Edgar Filing: BALL CORP

f10_main.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

Commission file number 1-7349

BALL CORPORATION

State of Indiana

35-0160610

10 Longs Peak Drive, P.O. Box 5000

Broomfield, CO 80021-2510

303/469-3131

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer x Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

	Class		Outstanding at October 28, 2007
	Common Stock, without par value		100,498,666 shares

Ball Corporation and Subsidiaries

QUARTERLY REPORT ON FORM 10-Q

For the period ended September 30, 2007

INDEX

		Page Number

PART I.	FINANCIAL INFORMATION:

Item 1.	Financial Statements

	Unaudited Condensed Consolidated Statements of Earnings for the Three Months and Nine Months Ended September 30, 2007, and October 1, 2006		1

	Unaudited Condensed Consolidated Balance Sheets at September 30, 2007, and December 31, 2006		2

	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007, and October 1, 2006		3

	Notes to Unaudited Condensed Consolidated Financial Statements		4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		27

Item 4.	Controls and Procedures		29

PART II.	OTHER INFORMATION		31

PART I.

FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

Ball Corporation and Subsidiaries

	Three Months Ended						Nine Months Ended
($ in millions, except per share amounts)	September 30, 2007			October 1, 2006			September 30, 2007			October 1, 2006

Net sales	$	1,992.1		$	1,822.3		$	5,719.1		$	5,029.7
Legal settlement (Note 5)		(85.6	)		–			(85.6	)		–
Total net sales		1,906.5			1,822.3			5,633.5			5,029.7


Costs and expenses
Cost of sales (excluding depreciation and amortization) (a)		1,659.5			1,516.7			4,736.4			4,228.2
Depreciation and amortization (Notes 8 and 10)		71.8			64.5			206.7			184.0
Property insurance gain (Note 5)		−			(2.8	)		−			(76.9	)
Business consolidation costs (Notes 5 and 16)		−			−			−			1.7
Selling, general and administrative (Note 1)		84.3			66.5			253.8			210.3
		1,815.6			1,644.9			5,196.9			4,547.3


Earnings before interest and taxes (a)		90.9			177.4			436.6			482.4


Interest expense		(36.2	)		(37.2	)		(112.2	)		(98.1	)

Earnings before taxes		54.7			140.2			324.4			384.3
Tax provision (Note 12) (a)		3.1			(36.6	)		(85.9	)		(114.2	)
Minority interests		(0.1	)		(0.1	)		(0.3	)		(0.5	)
Equity results in affiliates		3.2			3.6			9.8			11.7


Net earnings (a)	$	60.9		$	107.1		$	248.0		$	281.3


*Earnings per share (Note 15) (a):*
Basic	$	0.60		$	1.04		$	2.44		$	2.72
Diluted	$	0.59		$	1.02		$	2.40		$	2.68

Weighted average common shares outstanding (in thousands) (Note 15):
Basic		101,422			103,292			101,691			103,397
Diluted		102,997			104,901			103,372			105,124

Cash dividends declared and paid, per common share	$	0.10		$	0.10		$	0.30		$	0.30

(a)

The 2006 periods have been retrospectively adjusted for the company’s change in the fourth quarter of 2006 from the last-in, first-out method of inventory accounting for two of its segments to the first-in, first-out method. Additional details are available in Note 7.

See accompanying notes to unaudited condensed consolidated financial statements.

Page 1

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

Ball Corporation and Subsidiaries

($ in millions)	September 30, 2007			December 31, 2006
ASSETS
Current assets
Cash and cash equivalents	$	79.4		$	151.5
Receivables, net (Note 6)		852.8			579.5
Inventories, net (Note 7)		867.6			935.4
Deferred taxes, prepaid expenses and other (Note 12)		80.1			94.9
Total current assets		1,879.9			1,761.3

Property, plant and equipment, net (Note 8)		1,941.0			1,876.0
Goodwill (Notes 4 and 9)		1,837.8			1,773.7
Intangibles and other assets, net (Note 10)		356.7			429.9
Total Assets	$	6,015.4		$	5,840.9

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Short-term debt and current portion of long-term debt (Note 11)	$	169.4		$	181.3
Accounts payable		737.5			732.4
Accrued employee costs		216.3			201.1
Income taxes payable (Note 12)		35.2			71.8
Other current liabilities (Note 5)		266.4			267.7
Total current liabilities		1,424.8			1,454.3

Long-term debt (Note 11)		2,228.9			2,270.4
Employee benefit obligations (Note 13)		857.8			847.7
Deferred taxes and other liabilities (Note 12)		145.3			102.1
Total liabilities		4,656.8			4,674.5

Contingencies (Note 17)
Minority interests		1.3			1.0

Shareholders’ equity (Note 14)
Common stock (160,881,984 shares issued – 2007; 160,026,936 shares issued – 2006)		752.1			703.4
Retained earnings		1,741.0			1,535.3
Accumulated other comprehensive earnings (loss)		32.1			(29.5	)
Treasury stock, at cost (59,759,605 shares – 2007; 55,889,948 shares – 2006)		(1,167.9	)		(1,043.8	)
Total shareholders’ equity		1,357.3			1,165.4
Total Liabilities and Shareholders’ Equity	$	6,015.4		$	5,840.9

See accompanying notes to unaudited condensed consolidated financial statements.

