10-K: Annual report pursuant to Section 13 and 15(d)
Published on February 25, 2008
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-K
( X ) ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
fiscal year ended December 31, 2007
( ) TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
transition period from ________________ to ________________
Commission
File Number 1-7349
Ball
Corporation
State of
Indiana 35-0160610
10 Longs
Peak Drive, P.O. Box 5000
Broomfield,
Colorado 80021-2510
Registrant’s
telephone number, including area code: (303) 469-3131
Securities registered pursuant to Section 12(b) of the Act:
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Name
of each exchange
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Title
of each class
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on
which registered
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Common
Stock, without par value
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New
York Stock Exchange
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Chicago
Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: NONE
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act. YES [X] NO [ ]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. YES [ ] NO [X]
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES
[X] NO
[ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
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Large
accelerated filer [X]
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Accelerated
filer [ ]
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Non-accelerated
filer [ ]
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the
Act). YES [ ] NO [X]
The
aggregate market value of voting stock held by non-affiliates of the registrant
was $5,445 million based upon the closing market price and common shares
outstanding as of July 1, 2007.
Number of
shares outstanding as of the latest practicable date.
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Class
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Outstanding
at February 3, 2008
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Common
Stock, without par value
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97,547,020
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DOCUMENTS
INCORPORATED BY REFERENCE
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1.
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Proxy
statement to be filed with the Commission within 120 days after
December 31, 2007, to the extent indicated in
Part III.
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Ball
Corporation and Subsidiaries
ANNUAL
REPORT ON FORM 10-K
For the
year ended December 31, 2007
INDEX
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Page
Number
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PART
I.
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Information
about the business
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Item
1.
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Business
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1
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Item
1A.
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Risk
Factors
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9
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Item
1B.
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Unresolved Staff
Comments
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14
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Item
2.
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Properties
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14
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Item
3.
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Legal
Proceedings
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17
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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19
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PART
II.
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Item
5.
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Market
for the Registrant’s Common Stock and Related Stockholder
Matters
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19
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Item
6.
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Five-Year
Review of Selected Financial Data
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21
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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22
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Forward-Looking
Statements
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33
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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34
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Item
8.
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Financial
Statements and Supplementary Data
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36
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Report
of Independent Registered Public Accounting Firm
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36
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Consolidated
Statements of Earnings for the Years Ended December 31, 2007, 2006
and 2005
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37
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Consolidated
Balance Sheets at December 31, 2007, and December 31,
2006
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38
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Consolidated
Statements of Cash Flows for the Years Ended December 31,
2007, 2006 and 2005
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39
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Consolidated
Statements of Shareholders’ Equity and Comprehensive Earnings for the
Years Ended December 31, 2007, 2006 and 2005
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40
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Notes
to Consolidated Financial Statements
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41
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
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86
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Item
9A.
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Controls
and Procedures
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86
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Item
9B.
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Other
Information
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86
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PART
III.
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Item
10.
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Directors
and Executive Officers of the Registrant
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87
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Item
11.
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Executive
Compensation
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88
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Item
12.
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Security
Ownership and Certain Beneficial Owners and Management
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88
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Item
13.
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Certain
Relationships and Related Transactions
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88
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Item
14.
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Principal
Accountant Fees and Services
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88
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PART
IV.
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Item
15.
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Exhibits,
Financial Statement Schedules
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89
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Index
to Exhibits
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92
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PART
I
Item
1. Business
Ball
Corporation (Ball, we, the company or our) is one of the largest packaging
companies in the world. Our predecessor company, Ball Brothers Glass
Manufacturing Company, was founded in 1880 by five Ball brothers. Today, in
addition to metal and plastic packaging products, we provide aerospace products
and services through a wholly owned subsidiary, Ball Aerospace &
Technologies Corp. (Ball Aerospace). In 2007 our total consolidated net sales
were $7.4 billion. Packaging is responsible for 89 percent of that number;
Ball Aerospace contributes the rest.
We are
headquartered in Broomfield, Colorado, and employ approximately
15,500 people worldwide. Our stock is traded on the New York Stock Exchange
and the Chicago Stock Exchange under the ticker symbol BLL.
Today,
Ball’s packaging businesses make metal and plastic packaging for beverages,
foods and household products. Our largest product lines are aluminum and steel
beverage cans, which contributed 63 percent of our 2007 total net sales and
85 percent of our 2007 total segment earnings before interest and taxes. We
also produce steel food cans, steel aerosol cans, polyethylene terepthalate
(PET) and polypropylene plastic bottles for beverages and foods, plastic pails,
steel paint cans and decorative steel tins. Our ongoing packaging business dates
back to 1969 when Ball began supplying beverage cans.
Ball
Aerospace is a leader in the design, development and manufacture of innovative
aerospace systems. It produces spacecraft, instruments and sensors, radio
frequency and microwave technologies, data exploitation solutions and a variety
of advanced aerospace technologies and products that enable deep space missions.
Our packaging and aerospace businesses share a long history and a common
financial philosophy, and we benefit from the presence of each.
Our
corporate strategy is to grow our worldwide beverage can business and our U.S.
aerospace business, to improve the performance of the metal food and household
products packaging, Americas, and plastic packaging, Americas, segments and to
utilize free cash flow and earnings growth to increase shareholder
value.
Our
Financial Philosophy
Ball
Corporation maintains a clear and disciplined financial strategy focused on
improving shareholder returns through:
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·
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Long-term
earnings per share growth of 10 percent to 15 percent over
time
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·
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Increasing
Economic Value Added (EVA®)
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·
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Focusing
on free cash flow generation
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The
compensation of a majority of our employees is tied directly to the company’s
performance through our EVA® incentive program. When the company
performs well, our employees are paid more. If the company doesn’t perform well,
our employees get paid less or no incentive compensation.
We use
free cash flow as a lever as we manage our capital structure. The cash generated
by our businesses is used primarily: (1) to evaluate the company's operating
results, (2) to plan stock buy-back levels, (3) to evaluate strategic
investments and (4) to evaluate the company's ability to incur and service debt.
We also will, when we believe it will benefit the company and our shareholders,
make strategic acquisitions or divest parts of our business.
Page 1 of
94
Our
Core Purpose and Values
We
believe that our core purpose and core values are integral to our company’s
performance. They play an important role in our relationships with employees,
customers, suppliers, investors and other key stakeholders. We realize that
other companies have similar principles, under a variety of names. The proof is
in the way a company and its employees conduct business every day. Ball
Corporation has existed for 128 years. We believe our core purpose and core
values have had much to do with our longevity and success.
Ball
Corporation is in business to add value to all of its stakeholders, whether it
is providing quality products and services to customers, an attractive return on
investment to shareholders, a meaningful work life for employees or a
contribution of time, effort and resources to our communities. In all of our
interactions, we ask how we can get better for our own good and the good of
those who have a stake in our success. Our core values include integrity,
respect, motivation, flexibility, innovation and teamwork.
Information
Pertaining to Our Packaging Business
A
substantial part of Ball’s packaging sales are made directly to companies in
packaged beverage and food businesses, including SABMiller and bottlers of
Pepsi-Cola and Coca-Cola branded beverages and their affiliates that utilize
consolidated purchasing groups. Sales to SABMiller plc and PepsiCo, Inc.,
represented 11 percent and 9 percent of Ball’s consolidated net sales,
respectively, for the year ended December 31, 2007. Additional details
about sales to major customers are included in Note 2 to the consolidated
financial statements, which can be found in Item 8 of this Annual Report
(Financial Statements and Supplementary Data).
Our
principal packaging businesses are the manufacture and sale of aluminum, steel,
polyethylene terephthalate (PET) and polypropylene containers, primarily for
beverages, foods and household products. Our packaging products are sold in
highly competitive markets, primarily based on quality, service and price. The
packaging business is capital intensive, requiring significant investment in
machinery and equipment.
Profitability
is sensitive to selling prices, production volumes, labor, transportation,
utility and warehousing costs, as well as the availability and price of raw
materials, such as aluminum, steel, plastic resin and other direct materials.
These raw materials are generally available from several sources, and we have
secured what we consider to be adequate supplies and are not experiencing any
shortages. There is a high concentration of suppliers in both North America and
in Europe. In North America two steel suppliers provide more than
70 percent of our tinplate steel and four aluminum suppliers provide
virtually all of our requirements. In Europe, three steel suppliers and three
aluminum suppliers provide approximately 95 percent of our
requirements.
We
believe we have limited our exposure related to changes in the costs of
aluminum, steel and plastic resin as a result of: (1) the inclusion of
provisions in most aluminum container sales contracts to pass through aluminum
cost changes, as well as the use of derivative instruments, (2) the inclusion of
provisions in certain steel container sales contracts to pass through steel cost
changes and the existence of certain other steel container sales contracts that
incorporate annually negotiated metal costs and (3) the inclusion of provisions
in substantially all plastic container sales contracts to pass through resin
cost changes. In 2007 we were able to pass through the majority of steel cost
increases levied by producers, and we continually attempt to reduce
manufacturing and other material costs as much as possible. While raw materials
and energy sources, such as natural gas and electricity, may from time to time
be in short supply or unavailable due to external factors, and the pass through
of steel and aluminum costs to our customers may be limited in some instances,
we cannot predict the timing or effects, if any, of such occurrences on future
operations.
Research
and development (R&D) efforts in the North American packaging segments, as
well as in the European metal beverage container business, are primarily
directed toward packaging innovation, specifically the development of new sizes
and types of containers, as well as new uses for the current containers. Other
R&D efforts in these segments seek to improve manufacturing efficiencies.
Our North American packaging R&D activities are primarily conducted in the
Ball Technology & Innovation Center (BTIC) located in Westminster, Colorado.
The European R&D activities are primarily conducted in a technical center
located in Bonn, Germany.
Page 2 of
94
Our
Reporting Segments
Ball
Corporation reports its financial performance in five segments – metal beverage
packaging, Americas; metal beverage packaging, Europe/Asia; metal food and
household products packaging, Americas; plastic packaging, Americas; and
aerospace and technologies. The segments are organized on a product line and
geographic market basis. Prior periods required to be shown in this Annual
Report on Form 10-K (Annual Report) have been conformed to the current
presentation.
Metal
Beverage Packaging, Americas, Segment
Industry
Background
According
to publicly available information and company estimates, the combined U.S. and
Canada metal beverage container markets decreased in 2007 to 105 billion
units from 106 billion units in 2006. Four companies manufacture
substantially all of the metal beverage containers in the U.S. and Canada. Two
of these producers and three other independent producers also manufacture metal
beverage containers in Mexico. Ball produced nearly 33 billion recyclable
beverage cans in the U.S. and Canada in 2007 – about 31 percent of the
total market. Sales volumes of metal beverage containers in North America tend
to be highest during the period from April through September. All of the
beverage cans produced by Ball in the U.S. and Canada are made of
aluminum.
Beverage
container production capacity in the U.S., Canada and Mexico exceeds demand. In
order to more closely balance capacity and demand within our business, from time
to time we consolidate our can and end manufacturing capacity into fewer, more
efficient facilities, and we are actively considering additional plant
rationalizations. We also attempt to efficiently match capacity with the changes
in customer demand for our packaging products. To that end, during 2005 Ball
commenced a project to upgrade and streamline its North American beverage can
end manufacturing capabilities, a project expected to result in productivity
improvements and reduced manufacturing costs. We have installed the majority of
production modules in this multi-year project, the final modules are in the
design and installation phase and the project is expected to be mostly completed
in 2009. In connection with this project, the can end manufacturing operations
at the Reidsville, North Carolina, plant were shut down during the fourth
quarter of 2006.
The
aluminum beverage can competes aggressively with other packaging materials. The
glass bottle has shown resilience in the packaged beer industry, while the PET
container continues its growth in the carbonated soft drink and water industry.
In Canada, metal beverage containers have captured significantly lower
percentages of packaged beverage industry volumes than in the U.S., particularly
in the packaged beer industry.
The 2006
recycling rate in the United States for aluminum cans was 52 percent, the
highest recycling rate for any beverage container. The aluminum can sheet we
currently buy contains an average of 41 percent post consumer recycled
content and approximately 9 percent post industrial content, reducing the
amount of virgin material to 50 percent.
Ball’s
Operations
Metal
beverage packaging, Americas, represents Ball’s largest segment, accounting for
37 percent of consolidated net sales in 2007. Metal beverage containers are
primarily sold under multi-year supply contracts to fillers of carbonated soft
drinks, beer, energy drinks and other beverages. Decorated two-piece aluminum
beverage cans are produced at 16 manufacturing facilities in the U.S. and one
each in Canada and Puerto Rico. Can ends are produced within three of the U.S.
facilities, as well as in a fourth facility that manufactures only
ends.
Through
Rocky Mountain Metal Container, LLC, a 50/50 joint venture, which is accounted
for as an equity investment, Ball and Coors Brewing Company (Coors), a wholly
owned subsidiary of Molson Coors Brewing Company, operate beverage can and end
manufacturing facilities in Golden, Colorado. Coors and our largest North
American brewery customer, Miller Brewing Company, have announced plans to
combine their U.S. businesses in 2008, subject to regulatory approvals. We
also participate in a 50/50 joint venture in Brazil, Latapack-Ball Embalagens,
Ltda., that manufactures aluminum cans and ends and is accounted for as an
equity investment.
Page 3 of
94
Metal
Beverage Packaging, Europe/Asia, Segment
Industry
Background
The
European beverage can market is approximately 50 billion cans, about half the
size of the North American beverage can market. The European market is growing
significantly, however, and is highly regional in terms of growth and packaging
mix. Growth in central and eastern Europe has been particularly strong in recent
years. In Poland alone, the beverage can market grew by approximately
30 percent from 2006 to 2007. In Germany, the return of the beverage can market
is continuing after it was essentially eliminated in 2003 due to issues
surrounding the implementation of mandatory deposit legislation. Total
production grew to about 3.2 billion cans in 2007, still far below its peak
of 7.3 billion cans in 2001. However, the German consumption is only
approximately 500 million cans while the majority of German production is
still being exported.
Sales
volumes of metal beverage containers in Europe tend to be highest during the
period from May through August with a smaller increase in demand during the
Christmas season. As in North America, the metal beverage container competes
aggressively with other packaging materials used by the European beer and
carbonated soft drink industries. The glass bottle is heavily utilized in the
packaged beer industry, while the PET container is increasingly utilized in the
carbonated soft drink, juice and mineral water industries. Recycling rates vary
throughout Europe, but average around 53 percent for aluminum and steel
containers, which exceeds the European Union’s goal of 50 percent recycling for
metals. Due in part to the intrinsic value of aluminum and steel, metal
packaging recycling rates in Europe compare favorably to those of other
packaging materials. Ball’s European operations helped establish and financially
support recycling initiatives in growing markets such as Poland, Serbia and the
People’s Republic of China (PRC) to educate consumers about the benefits of
recycling aluminum and steel cans and to increase recycling rates.
The
beverage can market in the PRC is approximately 11 billion cans, of which
Ball’s consolidated operations represent an estimated 22 percent, with an
additional 13 percent manufactured by two joint ventures in which we
participate. Six other manufacturers make up the remainder of the market.
Capacity grew rapidly in the PRC in the late 1990s, resulting in a supply/demand
imbalance. A number of can makers, including Ball, responded by rationalizing
capacity. Demand growth has resumed and projected annual growth is expected to
be in the 6 percent range in the near term.
Ball’s
Operations
Ball
Packaging Europe is the largest metal beverage container manufacturer in
Germany, France and the Benelux countries and the second largest metal beverage
container manufacturer in the United Kingdom and Poland. Ball Asia Pacific
Limited is one of the largest manufacturers of beverage cans in
China.
The metal
beverage packaging, Europe/Asia, segment, which accounted for 26 percent of
Ball’s consolidated net sales in 2007, consists of 10 beverage can plants and
two beverage can end plants in Europe, as well as operations in the PRC. Of the
12 European plants, four are located in Germany, three in the United
Kingdom, two in France and one each in the Netherlands, Poland and Serbia. The
European plants produced slightly more than 14 billion cans in 2007, with
approximately 60 percent of those being produced from aluminum and 40
percent from steel. Six of the can plants use aluminum and four use steel. We
have also announced plans to construct a second beverage can plant in Poland
with production scheduled to commence in 2009. Overall, Ball Packaging Europe is
the second largest metal beverage container producer in Europe, with an
estimated 29 percent of European shipments, and produces two-piece beverage cans
and can ends for producers of beer, carbonated soft drinks, mineral water, fruit
juices, energy drinks and other beverages.
On April
1, 2006, a fire in our Hassloch, Germany, plant damaged the majority of the
plant’s building and machinery and equipment. Property insurance proceeds
largely covered equipment replacement and clean-up costs, and business
interruption insurance proceeds generally covered lost volumes and other costs.
In June 2007 we successfully started up a rebuilt Hassloch plant, which operates
two steel beverage can manufacturing lines. Also in the first half of 2007, we
started up a new aluminum beverage can manufacturing line in our Hermsdorf,
Germany, plant.
Page 4 of
94
In 2005
Ball completed the construction of an aluminum beverage can manufacturing plant
in Belgrade, Serbia, to serve the growing demand for beverage cans in southern
and eastern Europe. Ball announced plans in January 2008 to build a new beverage
can manufacturing plant in Poland in order to meet the rapidly growing demand
for beverage cans there and elsewhere in central and eastern Europe. The plant
will be built in Lublin, which is in eastern Poland near the borders of Belarus
and Ukraine. It will initially have one production line with an annual capacity
of approximately 750 million cans per year and is expected to begin production
in the first half of 2009. In addition during the fourth quarter of 2007, Ball
announced plans for a beverage can plant in India that primarily will use
existing manufacturing equipment from other Ball facilities.
European
raw material supply contracts are generally for a period of one year, although
Ball Packaging Europe has negotiated some longer term agreements. Aluminum is
purchased primarily in U.S. dollars, while the functional currencies of Ball
Packaging Europe and its subsidiaries are non-U.S. dollars. The company
minimizes the resulting foreign exchange rate risk through the use of
derivative contracts. In addition, purchase and sales contracts include fixed
price, floating and pass-through pricing arrangements.
Capacity
in the PRC has continued to grow in recent years, resulting in a continuing
supply/demand imbalance. Demand growth in the PRC continues to be strong and is
projected to grow by approximately 6 percent annually in the near term.
Ball is undertaking selected capacity increases in its existing facilities in
order to participate in the projected growth and may establish or obtain
additional manufacturing capacity in the coming years if growth in demand
continues. Our operations include the manufacture of aluminum cans and ends in
three plants in the PRC located in the north, central and south regions. In
addition we participate in two joint ventures that manufacture aluminum cans and
ends in the PRC.
We also
manufacture and sell high-density plastic containers in two PRC plants primarily
servicing the motor oil industry.
Metal
Food & Household Products Packaging, Americas, Segment
Industry
Background
The metal
food and household products packaging, Americas, segment competes primarily in
the steel tinplate food and aerosol can markets in North America. The steel
tinplate food can market consists of approximately 31 billion cans annually, of
which about 40 percent are three-piece cans and 60 percent are two-piece cans.
The steel tinplate aerosol can market is approximately 3.2 billion cans
annually. Growth in both markets is expected to be essentially flat over time.
Service, quality and price are important competitive factors.
Sales
volumes of metal food containers in North America tend to be highest from June
through October as a result of seasonal fruit, vegetable and salmon packs. We
estimate our 2007 shipments of more than 5.6 billion steel food containers to be
approximately 18 percent of total U.S. and Canadian metal food container
shipments. We estimate our aerosol business accounts for approximately 51
percent of total annual U.S. and Canadian steel aerosol shipments.
Competitors
in the metal food container product line include two national and a small number
of regional suppliers and self manufacturers. Several producers in Mexico also
manufacture steel food containers. Competition in the U.S. steel aerosol can
market primarily includes two national suppliers. Steel containers also compete
with other packaging materials in the food and household products industry
including glass, aluminum, plastic, paper and the stand-up pouch. As a result,
demand for this product line is dependent on product innovation and cost
reduction. Service, quality and price are among the other key competitive
factors.
Ball’s
Operations
The metal
food and household products packaging, Americas, segment accounted for
16 percent of consolidated net sales in 2007. The two major product lines
in this segment are steel food and, subsequent to the acquisition of
U.S. Can in March 2006, aerosol containers.
Page 5 of
94
Ball
produces two-piece and three-piece steel food containers and ends for packaging
vegetables, fruit, soups, meat, seafood, nutritional products, pet food and
other products. These containers and ends are manufactured in nine plants in the
U.S. and Canada and sold primarily to food processors in North
America.
The
segment also manufactures and sells aerosol cans, paint cans and custom and
specialty containers in eight plants in the U.S. and is the largest
manufacturer of aerosol cans in North America. In addition, the company
manufactures and sells aerosol cans in two plants in Argentina.
In
October 2007, as part of a restructuring of Ball’s metal food and household
products packaging division, Americas, Ball announced plans to close aerosol
container manufacturing plants in Tallapoosa, Georgia, and Commerce, California.
Ball also announced its intention to exit the custom and decorative tinplate can
business based in its Baltimore, Maryland, manufacturing plant. The company
recorded a largely non-cash, after-tax charge of approximately $27 million in
the fourth quarter of 2007, primarily related to the plant closures and
equipment relocation. When completed throughout 2008, the actions are expected
to yield annual pretax cost savings in excess of $15 million and improve
the aerosol business’ plant utilization rate to more than 85 percent from
about 70 percent.
In
December 2006 the company closed a leased facility in Alliance, Ohio, which
was one of the manufacturing locations acquired from U.S. Can, and a metal
food can manufacturing plant in Burlington, Ontario, which was part of the metal
food can operations prior to the U.S. Can acquisition. The closure of the
Alliance plant was treated as an opening balance sheet item related to the
acquisition. A pretax charge of $33.6 million ($27.4 million after
tax) was recorded in the fourth quarter in respect of the Burlington plant
closure. As part of these realignment projects, responsibility for the U.S. Can
plastic container business was transferred to the company’s plastic packaging,
Americas, segment effective January 1, 2007.
Plastic
Packaging, Americas, Segment
Industry
Background
Demand
for containers made of PET and polypropylene has increased in the beverage and
food markets, with improved barrier technologies and other advances. This growth
in demand is expected to continue. While PET and polypropylene beverage
containers compete against metal, glass and cardboard, the historical increase
in the sales of PET containers has come primarily at the expense of glass
containers and through new market introductions. Competition in the PET plastic
container industry is intense and includes several national and regional
suppliers and self manufacturers, while Ball is one of three major competitors
in the polypropylene container industry. Service, quality and price are
important competitive factors with price being by far the most important,
resulting in poor margins for most of the industry. The ability to produce
customized, differentiated plastic containers is also a key competitive
factor.
Ball’s
Operations
Plastic
packaging, Americas, accounted for 10 percent of Ball’s consolidated net
sales in 2007. We estimate our 2007 shipments of 6 billion plastic bottles
to be approximately 9 percent of total U.S. PET container shipments. In
addition, this segment produced approximately 900 million food and
specialty containers during 2007. The company operates eight plastic container
manufacturing facilities in the U.S. and one in Canada.
Most of
Ball’s PET containers are sold under long-term contracts to suppliers of bottled
water and carbonated soft drinks, including bottlers of Pepsi-Cola branded
beverages and their affiliates that utilize consolidated purchasing groups. Most
of our polypropylene containers are also sold under long-term contracts,
primarily to food packaging companies. Plastic beer containers are being
produced for several of our customers, and we are manufacturing plastic
containers for the single serve juice and wine markets. Our line of Heat-Tek®
PET plastic bottles for hot-filled beverages, such as sports drinks and juices,
includes sizes from 8 ounces to 64 ounces.
Ball’s
emphasis in this segment is on customized, differentiated containers. This
includes unique barrier plastics such as Ball’s Heat-Tek® and SIG Technology
AG's Plasmax®
heat set bottles. The company is not investing in the carbonated soft drink and
bottled water business, which is a commodity business, where return on
investment has been unacceptable.
Page 6 of
94
Aerospace
and Technologies Segment
Ball’s
aerospace and technologies segment, which accounted for 11 percent of
consolidated net sales in 2007, includes national defense solutions, advanced
technologies and products, and civil and operational space
businesses. The segment develops spacecraft, sensors and instruments,
radio frequency systems and other advanced technologies for the civil,
commercial and national security aerospace markets. The majority of the
aerospace and technologies business involves work under contracts, generally
from one to five years in duration, as a prime contractor or subcontractor for
the National Aeronautics and Space Administration (NASA), the U.S. Department of
Defense (DoD) and other U.S. government agencies. Contracts funded by the
various agencies of the federal government represented 84 percent of segment
sales in 2007. The percentage representing U.S. government sales decreased in
2007 due to higher revenues related to the WorldView 1 and WorldView 2
contracts with DigitalGlobe Inc. WorldView 1 and WorldView 2 are
remote sensing satellites used to provide detailed maps and data about the
Earth’s surface for civil government mapping, land-use planning, disaster
relief, exploration, defense and intelligence, and visualization and simulation
environments.
Geopolitical
events and executive and legislative branch priorities have yielded considerable
growth opportunities in areas matching Ball Aerospace’s core capabilities.
However, there is strong competition for new business. The civil space systems,
defense solutions and operational space businesses include hardware, software
and services sold primarily to U.S. customers, with emphasis on space science
and exploration, environmental and Earth sciences, and defense and intelligence
applications. Major contractual activities frequently involve the design,
manufacture and testing of satellites, remote sensors and ground station control
hardware and software, as well as related services such as launch vehicle
integration and satellite operations.
Other
hardware activities include: target identification, warning and attitude control
systems and components; cryogenic systems for reactant storage, and sensor
cooling devices using either closed-cycle mechanical refrigerators or open-cycle
solid and liquid cryogens; star trackers, which are general-purpose stellar
attitude sensors; and fast-steering mirrors. Additionally, the aerospace and
technologies segment provides diversified technical services and products to
government agencies, prime contractors and commercial organizations for a broad
range of information warfare, electronic warfare, avionics, intelligence,
training and space systems needs.
Backlog
in the aerospace and technologies segment was $774 million and
$886 million at December 31, 2007 and 2006, respectively, and consists
of the aggregate contract value of firm orders, excluding amounts previously
recognized as revenue. The 2007 backlog includes $473 million expected
to be recognized in revenues during 2008, with the remainder expected to be
recognized in revenues thereafter. Unfunded amounts included in backlog for
certain firm government orders, which are subject to annual funding, were
$463 million and $492 million at December 31, 2007 and 2006,
respectively. Year-to-year comparisons of backlog are not necessarily indicative
of the trend of future operations. On December 24, 2007, Ball Aerospace
entered into an agreement to sell its small Australian defense services business
to a subsidiary of QinetiQ plc. This sale was completed on February 15,
2008.
The
company’s aerospace and technologies segment has contracts with the U.S.
government or its contractors that have standard termination provisions. The
government retains the right to terminate contracts at its convenience. However,
if contracts are terminated in this manner, Ball is entitled to reimbursement
for allowable costs and profits on authorized work performed through the date of
termination. U.S. government contracts are also subject to reduction or
modification in the event of changes in government requirements or budgetary
constraints.
Patents
In the
opinion of the company, none of its active patents is essential to the
successful operation of its business as a whole.
Page 7 of
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Research
and Development
Note 20,
"Research and Development," in the consolidated financial statements within Item
8 of this report, contains information on company research and development
activity. Additional information is also included in Item 2,
“Properties.”
Sustainability
and the Environment
Sustainability
is a systematic way of thinking about the things we do every day as a global
company and how our activities interact with our world. Whether it is being more
environmentally protective, helping our customers become more sustainable or
investing further in our communities, we are committed to making Ball a more
sustainable enterprise. Environmental awareness, a key component of
sustainability, is not new to us. For many years, we have found ways to reduce
our own environmental footprint while providing a safe and healthy environment
for our diverse workforce.
Ball views the global emergence of sustainability as an opportunity. In 2007 we started a formal sustainability initiative and have created a cross-functional employee task force that is developing processes for capturing sustainability-related data and identifying existing and new opportunities in all of our activities. We are using the triple bottom line – environmental, economic and social aspects of sustainability – in our approach. Key issues for our company include recycling, climate change, energy use, water conservation, diversity and regulated chemicals and emissions. Those areas of focus may be expanded or become more specific as we continue this process. We plan to issue a corporate sustainability report in 2008 using the G3 Reporting Framework issued by the Global Reporting Initiative as a reporting framework. We are engaging our key stakeholders to help us develop and implement our plans. As we move forward, we will be posting additional information on our website.
Compliance with federal, state and local laws relating to protection of the environment has not had a material adverse effect upon the capital expenditures, earnings or competitive position of the company. As more fully described under Item 3, “Legal Proceedings,” the U.S. Environmental Protection Agency and various state environmental agencies have designated the company as a potentially responsible party, along with numerous other companies, for the cleanup of several hazardous waste sites. However, the company’s information at this time indicates that these matters will not have a material adverse effect upon the liquidity, results of operations or financial condition of the company.
Legislation
that would prohibit, tax or restrict the sale or use of certain types of
containers, or would require diversion of solid wastes, including packaging
materials, from disposal in landfills, has been or may be introduced anywhere we
operate. While container legislation has been adopted in some jurisdictions,
similar legislation has been defeated in public referenda and legislative bodies
in numerous others. The company anticipates that continuing efforts will be made
to consider and adopt such legislation in many jurisdictions in the future. If
such legislation were widely adopted, it potentially could have a material
adverse effect on the business of the company, including its liquidity, results
of operations or financial condition, as well as on the container manufacturing
industry generally, in view of the company’s substantial global sales and
investment in metal and PET container manufacturing. However, the packages we
produce are widely used and perform well in U.S. states, Canadian provinces and
European countries that have deposit systems.
Employees
At the
end of December 2007, the company employed approximately 15,500 people
worldwide, including 11,100 employees in the U.S. and 4,400 in other
countries. There are an additional 1,000 people employed in unconsolidated
joint ventures in which Ball participates. Approximately one-third of Ball's
North American packaging plant employees are unionized and most of our European
plant employees are union workers. Collective bargaining agreements with various
unions in the U.S. have terms of three to five years and those in Europe have
terms of one to two years. The agreements expire at regular intervals and are
customarily renewed in the ordinary course after bargaining between union and
company representatives. The company believes that its employee relations are
good and that its safety, training, education and retention practices assist in
enhancing employee satisfaction levels.
Page 8 of
94
Where
to Find More Information
Ball
Corporation is subject to the reporting and other information requirements of
the Securities Exchange Act of 1934, as amended (Exchange Act). Reports and
other information filed with the Securities and Exchange Commission (SEC)
pursuant to the Exchange Act may be inspected and copied at the public reference
facility maintained by the SEC in Washington, D.C. The SEC maintains a website
at www.sec.gov containing our reports, proxy materials, information statements
and other items. The company also maintains a website at www.ball.com on which it provides a
link to access Ball’s SEC reports free of charge.
The
company has established written Ball Corporation Corporate Governance
Guidelines; a Ball Corporation Executive Officers and Board of Directors
Business Ethics Statement (Ethics Statement); a Business Ethics booklet; and
Ball Corporation Audit Committee, Nominating/Corporate Governance Committee,
Human Resources Committee and Finance Committee charters. These documents are
set forth on the company’s website at www.ball.com under the section
“Investors,” under the subsection “Financial Information,” and under the link
“Corporate Governance.” A copy may also be obtained upon request from
the company’s corporate secretary.
The
company intends to post on its website the nature of any amendments to the
company’s codes of ethics that apply to executive officers and directors,
including the chief executive officer, chief financial officer and controller,
and the nature of any waiver or implied waiver from any code of ethics granted
by the company to any executive officer or director. These postings will appear
on the company’s website at www.ball.com under the section
“Investors,” under the subsection “Financial Information,” and under the link
“Corporate Governance.”
Item
1A. Risk Factors
Any of
the following risks could materially and adversely affect our business,
financial condition or results of operations.
The
loss of a key customer could have a significant negative impact on our
sales.
While we
have diversified our customer base, we do sell a majority of our packaging
products to relatively few major beverage, packaged food and household product
companies, some of which operate in North America, South America, Europe and
Asia.
Although
more than 70 percent of our customer contracts are long-term, these
contracts are terminable under certain circumstances, such as our failure to
meet quality or volume requirements. Because we depend on relatively few major
customers, our business, financial condition or results of operations could be
adversely affected by the loss of any of these customers, a reduction in the
purchasing levels of these customers, a strike or work stoppage by a significant
number of these customers' employees or an adverse change in the terms of the
supply agreements with these customers.
The
primary customers for our aerospace segment are U.S. government agencies or
their prime contractors. These sales represented approximately 9 percent of
Ball's consolidated 2007 net sales. Our contracts with these customers are
subject to several risks, including funding cuts and delays, technical
uncertainties, budget changes, competitive activity and changes in
scope.
We
face competitive risks from many sources that may negatively impact our
profitability.
Competition
within the packaging industry is intense. Increases in productivity, combined
with existing or potential surplus capacity in the industry, have maintained
competitive pricing pressures. The principal methods of competition in the
general packaging industry are price, service and quality. Some of our
competitors may have greater financial, technical and marketing resources. Our
current or potential competitors may offer products at a lower price or products
that are deemed superior to ours.
Page 9 of
94
We
are subject to competition from alternative products, which could result in
lower profits and reduced cash flows.
Our metal
packaging products are subject to significant competition from substitute
products, particularly plastic carbonated soft drink bottles made from PET,
single serve beer bottles and containers made of glass, cardboard or other
materials. Competition from plastic carbonated soft drink bottles is
particularly intense in the United States and the United Kingdom. There can be
no assurance that our products will successfully compete against alternative
products, which could result in a reduction in our profits or cash
flow.
We
have a narrow product range, and our business would suffer if usage of our
products decreased.
For the
12 months ended December 31, 2007, 63 percent of our consolidated net
sales were from the sale of metal beverage cans, and we expect to derive a
significant portion of our future revenues from the sale of metal beverage cans.
Our business would suffer if the use of metal beverage cans decreased.
Accordingly, broad acceptance by consumers of aluminum and steel cans for a wide
variety of beverages is critical to our future success. If demand for glass and
PET bottles increases relative to cans, or the demand for aluminum and steel
cans does not develop as expected, our business, financial condition or results
of operations could be materially adversely affected.
Our
business, financial condition and results of operations are subject to risks
resulting from increased international operations.
We
derived 29 percent of our consolidated net sales from outside of the U.S.
for the year ended December 31, 2007. This sizeable scope of international
operations may lead to more volatile financial results and make it more
difficult for us to manage our business. Reasons for this include, but are not
limited to, the following:
|
·
|
political and
economic instability in foreign
markets, including instability that might result from Kosovo’s
recent declaration of independence from
Serbia;
|
|
·
|
foreign
governments’ restrictive
trade policies;
|
|
·
|
the
imposition of duties, taxes or government
royalties;
|
|
·
|
foreign
exchange rate risks;
|
|
·
|
difficulties
in enforcement of contractual obligations and intellectual property
rights; and
|
|
·
|
the
geographic, language and cultural differences between personnel in
different areas of the world.
|
Any of
these factors could materially adversely affect our business, financial
condition or results of operations.
We
are exposed to exchange rate fluctuations.
