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, 2006
( ) 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:
|
Name
of each exchange
|
||
|
Title
of each class
|
on
which registered
|
|
|
Common
Stock, without par value
|
New
York Stock Exchange, Inc.
|
|
|
Chicago
Stock Exchange, Inc.
|
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.
|
Large
accelerated filer [X]
|
Accelerated
filer [ ]
|
Non-accelerated
filer [ ]
|
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 $3,873 million based upon the closing market price and common shares
outstanding as of July 2, 2006.
Number
of
shares outstanding as of the latest practicable date.
|
Class
|
Outstanding
at February 4, 2007
|
|||
|
Common
Stock, without par value
|
103,087,717
|
DOCUMENTS
INCORPORATED BY REFERENCE
1. Proxy
statement to be filed with the Commission within 120 days after
December 31, 2006, to the extent indicated in
Part III.
PART
I
Item
1. Business
Ball
Corporation was organized in 1880 and incorporated in Indiana in 1922. Its
principal executive offices are located at 10 Longs Peak Drive, Broomfield,
Colorado 80021-2510. The terms "Ball," "the company," "we" and "our" as
used herein refer to Ball Corporation and its consolidated
subsidiaries.
Ball
is a
manufacturer of metal and plastic packaging, primarily for beverages, foods
and
household products, and a supplier of aerospace and other technologies and
services to government and commercial customers.
Information
Pertaining to the Business of the Company
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. Prior periods required to be shown in
this Annual Report on Form 10-K (Annual Report) have been conformed to the
current presentation.
A
substantial part of our North American and international 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,
PepsiCo, Inc., and Coca-Cola Enterprises represented 11 percent,
9 percent and 9 percent of Ball’s consolidated net sales,
respectively, for the year ended December 31, 2006. 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”).
North
American Packaging Segments
Our
principal businesses in North America 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
North American 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. 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 2006 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 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 are
primarily directed toward packaging innovation, specifically the development
of
new sizes and types of metal and plastic beverage, food and household product
containers, as well as new uses for the current containers. Other research
and
development efforts in these segments seek to improve manufacturing
efficiencies. Our North American packaging R&D activities are conducted in
the Ball Technology and Innovation Center (BTIC) located in Westminster,
Colorado, including the relocated R&D activities relating to the plastic
bottle assets acquired March 28, 2006, from Alcan Packaging.
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Metal
Beverage Packaging, Americas
Metal
beverage packaging, Americas, represents Ball’s largest segment, accounting for
39 percent of consolidated net sales in 2006. 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.
Metal beverage containers are primarily sold under multi-year supply contracts
to fillers of carbonated soft drinks, beer, energy drinks and other beverages.
Sales volumes of metal beverage containers in North America tend to be highest
during the period from April through September.
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. The joint venture supplies Coors
with beverage cans and ends for its Golden, Colorado, brewery and supplies
ends
to its Shenandoah, Virginia, filling location. Ball receives management fees
and
technology licensing fees under agreements with the joint venture. In addition
to beverage containers supplied to Coors from the joint venture, Ball supplies,
from its own facilities, substantially all of Coors’ metal container
requirements for its Shenandoah, Virginia, filling location, as well as other
sizes of containers not manufactured by the joint venture.
We
also
participate in a 50/50 joint venture in Brazil that manufactures aluminum cans
and ends and is accounted for as an equity investment.
Based
on
publicly available industry information, we estimate that our North American
metal beverage container shipments in 2006 of approximately 33 billion cans
were approximately 32 percent of total U.S. and Canadian shipments of metal
beverage containers. Three producers manufacture substantially all of the
remaining metal beverage containers. Two of these producers and three other
independent producers also manufacture metal beverage containers in Mexico.
Available information indicates that North American metal beverage container
shipments have been relatively flat during the past several years. Although
in
2006 the U.S. industry experienced a 2.3 percent growth in can shipments,
it is difficult to predict whether this higher growth rate will become a
trend.
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. 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. In connection with these
activities, the company recorded a pretax charge of $19.3 million
($11.7 million after tax) in the third quarter of 2005. We have installed
the first three production modules in this multi-year project and the fourth
and
fifth modules are in the installation phase, and the project is expected to
be
fully completed in 2008. 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 container continues to compete aggressively with other
packaging materials in the beer and carbonated soft drink industries. The glass
bottle has shown resilience in the packaged beer industry, while carbonated
soft
drink and beer industry use of PET containers has grown. In Canada, metal
beverage containers have captured significantly lower percentages of the
packaged beverage industry than in the U.S., particularly in the packaged beer
industry.
Metal
Food & Household Products Packaging, Americas
Metal
food and household products packaging, Americas, accounted for 18 percent
of consolidated net sales in 2006. The two major product lines in this segment
are steel food and aerosol containers. Aerosol containers were added with the
acquisition of U.S. Can Corporation (U.S. Can) on March 27, 2006 (discussed
below). 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
9 plants in the U.S. and Canada and sold primarily to food processors in
North America. Sales volumes of metal food containers in North America tend
to
be highest from June through October as a result of seasonal vegetable and
salmon packs. We estimate our 2006 shipments of more than 6 billion steel
food containers to be approximately 20 percent of total U.S. and Canadian
metal food container shipments.
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On
March
27, 2006, Ball Corporation acquired all the issued and outstanding shares of
U.S. Can for consideration of 444,756 Ball common shares, together with the
repayment of $598 million of existing U.S. Can debt, including $27 million
of bond redemption premiums and fees. The acquired business manufactures and
sells aerosol cans, paint cans, plastic containers and custom and specialty
containers in 10 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. The acquired operations employ 2,300 people
and
have annual sales of approximately $600 million. The acquisition has been
accounted for as a purchase, and, accordingly, its results have been included
in
our consolidated financial statements in the metal food and household products
packaging, Americas, segment from March 27, 2006. We estimate the U.S. Can
aerosol business accounts for approximately 53 percent of total annual U.S.
and Canadian steel aerosol shipments.
In
December 2006, as part of a product realignment plan, the company closed a
leased facility in Alliance, Ohio, which was one of the 10 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 the realignment
plan, responsibility for the U.S. Can plastic container business was transferred
to the company’s plastic packaging, Americas, segment effective January 1,
2007.
Also
in
2006, a pretax charge of $1.4 million ($0.9 million after tax) was
recorded to shut down a metal food can production line in the Whitby, Ontario,
plant. Production from the line has ceased and other shut down activities are
expected to be completed by the end of the first quarter of 2007.
In
2005
the company recorded a pretax charge of $11.2 million ($7.5 million
after tax) related to a work force reduction in the Burlington plant and to
close a food can plant in Quebec. The Quebec plant was closed and ceased
operations in the third quarter of 2005 and the land and building were
sold.
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 key competitive factors.
Plastic
Packaging, Americas
Plastic
packaging, Americas, accounted for 10 percent of Ball’s consolidated net
sales in 2006. 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. We estimate
our 2006 shipments of more than 5.7 billion plastic containers to be
approximately 9 percent of total U.S. and Canadian PET container shipments.
In addition, this segment produced more than 640 million food and specialty
containers during 2006 as a result of the Alcan Packaging (Alcan) acquisition
(discussed below). The company operates seven plastic container manufacturing
facilities in the U.S. and one in Canada.
On
March
28, 2006, Ball Corporation acquired certain North American plastic container
net
assets from Alcan Packaging for a total cash consideration of $185 million.
Ball
acquired plastic container manufacturing plants in Batavia, Illinois; Bellevue,
Ohio; and Brampton, Ontario; as well as certain equipment and other assets
at an
Alcan research facility in Neenah, Wisconsin, and at a plant in Newark,
California. Subsequent to the acquisition, the R&D activities were relocated
from Neenah to the BTIC in Westminster, Colorado, and plastic bottle production
at the Newark, California, plant was terminated. The costs of these activities
were treated as opening balance sheet items. The acquired business primarily
manufactures and sells barrier polypropylene plastic bottles used in food
packaging and, to a lesser extent, manufactures and sells barrier PET plastic
bottles used for beverages and foods. The acquired business employs
approximately 470 people and has annual sales of approximately $150 million.
The
acquisition has been accounted for as a purchase, and, accordingly, its results
have been included in our consolidated financial statements in the plastic
packaging, Americas, segment from March 28, 2006.
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Competition
in the PET plastic container industry 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. The ability to produce customized, differentiated
plastic containers is also a key competitive factor.
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(TM)
PET plastic bottles for hot-filled beverages, such as sports drinks and juices,
includes sizes from 8 ounces to 64 ounces.
Metal
Beverage Packaging, Europe/Asia
The
metal
beverage packaging, Europe/Asia, segment, which accounted for 23 percent of
Ball’s consolidated net sales in 2006, consists
of 10 beverage can plants and two beverage can end plants in Europe, as
well as operations in the People’s Republic of China (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 approximately 13 billion cans in 2006, 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.
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. 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. 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.
On
April 1, 2006, a fire in the company’s Hassloch, Germany, plant damaged the
majority of the plant’s building and machinery and equipment. Property insurance
proceeds will largely cover equipment replacement cost and clean-up costs,
and
business interruption insurance proceeds generally cover lost volumes and other
costs. In June 2006 the company announced its intention to rebuild the
Hassloch plant with two steel lines and to add an aluminum line in its
Hermsdorf, Germany, plant to replace the lost volume. All three lines are
expected to be operational during the second quarter of 2007.
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.
The
European beverage can business is capital intensive, requiring significant
investments in machinery and equipment. Profitability is sensitive to selling
prices, foreign exchange rates, transportation costs, production volumes, labor
and the costs and availability of certain raw materials, such as aluminum and
steel. The European aluminum and steel industries are highly consolidated with
three steel suppliers and three aluminum suppliers providing 95 percent of
European requirements. 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.
This inherently results in a foreign exchange rate risk, which the company
minimizes through the use of derivative contracts. In addition, purchase and
sales contracts include fixed price, floating and pass-through pricing
arrangements.
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R&D
efforts in Europe are directed toward the development of new sizes and types
of
metal containers, as well as new uses for the current containers. Other research
and development objectives in this segment include improving manufacturing
efficiencies. The European R&D activities are conducted in a technical
center located in Bonn, Germany.
Through
Ball Asia Pacific Limited, we are one of the largest beverage can manufacturers
in the PRC and believe that our facilities are among the most modern in that
country. Capacity grew rapidly in the PRC in the late 1990s, resulting in a
supply/demand imbalance to which we responded by rationalizing capacity. Demand
growth has resumed and projected annual growth is expected to be in the 5 to
10 percent range in the near term. Ball is undertaking selected capacity
increases in its existing facilities in order to participate in the projected
growth. Our operations include the manufacture of aluminum cans and ends in
three plants in the PRC located in the north, central and south regions. We
also
manufacture and sell high-density plastic containers in two PRC plants. In
addition, we participate in two joint ventures that manufacture aluminum cans
and ends in the PRC.
In
the
fourth quarter of 2006, we acquired the minority interest ownership in the
high-density plastic (HDP) container business for $4.6 million in cash and
signed a long-term supply contract with the former minority owner. This business
operates two HDP container plants in the PRC.
For
more
information on Ball’s international operations, see Item 2, “Properties,” and
Exhibit 21, “Subsidiary List.”
Aerospace
and Technologies
The
aerospace and technologies segment, which accounted for 10 percent of
consolidated net sales in 2006, includes national defense solutions, advanced
technologies and products, civil space systems 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
90 percent of segment sales in 2006. Geopolitical events and executive and
legislative branch priorities have yielded considerable growth opportunities
in
areas matching our 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 $886 million and $761 million
at
December 31, 2006 and 2005, respectively, and consists of the aggregate contract
value of firm orders, excluding amounts previously recognized as revenue. The
2006 backlog includes $528 million expected to be recognized in revenues
during 2007, 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 $492 million and
$500 million at December 31, 2006 and 2005, respectively. Year-to-year
comparisons of backlog are not necessarily indicative of the trend of future
operations.
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The
company’s aerospace and technologies segment has contracts with the U.S.
government or its contractors which 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.
Research
and Development
Note 19,
"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.”
