f10-q.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 June 29,
2008
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, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
| |
Large
accelerated filer x
|
Accelerated filer o
|
| |
Non-accelerated filer
o
|
Smaller
reporting company 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 June 29, 2008
|
|
|
|
Common
Stock,
without
par value
|
|
96,686,443
shares
|
|
Ball
Corporation and Subsidiaries
QUARTERLY
REPORT ON FORM 10-Q
For the
period ended June 29, 2008
INDEX
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Page
Number
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PART
I.
|
FINANCIAL
INFORMATION:
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|
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Earnings for the Three Months and Six
Months
Ended
June
29, 2008, and July
1, 2007
|
1
|
|
|
|
|
|
|
Unaudited
Condensed Consolidated Balance Sheets at June 29, 2008, and
December 31, 2007
|
2
|
|
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended
June
29, 2008, and
July 1, 2007
|
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
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|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
29
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|
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|
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
|
|
|
Six
Months Ended
|
|
|
($
in millions, except per share amounts)
|
|
June
29, 2008
|
|
|
July
1, 2007
|
|
|
June
29, 2008
|
|
|
July
1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
2,080.3 |
|
|
$ |
2,032.8 |
|
|
$ |
3,820.5 |
|
|
$ |
3,727.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales (excluding depreciation and amortization)
|
|
|
1,738.5 |
|
|
|
1,682.6 |
|
|
|
3,176.2 |
|
|
|
3,076.9 |
|
|
Depreciation
and amortization (Notes 9 and 11)
|
|
|
76.2 |
|
|
|
69.9 |
|
|
|
150.8 |
|
|
|
134.9 |
|
|
Business
consolidation and other costs (Note 6)
|
|
|
11.5 |
|
|
|
− |
|
|
|
11.5 |
|
|
|
− |
|
|
Gain
on sale of subsidiary (Note 4)
|
|
|
− |
|
|
|
− |
|
|
|
(7.1 |
) |
|
|
− |
|
|
Selling,
general and administrative
|
|
|
78.5 |
|
|
|
87.3 |
|
|
|
160.1 |
|
|
|
169.5 |
|
|
|
|
|
1,904.7 |
|
|
|
1,839.8 |
|
|
|
3,491.5 |
|
|
|
3,381.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before interest and taxes
|
|
|
175.6 |
|
|
|
193.0 |
|
|
|
329.0 |
|
|
|
345.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(34.7 |
) |
|
|
(38.1 |
) |
|
|
(70.9 |
) |
|
|
(76.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before taxes
|
|
|
140.9 |
|
|
|
154.9 |
|
|
|
258.1 |
|
|
|
269.7 |
|
|
Tax
provision
|
|
|
(45.4 |
) |
|
|
(52.3 |
) |
|
|
(82.6 |
) |
|
|
(89.0 |
) |
|
Minority
interests
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
Equity
in results of affiliates
|
|
|
4.6 |
|
|
|
3.4 |
|
|
|
8.5 |
|
|
|
6.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
100.0 |
|
|
$ |
105.9 |
|
|
$ |
183.8 |
|
|
$ |
187.1 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
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|
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Earnings
per share (Note 15):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.03 |
|
|
$ |
1.04 |
|
|
$ |
1.89 |
|
|
$ |
1.84 |
|
|
Diluted
|
|
$ |
1.02 |
|
|
$ |
1.03 |
|
|
$ |
1.87 |
|
|
$ |
1.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding (000s)
(Note 15):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
96,911 |
|
|
|
101,542 |
|
|
|
97,055 |
|
|
|
101,826 |
|
|
Diluted
|
|
|
98,459 |
|
|
|
103,165 |
|
|
|
98,465 |
|
|
|
103,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Cash
dividends declared and paid, per common share
|
|
$ |
0.10 |
|
|
$ |
0.10 |
|
|
$ |
0.20 |
|
|
$ |
0.20 |
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
Ball
Corporation and Subsidiaries
|
($
in millions)
|
|
June
29,
2008
|
|
|
December
31,
2007
|
|
| |
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
63.4 |
|
|
$ |
151.6 |
|
|
Receivables,
net (Note 7)
|
|
|
839.0 |
|
|
|
582.7 |
|
|
Inventories,
net (Note 8)
|
|
|
1,092.8 |
|
|
|
998.1 |
|
|
Deferred
taxes and other current assets
|
|
|
170.2 |
|
|
|
110.5 |
|
|
Total
current assets
|
|
|
2,165.4 |
|
|
|
1,842.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net (Note 9)
|
|
|
2,016.0 |
|
|
|
1,941.2 |
|
|
Goodwill
(Note 10)
|
|
|
1,951.6 |
|
|
|
1,863.1 |
|
|
Intangibles
and other assets, net (Note 11)
|
|
|
447.6 |
|
|
|
373.4 |
|
|
Total
Assets
|
|
$ |
6,580.6 |
|
|
$ |
6,020.6 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
Short-term
debt and current portion of long-term debt (Note 12)
|
|
$ |
327.1 |
|
|
$ |
176.8 |
|
|
Accounts
payable
|
|
|
797.8 |
|
|
|
763.6 |
|
|
Accrued
employee costs
|
|
|
208.9 |
|
|
|
238.0 |
|
|
Income
taxes payable and current deferred taxes
|
|
|
21.5 |
|
|
|
15.7 |
|
|
Other
current liabilities
|
|
|
233.2 |
|
|
|
319.0 |
|
|
Total
current liabilities
|
|
|
1,588.5 |
|
|
|
1,513.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt (Note 12)
|
|
|
2,415.3 |
|
|
|
2,181.8 |
|
|
Employee
benefit obligations (Note 13)
|
|
|
790.7 |
|
|
|
799.0 |
|
|
Deferred
taxes and other liabilities
|
|
|
261.5 |
|
|
|
183.1 |
|
|
Total
liabilities
|
|
|
5,056.0 |
|
|
|
4,677.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Contingencies
(Note 17)
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
1.4 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity (Note 14)
|
|
|
|
|
|
|
|
|
|
Common
stock (160,895,113 shares issued – 2008;
160,678,695 shares issued – 2007)
|
|
|
778.5 |
|
|
|
760.3 |
|
|
Retained
earnings
|
|
|
1,929.5 |
|
|
|
1,765.0 |
|
|
Accumulated
other comprehensive earnings
|
|
|
261.5 |
|
|
|
106.9 |
|
|
Treasury
stock, at cost (64,208,670 shares – 2008;
60,454,245 shares – 2007)
|
|
|
(1,446.3 |
) |
|
|
(1,289.7 |
) |
|
Total
shareholders’ equity
|
|
|
1,523.2 |
|
|
|
1,342.5 |
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$ |
6,580.6 |
|
|
$ |
6,020.6 |
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Ball
Corporation and Subsidiaries
|
|
|
Six
Months Ended
|
|
| ($ in millions) |
|
June
29, 2008
|
|
|
July
1, 2007
|
|
| |
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
183.8 |
|
|
$ |
187.1 |
|
|
Adjustments
to reconcile net earnings to net cash provided by (used in)
operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
150.8 |
|
|
|
134.9 |
|
|
Business
consolidation and other costs (Note 6)
|
|
|
11.5 |
|
|
|
− |
|
|
Gain
on sale of subsidiary (Note 4)
|
|
|
(7.1 |
) |
|
|
− |
|
|
Legal
settlement (Note 5)
|
|
|
(70.3 |
) |
|
|
− |
|
|
Deferred
taxes
|
|
|
2.9 |
|
|
|
3.7 |
|
|
Other,
net
|
|
|
21.7 |
|
|
|
31.7 |
|
|
Changes
in working capital components, excluding effects of acquisitions and
dispositions
|
|
|
(362.9 |
) |
|
|
(106.3 |
) |
|
Cash
provided by (used in) operating activities
|
|
|
(69.6 |
) |
|
|
251.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(160.5 |
) |
|
|
(166.3 |
) |
|
Proceeds
from sale of subsidiary, net of cash sold (Note 4)
|
|
|
8.7 |
|
|
|
− |
|
|
Property
insurance proceeds
|
|
|
− |
|
|
|
48.6 |
|
|
Other,
net
|
|
|
(10.2 |
) |
|
|
0.7 |
|
|
Cash
used in investing activities
|
|
|
(162.0 |
) |
|
|
(117.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
Long-term
borrowings
|
|
|
338.1 |
|
|
|
284.6 |
|
|
Repayments
of long-term borrowings
|
|
|
(133.5 |
) |
|
|
(296.2 |
) |
|
Change
in short-term borrowings
|
|
|
130.7 |
|
|
|
(74.0 |
) |
|
Proceeds
from issuances of common stock
|
|
|
15.6 |
|
|
|
27.1 |
|
|
Acquisitions
of treasury stock
|
|
|
(196.8 |
) |
|
|
(122.4 |
) |
|
Common
dividends
|
|
|
(19.0 |
) |
|
|
(20.4 |
) |
|
Other,
net
|
|
|
2.4 |
|
|
|
6.7 |
|
|
Cash
provided by (used in) financing activities
|
|
|
137.5 |
|
|
|
(194.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
5.9 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Change
in cash and cash equivalents
|
|
|
(88.2 |
) |
|
|
(59.6 |
) |
|
Cash
and cash equivalents - beginning of period
|
|
|
151.6 |
|
|
|
151.5 |
|
|
Cash
and cash equivalents - end of period
|
|
$ |
63.4 |
|
|
$ |
91.9 |
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
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
and the irregularity of contract revenues in the aerospace and technologies
segment. 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, 2007 (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.
Certain
prior-year amounts have been reclassified in order to conform to the
current-year presentation.
Recently
Adopted Accounting Standards
Effective
January 1, 2008, Ball adopted Statement of Financial Accounting Standards
(SFAS) No. 157, “Fair Value Measurements,” and has identified its
implications as a critical accounting policy. SFAS No. 157 establishes
a framework for measuring fair 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. At
this time the January 1, 2008, adoption covers only financial assets and
liabilities and those nonfinancial assets and liabilities already disclosed at
fair value in the financial statements on a recurring basis but, subject to a
deferral, will be expanded to all other nonfinancial assets and liabilities as
of January 1, 2009. Details regarding the adoption of
SFAS No. 157 and its effects on the company’s unaudited condensed
consolidated financial statements are available in Note 16, “Fair Value of
Financial Instruments.”
New
Accounting Standards
In
April 2008 the Financial Accounting Standards Board (FASB) issued FASB
Staff Position (FSP) No. 142-3, “Determination of the Useful Life of
Intangible Assets.” This FSP amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other
Intangible Assets.” This FSP is effective for Ball as of January 1, 2009,
on a prospective basis, and early adoption is prohibited. The company is in the
process of evaluating the new pronouncement but does not anticipate any material
impact.
In
March 2008 the FASB issued SFAS No. 161, “Disclosures About
Derivative Instruments and Hedging Activities – an Amendment of FASB Statement
No. 133.” SFAS No. 161 is intended to enhance the current
disclosure requirement in SFAS No. 133. It requires that objectives
for using derivative instruments be disclosed in terms of underlying risk and
accounting designation, as well as information about credit-risk-related
contingent features. It also requires a company to disclose the fair values of
derivative instruments and their gains and losses in a tabular
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
2.
|
Accounting
Standards (continued)
|
format to
make more transparent the location in a company’s financial statements of both
the derivative positions existing
at period end and the effect of using derivatives during the reporting period.
The company also will be required to cross-reference within the footnotes to
help users of financial statements locate information about derivative
instruments. SFAS No. 161 is effective for Ball beginning on
January 1, 2009, and is currently under evaluation by the
company.
In
December 2007 the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations,” which replaces the original SFAS No. 141 issued in
June 2001. The new standard retains the fundamental requirements in
SFAS No. 141 that the purchase method of accounting be used for all
business combinations and for an acquirer to be identified for each business
combination. SFAS No. 141 (revised 2007) requires an acquirer to
recognize the assets acquired and liabilities assumed measured at their fair
values on the acquisition date, which replaces SFAS No. 141’s
cost-allocation method. SFAS No. 141 (revised 2007) also requires the
costs incurred to complete the acquisition and related restructuring costs to be
recognized separately from the business combination. The new standard will be
effective for Ball on a prospective basis beginning on January 1,
2009.
|
3.
|
Business
Segment Information
|
Ball’s
operations are organized and reviewed by management along its product lines in
five reportable segments. Due to first quarter 2008 management reporting
changes, Ball’s operations in the People’s Republic of China (PRC) are now
included in the metal beverage packaging, Americas and Asia, segment (previously
included with the company’s European operations). The results for the quarter
and six months ended July 1, 2007, and our financial position at
December 31, 2007, have been retrospectively adjusted to conform to the
current year presentation.