Page 2

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Ball Corporation and Subsidiaries

($ in millions)	Nine Months Ended
	September 30, 2007			October 1, 2006
Cash Flows from Operating Activities
Net earnings (a)	$	248.0		$	281.3
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		206.7			184.0
Legal settlement (Note 5)		85.6			–
Property insurance gain (Note 5)		−			(76.9	)
Business consolidation costs (Notes 5 and 16)		−			1.7
Deferred taxes (Note 7) (a)		(7.7	)		27.7
Other, net		27.1			(41.0	)
Changes in working capital components, excluding effects of acquisitions (Note 7) (a)		(154.5	)		(260.7	)
Cash provided by operating activities		405.2			116.1

Cash Flows from Investing Activities
Additions to property, plant and equipment		(222.9	)		(187.6	)
Business acquisitions, net of cash acquired (Note 4)		−			(786.4	)
Property insurance proceeds (Note 5)		48.6			32.4
Other, net		(5.4	)		9.7
Cash used in investing activities		(179.7	)		(931.9	)

Cash Flows from Financing Activities
Long-term borrowings		16.8			984.1
Repayments of long-term borrowings		(31.5	)		(100.9	)
Change in short-term borrowings		(106.9	)		7.0
Proceeds from issuance of common stock		38.0			27.9
Acquisitions of treasury stock		(193.1	)		(72.6	)
Common dividends		(30.4	)		(30.7	)
Other, net		8.3			(2.1	)
Cash provided by (used in) financing activities		(298.8	)		812.7

Effect of exchange rate changes on cash		1.2			1.2

Change in cash and cash equivalents		(72.1	)		(1.9	)
Cash and cash equivalents - beginning of period		151.5			61.0
Cash and cash equivalents - end of period	$	79.4		$	59.1

(a)

The nine months ended October 1, 2006, have been retrospectively adjusted for the company’s change in the fourth quarter of 2006 from the last-in, first-out method of inventory accounting for two of its segments to the first-in, first-out method. Additional details are available in Note 7.

See accompanying notes to unaudited condensed consolidated financial statements.

Page 3

Notes to Unaudited Condensed Consolidated Financial Statements

Ball Corporation and Subsidiaries

1.	Principles of Consolidation and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Ball Corporation and its controlled affiliates (collectively Ball, the company, we or our) and have been prepared by the company without audit. Certain information and footnote disclosures, including critical and significant accounting policies, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted.

Results of operations for the periods shown are not necessarily indicative of results for the year, particularly in view of the seasonality in the packaging segments. These unaudited condensed consolidated financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and the notes thereto included in the company’s Annual Report on Form 10-K pursuant to Section 13 of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2006 (annual report).

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. These estimates are based on historical experience and various assumptions believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions and conditions. However, we believe that the financial statements reflect all adjustments which are of a normal recurring nature and are necessary for a fair statement of the results for the interim period.

Ball adopted Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 48 as of January 1, 2007, and has identified accounting for uncertain tax positions under this guidance as a critical accounting policy. Considering tax laws of the multiple jurisdictions in which we operate, both domestic and foreign, we assess whether it is more likely than not that a tax position will be sustained upon examination and through any litigation and measure the largest amount of the benefit that is likely to be realized upon ultimate settlement. Consistent with our practice prior to adoption of FIN 48, we record related interest expense and penalties, if any, as a tax provision expense. Actual results may differ substantially from our estimates.

During the fourth quarter of 2006, Ball’s management changed the company’s method of inventory accounting from last-in, first-out (LIFO) to first-in, first-out (FIFO) in the metal beverage packaging, Americas, and the metal food and household products packaging, Americas, segments. Results for the three months and nine months ended October 1, 2006, have been retrospectively adjusted on a FIFO basis in accordance with Statement of Financial Accounting Standards (SFAS) No. 154 (see Note 7).

Subsequent to the issuance of its financial statements for the year ended December 31, 2005, the company determined that certain foreign currency exchange losses had been inadvertently deferred for the years 2005, 2004 and 2003. As a result, selling, general and administrative expenses were understated by $2.5 million, $2.3 million and $1 million in 2005, 2004 and 2003, respectively. Management assessed the impact of these adjustments and did not believe these amounts were material, individually or in the aggregate, to any previously issued financial statements or to our full year results of operations for 2006. A cumulative $5.8 million pretax out-of-period adjustment was included in selling, general and administrative expenses in the first quarter of 2006.

Certain prior-year amounts have been reclassified in order to conform to the current-year presentation. In addition, within the company’s annual report, the consolidated statement of changes in shareholders’ equity for the year ended December 31, 2006, included a transition adjustment of $47.9 million, net of tax, related to the adoption of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension Plans and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106 and 132(R),” as a component of 2006 comprehensive earnings rather than only as an adjustment to accumulated other comprehensive loss. Had the transition adjustment of $47.9 million been presented in accordance with SFAS No. 158, comprehensive earnings for the year ended December 31, 2006, would have been $448.7 million rather than the $400.8 million reported in the annual report.

Page 4

Notes to Unaudited Condensed Consolidated Financial Statements

Ball Corporation and Subsidiaries

1.	Principles of Consolidation and Basis of Presentation (continued)

Management has determined that the effect on the consolidated statement of changes in shareholders’ equity for this change in presentation was not material to the 2006 consolidated financial statements taken as a whole. Comprehensive earnings for 2006 will be revised in future presentations of the consolidated statements of changes in shareholders’ equity.

2.	New Accounting Standards

In April 2007 the FASB issued FASB Staff Position (FSP) FIN 39-1, “Amendment of FASB Interpretation No. 39,” which amends the terms of FIN 39, paragraph 3, to replace the terms “conditional contracts” and “exchange contracts” with the term “derivative instruments” as defined in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” It also amends paragraph 10 of FIN 39 to permit a reporting entity to offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement that have been offset in accordance with that paragraph. FSP FIN 39-1 will be effective for Ball as of January 1, 2008, and is currently under evaluation by the company.