For the
12 months ended December 31, 2007, 72 percent of our consolidated net
sales were attributable to operations with the U.S. dollar as their functional
currency, 12 percent with the euro as the functional currency and
16 percent were attributable to operations having functional currencies
other than the U.S. dollar or the euro.
Our
reporting currency is the U.S. dollar. Historically, Ball's foreign operations,
including assets and liabilities and revenues and expenses, have been
denominated in various currencies other than the U.S. dollar, and we expect that
our foreign operations will continue to be so denominated. As a result, the U.S.
dollar value of Ball's foreign operations has varied, and will continue to vary,
with exchange rate fluctuations. Ball has been, and is presently, primarily
exposed to fluctuations in the exchange rate of the euro, British pound,
Canadian dollar, Polish zloty, Chinese renminbi, Brazilian real, Argentine peso
and Serbian dinar.
A
decrease in the value of any of these currencies, especially the euro, British
pound, Polish zloty, Chinese renminbi and Canadian dollar, relative to the U.S.
dollar, could reduce our profits from foreign operations and the value of the
net assets of our foreign operations when reported in U.S. dollars in our
financial statements. This could have a material adverse effect on our business,
financial condition or results of operations as reported in U.S. dollars. In
addition fluctuations in currencies relative to currencies in which the earnings
are generated may make it more difficult to perform period-to-period comparisons
of our reported results of operations.
Page 10 of
94
We
actively manage our exposure to foreign currency fluctuations, particularly our
exposure to fluctuations in the euro to U.S. dollar exchange rate, in order to
mitigate the effect of foreign cash flow and reduce earnings volatility
associated with foreign exchange rate changes. We primarily use forward
contracts and options to manage our foreign currency exposures and, as a result,
we experience gains and losses on these derivative positions offset, in part, by
the impact of currency fluctuations on existing assets and liabilities. Our
inability to properly manage our exposure to currency fluctuations could
materially impact our results.
Our
business, operating results and financial condition are subject to particular
risks in certain regions of the world.
We may
experience an operating loss in one or more regions of the world for one or more
periods, which could have a material adverse effect on our business, operating
results or financial condition. Moreover, overcapacity, which often leads to
lower prices, exists in a number of regions, including North America, South
America and Asia, and may persist even if demand grows. As growth continues in
the European and other markets, other overcapacity situations could occur as our
competitors also expand to meet growth expectations. Our ability to manage such
operational fluctuations and to maintain adequate long-term strategies in the
face of such developments will be critical to our continued growth and
profitability.
If
we fail to retain key management and personnel, we may be unable to implement
our key objectives.
We
believe that our future success depends, in part, on our experienced management
team. Losing the services of key members of our management team could make it
difficult for us to manage our business and meet our objectives.
Decreases
in our ability to apply new technology and know-how may affect our
competitiveness.
Our
success depends partially on our ability to improve production processes and
services. We must also introduce new products and services to meet changing
customer needs. If we are unable to implement better production processes or to
develop new products, we may not be able to remain competitive with other
manufacturers. As a result, our business, financial condition or results of
operations could be adversely affected.
Bad
weather and climate changes may result in lower sales.
We
manufacture packaging products primarily for beverages and foods. Unseasonably
cool weather can reduce demand for certain beverages packaged in our containers.
In addition poor weather conditions or changes in climate that reduce crop
yields of fruits and vegetables can adversely affect demand for our food
containers. The effects of global warming on climate could have various effects
on the demand for our products in different regions around the
world.
We
are vulnerable to fluctuations in the supply and price of raw
materials.
We
purchase aluminum, steel, plastic resin and other raw materials and packaging
supplies from several sources. While all such materials are available from
independent suppliers, raw materials are subject to fluctuations in price
attributable to a number of factors, including general economic conditions,
commodity price fluctuations (particularly aluminum on the London Metal
Exchange), the demand by other industries for the same raw materials and the
availability of complementary and substitute materials. Although we enter into
commodities purchase agreements from time to time and use derivative instruments
to hedge our risk, we cannot ensure that our current suppliers of raw materials
will be able to supply us with sufficient quantities at reasonable prices.
Increases in raw material costs could have a material adverse effect on our
business, financial condition or results of operations. Because our North
American contracts often pass raw material costs directly on to the customer,
increasing raw material costs may not impact our near-term profitability but
could decrease our sales volumes over time. In Europe, our contracts do not
typically allow us to pass on increased raw material costs and we regularly use
derivative agreements to manage this risk. Our hedging procedures may be
insufficient and our results could be materially impacted if materials costs
increase.
Page 11 of
94
Prolonged
work stoppages at plants with union employees could jeopardize our financial
position.
As of
December 31, 2007, approximately one third of our employees in North America and
most of our employees in Europe were covered by one or more collective
bargaining agreements. These collective bargaining agreements have staggered
expirations during the next several years. Although we consider our employee
relations to be generally good, a prolonged work stoppage or strike at any
facility with union employees could have a material adverse effect on our
business, financial condition or results of operations. In addition, we cannot
ensure that upon the expiration of existing collective bargaining agreements,
new agreements will be reached without union action or that any such new
agreements will be on terms satisfactory to us.
Our
business is subject to substantial environmental remediation and compliance
costs.
Our
operations are subject to federal, state and local laws and regulations relating
to environmental hazards, such as emissions to air, discharges to water, the
handling and disposal of hazardous and solid wastes and the cleanup of hazardous
substances. The U.S. Environmental Protection Agency has designated us, along
with numerous other companies, as a potentially responsible party for the
cleanup of several hazardous waste sites. Based on available information, we do
not believe that any costs incurred in connection with such sites will have a
material adverse effect on our financial condition, results of operations,
capital expenditures or competitive position.
There
can be no assurance that any acquisition, including the U.S. Can and Alcan
businesses, will be successfully integrated into the acquiring company (see
Note 3 to the consolidated financial statements within Item 8 of this
report for details of recent acquisitions).
While we
have what we believe to be well designed integration plans, if we cannot
successfully integrate U.S. Can’s and Alcan’s operations with those of Ball, we
may experience material negative consequences to our business, financial
condition or results of operations. The integration of companies that have
previously been operated separately involves a number of risks, including
difficulties in assimilating and integrating new businesses, additional demands
on management, expenses related to undisclosed or potential liabilities,
retention of major customers and other risks.
Prior to
the acquisitions, Ball, U.S. Can and Alcan operated as separate businesses. We
may not be able to achieve potential synergies or maintain the levels of
revenue, earnings or operating efficiency that each business had achieved or
might achieve separately. The successful integration of U.S. Can’s and Alcan’s
operations will depend on our ability to manage those operations, realize
opportunities for revenue growth presented by strengthened product offerings
and, to some degree, eliminate redundant and excess costs.
If
we were required to write down all or part of our goodwill, our net earnings and
net worth could be materially adversely affected.
We have
$1,863.1 million of goodwill recorded on our consolidated balance sheet as
of December 31, 2007. We are required to periodically determine if
our goodwill has become impaired, in which case we would write down the impaired
portion of our goodwill. If we were required to write down all or a significant
part of our goodwill, our net earnings and net worth could be materially
adversely affected.
If
the investments in Ball's pension plans do not perform as expected, we may have
to contribute additional amounts to the plans, which would otherwise be
available to cover operating expenses.
Ball
maintains noncontributory, defined benefit pension plans covering substantially
all of its North American and United Kingdom employees, which we fund
based on certain actuarial assumptions. The plans’ assets consist
primarily of common stocks, fixed income securities and, in the
U.S., alternative investments. Our North American pension plans were
substantially funded as of December 31, 2007. However, if the investments
in the plans do not perform at expected levels or if longevity increases, we
will have to contribute additional funds to ensure that the plans will be able
to pay out benefits as scheduled. Such an increase in funding could result in a
decrease in our available cash flow and net earnings, and the recognition of
such an increase could result in a reduction to our shareholders’
equity.
Page 12 of
94
Our
significant debt level could adversely affect our financial health and prevent
us from fulfilling our obligations under the notes issued pursuant to our bond
indentures.
On
December 31, 2007, we had total debt of $2,358.6 million. Our
ratio of earnings to fixed charges as of that date was 3 times (see
Exhibit 12 attached to this Annual Report). Our level of debt could have
important consequences, including the following:
|
·
|
use
of a large portion of our cash flow to pay principal and interest on our
notes, the credit facilities and our other debt, which will reduce the
availability of our cash flow to fund working capital, capital
expenditures, research and development expenditures and other business
activities;
|
|
·
|
increase our
vulnerability to general adverse economic and industry conditions,
including the credit risks stemming from the recent subprime mortgage
crisis;
|
|
·
|
limit
our flexibility in planning for, or reacting to, changes in our business
and the industry in which we
operate;
|
|
·
|
restrict
us from making strategic acquisitions or exploiting business
opportunities;
|
|
·
|
place
us at a competitive disadvantage compared to our competitors that have
less debt;
|
|
·
|
limit
our ability to make capital expenditures in order to maintain our
manufacturing plants in good working order and repair;
and
|
|
·
|
limit,
along with the financial and other restrictive covenants in our debt,
among other things, our ability to borrow additional funds, dispose of
assets or pay cash dividends.
|
In
addition approximately one-half of our debt bears interest at variable rates. If
market interest rates increase, variable-rate debt will create higher debt
service requirements, which would adversely affect our cash flow. While we
sometimes enter into agreements limiting our exposure, any such agreements may
not offer complete protection from this risk.
We
will require a significant amount of cash to service our debt and fund other
investment opportunities. Our ability to generate cash depends on many factors
beyond our control.
Our
ability to make payments on and to refinance our debt, including the notes, and
to fund planned capital expenditures and research and development efforts, will
depend on our ability to generate cash in the future. This is subject to general
economic, financial, competitive, legislative, regulatory and other factors that
may be beyond our control.
Based on
our current level of operations, we believe our cash flow from operations,
available cash and available borrowings under our credit facilities will be
adequate to meet our liquidity needs for the next several years, barring any
unforeseen circumstances beyond our control.
We cannot
be certain that our business will generate sufficient cash flow from operations
or that future borrowings will be available to us under our credit facilities or
otherwise in an amount sufficient to enable us to pay our debt, including the
notes, or to fund our other liquidity needs. We may need to refinance all or a
portion of our debt, including the notes, on or before maturity. We cannot
assure you that we will be able to refinance any of our debt, including our
credit facilities and our senior notes, on commercially reasonable terms or at
all.
We
are subject to U.S. generally accepted accounting principles (U.S. GAAP), under
which we are often required to make changes in our accounting and reported
results.
U.S. GAAP
changes are routine and have become more frequent and significant over the past
few years. These changes can have significant effects on our reported results
when compared to prior periods and may even require us to retrospectively adjust
prior periods. In the application of U.S. GAAP, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingencies and reported amounts of revenues and
expenses. These estimates are based on historical experience and various other
assumptions believed to be reasonable under the circumstances. Actual results
could differ from these estimates under different assumptions or
conditions.
Page 13 of
94
Item
1B. Unresolved Staff Comments
There
were no matters required to be reported under this item.
|
Item
2.
|
Properties
|
The
company’s properties described below are well maintained, are considered
adequate and are being utilized for their intended purposes.
Ball’s
corporate headquarters and the aerospace and technologies segment offices are
located in Broomfield, Colorado. The Colorado-based operations of the aerospace
and technologies business occupy a variety of company-owned and leased
facilities in Broomfield, Boulder and Westminster, which together aggregate
1.4 million square feet of office, laboratory, research and
development, engineering and test and manufacturing space. Other aerospace and
technologies operations carry on business in smaller company-owned and leased
facilities in Georgia, New Mexico, Ohio, Virginia and Washington,
D.C.
The
offices of the company’s North American packaging operations are located in
Westminster, Colorado, and the offices for the European packaging operations are
located in Ratingen, Germany. Also located in Westminster is the Ball Technology
and Innovation Center, which serves as a research and development facility for
the North American metal packaging and plastic container operations. The
European Technical Center, which serves as a research and development facility
for the European beverage can manufacturing operations, is located in Bonn,
Germany.
Information
regarding the approximate size of the manufacturing locations for significant
packaging operations, which are owned or leased by the company, is set forth
below. Facilities in the process of being shut down have been excluded from the
list. Where certain locations include multiple facilities, the total approximate
size for the location is noted. In addition to the facilities listed, the
company leases other warehousing space.
Page 14 of
94
|
Approximate
|
|
|
Floor
Space in
|
|
|
Plant
Location
|
Square
Feet
|
|
Metal
beverage packaging, Americas, manufacturing facilities:
|
|
|
Fairfield,
California
|
358,000
|
|
Torrance,
California
|
382,000
|
|
Golden,
Colorado
|
509,000
|
|
Tampa,
Florida
|
238,000
|
|
Kapolei,
Hawaii
|
132,000
|
|
Monticello,
Indiana
|
356,000
|
|
Kansas
City, Missouri
|
496,000
|
|
Saratoga
Springs, New York
|
290,000
|
|
Wallkill,
New York
|
317,000
|
|
Reidsville,
North Carolina
|
447,000
|
|
Findlay,
Ohio (a)
|
733,000
|
|
Whitby,
Ontario
|
205,000
|
|
Guayama,
Puerto Rico
|
230,000
|
|
Conroe,
Texas
|
275,000
|
|
Fort
Worth, Texas
|
328,000
|
|
Bristol,
Virginia
|
245,000
|
|
Williamsburg,
Virginia
|
400,000
|
|
Kent,
Washington
|
166,000
|
|
Milwaukee,
Wisconsin (a)
|
392,000
|
|
Metal
beverage packaging, Europe/Asia, manufacturing facilities:
|
|
|
Europe
|
|
|
Bierne,
France
|
263,000
|
|
La
Ciotat, France
|
393,000
|
|
Braunschweig,
Germany
|
258,000
|
|
Hassloch,
Germany
|
283,000
|
|
Hermsdorf,
Germany
|
290,000
|
|
Weissenthurm,
Germany
|
331,000
|
|
Oss,
The Netherlands
|
231,000
|
|
Radomsko,
Poland
|
309,000
|
|
Belgrade,
Serbia
|
352,000
|
|
Deeside,
U.K.
|
109,000
|
|
Rugby,
U.K.
|
175,000
|
|
Wrexham,
U.K.
|
222,000
|
|
Asia
|
|
|
Beijing,
PRC
|
267,000
|
|
Hubei
(Wuhan), PRC
|
237,000
|
|
Shenzhen,
PRC
|
331,000
|
|
Taicang,
PRC (leased)
|
52,000
|
|
Tianjin,
PRC
|
47,000
|
|
(a)
|
Includes
both metal beverage container and metal food container manufacturing
operations.
|
Page 15 of
94
|
Approximate
|
|
|
Floor
Space in
|
|
|
Plant
Location
|
Square
Feet
|
|
Metal
food and household products packaging, Americas, manufacturing
facilities:
|
|
|
North
America
|
|
|
Springdale,
Arkansas
|
366,000
|
|
Richmond,
British Columbia
|
194,000
|
|
Oakdale,
California
|
370,000
|
|
Danville,
Illinois
|
118,000
|
|
Elgin,
Illinois
|
496,000
|
|
Baltimore,
Maryland (232,000 square feet leased)
|
352,000
|
|
Columbus,
Ohio
|
305,000
|
|
Findlay,
Ohio (a)
|
733,000
|
|
Hubbard,
Ohio
|
175,000
|
|
Chestnut
Hill, Tennessee
|
315,000
|
|
Horsham,
Pennsylvania
|
132,000
|
|
Weirton,
West Virginia (leased)
|
266,000
|
|
DeForest,
Wisconsin
|
400,000
|
|
Milwaukee,
Wisconsin (a)
|
397,000
|
|
South
America
|
|
|
Buenos
Aires, Argentina (leased)
|
34,000
|
|
San
Luis, Argentina
|
32,000
|
|
Plastic
packaging, Americas, manufacturing facilities (all North
America):
|
|
|
Chino,
California (leased)
|
578,000
|
|
Newnan,
Georgia (leased)
|
185,000
|
|
Batavia,
Illinois
|
387,000
|
|
Ames,
Iowa (including leased warehouse space)
|
840,000
|
|
Delran,
New Jersey
|
675,000
|
|
Baldwinsville,
New York (leased)
|
508,000
|
|
Bellevue,
Ohio
|
390,000
|
|
Brampton,
Ontario (leased)
|
130,000
|
|
Watertown,
Wisconsin
|
111,000
|
|
(a)
|
Includes
both metal beverage container and metal food container manufacturing
operations.
|
In
addition to the consolidated manufacturing facilities, the company has ownership
interests of 50 percent or less in packaging affiliates located primarily
in the U.S., PRC and Brazil.
Page 16 of
94
Item
3. Legal Proceedings
North
America
As
previously reported in the company’s Quarterly Report on Form 10-Q dated
November 7, 2007, during the second quarter of 2007, Miller Brewing Company
(Miller) asserted various claims against Ball Metal Beverage Container Corp.
(BMBCC), a wholly owned subsidiary of the company, alleging that BMBCC breached
its contract with Miller for the supply of aluminum beverage containers. BMBCC
disputed the claims and asserted that it had performed in accordance with the
supply contract. As previously reported, BMBCC and Miller settled their dispute
on October 4, 2007. The settlement terms include the payment by BMBCC to
Miller of approximately $70 million on January 31, 2008, and minor
adjustments to the provisions of BMBCC’s supply arrangement with Miller. The
overall settlement resulted in a third quarter charge to the company of
$85.6 million ($51.8 million after tax). BMBCC will continue to supply
all of Miller’s beverage can and end requirements through 2015.
As
previously reported, the company is investigating potential violations of the
Foreign Corrupt Practices Act in Argentina, which came to our attention on or
about October 15, 2007. Based on our investigation to date, we do not
believe this matter involved senior management or management or other employees
who have significant roles in internal control over financial
reporting.
As
previously reported, on October 6, 2005, Ball Metal Beverage Container
Corp. (BMBCC), a wholly owned subsidiary of the company, was served with an
amended complaint filed by Crown Packaging Technology, Inc. et. al.
(Crown), in the U.S. District Court for the Southern District of Ohio, Western
Division at Dayton, Ohio. The complaint alleges that the manufacture, sale and
use of certain ends by BMBCC and its customers infringes certain claims of
Crown’s U.S. patents. The complaint seeks unspecified monetary damages, fees,
and declaratory and injunctive relief. BMBCC has formally denied the allegations
of the complaint. The parties are awaiting a decision from the trial court on
claim construction. At the present time, the court has not set a new trial date.
Based on the information available to the company at the present time, the
company does not believe that this matter will have a material adverse effect
upon the liquidity, results of operations or financial condition of the
company.
As
previously reported, the U.S. Environmental Protection Agency (USEPA) considers
the company a Potentially Responsible Party (PRP) with respect to the Lowry
Landfill site located east of Denver, Colorado. On June 12, 1992, the
company was served with a lawsuit filed by the City and County of Denver
(Denver) and Waste Management of Colorado, Inc., seeking contributions from the
company and approximately 38 other companies. The company filed its answer
denying the allegations of the complaint. On July 8, 1992, the company was
served with a third-party complaint filed by S.W. Shattuck Chemical Company,
Inc., seeking contribution from the company and other companies for the costs
associated with cleaning up the Lowry Landfill. The company denied the
allegations of the complaints.
In July
1992 the company entered into a settlement and indemnification agreement with
Chemical Waste Management, Inc., and Waste Management of Colorado, Inc.
(collectively Waste Management) and Denver pursuant to which Waste Management
and Denver dismissed their lawsuit against the company, and Waste Management
agreed to defend, indemnify and hold harmless the company from claims and
lawsuits brought by governmental agencies and other parties relating to actions
seeking contributions or remedial costs from the company for the cleanup of the
site. Several other companies, which are defendants in the above-referenced
lawsuits, had already entered into the settlement and indemnification agreement
with Waste Management and Denver. Waste Management, Inc., has agreed to
guarantee the obligations for Waste Management. Waste Management and Denver may
seek additional payments from the company if the response costs related to the
site exceed $319 million. In 2003 Waste Management, Inc., indicated that
the cost of the site might exceed $319 million in 2030, approximately three
years before the projected completion of the project. The company might also be
responsible for payments (based on 1992 dollars) for any additional wastes that
may have been disposed of by the company at the site but which are identified
after the execution of the settlement agreement. While remediating the site,
contaminants were encountered, which could add an additional cleanup cost of
approximately $10 million. This additional cleanup cost could, in turn, add
approximately $1 million to total site costs for the PRP
group.
At this
time, there are no Lowry Landfill actions in which the company is actively
involved. Based on the information available to the company at this time, the
company does not believe that this matter will have a material adverse effect
upon the liquidity, results of operations or financial condition of the
company.
Page 17 of
94
The
company previously reported that, on August 1, 1997, the USEPA sent notice
of potential liability to 19 PRPs concerning past activities at one or more
of the four Rocky Flats parcels (including land owned by Precision Chemicals now
owned by Great Western Inorganics) at the Rocky Flats Industrial Park site
(RFIP) located in Jefferson County, Colorado. The RFIP site also includes the
American Ecological Recycling and Research Company (AERRCO) site and a site
owned by Thoro Products Company. Based upon sampling at the site in 1996, the
USEPA determined that additional site work would be required to determine the
extent of contamination and the possible cleanup of the site. In 1996 the USEPA
requested that the PRPs perform certain site work. On December 19, 1997,
the USEPA issued an Administrative Order on Consent (AOC) to conduct engineering
estimates and cost analyses. The company has funded approximately
$70,000 toward these costs. The PRPs have negotiated an agreement and the
company contributed $5,000 as an initial group contribution. The company
has agreed to pay 12 percent of the costs of cleanup at the AERRCO site and
a percentage of the cleanup costs on the Thoro site. On January 8, 2003,
and October 9, 2003, the company made additional payments of $97,200 each
(total $194,400) toward the cost of cleanup. The company paid $35,355 in
2004 toward the cleanup. An air sparge and soil vapor extraction system was
installed at a total cost of $1.1 million and was placed in operation in
May 2005. Based on the information available to the company at this time, the
company does not believe that this matter will have a material adverse effect
upon the liquidity, results of operations or financial condition of the
company.
As
previously reported, in October 2001 representatives of Vauxmont Intermountain
Communities (Vauxmont) notified six of the PRPs at the AERRCO site, including
the company (AERRCO PRPs), that hazardous materials might have contaminated
property owned by Vauxmont. The AERRCO site is contained within the RFIP site.
Vauxmont also alleges that it lost $7 million on a contract with a home
developer for the purchase of a portion of the land. Vauxmont representatives
requested that the AERRCO PRPs study any contamination to the Vauxmont real
estate. The AERRCO PRPs agreed to undertake such a study and sought the USEPA’s
final approval. The sampling results were made available to all parties. No
further claims have been made against the company by Vauxmont to date. Based on
the information available to the company at the present time, the company does
not believe that this matter will have a material adverse effect upon the
liquidity, results of operations or financial condition of the
company.
As
previously reported, during July 1992, the company received information that it
had been named a PRP with respect to the Solvents Recovery of New England Site
(SRSNE) located in Southington, Connecticut. According to the information
received, it is alleged that the company contributed approximately
0.08816 percent of the waste contributed to the site on a volumetric basis.
The PRP group has been involved in negotiations with the USEPA regarding the
remediation of the site. The company has paid approximately $17,500 toward
site investigation and remediation efforts. The PRP group spent $15 million
through the end of 2001. Approximately $1.5 million more was spent to
complete a Remedial Investigation and Feasibility Study and pay for remediation
work through 2003. As of December 2001, projected remediation cost estimates for
a bioremediation and enhanced oxidation system ranged from $20 million to
$30 million. The PRP group offered a $5.5 million settlement to
resolve the USEPA claim of $16 million for past costs at the SRSNE site.
PRP/USEPA negotiations to resolve the past cost claims from the USEPA have not
been resolved and are not being actively pursued by the PRP group. A natural
resources damage claim of approximately $4.5 million is anticipated. USEPA
gave final approval for a $29 million remediation plan for the site on
October 11, 2005. The cost of the site remedy is now expected to be
approximately $82 million. The company will be responsible for
approximately 0.00109 percent of the future site costs. Based on the
information available to the company at the present time, the company does not
believe that this matter will have a material adverse effect upon the liquidity,
results of operations or financial condition of the company.
On
December 30, 2002, the company received a 104(e) letter from the USEPA
pursuant to the Comprehensive Environmental Response Compensation and Liability
Act (CERCLA) requesting answers to certain questions regarding the waste
disposal practices of Heekin Can Company and the relationship between the
company and Heekin Can Company. Region 5 of the USEPA is involved in the cleanup
of the Jackson Brothers Paint Company site, which consists of four, and possibly
five, sites in and around Laurel, Indiana. The Jackson Brothers Paint Company
apparently disposed of drums of waste in those sites during the 1960s and 1970s.
The USEPA has alleged that some of the waste that has been uncovered was sent to
the sites from the Cincinnati plant operated by Heekin Can Company. The Indiana
Department of Environmental Management referred this matter to the USEPA for
removal of the drums and cleanup. At the present time, there are an undetermined
number of drums at one or more of the sites that have been initially identified
by the USEPA as originating from Heekin Can Company. The USEPA has sent 104(e)
letters to seven PRPs including Heekin Can Company. On January 30, 2003,
the company responded to
Page 18 of
94
the
request for information pursuant to Section 104(e) of CERCLA. The USEPA has
initially estimated cleanup costs to be between $4 million and
$5 million. Based on the information available to the company at the
present time, the company does not believe that this matter will have a material
adverse effect upon the liquidity, results of operations or financial condition
of the company.
Europe
In
January 2003 the German government passed legislation that imposed a
mandatory deposit of 25 eurocents on all one-way packages containing
beverages except milk, wine, fruit juices and certain alcoholic beverages. Ball
Packaging Europe GmbH (BPE), together with certain other plaintiffs, contested
the enactment of the mandatory deposit for non-returnable containers based on
the German Packaging Regulation (Verpackungsverordnung) in Federal and State
Administrative Court. All other proceedings have been terminated except for the
determination of minimal court fees that are still outstanding in some cases,
together with minimal ancillary legal fees. The relevant industries, including
BPE and its competitors, have successfully set up a Germany-wide return system
for one-way beverage containers, which has been operational since May 1,
2006, the date required under the deposit legislation.
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
There
were no matters submitted to the security holders during the fourth quarter of
2007.
Part
II
|
Item
5.
|
Market
for the Registrant’s Common Stock and Related Stockholder
Matters
|
Ball
Corporation common stock (BLL) is traded on the New York Stock Exchange and the
Chicago Stock Exchange. There were 5,424 common shareholders of record on
February 3, 2008.
Common
Stock Repurchases
The
following table summarizes the company’s repurchases of its common stock during
the quarter ended December 31, 2007.
Purchases
of Securities
|
Total Number of Shares
Purchased(a)
|
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)
|
|||||||||||||
|
October 1
to October 28, 2007
|
705,292 | $ | 53.53 | 705,292 | 4,904,824 | |||||||||||
|
October 29
to November 25, 2007
|
431,170 | $ | 48.11 | 431,170 | 4,473,654 | |||||||||||
|
November 26
to December 31, 2007
|
8,310 | (c) | $ | 44.99 | 8,310 | 4,465,344 | ||||||||||
|
Total
|
1,144,772 | $ | 51.42 | 1,144,772 | ||||||||||||
|
(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
for repurchase from time to time by Ball’s board of directors. On
January 23, 2008, Ball's board of directors authorized the repurchase
by the company of up to a total of 12 million shares of its common stock.
This repurchase authorization replaces all previous
authorizations.
|
| (c) |
Does
not include 675,000 shares under a forward share repurchase agreement
entered into in December 2007 and settled on January 7, 2008,
for approximately $31 million. Also does not include shares to be
acquired in 2008 under an accelerated share repurchase program entered
into in December 2007 and funded on January 7,
2008.
|
Page 19 of
94
Quarterly
Stock Prices and Dividends
Quarterly
prices for the company's common stock, as reported on the New York Stock
Exchange composite tape, and quarterly dividends in 2007 and 2006 (on a calendar
quarter basis) were:
|
2007
|
2006
|
|||||||||||||||||||||||||||||||
|
4th
|
3rd
|
2nd
|
1st
|
4th
|
3rd
|
2nd
|
1st
|
|||||||||||||||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||||||||||||||
|
High
|
$ | 56.05 | $ | 55.87 | $ | 55.75 | $ | 47.91 | $ | 44.08 | $ | 41.76 | $ | 44.34 | $ | 45.00 | ||||||||||||||||
|
Low
|
43.99 | 46.75 | 45.85 | 43.51 | 39.67 | 35.03 | 34.16 | 38.53 | ||||||||||||||||||||||||
|
Dividends
per share
|
0.10 | 0.10 | 0.10 | 0.10 | 0.10 | 0.10 | 0.10 | 0.10 | ||||||||||||||||||||||||
Shareholder
Return Performance
The line
graph below compares the annual percentage change in Ball Corporation’s
cumulative total shareholder return on its common stock with the cumulative
total return of the Dow Jones Containers & Packaging Index and the S&P
Composite 500 Stock Index for the five-year period ended December 31,
2007. It assumes $100 was invested on December 31, 2002, and that all
dividends were reinvested. The Dow Jones Containers & Packaging Index total
return has been weighted by market capitalization.
|
Total
Return Analysis
|
||||||||||
|
12/31/2002
|
12/31/2003
|
12/31/2004
|
12/31/2005
|
12/31/2006
|
12/31/2007
|
|||||
|
Ball
Corporation
|
$ 100.00
|
$ 117.45
|
$ 175.08
|
$ 159.71
|
$ 177.06
|
$ 184.23
|
||||
|
DJ
Container & Packaging Index
|
$ 100.00
|
$ 119.07
|
$ 142.46
|
$ 141.56
|
$ 158.68
|
$ 169.35
|
||||
|
S&P
500 Index
|
$ 100.00
|
$ 128.68
|
$ 142.69
|
$ 149.70
|
$ 173.34
|
$ 182.87
|
||||
|
Copyright
© 2008 Standard & Poor's, a division of The McGraw-Hill Companies,
Inc. All rights reserved.
|
||||||||||
|
www.researchdatagroup.com/S&P.htm
|
||||||||||
Page 20 of
94
Item
6. Selected Financial Data
Five-Year
Review of Selected Financial Data
Ball
Corporation and Subsidiaries
|
($
in millions, except per share amounts)
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
Net
sales
|
$ | 7,475.3 | $ | 6,621.5 | $ | 5,751.2 | $ | 5,440.2 | $ | 4,977.0 | ||||||||||
|
Legal
settlement (1)
|
(85.6 | ) | – | – | – | – | ||||||||||||||
|
Total
net sales
|
$ | 7,389.7 | $ | 6,621.5 | $ | 5,751.2 | $ | 5,440.2 | $ | 4,977.0 | ||||||||||
|
Net
earnings (1)
|
$ | 281.3 | $ | 329.6 | $ | 272.1 | $ | 302.1 | $ | 232.2 | ||||||||||
|
Return
on average common shareholders’ equity
|
22.4 | % | 32.7 | % | 27.9 | % | 31.8 | % | 35.7 | % | ||||||||||
|
Basic
earnings per share (1)(2)
|
$ | 2.78 | $ | 3.19 | $ | 2.52 | $ | 2.73 | $ | 2.08 | ||||||||||
|
Weighted
average common shares outstanding (000s) (2)
|
101,186 | 103,338 | 107,758 | 110,846 | 111,710 | |||||||||||||||
|
Diluted
earnings per share (1)(2)
|
$ | 2.74 | $ | 3.14 | $ | 2.48 | $ | 2.65 | $ | 2.03 | ||||||||||
|
Diluted
weighted average common shares outstanding (000s) (2)
|
102,760 | 104,951 | 109,732 | 113,790 | 114,275 | |||||||||||||||
|
Property,
plant and equipment additions (3)
|
$ | 308.5 | $ | 279.6 | $ | 291.7 | $ | 196.0 | $ | 137.2 | ||||||||||
|
Depreciation
and amortization
|
$ | 281.0 | $ | 252.6 | $ | 213.5 | $ | 215.1 | $ | 205.5 | ||||||||||
|
Total
assets
|
$ | 6,020.6 | $ | 5,840.9 | $ | 4,361.5 | $ | 4,485.0 | $ | 4,070.4 | ||||||||||
|
Total
interest bearing debt and capital lease obligations
|
$ | 2,358.6 | $ | 2,451.7 | $ | 1,589.7 | $ | 1,660.7 | $ | 1,686.9 | ||||||||||
|
Common
shareholders’ equity
|
$ | 1,342.5 | $ | 1,165.4 | $ | 853.4 | $ | 1,093.9 | $ | 808.6 | ||||||||||
|
Market
capitalization (4)
|
$ | 4,510.1 | $ | 4,540.4 | $ | 4,138.8 | $ | 4,956.2 | $ | 3,359.1 | ||||||||||
|
Net
debt to market capitalization (4)
|
48.9 | % | 50.7 | % | 36.9 | % | 29.5 | % | 49.1 | % | ||||||||||
|
Cash
dividends per share (2)
|
$ | 0.40 | $ | 0.40 | $ | 0.40 | $ | 0.35 | $ | 0.24 | ||||||||||
|
Book
value per share (2)
|
$ | 13.39 | $ | 11.19 | $ | 8.19 | $ | 9.71 | $ | 7.17 | ||||||||||
|
Market
value per share (2)
|
$ | 45.00 | $ | 43.60 | $ | 39.72 | $ | 43.98 | $ | 29.785 | ||||||||||
|
Annual
return (loss) to common shareholders (5)
|
4.0 | % | 10.9 | % | (8.8 | )% | 48.8 | % | 17.4 | % | ||||||||||
|
Working
capital
|
$ | 329.8 | $ | 307.0 | $ | 67.9 | $ | 256.6 | $ | 63.2 | ||||||||||
|
Current
ratio
|
1.22 | 1.21 | 1.06 | 1.26 | 1.07 | |||||||||||||||
|
(1)
|
Includes
business consolidation activities and other items affecting comparability
between years of after-tax expense of $27 million, $20.5 million
and $13.4 million in 2007, 2006 and 2005, respectively, and after-tax
income of $9.5 million and $2.3 million in 2004 and 2003,
respectively. 2007 net sales have been reduced by a pretax legal
settlement of $85.6 million ($51.8 million after tax) while 2006
net earnings include a $46.1 million after-tax gain related to
insurance proceeds in connection with a fire at one of Ball’s German
plants. Also includes $12.3 million and $9.9 million of
after-tax debt refinancing costs in 2005 and 2003, respectively, reported
as interest expense. Additional details about the 2007, 2006 and 2005
items are available in Notes 4, 5, 6 and 13 to the consolidated financial
statements within Item 8 of this
report.
|
|
(2)
|
Amounts
have been retrospectively adjusted for a two-for-one stock split effected
on August 23, 2004.
|
|
(3)
|
Amounts
in 2007 and 2006 do not include the offsets of $48.6 million and
$61.3 million, respectively, of insurance proceeds received to
replace fire-damaged assets in our Hassloch, Germany,
plant.
|
|
(4)
|
Market
capitalization is defined as the number of common shares outstanding at
year end, multiplied by the year-end closing price of Ball common stock.
