UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-K
( X ) ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
fiscal year ended December 31, 2008
( ) TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
transition period from ________________ to ________________
Commission
File Number 1-7349
Ball
Corporation
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State
of Indiana
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35-0160610
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10 Longs
Peak Drive, P.O. Box 5000
Broomfield,
Colorado 80021-2510
Registrant’s telephone
number, including area code: (303) 469-3131
Securities
registered pursuant to Section 12(b) of the Act:
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Name
of each exchange
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Title
of each class
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on
which registered
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Common
Stock, without par value
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New
York Stock Exchange
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Chicago
Stock
Exchange
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Securities
registered pursuant to Section 12(g) of the Act: NONE
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act. YES [X] NO [ ]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. YES [ ] NO [X]
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES
[X] NO
[ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
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Large
accelerated filer [X]
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Accelerated
filer [ ]
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Non-accelerated
filer
[ ]
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the
Act). YES [ ] NO [X]
The
aggregate market value of voting stock held by non-affiliates of the registrant
was $4,610 million based upon the closing market price and common shares
outstanding as of June 29, 2008.
Number of
shares outstanding as of the latest practicable date.
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Class
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Outstanding
at February 1, 2009
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Common
Stock, without par value
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93,777,593
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DOCUMENTS
INCORPORATED BY REFERENCE
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1.
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Proxy
statement to be filed with the Commission within 120 days after
December 31, 2008, to the extent indicated in
Part III.
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Ball
Corporation and Subsidiaries
ANNUAL
REPORT ON FORM 10-K
For the
year ended December 31, 2008
INDEX
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Page
Number
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PART
I.
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Item
1.
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Business
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1
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Item
1A.
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Risk
Factors
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9
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Item
1B.
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Unresolved
Staff Comments
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13
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Item
2.
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Properties
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13
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Item
3.
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Legal
Proceedings
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16
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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17
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PART
II.
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Item
5.
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Market
for the Registrant’s Common Stock and Related Stockholder
Matters
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17
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Item
6.
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Selected
Financial Data
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19
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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20
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Forward-Looking
Statements
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31
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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32
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Item
8.
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Financial
Statements and Supplementary Data
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34
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Report
of Independent Registered Public Accounting Firm
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34
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Consolidated
Statements of Earnings for the Years Ended December 31, 2008, 2007
and 2006
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35
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Consolidated
Balance Sheets at December 31, 2008, and December 31,
2007
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36
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Consolidated
Statements of Cash Flows for the Years Ended December 31,
2008, 2007 and 2006
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37
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Consolidated
Statements of Shareholders’ Equity and Comprehensive Earnings for the
Years
Ended December 31, 2008, 2007 and 2006 |
38
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Notes
to Consolidated Financial Statements
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39
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
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86
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Item
9A.
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Controls
and Procedures
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86
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Item
9B.
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Other
Information
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87
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PART
III.
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Item
10.
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Directors
and Executive Officers of the Registrant
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87
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Item
11.
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Executive
Compensation
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88
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management
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89
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Item
13.
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Certain
Relationships and Related Transactions
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89
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Item
14.
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Principal
Accountant Fees and Services
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89
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PART
IV.
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Item
15.
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Exhibits,
Financial Statement Schedules
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90
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Signatures
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91
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Index
to Exhibits
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93
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PART
I
Item
1. Business
Ball
Corporation (Ball, we, the company or our) is one of the world’s leading
suppliers of metal and plastic packaging to the beverage, food and household
products industries. Our packaging products are produced for a variety of end
uses and are manufactured in plants around the world. We also supply
aerospace and other technologies and services to governmental and commercial
customers within our aerospace and technologies segment (Ball Aerospace). In
2008 our total consolidated net sales were $7.6 billion. Our packaging
businesses are responsible for 90 percent of that number, with the remaining 10
percent contributed from our aerospace business.
Our
largest product lines are aluminum and steel beverage cans, which contributed
65 percent of our 2008 total net sales and 75 percent of our 2008
total segment earnings before interest and taxes. We also produce steel food
cans, steel aerosol cans, polyethylene terepthalate (PET) and polypropylene
plastic bottles for beverages and foods, plastic pails, steel paint cans and
decorative steel tins. Our ongoing packaging business dates back to 1969 when
Ball began supplying beverage cans.
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.
Ball
Aerospace is a leader in the design, development and manufacture of innovative
aerospace systems. It produces spacecraft, instruments and sensors, radio
frequency and microwave technologies, data exploitation solutions and a variety
of advanced aerospace technologies and products that enable deep space missions.
Our packaging and aerospace businesses share a long history and a common
financial philosophy, and we benefit from the presence of each.
Our
corporate strategy is to grow our worldwide beverage can business and our
aerospace business, to improve the performance of the metal food and household
products packaging, Americas, and plastic packaging, Americas, segments and to
utilize free cash flow and earnings growth to increase shareholder
value.
We are
headquartered in Broomfield, Colorado, and employ approximately
14,500 people worldwide. Our stock is traded on the New York Stock Exchange
and the Chicago Stock Exchange under the ticker symbol BLL. Our predecessor
company was founded in 1880 by five Ball brothers and operated for many years as
Ball Brothers Glass Manufacturing Company.
Our
Financial Strategy
Ball
Corporation maintains a clear and disciplined financial strategy focused on
improving shareholder returns through:
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Focusing
on free cash flow generation
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Increasing
Economic Value Added (EVA®)
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Delivering
long-term earnings per share growth of 10 percent to 15 percent over
time
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The cash
generated by our businesses is used primarily: (1) to finance the company's
operations, (2) to fund stock buy-back programs and dividend payments, (3) to
fund strategic investments and (4) to service the company's debt. We also
will, when we believe it will benefit the company and our shareholders, make
strategic acquisitions or divest parts of our business.
The
compensation of a majority of our employees is tied directly to the company’s
performance through our EVA® incentive program. When the company performs well,
our employees are paid more. If the company does not perform well, our employees
get paid less or no incentive compensation.
Page 1 of
96
Our
Reporting Segments
Ball
Corporation reports its financial performance in five reportable segments
organized along a combination of product lines, after aggregating operating
segments that have similar economic characteristics: (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. 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. Due to first quarter 2008 management
reporting changes, Ball’s operations in the PRC with 2008 net sales of
$289.6 million are now aggregated and included in the metal beverage
packaging, Americas and Asia, segment (previously included within the company’s
European operations). Prior periods required to be shown in this Annual Report
on Form 10-K (Annual Report) have been conformed to the current
presentation.
Profitability
is sensitive to selling prices, production volumes, labor, transportation,
utility and warehousing costs, as well as the availability and price of raw
materials, such as aluminum sheet, tinplate steel, plastic resin and other
direct materials. These raw materials are generally available from several
sources, and we have secured what we consider to be adequate supplies and are
not experiencing any shortages. There has been significant consolidation of
suppliers in both North America and in Europe. Raw materials and energy sources,
such as natural gas and electricity, may from time to time be in short supply or
unavailable due to external factors, and the pass through of steel and aluminum
costs to our customers may be limited in some instances. We cannot predict the
timing or effects, if any, of such occurrences on future
operations.
A
substantial part of Ball’s packaging sales are made directly to companies in
packaged beverage and food businesses, including SABMiller plc and bottlers of
Pepsi-Cola and Coca-Cola branded beverages and their affiliates that utilize
consolidated purchasing groups. Additional details about sales to major
customers are included in Note 2 to the consolidated financial statements, which
can be found in Item 8 of this Annual Report (Financial Statements and
Supplementary Data).
Metal
Beverage Packaging, Americas and Asia, Segment
Industry Background and
Ball’s Operations
According
to publicly available information and company estimates, the combined U.S. and
Canada metal beverage container markets decreased in 2008 to 101 billion
units from 105 billion units in 2007. Five companies manufacture
substantially all of the metal beverage containers in the U.S. and Canada. Two
of these producers and three other independent producers also manufacture metal
beverage containers in Mexico. Ball produced in excess of 30 billion
recyclable beverage cans in the U.S. and Canada in 2008 – about 30 percent
of the total market. Sales volumes of metal beverage containers in North America
tend to be highest during the period from April through September. All of the
beverage cans produced by Ball in the U.S. and Canada are made of aluminum, as
are all beverage cans produced by our competitors in the U.S., Canada and
Mexico. In 2008 we were able to pass through substantially all aluminum-related
cost increases levied by producers. In North America, four aluminum suppliers
provide virtually all of our requirements. Some of those aluminum suppliers have
experienced significant financial and liquidity constraints in recent years,
which may be exacerbated by the global economic crisis.
We
believe we have limited our exposure related to changes in the costs of aluminum
sheet as a result of the inclusion of provisions in most aluminum container
sales contracts to pass through aluminum cost changes, as well as the use of
derivative instruments.
Beverage
containers are sold in a highly competitive market based on quality, service and
price, which is relatively capital intensive and is characterized by plants that
run more or less continuously in order to operate profitably. In addition the
aluminum beverage can competes aggressively with other packaging materials. The
glass bottle has shown resilience in the packaged beer industry, while the PET
container has grown significantly in the carbonated soft drink and water
industries over the past quarter century. In Canada, metal beverage containers
have captured significantly lower percentages of packaged beverage industry
volumes than in the U.S., particularly in the packaged beer
industry.