In February 2007 the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115,” which permits companies to choose, at specified election dates, to measure certain financial instruments and other eligible items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are subsequently reported in earnings. The decision to elect the fair value option is generally irrevocable, is applied instrument by instrument and can only be applied to an entire instrument. The standard, which will be effective for Ball as of January 1, 2008, is currently under evaluation by the company. At this time, we do not expect to elect the fair value option for any eligible items and did not early adopt the standard in the first quarter of 2007 as permitted.

In September 2006 the FASB issued SFAS No. 157, “Fair Value Measurements,” which establishes a framework for measuring value and expands disclosures about fair value measurements. Although it does not require any new fair value measurements, the statement emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and should be determined based on the assumptions that market participants would use in pricing the asset or liability. The standard, which will be effective for Ball as of January 1, 2008, is currently under evaluation by the company.

In June 2006 the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109,” which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 became effective for Ball beginning on January 1, 2007. The adoption of FIN 48 included a net increase in uncertain tax liabilities of $2.1 million to a total of $45.8 million, excluding $1.2 million accrued in the opening balance sheet of the acquisition of U.S. Can Corporation (see Note 4). The company records the related interest expense and penalties, if any, as a tax expense, consistent with the practice prior to adoption. Additional details about the adoption of FIN 48 are provided in Note 12. In May 2007 the FASB amended FIN 48 by issuing FSP FIN 48-1, which provides guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. The adoption of FSP FIN 48-1 did not result in any changes to the amounts recorded upon the initial adoption of FIN 48 or during the nine months ended September 30, 2007.

Page 5

Notes to Unaudited Condensed Consolidated Financial Statements

Ball Corporation and Subsidiaries

3.	Business Segment Information

Ball’s operations are organized and reviewed by management along its product lines in five reportable segments:

Metal beverage packaging, Americas: Consists of operations in the U.S., Canada and Puerto Rico, which manufacture and sell metal containers, primarily for use in beverage packaging.

Metal beverage packaging, Europe/Asia: Consists of operations in several countries in Europe and the People’s Republic of China (PRC), which manufacture and sell metal beverage containers in Europe and Asia, as well as plastic containers in Asia.

Metal food & household products packaging, Americas: Consists of operations in the U.S., Canada and Argentina, which manufacture and sell metal food cans, aerosol cans, paint cans and custom and specialty cans.

Plastic packaging, Americas: Consists of operations in the U.S. and Canada, which manufacture and sell polyethylene terephthalate (PET) and polypropylene containers, primarily for use in beverage and food packaging. Effective January 1, 2007, this segment also includes the manufacture and sale of plastic containers used for industrial and household products, which were previously reported within the metal food and household products packaging, Americas, segment.

Aerospace & technologies: Consists of the manufacture and sale of aerospace and other related products and the providing of services used primarily in the defense, civil space and commercial space industries.

The accounting policies of the segments are the same as those in the unaudited condensed consolidated financial statements. A discussion of the company’s critical and significant accounting policies can be found in Ball’s annual report. We also have investments in companies in the U.S., PRC and Brazil, which are accounted for under the equity method of accounting and, accordingly, those results are not included in segment sales or earnings.

In the fourth quarter of 2006, the company changed its method of inventory accounting in the metal beverage packaging, Americas, and the metal food and household products packaging, Americas, segments from LIFO to FIFO (see Note 1). Effective January 1, 2007, a plastic pail product line with expected annual net sales of $55 million was transferred from the metal food and household products packaging, Americas, segment to the plastic packaging, Americas, segment. The three months and nine months ended October 1, 2006, have been retrospectively adjusted to conform to the current presentation for the change in inventory accounting method, as well as the transfer of the plastic pail product line.

Page 6

Notes to Unaudited Condensed Consolidated Financial Statements

Ball Corporation and Subsidiaries

3.	Business Segment Information (continued)

	Three Months Ended						Nine Months Ended
($ in millions)	September 30, 2007			October 1, 2006			September 30, 2007			October 1, 2006

Net Sales
Metal beverage packaging, Americas	$	728.8		$	659.6		$	2,182.9		$	1,992.6
Legal settlement (Note 5)		(85.6	)		–			(85.6	)		–
Total metal beverage packaging, Americas		643.2			659.6			2,097.3			1,992.6
Metal beverage packaging, Europe/Asia		522.4			425.1			1,446.7			1,159.8
Metal food & household products packaging, Americas		349.5			366.0			912.3			850.5
Plastic packaging, Americas		195.0			201.2			580.3			521.1
Aerospace & technologies		196.4			170.4			596.9			505.7
Net sales	$	1,906.5		$	1,822.3		$	5,633.5		$	5,029.7

Net Earnings
Metal beverage packaging, Americas	$	65.0		$	73.0		$	241.4		$	193.5
Legal settlement (Note 5)		(85.6	)		–			(85.6	)		–
Metal beverage packaging, Americas		(20.6	)		73.0			155.8			193.5

Metal beverage packaging, Europe/Asia		81.0			63.2			218.5			158.8
Property insurance gain (Note 5)		−			2.8			−			76.9
Total metal beverage packaging, Europe/Asia		81.0			66.0			218.5			235.7

Metal food & household products packaging, Americas		14.5			19.7			25.4			27.2
Business consolidation costs (Note 5)		−			−			−			(1.7	)
Total metal food & household products packaging, Americas		14.5			19.7			25.4			25.5

Plastic packaging, Americas		7.7			7.9			17.1			18.3
Aerospace & technologies		18.3			15.6			53.5			33.4
Segment earnings before interest and taxes		100.9			182.2			470.3			506.4
Corporate undistributed expenses, net		(10.0	)		(4.8	)		(33.7	)		(24.0	)
Earnings before interest and taxes		90.9			177.4			436.6			482.4
Interest expense		(36.2	)		(37.2	)		(112.2	)		(98.1	)
Tax provision		3.1			(36.6	)		(85.9	)		(114.2	)
Minority interests		(0.1	)		(0.1	)		(0.3	)		(0.5	)
Equity in results of affiliates		3.2			3.6			9.8			11.7
Net earnings	$	60.9		$	107.1		$	248.0		$	281.3

