10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 1, 2007
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 1,
2007
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 July 1, 2007
|
|||
Common
Stock,
without
par value
|
102,412,828
shares
|
Ball
Corporation and Subsidiaries
QUARTERLY
REPORT ON FORM 10-Q
For
the
period ended July 1, 2007
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 1, 2007, and July 2, 2006
|
1
|
|
Unaudited
Condensed Consolidated Balance Sheets at July 1, 2007, and
December 31, 2006
|
2
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows for the Three Months
and
Six Months Ended July 1, 2007, and July 2, 2006
|
3
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
4
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
20
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
25
|
Item
4.
|
Controls
and Procedures
|
27
|
PART
II.
|
OTHER
INFORMATION
|
29
|
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
1, 2007
|
July
2, 2006
|
July
1, 2007
|
July
2, 2006
|
||||||||||||
Net
sales
|
$ |
2,032.8
|
$ |
1,842.5
|
$ |
3,727.0
|
$ |
3,207.4
|
||||||||
Costs
and expenses
|
||||||||||||||||
Cost
of sales (excluding depreciation and amortization) (a)
|
1,682.6
|
1,554.8
|
3,076.9
|
2,711.5
|
||||||||||||
Depreciation
and amortization (Notes 8 and 10)
|
69.9
|
64.9
|
134.9
|
119.5
|
||||||||||||
Business
consolidation (gains) costs (Note 5)
|
–
|
(0.4 | ) |
–
|
1.7
|
|||||||||||
Property
insurance gain (Note 5)
|
–
|
(74.1 | ) |
–
|
(74.1 | ) | ||||||||||
Selling,
general and administrative (Note 1)
|
87.3
|
73.5
|
169.5
|
143.8
|
||||||||||||
1,839.8
|
1,618.7
|
3,381.3
|
2,902.4
|
|||||||||||||
Earnings
before interest and taxes (a)
|
193.0
|
223.8
|
345.7
|
305.0
|
||||||||||||
Interest
expense
|
38.1
|
37.6
|
76.0
|
60.9
|
||||||||||||
Earnings
before taxes
|
154.9
|
186.2
|
269.7
|
244.1
|
||||||||||||
Tax
provision (Note 12) (a)
|
(52.3 | ) | (61.1 | ) | (89.0 | ) | (77.6 | ) | ||||||||
Minority
interests
|
(0.1 | ) | (0.2 | ) | (0.2 | ) | (0.4 | ) | ||||||||
Equity
results in affiliates
|
3.4
|
4.9
|
6.6
|
8.1
|
||||||||||||
Net
earnings (a)
|
$ |
105.9
|
$ |
129.8
|
$ |
187.1
|
$ |
174.2
|
||||||||
Earnings
per share (Note 15) (a):
|
||||||||||||||||
Basic
|
$ |
1.04
|
$ |
1.25
|
$ |
1.84
|
$ |
1.68
|
||||||||
Diluted
|
$ |
1.03
|
$ |
1.23
|
$ |
1.81
|
$ |
1.66
|
||||||||
Weighted
average common shares outstanding (in thousands)
(Note 15):
|
||||||||||||||||
Basic
|
101,542
|
103,655
|
101,826
|
103,449
|
||||||||||||
Diluted
|
103,165
|
105,205
|
103,374
|
105,133
|
||||||||||||
Cash
dividends declared and paid, per common
share
|
$ |
0.10
|
$ |
0.10
|
$ |
0.20
|
$ |
0.20
|
(a)
|
The
2006 periods have been retrospectively adjusted for the company’s change
in the fourth quarter of 2006 from the last-in, first-out method
of
inventory accounting to the first-in, first-out method. Additional
details
are available in Note 7.
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
Page
1
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
Ball
Corporation and Subsidiaries
($
in millions)
|
July 1,
2007
|
December
31,
2006
|
||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ |
91.9
|
$ |
151.5
|
||||
Receivables,
net (Note 6)
|
772.4
|
579.5
|
||||||
Inventories,
net (Note 7)
|
898.8
|
935.4
|
||||||
Deferred
taxes and prepaid expenses
|
93.4
|
94.9
|
||||||
Total
current assets
|
1,856.5
|
1,761.3
|
||||||
Property,
plant and equipment, net (Note 8)
|
1,913.8
|
1,876.0
|
||||||
Goodwill
(Notes 4 and 9)
|
1,783.8
|
1,773.7
|
||||||
Intangibles
and other assets, net (Note 10)
|
371.0
|
429.9
|
||||||
Total
Assets
|
$ |
5,925.1
|
$ |
5,840.9
|
||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
Current
liabilities
|
||||||||
Short-term
debt and current portion of long-term debt (Note 11)
|
$ |
162.1
|
$ |
181.3
|
||||
Accounts
payable
|
748.9
|
732.4
|
||||||
Accrued
employee costs
|
189.9
|
201.1
|
||||||
Income
taxes payable (Note 12)
|
51.3
|
71.8
|
||||||
Other
current liabilities
|
183.3
|
267.7
|
||||||
Total
current liabilities
|
1,335.5
|
1,454.3
|
||||||
Long-term
debt (Note 11)
|
2,233.0
|
2,270.4
|
||||||
Employee
benefit obligations (Note 13)
|
849.6
|
847.7
|
||||||
Deferred
taxes and other liabilities (Note 12)
|
160.2
|
102.1
|
||||||
Total
liabilities
|
4,578.3
|
4,674.5
|
||||||
Contingencies
(Note 16)
|
||||||||
Minority
interests
|
1.2
|
1.0
|
||||||
Shareholders’
equity (Note 14)
|
||||||||
Common
stock (160,680,820 shares issued – 2007;
160,026,936 shares issued – 2006)
|
740.5
|
703.4
|
||||||
Retained
earnings
|
1,690.2
|
1,535.3
|
||||||
Accumulated
other comprehensive earnings (loss)
|
5.6
|
(29.5 | ) | |||||
Treasury
stock, at cost (58,267,992 shares – 2007;
55,889,948 shares – 2006)
|
(1,090.7 | ) | (1,043.8 | ) | ||||
Total
shareholders’ equity
|
1,345.6
|
1,165.4
|
||||||
Total
Liabilities and Shareholders’ Equity
|
$ |
5,925.1
|
$ |
5,840.9
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
Page
2
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Ball
Corporation and Subsidiaries
|
Six
Months Ended
|
|||||||
($ in millions) |
July
1, 2007
|
July
2, 2006
|
||||||
Cash
Flows from Operating Activities
|
||||||||
Net
earnings (a)
|
$ |
187.1
|
$ |
174.2
|
||||
Adjustments
to reconcile net earnings to net cash provided by
(used in) operating activities:
|
||||||||
Depreciation
and amortization
|
134.9
|
119.5
|
||||||
Property
insurance gain (Note 5)
|
–
|
(74.1 | ) | |||||
Business
consolidation costs (Note 5)
|
–
|
1.7
|
||||||
Deferred
taxes
(a)
|
3.7
|
12.2
|
||||||
Other,
net
|
31.7
|
(29.3 | ) | |||||
Changes
in working capital components, excluding effects of acquisitions
(a)
|
(106.3 | ) | (270.4 | ) | ||||
Cash
provided by (used in) operating activities
|
251.1
|
(66.2 | ) | |||||
Cash
Flows from Investing Activities
|
||||||||
Additions
to property, plant and equipment
|
(166.3 | ) | (127.5 | ) | ||||
Business
acquisitions, net of cash acquired (Note 4)
|
–
|
(785.4 | ) | |||||
Property
insurance proceeds (Note 5)
|
48.6
|
32.4
|
||||||
Other,
net
|
0.7
|
8.6
|
||||||
Cash
used in investing activities
|
(117.0 | ) | (871.9 | ) | ||||
Cash
Flows from Financing Activities
|
||||||||
Long-term
borrowings
|
9.6
|
1,049.1
|
||||||
Repayments
of long-term borrowings
|
(21.2 | ) | (66.8 | ) | ||||
Change
in short-term borrowings
|
(74.0 | ) |
2.7
|
|||||
Debt
issuance costs
|
–
|
(8.3 | ) | |||||
Proceeds
from issuance of common stock
|
27.1
|
19.2
|
||||||
Acquisitions
of treasury stock
|
(122.4 | ) | (50.7 | ) | ||||
Common
dividends
|
(20.4 | ) | (20.7 | ) | ||||
Other,
net
|
6.7
|
4.3
|
||||||
Cash
provided by (used in) financing activities
|
(194.6 | ) |
928.8
|
|||||
Effect
of exchange rate changes on cash
|
0.9
|
0.8
|
||||||
Change
in cash and cash equivalents
|
(59.6 | ) | (8.5 | ) | ||||
Cash
and cash equivalents - beginning of period
|
151.5
|
61.0
|
||||||
Cash
and cash equivalents - end of period
|
$ |
91.9
|
$ |
52.5
|
(a)
|
The
six months ended July 2, 2006, have been retrospectively adjusted for
the company’s change in the fourth quarter of 2006 from the last-in,
first-out method of inventory accounting to the first-in, first-out
method. Additional details are available in
Note 7.
