CORRESP: A correspondence can be sent as a document with another submission type or can be sent as a separate submission.
Published on December 9, 2005
December 9,
2005
Mr.
John
Hartz
Senior
Assistant Chief Accountant
Division
of Corporation Finance
United
States Securities and Exchange Commission
Washington,
DC 20549-0404
Re:
Your
letter dated 11/22/05 regarding: Ball Corporation’s
Form
10-K
for the year ended December 31, 2004, and
Forms
10-Q for the quarters ended April 3 and July 3, 2005
File
No.
001-7349
Dear
Mr.
Hartz:
We
understand that the purpose of your review process is to assist us in complying
with and enhancing the disclosures in the filings we make with the Commission
and, therefore, we welcome your input. After giving consideration to your
comments, we have the following responses.
Form
10-K for Fiscal year ended December 31, 2004
Note
2. Business Segment Information
Comment
#1 - You
disclose that you operate in three segments, North American packaging,
international packaging and aerospace and technologies. However, in your
business section and MD&A, you separately discuss product lines such as
North American metal beverage containers, North American metal food containers
and North American plastic containers. Please tell us the factors used to
identify the Company’s reportable segments and explain why you believe that
North American metal beverage, North American metal food and North American
plastics are not separate reportable segments pursuant to paragraphs 10-17
of
SFAS No. 131. See also paragraph 26 of
SFAS 131.
The
following discussion supports our current reporting by demonstrating that
although each of the three current North American product lines arguably meets
the definition of operating segments under SFAS No. 131, we satisfy
the aggregation criteria listed in Paragraph 17. Therefore, we
appropriately combine the three product line segments into one reportable
segment.
Ball
Corporation
December
9, 2005
Page
2
The
basis
for aggregating the various product lines within the North American packaging
segment under SFAS 131, paragraph 17, follows:
Economic
factors:
The
North American packaging segment is headed by a Chief Operating Officer (“COO”),
under which are separate presidents for each of the three North American
packaging product lines. The three product line presidents do not have broad
resource allocation or contractually binding authority and make some limited
operational decisions. For the most part, product line presidents have direct
responsibility over the day-to-day manufacturing operations, while all major
decisions regarding purchasing, sales, marketing, capital investment and
strategic direction are made by the COO of the segment. Further, all financing
issues, significant expenditures, sales and materials purchase contracts, and
management compensation arrangements are approved, as required, by the Chief
Operating Decision Making (“CODM”) body, comprised of the COO, Chief Financial
Officer and Chairman, President and Chief Executive Officer, or the Board of
Directors. Certain non-GAAP financial information is available for each of
the
product lines within the North American packaging segment. However, key
operations support activities such as purchasing, logistics, sales, marketing,
human resources functions, accounts payable and payroll processing are shared
and related costs are allocated. In several cases, manufacturing operations
are
also shared between the metal container lines, necessitating additional
accounting allocations.
In
making
capital investment decisions, the COO and CODM require that any investment
must
meet a required rate of return on the investment. The required rate of return,
currently nine percent, for all invested capital and for capital expenditure
requests is the same for all three product lines.
Earnings
before interest and taxes (“EBIT”) for each product line, including allocated
G&A costs of the packaging headquarters as well as allocated corporate
costs, is the key profit measure utilized by the COO, and CODM, in evaluating
performance. Many key packaging functions are shared in a central packaging
headquarters where costs related to these key functions are allocated to the
three product lines and such allocations are directed by the COO. We also have
considerable food can volumes that are manufactured in beverage can plants
where
certain plant and G&A costs and manufacturing variances are allocated. While
all of these allocations are generally made on a consistent basis, the
allocations can be arbitrary and impacted by decisions of the COO.
Multiyear
sales contracts are often negotiated on a multi-product basis where our
customers purchase products from one packaging product line in return for
discounts or incentives on products within one or more of the other product
lines. As we continue to develop our plastic packaging product line,
particularly in beer, we believe the business will continue to migrate to the
use of more multi-product sales arrangements with an increasing cross section
of
customers participating in metal beverage cans and plastic bottles.
