10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 9, 2006
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
x
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
quarterly period ended July
2, 2006
Commission
file number 1-7349
BALL
CORPORATION
|
State
of Indiana
|
35-0160610
|
10
Longs
Peak Drive, P.O. Box 5000
Broomfield,
CO 80021-2510
303/469-3131
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
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
Large
accelerated filer x Accelerated
filer o Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
|
Class
|
Outstanding
at August 4, 2006
|
|||
|
Common
Stock,
without
par value
|
104,204,578
shares
|
Ball
Corporation and Subsidiaries
QUARTERLY
REPORT ON FORM 10-Q
For
the
period ended July 2, 2006
INDEX
|
Page
Number
|
||
|
PART
I.
|
FINANCIAL
INFORMATION:
|
|
|
Item
1.
|
Financial
Statements
|
|
|
Unaudited
Condensed Consolidated Statements of Earnings for the Three Months
and Six
Months Ended July 2, 2006, and July 3, 2005
|
3
|
|
|
Unaudited
Condensed Consolidated Balance Sheets at July 2, 2006, and
December 31, 2005
|
4
|
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows for the Three Months
and
Six Months Ended July 2, 2006, and July 3, 2005
|
5
|
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
6
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
24
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
30
|
|
Item
4.
|
Controls
and Procedures
|
32
|
|
PART
II.
|
OTHER
INFORMATION
|
34
|
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
Item
1.
|
FINANCIAL
STATEMENTS
|
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Ball
Corporation and Subsidiaries
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||
|
($
in millions, except per share amounts)
|
July
2, 2006
|
July
3, 2005
|
July
2, 2006
|
July
3, 2005
|
||||||||
|
Net
sales
|
$
|
1,842.5
|
$
|
1,552.0
|
$
|
3,207.4
|
$
|
2,876.1
|
||||
|
Costs
and expenses
|
||||||||||||
|
Cost
of sales (excluding depreciation and amortization)
|
1,550.0
|
1,300.2
|
2,706.3
|
2,396.9
|
||||||||
|
Depreciation
and amortization (Notes 8 and 10)
|
64.9
|
53.0
|
119.5
|
106.4
|
||||||||
|
Business
consolidation costs (gains) (Note 5)
|
(0.4
|
)
|
8.8
|
1.7
|
8.8
|
|||||||
|
Property
insurance gain (Note 5)
|
(74.1
|
)
|
–
|
(74.1
|
)
|
–
|
||||||
|
Selling,
general and administrative (Note 1)
|
73.5
|
58.5
|
143.8
|
121.6
|
||||||||
|
1,613.9
|
1,420.5
|
2,897.2
|
2,633.7
|
|||||||||
|
Earnings
before interest and taxes
|
228.6
|
131.5
|
310.2
|
242.4
|
||||||||
|
Interest
expense
|
37.6
|
24.3
|
60.9
|
50.1
|
||||||||
|
Earnings
before taxes
|
191.0
|
107.2
|
249.3
|
192.3
|
||||||||
|
Tax
provision (Note 12)
|
(63.0
|
)
|
(32.9
|
)
|
(79.7
|
)
|
(62.7
|
)
|
||||
|
Minority
interests
|
(0.2
|
)
|
(0.3
|
)
|
(0.4
|
)
|
(0.5
|
)
|
||||
|
Equity
results in affiliates
|
4.9
|
5.0
|
8.1
|
8.5
|
||||||||
|
Net
earnings
|
$
|
132.7
|
$
|
79.0
|
$
|
177.3
|
$
|
137.6
|
||||
|
Earnings
per share (Note 15):
|
||||||||||||
|
Basic
|
$
|
1.28
|
$
|
0.72
|
$
|
1.71
|
$
|
1.24
|
||||
|
Diluted
|
$
|
1.26
|
$
|
0.71
|
$
|
1.69
|
$
|
1.22
|
||||
|
Weighted
average common shares outstanding (in thousands)
(Note 15):
|
||||||||||||
|
Basic
|
103,655
|
109,526
|
103,449
|
110,589
|
||||||||
|
Diluted
|
105,205
|
111,483
|
105,133
|
112,680
|
||||||||
|
Cash
dividends declared and paid, per common
share
|
$
|
0.10
|
$
|
0.10
|
$
|
0.20
|
$
|
0.20
|
||||
See
accompanying notes to unaudited condensed consolidated financial
statements.
Page
3
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
Ball
Corporation and Subsidiaries
|
($
in millions)
|
July 2,
2006
|
December
31,
2005
|
||||
|
ASSETS
|
||||||
|
Current
assets
|
||||||
|
Cash
and cash equivalents
|
$
|
52.5
|
$
|
61.0
|
||
|
Receivables,
net (Note 6)
|
770.7
|
376.6
|
||||
|
Inventories,
net (Note 7)
|
830.3
|
670.3
|
||||
|
Deferred
taxes, prepaids and other current assets
|
139.0
|
117.9
|
||||
|
Total
current assets
|
1,792.5
|
1,225.8
|
||||
|
Property,
plant and equipment, net (Notes 5 and 8)
|
1,831.4
|
1,556.6
|
||||
|
Goodwill
(Notes 4 and 9)
|
1,710.0
|
1,258.6
|
||||
|
Intangibles
and other assets, net (Note 10)
|
518.9
|
302.4
|
||||
|
Total
Assets
|
$
|
5,852.8
|
$
|
4,343.4
|
||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||
|
Current
liabilities
|
||||||
|
Short-term
debt and current portion of long-term debt (Note 11)
|
$
|
133.9
|
$
|
116.4
|
||
|
Accounts
payable
|
691.6
|
552.4
|
||||
|
Accrued
employee costs
|
177.2
|
198.4
|
||||
|
Income
taxes payable (Note 12)
|
127.0
|
127.5
|
||||
|
Other
current liabilities
|
210.8
|
181.3
|
||||
|
Total
current liabilities
|
1,340.5
|
1,176.0
|
||||
|
Long-term
debt (Note 11)
|
2,513.0
|
1,473.3
|
||||
|
Employee
benefit obligations (Note 13)
|
846.7
|
784.2
|
||||
|
Deferred
taxes and other liabilities (Note 12)
|
97.5
|
69.5
|
||||
|
Total
liabilities
|
4,797.7
|
3,503.0
|
||||
|
Contingencies
(Note 16)
|
||||||
|
Minority
interests
|
4.8
|
5.1
|
||||
|
Shareholders’
equity (Note 14)
|
||||||
|
Common
stock (159,548,711 shares issued - 2006;
158,382,813 shares issued - 2005)
|
685.2
|
633.6
|
||||
|
Retained
earnings
|
1,384.6
|
1,227.9
|
||||
|
Accumulated
other comprehensive loss
|
(58.0
|
)
|
(100.7
|
)
|
||
|
Treasury
stock, at cost (54,975,417 shares - 2006;
54,182,655 shares - 2005)
|
(961.5
|
)
|
(925.5
|
)
|
||
|
Total
shareholders’ equity
|
1,050.3
|
835.3
|
||||
|
Total
Liabilities and Shareholders’ Equity
|
$
|
5,852.8
|
$
|
4,343.4
|
||
See
accompanying notes to unaudited condensed consolidated financial
statements.
Page
4
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Ball
Corporation and Subsidiaries
|
($
in millions)
|
Six
Months Ended
|
|||||
|
July
2, 2006
|
July
3, 2005
|
|||||
|
Cash
Flows from Operating Activities
|
||||||
|
Net
earnings
|
$
|
177.3
|
$
|
137.6
|
||
|
Adjustments
to reconcile net earnings to net cash provided by
operating activities:
|
||||||
|
Depreciation
and amortization
|
119.5
|
106.4
|
||||
|
Property
insurance gain (Note 5)
|
(74.1
|
)
|
–
|
|||
|
Business
consolidation costs (Note 5)
|
1.7
|
8.8
|
||||
|
Deferred
taxes
|
14.3
|
(20.6
|
)
|
|||
|
Other,
net
|
(29.3
|
)
|
2.4
|
|||
|
Changes
in other working capital components, excluding effects
of acquisitions
|
(275.6
|
)
|
(164.4
|
)
|
||
|
Cash
provided by (used in) operating activities
|
(66.2
|
)
|
70.2
|
|||
|
Cash
Flows from Investing Activities
|
||||||
|
Additions
to property, plant and equipment
|
(127.5
|
)
|
(148.3
|
)
|
||
|
Business
acquisitions, net of cash acquired (Note 4)
|
(785.4
|
)
|
–
|
|||
|
Property
insurance proceeds (Note 5)
|
32.4
|
–
|
||||
|
Other,
net
|
8.6
|
(9.5
|
)
|
|||
|
Cash
used in investing activities
|
(871.9
|
)
|
(157.8
|
)
|
||
|
Cash
Flows from Financing Activities
|
||||||
|
Long-term
borrowings
|
1,049.1
|
145.4
|
||||
|
Repayments
of long-term borrowings
|
(66.8
|
)
|
(45.8
|
)
|
||
|
Change
in short-term borrowings
|
2.7
|
58.4
|
||||
|
Debt
issuance costs
|
(8.3
|
)
|
–
|
|||
|
Proceeds
from issuance of common stock
|
19.2
|
20.1
|
||||
|
Acquisitions
of treasury stock
|
(50.7
|
)
|
(188.1
|
)
|
||
|
Common
dividends
|
(20.7
|
)
|
(21.8
|
)
|
||
|
Other,
net
|
4.3
|
(0.2
|
)
|
|||
|
Cash
provided by (used in) financing activities
|
928.8
|
(32.0
|
)
|
|||
|
Effect
of exchange rate changes on cash
|
0.8
|
(3.4
|
)
|
|||
|
Change
in cash and cash equivalents
|
(8.5
|
)
|
(123.0
|
)
|
||
|
Cash
and Cash Equivalents —
Beginning
of Year
|
61.0
|
198.7
|
||||
|
Cash
and Cash Equivalents —
End of
Period
|
$
|
52.5
|
$
|
75.7
|
||
See
accompanying notes to unaudited condensed consolidated financial statements.
Page
5
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
1.
|
Principles
of Consolidation and Basis of
Presentation
|
The
accompanying unaudited condensed consolidated financial statements include
the
accounts of Ball Corporation and its controlled affiliates (collectively Ball,
the company, we or our) and have been prepared by the company without audit.
Certain information and footnote disclosures, including critical and significant
accounting policies, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been condensed
or
omitted.
Results
of operations for the periods shown are not necessarily indicative of results
for the year, particularly in view of the seasonality in the packaging segments.
These unaudited condensed consolidated financial statements and accompanying
notes should be read in conjunction with the consolidated financial statements
and the notes thereto included in the company’s Annual Report on Form 10-K
pursuant to Section 13 of the Securities Exchange Act of 1934 for the
fiscal year ended December 31, 2005 (annual report).
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements, and reported
amounts of revenues and expenses during the reporting period. These estimates
are based on historical experience and various assumptions believed to be
reasonable under the circumstances. Actual results could differ from these
estimates under different assumptions and conditions. However, we believe that
the financial statements reflect all adjustments which are of a normal recurring
nature and are necessary for a fair statement of the results for the interim
period.
Subsequent
to the issuance of its financial statements for the year ended December 31,
2005, the company determined that certain foreign currency exchange losses
had
been inadvertently deferred for the years 2003, 2004 and 2005. As a result,
selling, general and administrative expenses were understated by
$2.5 million, $2.3 million and $1 million in 2005, 2004 and 2003,
respectively. Management has assessed the impact of these adjustments and does
not believe these amounts are material, individually or in the aggregate, to
any
previously issued financial statements or to our expected full year results
of
operations for 2006. A cumulative $5.8 million pretax out-of-period
adjustment was included in selling, general and administrative expenses in
the
first quarter of 2006.
Prior
to
the adoption on January 1, 2006, of Statement of Financial Accounting
Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment,” expense
related to stock options was calculated using the intrinsic value method under
the guidelines of Accounting Principles Board (APB) Opinion No. 25, and
therefore was not included in the consolidated statement of earnings. Ball’s
earnings as reported in the second quarter and first six months of 2005 included
after-tax stock-based compensation of $0.6 million and $2.4 million,
respectively, compared to $2.7 million and $5.2 million for the same
periods in 2005, respectively, if the fair-value-based method had been used.
