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| BLL > SEC Filings for BLL > Form 10-Q on 4-Aug-2009 | All Recent SEC Filings |
4-Aug-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 the risk of customer loss. We are also subject to exposure from inflation and the rising costs of raw materials, as well as other inputs into our direct costs, although our contracts (many of which are based on floating rate commodity prices that result in increases in certain costs being passed along to customers) and long-term relationships and, to a smaller extent, inflation hedging 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 volumes. 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 near Rio de Janeiro and has added further can capacity in the existing Jacarei 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 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 cost-type 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 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.
Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and notes thereto included in the company's Annual Report on Form 10-K for the year ended December 31, 2008, which include additional information about our accounting policies, practices and the transactions that underlie our financial results. The preparation of our unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires us to make estimates and assumptions that affect the reported amounts in our unaudited condensed consolidated financial statements and the accompanying notes, including various claims and contingencies related to lawsuits, taxes, environmental and other matters arising out of the normal course of business. We apply our best judgment, our knowledge of existing facts and circumstances and actions that we may undertake in the future in determining the estimates that affect our unaudited condensed consolidated financial statements. We evaluate our estimates on an on-going basis using our historical experience, as well as other factors we believe appropriate under the circumstances, such as current economic conditions, and adjust or revise our estimates as circumstances change. As future events and their effects cannot be determined with precision, actual results may differ from these estimates.
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 second quarter of 2009 (40 percent in 2008) and 39 percent in the first six months of 2009 (40 percent in 2008). Sales in the second quarter of 2009 were 10 percent lower than the same period in 2008, primarily as a result of decreases in sales volumes of approximately 5 percent, along with the pass-through of lower aluminum prices. Similarly, year-to-date sales were down 11 percent with volumes down 7 percent as compared to 2008. The decrease in quarterly volumes was due to lower sales to carbonated soft drink customers driven by the current economic environment. Year-to-date sales volume declines were predominantly due to lower carbonated soft drink sales along with slightly lower beer volumes with some impact from plant closures.
Excluding business consolidation activities discussed below, segment earnings were $74.8 million in the second quarter of 2009 compared to earnings of $77.4 million in the second quarter of 2008, and $121 million in the first six months of 2009 compared to $151.4 million for the same period of 2008. Earnings in the second quarter and first six months of 2009 were 3 percent and 20 percent lower than in the same respective periods of 2008 primarily due to the sales volume declines and margin erosion resulting from higher inventory costs, partially offset by positive impacts from cost optimization measures, including plant closures.
Actions we have taken in the second quarter of 2009 to reduce headcount in our metal beverage packaging business resulted in a pretax charge of $3.3 million ($2 million after tax) for severance and other employee benefit costs. Results for the first six months of 2009 also included the restructuring charge of $5 million ($3.1 million after tax) for accelerated depreciation in connection with the closure of a North American metal beverage can plant.
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 at the end of the first quarter of 2009. Cost reductions associated with these plant closings and the previous Kent, Washington, plant closing, discussed below, are expected to be in excess of $35 million beginning 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.
The company announced in the second quarter of 2008 that by the end of 2008 it would close a metal beverage packaging plant in Kent, Washington, and recorded a pretax charge of $10.6 million ($6.4 million after tax) in the second quarter of 2008.
As the above-noted 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 better commercial terms. 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.
Subsequent Event
On July 1, 2009, the company announced that it signed a definitive agreement with a subsidiary of Anheuser-Busch InBev n.v./s.a. (AB InBev) to acquire certain of AB InBev's U.S. beverage manufacturing plants for approximately $577 million. The addition of these plants to our manufacturing operations improves our geographic distribution opportunities in North America, with additional favorable shipping points to help us and our customers reduce our carbon footprints for longer sustainability. The transaction is expected to close later this fiscal year or early in the first quarter of 2010, subject to regulatory approval, and to be accretive to Ball's earnings and cash flow in 2010.
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 26 percent of consolidated net sales in the second quarter of 2009 (27 percent in 2008) and 24 percent in the first six months of 2009 (26 percent in 2008). Volumes were essentially flat as compared to the prior year periods. Segment sales in the second quarter of 2009 as compared to the same period in the prior year were 14 percent lower largely due to the translation impact of the euro to the U.S. dollar and the translation impact of the British pound to the euro, partially offset by better commercial terms. Consistent with the quarterly comparison, sales for the first six months of 2009 were 15 percent lower than sales for the same period of 2008 as a result of the same factors noted above.
Segment earnings were $64.8 million in the second quarter of 2009 and $95.7 million in the first six months of 2009 compared to $77.2 million and $125.2 million for the same periods in 2009, respectively. While this quarter's sales volumes were consistent with those in the prior year comparable period, earnings in the second quarter of 2009 were negatively affected by $7 million due to the impact of foreign currency translation, both within Europe as well as when the euro is translated to the U.S. dollar, with the remaining decrease primarily due to higher inventory costs. Year-to-date results trended with those of the second quarter, with the adverse effects of foreign currency translation reducing earnings by $13 million compared to results in the six-month period in 2008, with the remaining decrease due to inflated inventory costs partially offset by better commercial terms in some of our contracts.
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 17 percent of consolidated net sales in the second quarter of 2009 (14 percent in 2008) and 17 percent in the first six months of 2009 (14 percent in 2008). Sales in the second quarter increased 14 percent over the same period in 2008, from $283.2 to $323.4 million, while year-to-date sales were up 11 percent from the six-month period in 2008, from $547 million to $607 million, due to higher selling prices driven by the higher cost of raw materials beginning in 2009, which were partially offset by a decrease in sales volume of 13 percent period over period for both the second quarter and the first six months due to the soft economy.
