Ball Corporation — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. This is an annual report; selected fourth-quarter results are also included. Unless otherwise noted, amounts are in U.S. dollars. Per-share data reflects the subsequent two-for-one stock split.
Business context
Ball supplied metal packaging to beverage, food and household-product customers and provided aerospace and technology products and services. Packaging generated 91% of 2010 sales; aerospace generated 9%. Metal beverage containers represented 73% of sales and 82% of earnings before interest and taxes. Ball sold its plastics packaging business in August 2010 and reported it as discontinued operations.
Key financial metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Net sales | $7,630.0 million | $6,710.4 million |
| EBIT | $764.6 million | $653.8 million |
| Net earnings from continuing operations attributable to Ball | $542.9 million | $390.1 million |
| Net earnings attributable to Ball, including discontinued operations | $468.0 million | $387.9 million |
| Diluted EPS from continuing operations | $2.96 | $2.05 |
| Total diluted EPS | $2.55 | $2.04 |
| Operating cash flow, including discontinued operations | $515.2 million | $559.7 million |
| Capital spending | $250.2 million | $157.9 million |
| Management-defined free cash flow | $505.8 million | $372.6 million |
| Cash and total interest-bearing debt | $152.0 million; $2,812.3 million | $210.6 million; $2,596.2 million |
Reported gross profit was $1,132.2 million, or approximately 14.8% of sales, versus $980.9 million, or approximately 14.6%, in 2009. Adjusted EBIT was $753.6 million and adjusted EBITDA was $1,019.1 million. Net debt was $2,660.3 million; adjusted net debt/EBITDA was 2.6x and adjusted EBIT/interest coverage was 5.0x. These adjusted measures are non-GAAP.
At year-end, current assets were $2,305.7 million and current liabilities were $1,383.3 million. Approximately $976 million was available under committed revolving facilities, with additional stated availability under PRC credit and receivables facilities. Ball reported compliance with its loan agreements.
Fourth quarter: Net sales were $1,995.2 million, compared with $1,727.6 million in fourth-quarter 2009. Net earnings attributable to Ball from continuing operations were $93.7 million versus $79.7 million; total net earnings attributable to Ball were $92.2 million versus $81.4 million. Diluted EPS was $0.52 versus $0.43.
Changes versus prior period and unusual items
- Full-year sales rose about 13.7%; management attributed much of the increase to acquisitions and consolidation of previously equity-accounted joint ventures. Continuing-operations earnings increased, but included $105.9 million of acquisition-related fair-value gains and equity earnings.
- Adjusted net earnings were $433.0 million versus $372.4 million. Reported net earnings were reduced by the plastics business’s $107.1 million pretax impairment charge; discontinued operations recorded a $74.9 million net loss for 2010.
- Operating cash flow included a $250 million working-capital outflow from adopting new receivables-securitization accounting. Excluding that accounting-related effect, management reported operating cash flow of $765.2 million for 2010. Its free-cash-flow calculation adds the $250 million back before subtracting capital spending.
- Americas and Asia beverage-packaging sales and segment earnings increased, with acquisitions, higher volumes, product mix and manufacturing performance contributing. European beverage-packaging sales and earnings were slightly lower, including foreign-exchange pressure. Aerospace sales and earnings increased; metal food and household-packaging sales and segment earnings were broadly steady before consolidation gains.
- Debt rose by $216.1 million. Ball issued $500 million of 6.75% senior notes due 2020 and $500 million of 5.75% senior notes due 2021, redeemed notes due 2012, and refinanced credit facilities to extend their maturity to December 2015. Interest expense increased to $158.2 million, including $8.8 million of refinancing-related costs.
Outlook, risks and contingencies
- Management estimated 2011 operating cash flow above $900 million, capital spending of approximately $500 million and free cash flow above $400 million. It expected an effective tax rate of approximately 31% and pension expense broadly flat year over year.
- Ball said it intended to use operating cash flow to continue share repurchases and fund capital spending. The board raised the quarterly dividend to $0.07 per post-split share and authorized repurchases of up to 20 million additional shares.
- Near-term plans included the completed January 2011 Aerocan acquisition for approximately $300 million in cash and assumed debt, a new beverage-can plant in northeast Brazil expected to start in early 2012, and North American plant and production-line realignments.
- Key risks include customer and supplier concentration, competitive overcapacity and substitution by other packaging materials, raw-material and energy costs, foreign-exchange movements, labor disruptions, pension assumptions, goodwill impairment, and government funding or program changes affecting aerospace. More than one-third of debt bore variable rates.
- Ball disclosed routine litigation and environmental matters, including potentially responsible-party cleanup obligations and a proposed Ontario remediation order. Management did not expect identified matters to materially affect liquidity, results or financial condition, while noting outcomes could differ. An SEC investigation concerning potential Foreign Corrupt Practices Act issues in Argentina had concluded at the staff level, with resolution expected in 2011.
- The auditor gave an unqualified opinion on the financial statements and internal control. Management also concluded controls were effective, but excluded the 2010 acquired/consolidated operations of Latapack-Ball, Jianlibao and Neuman from its control assessment; those operations represented 9% of assets and 3% of sales.
Important facts for investors to verify
- How much of earnings growth reflects recurring operations versus the $105.9 million acquisition-related gains, and how the plastics impairment affects comparisons.
- The reconciliation of reported cash flow to management’s normalized cash-flow and free-cash-flow measures, including the securitization accounting change.
- Debt maturity, variable-rate exposure, covenant headroom and the sustainability of repurchases alongside planned capital spending and acquisitions.
- Delivery against 2011 cash-flow and capital-spending estimates, and execution and returns from Aerocan, Brazil expansion and capacity realignment.
- Developments in customer concentration, environmental and legal matters, the Argentina investigation, and integration and control assessments for acquired businesses.