Ball Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless otherwise noted. Ball manufactures metal beverage, food and household packaging and provides aerospace and related technologies and services. Results are unaudited, and management cautions that seasonality and irregular aerospace contract revenues make quarterly results potentially unrepresentative of the full year.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $2,006.8 million | $1,991.0 million |
| EBIT | $217.4 million | $143.0 million |
| Net earnings attributable to Ball | $93.5 million | $72.0 million |
| Diluted EPS | $0.65 | $0.47 |
| Operating cash flow | $(136.2) million | $(324.6) million |
| Capital expenditures | $61.4 million | $88.7 million |
- Sales increased about 0.8%; EBIT rose about 52%. Ball-attributable earnings increased about 30%, while diluted EPS rose about 38%, supported in part by lower weighted-average share count.
- Ball-attributable net margin was 4.7%, versus 3.6%. Cost of sales excluding depreciation and amortization declined to 80.4% of sales from 82.5%.
- Operating cash outflow improved year over year, but remained negative, reflecting a $302.0 million working-capital use. Management cited improved receivables, inventory and payables metrics and lower pension funding as reasons for the improvement.
- At March 31, cash was $175.4 million, down from $416.0 million at year-end. Total debt was $3.77 billion, versus $3.6 billion at year-end; net debt was $3.60 billion. Total shareholders’ equity was $1.28 billion, down from $1.39 billion.
- Management reported $709 million available on committed revolving facilities through June 2018, plus $818 million of short-term uncommitted facilities, of which $200.2 million was outstanding and due on demand. The company was in compliance with debt covenants.
Material changes and segment results
- Metal beverage packaging, Americas and Asia: sales were essentially flat at $997.6 million; segment earnings increased to $129.7 million from $102.5 million, reflecting specialty-can volumes and improved manufacturing performance.
- Metal beverage packaging, Europe: sales rose to $450.2 million from $402.9 million; earnings increased to $54.3 million from $29.2 million, on higher volumes, favorable mix and lower costs.
- Metal food and household products packaging: sales declined to $341.1 million from $367.2 million, primarily on lower North American tinplate food and aerosol volumes. Earnings rose to $33.2 million from $15.9 million, largely because Q1 2013 included substantial closure costs.
- Aerospace and technologies: sales decreased to $220.7 million from $231.4 million, mainly on lower U.S. national defense contract sales; earnings increased to $24.1 million from $17.9 million due to favorable fixed-price program execution. Backlog was $868 million, down from $938 million at year-end.
Outlook, management commentary and risks
- Management expects a full-year 2014 effective tax rate of approximately 29% and capital expenditures of approximately $375 million; about $135 million was contractually committed at quarter-end. It expects pension contributions of about $67 million to funded plans and approximately $23 million of payments to unfunded German plans.
- Management said operating cash flow and available borrowings should meet operating, debt-service, dividend and capital expenditure needs. It described liquidity as strong, while noting seasonal working-capital needs.
- Reported interest expense included a $33.1 million pretax charge for redeeming the 7.375% senior notes due 2019. Comparable diluted EPS, excluding specified items, was $0.81 versus $0.58; these are non-GAAP measures.
- Ball repurchased $202.8 million of treasury shares during the quarter, including a $100 million accelerated share repurchase; the agreement was expected to settle by the end of Q2. The company declared and paid a $0.13-per-share dividend.
- Key exposures include customer and supplier concentration, metal and energy costs, foreign exchange, interest rates, industry capacity and pricing, pension assumptions, and the funding and timing of aerospace contracts. A hypothetical 10% strengthening of the U.S. dollar was estimated to reduce annual after-tax earnings by $25.1 million.
- Ball disclosed ordinary-course litigation and environmental matters, including the Lowry Landfill and Lower Duwamish sites and a patent dispute. Management did not believe these matters would materially affect the company, but noted that outcomes could differ and insurance may not cover all costs. Certain indemnities and guarantees have no stated maximum exposure, which the company said it could not reasonably estimate.
Important facts for investors to verify
- Whether improved packaging volumes, manufacturing performance and European results continue, and whether North American food and aerosol weakness persists.
- How working capital converts into cash in subsequent quarters, given the Q1 operating cash outflow and seasonal business patterns.
- Debt, liquidity and covenant headroom, including short-term borrowings due on demand and the use of receivables factoring and securitization.
- Progress toward the $375 million capital expenditure plan, pension funding expectations and the approximately 29% full-year tax-rate outlook.
- Final settlement of the accelerated share repurchase and the continuing effect of repurchases on cash, debt and per-share results.
- Developments in aerospace backlog and contract execution, as well as resolution and potential costs of disclosed legal and environmental contingencies.