Environment
Aluminum,
steel and plastic containers are recyclable, and significant amounts of used
containers are being diverted from the solid waste stream and recycled. Using
the most recent data available, in 2005 approximately 52 percent of
aluminum containers, 63 percent of steel containers and 23 percent of
the PET containers sold in the U.S. were recycled. Recycling
rates vary throughout Europe, but generally average 60 percent for aluminum
and steel containers, which exceeds the European Union’s goal of 50 percent
recycling for metals. Due in part to the intrinsic value of aluminum and steel,
metal packaging recycling rates in the U.S. and Europe compare favorably to
those of other packaging materials.
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
which would prohibit, tax or restrict the sale or use of certain types of
containers, and would require diversion of solid wastes such as 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. This legislation could also have a
material adverse effect 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 most jurisdictions that have deposit
systems.
Employees
At
the
end of December 2006, the company employed approximately 15,500 people
worldwide, including 11,200 employees in the U.S. and 4,300 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 training, education and retention practices assist in
enhancing employee satisfaction levels.
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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 or 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” and will include a January 24, 2007, amendment to its Ethics
Statement which sets out our policies and procedures for dealing with
transactions with related persons now required to be disclosed as a result
of
recent statutory amendments.
Item
1A. Risk Factors
Any
of
the following risks could materially and adversely affect our business,
financial condition or results of operations.
There
can be no assurance that the U.S. Can and Alcan businesses, or any acquisition,
will be successfully integrated into the acquiring company (see Note 3 to
the consolidated financial statements within Item 8 of this report for
details of the acquisitions).
While
we
have what we believe to be well designed integration plans, if we cannot
successfully integrate U.S. Can’s and Alcan’s operations with those of Ball, we
may experience material negative consequences to our business, financial
condition or results of operations. The integration of companies that have
previously been operated separately involves a number of risks, including,
but
not limited to:
| · |
demands
on management related to the increase in our size after the
acquisition;
|
| · |
the
diversion of management’s attention from the management of existing
operations to the integration of the acquired
operations;
|
| · |
difficulties
in the assimilation and retention of
employees;
|
| · |
difficulties
in the integration of departments, systems, including accounting
systems,
technologies, books and records and procedures, as well as in maintaining
uniform standards, controls (including internal accounting controls),
procedures and policies;
|
| · |
expenses
related to any undisclosed or potential liabilities;
and
|
| · |
retention
of major customers and suppliers.
|
Prior
to
the acquisitions, Ball, U.S. Can and Alcan operated as separate 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, to eliminate redundant and excess costs.
Page
7 of
98
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, which operate in North America, South America, Europe and Asia.
Although
approximately 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 2006 net sales. Our contracts with these customers are
subject to, among other things, the following risks:
| · |
unilateral
termination for convenience by the
customers;
|
| · |
reduction
or modification in the scope of the contracts due to changes in the
customer's requirements, governmental actions that preclude us from
submitting bids or budgetary
constraints;
|
| · |
under
fixed-price contracts, increased or unexpected costs causing reduced
profits or losses;
|
| · |
under
cost reimbursement contracts, unallowable costs causing reduced profits
or
losses;
|
| · |
rigorous
technical compliance standards which must be met to obtain and retain
customers;
|
| · |
intense
competitive activity, including from companies that are much larger
than
our aerospace segment; and
|
| · |
federal
budget reductions and priorities, or changes in agency budgets, which
could limit future funding and new contract awards or delay or prolong
contract performance.
|
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 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.
We
are subject to competition from alternative products, which could result in
lower profits and reduced cash flows.
Our
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, 2006, 62 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.
We sell no PET bottles in Europe. 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.
Page
8 of
98
Our
business, financial condition and results of operations are subject to risks
resulting from increased international operations.
We
derived 23 percent of our consolidated net sales from outside of North and
South America in the year ended December 31, 2006. 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;
|
| · |
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, 2006, 77 percent of our consolidated net
sales were attributable to operations with the U.S. dollar as their functional
currency, 11 percent with the euro as the functional currency and
12 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 and the
British pound, 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. For purposes of accounting,
the assets and liabilities of our foreign operations, where the local currency
is the functional currency, are translated using period-end exchange rates,
and
the revenues and expenses of our foreign operations are translated using average
exchange rates during each period. Translation gains and losses are reported
in
accumulated other comprehensive loss as a component of shareholders'
equity.
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. 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.
Page
9 of
98
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 in part 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, creating potentially adverse effects on our business. Natural or
other catastrophes, such as earthquakes, hurricanes, fires and floods, could
significantly damage or destroy one or more of our facilities, as well as those
of our suppliers and customers, which could adversely affect our business,
financial condition or results of operations.
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 or 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 materials costs may not impact our near-term profitability but
could decrease our sales volume 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.
Prolonged
work stoppages at plants with union employees could jeopardize our financial
position.
As
of
December 31, 2006, approximately a 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 three 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
assure you 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.
Page
10 of
98
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
$1,773.7 million of goodwill recorded on our consolidated balance sheet as
of December 31, 2006. 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 U.S. employees, which we fund based on certain actuarial assumptions.
The plans' assets consist primarily of common stocks and fixed income
securities. If the investments in the plans do not perform at expected levels,
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.
Our
significant debt could adversely affect our financial health and prevent us
from
fulfilling our obligations under the notes issued pursuant to our bond
indentures.
We
have a
significant amount of debt. On December 31, 2006, we had total debt of
$2,451.7 million. Our ratio of earnings to fixed charges as of that date
was 3.6 times (see Exhibit 12 attached to this Annual Report). Our
relatively high 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 new 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;
|
| · |
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, a substantial portion 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. 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 new credit facilities will
be
adequate to meet our future liquidity needs for the next several years, barring
any unforeseen circumstances which are beyond our control.
Page
11 of
98
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
be
sure 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.
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 company-owned and leased facilities
in Georgia, New Mexico, Ohio, Virginia, Washington, D.C., and
Australia.
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 Centre, 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
12 of
98
|
Approximate
|
|
|
Floor
Space in
|
|
|
Plant
Location
|
Square
Feet
|
|
Metal
beverage packaging, Americas, manufacturing
facilities:
|
|
|
Fairfield,
California
|
340,000
|
|
Torrance,
California
|
478,000
|
|
Golden,
Colorado
|
500,000
|
|
Tampa,
Florida
|
275,000
|
|
Kapolei,
Hawaii
|
132,000
|
|
Monticello,
Indiana
|
356,000
|
|
Kansas
City, Missouri
|
400,000
|
|
Saratoga
Springs, New York
|
358,000
|
|
Wallkill,
New York
|
317,000
|
|
Reidsville,
North Carolina
|
287,000
|
|
Findlay,
Ohio (a)
|
733,000
|
|
Whitby,
Ontario
|
200,000
|
|
Guayama,
Puerto Rico
|
230,000
|
|
Conroe,
Texas
|
275,000
|
|
Fort
Worth, Texas
|
328,000
|
|
Bristol,
Virginia
|
241,000
|
|
Williamsburg,
Virginia
|
400,000
|
|
Kent,
Washington
|
166,000
|
|
Milwaukee,
Wisconsin (a)
|
397,000
|
|
Metal
beverage packaging, Europe/Asia, manufacturing
facilities:
|
|
|
Europe
|
|
|
Bierne,
France
|
263,000
|
|
La
Ciotat, France
|
393,000
|
|
Braunschweig,
Germany
|
258,000
|
|
Hassloch,
Germany (b)
|
283,000
|
|
Hermsdorf,
Germany
|
290,000
|
|
Weissenthurm,
Germany
|
260,000
|
|
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
|
|
Hemei,
PRC (leased) (Taicang)
|
52,000
|
|
Zhongfu,
PRC (leased) (Tianjin)
|
47,000
|
(a) Includes
both metal beverage container and metal food container manufacturing
operations.
(b) Currently
under reconstruction after the plant was damaged by fire in April 2006.
(Additional details are available in Note 5 within Item 8 of this
Annual Report.)
Page
13 of
98
|
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
|
|
Commerce,
California (leased)
|
240,000
|
|
Oakdale,
California
|
370,000
|
|
Newnan,
Georgia (leased) (b)
|
185,000
|
|
Tallapoosa,
Georgia
|
249,000
|
|
Danville,
Illinois
|
118,000
|
|
Elgin,
Illinois
|
496,000
|
|
Baltimore,
Maryland (232,000 square feet leased)
|
369,000
|
|
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
|
266,000
|
|
DeForest,
Wisconsin
|
360,000
|
|
Milwaukee,
Wisconsin (a)
|
397,000
|
|
South
America
|
|
|
Buenos
Aires, Argentina
|
34,000
|
|
San
Luis, Argentina
|
32,000
|
|
Plastic
packaging, Americas, manufacturing facilities:
|
|
|
North
America
|
|
|
Chino,
California (leased)
|
578,000
|
|
Batavia,
Illinois
|
176,000
|
|
Ames,
Iowa (including leased warehouse space)
|
840,000
|
|
Delran,
New Jersey
|
674,000
|
|
Baldwinsville,
New York (leased)
|
508,000
|
|
Bellevue,
Ohio
|
389,000
|
|
Brampton,
Ontario (leased)
|
170,000
|
|
Watertown,
Wisconsin
|
111,000
|
(a) Includes
both metal beverage container and metal food container manufacturing
operations.
(b) Will
be included in plastic packaging, Americas, segment beginning in
2007.
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
14 of
98
Item
3. Legal
Proceedings
North
America
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 Chemical Waste Management, Inc., and Waste
Management of Colorado, Inc. 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
which
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.
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.
Page
15 of
98
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 $3 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 between
$35 million and $44 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 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.
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. A trial is currently set for May 7, 2007. 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.
Page
16 of
98
As
previously reported, on November 21, 2005, Ball Plastic Container Corp.
(BPCC), a wholly owned subsidiary of the company, was served with a complaint
filed by Constar International Inc. (Constar) in the U.S. District Court for
the
Western District of Wisconsin. The complaint alleged that the manufacture and
sale of plastic bottles having oxygen barrier properties infringed certain
claims of a Constar U.S. patent. Constar also sued Honeywell International
Inc.,
the supplier of the oxygen barrier material to BPCC. The complaint sought
monetary damages, fees and declaratory and injunctive relief. BPCC formally
denied the allegations of the complaint. On July 26, 2006, this case was
settled by the parties. This matter is now resolved without any material adverse
effect upon the liquidity, results of operations or the financial condition
of
the company.
Europe
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.
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.
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. Based upon 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.
|
Item
4.
|
Submission
of Matters to Vote of Security
Holders
|
There
were no matters submitted to the security holders during the fourth quarter
of
2006.
Page
17 of
98
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 5,499 common shareholders of record on
February 4, 2007.
Common
Stock Repurchases
The
following table summarizes the company’s repurchases of its common stock during
the quarter ended December 31, 2006.
|
Purchases
of Securities
|
|||||||||||||
|
($
in millions)
|
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 2
to October 29, 2006
|
182
|
$
|
42.58
|
182
|
10,199,458
|
||||||||
|
October 30
to November 26, 2006
|
145,487
|
$
|
42.18
|
145,487
|
10,053,971
|
||||||||
|
November 27
to December 31, 2006
|
125,796
|
(c)
|
$
|
42.72
|
125,796
|
9,928,175
|
|||||||
|
Total
|
271,465
|
$
|
42.43
|
271,465
|
|||||||||
(a) Includes
open market purchases and/or shares retained by the company to settle employee
withholding tax liabilities.
(b)
The
company has an ongoing repurchase program for which shares are authorized from
time to time by Ball’s board of directors.
(c) Does
not include 1,200,000 shares under a forward share repurchase agreement
entered into in December 2006 and settled on January 5, 2007, for
approximately $52 million.
