Ball 10-K 2010
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 1-7349
State of Indiana 35-0160610
10 Longs Peak Drive, P.O. Box 5000
Broomfield, Colorado 80021-2510
Registrant’s telephone number, including area code: (303) 469-3131
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES [X] NO [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES [ ] NO [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. YES [ ] NO [ X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES [ ] NO [X]
The aggregate market value of voting stock held by non-affiliates of the registrant was $4.04 billion based upon the closing market price and common shares outstanding as of June 28, 2009.
Number of shares outstanding as of the latest practicable date.
DOCUMENTS INCORPORATED BY REFERENCE
Ball Corporation and Subsidiaries
ANNUAL REPORT ON FORM 10-K
For the year ended December 31, 2009
Item 1. Business
Ball Corporation (Ball, we, the company or our) 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 within our aerospace and technologies segment (Ball Aerospace). In 2009 our total consolidated net sales were $7.35 billion. Our packaging businesses are responsible for 91 percent of our net sales, with the remaining 9 percent contributed by our aerospace business.
Our largest product lines are aluminum and steel beverage containers, which accounted for 63 percent of our 2009 total net sales and 77 percent of our 2009 total earnings before interest and taxes. We also produce steel food containers, steel aerosol containers, polyethylene terepthalate (PET) and polypropylene plastic bottles for beverages and foods, steel paint cans and decorative steel tins.
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. 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.
Ball Aerospace is a leader in the design, development and manufacture of innovative aerospace systems. It produces spacecraft, instruments and sensors, radio frequency and microwave technologies, data exploitation solutions and a variety of advanced aerospace technologies and products that enable deep space missions.
Our corporate strategy is to grow our worldwide beverage container business and our aerospace business, to continue to leverage and develop the metal food and household products packaging, Americas, segment, to improve the performance of the plastic packaging, Americas, segment, and to utilize free cash flow and earnings growth to increase shareholder value.
We are headquartered in Broomfield, Colorado. Our stock is traded on the New York Stock Exchange and the Chicago Stock Exchange under the ticker symbol BLL.
Our Financial Strategy
Ball Corporation maintains a clear and disciplined financial strategy focused on improving shareholder returns through:
● Delivering long-term earnings per share growth of 10 percent to 15 percent
● Focusing on free cash flow generation
● Increasing Economic Value Added (EVA®)
The cash generated by our businesses is used primarily: (1) to finance the company’s operations, (2) to fund stock buy-back programs and dividend payments, (3) to fund strategic capital investments and (4) to service the company’s debt. We will, when we believe it will benefit the company and our shareholders, make strategic acquisitions or divest parts of our business.
The compensation of a majority of our employees is tied directly to the company’s performance through our EVA® incentive programs. When the company performs well, our employees are paid more. If the company does not perform well, our employees get paid less or no incentive compensation.
Page 1 of 97
Our Reporting Segments
Ball Corporation reports its financial performance in five reportable segments organized along a combination of product lines, after aggregating operating segments that have 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.
Profitability is sensitive to selling prices, production volumes, labor, transportation, utility and warehousing costs, as well as the availability and price of raw materials, such as aluminum sheet, tinplate steel, plastic resin and other direct materials. These raw materials are generally available from several sources, and we have secured what we consider to be adequate supplies and are not experiencing any shortages. There has been significant consolidation of raw material suppliers in both North America and in Europe. Raw materials and energy sources, such as natural gas and electricity, may from time to time be in short supply or unavailable due to external factors. We cannot predict the timing or effects, if any, of such occurrences on future operations.
A substantial part of Ball’s packaging sales are made directly to companies in packaged beverage and food businesses, including MillerCoors LLC, Anheuser-Busch InBev n.v./s.a. and bottlers of Pepsi-Cola and Coca-Cola branded beverages and their affiliates that utilize consolidated purchasing groups.
Metal Beverage Packaging, Americas and Asia, Segment
Metal beverage packaging, Americas and Asia, is Ball’s largest segment, accounting for 39 percent of consolidated net sales in 2009. Metal beverage containers are primarily sold under multi-year supply contracts to fillers of carbonated soft drinks, beer, energy drinks and other beverages.
According to publicly available information and company estimates, the combined U.S. and Canadian metal beverage container markets represent more than 100 billion units. Five companies manufacture substantially all of the metal beverage containers in the U.S. and Canada. Two of these producers and three other independent producers also manufacture metal beverage containers in Mexico. Ball produced in excess of 31 billion recyclable beverage containers in the U.S. and Canada in 2009 – about 31 percent of the total market. Sales volumes of metal beverage containers in North America tend to be highest during the period from April through September. All of the beverage cans produced by Ball in the U.S. and Canada are made of aluminum, as are all beverage cans produced by our competitors in the U.S., Canada and Mexico. In 2009 we were able to recover substantially all aluminum-related cost increases levied by producers through either financial or contractual means. In North America, four aluminum suppliers provide virtually all of our requirements. Some of those aluminum suppliers have experienced significant financial and liquidity constraints in recent years.
We believe we have limited our exposure related to changes in the costs of aluminum ingot as a result of the inclusion of provisions in most aluminum container sales contracts to pass through aluminum ingot price changes, as well as the use of derivative instruments.
Beverage containers are sold based on quality, service, innovation and price in a highly competitive market, which is relatively capital intensive and is characterized by plants that run more or less continuously in order to operate profitably. In addition, the aluminum beverage container competes aggressively with other packaging materials. The glass bottle has shown resilience in the packaged beer industry, while the PET container has grown significantly in the carbonated soft drink and water industries over the past quarter century. In Canada, metal beverage containers have captured significantly lower percentages of packaged beverage industry volumes than in the U.S., particularly in the packaged beer industry.
Two-piece aluminum beverage containers are produced at 17 manufacturing facilities in the U.S. and one in Canada. Can ends are produced within four of the U.S. facilities, as well as in two facilities that manufacture only can ends. Through Rocky Mountain Metal Container, LLC, a 50-percent-owned joint venture, which is accounted for as an equity investment, Ball and MillerCoors, LLC, operate beverage container and can end manufacturing facilities in Golden, Colorado.
Page 2 of 97
On October 1, 2009, the company acquired three of Anheuser-Busch InBev n.v./s.a.’s (AB InBev) metal beverage container manufacturing plants and one of its beverage can end manufacturing plants, all of which are located in the U.S., for $574.7 million in cash. The acquired plants produce about 10 billion aluminum containers and 10 billion beverage can ends annually, more than two-thirds of which are produced for leading soft drink companies and the rest for AB InBev. With the shipments from the acquired plants, Ball estimates its annual shipments will grow to approximately 40 percent of total U.S. and Canadian shipments.
We participate in a 50-percent-owned joint venture in Brazil, Latapack-Ball Embalagens, Ltda., that manufactures aluminum beverage cans and ends and is accounted for as an equity investment. The Brazilian joint venture recently expanded capacity at its existing metal beverage container manufacturing facility near Jacarei and completed the construction of a new plant near Rio de Janeiro.
In order to more closely balance capacity and demand within our business, during 2008 and 2009 Ball completed the closure of three metal beverage packaging plants in North America:
Where growth is projected in certain markets or for certain products, Ball is undertaking selected capacity increases in its existing facilities and may establish or obtain additional manufacturing capacity to the extent required by the growth of any of the markets we serve.
The beverage can market in the PRC is approximately 13 billion containers, of which Ball’s operations represent an estimated 22 percent, with an additional 13 percent manufactured by two joint ventures in which we participate. Our percentage of the industry makes us one of the largest manufacturers of beverage containers in the PRC. Six other manufacturers make up the remainder of the market. Our operations include the manufacture of aluminum cans and ends in three plants in the PRC, as well as in our two joint ventures. Capacity grew rapidly in the PRC in the late 1990s, resulting in a supply/demand imbalance. The rapid growth slowed in the early 2000s, and a number of can makers, including Ball, responded by rationalizing capacity. Growth has resumed over the past several years, and we expect the PRC market to continue to grow over time. We also manufacture and sell high-density plastic containers in two PRC plants primarily servicing the motor oil industry.
On November 9, 2009, we announced our agreement to acquire Guangdong Jianlibao Group Co., Ltd’s (Jianlibao) 65-percent interest in a joint venture metal beverage can and end plant in Sanshui, PRC. We have owned 35 percent of the joint venture plant since 1992. We will acquire the plant and related assets for approximately $90 million in cash and assumed debt and will also enter into a long-term supply agreement with Jianlibao. The transaction is expected to close in 2010, subject to customary regulatory approvals.
Metal Beverage Packaging, Europe, Segment
The European beverage can market, excluding Russia, is approximately 47 billion cans and Ball Packaging Europe is the second largest metal beverage container producer with an estimated 32 percent of the European shipments. While current economic conditions have slowed growth in the near term, the European market is expected to grow, and is highly regional in terms of sales growth rates and packaging mix. Growth in central and eastern Europe has been particularly strong in past years but has been impacted by the global economic environment, causing the company to delay completion of its new plant in Lublin, Poland. Western European markets, including the United Kingdom and France, continue to maintain historical volumes and growth characteristics.
Page 3 of 97
Sales volumes of metal beverage containers in Europe tend to be highest during the period from May through August with a smaller increase in demand during the winter holiday season for the United Kingdom. As in North America, the metal beverage container competes aggressively with other packaging materials used by the European beer and carbonated soft drink industries. The glass bottle is heavily utilized in the packaged beer industry, while the PET container is utilized in the carbonated soft drink, beer, juice and mineral water industries.
The metal beverage packaging, Europe, segment, which accounted for 24 percent of Ball’s consolidated net sales in 2009, supplies two-piece beverage cans and can ends for producers of beer, carbonated soft drinks, mineral water, fruit juices, energy drinks and other beverages. The European operations consist of 12 plants – 10 beverage can plants and two beverage can end plants – of which four are located in Germany, three in the United Kingdom, two in France and one each in the Netherlands, Poland and Serbia. In addition, Ball Packaging Europe is currently renting additional space on the premises of a supplier in Haslach, Germany in order to produce the Ball Resealable End (BRE). The European plants produced approximately 16 billion cans in 2009, with approximately 57 percent of those being produced from aluminum and 43 percent from steel. Six of the can plants use aluminum and four use steel.
European raw material supply contracts are generally for a period of one year, although Ball Packaging Europe has negotiated some longer term agreements. In Europe three steel suppliers and four aluminum suppliers provide approximately 95 percent of our requirements. Aluminum is traded primarily in U.S. dollars, while the functional currencies of Ball Packaging Europe and its subsidiaries are non-U.S. dollars. The company generally tries to minimize the resulting foreign exchange rate risk with supply contracts in local currencies and the use of derivative contracts. In addition, purchase and sales contracts include fixed price, floating and pass-through pricing arrangements.
