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BLL > SEC Filings for BLL > Form 10-K on 24-Feb-2014All Recent SEC Filings

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Form 10-K for BALL CORP


24-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

Management's discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 8 of this Annual Report on Form 10-K, which include additional information about our accounting policies, practices and the transactions underlying our financial results. The preparation of our 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 consolidated financial statements and the accompanying notes including various claims and contingencies related to lawsuits, taxes, environmental and other matters arising during 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 consolidated financial statements. We evaluate our estimates on an ongoing 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. Ball Corporation and its subsidiaries are referred to collectively as "Ball Corporation," "Ball," "the company" or "we" or "our" in the following discussion and analysis.

OVERVIEW

Business Overview and Industry Trends

Ball Corporation is one of the world's leading suppliers of metal packaging to the beverage, food, personal care and household products industries. Our packaging products are produced for a variety of end uses, are manufactured in facilities around the world and are competitive with other substrates, such as plastics and glass. In the rigid packaging industry, sales and earnings can be increased by reducing costs, increasing prices, developing new products, expanding volumes and making strategic acquisitions. We also provide aerospace and other technologies and services to governmental and commercial customers.

We sell our packaging products mainly to large, multinational beverage, food, personal care 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 PRC and South America, as do our equity joint ventures in the U.S. and Vietnam. The overall metal container industry is growing globally and is expected to continue to grow in the medium to long term despite the North American industry seeing a continued decline in standard-sized aluminum beverage packaging for the carbonated soft drink market. The primary customers for the products and services provided by our aerospace and technologies segment are U.S. government agencies or their prime contractors.

We purchase our raw materials from relatively few suppliers. We also have exposure to inflation, in particular the rising costs of raw materials, as well as other direct cost inputs. We mitigate our exposure to the changes in the costs of metal through the inclusion of provisions in contracts covering the majority of our volumes to pass through metal price changes, as well as through the use of derivative instruments. The pass-through provisions generally result in proportional increases or decreases in sales and costs with a greatly reduced impact, if any, on net earnings. 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 contract provisions generally mitigate the risk of customer loss, and our long-term relationships represent a known, stable customer base.

We recognize sales under long-term contracts in the aerospace and technologies segment using percentage-of-completion under the cost-to-cost method of accounting. Throughout the period of contract performance, we regularly reevaluate and, if necessary, revise our estimates of aerospace and technologies 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.


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Corporate Strategy

Our Drive for 10 vision encompasses five strategic levers that are key to growing our business and achieving long-term success. Since we launched in 2011, we made progress on each of our Drive for 10 levers as described in the following:

maximizing value in our existing businesses through rationalizing standard beverage container and end capacity in North America and the expansion of specialty container production to meet current demand; redeployment of surplus equipment to other global locations; closure of certain metal beverage and metal food and aerosol packaging facilities; relocating our European headquarters to Zurich, Switzerland, to gain business, customer and supplier efficiencies; and cost-out and value-in initiatives across all of our businesses;

expanding further into new products and capabilities through expansion into extruded aluminum aerosol manufacturing with our Mexican acquisition in December 2012 and Aerocan in January 2011; successful commercialization of our light-weighted extruded aluminum aerosol can that utilizes a significant amount of recycled material;

aligning ourselves with the right customers and markets by investing capital to meet double-digit volume growth for specialty beverage containers throughout the global network and the addition of a second can line in our Alagoinhas, Brazil, aluminum beverage container facility;

broadening our geographic reach with the construction and start up of three beverage container manufacturing facilities in China, Brazil and Vietnam, as well as the award of a South Korean environmental instrument in our aerospace business; and

leveraging our technological expertise in packaging innovation and aerospace technologies to maintain our competitive advantage today and in the future.

These ongoing business developments help us stay close to our customers while expanding and/or sustaining our industry positions with major beverage, food, personal care, household products and aerospace customers.

RESULTS OF OPERATIONS

Consolidated Sales and Earnings



                                                         Years Ended December 31,
($ in millions)                                     2013           2012           2011

Net sales                                        $   8,468.1    $   8,735.7    $   8,630.9
Net earnings attributable to Ball Corporation          406.8          403.5          444.0
Net earnings attributable to Ball Corporation
as a % of consolidated net sales                         4.8 %          4.6 %          5.1 %

The decrease in net sales in 2013 compared to 2012 was driven largely by lower demand for standard 12-ounce aluminum beverage containers in the U.S., partially offset by specialty can growth in the Americas and higher sales volumes in Europe, Brazil and the PRC. Earnings were flat compared to 2012 with lower standard 12-ounce volumes in the U.S. and higher selling, general and administrative expenses being offset by higher specialty can volumes in the Americas and improved cost management in our global packaging operations. In addition to the business segment performance analyzed below, net earnings attributable to Ball Corporation included lower business consolidation and other activities, higher debt refinancing costs and a lower tax rate in 2013. These items are detailed in the "Management Performance Measures" section below.