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 2006 and 2005 (on a calendar
quarter basis) were:
|
2006
|
2005
|
||||||||||||||||||||||||
|
4th
|
3rd
|
2nd
|
1st
|
4th
|
3rd
|
2nd
|
1st
|
||||||||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
||||||||||||||||||
|
High
|
$
|
44.08
|
$
|
41.76
|
$
|
44.34
|
$
|
45.00
|
$
|
41.95
|
$
|
39.78
|
$
|
42.70
|
$
|
46.45
|
|||||||||
|
Low
|
39.67
|
35.03
|
34.16
|
38.53
|
35.06
|
35.25
|
35.80
|
39.65
|
|||||||||||||||||
|
Dividends
per share
|
0.10
|
0.10
|
0.10
|
0.10
|
0.10
|
0.10
|
0.10
|
0.10
|
|||||||||||||||||
Page
18 of
98
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 S&P Composite 500 Stock Index and the Dow Jones
Containers & Packaging Index for the five-year period ended
December 31, 2006. It assumes $100 was invested on December 31, 2001,
and that all dividends were reinvested. The Dow Jones Containers & Packaging
Index total return has been weighted by market capitalization.
|
12/31/01
|
12/31/02
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
||||||||||||||
|
Ball
Corporation
|
$
|
100.00
|
$
|
145.98
|
$
|
171.44
|
$
|
255.58
|
$
|
233.13
|
$
|
258.46
|
|||||||
|
DJ
Container & Packaging Index
|
100.00
|
107.59
|
128.11
|
153.28
|
152.31
|
170.72
|
|||||||||||||
|
S&P
500 Index
|
100.00
|
77.90
|
100.24
|
111.15
|
116.61
|
135.03
|
|||||||||||||
Page
19 of
98
|
Item
6.
|
Selected
Financial Data
|
Five-Year
Review of Selected Financial Data
Ball
Corporation and Subsidiaries
|
($
in millions, except per share amounts)
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Net
sales
|
$
|
6,621.5
|
$
|
5,751.2
|
$
|
5,440.2
|
$
|
4,977.0
|
$
|
3,858.9
|
||||||
|
Net
earnings (1)(2)
|
$
|
329.6
|
$
|
272.1
|
$
|
302.1
|
$
|
232.2
|
$
|
152.6
|
||||||
|
Return
on average common shareholders’ equity (2)
|
32.7
|
%
|
27.9
|
%
|
31.8
|
%
|
35.7
|
%
|
30.6
|
%
|
||||||
|
Basic
earnings per share (1)(2)(3)
|
$
|
3.19
|
$
|
2.52
|
$
|
2.73
|
$
|
2.08
|
$
|
1.35
|
||||||
|
Weighted
average common shares outstanding (000s) (3)
|
103,338
|
107,758
|
110,846
|
111,710
|
112,634
|
|||||||||||
|
Diluted
earnings per share (1)(2)(3)
|
$
|
3.14
|
$
|
2.48
|
$
|
2.65
|
$
|
2.03
|
$
|
1.33
|
||||||
|
Diluted
weighted average common shares outstanding (000s) (3)
|
104,951
|
109,732
|
113,790
|
114,275
|
115,076
|
|||||||||||
|
Property,
plant and equipment additions (4)
|
$
|
279.6
|
$
|
291.7
|
$
|
196.0
|
$
|
137.2
|
$
|
158.4
|
||||||
|
Depreciation
and amortization
|
$
|
252.6
|
$
|
213.5
|
$
|
215.1
|
$
|
205.5
|
$
|
149.2
|
||||||
|
Total
assets (2)
|
$
|
5,840.9
|
$
|
4,361.5
|
$
|
4,485.0
|
$
|
4,070.4
|
$
|
4,130.9
|
||||||
|
Total
interest bearing debt and capital lease obligations
|
$
|
2,451.7
|
$
|
1,589.7
|
$
|
1,660.7
|
$
|
1,686.9
|
$
|
1,981.0
|
||||||
|
Common
shareholders’ equity (2)
|
$
|
1,165.4
|
$
|
853.4
|
$
|
1,093.9
|
$
|
808.6
|
$
|
491.4
|
||||||
|
Market
capitalization (5)
|
$
|
4,540.4
|
$
|
4,138.8
|
$
|
4,956.2
|
$
|
3,359.1
|
$
|
2,904.8
|
||||||
|
Net
debt to market capitalization (5)
|
50.7
|
%
|
36.9
|
%
|
29.5
|
%
|
49.1
|
%
|
59.3
|
%
|
||||||
|
Cash
dividends per share (3)
|
$
|
0.40
|
$
|
0.40
|
$
|
0.35
|
$
|
0.24
|
$
|
0.18
|
||||||
|
Book
value per share (2)(3)
|
$
|
11.19
|
$
|
8.19
|
$
|
9.71
|
$
|
7.17
|
$
|
4.33
|
||||||
|
Market
value per share (3)
|
$
|
43.60
|
$
|
39.72
|
$
|
43.98
|
$
|
29.785
|
$
|
25.595
|
||||||
|
Annual
return (loss) to common shareholders (6)
|
10.9
|
%
|
(8.8
|
)%
|
48.8
|
%
|
17.4
|
%
|
46.0
|
%
|
||||||
|
Working
capital (2)
|
$
|
307.0
|
$
|
67.9
|
$
|
256.6
|
$
|
63.2
|
$
|
154.1
|
||||||
|
Current
ratio (2)
|
1.21
|
1.06
|
1.26
|
1.07
|
1.14
|
|||||||||||
(1) Includes
business consolidation activities and other items affecting comparability
between years of pretax expense of $35.5 million and $21.2 million in
2006 and 2005, respectively, and pretax income of $15.2 million,
$3.7 million and $2.3 million in 2004, 2003 and 2002, respectively.
2006 includes a $75.5 million pretax gain related to insurance proceeds in
connection with a fire at one of Ball’s German plants. Also includes
$19.3 million, $15.2 million and $5.2 million of debt refinancing
costs in 2005, 2003 and 2002, respectively, reported as interest expense.
Additional details about the 2006, 2005 and 2004 items are available in Notes
4,
5 and 12 to the consolidated financial statements within Item 8 of this
report.
(2) Amounts
have been retrospectively adjusted for the company’s change in 2006 from the
last-in, first-out method of inventory accounting to the first-in, first-out
method.
(3) Amounts
have been retrospectively adjusted for a two-for-one stock split effected on
August 23, 2004.
(4) Amount
in 2006 does not include the offset of $61.3 million of insurance proceeds
received in 2006 to replace fire-damaged assets in our Hassloch, Germany, plant.
(5) 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.
(6) Change
in stock price plus dividend yield assuming reinvestment of all dividends
paid.
Page
20 of
98
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, volume expansion and increasing pricing. In 2008 we
expect to complete a project to upgrade and streamline our North American
beverage can end manufacturing capabilities, a project that is expected to
result in productivity gains and cost reductions beginning in 2007. While the
U.S. and Canadian beverage container manufacturing industry is relatively
mature, the European, PRC and Brazilian beverage can markets are growing and
are
expected to continue to grow. We are capitalizing on this growth by continuing
to reconfigure some of our European can manufacturing lines and by having
constructed a new beverage can manufacturing plant in Belgrade, Serbia, in
2005.
To better position the company in the European market, the capacity from the
fire-damaged Hassloch, Germany, plant will be replaced with a mix of steel
beverage can manufacturing capacity in the Hassloch plant and aluminum beverage
can manufacturing capacity in the company’s Hermsdorf, Germany,
plant.
As
part
of our packaging strategy, we are focused on developing and marketing new and
existing products that meet the needs of our customers. These innovations
include new shapes, sizes, opening features and other functional benefits of
both metal and plastic packaging. This packaging development activity helps
us
maintain and expand our supply positions with major beverage, food and household
products customers.
Ball’s
consolidated earnings are exposed to foreign exchange rate fluctuations. We
attempt to mitigate this exposure through the use of derivative financial
instruments, as discussed in “Quantitative and Qualitative Disclosures About
Market Risk” within Item 7A of this report.
The
primary customers for the products and services provided by our aerospace and
technologies segment are U.S. government agencies or their prime contractors.
It
is possible that federal
budget reductions and priorities, or changes in agency budgets, could limit
future funding and new contract awards or delay or prolong contract
performance.
We
recognize sales under long-term contracts in the aerospace and technologies
segment using the cost-to-cost, percentage of completion method of accounting.
Our present contract mix consists of approximately two-thirds cost-type
contracts, which are billed at our costs plus an agreed upon and/or earned
profit component, and approximately one-third fixed price contracts. We
include time and material contracts in the fixed price category because such
contracts typically provide for the sale of engineering labor at fixed hourly
rates.
Page
21 of
98
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 valued added (operating earnings, as defined by the
company, less a charge for net operating assets employed). Our goal is to
increase economic valued 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
spoilage rates, quality control figures, safety statistics and production and
shipment volumes. Additional measures used to evaluate performance in the
aerospace and technologies segment include contract revenue realization, award
and incentive fees realized, proposal win rates and backlog (including awarded,
contracted and funded backlog).
We
recognize that attracting and retaining quality employees is essential to the
success of Ball and, because of this, we strive to pay employees competitively
and encourage their ownership of the company’s common stock as part of a
diversified portfolio. For most management employees, a meaningful portion
of
compensation is at risk as an incentive, dependent upon economic value added
operating performance. For more senior positions, more compensation is at risk.
Through our employee stock purchase plan and 401(k) plan, which matches employee
contributions with Ball common stock, employees, regardless of organizational
level, have opportunities to own Ball shares.
RECENT
DEVELOPMENTS
On
March 27, 2006, Ball acquired all of the issued and outstanding shares of
U.S. Can Corporation (U.S. Can) for consideration of 444,756 common shares
of Ball Corporation (valued at $44.28 per share for a total of
$19.7 million). In connection with the acquisition, Ball refinanced
$598.2 million of U.S. Can debt, including $26.8 million of bond
redemption premiums and fees, and over the next several years expects to realize
approximately $42 million for acquired net operating tax loss
carryforwards. As a result of this acquisition, Ball became the largest
manufacturer of aerosol cans in North America and now manufactures aerosol
cans,
paint cans, plastic containers and custom and specialty cans in 10 plants
in the U.S. and aerosol cans in two plants in Argentina. In October 2006
the company announced it would close an acquired plant in Alliance, Ohio. The
acquired operations have annual sales of approximately $600 million. The
acquired business forms part of Ball’s metal food and household products
packaging, Americas, segment and its results have been included since the date
of acquisition. Effective January 1, 2007, responsibility for the U.S. Can
plastics business was transferred to our plastic packaging, Americas,
segment.
On
March 28, 2006, Ball acquired North American plastic bottle container
assets from Alcan Packaging (Alcan) for $184.7 million cash. This
acquisition strengthens the company’s plastic container business and complements
its food container business. The acquired assets included two plastic container
manufacturing plants in the U.S. and one in Canada, as well as certain
manufacturing equipment and other assets from other Alcan facilities. The
acquired business primarily manufactures and sells barrier polypropylene plastic
bottles used in food packaging and, to a lesser extent, barrier PET plastic
bottles used for beverages and food. The acquired operations have annual sales
of approximately $150 million. The operations form part of Ball’s plastic
packaging, Americas, segment and their results have been included since the
date
of acquisition.
The
company refinanced U.S. Can’s debt at the time of the acquisition with
significantly lower interest rates through the issuance by Ball Corporation
of
$450 million of new senior notes and a $500 million increase in bank
debt under the senior credit facilities put in place in the fourth quarter
of
2005. The proceeds of these financings were also used to acquire the Alcan
operations and to reduce seasonal working capital debt.
On
April 1, 2006, a fire in the metal beverage can plant in Hassloch, Germany,
damaged the majority of the building and machinery and equipment. In
November 2006 the company reached final agreement with the insurance
carrier on property insurance and business interruption recoveries. Additional
details are available in the “Consolidated Sales and Earnings” section for the
“Metal Beverage Packaging, Europe/Asia” segment.
Page
22 of
98
In
June 2006 the company’s U.S. defined benefit plans for salaried employees
were amended to provide more flexibility for future pension benefits by allowing
portability and changing the benefit to a career average pay scheme that grows
by a prescribed amount annually. The annual accounting expense under the amended
plans will be lower and more predictable. The amendments,
which were effective January 1, 2007, reduced 2006 pension expense by
approximately $7 million. We intend to reduce our current return on asset
assumption for the U.S. pension plans to 8.25 percent for 2007, based upon
current market conditions and anticipated long-term rate of return on plan
assets, while increasing the discount rate assumption to 6 percent. Based
on these assumptions and the 2006 salaried plan design changes, U.S. pension
expense for 2007 is anticipated to increase $4 million compared to 2006,
most of which will be included in cost of sales. Pension expense in Europe
and
Canada combined is expected to be slightly higher than the 2006 expense. A
reduction of the plan asset return assumption by one quarter of a percentage
point would result in additional expense of approximately $2.2 million
while a quarter of a percentage point reduction in the discount rate would
result in approximately $1.9 million of additional expense. Additional
information regarding the company’s pension plans is provided in Note 14
accompanying the consolidated financial statements within Item 8 of this
report.
