Ball Corp. Beats Estimates

Ball Corporation (BLL - Analyst Report) reported net earnings of $132.1 million or 79 cents per share in the third quarter of 2011, declining significantly from $227.5 million or $1.25 per share in the year-ago quarter.

However, excluding business consolidation costs and other charges and benefits, the company’s adjusted income in the quarter came in at $135.4 million or 81 cents per share compared with $127.7 million or 70 cents per share a year ago. Adjusted income per share was also higher than the Zacks Consensus Estimate of 78 cents per share.

Solid demand for metal packaging in China and Europe, strong aerospace program performance, increased demand for metal beverage cans in North America and tax benefits in Brazil contributed significantly toward Ball’s earnings in the reported quarter.

Net sales increased 10.8% year over year to $2.26 billion and also beat the Zacks Consensus Estimate of $2.23 million. The improvement in revenues was attributable to better performances across all the company’s operating segments except Metal, Food & Household packaging, Americas.

Cost of sales increased to $1.86 billion from $1.65 billion in the year-ago quarter, while selling, general and administrative expense dropped to $89.7 million from $93.0 million last year.

Segment Performance

Metal Beverage Packaging, Americas & Asia: Sales for the segment increased 13% year over year to $1.13 billion. Operating earnings were $120.1 million compared with $112.8 million in the third quarter of 2010. The segment benefited from strong demand in China and increased volumes in North America.

Metal Beverage Packaging, Europe: This segment reported sales of $515.7 million, up 16.2% year over year, driven by increased volumes in the extruded aluminum packaging business, acquired in the beginning of the year and higher exchange rate, partly offset by declining beverage can volumes. Operating earnings were $64.9 million compared with $63.7 million in the third quarter of 2010.

Metal Food & Household Products Packaging, Americas: Sales in the segment dipped 1.6% year over year to $413.2 million. Operating earnings were $39.5 million compared with $49.4 million in the third quarter of 2010. Poor vegetable pack resulted in decreased food can volumes, which in turn led to lower sales.

Aerospace and Technologies: Sales for the segment improved 24.1% year over year to $208.4 million in the quarter. Operating earnings increased to $21.2 million from $18.4 million in the third quarter of 2010. The segment had a backlog of $985.5 million at quarter end.

Financial Performance

As of October 02, 2011, cash and cash equivalents increased to $190.1 million from $168.7 million as of September 26, 2010. Long-term debt increased to $2.98 billion as of October 02, 2011 from $2.05 billion as of September 26, 2010. Inventories rose to $1.09 billion at the end of the third quarter in 2011 from $898.9 million at the end of the third quarter in 2010.

Cash flow from operating activities was approximately $448.5 million in the first nine months of 2011 compared with $355.9 million in the comparable period of 2010, reflecting higher earnings. Capital expenditure was $323.8 million in the first three quarters of 2011 versus $131.1 million in the year-ago period, reflecting the company’s business expansion plans.

Outlook

Management expects to generate approximately $400 million in free cash flow. The company also plans to incur $500 million in capital expenditure of which $300 million will be invested in growth projects.

Our Take

Ball Corporation is set to deliver better results due to the successful integration of acquisitions, continued growth in the emerging markets and a focus on enhancing shareholder value. However, tough competition in the packaging business keeps the company under pressure to maintain profitability. It mainly competes with Crown Holdings Inc. (CCK - Snapshot Report), Rexam Plc (REXMY) and Silgan Holdings Inc. (SLGN - Analyst Report).

Headquartered in Broomfield, Colorado, Ball Corp. is a manufacturer of metal and plastic packaging, primarily for beverages and foods. It also supplies aerospace and other technologies and services to government as well as commercial customers.

Considering all these, we are maintaining our Neutral recommendation on the shares of Ball Corporation over the long term.