Ball Corporation — Q2 2010 Form 10-Q
Business context and period. The quarter ended June 27, 2010; comparisons are with the quarter ended June 28, 2009. Ball makes metal beverage, food and household-product packaging and provides aerospace and technology products and services. Results are unaudited, and packaging seasonality and irregular aerospace contract revenue may affect period comparisons.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $2,007.5 million | $1,744.6 million | $3,599.8 million | $3,170.5 million |
| EBIT | $222.1 million | $204.6 million | $354.7 million | $326.4 million |
| Net earnings from continuing operations | $144.6 million | $135.1 million | $227.1 million | $201.8 million |
| Net earnings attributable to Ball | $69.0 million | $133.3 million | $148.3 million | $202.8 million |
| Diluted EPS, continuing operations | $1.55 | $1.42 | $2.42 | $2.13 |
| Total diluted EPS | $0.74 | $1.40 | $1.58 | $2.14 |
Sales increased about 15% in Q2 and 14% year to date. Continuing-operations earnings rose about 7% and 13%, respectively. Total earnings fell because discontinued operations included a $107.1 million pretax impairment charge on the plastics packaging business. EBIT margin was approximately 11.1% in Q2 versus 11.7% a year earlier.
Cash flow and liquidity. For the first six months, operating cash flow was $30.7 million, investing cash flow was negative $175.9 million and financing cash flow was positive $12.0 million. Operating cash flow included a $250 million working-capital presentation impact from adopting new receivables-securitization accounting; excluding that impact, management reported operating cash flow of $280.7 million. Capital spending was $69.1 million. Cash was $75.0 million at June 27, down from $210.6 million at year-end 2009. Current assets were $2.550 billion and current liabilities $1.881 billion.
Debt. Total interest-bearing debt was approximately $2.708 billion, versus approximately $2.6 billion at December 31, 2009. Ball issued $500 million of 6.75% senior notes due 2020 and redeemed $509 million of 6.875% notes due 2012; the refinancing generated an $8.1 million charge. Reported interest expense was $44.7 million in Q2 and $78.6 million for six months, including that charge. Ball reported compliance with its debt agreements. Available borrowing capacity included approximately $575 million under committed revolving facilities, $30 million under a PRC facility and $180 million under the receivables program.
Material changes and segment trends
- Metal beverage packaging, Americas and Asia: Sales and segment earnings increased substantially, reflecting the four U.S. plants acquired from AB InBev in October 2009, higher volumes, promotional activity and favorable metal costs. Ball acquired the remaining 65% interest in its Sanshui, China joint venture on June 15 for $89.2 million in cash, net of cash acquired, and assumed debt.
- Metal beverage packaging, Europe: Q2 sales declined slightly, principally from unfavorable currency translation, while earnings increased on higher volumes.
- Metal food and household products packaging, Americas: Sales were lower and six-month segment earnings declined, partly reflecting comparison with lower inventory costs in 2009.
- Aerospace and technologies: Sales declined as several programs wound down and awards or government funding were delayed; earnings improved on favorable fixed-price program performance. Contracted backlog was $539 million, compared with $518 million at year-end.
- Plastics packaging divestiture: The business was classified as discontinued operations. Ball completed its sale to Amcor on August 2, 2010, after quarter-end, for $280 million, including $15 million of contingent consideration recognized at closing. The business had 2009 sales of $635 million.
Outlook, commentary and risks
- Management expected full-year 2010 capital spending of approximately $230 million and an effective tax rate of approximately 33%.
- Ball said it intended to direct cash flow toward share repurchases and debt reduction, and expected 2010 share repurchases to exceed $400 million net of issuances. It repurchased $162.9 million of treasury stock in the first six months and a further $118.3 million from June 28 through July 30.
- Management expected liquidity to cover operating needs and debt service, based on projected cash flow and available facilities. It expected approximately $55 million of 2010 contributions to funded defined-benefit plans and approximately $23 million of payments to unfunded German plans.
- On July 26, 2010, Ball acquired Neuman Aluminum for approximately $60 million in cash; the business had 2009 sales of approximately $128 million.
- Key stated risks include customer and supplier concentration, demand and pricing, raw-material and energy costs, foreign exchange, interest rates, pension assumptions, industry overcapacity, and the timing, funding and performance of aerospace contracts. Management also cited risks from acquisitions and divestitures, regulation, litigation and environmental matters.
- Ball disclosed routine litigation and environmental cleanup matters, including a proposed Ontario remediation order concerning a predecessor pulp-mill site. Management did not expect the identified matters to have a material adverse effect, subject to the ongoing investigation and discussions.
Investor verification points
- Confirm the final economics and any subsequent adjustments to the Amcor plastics sale, including the contingent consideration and the impairment recorded before closing.
- Assess operating cash conversion and working capital separately from the $250 million receivables-accounting presentation change.
- Review debt maturities, revolving-facility availability, covenant restrictions and the effect of continued share repurchases on leverage and liquidity.
- Evaluate whether volume, margin and currency trends in each continuing segment support management’s spending, tax and capital-allocation expectations.
- Monitor the Jianlibao acquisition accounting and earnings contribution, the Neuman integration, aerospace backlog and government funding, and the Ontario environmental matter.