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. We expect a strong first quarter in 2007 as elevated raw material
inventories are reduced to more normal levels.
During
the fourth quarter of 2006, Ball’s management changed its method of inventory
accounting for certain invnetories from the last-in, first-out (LIFO) method
to
the first-in, first-out (FIFO) method in the metal beverage, Americas, and
the
metal food and household products packaging, Americas, segments. All periods
presented have been retrospectively adjusted on a FIFO basis. In the third
quarter of 2006, the company changed its expense allocation method by allocating
to each of the packaging segments stock-based compensation expense previously
included in corporate undistributed expenses. The change did not have a
significant impact on any segment for the current or prior years. Prior periods
have been conformed to the current presentation of the segments and the change
in expense allocation.
Metal
Beverage Packaging, Americas
The
metal
beverage packaging, Americas, segment consists of operations located in the
U.S., Canada and Puerto Rico, which manufacture products used primarily in
beverage packaging. This segment accounted for 39 percent of consolidated
net sales in 2006 (42 percent in 2005). Sales were 9 percent higher in
2006 than in 2005 due to more than 4 percent higher beverage can shipments
coupled with higher aluminum prices passed through to our customers. The
increased sales over 2005 were also 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. Sales in 2005 were slightly higher than in 2004 as
lower 2005 sales volumes were offset by the pass through of higher aluminum
prices. Metal beverage container volumes in 2005 were 2.5 percent below the
previous year’s levels as a result of poor weather in the first quarter,
temporary volume reductions and general softness in the beer and carbonated
soft
drink markets. Based on publicly available information, we estimate that our
shipments of metal beverage containers were approximately 32 percent of
total U.S. and Canadian shipments in 2006.
We
continue to focus efforts on the growing custom beverage can business, which
includes cans of different shapes, diameters and fill volumes, and cans with
added functional attributes for new products and product line extensions. During
the first quarter of 2006, we completed the conversion of a line in our
Monticello, Indiana, plant from 12-ounce can manufacturing to a line capable
of
producing other sizes.
Earnings
in the segment were $269.4 million in 2006 compared to $234.8 million
in 2005 and $275.7 million in 2004. 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 charge included the write off of obsolete
equipment spare parts and tooling, as well as employee termination costs. Over
time, this capital project is expected to result in productivity improvements
and reduced manufacturing
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costs.
We
have installed and are operating three of eight production modules in this
multi-year project and the fourth and fifth modules are in the installation
phase. The project is expected to be completed in 2008. 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.
Despite
higher sales in 2006, segment earnings growth was constrained by product mix
and
continued year-over-year cost growth, particularly higher energy, other direct
material and freight costs, which were $21 million more than in 2005. While
contract price escalations have commenced for many of our customers, cost growth
has continued to outpace price increases. Energy, freight and other direct
material costs were $32 million higher in 2005 than in 2004, partially
offset by efficiency gains, cost controls and lower selling, general and
administrative costs in 2005. While pricing pressures continue on our raw
materials, other direct materials, and freight and utility costs, we continue
to
work with both customers and suppliers to maintain our volumes, as well as
preserve our margins.
Metal
Beverage Packaging, Europe/Asia
The
metal
beverage packaging, Europe/Asia, segment includes the production and sale of
metal beverage container products manufactured and sold in Europe and Asia
as
well as plastic containers manufactured and sold in Asia. This segment accounted
for 23 percent of consolidated net sales in 2006 (24 percent in 2005).
Ball Packaging Europe, which represents an estimated 29 percent of the
total European metal beverage container manufacturing capacity, has
manufacturing plants located in Germany, the United Kingdom, France, the
Netherlands, Poland and Serbia.
Due
to
strong demand, segment can shipments were more than 9 percent higher in
2006 than in 2005. Higher segment sales volumes were aided by favorable European
weather and Germany hosting the World Cup soccer championship during June and
July 2006, as well as by continued growth in the China market. Segment
sales, which grew 12 percent in 2006, also benefited from the strength of
the euro. Segment sales were approximately 9 percent higher in 2005
than in 2004 primarily as a result of an increase in sales volumes.
The
slow
return of the can to the German market, as a result of the mandatory deposit
legislation previously reported on, is being more than offset by stronger demand
elsewhere in Europe, including southern and eastern Europe. We expect PRC demand
for aluminum beverage cans to grow in the coming years, as both multinational
and Chinese beverage fillers expand their markets.
The
construction of a new beverage can plant in Belgrade, Serbia, was completed
near
the end of the second quarter of 2005 to serve the growing demand for beverage
cans in southern and eastern Europe. The plant 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.
Earnings
in the segment were $268.7 million in 2006, $180.5 million in 2005 and
$195.1 million in 2004. 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 in
the
“Recent Developments” section). The third quarter of 2006 also included a gain
of $5.5 million related to the change in an estimated liability. The fourth
quarter of 2005 included a $9.3 million gain primarily resulting from the
final settlement of all tax obligations related to liquidated China 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. Earnings in 2004 included income
of
$13.7 million related to the realization of proceeds on assets in the PRC
being in excess of amounts previously estimated, and costs of liquidation being
less than anticipated in a prior year business consolidation charge.
Segment
earnings in 2006 were higher than in 2005 due to the property insurance gain,
higher volumes, price recovery initiatives and effective manufacturing and
selling, general and administrative cost controls; partially offset by higher
raw material, freight and energy costs, and price/cost compression in the PRC.
Higher material, energy and transportation costs, as well as second and third
quarter start up costs related to a line conversion in the Netherlands and
the
new Serbia plant, had a negative effect on 2005 segment earnings compared to
2004. Partially offsetting these higher costs were lower selling, general and
administrative costs.
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On
April 1, 2006, a fire in the metal beverage can plant in Hassloch, Germany,
damaged the majority of the building, machinery and equipment. The property
insurance proceeds recorded for the year ended December 31, 2006, which are
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 ($49.6 million), which was recorded in
other long-term assets, 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 gain of €59.6 million ($75.5 million pretax) 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 €15 million ($19 million),
€13 million ($16.5 million) and €12 million ($15.5 million)
were recorded in cost of sales in the second, third and fourth quarters,
respectively, for insurance recoveries related to business interruption costs,
as well as €11.3 million ($14.3 million) to offset clean-up costs.
An
additional €27 million of business interruption recoveries has been agreed
upon with the insurance carrier and will be recognized in 2007.
In
June 2006 the company announced its intention to rebuild the Hassloch plant
with two steel lines and to add an aluminum line in its Hermsdorf, Germany,
plant. All three lines are expected to be operational during the second quarter
of 2007.
In
the
fourth quarter of 2006, we acquired the minority interest in our two PRC
high-density plastic joint ventures for $4.6 million in cash. During the
fourth quarter of 2004, Sanshui Jianlibao FTB Packaging Limited (Sanshui JFP),
a
35 percent owned PRC joint venture, experienced a greater than customary
seasonal production slowdown caused by cash flow difficulties. In response,
we
recorded an allowance for doubtful accounts in respect of Sanshui JFP’s
receivable from the joint venture partner for $15.2 million, which was
included in the 2004 consolidated statement of earnings as equity in results
of
affiliates. Information learned late in the first quarter of 2005 led the
company to record expense of $3.4 million to write off the remaining
carrying value of this investment.
Earnings
of $9.3 million and $13.7 million in 2005 and 2004, respectively, were
recognized as PRC restructuring activities that commenced in 2001 were
completed, resulting in realization on assets in excess of amounts previously
estimated, as well as costs incurred being less than estimated, including
settlement of tax matters. All costs and transactions related to the PRC
restructuring have been concluded.
Additional
details regarding business consolidation activities are available in Note 4
accompanying the consolidated financial statements included within Item 8
of this Annual Report.
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. With the acquisition of U.S. Can
(discussed in the “Recent Developments” section), the segment added to its metal
food can manufacturing the production of aerosol cans, paint cans, certain
plastic containers and custom and specialty cans. Segment sales in 2006
comprised 18 percent of consolidated net sales (14 percent in 2005)
and were 44 percent higher than 2005 sales. The primary reason for the
increase was the acquisition of U.S. Can. The favorable impact on 2006 sales
of
the pass through of higher raw material costs was offset by lower third quarter
food can volumes. Sales in 2005 were 6 percent higher than in 2004,
reflecting higher prices from the pass through of higher raw material costs.
Sales volumes were flat compared to 2004 levels including, in the first quarter
of 2005, the inclusion of a full quarter’s results from our Oakdale, California,
facility, which was acquired in March 2004. During 2006, 2005 and 2004, we
were able to pass through the majority of the steel price increases and
surcharges levied by steel producers. Based on publicly available trade
information, we estimate our 2006 shipments of more than 6 billion steel
food containers and 1.7 billion aerosol containers to be
approximately 20 percent and 53 percent of total U.S. and
Canadian metal food container and steel aerosol container shipments,
respectively.
Segment
earnings were $6 million in 2006 compared to $19.1 million in 2005 and
$46.4 million in 2004. The fourth quarter of 2006 included a pretax charge
of $33.8 million, primarily for the closure of a metal food can
manufacturing plant in Burlington, Ontario, as part of the realignment of the
segment following the U.S. Can acquisition (discussed in more detail below).
The
first six months of 2006 included a net pretax charge of $1.7 million
primarily related to the shut down of a metal food can manufacturing line in
the
Whitby, Ontario, plant.
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The
fourth quarter of 2005 included a pretax charge of $4.6 million
($3.1 million after tax) for pension, severance and other employee benefit
costs related to a reduction in force in the Burlington plant. The second
quarter of 2005 included a pretax charge of $8.8 million ($5.9 million
after tax) for the closure of a three-piece food can manufacturing plant in
Quebec. The Quebec plant was closed and ceased operations in the third quarter
of 2005 and an agreement was reached to sell the land and building, which
resulted in the second quarter charge being offset by a $2.2 million gain
($1.5 million after tax) in the fourth quarter of 2006 to adjust the plant
to net realizable value.
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
purchase accounting adjustments of $6.1 million, which increased cost of
sales due to inventory valuations associated with the acquired U.S. Can finished
goods inventory. Contributing to lower segment earnings in 2005 compared to
2004
were higher freight costs from fuel surcharges and higher other direct material
and utility costs. Energy, freight and other direct material costs were
$16 million higher in 2005 than in 2004, partially offset by efficiency
gains, cost controls and lower selling, general and administrative costs in
2005. While pricing pressures continue on all of our raw materials, other direct
materials and freight and utility costs, we continue to work with both customers
and suppliers to maintain our volumes, as well as to preserve our
margins.
In
October 2006 the company announced plans to close two manufacturing
facilities in North America by the end of 2006 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. A pretax charge
of $33.8 million ($27.5 million after tax) was recorded in the fourth
quarter, primarily related to the Burlington closure for employee termination
and pension costs, plant decommissioning costs and fixed asset impairment.
The
closure of the Ohio plant has been treated as an opening balance sheet item.
The
estimated costs of the closures will be cash flow neutral after tax benefits
and
anticipated proceeds from the sale of fixed assets. 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 4
accompanying the consolidated financial statements included within Item 8
of this Annual Report.
Plastic
Packaging,
Americas
The
plastic packaging, Americas, segment consists of operations located in the
U.S.
and Canada which manufacture polyethylene terephthalate (PET) and polypropylene
plastic container products used mainly in beverage and food packaging. Segment
sales in 2006 comprised 10 percent of consolidated sales (8 percent in
2005) and increased 32 percent compared to 2005 due largely to the plant
and other asset acquisitions from Alcan and higher PET bottle volumes. We
continue to focus PET development efforts in the custom hot-fill, beer, wine,
flavored alcoholic beverage and specialty container markets, and we are adding
specialty container production capacity to accommodate new demand. In the food
and specialty area, development efforts are focused on custom markets as
well.