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
Page
3
Notes
to Unaudited Condensed 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, 2006 (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.
Ball
adopted Financial Accounting Standards Board (FASB) Interpretation No. (FIN)
48
as of January 1, 2007, and has identified accounting for uncertain tax positions
under this guidance as a critical accounting policy. Considering tax laws
of the multiple jurisdictions in which we operate, both domestic and foreign,
we
assess whether it is more likely than not that a tax position will be sustained
upon examination and through any litigation and measure the largest amount
of
the benefit that is likely to be realized upon ultimate
settlement. Consistent with our practice prior to adoption of FIN 48, we
record related interest expense and penalties, if any, as a tax provision
expense. Actual results may differ substantially from our
estimates.
During
the fourth quarter of 2006, Ball’s management changed the company’s method of
inventory accounting from last-in, first-out (LIFO) to first-in, first-out
(FIFO) in the metal beverage packaging, Americas, and the metal food and
household products packaging, Americas, segments. Results for the three months
and six months ended July 2, 2006, have been retrospectively adjusted on a
FIFO basis in accordance with Statement of Financial Accounting Standards
(SFAS) No. 154 (see Note 7).
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 2005, 2004 and 2003. 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 assessed the impact of these adjustments and did not
believe these amounts were material, individually or in the aggregate, to any
previously issued financial statements or to our 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.
Certain
prior-year amounts have been reclassified in order to conform to the
current-year presentation. In addition, within the company’s annual report, the
consolidated statement of changes in shareholders’ equity for the year ended
December 31, 2006, included a transition adjustment of $47.9 million,
net of tax, related to the adoption of SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension Plans and Other Postretirement Plans,
an
Amendment of FASB Statements No. 87, 88, 106 and 132(R),” as a component of
2006 comprehensive earnings rather than only as an adjustment to accumulated
other comprehensive loss. Had the transition adjustment of $47.9 million
been presented in accordance with SFAS No. 158, comprehensive earnings for
the year ended December 31, 2006, would have been $448.7 million
rather than the $400.8 million reported in the annual report.
Page
4
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
2.
|
New
Accounting Standards
|
Management
has determined that the effect on the consolidated statement of changes in
shareholders’ equity for this change in presentation was not material to the
2006 consolidated financial statements taken as a whole. Comprehensive
earnings for 2006 will be revised in future presentations of the consolidated
statements of changes in shareholders’ equity.
In
April 2007 the FASB issued FASB Staff Position (FSP) FIN 39-1,
“Amendment of FASB Interpretation No. 39,” which amends the terms of FIN 39,
paragraph 3, to replace the terms “conditional contracts” and “exchange
contracts” with the term “derivative instruments” as defined in SFAS No.
133, “Accounting for Derivative Instruments and Hedging Activities.” It also
amends paragraph 10 of FIN 39 to permit a reporting entity to offset
fair value amounts recognized for the right to reclaim cash collateral (a
receivable) or the obligation to return cash collateral (a payable) against
fair
value amounts recognized for derivative instruments executed with the same
counterparty under the same master netting arrangement that have been offset
in
accordance with that paragraph. FSP FIN 39-1 will be effective for
Ball as of January 1, 2008, and is currently under evaluation by the
company.
In
February 2007 the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115,” which permits companies to choose, at specified election
dates, to measure certain financial instruments and other eligible items at
fair
value. Unrealized gains and losses on items for which the fair value option
has
been elected are subsequently reported in earnings. The decision to elect the
fair value option is generally irrevocable, is applied instrument by instrument
and can only be applied to an entire instrument. The standard, which will be
effective for Ball as of January 1, 2008, is currently under evaluation by
Ball’s management. At this time, we do not expect to elect the fair value option
for any eligible items and did not early adopt the standard in the first quarter
of 2007 as permitted.
In
September 2006 the FASB issued SFAS No. 157, “Fair Value
Measurements,” which establishes a framework for measuring value and expands
disclosures about fair value measurements. Although it does not require any
new
fair value measurements, the statement emphasizes that fair value is a
market-based measurement, not an entity-specific measurement, and should be
determined based on the assumptions that market participants would use in
pricing the asset or liability. The standard will be effective for Ball as
of
January 1, 2008.
In
June 2006 the FASB issued 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 became effective for Ball beginning on
January 1, 2007. The adoption of FIN 48 included a net increase in
uncertain tax liabilities of $2.1 million to a total of $45.8 million,
excluding $1.2 million accrued in the opening balance sheet of the
acquisition of U.S. Can Corporation (see Note 4). Additional details about
the adoption of FIN 48 are provided in Note 12. In May 2007 the FASB
amended FIN 48 by issuing FSP FIN 48-1, which provides guidance
on how an enterprise should determine whether a tax position is effectively
settled for the purpose of recognizing previously unrecognized tax benefits.
The
adoption of FSP FIN 48-1 did not result in any changes to the amounts
recorded upon the initial adoption of FIN 48 or during the six months ended
July 1, 2007.
Page
5
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
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
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.
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 and custom and specialty
cans.
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. Effective January 1, 2007, this segment also includes
the manufacture and sale of plastic containers used for industrial and household
products, which were previously reported within the metal food and household
products packaging, Americas, segment.
Aerospace
& technologies: Consists of the manufacture and
sale of aerospace and other related products and the providing of services
used
primarily in the defense, civil space and commercial space
industries.
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.
In
the
third quarter of 2006, the company changed its expense allocation method by
allocating to each of the packaging segments stock-based compensation expense
previously included in corporate undistributed expenses. The change did not
have
a significant impact on any segment for the current or prior years. In the
fourth quarter of 2006, the company changed its method of inventory accounting
in the metal beverage, Americas, and the metal food and household products
packaging, Americas, segments from LIFO to FIFO (see Note 1). Effective
January 1, 2007, a plastic
pail
product line with expected annual net sales of $59 million was transferred
from the metal food and household products packaging, Americas, segment to
the
plastic packaging, Americas, segment. The three months and six months ended
July 2, 2006, have been retrospectively adjusted to conform to the current
presentation for the changes in expense allocation and inventory accounting
method, as well as the transfer of the plastic pail product
line.
Page
6
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
3.
|
Business
Segment Information
(continued)
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
($
in millions)
|
July
1, 2007
|
July
2, 2006
|
July
1, 2007
|
July
2, 2006
|
||||||||||||
Net
Sales
|
||||||||||||||||
Metal
beverage packaging, Americas
|
$ |
816.7
|
$ |
740.6
|
$ |
1,454.2
|
$ |
1,333.0
|
||||||||
Metal
beverage packaging, Europe/Asia
|
539.3
|
433.8
|
924.3
|
734.7
|
||||||||||||
Metal
food & household products packaging, Americas
|
284.0
|
295.2
|
562.8
|
484.5
|
||||||||||||
Plastic
packaging, Americas
|
198.7
|
197.5
|
385.3
|
319.9
|
||||||||||||
Aerospace
& technologies
|
194.1
|
175.4
|
400.4
|
335.3
|
||||||||||||
Net
sales
|
$ |
2,032.8
|
$ |
1,842.5
|
$ |
3,727.0
|
$ |
3,207.4
|
||||||||
Net
Earnings
|
||||||||||||||||
Metal
beverage packaging, Americas
|
$ |
82.6
|
$ |
67.0
|
$ |
176.4
|
$ |
120.5
|
||||||||
Metal
beverage packaging, Europe/Asia
|
92.6
|
67.5
|
137.5
|
95.6
|
||||||||||||
Property
insurance gain (Note 5)
|
–
|
74.1
|
–
|
74.1
|
||||||||||||
Total
metal beverage packaging, Europe/Asia
|
92.6
|
141.6
|
137.5
|
169.7
|
||||||||||||
Metal
food & household products packaging, Americas
|
11.1
|
4.4
|
10.9
|
7.5
|
||||||||||||
Business
consolidation gains (costs) (Note 5)
|
–
|
0.4
|
–
|
(1.7 | ) | |||||||||||
Total
metal food & household products packaging, Americas
|
11.1
|
4.8
|
10.9
|
5.8
|
||||||||||||
Plastic
packaging, Americas
|
7.1
|
8.8
|
9.4
|
10.4
|
||||||||||||
Aerospace
& technologies
|
15.6
|
8.3
|
35.2
|
17.8
|
||||||||||||
Segment
earnings before interest and taxes
|
209.0
|
230.5
|
369.4
|
324.2
|
||||||||||||
Corporate
undistributed expenses, net
|
(16.0 | ) | (6.7 | ) | (23.7 | ) | (19.2 | ) | ||||||||
Earnings
before interest and taxes
|
193.0
|
223.8
|
345.7
|
305.0
|
||||||||||||
Interest
expense
|
(38.1 | ) | (37.6 | ) | (76.0 | ) | (60.9 | ) | ||||||||
Tax
provision
|
(52.3 | ) | (61.1 | ) | (89.0 | ) | (77.6 | ) | ||||||||
Minority
interests
|
(0.1 | ) | (0.2 | ) | (0.2 | ) | (0.4 | ) | ||||||||
Equity
in results of affiliates
|
3.4
|
4.9
|
6.6
|
8.1
|
||||||||||||
Net
earnings
|
$ |
105.9
|
$ |
129.8
|
$ |
187.1
|
$ |
174.2
|
($
in millions)
|
As
of
July
1, 2007
|
As
of
December
31, 2006
|
||||||
Total
Assets
|
||||||||
Metal
beverage packaging, Americas
|
$ |
1,170.6
|
$ |
1,147.2
|
||||
Metal
beverage packaging, Europe/Asia
|
2,507.4
|
2,412.7
|
||||||
Metal
food & household products packaging, Americas (a)
|
1,168.3
|
1,094.9
|
||||||
Plastic
packaging, Americas (a)
|
580.6
|
609.0
|
||||||
Aerospace
& technologies
|
269.4
|
268.2
|
||||||
Segment
assets
|
5,696.3
|
5,532.0
|
||||||
Corporate
assets, net of eliminations
|
228.8
|
308.9
|
||||||
Total
assets
|
$ |
5,925.1
|
$ |
5,840.9
|
(a)
|
Amounts
in 2006 have been retrospectively adjusted for the transfer of a
plastic
pail product line with assets of approximately
$65
million from the metal food and household products packaging, Americas,
segment to the plastic packaging, Americas,
segment,
which occurred as of January 1,
2007.
|
Page
7
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
4.
|
Acquisitions
|
U.S.