Page 7

Notes to Unaudited Condensed Consolidated Financial Statements

Ball Corporation and Subsidiaries

3.	Business Segment Information (continued)

($ in millions)	As of September 30, 2007		As of December 31, 2006

Total Assets
Metal beverage packaging, Americas	$	1,169.2	$	1,147.2
Metal beverage packaging, Europe/Asia		2,584.6		2,412.7
Metal food & household products packaging, Americas (a)		1,214.4		1,094.9
Plastic packaging, Americas (a)		577.7		609.0
Aerospace & technologies		292.8		268.2
Segment assets		5,838.7		5,532.0
Corporate assets, net of eliminations		176.7		308.9
Total assets	$	6,015.4	$	5,840.9

(a)

Amounts in 2006 have been retrospectively adjusted for the transfer of a plastic pail product line with assets of approximately $65 million from the metal food and household products packaging, Americas, segment to the plastic packaging, Americas, segment, which occurred as of January 1, 2007.

4.	Acquisitions

U.S. Can Corporation

On March 27, 2006, Ball acquired all of the issued and outstanding shares of U.S. Can Corporation (U.S. Can) for 444,756 common shares of Ball Corporation (valued at $44.28 per share for a total of $19.7 million) pursuant to the provisions of a merger agreement dated February 14, 2006, among Ball, U.S. Can and the shareholders of U.S. Can (merger agreement). Contemporaneously with the acquisition, Ball refinanced $598.2 million of U.S. Can debt, including $26.8 million of bond redemption premiums and fees, and over the next several years, expects to realize approximately $42 million of acquired net operating tax loss carryforwards. The acquired operations are included in the metal food and household products packaging, Americas, segment, except for a plastic pail product line that was transferred to the company’s plastic packaging, Americas, segment effective January 1, 2007, for which 2006 amounts have been retrospectively adjusted. The acquisition has been accounted for as a purchase and, accordingly, its results have been included in the consolidated financial statements since March 27, 2006.

Pursuant to the merger agreement, a certain portion of the common share consideration issued for the acquisition of U.S. Can was placed in escrow and was subsequently converted into cash, which remains in escrow. During the second quarter of 2007, Ball asserted claims against the former shareholders of U.S. Can, and the escrowed cash will be used to satisfy such claims to the extent they are agreed to or sustained.

Alcan Packaging

On March 28, 2006, Ball acquired North American plastic bottle container assets from Alcan Packaging (Alcan) for $184.7 million cash. The acquired business primarily manufactures and sells barrier polypropylene plastic bottles used in food packaging and, to a lesser extent, barrier PET plastic bottles used for beverages and food. The operations acquired form part of Ball’s plastic packaging, Americas, segment. The acquisition has been accounted for as a purchase and, accordingly, its results have been included in the consolidated financial statements since March 28, 2006.

Page 8

Notes to Unaudited Condensed Consolidated Financial Statements

Ball Corporation and Subsidiaries

4.	Acquisitions (continued)

Following is a summary of the net assets acquired in the U.S. Can and Alcan transactions. The valuations were performed by management, including identification and valuation of acquired intangible assets and of liabilities, including development and assessment of associated costs of consolidation and integration plans. The company also engaged third party experts to assist management in valuing certain assets and liabilities including inventory; property, plant and equipment; intangible assets and pension and other post-retirement obligations. During the first quarter of 2007, the company completed its valuation of the acquired assets and liabilities and revised the purchase price allocations accordingly. The final purchase price allocations resulted primarily in an increase in identifiable intangible assets for both acquisitions.

($ in millions)	U.S. Can (Metal Food & Household Products Packaging, Americas)			Alcan (Plastic Packaging, Americas)			Total

Cash	$	0.2		$	–		$	0.2
Property, plant and equipment		164.6			73.6			238.2
Goodwill		353.2			48.6			401.8
Intangibles		63.9			33.7			97.6
Other assets, primarily inventories and receivables		220.1			40.1			260.2
Liabilities assumed (excluding refinanced debt), primarily current		(184.1	)		(11.3	)		(195.4	)
Net assets acquired	$	617.9		$	184.7		$	802.6

With the assistance of an independent valuation firm, the customer relationships and acquired technologies of both acquisitions were identified as valuable intangible assets, and the company assigned to them an estimated life of 20 years based on the valuation firm’s estimates. Because the acquisition of U.S. Can was a stock purchase, neither the goodwill nor the intangible assets are deductible for U.S. income tax purposes unless, and until such time as, the stock is sold. However, because the Alcan acquisition was an asset purchase, the amortization of goodwill and intangible assets is deductible for U.S. tax purposes.

5.	Legal Settlement, Property Insurance Gain and Business Consolidation Activities

2007

Legal Settlement

During the second quarter of 2007, Miller Brewing Company (Miller), a U.S. customer, asserted various claims against a wholly owned subsidiary of the company, primarily related to the pricing of the aluminum component of the containers supplied by the subsidiary. On October 4, 2007, the dispute was settled in mediation. Ball will continue to supply all of Miller’s beverage can and end business through 2015 and Miller will receive $85.6 million ($51.8 million after tax), with approximately $70 million to be paid in the first quarter of 2008 (recorded on the consolidated balance sheet in other current liabilities). The remainder of the third quarter accrual will be recovered over the life of the contract. Third quarter net sales and pretax earnings have been reduced by the $85.6 million charge.

Details about a fourth quarter 2007 announcement regarding business consolidation activities are available in Note 16, “Subsequent Events.”