The
22 percent sales increase in 2005 compared to 2004 was largely due to the
pass through to our customers of higher resin prices, as well as
7.5 percent higher sales volumes in 2005 compared to 2004 as a result of
higher demand for barrier and heat-set containers that provide longer shelf-life
for products, combined with strong demand for plastic water bottles. Although
only a small percentage of our total volume, sales of juice, sports drink and
beer containers increased in 2006. These sales are expected to grow in the
future as more focus is placed on such specialty markets and the development
of
our Heat-Tek(TM) business. We estimate our 2006 shipments of more than
5.7 billion PET plastic containers to be approximately 9 percent of
total U.S. and Canadian PET container shipments. In addition, the plastic
packaging, Americas, segment produced more than 640 million food and
specialty containers during 2006.
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Segment
earnings were $24.7 million in 2006 compared to $16.7 million in 2005
and $9.6 million in 2004. Segment earnings in 2006 were higher than in 2005
largely due to the incremental sales from the Alcan acquisition, but were
partially offset by energy cost increases of approximately $6 million, the
timing of resin cost increases and costs 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. In 2007 the plastic packaging,
Americas, segment will include the sales and earnings of a plastic pail business
which was recorded in the 2006 operating results of the metal food and household
products packaging, Americas, segment.
The
improvement in earnings in 2005 over 2004 was the result of higher sales and
production volumes and growth in specialty products. Partially offsetting these
improvements in 2005 were higher utility costs. Segment earnings in 2004 were
reduced by $1.3 million, primarily related to costs associated with the
relocation of the plastics offices and research and development facility from
Atlanta, Georgia, to Colorado. Earnings in 2004 were also negatively impacted
by
continued pricing pressures on plastic containers for carbonated soft drink
and
water customers.
Aerospace
and Technologies
Aerospace
and technologies segment sales represented 10 percent of 2006 consolidated
net sales (12 percent in 2005) and were 3 percent lower than in 2005.
Sales in 2005 were 6 percent higher than in 2004. The lower 2006 sales were
largely due to contracts being completed during the period, as well as the
impact of government funding reductions and program delays. Higher sales in
2005
compared to 2004 resulted from a combination of newly awarded contracts and
additions to previously awarded contracts. 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 $50 million in 2006, $54.7 million in 2005 and
$48.7 million in 2004. 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. Earnings in 2006 were
negatively affected by the lower sales due to program delays and unfavorable
contract mix. The improvement in 2005 earnings compared to 2004 was primarily
the result of higher sales and improved program performance.
Some
of
the segment’s high-profile contracts include: 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 90 percent of segment sales in 2006,
87 percent in 2005 and 82 percent in 2004.
Contracted
backlog for the aerospace and technologies segment at December 31, 2006 and
2005, was $886 million and $761 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 other independent parties 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 4 accompanying the consolidated financial statements within
Item 8 of this report.
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Selling,
General and Administrative Expenses
Selling,
general and administrative (SG&A) expenses were $287.2 million,
$233.8 million and $268.8 million for 2006, 2005 and 2004,
respectively. 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, a $5.8 million
out-of-period adjustment (discussed below), higher expense of $6.3 million
associated with the adoption of SFAS 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 and normal
compensation and benefit increases. Expenses in 2005 were lower than 2004 in
all
areas of the company due largely to lower employee compensation and benefit
costs, including the company’s deposit share program and economic-value-added
based incentive compensation plans. These lower costs were partially offset
by
higher pension costs, higher accounts receivable securitization fees and the
write down of the PRC and aerospace equity investments in the first quarter
of
2005.
Subsequent
to the issuance of its financial statements for the year ended December 31,
2005, the company determined that certain foreign currency exchange losses
had
been inadvertently deferred for the years 2005, 2004 and 2003. Since the amounts
were not 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 out-of-period adjustment was included in SG&A
expenses in the first quarter of 2006.
On
October 26, 2005, Ball’s board of directors approved the accelerated
vesting of the out-of-the-money, unvested nonqualified stock options granted
in
April 2005. The acceleration affected approximately 665,000 options
granted to approximately 290 employees at an exercise price of $39.74. The
accelerated vesting of these nonqualified options allowed the company to
eliminate approximately $5 million of pretax expense (approximately
$3 million after tax) combined for 2006 to 2009.
Interest
and Taxes
Consolidated
interest expense was $134.4 million in 2006; $116.4 million, including
debt refinancing costs of $19.3 million, in 2005 and $103.7 million in
2004. The higher expense in 2006 was primarily due to the additional borrowings
used to finance the acquisitions of U.S. Can and the Alcan assets. The lower
expense in 2005 compared to 2004 was due to lower average borrowings and higher
capitalized interest. 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 2006 was 29.4 percent compared
to 29.2 percent in 2005 and 32.2 percent in 2004. While the
effective tax rates for 2006 and 2005 are similar, the 2006 rate was impacted
by
a one-time 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% 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 (see further discussion below) plus the tax
benefit on business consolidation costs applied at the higher marginal rate.
The
decrease in the 2005 effective tax rate compared to 2004 is primarily due to
the
net tax benefit recorded on the repatriation of foreign earnings under the
American Jobs Creation Act of 2004 (Jobs Act), the tax benefit on business
consolidation costs applied at the marginal tax rate, increased research and
development tax credits and the manufacturing deduction effective in 2005 under
the Jobs Act. (Further details of the amounts repatriated under the Jobs Act
are
available in Note 13 accompanying the consolidated financial statements
within Item 8 of this report.) These benefits were somewhat offset by the
fact that no tax benefit was provided in respect of the equity investment write
downs in the first quarter of 2005. The $3.8 million write down of the
aerospace investment is not tax deductible while the realization of tax
deductibility of the $3.4 million PRC write down, which will be a capital
loss, is not reasonably assured as the company does not have, nor does it
anticipate, any capital gains to offset the capital losses.
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In
connection with the Internal Revenue Service’s (IRS) examination of Ball’s
consolidated income tax returns for the tax years 2000 through 2004, the IRS
has
proposed to disallow Ball’s deductions of interest expense incurred on loans
under a company-owned life insurance plan that has been in place for more than
20 years. Ball believes that its interest deductions will be sustained as
filed and, therefore, no provision for loss has been recorded. The total
potential liability for the audit years 1999 through 2004, unaudited year 2005
and an estimate of the impact on 2006 is approximately $31 million,
excluding related interest. The IRS has withdrawn its proposed adjustments
for
any penalties. See Note 13 accompanying the consolidated financial statements
within Item 8 of this Annual Report.
Results
of Equity Affiliates
Equity
in
the earnings of affiliates in 2006 is primarily attributable to our
50 percent ownership in packaging investments in the U.S. and Brazil.
Earnings in 2004 included the results of a minority-owned aerospace business,
which was sold in October 2005, and a $15.2 million loss representing
Ball’s share of a provision for doubtful accounts relating to its
35 percent interest in Sanshui JFP (discussed above in “Metal
Beverage Packaging, Europe/Asia”). After consideration of the PRC loss,
earnings were $14.7 million in 2006 compared to $15.5 million in 2005
and $15.8 million in 2004.
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
Cash
flows from operating activities were $401.4 million in 2006 compared to
$558.8 million in 2005 and $535.9 million in 2004.
Management
internally uses a free cash flow measure: (1) to evaluate the company’s
operating results, (2) for planning purposes, (3) to evaluate
strategic investments and (4) to evaluate the company’s ability to incur and
service debt. Free cash flow is not a defined term under U.S. generally accepted
accounting principles, and it should not be inferred that the entire free cash
flow amount is available for discretionary expenditures. The company defines
free cash flow as cash flow from operating activities less additions to
property, plant and equipment (capital spending). Free cash flow is typically
derived directly from the company’s cash flow statements; however, it may be
adjusted for items that affect comparability between periods. An example of
such
an item included in 2006 is the property insurance proceeds for the replacement
of the fire-damaged assets in our Hassloch, Germany, plant, which is included
in
capital spending amounts.
Based
on
this, our consolidated free cash flow is summarized as follows:
|
($
in millions)
|
2006
|
2005
|
2004
|
|||||||
|
Cash
flows from operating activities
|
$
|
401.4
|
$
|
558.8
|
$
|
535.9
|
||||
|
Capital
spending
|
(279.6
|
)
|
(291.7
|
) |
(196.0
|
)
|
||||
|
Proceeds
for replacement of fire-damaged assets
|
61.3
|
–
|
–
|
|||||||
|
Free
cash flow
|
$
|
183.1
|
$
|
267.1
|
$
|
339.9
|
||||
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 expects the increase in working capital to be temporary
and
that working capital levels will return to normal levels by the end of the
first
half of 2007.
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Cash
flow
in 2005 compared to 2004 was negatively impacted by higher cash taxes. This
resulted in a decrease in deferred income taxes payable of
$51.6 million in 2005 compared to an estimated increase in deferred
taxes of $47 million in 2004. The primary causes of the increase in current
income taxes and decrease in deferred income taxes were the reduction in 2005
of
tax-deductible pension costs versus 2004, the impact in 2005 of the repatriation
of foreign earnings and a reduction of tax versus book depreciation expense
as
tax depreciation was accelerated in prior years, primarily due to bonus tax
depreciation permitted in the tax laws after September 11, 2001. Cash flows
from operating activities were positively affected in 2005 by lower accounts
receivable, higher accounts payable and lower pension
contributions.
Based
on
information currently available, we estimate cash flows from operating
activities for 2007 to be approximately $600 million, capital spending (net
of property insurance recoveries) to be approximately $250 million and free
cash flow to be in the $350 million range. Capital
spending of $218.3 million (net of $61.3 million in insurance
recoveries) in 2006 was below depreciation and amortization expense of
$252.6 million. We continue to invest capital in our best performing
operations, including projects to increase custom can capabilities, improve
beverage can end making productivity and convert lines from steel to aluminum
in
Europe, as well as expenditures in the aerospace and technologies segment.
Debt
Facilities and Refinancing
Interest-bearing
debt at December 31, 2006, increased $862 million to
$2,451.7 million from $1,589.7 million at December 31, 2005. This
increase includes the issuance by Ball Corporation in March 2006 of
$450 million of 6.625% senior notes due in 2018 and a
$500 million increase in bank debt under Ball Corporation’s senior credit
facilities put in place in the fourth quarter of 2005. The proceeds from these
financings were used to refinance existing U.S. Can debt at lower interest
rates, acquire certain net assets of Alcan and reduce seasonal working capital
debt. Other than acquisition related debt, the 2006 debt increase from 2005
was
primarily attributed to changes in foreign exchange rates.
At
December 31, 2006, $675 million was available under the company’s
multi-currency revolving credit facilities. The company also had
$329 million of short-term uncommitted credit facilities available at the
end of the year, of which $140.1 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.
During
the first quarter of 2004, Ball repaid €31 million ($38 million) of
its previous euro denominated Term Loan B and reduced the interest rate by
50 basis points. During the fourth quarter of 2003, Ball repaid
$160 million of its previous U.S. dollar denominated Term Loan B and
€25 million of its previous euro denominated Term Loan B. At the time
of the early repayment, the interest rate on the U.S. portion of the Term
Loan B was reduced by 50 basis points. Interest expense during the
first quarter of 2004 included $0.5 million for the write off of the
unamortized financing costs associated with the repaid loans.
The
company has a receivables sales agreement that provides for the ongoing,
revolving sale of a designated pool of trade accounts receivable of Ball’s North
American packaging operations, up to $225 million. The agreement qualifies
as off-balance sheet financing under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 140, as amended by SFAS No. 156.
Net funds received from the sale of the accounts receivable totaled
$201.3 million and $210 million at December 31, 2006 and 2005,
respectively, and are reflected as a reduction of accounts receivable in the
consolidated balance sheets.
The
company was not in default of any loan agreement at December 31, 2006, and
has met all payment obligations. The U.S. note agreements, bank credit agreement
and industrial development revenue bond agreements contain certain restrictions
relating to dividends, investments, financial ratios, guarantees and the
incurrence of additional indebtedness.