Can Corporation
On
March 27, 2006, Ball acquired all of the issued and outstanding shares of
U.S. Can Corporation (U.S. Can) for 444,756 common shares of Ball
Corporation (valued at $44.28 per share for a total of $19.7 million)
pursuant to the provisions of a merger agreement dated February 14, 2006,
among Ball, U.S. Can and the shareholders of U.S. Can (merger agreement).
Contemporaneously with the acquisition, Ball refinanced $598.2 million of
U.S. Can debt, including $26.8 million of bond redemption premiums and fees
and $42 million of acquired net operating tax loss carryforwards expected
to be realized over the next several years. The acquired operations are included
in the metal food and household products packaging, Americas, segment, except
for a plastic pail product line that was transferred to the company’s plastic
packaging, Americas, segment effective January 1, 2007, for which 2006
amounts have been retrospectively adjusted. 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.
Pursuant
to the merger agreement, a certain portion of the common share consideration
issued for the acquisition of U.S. Can was placed in escrow and was subsequently
converted into cash, which remains in escrow. During the second quarter of
2007,
Ball asserted claims against the former shareholders of U.S. Can, and the
escrowed cash will be used to satisfy such claims to the extent they are agreed
to or sustained.
Alcan
Packaging
On
March 28, 2006, Ball acquired North American plastic bottle container
assets from Alcan Packaging (Alcan) for $184.7 million cash. The acquired
business primarily manufactures and sells barrier polypropylene plastic bottles
used in food packaging and, to a lesser extent, barrier PET plastic bottles
used
for beverages and food. The operations acquired form part of Ball’s plastic
packaging, Americas, segment. The acquisition has been accounted for as a
purchase and, accordingly, its results have been included in the consolidated
financial statements since March 28, 2006.
Following
is a summary of the net assets acquired in the U.S. Can and Alcan transactions.
The valuations were performed by management, including identification and
valuation of acquired intangible assets and of liabilities, including
development and assessment of associated costs of consolidation and integration
plans. The company also engaged third party experts to assist management in
valuing certain assets and liabilities including inventory; property, plant
and
equipment; intangible assets and pension and other post-retirement obligations.
During the first quarter of 2007, the company completed its valuation of the
acquired assets and liabilities and revised the purchase price allocations
accordingly. The final purchase price allocations resulted primarily in an
increase in identifiable intangible assets for both acquisitions.
($
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
|
164.6
|
73.6
|
238.2
|
|||||||||
Goodwill
|
353.2
|
48.6
|
401.8
|
|||||||||
Intangibles
|
63.9
|
33.7
|
97.6
|
|||||||||
Other
assets, primarily inventories and receivables
|
220.1
|
40.1
|
260.2
|
|||||||||
Liabilities
assumed (excluding refinanced debt), primarily current
|
(184.1 | ) | (11.3 | ) | (195.4 | ) | ||||||
Net
assets acquired
|
$ |
617.9
|
$ |
184.7
|
$ |
802.6
|
Page
8
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
4.
|
Acquisitions
(continued)
|
With
the
assistance of an independent valuation firm, the customer relationships and
acquired technologies of both acquisitions were identified as valuable
intangible assets, and the company assigned them an estimated life of
20 years based on the valuation firm’s estimates. Because the acquisition
of U.S. Can was a stock purchase, neither the goodwill nor the intangible assets
are deductible for U.S. income tax purposes only if, and until such time as,
the
stock is sold. However, because the Alcan acquisition was an asset purchase,
the
amortization of goodwill and intangible assets is deductible for U.S. tax
purposes.
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 a significant portion of the building and machinery and equipment.
A
€26.7 million ($33.8 million) fixed asset write down was recorded in
2006 to reflect the estimated impairment of the assets damaged as a result
of
the fire. As a result, a pretax gain of €58.4 million ($74.1 million)
was recorded in the consolidated statement of earnings in the second quarter
of
2006. This pretax gain was revised to €59.6 million ($75.5 million) by
the end of 2006. In accordance with the final agreement reached with the
insurance company in November 2006, the final property insurance proceeds
of €37.6 million ($48.6 million) were received in January 2007.
Additionally, €12.8 million ($17.2 million) and €21.1 million
($28.1 million) were recognized in cost of sales during the second quarter
and first six months of 2007, respectively, for insurance recoveries related
to
business interruption costs. Approximately €5.9 million of additional
business interruption recoveries have been agreed upon with the insurance
carrier and will be recognized during the third and fourth quarters 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 Canada.
The charge was subsequently reduced by $0.7 million in the fourth quarter
of 2006 to reflect a gain on the disposition of the plant’s fixed assets on the
completion of the shut down activities.
In
October 2006 the company announced plans to close two manufacturing
facilities in North America as part of the realignment of the metal food and
household products packaging, Americas, segment following the acquisition
earlier in the year of U.S. Can. A pretax charge of $33.6 million
($27.4 million after tax) was recorded in the fourth quarter related to the
Burlington, Ontario, plant closure, including $7.8 million of severance
costs, $16.8 million of pension costs and $9 million of other costs.
The closure of the Alliance, Ohio, plant, estimated to cost approximately
$1 million for employee and other costs, was treated as an opening balance
sheet item related to the acquisition. Operations have ceased at both plants
and
payments of $8.6 million were made in the first six months of 2007 against
the reserves.
Page
9
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
5.
|
Business
Consolidation Activities and Property Insurance Gain
(continued)
|
Summary
The
following table summarizes the 2007 year-to-date activity related to the amounts
provided for business consolidation activities:
($
in millions)
|
Fixed
Assets/
Spare
Parts
|
Employee
Costs
|
Other
|
Total
|
||||||||||||
Balance
at December 31, 2006
|
$ |
6.7
|
$ |
14.1
|
$ |
4.3
|
$ |
25.1
|
||||||||
Payments
|
–
|
(8.1 | ) | (2.8 | ) | (10.9 | ) | |||||||||
Disposal
of spare parts
|
(1.5 | ) |
–
|
–
|
(1.5 | ) | ||||||||||
Balance
at July 1, 2007
|
$ |
5.2
|
$ |
6.0
|
$ |
1.5
|
$ |
12.7
|
The
remaining reserves are expected to be utilized during 2007 and 2008. The
carrying value of fixed assets remaining for sale in connection with business
consolidation activities was $14.3 million at July 1, 2007.
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, as amended by
SFAS No. 156. Net funds received from the sale of the accounts
receivable totaled $225 million at July 1, 2007, and
$201.3 million at December 31, 2006, and are reflected as a reduction
of accounts receivable in the condensed consolidated balance
sheets.
7.
|
Inventories
|
($
in millions)
|
July 1,
2007
|
December 31,
2006
|
||||||
Raw
materials and supplies
|
$ |
386.2
|
$ |
445.6
|
||||
Work
in process and finished goods
|
512.6
|
489.8
|
||||||
$ |
898.8
|
$ |
935.4
|
Historically
the cost of the majority of metal beverage packaging, Americas, and metal food
and household products packaging, Americas, inventories were determined using
the LIFO method of accounting. During the fourth quarter of 2006, the company
determined that the FIFO method of inventory accounting better matches revenues
and expenses in accordance with sales contract terms. Therefore, in the fourth
quarter of 2006, the accounting policy was changed to record all inventories
using the FIFO method of accounting. For comparative purposes, the 2006
statements of earnings and cash flows have been retrospectively adjusted on
a
FIFO basis in accordance with SFAS No. 154, “Accounting Changes and Error
Corrections – a Replacement of APB Opinion No. 20 and FASB Statement
No. 3.”
