Ball Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Figures are unaudited and in U.S. dollars; dollar amounts are millions except per-share data. Ball supplies metal packaging and aerospace products and services. Comparisons are significantly affected by the June 2016 Rexam acquisition and the concurrent divestiture of certain beverage-packaging operations.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $2,855 | $2,030 | $5,328 | $3,785 |
| EBIT | $187 | $279 | $339 | $168 |
| Net earnings attributable to Ball | $99 | $307 | $167 | $180 |
| Diluted EPS | $0.28 | $1.06 | $0.47 | $0.62 |
| Comparable net earnings (non-GAAP) | $190 | $152 | $327 | $237 |
| Comparable diluted EPS (non-GAAP) | $0.53 | $0.52 | $0.91 | $0.82 |
- Sales increased largely because 2017 included Rexam operations for the full periods, net of divested legacy Ball operations; aerospace sales also grew. The reported sales increase should not be read as equivalent organic growth.
- Q2 GAAP earnings fell from 2016, which included a divestiture gain and substantial tax benefits. Higher 2017 amortization and depreciation, acquisition-related charges, taxes and interest also weighed on reported earnings. Comparable net earnings and EPS improved year over year.
- Q2 cost of sales excluding depreciation and amortization was 80% of sales, versus 79% in 2016. Depreciation and amortization was 8% of sales versus 4%, reflecting the acquired Rexam asset base and valuation-related catch-up charges.
- Segment trends: beverage packaging North and Central America and South America increased comparable operating earnings; Europe declined to $63 from $74. Food and aerosol earnings declined to $25 from $33; aerospace rose to $26 from $19.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $263, versus $36 in 2016; capital expenditures were $240, implying free cash flow of approximately $23 using Ball’s stated definition. Investing cash outflow was $207 and financing cash outflow was $228. Cash ended at $433, down from $597 at year-end 2016.
- At June 30, total debt was approximately $7.5 billion, including $322 of short-term and current debt and $7,226 of long-term debt. Cash less debt implies net debt of approximately $7.1 billion. Total debt was approximately unchanged from year-end.
- Current assets were $3,765 and current liabilities $3,350. The company reported $1.3 billion available under revolving credit facilities and $968 million of short-term uncommitted facilities, of which $244 million was outstanding and due on demand. Ball said liquidity was strong and debt covenants were met.
- Cash from operations improved partly because 2016 included approximately $140 million of acquisition and divestiture costs; 2017 pension funding was higher. First-half pension contributions were $110 million, with approximately $190 million expected for the full year.
Outlook, material items and risks
- Management expected 2017 capital expenditures of at least $500 million, with about $410 million contractually committed at June 30. The expected full-year effective tax rate was approximately 26%.
- Ball expected the new revenue standard, effective for it January 1, 2018, to accelerate recognition on many metal-packaging contracts, with some revenue recognized before shipment or delivery. Aerospace revenue treatment was generally expected to remain similar, subject to contract terms.
- Rexam purchase-price allocation was finalized in Q2, increasing acquired intangible assets by $590 million and reducing goodwill by $384 million. The resulting catch-up depreciation and amortization included $58 million in Q2, including amounts relating to prior periods.
- After quarter-end, Ball ceased production at its Recklinghausen, Germany facilities on July 31. It expected an after-tax charge of about €62 million, primarily employee-related, with charges expected through Q2 2018. On August 7, it entered an agreement to repurchase approximately $100 million of shares.
- Sale-related exposure includes an estimated $57 million liability for tax indemnification claims at June 30 and a guarantee to Ardagh of up to $75 million if 2017 sales of the divested business fall below an agreed threshold. Ball also reported estimated environmental liabilities of approximately $45 million and described various litigation and environmental proceedings; management did not expect the identified matters to materially harm the company.
- Risks include customer and supplier concentration, commodity and foreign-exchange exposure, pension funding, integration and synergy delivery, aerospace contract funding and timing, and pricing pressure in China’s metal beverage-packaging market. Ball noted possible impairment risk for $78 million of Beverage Asia goodwill if oversupply persists.
- Disclosure controls were deemed ineffective because a previously identified material weakness remained open, involving tax accounting and significant or unusual transactions. Management said remediation actions were underway and stated the financial statements fairly presented the periods shown.
Important facts for investors to verify
- How much of sales and comparable earnings growth reflects Rexam, currency, volume, pricing and genuinely organic performance.
- Whether integration benefits and cost reductions offset higher acquired-asset amortization, ongoing restructuring and elevated debt interest.
- Cash conversion, working-capital needs, pension contributions and the funding of planned capital expenditures.
- Progress on the material weakness remediation and the accounting, cash and timing outcomes for Ardagh indemnities, the sales guarantee and other contingencies.
- The cost and operational effects of the Recklinghausen closure, and performance against aerospace backlog and contract-funding schedules.