Ball Corporation — Q2 2011 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and six months ended July 3, 2011, compared with periods ended June 27, 2010. Ball manufactures metal beverage, food and household-product packaging and provides aerospace and technology products and services. Results include acquisitions and consolidation changes, notably Aerocan in Europe and Latapack-Ball in Brazil; the plastics packaging business sold in August 2010 is reported as discontinued operations.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $2,309.7 million, up 15.1% from $2,007.5 million | $4,320.9 million, up 20.0% from $3,599.8 million |
| EBIT | $254.1 million vs. $222.1 million | $448.1 million vs. $354.7 million |
| EBIT margin (calculated) | 11.0% vs. 11.1% | 10.4% vs. 9.9% |
| Net earnings attributable to Ball | $143.1 million vs. $69.0 million | $234.4 million vs. $148.3 million |
| Diluted EPS | $0.84 vs. $0.37 | $1.37 vs. $0.79 |
Reported net earnings comparisons are affected by the 2010 plastics-business impairment and other discontinued-operation losses. Continuing-operations net earnings were $145.4 million versus $144.6 million in Q2 and $244.9 million versus $227.1 million for the first six months. Comparable diluted EPS, a non-GAAP measure adjusted for specified items, was $0.85 versus $0.69 in Q2 and $1.43 versus $1.12 for the six months.
- Segment trends: Sales and earnings increased in all four reportable segments. Americas and Asia beverage earnings benefited from acquisitions, volume, manufacturing performance and price/mix; Europe from Aerocan, volumes and currency; food and household packaging from pricing, mix and manufacturing improvements, partly offset by lower volumes; aerospace earnings benefited from improved fixed-price contract performance.
- Cash flow: First-half operating cash flow was $161.2 million, versus $30.7 million reported in 2010. However, excluding the $250 million prior-year cash-flow effect from an accounting change in receivables securitization, 2010 operating cash flow was $280.7 million; the 2011 decline primarily reflected working-capital changes. Capital expenditures were $213.5 million.
- Investment and financing: Investing cash outflow was $509.3 million, including $295.2 million for Aerocan and $213.5 million of capital expenditures. Financing cash inflow was $339.7 million, including borrowings and share repurchases. Cash ended at $144.8 million.
- Debt and liquidity: Interest-bearing debt was $3.474 billion, up from approximately $2.8 billion at year-end 2010, primarily reflecting acquisitions and seasonal working-capital needs. About $553 million was available under committed revolvers; $174.2 million of $465 million in short-term uncommitted facilities was outstanding and due on demand. The company reported compliance with debt covenants.
- Balance sheet: Total assets were $7.850 billion; current assets were $2.725 billion and current liabilities $1.752 billion. Goodwill was $2.372 billion and employee benefit obligations were $1.007 billion.
Outlook, commentary and risks
- Management expected 2011 capital expenditures of approximately $500 million, a full-year continuing-operations effective tax rate of approximately 32%, and net share repurchases of approximately $400 million. It expected pension contributions of about $30 million to funded plans and payments of about $25 million to unfunded German plans.
- Management said operating cash flows and available borrowings were expected to fund operating needs, debt service, dividends and planned capital spending. This is not a specific earnings forecast.
- Expansion plans included new or expanded beverage-can capacity in Brazil, Vietnam and China, with projects expected to begin production in 2011–2012. Aerospace backlog was $903 million at July 3, down from $989 million at December 31, 2010; the filing cautions backlog is not necessarily indicative of future operations.
- Business consolidation charges were $16.4 million for the first six months, mainly related to the Torrance plant closure and other activities. The company also reported a post-quarter $125 million accelerated share repurchase agreement, funded with cash and available borrowings.
- Key risks include packaging demand, competition and capacity, customer concentration, passing through aluminum and steel cost changes, energy and labor costs, currency and interest-rate movements, pension assumptions, government aerospace funding and contract execution, and integration of acquisitions. The filing also identifies litigation and environmental exposures, including a patent dispute with Crown and remediation discussions concerning a former Canadian mill site. Management did not expect these matters to have a material adverse effect based on information then available, but stated outcomes could differ.
- Management concluded disclosure controls were effective and reported no material quarter-period change in internal control over financial reporting. Some acquired operations were excluded from the applicable control assessments pending later evaluation.
Investor facts to verify
- How much of revenue and earnings growth reflects acquisitions, consolidation and foreign exchange versus organic volume, pricing and productivity?
- Whether working-capital investment, capital spending and acquisition-related borrowing affect full-year cash generation, leverage and liquidity.
- Progress against the stated $500 million capital-expenditure and approximately $400 million net-repurchase expectations, including the post-quarter $125 million repurchase.
- Whether aerospace backlog converts to funded sales and earnings, given its decline and the mix of fixed-price contracts.
- Developments in the Crown patent litigation, environmental matters and other contingencies, and any resulting changes to accruals or exposure.