Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2019
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-07349
BALL CORPORATION
State of Indiana
(State or other jurisdiction of incorporation or organization)
35-0160610
(I.R.S. Employer Identification No.)
10 Longs Peak Drive, P.O. Box 5000
Broomfield, CO 80021-2510
(Address of registrant’s principal executive office)
80021-2510
(Zip Code)
Registrant’s telephone number, including area code: 303/469-3131
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date, and the securities registered pursuant to section 12(b) of the Act:
Class
Trading Symbol
Name of Exchange
Outstanding at July 31, 2019
Common Stock, without par value
BLL
NYSE
332,002,911 shares
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ◻
Non-accelerated filer ◻
Smaller reporting company◻
Emerging growth company ◻
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ⌧
Ball Corporation
QUARTERLY REPORT ON FORM 10-Q
For the period ended June 30, 2019
INDEX
PageNumber
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
Unaudited Condensed Consolidated Statements of Earnings for the Three and Six Months Ended June 30, 2019 and 2018
1
Unaudited Condensed Consolidated Statements of Comprehensive Earnings (Loss) for the Three and Six Months Ended June 30, 2019 and 2018
2
Unaudited Condensed Consolidated Balance Sheets at June 30, 2019, and December 31, 2018
3
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018
4
Notes to the Unaudited Condensed Consolidated Financial Statements
5
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
42
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
51
Item 4.
Controls and Procedures
52
PART II.
OTHER INFORMATION
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended June 30,
Six Months Ended June 30,
($ in millions, except per share amounts)
2019
2018
Net sales
$
3,017
3,101
5,802
5,886
Costs and expenses
Cost of sales (excluding depreciation and amortization)
(2,428)
(2,484)
(4,681)
(4,721)
Depreciation and amortization
(171)
(178)
(341)
(358)
Selling, general and administrative
(111)
(127)
(238)
(239)
Business consolidation and other activities
—
(69)
(14)
(99)
(2,710)
(2,858)
(5,274)
(5,417)
Earnings before interest and taxes
307
243
528
469
Interest expense
(81)
(77)
(158)
(150)
Debt refinancing and other costs
(4)
(1)
Total interest expense
(162)
(151)
Earnings before taxes
226
166
366
318
Tax (provision) benefit
(31)
(46)
(41)
(80)
Equity in results of affiliates, net of tax
(11)
7
Net earnings
197
120
314
245
Net (earnings) loss attributable to noncontrolling interests
Net earnings attributable to Ball Corporation
119
244
Earnings per share:
Basic
0.59
0.34
0.94
0.70
Diluted
0.58
0.92
0.68
Weighted average shares outstanding: (000s)
332,825
348,221
333,528
349,212
341,637
354,904
342,233
356,276
See accompanying notes to the unaudited condensed consolidated financial statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
($ in millions)
Other comprehensive earnings (loss):
Foreign currency translation adjustment
(121)
86
(110)
Pension and other postretirement benefits
(17)
19
Derivatives designated as hedges
32
31
(20)
Total other comprehensive earnings (loss)
(9)
(86)
124
Income tax (provision) benefit
(8)
(7)
Total other comprehensive earnings (loss), net of tax
(94)
117
Total comprehensive earnings (loss)
189
26
431
134
Comprehensive (earnings) loss attributable to noncontrolling interests
Comprehensive earnings (loss) attributable to Ball Corporation
25
133
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
June 30,
December 31,
Assets
Current assets
Cash and cash equivalents
764
721
Receivables, net
1,956
1,802
Inventories, net
1,183
1,271
Other current assets
160
140
Assets held for sale
470
6
Total current assets
4,533
3,940
Noncurrent assets
Property, plant and equipment, net
4,385
4,542
Goodwill
4,433
4,475
Intangible assets, net
2,104
2,188
Other assets
1,654
1,409
Total assets
17,109
16,554
Liabilities and Equity
Current liabilities
Short-term debt and current portion of long-term debt
392
219
Accounts payable
2,739
3,095
Accrued employee costs
256
289
Other current liabilities
565
492
Liabilities held for sale
182
Total current liabilities
4,134
4,095
Noncurrent liabilities
Long-term debt
6,916
6,510
Employee benefit obligations
1,465
1,455
Deferred taxes
606
645
Other liabilities
424
287
Total liabilities
13,545
12,992
Equity
Common stock (675,463,115 shares issued - 2019; 673,236,720 shares issued - 2018)
1,172
1,157
Retained earnings
5,651
5,341
Accumulated other comprehensive earnings (loss)
(797)
(835)
Treasury stock, at cost (343,622,898 shares - 2019; 337,978,571 shares - 2018)
(2,566)
(2,205)
Total Ball Corporation shareholders' equity
3,460
3,458
Noncontrolling interests
104
Total equity
3,564
3,562
Total liabilities and equity
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities
Adjustments to reconcile net earnings to cash provided by (used in) operating activities:
341
358
14
99
Deferred tax provision (benefit)
37
Other, net
48
Changes in working capital components, net of dispositions
(415)
(353)
Cash provided by (used in) operating activities
253
434
Cash Flows from Investing Activities
Capital expenditures
(275)
(444)
Business dispositions, net of cash sold
(45)
11
39
Cash provided by (used in) investing activities
(264)
(450)
Cash Flows from Financing Activities
Long-term borrowings
1,046
1,426
Repayments of long-term borrowings
(609)
(840)
Net change in short-term borrowings
153
(165)
Proceeds from issuances of common stock, net of shares used for taxes
8
9
Acquisitions of treasury stock
(396)
(184)
Common stock dividends
(83)
(70)
(12)
Cash provided by (used in) financing activities
107
164
Effect of exchange rate changes on cash
12
(50)
Change in cash, cash equivalents and restricted cash
108
98
Cash, cash equivalents and restricted cash - beginning of period
728
459
Cash, cash equivalents and restricted cash - end of period
836
557
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Ball Corporation and its controlled affiliates, including its consolidated variable interest entities (collectively Ball, the company, we or our), and have been prepared by the company. Certain information and footnote disclosures, including critical and significant accounting policies normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted for this quarterly presentation.
Results of operations for the periods shown are not necessarily indicative of results for the year, particularly in view of the seasonality in the packaging segments and the variability of contract sales in the company’s aerospace segment. These unaudited condensed consolidated financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and the notes thereto included in the company’s 2018 Annual Report on Form 10-K filed on February 22, 2019, pursuant to the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2018 (annual report).
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires Ball’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and reported amounts of sales and expenses during the reporting periods. These estimates are based on historical experience and various assumptions believed to be reasonable under the circumstances. Ball’s management evaluates these estimates on an ongoing basis and adjusts or revises the estimates as circumstances change. As future events and their impacts cannot be determined with precision, actual results may differ from these estimates. In the opinion of management, the financial statements reflect all adjustments necessary to fairly state the results of the periods presented.
Certain prior year amounts have been reclassified in order to conform to the current year presentation.
2. Accounting Pronouncements
Recently Adopted Accounting Standards
New Lease Accounting Guidance
In February 2016, lease accounting guidance was issued which, for operating leases, requires a lessee to recognize a right-of-use (ROU) asset and a lease liability. The guidance also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight line basis. On January 1, 2019, Ball adopted the new guidance and all related amendments (the new lease standard), applying the modified retrospective method to all contracts that were not completed as of January 1, 2019. As such, comparative information has not been restated and continues to be reported under the accounting standards in effect for those prior periods.
As part of adopting the new lease standard, Ball has made the following elections:
The adoption of the new lease standard resulted in the following impacts on our unaudited consolidated balance sheets:
Balance at December 31, 2018
Adjustments Due to Adoption
Balance at January 1, 2019
Assets:
139
Operating lease right-of-use assets (a)
(25)
1,384
Liabilities:
(3)
489
Current operating lease liabilities (b)
53
273
Noncurrent operating lease liabilities (b)
Ball’s adoption of the new lease standard had an immaterial impact on Ball’s results of operations in the unaudited condensed consolidated statements of earnings; an immaterial impact on Ball’s cash flows from operating, financing, and investing activities in the unaudited condensed consolidated statements of cash flows and no impact on Ball’s opening retained earnings balance. Ball’s accounting for finance leases remains substantially unchanged as a result of the adoption. See Note 14 for further details regarding Ball’s leases.
Stranded Tax Effects
In February 2018, accounting guidance was issued to permit the reclassification from accumulated other comprehensive income to retained earnings of stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act signed into law in December 2017. Ball adopted this guidance on January 1, 2019, and an election was made to reclassify on the first day of the period of adoption. The total tax amount reclassified was $79 million. Remaining stranded tax amounts in accumulated other comprehensive income, which are not related to the U.S. Tax Cuts and Jobs Act, are not significant and will be reclassified to the income statement when the activity leading to the deferral of gains and losses has ceased in full.
New Accounting Guidance
Cloud Computing Arrangements
In August 2018, amendments to existing accounting guidance were issued to clarify the accounting for implementation costs related to cloud computing arrangements. The amendments specify that existing guidance for capitalizing implementation costs incurred to develop or obtain internal-use software also applies to capitalizing implementation costs incurred in a hosting arrangement that is a service contract. The guidance is effective for Ball on January 1, 2020, and the company is currently assessing the impact that the adoption of this new guidance will have on its consolidated financial statements.
Financial Assets
Amendments to existing guidance were issued in June 2016, followed by improvements and transition relief in 2018 and 2019, requiring financial assets or a group of financial assets measured at amortized cost basis to be presented at the net amount expected to be collected when finalized. The allowance for credit losses is a valuation account that will be deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. This guidance is expected to primarily affect Ball’s trade receivables; however, the guidance applies to other financial assets as well. The guidance is effective for Ball on January 1, 2020. The company has established a cross-functional team which is assessing the impact that the adoption of this new guidance will have on its consolidated financial statements.
3. Business Segment Information
Ball’s operations are organized and reviewed by management along its product lines and geographical areas and presented in the four reportable segments outlined below:
Beverage packaging, North and Central America: Consists of operations in the U.S., Canada and Mexico that manufacture and sell metal beverage containers throughout those countries.
Beverage packaging, South America: Consists of operations in Brazil, Argentina and Chile that manufacture and sell metal beverage containers throughout most of South America.
Beverage packaging, Europe: Consists of operations in numerous countries in Europe, including Russia, that manufacture and sell metal beverage containers throughout most of Europe.
Aerospace: Consists of operations that manufacture and sell aerospace and other related products and provide services used in the defense, civil space and commercial space industries.
As presented in the table below, Other consists of non-reportable segments located in Africa, Middle East and Asia (beverage packaging, AMEA) and Asia Pacific (beverage packaging, Asia Pacific) that manufacture and sell metal beverage containers; a non-reportable segment that manufactures and sells aerosol containers, extruded aluminum aerosol containers and aluminum slugs (aerosol packaging); undistributed corporate expenses; intercompany eliminations and other business activities.