Under
these arrangements and with cost allocations, margins and cash flows may be
sacrificed by the COO or CODM in one product line for the benefit of another
product line and, therefore, one product line’s performance and cash flows may
be diminished on a stand-alone basis while the other product line’s performance
and net cash flows may be improved.
Ball
Corporation
December
9, 2005
Page
3
As
a
consequence of the above, aggregation of the financial data of the North
American product lines most fairly represents their financial performance.
Economic characteristics such as long-term average EBIT margins, sales growth
trends, operating free cash flows (free cash flow being used by the CODM and
defined as cash flow from operating activities less capital expenditures),
etc.,
that are viewed in the aggregate are not impacted by the arbitrary cost
allocations or margins sacrificed for one product line on behalf of another.
Nature
of products:
Although
the products may be made of different materials (aluminum, steel, plastic
resin), their nature is more than similar (packaging products for
food/beverages) and customers view the products as interchangeable. We currently
have significant customers who can generally put their product in several of
our
packaging products, and we are doing research to allow others to do the same.
The food container product line includes cans for certain beverage products
including tomato juice, fruit juices and nutriceutical products. There is also
a
trend to convert food containers from steel to two-piece aluminum, as well
as a
trend to convert food containers from three-piece steel to two-piece steel
containers that are manufactured in beverage can plants. For the year ended
December 31, 2004, approximately 28 percent of all Ball food cans sold were
two-piece steel cans manufactured in beverage can plants. Ball has always
considered itself a manufacturer of a range of “packaging products” to meet
customer requirements.
While
there are three different primary raw materials used in our manufacturing
process and the raw material component is the most significant cost element
of
our products, the cost of the raw materials, including changes in market prices,
is, for the most part, passed through to the customer in our North American
sales contracts. As a result, EBIT margins are only minimally impacted, if
at
all, by the price of the raw material component, thus eliminating a potentially
significant distinguishing feature.
Nature
of the production processes:
Production methods are substantially similar based on the criteria discussed
in
Appendix B of SFAS No. 131. The packaging product lines are similarly
capital and labor intensive for similar levels of productive capacity, and
they
share similar basic manufacturing characteristics. Further, the manufacturing
process is sufficiently similar to permit Ball to manufacture multiple product
lines in shared plants supported by common quality assurance, customer service,
engineering and other plant personnel. This is best demonstrated by the ease
of
converting two-piece beverage can lines into food can lines, one in our Findlay,
Ohio, plant and, more recently in 2003, in our Milwaukee, Wisconsin, plant.
Further, two-piece can technology is used for both the beverage and food can
lines, the latter having traditionally used three-piece technology. Third,
both
lines use metal as the key raw material.
While
plastic container manufacturing requires a different process and resin is the
primary raw material, the key factors considered in the process are still quite
similar. These factors include, but are not limited to, the use of tooling
and
dies or molds to transform a primary raw material into a final packaging
product, the ability of the container to meet FDA standards, the ability to
retain carbonation, flavor and other characteristics of the food or beverage,
and the retention of the desired
Ball
Corporation
December
9, 2005
Page
4
temperature
of the filler’s product, if a requirement. Similarities also exist in the
conveying and packaging of these three product lines. The lines of business
are
capital intensive and have similar labor requirements.
Type
or class of customers:
In
accordance with the expanded definition of similarity found in Appendix B
to SFAS No. 131, and in relation to the three product lines in the
North American packaging segment, similar marketing methods are employed,
overlapping target customer markets exist, and the customer-demand levels for
each product are similarly sensitive to market price changes and the changes
in
general economic conditions. The customers of each line are the same or are
similar in that they are primarily large, multinational corporations, they
produce foods and beverages and, in many cases, the same customer buys from
each
line of containers and considers them interchangeable. Ball entered the plastic
container business largely to satisfy the expanding needs of certain metal
container customers who buy both plastic and metal containers.
Our
customers’ use of our different products is driven by various factors in their
own businesses including promotional activities, demands from their customer
base and their target markets or venues. Plastic bottles and metal beverage
cans
are viewed by our beverage customers as substitutable packages and are managed
within Ball as a homogeneous product line. Over 75 percent of the total sales
from the plastic packaging product line are made to customers that are also
customers for metal beverage cans. We entered the plastics packaging business
as
a direct response to our beverage and food customers’ requests for a wider
variety of rigid packaging products. Our investment in plastics expanded our
ability to serve existing customers and to increase our appeal to others who
desired to have plastic containers as an alternative package for their products,
including, but not limited to, soft drinks, fruit and vegetable juices and
alcoholic beverages.
