Ball Corporation (NYSE: BLL) — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Ball supplies aluminum packaging and aerospace products and services. Amounts are U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $2,801 | $3,017 | $5,586 | $5,802 |
| EBIT | $178 | $307 | $333 | $528 |
| Net earnings attributable to Ball | $94 | $197 | $117 | $314 |
| Diluted EPS | $0.28 | $0.58 | $0.35 | $0.92 |
| Comparable diluted EPS (non-GAAP) | $0.65 | $0.64 | $1.26 | $1.13 |
- Q2 sales declined 7% year over year; attributable earnings declined 52%. For the first half, sales were down 4% and attributable earnings down 63%.
- Cost of sales excluding depreciation and amortization was 80% of sales in Q2 and the first half of 2020, versus 80% and 81%, respectively, in 2019. Comparable operating earnings were $327 million in Q2 versus $347 million, and $634 million for the first half versus $622 million.
- Q2 segment comparable operating earnings: North and Central America beverage packaging $189 million (up from $141 million); EMEA $63 million (down from $98 million); South America $46 million (down from $65 million); aerospace $30 million (down from $38 million). Aerospace sales increased, but a subcontractor supply-chain issue weighed on quarterly earnings.
- Operating cash flow was negative $232 million for the first half, versus positive $253 million in 2019. Capital expenditures were $447 million, making free cash flow approximately negative $679 million, calculated as operating cash flow less capital expenditures. Investing cash outflow was $441 million and financing cash outflow $388 million.
- At June 30, cash was $643 million; current assets were $4,010 million and current liabilities $4,126 million. Interest-bearing debt was approximately $7.7 billion, compared with $7.8 billion at year-end 2019. Long-term debt was $7,158 million and current debt $523 million.
Material changes and notable items
- Working capital movements used $941 million of cash in the first half, driven by seasonal build, timing of metal payments and inventory accumulation amid lower sales volumes. Days sales outstanding rose to 48 from 38; days payable outstanding fell to 105 from 118.
- Business consolidation and other charges were $112 million in Q2 and $227 million for the first half, compared with no Q2 2019 charge and $14 million in the first half of 2019. Q2 included a $97 million non-cash pension settlement loss. First-half charges also included a $62 million goodwill impairment, a $23 million reduction in potential China-sale consideration, and other adjustments and costs.
- First-half interest expense included $40 million of debt extinguishment costs following redemption of $1 billion of 4.375% notes and €400 million of 3.50% notes in January. The company reported no debt maturities until 2022.
- Cash and cash equivalents fell from $1,798 million at December 31, 2019, to $643 million at June 30, 2020. The company had $918 million available on committed revolving facilities and approximately $930 million in short-term uncommitted facilities, of which $519 million was outstanding and due on demand.
Outlook, risks and contingencies
- Ball said its facilities continued operating as essential businesses, but COVID-19 affected customers and created uncertainty around demand, supply chains, receivable recovery, inventory values, asset impairment and forecast transactions. Management said the full financial impact could not be reasonably estimated.
- Management expected 2020 capital expenditures to exceed $900 million, with approximately $700 million contractually committed at June 30. Pension contributions were expected to total approximately $90 million for 2020, subject to change.
- Management described liquidity as strong and believed operating cash flows, cash and available borrowing facilities would meet ongoing requirements. It emphasized maintaining liquidity and flexibility. No specific earnings or revenue guidance was provided in the filing text.
- In August 2020, after quarter-end, Ball amended certain credit agreements: the maximum leverage covenant increased to 5.0 times, reverting to 4.5 times on December 31, 2022. Ball reported covenant compliance at June 30.
- Risks include pandemic-related customer or supplier disruption, raw-material availability and costs, foreign-exchange movements, aerospace contract funding and execution, pension asset performance, and access to capital. The company estimated known environmental liabilities at approximately $28 million and said it did not expect identified proceedings to materially affect liquidity, results or financial condition. Potential liabilities under certain guarantees and indemnities could not be reasonably estimated.
- A proposed acquisition of a Brazilian aluminum aerosol packaging business was expected to close in Q3 2020 for $80 million initial cash consideration, with up to $30 million additional consideration.
Investor verification priorities
- Assess whether the unusually large first-half working-capital outflow reverses and whether receivables collection and inventory levels normalize.
- Reconcile GAAP earnings declines with non-GAAP comparable earnings and evaluate the recurring versus nonrecurring nature of pension, impairment and other charges.
- Monitor cash, on-demand short-term borrowings, leverage covenant headroom and the effect of the August credit amendment.
- Track execution and funding of the greater-than-$900-million capital expenditure plan alongside operating cash generation.
- Verify the continuing effects of COVID-19 on segment volumes, especially EMEA and South America, aerospace supply chains, and customer and supplier concentrations.
- Follow the Brazilian aerosol acquisition, pension obligations and contributions, and material litigation or environmental developments.