Page 9

Notes to Unaudited Condensed Consolidated Financial Statements

Ball Corporation and Subsidiaries

5.	Legal Settlement, Property Insurance Gain and Business Consolidation Activities (continued)

2006

Property Insurance Gain

On April 1, 2006, a fire in the Hassloch, Germany, metal beverage can plant in the company’s metal beverage packaging, Europe/Asia, segment damaged a significant portion of the plant’s building and machinery and equipment. A €26.7 million ($33.8 million) fixed asset write down was recorded in 2006 to reflect the estimated impairment of the assets damaged as a result of the fire. As a result, a pretax gain of €58.4 million ($74.1 million) was recorded in the consolidated statement of earnings in the second quarter of 2006. This pretax gain was revised to €59.6 million ($75.5 million) by the end of 2006. In accordance with the final agreement reached with the insurance company in November 2006, the final property insurance proceeds of €37.6 million ($48.6 million) were received in January 2007. Additionally, €5.1 million ($7 million) and €26.2 million ($35.1 million) were recognized in cost of sales during the third quarter and first nine months of 2007, respectively, for insurance recoveries related to business interruption costs. Approximately €0.8 million of additional business interruption recoveries have been agreed upon with the insurance carrier and will be recognized during the fourth quarter of 2007.

Business Consolidation Activities

Through the first two quarters of 2006, a net pretax charge of $1.7 million ($1.2 million after tax) was recorded in the metal food and household products packaging, Americas, segment, primarily to shut down a metal food can production line in Whitby, Ontario.

In the fourth quarter of 2006, the company recorded a pretax charge of $33.6 million ($27.4 million after tax) to close two manufacturing facilities in North America as part of the realignment of the metal food and household products packaging, Americas, segment following the acquisition earlier in the year of U.S. Can. The charge included $7.8 million of severance costs, $16.8 million of pension costs and $9 million of other costs. Operations have ceased at both plants and payments of $9.8 million were made in the first nine months of 2007 against the reserves.

Summary

The following table summarizes the 2007 year-to-date activity related to the amounts provided for business consolidation activities:

($ in millions)	Fixed Assets/ Spare Parts			Employee Costs			Other			Total

Balance at December 31, 2006	$	6.7		$	14.1		$	4.3		$	25.1
Payments		–			(8.4	)		(3.7	)		(12.1	)
Asset dispositions and other		(1.3	)		–			(0.3	)		(1.6	)
Balance at September 30, 2007	$	5.4		$	5.7		$	0.3		$	11.4

The remaining reserves are expected to be utilized during 2007 and 2008. The carrying value of fixed assets remaining for sale in connection with business consolidation activities was $15.3 million at September 30, 2007.

Page 10

Notes to Unaudited Condensed Consolidated Financial Statements

Ball Corporation and Subsidiaries

6.	Receivables

The company’s receivables include trade accounts receivable and other types of receivables, including non-income tax receivables, such as property tax and sales tax, insurance claims receivable and other similar items. At September 30, 2007, receivables included $763.1 million of trade accounts receivable and $89.7 million of other receivables and at December 31, 2006, they included $422.2 million of trade accounts receivable and $157.3 million of other receivables.

A receivables sales agreement provides for the ongoing, revolving sale of a designated pool of trade accounts receivable of Ball’s North American packaging operations, up to $250 million (increased from $225 million in August 2007). The agreement qualifies as off-balance sheet financing under the provisions of SFAS No. 140, as amended by SFAS No. 156. Net funds received from the sale of the accounts receivable totaled $170 million at September 30, 2007, and $201.3 million at December 31, 2006, and are reflected as a reduction of accounts receivable in the condensed consolidated balance sheets.

7.	Inventories

($ in millions)	September 30, 2007		December 31, 2006

Raw materials and supplies	$	357.8	$	445.6
Work in process and finished goods		509.8		489.8
	$	867.6	$	935.4

Historically the cost of the majority of metal beverage packaging, Americas, and metal food and household products packaging, Americas, inventories was determined using the LIFO method of accounting. During the fourth quarter of 2006, the company determined that the FIFO method of inventory accounting better matches revenues and expenses in accordance with sales contract terms. Therefore, in the fourth quarter of 2006, the accounting policy was changed to record all inventories using the FIFO method of accounting. For comparative purposes, the 2006 statements of earnings and cash flows have been retrospectively adjusted on a FIFO basis in accordance with SFAS No. 154, “Accounting Changes and Error Corrections – a Replacement of APB Opinion No. 20 and FASB Statement No. 3.”

The following table summarizes the effect of the accounting change on the company’s consolidated financial statements:

	Three Months Ended October 1, 2006				Nine Months Ended October 1, 2006
($ in millions, except per share amounts)	As Originally Reported		As Adjusted for Accounting Change		As Originally Reported			As Adjusted for Accounting Change

Consolidated statements of earnings:
Cost of sales	$	1,526.0	$	1,516.7	$	4,232.3		$	4,228.2
Tax provision		32.9		36.6		112.6			114.2
Net earnings		101.5		107.1		278.8			281.3
Basic earnings per share		0.98		1.04		2.70			2.72
Diluted earnings per share		0.97		1.02		2.65			2.68

Consolidated statements of cash flows:
Deferred taxes						26.1			27.7
Change in working capital components						(256.6	)		(260.7	)

Page 11

Notes to Unaudited Condensed Consolidated Financial Statements

Ball Corporation and Subsidiaries

8.	Property, Plant and Equipment

($ in millions)	September 30, 2007			December 31, 2006

Land	$	91.8		$	88.5
Buildings		812.6			764.1
Machinery and equipment		2,895.6			2,618.6
Construction in progress		141.2			215.1
		3,941.2			3,686.3
Accumulated depreciation		(2,000.2	)		(1,810.3	)
	$	1,941.0		$	1,876.0

Property, plant and equipment are stated at historical cost. Depreciation expense amounted to $67.4 million and $194.1 million for the three months and nine months ended September 30, 2007, respectively, and $60.8 million and $173.3 million for the three months and nine months ended October 1, 2006, respectively.