Page
10
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
7.
|
Inventories
(continued)
|
The
following table summarizes the effect of the accounting change on the company’s
consolidated financial statements:
Three
Months Ended July 2, 2006
|
Six
Months Ended July 2, 2006
|
|||||||||||||||
($
in millions, except per share amounts)
|
As
Originally Reported
|
As
Adjusted for Accounting Change
|
As
Originally Reported
|
As
Adjusted for Accounting Change
|
||||||||||||
Consolidated
statements of earnings:
|
||||||||||||||||
Cost
of sales
|
$ |
1,550.0
|
$ |
1,554.8
|
$ |
2,706.3
|
$ |
2,711.5
|
||||||||
Tax
provision
|
(63.0 | ) | (61.1 | ) | (79.7 | ) | (77.6 | ) | ||||||||
Net
earnings
|
132.7
|
129.8
|
177.3
|
174.2
|
||||||||||||
Basic
earnings per share
|
1.28
|
1.25
|
1.71
|
1.68
|
||||||||||||
Diluted
earnings per share
|
1.26
|
1.23
|
1.69
|
1.66
|
||||||||||||
Consolidated
statements of cash flows:
|
||||||||||||||||
Deferred
taxes
|
14.3
|
12.2
|
||||||||||||||
Change
in working capital
|
(275.6 | ) | (270.4 | ) |
8.
|
Property,
Plant and Equipment
|
($
in millions)
|
July
1,
2007
|
December
31,
2006
|
||||||
Land
|
$ |
89.8
|
$ |
88.5
|
||||
Buildings
|
796.8
|
764.1
|
||||||
Machinery
and equipment
|
2,816.6
|
2,618.6
|
||||||
Construction
in progress
|
128.3
|
215.1
|
||||||
3,831.5
|
3,686.3
|
|||||||
Accumulated
depreciation
|
(1,917.7 | ) | (1,810.3 | ) | ||||
$ |
1,913.8
|
$ |
1,876.0
|
Property,
plant and equipment are stated at historical cost. Depreciation expense amounted
to $65.5 million and $126.7 million for the three months and six
months ended July 1, 2007, respectively, and $60.7 million and
$112.5 million for the three months and six months ended July 2, 2006,
respectively.
Page
11
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
9.
|
Goodwill
|
($
in millions)
|
Metal
Beverage
Packaging,
Americas
|
Metal
Beverage
Packaging,
Europe/Asia
|
Metal
Food & Household Products Packaging, Americas
|
Plastic
Packaging,
Americas
|
Total
|
|||||||||||||||
Balance
at December 31, 2006
|
$ |
279.4
|
$ |
1,020.6
|
$ |
389.0
|
$ |
84.7
|
$ |
1,773.7
|
||||||||||
Purchase
accounting adjustments (a)
|
–
|
–
|
(4.7 | ) | (1.0 | ) | (5.7 | ) | ||||||||||||
Transfer
of plastic pail product line
|
–
|
–
|
(30.0 | ) |
30.0
|
–
|
||||||||||||||
FIN
48 adoption adjustments (Notes 2 and 12)
|
–
|
(9.3 | ) |
–
|
–
|
(9.3 | ) | |||||||||||||
Effects
of foreign currency exchange rates
|
–
|
24.9
|
–
|
0.2
|
25.1
|
|||||||||||||||
Balance
at July 1, 2007
|
$ |
279.4
|
$ |
1,036.2
|
$ |
354.3
|
$ |
113.9
|
$ |
1,783.8
|
(a)
|
Related
to the final purchase price allocations for the U.S. Can and Alcan
acquisitions discussed in
Note 4.
|
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.
10.
|
Intangibles
and Other Assets
|
($
in millions)
|
July
1,
2007
|
December
31,
2006
|
||||||
Investments
in affiliates
|
$ |
78.3
|
$ |
76.5
|
||||
Intangibles
(net of accumulated amortization of $80 at July 1,
2007, and $70.7 at December 31, 2006)
|
126.8
|
116.2
|
||||||
Company-owned
life insurance
|
83.4
|
77.5
|
||||||
Deferred
tax asset
|
23.2
|
34.9
|
||||||
Property
insurance receivable (Note 5)
|
–
|
49.7
|
||||||
Other
|
59.3
|
75.1
|
||||||
$ |
371.0
|
$ |
429.9
|
Total
amortization expense of intangible assets amounted to $4.4 million and
$8.2 million for the three months and six months ended July 1, 2007,
respectively, and $4.2 million and $7 million for the comparable
periods in 2006, respectively.
Page
12
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
11.
|
Debt
and Interest Costs
|
Long-term
debt consisted of the following:
July
1, 2007
|
December
31, 2006
|
|||||||||||||||
(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 $2.9 in 2007
and
$3.2 in 2006)
|
$ |
550.0
|
$ |
550.0
|
$ |
550.0
|
$ |
550.0
|
||||||||
6.625%
Senior Notes, due March 2018 (excluding discount of $0.8 in 2007 and
$0.9 in 2006)
|
$ |
450.0
|
450.0
|
$ |
450.0
|
450.0
|
||||||||||
Senior
Credit Facilities, due October 2011 (at variable
rates)
|
||||||||||||||||
Term
A Loan, British sterling denominated
|
₤
|
85.0
|
170.7
|
₤ |
85.0
|
166.4
|
||||||||||
Term
B Loan, euro denominated
|
€ |
350.0
|
473.7
|
€ |
350.0
|
462.0
|
||||||||||
Term
C Loan, Canadian dollar denominated
|
C$
|
129.0
|
121.1
|
C$
|
134.0
|
114.9
|
||||||||||
Term
D Loan, U.S. dollar denominated
|
$ |
500.0
|
500.0
|
$ |
500.0
|
500.0
|
||||||||||
U.S.
dollar multi-currency revolver borrowings
|
$ |
10.0
|
10.0
|
$ |
15.0
|
15.0
|
||||||||||
British
sterling multi-currency revolver borrowings
|
₤
|
4.0
|
8.0
|
₤ |
4.0
|
7.8
|
||||||||||
Canadian
dollar multi-currency revolver borrowings
|
C$
|
10.0
|
9.4
|
–
|
–
|
|||||||||||
Industrial
Development Revenue Bonds
|
||||||||||||||||
Floating
rates due through 2015
|
$ |
13.0
|
13.0
|
$ |
20.0
|
20.0
|
||||||||||
Other
|
Various
|
20.8
|
Various
|
25.5
|
||||||||||||
2,326.7
|
2,311.6
|
|||||||||||||||
Less:
Current portion of long-term debt
|
(93.7 | ) | (41.2 | ) | ||||||||||||
$ |
2,233.0
|
$ |
2,270.4
|
At
July 1, 2007, approximately $678 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 $335 million at July 1, 2007, of
which $68.4 million was outstanding and due on demand.
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 1, 2007, 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
|
Effective
January 1, 2007, Ball adopted FIN 48, “Accounting for Uncertainty in Income
Taxes.” As of the date of adoption, the accrual for uncertain tax positions was
$45.8 million and the cumulative effect of the adoption was an increase in
the
reserve for uncertain tax positions of $2.1 million. The accrual includes
an $11.4 million charge to opening retained earnings and a
$9.3 million reduction in goodwill. An additional adjustment was made to
increase goodwill by $1.2 million in the opening balance sheet of the
acquisition of U.S. Can. During the six months ended July 1, 2007, the
accrual has been increased by $2.1 million, primarily related to interest
on accrued uncertain tax positions.
Page
13
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
13.
|
Employee
Benefit Obligations
|
($ in millions) |
July
1,
2007
|
December
31,
2006
|
||||||
Total
defined benefit pension liability
|
$ |
520.1
|
$ |
510.6
|
||||
Less
current portion
|
(25.2 | ) | (24.1 | ) | ||||
Long-term
defined benefit pension liability
|
494.9
|
486.5
|
||||||
Retiree
medical and other postemployment benefits
|
200.8
|
191.1
|
||||||
Deferred
compensation plans
|
143.5
|
144.0
|
||||||
Other
|
10.4
|
26.1
|
||||||
$ |
849.6
|
$ |
847.7
|
Components
of net periodic benefit cost associated with the company’s defined benefit
pension plans were:
Three
Months Ended
|
||||||||||||||||||||||||
July
1, 2007
|
July
2, 2006
|
|||||||||||||||||||||||
($
in millions)
|
U.S.
|
Foreign
|
Total
|
U.S.
|
Foreign
|
Total
|
||||||||||||||||||
Service
cost
|
$ |
10.3
|
$ |
2.1
|
$ |
12.4
|
$ |
7.2
|
$ |
2.2
|
$ |
9.4
|
||||||||||||
Interest
cost
|
11.8
|
7.5
|
19.3
|
11.0
|
6.9
|
17.9
|
||||||||||||||||||
Expected
return on plan assets
|
(13.6 | ) | (4.5 | ) | (18.1 | ) | (12.1 | ) | (4.0 | ) | (16.1 | ) | ||||||||||||
Amortization
of prior service cost
|
0.3
|
(0.1 | ) |
0.2
|
1.2
|
–
|
1.2
|
|||||||||||||||||
Recognized
net actuarial loss
|
3.4
|
1.1
|
4.5
|
4.9
|
0.8
|
5.7
|
||||||||||||||||||
Subtotal
|
12.2
|
6.1
|
18.3
|
12.2
|
5.9
|
18.1
|
||||||||||||||||||
Non-company
sponsored plans
|
0.3
|
–
|
0.3
|
0.2
|
–
|
0.2
|
||||||||||||||||||
Net
periodic benefit cost
|
$ |
12.5
|
$ |
6.1
|
$ |
18.6
|
$ |
12.4
|
$ |
5.9
|
$ |
18.3
|
Six
Months Ended
|
||||||||||||||||||||||||
July
1, 2007
|
July
2, 2006
|
|||||||||||||||||||||||
($
in millions)
|
U.S.