Net debt is total debt less cash and cash
equivalents.
|
|
(5)
|
Change
in stock price plus dividend yield assuming reinvestment of all dividends
paid.
|
Page 21 of
94
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Management’s
discussion and analysis should be read in conjunction with the consolidated
financial statements and accompanying notes. 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 companies 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 prices. In 2009 we
expect to complete a project to upgrade and streamline our North American
beverage can end manufacturing capabilities, a project that in 2007 began to
generate productivity gains and cost reductions in the metal beverage packaging,
Americas, segment. While the U.S. and Canadian beverage container manufacturing
industry is relatively mature, the European, Asian 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 and by announcing plans to establish a plant in India. 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.
Additionally, the company has announced plans for speeding up certain lines in
Europe and building a new plant in Poland. We are also considering additional
can and end manufacturing capacity there and in the PRC.
The
company regularly evaluates expansion opportunities in growing international
markets, including existing and developing markets in Europe, the PRC, Brazil
and other parts of the world. We recently announced our intention to build a
beverage can manufacturing plant in India, as well as the new plant in Poland to
meet the rapidly growing demand for beverage cans there and in central and
eastern Europe. We also recently announced the company’s participation in a
one-line metal beverage can plant in Brazil. This plant will be owned by Ball’s
unconsolidated 50 percent owned joint venture, Latapack-Ball Embalagens,
Ltda., and its construction will be financed by cash flows from the joint
venture.
As part
of our packaging strategy, we are focused on developing and marketing new and
existing products that meet the needs of our customers and the ultimate
consumer. These innovations include new shapes, sizes, opening features and
other functional benefits of both metal and plastic packaging. This packaging
development activity helps us maintain and expand our supply positions with
major beverage, food and household products customers. As part of this focus, we
are installing a new 24-ounce can production line in our Monticello, Indiana,
facility expected to be operational in mid-2008.
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 7A of this report.
Page 22 of
94
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 70 percent cost-type
contracts, which are billed at our costs plus an agreed upon and/or earned
profit component, while the remainder are 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.
Failure to be awarded certain key contracts could adversely affect segment
performance during 2008 compared to 2007.
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,
environmental, health and 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 highly talented employees are 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 economic value-added performance and various stock
compensation plans. Through our employee stock purchase plan and 401(k) plan,
which matches employee contributions with Ball common stock, employees,
regardless of organizational level, have opportunities to own Ball
stock.
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.
Effective
January 1, 2007, a plastic pail product line with 2007 net sales of
$52.1 million was transferred from the metal food and household products
packaging, Americas, segment to the plastic packaging, Americas, segment. Prior
periods have been retroactively adjusted to the current
presentation.
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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. During the second quarter of 2007, Miller Brewing Company
(Miller), a U.S. customer, asserted various claims against a wholly owned
subsidiary of the company, primarily related to the pricing of the aluminum
component of the containers supplied by the subsidiary, and on October 4, 2007,
the dispute was settled in mediation. Miller received $85.6 million
($51.8 million after tax) on settlement of the dispute and Ball retained
all of Miller’s beverage can and end supply through 2015. Miller received a
one-time payment of approximately $70 million ($42 million after tax) in
January 2008 (recorded on the December 31, 2007, consolidated balance
sheet in other current liabilities) with the remainder of the settlement to be
recovered over the life of the supply contract through 2015.
Including
the reduction in net sales resulting from the legal settlement, this segment
accounted for 37 percent of consolidated net sales in 2007 (39 percent
in 2006). Sales were 6 percent higher in 2007 than in 2006 with flat
volumes being offset by higher sales prices, which were primarily due to rising
aluminum prices and the pass through of various cost increases to customers.
These favorable factors were offset by the legal settlement, which decreased
sales by 3 percent in 2007 as compared to 2006. Sales were 9 percent
higher in 2006 than in 2005 due to an increase in beverage can shipments in
excess of 4 percent coupled with higher aluminum prices passed through to our
customers. The higher can shipments over 2005 were driven by favorable weather
in many parts of the U.S. and Canada, as well as the promotion of 12-ounce can
packages by beer and soft drink companies. Based on publicly available
information, we estimate that our shipments of metal beverage containers were
approximately 31 percent of total U.S. and Canadian shipments in 2007. 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.
Including
the effect of the legal settlement, earnings in the segment were
$213.6 million in 2007 compared to $269.4 million in 2006 and
$234.8 million in 2005. Contributing to the higher segment earnings in
2007, before the legal settlement, compared to 2006 were gains from sourcing of
raw materials that totaled approximately $30 million. Also contributing
were approximately $9 million of lower manufacturing costs related to the
new end technology project and improved production efficiencies. These gains
were offset by increased repairs and maintenance costs and higher labor and
other conversion costs, a portion of which could not be passed through to our
customers.
The third
quarter of 2005 included a pretax charge of $19.3 million
($11.7 million after tax) related to a project to significantly upgrade and
streamline our North American beverage can end manufacturing capabilities. The
project is expected to be largely completed in 2009. Segment earnings
growth in 2006 compared to 2005 (before the end project charge), although aided
by 9 percent higher sales in 2006, was constrained by product mix and
continued year-over-year cost growth, particularly higher energy, other direct
material and freight costs, which, combined, were approximately
$20 million higher than in 2005.
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 2007 (23 percent in 2006). Ball Packaging Europe,
which represents an estimated 29 percent of total European metal beverage
container manufacturing capacity, has manufacturing plants located in Germany,
the United Kingdom, France, the Netherlands, Poland and Serbia.
Segment
sales in 2007 were 26 percent higher than in 2006, due to over
9 percent sales volume growth, higher pricing and a 9 percent
year-over-year impact from the increase in the euro. Higher segment volumes were
aided by overall market dynamics in Europe that favor beverage cans, as well as
growth in Europe of custom can volumes. Offsetting these favorable volume trends
were the impacts of the colder and wetter than normal summer weather in many
parts of Europe.
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Segment
can shipments were more than 9 percent higher in 2006 than in 2005. Higher
segment sales volumes were aided by strong European demand, favorable European
weather, Germany hosting the World Cup soccer championship during June and
July 2006 and continued growth in the PRC market. Segment sales, which grew
12 percent in 2006, also benefited slightly from the strength of the euro.
The new beverage can plant in Belgrade, Serbia, built to serve the growing
demand for beverage cans in southern and eastern Europe, became fully
operational during the third quarter of 2005. The Serbian plant was constructed
to accommodate a second can production line and a can end manufacturing module
for future growth. Ball has announced its intention to increase capacity in this
segment through the construction of a beverage can manufacturing plant in India,
as well as a second beverage can plant in Poland.
Earnings
in the segment were $256.1 million in 2007, $268.7 million in 2006 and
$180.5 million in 2005. Segment earnings in 2006 included a
$75.5 million property insurance gain related to a fire at the company’s
Hassloch, Germany, metal beverage can plant (further details are provided
below). The fourth quarter of 2005 included a $9.3 million gain primarily
resulting from the final settlement of all tax obligations related to
liquidating PRC operations for amounts less than originally estimated. First
quarter 2005 segment earnings included a $3.4 million expense for the write
off of the remaining carrying value of an equity investment in the
PRC.
Segment
earnings in 2007 compared to 2006, excluding the $75.5 million property
insurance gain, increased due to a combination of $76 million in net margin
increases from higher sales volumes and price recovery initiatives,
$16 million from cost control programs and $13 million due to a
stronger euro. These earnings improvements were partially offset by
$15.9 million of lower business interruption insurance recognition in 2007
and $26 million of other higher costs. Segment earnings in 2006 were higher
than in 2005 due largely to 9 percent sales higher volumes, certain price
recovery initiatives and effective manufacturing and selling, general and
administrative cost controls. These gains were partially offset by higher raw
material, freight and energy costs, and price/cost compression in the
PRC.
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. The
property insurance proceeds recorded for the year ended December 31, 2006,
which were based on replacement cost, were €86.3 million
($109.3 million), of which €26 million ($32.4 million) was
received in April 2006, €22.7 million ($28.9 million) was
received in October 2006 and the remainder of €37.6 million
($48.6 million), which was recorded in other long-term assets at
December 31, 2006, was received in January 2007. A
€26.7 million ($33.8 million) fixed asset write down was recorded
to reflect the estimated impairment of the assets damaged as a result of the
fire. As a result, a pretax gain of €59.6 million ($75.5 million) was
recorded in the 2006 consolidated statement of earnings to reflect the
difference between the net book value of the impaired assets and the property
insurance proceeds. An additional €27.2 million ($35.1 million) and
€40 million ($51 million) were recorded in cost of sales in 2007 and
2006, respectively, for insurance recoveries related to business interruption
costs, as well as €11.3 million ($14.3 million) in 2006 to offset
clean-up costs.
Metal
Food and Household Products Packaging, Americas
The metal
food and household products packaging, Americas, segment consists of operations
located in the U.S., Canada and Argentina. The company acquired U.S. Can
Corporation (U.S. Can) on March 27, 2006, and with that acquisition, added
to its metal food can business the production and sale of aerosol cans, paint
cans, plastic pails and decorative specialty cans. Effective January 1,
2007, responsibility for the plastic pail product line with 2007 net sales of
$52.1 million was transferred to the plastic packaging, Americas, segment.
Accordingly, 2006 segment amounts have been retrospectively adjusted to reflect
the transfer.
Segment
sales in 2007 constituted 16 percent of consolidated net sales
(17 percent in 2006) and were 4 percent higher than 2006 sales. The
higher 2007 sales were impacted by 10 percent for the inclusion of a full
year’s sales from the acquisition of U.S. Can, partially offset by lost
business that resulted in a 2007 sales decline of 3 percent, as
well as customer operating issues in food cans, including a fire in a customer’s
factory, and unfavorable weather conditions in the Midwest.
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Segment
sales in 2006 were 38 percent higher than 2005 sales. The primary reason
for the increase was 45 percent higher sales due to the acquisition of U.S.
Can, combined with the pass through of higher raw material costs, partially
offset by 12 percent lower third quarter food can volumes. During 2007,
2006 and 2005, we were not able to pass through all of the steel price increases
and surcharges levied by steel producers and this resulted in margin
compression. Based on publicly available trade information, we estimate our 2007
shipments of 5.6 billion steel food containers and 1.6 billion aerosol
containers to be approximately 18 percent and 51 percent of total U.S.
and Canadian metal food container and steel aerosol container shipments,
respectively.
A segment
loss of $8 million was incurred in 2007 compared to earnings of
$2.4 million in 2006 and $19.1 million in 2005. These amounts included
pretax charges of $44.2 million in 2007, $35.5 million in 2006 and
$11.2 million in 2005, respectively, for business consolidation activities.
The 4 percent lower earnings in 2007 compared to 2006 (before the business
consolidation activity charges) were due to increased steel and coating material
costs, partially offset by improved manufacturing performance in 2007 and higher
cost of sales in the second quarter of 2006 related to $6.1 million of
purchase accounting adjustments for inventory valuations associated with the
acquired U.S. Can finished goods inventory. Higher sales volumes related to the
U.S. Can acquisition helped improve segment earnings in the last nine months of
2006, despite the negative impact of lower food can volumes attributable to the
loss of a customer in late 2005 and a poor salmon harvest in 2006. Additionally,
segment earnings in 2006 were reduced by the $6.1 million of purchase
accounting adjustments discussed previously, partially offset by lower freight
and other direct material costs of $4 million. While pricing pressures
continue on all of our raw materials, other direct materials and freight and
utility costs, we continue to seek price increases in the market place to
improve our margins.
On
October 24, 2007, Ball announced plans to close two manufacturing facilities and
to exit the custom and decorative tinplate can business located in Baltimore,
Maryland. Ball will close its food and household products packaging facilities
in Tallapoosa, Georgia, and Commerce, California, both of which manufacture
aerosol and general line cans. The two plant closures will result in a net
reduction in manufacturing capacity of 10 production lines, including the
relocation of two high-speed aerosol lines into existing Ball facilities, and
will allow us to supply customers from a consolidated asset base. When completed
throughout 2008, the actions are expected to yield annualized pretax cost
savings in excess of $15 million and improve the aerosol plant utilization
rate to more than 85 percent from about 70 percent. The cash costs of
these actions are expected to be offset by proceeds on asset dispositions and
tax recoveries. A pretax charge of $41.9 million ($25.4 million after
tax) was recorded in the fourth quarter of 2007 related to these closures. We
also recorded a $2.3 million ($1.4 million after tax) pension annuity
expense related to a previously closed plant.
In
October 2006 the company announced plans to close two manufacturing
facilities in North America by the end of that year as part of the realignment
of the metal food and household products packaging, Americas, segment following
the acquisition of U.S. Can earlier in the year. The company closed a leased
facility in Alliance, Ohio, which was one of 10 manufacturing locations
acquired from U.S. Can, and a plant in Burlington, Ontario, which was part of
the metal food can operations prior to the U.S. Can acquisition. The closure of
the Ohio plant was treated as an opening balance sheet item. A pretax charge of
$35.5 million ($28.7 million after tax) was recorded in 2006,
primarily related to the Burlington closure, for employee termination and
pension costs, plant decommissioning costs and fixed asset impairment, as well
as the shut down of a metal food can manufacturing line in the Whitby, Ontario,
plant. When the Burlington building is sold, the estimated costs of the closures
will be cash flow neutral after tax benefits and anticipated
proceeds.
The year
ended December 31, 2005, included a net pretax charge of $11.2 million
($7.5 million after tax) for pension, severance and other employee benefit
costs related to a reduction in force in the Burlington plant combined with the
closure of a three-piece food can manufacturing plant in Quebec.
The
company continues to evaluate the segment’s manufacturing structure and expects
to identify other opportunities to improve efficiencies. Additional details
regarding business consolidation activities are available in Note 5
accompanying the consolidated financial statements included within Item 8
of this Annual Report.
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Plastic
Packaging, Americas
The
plastic packaging, Americas, segment consists of operations located in the U.S.
and Canada that 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 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 in 2007 comprised 10 percent of consolidated net sales
(10 percent in 2006) and increased 8 percent compared to 2006
primarily due to an increase of 7 percent related to the March 2006 acquisition
of Alcan and the inclusion of the acquired U.S. Can plastic pail business, as
well as an increase of 3 percent for higher sales volumes. Segment sales in
2006 increased 42 percent compared to 2005, including 34 percent
related to plant and other asset acquisitions from Alcan and U.S. Can
and 6 percent related to higher sales volumes. In view of
the substandard performance related to our PET soft drink margins, we continue
to focus on price recovery initiatives, as well as our PET development efforts
in the custom hot-fill, beer, wine, flavored alcoholic beverage, and specialty
container markets. In the polypropylene plastic container
arena, development efforts are primarily focused on custom packaging
markets.
Segment
earnings were $25.9 million in 2007, $28.3 million in 2006 and
$16.7 million in 2005. Earnings were lower in 2007 than in 2006 primarily
due to lower sales margins related to approximately $5 million of customer
pricing concessions and $2 million of higher labor and overhead costs. The
earnings inhibitors were partially offset by approximately $2 million from
volume growth in specialty PET sales combined with the incremental margin impact
of sales in the first quarter of 2007 related to the acquired Alcan and U.S. Can
plants.
Segment
earnings in 2006 were higher than in 2005 largely due to the margin
impact of the incremental sales related to the Alcan and U.S. Can
acquisitions, partially offset by $9 million of higher energy and labor costs
and approximately $2 million incurred for a litigation claim that was
favorably resolved in July 2006. Earnings in the second quarter of 2006
also included purchase accounting adjustments of $1.2 million, which
increased cost of sales due to the valuation of inventories associated with the
acquired Alcan finished goods inventory.
We
estimate our 2007 shipments of 6 billion PET plastic bottles to be
approximately 9 percent of total U.S. and Canadian PET container shipments.
In addition, the plastic packaging, Americas, segment produced approximately
900 million food and specialty containers during 2007.
Aerospace
and Technologies
Aerospace
and technologies segment sales represented 11 percent of 2007 consolidated
net sales (10 percent in 2006) and were 17 percent higher than in
2006. Sales in 2006 were 3 percent lower than in 2005. The higher sales in
2007 were due to new programs, cost overruns and increased scope on previously
awarded contracts, with $58 million attributable to the WorldView and other
commercial space operations contracts. Lower sales in 2006 compared to 2005 were
largely due to contracts being completed during the period, as well as the
impact of government funding reductions and program delays. The aerospace and
technologies business won a number of large, strategic contracts and delivered a
considerable amount of sophisticated space and defense instrumentation
throughout the three-year period.
Segment
earnings were $64.6 million in 2007, $50 million in 2006 and
$54.7 million in 2005. Earnings improvement in 2007 was primarily due to
higher net sales, particularly $12 million related to the WorldView and
other commercial space contracts, an improved contract mix and better program
execution. Earnings in 2006 were negatively affected by lower sales due to
program delays and unfavorable contract mix. The first quarter of 2005 included
expense of $3.8 million for the write down to net realizable value of an
equity investment in an aerospace company. This investment was sold in
October 2005 for approximately its carrying value.
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Some of
the segment’s high-profile contracts include: the WorldView 1
and WorldView 2 advanced commercial remote sensing satellites; the James
Webb Space Telescope, a successor to the Hubble Space Telescope; the Space-Based
Space Surveillance System, which will detect and track space objects such as
satellites and orbital debris; NPOESS, the next-generation satellite weather
monitoring system; and a number of antennas for the Joint Strike
Fighter.
Sales to
the U.S. government, either directly as a prime contractor or indirectly as a
subcontractor, represented 84 percent of segment sales in 2007,
90 percent of segment sales in 2006 and 87 percent in 2005. Contracted
backlog for the aerospace and technologies segment at December 31, 2007 and
2006, was $774 million and $886 million, respectively. Year-to-year
comparisons of backlog are not necessarily indicative of the trend of future
operations.
Additional
Segment Information
For
additional information regarding the company’s segments, see the summary of
business segment information in Note 2 accompanying the consolidated financial
statements within Item 8 of this report. The charges recorded for business
consolidation activities were based on estimates by Ball management, actuaries
and others and were developed from information available at the time. If actual
outcomes vary from the estimates, the differences will be reflected in current
period earnings in the consolidated statement of earnings and identified as
business consolidation gains and losses. Additional details about our business
consolidation activities and associated costs are provided in Note 5
accompanying the consolidated financial statements within Item 8 of this
report.
Selling,
General and Administrative Expenses
Selling, general and
administrative (SG&A) expenses were $323.7 million, $287.2 million
and $233.8 million for 2007, 2006 and 2005, respectively.
Contributing to higher expenses in 2007 compared to 2006 were $4.5
million of additional SG&A from the U.S. Can acquisition, higher research
and development costs and aerospace bid and proposal costs of $9.4 million,
increased sales and marketing efforts of $5.4 million and
$15.8 million of compensation and benefit increases, including
year-over-year incentive compensation costs. Also, a $5.8 million out-of-period
foreign currency adjustment was included in SG&A expenses in the first
quarter of 2006 (discussed in further detail in Note 19 accompanying the
consolidated financial statements included within Item 8 of this
report).
The
increase in SG&A expenses in 2006 compared to 2005 was primarily the result
of $20 million of incremental SG&A (after realized synergies) from the
acquired U.S. Can operations, the $5.8 million out-of-period foreign
currency adjustment, higher expense of $6.3 million associated with the
adoption of Statement of Financial Accounting Standards No. 123
(revised 2004), $2 million for higher rates associated with the company’s
receivables sales agreement, $5 million of increased legal fees related to
patent litigation, $6.7 million for an initial mark-to-market adjustment to
one of the company’s deferred compensation stock plans due to a plan amendment,
as well as compensation and benefit increases.
Interest
and Taxes
Consolidated
interest expense was $149.4 million in 2007; $134.4 million in 2006
and $116.4 million, including debt refinancing costs of $19.3 million,
in 2005. The higher expense for each successive year was primarily due to the
additional borrowings used to finance the acquisitions of U.S. Can and the Alcan
assets, combined with higher interest rates in 2007. The debt refinancing costs
in 2005 of $19.3 million were costs associated with the refinancing of the
company’s senior credit facilities and the redemption in the last half of 2005
of the company’s 7.75% senior notes, which were due in August
2006.
Ball’s consolidated
effective income tax rate for 2007 was 26.3 percent compared to
29.4 percent in 2006 and 29.2 percent in 2005. The lower
effective rate in 2007 was the result of earnings mix (higher foreign
earnings taxed at lower rates) and net tax benefit adjustments of $17.2 million
recorded in the third quarter of 2007, as compared to $6.4 million in 2006.
These net tax benefit adjustments were the result of enacted income tax rate
reductions in Germany and the United Kingdom and a tax loss related to the
company’s Canadian operations. These benefits were offset by a tax provision to
adjust for the final settlement negotiations concluded in the quarter with the
Internal Revenue Service (IRS) related to a company-owned life insurance plan
(discussed below). Based on current estimates, the 2008 effective income tax
rate is expected to be around 33 percent.
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During 2007 the company
concluded final settlement negotiations with the IRS on the deductibility of
interest expense on incurred loans from a company-owned life insurance plan. An
additional accrual of $7 million was made in the third quarter to adjust the
accrued liability to the final settlement of $18.4 million, including interest,
for the years 2000-2004, which were under examination, and for the
unaudited years 2005-2007. This settlement included agreement on the prospective
treatment of interest deductibility on the policy loans, which will not have a
significant impact on earnings per share, cash flow or liquidity in future
periods. Further details are available in Note 14 to the consolidated financial
statements within Item 8 of this report.
While the
effective tax rates for 2006 and 2005 are similar, the 2006 rate was impacted by
a tax benefit of $8.1 million associated with a foreign exchange loss as a
result of the change in the functional currency of a European subsidiary in the
local statutory accounts. The one-time benefit was somewhat offset by a higher
foreign tax rate differential due to taxation of the German property insurance
gain at the marginal rate of 39 percent and a valuation allowance on a
Canadian net operating loss resulting from the 2006 business consolidation
costs. The 2005 rate was impacted by the tax benefit recorded on the
repatriation of foreign earnings at legislated reduced rates plus the tax
benefit on business consolidation costs applied at the higher marginal
rate.
Results
of Equity Affiliates
Equity in
the earnings of affiliates is primarily attributable to our 50 percent
ownership in packaging investments in the U.S. and Brazil. Earnings were
$12.9 million in 2007, $14.7 million in 2006 and $15.5 million in
2005.
CRITICAL
AND SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING
PRONOUNCEMENTS
For
information regarding the company’s critical and significant accounting
policies, as well as recent accounting pronouncements, see Note 1 to the
consolidated financial statements within Item 8 of this
report.
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash
Flows and Capital Expenditures
Our
primary sources of liquidity are cash provided by operating activities and
external borrowings. We believe that cash flows from operations and cash
provided by short-term and revolver borrowings, when necessary, will be
sufficient to meet our ongoing operating requirements, scheduled principal and
interest payments on debt, dividend payments and anticipated capital
expenditures. However, our liquidity could be impacted significantly by a
decrease in demand for our products, which could arise from competitive
circumstances, or any of the other factors we describe in Item 1A, “Risk
Factors.”
Cash flows from operating
activities were $673 million in 2007 compared to $401.4 million in
2006 and $558.8 million in 2005. The improvement over 2006 was
primarily due to higher net earnings before the legal settlement in 2007 and the
insurance gain in 2006 related to the Hassloch fire. The improvement in 2007 was
also the result of reduced changes in working capital components and lower
income tax payments, partially offset by higher pension
contributions.
Cash
flows from operating activities in 2006 were negatively affected by higher cash
pension funding and higher working capital levels compared to the prior year.
The higher working capital was a combination of higher than planned raw material
inventory levels, higher income tax payments and higher accounts receivable
balances, the latter resulting primarily from the repayment of a portion of the
accounts receivable securitization program and late payments from customers in
Europe.
Management
internally uses a free cash flow measure: (1) to evaluate the company’s
operating results, (2) to plan stock-buy back levels, (3) to evaluate
strategic investments and (4) to evaluate the company’s ability to incur and
service debt. Free cash flow is not a defined term under U.S. generally accepted
accounting principles, and it should not be inferred that the entire free cash
flow amount is available for discretionary expenditures. The company defines
free cash flow as cash flow from operating activities less additions to
property, plant and equipment (capital spending). Free cash flow is typically
derived directly from the company’s cash flow statements; however, it may be
adjusted for items that affect comparability between periods. An example of such
an item included in 2006 is the property insurance proceeds for the replacement
of the fire-damaged assets in our Hassloch, Germany, plant,
which
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are
included in capital spending amounts. Another example is the company’s decision
in 2007 to contribute an additional $44.5 million ($27.3 million) to
its pension plans as part of its overall debt reduction plan.
Based on
this, our consolidated free cash flow is summarized as follows:
|
($
in millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Cash
flows from operating activities
|
$ | 673.0 | $ | 401.4 | $ | 558.8 | ||||||
|
Incremental
pension funding, net of tax
|
27.3 | – | – | |||||||||
|
Capital
spending
|
(308.5 | ) | (279.6 | ) | (291.7 | ) | ||||||
|
Proceeds
for replacement of fire-damaged assets
|
48.6 | 61.3 | – | |||||||||
|
Free
cash flow
|
$ | 440.4 | $ | 183.1 | $ | 267.1 | ||||||
Based on
information currently available, we estimate cash flows from operating
activities for 2008 to be approximately $650 million, capital spending to
be approximately $350 million and free cash flow to be in the
$300 million range. Capital spending of $259.9 million (net of
$48.6 million in insurance recoveries) in 2007 was below depreciation and
amortization expense of $281 million. We continue to invest capital in our
best performing operations, including projects to increase custom can
capabilities, improve beverage can and end making productivity and add more
beverage can capacity in Europe, as well as expenditures in the aerospace and
technologies segment. Of the $350 million of planned capital spending for
2008, approximately $180 million will be spent on top-line sales growth
projects.
Debt
Facilities and Refinancing
Interest-bearing
debt at December 31, 2007, decreased $93.1 million to
$2,358.6 million from $2,451.7 million at December 31, 2006. The
2007 debt decrease from 2006 was primarily attributed to debt payments offset by
higher foreign exchange rates.
At
December 31, 2007, $705 million was available under the company’s
multi-currency revolving credit facilities. The company also had
$345 million of short-term uncommitted credit facilities available at the
end of the year, of which $49.7 million was outstanding.
On
October 13, 2005, Ball refinanced its senior secured credit facilities and
during the third and fourth quarters of 2005, Ball redeemed its 7.75% senior
notes due August 2006 primarily through the drawdown of funds under the new
credit facilities. The refinancing and redemption resulted in a pretax debt
refinancing charge of $19.3 million ($12.3 million after tax) to
reflect the call premium associated with the senior notes and the write off of
unamortized debt issuance costs.
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 $250 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
$170 million and $201.3 million at December 31, 2007 and 2006,
respectively, and are reflected as a reduction of accounts receivable in the
consolidated balance sheets.
The
company was not in default of any loan agreement at December 31, 2007, and
has met all payment obligations. The U.S. note agreements, bank credit agreement
and industrial development revenue bond agreements contain certain restrictions
relating to dividends, investments, financial ratios, guarantees and the
incurrence of additional indebtedness.
Additional
details about the company’s receivables sales agreement and debt are available
in Notes 7 and 13, respectively, accompanying the consolidated financial
statements within Item 8 of this report.
Page 30 of
94
Other
Liquidity Items
Cash
payments required for long-term debt maturities, rental payments under
noncancellable operating leases, purchase obligations and other commitments in
effect at December 31, 2007, are summarized in the following
table:
|
Payments
Due By Period (a)
|
||||||||||||||||||||
|
($
in millions)
|
Total
|
Less
than 1 Year
|
1-3
Years
|
3-5
Years
|
More
than 5 Years
|
|||||||||||||||
|
Long-term
debt
|
$ | 2,302.6 | $ | 126.1 | $ | 547.6 | $ | 1,174.9 | $ | 454.0 | ||||||||||
|
Capital
lease obligations
|
4.4 | 1.0 | 0.8 | 0.5 | 2.1 | |||||||||||||||
|
Interest
payments on long-term debt (b)
|
698.6 | 142.9 | 246.3 | 152.5 | 156.9 | |||||||||||||||
|
Operating
leases
|
218.5 | 49.9 | 71.7 | 42.5 | 54.4 | |||||||||||||||
|
Purchase
obligations (c)
|
6,092.6 | 2,397.2 | 3,118.8 | 576.6 | – | |||||||||||||||
|
Common
stock repurchase agreements
|
131.0 | 131.0 | – | – | – | |||||||||||||||
|
Legal
settlement
|
70.0 | 70.0 | – | – | – | |||||||||||||||
|
Total
payments on contractual obligations
|
$ | 9,517.7 | $ | 2,918.1 | $ | 3,985.2 | $ | 1,947.0 | $ | 667.4 | ||||||||||
|
(a)
|
Amounts
reported in local currencies have been translated at the year-end exchange
rates.
|
|
(b)
|
For
variable rate facilities, amounts are based on interest rates in effect at
year end and do not contemplate the effects of hedging
instruments.
|
| (c) |
The
company’s purchase obligations include contracted amounts for aluminum,
steel, plastic resin and other direct materials. Also included are
commitments for purchases of natural gas and electricity, aerospace and
technologies contracts and other less significant items. In cases where
variable prices and/or usage are involved, management’s best estimates
have been used. Depending on the circumstances, early termination of the
contracts may not result in penalties and, therefore, actual payments
could vary significantly.
|
Contributions
to the company’s defined benefit pension plans, not including the unfunded
German plans, are expected to be $49 million in 2008. This estimate may
change based on plan asset performance. Benefit payments related to these plans
are expected to be $66 million, $70 million, $74 million,
$77 million and $82 million for the years ending December 31, 2008
through 2012, respectively, and a total of $473 million for the years 2013
through 2017. Payments to participants in the unfunded German plans are expected
to be approximately $26 million in each of the years 2008 through 2012 and
a total of $136 million for the years 2013 through 2017.
In
accordance with 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) if imposed by the
appropriate regulatory agency, provide a lien on company assets in that amount
for the benefit of the plan. The guarantee can be removed upon approval by both
Ball and the pension plan trustees.
Our share
repurchase program in 2007 was $211.3 million, net of issuances, compared
to $45.7 million net repurchases in 2006 and $358.1 million in 2005.
The net repurchases included the $51.9 million settlement on
January 5, 2007, of a forward contract entered into in December 2006
for the repurchase of 1,200,000 shares. However, the 2007 net repurchases
did not include a forward contract entered into in December 2007 for the
repurchase of 675,000 shares. The contract was settled on January 7,
2008, for $31 million in cash.
On
December 12, 2007, in a privately negotiated transaction, Ball entered into
an accelerated share repurchase agreement to buy $100 million of its common
shares using cash on hand and available borrowings. The company advanced the
$100 million on January 7, 2008, and received approximately
2 million shares, which represented 90 percent of the total shares as
calculated using the previous day’s closing price. The exact number of shares to
be repurchased under the agreement, which will be determined on the settlement
date (no later than June 5, 2008), is subject to an adjustment based on a
weighted average price calculation for the period between the initial purchase
date and the settlement date. The company has the option to settle the contract
in either cash or shares. Including the settlements of the forward share
purchase contract and the accelerated share repurchase agreement, we expect to
repurchase approximately $300 million of our common shares, net of
issuances, in 2008.
Annual
cash dividends paid on common stock were 40 cents per share in 2007, 2006
and 2005. Total dividends paid were $40.6 million in 2007, $41 million
in 2006 and $42.5 million in 2005.
Page 31 of
94
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 we
participate, our operations in developing markets outside the U.S., changing
commodity prices for the materials used in the manufacture of our products and
changing capital markets. Where practicable, we attempt to reduce these risks
and uncertainties through the establishment of risk management policies and
procedures, including, at times, the use of derivative financial instruments as
explained in Item 7A of this report.
From time
to time, the company is subject to routine litigation incident to its business.
Additionally, the U.S. Environmental Protection Agency has designated Ball as a
potentially responsible party, along with numerous other companies, for the
cleanup of several hazardous waste sites. Our information at this time does not
indicate that these matters will have a material adverse effect upon the
liquidity, results of operations or financial condition of the
company.
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingencies at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Future events could affect
these estimates. See Note 1 to the consolidated financial statements within
Item 8 of this report for a summary of the company’s critical and
significant accounting policies.
The U.S.
and European economies have experienced minor general inflation during the past
several years. Management believes that evaluation of Ball’s performance during
the periods covered by these consolidated financial statements should be based
upon historical financial statements.
Page 32 of
94
Forward-Looking
Statements
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; mandatory deposit or 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 in senior management;
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 33 of
94
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
Financial
Instruments and Risk Management
In the
ordinary course of business, we employ established risk management policies and
procedures to reduce our exposure to fluctuations in commodity prices, interest
rates, foreign currencies and prices of the company’s common stock in regard to
common share repurchases. Although the instruments utilized involve varying
degrees of credit, market and interest risk, the counterparties to the
agreements are expected to perform fully under the terms of the
agreements.
We have
estimated our market risk exposure using sensitivity analysis. Market risk
exposure has been defined as the changes in fair value of derivative
instruments, financial instruments and commodity positions. To test the
sensitivity of our market risk exposure, we have estimated the changes in fair
value of market risk sensitive instruments assuming a hypothetical
10 percent adverse change in market prices or rates. The results of the
sensitivity analysis are summarized below.
Commodity
Price Risk
We manage
our North American commodity price risk in connection with market price
fluctuations of aluminum primarily by entering into container sales contracts
that include aluminum-based pricing terms that generally reflect price
fluctuations under our commercial supply contracts for aluminum purchases. The
terms include fixed, floating or pass-through aluminum component pricing. This
matched pricing affects substantially all of our metal beverage packaging,
Americas, net sales. We also, at times, use certain derivative instruments such
as option and forward contracts as cash flow and fair value hedges of commodity
price risk where there is not a pass-through arrangement in the sales
contract.
Most of
the plastic packaging, Americas, sales contracts include provisions to fully
pass-through resin cost changes. As a result, we believe we have minimal
exposure related to changes in the cost of plastic resin. Most metal food and
household products packaging, Americas, sales contracts either include
provisions permitting us to pass through some or all steel cost changes we
incur, or they incorporate annually negotiated steel costs. In 2007 and 2006, we
were able to pass through to our customers the majority of steel cost increases.
We anticipate that we will be able to pass through the majority of the steel
price increases that occur through the end of 2008.
In Europe
and Asia, the company manages the aluminum and steel raw material commodity
price risks through annual and long-term contracts for the purchase of the
materials, as well as certain sales of containers, that reduce the company’s exposure to
fluctuations in commodity prices within the current year. These purchase and
sales contracts include fixed price, floating and pass-through pricing
arrangements. We also use forward and option contracts as cash flow
hedges to manage future aluminum price risk and foreign exchange exposures for
those sales contracts where there is not a pass-through arrangement to minimize
the company’s exposure to significant price changes. We also use option
contracts to limit the impacts of European inflation in certain multi-year
contracts.
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 $6 million after-tax reduction in net earnings
over a one-year period. Additionally, if foreign currency exchange rates were to
change adversely by 10 percent, we estimate there could be a
$12 million after-tax reduction in net earnings over a one-year period for
foreign currency exposures on raw materials. Actual results may vary based on
actual changes in market prices and rates. Sensitivity to foreign currency
exposures related to metal increased over prior years due to an increase in
metal purchases and related payables at our foreign operations, which are
subject to foreign currency fluctuations.
The
company is also exposed to fluctuations in prices for utilities 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 $10 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.