9.	Goodwill

($ in millions)	Metal Beverage Packaging, Americas		Metal Beverage Packaging, Europe/Asia			Metal Food & Household Products Packaging, Americas			Plastic Packaging, Americas			Total

Balance at December 31, 2006	$	279.4	$	1,020.6		$	389.0		$	84.7		$	1,773.7
Purchase accounting adjustments (a)		–		−			(4.7	)		(1.0	)		(5.7	)
Transfer of plastic pail product line		−		−			(30.0	)		30.0			−
FIN 48 adoption adjustments (Notes 2 and 12)		−		(9.3	)		−			−			(9.3	)
Effects of foreign currency exchange rates		–		78.7			−			0.4			79.1
Balance at September 30, 2007	$	279.4	$	1,090.0		$	354.3		$	114.1		$	1,837.8

(a)

Related to the final purchase price allocations for the U.S. Can and Alcan acquisitions discussed in Note 4.

In accordance with SFAS No. 142, goodwill is not amortized but instead tested annually for impairment. There has been no goodwill impairment since the adoption of SFAS No. 142 on January 1, 2002.

Page 12

Notes to Unaudited Condensed Consolidated Financial Statements

Ball Corporation and Subsidiaries

10.

Intangibles and Other Assets

($ in millions)	September 30, 2007		December 31, 2006

Investments in affiliates	$	76.9	$	76.5
Intangibles (net of accumulated amortization of $87.1 at September 30, 2007, and $70.7 at December 31, 2006)		124.6		116.2
Company-owned life insurance		87.3		77.5
Deferred tax asset		8.6		34.9
Property insurance receivable (Note 5)		−		49.7
Other		59.3		75.1
	$	356.7	$	429.9

Total amortization expense of intangible assets amounted to $4.4 million and $12.6 million for the three months and nine months ended September 30, 2007, respectively, and $3.7 million and $10.7 million for the comparable periods in 2006, respectively.

11.

Debt and Interest Costs

Long-term debt consisted of the following:

	September 30, 2007					December 31, 2006
(in millions)	In Local Currency		In U.S. $			In Local Currency		In U.S. $

Notes Payable
6.875% Senior Notes, due December 2012 (excluding premium of $2.8 in 2007 and $3.2 in 2006)	$	550.0	$	550.0		$	550.0	$	550.0
6.625% Senior Notes, due March 2018 (excluding discount of $0.8 in 2007 and $0.9 in 2006)	$	450.0		450.0		$	450.0		450.0
Senior Credit Facilities, due October 2011 (at variable rates)
Term A Loan, British sterling denominated	₤	85.0		173.9		₤	85.0		166.4
Term B Loan, euro denominated	€	350.0		499.1		€	350.0		462.0
Term C Loan, Canadian dollar denominated	C$	129.0		129.7		C$	134.0		114.9
Term D Loan, U.S. dollar denominated	$	500.0		500.0		$	500.0		500.0
U.S. dollar multi-currency revolver borrowings	$	10.0		10.0		$	15.0		15.0
British sterling multi-currency revolver borrowings	₤	4.0		8.2		₤	4.0		7.8
Canadian dollar multi-currency revolver borrowings	C$	7.5		7.5			−		−
Industrial Development Revenue Bonds
Floating rates due through 2015	$	13.0		13.0		$	20.0		20.0
Other	Various			20.5		Various			25.5
				2,361.9					2,311.6
Less: Current portion of long-term debt				(133.0	)				(41.2	)
			$	2,228.9				$	2,270.4

At September 30, 2007, approximately $683 million was available under the multi-currency revolving credit facilities, which provide for up to $750 million in U.S. dollar equivalents. The company also had short-term uncommitted credit facilities of up to $342 million at September 30, 2007, of which $36.4 million was outstanding and due on demand.

Page 13

Notes to Unaudited Condensed Consolidated Financial Statements

Ball Corporation and Subsidiaries

11.

Debt and Interest Costs (continued)

The notes payable are guaranteed on a full, unconditional and joint and several basis by certain of the company’s wholly owned domestic subsidiaries. The notes payable also contain certain covenants and restrictions including, among other things, limits on the incurrence of additional indebtedness and limits on the amount of restricted payments, such as dividends and share repurchases. Exhibit 20 contains unaudited condensed, consolidating financial information for the company, segregating the guarantor subsidiaries and non-guarantor subsidiaries. Separate financial statements for the guarantor subsidiaries and the non-guarantor subsidiaries are not presented because management has determined that such financial statements would not be material to investors.

The company was in compliance with all loan agreements at September 30, 2007, and has met all debt payment obligations. The U.S. note agreements, bank credit agreement and industrial development revenue bond agreements contain certain restrictions relating to dividend payments, share repurchases, investments, financial ratios, guarantees and the incurrence of additional indebtedness.

12.

Income Taxes

The third quarter 2007 provision for income taxes was reduced by $10.8 million to adjust for the impact on deferred taxes of enacted income tax rate reductions in Germany and the United Kingdom. This benefit was offset by $3.8 million of additional taxes, primarily for reduced tax credits and a lower manufacturer’s deduction in the U.S. as a result of the legal settlement with a customer.