On
a pro forma basis, both basic and diluted earnings per share would have been
$0.02 and $0.03 lower for the quarter and six months ended July 3, 2005,
respectively. Details about the company’s 2006 share-based compensation expense
under SFAS No. 123 (revised 2004) are available in
Note 14.
Certain
prior-year amounts have been reclassified in order to conform to the
current-year presentation.
|
2.
|
New
Accounting Standards
|
In
December 2004 the FASB issued SFAS No. 123 (revised 2004),
“Share-Based Payment.” SFAS No. 123 (revised 2004) is a revision
of SFAS No. 123, “Accounting for Stock-Based Compensation,” and
supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”
The new standard, which was effective for Ball beginning January 1, 2006,
establishes accounting standards for transactions in which an entity exchanges
its equity instruments for goods or services, including stock option and
restricted stock grants. On March 29, 2005, the Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 107, which
summarizes the views of the SEC staff regarding the interaction between SFAS
No.
123 (revised 2004) and certain SEC rules and regulations and provides the SEC
staff’s views regarding the valuation of share-based payment arrangements for
public companies. Upon the adoption of the standard, Ball has elected to use
the
modified prospective
Page
6
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
2.
|
New
Accounting Standards (continued)
|
transition
method and, at least initially, the Black-Scholes valuation model. The effects
on the company’s consolidated financial statements of adopting
SFAS No. 123 (revised 2004) are discussed in
Note 14.
In
June 2006 the Financial Accounting Standards Board (FASB) issued Financial
Interpretation No. (FIN) 48, “Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109,” which prescribes a recognition
threshold and measurement attribute for the financial statement recognition
and
measurement of a tax position taken or expected to be taken in a tax return.
FIN 48 is effective for Ball beginning January 1, 2007, and the
company is currently evaluating the impact this standard will have on its
consolidated financial statements.
In
March 2006 the Emerging Issues Task Force (EITF) of the FASB reached a
consensus on Issue No. 06-3 for how taxes collected from customers and
remitted to governmental authorities should be presented in a company’s income
statement (a gross presentation) or only in its balance sheet (a net
presentation). The decision, which is effective for Ball’s reporting after
January 1, 2007, requires a company to disclose its policy for recording
and reporting such taxes (gross or net) and, if on a gross basis, the amounts
that are included in revenues and costs in the statement of earnings. Ball’s
current policy is to record taxes collected from customers as liabilities on
its
balance sheet and not in its statement of earnings.
|
3.
|
Business
Segment Information
|
Ball’s
operations are organized and reviewed by management along its product lines
in
five reportable segments:
Metal
beverage packaging, Americas:
Consists
of operations in the U.S., Canada and Puerto Rico, which manufacture and sell
metal containers, primarily for use in beverage packaging.
Metal
food & household products packaging, Americas:
Consists
of operations in the U.S., Canada and Argentina, which manufacture and sell
metal food cans, aerosol cans, paint cans, custom and specialty cans, as well
as
plastic containers used for household products.
Plastic
packaging, Americas:
Consists
of operations in the U.S. and Canada, which manufacture and sell polyethylene
terephthalate (PET) and polypropylene containers, primarily for use in beverage
and food packaging.
Metal
beverage packaging, Europe/Asia:
Consists
of operations in several countries in Europe and the People’s Republic of China
(PRC), which manufacture and sell metal beverage containers in Europe and Asia,
as well as plastic containers in Asia.
Aerospace
and technologies:
Consists
of the manufacture and sale of aerospace and other related products and services
used primarily in the defense, civil space and commercial space
industries.
Prior
periods have been conformed to the current presentation of segments. The
accounting policies of the segments are the same as those in the unaudited
condensed consolidated financial statements. A discussion of the company’s
critical and significant accounting policies can be found in Ball’s annual
report. We also have investments in companies in the U.S., PRC and Brazil,
which
are accounted for under the equity method of accounting and, accordingly, those
results are not included in segment sales or earnings.
Page
7
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
3.
|
Business
Segment Information (continued)
|
Summary
of Business by Segment
|
|
Three
Months Ended
|
Six
Months Ended
|
||||||||||
|
($
in millions)
|
July
2, 2006
|
July
3, 2005
|
July
2, 2006
|
July
3, 2005
|
||||||||
|
Net
Sales
|
||||||||||||
|
Metal
beverage packaging, Americas
|
$
|
740.6
|
$
|
664.5
|
$
|
1,333.0
|
$
|
1,208.6
|
||||
|
Metal
beverage packaging, Europe/Asia
|
433.8
|
394.3
|
734.7
|
692.3
|
||||||||
|
Metal
food & household products packaging, Americas
|
314.2
|
179.1
|
503.5
|
363.3
|
||||||||
|
Plastic
packaging, Americas
|
178.5
|
133.4
|
300.9
|
249.2
|
||||||||
|
Aerospace
and technologies
|
175.4
|
180.7
|
335.3
|
362.7
|
||||||||
|
Net
sales
|
$
|
1,842.5
|
$
|
1,552.0
|
$
|
3,207.4
|
$
|
2,876.1
|
||||
|
Net
Earnings
|
||||||||||||
|
Metal
beverage packaging, Americas
|
$
|
67.4
|
$
|
67.4
|
$
|
121.9
|
$
|
129.2
|
||||
|
Metal
beverage packaging, Europe/Asia
|
68.4
|
58.2
|
97.0
|
88.5
|
||||||||
|
Property
insurance gain (Note 5)
|
74.1
|
–
|
74.1
|
–
|
||||||||
|
Total
metal beverage packaging, Europe/Asia
|
142.5
|
58.2
|
171.1
|
88.5
|
||||||||
|
Metal
food & household products packaging, Americas
|
12.4
|
2.8
|
16.3
|
15.8
|
||||||||
|
Business
consolidation gains (costs) (Note 5)
|
0.4
|
(8.8
|
)
|
(1.7
|
)
|
(8.8
|
)
|
|||||
|
Total
metal food & household products packaging, Americas
|
12.8
|
(6.0
|
)
|
14.6
|
7.0
|
|||||||
|
Plastic
packaging, Americas
|
7.4
|
4.7
|
9.2
|
8.2
|
||||||||
|
Aerospace
and technologies
|
8.3
|
14.9
|
17.8
|
23.8
|
||||||||
|
Segment
earnings before interest and taxes
|
238.4
|
139.2
|
334.6
|
256.7
|
||||||||
|
Corporate
undistributed expenses, net
|
(9.8
|
)
|
(7.7
|
)
|
(24.4
|
)
|
(14.3
|
)
|
||||
|
Earnings
before interest and taxes
|
228.6
|
131.5
|
310.2
|
242.4
|
||||||||
|
Interest
expense
|
(37.6
|
)
|
(24.3
|
)
|
(60.9
|
)
|
(50.1
|
)
|
||||
|
Tax
provision
|
(63.0
|
)
|
(32.9
|
)
|
(79.7
|
)
|
(62.7
|
)
|
||||
|
Minority
interests
|
(0.2
|
)
|
(0.3
|
)
|
(0.4
|
)
|
(0.5
|
)
|
||||
|
Equity
in results of affiliates
|
4.9
|
5.0
|
8.1
|
8.5
|
||||||||
|
Net
earnings
|
$
|
132.7
|
$
|
79.0
|
$
|
177.3
|
$
|
137.6
|
||||
|
($
in millions)
|
As
of
July 2,
2006
|
As
of
December
31, 2005
|
||||
|
Total
Assets
|
||||||
|
Metal
beverage packaging, Americas
|
$
|
1,747.4
|
$
|
1,664.4
|
||
|
Metal
beverage packaging, Europe/Asia
|
2,430.0
|
2,122.6
|
||||
|
Metal
food & household products packaging, Americas
|
1,273.4
|
445.1
|
||||
|
Plastic
packaging, Americas
|
549.1
|
320.9
|
||||
|
Aerospace
and technologies
|
277.1
|
253.1
|
||||
|
Segment
eliminations
|
(644.6
|
)
|
(537.5
|
)
|
||
|
Segment
assets
|
5,632.4
|
4,268.6
|
||||
|
Corporate
assets, net of eliminations
|
220.4
|
74.8
|
||||
|
Total
assets
|
$
|
5,852.8
|
$
|
4,343.4
|
||
Page
8
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
4.
|
Acquisitions
|
On
March 27, 2006, Ball acquired all of the issued and outstanding shares of
U.S. Can Corporation (U.S. Can) for consideration of 758,981 common shares
of Ball Corporation (valued at $44.28 per share for a total of
$33.6 million). A
final
purchase price adjustment of $13.9 million for working capital and debt
levels reduced the number of shares to 444,690 shares. The remaining
314,291 shares are due to be returned to the company during the third
quarter of 2006. The acquisition balance sheet was adjusted as of July 2,
2006, to reflect the purchase price adjustment; however, the outstanding shares
did not reflect the purchase price share adjustment as the shares had not yet
been returned to the company. In connection with the acquisition, Ball also
refinanced $598.2 million of U.S. Can debt, including $26.8 million of
bond redemption premiums and fees, and over the next several years expects
to
realize approximately $42 million for acquired net operating tax loss
carryforwards. The company refinanced the U.S. Can debt at significantly lower
interest rates through the issuance of a new series of Ball Corporation senior
notes and an increase in Ball Corporation bank debt under the new senior credit
facilities put in place in the fourth quarter of 2005 (see Note 11). This
acquisition added to the company’s portfolio of rigid packaging products and
provides a meaningful position in a sizeable product line. As a result of this
acquisition, Ball became the largest manufacturer of aerosol cans in North
America and now produces aerosol cans, paint cans, plastic containers and custom
and specialty cans in 10 plants in the U.S. and aerosol cans in two plants
in Argentina. The newly acquired operations have annual sales of approximately
$600 million and form part of Ball’s metal food and household products
packaging, Americas, segment. The acquisition has been accounted for as a
purchase and, accordingly, its results have been included in the consolidated
financial statements since March 27, 2006.
On
March 28, 2006, Ball acquired North American plastic bottle container
assets from Alcan Packaging (Alcan) for $184.7 million cash, including a
$4.7 million working capital adjustment determined during the second
quarter in accordance with the terms of the acquisition agreement. The acquired
assets included two plastic container manufacturing plants in the U.S. and
one
in Canada, as well as certain manufacturing equipment and other assets from
other Alcan facilities. This acquisition strengthens the company’s plastic
container business and complements its food container business. The acquired
business primarily manufactures and sells barrier polypropylene plastic bottles
used in food packaging and, to a lesser extent, barrier PET plastic bottles
used
for beverages and food. The acquired operations have annual sales of
approximately $150 million and form part of Ball’s plastic packaging,
Americas, segment. The acquisition has been accounted for as a purchase and,
accordingly, its results have been included in the consolidated financial
statements since March 28, 2006.
Page
9
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
4.
|
Acquisitions
(continued)
|
Following
is a summary of the net assets acquired using preliminary fair values. The
valuation by management of certain assets, including identification and
valuation of acquired fixed assets and intangible assets, and of liabilities,
including development and assessment of associated costs of consolidation and
integration plans, is still in process and, therefore, the actual fair values
may vary from the preliminary estimates. The valuations are expected to be
completed by the end of 2006. The company has engaged third party experts to
value certain assets and liabilities including inventory, property, plant and
equipment, intangible assets and pension and other post-retirement
obligations.
|
($
in millions)
|
U.S.
