Ball Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended October 2, 2011; comparable periods ended September 26, 2010. Amounts are in U.S. dollars unless otherwise noted. Ball supplies metal packaging for beverage, food and household products and aerospace and technology products and services.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $2,258.3 million | $2,035.0 million | $6,579.2 million | $5,634.8 million |
| EBIT | $228.6 million | $233.1 million | $676.7 million | $587.8 million |
| Net earnings attributable to Ball | $132.1 million | $227.5 million | $366.5 million | $375.8 million |
| Diluted EPS | $0.79 | $1.25 | $2.15 | $2.02 |
| Operating cash flow, reported | — | — | $441.0 million | $371.4 million |
- Sales increased 11.0% in the quarter and 16.8% year to date. Calculated EBIT margin was 10.1% in Q3 versus 11.5%; year-to-date margin was 10.3% versus 10.4%.
- Q3 earnings attributable to Ball fell 42% year over year, substantially reflecting the prior-year quarter’s $85.8 million of equity-affiliate results, including acquisition-related gains. Year-to-date reported earnings declined 2.5%; comparable earnings, excluding specified unusual items, increased to $381.5 million from $338.6 million, and comparable diluted EPS rose to $2.24 from $1.82.
- Operating cash flow was $441.0 million. Management compared this with $621.4 million in 2010 after excluding a $250 million cash-flow presentation impact from adoption of receivables-securitization accounting; reported 2010 operating cash flow was $371.4 million.
- Investing cash outflow was $626.3 million, including $323.8 million of capital expenditures and $295.2 million for the Aerocan acquisition. Financing cash inflow was $216.3 million, including borrowings and share repurchases.
Segments and material changes
- Metal beverage packaging, Americas and Asia: Q3 sales were $1,125.4 million and segment earnings $118.7 million, including consolidation charges, versus $1,004.7 million and $111.9 million. Higher volumes, Latapack-Ball consolidation and commodity pricing supported sales; earnings benefited from volume and consolidation, partly offset by mix and freight costs.
- Metal beverage packaging, Europe: Q3 sales were $515.7 million and segment earnings $64.9 million, versus $443.7 million and $63.7 million. Aerocan contributed $53 million of quarterly sales and $11 million of earnings; foreign exchange also lifted sales, while lower volume partly offset earnings gains.
- Metal food and household products packaging, Americas: Q3 sales were $413.2 million and segment earnings $38.1 million, versus $420.1 million and $62.6 million. A poor seasonal food pack, lower volumes and higher manufacturing and commodity costs weighed on results.
- Aerospace and technologies: Q3 sales were $208.4 million and earnings $21.2 million, versus $167.9 million and $18.4 million, reflecting stronger national defense and commercial program sales and improved fixed-price contract performance. Contracted backlog was approximately $986 million, versus $989 million at year-end 2010.
- Aerocan, acquired in January for €221.7 million (about $295.2 million), expanded Ball into European extruded aluminum aerosol containers and slugs. The company continued capacity realignment, including the Torrance plant closure and line relocation.
Liquidity, debt and capital allocation
- At October 2, cash was $190.1 million; current assets were $2,573.9 million and current liabilities $1,785.6 million. Working capital was approximately $788 million.
- Total debt was $3,456.7 million, versus approximately $2.8 billion at December 31, 2010; net debt was $3,266.6 million. Management cited Aerocan financing and seasonal working-capital needs among the drivers.
- Approximately $730 million was available under committed revolving facilities through December 2015. Short-term uncommitted facilities totaled approximately $526 million, with $149.4 million outstanding and due on demand. A new three-year receivables securitization agreement provided borrowing capacity varying from $150 million to $275 million; $265.8 million of receivables had been sold under it.
- Ball reported compliance with debt covenants, which require interest coverage of at least 3.50 and leverage no greater than 4.00. Management’s trailing-12-month comparable EBIT/interest ratio was 4.9x and net debt/comparable EBITDA was 2.8x.
- Share repurchases, net of issuances, were $381.3 million for the first nine months. Management expected at least $450 million for full-year 2011. A further $100 million accelerated repurchase was announced after quarter-end. Quarterly dividends were $0.07 per share.
Outlook, risks and unusual items
- Management expected 2011 capital expenditures of approximately $500 million; $164 million was contractually committed at quarter-end. Full-year defined-benefit plan contributions were expected to be about $30 million, plus approximately $25 million of payments to unfunded German plans.
- The full-year 2011 effective tax rate on continuing operations was expected to remain below 31%. The filing did not provide a consolidated earnings or revenue forecast.
- Management said operating cash flows and available borrowings should meet operating needs, debt service, dividends and anticipated capital expenditures. Results are subject to packaging seasonality and irregular aerospace contract revenues.
- Key risks include raw-material and energy costs, ability to pass costs to customers, demand and pricing pressures, customer concentration, foreign exchange, interest rates, pension assumptions, aerospace contract funding and performance, acquisitions and integration, and litigation and environmental exposure.
- Ball recorded $16.8 million of business consolidation charges in the first nine months. The Torrance property was sold in October for net proceeds of $23.4 million, with a $6.9 million gain expected in Q4. An Ontario environmental settlement, approved in October subject to conditions, calls for Ball Canada to contribute $3.5 million; the company is seeking insurance reimbursement.
- A patent case brought by Crown was revived on appeal and remanded; Ball renewed a motion for summary judgment of non-infringement. Ball also disclosed a $5 million electricity-contract claim by Hess and potential environmental liabilities at the Lowry Landfill site; management did not expect these matters to materially affect the company, but outcomes remain uncertain.
Important facts for investors to verify
- How much of sales and earnings growth came from volume and operating performance versus acquisitions, commodity pricing and foreign exchange.
- Whether working-capital needs, capital spending and share repurchases remain supportable given higher debt and the seasonal borrowing profile.
- The full-year cash-flow comparison: the filing reports 2010 operating cash flow of $371.4 million, while MD&A cites $621.4 million excluding a $250 million accounting-related impact.
- Whether the Ontario settlement conditions are completed and insurance reimbursements are obtained; also monitor the Crown patent litigation and other disclosed contingencies.
- Progress on capacity expansions, Aerocan integration and aerospace backlog conversion, including the risks attached to fixed-price contracts.