Metal
beverage packaging, Americas and
Asia: Consists of
operations in the U.S., Canada, Puerto Rico and the PRC, which manufacture and
sell metal beverage containers in North America and the PRC, as well as
non-beverage plastic containers in the PRC.
Metal
beverage packaging, Europe: Consists of
operations in several countries in Europe, which manufacture and sell metal
beverage containers.
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 decorative 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. This segment also includes the manufacture and sale of
plastic containers used for industrial and household products.
Aerospace
and technologies: Consists of the
manufacture and sale of aerospace and other related products and the providing
of services used primarily in the defense, civil space and commercial space
industries.
The
accounting policies of the segments are the same as those in the 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.
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
3.
|
Business
Segment Information (continued)
|
|
Summary
of Business by Segment
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
($
in millions)
|
|
June
29, 2008
|
|
|
July
1, 2007
|
|
|
June
29, 2008
|
|
|
July
1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metal
beverage packaging, Americas & Asia
|
|
$ |
833.9 |
|
|
$ |
871.2 |
|
|
$ |
1,537.8 |
|
|
$ |
1,573.0 |
|
|
Metal
beverage packaging, Europe
|
|
|
571.0 |
|
|
|
484.8 |
|
|
|
976.6 |
|
|
|
805.5 |
|
|
Metal
food & household products packaging, Americas
|
|
|
283.2 |
|
|
|
284.0 |
|
|
|
547.0 |
|
|
|
562.8 |
|
|
Plastic
packaging, Americas
|
|
|
201.0 |
|
|
|
198.7 |
|
|
|
389.9 |
|
|
|
385.3 |
|
|
Aerospace
& technologies
|
|
|
191.2 |
|
|
|
194.1 |
|
|
|
369.2 |
|
|
|
400.4 |
|
|
Net
sales
|
|
$ |
2,080.3 |
|
|
$ |
2,032.8 |
|
|
$ |
3,820.5 |
|
|
$ |
3,727.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metal
beverage packaging, Americas & Asia
|
|
$ |
77.4 |
|
|
$ |
89.1 |
|
|
$ |
151.4 |
|
|
$ |
191.0 |
|
|
Business
consolidation and other costs (Note 6)
|
|
|
(3.4 |
) |
|
|
− |
|
|
|
(3.4 |
) |
|
|
− |
|
|
Total
metal beverage packaging, Americas & Asia
|
|
|
74.0 |
|
|
|
89.1 |
|
|
|
148.0 |
|
|
|
191.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metal
beverage packaging, Europe
|
|
|
77.2 |
|
|
|
86.1 |
|
|
|
125.2 |
|
|
|
122.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metal
food & household products packaging, Americas
|
|
|
14.3 |
|
|
|
11.1 |
|
|
|
29.1 |
|
|
|
10.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plastic
packaging, Americas
|
|
|
5.7 |
|
|
|
7.1 |
|
|
|
10.5 |
|
|
|
9.4 |
|
|
Business
consolidation and other costs (Note 6)
|
|
|
(4.3 |
) |
|
|
− |
|
|
|
(4.3 |
) |
|
|
− |
|
|
Total
plastic packaging, Americas
|
|
|
1.4 |
|
|
|
7.1 |
|
|
|
6.2 |
|
|
|
9.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace
& technologies
|
|
|
22.7 |
|
|
|
15.6 |
|
|
|
37.6 |
|
|
|
35.2 |
|
|
Gain
on sale of subsidiary (Note 4)
|
|
|
− |
|
|
|
− |
|
|
|
7.1 |
|
|
|
− |
|
|
Total
aerospace & technologies
|
|
|
22.7 |
|
|
|
15.6 |
|
|
|
44.7 |
|
|
|
35.2 |
|
|
Segment
earnings before interest and taxes
|
|
|
189.6 |
|
|
|
209.0 |
|
|
|
353.2 |
|
|
|
369.4 |
|
|
Undistributed
corporate expenses, net
|
|
|
(10.2 |
) |
|
|
(16.0 |
) |
|
|
(20.4 |
) |
|
|
(23.7 |
) |
|
Business
consolidation and other costs (Note 6)
|
|
|
(3.8 |
) |
|
|
− |
|
|
|
(3.8 |
) |
|
|
− |
|
|
Total
undistributed corporate expenses, net
|
|
|
(14.0 |
) |
|
|
(16.0 |
) |
|
|
(24.2 |
) |
|
|
(23.7 |
) |
|
Earnings before interest and
taxes
|
|
|
175.6 |
|
|
|
193.0 |
|
|
|
329.0 |
|
|
|
345.7 |
|
|
Interest
expense
|
|
|
(34.7 |
) |
|
|
(38.1 |
) |
|
|
(70.9 |
) |
|
|
(76.0 |
) |
|
Tax
provision
|
|
|
(45.4 |
) |
|
|
(52.3 |
) |
|
|
(82.6 |
) |
|
|
(89.0 |
) |
|
Minority
interests
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
Equity
in results of affiliates
|
|
|
4.6 |
|
|
|
3.4 |
|
|
|
8.5 |
|
|
|
6.6 |
|
|
Net
earnings
|
|
$ |
100.0 |
|
|
$ |
105.9 |
|
|
$ |
183.8 |
|
|
$ |
187.1 |
|
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
3.
|
Business
Segment Information (continued)
|
|
($
in millions)
|
|
As
of
June
29, 2008
|
|
|
As
of
December
31, 2007
|
|
|
Total
Assets
|
|
|
|
|
|
|
|
Metal
beverage packaging, Americas & Asia
|
|
$ |
1,587.1 |
|
|
$ |
1,400.8 |
|
|
Metal
beverage packaging, Europe
|
|
|
2,835.7 |
|
|
|
2,369.3 |
|
|
Metal
food & household products packaging, Americas
|
|
|
1,126.6 |
|
|
|
1,141.7 |
|
|
Plastic
packaging, Americas
|
|
|
559.8 |
|
|
|
568.8 |
|
|
Aerospace
& technologies
|
|
|
273.6 |
|
|
|
278.7 |
|
|
Segment
assets
|
|
|
6,382.8 |
|
|
|
5,759.3 |
|
|
Corporate
assets, net of eliminations
|
|
|
197.8 |
|
|
|
261.3 |
|
|
Total
assets
|
|
$ |
6,580.6 |
|
|
$ |
6,020.6 |
|
The
following table provides the 2007 segment net sales and earnings before interest
and taxes had the change in segment presentation for Ball’s PRC operations
occurred as of January 1, 2007:
|
($
in millions)
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Total
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metal
beverage packaging, Americas & Asia
|
|
$ |
701.8 |
|
|
$ |
871.2 |
|
|
$ |
711.4 |
(a) |
|
$ |
728.1 |
|
|
$ |
3,012.5 |
|
|
Metal
beverage packaging, Europe
|
|
|
320.7 |
|
|
|
484.8 |
|
|
|
454.2 |
|
|
|
393.9 |
|
|
|
1,653.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Before Interest and Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metal
beverage packaging, Americas & Asia
|
|
|
101.9 |
|
|
|
89.1 |
|
|
|
(14.4 |
)(a) |
|
|
64.2 |
|
|
|
240.8 |
|
|
Metal
beverage packaging, Europe
|
|
|
36.8 |
|
|
|
86.1 |
|
|
|
74.8 |
|
|
|
31.2 |
|
|
|
228.9 |
|
|
(a)
|
Amounts
were reduced by a pretax legal settlement of
$85.6 million.
|
On
February 15, 2008, Ball Aerospace & Technologies Corp. (BATC) completed the
sale of its shares in Ball Solutions Group Pty Ltd (BSG) to QinetiQ Pty Ltd for
approximately $10.5 million, including $1.8 million of cash sold. BSG was
previously a wholly owned Australian subsidiary of BATC that provided services
to the Australian department of defense and related government agencies. After
an adjustment for working capital items, the sale resulted in a pretax gain of
$7.1 million ($4.4 million after tax). The sale is not significant to the
aerospace and technologies segment’s financial statements or its ongoing
results.
During
the second quarter of 2007, Miller Brewing Company (Miller), a U.S. customer,
asserted various claims against a wholly owned subsidiary of the company,
primarily related to the pricing of the aluminum component of the containers
supplied by the subsidiary, and on October 4, 2007, the dispute was settled in
mediation. Miller received $85.6 million ($51.8 million after tax) on
settlement of the dispute, and Ball retained all of Miller’s beverage can and
end supply through 2015. Miller received a one-time payment of approximately $70
million ($42 million after tax) in January 2008 (recorded on the
December 31, 2007, consolidated balance sheet in other current liabilities)
with the remainder of the settlement to be recovered over the life of the supply
contract through 2015.
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
6.
|
Business
Consolidation and Other Costs
|
Business
Consolidation Costs
2008
Metal
Beverage Packaging, Americas & Asia
On April
23, 2008, the company announced plans to close a U.S. metal beverage packaging
plant in Kent, Washington. The plant has two 12-ounce aluminum beverage can
manufacturing lines that produce approximately 1.1 billion cans annually.
We plan to redeploy those lines elsewhere in Ball's worldwide beverage can
system to generate higher returns on those assets. A pretax charge of $10.6
million ($6.4 million after tax) was recorded in the second quarter results,
including $9.1 million for employee severance, pension and other employee
benefit costs, and $1.5 million primarily related to the write down to net
realizable value of certain fixed assets and related spare parts and tooling
inventory. The plant is expected to be shut down during the third quarter of
2008, and all costs, excluding pension costs of $5.2 million, are expected to be
incurred or paid during the balance of 2008 and during 2009.
Also in
the second quarter, a gain of $7.2 million ($4.4 million after tax) was recorded
for the recovery of previously expensed pension, employee severance and other
benefit closure obligation costs no longer required. This reflects a
decision made in the second quarter to continue to operate existing end-making
equipment and not install a new beverage can end module that would have been
part of a multi-year project. Cash payments of $1.4 million were made in the
first six months of 2008 against the remaining reserves related to the U.S.
beverage can end modernization project. The remaining reserves are expected to
be utilized in 2008 and 2009 as the multi-year U.S. end modernization project is
completed.
Plastic
Packaging, Americas
On June
26, 2008, the company announced plans to close a plastic packaging plant in
Brampton, Ontario. The plant manufactures polypropylene bottles for foods and
was acquired in 2006 with the company’s acquisition of certain North American
plastic bottle container assets of Alcan Packaging. The closed operations will
be consolidated into the company’s other plastic packaging manufacturing
facilities in North America. A charge of approximately $6 million will be
incurred related to the closed operations, of which $4.3 million ($3.8 million
after tax) was recorded in the second quarter, with the remaining closure costs
to be recorded in the second half of 2008. The second quarter charge included
$1.5 million for severance costs and $2.8 million for the write down of fixed
assets to net realizable value. The plant is expected to be shut down during the
third quarter of 2008, and all reserves are expected to be utilized during the
balance of 2008 and during 2009.
2007
Metal
Food & Household Products Packaging, Americas
In
October 2007 Ball announced plans to close aerosol and general line can
manufacturing facilities in Commerce, California, and Tallapoosa, Georgia, and
to exit the custom and decorative tinplate can business located in Baltimore,
Maryland. A pretax charge of $41.9 million ($25.4 million after tax)
was recorded in the fourth quarter in connection with the closure of the aerosol
plants, including $10.7 million for severance costs, $23 million for
the write down of fixed assets to net realizable value, $2.4 million for
excess inventory and $5.8 million for other associated costs. Cash payments
of $0.9 million were made in the first six months of 2008 against the
reserves. The remaining reserves are expected to be utilized during the balance
of 2008 and during 2009. The carrying value of fixed assets remaining for sale
in connection with the plant closures was $6.7 million at June 29,
2008.
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
6.
|
Business
Consolidation and Other Costs (continued)
|
Plastic
Packaging, Americas
In the
fourth quarter of 2007, Ball recorded a pretax charge of $0.4 million
($0.2 million after tax) for severance costs related to the termination of
approximately 50 employees in response to lost sales. These severance
amounts are being paid during 2008 and 2009.