Page
30 of
98
Additional
details about the company’s receivables sales agreement and debt are available
in Notes 6 and 12, respectively, accompanying the consolidated financial
statements within Item 8 of this report.
Other
Liquidity Items
Cash
payments required for long-term debt maturities, rental payments under
noncancellable operating leases and purchase obligations in effect at
December 31, 2006, are summarized in the following table:
|
Payments
Due By Period (a)
|
||||||||||||||||
|
($
in millions)
|
Total
|
Less
than
1 Year
|
1-3
Years
|
3-5
Years
|
More
than 5 Years
|
|||||||||||
|
Long-term
debt
|
$
|
2,301.6
|
$
|
38.5
|
$
|
278.4
|
$
|
972.9
|
$
|
1,011.8
|
||||||
|
Capital
lease obligations
|
7.6
|
2.7
|
2.4
|
0.4
|
2.1
|
|||||||||||
|
Interest
payments on long-term debt (b)
|
826.5
|
138.8
|
259.4
|
204.8
|
223.5
|
|||||||||||
|
Operating
leases
|
185.9
|
45.0
|
58.5
|
38.7
|
43.7
|
|||||||||||
|
Purchase
obligations (c)
|
7,450.4
|
2,682.5
|
3,169.4
|
1,524.6
|
73.9
|
|||||||||||
|
Total
payments on contractual obligations
|
$
|
10,772.0
|
$
|
2,907.5
|
$
|
3,768.1
|
$
|
2,741.4
|
$
|
1,355.0
|
||||||
(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.
(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 $69.1 million in 2007. This estimate may
change based on plan asset performance. Benefit payments related to these plans
are expected to be $62.6 million, $65.1 million, $68.9 million,
$73.9 million and $75.1 million for the years ending December 31, 2007
through 2011, respectively, and $436.7 million combined for 2012 through
2016. Payments to participants in the unfunded German plans are expected to
be
$24.6 million, $25.1 million, $25.5 million, $25.9 million
and $26.1 million in the years 2007 through 2011, respectively, and a total
of $136.6 million thereafter.
We
reduced our share repurchase program in 2006 to $45.7 million, net of
issuances, compared to $358.1 million net repurchases in 2005 and
$50 million in 2004. The net repurchases in 2006 did not include 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. In 2007 we expect to repurchase approximately
$175 million, net of issuances, and to reduce debt levels by more than
$125 million. Annual cash dividends paid on common stock were 40 cents
per share in 2006 and 2005 and 35 cents per share in 2004. Total dividends
paid were $41 million in 2006, $42.5 million in 2005 and
$38.9 million in 2004.
Page
31 of
98
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.
Due
to
political and legal uncertainties in Germany, no nationwide system for returning
beverage containers was in place at the time a mandatory deposit was imposed
in
January 2003, and nearly all retailers stopped carrying beverages in
non-refillable containers. We responded to the resulting lower demand for
beverage cans with several measures including reducing capacity and converting
production lines from steel to aluminum to facilitate exports from Germany
to
other European countries. Since May 1, 2006, all retailers have been required
to
redeem all returned one-way containers as long as they sell such containers.
Many retailers in Germany have begun the process of implementing a returnable
system for one-way containers. The retailers and the filling and packaging
industries have formed a committee to design a nationwide recollection system
and several retailers have ordered and installed reverse vending machines in
order to streamline the recollection system. One-way packaging sales by German
retailers have increased significantly since May 1, 2006 (albeit off a low
base). We believe it will take some time to recover from the significant
decrease experienced beginning in 2003. Usage will increase as one-way
collection systems are more fully developed and consumers become educated
regarding the systems and the reintroduction of one-way packaging.
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.
As
described in Note 13 accompanying the consolidated financial statements
within Item 8 of this Annual Report, the IRS has proposed to disallow
Ball’s deductions of interest expense for the tax years 2000 through 2004
incurred on loans under a company-owned life insurance plan that was established
in 1986. Ball has disputed the IRS’s claims and the company believes the
interest deductions will be sustained as filed.
Page
32 of
98
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; the German mandatory deposit or other restrictive
packaging legislation such as recycling laws; interest rates affecting our
debt;
labor strikes; increases and trends in various employee benefits and labor
costs, including pension, medical and health care costs; rates of return
projected and earned on assets and discount rates used to measure future
obligations and expenses of the company’s defined benefit retirement plans;
boycotts; antitrust, intellectual property, consumer and other litigation;
maintenance and capital expenditures; goodwill impairment; changes in generally
accepted accounting principles or their interpretation; accounting changes;
local economic conditions; the authorization, funding, availability and returns
of contracts for the aerospace and technologies segment and the nature and
continuation of those contracts and related services provided thereunder;
delays, extensions and technical uncertainties, as well as schedules of
performance associated with such segment contracts; international business
and
market risks such as the devaluation or revaluation of certain currencies and
the activities of foreign subsidiaries; international business risks (including
foreign exchange rates and activities of foreign subsidiaries) in Europe and
particularly in developing countries such as the PRC and Brazil; changes in
the
foreign exchange rates of the U.S. dollar against the European euro, British
pound, Polish zloty, Serbian dinar, Hong Kong dollar, Canadian dollar, Chinese
renminbi, Brazilian real and Argentine peso, and in the foreign exchange rate
of
the European euro against the British pound, Polish zloty and Serbian dinar;
terrorist activity or war that disrupts the company’s production or supply;
regulatory action or laws including tax, environmental and workplace safety;
technological developments and innovations; successful or unsuccessful
acquisitions, joint ventures or divestitures and the integration activities
associated therewith; changes to unaudited results due to statutory audits
of
our financial statements or management’s evaluation of the company’s internal
controls over financial reporting; and loss contingencies related to income
and
other tax matters, including those arising from audits performed by U.S. and
foreign tax authorities. If the company is unable to achieve its goals, then
the
company’s actual performance could vary materially from those goals expressed or
implied in the forward-looking statements. The company currently does not intend
to publicly update forward-looking statements except as it deems necessary
in
quarterly or annual earnings reports. You are advised, however, to consult
any
further disclosures we make on related subjects in our 10-K, 10-Q and 8-K
reports to the Securities and Exchange Commission.
Page
33 of
98
|
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 commodity price risk in connection with market price fluctuations of
aluminum primarily by entering into container sales contracts which generally
include aluminum-based pricing terms that consider price fluctuations under
our
commercial supply contracts for aluminum purchases. Such terms generally include
a fixed price, floating price or an upper limit to the aluminum component
pricing. This matched pricing affects substantially all of our metal beverage
packaging, Americas, net sales. We also, at times, use certain derivative
instruments such as option and forward contracts as cash flow 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 negotiated through the end
of
2006 include provisions to pass through resin cost changes. As a result, we
believe we have minimal, if any, exposure related to changes in the cost of
plastic resin. Most of our metal food and household products packaging,
Americas, sales contracts negotiated through the end of 2006 either include
provisions permitting us to pass through some or all steel cost changes we
incur, or they incorporate annually negotiated steel costs. We anticipate that
we will be able to pass through the majority of the steel price increases that
occur through the end of 2007.
In
Europe
and Asia, the company manages aluminum and steel raw material commodity price
risks through annual and long-term contracts for the purchase of the materials,
as well as certain sales 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
minimize the company’s exposure to significant price changes for those sales
contracts where there is not a pass-through arrangement.
Considering
the effects of derivative instruments, the market’s ability to accept price
increases and the company’s commodity price exposures, a hypothetical
10 percent adverse change in the company’s steel, aluminum and resin prices
could result in an estimated $16 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
$10.2 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 $8.4 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 $1.9 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
98
Interest
Rate Risk
Our
objective in managing exposure to interest rate changes is to limit 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 and options to manage our mix of floating and fixed-rate debt. Interest
rate instruments held by the company at December 31, 2006 and 2005, included
pay-fixed interest rate swaps. Pay-fixed swaps effectively convert variable
rate
obligations to fixed rate instruments.
Based
on
our interest rate exposure at December 31, 2006, assumed floating rate debt
levels throughout 2007 and the effects of derivative instruments, a 100 basis
point increase in interest rates could result in an estimated $9.1 million
after-tax reduction in net earnings over a one-year period. Actual results
may
vary based on actual changes in market prices and rates and the timing of these
changes.
Foreign
Currency Exchange Rate Risk
Our
objective in managing exposure to foreign currency fluctuations is to protect
foreign cash flows and earnings associated with foreign exchange rate changes
through the use of cash flow hedges. In addition, we manage foreign earnings
translation volatility through the use of foreign currency options. Our foreign
currency translation risk results from the European euro, British pound,
Canadian dollar, Polish zloty, Chinese renminbi, Brazilian real, Argentine
peso
and Serbian dinar. We face currency exposures in our global operations as a
result of purchasing raw materials in U.S. dollars and, to a lesser extent,
in
other currencies. Sales contracts are negotiated with customers to reflect
cost
changes and, where there is not a foreign exchange pass-through arrangement,
the
company uses forward and option contracts to manage foreign currency
exposures.
Considering
the company’s derivative financial instruments outstanding at December 31,
2006, and the currency exposures, a hypothetical 10 percent reduction in
foreign currency exchange rates compared to the U.S. dollar could result in
an
estimated $19.2 million after-tax reduction in net earnings over a one-year
period. This amount includes the $10.2 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 $75.7 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 2006.
Page
35 of
98
|
Item
8.
|
Financial
Statements and Supplementary
Data
|
Report
of Independent Registered Public Accounting Firm
To the
Board
of Directors and Shareholders of Ball Corporation:
We
have
completed integrated audits of Ball Corporation’s consolidated financial
statements and of its internal control over financial reporting as of December
31, 2006, in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our
opinions, based on our audits, are presented below.
Consolidated
financial
statements
In
our
opinion, the consolidated financial statements listed in the accompanying 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, 2006 and 2005, and the results of their operations and their cash
flows for each of the three years in the period ended December 31,
2006, in
conformity with accounting principles generally accepted in the United States
of
America. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements
in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit
to
obtain reasonable assurance about whether the financial statements are free
of
material misstatement. An audit of financial statements includes 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.
We believe that our audits provide a reasonable basis for our
opinion.
As
discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for inventory in 2006.
Internal
control over financial reporting
Also,
in
our opinion, management’s assessment, included in Management’s
Report on Internal Control Over Financial Reporting
appearing in Item 9A, that the Company maintained effective internal control
over financial reporting as of December 31, 2006, based
on
criteria established in Internal
Control - Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
is
fairly stated, in all material respects, based on those criteria. Furthermore,
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal
Control - Integrated Framework issued
by
the COSO. The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on management’s assessment and on the effectiveness of
the Company’s internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. An audit of internal control
over financial reporting includes obtaining an understanding of internal control
over financial reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinions.
Page
36 of
98
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures
of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use,
or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As
described in Management’s
Report on Internal Control Over Financial Reporting
appearing in Item 9A, management has excluded the operations of U.S. Can
Corporation (USCan) and operations
of Alcan
Packaging (Alcan) from
its
assessment of internal control over financial reporting as of December 31,
2006,
because they were acquired by the Company in purchase business combinations
during 2006. We have also excluded USCan and Alcan from our audit of internal
control over financial reporting. USCan and Alcan are operated by wholly-owned
subsidiaries of the Company and had combined assets and combined net sales
representing 17 percent and 8 percent, respectively, of the related
consolidated financial statement amounts as of and for the year ended December
31, 2006.