Upon completion of the company’s analysis during the third quarter of 2007, the tax provision was further reduced by $17.2 million related to the overall impact of a tax loss pertaining to the company’s Canadian operations. This benefit was offset by an additional income tax accrual of $7 million under FIN 48 to adjust the income tax liability to reflect the final settlement in the quarter with the Internal Revenue Service for interest deductions on incurred loans from a company-owned life insurance plan. The total accrual for the settlement for the applicable prior years 2000-2004 under examination and unaudited years 2005 through 2007 year-to-date was $18.4 million, including interest. The settlement resulted in a majority of the interest deductions being sustained with prospective application that results in no significant impact to future earnings per share or cash flows. The accrual for uncertain tax positions was $56.8 million at September 30, 2007, of which approximately $8.6 million represents potential interest expense. No penalties have been accrued.

The third quarter ended October 1, 2006, included a discrete period tax benefit of $6.4 million related to the settlement of various tax matters.

13.

Employee Benefit Obligations

($ in millions)	September 30, 2007			December 31, 2006

Total defined benefit pension liability	$	515.9		$	510.6
Less current portion		(26.6	)		(24.1	)
Long-term defined benefit pension liability		489.3			486.5
Retiree medical and other postemployment benefits		202.6			191.1
Deferred compensation plans		153.0			144.0
Other		12.9			26.1
	$	857.8		$	847.7

Page 14

Notes to Unaudited Condensed Consolidated Financial Statements

Ball Corporation and Subsidiaries

13.

Employee Benefit Obligations (continued)

Components of net periodic benefit cost associated with the company’s defined benefit pension plans were:

	Three Months Ended
	September 30, 2007									October 1, 2006
($ in millions)	U.S.			Foreign			Total			U.S.			Foreign			Total

Service cost	$	10.3		$	2.3		$	12.6		$	6.4		$	2.3		$	8.7
Interest cost		11.8			7.7			19.5			12.3			6.9			19.2
Expected return on plan assets		(13.7	)		(4.7	)		(18.4	)		(13.8	)		(4.1	)		(17.9	)
Amortization of prior service cost		0.3			(0.2	)		0.1			0.3			(0.1	)		0.2
Recognized net actuarial loss		3.3			1.3			4.6			4.3			0.9			5.2
Subtotal		12.0			6.4			18.4			9.5			5.9			15.4
Non-company sponsored plans		0.3			−			0.3			0.3			–			0.3
Net periodic benefit cost	$	12.3		$	6.4		$	18.7		$	9.8		$	5.9		$	15.7

	Nine Months Ended
	September 30, 2007									October 1, 2006
($ in millions)	U.S.			Foreign			Total			U.S.			Foreign			Total

Service cost	$	30.7		$	6.6		$	37.3		$	20.7		$	6.7		$	27.4
Interest cost		35.3			22.5			57.8			34.2			20.3			54.5
Expected return on plan assets		(40.9	)		(13.6	)		(54.5	)		(37.9	)		(11.9	)		(49.8	)
Amortization of prior service cost		0.7			(0.4	)		0.3			2.8			(0.2	)		2.6
Recognized net actuarial loss		10.1			3.6			13.7			14.1			2.5			16.6
Subtotal		35.9			18.7			54.6			33.9			17.4			51.3
Non-company sponsored plans		0.9			0.1			1.0			0.8			–			0.8
Net periodic benefit cost	$	36.8		$	18.8		$	55.6		$	34.7		$	17.4		$	52.1

Contributions to the company’s defined benefit pension plans, not including the unfunded German plans, were $58.9 million in the first nine months of 2007 ($58.6 million in 2006). The total minimum required contributions to these funded plans are expected to be approximately $57 million in 2007. As part of the company’s overall debt reduction plan, we anticipate contributing up to an incremental $45 million ($27 million after tax) over the minimum required contributions to our North American pension plans during the fourth quarter of 2007. Payments to participants in the unfunded German plans were €13.2 million ($17.8 million) in the first nine months of 2007 and are expected to be approximately €19 million (approximately $26 million) for the full year.

In accordance with new United Kingdom pension regulations, Ball has provided an £8 million guarantee to its defined benefit plan in the United Kingdom. If the company’s credit rating falls below specified levels, Ball will be required to either: (1) contribute an additional £8 million to the plan; (2) provide a letter of credit to the plan in that amount or (3) if imposed by the appropriate regulatory agency, provide a lien on company assets in that amount for the benefit of the plan. The guarantee can be removed upon approval by both Ball and the pension plan trustees.

Page 15

Notes to Unaudited Condensed Consolidated Financial Statements

Ball Corporation and Subsidiaries

14.

Shareholders’ Equity and Comprehensive Earnings

Accumulated Other Comprehensive Earnings (Loss)

Accumulated other comprehensive earnings (loss) include the cumulative effect of foreign currency translation, pension and other postretirement items and realized and unrealized gains and losses on derivative instruments receiving cash flow hedge accounting treatment.

($ in millions)	Foreign Currency Translation		Effective Financial Derivatives(a) (net of tax)			Pension and Other Postretirement Items (net of tax)			Accumulated Other Comprehensive Earnings (Loss)

December 31, 2006	$	131.8	$	0.6		$	(161.9	)	$	(29.5	)
Change		56.2		(1.6	)		7.0			61.6
September 30, 2007	$	188.0	$	(1.0	)	$	(154.9	)	$	32.1

(a)

Refer to Item 3, “Quantitative and Qualitative Disclosures About Market Risk,” for a discussion of the company’s use of derivative financial instruments.

Comprehensive Earnings

	Three Months Ended						Nine Months Ended
($ in millions)	September 30, 2007			October 1, 2006			September 30, 2007			October 1, 2006

Net earnings	$	60.9		$	107.1		$	248.0		$	281.3
Foreign currency translation adjustment		39.4			(2.2	)		56.2			28.5
Effect of derivative instruments		(14.4	)		2.7			(1.6	)		3.2
Pension and other postretirement items		1.5			−			7.0			11.5
Comprehensive earnings	$	87.4		$	107.6		$	309.6		$	324.5

Page 16

Notes to Unaudited Condensed Consolidated Financial Statements

Ball Corporation and Subsidiaries

14.