The accounting policies of the segments are the same as those in the company’s consolidated financial statements as discussed in Note 1. The company also has investments in operations in Guatemala, Panama, South Korea, the U.S. and Vietnam that are accounted for under the equity method of accounting and, accordingly, those results are not included in segment sales or earnings.
Summary of Business by Segment
Beverage packaging, North and Central America
1,286
1,241
2,417
2,276
Beverage packaging, South America
377
379
818
838
Beverage packaging, Europe
715
703
1,353
1,312
Aerospace
290
707
554
Reportable segment sales
2,757
2,613
5,295
4,980
Other
260
488
507
906
Comparable operating earnings
141
157
259
270
65
66
87
75
151
135
38
24
68
49
Reportable segment comparable operating earnings
331
322
611
618
Reconciling items
Other (a)
16
30
34
Amortization of acquired Rexam intangibles
(40)
(84)
The company does not disclose total assets by segment as it is not provided to the chief operating decision maker.
4. Acquisitions and Dispositions
Beverage Packaging China
In December 2018, the company announced an agreement to sell its metal beverage packaging business in China for consideration of approximately $225 million, plus potential additional consideration related to the relocation of an existing facility in China in the coming years. The transaction received all necessary antitrust approvals during the first quarter of 2019 and, accordingly, the assets and liabilities of the China beverage packaging business are presented as held for sale as of June 30, 2019. The transaction is expected to close in the second half of 2019.
Prior to the reclassification of the China beverage packaging business assets and liabilities to held for sale, the company assessed the carrying value of certain working capital balances and then conducted an impairment test of the goodwill and other long-lived assets of the China beverage packaging business. Upon reclassification of the assets and liabilities to held for sale, the carrying value of the disposal group as a whole was compared to the fair value of the business less costs to sell. The approach to establish fair value was consistent with that outlined in the critical accounting policy for “Recoverability of Goodwill and Intangible Assets” in Ball’s Form 10-K for the year ended December 31, 2018. No impairment or other adjustments were required as a result of these impairment assessments.
The company has not provided any deferred tax impact in the financial statements for the income tax consequences that may arise when the sale is completed in a future reporting period.
The following table summarizes the assets and liabilities of the China beverage packaging business included within held for sale:
June 30, 2019
Cash
63
Receivables
Inventories
43
Property, plant and equipment
171
451
148
27
U.S. Steel Food and Steel Aerosol Business
On July 31, 2018, Ball sold its U.S. steel food and steel aerosol packaging business and formed a joint venture, Ball Metalpack. In exchange for the sale of this business, Ball received approximately $600 million of cash proceeds, subject to customary closing adjustments completed as of December 31, 2018, as well as a 49 percent ownership interest in Ball Metalpack. This investment is reported in other assets as an equity method investment in Ball’s unaudited condensed consolidated balance sheets.
Ball recorded a loss of $41 million in connection with this sale. This loss was recorded in business consolidation and other activities in the unaudited condensed consolidated statement of earnings.
The assets of the sold business included nine plants that manufacture and sell steel food and steel aerosol containers. The manufacturing plants were located in Canton and Columbus, Ohio; Milwaukee and Deforest, Wisconsin; Chestnut Hill, Tennessee; Horsham, Pennsylvania; Springdale, Arkansas; and Oakdale, California.
In connection with the sale of the U.S. steel food and steel aerosol business, the company entered into an agreement to supply metal to Ball Metalpack, which expired on December 31, 2018, and agreements to provide transition and other services to Ball Metalpack. At June 30, 2019, and December 31, 2018, Ball was owed $33 million and $170 million, respectively, and Ball owed $5 million and $34 million, respectively, related to the above agreements, which are reported in receivables, net, and accounts payable, respectively, in Ball’s unaudited condensed consolidated balance sheets.
5. Revenue from Contracts with Customers
Disaggregation of Sales
The company disaggregates net sales by reportable segments as disclosed in Note 3, and based on the timing of transfer of control for goods and services as explained below. The transfer of control for goods and services may occur at a point in time or over time. As disclosed in Note 3, the company’s business consists of four reportable segments, which encompass disaggregated product lines and geographical areas: (1) beverage packaging, North and Central America; (2) beverage packaging, South America; (3) beverage packaging, Europe; and (4) aerospace.
The following table disaggregates the company’s net sales based on the timing of transfer of control:
Three Months Ended June 30, 2019
Six Months Ended June 30, 2019
Point in Time
Over Time
Total
Total net sales
547
2,470
1,104
4,698
Three Months Ended June 30, 2018
Six Months Ended June 30, 2018
755
2,346
1,417
4,469
Contract Balances
The company enters into contracts to sell beverage packaging, aerosol packaging, and aerospace products and services. The company did not have any contract assets at either June 30, 2019, or December 31, 2018. Unbilled receivables, which are not classified as contract assets, represent arrangements in which sales have been recorded prior to billing and right to payment is unconditional.
10
The opening and closing balances of the company’s current and noncurrent contract liabilities are as follows:
Contracts
Contract
Liabilities
(Current)
(Noncurrent)
Balance at December 31, 2017
45
Increase
Balance at June 30, 2019
During the six months ended June 30, 2019, contract liabilities increased by $8 million, which is net of cash received of $113 million and amounts recognized as sales of $105 million, all of which related to current contract liabilities. The amount of sales recognized in the six months ended June 30, 2019, which were included in the opening contract liabilities balances, was $45 million, all of which related to current contract liabilities. Current contract liabilities are classified within other current liabilities on the unaudited condensed consolidated balance sheet and noncurrent contract liabilities are classified within other liabilities.
The company also recognized sales of $6 million in the six months ended June 30, 2019, and $1 million and $5 million for the three and six months ended June 30, 2018, respectively, from performance obligations satisfied (or partially satisfied) in prior periods. These sales amounts are the result of changes in the transaction price of the company’s contracts with customers.
Transaction Price Allocated to Remaining Performance Obligations
In the context of the revenue recognition standard, enforceable contracts are those that have an enforceable right to payment, which Ball typically has once a binding forecast or purchase order (or similar contract) is in place and Ball produces under the contract. Within Ball’s packaging segments, enforceable contracts as defined all have a duration of less than one year. Contracts that have an original duration of less than one year are excluded from the requirement to disclose remaining performance obligations based on the company’s election to use the practical expedient.
The table below discloses: (1) the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period for contracts with an original duration of greater than one year, and (2) when the company expects to record sales on these multi-year contracts.
Next Twelve Months
Thereafter
Sales expected to be recognized on multi-year contracts in place as of June 30, 2019
1,105
881
1,986
The contracts with an original duration of less than one year, which are excluded from the table above based on the company’s election of the practical expedient, are primarily related to contracts where control will be fully transferred to the customers in less than one year.
6. Business Consolidation and Other Activities
The following is a summary of business consolidation and other activity (charges)/income included in the unaudited condensed consolidated statements of earnings:
(5)
(6)
(2)
36
(16)
(15)
(65)
(29)
(82)
Beverage Packaging, North and Central America
During the three and six months ended June 30, 2019, the company recorded charges of $5 million and $6 million, respectively, for revised estimates of charges recorded in prior periods in connection with the previously announced closures of its beverage can manufacturing facilities in Chatsworth, California, and Longview, Texas, and its beverage end manufacturing facility in Birmingham, Alabama. The Birmingham facility ceased production during the second quarter of 2018, and the Chatsworth and Longview facilities ceased production during the third quarter of 2018. Ball sold the Chatsworth facility during the fourth quarter of 2018.
Beverage Packaging, South America
During the three and six months ended June 30, 2019, the company recorded a $56 million gain related to indirect tax gain contingencies in Brazil as these amounts are now estimable and realizable. The company’s Brazilian subsidiaries filed lawsuits in 2014 and 2015 to challenge the Brazilian tax authorities regarding the computation of certain indirect taxes, claiming amounts were overpaid to the tax authorities because the tax base included a “tax on tax” component. See Note 21 for further details. The amounts recorded in business consolidation and other activities relate to periods prior to 2019. In the event other comparable cases are resolved and the amounts claimed become estimable and realizable, the company will record gains, which may result in material reimbursements to the company in future periods.
During the three and six months ended June 30, 2019, the company recorded charges of $16 million composed of facility shutdown costs, asset impairment, accelerated depreciation and other costs related to restructuring activities.
Charges in the three and six months ended June 30, 2019, included $3 million and $4 million of expense, respectively, for individually insignificant activities.
Beverage Packaging, Europe
During the three and six months ended June 30, 2019, the company recorded charges of $13 million and $11 million, respectively, for asset impairments, accelerated depreciation and inventory impairments related to previously announced plant closures and restructuring activities.
Other charges in the three and six months ended June 30, 2019, included $3 million and $4 million of expense, respectively, for individually insignificant activities.
During the three months ended June 30, 2019, the company recorded the following amounts:
During the six months ended June 30, 2019, the company recorded the following amounts:
During the six months ended June 30, 2018, the company recorded income of $5 million for revised estimates of charges recorded in prior periods in connection with the previously announced closures of its beverage can manufacturing facilities in Chatsworth, California, and Longview, Texas, and its beverage end manufacturing facility in Birmingham, Alabama.
During the six months ended June 30, 2018, the company recorded charges of $2 million related to the closure of its Reidsville, North Carolina, plant, which ceased production in 2017.
Other income and charges in the three and six months ended June 30, 2018, included $1 million of income and $5 million of expense, respectively, for individually insignificant activities.
Charges in the three and six months ended June 30, 2018, included $1 million of expense for individually insignificant
activities.
During the three and six months ended June 30, 2018, the company recorded charges of $2 million and $6 million, respectively, for employee severance and benefits and $1 million and $7 million, respectively, for facility shutdown costs and other costs in connection with the closure of its Recklinghausen, Germany, plant, which ceased production during the third quarter of 2017.
Other charges in the three and six months ended June 30, 2018, included $1 million of expense for individually insignificant activities.
13
During the three months ended June 30, 2018, the company recorded the following amounts:
During the six months ended June 30, 2018, the company recorded the following amounts:
7.
Supplemental Cash Flow Statement Disclosures
Beginning of period:
448
Current restricted cash (included in other current assets)
Noncurrent restricted cash (included in other assets)
Total cash, cash equivalents and restricted cash
End of period:
549
Cash reported in assets held for sale
The company’s restricted cash is primarily related to receivables factoring programs and represents amounts collected from customers that have not yet been remitted to the banks as of the end of the reporting period.
Noncash investing activities include the acquisition of property, plant and equipment (PP&E) for which payment has not been made. These noncash capital expenditures are excluded from the statement of cash flows. The PP&E acquired but not yet paid for amounted to $127 million at June 30, 2019, and December 31, 2018. Financing activities for the six months ended June 30, 2019, include treasury stock repurchases totaling $16 million which were included in the consolidated statement of equity as of December 31, 2018, but not yet settled.