2006
Metal
Food & Household Products Packaging, Americas
In
October 2006 the company announced plans to close two manufacturing
facilities in North America as part of the realignment of the metal food and
household products packaging, Americas, segment following the acquisition
earlier in that year of U.S. Can. The fourth quarter included a pretax charge of
$33.6 million ($27.4 million after tax) related to the
Burlington, Ontario, plant closure, of which $24.6 million related to
employee severance and pension costs. The closure of the Alliance, Ohio, plant,
which was estimated to cost approximately $1 million for employee and other
items, was treated as an opening balance sheet item related to the acquisition.
Operations have ceased at both plants and payments of $1.8 million were
made in the first six months of 2008 against the reserves. The remaining
reserves are expected to be utilized or paid during the balance of 2008 and the
first quarter of 2009. The carrying value of fixed assets remaining for sale in
connection with these business consolidation activities was $12.9 million
at June 29, 2008.
Summary
The
following table summarizes the 2008 year-to-date activity related to the amounts
provided for business consolidation activities:
|
($
in millions)
|
|
Fixed
Assets/
Spare
Parts
|
|
|
Employee
Costs
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
$ |
7.4 |
|
|
$ |
16.5 |
|
|
$ |
5.6 |
|
|
$ |
29.5 |
|
|
Charges
to earnings, net
|
|
|
4.3 |
|
|
|
2.9 |
|
|
|
0.5 |
|
|
|
7.7 |
|
|
Payments
|
|
|
– |
|
|
|
(3.3 |
) |
|
|
(0.8 |
) |
|
|
(4.1 |
) |
|
Asset
dispositions and other
|
|
|
(1.0 |
) |
|
|
0.6 |
|
|
|
(0.6 |
) |
|
|
(1.0 |
) |
|
Balance
at June 29, 2008
|
|
$ |
10.7 |
|
|
$ |
16.7 |
|
|
$ |
4.7 |
|
|
$ |
32.1 |
|
Other
Costs
Corporate
A pretax
charge of $3.8 million ($2.3 million after tax) was recorded in the second
quarter for estimated costs related to previously closed and sold
facilities.
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
|
|
June
29,
|
|
|
December
31,
|
|
|
($
in millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Trade
accounts receivable, net
|
|
$ |
748.9 |
|
|
$ |
505.4 |
|
|
Other
receivables
|
|
|
90.1 |
|
|
|
77.3 |
|
|
|
|
$ |
839.0 |
|
|
$ |
582.7 |
|
Trade
accounts receivable are shown net of an allowance for doubtful accounts of
$15.4 million at June 29, 2008, and $13.2 million at
December 31, 2007. Other receivables primarily include non-income tax
receivables, such as property tax, sales tax and certain vendor rebate
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. 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 $250 million at June 29, 2008, and $170 million at
December 31, 2007, and are reflected as a reduction of accounts receivable
in the condensed consolidated balance sheets.
|
($
in millions)
|
|
June
29,
2008
|
|
|
December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
Raw
materials and supplies
|
|
$ |
419.4 |
|
|
$ |
433.6 |
|
|
Work
in process and finished goods
|
|
|
673.4 |
|
|
|
564.5 |
|
|
|
|
$ |
1,092.8 |
|
|
$ |
998.1 |
|
|
9.
|
Property,
Plant and Equipment
|
|
($
in millions)
|
|
June
29,
2008
|
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
96.3 |
|
|
$ |
92.2 |
|
|
Buildings
|
|
|
851.4 |
|
|
|
820.1 |
|
|
Machinery
and equipment
|
|
|
3,036.6 |
|
|
|
2,914.2 |
|
|
Construction
in progress
|
|
|
194.5 |
|
|
|
154.7 |
|
|
|
|
|
4,178.8 |
|
|
|
3,981.2 |
|
|
Accumulated
depreciation
|
|
|
(2,162.8 |
) |
|
|
(2,040.0 |
) |
|
|
|
$ |
2,016.0 |
|
|
$ |
1,941.2 |
|
Property,
plant and equipment are stated at historical cost. Depreciation expense amounted
to $71.5 million and $141.7 million for the three months and six
months ended June 29, 2008, respectively, and $65.5 million and
$126.7 million for the three months and six months ended July 1, 2007,
respectively.
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
($
in millions)
|
|
Metal
Beverage
Packaging,
Americas
& Asia
|
|
|
Metal
Beverage
Packaging,
Europe
|
|
|
Metal
Food &
Household Products Packaging,
Americas
|
|
|
Plastic
Packaging,
Americas
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
$ |
310.1 |
|
|
$ |
1,084.6 |
|
|
$ |
354.3 |
|
|
$ |
114.1 |
|
|
$ |
1,863.1 |
|
|
Effects
of foreign currency exchange rates
|
|
|
– |
|
|
|
88.5 |
|
|
|
− |
|
|
|
– |
|
|
|
88.5 |
|
|
Balance
at June 29, 2008
|
|
$ |
310.1 |
|
|
$ |
1,173.1 |
|
|
$ |
354.3 |
|
|
$ |
114.1 |
|
|
$ |
1,951.6 |
|
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.
|
11.
|
Intangibles
and Other Assets
|
|
($
in millions)
|
|
June
29,
2008
|
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
Investments
in affiliates
|
|
$ |
81.6 |
|
|
$ |
77.6 |
|
|
Intangibles
(net of accumulated amortization of $106.6 at June 29,
2008, and $92.9 at December 31, 2007)
|
|
|
114.9 |
|
|
|
121.9 |
|
|
Company-owned
life insurance
|
|
|
92.7 |
|
|
|
88.9 |
|
|
Noncurrent
derivative asset
|
|
|
80.9 |
|
|
|
– |
|
|
Other
|
|
|
77.5 |
|
|
|
85.0 |
|
|
|
|
$ |
447.6 |
|
|
$ |
373.4 |
|
Total
amortization expense of intangible assets amounted to $4.7 million and
$9.1 million for the three months and six months ended June 29, 2008,
respectively, and $4.4 million and $8.2 million for the comparable periods in
2007, respectively.
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
12.
|
Debt
and Interest Costs
|
Long-term
debt consisted of the following:
|
|
|
June
29, 2008
|
|
|
December
31, 2007
|
|
|
(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 $2.4 in 2008 and
$2.7 in 2007)
|
|
$ |
509.0 |
|
|
$ |
509.0 |
|
|
$ |
550.0 |
|
|
$ |
550.0 |
|
|
6.625%
Senior Notes, due March 2018 (excluding discount of $0.7 in 2008 and
$0.8 in 2007)
|
|
$ |
450.0 |
|
|
|
450.0 |
|
|
$ |
450.0 |
|
|
|
450.0 |
|
|
Senior
Credit Facilities, due October 2011 (at variable
rates)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
A Loan, British sterling denominated
|
|
₤ |
80.8 |
|
|
|
161.1 |
|
|
₤ |
82.9 |
|
|
|
164.7 |
|
|
Term
B Loan, euro denominated
|
|
€ |
332.5 |
|
|
|
525.0 |
|
|
€ |
341.3 |
|
|
|
498.2 |
|
|
Term
C Loan, Canadian dollar denominated
|
|
C$ |
125.2 |
|
|
|
123.9 |
|
|
C$ |
126.8 |
|
|
|
127.6 |
|
|
Term
D Loan, U.S. dollar denominated
|
|
$ |
475.0 |
|
|
|
475.0 |
|
|
$ |
487.5 |
|
|
|
487.5 |
|
|
U.S.
dollar multi-currency revolver borrowings
|
|
$ |
273.0 |
|
|
|
273.0 |
|
|
$ |
– |
|
|
|
– |
|
|
British
sterling multi-currency revolver borrowings
|
|
₤ |
4.3 |
|
|
|
8.5 |
|
|
₤ |
2.1 |
|
|
|
4.2 |
|
|
Industrial
Development Revenue Bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rates due through 2015
|
|
$ |
13.0 |
|
|
|
13.0 |
|
|
$ |
13.0 |
|
|
|
13.0 |
|
|
Other
|
|
Various
|
|
|
|
14.2 |
|
|
Various
|
|
|
|
13.7 |
|
|
|
|
|
|
|
|
|
2,552.7 |
|
|
|
|
|
|
|
2,308.9 |
|
|
Less:
Current portion of long-term debt
|
|
|
|
|
|
|
(137.4 |
) |
|
|
|
|
|
|
(127.1 |
) |
|
|
|
|
|
|
|
$ |
2,415.3 |
|
|
|
|
|
|
$ |
2,181.8 |
|
At June
29, 2008, approximately $430 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 $350 million at June 29, 2008, of which
$189.7 million was outstanding and due on demand.
The notes
payable are guaranteed on a full, unconditional and joint and several basis by
certain of the company’s wholly owned domestic subsidiaries. The notes payable
also contain certain covenants and restrictions including, among other things,
limits on the incurrence of additional indebtedness and limits on the amount of
restricted payments, such as dividends and share repurchases. Exhibit 20
contains unaudited condensed, consolidating financial information for the
company, segregating the guarantor subsidiaries and non-guarantor subsidiaries.
Separate financial statements for the guarantor subsidiaries and the
non-guarantor subsidiaries are not presented, because management has determined
that such financial statements would not be material to investors.
The
company was in compliance with all loan agreements at June 29, 2008, and has met
all debt payment obligations. The U.S. note agreements, bank credit agreement
and industrial development revenue bond agreements contain certain restrictions
relating to dividend payments, share repurchases, investments, financial ratios,
guarantees and the incurrence of additional indebtedness.
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
13.
|
Employee
Benefit Obligations
|
|
($
in millions)
|
|
June
29,
2008
|
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
Total
defined benefit pension liability
|
|
$ |
431.0 |
|
|
$ |
406.2 |
|
|
Less
current portion
|
|
|
(27.9 |
) |
|
|
(25.7 |
) |
|
Long-term
defined benefit pension liability
|
|
|
403.1 |
|
|
|
380.5 |
|
|
Retiree
medical and other postemployment benefits
|
|
|
181.1 |
|
|
|
193.3 |
|
|
Deferred
compensation plans
|
|
|
183.7 |
|
|
|
185.4 |
|
|
Other
|
|
|
22.8 |
|
|
|
39.8 |
|
|
|
|
$ |
790.7 |
|
|
$ |
799.0 |
|
Components
of net periodic benefit cost associated with the company’s defined benefit
pension plans were:
|
|
|
Three
Months Ended
|
|
|
|
|
June
29, 2008
|
|
|
July
1, 2007
|
|
|
($
in millions)
|
|
U.S.
|
|
|
Foreign
|
|
|
Total
|
|
|
U.S.
|
|
|
Foreign
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
10.8 |
|
|
$ |
2.4 |
|
|
$ |
13.2 |
|
|
$ |
10.3 |
|
|
$ |
2.1 |
|
|
$ |
12.4 |
|
|
Interest
cost
|
|
|
12.7 |
|
|
|
8.7 |
|
|
|
21.4 |
|
|
|
11.8 |
|
|
|
7.5 |
|
|
|
19.3 |
|
|
Expected
return on plan assets
|
|
|
(16.0 |
) |
|
|
(4.7 |
) |
|
|
(20.7 |
) |
|
|
(13.6 |
) |
|
|
(4.5 |
) |
|
|
(18.1 |
) |
|
Amortization
of prior service cost
|
|
|
0.3 |
|
|
|
(0.2 |
) |
|
|
0.1 |
|
|
|
0.3 |
|
|
|
(0.1 |
) |
|
|
0.2 |
|
|
Recognized
net actuarial loss
|
|
|
2.5 |
|
|
|
0.9 |
|
|
|
3.4 |
|
|
|
3.4 |
|
|
|
1.1 |
|
|
|
4.5 |
|
|
Subtotal
|
|
|
10.3 |
|
|
|
7.1 |
|
|
|
17.4 |
|
|
|
12.2 |
|
|
|
6.1 |
|
|
|
18.3 |
|
|
Non-company
sponsored plans
|
|
|
0.4 |
|
|
|
– |
|
|
|
0.4 |
|
|
|
0.3 |
|
|
|
– |
|
|
|
0.3 |
|
|
Net
periodic benefit cost
|
|
$ |
10.7 |
|
|
$ |
7.1 |
|
|
$ |
17.8 |
|
|
$ |
12.5 |
|
|
$ |
6.1 |
|
|
$ |
18.6 |
|
|
|
|
Six
Months Ended
|
|
|
|
|
June
29, 2008
|
|
|
July
1, 2007
|
|
|
($
in millions)
|
|
U.S.
