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| BLL > SEC Filings for BLL > Form 10-Q on 7-May-2009 | All Recent SEC Filings |
7-May-2009
Quarterly Report
Management's discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes. Ball Corporation and its subsidiaries are referred to collectively as "Ball" or "the company" or "we" or "our" in the following discussion and analysis.
BUSINESS OVERVIEW
Ball Corporation is one of the world's leading suppliers of metal and plastic packaging to the beverage, food and household products industries. Our packaging products are produced for a variety of end uses and are manufactured in plants around the world. We also supply aerospace and other technologies and services to governmental and commercial customers.
We sell our packaging products primarily to major beverage, food and household products companies with which we have developed long-term customer relationships. This is evidenced by our high customer retention and our large number of long-term supply contracts. While we have a diversified customer base, we sell a majority of our packaging products to relatively few major companies in North America, Europe, the People's Republic of China (PRC) and Argentina, as do our equity joint ventures in Brazil, the U.S. and the PRC. We also purchase raw materials from relatively few suppliers. Because of our customer and supplier concentration, our business, financial condition and results of operations could be adversely affected by the loss, insolvency or bankruptcy of a major customer or supplier or a change in a supply agreement with a major customer or supplier, although our contracts and long-term relationships generally mitigate these risks. We are also subject to exposure from the rising costs of raw materials, as well as other inputs into our direct costs, although our contracts and long-term relationships help us to mitigate those risks in the majority of circumstances.
In the rigid packaging industry, sales and earnings can be improved by reducing costs, increasing prices, developing new products and expanding volume. Over the past two years, we have closed a number of packaging facilities in support of our ongoing objective of matching our supply with market demand. We have also identified and implemented plans to improve our return on invested capital through the redeployment of assets within our worldwide beverage can business.
As part of our packaging strategy, we are focused on developing and marketing new and existing products that meet the needs of our customers and the ultimate consumer. These innovations include new shapes, sizes, opening features and other functional benefits of both metal and plastic packaging. This packaging development activity helps us maintain and expand our supply positions with major beverage, food and household products customers. As part of this focus, we installed a new aluminum bottle line, as well as a 24-ounce beverage can production line, in our Monticello, Indiana, facility, and both became operational during the third quarter of 2008.
While the North American beverage container manufacturing industry is relatively mature, the European, PRC and Brazilian beverage can markets are growing and are expected to continue to grow in the medium to long term. While we are able to capitalize on this growth by increasing capacity in some of our European can manufacturing facilities by speeding up certain lines and by expansion, we have put on hold various projects, including the completion of the construction of a plant in Poland, due to the current world-wide economic environment. Our Brazilian joint venture is proceeding with the construction of a one-line metal beverage can plant in Brazil and is adding further can capacity in the existing Rio de Janeiro can plant. These Brazilian expansion efforts will be owned by Ball's unconsolidated 50-percent-owned joint venture, Latapack-Ball Embalagens, Ltda., and the expansion is being funded by cash flows from operations and incurrence of debt by the joint venture.
Ball's consolidated earnings are exposed to foreign exchange rate fluctuations and we attempt to mitigate this exposure through the use of derivative financial instruments, as discussed in "Quantitative and Qualitative Disclosures About Market Risk" within Item 3 of this report.
The primary customers for the products and services provided by our aerospace and technologies segment are U.S. government agencies or their prime contractors. It is possible that federal budget reductions and priorities, or
changes in agency budgets, could limit future funding and new contract awards or delay or prolong contract performance. We expect that the delay of certain program awards, as well as federal budget considerations under the new administration, will have an unfavorable impact on this segment in 2009, and we are continuing to take steps to adjust our resources accordingly.
We recognize sales under long-term contracts in the aerospace and technologies segment using the cost-to-cost, percentage of completion method of accounting. Our present contract mix consists of approximately two-thirds percent cost-type contracts, which are billed at our costs plus an agreed upon and/or earned profit component, while the remainder are fixed-price contracts. We include time and material contracts in the fixed-price category, because such contracts typically provide for the sale of engineering labor at fixed hourly rates. Failure to be awarded certain key contracts could further adversely affect segment performance during 2009 compared to 2008.
Throughout the period of contract performance, we regularly reevaluate and, if necessary, revise our estimates of Ball Aerospace and Technologies Corp.'s total contract revenue, total contract cost and progress toward completion. Because of contract payment schedules, limitations on funding and other contract terms, our sales and accounts receivable for this segment include amounts that have been earned but not yet billed.