Page 34 of
94
Interest
Rate Risk
Our
objective in managing our exposure to interest rate changes is to manage the
impact of interest rate changes on earnings and cash flows and to lower our
overall borrowing costs. To achieve these objectives, we use a variety of
interest rate swaps, collars and options to manage our mix of floating and
fixed-rate debt. Interest rate instruments held by the company at December 31,
2007, included pay-fixed interest rate swaps and interest rate collars.
Pay-fixed swaps effectively convert variable rate obligations to fixed rate
instruments. Collars create an upper and lower threshold within which interest
rates will fluctuate.
Based on
our interest rate exposure at December 31, 2007, assumed floating rate debt
levels throughout 2008 and the effects of derivative instruments, a 100 basis
point increase in interest rates could result in an estimated $8 million
after-tax reduction in net earnings over a one-year period. Actual results may
vary based on actual changes in market prices and rates and the timing of these
changes.
Foreign
Currency Exchange Rate Risk
Our
objective in managing exposure to foreign currency fluctuations is to protect
foreign cash flows and earnings from changes associated with foreign currency
exchange rate changes through the use of 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.
Considering
the company’s derivative financial instruments outstanding at December 31,
2007, and the currency exposures, a hypothetical 10 percent reduction (U.S.
dollar strengthening) in foreign currency exchange rates compared to the U.S.
dollar could result in an estimated $23 million after-tax reduction in net
earnings over a one-year period. This amount includes the $12 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 $84 million. Actual changes in
market prices or rates may differ from hypothetical changes.
Common
Share Repurchases
In
connection with the company’s ongoing share repurchases, the company
periodically sells put options, which give the purchasers of those options the
right to sell shares of the company’s common stock to the company on specified
dates at specified prices upon the exercise of those options. Our objective in
selling put options is to lower the average purchase price of acquired shares.
There were no put option contracts outstanding at the end of 2007.
On
December 3, 2007, Ball entered into a forward repurchase agreement for the
purchase of 675,000 shares of its common stock. This agreement was settled
for $31 million on January 7, 2008, and the shares were delivered that
day. On December 12, 2007, we also entered into an accelerated share
repurchase agreement for approximately $100 million. The agreement provided
for the delivery of approximately 2 million shares, which represented
90 percent of the total estimated shares to ultimately be delivered. The
$100 million was paid on January 7, 2008, at the time the shares were
delivered. The remaining shares and average price per share will be determined
at the conclusion of the contract, which is expected to occur no later than
June 5, 2008.
Page 35 of
94
Item
8. Financial Statements and Supplementary
Data
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Shareholders of Ball Corporation:
In our
opinion, the consolidated financial statements listed in the index appearing
under Item 15(a)(1) present fairly, in all material respects, the financial
position of Ball Corporation and its subsidiaries at December 31, 2007 and
2006, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2007 in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is
responsible for these financial statements, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in Management’s Report on
Internal Control Over Financial Reporting appearing under Item 9A. Our
responsibility is to express opinions on these financial statements and on the
Company’s
internal control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
PricewaterhouseCoopers
LLP
Denver,
Colorado
February
25, 2008
Page 36 of
94
Consolidated
Statements of Earnings
Ball
Corporation and Subsidiaries
|
Years
ended December 31,
|
||||||||||||
|
($
in millions, except per share amounts)
|
2007
|
2006
|
2005
|
|||||||||
|
Net
sales
|
$ | 7,475.3 | $ | 6,621.5 | $ | 5,751.2 | ||||||
|
Legal
settlement (Note 4)
|
(85.6 | ) | – | – | ||||||||
|
Total
net sales
|
7,389.7 | 6,621.5 | 5,751.2 | |||||||||
|
Costs
and expenses
|
||||||||||||
|
Cost
of sales (excluding depreciation)
|
6,226.5 | 5,540.4 | 4,802.7 | |||||||||
|
Depreciation
and amortization (Notes 2, 9 and 11)
|
281.0 | 252.6 | 213.5 | |||||||||
|
Business
consolidation costs (Note 5)
|
44.6 | 35.5 | 21.2 | |||||||||
|
Property
insurance gain (Note 6)
|
– | (75.5 | ) | – | ||||||||
|
Selling,
general and administrative
|
323.7 | 287.2 | 233.8 | |||||||||
| 6,875.8 | 6,040.2 | 5,271.2 | ||||||||||
|
Earnings
before interest and taxes
|
513.9 | 581.3 | 480.0 | |||||||||
|
Interest
expense (Note 13)
|
||||||||||||
|
Interest
expense before debt refinancing costs
|
(149.4 | ) | (134.4 | ) | (97.1 | ) | ||||||
|
Debt
refinancing costs
|
– | – | (19.3 | ) | ||||||||
|
Total
interest expense
|
(149.4 | ) | (134.4 | ) | (116.4 | ) | ||||||
|
Earnings
before taxes
|
364.5 | 446.9 | 363.6 | |||||||||
|
Tax
provision (Note 14)
|
(95.7 | ) | (131.6 | ) | (106.2 | ) | ||||||
|
Minority
interests
|
(0.4 | ) | (0.4 | ) | (0.8 | ) | ||||||
|
Equity
in results of affiliates
|
12.9 | 14.7 | 15.5 | |||||||||
|
Net
earnings
|
$ | 281.3 | $ | 329.6 | $ | 272.1 | ||||||
|
Earnings
per share (Notes 16 and 17):
|
||||||||||||
|
Basic
|
$ | 2.78 | $ | 3.19 | $ | 2.52 | ||||||
|
Diluted
|
$ | 2.74 | $ | 3.14 | $ | 2.48 | ||||||
|
Weighted
average shares outstanding (000s) (Note
17):
|
||||||||||||
|
Basic
|
101,186 | 103,338 | 107,758 | |||||||||
|
Diluted
|
102,760 | 104,951 | 109,732 | |||||||||
|
Cash
dividends declared and paid, per share
|
$ | 0.40 | $ | 0.40 | $ | 0.40 | ||||||
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
Page 37 of
94
Consolidated
Balance Sheets
Ball
Corporation and Subsidiaries
|
December
31,
|
||||||||
|
($
in millions)
|
2007
|
2006
|
||||||
|
Assets
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 151.6 | $ | 151.5 | ||||
|
Receivables,
net (Note 7)
|
582.7 | 579.5 | ||||||
|
Inventories,
net (Note 8)
|
998.1 | 935.4 | ||||||
|
Deferred
taxes and prepaid expenses (Note 14)
|
110.5 | 94.9 | ||||||
|
Total
current assets
|
1,842.9 | 1,761.3 | ||||||
|
Property,
plant and equipment, net (Notes 6 and 9)
|
1,941.2 | 1,876.0 | ||||||
|
Goodwill
(Notes 3 and 10)
|
1,863.1 | 1,773.7 | ||||||
|
Intangibles
and other assets, net (Notes 11 and 14)
|
373.4 | 429.9 | ||||||
|
Total
Assets
|
$ | 6,020.6 | $ | 5,840.9 | ||||
|
Liabilities
and Shareholders’ Equity
|
||||||||
|
Current
liabilities
|
||||||||
|
Short-term
debt and current portion of long-term debt (Note 13)
|
$ | 176.8 | $ | 181.3 | ||||
|
Accounts
payable
|
763.6 | 732.4 | ||||||
|
Accrued
employee costs
|
238.0 | 201.1 | ||||||
|
Income
taxes payable (Note 14)
|
15.7 | 71.8 | ||||||
|
Other
current liabilities (Note 4)
|
319.0 | 267.7 | ||||||
|
Total
current liabilities
|
1,513.1 | 1,454.3 | ||||||
|
Long-term
debt (Note 13)
|
2,181.8 | 2,270.4 | ||||||
|
Employee
benefit obligations (Note 15)
|
799.0 | 847.7 | ||||||
|
Deferred
taxes and other liabilities (Note 14)
|
183.1 | 102.1 | ||||||
|
Total
liabilities
|
4,677.0 | 4,674.5 | ||||||
|
Contingencies
(Note 23)
|
||||||||
|
Minority
interests
|
1.1 | 1.0 | ||||||
|
Shareholders’
equity (Note 16)
|
||||||||
|
Common
stock (160,678,695 shares issued – 2007; 160,026,936 shares issued –
2006)
|
760.3 | 703.4 | ||||||
|
Retained
earnings
|
1,765.0 | 1,535.3 | ||||||
|
Accumulated
other comprehensive earnings (loss)
|
106.9 | (29.5 | ) | |||||
|
Treasury
stock, at cost (60,454,245 shares – 2007; 55,889,948 shares –
2006)
|
(1,289.7 | ) | (1,043.8 | ) | ||||
|
Total
shareholders’ equity
|
1,342.5 | 1,165.4 | ||||||
|
Total
Liabilities and Shareholders’ Equity
|
$ | 6,020.6 | $ | 5,840.9 | ||||
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
Page 38 of
94
Consolidated
Statements of Cash Flows
Ball
Corporation and Subsidiaries
|
($
in millions)
|
Years
ended December 31,
|
|||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Cash
Flows from Operating Activities
|
||||||||||||
|
Net
earnings
|
$ | 281.3 | $ | 329.6 | $ | 272.1 | ||||||
|
Adjustments
to reconcile net earnings to cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
281.0 | 252.6 | 213.5 | |||||||||
|
Legal
settlement (Note 4)
|
85.6 | – | – | |||||||||
|
Property
insurance gain (Note 6)
|
– | (75.5 | ) | – | ||||||||
|
Business
consolidation costs (Note 5)
|
42.3 | 34.2 | 19.0 | |||||||||
|
Deferred
taxes
|
(21.0 | ) | 38.2 | (51.6 | ) | |||||||
|
Other,
net
|
(30.9 | ) | (40.4 | ) | 17.7 | |||||||
|
Working
capital changes, excluding effects of acquisitions:
|
||||||||||||
|
Receivables
|
26.9 | (57.0 | ) | (32.8 | ) | |||||||
|
Inventories
|
(41.0 | ) | (132.2 | ) | (71.7 | ) | ||||||
|
Accounts
payable
|
27.4 | 121.6 | 113.2 | |||||||||
|
Accrued
employee costs
|
32.7 | 53.1 | (17.2 | ) | ||||||||
|
Income
taxes payable and current deferred tax assets, net
|
32.2 | (62.4 | ) | 51.2 | ||||||||
|
Other,
net
|
(43.5 | ) | (60.4 | ) | 45.4 | |||||||
|
Cash
provided by operating activities
|
673.0 | 401.4 | 558.8 | |||||||||
|
Cash
Flows from Investing Activities
|
||||||||||||
|
Additions
to property, plant and equipment
|
(308.5 | ) | (279.6 | ) | (291.7 | ) | ||||||
|
Business
acquisitions, net of cash acquired (Note 3)
|
– | (791.1 | ) | − | ||||||||
|
Property
insurance proceeds (Note 6)
|
48.6 | 61.3 | – | |||||||||
|
Other,
net
|
(5.9 | ) | 16.0 | 1.7 | ||||||||
|
Cash
used in investing activities
|
(265.8 | ) | (993.4 | ) | (290.0 | ) | ||||||
|
Cash
Flows from Financing Activities
|
||||||||||||
|
Long-term
borrowings
|
0.3 | 949.4 | 882.8 | |||||||||
|
Repayments
of long-term borrowings
|
(74.5 | ) | (205.0 | ) | (949.7 | ) | ||||||
|
Change
in short-term borrowings
|
(95.8 | ) | 23.0 | 68.4 | ||||||||
|
Debt
prepayment costs
|
– | – | (6.6 | ) | ||||||||
|
Debt
issuance costs
|
– | (8.1 | ) | (4.8 | ) | |||||||
|
Proceeds
from issuances of common stock
|
46.5 | 38.4 | 35.6 | |||||||||
|
Acquisitions
of treasury stock
|
(257.8 | ) | (84.1 | ) | (393.7 | ) | ||||||
|
Common
dividends
|
(40.6 | ) | (41.0 | ) | (42.5 | ) | ||||||
|
Other,
net
|
9.5 | 7.6 | (0.2 | ) | ||||||||
|
Cash
provided by (used in) financing activities
|
(412.4 | ) | 680.2 | (410.7 | ) | |||||||
|
Effect
of exchange rate changes on cash
|
5.3 | 2.3 | 4.2 | |||||||||
|
Change
in cash and cash equivalents
|
0.1 | 90.5 | (137.7 | ) | ||||||||
|
Cash
and Cash Equivalents – Beginning of Year
|
151.5 | 61.0 | 198.7 | |||||||||
|
Cash
and Cash Equivalents – End of Year
|
$ | 151.6 | $ | 151.5 | $ | 61.0 | ||||||
The accompanying notes are an integral
part of the consolidated financial statements.
Page 39 of
94
Consolidated
Statements of Shareholders’ Equity and Comprehensive Earnings
Ball
Corporation and Subsidiaries
|
($
in millions, except share amounts)
|
Years
ended December 31,
|
|||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Number of Common Shares
Outstanding (000s)
|
||||||||||||
|
Balance,
beginning of year
|
160,027 | 158,383 | 157,506 | |||||||||
|
Shares
issued for stock options, other stock plans and business acquisitions, net
of shares exchanged (a)
|
652 | 1,644 | 877 | |||||||||
|
Balance,
end of year
|
160,679 | 160,027 | 158,383 | |||||||||
|
Number of Treasury Shares
Outstanding (000s)
|
||||||||||||
|
Balance,
beginning of year
|
(55,890 | ) | (54,183 | ) | (44,815 | ) | ||||||
|
Shares
purchased, net of shares reissued (a)(c)(d)
|
(4,564 | ) | (1,707 | ) | (9,368 | ) | ||||||
|
Balance,
end of year
|
(60,454 | ) | (55,890 | ) | (54,183 | ) | ||||||
|
Common
Stock
|
||||||||||||
|
Balance,
beginning of year
|
$ | 703.4 | $ | 633.6 | $ | 610.8 | ||||||
|
Shares
issued for stock options and other stock plans, net of shares exchanged
(cash and noncash)
|
47.4 | 28.7 | 15.5 | |||||||||
|
Shares
issued for business acquisitions (a)
|
– | 33.6 | – | |||||||||
|
Tax
benefit from option exercises
|
9.5 | 7.5 | 7.3 | |||||||||
|
Balance,
end of year
|
$ | 760.3 | $ | 703.4 | $ | 633.6 | ||||||
|
Retained
Earnings
|
||||||||||||
|
Balance,
beginning of year
|
$ | 1,535.3 | $ | 1,246.0 | $ | 1,015.0 | ||||||
|
Net
earnings
|
281.3 | 329.6 | 272.1 | |||||||||
|
Common
dividends, net of tax benefits
|
(40.2 | ) | (40.3 | ) | (41.1 | ) | ||||||
|
Adoption
of new accounting standard (Note 14)
|
(11.4 | ) | – | – | ||||||||
|
Balance,
end of year
|
$ | 1,765.0 | $ | 1,535.3 | $ | 1,246.0 | ||||||
|
Accumulated
Other Comprehensive Earnings (Loss) (Note 16)
|
||||||||||||
|
Balance,
beginning of year
|
$ | (29.5 | ) | $ | (100.7 | ) | $ | 33.2 | ||||
|
Foreign
currency translation adjustment
|
90.0 | 57.2 | (74.3 | ) | ||||||||
|
Pension
and other postretirement items, net of tax (b)
|
57.9 | 55.9 | (43.6 | ) | ||||||||
|
Effective
financial derivatives, net of tax
|
(11.5 | ) | 6.0 | (16.0 | ) | |||||||
|
Net
other comprehensive earnings (loss) adjustments
|
136.4 | 119.1 | (133.9 | ) | ||||||||
|
Adoption
of new accounting standard (b)
|
– | (47.9 | ) | – | ||||||||
|
Accumulated
other comprehensive earnings (loss)
|
$ | 106.9 | $ | (29.5 | ) | $ | (100.7 | ) | ||||
|
Treasury
Stock
|
||||||||||||
|
Balance,
beginning of year
|
$ | (1,043.8 | ) | $ | (925.5 | ) | $ | (564.9 | ) | |||
|
Shares
purchased, net of shares reissued (c)(d)
|
(214.9 | ) | (104.4 | ) | (360.6 | ) | ||||||
|
Diversification
of deferred compensation stock plan
|
(31.0 | ) | – | – | ||||||||
|
Shares
returned in business acquisitions (a)
|
– | (13.9 | ) | – | ||||||||
|
Balance,
end of year
|
$ | (1,289.7 | ) | $ | (1,043.8 | ) | $ | (925.5 | ) | |||
|
Comprehensive
Earnings
|
||||||||||||
|
Net
earnings
|
$ | 281.3 | $ | 329.6 | $ | 272.1 | ||||||
|
Net
other comprehensive earnings adjustments (see details above) (b)
|
136.4 | 119.1 | (133.9 | ) | ||||||||
|
Comprehensive
earnings (b)
|
$ | 417.7 | $ | 448.7 | $ | 138.2 | ||||||
|
(a)
|
In
connection with the acquisition of U.S. Can (discussed in Note 3),
758,981 shares were originally issued at $44.28 per share. As a
result of a purchase price adjustment, 314,225 shares were
subsequently returned to Ball and recorded as treasury
stock.
|
|
(b)
|
Within the
company’s 2006 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. The 2006 amounts have been revised to correct
the previous reporting.
|
|
(c)
|
Amounts
in 2007 and 2006 included 675,000 and 1,200,000 shares, respectively,
for amounts repurchased under forward contracts not settled until after
December 31. The contracts were settled for $31 million in
January 2008 and $51.9 million in January 2007,
respectively.
|
| (d) | Includes 588,662 shares, 716,420 and 939,139 shares reissued in 2007, 2006 and 2005, respectively. The total amounts related to these share reissuances were $26.5 million, $27.2 million and $36.1 million in each of these three years, respectively. |
The
accompanying notes are an integral part of the consolidated financial
statements.
Page 40 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
1. Critical
and Significant Accounting Policies
In the
application of accounting principles generally accepted in the United States of
America, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingencies and
reported amounts of revenues and expenses. These estimates are based on
historical experience and various other assumptions believed to be reasonable
under the circumstances. Actual results could differ from these estimates under
different assumptions or conditions.
Critical
Accounting Policies
The
company considers certain accounting policies to be critical, as their
application requires management’s best judgment in making estimates about the
effect of matters that are inherently uncertain. Following is a discussion of
the accounting policies we consider critical to our consolidated financial
statements.
Revenue
Recognition in the Aerospace and Technologies Segment
Sales
under long-term contracts in the aerospace and technologies segment are
primarily recognized under the cost-to-cost, percentage-of-completion method.
This business segment sells using two types of long-term sales contracts –
cost-type sales contracts, which represent approximately 70 percent of
sales, and fixed price sales contracts, which account for the remainder. A
cost-type sales contract is an agreement to perform the contract for cost plus
an agreed upon profit component, whereas fixed price sales contracts are
completed for a fixed price or involve the sale of engineering labor at fixed
rates per hour. Cost-type sales contracts can have different types of fee
arrangements, including fixed fee, cost, milestone and performance incentive
fees, award fees or a combination thereof.
During
initial periods of sales contract performance, our estimates of base, incentive
and other fees are established at a conservative estimate of profit over the
period of contract performance. Throughout the period of contract performance,
we regularly reevaluate and, if necessary, revise our estimates of total
contract revenue, total contract cost and extent of progress toward completion.
Provision for estimated contract losses, if any, is made in the period that such
losses are determined to be probable. Because of sales contract payment
schedules, limitations on funding and contract terms, our sales and accounts
receivable generally include amounts that have been earned but not yet billed.
As a prime U.S. government contractor or subcontractor, the aerospace and
technologies segment is subject to a high degree of regulation, financial review
and oversight by the U.S. government.
Acquisitions
The
company accounts for acquisitions using the purchase method as required by
Statement of Financial Accounting Standards (SFAS) No. 141, “Business
Combinations.” Under SFAS No. 141, the acquiring company allocates the
purchase price to the assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition, including intangible assets
that can be identified and named. The purchase price in excess of the fair value
of the net assets and liabilities is recorded as goodwill. Among other sources
of relevant information, the company uses independent appraisals and actuarial
or other valuations to assist in determining the estimated fair values of the
assets and liabilities.
Goodwill
and Other Intangible Assets
We
evaluate the carrying value of goodwill annually, and we evaluate our other
intangible assets whenever there is evidence that certain events or changes in
circumstances indicate that the carrying amount of these assets may not be
recoverable. Goodwill is tested for impairment using a fair value approach,
using discounted cash flows to establish fair values. We recognize an impairment
charge for any amount by which the carrying amount of goodwill exceeds its fair
value. When available and as appropriate, we use comparative market multiples to
corroborate discounted cash flow results. When a business within a reporting
unit is disposed of, goodwill is allocated to the gain or loss on disposition
using the relative fair value methodology.
Page 41 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
1. Critical
and Significant Accounting Policies (continued)
We
amortize the cost of other intangibles over their estimated useful lives unless
such lives are deemed indefinite. Amortizable intangible assets are tested for
impairment based on undiscounted cash flows and, if impaired, written down to
fair value based on either discounted cash flows or appraised values. Intangible
assets with indefinite lives are tested annually for impairment and written down
to fair value as required.
Defined
Benefit Pension Plans and Other Employee Benefits
The
company has defined benefit plans that cover the majority of its employees. We
also have postretirement plans that provide certain medical benefits and life
insurance for retirees and eligible dependents. The accounting for these plans
is subject to the guidance provided in SFAS No. 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB
Statements No. 87, 88, 106, and 132(R);” SFAS No. 87, "Employers’
Accounting for Pensions;" SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions" and SFAS No. 112,
“Employers' Accounting for Postemployment Benefits, an amendment of FASB
Statements No. 5 and 43.” These statements require that management make certain
assumptions relating to the long-term rate of return on plan assets, discount
rates used to measure future obligations and expenses, salary scale inflation
rates, health care cost trend rates, mortality and other assumptions. We believe
that the accounting estimates related to our pension and postretirement plans
are critical accounting estimates, because they are highly susceptible to change
from period to period based on the performance of plan assets, actuarial
valuations, market conditions and contracted benefit changes. The selection of
assumptions is based on historical trends and known economic and market
conditions at the time of valuation. However, actual results may differ
substantially from the estimates that were based on the critical
assumptions.
Pension
plan liabilities are revalued annually based on updated assumptions and
information about the individuals covered by the plan. For pension plans,
accumulated gains and losses in excess of a 10 percent corridor, the prior
service cost and the transition asset are amortized on a straight-line basis
from the date recognized over the average remaining service period of active
participants. For other postemployment benefits, the 10 percent corridor is
not used.
Effective
with its December 31, 2006, year-end reporting, Ball adopted
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),” which requires the recognition
of the funded status of each defined benefit pension plan and other
postretirement benefit plan on the consolidated balance sheet. Each overfunded
plan is recognized as an asset and each underfunded plan is recognized as a
liability.
In
addition to defined benefit and postretirement plans, the company maintains
reserves for employee medical claims, up to our insurance stop-loss limit, and
workers’ compensation claims. These are regularly evaluated and revised, as
needed, based on a variety of information, including historical experience,
actuarial estimates and current employee statistics.
Taxes
on Income
Deferred
tax assets, including operating loss, capital loss and tax credit carry
forwards, are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that any portion of these tax attributes
will not be realized. In addition, from time to time, management must assess the
need to accrue or disclose a possible loss contingency for proposed adjustments
from various federal, state and foreign tax authorities that regularly audit the
company in the normal course of business. In making these assessments,
management must often analyze complex tax laws of multiple jurisdictions,
including many foreign jurisdictions.
Page 42 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
1. Critical
and Significant Accounting Policies (continued)
Deferred
income taxes reflect the future tax consequences of differences between the tax
bases of assets and liabilities and their financial reporting amounts at each
balance sheet date, based upon enacted income tax laws and tax rates. Income tax
expense or benefit is provided based on earnings reported in the financial
statements. The provision for income tax expense or benefit differs from the
amounts of income taxes currently payable, because certain items of income and
expense included in the consolidated financial statements are recognized in
different time periods by taxing authorities.
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. The company records the related interest expense and
penalties, if any, as a tax expense, consistent with the practice prior to
adoption. Additional details about the adoption of FIN 48 are provided in
Note 14. 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 year ended
December 31, 2007.
Business
Consolidation Costs
The
company estimates its liabilities for business consolidation activities by
accumulating detailed estimates of costs and asset sales proceeds, if any, for
each business consolidation initiative. This includes the estimated costs of
employee severance, pension and related benefits; impairment of property and
equipment and other assets, including estimates of net realizable value;
contract termination payments for contracts and leases; contractual obligations
and any other qualifying costs related to the exit plan. These estimated costs
are grouped by specific projects within the overall exit plan and are then
monitored on a monthly basis. Such disclosures represent management's best
estimates, but require assumptions about the plans that may change over time.
Changes in estimates for individual locations and other matters are evaluated
periodically to determine if a change in estimate is required for the overall
restructuring plan. Subsequent changes to the original estimates are included in
current period earnings and identified as business consolidation gains or
losses.
Derivative
Financial Instruments
The
company uses derivative financial instruments for the purpose of hedging
exposures to fluctuations in interest rates, foreign currency exchange rates,
product sales, raw materials purchasing, inflation rates and common share
repurchases. The company’s derivative instruments are recorded in the
consolidated balance sheets at fair value. For a derivative designated as a fair
value hedge of a recognized asset or liability, the gain or loss is recognized
in earnings in the period of change together with the offsetting loss or gain on
the hedged item attributable to the risk being hedged. For a derivative
designated as a cash flow hedge, or a derivative designated as a fair value
hedge of a firm commitment not yet recorded on the balance sheet, the effective
portion of the derivative's gain or loss is initially reported as a component of
accumulated other comprehensive earnings and subsequently reclassified into
earnings when the forecasted transaction affects earnings. The ineffective
portion of the gain or loss associated with all hedges is reported in earnings
immediately. In the statements of cash flows, hedge activities are classified in
the same category as the items being hedged. Derivatives that do not qualify for
hedge accounting are marked to market with gains and losses reported immediately
in earnings.
Realized
gains and losses from hedges are classified in the consolidated statements of
earnings consistent with the accounting treatment of the items being hedged.
Gains and losses upon the early termination of effective derivative contracts
are deferred in accumulated other comprehensive earnings and amortized to
earnings in the same period as the originally hedged items affect
earnings.
Page 43 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
1. Critical
and Significant Accounting Policies (continued)
Significant
Accounting Policies
Principles
of Consolidation and Basis of Presentation
The
consolidated financial statements include the accounts of Ball Corporation and
its controlled subsidiaries (collectively, Ball, the company, we or our). Equity
investments in which we exercise significant influence, but do not control and
are not the primary beneficiary, are accounted for using the equity method of
accounting. Investments in which we do not exercise significant influence over
the investee are accounted for using the cost method of accounting. Intercompany
transactions are eliminated.
Cash
Equivalents
Cash
equivalents have original maturities of three months or less.
Inventories
Inventories
are stated at the lower of cost or market using the first-in, first-out (FIFO)
cost method of accounting.
Depreciation
and Amortization
Property,
plant and equipment are carried at the cost of acquisition or construction and
depreciated over the estimated useful lives of the assets. Depreciation and
amortization are provided using the straight-line method in amounts sufficient
to amortize the cost of the assets over their estimated useful lives (buildings
and improvements – 10 to 40 years; machinery and equipment – 3 to
15 years; other intangible assets – 13 years, weighted
average).
Deferred
financing costs are amortized over the life of the related loan facility and are
reported as part of interest expense. When debt is repaid prior to its maturity
date, the write-off of the remaining unamortized deferred financing costs, or
pro rata portion thereof, is also reported as interest expense.
Environmental
Reserves
We
estimate the liability related to environmental matters based on, among other
factors, the degree of probability of an unfavorable outcome and the ability to
make a reasonable estimate of the amount of loss. We record our best estimate of
a loss when the loss is considered probable. As additional information becomes
available, we assess the potential liability related to our pending matters and
revise our estimates.
Revenue
Recognition in the Packaging Segments
Sales of
products in the packaging segments are recognized when delivery has occurred and
title has transferred, there is persuasive evidence of an agreement or
arrangement, the price is fixed and determinable, and collection is reasonably
assured.
Page 44 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
1. Critical
and Significant Accounting Policies (continued)
Stock-Based
Compensation
Ball has
a variety of restricted stock and stock option plans. The compensation cost
associated with restricted stock grants has been calculated using the fair value
at the date of grant and amortized over the restriction period. Stock-based
compensation is reported as part of selling, general and administrative expenses
in the consolidated statements of earnings. In the fourth quarter of 2006, Ball
amended one of its deferred compensation stock plans to allow for limited
diversification beginning in 2007, which required an initial mark-to-market
adjustment of $6.7 million.
Effective
January 1, 2006, the company adopted SFAS No. 123 (revised 2004),
“Share-Based Payment,” and elected to use the modified prospective transition
method and the Black-Scholes valuation model. Tax benefits associated with
option exercises are reported in financing activities in the consolidated
statements of cash flows beginning in 2006. Prior to January 1, 2006,
expense related to stock options was calculated using the intrinsic value method
under the guidelines of Accounting Principles Board (APB) Opinion No. 25
and has therefore not been included in the consolidated statements of earnings
in 2005. Ball’s earnings as reported included after-tax stock-based compensation
of $6.6 million for the year ended December 31, 2005. If the fair
value based method had been used, after-tax stock-based compensation would have
been $8.7 million in 2005 and diluted earnings per share would have been
lower by $0.02. Further details regarding the expense calculated under the fair
value based method are provided in Note 16.
Foreign
Currency Translation
Assets
and liabilities of foreign operations are translated using period-end exchange
rates, and revenues and expenses are translated using average exchange rates
during each period. Translation gains and losses are reported in accumulated
other comprehensive earnings as a component of shareholders’
equity.
Reclassifications
Certain
prior year amounts have been reclassified in order to conform to the current
year presentation.
New
Accounting Pronouncements
In
December 2007 the Financial Accounting Standards Board (FASB) issued SFAS
No. 141 (revised 2007), “Business Combinations,” which replaces the
original SFAS No. 141 issued in June 2001. The new standard
retains the fundamental requirements in Statement 141 that the purchase
method of accounting be used for all business combinations and for an acquirer
to be identified for each business combination. SFAS No. 141 (revised
2007) requires an acquirer to recognize the assets acquired and liabilities
assumed measured at their fair values on the acquisition date, which replaces
SFAS No. 141’s cost-allocation process. SFAS No. 141
(revised 2007) also requires the costs incurred to effect the acquisition and
related restructuring costs to be recognized separately from the business
combination. The new standard will be effective for Ball on a prospective basis
beginning on January 1, 2009.
In
April 2007 the FASB issued FASB Staff Position (FSP) Interpretation No.
(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 became effective for Ball as of January 1, 2008, and
its effect is still under evaluation.
Page 45 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
1. Critical
and Significant Accounting Policies (continued)
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 became effective for Ball as of January 1, 2008, and at this time,
we do not expect to elect the fair value option for any eligible
items.
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 became effective for Ball as of
January 1, 2008, and is still being evaluated for its effect on the
company’s financial statements. In February 2008 the FASB delayed the
effective date for certain nonfinancial assets and liabilities until
January 1, 2009.
2. 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
and 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 condensed
consolidated financial statements.
We also
have investments in companies in the U.S., PRC and Brazil, which are accounted
for under the equity method of accounting and, accordingly, those results are
not included in segment sales or earnings.
Page 46 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
2. Business
Segment Information (continued)
Effective
January 1, 2007, a plastic product line with 2007 net sales of
$52.1 million was transferred from the metal food and household products
packaging, Americas, segment to the plastic packaging, Americas, segment. In the
third quarter of 2006, the company changed its expense allocation method by
allocating to each of the packaging segments stock-based compensation expense
previously included in corporate undistributed expenses. Prior periods have been
conformed to the current presentation.
