were reported ineffective because a previously identified material weakness continued. Remediation steps were underway, but management said the weakness would not be considered remediated until controls operated effectively for a sufficient period and testing confirmed effectiveness. Rexam operations were excluded from the internal-control assessment under the applicable acquisition transition guidance.
- After quarter-end, the board declared a two-for-one stock split effective May 16, 2017, and increased the quarterly dividend by 54% to $0.10 per post-split share.
Investor verification priorities
- Separate Rexam’s contribution and divested-business effects from underlying organic sales, earnings and segment trends.
- Assess whether working-capital outflows, especially receivables and inventory, normalize and how they affect cash conversion.
- Track debt reduction, short-term borrowings due on demand, covenant headroom and integration-related interest costs.
- Review the $50 million tax-indemnity estimate and the potential exposure from uncapped indemnification obligations and other litigation or environmental matters.
- Monitor remediation of the material weakness in tax controls and the impact of adopting the revenue-recognition standard.
- Compare actual 2017 tax rate, capital spending and pension contributions with management’s stated expectations.