8. Receivables, Net
Trade accounts receivable
1,017
812
Unbilled receivables
503
478
Less allowance for doubtful accounts
(10)
Net trade accounts receivable
1,511
1,280
Other receivables
445
522
The company has entered into several regional committed and uncommitted accounts receivable factoring programs with various financial institutions for certain of its receivables. The programs are accounted for as true sales of the receivables, without recourse to Ball, and had combined limits of approximately $1.28 billion at June 30, 2019, and $1.2 billion at December 31, 2018. A total of $188 million and $178 million were available for sale under these programs as of June 30, 2019, and December 31, 2018, respectively.
Other receivables include income and sales tax receivables, related party receivables and other miscellaneous receivables. See Note 4 for further details of related party receivables.
9. Inventories, Net
Raw materials and supplies
698
727
Work-in-process and finished goods
564
614
Less inventory reserves
(79)
10. Property, Plant and Equipment, Net
Land
152
159
Buildings
1,296
1,359
Machinery and equipment
5,197
5,250
Construction-in-progress
509
7,192
7,277
Accumulated depreciation
(2,807)
(2,735)
Depreciation expense amounted to $123 million and $245 million for the three and six months ended June 30, 2019, and $129 and $254 for the three and six months ended June 30, 2018, respectively.
15
11. Goodwill
BeveragePackaging,North & CentralAmerica
BeveragePackaging,South America
BeveragePackaging,Europe
Aerospace
1,275
1,299
1,435
40
426
Transfer to assets held for sale
(51)
Effects of currency exchange
1,444
375
The company’s annual goodwill impairment test completed in the fourth quarter of 2018 indicated the fair value of the metal beverage packaging, Asia Pacific (beverage Asia Pacific), and beverage packaging, AMEA (beverage AMEA), reporting units exceeded their carrying amounts by approximately 11 percent and 15 percent, respectively. The current supply of metal beverage packaging exceeds demand in China, resulting in pricing pressure and negative impacts on the profitability of our beverage Asia Pacific reporting unit. The worsening business climate in Saudi Arabia has resulted in negative impacts to the profitability of our beverage AMEA reporting unit. If it becomes an expectation that these situations will continue for an extended period of time, the company may be required to record noncash impairment charges for some or all of the goodwill associated with the beverage Asia Pacific and beverage AMEA reporting units, the total balances of which were $78 million and $102 million, respectively, at June 30, 2019. Of the goodwill associated with the beverage Asia Pacific reporting unit, $51 million relates to the China beverage packaging business and is reported in assets held for sale at June 30, 2019. The goodwill balance of $27 million within the beverage Asia Pacific reporting unit not reported in assets held for sale relates to the remaining business of beverage Asia Pacific. See Note 4 for further details regarding Ball’s planned sale of its metal beverage packaging business in China.
12. Intangible Assets, Net
Acquired Rexam intangibles (net of accumulated amortization of $482 million at June 30, 2019, and $399 million at December 31, 2018)
2,002
2,073
Capitalized software (net of accumulated amortization of $160 million at June 30, 2019, and $148 million at December 31, 2018)
82
Other intangibles (net of accumulated amortization of $112 million at June 30, 2019, and $112 million at December 31, 2018)
33
Total amortization expense of intangible assets amounted to $48 million and $96 million for the three and six months ended June 30, 2019, respectively, and $49 million and $104 million for the three and six months ended June 30, 2018, respectively.
13. Other Assets
Long-term deferred tax assets
237
Long-term pension assets
572
559
Investments in affiliates
284
302
Right-of-use operating lease assets
240
Company and trust-owned life insurance
177
192
14. Leases
Under the new lease standard, a contract is a lease or contains one when (1) the contract contains an explicitly or implicitly identified asset and (2) the customer obtains substantially all of the economic benefits from the use of that underlying asset and directs how and for what purpose the asset is used during the term of the contract in exchange for consideration. The company assesses whether an arrangement is a lease, or contains a lease, upon inception of the contract.
The company enters into operating leases for buildings, warehouses, office equipment, production equipment, aircraft, land and other types of equipment. When readily determinable, the discount rate used to calculate the lease liability is the rate implicit in the lease. Otherwise, the company uses its incremental borrowing rate based on the information available at lease commencement. The company’s finance and short-term leases are immaterial.
Many of the company’s leases include one or more renewal and/or termination options at the company’s discretion, which are included in the determination of the lease term if the company is reasonably certain to exercise the option. The company also enters into lease agreements that have variable payments, such as those related to usage or adjustments to certain indexes. Variable lease payments are recognized in the period in which those payments are incurred. Certain leases also include residual value guarantees; however, these amounts are not probable to be owed and are not included in the calculation of the lease liability.
The company subleases all or portions of certain building and warehouse leases to third parties, all of which are classified as operating leases. Some of these arrangements offer the lessee renewal options.
The components of lease expense were as follows:
Three Months Ended
Six Months Ended
Operating lease expense
(33)
Variable lease expense
Sublease income
Net lease expense
(23)
Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in the measurements of lease liabilities - Operating cash flows from operating leases
(36)
ROU assets obtained in exchange for operating lease obligations
23
17
Supplemental balance sheet information related to operating leases was as follows:
Balance Sheet Location
Operating lease ROU asset
Current operating lease liabilities
55
Noncurrent operating lease liabilities
185
Weighted average remaining lease term and weighted average discount rate for the company’s operating leases were as follows:
Weighted average remaining lease term in years
Weighted average discount rate (%)
4.4
Maturities of lease liabilities are as follows:
Operating Leases
2019 (excluding the six months ended June 30, 2019)
2020
2021
44
2022
2023
29
102
Future value of lease liabilities
296
Less: Imputed interest
(56)
Present value of lease liabilities
Total noncancellable operating leases in effect at December 31, 2018, as reported under previous lease accounting guidance, required rental payments of the following amounts in each of the following periods:
41
Total future lease payments
305
18
15. Debt
Long-term debt consisted of the following:
Senior Notes
5.25% due July 2025
1,000
4.375% due December 2020
4.00% due November 2023
4.375%, euro denominated, due December 2023
796
803
5.00% due March 2022
750
4.875% due March 2026
3.50%, euro denominated, due December 2020
455
Senior Credit Facility (at variable rates)
Term A loan, due March 2024
793
797
U.S. dollar revolver due March 2024 at variable rate
Other (including debt issuance costs)
6,944
6,518
Less: Current portion of long-term debt
(28)
On March 25, 2019, the company refinanced its existing credit facilities with a U.S. dollar term loan facility, a U.S. dollar revolving facility and a multicurrency revolving facility that mature in March 2024. The revolving facilities provide the company with up to the U.S. dollar equivalent of $1.75 billion. At June 30, 2019, taking into account outstanding letters of credit, approximately $1.27 billion was available under the company’s existing long-term, revolving credit facilities. In addition to these facilities, the company had approximately $1.5 billion of short-term uncommitted credit facilities available at June 30, 2019, of which $364 million was outstanding and due on demand. At December 31, 2018, the company had $211 million outstanding under short-term uncommitted credit facilities.
The fair value of long-term debt was estimated to be $7.3 billion at June 30, 2019, and $6.6 billion at December 31, 2018. The fair value reflects the market rates at each period end for debt with credit ratings similar to the company’s ratings and is classified as Level 2 within the fair value hierarchy. Rates currently available to the company for loans with similar terms and maturities are used to estimate the fair value of long-term debt based on discounted cash flows.
Ball provides letters of credit in the ordinary course of business to secure liabilities recorded in connection with certain self-insurance arrangements. Letters of credit outstanding were $38 million at June 30, 2019, and $28 million at December 31, 2018.
The U.S. note agreements and bank credit agreement contain certain restrictions relating to dividend payments, share repurchases, investments, financial ratios, guarantees and the incurrence of additional indebtedness. The most restrictive covenant is in the company’s bank credit agreement and requires the company to maintain a net leverage ratio (as defined) of no greater than 4.5 times at June 30, 2019. The company was in compliance with all loan agreements and debt covenants at June 30, 2019, and December 31, 2018, and has met all debt payment obligations.
16. Taxes on Income
As compared to the statutory U.S. tax rate, the effective tax rate for the three and six months ended June 30, 2019, was reduced by 3.5 percentage points and 6.5 percentage points, respectively, for the discrete impact of share-based compensation, reduced by 5.0 percentage points and 3.1 percentage points, respectively, for the impact of tax planning, increased 2.0 percentage points and 1.8 percentage points, respectively, for the foreign tax rate differential versus the U.S. tax rate, increased by 1.2 percentage points and 1.1 percentage points, respectively, for the impact of global intangible low-taxed income (GILTI) net of foreign derived intangible income (FDII), reduced by 0.4 percentage points and 1.3 percentage points, respectively, for the equity in results of affiliates and reduced by 0.9 percentage points and 1.1 percentage points, respectively, for federal tax credits.
17. Employee Benefit Obligations
Underfunded defined benefit pension liabilities
920
954
Less: Current portion
Long-term defined benefit pension liabilities
895
929
Long-term retiree medical liabilities
Deferred compensation plans
372
291
78
Components of net periodic benefit cost associated with the company’s defined benefit pension plans were:
U.S.
Foreign
Ball-sponsored plans:
Service cost
Interest cost
Expected return on plan assets
(27)
(55)
Amortization of prior service cost
Recognized net actuarial loss
Net periodic benefit cost for Ball sponsored plans
20
Net periodic benefit cost for multi-employer plans
Total net periodic benefit cost
21
35
50
84
(57)
(112)
(54)
(109)
28
Non-service pension income totaling $6 million and $11 million for the three and six months ended June 30, 2019, respectively, and $2 million and $3 million for the three and six months ended June 30, 2018, respectively, is included in selling, general, and administrative (SG&A) expenses.
Contributions to the company’s defined benefit pension plans were $73 million in the first six months of 2019 compared to $14 million in the first six months of 2018, and such contributions are expected to be approximately $92 million for the full year of 2019. This estimate may change based on changes to the U.S. Pension Protection Act and actual plan asset performance, among other factors.
18. Equity and Accumulated Other Comprehensive Earnings
The following tables provide additional details of the company’s equity activity:
Ball Corporation and Subsidiaries
Common Stock
Treasury Stock
Accumulated Other
Number of
Retained
Comprehensive
Noncontrolling
($ in millions; share amounts in thousands)
Shares
Amount
Earnings
Earnings (Loss)
Interest
Balance at March 31, 2019
674,692
1,154
(340,223)
(2,323)
5,504
(789)
103
3,649
Other comprehensive earnings (loss), net of tax
Common dividends, net of tax benefits
Treasury stock purchases
(3,540)
(251)
Treasury shares reissued
Shares issued and stock compensation for stock options and other stock plans, net of shares exchanged
771
Other activity
675,463
(343,623)
Balance at March 31, 2018
671,611
1,100
(321,435)
(1,508)
5,114
(673)
105
4,138
(35)
(4,219)
(161)
195
Balance at June 30, 2018
672,070
1,120
(325,459)
(1,663)
5,199
(767)
106
3,995
673,237
(337,979)
Reclassification of stranded tax effects
79
(6,174)
(380)
530
2,226
Balance at December 31, 2017, as adjusted
670,576
1,084
(320,695)
(1,474)
5,024
(655)
4,084
(5,259)
(202)
495
1,494
In May 2019, in a privately negotiated transaction, Ball entered into an accelerated share repurchase agreement to buy $250 million of its common shares using cash on hand and available borrowings. The company advanced the $250 million in May 2019, and received 3.4 million shares, which represented approximately 85 percent of the total shares calculated using the closing price on that date. The company received an additional 0.1 million shares in June 2019. The average price paid per share under this agreement as of June 30, 2019, was $62.33. This agreement is expected to settle during the third quarter of 2019.