Major
Customers
Following
is a summary of Ball’s major customers and their respective percentages of
consolidated net sales for the years ended December 31:
|
2007
|
2006
|
2005
|
||||||||||
|
SABMiller
plc
|
11 | % | 11 | % | 11 | % | ||||||
|
PepsiCo,
Inc. and affiliates
|
9 | % | 9 | % | 10 | % | ||||||
|
All
bottlers of Pepsi-Cola or Coca-Cola branded beverages
|
28 | % | 29 | % | 27 | % | ||||||
|
U.S.
government agencies and their prime contractors
|
9 | % | 9 | % | 11 | % | ||||||
Summary
of Net Sales by Geographic Area
|
($
in millions)
|
U.S.
|
Foreign
(a)
|
Consolidated
|
|||||||||
|
2007
|
$ | 5,268.4 | $ | 2,121.3 | $ | 7,389.7 | ||||||
|
2006
|
4,868.6 | 1,752.9 | 6,621.5 | |||||||||
|
2005
|
4,133.3 | 1,617.9 | 5,751.2 | |||||||||
Summary
of Long-Lived Assets by Geographic Area (b)
|
($
in millions)
|
U.S.
|
Germany
(c)
|
Other
(d)
|
Consolidated
|
||||||||||||
|
2007
|
$ | 2,052.3 | $ | 1,441.1 | $ | 684.3 | $ | 4,177.7 | ||||||||
|
2006
|
2,117.1 | 1,289.9 | 672.6 | 4,079.6 | ||||||||||||
|
(a)
|
Includes
the company’s net sales in the PRC, Canada and certain European countries
(none of which was individually significant), intercompany eliminations
and other.
|
|
(b)
|
Long-lived
assets primarily consist of property, plant and equipment; goodwill; and
other intangible assets.
|
| (c) | For reporting purposes, Ball Packaging Europe’s goodwill and intangible assets have been allocated to Germany. The total amounts allocated were $1,108.9 million and $1,021.7 million at December 31, 2007 and 2006, respectively. |
|
(d)
|
Includes
the company’s long-lived assets in the PRC, Canada and certain European
countries, not including Germany (none of which was individually
significant), intercompany eliminations and
other.
|
Page 47 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
2. Business
Segment Information (continued)
Summary
of Business by Segment
|
($
in millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Net
Sales
|
||||||||||||
|
Metal
beverage packaging, Americas
|
$ | 2,849.5 | $ | 2,604.4 | $ | 2,390.4 | ||||||
|
Legal
settlement (Note 4)
|
(85.6 | ) | – | – | ||||||||
|
Total
metal beverage packaging, Americas
|
2,763.9 | 2,604.4 | 2,390.4 | |||||||||
|
Metal
beverage packaging, Europe/Asia
|
1,902.2 | 1,512.5 | 1,354.5 | |||||||||
|
Metal
food & household products packaging, Americas
|
1,183.4 | 1,138.7 | 824.0 | |||||||||
|
Plastic
packaging, Americas
|
752.4 | 693.6 | 487.5 | |||||||||
|
Aerospace
& technologies
|
787.8 | 672.3 | 694.8 | |||||||||
|
Net
sales
|
$ | 7,389.7 | $ | 6,621.5 | $ | 5,751.2 | ||||||
|
Consolidated
Earnings
|
||||||||||||
|
Metal
beverage packaging, Americas
|
$ | 299.2 | $ | 269.4 | $ | 254.1 | ||||||
|
Legal
settlement (Note 4)
|
(85.6 | ) | – | – | ||||||||
|
Business
consolidation costs (Note 5)
|
– | – | (19.3 | ) | ||||||||
|
Total
metal beverage packaging, Americas
|
213.6 | 269.4 | 234.8 | |||||||||
|
Metal
beverage packaging, Europe/Asia
|
256.1 | 193.2 | 171.2 | |||||||||
|
Property
insurance gain (Note 6)
|
– | 75.5 | – | |||||||||
|
Business
consolidation gains (Note 5)
|
– | – | 9.3 | |||||||||
|
Total
metal beverage packaging, Europe/Asia
|
256.1 | 268.7 | 180.5 | |||||||||
|
Metal
food & household products packaging, Americas
|
36.2 | 37.9 | 30.3 | |||||||||
|
Business
consolidation costs (Note 5)
|
(44.2 | ) | (35.5 | ) | (11.2 | ) | ||||||
|
Total
metal food & household
products packaging, Americas
|
(8.0 | ) | 2.4 | 19.1 | ||||||||
|
Plastic
packaging, Americas
|
26.3 | 28.3 | 16.7 | |||||||||
|
Business
consolidation costs (Note 5)
|
(0.4 | ) | – | – | ||||||||
|
Total
plastic packaging, Americas
|
25.9 | 28.3 | 16.7 | |||||||||
|
Aerospace
& technologies
|
64.6 | 50.0 | 54.7 | |||||||||
|
Segment
earnings before interest and taxes
|
552.2 | 618.8 | 505.8 | |||||||||
|
Corporate
undistributed expenses
|
(38.3 | ) | (37.5 | ) | (25.8 | ) | ||||||
|
Earnings
before interest and taxes
|
513.9 | 581.3 | 480.0 | |||||||||
|
Interest
expense (a)
|
(149.4 | ) | (134.4 | ) | (116.4 | ) | ||||||
|
Tax
provision
|
(95.7 | ) | (131.6 | ) | (106.2 | ) | ||||||
|
Minority
interests
|
(0.4 | ) | (0.4 | ) | (0.8 | ) | ||||||
|
Equity
in results of affiliates (Note 11)
|
12.9 | 14.7 | 15.5 | |||||||||
|
Net
earnings
|
$ | 281.3 | $ | 329.6 | $ | 272.1 | ||||||
|
(a)
|
Includes
$19.3 million of debt refinancing costs in
2005.
|
Page 48 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
2. Business
Segment Information (continued)
Summary
of Business by Segment (continued)
|
($
in millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Depreciation
and Amortization
|
||||||||||||
|
Metal
beverage packaging, Americas
|
$ | 73.4 | $ | 74.2 | $ | 69.0 | ||||||
|
Metal
beverage packaging, Europe/Asia
|
91.9 | 80.3 | 73.4 | |||||||||
|
Metal
food & household products packaging, Americas (a)
|
42.8 | 32.2 | 16.3 | |||||||||
|
Plastic
packaging, Americas (a)
|
51.6 | 46.2 | 36.8 | |||||||||
|
Aerospace
& technologies
|
17.9 | 16.4 | 14.9 | |||||||||
|
Segment
depreciation and amortization
|
277.6 | 249.3 | 210.4 | |||||||||
|
Corporate
|
3.4 | 3.3 | 3.1 | |||||||||
|
Depreciation
and amortization
|
$ | 281.0 | $ | 252.6 | $ | 213.5 | ||||||
|
Property,
Plant and Equipment Additions
|
||||||||||||
|
Metal
beverage packaging, Americas
|
$ | 87.4 | $ | 88.7 | $ | 109.9 | ||||||
|
Metal
beverage packaging, Europe/Asia
|
150.7 | 82.1 | 97.9 | |||||||||
|
Metal
food & household products packaging, Americas (a)
|
23.0 | 19.4 | 16.8 | |||||||||
|
Plastic
packaging, Americas (a)
|
20.2 | 51.1 | 27.6 | |||||||||
|
Aerospace
& technologies
|
23.0 | 34.5 | 33.1 | |||||||||
|
Segment
property, plant and equipment additions
|
304.3 | 275.8 | 285.3 | |||||||||
|
Corporate
|
4.2 | 3.8 | 6.4 | |||||||||
|
Property,
plant and equipment additions
|
$ | 308.5 | $ | 279.6 | $ | 291.7 | ||||||
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Total
Assets
|
||||||||
|
Metal
beverage packaging, Americas
|
$ | 1,169.6 | $ | 1,147.2 | ||||
|
Metal
beverage packaging, Europe/Asia
|
2,600.5 | 2,412.7 | ||||||
|
Metal
food & household products packaging, Americas (a)
|
1,141.7 | 1,094.9 | ||||||
|
Plastic
packaging, Americas (a)
|
568.8 | 609.0 | ||||||
|
Aerospace
& technologies
|
278.7 | 268.2 | ||||||
|
Segment
assets
|
5,759.3 | 5,532.0 | ||||||
|
Corporate
assets, net of eliminations
|
261.3 | 308.9 | ||||||
|
Total
assets
|
$ | 6,020.6 | $ | 5,840.9 | ||||
|
Investments
in Affiliates
|
||||||||
|
Metal
beverage packaging, Americas
|
$ | 13.5 | $ | 15.7 | ||||
|
Metal
beverage packaging, Europe/Asia
|
0.2 | 0.2 | ||||||
|
Aerospace
& technologies
|
7.5 | 7.5 | ||||||
|
Corporate
(b)
|
56.4 | 53.1 | ||||||
|
Investments
in affiliates
|
$ | 77.6 | $ | 76.5 | ||||
|
(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.
|
|
(b)
|
Includes
equity investments not evaluated as part of the segments’
assets.
|
Page 49 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
3. Acquisitions
2006
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).
Contemporaneously with the acquisition, Ball also refinanced $598.2 million
of U.S. Can debt, including $26.8 million of bond redemption premiums and
fees, and the company expects to realize approximately $44 million of
acquired net operating tax loss and credit carryforwards of which approximately
$13 million have been utilized as of December 31, 2007. 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.
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.
Ball
Asia Pacific Limited
In the
fourth quarter of 2006, Ball Asia Pacific Limited, an indirect wholly owned
subsidiary of Ball Corporation, acquired all the minority ownership interest in
its PRC-based high-density polypropylene plastic container business for
$4.6 million in cash. The acquisition of the minority interest was not
significant to the company.
Page 50 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
3. Acquisitions
(continued)
Following
is a summary of the net assets acquired in the U.S. Can and Alcan transactions.
The valuations were performed by management, including the identification and
valuation of acquired intangible assets and of liabilities, including the
development and assessment of associated costs of consolidation and integration
plans. Management also performed valuations of certain assets and liabilities
including inventory; property, plant and equipment; intangible assets; and
pension and other post-retirement obligations. During the first quarter of 2007,
the company completed its final valuation of the acquired assets and liabilities
and revised the preliminary purchase price allocations accordingly. The final
allocation compared to the December 31, 2006, preliminary allocation
resulted primarily in an increase in identifiable intangible assets for both
acquisitions.
|
($
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 | ||||||
The
customer relationships and acquired technologies of both acquisitions were
identified as valuable intangible assets, and the company assigned to them an
estimated life of 20 years. Because the acquisition of U.S. Can was a stock
purchase, neither the goodwill nor the intangible assets are tax deductible for
U.S. income tax purposes unless, 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.
The
following unaudited pro forma consolidated results of operations have been
prepared as if the acquisitions had occurred as of January 1 in each of the
periods presented. The pro forma results are not necessarily indicative of the
actual results that would have occurred had the acquisitions been in effect for
the periods presented, nor are they necessarily indicative of the results that
may be obtained in the future.
|
December
31,
|
||||||||
|
($
in millions, except per share amounts)
|
2006
|
2005
|
||||||
|
Net
sales
|
$ | 6,799.0 | $ | 6,497.1 | ||||
|
Net
earnings
|
330.5 | 288.7 | ||||||
|
Basic
earnings per share
|
3.20 | 2.67 | ||||||
|
Diluted
earnings per share
|
3.15 | 2.62 | ||||||
Pro forma
adjustments primarily include the after-tax effects of: (1) increased
interest expense related to incremental borrowings used to finance the
acquisitions; (2) increased depreciation expense on property, plant and
equipment based on increased fair values; and (3) increased amortization
expense attributable to intangible assets arising from the
acquisitions.
Page 51 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
4. Legal
Settlement
During
the second quarter of 2007, Miller Brewing Company (Miller), a U.S. customer,
asserted various claims against a wholly owned subsidiary of the company,
primarily related to the pricing of the aluminum component of the containers
supplied by the subsidiary, and on October 4, 2007, the dispute was settled in
mediation. Miller received $85.6 million ($51.8 million after tax) on
settlement of the dispute, and Ball retained all of Miller’s beverage can and
end supply through 2015. Miller received a one-time payment of approximately $70
million ($42 million after tax) in January 2008 (recorded on the
December 31, 2007, consolidated balance sheet in other current liabilities)
with the remainder of the settlement to be recovered over the life of the supply
contract through 2015.
5. Business
Consolidation Activities
Following
is a summary of business consolidation activities included in the consolidated
statements of earnings for the years ended December 31:
|
($
in millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Metal
beverage packaging, Americas
|
$ | – | $ | – | $ | (19.3 | ) | |||||
|
Metal
beverage packaging, Europe/Asia
|
– | – | 9.3 | |||||||||
|
Metal
food & household products packaging, Americas
|
(44.2 | ) | (35.5 | ) | (11.2 | ) | ||||||
|
Plastic
packaging, Americas
|
(0.4 | ) | – | – | ||||||||
| $ | (44.6 | ) | $ | (35.5 | ) | $ | (21.2 | ) | ||||
2007
Metal
Food & Household Products Packaging, Americas
On
October 24, 2007, Ball announced plans to close two manufacturing facilities and
to exit the custom and decorative tinplate can business located in Baltimore,
Maryland. Ball will close its food and household products packaging facilities
in Tallapoosa, Georgia, and Commerce, California, both of which manufacture
aerosol and general line cans. The two plant closures will result in a net
reduction in manufacturing capacity of 10 production lines, including the
relocation of two high-speed aerosol lines into existing Ball facilities. A
pretax charge of $41.9 million ($25.4 million after tax) was recorded
in the fourth quarter in connection with the closure of the aerosol plants,
including $10.7 million for severance costs, $23 million for the write
down to net realizable value of fixed assets, $2.4 million for excess
inventory and $5.8 million for other associated costs. No cash costs
were incurred in 2007. The carrying value of fixed assets remaining for sale in
connection with the plant closures was $9.4 million at December 31,
2007.
The
company also recorded a $2.3 million pretax pension annuity expense
($1.4 million after tax) related to a previously closed food can plant. The
pension settlement payment was made in December 2007.
Plastic
Packaging, Americas
In the
fourth quarter of 2007, Ball recorded a pretax charge of $0.4 million
($0.2 million after tax) for severance costs related to the termination of
approximately 50 employees in response to lost sales. The severance amounts
are expected to be paid in the first quarter of 2008.
Page 52 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
5. Business
Consolidation Activities (continued)
2006
Metal
Food & Household Products Packaging, Americas
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. The company closed a leased facility in
Alliance, Ohio, which was one of 10 manufacturing locations acquired from
U.S. Can, and a food can plant in Burlington, Ontario. A pretax charge of
$33.6 million ($27.4 million after tax) was recorded in the fourth
quarter related to the Burlington closure, comprised of $7.8 million of
severance costs, $16.8 million of pension costs, $2.9 million of plant
decommissioning costs and $6.1 million for the write off of obsolete
equipment and related spare parts and tooling. Payments of $11 million were
made in 2007 against the Burlington reserves for employee severance and other
associated costs, and only $1 million of severance costs remain to be paid.
The carrying value of fixed assets remaining for sale in connection with the
Burlington plant closure was $14.5 million at December 31, 2007. The
closure of the Ohio plant, estimated to cost approximately $1 million for
employee and other costs, has been treated as an opening balance sheet item
related to the acquisition and all costs were incurred and paid as of
December 31, 2007.
The
fourth quarter also included a net charge of $0.9 million
($0.6 million after tax) to shut down a welded food can line at the
Richmond, British Columbia, plant and record the recovery of business
consolidation costs previously expensed. All activities have been completed and
all costs have been incurred as of the end of 2007.
In the
second quarter, earnings of $0.4 million ($0.2 million after tax) were
recorded to reflect the excess proceeds on the disposition of fixed assets
previously written down in a 2005 business consolidation charge.
In the
first quarter, a pretax charge of $2.1 million ($1.4 million after
tax) was recorded to shut down a metal food can production line in the Whitby,
Ontario, plant. The charge was comprised of $0.6 million of employee
termination costs, $0.7 million for equipment removal and other
decommissioning costs and $0.8 million for impairment of plant equipment
and related spares and tooling. Production from the line has ceased and other
related activities were completed during 2006. The fourth quarter of 2006
included $0.7 million of earnings ($0.5 million after tax) to reflect
the net proceeds on the disposition of the plant’s fixed assets. As of the end
of 2007, all costs have been incurred and paid and no reserve balances
remain.
2005
Metal
Beverage Packaging, Americas
The
company announced in July 2005 the commencement of a project to upgrade and
streamline its North American beverage can end manufacturing capabilities. The
project is expected to be completed in early 2009 and will result in
productivity gains and cost reductions. A pretax charge of $19.3 million
($11.7 million after tax) was recorded in the third quarter of 2005 in
connection with this project. The pretax charge included $11.7 million for
employee severance, pension and other employee benefit costs, $1.6 million
for decommissioning costs and $6 million for the write off of obsolete
equipment spare parts and tooling. Payments of $2.4 million were made in
2007 against the reserve. Severance and other employee benefit costs of
$4.4 million remain at December 31, 2007, all of which are expected to
be paid in 2008 and 2009 as the remaining end modules are put into operation.
Pension costs will be paid over the retirement period for the affected
employees.
Page 53 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
5. Business
Consolidation Activities (continued)
Metal
Food & Household Products Packaging, Americas
In the
fourth quarter, a pretax charge of $4.6 million ($3.1 million after
tax) was recorded for pension, severance and other employee benefit costs
related to a reduction in force in a Canadian food can plant. All costs have
been incurred and paid as of December 31, 2007.
In the
second quarter, a pretax charge of $8.8 million ($5.9 million after
tax) was recorded in connection with the closure of a three-piece food can
manufacturing plant in Baie d’Urfe, Quebec. The plant was closed in the third
quarter, and the subsequent real estate sale resulted in the second quarter
charge being offset by a $2.2 million gain ($1.5 million after tax) in
the fourth quarter. All costs have been incurred and paid as of
December 31, 2007.
Metal
Beverage Packaging, Europe/Asia
The
company recorded $9.3 million of earnings in 2005, primarily related to the
final settlement of PRC tax obligations, and an adjustment to reclassify an
asset to be put in service previously held for sale, related to a PRC business
consolidation charge taken in the second quarter of 2001. Tax clearances from
the applicable authorities were required during the formal liquidation process.
These matters have been concluded.
6. Property
Insurance Gain
On
April 1, 2006, a fire in the Hassloch, Germany, metal beverage can plant in
the company’s metal beverage packaging, Europe/Asia, segment damaged a
significant portion of the plant’s 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 €59.6 million ($75.5 million)
was recorded in the 2006 consolidated statement of earnings to reflect the
difference between the net book value of the impaired assets and the property
insurance proceeds. In accordance with the agreement reached with the insurance
company, property insurance proceeds of €48.7 million ($61.3 million)
were received in 2006 and the final proceeds of €37.6 million
($48.6 million) were received in January 2007. An additional
€27.2 million ($35.1 million) and €40 million ($51 million) were
recorded in cost of sales in 2007 and 2006, respectively, for insurance
recoveries related to business interruption costs, as well as €11.3 million
($14.3 million) in 2006 to offset clean-up costs.
Page 54 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
7. Accounts
Receivable
|
December
31,
|
||||||||
|
($
in millions)
|
2007
|
2006
|
||||||
|
Trade
accounts receivable, net
|
$ | 505.4 | $ | 422.2 | ||||
|
Business
interruption insurance receivable (Note 6)
|
– | 35.9 | ||||||
|
Other
receivables
|
77.3 | 121.4 | ||||||
| $ | 582.7 | $ | 579.5 | |||||
Trade
accounts receivable are shown net of an allowance for doubtful accounts of
$13.2 million at December 31, 2007, and $9.8 million at
December 31, 2006. Other receivables include non-income tax receivables,
such as property tax and sales tax; certain vendor rebate receivables; and other
similar items.
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 of up to $250 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 $170 million and $201.3 million at
December 31, 2007 and 2006, respectively, and are reflected as a reduction
of accounts receivable in the consolidated balance sheets. Fees incurred in
connection with the sale of accounts receivable, which are reported as part of
selling, general and administrative expenses, totaled $11.4 million in
2007, $9.7 million in 2006 and $7.7 million in 2005.
Net
accounts receivable under long-term contracts, due primarily from agencies of
the U.S. government and their prime contractors, were $136 million and
$125.3 million at December 31, 2007 and 2006, respectively, and
included $48.1 million and $62.4 million, respectively, representing
the recognized sales value of performance that had not been billed and was not
yet billable to customers. The average length of the long-term contracts
is approximately 4 years and the average length remaining on those
contracts at December 31, 2007, was 17 months. Approximately
$0.6 million of unbilled receivables at December 31, 2007, is
expected to be collected after one year and is related to customary fees and
cost withholdings that will be paid upon milestone or contract completions, as
well as final overhead rate settlements.
8. Inventories
|
December
31,
|
||||||||
|
($
in millions)
|
2007
|
2006
|
||||||
|
Raw
materials and supplies
|
$ | 433.6 | $ | 445.6 | ||||
|
Work
in process and finished goods
|
564.5 | 489.8 | ||||||
| $ | 998.1 | $ | 935.4 | |||||
Page 55 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
9. Property,
Plant and Equipment
|
December
31,
|
||||||||
|
($
in millions)
|
2007
|
2006
|
||||||
|
Land
|
$ | 92.2 | $ | 88.5 | ||||
|
Buildings
|
820.1 | 764.1 | ||||||
|
Machinery
and equipment
|
2,914.2 | 2,618.6 | ||||||
|
Construction
in progress
|
154.7 | 215.1 | ||||||
| 3,981.2 | 3,686.3 | |||||||
|
Accumulated
depreciation
|
(2,040.0 | ) | (1,810.3 | ) | ||||
| $ | 1,941.2 | $ | 1,876.0 | |||||
Property,
plant and equipment are stated at historical cost. Depreciation expense amounted
to $263.8 million, $238 million and $202.1 million for the years
ended December 31, 2007, 2006 and 2005, respectively.
The
change in the net property, plant and equipment balance during 2007 is primarily
the result of capital spending and changes in foreign currency exchange rates,
offset by depreciation. A fixed asset write down of €26.7 million
($33.8 million) was included in accumulated depreciation at
December 31, 2006, to record the estimated impairment of the assets damaged
as a result of the fire at the company’s Hassloch, Germany, metal beverage can
plant (see Note 6).
10. Goodwill
|
($
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 1 and 14)
|
– | (9.3 | ) | – | – | (9.3 | ) | |||||||||||||
|
Effects
of foreign currency exchange rates
|
– | 104.0 | – | 0.4 | 104.4 | |||||||||||||||
|
Balance
at December 31, 2007
|
$ | 279.4 | $ | 1,115.3 | $ | 354.3 | $ | 114.1 | $ | 1,863.1 | ||||||||||
|
(a)
|
Related
to the final purchase price allocations for the U.S. Can and Alcan
acquisitions discussed in
Note 3.
|
In
accordance with SFAS No. 142, goodwill is not amortized but instead
tested annually for impairment. There has been no goodwill impairment since the
adoption of SFAS No. 142 on January 1, 2002.
Page 56 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
11. Intangibles
and Other Assets
|
December
31,
|
||||||||
|
($
in millions)
|
2007
|
2006
|
||||||
|
Intangibles
and Other Assets:
|
||||||||
|
Investments
in affiliates
|
$ | 77.6 | $ | 76.5 | ||||
|
Prepaid
pension
|
10.3 | 2.3 | ||||||
|
Other
intangibles (net of accumulated amortization of $92.9
and $70.7
at December 31, 2007 and 2006, respectively)
|
121.9 | 116.2 | ||||||
|
Company-owned
life insurance
|
88.9 | 77.5 | ||||||
|
Deferred
tax asset
|
4.3 | 34.9 | ||||||
|
Property
insurance receivable (Note 6)
|
– | 49.7 | ||||||
|
Other
|
70.4 | 72.8 | ||||||
| $ | 373.4 | $ | 429.9 | |||||
Total
amortization expense of other intangible assets amounted to $17.2 million,
$14.6 million and $11.4 million for the years ended December 31,
2007, 2006 and 2005, respectively. Based on intangible assets and foreign
currency exchange rates as of December 31, 2007, total annual intangible asset
amortization expense is expected to be approximately $17 million in each of
the years 2008 and 2009 and approximately $6 million for each of the years
2010 through 2012.
12. Leases
The
company leases warehousing and manufacturing space and certain equipment in the
packaging segments and office and technical space in the aerospace and
technologies segment. During 2005 and 2003, we entered into leases that qualify
as operating leases for book purposes and capital leases for tax purposes. Under
these lease arrangements, Ball has the option to purchase the leased equipment
at the end of the lease term, or if we elect not to do so, to compensate the
lessors for the difference between the guaranteed minimum residual values
totaling $16.3 million and the fair market value of the assets, if less.
Certain of the company’s leases in effect at December 31, 2007, include
renewal options and/or escalation clauses for adjusting lease expense based on
various factors.
Total
noncancellable operating leases in effect at December 31, 2007, require rental
payments of $49.9 million, $40.4 million, $31.3 million,
$23.5 million and $19 million for the years 2008 through 2012,
respectively, and $54.4 million combined for all years thereafter. Lease
expense for all operating leases was $85.3 million, $83.1 million and
$74 million in 2007, 2006 and 2005, respectively.
Page 57 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
13. Debt
and Interest Costs
Short-term
debt at December 31, 2007, includes $49.7 million outstanding under
uncommitted bank facilities totaling $345 million. At December 31,
2006, $140.1 million was outstanding under uncommitted bank facilities
totaling $329 million. The weighted average interest rate of the
outstanding short-term facilities was 5.7 percent at December 31,
2007, and 4.8 percent at December 31, 2006.
Long-term
debt at December 31 consisted of the following:
|
2007
|
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 issue premium of $2.7 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
|
||||||||||||||||
|
Term
A Loan, British sterling denominated, due October 2011 (2007 – 6.85%;
2006 – 6.11%)
|
₤ | 82.9 | 164.7 | ₤ | 85.0 | 166.4 | ||||||||||
|
Term
B Loan, euro denominated, due October 2011 (2007 – 5.55%; 2006 –
4.46%)
|
€ | 341.3 | 498.2 | € | 350.0 | 462.0 | ||||||||||
|
Term
C Loan, Canadian dollar denominated, due October 2011 (2007 – 5.485%;
2006 – 5.205%)
|
C$ | 126.8 | 127.6 | C$ | 134.0 | 114.9 | ||||||||||
|
Term
D Loan, U.S. dollar denominated, due October 2011 (2007 – 5.72%; 2006
– 6.225%)
|
$ | 487.5 | 487.5 | $ | 500.0 | 500.0 | ||||||||||
|
U.S.
dollar multi-currency revolver borrowings, due October 2011
(2006 – 6.225%)
|
$ | – | – | $ | 15.0 | 15.0 | ||||||||||
|
British
sterling multi-currency revolver borrowings, due October 2011 (2007 –
6.92%; 2006 – 6.14%)
|
₤ | 2.1 | 4.2 | ₤ | 4.0 | 7.8 | ||||||||||
|
Industrial
Development Revenue Bonds
|
||||||||||||||||
|
Floating
rates due through 2015 (2007 – 3.46% to 3.7%; 2006 – 3.97% to
4.15%)
|
$ | 13.0 | 13.0 | $ | 20.0 | 20.0 | ||||||||||
|
Other
|
Various
|
13.7 |
Various
|
25.5 | ||||||||||||
| 2,308.9 | 2,311.6 | |||||||||||||||
|
Less:
Current portion of long-term debt
|
(127.1 | ) | (41.2 | ) | ||||||||||||
| $ | 2,181.8 | $ | 2,270.4 | |||||||||||||
The
senior credit facilities bear interest at variable rates and also include
(1) a multi-currency, long-term revolving credit facility that provides the
company with up to the equivalent of $715 million and (2) a Canadian
long-term revolving credit facility that provides the company with up to the
equivalent of $35 million. Both revolving credit facilities expire in
October 2011. At December 31, 2007, taking into account outstanding
letters of credit, $705 million was available under the revolving credit
facilities.
Page 58 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
13. Debt
and Interest Costs (continued)
Long-term
debt obligations outstanding at December 31, 2007, have maturities of
$127.1 million, $160 million, $388.4 million, $625.1 million
and $550.3 million for the years ending December 31, 2008 through 2012,
respectively, and $456.1 million thereafter. Ball provides letters of
credit in the ordinary course of business to secure liabilities recorded in
connection with industrial development revenue bonds and certain self-insurance
arrangements. Letters of credit outstanding at December 31, 2007 and 2006, were
$41 million and $52.4 million, respectively.
The notes
payable and senior credit facilities are guaranteed on a full, unconditional and
joint and several basis by certain of the company’s domestic wholly owned
subsidiaries. Certain foreign denominated tranches of the senior credit
facilities are similarly guaranteed by certain of the company’s wholly owned
foreign subsidiaries. Note 22 contains further details as well as
condensed, consolidating financial information for the company, segregating the
guarantor subsidiaries and non-guarantor subsidiaries.
The
company was not in default of any loan agreement at December 31, 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.
2006
On
March 27, 2006, Ball expanded its senior secured credit facilities with the
addition of a $500 million Term D Loan facility due in installments
through October 2011. Also on March 27, 2006, Ball issued at a price
of 99.799 percent $450 million of 6.625% senior notes (effective yield
to maturity of 6.65 percent) due in March 2018. The proceeds from
these financings were used to refinance existing U.S. Can debt with Ball
Corporation debt at lower interest rates, acquire certain North American plastic
container net assets from Alcan and reduce seasonal working capital debt. (See
Note 3 for further details of the acquisitions.)
2005
On
October 13, 2005, Ball refinanced its senior secured credit facilities
to extend debt maturities at lower interest rate spreads and provide the company
with additional borrowing capacity for future growth. During the third and
fourth quarters of 2005, Ball redeemed its 7.75% senior notes due in August
2006. The refinancing and senior note redemptions resulted in a debt refinancing
charge of $19.3 million ($12.3 million after tax) for the related call
premium and unamortized debt issuance costs.
A summary
of total interest cost paid and accrued follows:
|
($
in millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Interest
costs before refinancing costs
|
$ | 155.8 | $ | 142.5 | $ | 102.4 | ||||||
|
Debt
refinancing costs
|
– | – | 19.3 | |||||||||
|
Total
interest costs
|
155.8 | 142.5 | 121.7 | |||||||||
|
Amounts
capitalized
|
(6.4 | ) | (8.1 | ) | (5.3 | ) | ||||||
|
Interest
expense
|
$ | 149.4 | $ | 134.4 | $ | 116.4 | ||||||
|
Interest
paid during the year (a)
|
$ | 153.9 | $ | 125.4 | $ | 138.5 | ||||||
|
(a)
|
Includes
$6.6 million paid in 2005 in connection with the redemption of the
company’s senior and senior subordinated
notes.
|
Page 59 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
14. Taxes
on Income
The
amount of earnings before income taxes is:
|
($
in millions)
|
2007
|
2006
|
2005
|
|||||||||
|
U.S.
|
$ | 155.0 | $ | 252.6 | $ | 208.5 | ||||||
|
Foreign
|
209.5 | 194.3 | 155.1 | |||||||||
| $ | 364.5 | $ | 446.9 | $ | 363.6 | |||||||
The
provision for income tax expense is:
|
($
in millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Current
|
||||||||||||
|
U.S.
|
$ | 18.0 | $ | 51.7 | $ | 75.0 | ||||||
|
State
and local
|
7.0 | 10.7 | 15.3 | |||||||||
|
Foreign
|
80.2 | 31.0 | 51.5 | |||||||||
|
Uncertain
tax positions
|
11.5 | – | – | |||||||||
|
Repatriation
of foreign earnings
|
– | – | 16.0 | |||||||||
|
Total
current
|
116.7 | 93.4 | 157.8 | |||||||||
|
Deferred
|
||||||||||||
|
U.S.
|
5.8 | 17.1 | (12.5 | ) | ||||||||
|
State
and local
|
(0.9 | ) | 2.6 | (2.6 | ) | |||||||
|
Foreign
|
(25.9 | ) | 18.5 | (17.3 | ) | |||||||
|
Repatriation
of foreign earnings
|
– | – | (19.2 | ) | ||||||||
|
Total
deferred
|
(21.0 | ) | 38.2 | (51.6 | ) | |||||||
|
Provision
for income taxes
|
$ | 95.7 | $ | 131.6 | $ | 106.2 | ||||||
The
income tax provision recorded within the consolidated statements of earnings
differs from the provision determined by applying the U.S. statutory tax rate to
pretax earnings as a result of the following:
|
($
in millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Statutory
U.S. federal income tax
|
$ | 127.6 | $ | 156.4 | $ | 127.2 | ||||||
|
Increase
(decrease) due to:
|
||||||||||||
|
Foreign
tax holiday
|
(1.3 | ) | (6.1 | ) | (5.6 | ) | ||||||
|
Company-owned
life insurance
|
(3.9 | ) | (5.8 | ) | (3.2 | ) | ||||||
|
Tax
rate differences
|
(6.3 | ) | (1.1 | ) | (3.1 | ) | ||||||
|
Research
and development tax credits
|
(4.5 | ) | (11.6 | ) | (10.6 | ) | ||||||
|
Manufacturing
deduction
|
(3.3 | ) | (2.0 | ) | (2.9 | ) | ||||||
|
State
and local taxes, net
|
3.9 | 9.0 | 8.3 | |||||||||
|
Statutory
rate reduction
|
(10.4 | ) | – | – | ||||||||
|
Foreign
subsidiary stock loss
|
(17.2 | ) | – | – | ||||||||
|
Uncertain
tax positions
|
11.5 | – | – | |||||||||
|
Foreign
exchange loss of European subsidiary
|
– | (8.1 | ) | – | ||||||||
|
Other,
net
|
(0.4 | ) | 0.9 | (3.9 | ) | |||||||
|
Provision
for taxes
|
$ | 95.7 | $ | 131.6 | $ | 106.2 | ||||||
|
Effective
tax rate expressed as a percentage
of pretax earnings
|
26.3 | % | 29.4 | % | 29.2 | % | ||||||
Page 60 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
14. Taxes
on Income (continued)
The lower effective rate
in 2007 was the result of earnings mix (higher foreign earnings taxed at
lower rates) and net tax benefit adjustments of $17.2 million recorded in the
third quarter of 2007, as compared to $6.4 million in 2006. These net tax
benefit adjustments were the result of enacted income tax rate reductions in
Germany and the United Kingdom and a tax loss related to the company’s Canadian
operations. These benefits were offset by a tax provision to adjust for the
final settlement negotiations concluded in the fourth quarter with the Internal
Revenue Service (IRS) related to a company-owned life insurance plan (discussed
below).
In 1995
Ball Packaging Europe’s Polish subsidiary was granted a tax holiday. Under the
terms of the holiday, an exemption was granted on manufacturing earnings for up
to €39.5 million of income tax. At December 31, 2007, the tax
exemption had been fully utilized. In 2005 Ball Packaging Europe’s Serbian
subsidiary was granted a tax holiday. Under the terms of the holiday, the
earnings of this subsidiary are exempt from income taxation for a period of
10 years beginning in the first year the Serbian subsidiary has taxable
earnings. As of December 31, 2007, the 10-year period had commenced and
eight years remain.
Net
income tax payments were $63.6 million, $138.6 million and
$99 million for 2007, 2006 and 2005, respectively.
The
significant components of deferred tax assets and liabilities at December 31
were:
|
($
in millions)
|
2007
|
2006
|
||||||
|
Deferred
tax assets:
|
||||||||
|
Deferred
compensation
|
$ | 64.2 | $ | 58.7 | ||||
|
Accrued
employee benefits
|
105.0 | 113.8 | ||||||
|
Plant
closure costs
|
32.1 | 21.6 | ||||||
|
Accrued
pensions
|
33.4 | 93.0 | ||||||
|
Inventory
and other reserves
|
25.8 | 19.4 | ||||||
|
Net
operating losses
|
45.2 | 46.9 | ||||||
|
Other
|
23.0 | 36.8 | ||||||
|
Total
deferred tax assets
|
328.7 | 390.2 | ||||||
|
Valuation
allowance
|
(17.8 | ) | (13.4 | ) | ||||
|
Net
deferred tax assets
|
310.9 | 376.8 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Depreciation
|
(261.6 | ) | (289.9 | ) | ||||
|
Goodwill
and other intangible assets
|
(81.4 | ) | (71.4 | ) | ||||
|
LIFO
inventory reserves
|
(19.6 | ) | (24.2 | ) | ||||
|
Other
|
(22.9 | ) | (24.8 | ) | ||||
|
Total
deferred tax liabilities
|
(385.5 | ) | (410.3 | ) | ||||
|
Net
deferred tax liability
|
$ | (74.6 | ) | $ | (33.5 | ) | ||
At
December 31, 2007, the net deferred tax liability was included in the
consolidated balance sheets as follows:
|
($
in millions)
|
2007
|
2006
|
||||||
|
Deferred
taxes and prepaid expenses
|
$ | 48.3 | $ | 39.0 | ||||
|
Intangibles
and other assets, net
|
4.3 | 34.9 | ||||||
|
Income
taxes payable
|
(1.4 | ) | (11.4 | ) | ||||
|
Deferred
taxes and other liabilities
|
(125.8 | ) | (96.0 | ) | ||||
|
Net
deferred tax liability
|
$ | (74.6 | ) | $ | (33.5 | ) | ||
The
change in deferred taxes during 2007 is primarily attributable to book
depreciation exceeding tax depreciation and a decrease in accrued pension
liabilities.
Page 61 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
14. Taxes
on Income (continued)
At
December 31, 2007, Ball Corporation and its domestic subsidiaries had net
operating loss carryforwards, expiring between 2020 and 2026, of
$64.6 million with a related tax benefit of $25.2 million. Also at
December 31, 2007, Ball Packaging Europe and its subsidiaries had net
operating loss carryforwards, with no expiration date, of $54.4 million
with a related tax benefit of $14.6 million. Ball Packaging Products Canada
Corp. had a net operating loss carryforward, with no expiration date, of
$15.8 million with a related tax benefit of $5.4 million. Due to the
uncertainty of ultimate realization, these European and Canadian benefits have
been offset by valuation allowances of $8.6 million and $5.4 million,
respectively. Upon realization, $5.3 million of the European valuation
allowance will be recognized as a reduction in goodwill. At December 31,
2007, the company has foreign tax credit carryforwards of $5.8 million;
however, due to the uncertainty of realization of the entire credit, a valuation
allowance of $3.8 million has been applied to reduce the carrying value to
$2 million.