|
|
|
Foreign
|
|
|
Total
|
|
|
U.S.
|
|
|
Foreign
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
21.5 |
|
|
$ |
4.7 |
|
|
$ |
26.2 |
|
|
$ |
20.4 |
|
|
$ |
4.3 |
|
|
$ |
24.7 |
|
|
Interest
cost
|
|
|
25.4 |
|
|
|
17.3 |
|
|
|
42.7 |
|
|
|
23.5 |
|
|
|
14.8 |
|
|
|
38.3 |
|
|
Expected
return on plan assets
|
|
|
(32.0 |
) |
|
|
(9.5 |
) |
|
|
(41.5 |
) |
|
|
(27.2 |
) |
|
|
(8.9 |
) |
|
|
(36.1 |
) |
|
Amortization
of prior service cost
|
|
|
0.6 |
|
|
|
(0.3 |
) |
|
|
0.3 |
|
|
|
0.4 |
|
|
|
(0.2 |
) |
|
|
0.2 |
|
|
Recognized
net actuarial loss
|
|
|
5.1 |
|
|
|
1.9 |
|
|
|
7.0 |
|
|
|
6.8 |
|
|
|
2.3 |
|
|
|
9.1 |
|
|
Subtotal
|
|
|
20.6 |
|
|
|
14.1 |
|
|
|
34.7 |
|
|
|
23.9 |
|
|
|
12.3 |
|
|
|
36.2 |
|
|
Non-company
sponsored plans
|
|
|
0.7 |
|
|
|
– |
|
|
|
0.7 |
|
|
|
0.6 |
|
|
|
0.1 |
|
|
|
0.7 |
|
|
Net
periodic benefit cost
|
|
$ |
21.3 |
|
|
$ |
14.1 |
|
|
$ |
35.4 |
|
|
$ |
24.5 |
|
|
$ |
12.4 |
|
|
$ |
36.9 |
|
Contributions
to the company’s defined global benefit pension plans, not including the
unfunded German plans, were $21 million in the first six months of 2008
($26.8 million in 2007). The total required contributions to these funded plans
are expected to be approximately $47 million in 2008. Payments to participants
in the unfunded German plans were €8.9 million ($13.7 million) in the
first six months of 2008 and are expected to be approximately €18 million
(approximately $28 million) for the full year.
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
14. Shareholders’
Equity and Comprehensive Earnings
|
Accumulated
Other Comprehensive Earnings
|
Accumulated
other comprehensive earnings include the cumulative effect of foreign currency
translation, pension and other postretirement items and realized and unrealized
gains and losses on derivative instruments receiving cash flow hedge accounting
treatment.
|
($
in millions)
|
|
Foreign
Currency
Translation
|
|
|
Pension
and Other Postretirement Items
(net
of tax)
|
|
|
Effective
Financial
Derivatives(a)
(net
of tax)
|
|
|
Accumulated
Other
Comprehensive
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
$ |
221.8 |
|
|
$ |
(104.0 |
) |
|
$ |
(10.9 |
) |
|
$ |
106.9 |
|
|
Change
|
|
|
95.5 |
|
|
|
4.0 |
|
|
|
55.1 |
|
|
|
154.6 |
|
|
June 29,
2008
|
|
$ |
317.3 |
|
|
$ |
(100.0 |
) |
|
$ |
44.2 |
|
|
$ |
261.5 |
|
|
(a)
|
Refer
to Item 3, “Quantitative and Qualitative Disclosures About Market Risk,”
for a discussion of the company’s use of derivative financial
instruments.
|
Comprehensive
Earnings
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
($
in millions)
|
|
June 29,
2008
|
|
|
July 1,
2007
|
|
|
June 29,
2008
|
|
|
July 1,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
100.0 |
|
|
$ |
105.9 |
|
|
$ |
183.8 |
|
|
$ |
187.1 |
|
|
Foreign
currency translation adjustment
|
|
|
9.2 |
|
|
|
9.0 |
|
|
|
95.5 |
|
|
|
16.8 |
|
|
Pension
and other postretirement items
|
|
|
2.0 |
|
|
|
2.8 |
|
|
|
4.0 |
|
|
|
5.5 |
|
|
Effect
of derivative instruments
|
|
|
13.9 |
|
|
|
8.7 |
|
|
|
55.1 |
|
|
|
12.8 |
|
|
Comprehensive
earnings
|
|
$ |
125.1 |
|
|
$ |
126.4 |
|
|
$ |
338.4 |
|
|
$ |
222.2 |
|
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 terminating 10 years from the date of grant. A summary of stock
option activity for the six months ended June 29, 2008, follows:
|
|
|
Outstanding
Options
|
|
|
Nonvested
Options
|
|
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
of
Shares
|
|
|
Weighted
Average Grant Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
|
4,747,005 |
|
|
$ |
32.06 |
|
|
|
1,664,980 |
|
|
$ |
10.88 |
|
|
Granted
|
|
|
879,000 |
|
|
|
50.11 |
|
|
|
879,000 |
|
|
|
12.82 |
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
(552,595 |
) |
|
|
10.80 |
|
|
Exercised
|
|
|
(234,495 |
) |
|
|
22.46 |
|
|
|
|
|
|
|
|
|
|
Canceled/forfeited
|
|
|
(38,200 |
) |
|
|
44.20 |
|
|
|
(38,200 |
) |
|
|
10.66 |
|
|
End
of period
|
|
|
5,353,310 |
|
|
|
35.36 |
|
|
|
1,953,185 |
|
|
|
11.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and exercisable, end of period
|
|
|
3,400,125 |
|
|
|
27.82 |
|
|
|
|
|
|
|
|
|
|
Reserved
for future grants
|
|
|
3,652,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The
options granted in April 2008 included 384,995 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 June 29, 2008,
was 6.4 years and the aggregate intrinsic value (difference in
exercise price and closing price at that date) was $65.9 million. The
weighted average remaining contractual term for options vested and exercisable
at June 29, 2008, was 4.9 years and the aggregate intrinsic value was
$67.5 million. The company received $4.4 million from options
exercised during the three months ended June 29, 2008. The intrinsic value
associated with these exercises was $5.6 million, and the associated tax
benefit of $2 million was reported as other financing activities in the
condensed consolidated statement of cash flows. During the six months ended June
29, 2008, the company received $5.3 million from options exercised. The
intrinsic value associated with exercises for that period was $6.8 million and
the associated tax benefit reported as other financing activities was $2.4
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 2008 have an estimated weighted average fair value at the date of
grant of $12.82 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
|
|
0.80%
|
|
|
Expected
stock price volatility
|
|
24.48%
|
|
|
Risk-free
interest rate
|
|
2.99%
|
|
|
Expected
life of options
|
|
5.25
years
|
|
|
Forfeiture
rate
|
|
12.00%
|
In
addition to stock options, the company may issue to officers and certain
employees restricted shares and restricted stock units, which vest over various
periods. Other than the performance-contingent grants discussed below, such
restricted shares and restricted stock units generally vest in equal
installments over five years. Compensation cost is recorded based upon the fair
value of the shares at the grant date.
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
14. Shareholders’
Equity and Comprehensive Earnings (continued)
To
encourage certain senior management employees and outside directors to invest in
Ball stock, Ball adopted a deposit share program in March 2001 (subsequently
amended and restated in April 2004) that matches purchased shares with
restricted shares. In general, restrictions on the matching shares lapse at the
end of four years from date of grant, or earlier 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 closing market price of the shares at the grant date.
In
April 2008 and 2007, the company’s board of directors granted
246,650 and 170,000 performance-contingent restricted stock units,
respectively, to key employees, which will cliff-vest if the company’s return on
average invested capital during a 36-month performance period and 33-month
performance period, respectively, is equal to or exceeds the company’s cost of
capital. If the performance goals are 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 closing market price of the
shares at the grant date. On a quarterly basis, the company reassesses the
probability of the goals being met and adjusts compensation expense as
appropriate. No such adjustment was considered necessary at the end of the
second quarter 2008 for either grant.
For the
three and six months ended June 29, 2008, the company recognized pretax expense
of $5.8 million ($3.5 million after tax) and $10 million ($6 million
after tax), respectively, for share-based compensation arrangements, which
represented $0.04 per basic and diluted share for the second quarter and
$0.06 per basic and diluted share for the first six months. For the three and
six months ended July 1, 2007, the company recognized pretax expense of
$5.2 million ($3.1 million after tax) and $8.4 million ($5.1 million
after tax) for such arrangements, which represented $0.03 per basic and diluted
share and $0.05 per basic and diluted share, respectively, for those periods. At
June 29, 2008, there was $47.5 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.
Stock
Repurchase Agreements
Through
the second quarter of 2008, we repurchased $181.2 million of our common
stock, net of issuances, including a $31 million settlement on
January 7, 2008, of a forward contract entered into in December 2007
for the repurchase of 675,000 shares.
Net share
repurchases through the second quarter also included the preliminary settlement
of an accelerated share repurchase agreement entered into in December 2007
to buy $100 million of the company’s common shares. Ball advanced the
$100 million on January 7, 2008, and received 2,038,657 shares, which
represented 90 percent of the total shares as calculated using the previous
day’s closing price. The agreement was settled on July 11, 2008, and the company
received an additional 138,521 shares.
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
15. Earnings
Per Share
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
($
in millions, except per share amounts; shares in
thousands)
|
|
June 29,
2008
|
|
|
July 1,
2007
|
|
|
June 29,
2008
|
|
|
July 1,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
100.0 |
|
|
$ |
105.9 |
|
|
$ |
183.8 |
|
|
$ |
187.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
96,911 |
|
|
|
101,542 |
|
|
|
97,055 |
|
|
|
101,826 |
|
|
Effect
of dilutive securities
|
|
|
1,548 |
|
|
|
1,623 |
|
|
|
1,410 |
|
|
|
1,548 |
|
|
Weighted
average shares applicable to diluted earnings per share
|
|
|
98,459 |
|
|
|
103,165 |
|
|
|
98,465 |
|
|
|
103,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$ |
1.02 |
|
|
$ |
1.03 |
|
|
$ |
1.87 |
|
|
$ |
1.81 |
|
Information
needed to compute basic earnings per share is provided in the condensed
consolidated statements of earnings.
The
following outstanding options were excluded from the diluted earnings per share
calculation because they were anti-dilutive (i.e., the sum of the proceeds,
including the unrecognized compensation, exceeded the average closing stock
price for the period):
| |
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
Option
Price:
|
|
|
June 29,
2008
|
|
|
July
1,
2007
|
|
|
June 29,
2008
|
|
|
July
1,
2007
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
$
43.69
|
|
|
|
− |
|
|
|
− |
|
|
|
− |
|
|
|
867,025 |
|
| |
$
49.32
|
|
|
|
833,368 |
|
|
|
949,200 |
|
|
|
912,629 |
|
|
|
949,200 |
|
| |
$
50.11
|
|
|
|
830,245 |
|
|
|
− |
|
|
|
879,000 |
|
|
|
− |
|
| |
|
|
|
|
1,663,613 |
|
|
|
949,200 |
|
|
|
1,791,629 |
|
|
|
1,816,225 |
|
|
16.
|
Fair
Value of Financial Instruments
|
Ball
adopted SFAS No. 157 effective January 1, 2008, for
financial assets and liabilities and for nonfinancial assets and liabilities
measured on a recurring basis. As discussed in Note 2,
SFAS No. 157 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. As defined in SFAS No. 157, fair value
is the price that would be received to sell an asset or be paid to transfer a
liability in an orderly transaction between market participants at the
measurement date (exit price). However, it permits a mid-market pricing
convention (the mid-point price between bid and ask prices) as a practical
expedient. SFAS No. 157 requires that the fair value of a liability
include the nonperformance risk (including an entity’s credit risk and other
risks such as settlement risk) related to the liability being
measured.
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
16.
|
Fair
Value of Financial Instruments (continued)
|
The
statement establishes a fair value hierarchy that prioritizes the inputs used to
measure fair value using the following definitions (from highest to lowest
priority):
|
●
|
Level 1
– Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities.