On January 23, 2019, the Board authorized the repurchase by the company of up to a total of 50 million shares. This repurchase authorization replaced all previous authorizations.
Accumulated Other Comprehensive Earnings (Loss)
The activity related to accumulated other comprehensive earnings (loss) was as follows:
Currency
Translation
(Net of Tax)
Pension and
Other Postretirement
Benefits
Derivatives Designated as Hedges
Accumulated
(504)
(277)
Other comprehensive earnings (loss) before reclassifications
85
113
Amounts reclassified from accumulated other comprehensive earnings (loss) into earnings
Stranded tax effects reclassified into retained earnings
(76)
(419)
(346)
(32)
22
The following table provides additional details of the amounts recognized into net earnings from accumulated other comprehensive earnings (loss):
Gains (losses) on cash flow hedges:
Commodity contracts recorded in net sales
Commodity contracts recorded in cost of sales
Currency exchange contracts recorded in selling, general and administrative
Cross-currency swaps recorded in selling, general and administrative
59
Cross-currency swaps recorded in interest expense
Total before tax effect
(18)
80
61
Tax benefit (expense) on amounts reclassified into earnings
(13)
Recognized gain (loss), net of tax
62
Amortization of pension and other postretirement benefits: (a)
Actuarial gains (losses)
(19)
19. Earnings and Dividends Per Share
($ in millions, except per share amounts; shares in thousands)
Basic weighted average common shares
Effect of dilutive securities
8,812
6,683
8,705
7,064
Weighted average shares applicable to diluted earnings per share
Per basic share
Per diluted share
Certain outstanding options were excluded from the diluted earnings per share calculation because they were anti-dilutive (i.e., their assumed conversion into common stock would increase rather than decrease earnings per share). The options excluded totaled 1 million for the six months ended June 30, 2019, and 5 million for the three and six months ended June 30, 2018. There were no anti-dilutive shares for the three months ended June 30, 2019.
The company declared and paid dividends of $0.15 per share and $0.25 per share in the three and six months ended June 30, 2019, and $0.10 per share and $0.20 per share in the three and six months ended June 30, 2018.
20. Financial Instruments and Risk Management
Policies and Procedures
The company employs established risk management policies and procedures, which seek to reduce the company’s commercial risk exposure to fluctuations in commodity prices, interest rates, currency exchange rates and prices of the company’s common stock with regard to common share repurchases and the company’s deferred compensation stock plan. However, there can be no assurance these policies and procedures will be successful. Although the instruments utilized involve varying degrees of credit, market and interest risk, the counterparties to the agreements are expected to perform fully under the terms of the agreements. The company monitors counterparty credit risk, including lenders, on a regular basis, but Ball cannot be certain that all risks will be discerned or that its risk management policies and procedures will always be effective. Additionally, in the event of default under the company’s master derivative agreements, the non-defaulting party has the option to offset any amounts owed with regard to open derivative positions.
Commodity Price Risk
Aluminum
The company manages commodity price risk in connection with market price fluctuations of aluminum ingot through two different methods. First, the company enters into container sales contracts that include aluminum ingot-based pricing terms which generally reflect the same price fluctuations under commercial purchase contracts for aluminum sheet. The terms include fixed, floating or pass through aluminum ingot component pricing. Second, the company uses certain derivative instruments, including option and forward contracts as economic and cash flow hedges of commodity price risk where there are material differences between sales and purchase contracted pricing and volume.
At June 30, 2019, the company had aluminum contracts limiting its aluminum exposure with notional amounts of approximately $1.6 billion, of which $1.5 billion received hedge accounting treatment. Cash flow hedges relate to forecasted transactions that will occur within the next three years. Included in shareholders’ equity at June 30, 2019, within accumulated other comprehensive earnings (loss), is a net after-tax loss of $23 million associated with these contracts, substantially all of which is expected to be recognized in earnings during the next 12 months. The majority of this amount will be offset by pricing changes in sales and purchase contracts, thus resulting in little or no earnings impact to Ball.
Interest Rate Risk
The company’s objective in managing exposure to interest rate changes is to minimize the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve these objectives, the company may use a variety of interest rate swaps, collars and options to manage its mix of floating and fixed-rate debt. At June 30, 2019, the company had outstanding interest rate swap and option contracts with notional amounts of approximately $1.6 billion paying fixed rates expiring within the next two years. Less than $1 million of net after-tax loss related to these contracts is included in accumulated other comprehensive earnings at June 30, 2019, substantially all of which is expected to be recognized in earnings during the next 12 months.
Currency Exchange Rate Risk
The company’s objective in managing exposure to currency fluctuations is to limit the exposure of cash flows and earnings from changes associated with currency exchange rate changes through the use of various derivative contracts. In addition, at times the company manages earnings translation volatility through the use of currency option strategies, and the change in the fair value of those options is recorded in the company’s net earnings. At June 30, 2019, the company had outstanding exchange rate forward and option contracts with notional amounts totaling approximately $2.5 billion. Approximately $3 million of net after-tax gain related to these contracts is included in accumulated other comprehensive earnings at June 30, 2019, substantially all of which is expected to be recognized in earnings during the next 12 months. The contracts outstanding at June 30, 2019, expire within the next two years.
Additionally, the company entered into a $1 billion cross-currency swap contract to partially mitigate the risk associated with foreign currency denominated intercompany debt incurred in 2016. Approximately $11 million of net after-tax loss related to this contract is included in accumulated other comprehensive earnings at June 30, 2019, of which the amount expected to be recognized during the next 12 months is dependent upon changes in currency exchange rates. The contract expires within the next two years.
Common Stock Price Risk
The company’s deferred compensation stock program is subject to variable plan accounting and, accordingly, is marked to fair value using the company’s closing stock price at the end of the related reporting period. The company entered into total return swaps to reduce the company’s earnings exposure to these fair value fluctuations that will be outstanding through May 2020 and have a combined notional value of 2.9 million shares. Based on the current number of shares in the program, each $1 change in the company’s stock price has an insignificant impact on pretax earnings, net of the impact of related derivatives.
Collateral Calls
The company’s agreements with its financial counterparties require the posting of collateral in certain circumstances when the negative mark to fair value of the derivative contracts exceeds specified levels. Additionally, the company has collateral posting arrangements with certain customers on these derivative contracts. The cash flows of the margin calls, if any, are shown within the investing section of the company’s unaudited condensed consolidated statements of cash flows. As of June 30, 2019, and December 31, 2018, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position was $32 million and $46 million, respectively, and no collateral was required to be posted.
Fair Value Measurements
The company has classified all applicable financial derivative assets and liabilities as Level 2 within the fair value hierarchy as of June 30, 2019, and December 31, 2018, and those values are presented in the tables below. The company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
DerivativesDesignatedas HedgingInstruments
Derivatives notDesignated asHedgingInstruments
Commodity contracts
Foreign currency contracts
Cross-currency and other contracts
Total current derivative contracts
Total noncurrent derivative contracts
Other noncurrent assets
Other noncurrent liabilities
December 31, 2018
64
The company uses closing spot and forward market prices as published by the London Metal Exchange, the Chicago Mercantile Exchange, Reuters and Bloomberg to determine the fair value of any outstanding aluminum, currency, energy, inflation and interest rate spot and forward contracts. Option contracts are valued using a Black-Scholes model with observable market inputs for aluminum, currency and interest rates. The company values each of its financial instruments either internally using a single valuation technique or from a reliable observable market source. The company does not adjust the value of its financial instruments except in determining the fair value of a trade that settles in the future by discounting the value to its present value using a12-month LIBOR rate. Ball performs validations of its internally derived fair values reported for our financial instruments on a quarterly basis utilizing counterparty valuation statements. Additionally, the company evaluates counterparty creditworthiness and, as of June 30, 2019, has not identified any circumstances requiring the reported values of its financial instruments to be adjusted.
The following table provides the effects of derivative instruments in the consolidated statement of earnings and on accumulated other comprehensive earnings (loss):
Location of Gain (Loss)Recognized in Earningson Derivatives
Cash FlowHedge -ReclassifiedAmount fromAccumulatedOtherComprehensiveEarnings (Loss)
Gain (Loss) onDerivatives notDesignated asHedgeInstruments
Commodity contracts - manage exposure to customer pricing
Commodity contracts - manage exposure to supplier pricing
Cost of sales
Foreign currency contracts - manage currency exposure
Cross-currency swaps - manage intercompany currency exposure
Equity contracts
57
109
The changes in accumulated other comprehensive earnings (loss) for derivatives designated as hedges were as follows:
Amounts reclassified into earnings:
(24)
Cross-currency swap contracts
(62)
Currency exchange contracts
Change in fair value of cash flow hedges:
71
Foreign currency and tax impacts
Stranded tax effects reclassified into retained earnings:
21. Contingencies
Ball is subject to numerous lawsuits, claims or proceedings arising out of the ordinary course of business, including actions related to product liability; personal injury; the use and performance of company products; warranty matters; patent, trademark or other intellectual property infringement; contractual liability; the conduct of the company’s business; tax reporting in domestic and foreign jurisdictions; workplace safety and environmental and other matters. The company has also been identified as a potentially responsible party (PRP) at several waste disposal sites under U.S. federal and related state environmental statutes and regulations and may have joint and several liability for any investigation and remediation costs incurred with respect to such sites. In addition, we have received claims alleging that employees in certain plants have suffered damages due to exposure to alleged workplace hazards. Some of these lawsuits, claims and proceedings involve substantial amounts, including as described below, and some of the environmental proceedings involve potential monetary costs or sanctions that may be material. Ball has denied liability with respect to many of these lawsuits, claims and proceedings and is vigorously defending such lawsuits, claims and proceedings. The company carries various forms of commercial, property and casualty, and other forms of insurance; however, such insurance may not be applicable or adequate to cover the costs associated with a judgment against Ball with respect to these lawsuits, claims and proceedings. The company estimates that potential liabilities for all currently known and estimable environmental matters are approximately $29 million in the aggregate, and such amounts have been included in other current liabilities and other noncurrent liabilities at June 30, 2019.