Effective
January 1, 2007, Ball adopted FIN No. 48, “Accounting for
Uncertainty in Income Taxes.” As of the date of adoption, the accrual for
uncertain tax position 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 reduction in
opening retained earnings and a $9.3 million reduction in goodwill. A
reconciliation of the unrecognized tax benefits follows:
|
($
in millions)
|
As
Adjusted for Accounting Change
|
|||
|
Balance
at January 1, 2007
|
$ | 45.8 | ||
|
Additions
based on tax positions related to the current year
|
3.9 | |||
|
Additions
for tax positions of prior years
|
7.6 | |||
|
Reductions
for settlements
|
(18.4 | ) | ||
|
Effect
of foreign currency exchange rates
|
2.2 | |||
|
Balance
at December 31, 2007
|
$ | 41.1 | ||
|
Balance
sheet classification:
|
||||
|
Income
taxes payable
|
$ | 4.2 | ||
|
Deferred
taxes and other liabilities
|
36.9 | |||
|
Total
|
$ | 41.1 | ||
The
amount of unrecognized tax benefits at December 31, 2007, that, if
recognized, would reduce tax expense is $35.9 million. At this time there
are no positions where the unrecognized tax benefit is expected to increase or
decrease significantly within the next 12 months. U.S. Federal and state
income tax returns filed for the years 2000-2006 are open for audit, with an
effective settlement of the Federal returns through 2004. The income tax returns
filed in Europe for the years 2002 through 2006 are also open for audit. The
company’s significant filings in Europe are in Germany, France, the Netherlands,
Poland, Serbia and the United Kingdom.
The
company recognizes the accrual of interest and penalties related to unrecognized
tax benefits in income tax expense. During the year ended December 31, 2007,
Ball recognized approximately $2.7 million of interest expense. The accrual for uncertain
tax positions at December 31, 2007, includes approximately
$5.1 million representing potential interest expense. No penalties have
been accrued.
The 2007
provision for income taxes included an $11.5 million accrual under
FIN No. 48. The majority of this provision was related to the
effective settlement during the third quarter of 2007 with the Internal Revenue
Service for interest deductions on incurred loans from a company-owned life
insurance plan. The total accrual at December 31, 2007, for the effective
settlement of the applicable prior years 2000-2004 under examination, and
unaudited years 2005 through 2007, was $18.4 million, including estimated
interest. The settlement resulted in a
Page 62 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
14. Taxes
on Income (continued)
majority
of the interest deductions being sustained with prospective application that
results in no significant impact to future earnings per share or cash
flows.
On
October 22, 2004, the American Jobs Creation Act of 2004 (Jobs Act) was
signed into law. The Jobs Act provided certain domestic companies a temporary
opportunity to repatriate previously undistributed earnings of controlled
foreign subsidiaries at a reduced federal tax rate, approximating
5.25 percent. Under the company’s approved distribution plan, the company
received a distribution of $488.4 million, of which approximately $320.3 million
was taxable and subject to the provisions of the Jobs Act. In the
third quarter of 2005, the company recorded a current tax payable of $16 million
that was more than offset by the release of $19.2 million of accrued taxes on
prior year unremitted foreign earnings, resulting in a net decrease in tax
expense of $3.2 million for that period.
Notwithstanding
the 2005 distribution pursuant to the Jobs Act, management’s intention is to
indefinitely reinvest undistributed foreign earnings of Ball’s controlled
foreign corporations and, as a result, no U.S. income or foreign withholding tax
provision has been made. It is not practicable to estimate the additional taxes
that may become payable upon the eventual remittance of these foreign
earnings.
15. Employee
Benefit Obligations
|
December
31,
|
||||||||
|
($
in millions)
|
2007
|
2006
|
||||||
|
Total
defined benefit pension liability
|
$ | 406.2 | $ | 510.6 | ||||
|
Less
current portion
|
(25.7 | ) | (24.1 | ) | ||||
|
Long-term
defined benefit pension liability
|
380.5 | 486.5 | ||||||
|
Retiree
medical and other postemployment benefits
|
193.3 | 191.1 | ||||||
|
Deferred
compensation
|
185.4 | 144.0 | ||||||
|
Other
|
39.8 | 26.1 | ||||||
| $ | 799.0 | $ | 847.7 | |||||
Certain
management employees may elect to defer the payment of all or a portion of their
annual incentive compensation into the company’s deferred compensation plan
and/or the company’s deferred compensation stock plan. The employee becomes a
general unsecured creditor of the company with respect to amounts deferred.
Amounts deferred into the deferred compensation stock plan receive a
20 percent company match with a maximum match of $20,000 per year. Amounts
deferred into the stock plan are represented in the participant’s account as stock
units, with each unit having a value equivalent to one share of Ball’s common
stock. Beginning in 2007, participants in the stock plan were allowed to
reallocate a prescribed number of units to other notional investment funds,
comparable to those described above, subject to specified time
constraints.
The
company’s
pension plans cover substantially all U.S., Canadian and European employees
meeting certain eligibility requirements. The defined benefit plans for salaried
employees, as well as those for hourly employees in Germany and the United
Kingdom, provide pension benefits based on employee compensation and years of
service. Plans for North American hourly employees provide benefits based on
fixed rates for each year of service. The German plans are not funded but the
company maintains book reserves, and annual additions to the reserves are
generally tax deductible. With the exception of the German plans, our policy is
to fund the plans on a current basis to the extent deductible under existing tax
laws and regulations and in amounts sufficient to satisfy statutory funding
requirements. We also have defined benefit pension obligations in France and
Austria, the assets and liabilities of which are insignificant.
Page 63 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
15. Employment
Benefit Obligations (continued)
Defined
Benefit Pension Plans
An
analysis of the change in benefit accruals for 2007 and 2006
follows:
|
($
in millions)
|
2007
|
2006
|
||||||||||||||||||||||
|
U.S.
|
Foreign
|
Total
|
U.S.
|
Foreign
|
Total
|
|||||||||||||||||||
|
Change
in projected benefit obligation:
|
||||||||||||||||||||||||
|
Benefit
obligation at prior year end
|
$ | 805.3 | $ | 634.5 | $ | 1,439.8 | $ | 778.0 | $ | 593.6 | $ | 1,371.6 | ||||||||||||
|
Service
cost
|
40.9 | 8.9 | 49.8 | 26.9 | 9.3 | 36.2 | ||||||||||||||||||
|
Interest
cost
|
47.1 | 30.5 | 77.6 | 45.8 | 26.9 | 72.7 | ||||||||||||||||||
|
Benefits
paid
|
(45.8 | ) | (55.2 | ) | (101.0 | ) | (34.6 | ) | (45.1 | ) | (79.7 | ) | ||||||||||||
|
Net
actuarial gain
|
(17.0 | ) | (49.9 | ) | (66.9 | ) | (19.3 | ) | (10.3 | ) | (29.6 | ) | ||||||||||||
|
Business
acquisitions
|
– | – | – | 51.7 | – | 51.7 | ||||||||||||||||||
|
Effect
of exchange rates
|
– | 53.6 | 53.6 | – | 57.1 | 57.1 | ||||||||||||||||||
|
Plan
amendments and other
|
9.4 | 2.3 | 11.7 | (43.2 | ) | 3.0 | (40.2 | ) | ||||||||||||||||
|
Benefit
obligation at year end
|
839.9 | 624.7 | 1,464.6 | 805.3 | 634.5 | 1,439.8 | ||||||||||||||||||
|
Change
in plan assets:
|
||||||||||||||||||||||||
|
Fair
value of assets at prior year end
|
679.6 | 251.9 | 931.5 | 570.6 | 213.7 | 784.3 | ||||||||||||||||||
|
Actual
return on plan assets
|
64.2 | 11.4 | 75.6 | 65.6 | 29.1 | 94.7 | ||||||||||||||||||
|
Employer
contributions (a)
|
97.5 | 18.2 | 115.7 | 39.7 | 15.2 | 54.9 | ||||||||||||||||||
|
Contributions to unfunded German
plans (b)
|
– | 24.0 | 24.0 | – | 22.0 | 22.0 | ||||||||||||||||||
|
Benefits
paid
|
(45.8 | ) | (55.2 | ) | (101.0 | ) | (34.6 | ) | (45.1 | ) | (79.7 | ) | ||||||||||||
|
Business
acquisitions
|
– | – | – | 38.3 | – | 38.3 | ||||||||||||||||||
|
Effect
of exchange rates
|
– | 20.6 | 20.6 | – | 14.9 | 14.9 | ||||||||||||||||||
|
Other
|
– | 2.3 | 2.3 | – | 2.1 | 2.1 | ||||||||||||||||||
|
Fair
value of assets at end of year
|
795.5 | 273.2 | 1,068.7 | 679.6 | 251.9 | 931.5 | ||||||||||||||||||
|
Funded
status
|
$ | (44.4 | ) | $ | (351.5 | )(b) | $ | (395.9 | ) | $ | (125.7 | ) | $ | (382.6 | )(b) | $ | (508.3 | ) | ||||||
|
(a)
|
2007
contributions include additional pension contributions of
$44.5 million ($27.3 million after tax) to bring North American
plan obligations to a 95 percent or higher funded status
level.
|
|
(b)
|
The
German plans are unfunded and the liability is included in the company’s
consolidated balance sheets. Benefits are paid directly by the company to
the participants. The German plans represented $328.5 million and
$333.4 million of the total unfunded status at December 31, 2007
and 2006, respectively.
|
Amounts
recognized in the consolidated balance sheets for the funded status at
December 31 consisted of:
|
2007
|
2006
|
|||||||||||||||||||||||
|
($
in millions)
|
U.S.
|
Foreign
|
Total
|
U.S.
|
Foreign
|
Total
|
||||||||||||||||||
|
Prepaid
pension cost
|
$ | – | $ | 10.3 | $ | 10.3 | $ | – | $ | 2.3 | $ | 2.3 | ||||||||||||
|
Defined
benefit pension liabilities
|
(44.4 | ) | (361.8 | ) | (406.2 | ) | (125.7 | ) | (384.9 | ) | (510.6 | ) | ||||||||||||
| $ | (44.4 | ) | $ | (351.5 | ) | $ | (395.9 | ) | $ | (125.7 | ) | $ | (382.6 | ) | $ | (508.3 | ) | |||||||
Page 64 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
15. Employee
Benefit Obligations (continued)
Amounts
recognized in accumulated other comprehensive earnings (loss) at
December 31 consisted of:
|
2007
|
2006
|
|||||||||||||||||||||||
|
($
in millions)
|
U.S.
|
Foreign
|
Total
|
U.S.
|
Foreign
|
Total
|
||||||||||||||||||
|
Net
loss
|
$ | 180.0 | $ | 6.8 | $ | 186.8 | $ | 220.2 | $ | 50.3 | $ | 270.5 | ||||||||||||
|
Net
prior service credit
|
2.0 | (5.8 | ) | (3.8 | ) | (5.7 | ) | (6.3 | ) | (12.0 | ) | |||||||||||||
|
Tax
effect and foreign exchange rates
|
(71.9 | ) | (12.1 | ) | (84.0 | ) | (85.0 | ) | (21.7 | ) | (106.7 | ) | ||||||||||||
| $ | 110.1 | $ | (11.1 | ) | $ | 99.0 | $ | 129.5 | $ | 22.3 | $ | 151.8 | ||||||||||||
The
accumulated benefit obligation for all U.S. defined benefit pension plans was
$832.1 million and $804.8 million at December 31, 2007 and 2006,
respectively. The accumulated benefit obligation for all foreign defined benefit
pension plans was $571.6 million and $584.1 million at
December 31, 2007 and 2006, respectively. Following is the information for
defined benefit plans with an accumulated benefit obligation in excess of plan
assets at December 31:
|
2007
|
2006
|
|||||||||||||||||||||||
|
($
in millions)
|
U.S.
|
Foreign
|
Total
|
U.S.
|
Foreign
|
Total
|
||||||||||||||||||
|
Projected
benefit obligation
|
$ | 839.9 | $ | 328.8 | $ | 1,168.7 | $ | 805.3 | $ | 579.7 | $ | 1,385.0 | ||||||||||||
|
Accumulated
benefit obligation
|
832.1 | 318.9 | 1,151.0 | 804.8 | 529.9 | 1,334.7 | ||||||||||||||||||
|
Fair
value of plan assets
|
795.5 | 0.3 | (a) | 795.8 | 679.6 | 194.8 | (a) | 874.4 | ||||||||||||||||
|
(a)
|
The
German plans are unfunded and, therefore, there is no fair value of plan
assets associated with them. The unfunded status of those plans was
$328.5 million and $333.4 million at December 31, 2007 and
2006, respectively.
|
Components
of net periodic benefit cost were:
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||
|
($
in millions)
|
U.S.
|
Foreign
|
Total
|
U.S.
|
Foreign
|
Total
|
U.S.
|
Foreign
|
Total
|
|||||||||||||||||||||||||||
|
Service
cost
|
$ | 40.9 | $ | 8.9 | $ | 49.8 | $ | 26.9 | $ | 9.3 | $ | 36.2 | $ | 24.2 | $ | 8.4 | $ | 32.6 | ||||||||||||||||||
|
Interest
cost
|
47.1 | 30.5 | 77.6 | 45.8 | 26.9 | 72.7 | 40.1 | 28.1 | 68.2 | |||||||||||||||||||||||||||
|
Expected
return on plan assets
|
(54.5 | ) | (18.5 | ) | (73.0 | ) | (51.1 | ) | (15.5 | ) | (66.6 | ) | (46.2 | ) | (14.7 | ) | (60.9 | ) | ||||||||||||||||||
|
Amortization
of prior service cost
|
0.9 | (0.5 | ) | 0.4 | 3.0 | (0.3 | ) | 2.7 | 4.8 | (0.1 | ) | 4.7 | ||||||||||||||||||||||||
|
Recognized
net actuarial loss
|
13.5 | 5.0 | 18.5 | 18.4 | 3.3 | 21.7 | 15.5 | 2.3 | 17.8 | |||||||||||||||||||||||||||
|
Curtailment
loss
|
0.8 | 2.1 | 2.9 | – | 2.2 | 2.2 | – | 3.0 | 3.0 | |||||||||||||||||||||||||||
|
Subtotal
|
48.7 | 27.5 | 76.2 | 43.0 | 25.9 | 68.9 | 38.4 | 27.0 | 65.4 | |||||||||||||||||||||||||||
|
Non-company
sponsored plans
|
1.3 | 0.1 | 1.4 | 1.2 | 0.1 | 1.3 | 1.0 | – | 1.0 | |||||||||||||||||||||||||||
|
Net
periodic benefit cost
|
$ | 50.0 | $ | 27.6 | $ | 77.6 | $ | 44.2 | $ | 26.0 | $ | 70.2 | $ | 39.4 | $ | 27.0 | $ | 66.4 | ||||||||||||||||||
The
estimated net loss and prior service cost for the defined benefit pension plans
that will be amortized from accumulated other comprehensive earnings into net
periodic benefit cost during 2008 are $14.1 million and $0.6 million,
respectively.
Page 65 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
15. Employee
Benefit Obligations (continued)
Weighted
average assumptions used to determine benefit obligations for the North American
plans at December 31 were:
|
U.S.
|
Canada
|
|||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
|||||||||||||||||||
|
Discount
rate
|
6.25 | % | 6.00 | % | 5.75 | % | 5.75 | % | 5.00 | % | 5.00 | % | ||||||||||||
|
Rate
of compensation increase
|
4.80 | % | 4.80 | % | 3.33 | % | 3.50 | % | 3.50 | % | 3.50 | % | ||||||||||||
Weighted
average assumptions used to determine benefit obligations for the European plans
at December 31 were:
|
United
Kingdom
|
Germany
|
|||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
|||||||||||||||||||
|
Discount
rate
|
5.70 | % | 5.00 | % | 4.90 | % | 5.50 | % | 4.50 | % | 4.01 | % | ||||||||||||
|
Rate
of compensation increase
|
4.00 | % | 4.00 | % | 4.00 | % | 2.75 | % | 2.75 | % | 2.75 | % | ||||||||||||
|
Pension
increase
|
3.10 | % | 2.75 | % | 2.50 | % | 1.75 | % | 1.75 | % | 1.75 | % | ||||||||||||
The
discount and compensation increase rates used above to determine the benefit
obligations at December 31, 2007, will be used to determine net periodic
benefit cost for 2008.
Weighted
average assumptions used to determine net periodic benefit cost for the North
American plans for the years ended December 31 were:
|
U.S.
|
Canada
|
|||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
|||||||||||||||||||
|
Discount
rate
|
6.00 | % | 5.75 | % | 6.00 | % | 5.00 | % | 5.00 | % | 5.75 | % | ||||||||||||
|
Rate
of compensation increase
|
4.80 | % | 3.33 | % | 3.33 | % | 3.50 | % | 3.50 | % | 3.50 | % | ||||||||||||
|
Expected
long-term rate of return on assets
|
8.25 | % | 8.50 | % | 8.50 | % | 6.82 | % | 6.78 | % | 7.65 | % | ||||||||||||
Weighted
average assumptions used to determine net periodic benefit cost for the European
plans for the years ended December 31 were:
|
United
Kingdom
|
Germany
|
|||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
|||||||||||||||||||
|
Discount
rate
|
5.00 | % | 4.90 | % | 5.50 | % | 4.50 | % | 4.01 | % | 4.76 | % | ||||||||||||
|
Rate
of compensation increase
|
4.00 | % | 4.00 | % | 4.00 | % | 2.75 | % | 2.75 | % | 2.75 | % | ||||||||||||
|
Pension
increase
|
2.75 | % | 2.50 | % | 2.50 | % | 1.75 | % | 1.75 | % | 1.75 | % | ||||||||||||
|
Expected
long-term rate of return on assets
|
7.25 | % | 7.00 | % | 7.00 | % | N/A | N/A | N/A | |||||||||||||||
Current
financial accounting standards require that the discount rates used to calculate
the actuarial present value of pension and other postretirement benefit
obligations reflect the time value of money as of the measurement date of
the benefit obligation and reflect the rates of return currently available on
high quality fixed income securities whose cash flows (via coupons and
maturities) match the timing and amount of future benefit payments of the plan.
In addition, changes in the discount rate assumption should reflect changes in
the general level of interest rates.
Page 66 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
15. Employee
Benefit Obligations (continued)
In
selecting the U.S. discount rate for December 31, 2007, several
benchmarks were considered, including Moody's long-term corporate bond yield
for Aa bonds and the Citigroup Pension Liability Index. In addition, the
expected cash flows from the plans were modeled relative to the Citigroup
Pension Discount Curve and matched to cash flows from a portfolio of bonds rated
Aa or better. In Canada the markets for locally denominated high-quality,
longer term corporate bonds are relatively thin. As a result, the approach taken
in Canada was to use yield curve spot rates to discount the respective benefit
cash flows and to compute the underlying constant bond yield equivalent. The
Canadian discount rate at December 31, 2007, was selected based on a review
of the expected benefit payments for each of the Canadian defined benefit plans
over the next 60 years and then discounting the resulting cash flows to the
measurement date using the AA corporate bond spot rates to determine the
equivalent level discount rate. In the United Kingdom and Germany, the company
and its actuarial consultants considered the applicable iBoxx 15+ year AA
corporate bond yields for the respective markets and determined a rate
consistent with those expectations. In all countries, the discount rates
selected for December 31, 2007, were based on the range of values
obtained from cash flow specific methods, together with the changes in the
general level of interest rates reflected by the benchmarks.
The
assumption related to the expected long-term rate of return on plan assets
reflects the average rate of earnings expected on the funds invested to provide
for the benefits over the life of the plans. The assumption was based upon
Ball’s pension plan asset allocations, investment strategies and the views of
investment managers and other large pension plan sponsors. Some reliance was
placed on historical asset returns of our plans. An asset-return generation
model was used to project future asset returns using simulation and asset class
correlation. The analysis included expected future risk premiums,
forward-looking return expectations derived from the yield on long-term bonds
and the price earnings ratios of major stock market indexes, expected inflation
and real risk-free interest rate assumptions and the fund’s expected asset
allocation.
The
expected long-term rates of return on assets were calculated by applying the
expected rate of return to a market related value of plan assets at the
beginning of the year, adjusted for the weighted average expected contributions
and benefit payments. The market related value of plan assets used to calculate
expected return was $853 million for 2007, $780.7 million for 2006 and
$758.5 million for 2005.
Included
in other comprehensive earnings, net of the related tax effect, were decreases
in pension and other postretirement item obligations of $57.9 million and
$55.9 million in 2007 and 2006, respectively, and an increase of
$43.6 million in 2005.
For
pension plans, accumulated gains and losses in excess of a 10 percent
corridor and the prior service cost are amortized over the average remaining
service period of active participants.
Defined
Benefit Pension Plan Assets
Investment
policies and strategies for the plan assets in the U.S., Canada and the United
Kingdom are established by pension investment committees of the company and its
relevant subsidiaries and include the following common themes: (1) to provide
for long-term growth of principal income without undue exposure to risk, (2) to
minimize contributions to the plans, (3) to minimize and stabilize pension
expense, and (4) to achieve a rate of return above the market average for each
asset class over the long term. The pension investment committees are required
to regularly, but no less frequently than once annually, review asset mix and
asset performance, as well as the performance of the investment managers. Based
on their reviews, which are generally conducted quarterly, investment policies
and strategies are revised as appropriate.
In
accordance with 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) if imposed by the
appropriate regulatory agency, provide a lien on company assets in that amount
for the benefit of the plan. The guarantee can be removed upon approval by both
Ball and the pension plan trustees.
Page 67 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
15. Employee
Benefit Obligations (continued)
Target
asset allocations in the U.S. and Canada are set using a minimum and maximum
range for each asset category as a percent of the total funds’ market value.
Assets contributed to the United Kingdom plans are invested using established
percentages. Following are the target asset allocations established as of
December 31, 2007:
|
U.S.
|
Canada
|
United
Kingdom
|
||||||||||
|
Cash
and cash equivalents
|
0-10 | % | 0-10 | % | – | |||||||
|
Equity
securities
|
30-75 | % (a) | 50-75 | % (c) | 82 | % (d) | ||||||
|
Fixed
income securities
|
25-70 | % (b) | 25-45 | % | 18 | % | ||||||
|
Alternative
investments
|
0-35 | % | – | – | ||||||||
|
(a)
|
Equity
securities may consist of: (1) up to 25 percent large cap
equities, (2) up to 10 percent mid cap equities, (3) up to
10 percent small cap equities, (4) up to 35 percent foreign
equities and (5) up to 35 percent special equities.
Holdings in Ball Corporation common stock cannot exceed 5 percent of
the trust’s assets.
|
|
(b)
|
Debt
securities may include up to 10 percent high yield non-investment
grade bonds, up to 10 percent bank loans and up to 15 percent
international bonds.
|
| (c) |
May
include between 15 percent and 45 percent non-Canadian equity
securities and must remain within the Canadian tax law for foreign
property limits.
|
|
(d)
|
Equity
securities must consist of United Kingdom securities and up to
29 percent foreign securities.
|
The
actual weighted average asset allocations for Ball’s defined benefit pension
plans, which are within the established targets for each country, were as
follows at December 31:
|
2007
|
2006
|
|||||||
|
Cash
and cash equivalents
|
5 | % | 1 | % | ||||
|
Equity
securities
|
51 | % | 62 | % | ||||
|
Fixed
income securities
|
36 | % | 31 | % | ||||
|
Alternative
investments
|
8 | % | 6 | % | ||||
| 100 | % | 100 | % | |||||
Contributions
to the company’s defined benefit pension plans, not including the unfunded
German plans, are expected to be $49 million in 2008. This estimate may
change based on plan asset performance. Benefit payments related to these plans
are expected to be $66 million, $70 million, $74 million,
$77 million and $82 million for the years ending December 31, 2008
through 2012, respectively, and a total of $473 million for the years 2013
through 2017. Payments to participants in the unfunded German plans are expected
to be approximately $26 million in each of the years 2008 through 2012 and
a total of $136 million for the years 2013 through 2017.
Other
Postemployment Benefits
The
company sponsors defined benefit and defined contribution postretirement health
care and life insurance plans for substantially all U.S. and Canadian employees.
Employees may also qualify for long-term disability, medical and life insurance
continuation and other postemployment benefits upon termination of active
employment prior to retirement. All of the Ball-sponsored postretirement health
care and life insurance plans are unfunded and, with the exception of life
insurance benefits, are self-insured.
In
Canada, the company provides supplemental medical and other benefits in
conjunction with Canadian provincial health care plans. Most U.S. salaried
employees who retired prior to 1993 are covered by noncontributory defined
benefit medical plans with capped lifetime benefits. Ball provides a fixed
subsidy toward each retiree's future purchase of medical insurance for U.S.
salaried and substantially all nonunion hourly employees retiring after January
1, 1993. Life insurance benefits are noncontributory. Ball has no commitments to
increase benefits provided by any of the postemployment benefit
plans.
Page 68 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
15. Employee
Benefit Obligations (continued)
An
analysis of the change in other postretirement benefit accruals for 2007 and
2006 follows:
|
($
in millions)
|
2007
|
2006
|
||||||
|
Change
in benefit obligation:
|
||||||||
|
Benefit
obligation at prior year end
|
|
$ | 185.1 | $ | 176.0 | |||
|
Service
cost
|
3.1 | 3.3 | ||||||
|
Interest
cost
|
10.2 | 10.8 | ||||||
|
Benefits
paid
|
(15.3 | ) | (10.4 | ) | ||||
|
Net
actuarial gain
|
(3.1 | ) | (20.7 | ) | ||||
|
Business
acquisitions
|
– | 26.5 | ||||||
|
Curtailment
gain
|
– | (1.2 | ) | |||||
|
Plan
amendments
|
(5.9 | ) | 0.8 | |||||
|
Effect
of exchange rates
|
3.9 | – | ||||||
|
Benefit
obligation at year end
|
178.0 | 185.1 | ||||||
|
Change
in plan assets:
|
||||||||
|
Fair
value of assets at prior year end
|
– | – | ||||||
|
Employer
contributions
|
15.3 | 10.4 | ||||||
|
Benefits
paid
|
(15.4 | ) | (10.8 | ) | ||||
|
Medicare
Part D subsidy
|
0.1 | 0.4 | ||||||
|
Fair
value of assets at end of year
|
– | – | ||||||
|
Funded
status
|
$ | (178.0 | ) | $ | (185.1 | ) | ||
Components
of net periodic benefit cost were:
|
($
in millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Service
cost
|
$ | 3.1 | $ | 3.3 | $ | 2.6 | ||||||
|
Interest
cost
|
10.2 | 10.8 | 9.7 | |||||||||
|
Amortization
of prior service cost
|
0.4 | 1.5 | 1.5 | |||||||||
|
Recognized
net actuarial gain
|
0.6 | 2.4 | 2.3 | |||||||||
|
Net
periodic benefit cost
|
$ | 14.3 | $ | 18.0 | $ | 16.1 | ||||||
The
estimated net loss and prior service cost for the other postretirement plans
that will be amortized from accumulated other comprehensive earnings (loss) into
net periodic benefit cost during 2008 are $0.4 million and
$0.3 million, respectively.
The
assumptions used for the determination of benefit obligations and net periodic
benefit cost were the same as used for the U.S. and Canadian defined benefit
pension plans. For other postretirement benefits, accumulated gains and losses,
the prior service cost and the transition asset are amortized over the average
remaining service period of active participants.
For the
U.S. health care plans at December 31, 2007, a 9 percent health care
cost trend rate was used for pre-65 and post-65 benefits, and trend rates were
assumed to decrease to 5 percent in 2012 and remain at that level
thereafter. For the Canadian plans, a 9 percent health care cost
trend rate was used, which was assumed to decrease to 5 percent by 2016 and
remain at that level in subsequent years.
Health
care cost trend rates can have an effect on the amounts reported for the health
care plan. A one-percentage point change in assumed health care cost trend rates
would increase or decrease the total of service and interest cost by
$0.4 million and the postretirement benefit obligation by approximately
$4 million to $5 million.
Page 69 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
15. Employee
Benefit Obligations (continued)
Other
Benefit Plans
Through
December 31, 2006, the company matched employee contributions to the 401(k)
plan with shares of Ball common stock, up to 50 percent of up to
6 percent of a participant’s annual salary. Effective January 1, 2007,
the company matches U.S. salaried employee contributions with shares of Ball
common stock, up to 100 percent of the first 3 percent of a
participant’s salary plus 50 percent of the next 2 percent. The
expense associated with the company match amounted to $20.8 million,
$16.1 million and $14.3 million for 2007, 2006 and 2005,
respectively.
In
addition, substantially all employees within the company’s aerospace and
technologies segment who participate in Ball’s 401(k) plan receive a
performance-based matching cash contribution of up to 4 percent of base
salary. The company recognized $8.7 million and
$6.3 million of additional compensation expense related to this program for
the years 2007 and 2005, respectively. There was no matching contribution for
the year ended December 31, 2006.
In 2007
the company’s 401(k) plan matching contributions could not exceed $9,000 per
employee and the limit on employee contributions was $15,500 per
employee.
16. Shareholders’
Equity
At
December 31, 2007, the company had 550 million shares of common stock and
15 million shares of preferred stock authorized, both without par value.
Preferred stock includes 120,000 authorized but unissued shares designated as
Series A Junior Participating Preferred Stock.
Under the
company’s
shareholder Rights Agreement dated July 26, 2006, as amended, one preferred
stock purchase right (Right) is attached to each outstanding share of Ball
Corporation common stock. Subject to adjustment, each Right entitles the
registered holder to purchase from the company one one-thousandth of a share of
Series A Junior Participating Preferred Stock at an exercise price of $185 per
Right. Subject to certain limited exceptions for passive investors, if a person
or group acquires 10 percent or more of the company's outstanding common
stock (or upon occurrence of certain other events), the Rights (other than those
held by the acquiring person) become exercisable and generally entitle the
holder to purchase shares of Ball Corporation common stock at a 50 percent
discount. The Rights, which expire in 2016, are redeemable by the company at a
redemption price of $0.001 cent per Right and trade with the common stock.
Exercise of such Rights would cause substantial dilution to a person or group
attempting to acquire control of the company without the approval of Ball's
board of directors. The Rights would not interfere with any merger or other
business combinations approved by the board of directors.
The
company increased its share repurchase program in 2007 to $211.3 million,
net of issuances, compared to $45.7 million net repurchases in 2006 and
$358.1 million in 2005. The net repurchases in 2007 included a forward
contract entered into in December 2006 for the repurchase of
1,200,000 shares. The contract was settled on January 5, 2007, for
$51.9 million in cash. The 2007 net repurchases did not include a forward
contract entered into in December 2007 for the repurchase of
675,000 shares. That contract was settled on January 7, 2008, for
$31 million in cash.
On
December 12, 2007, in a privately negotiated transaction, Ball entered into
an accelerated share repurchase agreement to buy $100 million of its common
shares. The company advanced the $100 million on January 7, 2008, and
received approximately 2 million shares, which represented 90 percent
of the total shares as calculated using the previous day’s closing price. The
exact number of shares to be repurchased under the agreement, which will be
determined on the settlement date of June 5, 2008, is subject to an
adjustment based on a weighted average price calculation for the period between
the initial purchase date and the settlement date. The company has the option to
settle the contract in either cash or shares.
In
connection with the employee stock purchase plan, the company contributes
20 percent of up to $500 of each participating employee’s monthly payroll
deduction toward the purchase of Ball Corporation common stock. Company
contributions for this plan were $3.2 million each in 2007, 2006 and
2005.
Page 70 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
16. Shareholders’
Equity (continued)
On
October 24, 2007, Ball announced the discontinuance of the company’s
discount on the reinvestment of dividends associated with the company’s dividend
reinvestment and voluntary stock purchase plan for non-employee shareholders.
The 5 percent discount was discontinued on November 1,
2007.
Accumulated
Other Comprehensive Earnings (Loss)
The
activity related to accumulated other comprehensive earnings (loss) was as
follows:
|
($
in millions)
|
Foreign
Currency Translation
|
Pension
and Other Postretirement Items,
Net
of Tax
|
Effective
Financial Derivatives,
Net
of Tax
|
Accumulated
Other Comprehensive Earnings (Loss)
|
||||||||||||
|
December
31, 2004
|
$ | 148.9 | $ | (126.3 | ) | $ | 10.6 | $ | 33.2 | |||||||
|
2005
change
|
(74.3 | ) | (43.6 | ) | (16.0 | ) | (133.9 | ) | ||||||||
|
December
31, 2005
|
74.6 | (169.9 | ) | (5.4 | ) | (100.7 | ) | |||||||||
|
2006
change
|
57.2 | 55.9 | 6.0 | 119.1 | ||||||||||||
|
Effect
of SFAS No. 158 adoption (a)
|
– | (47.9 | ) | – | (47.9 | ) | ||||||||||
|
December
31, 2006
|
131.8 | (161.9 | ) | 0.6 | (29.5 | ) | ||||||||||
|
2007
change
|
90.0 | 57.9 | (11.5 | ) | 136.4 | |||||||||||
|
December
31, 2007
|
$ | 221.8 | $ | (104.0 | ) | $ | (10.9 | ) | $ | 106.9 | ||||||
|
(a)
|
Within the
company’s 2006 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. The 2006 amounts have been revised to correct
the previous reporting.
|
Notwithstanding
the 2005 distribution pursuant to the Jobs Act, management’s intention is to
indefinitely reinvest foreign earnings. Therefore, no taxes have been provided
on the foreign currency translation component for any period. The change in the
pension and other postretirement items is presented net of related tax expense
of $31.3 million and $2.9 million for 2007 and 2006, respectively, and a
related tax benefit of $27.3 million for 2005. The change in the effective
financial derivatives is presented net of related tax benefit of
$3.2 million for 2007, related tax expense of $5.7 million for
2006 and related tax benefit of $10.7 million for 2005.
Stock-Based
Compensation Programs
Effective
January 1, 2006, Ball adopted SFAS No. 123 (revised 2004), “Share
Based Payment,” which is a revision of SFAS No. 123 and supersedes APB
Opinion No. 25. The new standard establishes accounting standards for
transactions in which an entity exchanges its equity instruments for goods or
services, including stock option and restricted stock grants. The major
differences for Ball are that (1) expense is now recorded in the
consolidated statements of earnings for the fair value of new stock option
grants and nonvested portions of grants made prior to January 1, 2006, and
(2) the company’s deposit share program (discussed below) is no longer a
variable plan that is marked to current market value each month through
earnings. Upon adoption of SFAS No. 123 (revised 2004), Ball has
chosen to use the modified prospective transition method and the Black-Scholes
valuation model.
Page 71 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
16. Shareholders’
Equity (continued)
The
company has shareholder-approved stock option plans under which options to
purchase shares of Ball common stock have been granted to officers and certain
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 issued through December 31, 2007, 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 year ended December 31, 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
|
(501,357 | ) | 9.99 | |||||||||||||
|
Exercised
|
(985,373 | ) | 21.37 | |||||||||||||
|
Canceled/forfeited
|
(69,800 | ) | 44.20 | (69,800 | ) | 10.70 | ||||||||||
|
End
of period
|
4,747,005 | 32.06 | 1,664,980 | 10.88 | ||||||||||||
|
Vested
and exercisable, end of period
|
3,082,025 | 24.44 | ||||||||||||||
|
Reserved
for future grants
|
4,799,707 | |||||||||||||||
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
December 31, 2007, was 6.2 years and the aggregate intrinsic value
(difference in exercise price and closing price at that date) was
$61.4 million. The weighted average remaining contractual term for options
vested and exercisable at December 31, 2007, was 4.8 years and the
aggregate intrinsic value was $63.4 million. The company received
$21.1 million from options exercised during 2007. The intrinsic value
associated with these exercises was $28.5 million, and the associated tax
benefit of $9.5 million was reported as other financing activities in the
consolidated statement of cash flows. The total fair value of options vested
during 2007, 2006 and 2005 was $5 million, $4.8 million and
$15.5 million, respectively.
