Ball Corporation — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing, not a standalone quarterly report; fourth-quarter figures are included below where disclosed. Dollar amounts are in millions unless noted.
Business context
Ball supplies metal packaging for beverage, food, personal care and household products, and provides aerospace and technology products and services. Packaging represented 90% of 2012 sales and aerospace 10%. Metal beverage containers alone represented 74% of consolidated sales. Ball reported four segments: metal beverage packaging, Americas and Asia; metal beverage packaging, Europe; metal food and household products packaging, Americas; and aerospace and technologies.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $8,735.7 | $8,630.9 |
| EBIT | $790.5 | $836.9 |
| Net earnings attributable to Ball | $403.5 | $444.0 |
| Diluted EPS | $2.55 | $2.63 |
| Comparable diluted EPS (non-GAAP) | $3.06 | $2.73 |
| Operating cash flow | $853.2 | $948.4 |
| Free cash flow (non-GAAP) | $548.2 | $504.6 |
| Total debt, including capital leases | $3,305.1 | $3,144.1 |
Sales increased 1.2%, while reported EBIT declined 5.5% and attributable net earnings declined 9.1%. Net margin was 4.6%, versus 5.1% in 2011. Comparable EBIT rose to $893.3 from $867.2, and comparable earnings increased to $483.0 from $459.6; these are company-defined non-GAAP measures. Operating cash flow fell mainly because U.S. pension contributions were approximately $90 million higher. Capital expenditures were $305.0, versus $443.8; reported free cash flow increased year over year.
At year-end, cash was $174.1, current assets were $2,339.4 and current liabilities were $1,685.8. Approximately $773 million was available under committed revolving facilities, and about $614 million of short-term uncommitted facilities was available, of which $115.7 million was drawn and due on demand. Ball reported compliance with its debt covenants. Net debt to comparable EBITDA was 2.7x, versus 2.5x in 2011.
For Q4 2012, sales were $2,114.2, attributable earnings were $60.6 and diluted EPS was $0.39. Q4 2011 figures were $2,051.7, $77.5 and $0.47, respectively.
Segments and material changes
- Americas and Asia beverage packaging: Sales were $4,541.7, up from $4,415.8; segment earnings before consolidation costs rose to $522.5 from $481.7. Higher volumes, favorable mix and new facilities contributed; restructuring charges were substantially higher.
- Europe beverage packaging: Sales were $1,950.0, down from $2,017.6, and segment earnings before consolidation costs were $219.0, down from $243.7. Unfavorable currency translation and higher operating costs weighed on results.
- Americas food and household packaging: Sales declined to $1,381.4 from $1,426.4; segment earnings before consolidation costs were $131.1 versus $133.7. Lower volumes and the absence of prior-year inventory holding gains affected comparison.
- Aerospace and technologies: Sales increased to $876.8 from $784.6 and segment earnings before consolidation costs rose to $86.6 from $79.6, reflecting stronger national defense contract sales and program performance. Backlog increased 14% to $1.0 billion; $601 million was expected to convert to revenue in 2013.
Ball issued $750 million of 5.00% senior notes due 2022 and redeemed $450 million of 6.625% notes due 2018, recording $15.1 million of refinancing costs. It repurchased shares for $494.1 million net of issuances and paid $61.8 million in dividends. The quarterly dividend was raised to $0.13 per share beginning with the March 2013 payment.
Outlook, risks and unusual items
- Management estimated 2013 operating cash flow of approximately $850 million, capital expenditures of approximately $400 million and free cash flow of approximately $450 million. About $188 million of 2013 capital spending was contractually committed at year-end 2012.
- Management’s long-term financial strategy targeted annual EPS growth of 10%–15%, alongside free-cash-flow generation and increased EVA dollars; this is a strategic objective, not a specific 2013 earnings forecast.
- Material risks include customer concentration and possible reductions in customer requirements; packaging overcapacity and competition from plastic, glass and other materials; raw-material and energy costs; foreign exchange exposure; pension funding; and U.S. government budget cuts or sequestration affecting aerospace contracts. Approximately 90% of aerospace segment sales came from federal government-funded contracts in 2012.
- Business consolidation and other activities reduced 2012 earnings by $102.8 million. Significant actions included planned closures of beverage facilities in Columbus, Ohio, and Gainesville, Florida, and a Canadian pension settlement charge. A further approximately $13.1 million of charges for the beverage facility closures was expected in the first half of 2013. The planned Elgin, Illinois, facility closure was announced in February 2013; an estimated after-tax charge of approximately $21 million was expected.
- A change in estimated useful lives of certain production equipment reduced 2012 depreciation and cost of sales by $34.9 million ($22.3 million after tax, or $0.14 per diluted share). A related accounting alignment for tooling, spare parts and dunnage increased costs by $11.0 million ($6.7 million after tax).
- Ball disclosed $87.0 million of unrecognized tax benefits, with timing of resolution uncertain. It also faces ordinary-course litigation and environmental matters; management did not expect identified matters to materially affect financial condition, liquidity or results, but outcomes are not assured.
Important facts for investors to verify
- Reconcile reported earnings and EPS with the company’s adjusted comparable measures, particularly the $102.8 million of consolidation and other charges and the equipment-life estimate change.
- Assess the outlook for cash flow, capital spending, pension contributions and shareholder returns against the company’s debt and refinancing obligations.
- Monitor beverage-container demand, customer volume changes, facility consolidation execution and the expected offset from specialty-container growth.
- Track aerospace backlog funding and conversion, including exposure to government budget reductions and unfunded orders.
- Review the progression of pension obligations, uncertain tax positions, foreign exchange exposure and the integration of recent acquisitions.