|
Foreign
|
Total
|
U.S.
|
Foreign
|
Total
|
||||||||||||||||||
Service
cost
|
$ |
20.4
|
$ |
4.3
|
$ |
24.7
|
$ |
14.3
|
$ |
4.4
|
$ |
18.7
|
||||||||||||
Interest
cost
|
23.5
|
14.8
|
38.3
|
21.9
|
13.4
|
35.3
|
||||||||||||||||||
Expected
return on plan assets
|
(27.2 | ) | (8.9 | ) | (36.1 | ) | (24.1 | ) | (7.8 | ) | (31.9 | ) | ||||||||||||
Amortization
of prior service cost
|
0.4
|
(0.2 | ) |
0.2
|
2.5
|
(0.1 | ) |
2.4
|
||||||||||||||||
Recognized
net actuarial loss
|
6.8
|
2.3
|
9.1
|
9.8
|
1.6
|
11.4
|
||||||||||||||||||
Subtotal
|
23.9
|
12.3
|
36.2
|
24.4
|
11.5
|
35.9
|
||||||||||||||||||
Non-company
sponsored plans
|
0.6
|
0.1
|
0.7
|
0.5
|
–
|
0.5
|
||||||||||||||||||
Net
periodic benefit cost
|
$ |
24.5
|
$ |
12.4
|
$ |
36.9
|
$ |
24.9
|
$ |
11.5
|
$ |
36.4
|
Contributions
to the company’s defined benefit pension plans, not including the unfunded
German plans, were $26.8 million in the first six months of 2007
($37.3 million in 2006). The total required contributions to these funded
plans are expected to be approximately $56 million in 2007. Additionally,
as part of the company’s overall debt reduction plan, we anticipate contributing
up to an incremental $45 million ($27 million after tax) to our North
American pension plans during the fourth quarter of 2007. Payments
to
participants in the unfunded German plans were €8.8 million ($11.8 million)
in the first six months of 2007 and are expected to be approximately
€19 million (approximately $25 million) for the full
year.
Page
14
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
13.
|
Employee
Benefit Obligations
(continued)
|
In
accordance with new United Kingdom pension regulations, Ball has provided an
£8 million guarantee to the plan for its defined benefit plan in the United
Kingdom. If the company’s credit rating falls below specified levels, Ball will
be required to either: (1) contribute an additional £8 million to the
plan, (2) provide a letter of credit to the plan in that amount or
(3) provide a lien on company assets to the plan in that amount. The
guarantee can be removed upon approval by both Ball and the pension plan
trustees.
14. Shareholders’
Equity and Comprehensive Earnings
Accumulated
Other Comprehensive Earnings
(Loss)
|
Accumulated
other comprehensive earnings (loss) include the cumulative effect of foreign
currency translation, pension and other postretirement items and realized and
unrealized gains and losses on derivative instruments receiving cash flow hedge
accounting treatment.
($
in millions)
|
Foreign
Currency
Translation
|
Effective
Financial
Derivatives(a)
(net
of tax)
|
Pension
and Other Postretirement Items
(net
of tax)
|
Accumulated
Other
Comprehensive
Earnings
(Loss)
|
||||||||||||
December
31, 2006
|
$ |
131.8
|
$ |
0.6
|
$ | (161.9 | ) | $ | (29.5 | ) | ||||||
Change
|
16.8
|
12.8
|
5.5
|
35.1
|
||||||||||||
July
1, 2007
|
$ |
148.6
|
$ |
13.4
|
$ | (156.4 | ) | $ |
5.6
|
(a)
|
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 1,
2007
|
July 2,
2006
|
July 1,
2007
|
July 2,
2006
|
||||||||||||
Net
earnings
|
$ |
105.9
|
$ |
129.8
|
$ |
187.1
|
$ |
174.2
|
||||||||
Foreign
currency translation adjustment
|
9.0
|
21.7
|
16.8
|
30.7
|
||||||||||||
Effect
of derivative instruments
|
8.7
|
2.4
|
12.8
|
0.5
|
||||||||||||
Pension
and other postretirement items
|
2.8
|
11.5
|
5.5
|
11.5
|
||||||||||||
Comprehensive
earnings
|
$ |
126.4
|
$ |
165.4
|
$ |
222.2
|
$ |
216.9
|
Page
15
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
14. Shareholders’
Equity and Comprehensive Earnings (continued)
Stock-Based
Compensation Programs
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. Payment must be made
at
the time of exercise in cash or with shares of stock owned by the option holder,
which are valued at fair market value on the date exercised. In general, options
are exercisable in four equal installments commencing one year from the date
of
grant and terminate 10 years from the date of grant. A summary of stock
option activity for the six months ended July 1, 2007, follows:
Outstanding
Options
|
Nonvested
Options
|
|||||||||||||||
Number
of Shares
|
Weighted
Average Exercise
Price
|
Number
of Shares
|
Weighted
Average Grant Date Fair Value
|
|||||||||||||
Beginning
of year
|
4,852,978
|
$ |
26.69
|
1,286,937
|
$ |
10.27
|
||||||||||
Granted
|
949,200
|
49.32
|
949,200
|
11.22
|
||||||||||||
Vested
|
(473,607 | ) |
10.12
|
|||||||||||||
Exercised
|
(702,746 | ) |
20.86
|
|||||||||||||
Canceled/forfeited
|
(20,050 | ) |
41.99
|
(20,050 | ) |
10.40
|
||||||||||
End
of period
|
5,079,382
|
31.67
|
1,742,480
|
10.83
|
||||||||||||
Vested
and exercisable, end of period
|
3,336,902
|
24.26
|
||||||||||||||
Reserved
for future grants
|
4,789,342
|
The
options granted in April 2007 included 402,168 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 1,
2007, was 6.6 years and the aggregate intrinsic value (difference in
exercise price and closing price at that date) was $109.2 million. The
weighted average remaining contractual term for options vested and exercisable
at July 1, 2007, was 5.2 years and the aggregate intrinsic value was
$96.5 million. The company received $10.2 million from options
exercised during the three months ended July 1, 2007. The intrinsic value
associated with these exercises was $12.1 million and the associated tax
benefit of $3.8 million was reported as other financing activities in the
condensed consolidated statement of cash flows. During the six months ended
July 1, 2007, the company received $14.7 million from options
exercised. The intrinsic value associated with exercises for that period was
$20.2 million and the associated tax benefit reported as other financing
activities was $6.7 million.
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 2007 have an estimated weighted average fair value at the date of
grant of $11.22 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
|
0.81%
|
|
Expected
stock price volatility
|
17.94%
|
|
Risk-free
interest rate
|
4.55%
|
|
Expected
life of options
|
4.75
years
|
|
Forfeiture
rate
|
12.00%
|
Page
16
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
14. Shareholders’
Equity and Comprehensive Earnings (continued)
In
addition to stock options, the company issues to certain employees restricted
shares 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.
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) 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 in stages if established share ownership guidelines
are met, assuming the relevant qualifying purchased shares are not sold or
transferred prior to that time. Grants under the plan are accounted for as
equity awards and compensation expense is recorded based upon the fair value
of
the shares at the grant date.
In
April 2007 the company’s board of directors granted
170,000 performance-contingent restricted stock units, which will cliff
vest if the company’s return on average invested capital during a 33-month
performance period is equal to or exceeds the company’s estimated cost of
capital. If the performance goal is not met, the shares will be forfeited.
Current assumptions are that the performance targets will be met and,
accordingly, grants under the plan are being accounted for as equity awards
and
compensation expense is recorded based upon the fair value (closing market
price) of the shares at the grant date. On a quarterly basis, the company will
reassess the probability of the goal being met and will adjust compensation
expense as appropriate.
For
the
three and six months ended July 1, 2007, the company recognized in selling,
general and administrative expense pretax expense of $12.6 million
($7.6 million after tax) and $17.4 million ($10.5 after tax),
respectively, for share-based compensation arrangements, which represented
$0.07 per basic and diluted share for the second quarter of 2007 and
$0.10 per basic and diluted share for the first six months. For the three
and six months ended July 2, 2006, the company recognized pretax expense of
$4.2 million ($2.5 million after tax) and $7.3 million
($4.4 million after tax) for such arrangements, which represented $0.02 per
basic and diluted share and $0.04 per basic and diluted share,
respectively, for those periods. At July 1, 2007, there was $38.2 million
of total unrecognized compensation costs related to nonvested share-based
compensation arrangements. This cost is expected to be recognized in earnings
over a weighted-average period of 2.9 years.
