Ball Corporation — Q2 2013 Form 10-Q
Business context and period. Ball manufactures metal beverage, food and household-product packaging and provides aerospace and technology products and services. This unaudited filing covers the three and six months ended June 30, 2013; comparisons are with the periods ended July 1, 2012. Amounts are in U.S. dollars unless noted. Ball cautions that interim results may not indicate full-year performance because of packaging seasonality and irregular aerospace contract revenues.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $2,202.4 million | $2,296.3 million | $4,193.4 million | $4,339.0 million |
| Earnings before interest and taxes (EBIT) | $203.5 million | $237.6 million | $346.5 million | $419.6 million |
| Net earnings attributable to Ball | $95.1 million | $139.5 million | $167.1 million | $227.8 million |
| Diluted EPS | $0.63 | $0.88 | $1.10 | $1.42 |
| Ball net earnings as % of sales | 4.3% | 6.1% | 4.0% | 5.3% |
| Operating cash flow | Not presented for the quarter | $(57.5) million | $74.7 million |
- Cost of sales, excluding depreciation and amortization, was 81.7% of sales in Q2 and 82.1% for the first half, versus 82.3% and 82.5%, respectively, in 2012.
- First-half capital expenditures were $201.1 million; operating cash flow less capital expenditures was negative $258.6 million.
- At June 30, cash was $169.5 million; short-term debt and current maturities were $358.5 million and long-term debt was $3,472.6 million. Total interest-bearing debt was $3.831 billion, versus $3.3 billion at year-end 2012. Net debt was $3.662 billion.
- Total current assets were $2.620 billion and current liabilities $1.767 billion. About $926 million was available on committed revolving facilities; a further $583 million of short-term uncommitted facilities was available, of which $169.3 million was drawn and due on demand.
Material changes versus the prior comparable period
- Q2 sales declined $93.9 million and first-half sales declined $145.6 million. Ball attributed the reductions mainly to lower metal beverage-container volumes in North America and Europe; higher food and aerosol volumes and aerospace revenues partly offset the decline.
- Ball-attributable earnings fell $44.4 million in Q2 and $60.7 million in the first half. Results included higher consolidation charges and Q2 refinancing costs, partly offset by a lower tax rate.
- Metal beverage packaging, Americas and Asia, reported lower sales and earnings, chiefly from lower standard 12-ounce can volumes in North America. Europe earnings also declined, reflecting lower volume, unfavorable mix and higher input and labor costs.
- Food and household packaging earnings before consolidation costs improved, supported by manufacturing performance and Q2 volume; aerospace sales rose on U.S. national defense contracts, but earnings decreased due to program start-up timing and the absence of favorable 2012 fixed-price contract adjustments.
- First-half operating cash flow shifted from positive $74.7 million to negative $57.5 million, primarily because of unfavorable working-capital movements, including higher inventory days on hand (56 versus 51).
Outlook, management commentary, risks and unusual items
- Management expected 2013 capital expenditures of approximately $400 million, with about $140 million contractually committed at June 30. The expected full-year effective tax rate on continuing operations was approximately 27%. The filing does not provide a specific full-year earnings or revenue forecast.
- Management said expected operating cash flows and available borrowing facilities should meet operating needs, debt service, dividends and anticipated capital spending. It expected 2013 contributions of about $95 million to funded defined-benefit plans and approximately $22 million of payments to unfunded German plans.
- In May, Ball issued $1 billion of 4.00% notes due 2023, redeemed $375 million of 7.125% notes due 2016, and repaid a $125 million Term A loan. Refinancing-related charges were $26.7 million in Q2. The revolving-credit-facility maturity was extended to June 2018. Ball reported compliance with debt covenants; stated limits include minimum interest coverage of 3.50 and maximum leverage of 4.00.
- Business consolidation and other charges were $22.6 million in Q2 and $45.3 million in the first half, versus $2.8 million and $7.2 million, respectively, in 2012. These included closure-related costs, notably the planned December 2013 closure of the Elgin, Illinois facility; approximately $7 million of additional Elgin charges were expected through Q1 2014. Ball also recorded costs related to Milwaukee production changes and pension-plan migration.
- In July 2013, Ball signed an agreement with the PRC government to vacate its Shenzhen facility and relocate production equipment by the end of September; expected compensation proceeds were to offset closure and relocation costs.
- Aerospace contracted backlog was $966 million at June 30, versus $1.0 billion at year-end 2012; management cautioned that backlog comparisons may not predict future operations because of delivery schedules and program funding.
- Key stated risks include customer and supplier concentration, metal-container overcapacity and pricing, raw-material and energy costs, demand and volume changes, foreign exchange and interest-rate exposure, pension assumptions, aerospace contract funding and timing, and litigation, environmental and tax matters. Ball said it did not believe pending legal matters were material individually or in aggregate, but noted resolution could adversely affect results, liquidity or financial condition. The Lowry Landfill matter was not considered likely to have a material adverse effect based on information available.
- Ball reported effective disclosure controls and no material changes to internal control over financial reporting during the first half.
Important facts for investors to verify
- Whether beverage-container volume weakness and the resulting segment earnings declines persist, and whether manufacturing improvements can offset them.
- Working-capital trends and whether operating cash flow recovers after the first-half outflow, alongside planned capital expenditures and ongoing share repurchases.
- Debt levels, refinancing effects, covenant headroom and dependence on short-term facilities due on demand.
- Actual costs and savings from facility closures, including Elgin and Shenzhen, and whether expected compensation and restructuring estimates are realized.
- Delivery, funding and profitability of aerospace programs, and the conversion of reported backlog into revenue and cash.
- Actual tax rate, pension funding needs, and any changes in litigation, environmental or other contingent exposures.