In November 2012, the USEPA wrote to the company asserting that it is one of at least 50 PRPs with respect to the Lower Duwamish site located in Seattle, Washington, based on the company’s ownership of a glass container plant prior to 1995, and notifying the company of a proposed remediation action plan. A site was selected to begin data review on over 30 industrial companies and government entities and at least two PRP groups have been discussing various allocation proposals. The USEPA issued the site Record of Decision (ROD) in December 2014. Ball submitted its initial responses to the allocator’s questionnaire in March 2015, and after reviewing submissions from the PRPs alleging deficiencies in certain of Ball’s responses, the allocator denied certain of the allegations and directed the company to answer others, to which Ball responded during the fourth quarter of 2016. A group of de minimis PRPs, including Ball, retained a technical consultant to assist with their positions vis-à-vis larger PRPs, and further presentations were made to the site allocator during the fourth quarter of 2017 and the first quarter of 2018. Total site remediation costs of $342 million, to cover remediation of approximately 200 acres of river bottom, are expected according to the proposed remediation action plan, which does not include $100 million that has already been spent, and which will be allocated among the numerous PRPs in due course. Based on the information available to the company at this time, the company does not believe that this matter will have a material adverse effect upon the liquidity, results of operations or financial condition of the company.
In February 2012, Ball Metal Beverage Container Corp. (BMBCC) filed an action against Crown Packaging Technology, Inc. (Crown) in the U.S. District Court for the Southern District of Ohio (the Court) seeking a declaratory judgment that the manufacture, sale and use of certain ends by BMBCC and its customers do not infringe certain claims of Crown’s U.S. patents. Crown subsequently filed a counterclaim alleging infringement of certain claims in these patents seeking unspecified monetary damages, fees and declaratory and injunctive relief. The District Court issued a claim construction order at the end of December 2015 and held a scheduling conference on February 10, 2016, to determine the timeline for future steps in the litigation. The case was stayed by mutual agreement of the parties into the third quarter of 2016, during which Crown made preparations for its discovery with respect to certain ends previously produced by Rexam’s U.S. subsidiary, Rexam Beverage Can Company (RBCC). Such discovery began during the first half of 2017 and concluded in the fourth quarter of 2018. The parties attempted to mediate the case on August 1, 2017, but no progress was made, and the case continued as scheduled. In December, 2018, BMBCC and RBCC filed a motion for summary judgment that the Crown patents at issue are invalid and that the applicable ends supplied by BMBCC and RBCC did not infringe the patents. Crown did not file a motion for summary judgment. Oral argument on the motion filed by BMBCC and RBCC was completed in January 2019. On June 21, 2019, the District Court issued an order sustaining the BMBCC/RBCC motion as to invalidity, declining to rule on the other grounds as moot, and indicating that an expanded opinion and an appealable order would be forthcoming. The expanded opinion was docketed on July 22, 2019. The final, appealable order has not yet been issued but is expected to be issued shortly. Based on the information available to the company at the present time, the company does not believe that this matter will have a material adverse effect upon the liquidity, results of operations or financial condition of the company.
A former Rexam Personal Care site in Annecy, France, was found in 2003 to be contaminated following a leak of chlorinated solvents (TCE) from an underground feedline. The site underwent extensive investigation and an active remediation treatment system was put in place in 2006. The business operating from the site was sold to Albea in 2013 and in turn to a French company CATIDOM (operating as Reboul). Reboul vacated the site in September 2014, and the site reverted back to Rexam during the first quarter of 2015. As part of the site closure regulatory requirements, a new regulatory permit (Prefectoral Order) was issued in June 2016, which includes requirements to undertake a cost-benefit analysis and pilot studies of further treatment for the known residual solvent contamination following the shutdown of the current on-site treatment system. A new management plan was proposed to the French Environmental Authorities (DREAL) during 2018 and will be the subject of further discussions in 2019 before a final plan for the site is addressed. Based on the information available to the company at this time, the company does not believe that this matter will have a material adverse effect upon the liquidity, results of operations or financial condition of the company.
The company’s operations in Brazil are involved in various governmental assessments, principally related to claims for taxes on the internal transfer of inventory, gross sales taxes and indirect tax incentives. The company does not believe that the ultimate resolution of these matters will materially impact the company’s results of operations, financial position or cash flows. Under customary local regulations, the company’s Brazilian subsidiaries may need to post cash or other collateral if the process to challenge any administrative assessment proceeds to the Brazilian court system; however, the level of any potential cash or collateral required would not significantly impact the liquidity of those subsidiaries or Ball Corporation.
During the first quarter of 2017, the Brazilian Supreme Court (the Court) ruled against the Brazilian tax authorities in a leading case related to the computation of certain indirect taxes. The Court ruled that the indirect tax base should not include a value-added tax known as “ICMS.” By removing the ICMS from the tax base, the Court effectively eliminated a “tax on tax.” The Court decision, in principle, affects all applicable judicial proceedings in progress. However, after publication of the decision in October 2017, the Brazilian tax authorities filed an appeal seeking clarification of certain matters, including the amount of ICMS to which taxpayers would be entitled in order to reduce their indirect tax base (i.e., the gross rate or net rate). The appeal also requested a modulation of the decision’s effects, which may limit its impact on taxpayers.
The company’s Brazilian subsidiaries paid to the Brazilian tax authorities the gross amounts of certain indirect taxes (which included ICMS in their tax base) and filed lawsuits in 2014 and 2015 to challenge the legality of these tax on tax amounts. Pursuant to these lawsuits, the company requested reimbursement of prior excess tax payments and entitlement to retain amounts not remitted. During the third quarter of 2018, the company learned of a further decision of the Court indicating that lawsuits filed prior to the trial resulting in its 2017 decision, such as those filed by the company, would likely be upheld. The company also noted that other Brazilian companies, including customers of its Brazilian subsidiaries, which had timely filed equivalent lawsuits, were recording income based on the applicable ICMS amounts retained. During the second quarter of 2019, the company received additional favorable court rulings and completed its analysis of certain prior year overpayments related to ICMS. As these gain contingency amounts are now estimable and realizable, the company recorded $56 million of prior year collections in business consolidation and other activities within the company’s condensed consolidated statement of earnings. The company is currently seeking reimbursement for additional ICMS-related amounts previously paid to the Brazilian government; however, such amounts cannot be estimated at this time. In the event other comparable cases are resolved and the amounts claimed become estimable and realizable, the company will record gains, which may result in material reimbursements to the company in future periods.
22. Indemnifications and Guarantees
General Guarantees
The company or its appropriate consolidated direct or indirect subsidiaries, including Rexam and its subsidiaries, have made certain indemnities, commitments and guarantees under which the specified entity may be required to make payments in relation to certain transactions. These indemnities, commitments and guarantees include indemnities to the customers of the subsidiaries in connection with the sales of their packaging and aerospace products and services; guarantees to suppliers of subsidiaries of the company guaranteeing the performance of the respective entity under a purchase agreement, construction contract or other commitment; guarantees in respect of certain foreign subsidiaries’ pension plans; indemnities for liabilities associated with the infringement of third-party patents, trademarks or copyrights under various types of agreements; indemnities to various lessors in connection with facility, equipment, furniture and other personal property leases for certain claims arising from such leases; indemnities to governmental agencies in connection with the issuance of a permit or license to the company or a subsidiary; indemnities pursuant to agreements relating to certain joint ventures; indemnities in connection with the sale of businesses or substantially all of the assets and specified liabilities of businesses; and indemnities to directors, officers and employees of the company to the extent permitted under the laws of the State of Indiana and the United States of America. The duration of these indemnities, commitments and guarantees varies and, in certain cases, is indefinite.
In addition, many of these indemnities, commitments and guarantees do not provide for any limitation on the maximum potential future payments the company could be obligated to make. As such, the company is unable to reasonably estimate its potential exposure under these items.
Other than the indemnifications provided in connection with the Rexam acquisition, the company has not recorded any material liabilities for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets. The company does, however, accrue for payments under promissory notes and other evidences of incurred indebtedness and for losses for any known contingent liability, including those that may arise from indemnifications, commitments and guarantees, when future payment is both reasonably estimable and probable. Finally, the company carries specific and general liability insurance policies and has obtained indemnities, commitments and guarantees from third-party purchasers, sellers and other contracting parties, which the company believes would, in certain circumstances, provide recourse to any claims arising from these indemnifications, commitments and guarantees.
Debt Guarantees
The company’s and its subsidiaries’ obligations under the senior notes and senior credit facilities (or, in the case of U.S. domiciled foreign subsidiaries under the senior credit facilities, the obligations of foreign credit parties only) are guaranteed on a full, unconditional and joint and several basis by certain of the company’s domestic subsidiaries and the domestic subsidiary borrowers, and obligations of other guarantors and the subsidiary borrowers under the senior credit facilities are guaranteed by the company, in each case with certain exceptions and subject to grace periods. These guarantees are required in support of the senior notes and senior credit facilities referred to above, are coterminous with the terms of the respective note indentures, senior notes and credit agreement and could be enforced by the holders of the obligations thereunder during the continuation of an event of default under the note indentures, the senior notes or the credit agreement or any other loan document in respect thereof. The maximum potential amounts which could be required to be paid under such guarantees are essentially equal to the then outstanding obligations under the respective senior notes or the credit agreement (or, in the case of U.S. domiciled foreign subsidiaries under the senior credit facilities, the obligations of foreign credit parties only), with certain exceptions. All obligations under the guarantees of the senior credit facilities are secured, with certain exceptions and subject to certain grace periods, by a valid first priority perfected lien or pledge on (i) 100 percent of the capital stock of each of the company's material wholly owned domestic subsidiaries directly owned by the company or any of its wholly owned domestic subsidiaries and (ii) 65 percent of the capital stock of each of the company's material wholly owned first-tier foreign subsidiaries directly owned by the company or any of its wholly owned domestic subsidiaries. In addition, the obligations of certain foreign borrowers and foreign pledgors under the loan documents will be secured, with certain exceptions and subject to certain grace periods, by a valid first priority perfected lien or pledge on 100 percent of the capital stock of certain of the company's material wholly owned foreign subsidiaries and material wholly owned U.S. domiciled foreign subsidiaries directly owned by the company or any of its wholly owned material subsidiaries. The company is not in default under the above senior notes or senior credit facilities. The required condensed consolidating financial information for the guarantor and non-guarantor subsidiaries is presented in Note 23. Separate financial statements for the guarantor subsidiaries and the non-guarantor subsidiaries are not presented because management has determined that such financial statements are not required under the Securities and Exchange Commission (SEC) regulations.
23. Subsidiary Guarantees of Debt
The following unaudited condensed consolidating financial information is presented in accordance with SEC Regulations S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. For purposes of the presentation of unaudited condensed consolidating financial information, the subsidiaries of the company providing the guarantees are referred to as the guarantor subsidiaries, and subsidiaries of the company other than the guarantor subsidiaries are referred to as the non-guarantor subsidiaries. The eliminating adjustments substantively consist of intercompany transactions and the elimination of equity investments and earnings of subsidiaries. Separate financial statements for the guarantor subsidiaries and the non-guarantor subsidiaries are not presented because management has determined that such financial statements are not required under SEC regulations.