15. Earnings
Per Share
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
($
in millions, except per share amounts; shares in
thousands)
|
July 1,
2007
|
July 2,
2006
|
July 1,
2007
|
July 2,
2006
|
||||||||||||
Diluted
Earnings per Share:
|
||||||||||||||||
Net
earnings
|
$ |
105.9
|
$ |
129.8
|
$ |
187.1
|
$ |
174.2
|
||||||||
Weighted
average common shares
|
101,542
|
103,655
|
101,826
|
103,449
|
||||||||||||
Effect
of dilutive securities
|
1,623
|
1,550
|
1,548
|
1,684
|
||||||||||||
Weighted
average shares applicable to
diluted earnings per share
|
103,165
|
105,205
|
103,374
|
105,133
|
||||||||||||
Diluted
earnings per share
|
$ |
1.03
|
$ |
1.23
|
$ |
1.81
|
$ |
1.66
|
Page
17
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
15. Earnings
Per Share (continued)
The
following outstanding options were excluded from the diluted earnings per share
calculation since they were anti-dilutive (i.e., the sum of the proceeds,
including the unrecognized compensation, exceeded the average closing stock
price for the period):
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||||
Option
Price:
|
July 1,
2007
|
July 2,
2006
|
July 1,
2007
|
July 2,
2006
|
||||||||||||||
$
|
39.74
|
−
|
700,700
|
–
|
–
|
|||||||||||||
$
|
43.69
|
−
|
905,000
|
867,025
|
905,000
|
|||||||||||||
$
|
49.32
|
949,200
|
−
|
949,200
|
−
|
|||||||||||||
949,200
|
1,605,700
|
1,816,225
|
905,000
|
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
the
company 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.
During
the second quarter of 2007, Miller Brewing Company (customer) asserted various
claims against Ball Metal Beverage Container Corp. (BMBCC), a wholly owned
subsidiary of the company, alleging that BMBCC has breached its contract with
the customer for the supply of aluminum beverage containers. The customer
alleges, among other things, that Ball breached contract provisions relating
to
the pricing of the aluminum components of container costs and claims sizeable
damages for breach of contract. BMBCC disputes the claims and asserts that
it
has performed in accordance with the supply contract. The parties are engaging
in non-binding mediation under the supply contract and, if the dispute is not
settled through mediation scheduled for the fourth quarter of 2007, the contract
provides for the matter to be finally settled by arbitration. BMBCC and the
customer are continuing to perform under the supply contract during the pendency
of this matter. The company believes that BMBCC has meritorious defenses against
the customer’s claims, although, because of the uncertainties inherent in the
mediation or arbitration process, it is unable to predict the outcome. The
outcome is uncertain, and the company’s view is that under SFAS No. 5,
“Accounting for Contingencies,” a loss is not probable and the amount of the
loss, if any, cannot be reasonably estimated.
The
IRS
has proposed to disallow Ball’s deductions of interest expense for the tax years
2000 through 2004 incurred on loans under a company-owned life insurance plan
that was established in 1986. Ball has disputed the IRS’s claims, and the
company believes the interest deductions will be sustained as
filed.
Our
information at this time does not indicate that the above matters will have
a
material adverse effect upon the liquidity, results of operations or financial
condition of the company.
Page
18
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
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; guarantees
in
respect of certain foreign subsidiaries’ pension plans; 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 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 condensed 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 to 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.
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.
Page
19
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” or “our” in the following discussion and
analysis.
BUSINESS
OVERVIEW
Ball
Corporation is one of the world’s leading suppliers of metal and plastic
packaging to the beverage, food and household products industries. Our packaging
products are produced for a variety of end uses and are manufactured
in plants around the world. We also 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 products with which we have developed long-term customer
relationships. This is evidenced by our high customer retention and our large
number of long-term supply contracts. While we have diversified our customer
base, we do sell a majority of our packaging products to relatively few major
companies in North America, Europe, the People’s Republic of China (PRC) and
Argentina, as do our equity joint ventures in Brazil, the U.S. and the PRC.
We
also purchase raw materials from relatively few suppliers. Because of our
customer and supplier concentration, our business, financial condition and
results of operations could be adversely affected by the loss 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, expanding volume and increasing pricing. In 2008 we
expect to complete a project to upgrade and streamline our North American
beverage can end manufacturing capabilities, a project that is expected to
result in productivity gains and cost reductions beginning this year. 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 increasing
capacity in some of our European can manufacturing facilities. To better
position the company in the European market, the capacity from the fire-damaged
Hassloch, Germany, plant was 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. All three
lines were in commercial production by the end of the second quarter of 2007.
The company regularly evaluates expansion opportunities in growing international
markets, including Europe and the PRC.
As
part
of our packaging strategy, we are focused on developing and marketing new and
existing products that meet the needs of our 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.
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.
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-type
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.
Page
20
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
metric we use is economic value added (tax-effected operating earnings, as
defined by the company, less a charge for net operating assets employed). Our
goal is to increase economic value added on an annual basis. Other financial
metrics we use are earnings before interest and taxes (EBIT); earnings before
interest, taxes, depreciation and amortization (EBITDA); diluted earnings per
share; operating cash flow and free cash flow (generally defined by the company
as cash flow from operating activities less capital expenditures). These
financial measures may be adjusted at times for items that affect comparability
between periods. Nonfinancial measures in the packaging segments include
production efficiency and spoilage rates, quality control figures, 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 essential to the
success of Ball and, because of this, we strive to pay employees competitively
and encourage their ownership of the company’s common stock as part of a
diversified portfolio. For most management employees, a meaningful portion
of
compensation is at risk as an incentive, dependent upon economic value added
operating performance. For more senior positions, more compensation is at risk.
Through our employee stock purchase plan and 401(k) plan, which matches employee
contributions with Ball common stock, employees, regardless of organizational
level, have opportunities to own Ball stock.
CONSOLIDATED
SALES AND EARNINGS
The
company has five reportable segments organized along a combination of product
lines and geographic areas: (1) metal beverage packaging,
Americas; (2) metal beverage packaging, Europe/Asia; (3) metal food
and household products packaging, Americas; (4) plastic packaging, Americas;
and
(5) aerospace and technologies. We also have investments in companies in
the U.S., the PRC and Brazil, which are accounted for using the equity method
of
accounting and, accordingly, those results are not included in segment sales
or
earnings.
During
the fourth quarter of 2006, the company changed its method of inventory
accounting for certain inventories in the metal beverage, Americas, and the
metal food and household products packaging, Americas, segments from the
last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method.
In
the third quarter of 2006, the company changed its expense allocation method
by
allocating to each of the packaging segments stock-based compensation expense
previously included in corporate undistributed expenses. Effective
January 1, 2007, a plastic
pail
product line with expected annual net sales of $59 million was transferred
from the metal food and household products packaging, Americas, segment to
the
plastic packaging, Americas, segment. The three months and six months ended
July 2, 2006, have been retrospectively adjusted to conform to the current
presentation for the changes in expense allocation and inventory accounting
method, as well as the transfer of the plastic pail product line.
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
in
beverage packaging. This segment accounted for 40 percent of consolidated
net sales in the second quarter of 2007 (40 percent in 2006) and
39 percent in the first six months (42 percent in 2006). Sales were
9 percent higher in the first six months of 2007 than in 2006 as a result
of higher sales prices, which were primarily due to rising aluminum prices
and
the pass through of various cost increases to customers.
Segment
earnings of $82.6 million in the second quarter of 2007 were
23 percent higher than the second quarter 2006 earnings of $67 million
while earnings of $176.4 million in the first six months of 2007 were
46 percent higher than the prior year earnings of $120.5 million for
the same period. Contributing to the higher earnings in 2007 were gains from
purchases of raw materials in advance of scheduled price increases combined
with
the positive
cost impacts from new end technology projects and improved production
efficiencies in our manufacturing facilities. Reductions in energy costs also
contributed to the improved earnings performance.
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21
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. As
part of this focus, we plan to invest in additional custom can capacity in
the
second half of 2007.
Metal
Beverage Packaging, Europe/Asia
The
metal
beverage packaging, Europe/Asia, segment includes metal beverage packaging
products manufactured and sold in Europe and Asia, as well as plastic containers
manufactured and sold in Asia. This segment accounted for 26 percent of
consolidated net sales in the second quarter of 2007 and 25 percent in the
first six months (23 percent in both periods of 2006). Segment sales in the
second quarter and first six months of 2007 were 24 percent and
26 percent higher, respectively, compared to the same periods of the prior
year due largely to strong demand, market growth, higher volumes, price recovery
initiatives and the strength of the euro. Higher segment volumes were aided
by
overall market dynamics in Europe and the PRC that favor beverage cans, as
well
as growth in Europe of custom can volumes. While the return of the metal
beverage can to the German market, following the mandatory deposit legislation
previously reported on, has been slow, demand in southern and eastern Europe
experienced double-digit percentage growth in the first six months of
2007.
Segment
earnings were $92.6 million in the second quarter of 2007 and
$137.5 million in the first six months compared to $141.6 million
and $169.7 million for the same periods in 2006, respectively. The second
quarter of 2006 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). Earnings in 2007 were favorably impacted by
increased sales volumes; price recovery initiatives; a stronger euro; and
manufacturing and selling, general and administrative cost control programs.
These improvements were partially offset by higher raw material, freight and
energy costs.