Metal Food & Household Products Packaging, Americas, Segment
The metal food and household products packaging, Americas, segment, accounted for 19 percent of consolidated net sales in 2009. The two major product lines in this segment are steel food and aerosol containers. Ball produces two-piece and three-piece steel food containers and ends for packaging vegetables, fruit, soups, meat, seafood, nutritional products, pet food and other products. The segment also manufactures and sells aerosol cans, paint cans and custom and specialty containers. We are the largest manufacturer of aerosol cans in North America. There are a total of 14 plants in the U.S. and Canada that produce these products. In addition, the company manufactures and sells aerosol cans in two plants in Argentina.
Sales volumes of metal food containers in North America tend to be highest from May through October as a result of seasonal fruit, vegetable and salmon packs. We estimate our 2009 shipments of more than 5.1 billion steel food containers to be approximately 18 percent of total U.S. and Canadian metal food container shipments. We estimate our aerosol business accounts for approximately 45 percent of total annual U.S. and Canadian steel aerosol shipments.
Competitors in the metal food container product line include two national and a small number of regional suppliers and self manufacturers. Several producers in Mexico also manufacture steel food containers. Competition in the U.S. steel aerosol can market primarily includes two national suppliers and a regional supplier in the Midwest. Steel containers also compete with other packaging materials in the food and household products industry including glass, aluminum, plastic, paper and the stand-up pouch. As a result, demand for this product line is dependent on product innovation and cost reduction. Service, quality and price are among the other key competitive factors. In North America, two steel suppliers provide nearly 70 percent of our tinplate steel. We believe we have limited our exposure related to changes in the costs of steel tinplate as a result of the inclusion of provisions in certain steel container sales contracts to pass through steel cost changes and the existence of certain other steel container sales contracts that incorporate annually negotiated metal costs. In 2009 we were able to pass through the majority of steel cost increases levied by producers.
Cost containment is crucial to maintaining profitability in the food and aerosol container manufacturing industries and Ball is focused on doing so. Toward that end, during 2008 and 2009, Ball closed its aerosol container manufacturing plants in Tallapoosa, Georgia, and Commerce, California. The two plant closures result in a net reduction in manufacturing capacity of 10 production lines, including the relocation of two high-speed aerosol lines to other existing Ball facilities, and allow us to supply customers from a consolidated asset base.
Page 4 of 97
Plastic Packaging, Americas, Segment
Demand for containers made of PET and polypropylene has slowed in the beverage and food markets due to current economic conditions. While PET and polypropylene beverage containers compete against metal, glass and cardboard, the historical increase in the sales of PET containers has come primarily at the expense of glass containers and through new market introductions.
Competition in the PET plastic container industry is intense and includes several national and regional suppliers and self manufacturers. In the smaller polypropylene container industry, Ball is one of three major competitors. Service, quality, innovation and price are important competitive factors with price being by far the most important. The ability to produce customized, differentiated plastic containers is also a key competitive factor. We believe we have limited our exposure related to changes in the costs of plastic resin as a result of the inclusion of resin cost pass-through provisions in substantially all plastic container sales contracts.
Plastic packaging, Americas, accounted for 9 percent of Ball’s consolidated net sales in 2009. We estimate our 2009 shipments of 5 billion plastic bottles to be approximately 8 percent of total U.S. PET container shipments. In addition, this segment shipped approximately 625 million polypropylene food and specialty containers during 2009. The company operates five plastic container manufacturing facilities in the U.S.
Most of Ball’s PET containers are sold under long-term contracts to suppliers of bottled water and carbonated soft drinks, including bottlers of Pepsi-Cola branded beverages and their affiliates that utilize consolidated purchasing groups. Most of our polypropylene containers are also sold under long-term contracts, primarily to food packaging companies. We are also manufacturing plastic containers for the single-serve juice and wine markets. Our line of Heat-Tek® PET plastic bottles for hot-filled beverages, such as sports drinks and juices, includes sizes from 8 ounces to 64 ounces.
Ball’s emphasis in this segment is on customized, differentiated containers. This includes unique barrier plastics such as Gamma®, Gamma-Clear®, AmazonHM® and KHS Corpoplast GmbH Plasmax® barrier bottles. We are continuing to limit investment in the carbonated soft drink and bottled water business, which is a commodity business, where the return on investment has been unacceptable.
On October 23, 2009, we sold our plastic pail assets to BWAY Corporation for approximately $32 million. 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, as well as associated contracts. The plant produces injection molded plastic pails and drums for products such as building materials and pool chemicals. The associated after-tax loss was insignificant.
To reduce costs and gain efficiencies, during 2008 and 2009, Ball closed three facilities in Baldwinsville, New York, Watertown, Wisconsin, and Brampton, Ontario. The three plants’ operations have been consolidated into our other plastic packaging manufacturing facilities in the United States.
Aerospace and Technologies Segment
Ball’s aerospace and technologies segment, which accounted for 9 percent of consolidated net sales in 2009, includes national defense, antenna and video technologies, civil and operational space and systems engineering solutions businesses. The segment develops spacecraft, sensors and instruments, radio frequency systems and other advanced technologies for the civil, commercial and national security aerospace markets. The majority of the aerospace and technologies business involves work under contracts, generally from one to five years in duration, as a prime contractor or subcontractor for the U.S. Department of Defense (DoD), the National Aeronautics and Space Administration (NASA) and other U.S. government agencies. Contracts funded by the various agencies of the federal government represented 94 percent of segment sales in 2009.
Geopolitical events, shifting executive and legislative branch priorities, as well as funding shortfalls combined with increased competition for new business, have resulted in a decline in opportunities in areas matching our aerospace and technologies segment’s core capabilities in space hardware. Although we have seen declines in our space hardware opportunities, our traditional strength, we have seen growth in opportunities related to our information services and tactical components. The businesses include hardware, software and services sold primarily to U.S. customers, with emphasis on space science and exploration, environmental and Earth sciences, and defense and intelligence applications. Major contractual activities frequently involve the design, manufacture and testing of satellites, remote sensors and ground station control hardware and software, as well as related services such as launch vehicle integration and satellite operations.
Page 5 of 97
Other hardware activities include target identification, warning and attitude control systems and components; cryogenic systems for reactant storage, and associated sensor cooling devices; star trackers, which are general-purpose stellar attitude sensors; and fast-steering mirrors. Additionally, the aerospace and technologies segment provides diversified technical services and products to government agencies, prime contractors and commercial organizations for a broad range of information warfare, electronic warfare, avionics, intelligence, training and space systems needs.
Backlog in the aerospace and technologies segment was $518 million and $597 million at December 31, 2009 and 2008, respectively, and consists of the aggregate contract value of firm orders, excluding amounts previously recognized as revenue. The 2009 backlog includes $344 million expected to be recognized in revenues during 2010, with the remainder expected to be recognized in revenues thereafter. Unfunded amounts included in backlog for certain firm government orders, which are subject to annual funding, were $261 million and $309 million at December 31, 2009 and 2008, respectively. Year-over-year comparisons of backlog are not necessarily indicative of the trend of future operations.
On February 15, 2008, the segment completed the sale of its shares in Ball Solutions Group Pty Ltd (BSG) to QinetiQ Pty Ltd for approximately $10.5 million, including cash sold of $1.8 million. BSG was previously a wholly owned Australian subsidiary that provided services to the Australian department of defense and related government agencies. After an adjustment for working capital items, the sale resulted in a pretax gain of $7.1 million.
Ball’s aerospace and technologies segment has contracts with the U.S. government or its contractors that have standard termination provisions. The government retains the right to terminate contracts at its convenience. However, if contracts are terminated in this manner, Ball is entitled to reimbursement for allowable costs and profits on authorized work performed through the date of termination. U.S. government contracts are also subject to reduction or modification in the event of changes in government requirements or budgetary constraints.
In the opinion of the company, none of its active patents is essential to the successful operation of its business as a whole.
Research and Development
Research and development (R&D) efforts in the North American packaging segments, as well as in the European metal beverage container business, are primarily directed toward packaging innovation, specifically the development of new features, sizes, shapes and types of containers, as well as new uses for existing containers. Other R&D efforts in these segments seek to improve manufacturing efficiencies. Our North American packaging R&D activities are primarily conducted in the Ball Technology & Innovation Center (BTIC) located in Westminster, Colorado. The European R&D activities are primarily conducted in a technical center located in Bonn, Germany.
In our aerospace business, we continue to focus our R&D activities on the design, development and manufacture of innovative aerospace systems. This includes the production of spacecraft, instruments and sensors, radio frequency and microwave technologies, data exploitation solutions and a variety of advanced aerospace technologies and products that enable deep space missions. Our aerospace R&D activities are conducted in various locations in the U.S.
Additional information regarding company research and development activity is contained in Note 1 to the consolidated financial statements within Item 8 of this report, as well as included in Item 2, “Properties.”
Sustainability and the Environment
Throughout our company’s history, we have focused on sustainability and the environment in all aspects of our businesses and recently have formalized our initiatives. We continue to make progress on the sustainability goals stated in the sustainability report we issued in June 2008. We have committed to formally report on the status of our sustainability efforts in 2010.
Key issues for our company include reducing our use of electricity and natural gas, reducing waste and increasing recycling at our facilities, analyzing and reducing our water consumption, reducing our existing volatile organic compounds and further improving safety performance in our facilities.
The 2008 recycling rate in the United States for aluminum cans was 54 percent, the highest recycling rate for any beverage container. Other 2008 U.S. recycling rates were 65 percent for steel cans, 27 percent for PET bottles and 11 percent for polypropylene bottles. According to the most recently published data, the aluminum can sheet we buy contains an average of 44 percent post consumer recycled content and the average post consumer recycled content for steel cans is 28 percent.
Page 6 of 97
Recycling rates vary throughout Europe but average around 60 percent for aluminum and steel containers, which exceeds the European Union’s goal of 50 percent recycling for metals. Due in part to the intrinsic value of aluminum and steel, metal packaging recycling rates in Europe compare favorably to those of other packaging materials. Ball’s European operations help establish and financially support recycling initiatives in growing markets, such as Poland and Serbia, to educate consumers about the benefits of recycling aluminum and steel cans and to increase recycling rates. We have initiated a similar program in China to educate consumers in that market regarding the benefits of recycling.
Compliance with federal, state and local laws relating to protection of the environment has not had a material adverse effect upon the capital expenditures, earnings or competitive position of the company. As more fully described under Item 3, “Legal Proceedings,” the U.S. Environmental Protection Agency and various state environmental agencies have designated the company as a potentially responsible party, along with numerous other companies, for the cleanup of several hazardous waste sites. However, the company’s information at this time indicates that these matters will not have a material adverse effect upon the liquidity, results of operations or financial condition of the company.
