Ball Corporation — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; comparisons are with the same 2014 periods unless noted. Ball manufactures metal packaging and operates an aerospace and technologies business. Results are unaudited; management cautions that packaging seasonality and irregular aerospace contract revenue mean interim results may not indicate full-year performance.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $2,097.0m | $2,238.9m | $6,192.4m | $6,537.6m |
| EBIT | $76.1m | $228.0m | $475.8m | $701.3m |
| Net earnings attributable to Ball | $44.5m | $147.4m | $225.6m | $394.0m |
| Diluted EPS | $0.32 | $1.04 | $1.60 | $2.76 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $597.0m | $650.0m |
Sales fell 6% in Q3 and 5% year to date. Reported Ball-attributable earnings fell 70% in Q3 and 43% year to date. Reported EBIT margin was approximately 3.6% in Q3 and 7.7% year to date, versus 10.2% and 10.7%, respectively, in 2014. Cost of sales excluding depreciation and amortization was 80.6% of sales in Q3 and 81.2% year to date; the comparable 2014 figures were 80.7% and 80.6%.
Management’s non-GAAP comparable diluted EPS was $1.10 in Q3, unchanged from 2014, and $2.67 year to date, down from $3.04. Comparable net earnings were $154.9m and $377.1m, respectively; these measures exclude specified business-consolidation and debt-refinancing costs and should not be treated as GAAP results.
Segments and period-over-period changes
- Metal beverage, Americas and Asia: Q3 sales were $1,072.3m and segment earnings before consolidation charges were $131.9m. Year-to-date earnings declined to $383.4m from $400.8m, reflecting Brazil production curtailments, China pricing and lower standard-can volumes in North America; specialty-container sales provided some offset.
- Metal beverage, Europe: Q3 sales were $450.1m versus $489.2m; year-to-date sales were $1,310.3m versus $1,497.8m. Currency translation reduced sales by $89m in Q3 and $288m year to date. Year-to-date segment earnings before consolidation charges declined to $149.6m from $193.0m.
- Metal food and household packaging: Q3 sales declined to $372.0m from $450.6m and year-to-date sales to $1,012.3m from $1,159.4m, primarily due to lower food-container volumes following a customer shift effective January 2015, plus currency effects. Year-to-date earnings before consolidation charges were $89.5m versus $119.1m.
- Aerospace and technologies: Q3 sales were $203.4m versus $221.7m; year-to-date sales were $648.4m versus $683.5m, mainly due to completed or lower U.S. defense and commercial space programs. Year-to-date segment earnings were $60.9m versus $70.1m. Contracted backlog was $638m at September 30, down from $765m at year-end 2014.
Management attributed the consolidated sales decline mainly to unfavorable currency translation in Europe and lower North American metal food-container volumes, partly offset by higher global beverage-container volumes. Lower SG&A helped offset some pressure; Q3 SG&A was $106.8m versus $123.1m, mainly reflecting lower incentive compensation.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $597.0m, down from $650.0m. Capital expenditure was $356.8m versus $250.0m, leaving cash flow after capital expenditure of $240.2m versus $400.0m. Investing outflow was $367.6m; financing outflow was $185.8m.
- Cash was $244.4m at September 30, 2015, versus $191.4m at December 31, 2014. Current assets were $2,382.6m and current liabilities $2,279.6m.
- Interest-bearing debt was approximately $3.162bn; net debt was $2.918bn. Management reported net debt to comparable EBITDA of 2.7x and comparable EBIT to interest expense of 5.6x for the relevant trailing 12-month period.
- Ball reported $2.2bn available under its revolving facility, due February 2018, and approximately $760m of short-term uncommitted facilities, of which $88.5m was outstanding and due on demand. Approximately $1.4bn of credit-facility capacity was committed to the proposed Rexam acquisition. Ball said it was in compliance with debt covenants.
- In June, Ball issued $1bn of 5.25% senior notes due 2025. It also redeemed its 2020 and 2021 notes and refinanced facilities earlier in 2015. Year-to-date debt-refinancing and other costs were $85.9m.
Outlook, transactions, risks and unusual items
- Management expected full-year 2015 capital expenditure of approximately $500m, with about $130m contractually committed at quarter-end, and a full-year effective tax rate of approximately 17%.
- The proposed Rexam acquisition remained subject to Rexam shareholder approval, regulatory clearance and other customary conditions. Ball expected completion in the first half of 2016. The announced consideration was 407 pence cash plus 0.04568 Ball shares per Rexam share; the stated transaction value was approximately £4.3bn based on reference-date assumptions. A £302m break payment could apply in specified circumstances.
- Acquisition-related currency collars and options were not designated as accounting hedges. Ball recorded a $104.6m Q3 loss associated with these contracts; the filing reports a $36.3m net loss for the nine-month period, reflecting the period’s aggregate result. These fair-value movements contributed to sharply lower reported earnings and may not track the eventual cash purchase-price effect in the same period.
- Q3 business-consolidation and other charges were $151.9m, including the acquisition-related derivative result and acquisition professional fees. The filing also describes a planned Bristol, Virginia, end-making facility closure, expected to stop production in Q2 2016, with initial Q3 charges of $20.2m.
- Metal beverage supply continued to exceed demand in China, creating pricing pressure. Ball identified potential noncash impairment of up to $78.3m of Asia-segment goodwill if weak conditions persist; no interim impairment trigger was identified through September 30.
- Other risks include customer and supplier concentration, raw-material costs, foreign-exchange and interest-rate movements, aerospace contract funding and timing, and litigation and environmental claims. Ball said pending claims were not believed material individually or in aggregate, while noting outcomes could still adversely affect results or liquidity. The filing describes Lowry Landfill and Lower Duwamish remediation matters, among other proceedings.
- After quarter-end, Ball announced an agreement for its Latapack-Ball joint-venture partners to exchange their interests for 6m Ball treasury shares, subject to approvals and other conditions.
Key facts for investors to verify
- Reconcile the reported-versus-comparable earnings gap, especially the timing and cumulative effects of Rexam-related currency derivatives and refinancing costs.
- Track Rexam regulatory approvals, funding commitments, acquisition timetable and the potential break-payment obligation.
- Assess whether China beverage-can oversupply and pricing pressure persist and whether goodwill impairment indicators emerge.
- Monitor cash conversion, working-capital trends, planned capital expenditure and availability of borrowing capacity after acquisition commitments.
- Review aerospace backlog conversion and customer-volume trends in European beverage and North American food packaging.
- Evaluate the outcome and potential financial exposure from disclosed litigation, environmental proceedings and other contingencies.