Can
(Metal
Food & Household Products Packaging, Americas)
|
Alcan
(Plastic Packaging, Americas)
|
Total
|
||||||
|
Cash
|
$
|
0.2
|
$
|
–
|
$
|
0.2
|
|||
|
Property,
plant and equipment
|
176.8
|
80.6
|
257.4
|
||||||
|
Goodwill
|
334.6
|
45.0
|
379.6
|
||||||
|
Intangibles
|
80.0
|
27.9
|
107.9
|
||||||
|
Other
assets, primarily inventories and receivables
|
180.3
|
40.3
|
220.6
|
||||||
|
Liabilities
assumed (excluding refinanced debt), primarily current
|
(154.0
|
)
|
(9.1
|
)
|
(163.1
|
)
|
|||
|
Net
assets acquired
|
$
|
617.9
|
$
|
184.7
|
$
|
802.6
|
|||
The
following unaudited pro forma consolidated results of operations have been
prepared as if the acquisitions had occurred as of January 1 in each of the
periods presented. The pro forma results are not necessarily indicative of
the
actual results that would have occurred had the acquisitions been in effect
for
the periods presented, nor are they necessarily indicative of the results that
may be obtained in the future.
|
Three
Months Ended
|
Six
Months Ended
|
||||||||
|
($
in millions, except per share amounts)
|
July
3, 2005
|
July
2, 2006
|
July
3, 2005
|
||||||
|
Net
sales
|
$
|
1,751.6
|
$
|
3,384.9
|
$
|
3,268.8
|
|||
|
Net
earnings
|
84.4
|
178.0
|
151.5
|
||||||
|
Basic
earnings per share
|
0.77
|
1.72
|
1.36
|
||||||
|
Diluted
earnings per share
|
0.75
|
1.69
|
1.34
|
||||||
Pro forma adjustments primarily include the after-tax effects of: (1) increased interest expense related to incremental borrowings used to finance the acquisitions, (2) increased depreciation expense on plant and equipment based on increased fair values and (3) increased amortization expense attributable to intangible assets arising from the acquisitions. If the reduction of the original number of common shares issued to that ultimately issued as consideration in the purchase price was considered for the three months ended July 2, 2006, diluted earnings per share would have been $1.27 per share rather than the $1.26 per share reported for that period.
Page
10
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
5.
|
Business
Consolidation Activities and Property Insurance
Gain
|
2006
Metal
Beverage Packaging, Europe/Asia
On
April 1, 2006, a fire in the metal beverage can plant in Hassloch, Germany,
damaged the majority of the building and machinery and equipment. The property
insurance proceeds recorded for the six months ended July 2, 2006, which
are based on replacement cost, were €85.4 million, of which
€26 million ($32.4 million) was received in April 2006. A
€27 million fixed asset write down was recorded to reflect the estimated
impairment of the assets damaged as a result of the fire. As a result, a gain
of
€58.4 million ($74.1 million pretax, $45.2 million after tax) has
been recorded in the consolidated statement of earnings to reflect the
difference between the net book value of the impaired assets and the property
insurance proceeds. An additional €15 million ($19 million) was
recorded in cost of sales in the second quarter for insurance recoveries related
to business interruption costs, as well as €9 million ($11 million) to
offset clean-up costs. Additional business interruption, clean-up and property
damage cost recoveries will be recognized in future applicable periods as they
are reimbursed by the insurance company.
In
June
the company announced its intention to rebuild the Hassloch plant with two
steel
lines and to add an aluminum line in its Hermsdorf, Germany, plant. All three
lines are expected to be operational during the second quarter of
2007.
Metal
Food & Household Products Packaging, Americas
In
the
second quarter of 2006, earnings of $0.4 million ($0.2 million after
tax) were recorded to reflect the net proceeds on the disposition of fixed
assets previously written down in a 2005 business consolidation
charge.
In
the
first quarter of 2006, a pretax charge of $2.1 million ($1.4 million
after tax) was recorded to shut down a metal food can production line in an
Ontario plant. The charge was comprised of $0.6 million of employee
termination costs, $0.7 million for equipment removal and other
decommissioning costs and $0.8 million for impairment of plant equipment
and related spares and tooling. Production from the line has ceased and other
related activities are expected to be completed by the end of 2006.
2005
Metal
Beverage Packaging, Americas
In
the
third quarter of 2005, the company commenced a project to upgrade and streamline
North American beverage can end manufacturing capabilities. The project is
expected to be completed in 2008 and will result in productivity gains and
cost
reductions. A pretax charge of $19.3 million ($11.7 million after tax)
was recorded in connection with this project.
Page
11
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
5.
|
Business
Consolidation Activities and Property Insurance Gain (continued)
|
Metal
Food & Household Products Packaging, Americas
A
pretax
charge of $8.8 million ($5.9 million after tax) was recorded in the
second quarter of 2005 in connection with the closure of a three-piece food
can
manufacturing plant in Quebec. The pretax charge included $3.2 million for
employee severance, pension and other employee benefit costs and
$5.6 million for decommissioning costs and the write-down to net realizable
value of fixed assets and other costs. In the fourth quarter of 2005, the charge
was partially offset by a $2.2 million gain ($1.5 million after tax)
to adjust the Quebec plant land and building to net realizable value. The land
and building were sold in April 2006 and, other than employee costs to be
paid over future periods, the activities related to the plant closure have
been
concluded.
Summary
The
following table summarizes the year-to-date 2006 activity for liabilities
related to the 2006 and 2005 business consolidation activities:
|
($
in millions)
|
Employee
Costs
|
Other
Liabilities
|
Total
Liabilities
|
||||||
|
Balance
at December 31, 2005
|
$
|
10.0
|
$
|
2.0
|
$
|
12.0
|
|||
|
Charge
to earnings in first quarter 2006
|
0.6
|
0.7
|
1.3
|
||||||
|
Payments
|
(2.3
|
)
|
(0.5
|
)
|
(2.8
|
)
|
|||
|
Other
|
0.1
|
–
|
0.1
|
||||||
|
Balance
at July 2, 2006
|
$
|
8.4
|
$
|
2.2
|
$
|
10.6
|
|||
There
were also reserves at July 2, 2006, of $5.3 million for the write down
of fixed assets and related spare parts and tooling to net realizable value.
The
carrying value of fixed assets remaining for sale in connection with business
consolidation activities was insignificant at July 2, 2006.
|
6.
|
Receivables
|
A
receivables sales agreement provides for the ongoing, revolving sale of a
designated pool of trade accounts receivable of Ball’s North American packaging
operations, up to $225 million. The agreement qualifies as off-balance
sheet financing under the provisions of SFAS No. 140. Net funds
received from the sale of the accounts receivable totaled $175.3 million at
July 2, 2006, and $210 million at December 31, 2005.
|
7.
|
Inventories
|
|
($
in millions)
|
July 2,
2006
|
December 31,
2005
|
||||
|
Raw
materials and supplies
|
$
|
369.5
|
$
|
277.4
|
||
|
Work
in process and finished goods
|
460.8
|
392.9
|
||||
|
$
|
830.3
|
$
|
670.3
|
|||
Page
12
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
8.
|
Property,
Plant and Equipment
|
|
($
in millions)
|
July
2,
2006
|
December
31,
2005
|
||||
|
Land
|
$
|
89.6
|
$
|
76.8
|
||
|
Buildings
|
723.9
|
702.3
|
||||
|
Machinery
and equipment
|
2,578.1
|
2,233.5
|
||||
|
Construction
in progress
|
184.4
|
140.8
|
||||
|
3,576.0
|
3,153.4
|
|||||
|
Accumulated
depreciation
|
(1,744.6
|
)
|
(1,596.8
|
)
|
||
|
$
|
1,831.4
|
$
|
1,556.6
|
|||
Property,
plant and equipment are stated at historical cost. Depreciation expense amounted
to $60.7 million and $112.5 million for the three months and six
months ended July 2, 2006, respectively, and $50.1 million and
$100.5 million for the three months and six months ended July 3, 2005,
respectively.
A
fixed
asset write down of €27 million ($34 million) was included in
accumulated depreciation to record the estimated impairment of the assets
damaged as a result of the fire at the company’s Hassloch, Germany, metal
beverage can plant (see Note 5). The remaining change in the net property,
plant and equipment balance is the result of business acquisitions (see
Note 4), capital spending and changes in foreign exchange rates, offset by
depreciation.
|
9.
|
Goodwill
|
|
($
in millions)
|
Metal
Beverage
Packaging,
Americas
|
Metal
Food
& Household Products
Packaging,
Americas
|
Plastic
Packaging,
Americas
|
Metal
Beverage Packaging,
Europe/Asia
|
Total
|
||||||||||
|
Balance
at December 31, 2005
|
$
|
279.4
|
$
|
28.2
|
$
|
33.2
|
$
|
917.8
|
$
|
1,258.6
|
|||||
|
Business
acquisitions (Note 4)
|
–
|
334.6
|
45.0
|
–
|
379.6
|
||||||||||
|
Foreign
currency exchange rates
|
–
|
–
|
0.4
|
71.4
|
71.8
|
||||||||||
|
Balance
at July 2, 2006
|
$
|
279.4
|
$
|
362.8
|
$
|
78.6
|
$
|
989.2
|
$
|
1,710.0
|
|||||
In
accordance with SFAS No. 142, goodwill is not amortized but instead
tested annually for impairment. There has been no goodwill impairment since
the
adoption of SFAS No. 142 on January 1, 2002.
Page
13
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
10.
|
Intangibles
and Other Assets
|
|
($
in millions)
|
July
2,
2006
|
December
31,
2005
|
||||
|
Investments
in affiliates
|
$
|
69.0
|
$
|
65.4
|
||
|
Prepaid
pension and related intangible assets
|
42.9
|
42.3
|
||||
|
Intangibles
(net of accumulated amortization of $61.7 at
July 2, 2006, and $52.6 at December 31,
2005)
|
148.2
|
43.1
|
||||
|
Company
owned life insurance
|
74.9
|
65.4
|
||||
|
Deferred
tax asset
|
32.3
|
40.7
|
||||
|
Property
insurance receivable (Note 5)
|
74.8
|
–
|
||||
|
Other
|
76.8
|
45.5
|
||||
|
$
|
518.9
|
$
|
302.4
|
|||
Total
amortization expense of intangible assets amounted to $4.2 million and
$7 million for the three months and six months ended July 2, 2006,
respectively, and $2.9 million and $5.9 million for the comparable
periods in 2005, respectively. The increase in intangibles is due primarily
to
preliminary estimates of the fair market values of customer relationships
acquired in the U.S. Can and Alcan acquisitions (as discussed in
Note 4).
Page
14
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
11.
|
Debt
|
Long-term
debt consisted of the following:
|
July
2, 2006
|
December
31, 2005
|
||||||||||||
|
(in
millions)
|
In
Local
Currency
|
In
U.S. $
|
In
Local
Currency
|
In
U.S. $
|
|||||||||
|
Notes
Payable
|
|||||||||||||
|
6.875%
Senior Notes, due December 2012 (excluding premium of $3.5 in 2006
and
$3.8 in 2005)
|
$
|
550.0
|
$
|
550.0
|
$
|
550.0
|
$
|
550.0
|
|||||
|
6.625%
Senior Notes, due March 2018 (excluding discount of $0.9 in
2006)
|
$
|
450.0
|
450.0
|
–
|
–
|
||||||||
|
Senior
Credit Facilities, due October 2011 (at variable
rates)
|
|||||||||||||
|
Term
A Loan, British sterling denominated
|
₤
|
85.0
|
157.2
|
₤
|
85.0
|
146.2
|
|||||||
|
Term
B Loan, euro denominated
|
€
|
350.0
|
447.7
|
€
|
350.0
|
414.4
|
|||||||
|
Term
C Loan, Canadian dollar denominated
|
C$
|
149.0
|
133.5
|
C$
|
165.0
|
141.9
|
|||||||
|
Term
D Loan, U.S. dollar denominated
|
$
|
500.0
|
500.0
|
–
|
–
|
||||||||
|
Multi-currency
revolver:
|
|||||||||||||
|
U.S.
dollar borrowings
|
$
|
160.0
|
160.0
|
$
|
60.0
|
60.0
|
|||||||
|
Euro
borrowings
|
€
|
25.0
|
32.0
|
€
|
50.0
|
59.2
|
|||||||
|
British
sterling borrowings
|
₤
|
20.0
|
37.0
|
₤
|
22.0
|
37.9
|
|||||||
|
Canadian
dollar borrowings
|
–
|
–
|
C$
|
14.0
|
12.0
|
||||||||
|
European
Bank for Reconstruction and Development Loans
|
|||||||||||||
|
Floating
rates due October 2009
|
€
|
17.5
|
22.4
|
€
|
20.0
|
23.7
|
|||||||
|
Industrial
Development Revenue Bonds
|
|||||||||||||
|
Floating
rates due through 2015
|
$
|
20.0
|
20.0
|
$
|
16.0
|
16.0
|
|||||||
|
Other
|
Various
|
21.3
|
Various
|
21.6
|
|||||||||
|
2,531.1
|
1,482.9
|
||||||||||||
|
Less:
Current portion of long-term debt
|
(18.1
|
)
|
(9.6
|
)
|
|||||||||
|
$
|
2,513.0
|
$
|
1,473.3
|
||||||||||
On
March 27, 2006, Ball expanded its senior secured credit facilities with the
addition of a new $500 million Term D Loan facility due in
installments through October 2011. Also on March 27, 2006, Ball issued
at a price of 99.799 percent $450 million of new 6.625% senior notes
(effective yield to maturity of 6.65 percent) due in March 2018. The
proceeds from these financings were used to refinance existing U.S. Can debt
with Ball Corporation debt at lower interest rates, acquire certain North
American plastic container net assets from Alcan and reduce seasonal working
capital debt.