The increase in net sales in 2012 compared to 2011 was driven largely by higher sales in Aerospace and higher beverage container sales volumes in certain geographical regions being offset by lower sales volumes in food and household containers and unfavorable currency translation effects in Europe. Earnings were favorably impacted by higher sales volumes in certain geographical regions, improved pricing and product sales mix and continued year-over-year improvement in our manufacturing costs while negatively impacted by higher distribution and warehousing costs and new facility start-up costs in other markets.


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Cost of Sales (Excluding Depreciation and Amortization)

Cost of sales, excluding depreciation and amortization, was $6,875.4 million in 2013 compared to $7,174.0 million in 2012 and $7,081.2 million in 2011. These amounts represented 81.2 percent, 82.1 percent and 82.0 percent of consolidated net sales for those three years, respectively.

Depreciation and Amortization

Depreciation and amortization expense was $299.9 million in 2013 compared to $282.9 million in 2012 and $301.1 million in 2011. These amounts represented 3.5 percent, 3.2 percent and 3.5 percent of consolidated net sales for those three years, respectively. The higher depreciation and amortization expense in 2013 compared to 2012 was primarily due to capital spending in excess of historical levels and changes in currency exchange rates. The lower depreciation and amortization expense in 2012 compared to 2011 was primarily due to the revision of estimated useful lives of certain capital equipment and tooling. Further details of the revised estimated lives are available in Note 1 accompanying the consolidated financial statements included within Item 8 of this report.

Selling, General and Administrative

Selling, general and administrative (SG&A) expenses were $418.6 million in 2013 compared to $385.5 million in 2012 and $381.4 million in 2011. These amounts represented 4.9 percent, 4.4 percent and 4.4 percent of consolidated net sales for those three years, respectively. The higher expenses in 2013 were largely related to the reassessment of certain expenses in Europe from cost of sales to SG&A in light of the relocation of the European headquarters.

Interest Expense

Consolidated interest expense was $211.8 million in 2013 compared to $194.9 million in 2012 and $177.1 million in 2011. Excluding debt refinancing costs, interest expense in 2013 was higher than in 2012 due to higher average debt levels and the timing difference of the issuance of $1 billion senior notes due in 2023 versus the tender and call of the 2016 senior notes, partially offset by lower average borrowing rates. Interest expense in 2012 was slightly higher than in 2011 due to higher levels of debt, including the issuance in March 2012 of $750 million of senior notes due in 2022, partially offset by lower interest rates. Interest expense as a percentage of average monthly borrowings was 5.1 percent in 2013, 5.5 percent in 2012 and 5.4 percent in 2011.

Interest expense in 2013 included $28.0 million for the tender and call premiums, as well as the write off of unamortized financing costs and issuance discounts related to the tender of our 7.125 percent senior notes due in September 2016, the repayment of the Term A loan and the amendment and extension of the senior credit facilities. Interest expense in 2012 included $15.1 million for the call premium and the write off of unamortized financing costs and issuance premiums related to the tender of Ball's 6.625 percent senior notes due in March 2018.

Tax Provision

The effective income tax rate for earnings from continuing operations was 25.6 percent in 2013 compared to 27.7 percent in 2012 and 30.5 percent in 2011. The lower tax rate in 2013 was primarily the result of the retroactive extension of the U.S. research and development credit, a lower state effective tax rate and a higher foreign tax rate differential, partially offset by higher U.S. taxes on foreign earnings and the 2012 releases of uncertain tax positions which exceeded those occurring in 2013. The lower rate in 2012 compared to 2011 was primarily the net result of the release of various income tax reserves effectively settled with taxing jurisdictions, lower U.S. taxes on foreign earnings and an increased tax benefit related to company and trust-owned life insurance.

Equity in Results of Affiliates

In October 2011, we acquired our partners' 60 percent equity interests in QMCP, and recorded a gain of $9.2 million on the fair value of our previously held equity ownership as a result of the required purchased accounting. Additionally, in March 2011 we entered into a joint venture agreement with Thai Beverage Can Limited to construct a beverage container manufacturing facility in Vietnam that began production in the first quarter of 2012.


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Results of Business Segments

Ball's operations are organized and reviewed by management along its product lines and geographical areas and presented in the four reportable segments discussed below. On January 1, 2013, the company implemented changes to its management and internal reporting structure. As a result, the European extruded aluminum business, which was previously included in the metal beverage packaging, Europe, segment, is now included in the metal food and household products packaging segment. The segment results and disclosures for the years ended December 31, 2012 and 2011, and the financial position at December 31, 2012, have been retrospectively adjusted to conform to the current year presentation.

