Ball Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are with the same 2018 periods unless noted. Ball supplies metal packaging for beverage and other products and operates an aerospace business. The filing cautions that results may be seasonal and aerospace revenue can vary with contract timing.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $3.017bn | $3.101bn | $5.802bn | $5.886bn |
| EBIT | $307m | $243m | $528m | $469m |
| Net earnings attributable to Ball | $197m | $119m | $314m | $244m |
| Diluted EPS | $0.58 | $0.34 | $0.92 | $0.68 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $253m | $434m |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $275m | $444m |
- Q2 sales declined about 3%, while EBIT rose about 26% and Ball-attributable earnings rose about 66%. First-half sales declined about 1%, while EBIT increased about 13% and attributable earnings about 29%.
- Approximate Q2 EBIT margin was 10.2% versus 7.8%; net margin attributable to Ball was 6.5% versus 3.8%. First-half EBIT margin was 9.1% versus 8.0%; attributable net margin was 5.4% versus 4.1%.
- Management’s non-GAAP comparable diluted EPS was $0.64 in Q2 versus $0.58, and $1.13 for the first half versus $1.09. Comparable measures exclude specified items and are not U.S. GAAP measures.
- First-half free cash flow, using Ball’s definition of operating cash flow less capital expenditures, was negative $22m, compared with negative $10m. Operating cash flow fell mainly due to working-capital outflows and higher pension contributions; working capital used $415m.
Balance sheet and liquidity
- At June 30, 2019, cash and cash equivalents were $764m; current assets were $4.533bn and current liabilities $4.134bn, a current ratio of about 1.10. Total assets were $17.109bn and equity $3.564bn.
- Debt, including current maturities and short-term borrowings, was about $7.3bn, up from about $6.7bn at year-end 2018. Long-term debt was $6.916bn; short-term debt and current maturities were $392m. Cash less reported debt was approximately $6.5bn.
- Ball reported $1.27bn available under committed revolving credit facilities and approximately $1.5bn in short-term uncommitted facilities, of which $364m was outstanding and due on demand. The company said liquidity was strong and debt covenants were met; its most restrictive leverage covenant limit was 4.5x.
- Share repurchases totaled $396m in first-half cash outflows, and dividends totaled $83m. Ball paid $250m under an accelerated share repurchase agreement in May; final settlement was expected in Q3.
Performance drivers and material changes
- Lower consolidated sales reflected the 2018 divestiture of the U.S. steel food and steel aerosol business, the end of South American end-sales associated with the Rexam acquisition, and unfavorable European currency effects. Higher beverage volumes and aerospace sales partly offset those pressures.
- North and Central America sales increased, but comparable operating earnings declined due to unfavorable U.S. aluminum scrap rates and start-up costs at the Goodyear, Arizona, facility. Europe sales and comparable earnings increased, with higher volume and operating efficiencies partly offset by currency headwinds.
- South America comparable operating earnings declined to $65m in Q2 from $66m and to $133m for the first half from $164m, reflecting the end-sales agreement, regional pricing pressure, and other factors. Reported segment earnings included a $56m gain on Brazilian indirect-tax claims.
- Aerospace sales increased to $379m in Q2 from $290m and $707m for the first half from $554m, primarily on significant U.S. national defense contracts. Backlog was $2.0bn at June 30, down from $2.2bn at year-end; Ball cautioned backlog is not necessarily indicative of future results.
- Reported earnings benefited from lower consolidation costs and lower income tax expense. The effective tax rate was 13.7% in Q2 and 11.2% for the first half, versus 27.7% and 25.2% in 2018. Q2’s Brazilian tax gain and favorable tax items are important when assessing underlying performance.
Outlook, risks, and unusual items
- Ball expected 2019 capital expenditures of approximately $600m, with $397m contractually committed at June 30. Pension contributions were expected to total approximately $92m for 2019; $73m had been contributed in the first half.
- The planned sale of the China beverage packaging business, for approximately $225m plus potential additional consideration, was expected to close in the second half of 2019. The business was classified as held for sale; no impairment was recorded. Sale-related tax effects had not been provided.
- Ball recorded a $56m gain from Brazilian indirect-tax claims after favorable rulings made certain prior-period amounts estimable and realizable. Further potential claims could produce material future reimbursements, but amounts were not estimable.
- Management identified possible future noncash goodwill impairment risk for beverage Asia Pacific and AMEA if China oversupply/pricing pressure or weakness in Saudi Arabia persists. Related goodwill was $78m and $102m, respectively, including $51m of China goodwill classified as held for sale.
- Other risks include working-capital and collection trends, raw-material and aluminum pricing, foreign exchange, customer or supplier concentration, pension obligations, government-contract funding and timing, litigation, environmental claims, and geopolitical, tariff and regulatory developments. Ball reported approximately $29m of estimated liabilities for known environmental matters and said it did not expect the cited contingencies to materially affect the company.
- Ball adopted the new lease standard in January 2019, recognizing operating lease right-of-use assets and liabilities; the adoption had an immaterial effect on results and cash flows. Management concluded disclosure controls were effective and reported no material second-quarter change in internal control over financial reporting.
Investor verification priorities
- Assess earnings quality: separate the $56m Brazilian tax gain, lower tax expense, and reduced consolidation costs from recurring operating performance.
- Track cash conversion and working capital, particularly the $415m first-half outflow, higher days sales outstanding, and lower days payable outstanding.
- Monitor leverage, borrowing needs, and the effect of share repurchases and capital spending on debt and liquidity.
- Confirm the timing, proceeds, and tax consequences of the China business sale, and watch for impairment risks in Asia Pacific and AMEA.
- Evaluate aerospace contract awards, funding, execution, and backlog conversion; backlog comparisons may not predict future operations.