These
options cannot be traded in any equity market. However, based on the
Black-Scholes option pricing model, adapted for use in valuing compensatory
stock options in accordance with SFAS No. 123 (revised 2004), options granted in
2007, 2006 and 2005 have estimated weighted average fair values at the date of
grant of $11.22 per share, $10.46 per share and $11.65 per share,
respectively. 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:
|
2007
Grants
|
2006
Grants
|
2005
Grants
|
||||||||||
|
Expected
dividend yield
|
0.81 | % | 0.92 | % | 1.01 | % | ||||||
|
Expected
stock price volatility
|
17.94 | % | 19.70 | % | 30.09 | % | ||||||
|
Risk-free
interest rate
|
4.55 | % | 5.01 | % | 3.89 | % | ||||||
|
Expected
life of options
|
4.75
years
|
4.54
years
|
4.75
years
|
|||||||||
|
Estimated
forfeiture rate
|
12.00 | % | 14.63 | % | N/A | |||||||
Page 72 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
16. Shareholders’
Equity (continued)
For the
years ended December 31, 2007 and 2006, the company recognized in selling,
general and administrative expenses pretax expense of $15.9 million
($9.6 million after tax) and $12.9 million ($7.8 million after
tax), respectively, for share-based compensation arrangements. These amounts
represented $0.10 per basic share and $0.09 per diluted share in 2007,
respectively, and $0.08 per basic share and $0.07 per diluted share in
2006, respectively. At December 31, 2007, there was $31.2 million of
total unrecognized compensation cost related to nonvested share-based
compensation arrangements. This cost is expected to be recognized in earnings
over a weighted average period of 2.5 years.
In
addition to stock options, the company issues to officers and certain employees
restricted shares and restricted stock units, which vest over various periods
but generally in equal installments over five years. Compensation cost is
recorded based upon the fair value of the shares at the grant date. The adoption
of SFAS No. 123 (revised 2004) did not change the accounting for
compensation cost for the company’s normal restricted share
program.
To
encourage certain senior management employees and outside directors to invest in
Ball stock, Ball adopted a deposit share program in March 2001
(subsequently amended and restated in April 2004) that matches purchased
shares with restricted shares. In general, restrictions on the matching shares
lapse at the end of four years from date of grant, or earlier if established
share ownership guidelines are met, assuming the relevant qualifying purchased
shares are not sold or transferred prior to that time. Through December 31,
2005, under the principles of APB Opinion No. 25, this plan was
accounted for as a variable plan where compensation expense was recorded based
upon the current market price of the company’s common stock until restrictions
lapsed. Upon adoption of SFAS No. 123 (revised 2004) on
January 1, 2006, grants under the plan are accounted for as equity awards
and compensation expense is now recorded based upon the fair value of the shares
at the grant date. The company recorded $6.5 million, $6.7 million and
$7.3 million of expense in connection with this program in 2007, 2006 and
2005, respectively.
In
April 2007 the company’s board of directors granted
170,000 performance-contingent restricted stock units to key employees,
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
reassesses the probability of the goal being met and adjusts compensation
expense as appropriate. No such adjustment was considered necessary at the end
of 2007. The expense associated with the performance-contingent grants totaled
$2.2 million in 2007.
Page 73 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
17. Earnings
Per Share
The
following table provides additional information on the computation of earnings
per share amounts:
|
Years
ended December 31,
|
||||||||||||
|
($
in millions, except per share amounts)
|
2007
|
2006
|
2005
|
|||||||||
|
Diluted
Earnings per Share:
|
||||||||||||
|
Net
earnings
|
$ | 281.3 | $ | 329.6 | $ | 272.1 | ||||||
|
Weighted
average common shares (000s)
|
101,186 | 103,338 | 107,758 | |||||||||
|
Dilutive
effect of stock options and restricted shares
|
1,574 | 1,613 | 1,974 | |||||||||
|
Weighted
average shares applicable to diluted earnings
per share
|
102,760 | 104,951 | 109,732 | |||||||||
|
Diluted
earnings per share
|
$ | 2.74 | $ | 3.14 | $ | 2.48 | ||||||
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):
|
Years
ended December 31,
|
||||||||||||||
|
Option Price:
|
2007
|
2006
|
2005
|
|||||||||||
| $ | 39.74 | – | – | 709,250 | ||||||||||
| $ |
43.69
|
470,025 | 896,200 | – | ||||||||||
| $ |
49.32
|
926,300 | – | – | ||||||||||
| 1,396,325 | 896,200 | 709,250 | ||||||||||||
18. Financial
Instruments and Risk Management
Policies
and Procedures
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.
Commodity
Price Risk
We manage
our North American commodity price risk in connection with market price
fluctuations of aluminum primarily by entering into container sales contracts
that include aluminum-based pricing terms that generally reflect price
fluctuations under our commercial supply contracts for aluminum purchases. The
terms include fixed, floating or pass-through aluminum component pricing. This
matched pricing affects substantially all of our metal beverage packaging,
Americas, net sales. We also, at times, use certain derivative instruments such
as option and forward contracts as cash flow and fair value hedges of commodity
price risk where there is not a pass-through arrangement in the sales
contract.
Page 74 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
18. Financial
Instruments and Risk Management (continued)
Most of
the plastic packaging, Americas, sales contracts include provisions to fully
pass-through resin cost changes. As a result, we believe we have minimal
exposure related to changes in the cost of plastic resin. Most metal food and
household products packaging, Americas, sales contracts either include
provisions permitting us to pass through some or all steel cost changes we
incur, or they incorporate annually negotiated steel costs. In 2007 and 2006, we
were able to pass through to our customers the majority of steel cost increases.
We anticipate that we will be able to pass through the majority of the steel
price increases that occur through the end of 2008.
In Europe
and Asia, the company manages the aluminum and steel raw material commodity
price risks through annual and long-term contracts for the purchase of the
materials, as well as for certain sales of containers, 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. We also use 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 to minimize
the company’s exposure to significant price changes. We also use option
contracts to limit the impacts of European inflation in certain multi-year
contracts.
The
company had aluminum contracts hedging its aluminum exposure with notional
amounts of approximately $1 billion and $260.3 million at
December 31, 2007 and 2006, respectively. The aluminum contracts include
cash flow and fair value hedges that offset sales contracts of various terms and
lengths. Cash flow and fair value hedges related to forecasted transactions and
firm commitments expire within the next four years. Included in
shareholders’ equity at December 31, 2007, within accumulated other
comprehensive earnings, is a net after-tax loss of $16 million associated
with these contracts, of which a net loss of $17 million is expected to be
recognized in the consolidated statement of earnings during 2008. All of the
losses on these derivative contracts will be offset by higher revenue from sales
contracts. The consolidated balance sheet at December 31, 2007, included
$32 million in prepaid expenses and $50.2 million in liabilities
related to unrealized gains/losses on unsettled derivative contracts. The
consolidated balance sheet at December 31, 2006, included
$29.7 million in prepaid expenses and $34.8 million in liabilities for
these gains/losses.
Interest
Rate Risk
Our
objective in managing our exposure to interest rate changes is to manage the
impact of interest rate changes on earnings and cash flows and to lower our
overall borrowing costs. To achieve these objectives, we use a variety of
interest rate swaps, collars and options to manage our mix of floating and
fixed-rate debt. Interest rate instruments held by the company at
December 31, 2007, included pay-fixed interest rate swaps and interest rate
collars. Pay-fixed swaps effectively convert variable rate obligations to fixed
rate instruments. Collars create an upper and lower threshold within which
interest costs will fluctuate. Swap and collar agreements expire at various
times up to four years.
At
December 31, 2007, the company had outstanding interest rate swap
agreements in Europe with notional amounts of €135 million paying fixed
rates. Approximately $4.1 million of a net after-tax gain associated with
these contracts is included in accumulated other comprehensive earnings at
December 31, 2007, of which $1.3 million is expected to be recognized
in the consolidated statement of earnings during 2008. At December 31,
2007, the company had outstanding interest rate collars in the U.S. totaling
$100 million. The value of these contracts in accumulated other
comprehensive earnings at December 31, 2007, was insignificant.
Approximately $1.1 million of net gain related to the termination or
deselection of hedges is included in accumulated other comprehensive earnings at
December 31, 2007. The amount recognized in 2007 earnings related to
terminated hedges was insignificant.
The fair
value of all non-derivative financial instruments approximates their carrying
amounts with the exception of long-term debt. Rates currently available to the
company for loans with similar terms and maturities are used to estimate the
fair value of long-term debt based on discounted cash flows. The fair value of
derivatives generally reflects the estimated amounts that we would pay or
receive upon termination of the contracts at December 31, taking into
account any unrealized gains and losses on open contracts.
Page 75 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
18. Financial
Instruments and Risk Management (continued)
|
2007
|
2006
|
|||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
|
($
in millions)
|
Amount
|
Value
|
Amount
|
Value
|
||||||||||||
|
Long-term
debt, including current portion
|
$ | 2,308.9 | $ | 2,323.6 | $ | 2,311.6 | $ | 2,314.1 | ||||||||
|
Unrealized
pretax gain on derivative contracts
|
– | 5.7 | – | 4.1 | ||||||||||||
Foreign
Currency Exchange Rate Risk
Our
objective in managing exposure to foreign currency fluctuations is to protect
foreign cash flows and earnings from changes associated with foreign currency
exchange rate changes through the use of 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, Serbian dinar,
Brazilian real, Argentine peso and Chinese renminbi. 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. Such contracts outstanding at December 31,
2007, expire within four years and the amounts included in accumulated other
comprehensive earnings related to these contracts were
insignificant.
19. Quarterly
Results of Operations (Unaudited)
The
company’s fiscal years end on December 31 and the fiscal quarters generally
end on the Sunday nearest the calendar quarter end.
|
($
in millions, except per share amounts)
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Total
|
|||||||||||||||
|
2007
|
||||||||||||||||||||
|
Net
sales (a)
|
$ | 1,694.2 | $ | 2,032.8 | $ | 1,906.5 | $ | 1,756.2 | $ | 7,389.7 | ||||||||||
|
Gross
profit (b)
|
242.6 | 288.7 | 184.0 | 201.4 | 916.7 | |||||||||||||||
|
Net
earnings
|
$ | 81.2 | $ | 105.9 | $ | 60.9 | $ | 33.3 | $ | 281.3 | ||||||||||
|
Basic
earnings per share (c)
|
$ | 0.79 | $ | 1.04 | $ | 0.60 | $ | 0.33 | $ | 2.78 | ||||||||||
|
Diluted
earnings per share (c)
|
$ | 0.78 | $ | 1.03 | $ | 0.59 | $ | 0.33 | $ | 2.74 | ||||||||||
|
2006
|
||||||||||||||||||||
|
Net
sales
|
$ | 1,364.9 | $ | 1,842.5 | $ | 1,822.3 | $ | 1,591.8 | $ | 6,621.5 | ||||||||||
|
Gross
profit (b)
|
159.6 | 231.2 | 248.7 | 219.1 | 858.6 | |||||||||||||||
|
Net
earnings
|
$ | 44.4 | $ | 129.8 | $ | 107.1 | $ | 48.3 | $ | 329.6 | ||||||||||
|
Basic
earnings per share (c)
|
$ | 0.43 | $ | 1.25 | $ | 1.04 | $ | 0.47 | $ | 3.19 | ||||||||||
|
Diluted
earnings per share (c)
|
$ | 0.42 | $ | 1.23 | $ | 1.02 | $ | 0.46 | $ | 3.14 | ||||||||||
|
(a)
|
Net
sales in the third quarter of 2007 are shown net of an $85.6 million
legal settlement (see Note 4).
|
|
(b)
|
Gross
profit is shown after depreciation and amortization related to cost of
sales of $246.5 million and $222.5 million for the years ended
December 31, 2007 and 2006, respectively.
|
| (c) |
Earnings
per share calculations for each quarter are based on the weighted average
shares outstanding for that period. As a result, the sum of the quarterly
amounts may not equal the annual earnings per share
amount.
|
Page 76 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
19. Quarterly
Results of Operations (Unaudited) (continued)
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 has assessed the impact of these adjustments and does
not believe these amounts are material, individually or in the aggregate, to any
previously issued financial statements or to our full year results of operations
for 2006. A cumulative $5.8 million pretax out-of-period adjustment was
included in selling, general and administrative expenses in the first quarter of
2006.
The
unaudited quarterly results of operations included business consolidation costs
and other significant items that impacted the company’s operating performance. A
summary of the items in 2007 and 2006 follows (all amounts are shown after
tax):
|
($
in millions, except per share amounts)
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Total
|
|||||||||||||||
|
2007
|
||||||||||||||||||||
|
Legal
settlement (Note 4)
|
$ | – | $ | – | $ | (51.8 | ) | $ | – | $ | (51.8 | ) | ||||||||
|
Business
consolidation costs (Note 5)
|
– | – | – | (27.0 | ) | (27.0 | ) | |||||||||||||
| $ | – | $ | – | $ | (51.8 | ) | $ | (27.0 | ) | $ | (78.8 | ) | ||||||||
|
Basic
earnings per share
|
$ | – | $ | – | $ | (0.50 | ) | $ | (0.27 | ) | $ | (0.76 | ) | |||||||
|
Diluted
earnings per share
|
$ | – | $ | – | $ | (0.50 | ) | $ | (0.27 | ) | $ | (0.76 | ) | |||||||
|
2006
|
||||||||||||||||||||
|
Business
consolidation (costs) gain (Note 5)
|
$ | (1.4 | ) | $ | 0.3 | $ | – | $ | (27.5 | ) | $ | (28.6 | ) | |||||||
|
Property
insurance gain (Note 6)
|
– | 45.2 | 1.7 | (0.8 | ) | 46.1 | ||||||||||||||
|
Tax
benefit for change in statutory functional currency
|
– | – | – | 8.1 | 8.1 | |||||||||||||||
| $ | (1.4 | ) | $ | 45.5 | $ | 1.7 | $ | (20.2 | ) | $ | 25.6 | |||||||||
|
Basic
earnings per share
|
$ | (0.01 | ) | $ | 0.44 | $ | 0.02 | $ | (0.19 | ) | $ | 0.25 | ||||||||
|
Diluted
earnings per share
|
$ | (0.01 | ) | $ | 0.43 | $ | 0.02 | $ | (0.19 | ) | $ | 0.24 | ||||||||
Other
than the items discussed above, fluctuations in sales and earnings for the
quarters in 2007 and 2006 reflected the number of days in each fiscal quarter,
as well as the normal seasonality of our businesses.
20. Research
and Development
Research
and development costs are expensed as incurred in connection with the company’s
internal programs for the development of products and processes. Costs incurred
in connection with these programs, the majority of which are included in cost of
sales, amounted to $27.4 million, $22.5 million and $24.6 million
for the years ended December 31, 2007, 2006 and 2005,
respectively.
21. Subsequent
Event
On
February 15, 2008, Ball Aerospace & Technologies Corp. completed the sale of
its shares in Ball Solutions Group Pty Ltd (BSG) to QinetiQ Pty Ltd for
approximately $10.5 million. BSG was previously a wholly-owned Australian
subsidiary of Ball Aerospace that provided services to the Australian department
of defense and related government agencies. The sale is expected to result in a
gain of approximately $3 million.
Page 77 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
22. Subsidiary
Guarantees of Debt
As
discussed in Note 13, the company’s notes payable and senior credit
facilities are guaranteed on a full, unconditional and joint and several basis
by certain of the company’s domestic wholly owned subsidiaries. Certain foreign
denominated tranches of the senior credit facilities are similarly guaranteed by
certain of the company’s wholly owned foreign subsidiaries. The senior credit
facilities are secured by: (1) a pledge of 100 percent of the stock owned
by the company in its material direct and indirect majority-owned domestic
subsidiaries and (2) a pledge of the company’s stock, owned directly or
indirectly, of certain foreign subsidiaries, which equals 65 percent of the
stock of each such foreign subsidiary. The following is condensed, consolidating
financial information for the company, segregating the guarantor subsidiaries
and non-guarantor subsidiaries, as of December 31, 2007 and 2006, and for the
years ended December 31, 2007, 2006 and 2005 (in millions of dollars).
Separate financial statements for the guarantor subsidiaries and the
non-guarantor subsidiaries are not presented because management has determined
that such financial statements would not be material to
investors.
|
CONDENSED,
CONSOLIDATING STATEMENT OF EARNINGS
|
||||||||||||||||||||
|
For
the Year Ended December 31, 2007
|
||||||||||||||||||||
|
Ball
|
Guarantor
|
Non-Guarantor
|
Eliminating
|
Consolidated
|
||||||||||||||||
|
($
in millions)
|
Corporation
|
Subsidiaries
|
Subsidiaries
|
Adjustments
|
Total
|
|||||||||||||||
|
Net
sales
|
$ | - | $ | 5,499.1 | $ | 2,101.4 | $ | (125.2 | ) | $ | 7,475.3 | |||||||||
|
Legal
settlement
|
– | (85.6 | ) | – | – | (85.6 | ) | |||||||||||||
|
Total
net sales
|
– | 5,413.5 | 2,101.4 | (125.2 | ) | 7,389.7 | ||||||||||||||
|
Costs
and expenses
|
||||||||||||||||||||
|
Cost
of sales (excluding depreciation and amortization)
|
– | 4,709.1 | 1,642.6 | (125.2 | ) | 6,226.5 | ||||||||||||||
|
Depreciation
and amortization
|
3.4 | 179.0 | 98.6 | – | 281.0 | |||||||||||||||
|
Business
consolidation costs
|
- | 41.9 | 2.7 | – | 44.6 | |||||||||||||||
|
Selling,
general and administrative
|
71.3 | 168.7 | 83.7 | – | 323.7 | |||||||||||||||
|
Equity
in results of subsidiaries
|
(298.7 | ) | – | – | 298.7 | – | ||||||||||||||
|
Intercompany
license fees
|
(71.0 | ) | 69.5 | 1.5 | – | – | ||||||||||||||
| (295.0 | ) | 5,168.2 | 1,829.1 | 173.5 | 6,875.8 | |||||||||||||||
|
Earnings
(loss) before interest and taxes
|
295.0 | 245.3 | 272.3 | (298.7 | ) | 513.9 | ||||||||||||||
|
Interest
expense
|
(34.3 | ) | (53.4 | ) | (61.7 | ) | – | (149.4 | ) | |||||||||||
|
Earnings
(loss) before taxes
|
260.7 | 191.9 | 210.6 | (298.7 | ) | 364.5 | ||||||||||||||
|
Tax
provision
|
20.6 | (58.3 | ) | (58.0 | ) | – | (95.7 | ) | ||||||||||||
|
Minority
interests
|
– | – | (0.4 | ) | – | (0.4 | ) | |||||||||||||
|
Equity
in results of affiliates
|
– | 1.7 | 11.2 | – | 12.9 | |||||||||||||||
|
Net
earnings (loss)
|
$ | 281.3 | $ | 135.3 | $ | 163.4 | $ | (298.7 | ) | $ | 281.3 | |||||||||
Page 78 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
22. Subsidiary
Guarantees of Debt (continued)
|
CONDENSED,
CONSOLIDATING STATEMENT OF EARNINGS
|
||||||||||||||||||||
|
For
the Year Ended December 31, 2006
|
||||||||||||||||||||
|
Ball
|
Guarantor
|
Non-Guarantor
|
Eliminating
|
Consolidated
|
||||||||||||||||
|
($
in millions)
|
Corporation
|
Subsidiaries
|
Subsidiaries
|
Adjustments
|
Total
|
|||||||||||||||
|
Net
sales
|
$ | – | $ | 5,056.9 | $ | 1,733.0 | $ | (168.4 | ) | $ | 6,621.5 | |||||||||
|
Costs
and expenses
|
||||||||||||||||||||
|
Cost
of sales (excluding depreciation and amortization)
|
– | 4,349.9 | 1,358.9 | (168.4 | ) | 5,540.4 | ||||||||||||||
|
Depreciation
and amortization
|
3.3 | 160.3 | 89.0 | – | 252.6 | |||||||||||||||
|
Business
consolidation costs
|
- | – | 35.5 | – | 35.5 | |||||||||||||||
|
Selling,
general and administrative
|
71.6 | 135.5 | 80.1 | – | 287.2 | |||||||||||||||
|
Property
insurance gain
|
– | – | (75.5 | ) | – | (75.5 | ) | |||||||||||||
|
Equity
in results of subsidiaries
|
(349.6 | ) | – | – | 349.6 | – | ||||||||||||||
|
Intercompany
license fees
|
(70.4 | ) | 66.3 | 4.1 | – | – | ||||||||||||||
| (345.1 | ) | 4,712.0 | 1,492.1 | 181.2 | 6,040.2 | |||||||||||||||
|
Earnings
(loss) before interest and taxes
|
345.1 | 344.9 | 240.9 | (349.6 | ) | 581.3 | ||||||||||||||
|
Interest
expense
|
(27.8 | ) | (53.1 | ) | (53.5 | ) | – | (134.4 | ) | |||||||||||
|
Earnings
(loss) before taxes
|
317.3 | 291.8 | 187.4 | (349.6 | ) | 446.9 | ||||||||||||||
|
Tax
provision
|
12.3 | (94.9 | ) | (49.0 | ) | – | (131.6 | ) | ||||||||||||
|
Minority
interests
|
– | – | (0.4 | ) | – | (0.4 | ) | |||||||||||||
|
Equity
in results of affiliates
|
– | 3.7 | 11.0 | – | 14.7 | |||||||||||||||
|
Net
earnings (loss)
|
$ | 329.6 | $ | 200.6 | $ | 149.0 | $ | (349.6 | ) | $ | 329.6 | |||||||||
|
CONDENSED,
CONSOLIDATING STATEMENT OF EARNINGS
|
||||||||||||||||||||
|
For
the Year Ended December 31, 2005
|
||||||||||||||||||||
|
Ball
|
Guarantor
|
Non-Guarantor
|
Eliminating
|
Consolidated
|
||||||||||||||||
|
($
in millions)
|
Corporation
|
Subsidiaries
|
Subsidiaries
|
Adjustments
|
Total
|
|||||||||||||||
|
Net
sales
|
$ | – | $ | 4,396.7 | $ | 1,582.5 | $ | (228.0 | ) | $ | 5,751.2 | |||||||||
|
Costs
and expenses
|
||||||||||||||||||||
|
Cost
of sales (excluding depreciation and amortization)
|
– | 3,781.1 | 1,249.6 | (228.0 | ) | 4,802.7 | ||||||||||||||
|
Depreciation
and amortization
|
3.1 | 129.2 | 81.2 | – | 213.5 | |||||||||||||||
|
Business
consolidation costs
|
– | 19.3 | 1.9 | – | 21.2 | |||||||||||||||
|
Selling,
general and administrative
|
15.5 | 147.7 | 70.6 | – | 233.8 | |||||||||||||||
|
Equity
in results of subsidiaries
|
(268.9 | ) | – | – | 268.9 | – | ||||||||||||||
|
Intercompany
license fees
|
(68.6 | ) | 67.4 | 1.2 | – | – | ||||||||||||||
| (318.9 | ) | 4,144.7 | 1,404.5 | 40.9 | 5,271.2 | |||||||||||||||
|
Earnings
(loss) before interest and taxes
|
318.9 | 252.0 | 178.0 | (268.9 | ) | 480.0 | ||||||||||||||
|
Interest
expense
|
(38.5 | ) | (35.8 | ) | (42.1 | ) | – | (116.4 | ) | |||||||||||
|
Earnings
(loss) before taxes
|
280.4 | 216.2 | 135.9 | (268.9 | ) | 363.6 | ||||||||||||||
|
Tax
provision
|
(8.3 | ) | (82.7 | ) | (15.2 | ) | – | (106.2 | ) | |||||||||||
|
Minority
interests
|
– | – | (0.8 | ) | – | (0.8 | ) | |||||||||||||
|
Equity
in results of affiliates
|
– | 2.7 | 12.8 | – | 15.5 | |||||||||||||||
|
Net
earnings (loss)
|
$ | 272.1 | $ | 136.2 | $ | 132.7 | $ | (268.9 | ) | $ | 272.1 | |||||||||
Page 79 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
22. Subsidiary
Guarantees of Debt (continued)
|
CONDENSED,
CONSOLIDATING BALANCE SHEET
|
||||||||||||||||||||
|
December
31, 2007
|
||||||||||||||||||||
|
($
in millions)
|
Ball
|
Guarantor
|
Non-Guarantor
|
Eliminating
|
Consolidated
|
|||||||||||||||
|
Corporation
|
Subsidiaries
|
Subsidiaries
|
Adjustments
|
Total
|
||||||||||||||||
|
ASSETS
|
||||||||||||||||||||
|
Current
assets
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 70.1 | $ | 1.9 | $ | 79.6 | $ | – | $ | 151.6 | ||||||||||
|
Receivables,
net
|
1.1 | 164.9 | 416.7 | – | 582.7 | |||||||||||||||
|
Inventories,
net
|
– | 719.9 | 278.2 | - | 998.1 | |||||||||||||||
|
Deferred
taxes and prepaid expenses
|
25.8 | 53.5 | 31.2 | – | 110.5 | |||||||||||||||
|
Total
current assets
|
97.0 | 940.2 | 805.7 | – | 1,842.9 | |||||||||||||||
|
Property,
plant and equipment, net
|
24.4 | 1,047.5 | 869.3 | – | 1,941.2 | |||||||||||||||
|
Investment
in subsidiaries
|
2,274.7 | 413.7 | 81.0 | (2,769.4 | ) | – | ||||||||||||||
|
Goodwill
|
– | 740.8 | 1,122.3 | – | 1,863.1 | |||||||||||||||
|
Intangibles
and other assets, net
|
98.0 | 142.8 | 132.6 | – | 373.4 | |||||||||||||||
|
Total
assets
|
$ | 2,494.1 | $ | 3,285.0 | $ | 3,010.9 | $ | (2,769.4 | ) | $ | 6,020.6 | |||||||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||||||||||||||
|
Current
liabilities
|
||||||||||||||||||||
|
Short-term
debt and current portion of long-term debt
|
$ | 50.5 | $ | 2.5 | $ | 123.8 | $ | – | $ | 176.8 | ||||||||||
|
Accounts
payable
|
99.4 | 387.9 | 276.3 | – | 763.6 | |||||||||||||||
|
Accrued
employee costs
|
11.8 | 160.2 | 66.0 | - | 238.0 | |||||||||||||||
|
Income
taxes payable
|
15.5 | – | 0.2 | – | 15.7 | |||||||||||||||
|
Other
current liabilities
|
59.9 | 186.8 | 72.3 | – | 319.0 | |||||||||||||||
|
Total
current liabilities
|
237.1 | 737.4 | 538.6 | – | 1,513.1 | |||||||||||||||
|
Long-term
debt
|
1,448.4 | 9.6 | 723.8 | – | 2,181.8 | |||||||||||||||
|
Intercompany
borrowings
|
(694.3 | ) | 514.3 | 180.0 | – | – | ||||||||||||||
|
Employee
benefit obligations
|
180.9 | 229.7 | 388.4 | – | 799.0 | |||||||||||||||
|
Deferred
taxes and other liabilities
|
(20.5 | ) | 62.7 | 140.9 | – | 183.1 | ||||||||||||||
|
Total
liabilities
|
1,151.6 | 1,553.7 | 1,971.7 | – | 4,677.0 | |||||||||||||||
|
Minority
interests
|
– | – | 1.1 | – | 1.1 | |||||||||||||||
|
Shareholders’
equity
|
||||||||||||||||||||
|
Convertible
preferred stock
|
– | – | 4.8 | (4.8 | ) | – | ||||||||||||||
|
Preferred
shareholders’
equity
|
– | – | 4.8 | (4.8 | ) | – | ||||||||||||||
|
Common
stock
|
760.3 | 819.7 | 642.8 | (1,462.5 | ) | 760.3 | ||||||||||||||
|
Retained
earnings
|
1,765.0 | 998.9 | 235.7 | (1,234.6 | ) | 1,765.0 | ||||||||||||||
|
Accumulated
other comprehensive earnings (loss)
|
106.9 | (87.3 | ) | 154.8 | (67.5 | ) | 106.9 | |||||||||||||
|
Treasury
stock, at cost
|
(1,289.7 | ) | – | – | – | (1,289.7 | ) | |||||||||||||
|
Common
shareholders’ equity
|
1,342.5 | 1,731.3 | 1,033.3 | (2,764.6 | ) | 1,342.5 | ||||||||||||||
|
Total
shareholders’
equity
|
1,342.5 | 1,731.3 | 1,038.1 | (2,769.4 | ) | 1,342.5 | ||||||||||||||
|
Total
liabilities and shareholders’ equity
|
$ | 2,494.1 | $ | 3,285.0 | $ | 3,010.9 | $ | (2,769.4 | ) | $ | 6,020.6 | |||||||||
Page 80 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
22. Subsidiary
Guarantees of Debt (continued)
|
CONDENSED,
CONSOLIDATING BALANCE SHEET
|
||||||||||||||||||||
|
December
31, 2006
|
||||||||||||||||||||
|
($
in millions)
|
Ball
|
Guarantor
|
Non-Guarantor
|
Eliminating
|
Consolidated
|
|||||||||||||||
|
Corporation
|
Subsidiaries
|
Subsidiaries
|
Adjustments
|
Total
|
||||||||||||||||
|
ASSETS
|
||||||||||||||||||||
|
Current
assets
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 110.3 | $ | 2.3 | $ | 38.9 | $ | – | $ | 151.5 | ||||||||||
|
Receivables,
net
|
(0.3 | ) | 238.3 | 341.5 | – | 579.5 | ||||||||||||||
|
Inventories,
net
|
– | 671.2 | 264.2 | – | 935.4 | |||||||||||||||
|
Deferred
taxes and prepaid expenses
|
15.8 | 36.3 | 42.8 | – | 94.9 | |||||||||||||||
|
Total
current assets
|
125.8 | 948.1 | 687.4 | – | 1,761.3 | |||||||||||||||
|
Property,
plant and equipment, net
|
27.2 | 1,093.2 | 755.6 | – | 1,876.0 | |||||||||||||||
|
Investment
in subsidiaries
|
1,855.2 | 438.3 | 81.1 | (2,374.6 | ) | – | ||||||||||||||
|
Goodwill
|
– | 754.4 | 1,019.3 | – | 1,773.7 | |||||||||||||||
|
Intangibles
and other assets, net
|
102.4 | 141.2 | 186.3 | – | 429.9 | |||||||||||||||
|
Total
assets
|
$ | 2,110.6 | $ | 3,375.2 | $ | 2,729.7 | $ | (2,374.6 | ) | $ | 5,840.9 | |||||||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||||||||||||||
|
Current
liabilities
|
||||||||||||||||||||
|
Short-term
debt and current portion of long-term debt
|
$ | 12.5 | $ | 11.2 | $ | 157.6 | $ | – | $ | 181.3 | ||||||||||
|
Accounts
payable
|
98.3 | 404.1 | 230.0 | – | 732.4 | |||||||||||||||
|
Accrued
employee costs
|
9.5 | 137.1 | 54.5 | – | 201.1 | |||||||||||||||
|
Income
taxes payable
|
19.2 | – | 52.6 | – | 71.8 | |||||||||||||||
|
Other
current liabilities
|
79.1 | 91.2 | 97.4 | – | 267.7 | |||||||||||||||
|
Total
current liabilities
|
218.6 | 643.6 | 592.1 | – | 1,454.3 | |||||||||||||||
|
Long-term
debt
|
1,498.9 | 13.6 | 757.9 | – | 2,270.4 | |||||||||||||||
|
Intercompany
borrowings
|
(1,069.6 | ) | 1,012.7 | 56.9 | – | – | ||||||||||||||
|
Employee
benefit obligations
|
173.9 | 272.8 | 401.0 | – | 847.7 | |||||||||||||||
|
Deferred
taxes and other liabilities
|
123.4 | (121.8 | ) | 100.5 | – | 102.1 | ||||||||||||||
|
Total
liabilities
|
945.2 | 1,820.9 | 1,908.4 | – | 4,674.5 | |||||||||||||||
|
Minority
interests
|
– | – | 1.0 | – | 1.0 | |||||||||||||||
|
Shareholders’
equity
|
||||||||||||||||||||
|
Convertible
preferred stock
|
– | – | 179.6 | (179.6 | ) | – | ||||||||||||||
|
Preferred
shareholders’ equity
|
– | – | 179.6 | (179.6 | ) | – | ||||||||||||||
|
Common
stock
|
703.4 | 819.7 | 495.4 | (1,315.1 | ) | 703.4 | ||||||||||||||
|
Retained
earnings
|
1,535.3 | 861.0 | 48.6 | (909.6 | ) | 1,535.3 | ||||||||||||||
|
Accumulated
other comprehensive earnings (loss)
|
(29.5 | ) | (126.4 | ) | 96.7 | 29.7 | (29.5 | ) | ||||||||||||
|
Treasury
stock, at cost
|
(1,043.8 | ) | – | – | – | (1,043.8 | ) | |||||||||||||
|
Common
shareholders’ equity
|
1,165.4 | 1,554.3 | 640.7 | (2,195.0 | ) | 1,165.4 | ||||||||||||||
|
Total
shareholders’ equity
|
1,165.4 | 1,554.3 | 820.3 | (2,374.6 | ) | 1,165.4 | ||||||||||||||
|
Total
liabilities and shareholders’ equity
|
$ | 2,110.6 | $ | 3,375.2 | $ | 2,729.7 | $ | (2,374.6 | ) | $ | 5,840.9 | |||||||||
Page 81 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
22. Subsidiary
Guarantees of Debt (continued)
|
CONDENSED,
CONSOLIDATING STATEMENT OF CASH FLOWS
|
||||||||||||||||||||
|
For
the Year Ended December 31, 2007
|
||||||||||||||||||||
|
Ball
|
Guarantor
|
Non-Guarantor
|
Eliminating
|
Consolidated
|
||||||||||||||||
|
($
in millions)
|
Corporation
|
Subsidiaries
|
Subsidiaries
|
Adjustments
|
Total
|
|||||||||||||||
|
Cash
flows from operating activities
|
||||||||||||||||||||
|
Net
earnings (loss)
|
$ | 281.3 | $ | 135.3 | $ | 163.4 | $ | (298.7 | ) | $ | 281.3 | |||||||||
|
Adjustments
to reconcile net earnings to cash provided by operating
activities:
|
||||||||||||||||||||
|
Depreciation
and amortization
|
3.4 | 179.0 | 98.6 | – | 281.0 | |||||||||||||||
|
Legal
settlement
|
– | 85.6 | – | – | 85.6 | |||||||||||||||
|
Business
consolidation costs
|
– | 41.9 | 0.4 | – | 42.3 | |||||||||||||||
|
Deferred
taxes
|
(8.3 | ) | 13.2 | (25.9 | ) | – | (21.0 | ) | ||||||||||||
|
Equity
earnings of subsidiaries
|
(298.7 | ) | – | – | 298.7 | – | ||||||||||||||
|
Other,
net
|
0.8 | (13.3 | ) | (18.4 | ) | – | (30.9 | ) | ||||||||||||
|
Working
capital changes, net
|
164.8 | (103.6 | ) | (26.5 | ) | – | 34.7 | |||||||||||||
|
Cash
provided by operating activities
|
143.3 | 338.1 | 191.6 | – | 673.0 | |||||||||||||||
|
Cash
flows from investing activities
|
||||||||||||||||||||
|
Additions
to property, plant and equipment
|
(4.2 | ) | (150.8 | ) | (153.5 | ) | – | (308.5 | ) | |||||||||||
|
Investments
in and advances to affiliates
|
91.6 | (173.8 | ) | 82.2 | – | – | ||||||||||||||
|
Property
insurance proceeds
|
– | – | 48.6 | – | 48.6 | |||||||||||||||
|
Other,
net
|
(7.4 | ) | (1.3 | ) | 2.8 | – | (5.9 | ) | ||||||||||||
|
Cash
provided by (used in) investing activities
|
80.0 | (325.9 | ) | (19.9 | ) | – | (265.8 | ) | ||||||||||||
|
Cash
flows from financing activities
|
||||||||||||||||||||
|
Long-term
borrowings
|
– | 0.1 | 0.2 | – | 0.3 | |||||||||||||||
|
Repayments
of long-term borrowings
|
(27.5 | ) | (12.7 | ) | (34.3 | ) | – | (74.5 | ) | |||||||||||
|
Change
in short-term borrowings
|
6.4 | – | (102.2 | ) | – | (95.8 | ) | |||||||||||||
|
Proceeds
from issuances of common stock
|
46.5 | – | – | – | 46.5 | |||||||||||||||
|
Acquisitions
of treasury stock
|
