Ball Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; comparisons are with the periods ended October 2, 2011. Ball supplies metal packaging and aerospace products and services. Results are unaudited; packaging is seasonal and aerospace revenue can vary with contract timing.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $2,282.5 million | $2,258.3 million | $6,621.5 million | $6,579.2 million |
| EBIT | $218.6 million | $228.6 million | $638.2 million | $676.7 million |
| Net earnings attributable to Ball | $115.1 million | $132.1 million | $342.9 million | $366.5 million |
| Diluted EPS | $0.73 | $0.79 | $2.16 | $2.15 |
| Ball net earnings as % of sales | 5.0% | 5.8% | 5.2% | 5.6% |
Sales were nearly flat year over year, while reported earnings declined. Management’s non-GAAP comparable diluted EPS was $0.90 for Q3 versus $0.81 and $2.42 for the first nine months versus $2.24; comparable earnings exclude specified consolidation, discontinued-operation and, for the year-to-date period, refinancing items.
- Cash flow: Nine-month operating cash flow was $388.3 million, down from $441.0 million. Capital expenditures were $206.9 million, implying company-defined free cash flow of approximately $181.4 million. Investing cash outflow was $204.2 million; financing cash outflow was $169.8 million. Cash ended at $181.2 million.
- Balance sheet and debt: Total assets were $7.524 billion. Interest-bearing debt was $3.334 billion versus $3.144 billion at year-end 2011; net debt was $3.153 billion. Current assets of $2.570 billion exceeded current liabilities of $1.830 billion. Shareholders’ equity totaled $1.470 billion.
- Liquidity: Approximately $983 million remained available on committed revolving facilities through December 2015. A further $476 million of short-term uncommitted facilities was available, of which $154.1 million was outstanding and due on demand. Ball reported compliance with debt covenants.
Material changes and segment results
- Metal beverage packaging, Americas and Asia, increased sales and segment earnings before consolidation costs, supported by volume, pricing and mix. Segment sales were $1.170 billion in Q3 and $3.427 billion year to date.
- Europe sales and earnings declined year to date, with currency translation and price/cost compression affecting results. Metal food and household packaging sales and year-to-date earnings also declined, including comparison against $16 million of prior-year inventory holding gains. Aerospace and technologies sales and earnings increased; backlog reached approximately $1.1 billion, up from $897 million at year-end 2011.
- Business consolidation and other charges rose to $36.8 million in Q3 and $44.0 million year to date, primarily reflecting planned closures of the Columbus, Ohio, can facility and Gainesville, Florida, end facility. Ball expects approximately $33 million of additional closure charges through the first half of 2013, mostly in Q4 2012.
- A revised useful-life estimate for certain can-making equipment reduced depreciation and cost of sales by $26.7 million year to date ($16.8 million after tax, or $0.10 per diluted share). A separate accounting alignment for tooling, spare parts and dunnage increased costs by $8.1 million year to date ($4.7 million after tax, or $0.03 per diluted share).
- Ball issued $750 million of 5.00% notes due 2022 and redeemed $450 million of 6.625% notes due 2018. The refinancing generated a $15.1 million charge. Share repurchases, net of issuances, were $304.9 million year to date; dividends were $0.10 per share in each of the first three quarters.
Outlook, risks and contingencies
- Management expected a full-year 2012 effective tax rate of approximately 27% and capital expenditures below $350 million; approximately $120 million of capex was contractually committed at September 30. It expected operating cash flow and available borrowing capacity to cover ongoing requirements, debt service, dividends and anticipated investment. The filing provides no clear full-year earnings or EPS guidance.
- Ball expected approximately $110 million of 2012 contributions to funded defined-benefit plans and approximately $22 million of payments to unfunded German plans; $108.7 million had been contributed to funded plans by September 30.
- In October, Ball announced a proposed acquisition of a Mexican aerosol-packaging producer and a separate Argentina joint venture, for approximately $125 million plus contribution of Ball’s Argentine aerosol business. The transactions were subject to conditions and regulatory approvals; Ball expected to own 25% of the joint venture.
- Key stated risks include customer and supplier concentration, demand and capacity changes, metal and energy costs, price/cost pass-through, foreign exchange, pension assumptions, interest rates, and the timing, funding and performance of aerospace contracts. Management also cautioned that litigation and environmental matters could ultimately affect results despite its view that existing matters were adequately accrued and not expected to be material.
- Unusual legal items include a $4 million Hess settlement recorded in discontinued operations. A Crown patent dispute remained under appeal, with a hearing scheduled for December 2012. Ball reported no material change in disclosure controls and management concluded they were effective.
Investor verification points
- Check whether the expected additional $33 million of facility-closure costs and related savings materialize on schedule.
- Assess underlying earnings after separating the depreciation-estimate benefit, tooling/spares charges, consolidation costs and refinancing charge.
- Monitor working capital, pension funding, capital spending and the ability to sustain cash generation and share repurchases.
- Review debt maturities, variable-rate exposure, available committed liquidity and covenant headroom as debt has increased.
- Verify progress and final terms of the proposed Envases acquisition and joint venture, and track aerospace backlog conversion and segment margins.
- Follow the Crown appeal and other litigation/environmental contingencies; the filing does not quantify a clear maximum exposure for all such matters.