Legislation that would prohibit, tax or restrict the sale or use of certain types of containers, or would require diversion of solid wastes, including packaging materials, from disposal in landfills, has been or may be introduced anywhere we operate. While container legislation has been adopted in some jurisdictions, similar legislation has been defeated in public referenda and legislative bodies in numerous others. The company anticipates that continuing efforts will be made to consider and adopt such legislation in many jurisdictions in the future. If such legislation were widely adopted, it could potentially have a material adverse effect on the business of the company, including its liquidity, results of operations or financial condition, as well as on the container manufacturing industry generally, in view of the company’s substantial global sales and investment in metal and PET container manufacturing. However, the packages we produce are widely used and perform well in U.S. states, Canadian provinces and European countries that have deposit systems.
At the end of 2009, the company and its subsidiaries employed approximately 10,500 employees in the U.S. and 4,000 in other countries. An additional 1,100 people were employed in unconsolidated joint ventures in which Ball participates.
Approximately 40 percent of Ball's North American packaging plant employees are unionized and most of our European plant employees are union workers. Collective bargaining agreements with various unions in the U.S. have terms of three to five years and those in Europe have terms of one to two years. The agreements expire at regular intervals and are customarily renewed in the ordinary course after bargaining between union and company representatives. The company believes that its employee relations are good and that its safety, training, education, diversity and retention practices assist in enhancing employee satisfaction levels.
Where to Find More Information
Ball Corporation is subject to the reporting and other information requirements of the Securities Exchange Act of 1934, as amended (Exchange Act). Reports and other information filed with the Securities and Exchange Commission (SEC) pursuant to the Exchange Act may be inspected and copied at the public reference facility maintained by the SEC in Washington, D.C. The SEC maintains a website at www.sec.gov containing our reports, proxy materials and other items. The company also maintains a website at www.ball.com on which it provides a link to access Ball’s SEC reports free of charge.
The company has established written Ball Corporation Corporate Governance Guidelines; a Ball Corporation Executive Officers and Board of Directors Business Ethics Statement (Ethics Statement); a Business Ethics booklet; and Ball Corporation Audit Committee, Nominating/Corporate Governance Committee, Human Resources Committee and Finance Committee charters. These documents are set forth on the company’s website at www.ball.com on the “Corporate” page, under the section “Investors,” under the subsection “Financial Information,” and under the link “Corporate Governance.” A copy may also be obtained upon request from the company’s corporate secretary.
The company intends to post on its website the nature of any amendments to the company’s codes of ethics that apply to executive officers and directors, including the chief executive officer, chief financial officer and controller, and the nature of any waiver or implied waiver from any code of ethics granted by the company to any executive officer or director. These postings will appear on the company’s website at www.ball.com under the “Corporate” page, section “Investors,” under the subsection “Financial Information,” and under the link “Corporate Governance.”
Page 7 of 97
Item 1A. Risk Factors
Any of the following risks could materially and adversely affect our business, financial condition or results of operations.
There can be no assurance that the acquisition of certain AB InBev plants, or any other acquisition, will be successfully integrated into the acquiring company (see Note 3 to the consolidated financial statements within Item 8 of this report for details of the acquisition).
While we have what we believe to be well designed integration plans, if we cannot successfully integrate the acquired operations with those of Ball, we may experience material negative consequences to our business, financial condition or results of operations. The integration of companies that have previously been operated separately involves a number of risks, including, but not limited to:
We may not be able to achieve potential synergies or maintain the levels of revenue, earnings or operating efficiency that each business had achieved or might achieve separately. The successful integration of the acquired operations will depend on our ability to manage those operations, realize revenue opportunities and, to some degree, eliminate redundant and excess costs.
The loss of a key customer, or a reduction in its requirements, could have a significant negative impact on our sales.
We sell a majority of our packaging products to relatively few major beverage, packaged food and household product companies, some of which operate in North America, South America, Europe and Asia.
Although the majority of our customer contracts are long-term, these contracts are terminable under certain circumstances, such as our failure to meet quality, volume or market pricing requirements. Because we depend on relatively few major customers, our business, financial condition or results of operations could be adversely affected by the loss of any of these customers, a reduction in the purchasing levels of these customers, a strike or work stoppage by a significant number of these customers' employees or an adverse change in the terms of the supply agreements with these customers.
The primary customers for our aerospace segment are U.S. government agencies or their prime contractors. Our contracts with these customers are subject to several risks, including funding cuts and delays, technical uncertainties, budget changes, competitive activity and changes in scope.
We face competitive risks from many sources that may negatively impact our profitability.
Competition within the packaging industry is intense. Increases in productivity, combined with existing or potential surplus capacity in the industry, have maintained competitive pricing pressures. The principal methods of competition in the general packaging industry are price, service and quality. Some of our competitors may have greater financial, technical and marketing resources. Our current or potential competitors may offer products at a lower price or products that are deemed superior to ours. The global economic environment may result in reductions in demand for our products, which, in turn, could increase these competitive pressures.
We are subject to competition from alternative products, which could result in lower profits and reduced cash flows.
Our metal packaging products are subject to significant competition from substitute products, particularly plastic carbonated soft drink bottles made from PET, single serve beer bottles and other food and beverage containers made of glass, cardboard or other materials. Competition from plastic carbonated soft drink bottles is particularly intense in the United States, the United Kingdom and the PRC. Certain of our aerospace products are also subject to competition from alternative solutions. There can be no assurance that our products will successfully compete against alternative products, which could result in a reduction in our profits or cash flow.
Page 8 of 97
We have a narrow product range, and our business would suffer if usage of our products decreased.
For the 12 months ended December 31, 2009, 63 percent of our consolidated net sales were from the sale of metal beverage cans, and we expect to derive a significant portion of our future revenues and cash flows from the sale of metal beverage cans. Our business would suffer if the use of metal beverage cans decreased. Accordingly, broad acceptance by consumers of aluminum and steel cans for a wide variety of beverages is critical to our future success. If demand for glass and PET bottles increases relative to cans, or the demand for aluminum and steel cans does not develop as expected, our business, financial condition or results of operations could be materially adversely affected.
Changes in laws and governmental regulations may adversely affect our business and operations.
We and our customers and suppliers are subject to various federal, state and provincial laws and regulations. Each of our, and their, plants is subject to federal, state, provincial and local licensing and regulation by health, environmental, workplace safety and other agencies. Requirements of governmental authorities with respect to manufacturing, product content and safety, climate change, workplace safety and health, and environmental and other standards could adversely affect our ability to manufacture or sell our products. In addition, we face risks arising from compliance with and enforcement of increasingly numerous and complex federal, state and provincial laws and regulations.
Our operations in the U.S. are subject to the Fair Labor Standards Act, which governs such matters as minimum wages, overtime and other working conditions, family leave mandates and similar state laws that govern these and other employment law matters. The U.S. federal government has proposed sweeping changes to laws affecting the health care of all Americans, including our employees, as well as new or changing laws or regulations relating to union organizing rights and activities that may impact our operations and increase our cost of labor. Significant environmental legislation and regulatory changes are also being considered. The compliance costs associated with current and proposed laws and evolving regulations could be substantial, and any failure or alleged failure to comply with these laws or regulations could lead to litigation, all of which could adversely affect our financial condition or results of operations.
Our business, financial condition and results of operations are subject to risks resulting from increased international operations.
We derived approximately 30 percent of our consolidated net sales from outside of the U.S. for the year ended December 31, 2009. This sizeable scope of international operations may lead to more volatile financial results and make it more difficult for us to manage our business. Reasons for this include, but are not limited to, the following:
Any of these factors, some of which are also present in the U.S., could materially adversely affect our business, financial condition or results of operations.
We are exposed to exchange rate fluctuations.
Our reporting currency is the U.S. dollar. Historically, Ball's foreign operations, including assets and liabilities and revenues and expenses, have been denominated in various currencies other than the U.S. dollar, and we expect that our foreign operations will continue to be so denominated. As a result, the U.S. dollar value of Ball's foreign operations has varied, and will continue to vary, with exchange rate fluctuations. Ball has been, and is presently, primarily exposed to fluctuations in the exchange rate of the euro, British pound, Canadian dollar, Polish zloty, Chinese renminbi, Brazilian real, Argentine peso and Serbian dinar.
A decrease in the value of any of these currencies, especially the euro, British pound, Polish zloty, Chinese renminbi and Canadian dollar, relative to the U.S. dollar, could reduce our profits from foreign operations and the value of the net assets of our foreign operations when reported in U.S. dollars in our financial statements. This could have a material adverse effect on our business, financial condition or results of operations as reported in U.S. dollars. In addition, fluctuations in currencies relative to currencies in which the earnings are generated may make it more difficult to perform period-to-period comparisons of our reported results of operations.
Page 9 of 97
We manage our exposure to foreign currency fluctuations, particularly our exposure to fluctuations in the euro to U.S. dollar exchange rate, in order to attempt to mitigate the effect of foreign cash flow and earnings volatility associated with foreign exchange rate changes. We primarily use forward contracts and options to manage our foreign currency exposures and, as a result, we experience gains and losses on these derivative positions offset, in part, by the impact of currency fluctuations on existing assets and liabilities. Our inability to properly manage our exposure to currency fluctuations could materially impact our results.
Our business, operating results and financial condition are subject to particular risks in certain regions of the world.
We may experience an operating loss in one or more regions of the world for one or more periods, which could have a material adverse effect on our business, operating results or financial condition. Moreover, overcapacity, which often leads to lower prices, exists in a number of the regions in which we operate and may persist even if demand grows. Our ability to manage such operational fluctuations and to maintain adequate long-term strategies in the face of such developments will be critical to our continued growth and profitability.
If we fail to retain key management and personnel, we may be unable to implement our key objectives.
We believe that our future success depends, in part, on our experienced management team. Losing the services of key members of our management team could make it difficult for us to manage our business and meet our objectives.
Decreases in our ability to apply new technology and know-how may affect our competitiveness.
Our success depends partially on our ability to improve production processes and services. We must also introduce new products and services to meet changing customer needs. If we are unable to implement better production processes or to develop new products, we may not be able to remain competitive with other manufacturers. As a result, our business, financial condition or results of operations could be adversely affected.
Adverse weather and climate changes may result in lower sales.
We manufacture packaging products primarily for beverages and foods. Unseasonably cool weather can reduce demand for certain beverages packaged in our containers. In addition, poor weather conditions or changes in climate that reduce crop yields of fruits and vegetables can adversely affect demand for our food containers. Climate change could have various effects on the demand for our products in different regions around the world.
We are vulnerable to fluctuations in the supply and price of raw materials.
