Ball Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Ball makes metal packaging for beverage, food, personal care and household products, and provides aerospace and technology products and services. Amounts are in U.S. dollars; financial figures are in millions unless noted.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $2,277.9 | $2,282.5 | $6,471.3 | $6,621.5 |
| EBIT | $211.6 | $218.6 | $558.1 | $638.2 |
| Net earnings attributable to Ball | $115.2 | $115.1 | $282.3 | $342.9 |
| Diluted EPS | $0.78 | $0.73 | $1.88 | $2.16 |
| Operating cash flow | Not presented by quarter | $451.9 | $388.3 |
- Q3 sales were essentially flat year over year; nine-month sales declined 2.3%. Ball attributed the year-to-date decrease mainly to lower North American metal beverage container volumes.
- Q3 net earnings attributable to Ball were approximately flat, while diluted EPS increased, with the weighted-average diluted share count lower year over year. Nine-month earnings and diluted EPS fell, reflecting weaker operating results and higher restructuring and refinancing costs.
- Cost of sales excluding depreciation and amortization was 81.1% of sales in Q3 and 81.7% year to date, versus 81.8% and 82.2% in the comparable 2012 periods. SG&A rose to 4.3% of Q3 sales and 4.8% year to date, from 3.8% and 4.3%.
- Cash from operations less capital expenditures was $142.3 for the first nine months of 2013, compared with $181.4 in 2012; this is a simple calculation from reported cash flow and capex.
Segments and material changes
- Metal beverage packaging, Americas and Asia: Q3 sales decreased $60.4 and segment earnings before consolidation costs decreased $7.4. North American standard 12-ounce can volumes and unfavorable PRC pricing weighed on results; manufacturing improvements partly offset the declines.
- Metal beverage packaging, Europe: Q3 sales increased $38.1 and segment earnings before consolidation costs increased $6.2. Year-to-date earnings were lower by $9.5, with product mix, labor costs and price-cost compression cited as factors.
- Metal food and household products packaging: Q3 sales rose $17.8 and earnings before consolidation costs rose $8.3, supported by the Mexico acquisition, seasonal food volumes and improved manufacturing. The segment recorded $28.9 of Q3 consolidation and other charges, including a $27.0 receivables provision tied to a customer bankruptcy filing on October 28, 2013.
- Aerospace and technologies: Year-to-date sales increased $43.2, primarily from higher U.S. national defense contract sales, but earnings declined $7.4 because 2012 included more favorable contract adjustments. Backlog was $942 at September 30, down from $1.0 billion at year-end 2012.
Balance sheet, debt and liquidity
- At September 30, cash was $168.2; current assets were $2,425.4 and current liabilities were $1,570.2.
- Total interest-bearing debt was approximately $3.522 billion, versus $3.305 billion at December 31, 2012. Net debt, as defined by Ball, was $3.354 billion. Long-term debt was $3.418 billion.
- Ball reported $984 of availability under committed revolving credit facilities and approximately $658 of short-term uncommitted facilities, of which $57.9 was outstanding and due on demand. The company was in compliance with debt covenants.
- Operating cash flow was $451.9; capital expenditures were $309.6, versus $206.9 in the prior-year period. Investing cash outflow was $321.6. Financing cash outflow was $126.6, including $292.2 of treasury-share purchases and $56.8 of dividends.
- In May, Ball issued $1.0 billion of 4.00% notes due 2023, redeemed $375 of 7.125% notes due 2016 and repaid a $125 term loan. Refinancing and related charges totaled $28.0 for the first nine months. The revolving-credit maturity was extended to June 2018.
Outlook, commentary and risks
- Management said operating cash flows and available committed borrowing capacity should be sufficient for ongoing operations, debt service, dividends and anticipated capital spending.
- Ball expected 2013 capital expenditures of approximately $400; $125 was contractually committed at quarter-end. It expected a full-year 2013 effective tax rate of approximately 28%.
- Ball expected approximately $95 of contributions to funded defined-benefit plans for 2013, of which $89.7 had been contributed by September 30, plus approximately $23 of payments to participants in unfunded German plans.
- A compensation agreement with the PRC government for vacating and relocating the Shenzhen facility was expected to provide approximately $72 pretax. Ball received $28.4 in Q3, with the remainder expected in Q4; some proceeds were deferred pending related costs and losses.
- Key risks include customer and supplier concentration, raw-material and energy costs, packaging demand and pricing, production capacity and cost-reduction execution, foreign exchange, pension obligations, and funding, timing and performance of aerospace contracts. The filing notes that packaging results are seasonal and aerospace contract revenue can be irregular.
- Ball recorded a $27.0 provision against an approximately $46.5 receivable from the customer that filed for bankruptcy after quarter-end. Management said its estimated potential loss could change materially as the customer’s circumstances develop.
- Other unusual items included restructuring charges, planned closure of the Elgin, Illinois facility, Shenzhen relocation costs and compensation, and continued share repurchases. Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting during the first nine months.
Important facts for investors to verify
- Recovery prospects for the bankrupt customer receivable and whether the $27.0 provision ultimately captures Ball’s exposure.
- Timing and final net financial effect of Shenzhen compensation, relocation and closure costs.
- Whether North American beverage-can volumes, especially standard 12-ounce cans, stabilize and whether manufacturing improvements persist.
- Execution and total costs of restructuring actions, including the Elgin closure, and how much of reported earnings weakness is recurring versus unusual.
- Progress against the $400 capital-spending outlook, pension funding estimates, debt levels and liquidity availability.
- Aerospace backlog conversion, contract funding and the impact of contract adjustments on segment earnings.