There
is
not a clear distinction among products within the product lines. For example,
containers for beverages are produced within all three packaging product lines.
Many food can customers are also beverage container customers, and certain
other
customers, such as Pepsi Co., and its affiliates, comprise a significant
percentage of both our plastic and our metal beverage container sales. Also,
the
focus of our plastic container business has been soft drinks and bottled water;
however, the field has broadened, and we are developing plastic containers
for
beer and for hot-fill products such as sports drinks, fruit and vegetable juices
(the packaging for which has historically been metal cans). In addition, certain
Ball customers purchase both three-piece steel and two-piece aluminum products
to accommodate both high-acid and low-acid products.
Method
used to distribute the products:
Methods
of distribution are similar, consisting primarily of pallets of containers
shipped on trucks to filling locations within 300 miles of each manufacturing
plant. As discussed earlier, logistics and packaging material costs are shared
among the three packaging businesses.
Nature
of the regulatory environments:
Regulatory environments are similar, with equivalent FDA compliance required
for
each product line.
Ball
Corporation
December
9, 2005
Page
5
While
we
would agree that various financial data on each product line is available,
an
analysis of the data will not add to a better understanding of Ball’s North
American packaging business as a whole and in certain instances may be
misleading. Not understanding the complex and constantly changing
interrelationships among the various packaging product lines could lead
financial statement users to erroneous conclusions regarding the short- and
long-term prospects of any one product line at a given point in time. We believe
that we clearly meet the aggregation criteria and aggregation is simply the
only
way to truly reflect the economic factors of our North American packaging
business. We also believe that showing our North American packaging business
as
one reportable segment best portrays Ball’s business as it is managed internally
and provides a financial statement reader with a better understanding of Ball’s
performance, a better assessment of our prospects for future cash flows and
a
more informed judgment about our enterprise as a whole.
Please
note that in late 1999 and early 2000, we received and responded to several
Commission comments regarding the determination of our reportable segments
under
SFAS No. 131. The Commission previously accepted our segment reporting
after consideration of our responses. We would like to emphasize that the
reasons for aggregation presented in our 1999 responses continue to be prevalent
today and have become even more compelling given the further integration of
the
North American packaging functions.
It
is our
hope that the factors we have brought to your attention will lead you to agree
that the aggregation criteria have indeed been met and that aggregating the
packaging product lines in our North American packaging business continues
to
provide the most meaningful presentation of Ball’s operating results and
performance. One segment is in fact how the COO and CODM manages the North
American packaging business - as a cohesive unit where the three product lines
support, and are supported by, each other and build off the synergies inherent
in such a relationship.
Ball
Corporation
December
9, 2005
Page
6
Form
10-Q for the Quarter Ended July 3, 2005
Accounts
Receivable
Comment
#2 - We
note that your accounts receivable balance increased 56% during the six months
ending July 3, 2005. We further note that your receivable days sales
outstanding has increased from 22.9 days at December 31, 2004 to
33.9 days at July 3, 2005. Regarding your accounts receivable
balances, tell us the following:
| · |
The
reasons for the increases in your accounts receivable balances in
recent
periods;
|
| · |
The
factors that led to the increase in days sales
outstanding;
|
| · |
The
extent to which you have successfully collected these amounts subsequent
to the balance sheet dates;
|
| · |
Whether
you had any significant delinquent or disputed accounts that you
have
written off; and,
|
| · |
What
consideration, if any, was given to disclosing the above information
in
your liquidity section of your
Form 10-Q.
|
Please
note that your liquidity section should include a detailed discussion and
analysis regarding the trends and uncertainties surrounding the collectibility
of accounts receivable, including why your days sales outstanding significantly
increased when compared to the prior period. Refer to Item 303(A)(1) of
Regulation S-K for disclosure requirements and guidance as well as the
Commission’s MD&A Interpretive Release 33-8350.