We purchase aluminum, steel, plastic resin and other raw materials and packaging supplies from several sources. While all such materials are available from independent suppliers, raw materials are subject to fluctuations in price and availability attributable to a number of factors, including general economic conditions, commodity price fluctuations (particularly aluminum on the London Metal Exchange), the demand by other industries for the same raw materials and the availability of complementary and substitute materials. Although we enter into commodities purchase agreements from time to time and use derivative instruments to manage our risk, we cannot ensure that our current suppliers of raw materials will be able to supply us with sufficient quantities at reasonable prices. Economic and financial factors could impact our suppliers, thereby causing supply shortages. Increases in raw material costs could have a material adverse effect on our business, financial condition or results of operations. In North America and Europe, some contracts do not allow us to pass along increased raw material costs and we use derivative agreements to manage this risk. Our hedging procedures may be insufficient and our results could be materially impacted if costs of materials increase. Due to the fixed price contracts and derivative activities, while increasing raw material costs may not impact our near-term profitability, increased prices could decrease our sales volume over time.
Prolonged work stoppages at plants with union employees could jeopardize our financial position.
As of December 31, 2009, approximately 40 percent of our North American packaging plant employees and most of our packaging plant employees in Europe were covered by collective bargaining agreements. These collective bargaining agreements have staggered expirations during the next several years. Although we consider our employee relations to be generally good, a prolonged work stoppage or strike at any facility with union employees could have a material adverse effect on our business, financial condition or results of operations. In addition, we cannot ensure that upon the expiration of existing collective bargaining agreements, new agreements will be reached without union action or that any such new agreements will be on terms satisfactory to us. Potential legislation has been discussed in the United States, which may, if enacted, facilitate the ability of unions to unionize workers and to establish collective bargaining agreements with employers, including the company.
Page 10 of 97
Our aerospace and technologies segment is subject to certain risks specific to that business, including those outlined below.
In our aerospace business, existing U.S. government contracts are subject to continued appropriations by Congress and may be terminated or delayed if future funding is not made available.
Our backlog includes both cost-type and fixed-price contracts. Cost-type contracts generally have lower profit margins than fixed-price contracts. Our earnings and margins may vary depending on the types of government contracts undertaken, the nature of the work performed under those contracts, the costs incurred in performing the work, the achievement of other performance objectives and their impact on our ability to receive fees.
Our business is subject to substantial environmental remediation and compliance costs.
Our operations are subject to federal, state and local laws and regulations relating to environmental hazards, such as emissions to air, discharges to water, the handling and disposal of hazardous and solid wastes and the cleanup of hazardous substances. The U.S. Environmental Protection Agency has designated us, along with numerous other companies, as a potentially responsible party for the cleanup of several hazardous waste sites. Based on available information, we do not believe that any costs incurred in connection with such sites will have a material adverse effect on our financial condition, results of operations, capital expenditures or competitive position. There is increased focus on the regulation of greenhouse gas emissions and other environmental issues worldwide.
Net earnings and net worth could be materially affected by an impairment of goodwill.
We have a significant amount of goodwill recorded on the consolidated balance sheet as of December 31, 2009. We are required annually to test the recoverability of goodwill. The recoverability test of goodwill is based on the current fair value of our identified reporting units. Fair value measurement requires assumptions and estimates of many critical factors, including revenue and market growth, operating cash flows and discount rates. If general market conditions deteriorate in portions of our business, we could experience a significant decline in the fair value of reporting units. This decline could lead to an impairment of all or a significant portion of the goodwill balance, which could materially affect our net earnings and net worth.
If the investments in Ball's pension plans do not perform as expected, we may have to contribute additional amounts to the plans, which would otherwise be available to cover operating expenses.
Ball maintains defined benefit pension plans covering substantially all of its North American and United Kingdom employees, which we fund based on certain actuarial assumptions. The plans’ assets consist primarily of common stocks, fixed income securities and, in the U.S., alternative investments. Market declines, longevity increases or legislative changes, such as the Pension Protection Act in the U.S., could result in a prospective decrease in our available cash flow and net earnings over time, and the recognition of an increase in our pension obligations could result in a reduction to our shareholders' equity.
Restricted access to capital markets could adversely affect our short-term liquidity and prevent us from fulfilling our obligations under the notes issued pursuant to our bond indentures.
On December 31, 2009, we had total debt of $2.6 billion and unused committed credit lines in excess of $600 million. A reduction of financial liquidity could have important consequences, including the following:
In addition, more than one third of our debt bears interest at variable rates. If market interest rates increase, variable-rate debt will create higher debt service requirements, which would adversely affect our cash flow. While we sometimes enter into agreements limiting our exposure, any such agreements may not offer complete protection from this risk.
Page 11 of 97
Changes in U.S. generally accepted accounting principles (U.S. GAAP) and Securities and Exchange Commission (SEC) rules and regulations, could materially impact our reported results.
U.S. GAAP and SEC accounting and reporting changes are common and have become more frequent and significant over the past few years. These changes could have significant effects on our reported results when compared to prior periods and may even require us to retrospectively adjust prior periods. Additionally, material changes to the presentation of transactions in the consolidated financial statements could impact key ratios that analysts and credit rating agencies use to rate Ball. The material changes in net earnings and/or presentation of transactions could impact our credit rating and ultimately our ability to access the credit markets in an efficient manner.
The global credit, financial and economic environment could have a negative impact on our results of operations, financial position or cash flows.
The global credit, financial and economic environment could have significant negative effects on our operations, including, but not limited to, the following:
There were no matters required to be reported under this item.
The company’s properties described below are well maintained, are considered adequate and are being utilized for their intended purposes.
Ball’s corporate headquarters and the aerospace and technologies segment offices are located in Broomfield, Colorado. The Colorado-based operations of the aerospace and technologies segment occupy a variety of company-owned and leased facilities in Broomfield, Boulder and Westminster, which together aggregate 1.3 million square feet of office, laboratory, research and development, engineering and test and manufacturing space. Other aerospace and technologies operations carry on business in smaller company-owned and leased facilities in Georgia, New Mexico, Ohio, Virginia and Washington, D.C.
The offices of the company’s various North American packaging operations are located in Westminster, Colorado, and the offices for the European packaging operations are located in Ratingen, Germany. Also located in Westminster is the Ball Technology and Innovation Center, which serves as a research and development facility for our various North American packaging operations. The European Technical Center, which serves as a research and development facility for the European beverage can manufacturing operations, is located in Bonn, Germany.
Information regarding the approximate size of the manufacturing locations for significant packaging operations, which are owned or leased by the company, is set forth below. Facilities in the process of being constructed or shut down have been excluded from the list. Where certain locations include multiple facilities, the total approximate size for the location is noted. In addition to the facilities listed, the company leases other warehousing space.
Page 12 of 97
Page 13 of 97
In addition to the consolidated manufacturing facilities, the company has ownership interests of 50 percent or less in packaging affiliates located primarily in the U.S., PRC and Brazil, which affiliates own or lease manufacturing facilities in each of those countries.
We are subject to numerous lawsuits, claims or proceedings arising out of the ordinary course of our business, including actions related to product liability; personal injury; the use and performance of our products; warranty matters; patent, trademark or other intellectual property infringement; contractual liability; the conduct of our business; tax reporting in foreign jurisdictions; workplace safety; and environmental and other matters. We also have been identified as a potentially responsible party at several waste disposal sites under U.S. federal and related state environmental statutes and regulations and may have joint and several liability for any investigation and remediation costs incurred with respect to such sites. Some of these lawsuits, claims and proceedings involve substantial amounts, as described below, and some of our environmental proceedings involve potential monetary costs or sanctions that may exceed $100,000. We have denied liability with respect to many of these lawsuits, claims and proceedings and are vigorously defending such lawsuits, claims and proceedings. We carry various forms of commercial, property and casualty, and other forms of insurance; however, such insurance may not be applicable or adequate to cover the costs associated with a judgment against us with respect to these lawsuits, claims and proceedings. We do not believe that these lawsuits, claims and proceedings are material individually or in the aggregate. While we believe we have also established adequate accruals for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based upon then presently available information, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our liquidity, results of operations or financial condition of the company.
Page 14 of 97
On or about February 19, 2010, the company’s Canadian subsidiary, Ball Packaging Products Canada Corp. (Ball Canada), was advised by the Ontario Ministry of the Environment (the Ministry) that the Ministry would post, for public comment, a proposed Order under the Environmental Protection Act. The proposed Order would require Ball Canada to remediate areas which were allegedly contaminated by its predecessor company, Marathon Paper Mills of Canada Limited, and certain successors (Marathon). Those companies operated a paper mill on the north shore of Lake Superior for many years until it was sold to James River Company in 1983. Ball Canada is investigating whether the allegations in the proposed Order are correct and, if so, whether or not it has any liability or any recourse against other parties, including any former or subsequent owners or other parties associated with the paper mill. Subject to the results of such investigation, the company does not believe this matter will have a material adverse effect upon the liquidity, results of operations or financial condition of the company.
As previously reported, the company is investigating potential violations of the Foreign Corrupt Practices Act in Argentina, which came to our attention on or about October 15, 2007. The Department of Justice and the SEC were also made aware of this matter, on or about the same date. The Department of Justice has informed us that it has completed its investigation and will not bring charges; the SEC’s investigation continues. Based on our investigation to date, we do not believe this matter involved senior management or management or other employees who have significant roles in internal control over financial reporting.
As previously reported, on October 6, 2005, Ball Metal Beverage Container Corp. (BMBCC), a wholly owned subsidiary of the company, was served with an amended complaint filed by Crown Packaging Technology, Inc. et. al. (Crown), in the U.S. District Court for the Southern District of Ohio, Western Division at Dayton, Ohio. The complaint alleges that the manufacture, sale and use of certain ends by BMBCC and its customers infringes certain claims of Crown’s U.S. patents. The complaint seeks unspecified monetary damages, fees, and declaratory and injunctive relief. BMBCC has formally denied the allegations of the complaint. On September 8, 2009, the District Court granted Ball’s motion for summary judgment holding that the asserted patent claims were invalid for failure to comply with the written description requirement and because they were anticipated by prior art. On October 7, 2009, Crown filed its Notice of Appeal seeking to overturn the Trial Court’s decision. Briefing is currently stayed pending the outcome in the appeal of a case in which the written description requirement is under en banc review. Once the decision in that case is issued, briefing will begin. Based on the information available to the company at the present time, the company does not believe that this matter will have a material adverse effect upon the liquidity, results of operations or financial condition of the company.