The company’s senior notes are guaranteed on a full and unconditional, joint and several basis by certain domestic subsidiaries of the company. Each of the guarantor subsidiaries is 100 percent owned by the company. As described in the supplemental indentures governing the company’s existing senior notes, the senior notes are guaranteed by any of the company’s domestic subsidiaries that guarantee any other indebtedness of the company. The following is unaudited condensed consolidating financial information for the company, segregating the guarantor subsidiaries and non-guarantor subsidiaries, as of June 30, 2019, and December 31, 2018, and for the three and six months ended June 30, 2019 and 2018. The unaudited condensed consolidating financial information presented below is not necessarily indicative of the financial position, results of operations, earnings or cash flows of the company or any of the company’s subsidiaries on a stand-alone basis.
Unaudited Condensed Consolidating Statement of Earnings
BallCorporation
GuarantorSubsidiaries
Non-Guarantor Subsidiaries
EliminatingAdjustments
ConsolidatedTotal
1,737
1,493
(213)
Cost and expenses
(1,528)
(1,113)
213
(119)
(37)
(34)
Equity in results of subsidiaries
251
125
(376)
Intercompany
269
(1,288)
(163)
Earnings (loss) before interest and taxes
209
205
Earnings (loss) before taxes
187
210
Net earnings (loss)
181
Less net earnings attributable to noncontrolling interests
Net earnings (loss) attributable to Ball Corporation
180
168
(348)
1,515
(216)
(1,524)
(1,176)
216
(52)
(124)
(73)
(48)
(122)
94
191
(1,788)
(1,355)
111
(39)
For the Six Months Ended June 30, 2019
3,286
2,928
(412)
(2,852)
(2,241)
412
(240)
(61)
(88)
(89)
387
145
(532)
127
(64)
(63)
435
(2,965)
(2,624)
(120)
321
304
(160)
(164)
271
324
303
272
422
353
(775)
For the Six Months Ended June 30, 2018
3,337
2,947
(398)
(2,830)
(2,289)
398
(104)
(114)
(91)
265
(318)
176
(152)
(3,201)
(2,683)
136
264
(156)
(157)
230
143
263
97
(93)
Unaudited Condensed Consolidating Balance Sheet
749
663
1,270
Intercompany receivables
475
1,690
(2,273)
471
712
466
179
1,642
4,985
1,399
2,958
Investment in subsidiaries
11,627
3,348
(100)
(14,875)
1,191
3,242
1,694
266
292
1,096
12,118
8,264
13,875
(17,148)
980
1,746
Intercompany payables
2,290
92
(2,870)
121
163
2,838
1,332
2,834
6,913
886
294
285
Intercompany long-term notes
(1,840)
(746)
1,989
597
(249)
246
609
Long-term deferred tax and other liabilities
110
8,658
1,245
5,915
Common stock
2,523
4,681
(7,204)
Preferred stock
5,010
3,538
(8,548)
(514)
(368)
882
Treasury stock, at cost
Total Ball Corporation equity
7,019
7,856
7,960
717
613
1,168
1,657
(2,218)
527
744
77
123
1,670
4,365
1,378
3,140
11,145
3,779
(14,825)
3,284
409
1,761
215
981
11,523
8,642
13,432
(17,043)
173
46
1,178
1,867
2,310
(2,825)
144
220
2,725
1,490
2,705
6,504
871
286
298
(1,977)
1,368
(172)
169
648
114
128
8,065
1,993
5,153
(2,219)
5,314
(7,837)
4,712
3,316
(8,028)
(586)
(460)
6,649
8,175
(14,824)
8,279
Unaudited Condensed Consolidating Statement of Cash Flows
(155)
274
Cash flows from investing activities
(123)
(145)
(139)
Cash flows from financing activities
1,045
(605)
138
172
96
Cash, cash equivalents and restricted cash – beginning of period
725
Cash, cash equivalents and restricted cash – end of period
821
(59)
(265)
(175)
Proceeds from dispositions, net of cash sold
(49)
(255)
(146)
1,425
(295)
376
454
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 1 of this Quarterly Report on Form 10-Q, which include additional information about our accounting policies, practices and the transactions underlying our financial results. The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires us to make estimates and assumptions that affect the reported amounts in our consolidated financial statements and the accompanying notes including various claims and contingencies related to lawsuits, taxes, environmental and other matters arising during the normal course of business. We apply our best judgment, our knowledge of existing facts and circumstances and actions that we may undertake in the future in determining the estimates that affect our consolidated financial statements. We evaluate our estimates on an ongoing basis using our historical experience, as well as other factors we believe appropriate under the circumstances, such as current economic conditions, and adjust or revise our estimates as circumstances change. As future events and their effects cannot be determined with precision, actual results may differ from these estimates. Ball Corporation and its subsidiaries are referred to collectively as “Ball Corporation,” “Ball,” “the company,” “we” or “our” in the following discussion and analysis.
OVERVIEW
Business Overview and Industry Trends
Ball Corporation is one of the world’s leading suppliers of metal packaging to the beverage, personal care and household products industries. Our packaging products are produced for a variety of end uses, are manufactured in facilities around the world and are competitive with other substrates, such as plastics and glass. In the rigid packaging industry, sales and earnings can be increased by reducing costs, increasing prices, developing new products, expanding volumes and making strategic acquisitions. We also provide aerospace and other technologies and services to governmental and commercial customers, including national defense hardware, antenna and video tactical solutions, civil and operational space hardware and system engineering services.
We sell our packaging products mainly to large, multinational beverage, personal care and household products companies with which we have developed long-term relationships. This is evidenced by our high customer retention and our large number of long-term supply contracts. While we have a diversified customer base, we sell a significant portion of our packaging products to major companies and brands, as well as to numerous regional customers. The overall global beverage and aerosol metal container industries are growing and are expected to continue to grow in the medium to long term. The primary customers for the products and services provided by our aerospace segment are U.S. government agencies or their prime contractors.
We purchase our raw materials from relatively few suppliers. We also have exposure to inflation, in particular the rising costs of raw materials, as well as other direct cost inputs. We mitigate our exposure to the changes in the costs of metal through the inclusion of provisions in contracts covering the majority of our volumes to pass through metal price changes, as well as through the use of derivative instruments. The pass-through provisions generally result in proportional increases or decreases in sales and costs with a greatly reduced impact, if any, on net earnings. Because of our customer and supplier concentration, our business, financial condition and results of operations could be adversely affected by the loss, insolvency or bankruptcy of a major customer or supplier or a change in a supply agreement with a major customer or supplier, although our contract provisions generally mitigate the risk of customer loss, and our long-term relationships represent a known, stable customer base.
The majority of the aerospace business involves work under contracts, generally from one to five years in duration, as a prime contractor or subcontractor for various U.S. government agencies. Intense competition and long operating cycles are key characteristics of the company’s aerospace and defense industry where it is common for work on major programs to be shared among a number of companies. A company competing to be a prime contractor may, upon ultimate award of the contract to a competitor, become a subcontractor for the ultimate prime contracting company.
Corporate Strategy
Our Drive for 10 vision encompasses five strategic levers that are key to growing our business and achieving long-term success. Since launching Drive for 10 in 2011, we have made progress on each of the levers as follows:
These ongoing business developments and the successful acquisition of Rexam in 2016 help us stay close to our customers while expanding and/or sustaining our industry positions and global reach with major beverage, personal care, household products and aerospace customers.
RESULTS OF CONSOLIDATED OPERATIONS
Management’s discussion and analysis for our results of operations on a consolidated and segment basis include a quantification of factors that had a material impact. Other factors that did not have a material impact, but that are significant to understand the results, are qualitatively described.
Consolidated Sales and Earnings
Net earnings attributable to Ball Corporation as a % of consolidated net sales
%
Sales in the three months ended June 30, 2019, decreased compared to the same period in 2018 primarily due to the loss of sales from our former U.S. steel food and steel aerosol business, which was divested in the third quarter of 2018, the conclusion of the South America segment’s end sales associated with the Rexam acquisition and unfavorable exchange rates for our Europe segment, partially offset by higher volumes in our beverage packaging segments and increased sales in our aerospace segment. Net earnings for the three months ended June 30, 2019, increased compared to the same period in 2018 primarily due to higher volumes in our beverage packaging segments, lower business consolidation costs and lower income tax expense, partially offset by the conclusion of our South America segment’s end sales agreement associated with the Rexam acquisition, unfavorable U.S. aluminum scrap rates and increased start-up costs in our North and Central America segment.
Sales in the six months ended June 30, 2019, decreased compared to the same period in 2018 primarily due to the loss of sales from our former U.S. steel food and steel aerosol business, which was divested in the third quarter of 2018, the conclusion of the South America segment’s end sales associated with the Rexam acquisition and unfavorable exchange rates for our Europe segment, partially offset by higher beverage can unit volumes and higher pricing for our Europe and North and Central America segments and increased sales in the aerospace segment. Net earnings for the six months ended June 30, 2019, increased compared to the same period in 2018 primarily due to higher beverage can unit volumes, lower business consolidation costs and lower income tax expense, partially offset by the conclusion of our South America segment’s end sales agreement associated with the Rexam acquisition, unfavorable U.S. aluminum scrap rates and increased start-up costs in our North and Central America segment.
Cost of Sales (Excluding Depreciation and Amortization)
Cost of sales, excluding depreciation and amortization, was $2,428 million and $4,681 million for the three and six months ended June 30, 2019, respectively, compared to $2,484 million and $4,721 million for the same periods in 2018. These amounts represented 80 percent and 81 percent of consolidated net sales for the three and six months ended June 30, 2019, respectively, and 80 percent of consolidated net sales for the three and six months ended June 30, 2018, respectively.
Depreciation and Amortization
Depreciation and amortization expense was $171 million and $341 million for the three and six months ended June 30, 2019 compared to $178 million and $358 million for the same periods in 2018. These amounts represented 6 percent of consolidated net sales for the three and six months ended June 30, 2019 and 2018.
Selling, General and Administrative
Selling, general and administrative (SG&A) expenses were $111 million and $238 million for the three and six months ended June 30, 2019, respectively, compared to $127 million and $239 million for the same periods in 2018. These amounts represented 4 percent of consolidated net sales for the three and six months ended June 30, 2019 and 2018.
Business Consolidation Costs and Other Activities
Business consolidation and other activities were zero and $14 million for the three and six months ended June 30, 2019, respectively, and $69 million and $99 million for the three and six months ended June 30, 2018. These amounts represented less than one percent of consolidated net sales for the six months ended June 30, 2019, and 2 percent for the three and six months ended June 30, 2018. The decrease for the three and six months ended June 30, 2019, was primarily due to a gain on indirect taxes in Brazil and lower facility shut down and consolidation costs.
Interest Expense
Total interest expense was $81 million and $162 million for the three and six months ended June 30, 2019, respectively, compared to $77 million and $151 million for the same periods in 2018. Interest expense as a percentage of average monthly borrowings was 4 percent for the three and six months ended June 30 2019 and 2018.