| · |
The
reasons for the increases in your accounts receivable balances in
recent
periods
|
Normal
seasonality and larger than normal 2005 raw material price increases passed
through to customers in our North American packaging segment contributed to
the
majority of our increases in accounts receivable balances from December 31,
2004
to July 3, 2005. This seasonal increase and the impact of the pass through
of
raw material price increases are customary in our packaging businesses. The
table below demonstrates the seasonal build of our accounts receivable that
is
primarily attributed to our packaging segments:
|
($
in millions)
|
December
|
June
|
$
Increase
|
%
Increase
|
|||||||||
|
December
2000 to June 2001
|
$
|
230.2
|
$
|
329.3
|
$
|
99.1
|
43.0
|
%
|
|||||
|
December
2001 to June 2002
|
172.0
|
284.9
|
112.9
|
65.6
|
%
|
||||||||
|
December
2002 to June 2003
|
345.9
|
472.7
|
126.8
|
36.7
|
%
|
||||||||
|
December
2003 to June 2004
|
250.1
|
502.5
|
252.4
|
100.9
|
%
|
||||||||
|
December
2004 to June 2005
|
346.8
|
543.0
|
196.2
|
56.6
|
%
|
||||||||
Ball
Corporation
December
9, 2005
Page
7
Sales
in
the second quarter and first six months of both 2004 and 2005 reflected higher
prices from the pass through of higher raw material costs in both our packaging
segments. The 2005 sales increase was primarily related to the pass through
to
our customers of aluminum, steel, resin and other direct material price
increases that went into effect the first half of 2005.
Ball’s
packaging businesses, which consist of two reporting segments, North American
packaging and international packaging, are subject to seasonality due to their
customer bases. Ball’s North American and international packaging segments
supply metal containers to major food and beverage producers. While these
customers have different peaks from a sales and accounts receivable perspective,
the timeframe in question and the related increase in accounts receivable can
be
explained by the seasonality of our customers’ businesses.
Ball’s
metal food container sales are highly seasonal. Payment terms that are extended
to seasonal processors normally require that the customer pay for their seasonal
account only upon completion of their annual “fresh pack.” Under our agreements
with these processors, they begin to fill their warehouses with our containers
in the spring as they begin to move their finished product from the prior year.
As revenue is recognized and the customer is invoiced when delivery has occurred
and title has transferred under the fixed price sales contract, accounts
receivable balances begin to build during the months prior to the completion
of
the fresh pack season. While many products are processed by our customers as
early as May and June, their account is often not due until the last couple
of
months of the year when they have completed processing their entire complement
of products. These business terms have been standard in the food container
industry for many years. With few exceptions, all seasonal accounts are paid
prior to the end of Ball’s fiscal year end. To date for 2005, we have
successfully collected or made alternative arrangements for all debts due in
November.
Ball’s
North American metal beverage business and international packaging segment,
which sell metal beverage and plastic containers, are also seasonal in nature.
These businesses serve beverage processors such as breweries and soft drink
bottlers. Accounts receivable reach low ebb at the end of Ball’s fiscal year end
in this business as most of our larger customers shut down bottling operations
between Christmas and New Year’s. Payment terms on these accounts, however,
cause these customers to pay on their open account, even while we are not
shipping at usual levels. This dynamic has historically pushed the accounts
receivable balance at December 31 to its lowest annual level.
Sales
volumes in our North American metal beverage and international packaging
businesses are historically strong in the month of June. Balances tend to be
higher at the end of June as beverage bottlers are canning and bottling
additional products for the summer months. In June 2005 we showed more than
a 50
percent increase in accounts receivable due to an increase in billings in the
month of June versus December 31, 2004.