As previously reported, the U.S. Environmental Protection Agency (USEPA) considers the company a Potentially Responsible Party (PRP) with respect to the Lowry Landfill site located east of Denver, Colorado. On June 12, 1992, the company was served with a lawsuit filed by the City and County of Denver (Denver) and Waste Management of Colorado, Inc., seeking contributions from the company and approximately 38 other companies. The company filed its answer denying the allegations of the complaint. On July 8, 1992, the company was served with a third-party complaint filed by S.W. Shattuck Chemical Company, Inc., seeking contribution from the company and other companies for the costs associated with cleaning up the Lowry Landfill. The company denied the allegations of the complaints.
In July 1992 the company entered into a settlement and indemnification agreement with Chemical Waste Management, Inc., and Waste Management of Colorado, Inc. (collectively Waste Management) and Denver pursuant to which Waste Management and Denver dismissed their lawsuit against the company, and Waste Management agreed to defend, indemnify and hold harmless the company from claims and lawsuits brought by governmental agencies and other parties relating to actions seeking contributions or remedial costs from the company for the cleanup of the site. Waste Management, Inc., has agreed to guarantee the obligations of Waste Management. Waste Management and Denver may seek additional payments from the company if the response costs related to the site exceed $319 million. In 2003 Waste Management, Inc., indicated that the cost of the site might exceed $319 million in 2030, approximately three years before the projected completion of the project. The company might also be responsible for payments (based on 1992 dollars) for any additional wastes that may have been disposed of by the company at the site but which are identified after the execution of the settlement agreement. While remediating the site, contaminants were encountered, which could add an additional cleanup cost of approximately $10 million. This additional cleanup cost could, in turn, add approximately $1 million to total site costs for the PRP group.
At this time, there are no Lowry Landfill actions in which the company is actively involved. Based on the information available to the company at this time, the company does not believe that this matter will have a material adverse effect upon the liquidity, results of operations or financial condition of the company.
There were no matters submitted to the security holders during the fourth quarter of 2009.
Page 15 of 97
Ball Corporation common stock (BLL) is traded on the New York Stock Exchange and the Chicago Stock Exchange. There were 5,563 common shareholders of record on January 31, 2010.
Common Stock Repurchases
The following table summarizes the company’s repurchases of its common stock during the quarter ended December 31, 2009.
Quarterly Stock Prices and Dividends
Quarterly prices for the company's common stock, as reported on the New York Stock Exchange composite tape, and quarterly dividends in 2009 and 2008 (on a calendar quarter basis) were:
Page 16 of 97
Shareholder Return Performance
The line graph below compares the annual percentage change in Ball Corporation’s cumulative total shareholder return on its common stock with the cumulative total return of the Dow Jones Containers & Packaging Index and the S&P Composite 500 Stock Index for the five-year period ended December 31, 2009. It assumes $100 was invested on December 31, 2004, and that all dividends were reinvested. The Dow Jones Containers & Packaging Index total return has been weighted by market capitalization.
Page 17 of 97
Five-Year Review of Selected Financial Data
Ball Corporation and Subsidiaries
Page 18 of 97
Management’s discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 8 of this report, 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 makes 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” or “the company” or “we” or “our” in the following discussion and analysis.
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. We reduce our risk to these exposures either by fixing our material costs through derivative contracts or by including provisions in our sales contracts to recover the increases from our customers.
Industry Trends and Corporate Strategy
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 operations.
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.
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 and Eastern Europe will be an area of growth once the economy recovers. Our Brazilian joint venture has completed the construction of a metal beverage container plant near Rio de Janeiro and has added further can capacity in the existing Jacarei can plant. These Brazilian expansion efforts are owned by Ball’s unconsolidated 50-percent-owned joint venture, Latapack-Ball Embalagens, Ltda., and the expansion was funded by cash flows from operations and incurrence of debt by the joint venture.
Page 19 of 97
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 7A 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, will have an unfavorable impact on this segment in 2010, 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 in 2010 compared to 2009.
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 Performance Measures
Management uses various measures to evaluate company performance such as earnings before interest and taxes (EBIT); earnings before interest, taxes, depreciation and amortization (EBITDA); diluted earnings per share; cash flow from operating activities; free cash flow (generally defined by the company as cash flow from operating activities less additions to property, plant and equipment); and economic value added (net operating earnings after tax, as defined by the company, less a capital charge on net operating assets employed). These financial measures may be adjusted at times for items that affect comparability between periods such as business consolidation costs and gains or losses on dispositions. Nonfinancial measures in the packaging segments include production efficiency and spoilage rates; quality control figures; environmental, health and safety statistics; production and sales volumes; asset utilization rates; and measures of sustainability. 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 that, 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.
Page 20 of 97
RESULTS OF OPERATIONS
Consolidated Sales and Earnings
The company has five reportable segments organized along a combination of product lines, after aggregating operating segments that have 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, Puerto Rico (through fiscal year 2008) 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 2009 (40 percent in 2008 and 41 percent in 2007, including the impact of the $85.6 million legal settlement discussed below).
Net sales were 3 percent lower in 2009 than in 2008, primarily as a result of the impact of lower aluminum prices partially offset by a 2 percent increase in sales volumes. The higher sales volumes in 2009 were the result of incremental volumes from the four plants purchased from Anheuser-Busch InBev n.v./s.a. (AB InBev) on October 1 (discussed further below), partially offset by lower sales volumes and plant closures in the existing business. Excluding the effect of the legal settlement, sales were 4 percent lower in 2008 than in 2007, primarily as a result of 2008 decreases in North American sales volumes of approximately 5 percent. The decrease was due primarily to lower unit volume sales to carbonated soft drink customers, consistent with the industry, and lost beer sales volumes on the discontinuance of a contract that did not provide sufficient profitability. This decrease was partially offset by sales volume increases in the PRC of 14 percent during 2008.
Based on publicly available information, we estimate that our shipments of metal beverage containers in 2009 were approximately 31 percent of total U.S. and Canadian shipments and 22 percent of total PRC shipments. We continue to focus efforts on the growing custom beverage can business, which includes cans of different shapes, diameters and fill volumes, and cans with added functional attributes for new products and product line extensions.
In 2007 a customer asserted various claims against the company, primarily related to the pricing of the aluminum component of the containers supplied by a subsidiary, and on October 4, 2007, the dispute was settled in mediation. The customer received $85.6 million ($51.8 million after tax) to settle the dispute, and Ball retained all of the customer’s beverage can and end supply through 2015. Ball made a one-time payment of $70.3 million ($42.5 million after tax) in January 2008 with the remainder of the settlement to be recovered over the life of the supply contract.
Excluding the business consolidation charges, segment earnings in 2009 were higher than in 2008 due to $12 million of earnings contribution from the four acquired plants, approximately $21 million of savings associated with the plant closures discussed below and $3 million of margin growth in Asia. Partially offsetting these favorable impacts were lower carbonated soft drink and beer can sales volumes (excluding the newly acquired plants) and $25 million related to higher cost inventories in the first half of 2009. Excluding the business consolidation charge in 2008 and the legal settlement in 2007, earnings in 2008 were lower than in 2007 by 13 percent, primarily due to raw material inventory gains of $52 million realized in 2007, which did not recur in 2008. Earnings in 2008 were also negatively impacted by lower North American sales volumes, which were partially offset by the higher sales volumes in the PRC.
Page 21 of 97
On October 1, 2009, the company acquired three of Anheuser-Busch InBev n.v./s.a.’s (AB InBev) metal beverage can manufacturing plants and one of its beverage can end manufacturing plants, all of which are located in the U.S., for $574.7 million in cash. The acquired plants produce approximately 10 billion aluminum beverage containers and 10 billion beverage can ends annually, more than two-thirds of which are produced for leading soft drink companies and the rest for AB InBev. The plants’ operations were included in Ball’s results beginning October 1, 2009, which amounted to $160 million of net sales and $12 million of segment earnings from that date through December 31, 2009. The facilities acquired employ approximately 635 people. The acquired plants will enhance the segment’s ability to better serve its customers.
On November 9, 2009, the company announced its agreement to acquire Guangdong Jianlibao Group Co., Ltd’s (Jianlibao) 65-percent interest in a joint venture metal beverage can and end plant in Sanshui, PRC. Ball has owned 35 percent of the joint venture plant since 1992. Ball will acquire the plant and related net assets for approximately $90 million in cash and assumed debt and will also enter into a long-term supply agreement with Jianlibao. The transaction is expected to close in 2010, subject to customary regulatory approvals.
We are actively pursuing improved profitability through better asset utilization and cost optimization throughout the segment. 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.
As part of our efforts to improve profitability, we undertook various actions in 2009 and 2008 including the reduction of headcount in our metal beverage packaging business and the closures of our Guayama, Puerto Rico; Kansas City, Missouri; and Kent, Washington, metal beverage container plants.
Metal Beverage Packaging, Europe
The metal beverage packaging, Europe, segment includes metal beverage packaging products manufactured in Europe. Ball Packaging Europe, which represents an estimated 32 percent of total European metal beverage container shipments in 2009 (excluding Russia), has manufacturing plants located in Germany, the United Kingdom, France, the Netherlands, Poland and Serbia, and is the second largest metal beverage container business in Europe.
This segment accounted for 24 percent of consolidated net sales in 2009 (25 percent in 2008 and 22 percent in 2007). Segment sales in 2009 as compared to 2008 were 7 percent lower due to the translation impact of the euro to the U.S. dollar, partially offset by better commercial terms. Sales volumes in 2009 were essentially flat compared to those in the prior year. Segment sales in 2008 were 13 percent higher than in 2007, due largely to higher sales volumes of approximately 8 percent, consistent with overall market growth, higher sales prices and foreign currency gains of 8 percent on the strength of the euro. These positive impacts were offset by certain small unfavorable cost changes, including product mix changes towards smaller containers.
While 2009 sales volumes were consistent with the prior year, the adverse effects of foreign currency translation, both within Europe and on the conversion of the euro to the U.S. dollar, reduced segment earnings by $8 million. Also contributing to lower segment earnings were higher cost inventory carried into 2009 and a change in sales mix, partially offset by better commercial terms in some of our contracts. Earnings in 2008 were positively impacted by an increase in net margins of approximately $55 million due to the combined impact of the increased sales volumes and price recovery initiatives, which exceeded the negative impact from product mix, as well as approximately $20 million related to a stronger euro. These improvements were partially offset by approximately $36 million of higher other costs including a negative foreign exchange impact from the conversion of the British pound to the euro and $35 million for business interruption recoveries in 2007 that were not repeated in 2008 (for further details see below).
Page 22 of 97
In April 2006, a fire in the metal beverage can plant in Hassloch, Germany, damaged a significant portion of the building and machinery and equipment. In 2007 the company recorded €37.6 million ($48.6 million) for insurance proceeds, which were based on replacement cost, and €27.2 million ($35.1 million) in cost of sales for insurance recoveries related to business interruption costs.
