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| BLL > SEC Filings for BLL > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-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 provide 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. However, we continue to believe that Central Europe will be an area of growth once the economy recovers. Our Brazilian joint venture is proceeding with the construction of a 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 current 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, and approximately 20 percent fixed-price contracts. The remainder represents time and material contracts, which 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 capital charge on 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 long-term and 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 36 percent of consolidated net sales in the third quarter of 2009 (38 percent in 2008) and 38 percent in the first nine months of 2009 (40 percent in 2008). Sales in the third quarter of 2009 were 8 percent lower than the same period in 2008, primarily as a result of decreases in sales volumes of approximately 3 percent, along with the pass-through of lower aluminum prices. Similarly, year-to-date sales were down 10 percent with volumes down 5 percent as compared to 2008. The decrease in quarterly volumes was due to lower sales to carbonated soft drink customers in the Americas driven by the current economic environment. Quarterly volumes were relatively flat in the Asian market. Year-to-date sales volume declines were predominantly due to lower carbonated soft drink sales along with slightly lower beer volumes in both the Americas and in Asia with some impact from plant closures.
Excluding business consolidation activities discussed below, segment earnings were $102.9 million in the third quarter of 2009 compared to earnings of $77 million in the third quarter of 2008, and $223.9 million in the first nine months of 2009 compared to $228.4 million for the same period of 2008. Earnings in the third quarter and first nine months of 2009 were 34 percent higher and 2 percent lower than in the same respective periods of 2008. The significant increase in the third quarter was largely due to positive impacts from cost reductions, including $12 million from plant closures and other cost reduction efforts coupled with $7 million of lower freight and energy savings, and $5 million of lower benefit costs, partially offset by sales volume declines in the Americas. In Asia, profit margins increased in the quarter as overall cost reductions exceeded the impact of reduced sales due to the lower cost of metal. Year-to-date earnings benefited from the third quarter increase in profits, which helped to make up for the lower comparable earnings in the first two quarters due to sales volumes declines and sales of higher cost inventory.
Actions we took 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 nine months of 2009 also included a restructuring charge of $5 million ($3.1 million after tax) for accelerated depreciation in connection with the closure of the Kansas City plant, as well as $1 million ($0.6 million after tax) primarily for winding down the Puerto Rico and Kansas City plants.
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. Annualized 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, a portion of which began 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 its metal beverage packaging plant in Kent and recorded a pretax charge of $10.6 million ($6.4 million after tax) in the second quarter of 2008 and an additional $0.6 million pretax charge ($0.4 million after tax) in the third quarter of 2008.
As the above-noted plant closures and other actions 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 October 1, 2009, the company acquired three Anheuser-Busch InBev n.v./s.a (AB InBev) beverage can manufacturing plants and one of its beverage can end manufacturing plants, all of which are located in the U.S., for approximately $577 million in cash, subject to customary post-closing adjustments. These plants produce about 10 billion aluminum cans and 10 billion easy-open can ends annually, more than two-thirds of which are produced for leading soft drink companies and the rest for AB InBev. The addition of these plants to our manufacturing operations will improve our geographic distribution opportunities in North America, with additional favorable shipping points to help us and our customers reduce our carbon footprints. In the first full year of operation, Ball expects the plants to generate revenue of approximately $680 million.
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 24 percent of consolidated net sales in the third quarter of 2009 (26 percent in 2008) and 24 percent in the first nine months of 2009 (25 percent in 2008). Volumes were essentially flat as compared to the prior year periods. Segment sales in the third quarter of 2009 as compared to the same period in the prior year were 7 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. Sales for the first nine months of 2009 were 12 percent lower than sales for the same period of 2008 as a result of the same factors noted above.
Segment earnings were $68.8 million in the third quarter of 2009 and $164.5 million in the first nine months of 2009 compared to $76.7 million and $201.9 million for the same periods in 2008, respectively. While this quarter's sales volumes were consistent with those in the prior year comparable period, earnings in the third quarter of 2009 were negatively affected by a $3 million impact of the euro to U.S. dollar exchange rate, higher cost inventory carried into the quarter and a change in sales mix. Year-to-date results trended with those of the third quarter, with the adverse effects of foreign currency translation, both within Europe and on the conversion of the euro to the U.S. dollar, reducing earnings by $14 million compared to results in the nine-month period in 2008. The remaining decrease was due to high inventory costs partially offset by better commercial terms in some of our contracts and a change in sales mix.
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 23 percent of consolidated net sales in the third quarter of 2009 (18 percent in 2008) and 20 percent in the first nine months of 2009 (16 percent in 2008). Sales in the third quarter increased 26 percent over the same period in 2008, from $365 million to $459.5 million, while year-to-date sales were up 17 percent from the nine-month period in 2008, from $912 million to $1,066.5 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 3 percent period over period for the third quarter and 9 percent for the first nine months due to the effects of the economic recession and Ball's decision to walk away from unprofitable business.