Shareholders’ Equity and Comprehensive Earnings (continued)

Stock-Based Compensation Programs

The company has shareholder-approved stock option plans under which options to purchase shares of Ball common stock have been granted to officers and employees at the market value of the stock at the date of grant. Payment must be made at the time of exercise in cash or with shares of stock owned by the option holder, which are valued at fair market value on the date exercised. In general, options are exercisable in four equal installments commencing one year from the date of grant and terminate 10 years from the date of grant. A summary of stock option activity for the nine months ended September 30, 2007, follows:

	Outstanding Options					Nonvested Options
	Number of Shares			Weighted Average Exercise Price		Number of Shares			Weighted Average Grant Date Fair Value

Beginning of year		4,852,978		$	26.69		1,286,937		$	10.27
Granted		949,200			49.32		949,200			11.22
Vested							(497,857	)		9.98
Exercised		(847,653	)		21.00
Canceled/forfeited		(40,400	)		42.70		(40,400	)		10.54
End of period		4,914,125			31.91		1,697,880			10.88

Vested and exercisable, end of period		3,216,245			24.38
Reserved for future grants		4,784,331

The options granted in April 2007 included 402,168 stock-settled stock appreciation rights, which have the same terms as the stock options. The weighted average remaining contractual term for all options outstanding at September 30, 2007, was 6.4 years and the aggregate intrinsic value (difference in exercise price and closing price at that date) was $107.3 million. The weighted average remaining contractual term for options vested and exercisable at September 30, 2007, was 5 years and the aggregate intrinsic value was $94.5 million. The company received $3.1 million from options exercised during the three months ended September 30, 2007. The intrinsic value associated with these exercises was $4.7 million and the associated tax benefit of $1.6 million was reported as other financing activities in the condensed consolidated statement of cash flows. During the nine months ended September 30, 2007, the company received $17.8 million from options exercised. The intrinsic value associated with exercises for that period was $24.9 million and the associated tax benefit reported as other financing activities was $8.3 million.

Based on the Black-Scholes option pricing model, adapted for use in valuing compensatory stock options in accordance with SFAS No. 123 (revised 2004), options granted in April 2007 have an estimated weighted average fair value at the date of grant of $11.22 per share. The actual value an employee may realize will depend on the excess of the stock price over the exercise price on the date the option is exercised. Consequently, there is no assurance that the value realized by an employee will be at or near the value estimated. The fair values were estimated using the following weighted average assumptions:

Expected dividend yield		0.81%
Expected stock price volatility		17.94%
Risk-free interest rate		4.55%
Expected life of options		4.75 years
Forfeiture rate		12.00%

Page 17

Notes to Unaudited Condensed Consolidated Financial Statements

Ball Corporation and Subsidiaries

14.

Shareholders’ Equity and Comprehensive Earnings (continued)

In addition to stock options, the company issues to certain employees restricted shares, which vest over various periods but generally in equal installments over five years. Compensation cost is recorded based upon the fair value of the shares at the grant date.

To encourage certain senior management employees and outside directors to invest in Ball stock, Ball adopted a deposit share program in March 2001 (subsequently amended and restated) that matches purchased shares with restricted shares. In general, restrictions on the matching shares lapse at the end of four years from date of grant, or earlier in stages if established share ownership guidelines are met, assuming the relevant qualifying purchased shares are not sold or transferred prior to that time. Grants under the plan are accounted for as equity awards and compensation expense is recorded based upon the fair value of the shares at the grant date.

In April 2007 the company’s board of directors granted 170,000 performance-contingent restricted stock units to key employees, which will cliff vest if the company’s return on average invested capital during a 33-month performance period is equal to or exceeds the company’s estimated cost of capital. If the performance goal is not met, the shares will be forfeited. Current assumptions are that the performance targets will be met and, accordingly, grants under the plan are being accounted for as equity awards and compensation expense is recorded based upon the fair value (closing market price) of the shares at the grant date. On a quarterly basis, the company reassesses the probability of the goal being met and adjusts compensation expense as appropriate. No such adjustment was considered necessary at the end of the third quarter 2007.

For the three and nine months ended September 30, 2007, the company recognized in selling, general and administrative expenses pretax expense of $4.5 million ($2.8 million after tax) and $21.9 million ($13.3 million after tax), respectively, for share-based compensation arrangements, which represented $0.03 per basic and diluted share for the third quarter of 2007 and $0.13 per basic and diluted share for the first nine months. For the three and nine months ended October 1, 2006, the company recognized pretax expense of $2.8 million ($1.7 million after tax) and $10.1 million ($6.1 million after tax) for such arrangements, which represented $0.02 per basic and diluted share and $0.06 per basic and diluted share, respectively, for those periods. At September 30, 2007, there was $34.9 million of total unrecognized compensation costs related to nonvested share-based compensation arrangements. This cost is expected to be recognized in earnings over a weighted-average period of 2.7 years.

15.

Earnings per Share

	Three Months Ended				Nine Months Ended
($ in millions, except per share amounts; shares in thousands)	September 30, 2007		October 1, 2006		September 30, 2007		October 1, 2006

Diluted Earnings per Share:
Net earnings	$	60.9	$	107.1	$	248.0	$	281.3

Weighted average common shares		101,422		103,292		101,691		103,397
Effect of dilutive securities		1,575		1,609		1,681		1,727
Weighted average shares applicable to diluted earnings per share		102,997		104,901