Metal Food and Household Products Packaging, Americas
The metal food and household products packaging, Americas, segment consists of operations located in the U.S., Canada and Argentina and includes the manufacture and sale of metal food cans, aerosol cans, paint cans, general line cans and decorative specialty cans. Segment sales were 19 percent of consolidated net sales in 2009 (16 percent in both 2008 and 2007). Segment sales in 2009 increased 14 percent over 2008 due to higher selling prices driven by higher raw material costs beginning in 2009, which were partially offset by an 11 percent decrease in sales volume caused by the effects of the economic recession and Ball’s decision to not pursue low margin business. We estimate our 2009 shipments accounted for approximately 18 percent and 45 percent of total annual U.S. and Canadian steel food container and steel aerosol container shipments, respectively. Segment sales in 2008 increased 3 percent compared to 2007 mostly due to higher selling prices offset by an approximate 3 percent decrease in sales volumes primarily as a result of decisions by management to discontinue low margin business, which led to the announced closure of our Commerce, California, and Tallapoosa, Georgia, facilities in 2007.
Excluding the business consolidation activities for each period, earnings in 2009 were 92 percent higher than in 2008 due primarily to the increased sales prices mentioned above coupled with $44 million of lower cost inventory carried into 2009 and $22 million of improvements in manufacturing performance, partially offset by the lower sales volumes and a settlement gain of $7 million in 2008 not recurring in 2009. The 88 percent higher earnings in 2008 compared to 2007 were largely related to improved pricing, better manufacturing performance and the $7 million settlement gain, partially offset by the negative impact of 3 percent lower sales volumes in 2008.
As part of our efforts to improve profitability in this segment and to better align supply with customer demand, we announced plans in October 2007 to close aerosol manufacturing plants in Tallapoosa, Georgia, and Commerce, California. The Commerce plant was closed in 2008, and the Tallapoosa plant was closed in the first quarter of 2009. The cash costs of these actions are expected to be offset by proceeds on asset dispositions and tax recoveries.
Plastic Packaging, Americas
Page 23 of 97
The plastic packaging, Americas, segment consists of operations located in the U.S. (and Canada through most of the third quarter of 2008), which manufacture PET and polypropylene plastic container products used mainly in beverage and food packaging, as well as polypropylene containers for household product applications.
On October 23, 2009, the company announced the sale of its plastic pail assets to BWAY Corporation for approximately $32 million. 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, and associated contracts. The plant produces injection molded plastic pails and drums for products such as building materials and pool chemicals. The associated after-tax loss was insignificant.
This segment accounted for 9 percent of consolidated net sales in 2009 (9 percent in 2008 and 10 percent in 2007). Segment sales in 2009 were down 14 percent from sales in 2008 despite an increase in conversion sales prices. An 11 percent decline in bottle sales volumes and a 15 percent reduction in preform sales volumes were the primary reasons for lower sales compared to 2008. Other factors contributing to lower 2009 sales included resin price reductions and the previously mentioned disposition of the plastic pail assets. Segment sales in 2008 decreased 2 percent compared to 2007 due to a decrease of approximately 9 percent in sales volumes offset by higher raw material cost increases passed through to customers during 2008. The volume losses over the three-year period included decreases in carbonated soft drink and water bottle sales due, in part, to lower convenience store sales by our customers. The volume losses were partially offset by higher sales in specialty business markets, which include custom hot-fill, alcohol, food and juice drinks. Reduced preform sales also contributed to the sales decreases over the three years due, in part, to the bankruptcy filing of a preform customer in the second quarter of 2008.
Excluding business consolidation charges and the pretax gain on sale of the plastic pail assets, segment earnings in 2009 were slightly higher than in 2008, primarily due to higher selling prices and improved operating performance, including benefits from a plant closure in the third quarter of 2008 and plant closures in the third quarter of 2009, offset by lower sales volumes. Segment earnings in 2008 were lower than in 2007 by approximately 40 percent primarily due to the previously mentioned volume losses and a $1.8 million charge due to a customer bankruptcy filing during the second quarter of 2008. In view of the low PET margins, we continue to focus our efforts on price and margin recovery initiatives, as well as PET development efforts in the custom hot-fill, beer, wine, flavored alcoholic beverage and specialty container markets. In the polypropylene plastic container arena, development efforts are primarily focused on custom packaging markets.
We estimate our 2009 shipments of PET plastic bottles to be approximately 8 percent of total U.S. and Canadian PET container shipments. In addition, the plastic packaging, Americas, segment shipped approximately 625 million polypropylene food and specialty containers during 2009.
To improve cost performance and gain efficiencies, in the third quarter of 2009 we closed PET plastic packaging manufacturing plants in Watertown, Wisconsin, and Baldwinsville, New York. A plastic packaging manufacturing plant in Brampton, Ontario, was closed in the third quarter of 2008.
Aerospace and Technologies
Aerospace and technologies segment sales represented 9 percent of consolidated net sales in 2009 (10 percent in 2008 and 11 percent in 2007). Segment sales in 2009 were 8 percent lower than in 2008, driven by the delivery of several large spacecraft. Segment sales in 2008 were 5 percent lower as compared to 2007 as a result of a combination of large programs nearing completion, program terminations, delays in program awards and government funding constraints. The reductions were partially offset by new program starts and increased scope on previously awarded contracts.
Page 24 of 97
Some of the segment’s high-profile contracts include: the James Webb Space Telescope, a successor to the Hubble Space Telescope; the Space-Based Space Surveillance System, which will detect and track space objects such as satellites and orbital debris; NPOESS, the next-generation satellite weather monitoring system; and a number of antennas for the Joint Strike Fighter. During 2009, we shipped several large instruments/spacecraft including Kepler (January ship, March launch), WorldView 2 (August ship, October launch), WISE (August ship, December launch) and participated in the latest Hubble servicing mission in May. This segment is also supporting the replacement of the current space shuttle program.
Excluding the gain on the sale of an Australian subsidiary (BSG) in 2008, earnings in 2009 were down 19 percent compared to 2008, primarily attributable to the winding down of several large programs and overall reduced program activity. Excluding the sale of BSG, segment earnings in 2008 were up 18 percent in comparison to 2007. Earnings improved in 2008 as the sales volume decline described above was more than offset by improved margins on contracts due to improvements in program execution, risk retirement on several fixed price programs, as well as a reduction of unreimbursable pension and benefit expenses.
On February 15, 2008, Ball completed the sale of its shares in BSG to QinetiQ Pty Ltd for approximately $10.5 million, including cash sold of $1.8 million. The subsidiary provided services to the Australian department of defense and related government agencies. After an adjustment for working capital items, the sale resulted in a pretax gain of $7.1 million.
Sales to the U.S. government, either directly as a prime contractor or indirectly as a subcontractor, represented 94 percent of segment sales in 2009, 91 percent in 2008 and 84 percent in 2007. Contracted backlog for the aerospace and technologies segment at December 31, 2009 and 2008, was $518 million and $597 million, respectively.
Additional Segment Information
For additional information regarding the company’s segments, see the summary of business segment information in Note 2 accompanying the consolidated financial statements within Item 8 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 6 accompanying the consolidated financial statements within Item 8 of this report.
Undistributed Corporate Expenses, Net
Included in undistributed corporate expenses for 2009 was a $34.8 million gain ($30.7 million after tax) on the sale of a portion of our 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 $37.0 million in the second quarter of 2009. Also included in 2009 was a charge of $11.1 million ($6.7 million after tax) for transaction costs associated with the AB InBev acquisition, which, in accordance with recent changes to the guidance related to accounting for business combinations, are required to be expensed as incurred. The transaction costs are included in the business consolidation and other activities line of the consolidated statement of earnings. Undistributed corporate expenses in 2008 included $11.5 million for mark-to-market losses related to aluminum derivative instruments that were largely recovered in 2009 through customer contract arrangements.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses were $328.6 million, $288.2 million and $323.7 million for 2009, 2008 and 2007, respectively. The increases in SG&A expenses in 2009 compared to 2008 were the result of approximately $31 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; $13 million of gains in 2008 not recurring in 2009, including a $7 million claim settlement and $7 million of death benefit insurance proceeds; and $8 million of unfavorable foreign currency exchange impacts. These were offset by net favorable decreased costs of $12 million, including lower receivables securitization fees, legal expenses and research and development costs.
The decreases in SG&A expenses in 2008 compared to 2007 were due to approximately $8 million of lower general and administrative costs as a result of the sale in February 2008 of BSG, lower aerospace research and development costs and bid and proposal costs of $4 million, life insurance death benefits of $7 million, the settlement of a claim for $7 million, the favorable net year-over-year change in foreign currency hedges and exchange impacts of $13 million, and other miscellaneous net cost reductions.
Page 25 of 97
Interest and Taxes
Consolidated interest expense was $117.2 million in 2009, $137.7 million in 2008 and $149.4 million in 2007. The lower expense in 2009 was primarily due to lower interest rates on floating rate debt, partially offset by additional interest associated with the issuance of $700 million of new senior notes in August 2009. The reduced expense in 2008 compared to 2007 was primarily due to lower interest rates on floating rate debt, as U.S. and European Central Banks cut interest rates amid the global financial crisis.
Based on current estimates, the 2010 effective income tax rate is expected to be approximately 33 percent. Ball’s consolidated effective income tax rate for 2009 was 30.3 percent compared to 32.6 percent in 2008 and 26.3 percent in 2007. The lower tax rate in 2009 as compared to 2008 was primarily due to a $4 million net increase in tax benefits as a result of a foreign tax settlement, legislative changes and a release of a valuation allowance for a net operating loss carryforward; a $6 million tax benefit from the sale of shares in a stock investment and other assets due to a higher tax basis and a favorable change of $11 million in the provision for uncertain tax positions due to tax settlements in several foreign jurisdictions. These benefits were offset somewhat by an increase due to the change in our earnings mix to higher taxed jurisdictions, lower research and development tax credits and a decrease in the benefit of lower tax rates in foreign tax jurisdictions coupled with increased withholding taxes.
The lower tax rate in 2007 as compared to 2008 was primarily the result of earnings mix (higher foreign earnings taxed at lower rates) and net tax benefit adjustments of $17 million recorded in 2007. Additionally, the inability to fully use Canadian net operating losses on plant closures in 2008 contributed to a higher effective tax rate. The 2008 rate was partially reduced by a $4.5 million tax benefit recognized during the third quarter of 2008 for an enacted tax law change in the United Kingdom, which was offset by the impact of nondeductible losses in the cash surrender value of certain company-owned life insurance plans. The $17 million net reduction in the 2007 tax provision was primarily a result of enacted income tax rate reductions in Germany and the United Kingdom and a tax loss related to the company’s Canadian operations, which were offset by an increase in the tax provision for uncertain tax positions in 2007 to adjust for the final settlement negotiations concluded with the Internal Revenue Service (IRS) related to a company-owned life insurance plan (discussed below).