Ball
Corporation
December
9, 2005
Page
8
| · |
The
factors that led to the increase in days sales
outstanding
|
Accounts
receivable related to Ball’s North American metal food container sales increased
substantially over the period in question (December 31, 2004, through July
3,
2005). The days sales outstanding (DSO) in this business tends to grow larger
than Ball’s other businesses due to the fresh pack seasonal terms. This business
does not have the regular accounts receivable turns that are associated with
businesses that have normal net 30-day terms. While we do have food processing
customers that have more regular terms, the DSO is skewed by the sales to our
seasonal processors.
| · |
The
extent to which you have successfully collected these amounts subsequent
to the balance sheet dates
|
Ball
Corporation had no significant delinquent accounts year to date through November
2005. Any increases in exposure are monitored by collection personnel on a
regular basis, as is the aging of customer accounts. Substantially all of the
increases in the accounts receivable balances from June 2005 have subsequently
been collected in the normal course of business. Any delinquent amounts are
not
considered significant and are adequately covered by bad debt reserves. This
is
also consistent with prior years.
| · |
Whether
you had any significant delinquent or disputed accounts that you
have
written off
|
In
2005,
the bad debts written off for Ball Corporation have been minimal. Ball maintains
bad debt reserves adequate to cover these losses.
| · |
What
consideration, if any, was given to disclosing the above information
in
your liquidity section of your
Form 10-Q.
|
Historically,
Ball Corporation’s bad debt write-offs have not been significant. Additionally,
the fluctuations in DSO throughout the year are expected due to the seasonality
of our business. We had minimal write-offs in 2005 and do not view this as
a
high-risk area for our company. With over $5 billion in annual net sales for
all
segments, our annual bad debt write-offs only averaged $1.8 million over the
past three years. Therefore, we do not include accounts receivable write-offs
in
our liquidity section of MD&A as we believe it has minimal impact on our
liquidity. We will continue to evaluate the seasonality of our business at
each
reporting period and determine if a discussion in the MD&A liquidity section
is necessary and meaningful.
Shareholders’
Equity
Comment
#3
-
You
disclose in your Form 10-K that on January 31, 2005, you repurchased
three million of your outstanding shares in a privately negotiated accelerated
stock repurchase transaction. Explain to us the terms of the agreement including
the settlement terms. Tell us how you accounted for this transaction and your
consideration of EITF 99-7 and EITF 00-19.
Ball
Corporation
December
9, 2005
Page
9
Terms
of the agreement:
The
company entered into a forward contract with a financial institution to purchase
a fixed number of shares (three million Ball Corporation shares) at the market
price on January 31, 2005 of $42.72 per share. The contract value was
$128.5 million and the company paid the financial institution
$108.5 million on January 31, 2005, and owed the remaining $20 million on
the settlement date of July 6, 2005. Daily interest was due by the company
on
the $20 million remaining obligation. Physical settlement was required in the
forward contract and the company would receive dividend payments on three
million shares if declared during the period. The financial institution had
approximately 5 months to purchase the shares and deliver these shares to the
company on the settlement date. The company could cancel the forward contract
before the entire three million shares had been purchased. Upon request, the
company could take possession of all Ball shares held by the financial
institution before the settlement date as the financial institution bought
the
shares daily on behalf of the company. The financial institution purchased
on
behalf of the company 536,800 shares, 664,200 shares, 549,400 shares, and
1,249,600 shares for the months of February, March, April, and May,
respectively, and on May 10, 2005 the company took delivery of all three million
shares.
On
January 31, 2005, the company also entered into an amortizing equity swap with
the same financial institution. The equity swap reimbursed the financial
institution for any dividend paid to the company under the forward contract
for
Ball shares not yet purchased by the financial institution. The equity swap
also
reimbursed either Ball or the financial institution based upon the actual cost
of shares purchased compared to the $42.72 forward contract price. The financial
institution also paid the company interest on the $108.5 million paid upfront
in
the forward contract less the amount of purchased shares. The equity swap could
be net share or net cash settled at the company's choice upon completion.
The
equity swap and forward purchase contract were two separate agreements and
were
legally detachable and separately exercisable. Amounts due under the forward
contract and equity swap could be net settled. The company has historically
settled similar transactions with cash.
Accounting
for the transaction:
After
consultation with our auditors, we accounted for the above transactions under
SFAS No. 150, “Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.” Paragraph 14 of SFAS
No. 150 states, “A freestanding financial instrument that is within the
scope of this Statement shall not be combined with another freestanding
financial instrument in applying paragraphs 9-12, unless combination is required
under the provisions of Statement 133 and related guidance.” Based on the
provisions of SFAS No.
133
Implementation Issue No. K1, the
forward contract and the equity swap were considered one transaction for
accounting purposes.