(257.8 | ) | – | – | – | (257.8 | ) | |||||||||||||
|
Common
dividends
|
(40.6 | ) | – | – | – | (40.6 | ) | |||||||||||||
|
Other,
net
|
9.5 | – | – | – | 9.5 | |||||||||||||||
|
Cash
used in financing activities
|
(263.5 | ) | (12.6 | ) | (136.3 | ) | – | (412.4 | ) | |||||||||||
|
Effect
of exchange rate changes on cash
|
– | – | 5.3 | – | 5.3 | |||||||||||||||
|
Change
in cash and cash equivalents
|
(40.2 | ) | (0.4 | ) | 40.7 | – | 0.1 | |||||||||||||
|
Cash
and cash equivalents - beginning of
year
|
110.3 | 2.3 | 38.9 | – | 151.5 | |||||||||||||||
|
Cash
and cash equivalents - end of
year
|
$ | 70.1 | $ | 1.9 | $ | 79.6 | $ | – | $ | 151.6 | ||||||||||
Page 82 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
22. Subsidiary
Guarantees of Debt (continued)
|
CONDENSED,
CONSOLIDATING STATEMENT OF CASH FLOWS
|
||||||||||||||||||||
|
For
the Year Ended December 31, 2006
|
||||||||||||||||||||
|
Ball
|
Guarantor
|
Non-Guarantor
|
Eliminating
|
Consolidated
|
||||||||||||||||
|
($
in millions)
|
Corporation
|
Subsidiaries
|
Subsidiaries
|
Adjustments
|
Total
|
|||||||||||||||
|
Cash
flows from operating activities
|
||||||||||||||||||||
|
Net
earnings (loss)
|
$ | 329.6 | $ | 200.6 | $ | 149.0 | $ | (349.6 | ) | $ | 329.6 | |||||||||
|
Adjustments
to reconcile net earnings to cash provided by operating
activities:
|
||||||||||||||||||||
|
Depreciation
and amortization
|
3.3 | 160.3 | 89.0 | – | 252.6 | |||||||||||||||
|
Property
insurance gain
|
– | – | (75.5 | ) | – | (75.5 | ) | |||||||||||||
|
Business
consolidation costs
|
– | – | 34.2 | – | 34.2 | |||||||||||||||
|
Deferred
taxes
|
1.4 | 18.4 | 18.4 | – | 38.2 | |||||||||||||||
|
Equity
earnings of subsidiaries
|
(349.6 | ) | – | – | 349.6 | – | ||||||||||||||
|
Other,
net
|
30.8 | (45.1 | ) | (26.1 | ) | – | (40.4 | ) | ||||||||||||
|
Working
capital changes, net
|
46.9 | (69.0 | ) | (115.2 | ) | – | (137.3 | ) | ||||||||||||
|
Cash
provided by operating activities
|
62.4 | 265.2 | 73.8 | – | 401.4 | |||||||||||||||
|
Cash
flows from investing activities
|
||||||||||||||||||||
|
Additions
to property, plant and equipment
|
(3.7 | ) | (192.5 | ) | (83.4 | ) | – | (279.6 | ) | |||||||||||
|
Business
acquisitions, net of cash acquired
|
– | (759.6 | ) | (31.5 | ) | – | (791.1 | ) | ||||||||||||
|
Investments
in and advances to affiliates
|
(754.1 | ) | 689.5 | 64.6 | – | – | ||||||||||||||
|
Property
insurance proceeds
|
– | – | 61.3 | – | 61.3 | |||||||||||||||
|
Other,
net
|
(1.0 | ) | 9.1 | 7.9 | – | 16.0 | ||||||||||||||
|
Cash
provided by (used in) investing activities
|
(758.8 | ) | (253.5 | ) | 18.9 | – | (993.4 | ) | ||||||||||||
|
Cash
flows from financing activities
|
||||||||||||||||||||
|
Long-term
borrowings
|
949.1 | 0.3 | – | – | 949.4 | |||||||||||||||
|
Repayments
of long-term borrowings
|
(45.0 | ) | (3.8 | ) | (156.2 | ) | – | (205.0 | ) | |||||||||||
|
Change
in short-term borrowings
|
(25.8 | ) | – | 48.8 | – | 23.0 | ||||||||||||||
|
Proceeds
from issuances of common stock
|
38.4 | – | – | – | 38.4 | |||||||||||||||
|
Acquisitions
of treasury stock
|
(84.1 | ) | – | – | – | (84.1 | ) | |||||||||||||
|
Common
dividends
|
(41.0 | ) | – | – | – | (41.0 | ) | |||||||||||||
|
Other,
net
|
7.1 | (7.6 | ) | – | – | (0.5 | ) | |||||||||||||
|
Cash
provided by (used in) financing activities
|
798.7 | (11.1 | ) | (107.4 | ) | – | 680.2 | |||||||||||||
|
Effect
of exchange rate changes on cash
|
– | – | 2.3 | – | 2.3 | |||||||||||||||
|
Change
in cash and cash equivalents
|
102.3 | 0.6 | (12.4 | ) | – | 90.5 | ||||||||||||||
|
Cash
and cash equivalents - beginning of
year
|
8.0 | 1.7 | 51.3 | – | 61.0 | |||||||||||||||
|
Cash
and cash equivalents - end of
year
|
$ | 110.3 | $ | 2.3 | $ | 38.9 | $ | – | $ | 151.5 | ||||||||||
Page 83 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
22. Subsidiary
Guarantees of Debt (continued)
|
CONDENSED,
CONSOLIDATING STATEMENT OF CASH FLOWS
|
||||||||||||||||||||
|
For
the Year Ended December 31, 2005
|
||||||||||||||||||||
|
Ball
|
Guarantor
|
Non-Guarantor
|
Eliminating
|
Consolidated
|
||||||||||||||||
|
($
in millions)
|
Corporation
|
Subsidiaries
|
Subsidiaries
|
Adjustments
|
Total
|
|||||||||||||||
|
Cash
flows from operating activities
|
||||||||||||||||||||
|
Net
earnings (loss)
|
$ | 272.1 | $ | 136.2 | $ | 132.7 | $ | (268.9 | ) | $ | 272.1 | |||||||||
|
Adjustments
to reconcile net earnings to cash provided by operating
activities:
|
||||||||||||||||||||
|
Depreciation
and amortization
|
3.1 | 129.2 | 81.2 | – | 213.5 | |||||||||||||||
|
Business
consolidation costs (gains)
|
– | 19.1 | (0.1 | ) | – | 19.0 | ||||||||||||||
|
Deferred
taxes
|
(11.3 | ) | (3.8 | ) | (36.5 | ) | – | (51.6 | ) | |||||||||||
|
Equity
earnings of subsidiaries
|
(268.9 | ) | – | – | 268.9 | – | ||||||||||||||
|
Other,
net
|
30.0 | (8.4 | ) | (3.9 | ) | – | 17.7 | |||||||||||||
|
Working
capital changes, net
|
15.3 | 5.5 | 67.3 | – | 88.1 | |||||||||||||||
|
Cash
provided by (used in) operating activities
|
40.3 | 277.8 | 240.7 | – | 558.8 | |||||||||||||||
|
Cash
flows from investing activities
|
||||||||||||||||||||
|
Additions
to property, plant and equipment
|
(6.4 | ) | (182.9 | ) | (102.4 | ) | – | (291.7 | ) | |||||||||||
|
Investments
in and advances to affiliates
|
683.9 | (102.1 | ) | (581.8 | ) | – | – | |||||||||||||
|
Other,
net
|
(9.5 | ) | 11.3 | (0.1 | ) | – | 1.7 | |||||||||||||
|
Cash
provided by (used in) investing activities
|
668.0 | (273.7 | ) | (684.3 | ) | – | (290.0 | ) | ||||||||||||
|
Cash
flows from financing activities
|
||||||||||||||||||||
|
Long-term
borrowings
|
60.0 | 0.4 | 822.4 | – | 882.8 | |||||||||||||||
|
Repayments
of long-term borrowings
|
(493.0 | ) | (3.4 | ) | (453.3 | ) | – | (949.7 | ) | |||||||||||
|
Change
in short-term borrowings
|
29.0 | – | 39.4 | – | 68.4 | |||||||||||||||
|
Proceeds
from issuances of common stock
|
35.6 | – | – | – | 35.6 | |||||||||||||||
|
Acquisitions
of treasury stock
|
(393.7 | ) | – | – | – | (393.7 | ) | |||||||||||||
|
Common
dividends
|
(42.5 | ) | – | – | – | (42.5 | ) | |||||||||||||
|
Other,
net
|
(9.5 | ) | – | (2.1 | ) | – | (11.6 | ) | ||||||||||||
|
Cash
provided by (used in) financing activities
|
(814.1 | ) | (3.0 | ) | 406.4 | – | (410.7 | ) | ||||||||||||
|
Effect
of exchange rate changes on cash
|
– | – | 4.2 | – | 4.2 | |||||||||||||||
|
Change
in cash and cash equivalents
|
(105.8 | ) | 1.1 | (33.0 | ) | - | (137.7 | ) | ||||||||||||
|
Cash
and cash equivalents - beginning of
year
|
113.8 | 0.6 | 84.3 | – | 198.7 | |||||||||||||||
|
Cash
and cash equivalents - end of
year
|
$ | 8.0 | $ | 1.7 | $ | 51.3 | $ | – | $ | 61.0 | ||||||||||
Page 84 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
23. 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 we
participate, our operations in developing markets, changing commodity prices for
the materials used in the manufacture of our products and changing capital
markets. Where practicable, we attempt to 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 business.
Additionally, the U.S. Environmental Protection Agency has designated Ball as a
potentially responsible party, along with numerous other companies, for the
cleanup of several hazardous waste sites. Our information at this time does not
indicate that these matters will have a material adverse effect upon the
liquidity, results of operations or financial condition of the
company.
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
or sustained. The representative for the former shareholders of U.S. Can filed a
lawsuit against the company in the first quarter of 2008 seeking a declaration
of the parties’ rights and obligations with respect to the claims asserted by
the company.
24. Indemnifications
and Guarantees
During
the normal course of business, the company or the appropriate consolidated
direct or indirect subsidiaries have made certain indemnities, commitments and
guarantees under which the specified entity may be required to make payments in
relation to certain transactions. These indemnities, commitments and guarantees
include indemnities to the customers of the subsidiaries in connection with the
sales of their packaging and aerospace products and services; guarantees to
suppliers of direct or indirect subsidiaries of the company guaranteeing the
performance of the respective entity under a purchase agreement; indemnities for
liabilities associated with the infringement of third party patents, trademarks
or copyrights under various types of agreements; indemnities to various lessors
in connection with facility, equipment, furniture, and other personal property
leases for certain claims arising from such leases; indemnities 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
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 many 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. Certain foreign denominated 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 that could be required to be paid
under the guarantees are essentially equal to the then outstanding principal and
interest under the respective notes and credit agreement, or under the
applicable tranche. The company is not in default under the above notes or
credit facilities.
Page 85 of
94
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
24. Indemnifications
and Guarantees (continued)
Ball
Capital Corp. II is a separate, wholly owned corporate entity created for the
purchase of receivables from certain of the company’s wholly owned subsidiaries.
Ball Capital Corp. II’s assets will be available first and foremost 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 that could be paid is equal
to the outstanding amounts due under the accounts receivable financing (see
Note 7). The company, the appropriate 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 that is expected to have a material adverse effect on the
company’s consolidated results of operations, financial position or cash
flows.
Item
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
There
were no matters required to be reported under this item.
|
Item
9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We have
established disclosure controls and procedures to seek to ensure that material
information relating to the company, including its consolidated subsidiaries, is
made known to the officers who certify the company’s financial reports and to
other members of senior management and the board of directors. Based on their
evaluation as of December 31, 2007, the chief executive officer and chief
financial officer of the company have concluded that the company’s disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) were effective.
Management’s Report on Internal
Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in “Internal Control – Integrated
Framework” issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on our evaluation under the framework in “Internal Control – Integrated
Framework,” our management concluded that our internal control over financial
reporting was effective as of December 31, 2007.
The
effectiveness of our internal control over financial reporting as of
December 31, 2007, has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report, which
is included in Item 8, “Financial Statements and Supplementary
Data.”
Changes
in Internal Control
There
were no changes in our internal control over financial reporting during the
quarter ended December 31, 2007, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Item
9B. Other Information
There
were no matters required to be reported under this item.
Page 86 of
94
|
Part
III
|
|
Item
10. Directors and Executive Officers of the
Registrant
|
|
The
executive officers of the company as of December 31, 2007, were as
follows:
|
|
1.
|
R.
David Hoover, 62, Chairman, President and Chief Executive Officer since
April 2002 and a director since 1996. Mr. Hoover was President and
Chief Executive Officer from January 2001 until April 2002 and Vice
Chairman, President and Chief Operating Officer from April 2000 to
January 2001; Vice Chairman, President and Chief Financial Officer
from January 2000 to April 2000; Vice Chairman and Chief Financial
Officer, 1998-2000; Executive Vice President and Chief Financial Officer,
1997-1998; Executive Vice President, Chief Financial Officer and
Treasurer, 1996-1997; Executive Vice President and Chief Financial
Officer, 1995-1996; Senior Vice President and Chief Financial Officer,
1992-1995; Vice President and Treasurer, 1988-1992; Assistant Treasurer,
1987-1988; Vice President, Finance and Administration, Technical Products,
1985-1987; Vice President, Finance and Administration, Management Services
Division, 1983-1985.
|
|
2.
|
Raymond
J. Seabrook, 56, Executive Vice President and Chief Financial Officer
since April 2006; Senior Vice President and Chief Financial Officer, April
2000 to April 2006; Senior Vice President, Finance, April 1998 to
April 2000; Vice President, Planning and Control, 1996-1998; Vice
President and Treasurer, 1992-1996; Senior Vice President and Chief
Financial Officer, Ball Packaging Products Canada, Inc.,
1988-1992.
|
|
3.
|
John
A. Hayes, 42, Executive Vice President and Chief Operating Officer since
January 23, 2008; Senior Vice President, Ball Corporation, and
President, Ball Packaging Europe, April 25, 2007, to January 23,
2008; Vice President, Ball Corporation, and President, Ball Packaging
Europe, March 2006 to April 25, 2007; Executive Vice President
of Ball’s European packaging business, July 2005 to March 2006;
Vice President, Corporate Strategy, Marketing and Development,
January 2003 to July 2005; Vice President, Corporate Planning
and Development, April 2000 to January 2003; Senior Director,
Corporate Planning and Development, February 1999 to April 2000; Vice
President, Mergers and Acquisitions/Corporate Finance, Lehman Brothers,
Chicago, Illinois, April 1993 to February
1999.
|
|
4.
|
John
R. Friedery, 51, President, Metal Beverage Packaging, Americas and Asia,
since January 23, 2008; Senior Vice President and Chief Operating
Officer, North American Packaging, January 2004 to January 23,
2008; President, Metal Beverage Container, 2000 to January 2004;
Senior Vice President, Manufacturing, 1998-2000; Vice President,
Manufacturing, 1996-1998; Plant Manager, 1993-1996; Assistant Plant
Manager, 1992-1993; Administrative Manager, 1991-1992; General Supervisor,
1989-1991; Production Supervisor,
1988-1989.
|
|
5.
|
Charles
E. Baker, 50, Vice President, General Counsel and Assistant Corporate
Secretary since April 2004; Associate General Counsel, 1999 to
April 2004; Senior Director, Business Development, 1995-1999;
Director, Corporate Compliance, 1994-1997; Director, Business Development,
1993-1995.
|
|
6.
|
Harold
L. Sohn, 61, Senior Vice President, Corporate Relations, since
April 25, 2007; Vice President, Corporate Relations, 1993 to
April 25, 2007; Director, Industry Affairs, Packaging Products,
1988-1993.
|
|
7.
|
David
A. Westerlund, 57, Executive Vice President, Administration since
April 2006 and Corporate Secretary since December 2002; Senior
Vice President, Administration, April 1998 to April 2006; Vice
President, Administration, 1997-1998; Vice President, Human Resources,
1994-1997; Senior Director, Corporate Human Resources, July 1994-December
1994; Vice President, Human Resources and Administration, Ball Glass
Container Corporation, 1988-1994; Vice President, Human Resources,
Ball-InCon Glass Packaging Corp.,
1987-1988.
|
|
8.
|
Scott
C. Morrison, 45, Vice President and Treasurer since April 2002;
Treasurer, September 2000 to April 2002; Managing
Director/Senior Banker of Corporate Banking, Bank One, Indianapolis,
Indiana, 1995 to August 2000.
|
|
9.
|
Douglas
K. Bradford, 50, Vice President and Controller since April 2003;
Controller since April 2002; Assistant Controller, May 1998 to
April 2002; Senior Director, Tax Administration, January 1995 to
May 1998; Director, Tax Administration, July 1989 to
January 1995.
|
Page 87 of
94
Other
information required by Item 10 appearing under the caption "Director Nominees
and Continuing Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance," of the company’s proxy statement to be filed pursuant to Regulation
14A within 120 days after December 31, 2007, is incorporated herein by
reference.
Item
11. Executive Compensation
The
information required by Item 11 appearing under the caption "Executive
Compensation" in the company’s proxy statement, to be filed pursuant to
Regulation 14A within 120 days after December 31, 2007, is incorporated herein
by reference. Additionally, the Ball Corporation 2000 Deferred Compensation
Company Stock Plan, the Ball Corporation 2005 Deferred Compensation Company
Stock Plan, the Ball Corporation Deposit Share Program and the Ball Corporation
Directors Deposit Share Program were created to encourage key executives and
other participants to acquire a larger equity ownership interest in the company
and to increase their interest in the company’s stock performance. Non-employee
directors also participate in the 2000 Deferred Compensation Company Stock
Plan.
Item
12. Security Ownership of Certain Beneficial Owners and
Management
The
information required by Item 12 appearing under the caption "Voting Securities
and Principal Shareholders," in the company’s proxy statement to be filed
pursuant to Regulation 14A within 120 days after December 31, 2007, is
incorporated herein by reference.
Securities
authorized for issuance under equity compensation plans are summarized
below:
|
Equity
Compensation Plan Information
|
||||||||||||
|
Plan category
|
Number
of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
and Rights
(a)
|
Weighted-average
Exercise Price of Outstanding Options, Warrants and Rights
(b)
|
Number
of Securities Remaining Available for Future Issuance
Under Equity Compensation Plans (Excluding Securities Reflected in
Column (a))
(c)
|
|||||||||
|
Equity
compensation plans approved by security holders
|
4,747,005 | $ | 32.06 | 4,799,707 | ||||||||
|
Equity
compensation plans not approved by security holders
|
– | – | – | |||||||||
|
Total
|
4,747,005 | $ | 32.06 | 4,799,707 | ||||||||
Item
13. Certain Relationships and Related
Transactions
The
information required by Item 13 appearing under the caption "Ratification of the
Appointment of Independent Registered Public Accounting Firm," in the
company’s proxy statement to be filed pursuant to Regulation 14A within
120 days after December 31, 2007, is incorporated herein by
reference.
Item
14. Principal Accountant Fees and
Services
The
information required by Item 14 appearing under the caption "Certain Committees
of the Board," in the company’s proxy statement to be filed pursuant to
Regulation 14A within 120 days after December 31, 2007, is
incorporated herein by reference.
Page 88 of
94
Part
IV
|
Item
15.
|
Exhibits,
Financial Statement Schedules
|
|
(a)
|
(1) Financial
Statements:
|
|
The
following documents are included in Part II, Item 8:
|
|
|
Report
of independent registered public accounting firm
|
|
|
Consolidated
statements of earnings – Years ended December 31, 2007, 2006 and
2005
|
|
|
Consolidated
balance sheets – December 31, 2007 and 2006
|
|
|
Consolidated
statements of cash flows – Years ended December 31, 2007, 2006 and
2005
|
|
|
Consolidated
statements of shareholders’ equity and comprehensive earnings – Years
ended December 31, 2007, 2006 and 2005
|
|
|
Notes
to consolidated financial statements
|
|
|
(2)
Financial
Statement Schedules:
|
|
|
Financial
statement schedules have been omitted as they are either not applicable,
are considered insignificant or the required information is included in
the consolidated financial statements or notes thereto.
|
|
|
(3)
Exhibits:
|
|
|
See
the Index to Exhibits, which appears at the end of this document and is
incorporated by reference herein.
|
Page 89 of
94
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
BALL
CORPORATION
|
||
|
(Registrant)
|
||
|
By:
|
/s/
R. David Hoover
|
|
|
R.
David Hoover
|
||
|
Chairman,
President and Chief Executive Officer
|
||
|
February
25, 2008
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
(1)
|
Principal
Executive Officer:
|
||
|
/s/
R. David Hoover
|
Chairman,
President and Chief Executive Officer
|
||
|
R.
David Hoover
|
February
25, 2008
|
||
|
(2)
|
Principal
Financial Accounting Officer:
|
||
|
/s/
Raymond J. Seabrook
|
Executive
Vice President and Chief Financial Officer
|
||
|
Raymond
J. Seabrook
|
February
25, 2008
|
||
|
(3)
|
Controller:
|
||
|
/s/
Douglas K. Bradford
|
Vice
President and Controller
|
||
|
Douglas
K. Bradford
|
February
25, 2008
|
||
|
(4)
|
A
Majority of the Board of Directors:
|
||
|
/s/
Robert W. Alspaugh
|
Director
|
||
|
Robert
W. Alspaugh
|
February 25,
2008
|
||
|
/s/
Howard M. Dean
|
*
|
Director
|
|
|
Howard
M. Dean
|
February
25, 2008
|
||
|
/s/
Hanno C. Fiedler
|
*
|
Director
|
|
|
Hanno
C. Fiedler
|
February
25, 2008
|
||
|
/s/
R. David Hoover
|
*
|
Chairman
of the Board and Director
|
|
|
R.
David Hoover
|
February
25, 2008
|
||
|
/s/
John F. Lehman
|
*
|
Director
|
|
|
John
F. Lehman
|
February
25, 2008
|
||
|
/s/
Georgia Nelson
|
*
|
Director
|
|
|
Georgia
Nelson
|
February
25, 2008
|
||
|
/s/
Jan Nicholson
|
*
|
Director
|
|
|
Jan
Nicholson
|
February
25, 2008
|
||
Page 90 of
94
|
/s/
George M. Smart
|
*
|
Director
|
|
|
George
M. Smart
|
February
25, 2008
|
||
|
/s/
Theodore M. Solso
|
*
|
Director
|
|
|
Theodore
M. Solso
|
February
25, 2008
|
||
|
/s/
Stuart A. Taylor II
|
*
|
Director
|
|
|
Stuart
A. Taylor II
|
February
25, 2008
|
||
|
/s/
Erik H. van der Kaay
|
*
|
Director
|
|
|
Erik
H. van der Kaay
|
February
25, 2008
|
*By R.
David Hoover as Attorney-in-Fact pursuant to a Limited Power of Attorney
executed by the directors listed above, which Power of Attorney has been filed
with the Securities and Exchange Commission.
|
BALL
CORPORATION
|
||
|
(Registrant)
|
||
|
By:
|
/s/
R. David Hoover
|
|
|
R.
David Hoover
|
||
|
As
Attorney-in-Fact
|
||
|
February
25, 2008
|
||
Page 91 of
94
Ball
Corporation and Subsidiaries
Annual
Report on Form 10-K
For
the year ended December 31, 2007
Index
to Exhibits
|
Exhibit
Number
|
Description
of Exhibit
|
|
2.1
|
Share
Sale and Transfer Agreement dated August 29/30, 2002, among
Schmalbach-Lubeca Holding GmbH, AV Packaging GmbH, Ball Pan-European
Holdings, Inc. and Ball Corporation (filed by incorporation by reference
to Ball Corporation’s Quarterly Report on Form 10-Q for the quarter
ended September 29, 2002) filed November 14,
2002.
|
|
2.2
|
Amendment
Agreement, dated December 18, 2002, among Schmalbach-Lubeca Holding
GmbH, AV Packaging GmbH, Ball Pan-European Holdings, Inc., Ball
Corporation and Ball (Germany) Acquisition GmbH, amending the Share Sale
and Transfer Agreement, dated August 29/30, 2002, among
Schmalbach-Lubeca Holding GmbH, AV Packaging GmbH, Ball Pan-European
Holdings, Inc. and Ball Corporation (filed by incorporation by reference
to the Current Report on Form 8-K, dated December 19, 2002)
filed December 31, 2002.
|
|
3.i
|
Amended
Articles of Incorporation as of June 24, 2005 (filed by incorporation
by reference to the Quarterly Report on Form 10-Q dated July 3,
2005) filed August 9, 2005.
|
|
3.ii
|
Bylaws
of Ball Corporation as amended January 22, 2008. (Filed
herewith.)
|
|
4.1(a)
|
Registration
Rights Agreement, dated as of December 19, 2002, by and among Ball
Corporation, Lehman Brothers, Inc., Deutsche Bank Securities Inc., Banc of
America Securities LLC, Banc One Capital Markets, Inc., BNP Paribas
Securities Corp., Dresdner Kleinwort Wasserstein-Grantchester, Inc.,
McDonald Investments Inc., Sun Trust Capital Markets, Inc. and Wells Fargo
Brokerage Services, LLC and certain subsidiary guarantors of Ball
Corporation (filed by incorporation by reference to Exhibit 4.1 of the
Current Report on Form 8-K, dated December 19, 2002) filed
December 31, 2002.
|
|
4.1(b)
|
Senior
Note Indenture, dated as of December 19, 2002, by and among Ball
Corporation, certain subsidiary guarantors of Ball Corporation and The
Bank of New York, as Trustee (filed by incorporation by reference to the
Current Report on Form 8-K dated December 19, 2002) filed
December 31, 2002.
|
|
10.1
|
1988
Restricted Stock Plan and 1988 Stock Option and Stock Appreciation Rights
Plan (filed by incorporation by reference to the Form S-8
Registration Statement, No. 33-21506) filed April 27,
1988.
|
|
10.2
|
Ball
Corporation Deferred Incentive Compensation Plan (filed by incorporation
by reference to the Annual Report on Form 10-K for the year ended
December 31, 1987) filed March 25, 1988.
|
|
10.3
|
Ball
Corporation 1986 Deferred Compensation Plan, as amended July 1, 1994
(filed by incorporation by reference to the Quarterly Report on
Form 10-Q for the quarter ended July 3, 1994) filed
August 17, 1994.
|
|
10.4
|
Ball
Corporation 1988 Deferred Compensation Plan, as amended July 1, 1994
(filed by incorporation by reference to the Quarterly Report on
Form 10-Q for the quarter ended July 3, 1994) filed
August 17, 1994.
|
|
10.5
|
Ball
Corporation 1989 Deferred Compensation Plan, as amended July 1, 1994
(filed by incorporation by reference to the Quarterly Report on
Form 10-Q for the quarter ended July 3, 1994) filed
August 17, 1994.
|
Page 92 of
94
|
Exhibit
Number
|
Description
of Exhibit
|
|
10.6
|
Amended
and Restated Form of Severance Benefit Agreement that exists between the
company and its executive officers, effective as
of August 1, 1994, and as amended on January 24, 1996
(filed by incorporation by reference to the Quarterly Report on
Form 10-Q for the quarter ended March 22, 1996) filed
May 15, 1996.
|
|
10.7
|
Ball
Corporation 1986 Deferred Compensation Plan for Directors, as amended
October 27, 1987 (filed by incorporation by reference to the Annual
Report on Form 10-K for the year ended December 31, 1990) filed
April 1, 1991.
|
|
10.8
|
1991
Restricted Stock Plan for Nonemployee Directors of Ball Corporation (filed
by incorporation by reference to the Form S-8 Registration Statement,
No. 33-40199) filed April 26, 1991.
|
|
10.9
|
Ball
Corporation Economic Value Added Incentive Compensation Plan dated
January 1, 1994 (filed by incorporation by reference to the Annual
Report on Form 10-K for the year ended December 31, 1994) filed
March 29, 1995.
|
|
10.10
|
Ball
Corporation 1997 Stock Incentive Plan (filed by incorporation by reference
to the Form S-8 Registration Statement, No. 333-26361) filed
May 1, 1997.
|
|
10.11
|
1993
Stock Option Plan (filed by incorporation by reference to the
Form S-8 Registration Statement, No. 33-61986) filed
April 30, 1993.
|
|
10.12
|
Ball
Corporation Supplemental Executive Retirement Plan (filed by incorporation
by reference to the Quarterly Report on Form 10-Q for the quarter
ended October 2, 1994) filed November 15,
1994.
|
|
10.13
|
Ball
Corporation Long-Term Cash Incentive Plan, dated October 25, 1994,
amended and restated effective January 1, 2003 (filed by
incorporation by reference to the Annual Report on Form 10-K for the
year ended December 31, 2003) filed March 12,
2004.
|
|
10.14
|
Amended
and Restated Form of Severance Agreement (Change of Control Agreement)
that exists between the company and its executive officers (filed by
incorporation by reference to the Annual Report on Form 10-K for the
year ended December 31, 2005) filed February 22,
2006.
|
|
10.15
|
Ball
Corporation 2000 Deferred Compensation Company Stock Plan (filed by
incorporation by reference to the Annual Report on Form 10-K for the
year ended December 31, 2001) filed March 28,
2002.
|
|
10.16
|
Ball
Corporation Deposit Share Program, as amended (filed by incorporation by
reference to the Quarterly Report on Form 10-Q for the quarter ended
July 4, 2004) filed August 11, 2004.
|
|
10.17
|
Ball
Corporation Directors Deposit Share Program, as amended. This plan is
referred to in Item 11, the Executive Compensation section of this
Form 10-K (filed by incorporation by reference to the Quarterly
Report on Form 10-Q for the quarter ended July 4, 2004) filed
August 11, 2004.
|
|
10.18
|
Ball
Corporation 2005 Deferred Compensation Plan, effective January 1,
2005 (filed by incorporation by reference to the Current Report on
Form 8-K dated December 23, 2005) filed December 23,
2005.
|
|
10.19
|
Ball
Corporation 2005 Deferred Compensation Company Stock Plan, effective
January 1, 2005 (filed by incorporation by reference to the Current
Report on Form 8-K dated December 23, 2005) filed
December 23, 2005.
|
|
10.20
|
Ball
Corporation 2005 Deferred Compensation Plan for Directors, effective
January 1, 2005 (filed by incorporation by reference to the Current
Report on Form 8-K dated December 23, 2005) filed
December 23, 2005.
|
Page 93 of
94
|
Exhibit
Number
|
Description
of Exhibit
|
|
10.21
|
Credit
agreement dated October 13, 2005, among Ball Corporation, Ball
European Holdings S.ar.l., Ball Packaging Products Canada Corp. and each
Other Subsidiary Borrower, Deutsche Bank AG, New York Branch, as a Lender,
Administrative Agent and Collateral Agent and The Bank of Nova Scotia, as
the Canadian Administrative Agent (filed by incorporation by reference to
the Current Report on Form 8-K dated October 17, 2005) filed
October 17, 2005.
|
|
10.22
|
Subsidiary
Guaranty Agreement dated as of October 13, 2005, among certain
Domestic subsidiaries listed therein as Guarantors, and Deutsche Bank AG,
New York Branch, as Administrative Agent (filed by incorporation by
reference to the Current Report on Form 8-K dated October 17, 2005)
filed October 17, 2005.
|
|
11
|
Statement
re: Computation of Earnings per Share (filed by incorporation by reference
to the notes to the consolidated financial statements in Item 8,
“Financial Statements and Supplementary Data”).
|
|
12
|
Statement
re: Computation of Ratio of Earnings to Fixed Charges. (Filed
herewith.)
|
|
14
|
Ball
Corporation Executive Officers and Board of Directors Business Ethics
Statement (filed by incorporation by reference to the Annual Report on
Form 10-K for the year ended December 31, 2005) filed February 22,
2006.
|
|
18.1
|
Letter
re: Change in Accounting Principles regarding change in pension plan
valuation measurement date (filed by incorporation by reference to the
Annual Report on Form 10-K for the year ended December 31, 2002)
filed March 27, 2003.
|
|
18.2
|
Letter
re: Change in Accounting Principles regarding the change in accounting for
certain inventories (filed by incorporation by reference to the Annual
Report on Form 10-K for the year ended December 31, 2006) filed February
22, 2007.
|
|
21
|
List
of Subsidiaries of Ball Corporation. (Filed herewith.)
|
|
23
|
Consent
of Independent Registered Public Accounting Firm. (Filed
herewith.)
|
|
24
|
Limited
Power of Attorney. (Filed herewith.)
|
|
31
|
Certifications
pursuant to Rule 13a-14(a) or Rule 15d-14(a), by R. David Hoover, Chairman
of the Board, President and Chief Executive Officer of Ball Corporation,
and by Raymond J. Seabrook, Executive Vice President and Chief Financial
Officer of Ball Corporation. (Filed herewith.)
|
|
32
|
Certifications
pursuant to Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter
63 of Title 18 of the United States Code, by R. David Hoover, Chairman of
the Board, President and Chief Executive Officer of Ball Corporation, and
by Raymond J. Seabrook, Executive Vice President and Chief Financial
Officer of Ball Corporation. (Furnished herewith.)
|
|
99.1
|
Specimen
Certificate of Common Stock (filed by incorporation by reference to the
Annual Report on Form 10-K for the year ended December 31, 1979)
filed March 24, 1980.
|
|
99.2
|
Cautionary
statement for purposes of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, as amended. (Filed
herewith.)
|
Page 94 of
94