Page 2 of
96
Metal
beverage packaging, Americas and Asia, is Ball’s largest segment, accounting for
40 percent of consolidated net sales in 2008. Metal beverage containers are
primarily sold under multi-year supply contracts to fillers of carbonated soft
drinks, beer, energy drinks and other beverages. Decorated two-piece aluminum
beverage cans are produced at 14 manufacturing facilities in the U.S. and one in
Canada. Can ends are produced within two of the U.S. facilities, as well as in a
third facility that manufactures only ends. Through Rocky Mountain Metal
Container, LLC, a 50:50 joint venture, which is accounted for as an equity
investment, Ball and MillerCoors, LLC, operate beverage can and end
manufacturing facilities in Golden, Colorado. On July 1, 2008, the U.S. and
Puerto Rico businesses of Coors Brewing Company (Coors) and our largest North
American brewery customer, Miller Brewing Company (Miller), were combined to
form MillerCoors, LLC.
The
beverage can market in the PRC is approximately 12 billion cans, of which
Ball’s operations represent an estimated 22 percent, with an additional
13 percent manufactured by two joint ventures in which we participate. Our
percentage of the industry makes us one of the largest manufacturers of beverage
cans in the PRC. Six other manufacturers make up the remainder of the market.
Our operations include the manufacture of aluminum cans and ends in three plants
in the PRC, as well as in our two joint ventures. We also manufacture and sell
high-density plastic containers in two PRC plants primarily servicing the motor
oil industry. Capacity grew rapidly in the PRC in the late 1990s, resulting in a
supply/demand imbalance. A number of can makers, including Ball, responded by
rationalizing capacity. Demand growth has resumed over the past several years,
and we expect the PRC market to continue to grow over time, after the effects of
the current global economic crisis begin to dissipate.
We
participate in a 50:50 joint venture in Brazil, Latapack-Ball Embalagens, Ltda.,
that manufactures aluminum cans and ends and is accounted for as an equity
investment. The Brazilian joint venture is expanding capacity at its existing
facility near Sao Paulo and is building a new plant near Rio de
Janeiro.
In order
to more closely balance capacity and demand within our business, during 2008
Ball announced or completed the closure of three metal beverage packaging plants
in North America:
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●
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We
closed a metal beverage packaging plant in Kent, Washington. The plant had
two 12-ounce aluminum beverage can manufacturing lines that produced
approximately 1.1 billion cans annually. The closure is expected to
result in net fixed costs savings of approximately $10 million in
2009.
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●
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We
announced on October 30, 2008, the closure of our metal beverage can
plants in Kansas City, Missouri, and Guayama, Puerto Rico. The Kansas City
plant, which primarily manufactures specialty beverage cans, will be
closed by the end of the first quarter 2009 with manufacturing volumes
absorbed by other North American beverage can plants. The Puerto Rico
facility, which manufactured 12-ounce beverage cans, was closed at the end
of 2008. Cost reductions associated with these plant closings are expected
to be up to $30 million in 2009 and be $7 million cash positive upon final
disposition of the assets.
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Where
growth is projected in certain markets or for certain products, Ball is
undertaking selected capacity increases in its existing facilities and may
establish or obtain additional manufacturing capacity to the extent required by
the growth of any of the markets we serve.
Metal
Beverage Packaging, Europe, Segment
Industry Background and
Ball’s Operations
The
European beverage can market is approximately 55 billion cans, or more than half
the size of the North American beverage can market. While current economic
conditions have slowed growth in the near term, the European market is expected
to grow, and is highly regional in terms of growth and packaging mix. Growth in
central and eastern Europe has been particularly strong in recent years but has
been impacted by the recent economic downturn, causing the company to delay
completion of its new plant in Lublin, Poland. Western markets, including the
United Kingdom and France continue to hold up on a relative
basis.
Page 3 of
96
Sales
volumes of metal beverage containers in Europe tend to be highest during the
period from May through August with a smaller increase in demand during the
winter holiday season for the United Kingdom. As in North America, the metal
beverage container competes aggressively with other packaging materials used by
the European beer and carbonated soft drink industries. The glass bottle is
heavily utilized in the packaged beer industry, while the PET container is
increasingly utilized in the carbonated soft drink, juice and mineral water
industries.
Ball
Packaging Europe is the second largest metal beverage container producer in
Europe, with an estimated 29 percent of European shipments, and supplies
two-piece beverage cans and can ends for producers of beer, carbonated soft
drinks, mineral water, fruit juices, energy drinks and other
beverages.
The metal
beverage packaging, Europe, segment, which accounted for 25 percent of Ball’s
consolidated net sales in 2008, consists of 10 beverage can plants and two
beverage can end plants in Europe. Of the 12 European plants, four are
located in Germany, three in the United Kingdom, two in France and one each in
the Netherlands, Poland and Serbia. In addition Ball Packaging Europe is
currently renting additional space on the premises of a supplier in Haslach,
Germany in order to produce the Ball Resealable End (BRE). The European plants
produced approximately 16 billion cans in 2008, with approximately
56 percent of those being produced from aluminum and 44 percent from steel.
Six of the can plants use aluminum and four use steel.
Ball
announced plans in January 2008 to build a new beverage can manufacturing plant
in Poland in order to meet the rapidly growing demand for beverage cans there
and elsewhere in central and eastern Europe. The plant is being built in Lublin,
which is in eastern Poland near the borders of Belarus and Ukraine. It will
initially have one production line with an annual capacity of approximately 750
million cans per year. However, due to the recent global economic downturn, we
will delay the completion of the plant until market conditions warrant such
startup. In addition we are delaying construction of our planned beverage can
plant in India due to current economic conditions in that country.
European
raw material supply contracts are generally for a period of one year, although
Ball Packaging Europe has negotiated some longer term agreements. In Europe
three steel suppliers and four aluminum suppliers provide approximately 95
percent of our requirements. Aluminum is purchased primarily in U.S. dollars,
while the functional currencies of Ball Packaging Europe and its subsidiaries
are non-U.S. dollars. The company generally tries to minimize the resulting
foreign exchange rate risk through the use of derivative contracts. In addition
purchase and sales contracts include fixed price, floating and pass-through
pricing arrangements.
Metal
Food & Household Products Packaging, Americas, Segment
Industry Background and
Ball’s Operations
The metal
food and household products packaging, Americas, segment competes primarily in
the steel tinplate food and aerosol can markets in North America. The steel
tinplate food can market consists of approximately 31 billion cans annually, of
which about 43 percent are three-piece cans and 57 percent are two-piece cans.
The steel tinplate aerosol can market is approximately 3.2 billion cans
annually. We anticipate slight growth in the aerosol market, while the food
market is expected to be essentially flat over time.
Sales
volumes of metal food containers in North America tend to be highest from May
through October as a result of seasonal fruit, vegetable and salmon packs. We
estimate our 2008 shipments of more than 5.6 billion steel food containers to be
approximately 19 percent of total U.S. and Canadian metal food container
shipments. We estimate our aerosol business accounts for approximately 50
percent of total annual U.S. and Canadian steel aerosol shipments.
Competitors
in the metal food container product line include two national and a small number
of regional suppliers and self manufacturers. Several producers in Mexico also
manufacture steel food containers. Competition in the U.S. steel aerosol can
market primarily includes two national suppliers. Steel containers also compete
with other packaging materials in the food and household products industry
including glass, aluminum, plastic, paper and the stand-up pouch. As a result,
demand for this product line is dependent on product innovation and cost
reduction. Service, quality and price are among the other key competitive
factors. In North America, two steel suppliers provide more than 70 percent
of our tinplate steel. Some steel suppliers have experienced significant
financial and liquidity constraints in recent years, which may be exacerbated by
the global economic crisis. We believe we have limited our exposure related to
changes in the costs of steel tinplate as a result of the inclusion of
provisions in
Page 4 of
96
certain
steel container sales contracts to pass through steel cost changes and the
existence of certain other steel container sales contracts that incorporate
annually negotiated metal costs. In 2008 we were able to pass through the
majority of steel cost increases levied by producers.
The metal
food and household products packaging, Americas, segment accounted for
16 percent of consolidated net sales in 2008. The two major product lines
in this segment are steel food and aerosol containers. Ball produces two-piece
and three-piece steel food containers and ends for packaging vegetables, fruit,
soups, meat, seafood, nutritional products, pet food and other products. These
containers and ends are manufactured in nine plants in the U.S. and Canada and
sold primarily to food processors in North America.
The
segment also manufactures and sells aerosol cans, paint cans and custom and
specialty containers in eight plants in the U.S. and is the largest
manufacturer of aerosol cans in North America. In addition the company
manufactures and sells aerosol cans in two plants in Argentina.
In
October 2007, as part of a restructuring of Ball’s metal food and household
products packaging, Americas, segment, Ball announced plans to close aerosol
container manufacturing plants in Tallapoosa, Georgia, and Commerce, California.
Ball closed the Commerce facility during the third quarter of 2008 and closed
the Tallapoosa facility in January 2009. The two plant closures result in a net
reduction in manufacturing capacity of 10 production lines, including the
relocation of two high-speed aerosol lines into existing Ball facilities, and
allow us to supply customers from a consolidated asset base. These actions are
expected to yield annual pretax cost savings in excess of $15 million in
2009 and improve aerosol plant manufacturing utilization to more than
85 percent from about 70 percent.
Also in
October 2007, Ball announced its intention to exit the custom and decorative
tinplate can business based in its Baltimore, Maryland, manufacturing plant.
During 2008 it was determined, based on market conditions that we would remain
in that business.
Plastic
Packaging, Americas, Segment
Industry Background and
Ball’s Operations
Demand
for containers made of PET and polypropylene has slowed in the beverage and food
markets due to current economic conditions. While PET and polypropylene beverage
containers compete against metal, glass and cardboard, the historical increase
in the sales of PET containers has come primarily at the expense of glass
containers and through new market introductions.