Income Taxes
The company’s effective tax rate is affected by recurring items such as income earned in foreign jurisdictions with tax rates that differ from the U.S. tax rate and by discrete items that may occur in any given year but are not consistent from year to year. The effective income tax rate for the three and six months ended June 30, 2019, respectively, was 13.7 percent and 11.2 percent, respectively, compared to 27.7 percent and 25.2 percent for the same periods in 2018. The decrease of 14.0 percentage points for the three and six months ended June 30, 2019, was primarily due to discrete tax impact of excess tax benefits for share-based compensation in 2019, the discrete tax benefit associated with the equity in results of affiliates loss in 2019, the discrete tax benefit of tax planning, the discrete tax impact of foreign exchange, and the reduced impact for GILTI net of FDII.
As compared to the statutory U.S. tax rate, the effective tax rate for the three and six months ended June 30, 2019, was reduced by 3.5 percentage points and 6.5 percentage points, respectively, for the discrete impact of share-based compensation, reduced by 5.0 percentage points and 3.1 percentage points, respectively, for the impact of tax planning, increased 2.0 percentage points and 1.8 percentage points, respectively, for the foreign tax rate differential versus the U.S. tax rate, increased by 1.2 percentage points and 1.1 percentage points, respectively, for the impact of GILTI net of FDII, reduced by 0.4 percentage points and 1.3 percentage points, respectively, for the equity in results of affiliates and reduced by 0.9 percentage points and 1.1 percentage points, respectively, for federal tax credits.
RESULTS OF BUSINESS SEGMENTS
Segment Results
Ball’s operations are organized and reviewed by management along its product lines and geographical areas and presented in the four reportable segments discussed below.
Business consolidation and other activities (a)
Total segment earnings
129
238
252
Comparable operating earnings as a % of segment net sales
The beverage packaging, North and Central America, segment consists of operations located in the U.S., Canada and Mexico that manufacture aluminum containers used in beverage packaging in those countries. Our beverage can manufacturing facility in Birmingham, Alabama, ceased production during the second quarter of 2018 and the Chatsworth, California, and Longview, Texas, facilities ceased production during the third quarter of 2018. In order to serve growing customer demand for specialty cans in the southwestern U.S., the company constructed a four-line beverage packaging facility in Goodyear, Arizona, which began production in the second quarter of 2018.
Segment sales for the three and six months ended June 30, 2019, respectively, were $45 million and $141 million higher compared to the same periods in 2018. The increase for the three months ended June 30, 2019, was primarily due to higher volumes of $58 million, partially offset by customer sales mix. The increase for the six months ended June 30, 2019, was primarily due to higher volumes of $115 million, higher pricing and customer sales mix.
Comparable operating earnings for the three and six months ended June 30, 2019, respectively, were $16 million and $11 million lower compared to the same periods in 2018. The decrease for the three months ended June 30, 2019, was primarily due to unfavorable U.S. aluminum scrap rates, increased ramp-up costs at our new Goodyear, Arizona, facility and customer sales mix, partially offset by higher sales volumes. The decrease for the six months ended June 30, 2019, was primarily due to unfavorable U.S. aluminum scrap rates and increased ramp-up costs at our new Goodyear, Arizona, facility, partially offset by higher sales volumes, higher pricing and customer sales mix.
88
The beverage packaging, South America, segment consists of operations located in Brazil, Argentina and Chile that manufacture aluminum containers used in beverage packaging in most countries in South America. To support contracted volumes for aluminum beverage packaging across Paraguay, Argentina and Bolivia, the company is constructing a one-line beverage can and end manufacturing facility in Paraguay, and is adding capacity to our Buenos Aires, Argentina, and Santiago, Chile, facilities. The Paraguay facility is expected to begin production in the second half of 2019.
Segment sales for the three and six months ended June 30, 2019, respectively, were $2 million and $20 million lower compared to the same periods in 2018. Comparable operating earnings for the three and six months ended June 30, 2019, respectively, were $1 million and $31 million lower compared to the same periods in 2018. The decreases in sales and comparable operating earnings for the three and six months ended June 30, 2019, were primarily due to the conclusion of the end sales agreement associated with the Rexam acquisition of $14 million and $47 million, respectively, and regional pricing pressures, partially offset by higher can and end volumes.
The beverage packaging, Europe, segment includes the manufacture and sale of metal beverage containers in facilities located throughout Europe, including Russia. To support growth for beverage cans in the Iberian Peninsula, the company constructed a two-line, aluminum beverage can manufacturing facility near Madrid, Spain, with a majority of the facility’s capacity secured under a long-term customer contract. The facility became fully operational in the fourth quarter of 2018 and produces multiple can sizes utilizing both lines. In December 2018, we closed our beverage packaging facility located in San Martino, Italy.
Segment sales for the three and six months ended June 30, 2019, respectively, were $12 million and $41 million higher compared to the same periods in 2018. The increase in sales for the three months ended June 30, 2019, was primarily related to higher sales volumes of $59 million, partially offset by unfavorable currency exchange rates of $50 million. The increase in sales for the six months ended June 30, 2019, was primarily related to higher sales volumes of $137 million, partially offset by unfavorable currency exchange rates of $106 million.
Comparable operating earnings for the three and six months ended June 30, 2019, respectively, were $12 million and $16 million higher compared to the same periods in 2018. The increase for the three and six months ended June 30, 2019, were primarily due to increased sales volumes and operational efficiencies from plant network optimization, partially offset by unfavorable currency exchange rates.
The aerospace segment consists of the manufacture and sale of aerospace and other related products and services provided for the defense, civil space and commercial space industries.
Segment sales for the three and six months ended June 30, 2019, respectively, were $89 million and $153 million higher compared to the same periods in 2018 and comparable operating earnings for the three and six months ended June 30, 2019, respectively, were $14 million higher and $19 million higher compared to the same periods in 2018. The higher sales and comparable earnings for the three and six months ended June 30, 2019, were primarily the result of an increase in sales from significant U.S. national defense contracts.
The aerospace sales contract mix for the six months ended June 30, 2019, consisted of 68 percent cost-type contracts, which are billed at our costs plus an agreed upon and/or earned profit component, and 30 percent fixed-price contracts. The remaining sales were for time and materials contracts. Contracted backlog was $2 billion at June 30, 2019, compared to $2.2 billion at December 31, 2018. The backlog at June 30, 2019, consisted of 65 percent cost-type contracts. Comparisons of backlog are not necessarily indicative of the trend of future operations due to the nature of varying delivery and milestone schedules on contracts, funding of programs and the uncertainty of timing of future contract awards.
Additional Segment Information
For additional information regarding our segments, see the business segment information in Note 3 accompanying the unaudited condensed consolidated financial statements included within Item 1 of this report. The charges and income recorded for business consolidation and other activities were based on estimates by management and were developed from information available at the time the amounts were recognized. If actual outcomes vary from these estimates, the differences will be reflected in current period earnings in the statement of earnings and identified as business consolidation gains and losses. Additional details about our business consolidation and other activities, as well as the associated costs, are provided in Note 6 to the unaudited condensed consolidated financial statements included within Item 1 of this report on Form 10-Q.
47
NEW ACCOUNTING PRONOUNCEMENTS
For information regarding recent accounting pronouncements, see Note 2 to the unaudited condensed consolidated financial statements within Item 1 of this report on Form 10-Q.
Management Performance Measures
Management internally uses various measures to evaluate company performance such as comparable operating earnings (earnings before interest, taxes and business consolidation and other non-comparable costs); comparable net earnings (earnings before business consolidation costs and other non-comparable costs after tax); comparable diluted earnings per share (comparable net earnings divided by diluted weighted average shares outstanding); return on average invested capital (net operating earnings after tax over the relevant performance period divided by average invested capital over the same period); economic value added (EVA®) dollars (net operating earnings after tax less a capital charge on average invested capital employed); earnings before interest and taxes (EBIT); earnings before interest, taxes, depreciation and amortization (EBITDA); and diluted earnings per share. Management also uses free cash flow (generally defined by the company as cash flow from operating activities less capital expenditures) as a measure to evaluate the company’s liquidity. We believe this information is also useful to investors as it provides insight into the earnings and cash flow criteria management uses to make strategic decisions. These financial measures may be adjusted at times for items that affect comparability between periods such as business consolidation costs and gains or losses on acquisitions and dispositions.
Nonfinancial measures in the packaging businesses include production efficiency and spoilage rates; quality control figures; environmental, health and safety statistics; production and sales volumes; asset utilization rates and measures of sustainability. Additional measures used to evaluate financial performance in the aerospace segment include contract revenue realization, award and incentive fees realized, proposal win rates and backlog (including awarded, contracted and funded backlog).
The following financial measurements are presented on a non-U.S. GAAP basis and should be considered in connection with the unaudited condensed consolidated financial statements within Item 1 of this report. Non-U.S. GAAP measures should not be considered in isolation and should not be considered superior to, or a substitute for, financial measures calculated in accordance with U.S. GAAP. A presentation of earnings in accordance with U.S. GAAP is available in Item 1 of this report.
Based on the above definitions, our calculation of comparable operating earnings is summarized below:
Add: Net earnings attributable to noncontrolling interests
Less: Equity in results of affiliates, net of tax
Add: Tax provision (benefit)
Earnings before taxes, as reported
Add: Total interest expense
81
162
Add: Business consolidation and other activities
69
Add: Amortization of acquired Rexam intangibles
347
352
622
652
Our calculation of comparable net earnings is summarized below:
Add: Share of equity method affiliate non-comparable costs
Add: Debt refinancing and other costs
Less: Noncomparable taxes
(22)
(21)
(42)
Comparable net earnings
207
386
Diluted earnings per share, as reported
Comparable diluted earnings per share
0.64
1.13
1.09
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows and Capital Expenditures
Our primary sources of liquidity are cash provided by operating activities and external borrowings. We believe that cash flows from operations and cash provided by short-term, long-term and committed revolver borrowings, when necessary, will be sufficient to meet our ongoing operating requirements, scheduled principal and interest payments on debt, dividend payments, anticipated share repurchases and anticipated capital expenditures. The following summarizes our cash flows:
Cash flows provided by (used in) operating activities
Cash flows provided by (used in) investing activities
Cash flows provided by (used in) financing activities
Cash flows provided by operations were lower in 2019 compared to 2018, primarily due to higher working capital outflows and higher pension contributions, partially offset by higher earnings. The impact of changes in working capital on operating cash flows for the six months ended June 30, 2019, was a $415 million outflow. Excluding the impact of the sale of the U.S. steel food and steel aerosol packaging business in 2018 and the transfer of the China beverage packaging business assets and liabilities to held for sale in 2019, our working capital movements reflect an increase of days sales outstanding from 42 days in 2018 to 51 days in 2019 and a decrease in days payable outstanding from 112 days in 2018 to 106 days in 2019 which were partially offset by decreases in other amounts receivable which are not included in the calculation of days sales outstanding.