During 2007 the company concluded final settlement negotiations with the IRS on the deductibility of interest expense on incurred loans from a company-owned life insurance plan. An additional accrual of $7.0 million was made in the third quarter of 2007 to adjust the accrued liability to the final settlement of $18.4 million, including interest, for the years 2000 through 2006. This settlement included agreement on the prospective treatment of interest deductibility on the policy loans, which has not had a significant impact on earnings per share, cash flow or liquidity. Further details are available in Note 16 to the consolidated financial statements within Item 8 of this report.
Results of Equity Affiliates
Equity in the earnings of affiliates is primarily attributable to our 50 percent ownership in packaging investments in the U.S. and Brazil. Earnings were $13.8 million in 2009, $14.5 million in 2008 and $12.9 million in 2007.
CRITICAL AND SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS
For information regarding the company’s critical and significant accounting policies, as well as recent accounting pronouncements, see Note 1 to the consolidated financial statements within Item 8 of this report.
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. We had in excess of $600 million of available funds under committed multi-currency revolving credit facilities at December 31, 2009.
Page 26 of 97
Cash flows provided by operations were $559.7 million in 2009 compared to $627.6 million in 2008 and $673 million in 2007. Lower operating cash flows in 2009 compared to 2008 were the result of working capital increases and higher pension funding and income tax payments during the year. The reduction in 2008 as compared to 2007 was primarily due to the payment of approximately $70 million in January 2008 of a legal settlement to a customer. This reduction was partially offset by the net impact of increases in net earnings and depreciation, lower tax payments, lower pension contributions and a net increase in working capital during the year.
Financial Instrument Collateral
In our worldwide beverage can business, we use financial derivative contracts as discussed in “Quantitative and Qualitative Disclosures About Market Risk” within Item 7A of this report to manage certain future aluminum price volatility for our customers. As these derivative contracts are matched to customer sales contracts, they have little or no economic impact on our earnings. Our agreements with our financial counterparties require us 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 on these derivative contracts. The cash flows of the collateral postings are shown within the investing section of our consolidated statements of cash flows. At December 31, 2009, Ball had $14.2 million of cash posted as collateral, which was offset by cash collateral receipts from customers of $14.2 million. At December 31, 2008, Ball had $229.5 million of cash posted as collateral and had received $124.0 million of cash from customers for a net amount of $105.5 million.
Management Performance Measures
The following financial measurements are on a non-U.S. GAAP basis and should be considered in connection with the consolidated financial statements within Item 8 of this report. Non-U.S. GAAP measures should not be considered in isolation and should not be considered superior to, or a substitute for, financial measures calculated in accordance with U.S. GAAP. A presentation of earnings in accordance with U.S. GAAP is available in Item 8 of this report.
Free Cash Flow
Management internally uses a free cash flow measure: (1) to evaluate the company’s operating results, (2) to plan stock buyback levels, (3) to evaluate strategic investments and (4) to evaluate the company’s ability to incur and service debt. Free cash flow is not a defined term under U.S. generally accepted accounting principles, and it should not be inferred that the entire free cash flow amount is available for discretionary expenditures. The company defines free cash flow as cash flow from operating activities less additions to property, plant and equipment (capital spending). Free cash flow is typically derived directly from the company’s cash flow statements; however, it may be adjusted for items that affect comparability between periods. In 2007 we adjusted free cash flow to reflect our decision to contribute an additional $44.5 million ($27.3 million after tax) to our pension plans and to include the property insurance proceeds used to fund the replacement of the fire-damaged assets in our Hassloch, Germany, plant.
Based on the above definition, our consolidated free cash flow is summarized as follows:
There were no reconciling items to cash flows from investing or financing activities as reported in the consolidated statements of cash flows within Item 8 of this report.
Based on information currently available, we estimate cash flows from operating activities for 2010 to be approximately $735 million, capital spending to be approximately $235 million and free cash flow to be in the $500 million range. These estimates do not reflect that, under new accounting guidance effective January 1, 2010, our accounts receivable securitization program will likely be recorded on our consolidated balance sheet and the related activity shown in our consolidated cash flow statement as a financing activity rather than as an operating activity. In 2010 we intend to allocate our operating cash flow to reducing our debt and growing our cash balances while increasing our stock repurchases and covering our capital spending programs.
Page 27 of 97
EBIT and EBITDA
Management internally uses adjusted earnings before interest and taxes (adjusted EBIT) and adjusted earnings before interest, taxes, depreciation and amortization (adjusted EBITDA) to evaluate the company's performance. EBIT and EBITDA are typically derived directly from the company’s consolidated statement of earnings; however, they may be adjusted for items that affect comparability between periods. Management also uses interest coverage and net debt to adjusted EBITDA ratios as metrics to monitor our credit quality.
Based on the above definitions, our calculation of adjusted EBIT, adjusted EBITDA, interest coverage ratio and net debt to adjusted EBITDA ratio are summarized below:
Debt Facilities and Refinancing
Interest-bearing debt at December 31, 2009, increased $186.1 million to $2.6 billion from $2.4 billion at December 31, 2008. The relatively small debt increase from 2008 was achieved despite our issuance of $700 million of new senior notes on August 20, 2009.
At December 31, 2009, $663 million was available under our multi-currency revolving credit facilities. These committed credit facilities are available until October 2011. We also had $305 million of short-term uncommitted credit facilities available at the end of the year, on which $63.5 million was outstanding.
Given our free cash flow projections and unused credit facilities that are available until October 2011, our liquidity is strong and is expected to meet our ongoing operating cash flow and debt service requirements. While the recent financial and economic conditions have raised concerns about credit risk with counterparties to derivative transactions, the company mitigates its exposure by spreading the risk among various counterparties and limiting exposure to any one party. We also monitor the credit ratings of our suppliers, customers, lenders and counterparties on a regular basis.
The financial and economic environment has exacerbated 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. At December 31, 2009, the amount advanced was included in accounts receivable in our consolidated balance sheet included within Item 8 of this report.
Page 28 of 97
We were in compliance with all loan agreements at December 31, 2009, and all prior years presented, and have met all debt payment obligations. The U.S. note agreements, bank credit agreement and industrial development revenue bond agreements contain certain restrictions relating to dividends, investments, financial ratios, guarantees and the incurrence of additional indebtedness. Additional details about our debt and receivables sales agreements are available in Notes 15 and 8, respectively, accompanying the consolidated financial statements within Item 8 of this report.
Accounts Receivable Securitization
We have 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 accounting guidance in effect through December 31, 2009. Net funds received from the sale of the accounts receivable totaled $250 million at both December 31, 2009 and 2008 and are reflected as a reduction of accounts receivable in the consolidated balance sheets. Under new accounting guidance that will be effective as of January 1, 2010, it is likely that the sold accounts receivable will remain on our consolidated balance sheet, resulting in a corresponding increase in debt. This will create a one-time reduction in cash flows from operating activities in 2010 and an offsetting one-time increase in cash flows from financing activities.
Other Liquidity Items
Cash payments required for long-term debt maturities, rental payments under noncancellable operating leases, purchase obligations and other commitments in effect at December 31, 2009, are summarized in the following table:
Contributions to the company’s defined benefit pension plans, not including the unfunded German plans, are expected to be in the range of $55 million in 2010. This estimate may change based on changes in the Pension Protection Act and actual plan asset performance, among other factors. Benefit payments related to these plans are expected to be $78 million, $80 million, $83 million, $87 million and $91 million for the years ending December 31, 2010 through 2014, respectively, and a total of $520 million for the years 2015 through 2019. Payments to participants in the unfunded German plans are expected to be approximately $24 million to $25 million in each of the years 2010 through 2014 and a total of $113 million for the years 2015 through 2019.
For the U.S. pension plans in 2010, we intend to maintain our current return on asset assumption of 8.25 percent and to change our discount rate assumption to 6.00 percent (from 6.25 percent in 2009). Based on these assumptions, U.S. pension expense for 2010 is anticipated to increase approximately $5 million compared to 2009 expense of $48.1 million, most of which will be included in cost of sales. Pension expense in Europe and Canada combined is expected to be higher than the 2009 expense of $25.8 million by approximately $2 million. A reduction of the expected return on pension assets assumption by one quarter of a percentage point would result in an estimated $2.7 million increase in the 2010 pension expense, while a quarter of a percentage point reduction in the discount rate applied to the pension liability would result in an estimated $3.2 million of additional pension expense in 2010. Additional information regarding the company’s pension plans is provided in Note 17 accompanying the consolidated financial statements within Item 8 of this report.
Page 29 of 97
Annual cash dividends paid on common stock were 40 cents per share in 2009, 2008 and 2007. Total dividends paid were $37.4 million in 2009, $37.5 million in 2008 and $40.6 million in 2007.
Our share repurchases, net of issuances, totaled $5.1 million in 2009, $299.6 million in 2008 and $211.3 million in 2007. The net repurchases in 2008 included a $31 million settlement on January 7, 2008, of a forward contract entered into in December 2007 for the repurchase of 675,000 shares. Additionally, in 2007 net repurchases included a $51.9 million settlement on January 5, 2007, of a forward contract entered into in December 2006 for the repurchase of 1,200,000 shares.
On December 12, 2007, in a privately negotiated transaction, Ball entered into an accelerated share repurchase agreement to purchase $100 million of its common shares using cash on hand and available borrowings. We advanced the $100 million on January 7, 2008, and received 2,038,657 shares, which represented 90 percent of the total shares as calculated using the previous day’s closing price. The agreement was settled on July 11, 2008, and the company received an additional 138,521 shares.
On February 17, 2010, in a privately negotiated transaction, Ball entered into an accelerated share repurchase agreement to buy $125 million of its common shares using cash on hand and available borrowings. The company advanced the $125 million on February 22, 2010, and received approximately 2.2 million shares, which represented 90 percent of the total shares as calculated using the previous day’s closing price. The remaining shares and average price per share will be determined at the conclusion of the contract, which is expected to occur no later than August 2010.
From time to time, the company is subject to routine litigation incident to its businesses. Additionally, the U.S. Environmental Protection Agency has designated Ball as a potentially responsible party, along with numerous other companies, for the cleanup of several hazardous waste sites. Our information at this time does not indicate that the matters identified will have a material adverse effect upon the liquidity, results of operations or financial condition of the company.