Competition
in the PET plastic container industry is intense and includes several national
and regional suppliers and self manufacturers. In the smaller polypropylene
container industry, Ball is one of three major competitors. Service, quality and
price are important competitive factors with price being by far the most
important, resulting in poor margins for most of the industry. The ability to
produce customized, differentiated plastic containers is also a key competitive
factor. We believe we have limited our exposure related to changes in the costs
of plastic resin as a result of the inclusion of provisions in substantially all
plastic container sales contracts to pass through resin cost
changes.
Plastic
packaging, Americas, accounted for 9 percent of Ball’s consolidated net
sales in 2008. We estimate our 2008 shipments of 5.5 billion plastic
bottles to be approximately 10 percent of total U.S. PET container shipments. In
addition this segment shipped approximately 750 million polypropylene food
and specialty containers during 2008. The company operates eight plastic
container manufacturing facilities in the U.S.
Most of
Ball’s PET containers are sold under long-term contracts to suppliers of bottled
water and carbonated soft drinks, including bottlers of Pepsi-Cola branded
beverages and their affiliates that utilize consolidated purchasing groups. Most
of our polypropylene containers are also sold under long-term contracts,
primarily to food packaging companies. Plastic beer containers are being
produced for several of our customers, and we are manufacturing plastic
containers for the single-serve juice and wine markets. Our line of Heat-Tek®
PET plastic bottles for hot-filled beverages, such as sports drinks and juices,
includes sizes from 8 ounces to 64 ounces.
Page 5 of
96
Ball’s
emphasis in this segment is on customized, differentiated containers. This
includes unique barrier plastics such as Gamma®, Gamma-Clear®, AmazonHM® and KHS
Corpoplast GmbH Plasmax® barrier bottles. The company is not investing in the
carbonated soft drink and bottled water business, which is a commodity business,
where return on investment has been unacceptable.
On June
26, 2008, Ball announced the closure of a plastic packaging manufacturing plant
in Brampton, Ontario, which ceased operations in the third quarter of 2008. The
Brampton operations have been consolidated into the company’s other plastic
packaging manufacturing facilities in the United States, and the closure of this
facility is expected to result in annual, fixed-cost savings of approximately $4
million beginning in 2009.
Aerospace
and Technologies Segment
Ball’s
aerospace and technologies segment, which accounted for 10 percent of
consolidated net sales in 2008, includes national defense, antenna and video
technologies, civil and operational space and systems engineering solutions
businesses. The segment develops spacecraft, sensors and instruments, radio
frequency systems and other advanced technologies for the civil, commercial and
national security aerospace markets. The majority of the aerospace and
technologies business involves work under contracts, generally from one to five
years in duration, as a prime contractor or subcontractor for the National
Aeronautics and Space Administration (NASA), the U.S. Department of Defense
(DoD) and other U.S. government agencies. Contracts funded by the various
agencies of the federal government represented 91 percent of segment sales in
2008.
Geopolitical
events, shifting executive and legislative branch priorities, funding shortfalls
combined with increased competition for new business have resulted in a decline
in opportunities in areas matching Ball’s aerospace and technologies segment’s
core capabilities in space hardware. Although we have seen declines in our space
hardware opportunities, our traditional strength, we have seen growth in
opportunities related to our services and tactical components. The businesses
include hardware, software and services sold primarily to U.S. customers, with
emphasis on space science and exploration, environmental and Earth sciences, and
defense and intelligence applications. Major contractual activities frequently
involve the design, manufacture and testing of satellites, remote sensors and
ground station control hardware and software, as well as related services such
as launch vehicle integration and satellite operations.
Other
hardware activities include target identification, warning and attitude control
systems and components; cryogenic systems for reactant storage, and sensor
cooling devices using either closed-cycle mechanical refrigerators or open-cycle
solid and liquid cryogens; star trackers, which are general-purpose stellar
attitude sensors; and fast-steering mirrors. Additionally, the aerospace and
technologies segment provides diversified technical services and products to
government agencies, prime contractors and commercial organizations for a broad
range of information warfare, electronic warfare, avionics, intelligence,
training and space systems needs.
Backlog
in the aerospace and technologies segment was $597 million and
$774 million at December 31, 2008 and 2007, respectively, and consists
of the aggregate contract value of firm orders, excluding amounts previously
recognized as revenue. The 2008 backlog includes $378 million expected
to be recognized in revenues during 2009, with the remainder expected to be
recognized in revenues thereafter. Unfunded amounts included in backlog for
certain firm government orders, which are subject to annual funding, were
$309 million and $463 million at December 31, 2008 and 2007,
respectively. Year-to-year comparisons of backlog are not necessarily indicative
of the trend of future operations.
On
February 15, 2008, the segment 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 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.
Ball’s
aerospace and technologies segment has contracts with the U.S. government or its
contractors that have standard termination provisions. The government retains
the right to terminate contracts at its convenience. However, if contracts are
terminated in this manner, Ball is entitled to reimbursement for allowable costs
and profits on authorized work performed through the date of termination. U.S.
government contracts are also subject to reduction or modification in the event
of changes in government requirements or budgetary constraints.
Page 6 of
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Patents
In the
opinion of the company, none of its active patents is essential to the
successful operation of its business as a whole.
Research
and Development
Research
and development (R&D) efforts in the North American packaging segments, as
well as in the European metal beverage container business, are primarily
directed toward packaging innovation, specifically the development of new sizes
and types of containers, as well as new uses for the current containers. Other
R&D efforts in these segments seek to improve manufacturing efficiencies.
Our North American packaging R&D activities are primarily conducted in the
Ball Technology & Innovation Center (BTIC) located in Westminster, Colorado.
The European R&D activities are primarily conducted in a technical center
located in Bonn, Germany.
In our
aerospace business, we continue to focus our R&D activities on the design,
development and manufacture of innovative aerospace systems. This includes the
production of spacecraft, instruments and sensors, radio frequency and microwave
technologies, data exploitation solutions and a variety of advanced aerospace
technologies and products that enable deep space missions. Our aerospace R&D
activities are conducted in various locations in the U.S.
Note 23,
"Research and Development," in the consolidated financial statements within Item
8 of this report, contains information on company research and development
activity. Additional information is also included in Item 2,
“Properties.”
Sustainability
and the Environment
Throughout
our company’s history, we have focused on sustainability and the environment in
all aspects of our businesses and recently have formalized our initiatives in
light of the current environment. We continue to make progress on the
sustainability goals stated in the sustainability report we issued on June 30,
2008. We have committed to formally report on the status of our sustainability
efforts in 2010.
Key
issues for our company include reducing our use of electricity and natural gas,
reducing waste and increasing recycling at our facilities, analyzing and
reducing our water consumption, reducing our existing volatile organic compounds
and further improving safety performance in our facilities.
The 2007
recycling rate in the United States for aluminum cans was 54 percent, the
highest recycling rate for any beverage container. According to the most
recently published data, the aluminum can sheet we buy contains an average of
41 percent post consumer recycled content and approximately 9 percent
post industrial content, reducing the amount of virgin material to
50 percent.
Recycling
rates vary throughout Europe but average around 60 percent for aluminum and
steel containers, which exceeds the European Union’s goal of 50 percent
recycling for metals. Due in part to the intrinsic value of aluminum and steel,
metal packaging recycling rates in Europe compare favorably to those of other
packaging materials. Ball’s European operations help establish and financially
support recycling initiatives in growing markets, such as Poland and Serbia, to
educate consumers about the benefits of recycling aluminum and steel cans and to
increase recycling rates. We have also initiated a similar program in China to
educate consumers in that market regarding the benefits of
recycling.
Compliance
with federal, state and local laws relating to protection of the environment has
not had a material adverse effect upon the capital expenditures, earnings or
competitive position of the company. As more fully described under Item 3,
“Legal Proceedings,” the U.S. Environmental Protection Agency and various state
environmental agencies have designated the company as a potentially responsible
party, along with numerous other companies, for the cleanup of several hazardous
waste sites. However, the company’s information at this time indicates that
these matters will not have a material adverse effect upon the liquidity,
results of operations or financial condition of the company.
Page 7 of
96
Legislation
that would prohibit, tax or restrict the sale or use of certain types of
containers, or would require diversion of solid wastes, including packaging
materials, from disposal in landfills, has been or may be introduced anywhere we
operate. While container legislation has been adopted in some jurisdictions,
similar legislation has been defeated in public referenda and legislative bodies
in numerous others. The company anticipates that continuing efforts will be made
to consider and adopt such legislation in many jurisdictions in the future. If
such legislation were widely adopted, it could potentially have a material
adverse effect on the business of the company, including its liquidity, results
of operations or financial condition, as well as on the container manufacturing
industry generally, in view of the company’s substantial global sales and
investment in metal and PET container manufacturing. However, the packages we
produce are widely used and perform well in U.S. states, Canadian provinces and
European countries that have deposit systems.
Employee
Relations
At the
end of 2008, the company employed approximately 10,400 employees in the
U.S. and 4,100 in other countries. An additional 1,000 people were
employed in unconsolidated joint ventures in which Ball
participates.
Approximately
30 percent of Ball's North American packaging plant employees are unionized and
most of our European plant employees are union workers. Collective bargaining
agreements with various unions in the U.S. have terms of three to five years and
those in Europe have terms of one to two years. The agreements expire at regular
intervals and are customarily renewed in the ordinary course after bargaining
between union and company representatives. The company believes that its
employee relations are good and that its safety, training, education and
retention practices assist in enhancing employee satisfaction
levels.