Level 1 primarily consists of financial instruments, such as
exchange-traded derivatives and listed equity
securities.
|
|
●
|
Level 2
– Quoted prices in markets that are not active, or inputs that are
observable, either directly or indirectly, for substantially the full term
of the asset or liability. Level 2 includes those financial
instruments that are valued using models or other valuation methodologies.
These models are primarily industry-standard models that consider various
assumptions, including quoted forward prices for commodities, time value,
volatility factors and current market and contractual prices for the
underlying instruments. Substantially all of these assumptions are
observable in the marketplace throughout the full term of the instrument,
can be derived from observable data or are supported by observable levels
at which transactions are executed in the marketplace. Instruments in this
category include non-exchange-traded derivatives, such as over-the-counter
forwards and options.
|
|
●
|
Level 3
– Prices or valuation techniques requiring inputs that are both
significant to the fair value measurement and unobservable (i.e.,
supported by little or no market
activity).
|
The
following table summarizes by level within the fair value hierarchy the
company’s financial assets and liabilities and nonfinancial assets and
liabilities accounted for at fair value on a recurring basis as of June 29,
2008. The company’s assessment of the significance of a particular input to the
fair value measurement requires judgment and may affect the valuation of fair
value assets and liabilities and their placement within the fair value hierarchy
levels.
|
($
in millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Current
commodity derivatives (a)
|
|
$ |
– |
|
|
$ |
69.5 |
|
|
$ |
69.5 |
|
|
Noncurrent
commodity derivatives (b)
|
|
|
– |
|
|
|
66.9 |
|
|
|
66.9 |
|
|
Scrap
metal program (c)
|
|
|
– |
|
|
|
31.9 |
|
|
|
31.9 |
|
|
Other
assets (b)
|
|
|
– |
|
|
|
14.0 |
|
|
|
14.0 |
|
|
Total
assets
|
|
$ |
– |
|
|
$ |
182.3 |
|
|
$ |
182.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
commodity derivatives (d)
|
|
$ |
– |
|
|
$ |
56.3 |
|
|
$ |
56.3 |
|
|
Noncurrent
commodity derivatives (e)
|
|
|
– |
|
|
|
35.5 |
|
|
|
35.5 |
|
|
Deferred
compensation liabilities (f)
|
|
|
113.3 |
|
|
|
70.4 |
|
|
|
183.7 |
|
|
Other
liabilities
|
|
|
– |
|
|
|
4.4 |
|
|
|
4.4 |
|
|
Total
|
|
$ |
113.3 |
|
|
$ |
166.6 |
|
|
$ |
279.9 |
|
|
(a)
|
Amounts
are included in the consolidated balance sheet within deferred taxes and
other current assets.
|
|
(b)
|
Amounts
are included in the consolidated balance sheet within intangibles and
others assets, net.
|
|
(c)
|
Amounts
are included in the consolidated balance sheet within receivables,
net.
|
|
(d)
|
Amounts
are included in the consolidated balance sheet within other current
liabilities.
|
| (e) |
Amounts
are included in the consolidated balance sheet within deferred taxes and
other liabilities.
|
| (f) |
See
Note 13.
|
The
company has not identified any Level 3 items at June 29, 2008. The
fair value of the company’s pension assets will be evaluated under
SFAS No. 157 as of December 31, 2008, as part of the year-end
valuation of the company’s pension benefit obligations.
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
|
16.
|
Fair
Value of Financial Instruments (continued)
|
The
company uses closing spot and forward market prices as published by the London
Metal Exchange, Reuters and Bloomberg to determine the fair value of its
aluminum, currency and interest rate spot and forward contracts. Option
contracts are valued using a Black-Scholes model with observable market inputs
for aluminum, currency and interest rates. The company additionally evaluates
counterparty creditworthiness to determine if any adjustment to fair value is
needed, and since the company’s financial derivatives are traded in highly
liquid markets, no illiquidity reserve is taken against the determined fair
value.
For the
six months ended June 29, 2008, the company recorded a net pretax loss of
$2.2 million for the changes in the fair value of its derivative
instruments, the majority of which is expected to reverse in future
periods.
As
permitted, the company’s long-term debt is not carried in the company’s
financial statements at fair value. The fair value of the long-term debt was
estimated at $2.5 billion as of June 29, 2008, as compared to its
carrying value of $2.6 billion. Rates currently available to the company
for loans with similar terms and maturities are used to estimate the fair value
of long-term debt based on cash flows.
The
company is subject to various risks and uncertainties in the ordinary course of
business due, in part, to the competitive nature of the industries in which the
company participates. We do business in countries outside the U.S., have
changing commodity prices for the materials used in the manufacture of our
packaging products and participate in changing capital markets. Where management
considers it warranted, we reduce these risks and uncertainties through the
establishment of risk management policies and procedures, including, at times,
the use of certain derivative financial instruments.
From time
to time, the company is subject to routine litigation incident to its
businesses. Additionally, the U.S. Environmental Protection Agency has
designated Ball as a potentially responsible party, along with numerous other
companies, for the cleanup of several hazardous waste sites.
Pursuant
to the merger agreement, a certain portion of the common share consideration
issued for the acquisition of U.S. Can was placed in escrow and was subsequently
converted into cash, which remains in escrow. During the second quarter of 2007,
Ball asserted claims against the former shareholders of U.S. Can, and the
escrowed cash will be used to satisfy such claims to the extent they are agreed
or sustained. The representative for the former shareholders of U.S. Can filed a
lawsuit against the company in the first quarter of 2008 seeking a declaration
of the parties’ rights and obligations with respect to the claims asserted by
the company.
Several
tax and other matters have come to the attention of the company related to its
wholly owned Argentina subsidiary in the metal food and household products
packaging, Americas, segment. All matters relate to periods prior to the
acquisition of the Argentine business as part of the acquisition of U.S. Can in
March 2006. To the extent the matters are settled unfavorably, the company plans
to seek recovery from the former shareholders of U.S. Can.
Our
information at this time does not indicate that the matters identified above
will have a material adverse effect upon the liquidity, results of operations or
financial condition of the company.
18.
Indemnifications and Guarantees
During
the normal course of business, the company or its appropriate consolidated
direct or indirect subsidiaries have made certain indemnities, commitments and
guarantees under which the specified entity may be required to make payments in
relation to certain transactions. These indemnities, commitments and guarantees
include indemnities to the customers of the subsidiaries in connection with the
sales of their packaging and aerospace products and services; guarantees to
suppliers of direct or indirect subsidiaries of the company guaranteeing the
performance of the respective entity under a purchase agreement, construction
contract or other commitment; guarantees in respect of certain foreign
subsidiaries’ pension plans; indemnities for liabilities associated with the
Notes
to Unaudited Condensed Consolidated Financial Statements
Ball
Corporation and Subsidiaries
18.
Indemnifications and Guarantees (continued)
infringement
of third party patents, trademarks or copyrights under various types of
agreements; indemnities to various lessors in connection with facility,
equipment, furniture and other personal property leases for certain claims
arising from such leases; indemnities to governmental agencies in connection
with the issuance of a permit or license to the company or a subsidiary;
indemnities pursuant to agreements relating to certain joint ventures;
indemnities in connection with the sale of businesses or substantially all of
the assets and specified liabilities of businesses; and indemnities to
directors, officers and employees of the company to the extent permitted under
the laws of the State of Indiana and the United States of America. The duration
of these indemnities, commitments and guarantees varies, and in certain cases,
is indefinite. In addition, the majority of these indemnities, commitments and
guarantees do not provide for any limitation on the maximum potential future
payments the company could be obligated to make. As such, the company is unable
to reasonably estimate its potential exposure under these items.
The
company has not recorded any liability for these indemnities, commitments and
guarantees in the accompanying condensed consolidated balance sheets. The
company does, however, accrue for payments under promissory notes and other
evidences of incurred indebtedness and for losses for any known contingent
liability, including those that may arise
from indemnifications, commitments and guarantees, when future payment is both
reasonably determinable and probable. Finally, the company carries specific and
general liability insurance policies and has obtained indemnities,
commitments and guarantees from third party purchasers, sellers and other
contracting parties, which the company believes would, in certain circumstances,
provide recourse to any claims arising from these indemnifications, commitments
and guarantees.
The
company’s senior notes and senior credit facilities are guaranteed on a full,
unconditional and joint and several basis by certain of the company’s wholly
owned domestic subsidiaries. Foreign tranches of the senior credit facilities
are similarly guaranteed by certain of the company’s wholly owned foreign
subsidiaries. These guarantees are required in support of the notes and credit
facilities referred to above, are co-terminous with the terms of the respective
note indentures and credit agreement and would require performance upon certain
events of default referred to in the respective guarantees. The maximum
potential amounts which could be required to be paid under the guarantees are
essentially equal to the then outstanding principal and interest under the
respective notes and credit agreement, or under the applicable tranche. The
company is not in default under the above notes or credit
facilities.
Ball
Capital Corp. II is a separate, wholly owned corporate entity created for the
purchase of receivables from certain of the company’s wholly owned subsidiaries.
Ball Capital Corp. II’s assets will be available first to satisfy the claims of
its creditors. The company has provided an undertaking to Ball Capital Corp. II
in support of the sale of receivables to a commercial lender or lenders who
would require performance upon certain events of default referred to in the
undertaking. The maximum potential amount which could be paid is equal to the
outstanding amounts due under the accounts receivable financing (see
Note 7). The company, the relevant subsidiaries and Ball Capital Corp. II
are not in default under the above credit arrangement.
From time
to time, the company is subject to claims arising in the ordinary course of
business. In the opinion of management, no such matter, individually or in the
aggregate, exists which is expected to have a material adverse effect on the
company’s consolidated results of operations, financial position or cash
flows. Additionally, See Note 19, “Subsequent
Event.”
Subsequent
to our second quarter 2008 earnings release, we became aware that a major steel
supplier failed to honor certain contractual commitments to supply tinplate
steel for the production of aerosol containers by our food and household
container business. While we are attempting to mitigate the effects of this
event, we have notified our affected North American aerosol customers that our
ability to supply certain containers to them may be severely constrained over
the next several weeks. We have formally notified the steel supplier that we
intend to take action to recover from them any losses, liabilities and
expenses which may be incurred. We will continue to evaluate these matters
and will provide further information as appropriate.
Item
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s
discussion and analysis should be read in conjunction with the unaudited
condensed consolidated financial statements and the accompanying notes. Ball
Corporation and its subsidiaries are referred to collectively as “Ball” or the
“company” or “we” or “our” in the following discussion and
analysis.
BUSINESS
OVERVIEW
Ball
Corporation is one of the world’s leading suppliers of metal and plastic
packaging to the beverage, food and household products industries. Our packaging
products are produced for a variety of end uses and are manufactured
in plants around the world. Our wholly owned subsidiary, Ball Aerospace
& Technologies Corp. (BATC), supplies aerospace and other technologies and
services to governmental and commercial customers.
We sell
our packaging products primarily to major beverage, food and household products
companies 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 a diversified customer base, we 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 contracts and
long-term relationships generally mitigate these risks. We are also subject to
exposure from the rising costs of raw materials, as well as other inputs into
our direct costs, although our contracts and long-term relationships help us to
recover these costs in the majority of those circumstances.
In the
rigid packaging industry, sales and earnings can be improved by reducing costs,
developing new products, expanding volume and increasing prices. In 2009 we
expect to complete the project to upgrade and streamline our North American
beverage can end manufacturing capabilities, a project that in 2007 began to
generate productivity gains and cost reductions in the metal beverage packaging,
Americas and Asia, segment.
While the
U.S. and Canadian beverage container manufacturing industry is relatively
mature, the European, PRC and Brazilian beverage can markets are growing and are
expected to continue to grow. We are capitalizing on this growth by increasing
capacity in some of our European can manufacturing facilities by speeding up
certain lines and by expansion. Our announced expansion plans include the
construction of a beverage can manufacturing plant in India, and a new plant in
Poland, to meet the rapidly growing demand for beverage cans there and in
central and eastern Europe. To better position the company in the European
market, the capacity from the fire-damaged Hassloch, Germany, plant was replaced
with a mix of steel beverage can manufacturing capacity in the Hassloch plant
and aluminum beverage can manufacturing capacity in the company’s Hermsdorf,
Germany, plant. All three lines were in commercial production by the end of the
second quarter of 2007. We are also considering additional can and end
manufacturing capacity in Europe and in the PRC. Additionally, we recently
announced a new one-line metal beverage can plant in our Brazil joint venture
and are adding further can capacity in the existing Brazilian can plant. These
Brazilian expansion efforts will be owned by Ball’s unconsolidated 50-percent
owned joint venture, Latapack-Ball Embalagens, Ltda., with the financing
anticipated to be funded by cash flows from operations and incurrence of debt by
the joint venture.