At
July
2, 2006, approximately $472 million was available under the multi-currency
revolving credit facilities, which provide for up to $750 million in U.S.
dollar equivalents. The company also had short-term uncommitted credit
facilities of up to $301 million at July 2, 2006, of which
$115.8 million was outstanding and due on demand.
Page
15
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
11.
|
Debt
(continued)
|
The
notes
payable are guaranteed on a full, unconditional and joint and several basis
by
certain of the company’s wholly owned domestic subsidiaries. The notes payable
also contain certain covenants and restrictions including, among other things,
limits on the incurrence of additional indebtedness and limits on the amount
of
restricted payments, such as dividends and share repurchases. Exhibit 20
contains unaudited condensed, consolidating financial information for the
company, segregating the guarantor subsidiaries and non-guarantor subsidiaries.
Separate financial statements for the guarantor subsidiaries and the
non-guarantor subsidiaries are not presented because management has determined
that such financial statements would not be material to investors.
The
company was in compliance with all loan agreements at July 2, 2006, and has
met
all debt payment obligations. The U.S. note agreements, bank credit agreement
and industrial development revenue bond agreements contain certain restrictions
relating to dividend payments, share repurchases, investments, financial ratios,
guarantees and the incurrence of additional indebtedness.
|
12.
|
Income
Taxes
|
As
previously reported in the company’s 2005 annual report, in connection with the
Internal Revenue Service’s (IRS) examination of Ball’s consolidated income tax
returns for the tax years 2000 through 2004, the IRS has proposed to disallow
Ball’s deductions of interest expense incurred on loans under a company-owned
life insurance plan that has been in place for more than 20 years. Ball believes
that its interest deductions will be sustained as filed and, therefore, no
provision for loss has been accrued. The IRS’s proposed adjustments would result
in an increase in taxable income for the years 1999 through 2004 of $56.8
million and a corresponding increase in taxable income for subsequent tax year
2005 in the aggregate amount of $10.1 million with a corresponding increase
in
aggregate tax expense of approximately $27 million plus any related
interest expense and penalties. The examination reports for the 2000 to 2003
examinations have been forwarded to the appeals division of the IRS, and no
further action has taken place to change Ball’s position.
Page
16
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
13.
|
Employee
Benefit Obligations
|
|
($
in millions)
|
July
2,
2006
|
December
31,
2005
|
||||
|
Total
defined benefit pension liability
|
$
|
550.1
|
$
|
529.9
|
||
|
Less
current portion
|
(24.0
|
)
|
(39.2
|
)
|
||
|
Long-term
defined benefit pension liability
|
526.1
|
490.7
|
||||
|
Retiree
medical and other post-employment benefits
|
172.9
|
141.1
|
||||
|
Deferred
compensation plans
|
134.4
|
130.4
|
||||
|
Other
|
13.3
|
22.0
|
||||
|
$
|
846.7
|
$
|
784.2
|
|||
Components
of net periodic benefit cost associated with the company’s defined benefit
pension plans were:
|
Three
Months Ended
|
||||||||||||||||||
|
July
2, 2006
|
July
3, 2005
|
|||||||||||||||||
|
($
in millions)
|
U.S.
|
Foreign
|
Total
|
U.S.
|
Foreign
|
Total
|
||||||||||||
|
Service
cost
|
$
|
7.2
|
$
|
2.2
|
$
|
9.4
|
$
|
6.1
|
$
|
2.1
|
$
|
8.2
|
||||||
|
Interest
cost
|
11.0
|
6.9
|
17.9
|
10.1
|
7.0
|
17.1
|
||||||||||||
|
Expected
return on plan assets
|
(12.1
|
)
|
(4.0
|
)
|
(16.1
|
)
|
(11.6
|
)
|
(3.6
|
)
|
(15.2
|
)
|
||||||
|
Amortization
of prior service cost
|
1.2
|
–
|
1.2
|
1.2
|
(0.1
|
)
|
1.1
|
|||||||||||
|
Recognized
net actuarial loss
|
4.9
|
0.8
|
5.7
|
3.8
|
0.6
|
4.4
|
||||||||||||
|
Curtailment
loss
|
–
|
–
|
–
|
–
|
0.4
|
0.4
|
||||||||||||
|
Subtotal
|
12.2
|
5.9
|
18.1
|
9.6
|
7.4
|
16.0
|
||||||||||||
|
Non-company
sponsored plan
|
0.2
|
–
|
0.2
|
0.2
|
–
|
0.2
|
||||||||||||
|
Net
periodic benefit cost
|
$
|
12.4
|
$
|
5.9
|
$
|
18.3
|
$
|
9.8
|
$
|
7.4
|
$
|
16.2
|
||||||
|
Six
Months Ended
|
||||||||||||||||||
|
July
2, 2006
|
July
3, 2005
|
|||||||||||||||||
|
($
in millions)
|
U.S.
|
Foreign
|
Total
|
U.S.
|
Foreign
|
Total
|
||||||||||||
|
Service
cost
|
$
|
14.3
|
$
|
4.4
|
$
|
18.7
|
$
|
12.1
|
$
|
4.3
|
$
|
16.4
|
||||||
|
Interest
cost
|
21.9
|
13.4
|
35.3
|
20.1
|
14.3
|
34.4
|
||||||||||||
|
Expected
return on plan assets
|
(24.1
|
)
|
(7.8
|
)
|
(31.9
|
)
|
(23.1
|
)
|
(7.3
|
)
|
(30.4
|
)
|
||||||
|
Amortization
of prior service cost
|
2.5
|
(0.1
|
)
|
2.4
|
2.4
|
(0.1
|
)
|
2.3
|
||||||||||
|
Recognized
net actuarial loss
|
9.8
|
1.6
|
11.4
|
7.7
|
1.1
|
8.8
|
||||||||||||
|
Curtailment
loss
|
–
|
–
|
–
|
–
|
0.4
|
0.4
|
||||||||||||
|
Subtotal
|
24.4
|
11.5
|
35.9
|
19.2
|
12.7
|
31.9
|
||||||||||||
|
Non-company
sponsored plan
|
0.5
|
–
|
0.5
|
0.4
|
–
|
0.4
|
||||||||||||
|
Net
periodic benefit cost
|
$
|
24.9
|
$
|
11.5
|
$
|
36.4
|
$
|
19.6
|
$
|
12.7
|
$
|
32.3
|
||||||
Page
17
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
13.
|
Employee
Benefit Obligations (continued)
|
In
June 2006 the company’s U.S. defined benefit plans for salaried employees
were amended effective January 1, 2007, to provide more flexibility for
future pension benefits by allowing portability and changing the benefit to
a
career average pay scheme that grows by a prescribed amount annually. The
annual accounting expense under the amended plans will be lower and more
predictable. As a result of the amendments, the plans were revalued by the
company’s third-party actuaries as of July 2, 2006, resulting in a
$20 million reduction of the company’s additional minimum liability, an
$11.5 million increase (net of tax) in accumulated other comprehensive loss
and a $0.9 million reduction in pension intangible assets. At the
remeasurement date for the pension liabilities, the unfunded status was reduced
by approximately $71 million.
Contributions
to the company’s defined benefit pension plans were $37.3 million in the
first six months of 2006 ($20.1 million in the first six months of 2005).
The total contributions to these funded plans are expected to be approximately
$77 million for the full year. Actual contributions may vary upon
revaluation of the plans’ liabilities later in 2006.
|
14.
|
Shareholders’
Equity and Comprehensive
Earnings
|
Accumulated
Other Comprehensive Loss
Accumulated
other comprehensive loss includes the cumulative effect of foreign currency
translation, additional minimum pension liability and realized and unrealized
gains and losses on derivative instruments receiving cash flow hedge accounting
treatment.
|
($
in millions)
|
Foreign
Currency
Translation
|
Minimum
Pension
Liability(a)
(net
of tax)
|
Effective
Financial
Derivatives(b)
(net
of tax)
|
Accumulated
Other
Comprehensive
Loss
|
||||||||
|
December
31, 2005
|
$
|
74.6
|
$
|
(169.9
|
)
|
$
|
(5.4
|
)
|
$
|
(100.7
|
)
|
|
|
Change
|
30.7
|
11.5
|
0.5
|
42.7
|
||||||||
|
July
2, 2006
|
$
|
105.3
|
$
|
(158.4
|
)
|
$
|
(4.9
|
)
|
$
|
(58.0
|
)
|
|
|
(a)
|
The
minimum pension liability is generally adjusted annually as of December
31. However, as a result of certain plan amendments, a revaluation
adjustment was made as of July 2, 2006 (as discussed in
Note 13).
|
|
(b)
|
Refer
to Item 3, “Quantitative and Qualitative Disclosures About Market Risk,”
for a discussion of the company’s use of derivative financial
instruments.
|
Comprehensive
Earnings
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||
|
($
in millions)
|
July 2,
2006
|
July 3,
2005
|
July 2,
2006
|
July 3,
2005
|
||||||||
|
Net
earnings
|
$
|
132.7
|
$
|
79.0
|
$
|
177.3
|
$
|
137.6
|
||||
|
Foreign
currency translation adjustment
|
21.7
|
(52.7
|
)
|
30.7
|
(81.8
|
)
|
||||||
|
Effect
of derivative instruments
|
2.4
|
(8.4
|
)
|
0.5
|
(5.7
|
)
|
||||||
|
Minimum
pension liability adjustment
|
11.5
|
–
|
11.5
|
–
|
||||||||
|
Comprehensive
earnings
|
$
|
168.3
|
$
|
17.9
|
$
|
220.0
|
$
|
50.1
|
||||
Page
18
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
14.
|
Shareholders’
Equity and Comprehensive Earnings (continued)
|
Stock-Based
Compensation Programs
Effective
January 1, 2006, Ball adopted SFAS No. 123 (revised 2004), “Share
Based Payment,” which is a revision of SFAS No. 123 and supersedes APB
Opinion No. 25. The new standard establishes accounting standards for
transactions in which an entity exchanges its equity instruments for goods
or
services, including stock option and restricted stock grants. The major
differences for Ball are that (1) expense is now recorded in the
consolidated statement of earnings for the fair value of new stock option grants
and nonvested portions of grants made prior to January 1, 2006, and (2) the
company’s deposit share program (discussed below) is no longer a variable plan
that is marked to current market value each month through earnings. Upon
adoption of SFAS No. 123 (revised 2004), Ball has chosen to use the
modified prospective transition method and, at least initially, the
Black-Scholes valuation model.