Segment earnings were $35.1 million in the second quarter of 2009 compared to earnings of $14.3 million in 2008 and $84.7 million in the first six months of 2009 compared to $29.1 million in 2008. The increase in earnings in the second quarter and first six months of 2009 was due primarily to the increased sales prices mentioned above coupled with lower costs of inventory carried into both the second quarter and the first half of 2009 and improvements in manufacturing performance.
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.
This segment accounted for 9 percent of consolidated net sales in the second quarter of 2009 (10 percent in 2008) and 10 percent in the first six months of 2009 (10 percent in 2008). Segment sales in the second quarter of 2009 decreased 10 percent, or $19.4 million, as compared to the same period of 2008 due to a 10 percent decline in sales volumes. Sales of $341.3 million for the first six months of 2009 were down 12 percent from sales of $389.9 million for the same period in the prior year, consistent with the 13 percent decline in volume sales. The volume loss for the respective periods included decreases in food, carbonated soft drink, and water bottle sales due, in part, to lower convenience store sales by our customers and growth in customer self-manufacturing of bottles, 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.
Excluding applicable business consolidation costs for 2009 and 2008, segment earnings of $7.8 million in the second quarter of 2009 and $11.4 million in the first six months were higher than prior year earnings of $5.7 million and $10.5 million for the same periods, primarily due to better commercial terms and improved operating performance, including benefits from the plant closure in the second quarter of 2008.
On April 8, 2009, we announced that the company will cease manufacturing operations at PET plastic packaging manufacturing plants in Watertown, Wisconsin, and Baldwinsville, New York, this fiscal year. Manufacturing volumes will be absorbed by other plastic packaging plants as we consolidate production capacity into lower-cost plants. A pretax charge of $11.9 million ($7.2 million after tax) was 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.
Last year, the company announced plans to close a plastic packaging plant in Brampton, Ontario, taking a charge of $4.3 million ($3.8 million after tax) in the second quarter of 2008.
Aerospace and Technologies
Aerospace and technologies segment sales represented 9 percent of consolidated net sales in the second quarter of 2009 (9 percent in 2008) and 10 percent in the first six months of 2009 (10 percent in 2008). Second quarter sales were down approximately 5 percent from the same period in the prior year, while sales in the first half of 2009 compared to those of the first six months of 2008 were 3 percent lower. These decreases were driven by the winding down of several of our large spacecraft programs, which is currently happening at a faster pace than new contract awards.
Segment earnings were $14.8 million in the second quarter of 2009 compared to $22.7 million in the same period of 2008 and $29.4 million in the first six months of 2009 compared to $37.6 million in 2008, excluding a pretax gain of $7.1 million on the sale of a subsidiary in 2008. The drop in earnings from the same period in the prior year and year-to-date was primarily attributable to increased profitability in 2008 due to risk retirement on several fixed price programs that did not occur in 2009.
Sales to the U.S. government, either directly as a prime contractor or indirectly as a subcontractor, represented 93.5 percent of segment sales in the second quarter of 2009 and 93.5 percent for the first half of 2009 compared to 86.9 percent and 88.2 percent for the respective periods in 2008. Contracted backlog in the aerospace and technologies segment at June 28, 2009, was $587 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 six months of 2009 compared to the first six months of 2008 was primarily due to foreign currency impacts on our investment in Brazil in the first quarter of 2009.
Selling, General and Administrative
Selling, general and administrative (SG&A) expenses were $77.9 million in the second quarter of 2009 compared to $78.5 million for the same period in 2008 and $153.1 million in the first six months of 2009 compared to $160.1 million in the first six months of 2008. This year-to-date decrease in SG&A expenses was due to lower general and administrative costs in the aerospace and technologies segment of approximately $3.1 million; less research and development spending of $1.9 million; favorable mark-to-market adjustments of derivatives of approximately $3.7 million, lower accounts receivable securitization fees of $2.4 million, and $2.1 million of other miscellaneous net cost reductions. These reductions and favorable adjustments were partially offset by an increase in employee compensation, including incentive compensation plan costs, of approximately $6.2 million.
Gain on Sale of Investment
The company sold a portion of its interest in DigitalGlobe, a provider of commercial high resolution earth imagery products and services, in conjunction with its initial public offering. The sale generated proceeds of $37 million in the second quarter of 2009. As a result of this transaction, a non-operating pretax gain of $34.8 million ($30.7 million after tax) was recorded.
Interest and Taxes
Consolidated interest expense was $24.7 million for the second quarter of 2009 compared to $34.7 million in the same period of 2008 and $50.5 million for the first six months of 2009 compared to $70.9 million for the first six months of 2008. The reduced expense for both periods in 2009 compared to those in 2008 was primarily due to lower interest rates on floating rate debt, and a lower euro compared to the U.S. dollar.
In the second quarter and first six months of 2009, $0.9 million and $2.2 million of interest was capitalized, respectively, compared to $1.8 million and $3.6 million in the comparable periods in 2008. Capitalized interest is associated with preparing assets for their intended use in European and North American plants.
The effective income tax rate was 27.6 percent for the first six months of 2009 compared to 32 percent for the same period in 2008. The lower tax rate was primarily due to an $8.4 million net increase in tax benefits as a result of a foreign tax settlement and a release of a valuation allowance for a net operating loss carryforward and a $9.6 million tax benefit from the sale of shares in a stock investment due to a higher tax basis. These benefits were offset somewhat by an approximate $5 million increase due to the change in our earnings mix to higher taxed jurisdictions.
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 and uncommitted 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. 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. Our 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 June 28, 2009, Ball had $119.4 million of cash posted as collateral and had received $69.5 million of cash collateral from customers . . .
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