Business Context and Reporting Period
Company: Ball Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended March 28, 2010
Business Overview: Ball is a leading global supplier of metal and plastic packaging for beverage, food, and household products, as well as aerospace and technologies services. Operations are organized into five segments: Metal Beverage Packaging (Americas & Asia, Europe), Metal Food & Household Products Packaging (Americas), Plastic Packaging (Americas), and Aerospace & Technologies.
Key Financial Metrics
| Metric ($ in millions, except per share) | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Sales | $1,706.2 | $1,585.6 |
| Net Earnings (Attributable to Ball) | $79.3 | $69.5 |
| Diluted Earnings Per Share | $0.84 | $0.73 |
| Earnings Before Interest and Taxes (EBIT) | $127.7 | $126.2 |
| Operating Cash Flow | ($272.0) used | ($307.8) used |
| Free Cash Flow (Operating - CapEx) | ($309.2) | ($375.6) |
| Total Debt (Short-term + Long-term) | $3,193.6 | $2,596.2 |
| Cash and Cash Equivalents | $391.4 | $53.1 |
| Working Capital (Current Assets - Current Liab) | $546.1 | $494.7 |
Note: Operating cash flow for Q1 2010 includes a $250 million non-cash outflow due to a change in accounting for accounts receivable securitization. Excluding this, operating cash flow used was $22.0 million.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 7.6% year-over-year, driven primarily by the Metal Beverage Packaging, Americas & Asia segment (+25%), which benefited from the October 2009 acquisition of four plants from Anheuser-Busch InBev.
- Profitability: Net earnings increased 14.1% to $79.3 million. Earnings per share rose from $0.73 to $0.84.
- Segment Performance:
- Plastic Packaging, Americas: Reported a loss of $5.4 million (vs. $3.6 million profit in 2009) due to a 29% sales decline, manufacturing disruptions, and lower resin prices.
- Metal Food & Household: Earnings dropped significantly to $21.7 million (vs. $49.6 million in 2009) due to lower inventory costs in the prior year.
- Aerospace: Sales declined 7% to $165.0 million due to the winding down of large programs (e.g., Hubble, Kepler) and government funding constraints.
- Debt Levels: Total interest-bearing debt increased by approximately $597 million to $3.2 billion, largely due to the issuance of $500 million in new senior notes in March 2010.
- Accounting Change: Adoption of new guidance regarding securitizations resulted in a $250 million increase in reported accounts receivable and a corresponding increase in short-term debt.
Guidance, Outlook, and Risks
- Capital Allocation: Management intends to focus cash flow on share repurchases and debt reduction for the remainder of 2010. Estimated capital spending for 2010 is approximately $235 million.
- Tax Outlook: The full-year effective income tax rate for 2010 is expected to be approximately 32%.
- Share Repurchases: Entered into an accelerated share repurchase agreement for $125 million in February 2010. Approximately 2.2 million shares were received initially, with the remainder expected by August 2010.
- Debt Refinancing: Called $509 million of 6.875% senior notes due in December 2012. The redemption occurred in April 2010, resulting in a $7.8 million charge to be recognized in Q2 2010.
- Risks and Contingencies:
- Goodwill Impairment: Updated testing for the Plastic Packaging segment indicated a reduction in excess fair value, making future impairment "reasonably possible," though no impairment was recorded.
- Market Risks: Exposure to commodity prices (aluminum, steel, resin), foreign currency fluctuations, and interest rates. A 10% adverse change in foreign currency rates could reduce net earnings by an estimated $24.6 million annually.
- Aerospace Backlog: Contracted backlog was $516 million, slightly down from $518 million at year-end 2009.
Investor Verification Checklist
- Accounting Change Impact: Verify the $250 million non-cash adjustment to operating cash flow and accounts receivable due to the new securitization accounting guidance.
- Debt Refinancing Costs: Monitor Q2 2010 results for the $7.8 million charge associated with the early redemption of the 6.875% senior notes.
- Plastic Segment Turnaround: Assess the resolution of manufacturing disruptions and the startup of the new PET preform contract in the Americas segment.
- Goodwill Monitoring: Watch for further impairment testing updates regarding the Plastic Packaging segment given the reduced margin of safety.
- Share Repurchase Completion: Track the final settlement of the $125 million accelerated share repurchase agreement expected by August 2010.