Ball Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. Ball supplies metal packaging and aerospace products and services. The company cautions that packaging seasonality and variable aerospace contract sales make quarterly results an imperfect guide to full-year performance.
Financial performance and condition
- Revenue: Net sales were $2.785 billion, unchanged year over year. Higher volumes, metal input prices and pricing in North and Central America and Europe, and aerospace growth were offset by the end of a South America sales agreement, unfavorable European exchange rates, and the divested U.S. steel food and aerosol business.
- Earnings: Net earnings attributable to Ball were $117 million, down from $125 million; diluted EPS was $0.34 versus $0.35. The effective tax rate fell to 7.1% from 22.4%, primarily reflecting discrete tax benefits. Comparable net earnings, a non-GAAP measure, were $167 million ($0.49 per diluted share), versus $180 million ($0.50).
- Operating costs and margins: Cost of sales excluding depreciation and amortization was $2.253 billion, or 81% of sales, versus $2.237 billion, or 80%. SG&A rose to $127 million from $112 million; depreciation and amortization declined to $170 million from $180 million. Reported EBIT was $221 million versus $226 million. Comparable operating earnings, a non-GAAP measure, were $275 million versus $300 million.
- Segments: Comparable operating earnings increased in North and Central America ($118 million versus $113 million), Europe ($64 million versus $60 million) and Aerospace ($30 million versus $25 million), but fell in South America ($68 million versus $98 million). South America cited the ended sales agreement and regional pricing pressure. Aerospace growth reflected significant U.S. national defense contracts.
- Cash flow: Operating cash flow was a use of $129 million, compared with a use of $74 million, chiefly due to a $487 million working-capital outflow. Capital expenditures were $154 million versus $242 million; investing cash outflow was $163 million. Financing provided $225 million, including borrowings and $146 million of treasury-stock purchases. Cash, cash equivalents and restricted cash ended at $672 million, including $63 million reported in assets held for sale.
- Debt and liquidity: Interest-bearing debt was approximately $7.1 billion, up from $6.7 billion at year-end; balance-sheet short- and long-term debt totaled $7.118 billion. Cash and cash equivalents were $603 million. A March refinancing established facilities maturing in March 2024, with up to $2.55 billion of capacity; approximately $1.45 billion was available under long-term revolvers. Short-term uncommitted facilities totaled about $1.1 billion, with $371 million outstanding and due on demand. Ball reported covenant compliance; the maximum net leverage covenant was 4.5x.
- Balance sheet: Total assets were $16.923 billion and total equity $3.649 billion at March 31. Current assets were $4.399 billion and current liabilities $4.035 billion. The company adopted lease accounting on January 1, recognizing $236 million of operating lease right-of-use assets and $235 million of lease liabilities at quarter-end.
Material changes and notable items
- North and Central America sales rose $96 million, driven mainly by higher volumes; earnings growth was partly offset by startup costs at the Goodyear, Arizona facility. Europe sales rose $29 million, although unfavorable currency exchange rates offset part of volume growth.
- South America sales declined $18 million and comparable operating earnings fell $30 million, mainly following the conclusion of the Rexam-related end sales agreement and regional pricing pressure.
- Aerospace sales increased $64 million and comparable operating earnings rose $5 million. Contracted backlog was $2.1 billion at quarter-end versus $2.2 billion at December 31, 2018; management cautioned backlog is not necessarily indicative of future operations.
- Business consolidation and other costs were $14 million, down from $30 million. Q1 2019 included $13 million of estimated severance and professional-service costs related to the planned China business sale.
- Ball repurchased 2.63 million shares during the quarter and reported $150 million of repurchases net of issuances, versus $35 million in Q1 2018. The board authorized repurchases of up to 50 million shares in January.
Outlook, risks and contingencies
- Near-term plans: Ball expected 2019 capital expenditures of approximately $600 million, with $362 million contractually committed at quarter-end, and pension contributions of approximately $92 million for the year. Management said operating cash flows and available borrowing capacity should cover operating needs, debt service, dividends, anticipated repurchases and capital spending; this is a forward-looking assessment, not a guarantee.
- China divestiture: The sale of the China beverage packaging business was expected to close in the second half of 2019 for approximately $225 million, plus potential additional consideration. Assets and liabilities were classified as held for sale; no impairment was recorded. The filing does not provide a clear estimate of the sale’s future tax impact.
- Market and operating risks: Management cited raw-material and logistics costs, customer and supplier concentration, pricing and substitution, foreign exchange, political and regulatory changes, and the possibility of losing or changing major customer or supplier contracts. Aerospace results are exposed to contract funding, timing, technical uncertainty and award variability. The filing also warned of potential goodwill impairment if adverse conditions in China or Saudi Arabia persist.
- Legal and tax matters: Ball estimated known, estimable environmental liabilities at approximately $29 million and described ongoing environmental, patent, workplace and other proceedings; it did not expect the identified matters to materially harm liquidity, results or financial condition. Potential Brazilian indirect-tax reimbursements could be material, but the amount was not estimable and income would be recognized when realized or considered realizable.
- Other: The board increased the quarterly dividend 50% to $0.15 per share, effective for the June 2019 payment. The filing identifies risks from derivatives and counterparties and states that hedging policies cannot assure successful risk reduction. Results also depend on estimates and assumptions that may differ from actual outcomes.
Important facts for investors to verify
- Whether South America earnings stabilize after the sales agreement ended, and whether North American startup costs decline as the Goodyear facility ramps up.
- Progress and final proceeds, including any additional consideration and tax effects, from the planned China sale.
- Working-capital recovery, particularly the rise in days sales outstanding from 42 to 50 and operating cash outflow of $129 million.
- Debt, covenant headroom, refinancing terms and the balance between capital spending, share repurchases and the higher dividend.
- Whether China and AMEA market conditions worsen enough to trigger goodwill impairment, and how litigation, environmental matters and Brazilian tax claims develop.
- Reconciliation and definitions of non-GAAP comparable earnings against GAAP results; quarterly figures are subject to seasonality and aerospace contract timing.