Ball Corporation — Q2 2018 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2018, compared with the corresponding 2017 periods. Ball manufactures metal packaging for beverage, food and aerosol markets and provides aerospace products and services. The company notes that packaging results are seasonal and aerospace sales can vary with contract timing.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $3.101bn | $2.855bn | $5.886bn | $5.328bn |
| EBIT | $243m | $187m | $469m | $339m |
| Net earnings attributable to Ball | $119m | $99m | $244m | $167m |
| Diluted EPS | $0.34 | $0.28 | $0.68 | $0.47 |
| Operating cash flow | — | $434m | $261m | |
| Capital expenditures | — | $444m | $240m |
Sales increased about 9% in Q2 and 10% year to date. Reported net margin was approximately 3.8% in Q2 (3.5% prior year) and 4.1% for six months (3.1% prior year); EBIT margin was approximately 7.8% and 8.0%, respectively, versus 6.6% and 6.4%. Management attributed earnings growth to volumes, pricing, manufacturing performance and foreign exchange, partly offset by higher taxes and, year to date, interest expense. Cost of sales excluding depreciation and amortization remained 80% of sales.
Operating cash flow benefited from higher earnings and lower pension contributions but was reduced by a $353m working-capital outflow. Operating cash flow less capital expenditures was negative $10m for the half year, versus negative $21m in 2017. Cash and cash equivalents were $549m at June 30, 2018, versus $448m at year-end 2017. Total debt was approximately $7.3bn, up from $7.0bn; total liabilities were $13.5bn. The company reported about $1bn available on long-term revolving facilities and $905m of short-term uncommitted facilities, with $167m drawn. It was in compliance with debt covenants; the maximum net leverage covenant was 4.25x.
Material changes and unusual items
- Comparable diluted EPS, a non-GAAP measure, was $0.58 for Q2 versus $0.53, and $1.09 for the half year versus $0.91. Comparability reflects adjustments including consolidation costs, Rexam intangible amortization and noncomparable taxes.
- Business consolidation and other charges were $69m in Q2 and $99m year to date. These included a $41m loss on assets classified as held for sale, associated with the U.S. steel food and aerosol business.
- On July 31, 2018, after quarter-end, Ball sold that U.S. business and formed Ball Metalpack, receiving approximately $600m after tax, subject to closing adjustments, plus a 49% interest. The filing states the transaction accounting was not complete.
- Ball adopted the new revenue standard in 2018 using the modified retrospective method. It accelerated recognition on certain packaging sales; compared with prior guidance, adoption reduced Q2 sales by $42m and Ball-attributable earnings by $5m, and reduced six-month sales by $9m and earnings by $3m. Prior-year figures were not restated.
- Foreign-currency translation reduced comprehensive earnings by $121m in Q2 and $110m for the half year. The Q2 effective tax rate was 27.7%, versus 19.6%, mainly due to GILTI and Brazilian deferred-tax revaluation.
Outlook, commentary and risks
Management expected 2018 capital expenditures of approximately $700m, with about $370m contractually committed at quarter-end, and net share repurchases to approach $700m. Ball said operating cash flows and available borrowing facilities should meet ongoing needs. Aerospace contracted backlog was $1.86bn, versus $1.75bn at year-end; management cautioned backlog is not necessarily indicative of future results. The filing provides no consolidated earnings or revenue guidance.
Key exposures include demand and metal-price changes, customer and supplier concentration, foreign exchange and interest rates, tariffs, labor disruptions, government aerospace funding and contract execution, and integration or divestiture risks. Ball estimated known, estimable environmental liabilities at approximately $35m and said it did not expect identified proceedings to materially affect its financial condition; some outcomes, including Brazilian tax matters, remain uncertain. The company also warned that U.S. tax-law estimates could change materially and expected to complete its analysis by December 2018.
Important facts for investors to verify
- Whether the Ball Metalpack sale proceeds, final adjustments and 49% equity-method investment were recorded as expected after closing.
- Whether working-capital needs, capital spending and repurchases affected subsequent cash generation and leverage.
- How much reported growth reflects volume and operating improvement versus metal-price pass-through and currency effects.
- Final effects of the Tax Cuts and Jobs Act estimates, including GILTI and the indefinite-reinvestment assessment.
- Developments in environmental, litigation and Brazilian tax contingencies, and whether the beverage-container oversupply in China affects goodwill impairment risk.