Ball Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited results. Ball manufactures metal packaging and provides aerospace products and services.
Business context and major transactions
- Ball acquired all of Rexam on June 30, 2016, for approximately $3.8 billion in cash and 32.25 million Ball shares valued at $2.3 billion, plus $21 million of stock-compensation consideration. The cash purchase price was paid in July using escrow proceeds and borrowings.
- Immediately after closing, Ball sold the regulatory divestiture business to Ardagh for $3.42 billion, subject to closing adjustments, and recorded a $331 million pretax gain. The newly acquired Rexam operations were included in corporate and other for the quarter and had no significant effect on reported earnings or cash flow from the acquisition date.
- Reported year-over-year comparisons reflect lower metal input costs and the sale of businesses, as well as acquisition, financing, foreign-exchange and tax effects. Ball cautioned that interim results are affected by seasonality and the transactions.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $2.030B | $2.172B | $3.785B | $4.095B |
| EBIT | $278M | $274M | $167M | $400M |
| Net earnings attributable to Ball | $338M | $160M | $211M | $181M |
| Diluted EPS | $2.33 | $1.13 | $1.45 | $1.28 |
| Comparable net earnings | $152M | $125M | $237M | $222M |
| Comparable diluted EPS | $1.05 | $0.89 | $1.63 | $1.57 |
- Sales fell about 6.5% in Q2 and 7.6% in the first half. Management attributed much of the decline to pass-through of lower metal costs; other pressures included lower China pricing, reduced food-can volumes and aerospace programs nearing completion.
- Q2 reported earnings benefited from significant tax effects and transaction-related items. The filing cites $205 million of tax benefits associated with Brazil legal-entity restructuring and Rexam/divestiture-related items in its comparable-earnings reconciliation. First-half comparable earnings exclude $240 million of business consolidation and other expense and $106 million of debt-refinancing and other costs, net of disclosed tax effects.
- Segment earnings before business-consolidation items: Americas and Asia $137M in Q2 and $239M in the first half; Europe $74M and $113M; food and aerosol $33M and $53M; aerospace $19M and $37M. Versus 2015, Europe improved, while first-half Americas and Asia, food and aerosol, and aerospace earnings declined.
- Cost of sales excluding depreciation and amortization was 79% of sales in Q2 and 80% in the first half, versus 81% in both comparable 2015 periods. Reported figures include unusual transaction items and are not a clean measure of underlying margins.
Cash flow, debt and liquidity
- First-half operating cash flow was $36M, down from $211M. Capital expenditures were $273M, making operating cash flow less capital expenditures negative $237M (calculated). Working-capital outflows included acquisition/divestiture costs; the filing also cites increased pension funding.
- Investing cash flow was $2.869B, including $2.815B of disposition proceeds. Financing cash flow was $3.320B. Cash and cash equivalents ended at $6.399B, compared with $224M at year-end; restricted cash of $2.124B was separately reported.
- At June 30, total debt was approximately $11.359B, including $3.125B of short-term and current debt and $8.234B of long-term debt. Ball assumed about $2.8B of Rexam debt; approximately $2.7B was extinguished after quarter-end, using divestiture proceeds.
- Available committed revolving credit was approximately $854M. Short-term uncommitted facilities totaled $601M, of which $324M was outstanding and due on demand. Ball reported compliance with debt covenants. Its non-GAAP net debt/Comparable EBITDA measure was 2.5x; this calculation deducts cash and noncurrent restricted cash from debt.
- Current liabilities included a $3.825B cash purchase price payable to Rexam shareholders at quarter-end, before the July payment. This significantly affects the reported current-liquidity position.
Outlook, risks and unusual items
- Management expected 2016 capital expenditures of approximately $500M, with about $228M contractually committed at June 30. Full-year pension contributions were estimated at approximately $260M, excluding payments for unfunded German plans.
- Management projected a full-year 2016 effective tax rate of approximately negative 10%, or approximately 28% before specified business-consolidation, financing and other significant items. The unusual tax effects make reported earnings and the effective rate especially sensitive to adjustments.
- Management cited potential long-term value from Rexam through sourcing, cost reduction and operating efficiencies, but did not quantify expected synergies in this filing. Integration, assumed commitments and final purchase-accounting valuations remained under evaluation.
- Ardagh sale terms include a 2017 minimum-volume guarantee that could require Ball to pay up to $75M if sales fall below an agreed threshold. Final sale working-capital adjustments were also pending.
- Risks include continued pricing pressure and oversupply in China, which could lead to impairment of $78M of Beverage Asia goodwill; customer and supplier concentration; commodity, foreign-exchange and interest-rate exposures; pension obligations; and aerospace contract funding and timing. Ball also disclosed environmental, patent, tax and other proceedings, while stating it did not expect the discussed matters to have a material adverse effect based on information then available. Rexam-related claims were still being evaluated.
- Ball said disclosure controls were effective. Rexam’s internal controls were excluded from the company’s evaluation because the acquisition had just closed.
Investor verification priorities
- Separate recurring operating performance from the $331M divestiture gain, acquisition and refinancing costs, foreign-exchange/derivative impacts, and unusual tax benefits; reconcile reported and comparable earnings.
- Confirm post-quarter payment of the Rexam cash consideration and the approximately $2.7B debt extinguishment, and assess debt, cash, restricted cash and covenant leverage after those transactions.
- Track Rexam integration, final acquisition valuations, assumed commitments and any quantified synergy targets; verify the accounting and cash effects of the divestiture and its $75M volume guarantee.
- Monitor China pricing and demand, the food-can and aerospace trends, pension funding, and any developments in environmental, patent, tax or Rexam-related contingencies.