Metal Beverage Packaging, Americas and Asia



                                                      Years Ended December 31,
($ in millions)                                   2013          2012          2011

Net sales                                      $  4,193.4    $  4,541.7    $  4,415.8

Segment earnings                               $    511.8    $    522.5    $    481.7
Business consolidation and other activities
(a)                                                  (3.6 )       (52.4 )       (11.0 )
Total segment earnings                         $    508.2    $    470.1    $    470.7

Segment earnings before business
consolidation costs as a % of segment net
sales                                                12.2 %        11.5 %        10.9 %



(a) Further details of these items are included in Note 5 to the consolidated financial statements within Item 8 of this annual report.

The metal beverage packaging, Americas and Asia, segment consists of operations located in the U.S., Canada, Brazil and the PRC, which manufacture metal container products used in beverage packaging, as well as non-beverage plastic containers manufactured and sold in the PRC. Our acquisition of the remaining 60 percent interest in QMCP was completed in October 2011.

Segment sales in 2013 were $348.3 million lower compared to 2012 due to $320 million for the combination of lower sales volumes, principally related to lower standard 12-ounce container sales volumes in North America, and a reduction in the pass through price of aluminum, partially offset by higher specialty container sales volumes.

Segment sales in 2012 were $125.9 million higher compared to 2011 primarily due to favorable sales mix of $73 million, higher sales volumes and contribution from the new facilities in Qingdao, PRC, and Alagoinhas, Brazil.

Segment earnings in 2013 were $10.7 million lower than in 2012 due to a total of $109 million from unfavorable net pricing in the PRC and lower variable margin contribution attributable to the aforementioned lower standard 12-ounce container sales volumes, net of higher specialty container sales volumes. The volume and pricing variances were largely offset by $104 million of improved manufacturing performance, reduced fixed costs and other reduced costs.

Segment earnings in 2012 were $40.8 million higher than in 2011 due to $51 million from favorable sales mix, higher sales volumes and lower depreciation as a result of the change in the estimated useful lives, partially offset by $20 million from higher distribution and warehousing costs and higher tooling, spare parts and dunnage expense as a result of the accounting change.

Metal Beverage Packaging, Europe



                                                       Years Ended December 31,
($ in millions)                                    2013          2012          2011

Net sales                                       $  1,828.3    $  1,771.3    $  1,837.6

Segment earnings                                $    182.6    $    182.3    $    206.7
Business consolidation and other activities
(a)                                                  (10.6 )        (9.6 )       (14.1 )
Total segment earnings                          $    172.0    $    172.7    $    192.6

Segment earnings before business
consolidation costs as a % of segment net
sales                                                 10.0 %        10.3 %        11.2 %


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(a) Further details of these items are included in Note 5 to the consolidated financial statements within Item 8 of this annual report.

The metal beverage packaging, Europe, segment includes the manufacture and sale of metal beverage containers in facilities located throughout Europe.

Segment sales in 2013 increased $57.0 million compared to 2012 due primarily to favorable currency exchange effects of $42 million and higher sales volumes, net of unfavorable product mix, of $15 million.

Segment sales in 2012 decreased $66.3 million compared to 2011 due to $157 million from unfavorable currency exchange effects, partially offset by $77 million from higher sales volumes and product sales mix.

Segment earnings in 2013 were flat compared to 2012 primarily due to higher sales volumes and improved manufacturing performance, offset by higher aluminum premiums and higher labor costs.

Segment earnings in 2012 decreased $24.4 million compared to 2011 primarily due to $14 million from unfavorable currency exchange effects and other higher operating costs.

Metal Food and Household Products Packaging



                                                       Years Ended December 31,
($ in millions)                                    2013          2012          2011

Net sales                                       $  1,558.6    $  1,559.9    $  1,604.3

Segment earnings                                $    177.4    $    167.8    $    170.7
Business consolidation and other activities
(a)                                                  (63.7 )       (27.5 )        (1.9 )
Total segment earnings                          $    113.7    $    140.3    $    168.8

Segment earnings before business
consolidation costs as a % of segment net
sales                                                 11.4 %        10.8 %        10.6 %



(a) Further details of these items are included in Note 5 to the consolidated financial statements within Item 8 of this annual report.

The metal food and household products packaging segment consists of operations located in the U.S., Europe, Canada, Mexico and Argentina that manufacture and sell metal food, aerosol, paint, general line and extruded aluminum containers, as well as decorative specialty containers and aluminum slugs. In December 2012, we acquired a leading producer of extruded aluminum aerosol packaging in Mexico with one manufacturing facility.

