Ball Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with the three months ended April 1, 2012, unless noted. Ball supplies metal packaging for beverage, food, personal care and household products, and aerospace and technology products and services. Results are unaudited; management cautions that packaging seasonality and irregular aerospace contract revenues limit the usefulness of quarterly results as a full-year indicator.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $1,991.0 million | $2,042.7 million |
| EBIT | $143.0 million | $182.0 million |
| Net earnings attributable to Ball | $72.0 million | $88.3 million |
| Diluted EPS | $0.47 | $0.55 |
| Operating cash flow | $(324.6) million | $(218.3) million |
| Capital expenditures | $88.7 million | $76.0 million |
- Ball-attributable net margin was 3.6%, down from 4.3%. Cost of sales excluding depreciation and amortization was 82.5% of sales versus 82.6%; SG&A rose to 5.5% of sales from 4.9%.
- Reported net earnings included $22.7 million of business consolidation and other charges, versus $4.4 million a year earlier. Comparable net earnings, a company-defined non-GAAP measure, were $87.9 million ($0.58 per diluted share), versus $100.8 million ($0.63).
- Operating cash use increased mainly because working capital consumed $450.3 million, compared with $327.3 million in Q1 2012. Management cited higher inventory days and receivable collection days, partly offset by increased payable days. Financing activities provided $469.0 million, including net short-term borrowings; cash ended the quarter at $208.0 million.
- At March 31, total debt was $3.831 billion, compared with approximately $3.3 billion at year-end, reflecting seasonal working-capital needs. Net debt was $3.623 billion. Total assets were $7.776 billion and shareholders’ equity was $1.258 billion.
- Current assets were $2.623 billion and current liabilities $1.743 billion. Approximately $494 million remained available on committed revolving facilities; $635 million of short-term uncommitted facilities was available, of which $170.7 million was outstanding and due on demand. Ball also had $171 million of receivables sold under its securitization agreement.
Changes versus prior period and segment results
- Sales declined 2.5%, primarily due to lower metal packaging volumes. EBIT fell $39.0 million; lower consolidation charges and the absence of 2012 debt-refinancing costs partly offset weaker operating results. Q1 2012 interest expense included $15.1 million of refinancing costs.
- Metal beverage packaging, Americas and Asia: Sales were $995.2 million versus $1,049.7 million; segment earnings before consolidation costs were $104.0 million versus $105.5 million. Lower North American commodity-container volumes were partly offset by favorable pricing and mix and improved manufacturing performance.
- Metal beverage packaging, Europe: Sales were $402.9 million versus $414.5 million; segment earnings before consolidation costs were $30.9 million versus $42.4 million. Lower volume, unfavorable pricing and mix, and higher input costs weighed on results.
- Metal food and household products packaging: Sales were $367.2 million versus $378.9 million; segment earnings before consolidation costs were $34.7 million versus $39.3 million. The segment reported $18.8 million of consolidation charges, principally related to the planned Elgin facility closure.
- Aerospace and technologies: Sales rose to $231.4 million from $201.6 million, mainly on higher U.S. national defense contract sales; earnings declined to $17.9 million from $19.7 million, partly because favorable nonrecurring fixed-price contract adjustments did not recur. Contracted backlog was approximately $1.1 billion at quarter-end, versus $1.0 billion at year-end.
- From January 1, 2013, Ball moved its European extruded-aluminum business into the metal food and household products segment and retrospectively adjusted prior-period segment comparisons.
Outlook, management commentary and risks
- Management said operating cash flow and available borrowings should meet ongoing needs, debt service, dividends and planned capital expenditures. It expected 2013 capital expenditures of approximately $400 million, with about $160 million contractually committed at March 31.
- Ball expected a full-year 2013 effective tax rate of approximately 28% on a U.S. GAAP basis. It expected approximately $95 million of contributions to funded global benefit plans and approximately $22 million of payments to unfunded German plans for the year.
- Ball announced that it would close its Elgin, Illinois, facility in December 2013. It recorded a $20.8 million charge related to the closure and expected approximately $12 million of additional charges during the remainder of 2013. Approximately $10 million of additional charges were also expected in 2013 for previously announced beverage-plant closures and separation programs.
- Ball reported compliance with debt covenants at March 31. Its most restrictive specified thresholds were interest coverage of at least 3.50 and leverage no greater than 4.00; the disclosed trailing-12-month net-debt-to-comparable-EBITDA ratio was 3.1x and comparable-EBIT-to-interest coverage was 4.9x.
- Principal risks include customer and supplier concentration, packaging demand and pricing, industry overcapacity, raw-material and energy costs, the ability to pass cost changes through to customers, foreign exchange and interest-rate exposure, pension obligations, and the funding and timing of aerospace contracts. Derivative hedges may not fully offset market exposures.
- Ball is party to ordinary-course litigation and environmental matters. It said it did not expect the identified proceedings to be material individually or in aggregate, while noting final outcomes could adversely affect results or liquidity. For the Lowry Landfill matter, additional payments could be sought if site costs exceed $319 million; Ball stated it did not believe the matter would have a material adverse effect based on information then available. Certain indemnities have no stated maximum exposure, which Ball said it could not reasonably estimate.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track working-capital trends and seasonal cash usage, particularly inventory, receivable days and reliance on short-term borrowing and receivables programs.
- Assess whether volume and margin trends improve in European beverage packaging and food and household products packaging, and whether planned plant closures deliver expected savings.
- Verify the timing and amount of remaining Elgin and other consolidation costs, and compare actual 2013 capital spending and pension contributions with management’s expectations.
- Monitor debt levels, covenant headroom, available committed credit and refinancing needs; consider that some short-term facilities are due on demand.
- Follow aerospace contract funding, backlog conversion and fixed-price contract performance, as backlog comparisons may not predict future operations.
- Review developments in litigation, environmental exposure, pension obligations and the effectiveness of commodity, currency and interest-rate hedges.