On
April 1, 2006, a fire in the metal beverage can plant in Hassloch, Germany,
damaged a significant portion of the building and machinery and equipment.
A
€26.7 million ($33.8 million) fixed asset write down was recorded in
2006 to reflect the estimated impairment of the assets damaged as a result
of
the fire. As a result, a pretax gain of €58.4 million ($74.1 million)
was recorded in the consolidated statement of earnings in the second quarter
of
2006. This pretax gain was revised to €59.6 million ($75.5 million) by
the end of 2006. In accordance with the final agreement reached with the
insurance company in November 2006, the final property insurance proceeds
of €37.6 million ($48.6 million) were received in January 2007.
Additionally, €12.8 million ($17.2 million) and €21.1 million
($28.1 million) were recognized in cost of sales during the second quarter
and first six months of 2007, respectively, for insurance recoveries related
to
business interruption costs. A total of €5.9 million of additional business
interruption recoveries has been agreed upon with the insurance carrier and
will
be recognized during the third and fourth quarters 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. The company acquired U.S. Can
Corporation (U.S. Can) on March 27, 2006, and with that acquisition, added
to its metal food can manufacturing the production of aerosol cans, paint cans
and custom and specialty cans. Effective January 1, 2007, responsibility
for a plastic pail product line was transferred to the plastic packaging,
Americas, segment. Accordingly, 2006 segment amounts have been retrospectively
adjusted to reflect the transfer.
Segment
sales, which comprised 14 percent of consolidated net sales in the second
quarter of 2007 (16 percent in 2006) and 15 percent in the first six
months (15 percent in 2006), were 4 percent below the second quarter
of 2006 and 16 percent above the first six months. The decrease in the
second quarter was due to lower sales volumes in the quarter compared to a
year
ago, while the increase in the first six months was due to the inclusion of
sales from the acquisition of U.S. Can, partially offset by lower food can
volumes.
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22
Segment
earnings were $11.1 million in the second quarter of 2007 compared to
$4.8 million in the second quarter of 2006, and $10.9 million in the
first six months of 2007 compared to $5.8 million in 2006. The first
quarter of 2006 included a pretax charge of $2.1 million ($1.4 million
after tax) related to the shut down of a food can manufacturing line in Canada.
The second quarter of 2006 included earnings of $0.4 million related to the
2005 closure of a Canadian plant. The improvement in earnings in the second
quarter of 2007 was due to improved manufacturing performance in 2007 and higher
cost of sales in the second quarter of 2006 due to inventory step-up costs
relating to the U.S. Can acquisition, partially offset by higher material costs
and lower sales volumes in 2007. The improvement in earnings in the first six
months of 2007 was due to the favorable factors discussed above, partially
offset by higher costs in the first quarter of 2007 as a result of poor
manufacturing performance in late 2006 carried into 2007 and higher
manufacturing costs and inefficiencies attributable to ongoing integration
efforts related to the closure of our Burlington, Ontario, manufacturing
facility in the fourth quarter of 2006.
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.
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, as well
as high density polyethylene and polypropylene containers for industrial and
household product applications. On March 28, 2006, Ball acquired certain
North American plastic bottle container assets from Alcan Packaging (Alcan),
including 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. Effective January 1, 2007, the plastic packaging,
Americas, segment assumed responsibility for the plastic pail assets acquired
as
part of the U.S. Can acquisition. Accordingly, 2006 segment amounts have been
retrospectively adjusted to reflect the transfer.
Segment
sales, which accounted for 10 percent of consolidated net sales in both the
second quarter and first six months of 2007 (11 percent and 10 percent
for the comparable periods in 2006), were up 1 percent compared to the
second quarter of 2006, and 20 percent higher than the first six months of
2006. The segment sales increase in the first six months of 2007 was related
to
the Alcan and U.S. Can acquisitions in March 2006, as well as higher PET
sales volumes and prices compared to 2006. The segment sales increase in the
second quarter of 2007 was attributable to higher bottle volumes and prices
on
existing business lines. We continue to focus our PET development efforts in
the
custom hot-fill, beer, wine, flavored alcoholic beverage and specialty container
markets, and we have added specialty container production capacity in these
areas to accommodate anticipated new demand. In the polypropylene
plastic container area, development efforts are primarily focused on custom
packaging markets.
Segment
earnings of $7.1 million in the second quarter of 2007 and
$9.4 million in the first six months were lower than 2006 earnings of
$8.8 million and $10.4 million for the same periods, respectively. The
lower earnings were largely due to lower margins related to the temporary idling
of PET bottle production capacity attributable to lower-than-expected custom
PET
sales volumes and higher labor and depreciation costs.
Aerospace
& Technologies
Aerospace
and technologies segment sales, which represented 10 percent of
consolidated net sales in the second quarter of 2007 (10 percent in 2006)
and 11 percent in the first six months (10 percent in 2006), were
11 percent higher in the second quarter of 2007 than in 2006 and
19 percent higher in the first six months. The higher sales were due to new
programs, increased scope on previously awarded contracts and cost overruns.
Segment earnings were $15.6 million in the second quarter of 2007 compared
to $8.3 million in 2006 and $35.2 million in the first six months
compared to $17.8 million in 2006. Earnings improvement through the second
quarter of 2007 was due to an improved contract mix as a consequence of newer,
more profitable programs.
Contracted
backlog in the aerospace and technologies segment at July 1, 2007, was
$753 million compared to a backlog of $886 million at December 31,
2006. The backlog at the end of the second quarter does not include the
award to Ball in July 2007 of a contract valued at more than
$120 million to build the Operational Land Imager for the eighth Landsat
Data Continuity Mission. Comparisons of backlog are not necessarily indicative
of the trend of future operations.
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23
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 $87.3 million in the
second quarter of 2007 compared to $73.5 million for the same period in
2006 and $169.5 million in the first six months of 2007 compared to
$143.8 million in the first six months of 2006. Contributing to higher
expenses in 2007 compared to 2006 were $4.5 million of additional SG&A
from the U.S. Can acquisition, expense of $9.2 million associated with the
mark-to-market adjustment of a deferred stock incentive compensation plan and
normal compensation and benefit increases, including incentive compensation.
Also, a $5.8 million out-of-period adjustment was included in SG&A
expenses in the first quarter of 2006.
Interest
and Taxes
Consolidated
interest expense was $38.1 million for the second quarter of 2007 compared
to $37.6 million in the same period of 2006 and $76 million for the
first six months of 2007 compared to $60.9 million for the same period in
2006. The higher expense in 2007 was primarily due to higher average borrowings
in connection with the company’s acquisitions in March 2006, as well as
higher foreign exchange rates and interest rates on foreign currency borrowings
in Europe, partially offset by the reduced debt levels in second
quarter 2007 versus second quarter 2006.
The
consolidated effective income tax rate was 33 percent for the first six months
of 2007 compared to 32 percent for the same period in 2006. The tax rate
was higher in 2007 primarily due to the current impact of Financial
Interpretation No. (FIN) 48, which the company adopted as of
January 1, 2007; slightly lower projected tax credits in 2007; the
expiration, on December 31, 2006, of the extraterritorial income exclusion
for exporters, which was partially offset by an increase in the 2007
manufacturing deduction percentage; and a shift in the pretax income mix to
higher tax jurisdictions. In addition, the 2006 effective tax rate included
a
discrete period $1.4 million tax benefit recorded upon the settlement of
certain tax matters, as well as the tax benefit for some non-recurring
deductions, including a Canadian rationalization charge. Details regarding
the
adoption of FIN 48 are included in Note 12 to the unaudited condensed
consolidated financial statements within Item 1 of this
report.
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 provided by operations were $251.1 million in the first six months of
2007 compared to cash flows used of $66.2 million in the first six months
of 2006. The improvement over 2006 was primarily due to higher net earnings,
lower receivables and inventories and lower income tax payments.
Based
on
information currently available, we estimate 2007 capital spending to be
approximately $300 million, net of property insurance recoveries, compared
to 2006 net capital spending of $218.3 million.
Interest-bearing
debt decreased to $2,395.1 million at July 1, 2007, compared to
$2,451.7 million at December 31, 2006, primarily due to lower receivables
and inventories, partially offset by higher common stock repurchases and a
higher euro. We intend to allocate our operating cash flow in the balance of
2007 to debt reduction, dividends and common stock repurchases. Our stock
repurchase program, net of issuances, is expected to be around $200 million
in 2007 compared to $45.7 million in 2006. Through the first six months of
2007, we repurchased $95.3 million of our common stock, net of issuances,
including the $51.9 million settlement in January 2007 of a forward
contract commenced in December 2006.
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24
Total
required contributions to the company’s defined benefit plans, not including the
unfunded German plans, are expected to be approximately $56 million in
2007. As part of the company’s overall debt reduction plan, we anticipate
contributing up to an incremental $45 million ($27 million after tax)
to our North American pension plans during the fourth quarter of 2007. We expect
these incremental contributions to bring the North American pension plans’
funding to the 95 percent level. This
estimate
may change based on plan asset performance, the revaluation of the plans’
liabilities later in 2007 and revised estimates of 2007 full-year cash flows.