Segment sales in 2013 were flat compared to 2012 with sales from the Mexico acquisition offset by unfavorable sales mix. Segment earnings in 2013 increased $9.6 million compared to 2012 due to the Mexico acquisition and improved manufacturing performance, partially offset by lower sales volumes and higher cost inventory carried into 2013.

Segment sales in 2012 decreased $44.4 million compared to 2011 due to lower sales volumes, partially offset by pricing and product mix. Segment earnings in 2012 decreased $2.9 million compared to 2011 primarily due to nonrecurring inventory holding gains in 2011 of $16 million and lower 2012 sales volumes, partially offset by favorable manufacturing performance and improved pricing and product mix.


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Aerospace and Technologies



                                                        Years Ended December 31,
($ in millions)                                    2013           2012           2011

Net sales                                       $     897.1    $     876.8    $    784.6

Segment earnings                                $      80.1    $      86.6    $     79.6
Business consolidation and other activities
(a)                                                    (0.2 )         (1.9 )           -
Total segment earnings                          $      79.9    $      84.7    $     79.6

Segment earnings before business
consolidation costs as a % of segment net
sales                                                   8.9 %          9.9 %        10.1 %



(a) Further details of these items are included in Note 5 to the consolidated financial statements within Item 8 of this annual report.

The aerospace and technologies segment consists of the manufacture and sale of aerospace and other related products and services provided for the defense, civil space and commercial space industries.

Segment sales in 2013 increased $20.3 million compared to 2012 due to higher sales from U.S. national defense contracts. Segment earnings in 2013 decreased $6.5 million due to higher amounts of net favorable contract adjustments in 2012.

Segment sales in 2012 increased $92.2 million compared to 2011 primarily due to higher sales from U.S. national defense contracts. Segment earnings in 2012 compared to 2011 increased $7.0 million as a result of continued strong program performance and higher sales.

Sales to the U.S. government, either directly as a prime contractor or indirectly as a subcontractor, represented 94 percent of segment sales in 2013, 90 percent in 2012 and 87 percent in 2011. The aerospace and technologies contract mix in 2013 consisted of approximately 63 percent cost-type contracts, which are billed at our costs plus an agreed upon and/or earned profit component, and 35 percent fixed-price contracts. The remainder represented time and material contracts, which typically provide for the sale of labor at fixed hourly rates.

Contracted backlog for the aerospace and technologies segment at December 31, 2013 and 2012, was $938 million and $1.0 billion, respectively. Comparisons of backlog are not necessarily indicative of the trend of future operations due to the nature of varying delivery and milestone schedules on contracts and the funding of programs.

Additional Segment Information

For additional information regarding our segments, see the business segment information in Note 3 accompanying the consolidated financial statements within Item 8 of this annual report. The charges recorded for business consolidation and other 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 and other activities are provided in Note 5 accompanying the consolidated financial statements within Item 8 of this annual report.


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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash Flows and Capital Expenditures

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. The following summarizes our cash flows:

                                                           Years Ended December 31,
($ in millions)                                           2013         2012      2011

Cash flows provided by (used in) operating activities   $   839.0    $  853.2   $ 948.4
Cash flows provided by (used in) investing activities      (379.1 )    (356.0 )  (738.0 )
Cash flows provided by (used in) financing activities      (204.0 )    (486.9 )  (216.8 )

Working capital changes in 2013 were primarily related to higher days payable outstanding and lower days sales outstanding, partially offset by higher inventory days on hand. Days payable outstanding increased from 47 days to 51 days, days sales outstanding decreased from 37 days to 36 days and inventory days on hand increased from 51 days to 53 days.

Lower operating cash flows in 2012 compared to 2011 were primarily due to approximately $90 million higher U.S. pension funding. Working capital changes in 2012 were primarily related to higher days payable outstanding and more effective inventory management, partially offset by higher days sales outstanding. Days payable outstanding increased from 42 days to 47 days, inventory days on hand decreased from 53 days to 51 days and days sales outstanding increased from 36 days to 37 days.

We have several regional uncommitted accounts receivable factoring programs with various financial institutions for certain receivables of the company. The programs are accounted for as true sales of the receivables, without recourse to Ball, and had combined limits of approximately $248 million at December 31, 2013. A total of $137.5 million and $75.0 million were sold under these programs as of December 31, 2013 and 2012, respectively. Latapack-Ball also commenced a non-recourse uncommitted accounts receivable factoring program in 2013 with a financial institution, which is limited to the total of eligible Latapack-Ball receivables, as defined in the agreement. A total of $6.0 million was sold under this program as of December 31, 2013.

Annual cash dividends paid on common stock were 52 cents per share in 2013, 40 cents per share in 2012 and 28 cents per share in 2011. Total dividends paid . . .

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