As part
of our packaging strategy, we are focused on developing and marketing new and
existing products that meet the needs of our customers and the ultimate
consumer. These innovations include new shapes, sizes, opening features and
other functional benefits of both metal and plastic packaging. This packaging
development activity helps us maintain and expand our supply positions with
major beverage, food and household products customers. As part of this focus, we
installed a new 24-ounce beverage can production line in our Monticello,
Indiana, facility, which is expected to become operational during the third
quarter of 2008.
Ball’s
consolidated earnings are exposed to foreign exchange rate fluctuations. We
attempt to mitigate this exposure through the use of derivative financial
instruments, as discussed in “Quantitative and Qualitative Disclosures About
Market Risk” within Item 3 of this report.
The
primary customers for the products and services provided by our aerospace and
technologies segment are U.S. government agencies or their prime contractors. It
is possible that federal budget reductions and priorities, or changes in agency
budgets, could limit future funding and new contract awards or delay or prolong
contract performance.
We
recognize sales under long-term contracts in the aerospace and technologies
segment using the cost-to-cost, percentage of completion method of accounting.
Our present contract mix consists of approximately 67 percent cost-type
contracts, which are billed at our costs plus an agreed upon and/or earned
profit component, while the remainder are fixed price contracts. We include
time and material contracts in the fixed price category because such contracts
typically provide for the sale of engineering labor at fixed hourly rates.
Failure to be awarded certain key contracts could adversely affect segment
performance.
Throughout
the period of contract performance, we regularly reevaluate and, if necessary,
revise our estimates of BATC’s total contract revenue, total contract cost and
progress toward completion. Because of contract payment schedules, limitations
on funding and other contract terms, our sales and accounts receivable for this
segment include amounts that have been earned but not yet billed.
Management
uses various measures to evaluate company performance. The primary financial
metric we use is economic value added (tax-effected operating earnings, as
defined by the company, less a charge for net operating assets employed). Our
goal is to increase economic value added on an annual basis. Other financial
metrics we use are earnings before interest and taxes (EBIT); earnings before
interest, taxes, depreciation and amortization (EBITDA); diluted earnings per
share; operating cash flow and free cash flow (generally defined by the company
as cash flow from operating activities less capital expenditures). These
financial measures may be adjusted at times for items that affect comparability
between periods. Nonfinancial measures in the packaging segments include
production efficiency and spoilage rates, quality control figures,
environmental, health and safety statistics and production and shipment volumes.
Additional measures used to evaluate performance in the aerospace and
technologies segment include contract revenue realization, award and incentive
fees realized, proposal win rates and backlog (including awarded, contracted and
funded backlog).
We
recognize that attracting, developing and retaining highly talented employees
are essential to the success of Ball and, because of this, we strive to pay
employees competitively and encourage their ownership of the company’s common
stock as part of a diversified portfolio. For most management employees, a
meaningful portion of compensation is at risk as an incentive, dependent upon
economic value-added operating performance. For more senior positions, more
compensation is at risk through economic value-added performance and various
stock compensation plans. Through our employee stock purchase plan and 401(k)
plan, which matches employee contributions with Ball common stock, employees,
regardless of organizational level, have opportunities to own Ball
stock.
CONSOLIDATED
SALES AND EARNINGS
The
company has five reportable segments organized along a combination of product
lines and geographic areas: (1) metal beverage packaging,
Americas and Asia; (2) metal beverage packaging, Europe; (3) metal
food and household products packaging, Americas; (4) plastic packaging,
Americas; and (5) aerospace and technologies. Due to first quarter 2008
management reporting changes, Ball’s PRC operations are now included in the
metal beverage packaging, Americas and Asia, segment. The 2007 segment
information has been retrospectively adjusted to conform to the current year
presentation. We also have investments in companies in the U.S., the PRC and
Brazil, which are accounted for using the equity method of accounting and,
accordingly, those results are not included in segment sales or
earnings.
Metal
Beverage Packaging, Americas and Asia
The metal
beverage packaging, Americas and Asia, segment consists of operations located in
the U.S., Canada, Puerto Rico and the PRC, which manufacture metal container
products used in beverage packaging, as well as non-beverage plastic containers
manufactured and sold mainly in the PRC. This segment accounted for
40 percent of consolidated net sales in the second quarter of 2008
(43 percent in 2007) and 40 percent in the first six months
(42 percent in 2007). Sales in the second quarter and first six months of
2008 were lower than in 2007 as higher sales prices in 2008, primarily due to
rising aluminum prices, were more than offset by a decrease in North American
volumes of over 6 percent for the second quarter and 5 percent for the
first six months of 2008. The decrease in North American sales volumes was due
in part to lower unit volume sales to carbonated soft drink
customers,
lower convenience store sales and a decision in 2007 to not match a competitive
offer for certain beer unit volumes. This was somewhat offset by double-digit
sales volume increases in the PRC for the second quarter and first six months of
2008, respectively. Lower sales volumes in North America were caused in part by
the loss of certain 12-ounce beer can business in Canada which the company chose
not to continue to supply.
Segment
earnings of $74 million in the second quarter of 2008 were 17 percent lower
than the second quarter 2007 earnings of $89.1 million while earnings of
$148 million in the first six months of 2008 were 23 percent lower than the
prior year earnings of $191 million for the same period. Contributing to the
higher earnings in 2007 were raw material inventory gains of approximately $52
million realized through the first six months of 2007, which did not recur
in 2008. Earnings in the second quarter and first six months of 2008 were
negatively impacted by lower North American sales volumes, which were
partially offset by the increased sales volumes in the PRC. Charges were
incurred in the second quarter of 2008 related to the segment’s business
consolidation activities with a net cost of $3.4 million (see comments below),
further reducing earnings for the first six months of 2008. Positive cost
impacts from the new end technology projects and other cost savings measures
partially offset the prior year, non-recurring inventory gain, the unfavorable
net sales volume decrease and the second quarter consolidation
charges.
The
company announced in the second quarter of 2008 that by the end of 2008 it would
close a metal beverage packaging plant in Kent, Washington, and recorded a
pretax charge of $10.6 million ($6.4 million after tax). The closure is expected
to result in annual, fixed-cost savings of approximately $16 million beginning
in 2010. Also
in the second quarter, a gain of $7.2 million ($4.4 million after tax) was
recorded for the recovery of previously expensed pension, employee severance and
other benefit closure obligation costs no longer required. This reflects a
decision made in the second quarter to continue to operate existing end-making
equipment and not install a new beverage can end module that would have been
part of a multi-year project. Additional details regarding business
consolidation activities are available in Note 6 accompanying the unaudited
condensed consolidated financial statements included within Item 1 of this
report.
We
continue to focus efforts on the custom beverage can business, which includes
cans of different shapes, diameters and fill volumes, and cans with added
functional attributes (such as resealability) for new products and product line
extensions.
Metal
Beverage Packaging, Europe
The metal
beverage packaging, Europe, segment includes metal beverage packaging products
manufactured in Europe and sold there as well as in Africa and India. This
segment accounted for 27 percent of consolidated net sales in the second quarter
of 2008 (24 percent in 2007) and 26 percent in the first six months (22 percent
in 2007). Segment sales in the second quarter and first six months of 2008 as
compared to the same periods in the prior year were 18 and 21 percent higher,
respectively, due largely to approximately 7 and 9 percent higher volumes,
consistent with overall market growth; higher sales prices in both periods; and
foreign currency sales gains of 16 and 15 percent on the strength of the euro.
In both periods, these positive impacts were offset by certain small unfavorable
changes. Higher segment sales volumes were aided by the growth in Europe of
custom can volumes, including the successful introduction of the Ball sleek can
into Italy. The slow return of the metal beverage can to the German market,
following the mandatory deposit legislation previously reported on, is being
offset by stronger demand outside Germany.
Segment
earnings were $77.2 million in the second quarter of 2008 and $125.2 million in
the first six months compared to $86.1 million and $122.9 million for the same
periods in 2007, respectively. Earnings in the second quarter of 2008 were
positively impacted by an increase in net margins of $5 million due to the
combined impact of increased sales volumes and price recovery initiatives that
exceeded the negative impact from product mix, as well as approximately
$10 million related to a stronger euro. These improvements were offset by
$6 million of higher other costs. Earnings in the first six months of 2008
were positively impacted by $25 million due to the combined impact of
increased sales volumes and price recovery initiatives that exceeded the
negative impact from product mix, as well as approximately $17 million
related to a stronger euro. These improvements were offset by $11 million
of higher other costs. Approximately, €12.8 million ($17.2 million) and €21.1
million ($28.1 million) were recognized in cost of sales during the second
quarter and first six months of 2007, respectively, for insurance recoveries
related to business interruption costs as a result of an April 2006 fire in one
of the company’s German plants.
Metal
Food & Household Products Packaging, Americas
The metal
food and household products packaging, Americas, segment consists of operations
located in the U.S., Canada and Argentina. The segment includes the manufacture
and sale of metal cans used for food packaging, aerosol cans, paint cans and
decorative specialty cans.
Segment
sales were approximately 14 percent of consolidated net sales in the second
quarter of 2008 (14 percent in 2007) and 14 percent in the first six months
(15 percent in 2007). Sales in the second quarter of 2008 were relatively
flat in comparison to sales in the second quarter of 2007, while sales in the
first six months of 2008 were 3 percent lower than in the first six months
of 2007. The decrease experienced during the first six months of 2008 was the
result of an approximately 10 percent decrease in sales volumes due to lower
preseason shipments to seasonal customers and decisions by management to
discontinue unprofitable business, resulting in the announced closure of our
Commerce, California, and Tallapoosa, Georgia, facilities, partially offset by
higher selling prices.
Segment
earnings were $14.3 million in the second quarter of 2008 compared to $11.1
million in the second quarter of 2007, and $29.1 million in the first six months
of 2008 compared to $10.9 million in 2007. The improved performance in the
second quarter and the first six months of 2008 were primarily related to
improved pricing and better manufacturing performance offset by the negative
impact of 7 and 10 percent lower sales volumes for the quarter and six months,
respectively.
The
company announced in the fourth quarter of 2007 that by the end of 2008 it would
close metal food and household products packaging plants in Commerce,
California, and Tallapoosa, Georgia, and redeploy certain of those assets to
other food and household facilities, including Oakdale, California, and Chestnut
Hill, Tennessee. When completed during 2008, the actions are expected to yield
annualized pretax cost savings in excess of $15 million and improve the aerosol
plant utilization rate to more than 85 percent from about 70 percent. Additional
details regarding business consolidation activities are available in Note 6
accompanying the unaudited condensed consolidated financial statements included
within Item 1 of this report.
Subsequent
Event
Subsequent
to our second quarter 2008 earnings release, we became aware that a major steel
supplier failed to honor certain contractual commitments to supply tinplate
steel for the production of aerosol containers by our food and household
container business. While we are attempting to mitigate the effects of this
event, we have notified our affected North American aerosol customers that our
ability to supply certain containers to them may be severely constrained over
the next several weeks. We have formally notified the steel supplier that we
intend to take action to recover from them any losses, liabilities and
expenses which may be incurred. We will continue to evaluate these matters
and will provide further information as appropriate.
Plastic
Packaging, Americas
The
plastic packaging, Americas, segment consists of operations located in the U.S.
and Canada, which manufacture polyethylene terephthalate (PET) and polypropylene
plastic container products used mainly in beverage and food packaging, as well
as high density polyethylene and polypropylene containers for industrial and
household product applications.
Segment
sales accounted for 10 percent of consolidated net sales in the second
quarter of 2008 (10 percent in 2007) and 10 percent in the first six months
of 2008 (10 percent in 2007). Raw material cost increases passed through
accounted for $16 million of the net sales increase for the second quarter of
2008 offset by approximately 5 percent volume loss compared to the same period
last year. For the first six months of 2008, raw material cost increases
passed through accounted for $36 million of the net sales increase offset
by approximately 5 percent volume loss compared to the same period last year.
The volume loss included a decrease in carbonated soft drink and water
bottle sales due in part to lower convenience store sales, which was partially
offset by higher sales in specialty business markets (e.g., custom hot-fill,
alcohol, food and juice drinks) and a decrease in preform sales due in part to
the bankruptcy filing of a preform customer.