On
a
combined basis the transaction was viewed as a forward contract to purchase
a
variable number of shares which could require the transfer of cash. Paragraph
11
of SFAS No. 150 states, “A financial instrument, other than an outstanding
share, that, at inception, (a) embodies an obligation to repurchase the issuer’s
equity shares, or is indexed to such an obligation, and (b) requires or may
require the issuer to settle the obligation by transferring assets shall be
classified as a liability (or an asset in some circumstances)….” Therefore, we
accounted for the initial prepayment as a prepaid asset until the
Ball
Corporation
December
9, 2005
Page
10
receipt
of the shares. Furthermore, paragraph 24 of SFAS No. 150 requires the
transaction to be valued at fair value with subsequent changes in fair value
to
be recognized in earnings.
The
financial institution located a large block of Ball’s common stock available for
sale in early May and completed the three million share purchase at which time
the company took possession of all three million shares and settled the
transaction on May 10, 2005. The net amount paid to the financial
institution on May 10, 2005, to settle the forward purchase contract and equity
swap was $16.3 million (the $20 million remaining forward obligation, plus
interest, less the average price adjustment under the equity swap). We obtained
an independent third party fair value appraisal that reflected $131,070 of
income on the two combined transactions. We recorded the $131,070 as interest
income and $124.9 million was booked to treasury stock. We reduced our number
of
shares outstanding by three million on May 10, 2005, for our weighted
average earnings per share calculations.
SFAS
No. 150 partially nullifies EITF 00-19 for freestanding financial
instruments within the scope of SFAS No. 150 per paragraph 72 in EITF
00-19. EITF 99-7 was not considered applicable because the financial institution
did not borrow and deliver the shares at the inception of the agreement and
EITF
99-7 would contemplate the forward and swap contracts as separate
transactions.
Journal
entries for the transaction (in $ thousands):
Initial
trade date, January 31, 2005:
|
DR
Prepaid
|
$
|
108,460
|
|||||
|
CR
Cash
|
$
|
108,460
|
Record
the cash payment to the financial institution on the forward
contract
Subsequent
entries:
|
DR
Cash
|
$
|
50
|
|||||
|
CR
Dividends paid
|
$
|
50
|
Record
the net dividends received from the forward contract and equity
swap
|
DR
Treasury stock cost
|
$
|
108,460
|
|||||
|
CR
Prepaid
|
$
|
108,460
|
Receipt
of shares on initial prepaid amount
|
DR
Treasury stock cost
|
$
|
16,416
|
|||||
|
CR
Interest income
|
$
|
131
|
|||||
|
CR
Cash
|
16,285
|
Final
settlement payment and receipt of shares
The
above
represents the final impact on Ball’s books and records. Interim fair value
changes were recorded to earnings for reporting purposes.
Ball
Corporation
December
9, 2005
Page
11
Item 4.
Controls and Procedures
Comment
#4
-
You
disclose that your disclosure controls and procedures “were appropriate” at
July 3, 2005. It does not appear that your disclosure controls and
procedures are effective. Supplementally, confirm, if true, the conclusions
of
management that the disclosure controls and procedures are
effective.
We
intended to convey that our disclosure controls and procedures were effective
(a
higher level of confidence than “appropriate”). We hereby confirm that we
believe our disclosure controls and procedures were effective as of July 3,
2005, and we will ensure that, in all future filings, we will replace the word
“appropriate” with “effective.”
As
requested in your letter, the company hereby acknowledges our understanding
that:
| · |
We
are responsible for the adequacy and accuracy of the disclosure in
our
filings;
|
|
·
|
Staff
comments or changes to disclosures in response to staff comments
do not
foreclose the Commission from taking any action with respect to the
filing; and
|
| · |
We
may not assert staff comments as a defense in any proceeding initiated
by
the Commission or any person under the federal securities laws of
the
United States.
|
We
appreciate your comments and believe we have adequately addressed them in our
responses.
Sincerely,
/s/
R.
David Hoover
R.
David
Hoover
Chairman,
President and Chief Executive Officer
/s/
Raymond J. Seabrook
Raymond
J. Seabrook
Senior
Vice President and Chief Financial Officer