/s/
PricewaterhouseCoopers LLP
PricewaterhouseCoopers
LLP
Denver,
Colorado
February 22,
2007
Page
37 of
98
Consolidated
Statements of Earnings
Ball
Corporation and Subsidiaries
|
Years
ended December 31,
|
||||||||||
|
($
in millions, except per share amounts)
|
2006
|
2005
|
2004
|
|||||||
|
Net
sales
|
$
|
6,621.5
|
$
|
5,751.2
|
$
|
5,440.2
|
||||
|
Costs
and expenses
|
||||||||||
|
Cost
of sales (excluding depreciation and amortization) (a)
|
5,540.4
|
4,802.7
|
4,421.9
|
|||||||
|
Depreciation
and amortization (Notes 2, 8 and 10)
|
252.6
|
213.5
|
215.1
|
|||||||
|
Business
consolidation costs (gains) (Note 4)
|
35.5
|
21.2
|
(15.2
|
)
|
||||||
|
Selling,
general and administrative
|
287.2
|
233.8
|
268.8
|
|||||||
|
Property
insurance gain (Note 5)
|
(75.5
|
)
|
–
|
–
|
||||||
|
6,040.2
|
5,271.2
|
4,890.6
|
||||||||
|
Earnings
before interest and taxes (a)
|
581.3
|
480.0
|
549.6
|
|||||||
|
Interest
expense (Note 12)
|
||||||||||
|
Interest
expense before debt refinancing costs
|
134.4
|
97.1
|
103.7
|
|||||||
|
Debt
refinancing costs
|
–
|
19.3
|
–
|
|||||||
|
Total
interest expense
|
134.4
|
116.4
|
103.7
|
|||||||
|
Earnings
before taxes
|
446.9
|
363.6
|
445.9
|
|||||||
|
Tax
provision (Note 13) (a)
|
(131.6
|
)
|
(106.2
|
)
|
(143.4
|
)
|
||||
|
Minority
interests
|
(0.4
|
)
|
(0.8
|
)
|
(1.0
|
)
|
||||
|
Equity
in results of affiliates (Note 10)
|
14.7
|
15.5
|
0.6
|
|||||||
|
Net
earnings (a)
|
$
|
329.6
|
$
|
272.1
|
$
|
302.1
|
||||
|
Earnings
per share (Notes 15 and 16) (a):
|
||||||||||
|
Basic
|
$
|
3.19
|
$
|
2.52
|
$
|
2.73
|
||||
|
Diluted
|
$
|
3.14
|
$
|
2.48
|
$
|
2.65
|
||||
|
Weighted
average shares outstanding (000s)
(Note 16) (a):
|
||||||||||
|
Basic
|
103,338
|
107,758
|
110,846
|
|||||||
|
Diluted
|
104,951
|
109,732
|
113,790
|
|||||||
|
Cash
dividends declared and paid, per share
|
$
|
0.40
|
$
|
0.40
|
$
|
0.35
|
||||
(a) 2005
and 2004 have been retrospectively adjusted for the company’s change in 2006
from the last-in, first-out method of inventory accounting to the first-in,
first-out method. Additional details are available in
Note 7.
The
accompanying notes are an integral part of the consolidated financial
statements.
Page
38 of
98
Consolidated
Balance Sheets
Ball
Corporation and Subsidiaries
|
December
31,
|
|||||||
|
($
in millions)
|
2006
|
2005
|
|||||
|
Assets
|
|||||||
|
Current
assets
|
|||||||
|
Cash
and cash equivalents
|
$
|
151.5
|
$
|
61.0
|
|||
|
Receivables,
net (Note 6)
|
579.5
|
376.6
|
|||||
|
Inventories,
net (Note 7) (a)
|
935.4
|
699.9
|
|||||
|
Deferred
taxes and prepaid expenses (a)
|
94.9
|
106.4
|
|||||
|
Total
current assets
|
1,761.3
|
1,243.9
|
|||||
|
Property,
plant and equipment, net (Notes 5 and 8)
|
1,876.0
|
1,556.6
|
|||||
|
Goodwill
(Notes 3, 4 and 9)
|
1,773.7
|
1,258.6
|
|||||
|
Intangibles
and other assets, net (Note 10)
|
429.9
|
302.4
|
|||||
|
Total
Assets
|
$
|
5,840.9
|
$
|
4,361.5
|
|||
|
Liabilities
and Shareholders’ Equity
|
|||||||
|
Current
liabilities
|
|||||||
|
Short-term
debt and current portion of long-term debt (Note 12)
|
$
|
181.3
|
$
|
116.4
|
|||
|
Accounts
payable
|
732.4
|
552.4
|
|||||
|
Accrued
employee costs
|
201.1
|
198.4
|
|||||
|
Income
taxes payable
|
71.8
|
127.5
|
|||||
|
Other
current liabilities
|
267.7
|
181.3
|
|||||
|
Total
current liabilities
|
1,454.3
|
1,176.0
|
|||||
|
Long-term
debt (Note 12)
|
2,270.4
|
1,473.3
|
|||||
|
Employee
benefit obligations (Note 14)
|
847.7
|
784.2
|
|||||
|
Deferred
taxes and other liabilities
|
102.1
|
69.5
|
|||||
|
Total
liabilities
|
4,674.5
|
3,503.0
|
|||||
|
Contingencies
(Note 21)
|
|||||||
|
Minority
interests
|
1.0
|
5.1
|
|||||
|
Shareholders’
equity (Note 15)
|
|||||||
|
Common
stock (160,026,936 shares issued - 2006;
158,382,813 shares issued - 2005)
|
703.4
|
633.6
|
|||||
|
Retained
earnings (a)
|
1,535.3
|
1,246.0
|
|||||
|
Accumulated
other comprehensive loss
|
(29.5
|
)
|
(100.7
|
)
|
|||
|
Treasury
stock, at cost (55,889,948 shares - 2006; 54,182,655 shares -
2005)
|
(1,043.8
|
)
|
(925.5
|
)
|
|||
|
Total
shareholders’ equity
|
1,165.4
|
853.4
|
|||||
|
Total
Liabilities and Shareholders’ Equity
|
$
|
5,840.9
|
$
|
4,361.5
|
|||
(a) 2005
has been retrospectively adjusted for the company’s change in 2006 from the
last-in, first-out method of inventory accounting to the first-in, first-out
method. Additional details are available in Note 7.
The
accompanying notes are an integral part of the consolidated financial
statements.
Page
39 of
98
Consolidated
Statements of Cash Flows
Ball
Corporation and Subsidiaries
|
Years
ended December 31,
|
||||||||||
|
($
in millions)
|
2006
|
2005
|
2004
|
|||||||
|
Cash
Flows from Operating Activities
|
||||||||||
|
Net
earnings
|
$
|
329.6
|
$
|
272.1
|
$
|
302.1
|
||||
|
Adjustments
to reconcile net earnings to cash provided by operating
activities:
|
||||||||||
|
Depreciation
and amortization
|
252.6
|
213.5
|
215.1
|
|||||||
|
Property
insurance gain (Note 5)
|
(75.5
|
)
|
–
|
–
|
||||||
|
Business
consolidation costs (gains) (Note 4)
|
34.2
|
19.0
|
(15.2
|
)
|
||||||
|
Deferred
taxes (a)
|
38.2
|
(51.6
|
)
|
47.0
|
||||||
|
Contributions
to defined benefit pension plans
|
(54.9
|
)
|
(17.1
|
)
|
(60.6
|
)
|
||||
|
Debt
prepayment costs
|
–
|
6.6
|
–
|
|||||||
|
Noncash
write off of deferred financing costs
|
–
|
12.7
|
0.5
|
|||||||
|
Other,
net
|
14.5
|
15.5
|
50.6
|
|||||||
|
Working
capital changes, excluding effects of
acquisitions:
|
||||||||||
|
Receivables
|
(57.0
|
)
|
(32.8
|
)
|
(81.3
|
)
|
||||
|
Inventories
(a)
|
(132.2
|
)
|
(71.7
|
)
|
(60.0
|
)
|
||||
|
Accounts
payable
|
121.6
|
113.2
|
87.1
|
|||||||
|
Accrued
employee costs
|
53.1
|
(17.2
|
)
|
39.9
|
||||||
|
Income
taxes payable and current deferred tax assets, net
|
(62.4
|
)
|
51.2
|
18.1
|
||||||
|
Other,
net
|
(60.4
|
)
|
45.4
|
(7.4
|
)
|
|||||
|
Cash
provided by operating activities
|
401.4
|
558.8
|
535.9
|
|||||||
|
Cash
Flows from Investing Activities
|
||||||||||
|
Additions
to property, plant and equipment
|
(279.6
|
)
|
(291.7
|
)
|
(196.0
|
)
|
||||
|
Business
acquisitions, net of cash acquired (Note 3)
|
(791.1
|
)
|
−
|
(17.2
|
)
|
|||||
|
Property
insurance proceeds (Note 5)
|
61.3
|
–
|
–
|
|||||||
|
Other,
net
|
16.0
|
1.7
|
3.6
|
|||||||
|
Cash
used in investing activities
|
(993.4
|
)
|
(290.0
|
)
|
(209.6
|
)
|
||||
|
Cash
Flows from Financing Activities
|
||||||||||
|
Long-term
borrowings
|
949.4
|
882.8
|
26.3
|
|||||||
|
Repayments
of long-term borrowings
|
(205.0
|
)
|
(949.7
|
)
|
(107.2
|
)
|
||||
|
Change
in short-term borrowings
|
23.0
|
68.4
|
2.6
|
|||||||
|
Debt
prepayment costs
|
–
|
(6.6
|
)
|
–
|
||||||
|
Debt
issuance costs
|
(8.1
|
)
|
(4.8
|
)
|
–
|
|||||
|
Proceeds
from issuances of common stock
|
38.4
|
35.6
|
35.3
|
|||||||
|
Acquisitions
of treasury stock
|
(84.1
|
)
|
(393.7
|
)
|
(85.3
|
)
|
||||
|
Common
dividends
|
(41.0
|
)
|
(42.5
|
)
|
(38.9
|
)
|
||||
|
Other,
net
|
7.6
|
(0.2
|
)
|
(0.9
|
)
|
|||||
|
Cash
provided by (used in) financing activities
|
680.2
|
(410.7
|
)
|
(168.1
|
)
|
|||||
|
Effect
of exchange rate changes on cash
|
2.3
|
4.2
|
4.0
|
|||||||
|
Change
in cash and cash equivalents
|
90.5
|
(137.7
|
)
|
162.2
|
||||||
|
Cash
and Cash Equivalents - Beginning of Year
|
61.0
|
198.7
|
36.5
|
|||||||
|
Cash
and Cash Equivalents - End of Year
|
$
|
151.5
|
$
|
61.0
|
$
|
198.7
|
||||
(a) 2005
and 2004 have been retrospectively adjusted for the company’s change in 2006
from the last-in, first-out method of inventory accounting to the first-in,
first-out method. Additional details are available in
Note 7.
The
accompanying notes are an integral part of the consolidated financial
statements.