The
company has shareholder approved stock option plans under which options to
purchase shares of Ball common stock have been granted to officers and employees
at the market value of the stock at the date of grant. In general, options
are
exercisable in four equal installments commencing one year from the date of
grant. The options terminate 10 years from the date of grant. A summary of
stock option activity for the six months ended July 2, 2006,
follows:
|
Outstanding
Options
|
Nonvested
Options
|
|||||||||||
|
Number
of Shares
|
Weighted
Average Exercise Price
|
Number
of Shares
|
Weighted
Average Grant Date Fair Value
|
|||||||||
|
Beginning
of year
|
4,811,602
|
$
|
21.68
|
965,445
|
$
|
9.41
|
||||||
|
Granted
|
906,600
|
43.69
|
906,600
|
10.46
|
||||||||
|
Vested
|
|
|
(507,120
|
) |
9.14
|
|||||||
|
Exercised
|
(432,779
|
)
|
15.28
|
|
|
|||||||
|
Canceled/forfeited
|
(36,075
|
)
|
32.28
|
(36,075
|
) |
9.73
|
||||||
|
End
of period
|
5,249,348
|
25.94
|
1,328,850
|
10.22
|
||||||||
|
Vested
and exercisable, end of period
|
3,920,498
|
21.25
|
||||||||||
|
Reserved
for future grants
|
6,022,626
|
|||||||||||
The options granted in April 2006 included 378,000 stock-settled stock appreciation rights which have the same terms as the stock options. The weighted average remaining contractual term for all options outstanding at July 2, 2006, was 6.5 years and the aggregate intrinsic value (difference in exercise price and closing price at that date) was $58.7 million. The weighted average remaining contractual term for options vested and exercisable at July 2, 2006, was 5.6 years and the aggregate intrinsic value was $61.9 million. The company received $2.7 million from options exercised during the three months ended July 2, 2006. The intrinsic value associated with these exercises was $3.9 million and the associated tax benefit of $1.5 million was reported as other financing activities in the consolidated statement of cash flows. During the six months ended July 2, 2006, the company received $6.6 million from options exercised. The intrinsic value associated with exercises for that period was $11.5 million and the associated tax benefit reported as other financing activities was $4.5 million.
Page
19
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
14.
|
Shareholders’
Equity and Comprehensive Earnings (continued)
|
The
company’s stock options cannot be traded in any equity market. However, based on
the Black-Scholes option pricing model, adapted for use in valuing compensatory
stock options in accordance with SFAS No. 123 (revised 2004), options granted
in
April 2006 have an estimated weighted average fair value at the date of
grant of $10.46 per share. The actual value an employee may realize will
depend on the excess of the stock price over the exercise price on the date
the
option is exercised. Consequently, there is no assurance that the value realized
by an employee will be at or near the value estimated. The fair values were
estimated using the following weighted average assumptions:
|
Expected
dividend yield
|
0.92
|
%
|
|
|
Expected
stock price volatility
|
19.70
|
%
|
|
|
Risk-free
interest rate
|
5.01
|
%
|
|
|
Expected
life of options
|
4.54
years
|
||
|
Forfeiture
rate
|
14.63
|
%
|
|
In
addition to stock options, the company issues to certain employees restricted
shares and restricted stock units which vest over various periods but generally
in equal installments over five years. Compensation cost is recorded based
upon
the fair value of the shares at the grant date. The adoption of
SFAS No. 123 (revised 2004) did not change the accounting for
compensation cost for the company’s normal restricted share
program.
To
encourage certain senior management employees and outside directors to invest
in
Ball stock, Ball adopted a deposit share program in March 2001 (subsequently
amended and restated in April 2004) that matches purchased shares with
restricted shares. In general, restrictions on the matching shares lapse at
the
end of four years from date of grant, or earlier if established share ownership
guidelines are met, assuming the relevant qualifying purchased shares are not
sold or transferred prior to that time. Through December 31, 2005, under
the principles of APB Opinion No. 25, this plan was accounted for as a variable
plan where compensation expense was recorded based upon the current market
price
of the company’s common stock until restrictions lapsed. Upon adoption of SFAS
No. 123 (revised 2004) on January 1, 2006, grants under the plan are
accounted for as equity awards and compensation expense is now recorded based
upon the fair value of the shares at the grant date.
For
the
three and six months ended July 2, 2006, the company recognized in selling,
general and administrative expenses pretax expense of $4.2 million
($2.5 million after tax) and $7.3 million ($4.4 million after
tax), respectively, for share-based compensation arrangements, which represented
$0.02 per basic and diluted share for the second quarter of 2006 and $0.04
per basic and diluted share for the first six months. At July 2, 2006,
there was $26.3 million of total unrecognized compensation costs related to
nonvested share-based compensation arrangements. This cost is expected to be
recognized in earnings over a weighted average period of
3 years.
Page
20
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
15.
|
Earnings
Per Share
|
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||
|
($
in millions, except per share amounts)
|
July 2,
2006
|
July 3,
2005
|
July
2, 2006
|
July
3, 2005
|
||||||||
|
Diluted
Earnings per Share:
|
||||||||||||
|
Net
earnings
|
$
|
132.7
|
$
|
79.0
|
$
|
177.3
|
$
|
137.6
|
||||
|
Weighted
average common shares (000s)
|
103,655
|
109,526
|
103,449
|
110,589
|
||||||||
|
Effect
of dilutive stock options
|
1,550
|
1,957
|
1,684
|
2,091
|
||||||||
|
Weighted
average shares applicable
to
diluted earnings per share
|
105,205
|
111,483
|
105,133
|
112,680
|
||||||||
|
Diluted
earnings per share
|
$
|
1.26
|
$
|
0.71
|
$
|
1.69
|
$
|
1.22
|
||||
The
following outstanding options were excluded from the diluted earnings per share
calculation since they were anti-dilutive (i.e., the exercise price was higher
than the average closing market price of common stock for the
period):
|
Three
Months Ended
|
Six
Months Ended
|
||||||||||||
|
Option
Price
|
July 2,
2006
|
July 3,
2005
|
July 2,
2006
|
July 3,
2005
|
|||||||||
|
$
39.74
|
700,700
|
714,650
|
–
|
714,650
|
|||||||||
|
$
43.69
|
905,000
|
–
|
905,000
|
–
|
|||||||||
|
1,605,700
|
714,650
|
905,000
|
714,650
|
||||||||||
|
16.
|
Contingencies
|
The
company is subject to various risks and uncertainties in the ordinary course
of
business due, in part, to the competitive nature of the industries in which
it
participates. We do business in countries outside the U.S., have changing
commodity prices for the materials used in the manufacture of our packaging
products and participate in changing capital markets. Where management considers
it warranted, we reduce these risks and uncertainties through the establishment
of risk management policies and procedures, including, at times, the use of
certain derivative financial instruments.
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 these matters will have a material adverse
effect upon the liquidity, results of operations or financial condition of
the
company.
Page
21
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
16.
|
Contingencies
(continued)
|
Due
to
political and legal uncertainties in Germany, no nationwide system for returning
beverage containers was in place at the time a mandatory deposit was imposed
in
January 2003 and nearly all retailers stopped carrying beverages in
non-refillable containers. We responded to the resulting lower demand for
beverage cans with several measures including reducing capacity and converting
production lines from steel to aluminum to facilitate exports from Germany
to
other European countries. As of May 1, 2006, all retailers are required to
redeem all returned one-way containers as long as they sell such containers.
Many retailers in Germany have begun the process of implementing a returnable
system for one-way containers since they, along with fillers, now appear to
accept the deposit. The retailers and the filling and packaging industries
have
formed a committee to design a nationwide recollection system and several
retailers have begun to order and install reverse vending machines in order
to
streamline the recollection system. One-way packaging sales by German retailers
have increased significantly since May 1, 2006 (albeit off a low base). We
believe it will take some time to recover from the significant decrease
experienced several years ago as one-way collection systems continue to be
installed and consumers become educated regarding the system and the
reintroduction of one-way packaging.
|
17.
|
Indemnifications
and Guarantees
|
During
the normal course of business, the company or its appropriate consolidated
direct or indirect subsidiaries have made certain indemnities, commitments
and
guarantees under which the specified entity may be required to make payments
in
relation to certain transactions. These indemnities, commitments and guarantees
include indemnities to the customers of the subsidiaries in connection with
the
sales of their packaging and aerospace products and services, guarantees to
suppliers of direct or indirect subsidiaries of the company guaranteeing the
performance of the respective entity under a purchase agreement, indemnities
for
liabilities associated with the infringement of third party patents, trademarks
or copyrights under various types of agreements, indemnities to various lessors
in connection with facility, equipment, furniture and other personal property
leases for certain claims arising from such leases, indemnities to governmental
agencies in connection with the issuance of a permit or license to the company
or a subsidiary, indemnities pursuant to agreements relating to certain joint
ventures, indemnities in connection with the sale of plants, properties or
businesses, or substantially all of the assets and specified liabilities of
businesses, and indemnities to directors, officers and employees of the company
to the extent permitted under the laws of the State of Indiana and the United
States of America. The duration of these indemnities, commitments and guarantees
varies, and in certain cases, is indefinite. In addition, the majority of these
indemnities, commitments and guarantees do not provide for any limitation on
the
maximum potential future payments the company could be obligated to make. As
such, the company is unable to reasonably estimate its potential exposure under
these items.
The
company has not recorded any liability for these indemnities, commitments and
guarantees in the accompanying consolidated balance sheets. The company does,
however, accrue for payments under promissory notes and other evidences of
incurred indebtedness and for losses for any known contingent liability,
including those that may arise from indemnifications, commitments and
guarantees, when future payment is both reasonably determinable and probable.
Finally, the company carries specific and general liability insurance policies
and has obtained indemnities, commitments and guarantees from third party
purchasers, sellers and other contracting parties, which the company believes
would, in certain circumstances, provide recourse for any claims arising from
these indemnifications, commitments and guarantees.
The
company’s senior notes and senior credit facilities are guaranteed on a full,
unconditional and joint and several basis by certain of the company’s wholly
owned domestic subsidiaries. Foreign tranches of the senior credit facilities
are similarly guaranteed by certain of the company’s wholly owned foreign
subsidiaries. These guarantees are required in support of the notes and credit
facilities referred to above, are co-terminous with the terms of the respective
note indentures and credit agreement and would require performance upon certain
events of default referred to in the respective guarantees. The maximum
potential amounts which could be required to be paid under the guarantees are
essentially equal to the then outstanding principal and interest under the
respective notes and credit agreement, or under the applicable tranche. The
company is not in default under the above notes or credit
facilities.
Page
22
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
17.
|
Indemnifications
and Guarantees (continued)
|
Ball
Capital Corp. II is a separate, wholly owned corporate entity created for the
purchase of receivables from certain of the company’s wholly owned subsidiaries.
Ball Capital Corp. II’s assets will be available first to satisfy the claims of
its creditors. The company has provided an undertaking to Ball Capital Corp.
II
in support of the sale of receivables to a commercial lender or lenders which
would require performance upon certain events of default referred to in the
undertaking. The maximum potential amount which could be paid is equal to the
outstanding amounts due under the accounts receivable financing (see
Note 6). The company, the relevant subsidiaries and Ball Capital Corp. II
are not in default under the above credit arrangement.
From
time
to time, the company is subject to claims arising in the ordinary course of
business. In the opinion of management, no such matter, individually or in
the
aggregate, exists which is expected to have a material adverse effect on the
company’s consolidated results of operations, financial position or cash
flows.
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23
Item
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management’s
discussion and analysis should be read in conjunction with the unaudited
condensed consolidated financial statements and the accompanying notes. Ball
Corporation and its subsidiaries are referred to collectively as “Ball” or the
“company” or “we” and “our” in the following discussion and
analysis.
BUSINESS
OVERVIEW
Ball
Corporation is one of the world’s leading suppliers of metal and plastic
packaging to the beverage, food and household products industries. Our packaging
products are produced for a variety of end uses and are manufactured
in plants around the world. We also supply aerospace and other technologies
and services to governmental and commercial customers.
We
sell
our packaging products primarily to major beverage and food producers and
producers of household use products with which we or the companies we have
acquired 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 diversified our customer base, we do sell a majority of our
packaging products to relatively few major beverage and food 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 of a major customer or supplier or a change
in
a supply agreement with a major customer or supplier, although our long-term
relationships and contracts mitigate these risks.
