Business context and reporting period
Ball Corporation’s unaudited Form 10-Q covers the quarter and nine months ended September 26, 2010, compared with the periods ended September 27, 2009. Ball manufactures metal beverage, food and household-product packaging and provides aerospace and technology products and services. Results are affected by seasonality, commodity prices, foreign exchange and irregular aerospace contract revenue.
In August, Ball completed the sale of its plastics packaging, Americas, business to Amcor for $280 million, including $15 million of contingent consideration, subject to approximately $20 million of closing adjustments. The business is reported as discontinued operations. Ball also acquired Neuman Aluminum, increased its Brazilian joint-venture interest to 60.1% and consolidated that business, and acquired the remaining interest in a Chinese beverage-can joint venture.
Financial performance and position
Amounts are in millions of dollars except per-share data. Comparisons are year over year.
| Metric | Third quarter 2010 | Third quarter 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $2,035.0 | $1,812.3 | $5,634.8 | $4,982.8 |
| EBIT | $233.1 | $187.5 | $587.8 | $513.9 |
| Continuing-operations earnings | $222.2 | $109.0 | $449.3 | $310.8 |
| Net earnings attributable to Ball | $227.5 | $103.7 | $375.8 | $306.5 |
| Diluted EPS | $2.50 | $1.09 | $4.05 | $3.23 |
| Operating cash flow, including discontinued operations | Not presented quarterly | $371.4 | $6.1 |
- Quarterly sales rose about 12%; nine-month sales rose about 13%. EBIT margins were approximately 11.5% and 10.4% in the respective 2010 periods, versus approximately 10.3% and 10.3% in 2009.
- Continuing-operations earnings increased substantially, but included $105.9 million of gains associated with purchase accounting for previously held equity interests in the Brazilian and Chinese joint ventures.
- Nine-month continuing operating cash flow was $355.9 million, and total operating cash flow was $371.4 million. A $250 million accounting change for the receivables program reduced reported operating cash flow; excluding that impact, management reported operating cash flow of $621.4 million. Capital spending was $131.1 million.
- At September 26, cash was $168.7 million, total debt was approximately $2.65 billion and net debt was approximately $2.48 billion. Total debt was broadly comparable with year-end 2009. Long-term debt was $2.05 billion; short-term debt and current maturities were $592.5 million.
- Available borrowing included approximately $659 million under committed revolving facilities, $20 million for PRC operations, $54 million for Latapack-Ball and $222 million under the receivables program. Ball was in compliance with debt agreements.
Material changes and segment results
- Metal beverage packaging, Americas and Asia: Nine-month sales increased to $2,815.1 million from $2,075.9 million, primarily reflecting acquired plants and consolidation of the Brazilian and Chinese joint ventures, as well as higher aluminum-price pass-through and Asia volumes. Nine-month segment earnings, including consolidation items, increased to $301.7 million from $214.6 million.
- Metal beverage packaging, Europe: Nine-month sales declined to $1,289.1 million from $1,312.4 million, mainly due to foreign exchange and pricing/mix. Earnings increased to $170.6 million from $164.5 million, supported by volume.
- Metal food and household products packaging, Americas: Nine-month sales declined to $1,017.5 million from $1,066.5 million. Earnings including consolidation items increased to $117.7 million from $112.5 million; quarterly improvement reflected better manufacturing performance, while year-to-date earnings were lower before the benefit of consolidation items.
- Aerospace and technologies: Nine-month sales declined to $513.1 million from $528.0 million as programs wound down and government funding was delayed; earnings increased to $50.5 million from $45.6 million. Contracted backlog was $852 million, up from $518 million at year-end 2009, mainly from WorldView-3 and JPSS awards.
Outlook, commentary and risks
- Management expected 2010 capital spending of approximately $300 million, defined benefit plan contributions of $55–$60 million, and a full-year continuing-operations tax rate of approximately 31%. It expected 2010 share repurchases to exceed $450 million, including the subsequent-period purchase, net of issuances; management also said cash use for the remainder of 2010 would focus on repurchases and debt reduction.
- Management expected operating cash flows and available borrowing capacity to meet ongoing operating needs, debt service, dividends and anticipated capital expenditures. The main committed revolver facilities were available until October 2011.
- Key risks include customer and supplier concentration; packaging demand, capacity and pricing; steel, aluminum and energy costs and the ability to pass them through; currency and interest-rate exposure; foreign-market and acquisition risks; and changes in government funding, awards or schedules for aerospace programs. Management’s sensitivities included an estimated $34.7 million after-tax earnings reduction from a hypothetical 10% strengthening of the U.S. dollar, and a $4.0 million reduction from a 100-basis-point interest-rate increase.
- Ball announced closure of its Richmond, British Columbia, metal food-can plant, with production expected to cease in first-quarter 2011. A $17.8 million pension-liability accrual related to an earlier Canadian closure was reversed as an out-of-period adjustment; management said the adjustment was not material to prior or current periods.
- Routine litigation and environmental matters were disclosed. For an Ontario pulp-mill site, Ball and other parties agreed to a risk assessment and planned further mediation to determine any containment scope and cost allocation. Management did not expect identified matters to have a material adverse effect, but the final environmental obligations were not yet determined. Certain indemnities and guarantees have no stated maximum exposure, which Ball said it could not reasonably estimate.
- Management concluded disclosure controls were effective. It excluded certain acquired operations from the current internal-control assessment, with evaluation deadlines extending through 2010 for the AB InBev plants and through 2011 for Latapack-Ball.
Important facts for investors to verify
- How much reported earnings growth is recurring operating performance versus the $105.9 million of purchase-accounting gains, and how acquisition-related results compare with the prior period.
- The final sale adjustments and contingent consideration for the plastics business, and the significance of the $107.1 million impairment recorded in discontinued operations during the first nine months.
- The sustainability of operating cash flow after accounting for the $250 million receivables-program transition, working-capital movements and planned capital spending.
- Debt maturities and refinancing needs around the October 2011 expiry of the main committed revolvers, together with the company’s substantial planned share repurchases.
- The outcome and potential cost of the Ontario environmental matter, and any further developments in pension obligations or other contingencies.