Where
to Find More Information
Ball
Corporation is subject to the reporting and other information requirements of
the Securities Exchange Act of 1934, as amended (Exchange Act). Reports and
other information filed with the Securities and Exchange Commission (SEC)
pursuant to the Exchange Act may be inspected and copied at the public reference
facility maintained by the SEC in Washington, D.C. The SEC maintains a website
at www.sec.gov containing our reports, proxy materials, information statements
and other items. The company also maintains a website at www.ball.com on which
it provides a link to access Ball’s SEC reports free of charge.
The
company has established written Ball Corporation Corporate Governance
Guidelines; a Ball Corporation Executive Officers and Board of Directors
Business Ethics Statement (Ethics Statement); a Business Ethics booklet; and
Ball Corporation Audit Committee, Nominating/Corporate Governance Committee,
Human Resources Committee and Finance Committee charters. These documents are
set forth on the company’s website at www.ball.com on the
“Corporate” page, under the section “Investors,” under the subsection “Financial
Information,” and under the link “Corporate Governance.” A copy may also be
obtained upon request from the company’s corporate secretary.
The
company intends to post on its website the nature of any amendments to the
company’s codes of ethics that apply to executive officers and directors,
including the chief executive officer, chief financial officer and controller,
and the nature of any waiver or implied waiver from any code of ethics granted
by the company to any executive officer or director. These postings will appear
on the company’s website at www.ball.com under
the “Corporate” page, section “Investors,” under the subsection “Financial
Information,” and under the link “Corporate Governance.”
Page 8 of
96
Item
1A. Risk Factors
Any of
the following risks could materially and adversely affect our business,
financial condition or results of operations.
The
loss of a key customer, or a reduction in its requirements, could have a
significant negative impact on our sales.
While we
have diversified our customer base, we do sell a majority of our packaging
products to relatively few major beverage, packaged food and household product
companies, some of which operate in North America, South America, Europe and
Asia.
Although
approximately 65 percent of our customer contracts are long-term, these
contracts are terminable under certain circumstances, such as our failure to
meet quality or volume requirements. Because we depend on relatively few major
customers, our business, financial condition or results of operations could be
adversely affected by the loss of any of these customers, a reduction in the
purchasing levels of these customers, a strike or work stoppage by a significant
number of these customers' employees or an adverse change in the terms of the
supply agreements with these customers.
The
primary customers for our aerospace segment are U.S. government agencies or
their prime contractors. These sales represented approximately 9 percent of
Ball's consolidated 2008 net sales. Our contracts with these customers are
subject to several risks, including funding cuts and delays, technical
uncertainties, budget changes, competitive activity and changes in
scope.
We
face competitive risks from many sources that may negatively impact our
profitability.
Competition
within the packaging industry is intense. Increases in productivity, combined
with existing or potential surplus capacity in the industry, have maintained
competitive pricing pressures. The principal methods of competition in the
general packaging industry are price, service and quality. Some of our
competitors may have greater financial, technical and marketing resources. Our
current or potential competitors may offer products at a lower price or products
that are deemed superior to ours. The current global economic crisis may result
in reductions in demand for our products, which, in turn, could increase these
competitive pressures.
We
are subject to competition from alternative products, which could result in
lower profits and reduced cash flows.
Our metal
packaging products are subject to significant competition from substitute
products, particularly plastic carbonated soft drink bottles made from PET,
single serve beer bottles and other food and beverage containers made of glass,
cardboard or other materials. Competition from plastic carbonated soft drink
bottles is particularly intense in the United States and the United Kingdom.
Certain of our aerospace products are also subject to competition from
alternative solutions. There can be no assurance that our products will
successfully compete against alternative products, which could result in a
reduction in our profits or cash flow.
We
have a narrow product range, and our business would suffer if usage of our
products decreased.
For the
12 months ended December 31, 2008, 65 percent of our consolidated net
sales were from the sale of metal beverage cans, and we expect to derive a
significant portion of our future revenues from the sale of metal beverage cans.
Our business would suffer if the use of metal beverage cans decreased.
Accordingly, broad acceptance by consumers of aluminum and steel cans for a wide
variety of beverages is critical to our future success. If demand for glass and
PET bottles increases relative to cans, or the demand for aluminum and steel
cans does not develop as expected, our business, financial condition or results
of operations could be materially adversely affected.
Page 9 of
96
Our
business, financial condition and results of operations are subject to risks
resulting from increased international operations.
We
derived 31 percent of our consolidated net sales from outside of the U.S.
for the year ended December 31, 2008. This sizeable scope of international
operations may lead to more volatile financial results and make it more
difficult for us to manage our business. Reasons for this include, but are not
limited to, the following:
|
●
|
political
and economic instability in foreign
markets;
|
|
●
|
foreign
governments' restrictive trade
policies;
|
|
●
|
the
imposition of duties, taxes or government
royalties;
|
|
●
|
foreign
exchange rate risks;
|
|
●
|
difficulties
in enforcement of contractual obligations and intellectual property
rights; and
|
|
●
|
the
geographic, language and cultural differences between personnel in
different areas of the world.
|
Any of
these factors, some of which are also present in the U.S., could
materially adversely affect our business, financial condition or results of
operations.
We
are exposed to exchange rate fluctuations.
For the
12 months ended December 31, 2008, 73 percent of our consolidated net
sales were attributable to operations with the U.S. dollar as their functional
currency, 15 percent with the euro as the functional currency and
12 percent were attributable to operations having functional currencies
other than the U.S. dollar or the euro.
Our
reporting currency is the U.S. dollar. Historically, Ball's foreign operations,
including assets and liabilities and revenues and expenses, have been
denominated in various currencies other than the U.S. dollar, and we expect that
our foreign operations will continue to be so denominated. As a result, the U.S.
dollar value of Ball's foreign operations has varied, and will continue to vary,
with exchange rate fluctuations. Ball has been, and is presently, primarily
exposed to fluctuations in the exchange rate of the euro, British pound,
Canadian dollar, Polish zloty, Chinese renminbi, Brazilian real, Argentine peso
and Serbian dinar.
A
decrease in the value of any of these currencies, especially the euro, British
pound, Polish zloty, Chinese renminbi and Canadian dollar, relative to the U.S.
dollar, could reduce our profits from foreign operations and the value of the
net assets of our foreign operations when reported in U.S. dollars in our
financial statements. This could have a material adverse effect on our business,
financial condition or results of operations as reported in U.S. dollars. In
addition fluctuations in currencies relative to currencies in which the earnings
are generated may make it more difficult to perform period-to-period comparisons
of our reported results of operations.
We
actively manage our exposure to foreign currency fluctuations, particularly our
exposure to fluctuations in the euro to U.S. dollar exchange rate, in order to
attempt to mitigate the effect of foreign cash flow and earnings volatility
associated with foreign exchange rate changes. We primarily use forward
contracts and options to manage our foreign currency exposures and, as a result,
we experience gains and losses on these derivative positions offset, in part, by
the impact of currency fluctuations on existing assets and liabilities. Our
inability to properly manage our exposure to currency fluctuations could
materially impact our results.
Our
business, operating results and financial condition are subject to particular
risks in certain regions of the world.
We may
experience an operating loss in one or more regions of the world for one or more
periods, which could have a material adverse effect on our business, operating
results or financial condition. Moreover, overcapacity, which often leads to
lower prices, exists in a number of the regions in which we operate and may
persist even if demand grows. Our ability to manage such operational
fluctuations and to maintain adequate long-term strategies in the face of such
developments will be critical to our continued growth and
profitability.
If
we fail to retain key management and personnel, we may be unable to implement
our key objectives.
We
believe that our future success depends, in part, on our experienced management
team. Losing the services of key members of our management team could make it
difficult for us to manage our business and meet our
objectives.
Page 10
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Decreases
in our ability to apply new technology and know-how may affect our
competitiveness.
Our
success depends partially on our ability to improve production processes and
services. We must also introduce new products and services to meet changing
customer needs. If we are unable to implement better production processes or to
develop new products, we may not be able to remain competitive with other
manufacturers. As a result, our business, financial condition or results of
operations could be adversely affected.
Bad
weather and climate changes may result in lower sales.
We
manufacture packaging products primarily for beverages and foods. Unseasonably
cool weather can reduce demand for certain beverages packaged in our containers.
In addition poor weather conditions or changes in climate that reduce crop
yields of fruits and vegetables can adversely affect demand for our food
containers. The effects of global warming on climate could have various effects
on the demand for our products in different regions around the
world.
We
are vulnerable to fluctuations in the supply and price of raw
materials.
We
purchase aluminum, steel, plastic resin and other raw materials and packaging
supplies from several sources. While all such materials are available from
independent suppliers, raw materials are subject to fluctuations in price
attributable to a number of factors, including general economic conditions,
commodity price fluctuations (particularly aluminum on the London Metal
Exchange), the demand by other industries for the same raw materials and the
availability of complementary and substitute materials. Although we enter into
commodities purchase agreements from time to time and use derivative instruments
to manage our risk, we cannot ensure that our current suppliers of raw materials
will be able to supply us with sufficient quantities at reasonable prices.
Economic and financial factors could impact our suppliers, thereby causing
supply shortages. Increases in raw material costs could have a material adverse
effect on our business, financial condition or results of operations. Because
our North American contracts often pass raw material costs directly on to the
customer, increasing raw material costs may not impact our near-term
profitability but could decrease our sales volumes over time. In Europe, some
contracts do not allow us to pass on increased raw material costs and we
regularly use derivative agreements to manage this risk. Our hedging procedures
may be insufficient and our results could be materially impacted if costs of
materials increase.