Page
40 of
98
Ball
Corporation and Subsidiaries
|
($
in millions, except share amounts)
|
Years
ended December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Number
of Common Shares Outstanding
(000s)
|
||||||||||
|
Balance,
beginning of year
|
158,383
|
157,506
|
155,885
|
|||||||
|
Shares
issued for stock options, other stock plans and business acquisitions,
net
of shares exchanged (a)
|
1,644
|
877
|
1,621
|
|||||||
|
Balance,
end of year
|
160,027
|
158,383
|
157,506
|
|||||||
|
Number
of Treasury Shares Outstanding
(000s)
|
|
|
||||||||
|
Balance,
beginning of year
|
(54,183
|
)
|
(44,815
|
)
|
(43,106
|
)
|
||||
|
Shares
purchased, net of shares reissued (a)
|
(1,707
|
)
|
(9,368
|
)
|
(1,709
|
)
|
||||
|
Balance,
end of year
|
(55,890
|
)
|
(54,183
|
)
|
(44,815
|
)
|
||||
|
Common
Stock
|
||||||||||
|
Balance,
beginning of year
|
$
|
633.6
|
$
|
610.8
|
$
|
567.3
|
||||
|
Shares
issued for stock options and other stock plans, net of shares
exchanged
|
28.7
|
15.5
|
29.8
|
|||||||
|
Shares
issued for business acquisitions (a)
|
33.6
|
–
|
–
|
|||||||
|
Tax
benefit from option exercises
|
7.5
|
7.3
|
13.7
|
|||||||
|
Balance,
end of year
|
$
|
703.4
|
$
|
633.6
|
$
|
610.8
|
||||
|
Retained
Earnings (b)
|
||||||||||
|
Balance,
beginning of year
|
$
|
1,246.0
|
$
|
1,015.0
|
$
|
749.8
|
||||
|
Net
earnings
|
329.6
|
272.1
|
302.1
|
|||||||
|
Common
dividends, net of tax benefits
|
(40.3
|
)
|
(41.1
|
)
|
(36.9
|
)
|
||||
|
Balance,
end of year
|
$
|
1,535.3
|
$
|
1,246.0
|
$
|
1,015.0
|
||||
|
Accumulated
Other Comprehensive Earnings (Loss) (Note 15)
|
||||||||||
|
Balance,
beginning of year
|
$
|
(100.7
|
)
|
$
|
33.2
|
$
|
(1.4
|
)
|
||
|
Foreign
currency translation adjustment
|
57.2
|
(74.3
|
)
|
68.2
|
||||||
|
Change
in minimum pension liability, net of tax
|
8.0
|
(43.6
|
)
|
(33.2
|
)
|
|||||
|
Effective
financial derivatives, net of tax
|
6.0
|
(16.0
|
)
|
(0.4
|
)
|
|||||
|
Net
other comprehensive earnings adjustments
|
71.2
|
(133.9
|
)
|
34.6
|
||||||
|
Accumulated
other comprehensive earnings (loss)
|
$
|
(29.5
|
)
|
$
|
(100.7
|
)
|
$
|
33.2
|
||
|
Treasury
Stock
|
||||||||||
|
Balance,
beginning of year
|
$
|
(925.5
|
)
|
$
|
(564.9
|
)
|
$
|
(506.9
|
)
|
|
|
Shares
purchased, net of shares reissued
|
(104.4
|
)
|
(360.6
|
)
|
(58.0
|
)
|
||||
|
Shares
returned in business acquisitions (a)
|
(13.9
|
)
|
–
|
–
|
||||||
|
Balance,
end of year
|
$
|
(1,043.8
|
)
|
$
|
(925.5
|
)
|
$
|
(564.9
|
)
|
|
|
Comprehensive
Earnings
(b)
|
||||||||||
|
Net
earnings
|
$
|
329.6
|
$
|
272.1
|
$
|
302.1
|
||||
|
Net
other comprehensive earnings adjustments (see details
above)
|
71.2
|
(133.9
|
)
|
34.6
|
||||||
|
Comprehensive
earnings
|
$
|
400.8
|
$
|
138.2
|
$
|
336.7
|
||||
| (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). In
accordance with a purchase price adjustment, 314,225 shares were
subsequently returned to Ball and recorded as treasury stock. The
net
number of shares issued in the acquisition was 444,756 at a price
of
$44.28 per share.
|
| (b) |
2005
and 2004 have been retrospectively adjusted for the company’s change in
2006 from the last-in, first-out method of inventory accounting to
the
first-in, first-out method. Additional details are available in
Note 7.
|
The
accompanying notes are an integral part of the consolidated financial
statements.
Page
41 of
98
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
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 two-thirds 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
42 of
98
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,” and SFAS No. 106, “Employers' Accounting for
Postretirement Benefits Other than Pensions.” 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.
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,
third party 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.
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.
Page
43 of
98
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
1.
Critical and Significant Accounting Policies (continued)
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 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.
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. Prior to the fourth quarter of 2006, the majority
of
the U.S. inventories in the metal beverage packaging, Americas, and metal food
and household products packaging, Americas, segments were accounted for using
the last-in, first-out (LIFO) method of accounting. During the fourth quarter
of
2006, management changed its method of accounting for these inventories
from the LIFO method to the FIFO method. The FIFO method of inventory
accounting better matches revenues and expenses in accordance with sales
contract terms. All periods have been retrospectively adjusted on a FIFO basis
in accordance with SFAS No. 154. Additional details are available in
Note 7.
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 - 15 to 40 years; machinery and equipment - 5 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 is
also reported as interest expense.
Page
44 of
98
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
1.
Critical and Significant Accounting Policies (continued)
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.
Stock-Based
Compensation
Ball
has
a variety of restricted stock and stock option plans. With the exception of
the
company’s deposit share program, which through 2005 was accounted for as a
variable plan and is discussed in Note 15, 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. In the fourth quarter of 2006,
Ball amended one of its deferred compensation stock plans to allow limited
diversification, which required an initial mark-to-market adjustment of
$6.7 million. Stock-based compensation is reported as part of selling,
general and administrative expenses in the consolidated statements of
earnings.
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 or 2004. Ball’s earnings as reported included after-tax stock-based
compensation of $6.6 million and $12.5 million for the years ended
December 31, 2005 and 2004, respectively. If the fair value based method
had been used, after-tax stock-based compensation would have been
$8.7 million in 2005 and $9.3 million in 2004, and diluted earnings
per share would have been lower by $0.02 in 2005 and higher by $0.03 in 2004.
Further details regarding the expense calculated under the fair value based
method are provided in Note 15.
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.
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 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
Page
45 of
98
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
1.
Critical and Significant Accounting Policies (continued)
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.
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.
Reclassifications
Certain
prior year amounts have been reclassified in order to conform to the current
year presentation.
New
Accounting Pronouncements
In
September 2006 the Financial Accounting Standards Board (FASB) issued
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),” which was effective in Ball’s annual report for the year ended
December 31, 2006. The new standard requires employers to recognize the
overfunded or underfunded status of a defined benefit postretirement plan as
an
asset or liability in its statement of financial position and to recognize
changes in that funded status in the year in which the changes occur through
other comprehensive earnings. It also requires disclosure of certain effects
on
net periodic benefit cost for the next fiscal year that arise from delayed
recognition of the gains or losses, prior service costs or credits and
transition assets or obligations. The effects of Ball’s adoption of this
standard are detailed in Note 14, “Employee Benefit
Obligations.”
Also
in
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements,” which establishes a framework for measuring value and expands
disclosures about fair value measurements. Although it does not require any
new
fair value measurements, the statement emphasizes that fair value is a
market-based measurement, not an entity-specific measurement, and should be
determined based on the assumptions that market participants would use in
pricing the asset or liability. The standard will be effective for Ball as
of
January 1, 2008.
Staff
Accounting Bulletin (SAB) No. 108 was issued in September 2006 by the
Securities and Exchange Commission (SEC) addressing the SEC staff’s view
regarding the process of consideration of the effects of prior year
misstatements in quantifying current year misstatements for the purpose of
materiality. The company’s process is consistent with the SEC’s
view.
In
June 2006 the FASB issued Financial Interpretation No. (FIN) 48,
“Accounting for Uncertainty in Income Taxes - an Interpretation of FASB
Statement No. 109,” which prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. FIN 48 became
effective for Ball beginning on January 1, 2007. The company is evaluating
the impact this standard will have on its consolidated financial statements.
While adoption of this standard will require balance sheet reclassifications
of
the accruals for uncertain tax positions and a cumulative adjustment for the
retrospective application of the standard, at the time of this filing the
company is unable to determine the impact of any reclassifications or to
determine whether the cumulative adjustment is material.
In
March 2006 the Emerging Issues Task Force of the FASB reached a consensus
on Issue No. 06-3 regarding whether taxes collected from customers and
remitted to governmental authorities are presented in a company’s income
statement (a gross presentation) or only in its balance sheet (a net
presentation). The decision, which is effective for Ball’s reporting beginning
January 1, 2007, requires a company to disclose its policy for recording
and reporting such taxes (gross or net) and, if on a gross basis, the amounts
that are included in revenues and costs in the statement of earnings. Ball’s
current policy is to record taxes collected from customers as liabilities on
its
consolidated balance sheet and not in its consolidated statement of
earnings.
Page
46 of
98
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
1.
Critical and Significant Accounting Policies (continued)
In
May 2005 the FASB issued SFAS No. 154, “Accounting Changes and Error
Corrections - a Replacement of APB Opinion No. 20 and FASB Statement
No. 3.” The new standard changes the requirements for the accounting for
and reporting of a change in accounting principle and applies to all such
voluntary changes. The previous accounting required that most changes in
accounting principle be recognized in net earnings by including a cumulative
effect of the change in the period of the change. SFAS No. 154, which was
effective for Ball beginning January 1, 2006, requires retroactive
application to prior periods’ financial statements. The company applied
SFAS No. 154 to its change from the LIFO to the FIFO method of
accounting for certain inventories, which occurred in the fourth quarter of
2006
.
In
December 2004 the FASB issued SFAS No. 123 (revised 2004),
“Share-Based Payment.” SFAS No. 123 (revised 2004) is a revision
of SFAS No. 123, “Accounting for Stock-Based Compensation,” and
supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”
The new standard, which was effective for Ball beginning January 1, 2006,
establishes accounting standards for transactions in which an entity exchanges
its equity instruments for goods or services, including stock option and
restricted stock grants. On March 29, 2005, the SEC issued SAB
No. 107, which summarizes the views of the SEC staff regarding the
interaction between SFAS No. 123 (revised 2004) and certain SEC rules and
regulations and provides the SEC staff’s views regarding the valuation of
share-based payment arrangements for public companies. Upon the adoption of
the
standard, Ball elected to use the modified prospective transition method and
the
Black-Scholes valuation model. The adoption of SFAS No. 123 (revised
2004) resulted in higher stock-based compensation in 2006 of $6.3 million
compared to 2005. Additional effects on the company’s consolidated financial
statements of adopting SFAS No. 123 (revised 2004) are discussed in
Note 15.
In
November 2004 the FASB issued SFAS No. 151, “Inventory Costs - an
amendment of ARB No. 43, Chapter 4.” SFAS No. 151 requires abnormal
amounts of idle facility expense, freight, handling costs and wasted material
(spoilage) to be recognized as current-period charges. It also requires that
the
allocation of fixed production overheads to the costs of conversion be based
on
the normal capacity of the production facilities. SFAS No. 151 was
effective for inventory costs incurred by Ball beginning on January 1,
2006. The adoption of SFAS No. 151 had an insignificant effect on
Ball’s consolidated financial statements.
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, as
well
as plastic containers used for household products.
Plastic
packaging, Americas:
Consists
of operations in the U.S. and Canada, which manufacture and sell polyethylene
terephthalate (PET) and polypropylene containers, primarily for use in beverage
and food packaging.
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.
Page
47 of
98
Notes
to Consolidated Financial Statements
Ball
Corporation and Subsidiaries
2.
Business Segment Information (continued)
During
the fourth quarter of 2006, Ball’s management changed its method of inventory
accounting from LIFO to FIFO in the metal beverage, Americas, and the metal
food
and household products packaging, Americas, segments. Segment results for all
periods presented have been retrospectively adjusted on a FIFO basis in
accordance with SFAS No. 154 (see Notes 1 and 7). In the third quarter
of 2006, the company changed its expense allocation method by allocating to
each
of the packaging segments stock-based compensation expense previously included
in corporate undistributed expenses. The change did not have a significant
impact on any segment for the current or prior years. Prior periods have been
conformed to the current presentation of the segments and the change in expense
allocation.
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.
Major
Customers
Following
is a summary of Ball’s major customers and their respective percentages of
consolidated sales for the years ended December 31:
|
2006
|
2005
|
2004
|
||||||||
|
SABMiller
plc
|
11
|
%
|
11
|
%
|
11
|
%
|
||||
|
PepsiCo,
Inc. and affiliates
|
9
|
%
|
10
|
%
|
9
|
%
|
||||
|
All
bottlers of Pepsi-Cola or Coca-Cola branded beverages
|
29
|
%
|
27
|
%
|
28
|
%
|
||||
|
U.S.
government agencies and their prime contractors
|
9
|
%
|
11
|
%
|
10
|
%
|
||||
Summary
of Net Sales by Geographic Area
|
|
||||||||||
| ($ in millions) |
U.S.
|
Foreign
(a)
|
Consolidated
|
|||||||
|
2006
|
$
|
4,868.6
|
$
|
1,752.9
|
$
|
6,621.5
|
||||
|
2005
|
4,133.3
|
1,617.9
|
5,751.2
|
|||||||
|
2004
|
3,898.9
|
1,541.3
|
5,440.2
|
|||||||
Summary
of Long-Lived Assets by Geographic Area (b)
|
|
|||||||||||||
|
($
in millions)
|
U.S.
|
Germany
|
Other
(c)
|
||||||||||