BALL Corp quarterly report, Q2 FY2012

Ball Corporation 10-Q Summary

Reporting period: Quarter and six months ended July 1, 2012; comparisons are with the periods ended July 3, 2011. Ball manufactures metal beverage, food and household-product packaging and provides aerospace and technology products and services. Results are unaudited and packaging results are seasonal.

Financial performance

Metric	Q2 2012	Q2 2011	Six months 2012	Six months 2011
Net sales	$2,296.3 million	$2,309.7 million	$4,339.0 million	$4,320.9 million
EBIT	$237.6 million	$254.1 million	$419.6 million	$448.1 million
Net earnings attributable to Ball	$139.5 million	$143.1 million	$227.8 million	$234.4 million
Diluted EPS	$0.88	$0.84	$1.42	$1.37

Q2 sales declined 0.6%; first-half sales increased 0.4%. Ball attributed broadly flat sales to growth in Brazil, China and Europe offset by lower North American volumes and unfavorable European currency translation.
Ball-attributable earnings fell about 2% in Q2 and 3% for the first half, while diluted EPS rose, supported by a lower weighted-average share count following repurchases. Cost of sales excluding depreciation increased to 82.3% of sales in Q2 and 82.5% in the first half, from 81.6% and 81.4%, respectively.
First-half operating cash flow was $74.7 million, versus $161.2 million. Capital expenditures were $138.5 million, making operating cash flow less capital expenditures negative $63.8 million. Cash ended at $123.5 million, down from $165.8 million at year-end.
At July 1, total debt was $3.46 billion and net debt was $3.34 billion. Cash and cash equivalents were $123.5 million; current assets were $2.51 billion and current liabilities $1.89 billion. Management reported $963 million available under committed revolving facilities, plus approximately $530 million of short-term uncommitted facilities, of which $178.8 million was drawn and due on demand.
Trailing-twelve-month net debt to comparable EBITDA was 3.0x; comparable EBIT to interest was 4.7x. Ball said it complied with debt covenants, including minimum interest coverage of 3.50x and maximum leverage of 4.00x.

Material changes and segment results

Metal beverage, Americas and Asia: Q2 sales rose to $1,207.6 million from $1,164.1 million, and segment earnings increased to $137.1 million from $123.6 million, including consolidation items. First-half earnings were broadly flat at $240.9 million versus $228.3 million, with favorable pricing and mix offset by manufacturing performance.
Metal beverage, Europe: Q2 sales fell to $556.2 million from $607.9 million and earnings to $64.8 million from $84.4 million. Currency translation, price/cost compression and lower reported sales weighed on results; higher volumes partly offset the decline.
Metal food and household products, Americas: Q2 sales were $327.6 million versus $345.7 million and earnings $31.9 million versus $41.3 million. Lower volumes and the absence of prior-year inventory holding gains contributed to weaker results.
Aerospace and technologies: Q2 sales increased to $210.3 million from $199.9 million, while earnings decreased to $20.2 million from $21.7 million. Higher national defense sales were partly offset by lower civil-space sales and contract fee adjustments.

Liquidity, outlook, risks and unusual items

Ball issued $750 million of 5.00% senior notes due 2022 and redeemed $450 million of 6.625% notes due 2018. The refinancing generated a $15.1 million first-half charge. Debt increased from year-end, and share repurchases used $278.4 million of cash in the first half; common dividends were $31.2 million.
Management described liquidity as strong and expected operating cash flow and available borrowing capacity to meet operating needs, debt service, dividends and planned capital spending. It projected 2012 capital expenditures of about $350 million, with $133 million contractually committed at July 1.
Management expected a 2012 effective tax rate of approximately 29%. Defined benefit plan contributions were expected to be about $110 million for funded plans and $22 million for unfunded German plans. First-half funded-plan contributions were $101.5 million, versus $8.9 million in the prior-year period.
Management disclosed a reduction in a North American customer's standard 12-ounce can requirements beginning in January 2013. Specialty-container demand is expected to offset some of the lost volume; Ball said it would continue to align capacity with demand. Aerospace backlog was approximately $780 million, down from $897 million at December 31, 2011; backlog comparisons may not predict future activity.
Revised useful-life estimates for certain can-making equipment reduced depreciation and cost of sales by $8.9 million pretax in Q2 and $17.8 million in the first half. Ball estimated a full-year 2012 reduction of about $34.9 million pretax. A separate accounting alignment for tooling, spare parts and dunnage increased Q2 costs by $2.9 million and first-half costs by $5.2 million; the estimated full-year increase was $11.0 million. These estimates affect comparability of reported earnings.
Key risks include customer and supplier concentration, packaging overcapacity and demand shifts, raw-material and energy costs, the ability to pass costs through, currency and interest-rate movements, pension obligations, and aerospace contract funding and timing. Ball uses derivatives but cautioned that risk-management measures may not be effective in all circumstances.
Ball reported ordinary-course litigation and environmental matters. In the Hess electricity-contract case, a court found a breach and encouraged settlement discussions over damages; Hess had claimed about $5 million. Ball did not believe the matter or the other specifically discussed cases would materially affect its financial condition, but outcomes remain uncertain.

Important facts for investors to verify

Whether North American beverage-volume reductions beginning in 2013 are offset by specialty-can growth and capacity changes.
Whether price/cost compression and weaker food-packaging volumes persist, particularly in Europe and the Americas food segment.
Cash conversion after substantial pension contributions, planned capital expenditures and share repurchases; also monitor debt and covenant headroom.
The effect of the useful-life and tooling accounting estimates on reported and comparable earnings, including whether the full-year estimates are realized.
Developments in the Hess case and other litigation, environmental contingencies and aerospace backlog conversion.