Segment earnings of $1.4 million in the second quarter of 2008
and $6.2 million in the first six months were lower than prior year earnings of
$7.1 million and $9.4 million for the same periods primarily due to the
previously
mentioned volume losses, a $4.3 million restructuring charge related
to the closing of a Canadian plant and a $1.8 million charge due to the
customer bankruptcy filing in the second quarter of 2008.
In view
of the substandard PET margins, we continue to
focus our efforts on price and margin recovery initiatives, as
well as PET development efforts in the custom hot-fill, beer, wine,
flavored alcoholic beverage and specialty container markets. In the
polypropylene plastic container arena, development efforts are primarily focused
on custom packaging markets.
The
company announced in the second quarter of 2008 the closure of a plastic
packaging manufacturing plant in Brampton, Ontario, which employs 90 people. The
Brampton operations will be consolidated into the company’s other plastic
packaging manufacturing facilities in North America and will result in a charge
of approximately $6 million, of which $4.3 million ($3.8 million after tax)
was recorded in the second quarter, with the remaining closure costs to be
recorded in the second half of 2008. The closure is expected to result in
annual, fixed-cost savings of approximately $4 million beginning in 2009. Additional
details regarding business consolidation activities are available in Note 6
accompanying the unaudited condensed consolidated financial statements included
within Item 1 of this report.
Aerospace
and Technologies
Aerospace
and technologies segment sales, which represented 9 percent of consolidated
net sales in the second quarter of 2008 (9 percent in 2007) and 10 percent
in the first six months (11 percent in 2007), were nearly equal to sales in the
second quarter of 2007 and 8 percent lower in the first six months. The
reduction noted during the first six months of 2008 was the result of a
combination of large programs nearing completion and program terminations and
delays due to government funding constraints. The reductions were partially
offset by new program starts and increased scope on previously awarded
contracts.
On
February 15, 2008, BATC completed the sale of its shares in Ball Solutions Group
Pty Ltd (BSG) to QinetiQ Pty Ltd for approximately $10.5 million, including cash
sold of $1.8 million. BSG was previously a wholly owned Australian
subsidiary of BATC that provided services to the Australian department of
defense and related government agencies. After an adjustment for working capital
items, the sale resulted in a pretax gain of $7.1 million ($4.4 million after
tax).
Segment
earnings were $22.7 million in the second quarter of 2008 compared to
$15.6 million in 2007 and $44.7 million in the first six months, which
included the gain on BSG, compared to $35.2 million in 2007. Excluding the gain
on sale, earnings were higher in the second quarter and first six months of 2008
than in 2007 as a result of improved margins on contracts due to better program
execution, improved contract mix and risk retirement on several fixed price
programs, as well as a reserve release of $1.3 million in the second quarter due
to the reduced exposure for estimated unallowable expenses.
Contracted
backlog in the aerospace and technologies segment at June 29, 2008, was $654
million compared to a backlog of $774 million at December 31, 2007.
Additional
Segment Information
For
additional information on our segment operations, see the Business Segment
Information in Note 3 accompanying the unaudited condensed consolidated
financial statements included within Item 1 of this report.
Selling, General and
Administrative
Selling,
general and administrative (SG&A) expenses were $78.5 million in the
second quarter of 2008 compared to $87.3 million for the same period in
2007 and $160.1 million in the first six months of 2008 compared to
$169.5 million in the first six months of 2007. The decreases in SG&A
expenses for the second quarter and first six months of 2008 were due to lower
research and development costs in our Aerospace segment; death benefit insurance
proceeds of $3 million; reduced incentive and deferred compensation stock
plan costs of approximately $5 million and $8 million, respectively,
and other miscellaneous net cost reductions. In the first six months, an
increase in bad debt expense of $2 million offset these
changes.
Interest and
Taxes
Consolidated
interest expense was $34.7 million for the second quarter of 2008 compared
to $38.1 million in the same period of 2007 and $70.9 million for the first
six months of 2008 compared to $76 million for the same period in 2007. The
reduced expense in 2008 was primarily due to lower interest rates.
The
effective income tax rate was approximately 32 percent for the first six
months of 2008 compared to 33 percent for the same period in 2007. The rate in
2008 was favorably impacted by the earnings mix increasing in lower
taxed jurisdictions, including Germany and the United Kingdom, which had enacted
rate reductions effective January 1, 2008, and April 1, 2008, respectively. This
was somewhat offset by a decrease in U.S. foreign tax credit
utilization and the U.S. research and development credit expiring at the
end of 2007.
NEW
ACCOUNTING PRONOUNCEMENTS
For
information regarding recent accounting pronouncements, see Note 2 to the
unaudited condensed consolidated financial statements within Item 1 of this
report.
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Our
primary sources of liquidity are cash provided by operating activities and
external borrowings. We believe that cash flows from operations and cash
provided by short-term and revolver borrowings, when necessary, will be
sufficient to meet our ongoing operating requirements, scheduled principal and
interest payments on debt, dividend payments and anticipated capital
expenditures. However, our liquidity could be impacted significantly by a
decrease in demand for our products, which could arise from competitive
circumstances, or any of the other factors described in Item 1A, “Risk Factors,”
within the company’s annual report.
Cash
flows used in operations were $69.6 million in the first six months of 2008
compared to cash flows provided by operations of $251.1 million in the
first six months of 2007. The reduction in 2008 was primarily due to the
approximately $70 million payment in January of a legal settlement to a
customer, as well as an increase in working capital.
Based on
information currently available, we estimate 2008 capital spending to be
approximately $330 million compared to 2007 capital spending of
$259.9 million (net of $48.6 million in insurance recoveries).
Approximately 75 percent of the total capital spending will be in the metal
beverage can segments and more than 50 percent of the total spending will
be for new top-line growth projects. The 2008 capital spending projection
includes the effects of foreign currency exchange rates as many of our capital
projects will occur in Europe.
Interest-bearing
debt increased to $2,742.4 million at June 29, 2008, compared to
$2,358.6 million at December 31, 2007, primarily due to seasonal working
capital needs, higher common stock repurchases and a higher euro exchange rate.
We intend to continue to allocate our operating cash flow in the balance of 2008
to capital spending programs, common stock repurchases and dividends. Our stock
repurchase program, net of issuances, is expected to be in the range of
$300 million in 2008 compared to $211.3 million in 2007. Through the
first six months of 2008, we repurchased $181.2 million of our common
stock, net of issuances, including a $31 million settlement on
January 7, 2008, of a forward contract entered into in December 2007
for the repurchase of 675,000 shares.
Ball’s
net share repurchases through the second quarter of 2008 also included the
preliminary settlement of an accelerated share repurchase agreement entered into
in December 2007 to buy $100 million of the company’s common shares.
Ball advanced the $100 million on January 7, 2008, and received
2,038,657 shares, which represented 90 percent of the total shares as
calculated using the previous day’s closing price. The agreement was settled on
July 11, 2008, and the company received an additional 138,521
shares.
Total
required contributions to the company’s defined benefit plans, not including the
unfunded German plans, are expected to be approximately $47 million in
2008. This estimate
may change based on plan asset performance, the revaluation
of the plans’ liabilities later in 2008 and revised estimates of 2008 full-year
cash flows. Payments to participants in the unfunded German plans are expected
to be approximately €18 million (approximately $28 million) for the full
year.
At June
29, 2008, approximately $430 million was available under the company’s
multi-currency revolving credit facilities. In addition, the company had
short-term uncommitted credit facilities of $350 million at the end of the
second quarter, of which $189.7 million was outstanding.
The
company has a receivables sales agreement that provides for the ongoing,
revolving sale of a designated pool of trade accounts receivable of Ball’s North
American packaging operations, up to $250 million. The agreement qualifies
as off-balance sheet financing under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 140, as amended by SFAS No. 156.
Net funds received from the sale of the accounts receivable totaled
$250 million at June 29, 2008, and $170 million at December 31, 2007,
and are reflected as a reduction of accounts receivable in the condensed
consolidated balance sheets.
The
company was in compliance with all loan agreements at June 29, 2008, and has met
all debt payment obligations. Additional details about the company’s debt and
receivables sales agreements are available in Notes 12 and 7, respectively,
accompanying the unaudited condensed consolidated financial statements included
within Item 1 of this report.
CONTINGENCIES,
INDEMNIFICATIONS AND GUARANTEES
Details
about the company’s contingencies, indemnifications and guarantees are available
in Notes 17 and 18 accompanying the unaudited condensed consolidated
financial statements included within Item 1 of this report.
Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
In the
ordinary course of business, we employ established risk management policies and
procedures to reduce our exposure to fluctuations in commodity prices, interest
rates, foreign currencies and prices of the company’s common stock in regard to
common share repurchases. Although the instruments utilized involve varying
degrees of credit, market and interest risk, the counterparties to the
agreements are expected to perform fully under the terms of the
agreements.
We have
estimated our market risk exposure using sensitivity analysis. Market risk
exposure has been defined as the changes in fair value of derivative
instruments, financial instruments and commodity positions. To test the
sensitivity of our market risk exposure, we have estimated the changes in fair
value of market risk sensitive instruments assuming a hypothetical
10 percent adverse change in market prices or rates. The results of the
sensitivity analysis are summarized below.
Commodity
Price Risk
We manage
our North American commodity price risk in connection with market price
fluctuations of aluminum ingot primarily by entering into container sales
contracts that include aluminum ingot-based pricing terms that generally reflect
price fluctuations under our commercial supply contracts for aluminum sheet
purchases. The terms include fixed, floating or pass-through aluminum ingot
component pricing. This matched pricing affects substantially all of our North
American metal beverage packaging net sales. We also, at times, use certain
derivative instruments such as option and forward contracts as cash flow and
fair value hedges of commodity price risk where there is not a pass-through
arrangement in the sales contract.
Most of
the plastic packaging, Americas, sales contracts include provisions to fully
pass through resin cost changes. As a result, we believe we have minimal
exposure related to changes in the cost of plastic resin. Most metal food and
household products packaging, Americas, sales contracts either include
provisions permitting us to pass through some or all steel cost changes we
incur, or they incorporate annually negotiated steel costs. In 2008 and in 2007,
we were able to pass through to our customers the majority of steel cost
increases. While we cannot predict what steel cost increases might occur when we
negotiate 2009 contracts, we still anticipate at this time that we will be able
to pass through the majority of the steel price increases that occur over the
next twelve months.
In Europe and the PRC, the company manages the aluminum and steel raw
material commodity price risks through annual and long-term contracts for the
purchase of the materials, as well as certain sales of containers, that reduce
the company’s
exposure to fluctuations in commodity prices within the current year. These
purchase and sales contracts include fixed price, floating and pass-through
pricing arrangements. We also use forward and option contracts as
cash flow
hedges to manage future aluminum price risk and foreign exchange exposures for
those sales contracts where there is not a pass-through arrangement to minimize
the company’s exposure to significant price changes.
The
company had aluminum contracts hedging its aluminum exposure with notional
amounts of approximately $1 billion at both June 29, 2008, and
December 31, 2007. The aluminum contracts include cash flow and fair value
hedges that offset sales contracts of various terms and lengths, as well as
other derivative instruments for which the company elects mark-to-market
accounting. Cash flow and fair value hedges related to forecasted transactions
and firm commitments expire within the next four years. Included in
shareholders’ equity at June 29, 2008, within accumulated other
comprehensive earnings, is a net after-tax gain of $38 million associated
with these contracts, of which a net gain of $19 million is expected to be
recognized in the consolidated statement of earnings during the next twelve
months. The net gain on these derivative contracts will be passed through to
customers by lower revenue from sales contracts. Additional details about the
company’s unsettled commodity derivative contracts are available in Note 16
accompanying the unaudited condensed consolidated financial statements included
within Item 1 of this report.
Considering
the effects of derivative instruments, the company’s ability to pass through
certain raw material costs through contractual provisions, the market’s ability
to accept price increases and the company’s commodity price exposures under its
contract terms, a hypothetical 10 percent adverse change in the company’s
steel, aluminum and resin prices could result in an estimated $8 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 $9 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.
The
company is also exposed to fluctuations in prices for 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 natural gas and electricity
prices, without considering such pass-through provisions, could result in an
estimated $7 million after-tax reduction of net earnings over a one-year
period. A hypothetical 10 percent increase in diesel fuel prices could
result in an estimated $2 million after-tax reduction of net earnings over
the same period. Actual results may vary based on actual changes in market
prices and rates.