Management uses various measures to evaluate company performance. The primary financial metric we use is economic value added (tax-effected operating earnings, as defined by the company, less a charge for net operating assets employed). Our goal is to increase economic value added on an annual basis. Other financial metrics we use are earnings before interest and taxes (EBIT); earnings before interest, taxes, depreciation and amortization (EBITDA); diluted earnings per share; operating cash flow and free cash flow (generally defined by the company as cash flow from operating activities less capital expenditures). These financial measures may be adjusted at times for items that affect comparability between periods. Nonfinancial measures in the packaging segments include production efficiency and spoilage rates; quality control figures; environmental, health and safety statistics and production and sales volumes. Additional measures used to evaluate financial performance in the aerospace and technologies segment include contract revenue realization, award and incentive fees realized, proposal win rates and backlog (including awarded, contracted and funded backlog).
We recognize that attracting, developing and retaining highly talented employees are essential to the success of Ball and, because of this, we strive to pay employees competitively and encourage their ownership of the company's common stock as part of a diversified portfolio. For most management employees, a meaningful portion of compensation is at risk as an incentive, dependent upon economic value-added operating performance. For more senior positions, more compensation is at risk through economic value-added performance and various stock compensation plans. Through our employee stock purchase plan and 401(k) plan, which matches employee contributions with Ball common stock, employees, regardless of organizational level, have opportunities to own Ball stock.
CONSOLIDATED SALES AND EARNINGS
The company has five reportable segments organized along a combination of product lines, after aggregating the metal beverage packaging, Americas and Asia operations based on similar economic characteristics: (1) metal beverage packaging, Americas and Asia; (2) metal beverage packaging, Europe; (3) metal food and household products packaging, Americas; (4) plastic packaging, Americas; and (5) aerospace and technologies. We also have investments in companies in the U.S., the PRC and Brazil, which are accounted for using the equity method of accounting and, accordingly, those results are not included in segment sales or earnings.
Metal Beverage Packaging, Americas and Asia
The metal beverage packaging, Americas and Asia, segment consists of operations located in the U.S., Canada and the PRC, which manufacture metal container products used in beverage packaging, as well as non-beverage plastic containers manufactured and sold mainly in the PRC.
This segment accounted for 39 percent of consolidated net sales in the first quarter of 2009 (41 percent in 2008). Sales in the first quarter of 2009 were 12 percent lower than the same period in 2008, primarily as a result of 2009 decreases in sales volume of approximately 9 percent, along with the pass-through of lower aluminum prices. The decrease in sales volume was due to lower sales to carbonated soft drink customers driven in part by the current economic environment, as well as slightly lower beer volumes with some impact from plant closures.
Segment earnings were $41.2 million in the first quarter of 2009 ($46.2 million excluding business consolidation activities) compared to earnings of $74 million in the first quarter of 2008. Excluding the $5 million in business consolidation activities (see comment below), earnings in 2009 were 38 percent lower than in the first quarter of 2008 primarily due to approximately $9 million related to sales volume declines with the sale of higher cost inventory making up the remainder. Positive impacts from cost optimization measures offset negative foreign currency impacts in China.
In October 2008 Ball announced the closure of metal beverage can plants in Guayama, Puerto Rico, and Kansas City, Missouri. The plant in Puerto Rico ceased operations at the end of 2008, and the plant in Kansas City was closed during the first quarter of 2009, resulting in an additional pretax charge of $5 million ($3.1 million after tax) for the quarter.
Cost reductions associated with these plant closings and the previous Kent, Washington, plant closing are expected to be up to $35 million in 2009 and to be $12 million cash positive upon final disposition of the assets, which includes cash benefits received in the fourth quarter of 2008 from the sale of the Kent facility.
As the aforementioned plant closures indicate, we are actively pursuing improved profitability through better asset utilization and cost optimization across all of the business. We are also committed to improving margins on this portion of our business through active revenue management. We continue to focus efforts on the custom beverage can business, specifically on cans of different shapes, diameters and fill volumes and by developing cans with added functional attributes (such as resealability) and through product line extensions.
Metal Beverage Packaging, Europe
The metal beverage packaging, Europe, segment includes metal beverage packaging products manufactured in Germany, the United Kingdom, France, the Netherlands, Poland and Serbia. This segment accounted for 22 percent of consolidated net sales in the first quarter of 2009 (23 percent in 2008). Segment sales in the first quarter of 2009 as compared to the same period in the prior year were 15 percent lower largely due to foreign currency translation declines of 13 percent on the weakening of the euro and slightly lower sales volume, which were partially offset by price increases.
Segment earnings were $30.9 million in the first quarter of 2009 compared to earnings of $48 million for the same period in 2008. Earnings in the first quarter of 2009 were negatively impacted by $9 million in foreign currency declines and equal proportions of higher cost inventory and price-cost compression.
Metal Food & Household Products Packaging, Americas
The metal food and household products packaging, Americas, segment consists of operations located in the U.S., Canada and Argentina. The segment includes the manufacture and sale of metal cans used for food packaging, aerosol cans, paint cans, general line cans and decorative specialty cans.
