Ball Corporation — 2014 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; unaudited. Ball makes metal packaging for beverage, food and household products markets and provides aerospace and technology products and services. Comparisons below are with the corresponding 2013 periods; certain 2013 figures were revised for deferred-tax corrections.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $2,238.9 million | $2,277.9 million | $6,537.6 million | $6,471.3 million |
| EBIT | $228.0 million | $211.6 million | $701.3 million | $558.1 million |
| Net earnings attributable to Ball | $147.4 million | $115.2 million | $394.0 million | $282.3 million |
| Diluted EPS | $1.04 | $0.78 | $2.76 | $1.88 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $650.0 million | $411.3 million |
- Q3 sales declined about 2%, while Ball-attributable earnings rose about 28%. For the first nine months, sales increased about 1% and attributable earnings rose about 40%.
- Cost of sales, excluding depreciation and amortization, was 80.7% of sales in Q3 and 80.6% year to date, compared with 81.1% and 81.7%, respectively, in 2013. Ball-attributable earnings were 6.6% of sales in Q3 and 6.0% year to date, versus 5.1% and 4.4%.
- Q3 comprehensive earnings attributable to Ball were $75.0 million, down from $179.2 million, reflecting a $106.1 million foreign-currency translation loss in other comprehensive earnings.
- At September 30, cash was $189.5 million, total debt was $3,315.5 million, and net debt was $3,126.0 million. Total debt was $3.6 billion at December 31, 2013. Total assets were $7,614.9 million and total equity was $1,414.7 million.
- Nine-month investing cash outflow was $238.9 million, including $250.0 million in capital expenditures. Financing cash outflow was $633.3 million, including $335.5 million of treasury-stock purchases and $54.8 million of dividends. Cash declined $226.5 million from year-end.
Changes and operating drivers
- Q3 sales were lower mainly because of reduced beverage-container volumes in Brazil and lower North American food and household-product volumes. Earnings improved with higher beverage-container volumes, lower depreciation, lower consolidation costs, lower interest expense and a lower quarterly tax rate.
- Year-to-date earnings benefited from higher beverage-container volumes, favorable European currency translation, lower depreciation and consolidation costs, and lower interest expense. Offsets included weaker North American food and household volumes, poor U.S. tinplate service-center performance, higher refinancing costs and a higher tax rate.
- Metal beverage packaging in Europe and Aerospace and Technologies improved earnings year to date. Metal food and household packaging earnings declined, principally due to lower volumes and U.S. tinplate manufacturing performance.
- SG&A increased to $123.1 million in Q3 and $342.2 million year to date, from $99.0 million and $311.2 million, respectively, primarily due to higher incentive compensation and currency effects.
- Cash from operations improved year over year, mainly from favorable working capital: annualized days sales outstanding declined from 45 to 39 days and days payable outstanding increased from 48 to 63 days.
Liquidity, debt and outlook
- Management said liquidity was strong and expected operating cash flow and available borrowing capacity to cover ongoing operations, debt service, dividends and anticipated capital spending. About $984 million was available on committed revolving facilities through June 2018; approximately $840 million of short-term uncommitted facilities was also available, with $113.1 million outstanding and due on demand.
- Ball was in compliance with debt covenants at September 30. Covenants include minimum interest coverage of 3.50 and maximum leverage of 4.00, as defined in the agreements. The company reported a 5.7x comparable EBIT-to-interest ratio and 2.5x net debt-to-comparable EBITDA for the trailing 12 months.
- Management expected 2014 capital expenditures of about $375 million, with approximately $200 million contractually committed at quarter-end. It expected a full-year 2014 effective tax rate of approximately 25%.
- Defined-benefit plan contributions, excluding unfunded German plans, were expected to total about $90 million for 2014; payments to German plan participants were expected to be about $23 million. Ball expected a non-cash pension settlement charge of approximately $40 million in Q4 2014 related to a lump-sum buyout offer; the final amount could change with asset returns and assumptions.
- Aerospace and Technologies contracted backlog was $846 million at September 30, down from $938 million at December 31, 2013. The filing cautions that backlog is not necessarily indicative of future operations because of delivery schedules, program funding and award timing.
- Expansion plans included a Myanmar beverage-can facility and an India aluminum-aerosol facility, each expected to begin production in the second half of 2015.
Unusual items, risks and contingencies
- Nine-month 2014 results included a $33.1 million pretax refinancing charge for redeeming 7.375% senior notes. Business consolidation and other charges were $17.8 million for the nine months, versus $89.1 million in 2013; 2013 included significant closure and restructuring costs.
- In Q2 2014, Ball identified deferred-tax errors originating in 2007 and earlier, primarily involving Canadian tax and benefit balances. Management judged the prior-period errors not material to those periods, but concluded correction was material to Q2 and full-year 2014 earnings; it revised the 2013 interim comparisons in this filing and said 2013 and 2012 annual statements would be revised in the 2014 Form 10-K.
- Risks include customer and supplier concentration, metal and energy costs, packaging-industry overcapacity and pricing, foreign-exchange movements, pension assumptions, aerospace contract funding and timing, and litigation and environmental matters. Ball identified potential responsibility at several environmental sites and described patent and tax disputes; it did not believe the disclosed matters would materially affect its financial condition, liquidity or results, while noting outcomes could differ.
- A hypothetical 10% strengthening of the U.S. dollar could reduce annual net earnings by an estimated $27.0 million after tax, considering exposures and derivatives at September 30. Management cautioned that hedging policies may not fully succeed.
- Management concluded disclosure controls were effective and reported no material changes to internal control over financial reporting during the first nine months of 2014.
Important facts for investors to verify
- Review the 2014 Form 10-K for the promised revisions to 2012 and 2013 statements and the final treatment of the deferred-tax corrections.
- Check whether the expected Q4 pension settlement charge, full-year tax rate and capital spending matched management’s estimates.
- Assess whether improved operating cash flow is sustainable, given the contribution from faster collections and extended supplier-payment timing, and monitor cash use for repurchases and dividends.
- Track performance in North American food and household packaging, U.S. tinplate operations, Brazil beverage volumes, and progress against aerospace backlog and funding schedules.
- Monitor foreign-exchange, commodity, pension, customer-concentration and environmental/legal exposures, along with debt levels and covenant headroom.