Prolonged
work stoppages at plants with union employees could jeopardize our financial
position.
As of
December 31, 2008, approximately 30 percent of our employees in North America
and most of our employees in Europe were covered by one or more collective
bargaining agreements. These collective bargaining agreements have staggered
expirations during the next several years. Although we consider our employee
relations to be generally good, a prolonged work stoppage or strike at any
facility with union employees could have a material adverse effect on our
business, financial condition or results of operations. In addition we cannot
ensure that upon the expiration of existing collective bargaining agreements,
new agreements will be reached without union action or that any such new
agreements will be on terms satisfactory to us. Potential legislation has been
discussed in the United States, which may, if enacted, facilitate the ability of
unions to unionize workers and to establish collective bargaining agreements
with employers, including the company.
Our
aerospace and technologies segment is subject to certain risks specific to that
business including those outlined below.
In
our aerospace business, existing U.S. government contracts are subject to
continued appropriations by Congress and may be terminated or delayed if future
funding is not made available.
Our
backlog includes both cost-type and fixed-price contracts. Cost-type contracts
generally have lower profit margins than fixed-price contracts. Our earnings and
margins may vary depending on the types of government contracts undertaken, the
nature of the work performed under those contracts, the costs incurred in
performing the work, the achievement of other performance objectives and their
impact on our ability to receive fees.
Our
business is subject to substantial environmental remediation and compliance
costs.
Our
operations are subject to federal, state and local laws and regulations relating
to environmental hazards, such as emissions to air, discharges to water, the
handling and disposal of hazardous and solid wastes and the cleanup of
hazardous substances. The U.S. Environmental Protection Agency has
designated us, along with numerous other
Page 11
of 96
companies, as a potentially responsible party for the cleanup of
several hazardous waste sites. Based on available information, we do not believe
that any costs incurred in connection with such sites will have a material
adverse effect on our financial condition, results of operations, capital
expenditures or competitive position. The new U.S. executive administration
could bring renewed focus and attention to the regulation of greenhouse gas
emissions and other environmental issues.
There
can be no assurance that any acquired business, will be successfully integrated
into the acquiring company.
While we
have what we believe to be well designed integration plans, if we cannot
successfully integrate newly acquired businesses with those of Ball, we may
experience negative consequences to our business, financial condition or results
of operations. The integration of companies that have previously been operated
separately involves a number of risks, including difficulties in assimilating
and integrating new businesses, additional demands on management, expenses
related to undisclosed or potential liabilities, retention of major customers
and other risks.
If
we have a fair value impairment in a business segment, net earnings and net
worth could be materially adversely affected by a write down of
goodwill.
We have
$1,825.5 million of goodwill recorded on the consolidated balance sheet as
of December 31, 2008. We are required to periodically determine if
our goodwill has become impaired, in which case we would write down the impaired
portion of goodwill. If we were required to write down all or a significant part
of our goodwill, our net earnings and net worth could be materially adversely
affected.
If
the investments in Ball's pension plans do not perform as expected, we may have
to contribute additional amounts to the plans, which would otherwise be
available to cover operating expenses.
Ball
maintains defined benefit pension plans covering substantially all of its
North American and United Kingdom employees, which we fund based on certain
actuarial assumptions. The plans’ assets consist
primarily of common stocks, fixed income securities and, in the U.S.,
alternative investments. Due to the significant fall in worldwide equity prices
during 2008, the company will increase contributions to the plans during 2009.
At this time the company estimates the additional U.S. pension plan contribution
to be within the range of $35 million to $40 million pretax; however, we are
monitoring legislative activity and equity markets to determine the final amount
we will contribute to ensure that the plans will be able to pay out benefits as
scheduled. Further equity market declines, longevity increases or legislative
changes could result in a decrease in our available cash flow and net earnings,
and the recognition of such an increase could result in a reduction to our
shareholders' equity.
Restricted access to capital markets
could adversely affect our short-term liquidity and prevent us
from fulfilling our obligations under the notes issued pursuant to our bond
indentures.
On
December 31, 2008, we had total debt of $2,410.1 million and unused
committed credit lines in excess of $500 million. Our ratio of earnings to fixed
charges as of that date was 3.7 times (see Exhibit 12 attached to this
Annual Report). A reduction of financial liquidity could have important
consequences, including the following:
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●
|
reduce
our ability to fund working capital, capital expenditures, research and
development expenditures and other business
activities;
|
|
●
|
increase
our vulnerability to general adverse economic and industry conditions,
including the credit risks stemming from the current global credit
crisis;
|
|
●
|
limit
our flexibility in planning for, or reacting to, changes in our businesses
and the industries in which we
operate;
|
|
●
|
restrict
us from making strategic acquisitions or exploiting business
opportunities; and
|
|
●
|
limit,
along with the financial and other restrictive covenants in our debt,
among other things, our ability to borrow additional funds, dispose of
assets, pay cash dividends or refinance debt
maturities.
|
In
addition approximately 60 percent of our debt bears interest at variable rates.
If market interest rates increase, variable-rate debt will create higher debt
service requirements, which would adversely affect our cash flow. While we
sometimes enter into agreements limiting our exposure, any such agreements may
not offer complete protection from this risk.
Page 12
of 96
The
current global credit, financial and economic crisis could have a negative
impact on our results of operations, financial position or cash
flows.
The
current global credit, financial and economic crisis could have significant
negative effects on our operations, including, but not limited to, the
following:
|
●
|
the
creditworthiness of customers, suppliers and counterparties could
deteriorate resulting in a financial loss or a disruption in our supply of
raw materials;
|
|
●
|
the
recent downward trend of market performance could affect the fair value of
our pension assets, potentially requiring us to make significant
additional contributions to our defined benefit plans to maintain
prescribed funding levels;
|
|
●
|
a significant
weakening of our financial position or operating results could result in
noncompliance with our debt covenants;
and
|
|
●
|
reduced
cash flow from our operations could adversely affect our ability to
execute our long-term strategy to increase liquidity, reduce debt,
repurchase our stock and invest in our
businesses.
|
We
are subject to U.S. generally accepted accounting principles (U.S. GAAP), under
which we are often required to make changes in our accounting and reported
results.
U.S. GAAP
changes are routine and have become more frequent and significant over the past
few years. These changes can have significant effects on our reported results
when compared to prior periods and may even require us to retrospectively adjust
prior periods. In the application of U.S. GAAP, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingencies and reported amounts of revenues and
expenses. These estimates are based on historical experience and various other
assumptions believed to be reasonable under the circumstances. Actual results
could differ from these estimates under different assumptions or conditions. The
proposed steps to adopt International Financial Reporting Standards in the U.S.
could exacerbate these risks.
Item
1B. Unresolved Staff Comments
There
were no matters required to be reported under this item.
Item
2. Properties
The
company’s properties described below are well maintained, are considered
adequate and are being utilized for their intended purposes.
Ball’s
corporate headquarters and the aerospace and technologies segment offices are
located in Broomfield, Colorado. The Colorado-based operations of the aerospace
and technologies segment occupy a variety of company-owned and leased
facilities in Broomfield, Boulder and Westminster, which together aggregate
1.3 million square feet of office, laboratory, research and
development, engineering and test and manufacturing space. Other aerospace and
technologies operations carry on business in smaller company-owned and leased
facilities in Georgia, New Mexico, Ohio, Virginia and Washington,
D.C.
The
offices of the company’s North American packaging operations are located in
Westminster, Colorado, and the offices for the European packaging operations are
located in Ratingen, Germany. Also located in Westminster is the Ball Technology
and Innovation Center, which serves as a research and development facility for
the North American metal packaging and plastic container operations. The
European Technical Center, which serves as a research and development facility
for the European beverage can manufacturing operations, is located in Bonn,
Germany.
Information
regarding the approximate size of the manufacturing locations for significant
packaging operations, which are owned or leased by the company, is set forth
below. Facilities in the process of being shut down have been excluded from the
list. Where certain locations include multiple facilities, the total approximate
size for the location is noted. In addition to the facilities listed, the
company leases other warehousing space.
Page 13
of 96
|
Approximate
|
|
|
Floor
Space in
|
|
|
Plant
Location
|
Square
Feet
|
|
Metal
beverage packaging, Americas and Asia, manufacturing
facilities:
|
|
|
Americas
|
|
|
Fairfield,
California
|
358,000
|
|
Torrance,
California
|
382,000
|
|
Golden,
Colorado
|
509,000
|
|
Tampa,
Florida
|
238,000
|
|
Kapolei,
Hawaii
|
132,000
|
|
Monticello,
Indiana
|
356,000
|
|
Saratoga
Springs, New York
|
290,000
|
|
Wallkill,
New York
|
317,000
|
|
Reidsville,
North Carolina
|
447,000
|
|
Findlay,
Ohio (a)
|
733,000
|
|
Whitby,
Ontario
|
205,000
|
|
Conroe,
Texas
|
275,000
|
|
Fort
Worth, Texas
|
328,000
|
|
Bristol,
Virginia
|
245,000
|
|
Williamsburg,
Virginia
|
400,000
|
|
Milwaukee,
Wisconsin (including leased warehouse space) (a)
|
502,000
|
|
Asia
|
|
|
Beijing,
PRC
|
267,000
|
|
Hubei
(Wuhan), PRC
|
237,000
|
|
Shenzhen,
PRC
|
331,000
|
|
Taicang,
PRC (leased)
|
81,000
|
|
Tianjin,
PRC
|
47,000
|
|
Metal
beverage packaging, Europe, manufacturing facilities:
|
|
|
Bierne,
France
|
263,000
|
|
La
Ciotat, France
|
393,000
|
|
Braunschweig,
Germany
|
258,000
|
|
Hassloch,
Germany
|
283,000
|
|
Hermsdorf,
Germany
|
290,000
|
|
Weissenthurm,
Germany
|
331,000
|
|
Oss,
Netherlands
|
231,000
|
|
Radomsko,
Poland
|
311,000
|
|
Belgrade,
Serbia
|
352,000
|
|
Deeside,
United Kingdom
|
109,000
|
|
Rugby,
United Kingdom
|
175,000
|
|
Wrexham,
United Kingdom
|
222,000
|
|
(a)
|
Includes both metal beverage container and metal food container
manufacturing operations.