Excluding business consolidation costs discussed below, segment earnings were $27.8 million in the third quarter of 2009 compared to earnings of $15.8 million in 2008 and $112.5 million in the first nine months of 2009 compared to $44.9 million in 2008. The increase in earnings in the third quarter of 2009 was due primarily to the increased sales prices mentioned above and improvements in manufacturing performance. The increase in earnings for the first nine months of 2009 was due primarily to the increased sales prices mentioned above coupled with lower costs of inventory carried into 2009 and improvements in manufacturing performance.
The company recorded an additional $4.5 million charge ($2.8 million after tax) in the third quarter of 2008 related to the closures of metal food and household products packaging plants in California and Georgia, and the redeployment of certain of those assets to other food and household facilities. These actions are expected to yield annualized pretax cost savings of approximately $15 million.
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 polypropylene containers for industrial and household product applications.
This segment accounted for 8 percent of consolidated net sales in the third quarter of 2009 (9 percent in 2008) and 9 percent in the first nine months of 2009 (10 percent in 2008). Segment sales in the third quarter of 2009 decreased 15 percent compared to the same period of 2008 due to a 9 percent decline in sales volumes and lower revenue related to resin price declines. Sales for the first nine months of 2009 were down 13 percent from sales in the same period in the prior year, consistent with the 12 percent decline in sales volume. 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, juice and sports drinks). Reduced preform sales also contributed to the year-to-date 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 discussed below, segment earnings of $3.8 million in the third quarter of 2009 and $15.2 million in the first nine months were lower than prior year earnings of $5.3 million and $15.8 million for the same periods, primarily due to lower sales offset by improved commercial terms and operating performance, including benefits from a plant closure in the second quarter of 2008 and plant closures in the third quarter of 2009.
On April 8, 2009, we announced that the company would cease operations at PET plastic packaging manufacturing plants in Watertown, Wisconsin, and Baldwinsville, New York. Operations ceased at both locations during the third quarter. Manufacturing volumes will be absorbed by our other plastic packaging plants as we consolidate production capacity into lower-cost facilities. Pretax charges of $9.5 million ($5.8 million after tax) and $11.9 million ($7.2 million after tax) were recorded in the third quarter and second quarter 2009 results, respectively. Cost savings associated with these activities are expected to exceed $12 million annually beginning in 2010.
In 2008 the company announced plans to close a plastic packaging plant in Brampton, Ontario, taking a pretax charge of $4.3 million ($3.8 million after tax) in the second quarter of 2008 and an additional $4 million (before and after tax) in the third quarter. The third quarter 2009 results also included a $3.1 million pretax charge ($2.5 million after tax) for accelerated depreciation and lease termination costs related to the Brampton closure.
Subsequent Event
On October 23, 2009, Ball completed the sale of its plastic pail assets to BWAY Corporation for $32 million, subject to customary post-closing adjustments. The transaction involved the sale of a plastic pail manufacturing plant in Newnan, Georgia, which Ball acquired in 2006 as part of its purchase of U.S. Can Corporation. The plant produces injection molded plastic pails and drums for products such as building materials and pool chemicals. The company estimates that the after-tax gain or loss on the transaction will be insignificant.
Aerospace and Technologies
Aerospace and technologies segment sales represented 9 percent of consolidated net sales in the third quarter of 2009 (9 percent in 2008) and 9 percent in the first nine months of 2009 (9 percent in 2008). Third quarter sales were down approximately 7 percent from the same period in the prior year, while sales in the first nine months of 2009 compared to those of the first nine months of 2008 were 4 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 $16.2 million in the third quarter of 2009 compared to $18.4 million in the same period of 2008 and $45.6 million in the first nine months of 2009 compared to $56 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 the winding down of several large programs and overall reduced program activity. Sales to the U.S. government, either directly as a prime contractor or indirectly as a subcontractor, represented 94 percent of segment sales in both the third quarter and first nine months of 2009 compared to 92 percent and 89 percent for the respective periods in 2008. Contracted backlog in the aerospace and technologies segment at September 27, 2009, was $563 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 nine months of 2009 compared to the first nine 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 $86.8 million in the third quarter of 2009 compared to $67.5 million for the same period in 2008 and $239.9 million in the first nine months of 2009 compared to $227.6 million in the first nine months of 2008. The year-to-date increase in SG&A expenses was primarily due to $21.4 million of higher employee compensation costs, including incentive compensation costs, and higher stock-based compensation costs, including mark-to-market adjustments for the company's deferred compensation stock plans. These were offset by net favorable decreased costs of $9.1 million, including lower receivables securitization fees and lower research and development costs.
Gain on Sale of Investment
The company sold a portion of its investment in DigitalGlobe, a provider of commercial high resolution earth imagery products and services, in conjunction with DigitalGlobe's 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 $28.9 million for the third quarter of 2009 compared to $33.1 million in the same period of 2008 and $79.4 million for the first nine months of 2009 compared to $104 million for the first nine 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. Interest expense is expected to increase in the fourth quarter as a result of the $700 million of new senior notes issued in August 2009 (as discussed in Note 11 to the unaudited condensed consolidated financial statements within Item 1 of this report).
The effective income tax rate was 30 percent for the first nine months of 2009 compared to 32 percent for the same period in 2008. The lower tax rate was . . .
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