Interest
Rate Risk
Our
objective in managing our exposure to interest rate changes is to minimize the
impact of interest rate changes on earnings and cash flows and to lower our
overall borrowing costs. To achieve these objectives, we use a variety of
interest rate swaps, collars and options to manage our mix of floating and
fixed-rate debt. Interest rate instruments held by the company at June 29, 2008,
included pay-fixed interest rate swaps and interest rate collars. Pay-fixed
swaps effectively convert variable rate obligations to fixed rate instruments.
Collars create an upper and lower threshold within which interest rates will
fluctuate.
At
June 29, 2008, the company had outstanding interest rate swap agreements in
Europe with notional amounts of €135 million paying fixed rates expiring
within the next three years. Ball Packaging Europe additionally has forward rate
agreements expiring in less than three months with notional amounts of
€324 million and ₤79 million. An approximate $6 million net after-tax
gain associated with these contracts is included in accumulated other
comprehensive earnings at June 29, 2008, of which $2 million is expected to
be recognized in the consolidated statement of earnings during the next twelve
months. At June 29, 2008, the company had outstanding interest rate collars
in the U.S. totaling $150 million. The value of these contracts in
accumulated other comprehensive earnings at June 29, 2008, was a loss of
approximately $0.2 million. Approximately $1 million of net gain related to
the termination or deselection of hedges is included in accumulated other
comprehensive earnings at June 29, 2008. The amount recognized in 2008 earnings
related to terminated hedges was insignificant.
We also
use European inflation option contracts to limit the impacts from spikes in
inflation against certain multi-year contracts. At June 29, 2008, the company
had inflation options in Europe with notional amounts of €115 million.
The company uses mark-to-market accounting for these options, and the fair value
at June 29, 2008, was €3 million. The contracts expire within the next five
years.
Based on
our interest rate exposure at June 29, 2008, assumed floating rate debt levels
throughout the next twelve months and the effects of derivative instruments, a
100-basis point increase in interest rates could result in
an
estimated
$9 million after-tax reduction in net earnings over a one-year period.
Actual results may vary based on actual changes in market prices and rates and
the timing of these changes.
Foreign
Currency Exchange Rate Risk
Our
objective in managing exposure to foreign currency fluctuations is to protect
foreign cash flows and earnings from changes associated with foreign currency
exchange rate changes through the use of cash flow hedges. In addition, we
manage foreign earnings translation volatility through the use of various
foreign currency option strategies, and the change in the fair value of those
options is recorded in the company’s quarterly earnings. Our foreign currency
translation risk results from the European euro, British pound, Canadian dollar,
Polish zloty, Chinese renminbi, Hong Kong dollar, 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.
We additionally use various option strategies to manage the earnings translation
of the company’s European operations into U.S. dollars. Such contracts
outstanding at June 29, 2008, expire within four years, and the amounts included
in accumulated other comprehensive earnings related to these contracts were not
significant.
Considering
the company’s derivative financial instruments outstanding at June 29,
2008, and the currency exposures, a hypothetical 10 percent reduction (U.S.
dollar strengthening) in foreign currency exchange rates compared to the U.S.
dollar could result in an estimated $25 million after-tax reduction in net
earnings over a one-year period. This amount includes the $9 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 $112 million. Actual changes in
market prices or rates may differ from hypothetical changes.
Common
Share Repurchases
On
December 3, 2007, Ball entered into a forward repurchase agreement for the
purchase of 675,000 shares of its common stock. This agreement was settled
for $31 million on January 7, 2008, and the shares were delivered that
day. On December 12, 2007, we also entered into an accelerated share
repurchase agreement for approximately $100 million. The agreement provided
for the delivery of 2,038,657 shares, which represented 90 percent of the
total estimated shares to ultimately be delivered. The $100 million was
paid on January 7, 2008, at the time the shares were delivered. The
agreement was settled on July 11, 2008, and the company received an additional
138,521 shares. Through the second quarter of 2008, inclusive of these
agreements, we repurchased $181.2 million of our common stock, net of
issuances.
Item
4. CONTROLS AND PROCEDURES
Our chief
executive officer and chief financial officer participated in management’s
evaluation of our disclosure controls and procedures, as defined by the
Securities and Exchange Commission (SEC), as of the end of the period covered by
this report and concluded that our controls and procedures were effective.
During the quarter, there were no changes in the company’s internal control over
financial reporting that have materially affected, or are reasonably likely to
materially affect, the company’s internal control over financial
reporting.
FORWARD-LOOKING
STATEMENT
The
company has made or implied certain forward-looking statements in this report
which are made as of the end of the time frame covered by this report. These
forward-looking statements represent the company’s goals, and results could vary
materially from those expressed or implied. From time to time we also provide
oral or written forward-looking statements in other materials we release to the
public. As time passes, the relevance and accuracy of forward-looking statements
may change. Some factors that could cause the company’s actual results or
outcomes to differ materially from those discussed in the forward-looking
statements include, but are not limited to: fluctuation in customer and consumer
growth, demand and preferences; loss of one or more major customers or changes
to contracts with one or more customers; insufficient production capacity;
overcapacity in foreign and domestic metal and plastic container industry
production facilities and its impact on pricing; failure to achieve anticipated
productivity improvements or production cost reductions, including those
associated with capital expenditures such as our beverage can end project;
changes in climate and weather; fruit, vegetable and fishing yields; power and
natural resource costs; difficulty in obtaining supplies and energy, such as gas
and electric power; availability and cost of raw materials, as well as the
recent significant increases in resin, steel, aluminum and energy costs, and the
ability or inability to include or pass on to customers changes in raw material
costs; changes in the pricing of the company’s products and services;
competition in pricing and the possible decrease in, or loss of, sales resulting
therefrom; insufficient or reduced cash flow; transportation costs; the number
and timing of the purchases of the company’s common shares; regulatory action or
federal and state legislation including mandated corporate governance and
financial reporting laws; the effects of the German mandatory deposit or other
restrictive packaging legislation such as recycling laws; interest rates
affecting our debt; labor strikes; increases and trends in various employee
benefits and labor costs, including pension, medical and health care costs;
rates of return projected and earned on assets and discount rates used to
measure future obligations and expenses of the company’s defined benefit
retirement plans; boycotts; antitrust, intellectual property, consumer and other
litigation; maintenance and capital expenditures; goodwill impairment; changes
in generally accepted accounting principles or their interpretation; accounting
changes; local economic conditions; the authorization, funding, availability and
returns of contracts for the aerospace and technologies segment and the nature
and continuation of those contracts and related services provided thereunder;
delays, extensions and technical uncertainties, as well as schedules of
performance associated with such segment contracts; the current global credit
situation; 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, Serbian
dinar and Indian rupee; terrorist activity or war that disrupts the company’s
production or supply; regulatory action or laws including tax, environmental,
health and workplace safety, including in respect of chemicals or substances
used in raw materials or in the manufacturing process; 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.
PART
II. OTHER INFORMATION
|
Item
1.
|
Legal
Proceedings
|
There
were no events required to be reported under Item 1 for the quarter ended June
29, 2008.
Risk
factors affecting the company can be found within Item 1A of the company’s
annual report on Form 10-K.
|
Item
2.
|
Changes
in Securities
|
The
following table summarizes the company’s repurchases of its common stock during
the quarter ended June 29, 2008.
|
Purchases
of Securities
|
|
|
($
in millions)
|
|
Total
Number
of
Shares
Purchased
|
|
|
Average
Price
Paid
per Share
|
|
|
Total
Number
of
Shares Purchased as
Part
of Publicly
Announced
Plans
or
Programs
|
|
|
Maximum
Number
of
Shares that May
Yet
Be Purchased
Under
the Plans
or Programs(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
to April 27, 2008
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
11,989,126 |
|
|
April 28
to May 25, 2008
|
|
|
525,000 |
|
|
$ |
54.28 |
|
|
|
525,000 |
|
|
|
11,464,126 |
|
|
May 26
to June 29, 2008
|
|
|
700,234 |
|
|
$ |
52.53 |
|
|
|
700,234 |
|
|
|
10,763,892 |
|
|
Total
|
|
|
1,225,234 |
(a) |
|
$ |
53.28 |
|
|
|
1,225,234 |
|
|
|
|
|
|
(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. On January 23, 2008,
Ball's board of directors authorized the repurchase by the company of up
to a total of 12 million shares of its common stock. This repurchase
authorization replaced all previous
authorizations.
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
There
were no events required to be reported under Item 3 for the quarter ended June
29, 2008.
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
The
company held the Annual Meeting of Shareholders on April 23, 2008. Matters voted
upon by proxy, and the results of the votes, were as follows:
|
|
|
For
|
|
|
Against/
Withheld
|
|
|
Abstained/
Broker
Non-Vote
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Election
of directors for terms expiring in 2009:
|
|
|
|
|
|
|
|
|
|
|
Robert
W. Alspaugh
|
|
|
87,866,147 |
|
|
|
1,991,741 |
|
|
|
– |
|
|
Election
of directors for terms expiring in 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George
M. Smart
|
|
|
60,949,705 |
|
|
|
28,908,183 |
|
|
|
– |
|
|
Theodore
M. Solso
|
|
|
60,696,236 |
|
|
|
29,161,652 |
|
|
|
– |
|
|
Stuart
A. Taylor II
|
|
|
60,710,303 |
|
|
|
29,147,585 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Action
upon shareholder proposal to declassify Board of Directors
|
|
|
53,443,182 |
|
|
|
28,857,113 |
|
|
|
7,557,593 |
|
|
Appointment
of PricewaterhouseCoopers LLP as independent registered public
accounting firm for 2008
|
|
|
84,866,954 |
|
|
|
4,179,129 |
|
|
|
811,804 |
|
In
addition to the four directors elected at the most recent Annual Meeting of
Shareholders on April 23, 2008, the following directors have terms expiring in
2009: R. David Hoover and Jan Nicholson. The following directors
have terms expiring in 2010: Hanno C. Fiedler, John F. Lehman, Georgia R.
Nelson and Erik H. Van der Kaay.
Item
5. Other Information
There
were no events required to be reported under Item 5 for the quarter ended June
29, 2008.
Item
6. Exhibits
|
20
|
Subsidiary
Guarantees of Debt
|
|
|
|
|
31
|
Certifications
pursuant to Rule 13a-14(a) or Rule 15d-14(a), by R. David Hoover, Chairman
of the Board, President and Chief Executive Officer of Ball Corporation
and by Raymond J. Seabrook, Executive Vice President and Chief Financial
Officer of Ball Corporation
|
|
|
|
|
32
|
Certifications
pursuant to Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter
63 of Title 18 of the United States Code, by R. David Hoover, Chairman of
the Board, President and Chief Executive Officer of Ball Corporation and
by Raymond J. Seabrook, Executive Vice President and Chief Financial
Officer of Ball Corporation
|
|
|
|
|
99
|
Safe
Harbor Statement Under the Private Securities Litigation Reform Act of
1995, as amended
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
Ball
Corporation
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Raymond J. Seabrook
|
|
|
|
Raymond
J. Seabrook
|
|
|
|
Executive
Vice President and Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
Date:
|
August 5,
2008
|
|
Ball
Corporation and Subsidiaries
QUARTERLY
REPORT ON FORM 10-Q
June 29,
2008
EXHIBIT
INDEX
|
Description
|
Exhibit
|
|
|
|
|
Subsidiary
Guarantees of Debt (Filed herewith.)
|
EX-20
|
|
|
|
|
Certifications
pursuant to Rule 13a-14(a) or Rule 15d-14(a), by R. David Hoover, Chairman
of the Board, President and Chief Executive Officer of Ball Corporation
and by Raymond J. Seabrook, Executive Vice President and Chief Financial
Officer of Ball Corporation (Filed herewith.)
|
EX-31
|
|
|
|
|
Certifications
pursuant to Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter
63 of Title 18 of the United States Code, by R. David Hoover, Chairman of
the Board, President and Chief Executive Officer of Ball Corporation and
by Raymond J. Seabrook, Executive Vice President and Chief Financial
Officer of Ball Corporation (Furnished herewith.)
|
EX-32
|
|
|
|
|
Safe
Harbor Statement Under the Private Securities Litigation Reform Act of
1995, as amended (Filed herewith.)
|
EX-99
|