In
the
rigid packaging industry, sales and earnings can be improved by reducing costs,
developing new products, volume expansion and increasing pricing. In 2005 we
commenced a project to upgrade and streamline our North American beverage can
end manufacturing capabilities, a project that will result in productivity
gains
and cost reductions as its stages are completed. While the U.S. and Canadian
beverage container manufacturing industry is relatively mature, the European,
PRC and Brazilian beverage can markets are growing and are expected to continue
to grow. We are capitalizing on this growth by continuing to reconfigure some
of
our European can manufacturing lines and by having constructed a new beverage
can manufacturing plant in Belgrade, Serbia, in 2005. To better position the
company in the European market, the capacity from the fire-damaged Hassloch,
Germany, plant will be replaced with a mix of steel beverage can manufacturing
capacity in the Hassloch plant and aluminum beverage can manufacturing capacity
in the company’s Hermsdorf, Germany, plant.
Ball’s
consolidated earnings are exposed to foreign exchange rate fluctuations. We
attempt to mitigate this exposure through the use of derivative financial
instruments, as discussed in “Quantitative and Qualitative Disclosures About
Market Risk” within Item 3 of this report.
As
part
of our packaging strategy, we are focused on developing and marketing new and
existing products that meet the needs of our beverage and food customers. 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.
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
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-plus
contracts, which are billed at our costs plus an agreed upon and/or earned
profit component, and approximately one-third fixed price contracts. We
include time and material contracts in the fixed price category because such
contracts typically provide for the sale of engineering labor at fixed hourly
rates.
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24
Throughout
the period of contract performance, we regularly reevaluate and, if necessary,
revise our estimates of total contract revenue, total contract cost and progress
toward completion. Because of contract payment schedules, limitations on funding
and other contract terms, our sales and accounts receivable for this segment
include amounts that have been earned but not yet billed.
Management
uses various measures to evaluate company performance. The primary financial
measures we use are earnings before interest and taxes (EBIT), earnings before
interest, taxes, depreciation and amortization (EBITDA), diluted earnings per
share, economic value added (operating earnings, as defined by the company,
less
our cost of capital), operating cash flow and free cash flow (generally defined
by the company as cash flow from operating activities less capital
expenditures). These financial measures may be adjusted at times for items
that
affect comparability between periods. Nonfinancial measures in the packaging
segments include production spoilage rates, quality control measures, safety
statistics and production and shipment volumes. Additional measures used to
evaluate 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 and retaining quality employees is critically
important to the success of Ball and, because of this, we strive to pay
employees competitively and encourage their prudent ownership of the company’s
common stock. 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 our employee stock purchase plan and 401(k) plan, which matches employee
contributions with Ball common stock, many employees, regardless of
organizational level, have opportunities to participate as Ball
shareholders.
RECENT
DEVELOPMENTS
On
March 27, 2006, Ball acquired all of the issued and outstanding shares of
U.S. Can Corporation (U.S. Can) for consideration of 758,981 common shares
of Ball Corporation (valued at $44.28 per share for a total of
$33.6 million). In July 2006 a purchase price adjustment of
$13.9 million reduced the number of shares to 444,690 shares. The
remaining 314,291 shares are due to be returned to the company during the
third quarter of 2006. In connection with the acquisition, Ball refinanced
$598.2 million of U.S. Can debt, including $26.8 million of bond
redemption premiums and fees, and over the next several years expects to realize
approximately $42 million for acquired net operating tax loss
carryforwards. This acquisition added to the company’s portfolio of rigid
packaging products and provides a meaningful position in a sizeable product
line. As a result of this acquisition, Ball became the largest manufacturer
of
aerosol cans in North America and now manufactures aerosol cans, paint cans,
plastic containers and custom and specialty cans in 10 plants in the U.S.
and aerosol cans in two plants in Argentina. The newly acquired operations
have
annual sales of approximately $600 million. The acquired business forms
part of Ball’s metal food and household products packaging, Americas, segment
and its results have been included since the date of acquisition.
On
March 28, 2006, Ball acquired North American plastic bottle container
assets from Alcan Packaging (Alcan) for $184.7 million cash, including a
$4.7 million working capital adjustment determined during the second
quarter in accordance with the terms of the acquisition agreement. This
acquisition strengthens the company’s plastic container business and complements
its food container business. The acquired assets included two plastic container
manufacturing plants in the U.S. and one in Canada, as well as certain
manufacturing equipment and other assets from other Alcan facilities. The
acquired business primarily manufactures and sells barrier polypropylene plastic
bottles used in food packaging and, to a lesser extent, barrier PET plastic
bottles used for beverages and food. The acquired operations have annual sales
of approximately $150 million. The operations form part of Ball’s plastic
packaging, Americas, segment and their results have been included since the
date
of acquisition.
The
company refinanced U.S. Can’s debt at significantly lower interest rates through
the issuance by Ball Corporation of $450 million of new senior notes and a
$500 million increase in bank debt under the new senior credit facilities
put in place in the fourth quarter of 2005. The proceeds of these financings
were also used to acquire the Alcan operations and to reduce seasonal working
capital debt.
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25
In
June 2006 the company’s U.S. defined benefit plans for salaried employees
were amended to provide more flexibility for future pension benefits by allowing
portability and changing the benefit to a career average pay scheme that
grows by a prescribed amount annually. The annual accounting expense under
the amended plans will be lower and more predictable. The amendments, which
will
be effective January 1, 2007, are expected to reduce 2006 pension expense
by $7 million and reduce future annual pension expense by
$7 million to $8 million. The majority of the expected pension expense
reductions will be included in cost of sales. At the remeasurement date for
the
pension liabilities, the unfunded status was reduced by approximately
$71 million.
CONSOLIDATED
SALES AND EARNINGS
The
company has determined that it has five reportable segments organized along
a
combination of product lines and geographic areas: (1) metal beverage
packaging, Americas, (2) metal food and household products packaging,
Americas, (3) plastic packaging, Americas, (4) metal beverage
packaging, Europe/Asia 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
The
metal
beverage packaging, Americas, segment consists of operations located in the
U.S., Canada and Puerto Rico, which manufacture metal container products used
primarily in beverage packaging. Sales in this segment, which represented
40 percent of consolidated net sales in the second quarter of 2006 and
42 percent in the first six months, were 11 percent higher in the
second quarter of 2006 than in 2005 as a result of higher sales volumes and
prices. For 2006 the increased sales over 2005 were driven by favorable weather
in many parts of the U.S. and Canada, as well as the promotion of 12-ounce
can
packages by beer and soft drink companies. Additionally, selling prices were
increased due to higher raw material costs being passed through to our
customers. Sales in the first quarter of 2005 were also negatively affected
by
poor weather and general softness in the beer and soft drink
markets.
Segment
earnings of $67.4 million in the second quarter of 2006 were flat compared
to the same period in 2005 while earnings of $121.9 million in the first
six months of 2006 were 6 percent lower than the prior year earnings of
$129.2 million for the same period. Despite higher sales, earnings growth
was constrained by product mix and continued year-over-year cost growth,
particularly higher energy, other direct material and freight costs. While
contract price escalations have commenced for many of our customers, cost growth
has continued to outpace price increases.
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.
During
the first quarter of 2006, we
completed the conversion of a line in our Monticello, Indiana, plant from
12-ounce can manufacturing to a line capable of producing other sizes. The
multi-year project begun in 2005 to streamline and upgrade our end manufacturing
capabilities is progressing well but with some delays in equipment delivery
and
start-up.
Metal
Beverage Packaging, Europe/Asia
The
metal
beverage packaging, Europe/Asia, segment includes metal beverage packaging
products manufactured in Europe and Asia as well as plastic containers
manufactured in Asia. This segment accounted for 23 percent of consolidated
net sales in the second quarter and first six months of 2006. Segment sales
in
the second quarter and first six months of 2006 were 10 percent and
6 percent higher than in the same periods of 2005, respectively, with
higher sales volumes in Europe and Asia being partially offset by the impact
of
weakened foreign currency exchange rates. Higher segment sales volumes were
aided by favorable European weather and Germany hosting the World Cup soccer
championship which commenced in June 2006.
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26
Segment
earnings of $142.5 million in the second quarter of 2006 and
$171.1 million in the first six months included a $74.1 million
property insurance gain related to a fire at the company’s Hassloch, Germany,
metal beverage can plant (further details are provided below). Segment earnings
in 2005 were $58.2 million for the second quarter and $88.5 million
for the first six months and included a $3.4 million expense in the first
quarter for the write off of the remaining carrying value of an equity
investment in the PRC. Segment earnings in 2006 were higher than in 2005 due
to
higher volumes, price recovery initiatives and effective manufacturing cost
controls, partially offset by higher raw material, freight and energy costs,
and
price compression in the PRC. In addition, earnings in the first six months
of
2006 were negatively affected compared to 2005 by approximately $2 million
from the weakened euro against the U.S. dollar in the first quarter of
2006.
On
April 1, 2006, a fire in the metal beverage can plant in Hassloch, Germany,
damaged the majority of the building and machinery and equipment. The property
insurance proceeds recorded in the six months ended July 2, 2006, which are
based on replacement cost, were €85.4 million, of which €26 million
($32.4 million) was received in April 2006. A €27 million fixed
asset write down was recorded to reflect the estimated impairment of the assets
damaged as a result of the fire. As a result, a gain of €58.4 million
($74.1 million pretax, $45.2 million after tax) has been recorded in
the consolidated statement of earnings to reflect the difference between the
net
book value of the impaired assets and the property insurance proceeds. An
additional €15 million ($19 million) was recorded in cost of sales in
the second quarter for insurance recoveries related to business interruption
costs, as well as €9 million ($11 million) to offset clean-up costs.
Additional business interruption, clean up and property damage cost recoveries
will be recognized in future applicable periods as they are reimbursed by the
insurance company.
In
June
the company announced its intention to rebuild the Hassloch plant with two
steel
lines and to add an aluminum line in its Hermsdorf, Germany, plant. All three
lines are expected to be operational during the second quarter of
2007.
Metal
Food & Household Products Packaging, Americas
The
metal
food and household products packaging, Americas, segment consists of operations
located in the U.S., Canada and Argentina. With the acquisition of U.S. Can
(discussed in the “Recent Developments” section), the segment has added to its
metal food can manufacturing the production of aerosol cans, paint cans, certain
plastic containers and custom and specialty cans.
Segment
sales, which comprised 17 percent of consolidated net sales in the second
quarter of 2006 and 16 percent in the first six months, were
75 percent and 39 percent above the same periods of 2005. The primary
reason for the increase was the acquisition of U.S. Can. Also contributing
to
the higher sales in 2006 was the pass through of higher raw material costs.
Segment
earnings were $12.8 million in the second quarter of 2006 compared to a
loss of $6 million in the second quarter of 2005, and $14.6 million in
the first six months of 2006 compared to $7 million in 2005. The first
quarter of 2006 included a pretax charge of $2.1 million ($1.4 million
after tax) for employee benefit and decommissioning costs related to the shut
down of a metal food can manufacturing line in Ball’s Whitby, Ontario, plant.
The second quarter of 2006 included earnings of $0.4 million related to the
closure of a three-piece food can manufacturing plant in Quebec in the second
quarter of 2005. The second quarter 2005 pretax charge was $8.8 million
($5.9 million after tax). Higher sales volumes related to the U.S. Can
acquisition helped improve segment earnings in the second quarter of 2006,
despite the negative impact of continued year-over-year increases in energy
and
other direct material costs.
Additional
details regarding business consolidation activities are available in Note 5
accompanying the unaudited condensed consolidated financial statements included
within Item 1 of this report.