|
Page 14
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|
Approximate
|
|
|
Floor
Space in
|
|
|
Plant
Location
|
Square
Feet
|
|
Metal
food and household products packaging, Americas, manufacturing
facilities:
|
|
|
North America
|
|
|
Springdale,
Arkansas
|
366,000
|
|
Richmond,
British Columbia
|
194,000
|
|
Oakdale,
California
|
370,000
|
|
Danville,
Illinois
|
118,000
|
|
Elgin,
Illinois
|
496,000
|
|
Baltimore,
Maryland (including leased warehouse space)
|
241,000
|
|
Columbus,
Ohio
|
305,000
|
|
Findlay,
Ohio (a)
|
733,000
|
|
Hubbard,
Ohio
|
175,000
|
|
Horsham,
Pennsylvania
|
132,000
|
|
Chestnut
Hill, Tennessee
|
347,000
|
|
Weirton,
West Virginia (leased)
|
266,000
|
|
DeForest,
Wisconsin
|
400,000
|
|
Milwaukee,
Wisconsin (including leased warehouse space)
(a)
|
502,000
|
|
|
|
|
South America
|
|
|
Buenos
Aires, Argentina (leased)
|
34,000
|
|
San
Luis, Argentina
|
32,000
|
|
|
|
|
Plastic
packaging, Americas, manufacturing facilities (all North
America):
|
|
|
Chino,
California (leased)
|
729,000
|
|
Newnan,
Georgia (leased)
|
185,000
|
|
Batavia,
Illinois
|
387,000
|
|
Ames,
Iowa (including leased warehouse space)
|
840,000
|
|
Delran,
New Jersey (including leased warehouse space)
|
892,000
|
|
Baldwinsville,
New York (leased)
|
496,000
|
|
Bellevue,
Ohio
|
390,000
|
|
Watertown,
Wisconsin
|
111,000
|
|
(a)
|
Includes both metal beverage container and metal food container
manufacturing operations.
|
In
addition to the consolidated manufacturing facilities, the company has ownership
interests of 50 percent or less in packaging affiliates located primarily
in the U.S., PRC and Brazil, which affiliates own or lease manufacturing
facilities in each of those countries.
Page 15
of 96
Item
3. Legal Proceedings
As
previously reported, the company is investigating potential violations of the
Foreign Corrupt Practices Act in Argentina, which came to our attention on or
about October 15, 2007. The Department of Justice and the SEC were also
made aware of this matter, on or about the same date. Based on our investigation
to date, we do not believe this matter involved senior management or management
or other employees who have significant roles in internal control over financial
reporting.
As
previously reported, on October 6, 2005, Ball Metal Beverage Container
Corp. (BMBCC), a wholly owned subsidiary of the company, was served with an
amended complaint filed by Crown Packaging Technology, Inc. et. al.
(Crown), in the U.S. District Court for the Southern District of Ohio, Western
Division at Dayton, Ohio. The complaint alleges that the manufacture, sale and
use of certain ends by BMBCC and its customers infringes certain claims of
Crown’s U.S. patents. The complaint seeks unspecified monetary damages, fees,
and declaratory and injunctive relief. BMBCC has formally denied the allegations
of the complaint. A Markman order construing the claim terms has been issued in
this case and motions for summary judgment have been filed by both parties. A
trial has been tentatively set to begin in May 2009. Based on the information
available to the company at the present time, the company does not believe that
this matter will have a material adverse effect upon the liquidity, results of
operations or financial condition of the company.
As
previously reported, the U.S. Environmental Protection Agency (USEPA) considers
the company a Potentially Responsible Party (PRP) with respect to the Lowry
Landfill site located east of Denver, Colorado. On June 12, 1992, the
company was served with a lawsuit filed by the City and County of Denver
(Denver) and Waste Management of Colorado, Inc., seeking contributions from the
company and approximately 38 other companies. The company filed its answer
denying the allegations of the complaint. On July 8, 1992, the company was
served with a third-party complaint filed by S.W. Shattuck Chemical Company,
Inc., seeking contribution from the company and other companies for the costs
associated with cleaning up the Lowry Landfill. The company denied the
allegations of the complaints.
In July
1992 the company entered into a settlement and indemnification agreement with
Chemical Waste Management, Inc., and Waste Management of Colorado, Inc.
(collectively Waste Management) and Denver pursuant to which Waste Management
and Denver dismissed their lawsuit against the company, and Waste Management
agreed to defend, indemnify and hold harmless the company from claims and
lawsuits brought by governmental agencies and other parties relating to actions
seeking contributions or remedial costs from the company for the cleanup of the
site. Waste Management, Inc., has agreed to guarantee the obligations for Waste
Management. Waste Management and Denver may seek additional payments from the
company if the response costs related to the site exceed $319 million. In
2003 Waste Management, Inc., indicated that the cost of the site might exceed
$319 million in 2030, approximately three years before the projected
completion of the project. The company might also be responsible for payments
(based on 1992 dollars) for any additional wastes that may have been disposed of
by the company at the site but which are identified after the execution of the
settlement agreement. While remediating the site, contaminants were encountered,
which could add an additional cleanup cost of approximately $10 million.
This additional cleanup cost could, in turn, add approximately $1 million
to total site costs for the PRP group.
At this
time, there are no Lowry Landfill actions in which the company is actively
involved. Based on the information available to the company at this time, the
company does not believe that this matter will have a material adverse effect
upon the liquidity, results of operations or financial condition of the
company.
As
previously reported, the USEPA has sent notice of potential liability to Ball
and other PRPs with respect to four parcels at the Rocky Flats Industrial Park
site, and other adjacent sites, located in Jefferson County, Colorado, as well
as with respect to the Solvents Recovery of New England site located in
Southington, Connecticut. Based on the information available to the company at
the present time, the company believes that these matters will not have a
material adverse effect upon the liquidity, results of operations or financial
condition of the company.
On
December 30, 2002, the company received a letter from the USEPA pursuant to
the Comprehensive Environmental Response Compensation and Liability Act (CERCLA)
requesting answers to certain questions regarding the waste disposal practices
of Heekin Can Company, which the company acquired in 1993, and the relationship
between the company and Heekin Can Company. Region 5 of the USEPA is involved in
the cleanup
Page 16
of 96
of the
Jackson Brothers Paint Company site, which consists of four, and possibly five,
sites in and around Laurel, Indiana. The Jackson Brothers Paint Company
apparently disposed of drums of waste in those sites during the 1960s and 1970s.
The USEPA has alleged that some of the waste that has been uncovered was sent to
the sites from the Cincinnati plant operated by Heekin Can Company. The Indiana
Department of Environmental Management referred this matter to the USEPA for
removal of the drums and cleanup. At the present time, there are an undetermined
number of drums at one or more of the sites that have been initially identified
by the USEPA as originating from Heekin Can Company. The USEPA has sent letters
to seven PRPs including Heekin Can Company. On January 30, 2003, the
company responded to the USEPA’s requests for information pursuant to
Section 104(e) of CERCLA. The USEPA has initially estimated cleanup costs
to be between $4 million and $5 million. Based on the information
available to the company at the present time, the company does not believe that
this matter will have a material adverse effect upon the liquidity, results of
operations or financial condition of the company.
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
There
were no matters submitted to the security holders during the fourth quarter of
2008.
Part
II
|
Item
5.
|
Market
for the Registrant’s Common Stock and Related Stockholder
Matters
|
Ball
Corporation common stock (BLL) is traded on the New York Stock Exchange and the
Chicago Stock Exchange. There were 5,435 common shareholders of record on
February 1, 2009.
Common
Stock Repurchases
The
following table summarizes the company’s repurchases of its common stock during
the quarter ended December 31, 2008.