Segment sales were approximately 18 percent of consolidated net sales in the first quarter of 2009 (15 percent in 2008). Sales in the first quarter increased 8 percent over the same period in 2008 due to higher selling prices driven by the higher cost of raw materials beginning in 2009, which was partially offset by a decrease in sales volume of 12 percent period over period.
Segment earnings were $49.6 million in the first quarter of 2009 compared to earnings of $14.8 million in 2008. The increase in earnings in the first quarter of 2009 was due primarily to lower costs of inventory carried into 2009. Better manufacturing performance also offset lower sales volume for the quarter.
Plastic Packaging, Americas
The plastic packaging, Americas, segment consists of operations located in the U.S., which manufacture polyethylene terephthalate (PET) and polypropylene plastic container products used mainly in beverage and food packaging, as well as high density polyethylene and polypropylene containers for industrial and household product applications. Manufacturing operations ceased in Canada during the third quarter of 2008 with the closure of the Brampton, Ontario, plant.
This segment accounted for 10 percent of consolidated net sales in the first quarter of 2009 (11 percent in 2008). Segment net sales in the first quarter of 2009 decreased 15 percent, or $29 million, as compared to the same period of 2008 primarily due to sales volume declines offset to some extent by selling price increases. The volume loss included decreases in carbonated soft drink and water bottle sales due, in part, to lower convenience store sales by our customers and growth in customer self-manufacturing efforts partially offset by higher sales in specialty business markets (e.g., custom hot-fill, alcohol, food and juice drinks). Reduced preform sales also contributed to the sales decrease in 2009 due, in part, to the bankruptcy filing of a preform customer in the second quarter of 2008.
Segment earnings of $3.6 million in the first quarter of 2009 were lower than quarterly earnings of $4.8 million in the prior year, primarily due to the previously mentioned volume losses partially offset by higher selling prices and improved operating performance.
Subsequent Event
On April 8, 2009, the company announced that it will permanently cease manufacturing operations at PET plastic packaging manufacturing plants in Watertown, Wisconsin, and Baldwinsville, New York. Production at these plants will cease in the second and third quarters of 2009, respectively. Manufacturing volumes will be absorbed by other plastic packaging plants as we consolidate production capacity into lower-cost plants. A pretax charge of approximately $24 million ($14 million after tax) will be recorded in the results of the second quarter of 2009. Cost savings associated with these activities are expected to exceed $12 million annually beginning in 2010.
Aerospace and Technologies
Aerospace and technologies segment sales represented 11 percent of consolidated net sales in the first quarter of 2009 (10 percent in 2008) and were essentially flat period over period.
Segment earnings were $14.6 million in the first quarter of 2009 compared to $22 million in the same period of 2008, which included a pretax gain of $7.1 million on the sale of a subsidiary in 2008. Excluding the pretax gain on the sale, earnings were relatively flat period over period.
Contracted backlog in the aerospace and technologies segment at March 29, 2009, was $592 million compared to a backlog of $597 million at December 31, 2008.
Additional Segment Information
For additional information regarding the company's segments, see the business segment information in Note 3 accompanying the unaudited condensed consolidated financial statements included within Item 1 of this report. The charges recorded for business consolidation activities were based on estimates by Ball management and were developed from information available at the time. If actual outcomes vary from the estimates, the differences will be reflected in current period earnings in the consolidated statement of earnings and identified as business consolidation gains and losses. Additional details about our business consolidation activities and associated costs are provided in Note 4 accompanying the unaudited condensed consolidated financial statements included within Item 1 of this report.
Equity in Results of Affiliates
The reduction in equity in results of affiliates in the first quarter of 2009 compared to the first quarter of 2008 was primarily due to foreign currency translation impacts on our investment in Brazil.
Selling, General and Administrative
Selling, general and administrative (SG&A) expenses were $75.2 million in the first quarter of 2009 compared to $81.6 million for the same period in 2008. This decrease in SG&A expenses was due to lower general and administrative costs in the aerospace and technologies segment of approximately $4 million; favorable mark-to-market adjustments of derivatives of approximately $3.8 million and other miscellaneous net cost reductions. These reductions and favorable adjustments were partially offset by an increase in stock-based compensation, including deferred compensation stock plan costs of approximately $3.5 million.
Interest and Taxes
Consolidated interest expense was $25.8 million for the first quarter of 2009 compared to $36.2 million in the same period of 2008. The reduced expense in 2009 was primarily due to lower interest rates on floating rate debt, and a lower euro compared to the U.S. dollar.