Payments to participants in the unfunded German plans are expected to be
approximately €19 million for the full year (approximately $25
million).
At
July
1, 2007, approximately $678 million was available under the company’s
multi-currency revolving credit facilities. In addition, the company had
short-term uncommitted credit facilities of up to $335 million at the end
of the second quarter, of which $68.4 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 Statement of Financial
Accounting Standards (SFAS) No. 140, as amended by SFAS No. 156.
Net funds received from the sale of the accounts receivable totaled
$225 million at July 1, 2007, and $201.3 million at December 31, 2006,
and are reflected as a reduction of accounts receivable in the condensed
consolidated balance sheets.
The
company was in compliance with all loan agreements at July 1, 2007, 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.
In
accordance with new United Kingdom pension regulations, Ball has provided an
£8 million guarantee to the plan for its defined benefit plan in the United
Kingdom. If the company’s credit rating falls below specified levels, Ball will
be required to either: (1) contribute an additional £8 million to the
plan, (2) provide a letter of credit to the plan in that amount or
(3) provide a lien on company assets to the plan in that amount. The
guarantee can be removed upon approval by both Ball and the pension plan
trustees.
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.
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25
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 can 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
of 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 to match
commodity price risk with sales contracts.
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
that we will be able to pass through the majority of the steel price increases
that occur through the end of 2007.
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. To minimize Ball’s exposure to significant price changes, the
company also uses forward and option contracts as cash flow hedges to manage
future aluminum price risk and foreign exchange exposures for those sales
contracts where there is not a pass-through arrangement.
Outstanding
derivative contracts at the end of the second quarter of 2007 expire within
five
years. Included in shareholders’ equity at July 1, 2007, within accumulated
other comprehensive earnings, is approximately $6.9 million of net gain
associated with these contracts, of which $1.6 million of net gain 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 steel, aluminum and resin prices
could result in an estimated $16.8 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
$15.8 million after-tax reduction of net earnings over a one-year period
for foreign currency exposures on 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, as well as the cost of diesel fuel as a component of freight
cost. A hypothetical 10 percent increase in our utility prices could result
in an estimated $8.9 million after-tax reduction of net earnings over a one-year
period. A hypothetical 10 percent increase in our diesel fuel surcharge
could result in an estimated $2 million after-tax reduction of net earnings
over the same 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 1, 2007, 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
four years. Included in shareholders’ equity at July 1, 2007, within
accumulated other comprehensive earnings, is approximately $6.5 million of
net gain associated with these contracts, of which $1.5 million of net
earnings is expected to be recognized in the consolidated statement of earnings
during the next 12 months. Approximately $1.5 million of net gain
related to the termination or deselection of hedges is included in the above
accumulated other comprehensive earnings at July 1, 2007. The amount recognized
in 2007 earnings related to terminated hedges is insignificant.
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26
Based
on
our interest rate exposure at July 1, 2007, assumed floating rate debt levels
through the second quarter of 2008 and the effects of derivative instruments,
a
100 basis point increase in interest rates could result in an estimated
$6.9 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
and
the timing of these changes.
Foreign
Currency Exchange Rate Risk
Our
objective in managing exposure to foreign currency fluctuations is to protect
foreign cash flows and earnings 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 2007 expire within five
years. At July 1, 2007, there were no amounts included in accumulated other
comprehensive earnings for these items.
Considering
the company’s derivative financial instruments outstanding at July 1, 2007, 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
$25.1 million after-tax reduction of net earnings over a one-year period.
This amount includes the $15.8 million currency exposure discussed above in
the
“Commodity Price Risk” section. This hypothetical adverse change in foreign
currency exchange rates would also reduce our forecasted average debt balance
by
$85.3 million. Actual changes in market prices or rates may differ from
hypothetical changes.
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 controls and procedures were
effective.
During
the quarter, there were no changes in the company’s internal control over
financial reporting that have materially affected, or are reasonably likely
to
materially affect, the company’s internal control over financial reporting. The
company acquired certain operations of U.S. Can on March 27, 2006, and certain
assets of Alcan on March 28, 2006. (Additional details are available in
Note 4 to the condensed consolidated financial statements within
Item 1 of this report.) The company is integrating the 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.
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27
FORWARD-LOOKING
STATEMENT
The
company has made or implied certain forward-looking statements in this report
which are made as of the end of the time frame covered by this report. These
forward-looking statements represent the company’s goals, and results could vary
materially from those expressed or implied. From time to time we also provide
oral or written forward-looking statements in other materials we release to
the
public. As time passes, the relevance and accuracy of forward-looking statements
may change. Some factors that could cause the company’s actual results or
outcomes to differ materially from those discussed in the forward-looking
statements include, but are not limited to: fluctuation in customer and consumer
growth, demand and preferences; loss of one or more major customers or changes
to contracts with one or more customers; insufficient production capacity;
overcapacity in foreign and domestic metal and plastic container industry
production facilities and its impact on pricing; failure to achieve anticipated
productivity improvements or production cost reductions, including those
associated with capital expenditures 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 effects of the German mandatory deposit or other
restrictive packaging legislation such as recycling laws; interest rates
affecting our debt; labor strikes; increases and trends in various employee
benefits and labor costs, including pension, medical and health care costs;
rates of return projected and earned on assets and discount rates used to
measure future obligations and expenses of the company’s defined benefit
retirement plans; boycotts; antitrust, intellectual property, consumer and
other
litigation; maintenance and capital expenditures; goodwill impairment; changes
in generally accepted accounting principles or their interpretation; accounting
changes; local economic conditions; the authorization, funding, availability
and
returns of contracts for the aerospace and technologies segment and the nature
and continuation of those contracts and related services provided thereunder;
delays, extensions and technical uncertainties, as well as schedules of
performance associated with such segment contracts; international business
and
market risks such as the devaluation or revaluation of certain currencies and
the activities of foreign subsidiaries; international business risks (including
foreign exchange rates and activities of foreign subsidiaries) in Europe and
particularly in developing countries such as the PRC and Brazil; changes in
the
foreign exchange rates of the U.S. dollar against the European euro, British
pound, Polish zloty, Serbian dinar, Hong Kong dollar, Canadian dollar, Chinese
renminbi, Brazilian real and Argentine peso, and in the foreign exchange rate
of
the European euro against the British pound, Polish 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; 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; 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
28
PART
II. OTHER INFORMATION
Item
1.
|
Legal
Proceedings
|
During
the second quarter of 2007, Miller Brewing Company (customer) asserted various
claims against Ball Metal Beverage Container Corp. (BMBCC), a wholly owned
subsidiary of the company, alleging that BMBCC has breached its contract with
the customer for the supply of aluminum beverage containers. The customer
alleges, among other things, that Ball breached contract provisions relating
to
the pricing of the aluminum components of container costs and claims sizeable
damages for breach of contract. BMBCC disputes the claims and asserts that
it
has performed in accordance with the supply contract. The parties are engaging
in non-binding mediation under the supply contract and, if the dispute is not
settled through mediation scheduled for the fourth quarter of 2007, the contract
provides for the matter to be finally settled by arbitration. BMBCC and the
customer are continuing to perform under the supply contract during the pendency
of this matter. The company believes that BMBCC has meritorious defenses against
the customer’s claims, although, because of the uncertainties inherent in the
mediation or arbitration process, it is unable to predict the
outcome.
As
previously reported, on October 6, 2005, Ball Metal Beverage Container
Corp. (BMBCC), a wholly owned subsidiary of the company, was served with an
amended complaint filed by Crown Packaging Technology, Inc. et.
al. (Crown), in the U.S. District Court for the Southern District of
Ohio, Western Division at Dayton, Ohio. The complaint alleges that the
manufacture, sale and use of certain ends by BMBCC and its customers infringes
upon 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 new trial date has been set for
December 4, 2007.
Based
on
the information available to the company at the present time, the company does
not believe that the above matters will have a material adverse effect upon
the
liquidity, results of operations or financial condition of the
company.
Item
1A.
|
Risk
Factors
|
Risk
factors affecting the company can be found within Item 1A of the company’s
annual report on Form 10-K.
Item
2. Changes in Securities
The
following table summarizes the company’s repurchases of its common stock during
the quarter ended July 1, 2007.
Purchases
of Securities
|
||||||||||||||||
($
in millions)
|
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
2 to April 29, 2007
|
326,499
|
$ |
48.27
|
326,499
|
7,282,144
|
|||||||||||
April 30
to May 27, 2007
|
58,411
|
$ |
51.71
|
58,411
|
7,223,733
|
|||||||||||
May 28
to July 1, 2007
|
7,011
|
$ |
53.54
|
7,011
|
7,216,722
|
|||||||||||
Total
|
391,921 | (a) | $ |
48.88
|
391,921
|
(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.
|
Page
29
Item
3.
|
Defaults
Upon Senior Securities
|
There
were no events required to be reported under Item 3 for the quarter ended July
1, 2007.
Item
4. Submission of Matters to a Vote of Security
Holders
The
company held the Annual Meeting of Shareholders on April 25, 2007. Matters
voted upon by proxy, and the results of the votes, were as follows:
For
|
Against/
Withheld
|
Abstained/
Broker
|