Purchases
of Securities
|
Total Number
of Shares Purchased (a) |
Average
Price
Paid
per Share
|
Total
Number of
Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum
Number
of Shares that May Yet Be Purchased Under the Plans or Programs (b) |
||||||||||
|
September 29
to October 26, 2008
|
397,146 |
$
|
33.18 | 397,146 | 8,384,720 | ||||||||
|
October 27
to November 23, 2008
|
440,683 | $ | 32.96 | 440,683 | 7,944,037 | ||||||||
|
November 24
to December 31, 2008
|
517,247 | $ | 37.74 | 517,247 | 7,426,790 | ||||||||
|
Total
|
1,355,076 | $ | 34.85 | 1,355,076 | |||||||||
|
(a)
|
Includes
open market purchases and/or shares retained by the company to settle
employee withholding tax
liabilities.
|
|
(b)
|
The
company has an ongoing repurchase program for which shares are authorized
for repurchase from time to time by Ball’s board of
directors. On January 23, 2008, Ball’s board of
directors authorized the repurchase by the company of up to a total of 12
million shares of its common stock. This repurchase authorization replaced
all previous authorizations.
|
Page 17
of 96
Quarterly
Stock Prices and Dividends
Quarterly
prices for the company's common stock, as reported on the New York Stock
Exchange composite tape, and quarterly dividends in 2008 and 2007 (on a calendar
quarter basis) were:
|
2008
|
2007
|
|||||||||||||||||||||||||||||||
|
4th
|
3rd
|
2nd
|
1st
|
4th
|
3rd
|
2nd
|
1st
|
|||||||||||||||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||||||||||||||
|
High
|
$ | 42.49 | $ | 53.44 | $ | 56.20 | $ | 47.02 | $ | 56.05 | $ | 55.87 | $ | 55.75 | $ | 47.91 | ||||||||||||||||
|
Low
|
27.37 | 38.37 | 45.79 | 40.23 | 43.99 | 46.75 | 45.85 | 43.51 | ||||||||||||||||||||||||
|
Dividends
per share
|
0.10 | 0.10 | 0.10 | 0.10 | 0.10 | 0.10 | 0.10 | 0.10 | ||||||||||||||||||||||||
Shareholder
Return Performance
The line
graph below compares the annual percentage change in Ball Corporation’s
cumulative total shareholder return on its common stock with the cumulative
total return of the Dow Jones Containers & Packaging Index and the S&P
Composite 500 Stock Index for the five-year period ended December 31,
2008. It assumes $100 was invested on December 31, 2003, and that all
dividends were reinvested. The Dow Jones Containers & Packaging Index total
return has been weighted by market capitalization.
|
Total
Return Analysis
|
|||||||
|
12/31/2003
|
12/31/2004
|
12/31/2005
|
12/31/2006
|
12/31/2007
|
12/31/2008
|
||
|
Ball
Corporation
|
$ 100.00
|
$ 149.08
|
$ 135.98
|
$ 150.76
|
$ 156.86
|
$ 146.29
|
|
|
DJ
Containers & Packaging Index
|
$ 100.00
|
$ 110.88
|
$ 116.33
|
$ 134.70
|
$ 142.10
|
$ 89.53
|
|
|
S&P
500 Index
|
$ 100.00
|
$ 119.64
|
$ 118.89
|
$ 133.26
|
$ 142.22
|
$ 89.17
|
|
|
Copyright
© 2009 Standard & Poor's, a division of The McGraw-Hill Companies,
Inc. All rights reserved.
|
|||||||
|
www.researchdatagroup.com/S&P.htm
|
|||||||
Page 18
of 96
Item
6. Selected Financial Data
Five-Year
Review of Selected Financial Data
Ball
Corporation and Subsidiaries
|
($
in millions, except per share amounts)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Net
sales
|
$ | 7,561.5 | $ | 7,475.3 | $ | 6,621.5 | $ | 5,751.2 | $ | 5,440.2 | ||||||||||
|
Legal
settlement (1)
|
– | (85.6 | ) | – | – | – | ||||||||||||||
|
Total
net sales
|
$ | 7,561.5 | $ | 7,389.7 | $ | 6,621.5 | $ | 5,751.2 | $ | 5,440.2 | ||||||||||
|
Net
earnings (1)
|
$ | 319.5 | $ | 281.3 | $ | 329.6 | $ | 272.1 | $ | 302.1 | ||||||||||
|
Return
on average common shareholders’ equity
|
26.3 | % | 22.4 | % | 32.7 | % | 27.9 | % | 31.8 | % | ||||||||||
|
Basic
earnings per share (1)
|
$ | 3.33 | $ | 2.78 | $ | 3.19 | $ | 2.52 | $ | 2.73 | ||||||||||
|
Weighted
average common shares outstanding (000s)
|
95,857 | 101,186 | 103,338 | 107,758 | 110,846 | |||||||||||||||
|
Diluted
earnings per share (1)
|
$ | 3.29 | $ | 2.74 | $ | 3.14 | $ | 2.48 | $ | 2.65 | ||||||||||
|
Diluted
weighted average common shares outstanding (000s)
|
97,019 | 102,760 | 104,951 | 109,732 | 113,790 | |||||||||||||||
|
Property,
plant and equipment additions (2)
|
$ | 306.9 | $ | 308.5 | $ | 279.6 | $ | 291.7 | $ | 196.0 | ||||||||||
|
Depreciation
and amortization
|
$ | 297.4 | $ | 281.0 | $ | 252.6 | $ | 213.5 | $ | 215.1 | ||||||||||
|
Total
assets
|
$ | 6,368.7 | $ | 6,020.6 | $ | 5,840.9 | $ | 4,361.5 | $ | 4,485.0 | ||||||||||
|
Total
interest bearing debt and capital lease obligations
|
$ | 2,410.1 | $ | 2,358.6 | $ | 2,451.7 | $ | 1,589.7 | $ | 1,660.7 | ||||||||||
|
Common
shareholders’ equity
|
$ | 1,085.8 | $ | 1,342.5 | $ | 1,165.4 | $ | 853.4 | $ | 1,093.9 | ||||||||||
|
Market
capitalization (3)
|
$ | 3,898.3 | $ | 4,510.1 | $ | 4,540.4 | $ | 4,138.8 | $ | 4,956.2 | ||||||||||
|
Net
debt to market capitalization (3)
|
58.6 | % | 48.9 | % | 50.7 | % | 36.9 | % | 29.5 | % | ||||||||||
|
Cash
dividends per share
|
$ | 0.40 | $ | 0.40 | $ | 0.40 | $ | 0.40 | $ | 0.35 | ||||||||||
|
Book
value per share
|
$ | 11.58 | $ | 13.39 | $ | 11.19 | $ | 8.19 | $ | 9.71 | ||||||||||
|
Market
value per share
|
$ | 41.59 | $ | 45.00 | $ | 43.60 | $ | 39.72 | $ | 43.98 | ||||||||||
|
Annual
return (loss) to common shareholders (4)
|
(6.7 | )% | 4.0 | % | 10.9 | % | (8.8 | )% | 48.8 | % | ||||||||||
|
Working
capital
|
$ | 302.9 | $ | 329.8 | $ | 307.0 | $ | 67.9 | $ | 256.6 | ||||||||||
|
Current
ratio
|
1.16 | 1.22 | 1.21 | 1.06 | 1.26 | |||||||||||||||
|
(1)
|
Includes
business consolidation activities and other items affecting comparability
between years of after-tax expense of $34.9 million,
$27 million, $20.5 million and $13.4 million in 2008, 2007,
2006 and 2005, respectively, and after-tax income of $9.5 million in
2004. 2008 net earnings include a $4.4 million after-tax gain on the sale
of an Australian subsidiary, 2007 net sales have been reduced by a pretax
legal settlement of $85.6 million ($51.8 million after tax),
while 2006 net earnings include a $46.1 million after-tax gain
related to insurance proceeds in connection with a fire at one of Ball’s
German plants. Also includes $12.3 million of after-tax debt
refinancing costs in 2005 reported as interest expense. Additional details
about the 2008, 2007 and 2006 items are available in Notes 5, 6, 7, 8 and
15 to the consolidated financial statements within Item 8 of this
report.
|
|
(2)
|
Amounts
in 2007 and 2006 do not include the offsets of $48.6 million and
$61.3 million, respectively, of insurance proceeds received to
replace fire-damaged assets in our Hassloch, Germany,
plant.
|
|
(3)
|
Market
capitalization is defined as the number of common shares outstanding at
year end, multiplied by the year-end closing price of Ball common stock.
Net debt is total debt less cash and cash
equivalents.
|
|
(4)
|
Change
in stock price plus dividends paid, assuming reinvestment of all dividends
paid.
|
Page 19
of 96
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Management’s
discussion and analysis should be read in conjunction with the consolidated
financial statements and accompanying notes. Ball Corporation and its
subsidiaries are referred to collectively as “Ball” or “the company” or “we” or
“our” in the following discussion and analysis.
BUSINESS
OVERVIEW
Ball
Corporation is one of the world’s leading suppliers of metal and plastic
packaging to the beverage, food and household products industries. Our packaging
products are produced for a variety of end uses and are manufactured
in plants around the world. We also supply aerospace and other technologies
and services to governmental and commercial customers.
We sell
our packaging products primarily to major beverage, 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 help us
to mitigate those risks in the majority of circumstances.
In the
rigid packaging industry, sales and earnings can be improved by reducing costs,
increasing prices, developing new products and expanding volume. Over the past
two years, we have closed several packaging facilities in support of our ongoing
objective of matching our supply with market demand. We have also identified and
implemented plans to improve our return on invested capital through the
redeployment of assets within our worldwide beverage can business.
While the
North American beverage container manufacturing industry is relatively mature,
the European, PRC and Brazilian beverage can markets are growing and are
expected to continue to grow in the medium to long-term. While we are able to
capitalize on this growth by increasing capacity in some of our European can
manufacturing facilities by speeding up certain lines and by expansion, we have
put on hold various projects, including the completion of the construction of
the Poland plant and new construction in India, due to the current world-wide
economic environment. We are proceeding with the recently announced 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., and the expansion is being 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 aluminum bottle line, as well as a 24-ounce beverage can
production line in our Monticello, Indiana, facility, both of which became
operational during the third quarter of 2008.
Ball’s
consolidated earnings are exposed to foreign exchange rate fluctuations, and we
attempt to mitigate this exposure through the use of derivative financial
instruments, as discussed in “Quantitative and Qualitative Disclosures About
Market Risk” within Item 7A of this report.