The effective income tax rate was 28 percent for the first three months of 2009 compared to 32 percent for the same period in 2008. The lower tax rate in 2009 was primarily the result of a $4.8 million release of the company's tax reserve for Financial Accounting Standards Board Interpretation 48, "Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109," as a result of a foreign tax settlement.
NEW ACCOUNTING PRONOUNCEMENTS
For information regarding recent accounting pronouncements, see Note 2 to the unaudited condensed consolidated financial statements within Item 1 of this report.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash provided by operating activities and external committed borrowings. We believe that cash flows from operations and cash provided by short-term and committed revolver borrowings, when necessary, will be sufficient to meet our ongoing operating requirements, scheduled principal and interest payments on debt, dividend payments and anticipated capital expenditures. We had approximately $228 million of available funds under committed multi-currency revolving credit facilities at March 29, 2009. However, our liquidity could be impacted significantly by a decrease in demand for our products, which could arise from competitive circumstances, the current global credit, financial and economic crisis or any of the other factors described in Item 1A, "Risk Factors," within the company's annual report.
In our worldwide beverage can business, we use financial derivative contracts, as discussed in "Quantitative and Qualitative Disclosures About Market Risk" within Item 3 of this report, to manage future aluminum price volatility for our customers. As these derivative contracts are largely matched to customer sales contracts, they have very limited economic impact on our earnings. Ball's financial counterparties to these derivative contracts require Ball to post collateral in certain circumstances when the negative mark-to-market value of the contracts exceeds specified levels. Additionally, Ball has similar collateral posting arrangements with certain customers and other financial counterparties on these derivative contracts. At March 29, 2009, Ball had $181.9 million of cash posted as collateral and had received $98.1 million of cash collateral from customers for a net amount of $83.8 million. The cash flows of the collateral postings are shown in the investing section of our consolidated statements of cash flows. We expect to recover all of these net cash deposits in 2009.
Cash flows used by operations were $307.8 million in the first three months of 2009 compared to $214.6 million in the first three months of 2008. The increase in cash flows used by operations in 2009 as compared to 2008 was primarily due to an increase in receivables and lower payables.
Based on information currently available, we estimate 2009 capital spending to be less than $250 million compared to 2008 capital spending of $306.9 million. We have reduced our expected capital spending year over year to focus on reducing our debt net of cash balances.
Interest-bearing debt at March 29, 2009, increased approximately $249 million to $2.66 billion from $2.41 billion at December 31, 2008. The debt increase was primarily due to seasonal working capital needs. We intend to continue to allocate our operating cash flow for the balance of 2009 to reducing our debt net of cash balances while covering our capital spending programs, dividend payments and incremental pension funding.
At March 29, 2009, approximately $228 million was available under the company's committed multi-currency revolving credit facilities, which are available until October 2011. The company also had $333 million of short-term uncommitted credit facilities available at the end of the first quarter, of which $158.1 million was outstanding. Given our cash flow projections and unused credit facilities that are available until October 2011, the company's liquidity is expected to meet its ongoing operating cash flow and debt service requirements. While the current financial and economic conditions have raised concerns about credit risk with counterparties to derivative
The current financial and economic environment has increased liquidity and credit risks with some of our customers and suppliers. In October 2008 we advanced interest-bearing funding of $22 million in support of one of our key suppliers, which advance is secured by accounts receivable and inventory.
The company has a receivables sales agreement that provides for the ongoing, revolving sale of a designated pool of trade accounts receivable of Ball's North American packaging operations, up to $250 million. The agreement qualifies as off-balance sheet financing under the provisions of Statement of Financial Accounting Standards (SFAS) No. 140, as amended by SFAS No. 156. Net funds received from the sale of the accounts receivable totaled $203.1 million at March 29, 2009, and $250 million at December 31, 2008, and are reflected as a reduction of accounts receivable.
The company was in compliance with all loan agreements at March 29, 2009, and all prior periods presented and has met all debt payment obligations. The U.S. note agreements, bank credit agreement and industrial development revenue bond agreements contain certain restrictions relating to dividend payments, share repurchases, investments, financial ratios, guarantees and the incurrence of additional indebtedness. Additional details about the company's debt and receivables sales agreements are available in Notes 11 and 6, respectively, accompanying the unaudited condensed consolidated financial statements included within Item 1 of this report.
Contributions to the company's defined benefit plans, not including the unfunded German plans, are expected to be in the range of $75 million to $85 million in 2009. This estimate may change based on changes in the Pension Protection Act and actual plan asset performance, among other factors. Payments to participants in the unfunded German plans are expected to be approximately €18 million (approximately $23 million) for the full year.
CONTINGENCIES, INDEMNIFICATIONS AND GUARANTEES
Details about the company's contingencies, indemnifications and guarantees are available in Notes 16 and 17 accompanying the unaudited condensed consolidated financial statements included within Item 1 of this report.
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