Page 30 of 97
The company has made or implied certain forward-looking statements in this report which are made as of the end of the time frame covered by this report. These forward-looking statements represent the company’s goals, and results could vary materially from those expressed or implied. From time to time we also provide oral or written forward-looking statements in other materials we release to the public. As time passes, the relevance and accuracy of forward-looking statements may change. Some factors that could cause the company’s actual results or outcomes to differ materially from those discussed in the forward-looking statements include, but are not limited to: fluctuation in customer and consumer growth, demand and preferences; loss of one or more major customers or changes to contracts with one or more customers; insufficient production capacity; changes in senior management; the current global recession and its effects on liquidity, credit risk, asset values and the economy; overcapacity in foreign and domestic metal and plastic container industry production facilities and its impact on pricing; failure to achieve anticipated productivity improvements or production cost reductions, including those associated with capital expenditures; changes in climate and weather; fruit, vegetable and fishing yields; power and natural resource costs; difficulty in obtaining supplies and energy, such as gas and electric power; availability and cost of raw materials, as well as the recent significant increases in resin, steel, aluminum and energy costs, and the ability or inability to include or pass on to customers changes in raw material costs; changes in the pricing of the company’s products and services; competition in pricing and the possible decrease in, or loss of, sales resulting therefrom; insufficient or reduced cash flow; transportation costs; the number and timing of the purchases of the company’s common shares; regulatory action or federal and state legislation including mandated corporate governance and financial reporting laws; the effects of other restrictive packaging legislation, such as recycling laws; interest rates affecting our debt; labor strikes; increases and trends in various employee benefits and labor costs, including pension, medical and health care costs; rates of return projected and earned on assets and discount rates used to measure future obligations and expenses of the company’s defined benefit retirement plans; boycotts; antitrust, intellectual property, consumer and other litigation; maintenance and capital expenditures; goodwill impairment; changes in generally accepted accounting principles or their interpretation; accounting changes; local economic conditions; the authorization, funding, availability and returns of contracts for the aerospace and technologies segment and the nature and continuation of those contracts and related services provided thereunder; delays, extensions and technical uncertainties, as well as schedules of performance associated with such segment contracts; regional and global pandemics; international business and market risks, such as the devaluation or revaluation of certain currencies; international business risks (including foreign exchange rates) in Europe and particularly in developing countries such as the PRC and Brazil; changes in the foreign exchange rates of the U.S. dollar against the European euro, British pound, Polish zloty, Serbian dinar, Hong Kong dollar, Canadian dollar, Chinese renminbi, Brazilian real and Argentine peso, and in the foreign exchange rate of the European euro against the British pound, Polish zlot, Serbian dinar and Indian rupee; terrorist activity or war that disrupts the company’s production or supply; regulatory action or laws including tax, environmental, health and workplace safety, including in respect of climate change, or chemicals or substances used in raw materials or in the manufacturing process, particularly publicity concerning Bisphenol-A, or BPA, a chemical used in the manufacture of epoxy coatings applied to many types of containers (including certain of those produced by the company); technological developments and innovations; successful or unsuccessful acquisitions, joint ventures or divestitures and the integration activities associated therewith, including the recent acquisition and related integration of four metal beverage can and end plants; changes to unaudited results due to statutory audits of our financial statements or management’s evaluation of the company’s internal control over financial reporting; and loss contingencies related to income and other tax matters, including those arising from audits performed by U.S. and foreign tax authorities. If the company is unable to achieve its goals, then the company’s actual performance could vary materially from those goals expressed or implied in the forward-looking statements. The company currently does not intend to publicly update forward-looking statements except as it deems necessary in quarterly or annual earnings reports. You are advised, however, to consult any further disclosures we make on related subjects in our 10-K, 10-Q and 8-K reports to the SEC.
Page 31 of 97
Financial Instruments and Risk Management
In the ordinary course of business, we employ established risk management policies and procedures, which seek to reduce our exposure to fluctuations in commodity prices, interest rates, foreign currencies and prices of the company’s common stock in respect of common share repurchases, although there can be no assurance that these policies and procedures will be successful. Although the instruments utilized involve varying degrees of credit, market and interest risk, the counterparties to the agreements are expected to perform fully under the terms of the agreements. The company monitors counterparty credit risk, including that of its lenders, on a regular basis, but we cannot be certain that all risks will be discerned or that our risk management policies and procedures will always be effective.
We have estimated our market risk exposure using sensitivity analysis. Market risk exposure has been defined as the changes in fair value of derivative instruments, financial instruments and commodity positions. To test the sensitivity of our market risk exposure, we have estimated the changes in fair value of market risk sensitive instruments assuming a hypothetical 10 percent adverse change in market prices or rates. The results of the sensitivity analyses are summarized below.
Commodity Price Risk
We manage our North American commodity price risk in connection with market price fluctuations of aluminum ingot primarily by entering into container sales contracts that include aluminum ingot-based pricing terms that generally reflect price fluctuations under our commercial supply contracts for aluminum sheet purchases. The terms include fixed, floating or pass-through aluminum ingot component pricing. This matched pricing affects most of our North American metal beverage packaging net sales. We also, at times, use certain derivative instruments such as option and forward contracts as cash flow hedges of commodity price risk where there is not a pass-through arrangement in the sales contract to match underlying purchase volumes and pricing with sales volumes and pricing.
Most of the plastic packaging, Americas, sales contracts include provisions to fully pass through resin cost changes. As a result, we believe we have minimal exposure related to changes in the cost of plastic resin. Most metal food and household products packaging, Americas, sales contracts either include provisions permitting us to pass through some or all steel cost changes we incur, or they incorporate annually negotiated steel costs. In 2009 and in 2008, we were able to pass through to our customers the majority of the steel cost increases. We anticipate at this time that we will be able to pass through the majority of the steel price increases that occur in 2010.
In Europe and the PRC, the company manages the aluminum and steel raw material commodity price risks through annual and long-term contracts for the purchase of the materials, as well as certain sales of containers that reduce the company's exposure to fluctuations in commodity prices within the current year. These contracts include fixed price, floating and/or pass-through pricing arrangements. We also use forward and option contracts as cash flow hedges to manage future aluminum price risk and foreign exchange exposures to match underlying purchase volumes and pricing with sales volumes and pricing for those sales contracts where there is not a pass-through arrangement to minimize the company’s exposure to significant price changes.
Considering the effects of derivative instruments, the company’s ability to pass through certain raw material costs through contractual provisions, the market’s ability to accept price increases and the company’s commodity price exposures under its contract terms, a hypothetical 10 percent adverse change in the company’s steel, aluminum and resin prices could result in an estimated $3.5 million after-tax reduction in net earnings over a one-year period. Additionally, if foreign currency exchange rates were to change adversely by 10 percent, we estimate there could be a $12.3 million after-tax reduction in net earnings over a one-year period for foreign currency exposures on raw materials. Actual results may vary based on actual changes in market prices and rates.
The company is also exposed to fluctuations in prices for natural gas and electricity, as well as the cost of diesel fuel as a component of freight cost. A hypothetical 10 percent increase in our natural gas and electricity prices could result in an estimated $5.0 million after-tax reduction of net earnings over a one-year period. A hypothetical 10 percent increase in diesel fuel prices could result in an estimated $2.3 million after-tax reduction of net earnings over the same period. Actual results may vary based on actual changes in market prices and rates.
Page 32 of 97
Interest Rate Risk
Our objective in managing our exposure to interest rate changes is to minimize the impact of such changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we use a variety of interest rate swaps, collars and options to manage our mix of floating and fixed-rate debt. Interest rate instruments held by the company at December 31, 2009, included pay-fixed interest rate swaps and interest rate collars. Pay-fixed swaps effectively convert variable rate obligations to fixed rate instruments. Collars create an upper and lower threshold within which interest rates will fluctuate.
Based on our interest rate exposure at December 31, 2009, assumed floating rate debt levels throughout the next 12 months and the effects of derivative instruments, a 100-basis point increase in interest rates could result in an estimated $5.1 million after-tax reduction in net earnings over a one-year period. Actual results may vary based on actual changes in market prices and rates and the timing of these changes.
Foreign Currency Exchange Rate Risk
Our objective in managing exposure to foreign currency fluctuations is to protect foreign cash flows and earnings from changes associated with foreign currency exchange rate changes through the use of various derivative contracts. In addition, we manage foreign earnings translation volatility through the use of various foreign currency option strategies, and the change in the fair value of those options is recorded in the company’s earnings. Our foreign currency translation risk results from the European euro, British pound, Canadian dollar, Polish zloty, Chinese renminbi, Hong Kong dollar, Brazilian real, Argentine peso and Serbian dinar. We face currency exposures in our global operations as a result of purchasing raw materials in U.S. dollars and, to a lesser extent, in other currencies. Sales contracts are negotiated with customers to reflect cost changes and, where there is not a foreign exchange pass-through arrangement, the company uses forward and option contracts to manage foreign currency exposures. We additionally use various option strategies to manage the earnings translation of the company’s European operations into U.S. dollars.
Considering the company’s derivative financial instruments outstanding at December 31, 2009, and the currency exposures, a hypothetical 10 percent reduction (U.S. dollar strengthening) in foreign currency exchange rates compared to the U.S. dollar could result in an estimated $27.5 million after-tax reduction in net earnings over a one-year period. This amount includes the $12.3 million currency exposure discussed above in the “Commodity Price Risk” section. This hypothetical adverse change in foreign currency exchange rates would also reduce our forecasted average debt balance by $57.3 million. Actual changes in market prices or rates may differ from hypothetical changes.
Equity Price Risk
The company’s deferred compensation stock program is subject to variable accounting and, accordingly, is marked to market using the company’s closing stock price at the end of a reporting period. Based on current share levels in the program, each $1 change in the company’s stock price has an effect of $0.8 million on pretax earnings. As a way to partially reduce cash flow and earnings volatility, as well as stock price changes associated with our deferred compensation stock program, from time to time the company sells equity put options on its common stock. Mark-to-market accounting applies to these equity put options. Approximately $3.2 million of income was included in 2009 earnings to record the variance between the historical fair value and the current market value of outstanding equity put options. All of the outstanding options expired without value during August 2009.
Page 33 of 97
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Ball Corporation:
In our opinion, the consolidated financial statements listed in the index appearing under 15(a)(1) present fairly, in all material respects, the financial position of Ball Corporation and its subsidiaries at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 12 to the consolidated financial statements, the Company changed the timing of its annual goodwill impairment test in 2009.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management's Report on Internal Control Over Financial Reporting, management has excluded four Anheuser-Busch InBev's n.v./s.a. manufacturing plants (AB InBev plants) from its assessment of internal control over financial reporting as of December 31, 2009 because they were acquired by the Company in a purchase business combination in 2009. We have also excluded the AB InBev plants from our audit of internal control over financial reporting. The AB InBev plants had combined assets and combined net sales representing 8.9 percent and 2.2 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2009.
/s/ PricewaterhouseCoopers LLP
February 25, 2010
Page 34 of 97
Consolidated Statements of Earnings
Ball Corporation and Subsidiaries