We have entered into several regional committed and uncommitted accounts receivable factoring programs with various financial institutions for certain of our receivables. The programs are accounted for as true sales of the receivables, without recourse to Ball, and had combined limits of approximately $1.28 billion and $1.2 billion at June 30, 2019, and December 31, 2018. A total of $188 million and $178 million were available for sale under such programs as of June 30, 2019, and December 31, 2018, respectively.
Contributions to the company’s defined benefit pension plans were $73 million in the first six months of 2019 compared to $14 million in the first six months of 2018 and such contributions are expected to be approximately $92 million for the full year of 2019. This estimate may change based on changes to the U.S. Pension Protection Act and actual plan asset performance, among other factors.
We expect 2019 capital expenditures for property, plant and equipment to be in the range of $600 million, and approximately $397 million was contractually committed as of June 30, 2019. Capital expenditures are expected to be funded by cash flows from operations.
As of June 30, 2019, approximately $749 million of our cash was held outside of the U.S., which is in addition to the $63 million of cash reported in assets held for sale in the unaudited condensed consolidated financial statements included within Item 1 of this report. In the event we need to utilize any of the cash held outside of the U.S. for purposes within the U.S., there are no material legal or other economic restrictions regarding the repatriation of cash from any of the countries outside the U.S. where we have cash, other than market liquidity constraints that may limit the ability to convert Egyptian pounds held by the company in Egypt with a U.S. dollar equivalent value of $34 million into other curencies. The company believes its U.S. operating cash flows, as well as availability under its long-term, revolving credit facilities, uncommitted short-term credit facilities and committed and uncommitted accounts receivable factoring programs will be sufficient to meet the cash requirements of the U.S. portion of our ongoing operations, scheduled principal and interest payments on U.S. debt, dividend payments, capital expenditures and other U.S. cash requirements. If foreign funds are needed for our U.S. cash requirements and we are unable to provide the funds through intercompany financing arrangements, we would be required to repatriate funds from foreign locations where the company has previously asserted indefinite reinvestment of funds outside the U.S.
Based on its indefinite reinvestment assertion, the company has not provided deferred taxes on earnings in certain non-U.S. subsidiaries because such earnings are intended to be indefinitely reinvested in its international operations. It is not practical to estimate the additional taxes that may become payable if these earnings were remitted to the U.S.
Share Repurchases
The company’s share repurchases, net of issuances, totaled $388 million during the six months ended June 30, 2019, compared to $175 million of repurchases, net of issuances, during the same period of 2018. Share repurchases are completed using cash on hand and available borrowings. Additional details about our share repurchase activities are provided in Note 18 to the consolidated financial statements within Item 1 of this quarterly report.
Debt Facilities and Refinancing
Given our cash flow projections and unused credit facilities that are available until March 2024, our liquidity is strong and is expected to meet our ongoing cash and debt service requirements. Interest-bearing debt of $7.3 billion and $6.7 billion was outstanding at June 30, 2019, and December 31, 2018, respectively.
On March 25, 2019, the company refinanced its existing credit facilities with a U.S. dollar term loan facility, a U.S. dollar revolving facility and a multicurrency revolving facility that mature in March 2024. The revolving facilities provide the company with up to the U.S. dollar equivalent of $1.75 billion. At June 30, 2019, taking into account our outstanding letters of credit, approximately $1.27 billion was available under existing long-term, revolving credit facilities. In addition to these facilities, the company had approximately $1.5 billion of short-term uncommitted credit facilities available as of June 30, 2019, of which $364 million was outstanding and due on demand. At December 31, 2018, the company had $211 million outstanding under short-term uncommitted credit facilities.
In March 2018, Ball issued $750 million of 4.875 percent senior notes and used the proceeds to repay $315 million of its Term A loan and outstanding multi-currency revolver and short-term credit facility borrowings.
While ongoing financial and economic conditions in certain areas may raise concerns about credit risk with counterparties to derivative transactions, the company mitigates its exposure by allocating the risk among various counterparties and limiting exposure to any one party. We also monitor the credit ratings of our suppliers, customers, lenders and counterparties on a regular basis.
We were in compliance with all loan agreements at June 30, 2019, and for all prior years presented, and we have met all debt payment obligations. The U.S. note agreements and bank credit agreement contain certain restrictions relating to dividends, investments, financial ratios, guarantees and the incurrence of additional indebtedness. The most restrictive covenant is in the company’s bank credit agreement and requires the company to maintain a leverage ratio (as defined) of no greater than 4.5 times at June 30, 2019. As of June 30, 2019, approximately $1.5 billion of the amounts disclosed as available under the company’s long-term multi-currency committed revolving facilities and short-term uncommitted credit facilities are available without violating our existing debt covenants. Additional details regarding our debt are available in Note 15 accompanying the unaudited condensed consolidated financial statements within Item 1 of this report.
CONTINGENCIES, INDEMNIFICATIONS AND GUARANTEES
Details about the company’s contingencies, indemnifications and guarantees are available in Notes 21 and 22 accompanying the unaudited condensed consolidated financial statements included within Item 1 of this report. The company is routinely subject to litigation incident to operating its businesses, and has been designated by various federal and state environmental agencies as a potentially responsible party, along with numerous other companies, for the clean-up of several hazardous waste sites, including in respect of sites related to alleged activities of certain Rexam subsidiaries. The company believes the matters identified will not have a material adverse effect upon the liquidity, results of operations or financial condition of the company.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of business, the company employs established risk management policies and procedures, which seek to reduce our exposure to fluctuations in commodity prices, interest rates, exchange currencies and prices of the company’s common stock in regard to common share repurchases and the company’s deferred compensation stock plan, although there can be no assurance that these policies and procedures will be successful. The company mitigates its exposure by spreading the risk among various counterparties, thus limiting exposure with any one party. The company also monitors the credit ratings of its suppliers, customers, lenders and counterparties on a regular basis. Further details are available in Item 7A within Ball’s 2018 Annual Report on Form 10-K filed on February 22, 2019, and in Note 20 accompanying the unaudited condensed consolidated financial statements included within Item 1 of this report.
Item 4. CONTROLS AND PROCEDURES
Our chief executive officer and chief financial officer participated in management’s evaluation of our disclosure controls and procedures, as defined by the Securities and Exchange Commission (SEC), as of the end of the period covered by this report and concluded that our controls and procedures were effective. There were no changes to internal controls during the company’s second quarter of 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
FORWARD-LOOKING STATEMENTS
This release contains "forward-looking" statements concerning future events and financial performance. Words such as "expects," "anticipates," "estimates," "believes," "targets," "likely," "positions" and similar expressions typically identify forward-looking statements, which are generally any statements other than statements of historical fact. Such statements are based on current expectations or views of the future and are subject to risks and uncertainties, which could cause actual results or events to differ materially from those expressed or implied. You should therefore not place undue reliance upon any forward-looking statements and any such statements should be read in conjunction with, and, qualified in their entirety by, the cautionary statements referenced below. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Key factors, risks and uncertainties that could cause actual outcomes and results to be different are summarized in filings with the Securities and Exchange Commission, including Exhibit 99 in our Form 10-K, which are available on our website and at www.sec.gov. Additional factors that might affect: a) our packaging segments include product demand fluctuations; availability/cost of raw materials and logistics; competitive packaging, pricing and substitution; changes in climate and weather; footprint adjustments and other manufacturing changes, including the startup of new facilities and lines; failure to achieve synergies, productivity improvements or cost reductions; mandatory deposit or other restrictive packaging laws; customer and supplier consolidation, power and supply chain interruptions; potential delays and tariffs related to the U.K’s departure from the EU; changes in major customer or supplier contracts or a loss of a major customer or supplier; political instability and sanctions; currency controls; changes in foreign exchange or tax rates; and tariffs, trade actions, or other governmental actions in any country affecting goods produced by us or in our supply chain, including imported raw materials, such as pursuant to section 232 of the U.S. Trade Expansion Act of 1962; b) our aerospace segment include funding, authorization, availability and returns of government and commercial contracts; and delays, extensions and technical uncertainties affecting segment contracts; c) the company as a whole include those listed plus: changes in senior management; regulatory action or issues including tax, environmental, health and workplace safety, including U.S. FDA and other actions or public concerns affecting products filled in our containers, or chemicals or substances used in raw materials or in the manufacturing process; technological developments and innovations; litigation; strikes; labor cost changes; rates of return on assets of the company's defined benefit retirement plans; pension changes; uncertainties surrounding geopolitical events and governmental policies both in the U.S. and in other countries, including the U.S. government elections, budget, sequestration and debt limit; reduced cash flow; interest rates affecting our debt; and successful or unsuccessful joint ventures, acquisitions and divestitures, including with respect to the Rexam PLC acquisition, its integration, the associated divestiture, and their effects on our operating results and business generally.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There were no events required to be reported under Item 1 for the three months ended June 30, 2019, except as discussed in Note 21 to the unaudited condensed consolidated financial statements within Part I, Item 1 of this report.
Item 1A. Risk Factors
Risk factors affecting the company can be found within Item 1A of the company’s 2018 Annual Report on Form 10-K filed on February 22, 2019, for the year ended December 31, 2018.
Item 2. Changes in Securities
The following table summarizes the company’s repurchases of its common stock during the second quarter of 2019.
Purchases of Securities
Purchased
(a)
AveragePricePaid perShare
Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms (a)
Maximum Number ofShares that May YetBe Purchased Underthe Plans or Programs(b)
April 1 to April 30, 2019
49,072,268
May 1 to May 31, 2019
3,540,361
62.33
45,531,907
June 1 to June 30, 2019
Item 3. Defaults Upon Senior Securities
There were no events required to be reported under Item 3 for the three months ended June 30, 2019.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
There were no events required to be reported under Item 5 for the three months ended June 30, 2019.
Item 6. Exhibits
10.1
Ball Corporation Deposit Share Program for United States Participants, amended and restated as of July 27, 2016 (filed herewith).
31.1
Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) by John A. Hayes, Chairman, President and Chief Executive Officer of Ball Corporation.
31.2
Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) by Scott C. Morrison, Senior Vice President and Chief Financial Officer of Ball Corporation.
32.1
Certification pursuant to Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code by John A. Hayes, Chairman, President and Chief Executive Officer of Ball Corporation.
32.2
Certification pursuant to Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code by Scott C. Morrison, Senior Vice President and Chief Financial Officer of Ball Corporation.
Cautionary statement for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended.
101
The following materials from the company’s quarterly report on Form 10-Q for the quarter ended June 30, 2019, formatted in iXBRL (Inline eXtensible Business Reporting Language) the: (i) Unaudited Condensed Consolidated Statement of Earnings, (ii) Unaudited Statement of Comprehensive Earnings, (iii) Unaudited Condensed Consolidated Balance Sheet, (iv) Unaudited Condensed Consolidated Statement of Cash Flows and (v) Notes to the Unaudited Condensed Consolidated Financial Statements.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
By:
/s/ Scott C. Morrison
Scott C. Morrison
Senior Vice President and Chief Financial Officer
Date:
August 2, 2019
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