Business context and reporting period
Ball Corporation’s unaudited Form 10-Q covers the three months ended April 3, 2011, compared with the three months ended March 28, 2010. Ball makes metal packaging for beverage, food and household products and provides aerospace and technology products and services. Results are subject to packaging seasonality and irregular aerospace contract revenues.
Comparisons reflect acquisitions and changes in consolidation: Ball acquired Aerocan in January 2011, and consolidated its Brazilian Latapack-Ball and PRC Jianlibao joint ventures in 2010. The plastics packaging, Americas business, sold in August 2010, is presented as discontinued operations.
Financial performance and position
| Metric | Q1 2011 | Prior period |
|---|---|---|
| Net sales | $2,011.2 million | $1,592.3 million |
| EBIT | $194.0 million | $132.6 million |
| Net earnings from continuing operations | $99.5 million | $82.5 million |
| Net earnings attributable to Ball | $91.3 million | $79.3 million |
| Diluted EPS | $0.53 total; $0.54 continuing operations | $0.42 total; $0.44 continuing operations |
| Operating cash flow | $(74.4) million | $(272.0) million |
| Capital expenditures | $95.0 million | $33.3 million |
Sales rose about 26%, while EBIT rose about 46%. EBIT margin increased to about 9.6% from 8.3%. Net earnings attributable to Ball increased about 15%; the effective tax rate was 32.5%, versus 21.2% in the prior period. Prior-year EPS and share data were retrospectively adjusted for the February 2011 two-for-one stock split.
Operating cash flow remained negative, primarily reflecting seasonal working-capital needs. The prior-year cash outflow included a $250 million effect from an accounting change in receivables securitization; excluding that item, operating cash use was $22.0 million in Q1 2010, compared with $74.4 million in Q1 2011. Investing cash outflow was $384.2 million, including $295.2 million for Aerocan. Financing provided $498.0 million, including new borrowings and share repurchases.
At April 3, 2011, cash was $193.1 million; total debt was approximately $3.52 billion and net debt approximately $3.32 billion. Current assets were $2.71 billion and current liabilities $1.68 billion. Long-term debt was $3.20 billion. Ball reported $487 million available under committed multi-currency revolvers, approximately $20 million under a PRC committed facility, and $428 million in short-term uncommitted facilities, of which $186.4 million was outstanding and due on demand. The company was in compliance with debt covenants.
Material changes and segment results
- Metal beverage packaging, Americas and Asia: sales were $1,032.3 million versus $774.4 million; segment earnings before consolidation charges were $115.6 million versus $74.0 million. Growth reflected Brazilian and PRC consolidation, higher volumes and input prices.
- Metal beverage packaging, Europe: sales were $443.0 million versus $367.5 million; segment earnings before charges were $53.1 million versus $35.0 million. Aerocan contributed, alongside higher volumes; higher inventory and other costs partly offset gains.
- Metal food and household products packaging, Americas: sales were $344.7 million versus $285.4 million; earnings were $39.8 million versus $21.7 million. About half the earnings increase was attributed to inventory holding gains.
- Aerospace and technologies: sales were $191.2 million versus $165.0 million, and earnings were $18.7 million versus $13.5 million, reflecting national defense contract volume and better performance on fixed-price contracts. Contracted backlog was $1.0 billion at quarter-end, versus $989 million at year-end; Ball cautioned that backlog is not necessarily indicative of future operations.
Interest expense increased to $46.5 million from $33.9 million, reflecting higher debt, including borrowing to fund Aerocan. Q1 included $13.5 million of business consolidation and other charges, primarily the Torrance plant closure and Aerocan transaction costs. Adjusted diluted EPS, a non-GAAP measure, was $0.58 versus $0.43.
Outlook, risks and unusual items
- Management expected 2011 capital expenditures of approximately $500 million, with about $160 million contractually committed at quarter-end. It expected full-year continuing-operations effective tax rate of approximately 32%.
- Ball expected to repurchase at least $300 million of common shares, net of issuances, in 2011. Q1 repurchases, net of issuances, were $150.6 million; a further $36.8 million was purchased between April 4 and May 6.
- Management said cash flows and available borrowing capacity were expected to meet operating needs and debt service. This outlook is subject to working-capital, market and financing conditions.
- Growth investment included a planned new beverage-can plant in Brazil, a Vietnam joint venture plant and a Qingdao, China plant under construction. The Brazil plant was expected to start in early 2012; the Qingdao plant was expected to operate by year-end 2011.
- Key disclosed risks include customer and supplier concentration, raw-material and energy costs, pricing and capacity pressures, foreign exchange and interest rates, pension obligations, acquisition integration, and dependence of aerospace work on government funding and contract performance.
- Contingencies include ordinary-course litigation and environmental matters. A Crown patent case was reversed on appeal in April 2011 after a prior judgment for Ball; Ball sought rehearing. Ball said it did not expect the matter to materially affect its financial condition, liquidity or results. The SEC Argentina FCPA matter concluded in March 2011 with a $300,000 fine, which Ball paid.
- Ball reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. Management excluded Aerocan from its current internal-control assessment, with evaluation planned in 2012.
Important facts for investors to verify
- How much of sales and earnings growth reflects acquisitions and consolidation versus organic volume, pricing and manufacturing performance.
- Whether seasonal working-capital use normalizes and whether planned capital spending can be funded while reducing leverage.
- Debt maturity, variable-rate exposure, facility availability and covenant headroom, especially with debt higher following Aerocan.
- The sustainability of segment earnings, including the contribution of inventory holding gains and the impact of consolidation charges.
- Execution, integration and returns from Aerocan and other acquisitions, and progress on announced capacity projects.
- Developments in the Crown patent appeal and environmental matters, and any material changes in related exposures.