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Plastic
Packaging, Americas
The
plastic packaging, Americas, segment consists of operations located in the
U.S.
and Canada which manufacture polyethylene terephthalate (PET) and polypropylene
plastic container products used mainly in beverage and food packaging. Segment
sales, which accounted for 10 percent of consolidated net sales in the
second quarter of 2006 and 9 percent in the first six months, were
34 percent and 21 percent higher than in the same periods of 2005,
respectively. The segment sales increase in 2006 was related to the plant and
other asset acquisitions and higher PET bottle volumes, partially offset by
the
increased promotions of metal beverage cans by certain customers. We continue
to
focus PET development efforts in the custom hot-fill, beer, wine, flavored
alcoholic beverage and specialty container markets and are adding specialty
container production capacity to accommodate new demand. In the food and
specialty area, development efforts are focused on custom markets for gamma
clear and retort applications. Segment earnings of $7.4 million in the
second quarter of 2006 were higher than 2005 earnings of $4.7 million,
primarily as a result of the incremental sales due to the acquisition, and
were
partially offset by energy cost increases, the timing of resin cost increases
and costs incurred for the Constar International, Inc., litigation that was
favorably resolved in July 2006 (discussed within Part II, Item 2, of
this report). Earnings in the second quarter of 2006 also included purchase
accounting adjustments of $1.2 million which increased cost of sales due to
the step up to fair market value of acquired finished goods
inventory.
Aerospace
and Technologies
Aerospace
and technologies segment sales, which represented 10 percent of
consolidated net sales in both the second quarter and first six months of 2006,
were 3 percent lower in the second quarter of 2006 than in 2005 and
8 percent lower in the first six months. The lower sales were largely due
to contracts being completed during the periods, as well as the impact of
government funding reductions and program delays. Segment earnings were
$8.3 million in the second quarter of 2006 compared to $14.9 million
in 2005 and $17.8 million in the first six months compared to
$23.8 million in 2005. The first quarter of 2005 included an expense of
$3.8 million for the write down to net realizable value of an equity
investment in an aerospace company. That investment was sold in
October 2005. Earnings in 2006 were negatively affected by the lower sales
due to program delays and increased nonrecoverable pension costs.
Contracted
backlog in the aerospace and technologies segment was $761 million at both
July 2, 2006, and December 31, 2005. Comparisons of backlog are not
necessarily indicative of the trend of future operations.
For
additional information on our segment operations, see the Summary of Business
by
Segment in Note 3 accompanying the unaudited condensed consolidated financial
statements included within Item 1 of this report.
Selling,
General and Administrative
Selling,
general and administrative (SG&A) expenses were $73.5 million in the
second quarter of 2006 compared to $58.5 million for the same period in
2005 and $143.8 million in the first six months of 2006 compared to
$121.6 million in the first six months of 2005. Subsequent to the issuance
of its financial statements for the year ended December 31, 2005, the
company determined that certain foreign currency exchange losses had been
inadvertently deferred for the years 2003, 2004 and 2005. Since the amounts
were
not material, individually or in the aggregate, to any previously issued
financial statements or to our expected full year results of operations for
2006, a cumulative $5.8 million out-of-period adjustment was included in
SG&A expenses in the first quarter of 2006.
In
addition to the above, the increase in selling SG&A expenses in 2006
compared to 2005 is primarily the result of additional SG&A from the U.S.
Can acquisition, higher expense associated with the adoption of Statement of
Financial Accounting Standards (SFAS) No. 123 (revised 2004), normal
compensation and benefit increases and higher rates associated with the
company’s receivables sales agreement. While the first quarter of 2005 included
$7.2 million for the write down of PRC and aerospace equity investments,
cost increases occurred in 2006 for items other than those mentioned above,
none
of which were individually significant.
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28
Interest
and Taxes
Consolidated
interest expense was $37.6 million for the second quarter of 2006 compared
to $24.3 million in the same period of 2005 and $60.9 million for the
first six months of 2006 compared to $50.1 million for the same period in
2005. The higher expense in 2006 was primarily due to the additional borrowings
used to finance the acquisitions of U.S. Can and Alcan plants.
The
consolidated effective income tax rate was approximately 32 percent for the
first six months of 2006 compared to 32.6 percent for the same period in
2005. While the effective rates are similar for both years, the rate in 2006
was
affected by applying the 39 percent German marginal tax rate on the
insurance gain, partially offset by the effect of $4 million of tax
benefits recorded as a result of the settlement of certain tax matters. The
2005
tax rate was primarily affected by the fact that no benefit was provided in
respect of certain equity investment write downs in the first quarter of 2005.
The $3.8 million write down in 2005 of the aerospace equity investment is
not tax deductible while the realization of tax deductibility of the
$3.4 million PRC write down, which will be a capital loss, is not
reasonably assured as the company does not have, nor does it anticipate, any
capital gains to utilize the losses.
There
has
been no change in connection with the Internal Revenue Service’s (IRS)
examination of Ball’s consolidated income tax returns for the tax years 2000
through 2004 that would affect Ball’s position that it will sustain its
deductions of interest expense incurred on loans under a company-owned life
insurance plan that has been in place for more than 20 years. Therefore, no
provision for loss has been accrued for the IRS’s proposed disallowance. The
total potential liability for the audited years 1999 through 2004 and unaudited
year 2005 is approximately $27 million, excluding related penalties and
interest. See Note 12 to the consolidated financial statements within
Item 1 of this report for additional information.
NEW
ACCOUNTING PRONOUNCEMENTS
For
information regarding recent accounting pronouncements, see Note 2 to the
unaudited condensed consolidated financial statements within Item 1 of this
report.
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash
Flows and Capital Expenditures
Cash
flow
used in operations was $66.2 million in the first six months of 2006
compared to $70.2 million cash flow generated in the first six months of
2005. Negatively affecting 2006 cash flow from operations were cash pension
funding and higher working capital levels compared to the prior year. The
changes in these working capital items reflected seasonality and timing of
customer purchases.
Based
on
information currently available, we estimate 2006 capital spending to be
approximately $300 million compared to 2005 spending of
$291.7 million. The 2006 estimate includes capital spending related to the
acquired plants but excludes spending for the replacement of the fire-damaged
assets in Germany, which is expected to be reimbursed by insurance
proceeds.
Debt
Facilities and Refinancing
Interest-bearing
debt increased to $2,646.9 million at July 2, 2006, compared to
$1,589.7 million at December 31, 2005. This increase includes the issuance
by Ball Corporation of $450 million of 6.625% senior notes due in 2018 and
a $500 million increase in bank debt under Ball Corporation’s new senior
credit facilities put in place in the fourth quarter of 2005. The proceeds
from
these financings were used to refinance existing U.S. Can debt at lower interest
rates, acquire certain net assets of Alcan and reduce seasonal working capital
debt.
We
intend
to emphasize debt reduction during the remainder of 2006 and, subject to foreign
currency exchange rate fluctuations, expect to end the year with debt
$400 million to $450 million lower than at July 2, 2006. Our
stock repurchase program, net of issuances, is expected to be in the
$50 million range in 2006 compared to $358.1 million in
2005.
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29
At
July
2, 2006, approximately $472 million was available under the company’s
multi-currency revolving credit facilities. In addition, the company had
short-term uncommitted credit facilities of $301 million at the end of the
first quarter, of which $115.8 million was outstanding and due on
demand.
The
company has 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 $225 million. The agreement qualifies
as off-balance sheet financing under the provisions of SFAS No. 140. Net
funds received from the sale of the accounts receivable totaled
$175.3 million at July 2, 2006, and $210 million at December 31,
2005.
The
company was in compliance with all loan agreements at July 2, 2006, and has
met
all debt payment obligations. Additional details about the company’s debt and
receivables sales agreement are available in Notes 11 and 6, respectively,
accompanying the unaudited condensed consolidated financial statements included
within Item 1 of this report.
Other
Liquidity Items
Maturities
on the Term D loan facility and 6.625% senior notes due in 2018 (both issued
in
connection with the acquisitions in March) are expected to be
$12.5 million, $50 million, $62.5 million, $150 million and
$225 million for the years ended December 31, 2007, through 2011,
respectively, and $450 million in 2018. The company is evaluating the
effects the acquisitions will have on its purchase obligations and operating
lease commitments. In certain cases, contracts assumed in the acquisitions
are
being renegotiated.
Contributions
to the company’s defined benefit plans are expected to be approximately
$77 million in 2006. This estimate may change based on plan asset
performance, the revaluation of the plans’ liabilities later in 2006 and revised
estimates of 2006 full-year cash flows.
CONTINGENCIES,
INDEMNIFICATIONS AND GUARANTEES
Details
about the company’s contingencies, indemnifications and guarantees are available
in Notes 16 and 17 accompanying the unaudited condensed consolidated
financial statements included within Item 1 of this report.
Item
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In
the
ordinary course of business, we employ established risk management policies
and
procedures to reduce our exposure to fluctuations in commodity prices, interest
rates, foreign currencies and prices of the company’s common stock in regard to
common share repurchases. 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.
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 analysis are summarized below.
Commodity
Price Risk
We
manage
our North American commodity price risk in connection with market price
fluctuations of aluminum primarily by entering into can and end sales contracts,
which generally include aluminum-based pricing terms that consider price
fluctuations under our commercial supply contracts for aluminum purchases.
Such
terms may include a fixed price or an upper limit to the aluminum component
pricing. This matched pricing affects substantially all of our metal beverage
packaging, Americas, net sales. We also, at times, use certain derivative
instruments such as option and forward contracts as cash flow hedges of
commodity price risk.
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30
Most
of
the plastic packaging, Americas, sales contracts negotiated through the end
of
the second quarter include provisions to pass through resin cost changes. As
a
result, we believe we have minimal exposure related to changes in the cost
of
plastic resin. Many of our metal food and household products packaging,
Americas, sales contracts negotiated through the end of the second quarter
either include provisions permitting us to pass through some or all steel cost
changes we incur or incorporate annually negotiated steel costs. We anticipate
we will be able to pass through the majority of the steel price increases that
occur in 2006.
In
Europe
and Asia the company manages 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 contracts, that reduce the company’s exposure to
fluctuations in commodity prices within the current year. These purchase and
sales contracts include fixed price, floating and pass-through pricing
arrangements. The company also uses forward and option contracts as cash flow
hedges to minimize the company’s exposure to significant price changes for those
sales contracts where there is not a pass-through arrangement. Despite these
efforts, the rapid and unprecedented increase in the price of aluminum in recent
months is expected to cause margin compression in our metal beverage container
business in the PRC during the remainder of 2006.
Outstanding
derivative contracts at the end of the second quarter 2006 expire within two
years. Included in shareholders’ equity at July 2, 2006, within accumulated
other comprehensive loss, is approximately $9.2 million of net loss
associated with these contracts, of which $15.2 million of net loss is
expected to be recognized in the consolidated statement of earnings during
the
next 12 months. Gains and/or losses on these derivative contracts will be
offset by higher and/or lower costs on metal purchases.
Considering
the effects of derivative instruments, the market’s ability to accept price
increases and the company’s commodity price exposures, a hypothetical
10 percent adverse change in the company’s metal prices could result in an
estimated $17 million after-tax reduction of 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 $17 million
after-tax reduction of net earnings over a one-year period for foreign currency
exposures on the metal. Actual results may vary based on actual changes in
market prices and rates.
The
company is also exposed to fluctuations in prices for energy such as natural
gas
and electricity. A hypothetical 10 percent increase in our energy prices
could result in an estimated $8.9 million after-tax reduction of net earnings
over a one-year period. Actual results may vary based on actual changes in
market prices and rates.
Interest
Rate Risk
Our
objectives in managing exposure to interest rate changes are to limit the
effect
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
and
options to manage our mix of floating and fixed-rate debt. Interest rate
instruments held by the company at July 2, 2006, included pay-fixed interest
rate swaps. Pay-fixed swaps effectively convert variable rate obligations
to
fixed rate instruments. Swap agreements expire at various times within the
next
5 years. Included in shareholders’ equity at July 2, 2006, within accumulated
other comprehensive loss, is approximately $3.9 million of net gain
associated with these contracts, of which $0.7 million of net earnings is
expected to be recognized in the consolidated statement of earnings during
the
next 12 months. Approximately $1.3 million of net gain related to the
termination or deselection of hedges is included in the above accumulated
other
comprehensive loss at July 2, 2006. The amount recognized in 2006 earnings
related to terminated hedges is insignificant.
