Ball Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Ball makes metal packaging for beverage, food, personal care and household products, and provides aerospace and technology products and services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2015 | Q2 2014 | H1 2015 | H1 2014 |
|---|---|---|---|---|
| Net sales | $2,172.3 | $2,291.9 | $4,095.4 | $4,298.7 |
| EBIT | $273.8 | $255.9 | $399.7 | $473.3 |
| Net earnings attributable to Ball | $160.4 | $153.1 | $181.1 | $246.6 |
| Diluted EPS | $1.13 | $1.07 | $1.28 | $1.72 |
| Operating cash flow | Not stated separately | Not stated separately | $211.7 | $210.0 |
- Sales fell 5.2% in Q2 and 4.7% in H1 year over year. Management cited unfavorable currency translation, particularly in Europe, and lower North American metal food-container volumes.
- Ball-attributable net earnings rose 4.8% in Q2 but fell 26.5% in H1. The Q2 result included a $96.0 million gain on Rexam-related currency collars and options; H1 included $64.9 million of debt refinancing and other costs and a $68.3 million net gain on those acquisition-related currency contracts.
- Comparable diluted EPS, a non-GAAP measure, was $0.89 in Q2 versus $1.13, and $1.57 in H1 versus $1.94. Comparable EBIT was $208.2 million in Q2 versus $264.5 million and $386.1 million in H1 versus $481.9 million.
- Cost of sales excluding depreciation and amortization was 81.7% of sales in Q2 and 81.5% in H1, versus 80.6% and 80.5%. Reported EBIT margin was approximately 12.6% in Q2 and 9.8% in H1; the filing does not present these as labeled margin measures. SG&A rose to 5.4% of Q2 sales and 5.7% of H1 sales, from 4.9% and 5.1%.
- H1 cash flow from operations was $211.7 million; capital expenditures were $227.7 million, implying negative free cash flow of approximately $16.0 million on Ball’s stated definition. Investing cash outflow was $235.2 million; financing cash inflow was $50.9 million. Ending cash was $227.3 million.
Balance sheet, debt and liquidity
- At June 30, 2015, cash was $227.3 million, current assets $2.505 billion and current liabilities $2.192 billion (current ratio approximately 1.14). Total assets were $7.853 billion and shareholders’ equity $1.343 billion.
- Total debt was $3.260 billion and net debt $3.033 billion. Ball reported interest-bearing debt of $3.3 billion, compared with $3.2 billion at year-end 2014. Cash and total debt figures are reported at different levels of rounding in the filing.
- Approximately $2.1 billion was available under the revolving facility, and $749 million of short-term uncommitted facilities was available, of which $157.6 million was outstanding and due on demand. About $1.6 billion of facility availability was committed to the proposed Rexam acquisition. Ball said it complied with its debt covenants.
- Receivables sold through factoring programs totaled $350.9 million at June 30, up from $197.6 million at December 31, 2014. Working capital changes used $155.7 million of H1 cash, although management said changes were more favorable than in the prior-year period.
Material changes and segment results
- Metal beverage packaging, Americas and Asia: Q2 sales were nearly flat at $1.132 billion; segment earnings declined to $126.2 million from $139.0 million. H1 earnings were $248.9 million versus $268.9 million. Management cited Brazil production curtailments, weaker China pricing and lower standard-can volumes, partly offset by specialty-can growth.
- Metal beverage packaging, Europe: Q2 sales fell to $481.0 million from $558.4 million, including $114 million of unfavorable currency translation. Total segment earnings fell to $54.3 million from $72.6 million. H1 sales and earnings also declined substantially, with currency, metal premiums and start-up costs contributing.
- Metal food and household products: Q2 sales were $332.0 million versus $367.7 million; segment earnings were $28.0 million versus $35.8 million. Lower food-can volumes, including a customer shift, and currency effects weighed on results.
- Aerospace and technologies: Q2 sales were $230.2 million versus $241.1 million and segment earnings were $19.5 million versus $24.8 million, primarily reflecting lower U.S. national defense and commercial space sales. Contracted backlog was $641 million, down from $765 million at year-end; management cautioned that backlog is not necessarily indicative of future operations.
Outlook, transactions and risks
- Rexam proposal: Ball proposed a cash-and-stock acquisition valued at approximately £4.3 billion ($6.6 billion) based on the stated reference prices and exchange rate. Ball expected completion in the first half of 2016, subject to Rexam shareholder, regulatory and other approvals. Ball shareholders approved the share issuance on July 28, 2015; the transaction was not yet completed. A £302 million break payment could be due in specified circumstances. A related Brazilian joint-venture acquisition was under discussion and subject to a non-binding letter of intent.
- Ball issued $1 billion of 5.25% senior notes due 2025 and redeemed its 2020 and 2021 notes. H1 debt refinancing charges were $64.9 million, including $55.8 million of call premiums and financing-cost write-offs. The acquisition’s £3.3 billion committed bridge facility and acquisition-related debt obligations could materially affect financing needs.
- Management expected 2015 capital expenditures of approximately $450 million, with $317 million contractually committed at June 30, and a full-year effective tax rate of approximately 28%. It expected pension contributions for defined benefit plans, excluding unfunded German plans, to be insignificant; payments to participants in those German plans were expected to total approximately $19 million for 2015.
- In July 2015, Ball announced closure of its Bristol, Virginia beverage-end facility, with production expected to cease in Q2 2016 and an estimated after-tax charge of approximately $19 million.
- Key exposures include foreign exchange, interest rates, commodity prices, customer and supplier concentration, demand and contract variability, pension obligations, and litigation and environmental matters. Ball identified environmental sites and other proceedings but said it did not expect the disclosed matters to materially affect its financial condition; outcomes remain uncertain. Acquisition-related currency derivatives had approximately £2.2 billion notional value; the filing’s sensitivity analysis estimated a $181 million pre-tax loss for a 10% sterling decline and a $206 million gain for a 10% increase, with the purchase-price effect expected to offset these derivative movements.
- Ball noted seasonality in packaging and irregular aerospace contract revenue; interim results are not necessarily indicative of full-year results. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Progress and final terms of the Rexam acquisition, including remaining approvals, financing commitments, potential break-payment exposure and the proposed Brazilian transaction.
- How much reported earnings depend on acquisition-related derivative gains and refinancing items; compare GAAP results with comparable, non-GAAP measures.
- Whether the operating trends in Europe, food packaging and aerospace improve, and how foreign exchange, volumes, pricing and aerospace contract awards affect results.
- Cash conversion and liquidity, including capital spending, working-capital movements, receivables factoring and debt commitments reserved for the acquisition.
- Developments in disclosed litigation and environmental contingencies, the Bristol closure costs and the estimated 2015 tax and capital-spending outlook.