Based
on
our interest rate exposure at July 2, 2006, assumed floating rate debt levels
through the second quarter of 2007 and the effects of derivative instruments,
a
100 basis point increase in interest rates could result in an estimated
$7.4 million after-tax reduction of 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.
Page
31
Foreign
Currency Exchange Rate Risk
Our
objective in managing exposure to foreign currency fluctuations is to protect
foreign cash flows and earnings associated with foreign exchange rate changes
through the use of cash flow hedges. In addition, we manage foreign earnings
translation volatility through the use of foreign currency options. Our foreign
currency translation risk results from the European euro, British pound,
Canadian dollar, Polish zloty, Chinese renminbi, 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.
Contracts outstanding at the end of the second quarter 2006 expire within one
year. At July 2, 2006, there were no amounts included in accumulated other
comprehensive loss for these items.
Considering
the company’s derivative financial instruments outstanding at July 2, 2006, and
the currency exposures, a hypothetical 10 percent reduction in foreign
currency exchange rates compared to the U.S. dollar could result in an estimated
$26.4 million after-tax reduction of net earnings over a one-year period.
This amount includes the $17 million currency exposure discussed above in the
“Commodity Price Risk” section. Actual changes in market prices or rates may
differ from hypothetical changes.
Common
Share Repurchases
In
connection with the company’s ongoing share repurchases, the company sells put
options which give the purchasers of those options the right to sell shares
of
the company’s common stock to the company on specified dates at specified prices
upon the exercise of those options. Our objective in selling put options is
to
lower the average purchase price of acquired shares. At July 2, 2006, there
were put option contracts outstanding for 150,000 shares at a price of
$34.6503 per share.
Item
4. CONTROLS
AND PROCEDURES
Our
chief
executive officer and chief financial officer participated in management’s evaluation
of
our disclosure controls and procedures, as defined by the Securities and
Exchange Commission (SEC), as of the end of the period covered by this report
and concluded that our disclosure controls and procedures were effective.
During
the quarter, there was no change in the company’s internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the company’s internal control over financial reporting. In
the first quarter of 2006, the company acquired certain operations of U.S.
Can
Corporation (U.S. Can) on March 27, 2006, and certain assets of Alcan Packaging
(Alcan) on March 28, 2006. (Additional details are available in Note 4 to
the consolidated financial statements within Item 1 of this
report.) As a result of these acquisitions, the company has included our
recently acquired U.S. Can and Alcan operations within its system of internal
controls over financial reporting. Pursuant to rules promulgated under
Section 404 of the Sarbanes-Oxley Act of 2002, the controls for these
acquired operations are required to be evaluated and tested by the end of
2007.
Page
32
FORWARD-LOOKING
STATEMENTS
The
company has made or implied certain forward-looking statements in this quarterly
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 and demand; loss of one or more major customers
or
suppliers or changes to contracts with one or more customers or suppliers;
insufficient production capacity; overcapacity in foreign and domestic metal
and
plastic container industry production facilities and its impact on pricing
and
financial results; failure to achieve anticipated productivity improvements
or
production cost reductions, including those associated with capital expenditures
such as our beverage can end project; 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 German
mandatory deposit or other restrictive packaging legislation such as recycling
laws; increases in interest rates, particularly on floating rate debt of the
company; labor strikes; increases and trends in various employee benefits and
labor costs, including pension, medical and health care costs incurred in the
countries in which Ball has operations; 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; the effect of LIFO accounting on earnings; changes in
generally accepted accounting principles or their interpretation; local economic
conditions; the authorization, funding and availability 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; international business and market risks such as the
devaluation of certain currencies; international business risks (including
foreign exchange rates and activities of foreign subsidiaries) in Europe and
particularly in developing countries such as the PRC, Brazil and Argentina;
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 zloty
and
Serbian dinar; terrorist activity or war that disrupts the company’s production
or supply; regulatory action or laws including tax, environmental and workplace
safety; technological developments and innovations; successful or unsuccessful
acquisitions, joint ventures or divestitures and the integration activities
associated therewith, including the businesses recently acquired from the
shareholders of U.S. Can and from Alcan Packaging; changes to unaudited results
due to statutory audits of our financial statements or management’s evaluation
of the company’s internal controls over financial reporting; changes in the
company’s pension plans; 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 Securities and Exchange Commission.
Page
33
|
PART
II.
|
OTHER
INFORMATION
|
|
Item
1.
|
Legal
Proceedings
|
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 of Dayton,
Ohio. The complaint alleges that the manufacture, sale and use of certain ends
by BMBCC and its customers infringes on 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.
A
trial date is set for May 7, 2007. Discovery is continuing in the case. 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, on November 21, 2005, Ball Plastic Container Corp. (BPCC),
a wholly owned subsidiary of the company, was served with a complaint filed
by
Constar International Inc. (Constar) in the U.S. District Court for the Western
District of Wisconsin. The complaint alleges that the manufacture and sale
of
plastic bottles having oxygen barrier properties infringes on certain claims
of
a Constar U.S. patent. Constar also sued Honeywell International, Inc., the
supplier of the oxygen barrier material to BPCC. The complaint sought monetary
damages, fees and declaratory and injunctive relief. BPCC formally denied the
allegations of the complaint. On July 26, 2006, this case was settled by
the parties. This matter is now resolved without any material adverse effect
upon the liquidity, results of operations or the financial condition of the
company.
|
Item
1A.
|
Risk
Factors
|
There
can be no assurance that the U.S. Can and Alcan businesses, or any acquisition,
will be successfully integrated into the acquiring company (see Note 4 to
the consolidated financial statements within Item 1 of this report for
details of the recent Ball acquisitions).
While
we
have what we believe to be well designed integration plans, if we cannot
successfully integrate U.S. Can’s and Alcan’s 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:
| · |
demands
on management related to the increase in our size after the
acquisition;
|
| · |
the
diversion of management’s attention from the management of existing
operations to the integration of the acquired
operations;
|
| · |
difficulties
in the assimilation and retention of
employees;
|
| · |
difficulties
in the integration of departments, systems, including accounting
systems,
technologies, books and records and procedures, as well as in maintaining
uniform standards, controls, including internal accounting controls,
procedures and policies;
|
| · |
expenses
related to any undisclosed or potential liabilities;
and
|
| · |
retention
of major customers and suppliers.
|
Prior
to
the acquisitions, Ball, U.S. Can and Alcan operated as separate entities. We
may
not be able to achieve potential synergies or maintain the levels of revenue,
earnings or operating efficiency that each entity had achieved or might achieve
separately. The successful integration of U.S. Can’s and Alcan’s operations will
depend on our ability to manage those operations, realize opportunities for
revenue growth presented by strengthened product offerings and, to some degree,
to eliminate redundant and excess costs.
Other
risk factors can be found within Item 1A of the company’s annual report on
Form 10-K.
Page
34
Item
2. Changes
in Securities
The
following table summarizes the company’s repurchases of its common stock during
the quarter ended July 2, 2006.
|
Purchases
of Securities
|
|||||||||||||
|
Total
Number
of
Shares
Purchased
|
Average
Price
Paid
per Share
|
Total
Number of
Shares
Purchased
as
Part of Publicly
Announced
Plans
or
Programs
|
Maximum
Number
of
Shares that May
Yet
Be Purchased
Under
the Plans
or Programs(b)
|
||||||||||
|
April
3 to April 30, 2006
|
7,244
|
$
|
42.41
|
7,244
|
11,165,348
|
||||||||
|
May
1 to May 28, 2006
|
275,210
|
$
|
38.23
|
275,210
|
10,890,138
|
||||||||
|
May
29 to July 2,
2006
|
104,091
|
$
|
37.03
|
104,091
|
10,786,047
|
||||||||
|
Total
|
386,545(a
|
)
|
$
|
37.99
|
386,545
|
||||||||
|
(a)
|
Includes
open market purchases and/or shares retained by the company to settle
employee withholding tax
liabilities.
|
|
(b)
|
The
company has an ongoing repurchase program for which shares are authorized
from time to time by Ball’s board of
directors.
|
Item
3. Defaults
Upon Senior Securities
There
were no events required to be reported under Item 3 for the quarter ended July
2, 2006.
Item
4. Submission
of Matters to a Vote of Security Holders
The
company held the Annual Meeting of Shareholders on April 26, 2006. Matters
voted upon by proxy, and the results of the votes, were as follows:
|
For
|
Against/
Withheld
|
Abstained/
Broker
Non-Vote
|
|||||||
|
Election
of directors for terms expiring in 2009:
|
|||||||||
|
Howard
M. Dean
|
87,597,630
|
2,709,548
|
–
|
||||||
|
R.
David Hoover
|
88,512,398
|
1,794,780
|
–
|
||||||
|
Jan
Nicholson
|
88,494,173
|
1,831,005
|
–
|
||||||
|
Appointment
of PricewaterhouseCoopers LLP as independent registered public
accounting firm for 2006
|
88,137,518
|
1,478,187
|
691,473
|
||||||
|
Action
upon non-binding shareholder proposal to declassify Board
of Directors
|
36,650,949
|
28,432,137
|
25,224,092
|
||||||
Item
5. Other
Information
There
were no events required to be reported under Item 5 for the quarter ended July
2, 2006.
Page
35
Item
6. Exhibits
|
10
|
Ball
Corporation Acquisition-Related, Special Incentive Plan - Combined
Metal
Food & Household Products Packaging Division and Plastics Packaging
Division, which provides for certain cash incentive payments based
upon
the attainment of certain performance
criteria
|
|
20
|
Subsidiary
Guarantees of Debt
|
|
31
|
Certifications
pursuant to Rule 13a-14(a) or Rule 15d-14(a), by R. David Hoover,
Chairman
of the Board, President and Chief Executive Officer of Ball Corporation
and by Raymond J. Seabrook, Executive Vice President and Chief Financial
Officer of Ball Corporation
|
|
32
|
Certifications
pursuant to Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of
Chapter
63 of Title 18 of the United States Code, by R. David Hoover, Chairman
of
the Board, President and Chief Executive Officer of Ball Corporation
and
by Raymond J. Seabrook, Executive Vice President and Chief Financial
Officer of Ball Corporation
|
|
99
|
Safe
Harbor Statement Under the Private Securities Litigation Reform Act
of
1995, as amended
|
Page
36
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
Ball
Corporation
|
||
|
(Registrant)
|
||
|
By:
|
/s/
Raymond J. Seabrook
|
|
|
Raymond
J. Seabrook
|
||
|
Executive
Vice President and Chief Financial Officer
|
||
|
Date:
|
August 9,
2006
|
|
Page
37
Ball
Corporation and Subsidiaries
QUARTERLY
REPORT ON FORM 10-Q
July
2,
2006
EXHIBIT
INDEX
|
Description
|
Exhibit
|
|
|
Ball
Corporation Acquisition-Related, Special Incentive Plan - Combined
Metal
Food & Household Products Packaging Division and Plastics Packaging
Division, which provides for certain cash incentive payments based
upon
the attainment of certain performance criteria (Form of the plan
filed
herewith.)
|
EX-10
|
|
|
Subsidiary
Guarantees of Debt (Filed herewith.)
|
EX-20
|
|
|
Certifications
pursuant to Rule 13a-14(a) or Rule 15d-14(a), by R. David Hoover,
Chairman
of the Board, President and Chief Executive Officer of Ball Corporation
and by Raymond J. Seabrook, Executive Vice President and Chief Financial
Officer of Ball Corporation (Filed herewith.)
|
EX-31
|
|
|
Certifications
pursuant to Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of
Chapter
63 of Title 18 of the United States Code, by R. David Hoover, Chairman
of
the Board, President and Chief Executive Officer of Ball Corporation
and
by Raymond J. Seabrook, Executive Vice President and Chief Financial
Officer of Ball Corporation (Furnished herewith.)
|
EX-32
|
|
|
Safe
Harbor Statement Under the Private Securities Litigation Reform Act
of
1995, as amended (Filed herewith.)
|
EX-99
|
Page
38