Page 20
of 96
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 expect that the delay of certain program awards, as
well as federal budget considerations under the new administration, will have an
unfavorable impact on this segment in 2009, and we are taking steps to adjust
our resources accordingly.
We
recognize sales under long-term contracts in the aerospace and technologies
segment using the cost-to-cost, percentage of completion method of accounting.
Our present contract mix consists of approximately two-thirds 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 further adversely affect
segment performance during 2009 compared to 2008.
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 sales 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, after aggregating operating segments that have similar economic
characteristics: (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. 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.
Due to
first quarter 2008 management reporting changes, Ball’s operations in the PRC
with 2008 net sales of $289.6 million are now aggregated and included in
the metal beverage packaging, Americas and Asia, segment (previously included
within the company’s European operations). Also, effective January 1, 2007,
a plastic pail product line with 2007 net sales of $52.1 million was
transferred from the metal food and household products packaging, Americas,
segment to the plastic packaging, Americas, segment. Prior periods have been
retrospectively adjusted to the current presentation.
Page 21
of 96
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 (through fiscal year 2008) 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 2008
(41 percent in 2007, including the impact from the $85.6 million legal
settlement with Miller discussed below, and 42 percent in 2006). Excluding
the effect of the legal settlement, sales were 4 percent lower in 2008 than
in 2007, primarily as a result of 2008 decreases in North American sales volumes
of approximately 5 percent. The decrease in North American sales volumes was due
primarily to lower unit volume sales to carbonated soft drink customers,
consistent with the industry, and lost beer sales volumes on discontinuance of a
contract that did not provide sufficient profitability. This decrease was
somewhat offset by sales volume increases in the PRC of 14 percent during 2008.
Sales were 10 percent higher in 2007 than in 2006 (7 percent higher
including the effect from the legal settlement) with flat volumes being offset
by higher sales prices, which were primarily due to rising aluminum prices and
the pass through of various cost increases to customers. Based on publicly
available information, we estimate that our shipments of metal beverage
containers were approximately 30 percent of total U.S. and Canadian
shipments and 22 percent of total PRC shipments in 2008. We continue to focus
efforts on the growing custom beverage can business, which includes cans of
different shapes, diameters and fill volumes, and cans with added functional
attributes for new products and product line extensions.
During
the second quarter of 2007, Miller 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 $70.3 million ($42.5 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, which extends through 2015. On July 1, 2008,
Miller’s business was combined with the U.S. business of Coors Brewing Company,
which we also supply, to form MillerCoors, LLC.
Segment
earnings in 2008 were $243.5 million ($284.1 million excluding business
consolidation costs discussed in more detail below) compared to
$240.8 million ($326.4 million excluding the legal settlement) in 2007 and
$285.8 million in 2006. Excluding the $40.6 million in business
consolidation charges in 2008 and $85.6 million settlement in 2007, earnings in
2008 were lower than in 2007 by 13 percent, primarily due to raw material
inventory gains of $52 million realized in 2007, which did not recur in 2008.
Earnings in 2008 were also negatively impacted by lower North American sales
volumes, which were partially offset by the higher sales volumes in the PRC.
Positive cost impacts from a new end technology project commenced in 2006 and
other cost optimization measures partially offset the prior year non-recurring
inventory gain and the unfavorable net sales volume decreases. The higher
segment earnings in 2007, before the legal settlement, compared to 2006 were due
to raw material inventory gains in 2007 that exceeded 2006 by approximately
$30 million. Also contributing were approximately $9 million of lower
manufacturing costs related to the new end technology project and improved
production efficiencies. These gains were offset by increased repair and
maintenance costs and higher labor and other conversion costs, a portion of
which could not be passed through to our customers.
On April
23, 2008, Ball announced that by the end of 2008 it would close a metal beverage
packaging plant in Kent, Washington, and in 2008 recorded pretax charges of $7.1
million ($4.3 million after tax), including the sale of the plant facility in
the fourth quarter. The closure of the Kent facility is expected to result in
net fixed costs savings of approximately $10 million in 2009. Also in the second
quarter of 2008, 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 our multi-year project.
On
October 30, 2008, Ball announced the closure of two North American metal
beverage can plants. A plant in Kansas City, Missouri, which primarily
manufactures specialty beverage cans, will be closed by the end of the first
quarter 2009, with manufacturing volumes absorbed by other North American
beverage can plants. A plant in Puerto Rico, which manufactured 12-ounce
beverage cans, was closed at the end of 2008. A pretax charge
of
Page 22
of 96
approximately
$40.7 million ($25.2 million after tax) was recorded in the fourth quarter
of 2008 with an additional $5 million ($3 million after tax) expected in
2009. Cost reductions associated with these plant closings are expected to be up
to $30 million in 2009 and be $7 million cash positive upon final disposition of
the assets.
Metal
Beverage Packaging, Europe
The metal
beverage packaging, Europe, segment includes metal beverage packaging products
manufactured in Europe. Ball Packaging Europe, which represents an estimated
29 percent of total European metal beverage container manufacturing
capacity, has manufacturing plants located in Germany, the United Kingdom,
France, the Netherlands, Poland and Serbia, and is the second largest metal
beverage container business in Europe.
This
segment accounted for 25 percent of consolidated net sales in 2008 (22
percent in 2007 and 20 percent in 2006). Segment sales in 2008 as compared
to 2007 were 13 percent higher due largely to approximately 8 percent higher
sales volume, consistent with overall market growth; higher sales prices and
foreign currency sales gains of 8 percent on the strength of the euro.
These positive impacts were offset by certain small unfavorable cost changes,
including product mix changes towards smaller containers. Segment sales in 2007
were 26 percent higher than in 2006, due primarily to over 9 percent
higher sales volume, higher sales prices and foreign currency sales gains of
9 percent on the strength of the euro. Higher segment volumes in both
periods were aided by the growth in Europe of specialty 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 $230.9 million in 2008, $228.9 million in 2007 and
$252.3 million ($176.8 million excluding a $75.5 million property insurance
gain) in 2006. Earnings in 2008 were positively impacted by an increase in net
margins of $55 million due to the combined impact of the increased sales volumes
and price recovery initiatives, which exceeded the negative impact from product
mix, as well as approximately $20 million related to a stronger euro. These
improvements were partially offset by $36 million of higher other costs
including a negative foreign exchange impact from the conversion of the British
pound to the euro and $35.1 million for business interruption recoveries in 2007
that were not repeated in 2008 (for further details see below). Earnings in 2007
compared to 2006, excluding the $75.5 million property insurance gain
received in 2006 due to a fire at the company’s Hassloch, Germany, metal
beverage can plant (further details are provided below), were positively
impacted by an increase in net margins of $76 million due to the combined impact
of increased sales volumes and price recovery initiatives, $16 million from
cost control programs and $13 million related to a stronger euro. These
improvements were partially offset by $26 million of other higher costs and
$15.9 million of lower business interruption insurance recognition in
2007.
On
April 1, 2006, a fire in the metal beverage can plant in Hassloch, Germany,
damaged a significant portion of the building and machinery and equipment. The
property insurance proceeds recorded for the combined years ended
December 31, 2007 and 2006, which were based on replacement cost, were
€86.3 million ($109.9 million). A
€26.7 million ($33.8 million) fixed asset write down was recorded
to reflect the estimated impairment of the assets damaged as a result of the
fire. As a result, a pretax gain of €59.6 million ($75.5 million) was
recorded in the 2006 consolidated statement of earnings to reflect the
difference between the net book value of the impaired assets and the property
insurance proceeds. An additional €27.2 million ($35.1 million) and
€40 million ($51 million) were recorded in cost of sales in 2007 and
2006, respectively, for insurance recoveries related to business interruption
costs, as well as €11.3 million ($14.3 million) in 2006 to offset
clean-up costs.
Metal
Food and Household Products Packaging, Americas
The metal
food and household products packaging, Americas, segment consists of operations
located in the U.S., Canada and Argentina. The company acquired U.S. Can
Corporation (U.S. Can) on March 27, 2006, and with that acquisition, added
to its metal food can business the production and sale of aerosol cans, paint
cans, plastic pails and decorative specialty cans. Effective January 1,
2007, responsibility for the plastic pail product line, with 2007 net sales of
$52.1 million, was transferred to the plastic packaging, Americas, segment.
Accordingly, 2006 segment amounts have been retrospectively adjusted to reflect
the transfer.
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This
segment accounted for 16 percent of consolidated net sales in 2008 (16
percent in 2007 and 17 percent in 2006). Segment sales in 2008 increased 3
percent as compared to 2007 mostly due to higher selling prices offset by an
approximate 3 percent decrease in sales volumes primarily as a result of
decisions by management to discontinue low margin business, which led to the
announced closure of our Commerce, California, and Tallapoosa, Georgia,
facilities in 2007. We estimate our 2008 shipments account for approximately 19
percent and 50 percent of total annual U.S. and Canadian steel food container
and steel aerosol container shipments, respectively. Segment sales in 2007
increased 4 percent as compared to 2006 due to an approximate 10 percent
increase in sales for the inclusion of a full year’s sales from the acquisition
of U.S. Can, partially offset by a 3 percent decline in sales from lost
business, as well as customer operating issues in food cans, including a fire in
a customer’s factory, and unfavorable weather conditions in the
Midwest.
Segment
earnings were $69.7 million ($68.1 million
excluding a $1.6 million gain from business consolidation activities) in 2008,
compared to a loss of $8 million (earnings of $36.2 million excluding
business consolidation costs of $44.2 million) in 2007 and earnings of
$2.4 million ($37.9 million excluding business consolidation costs of $35.5
million) in 2006. Excluding the business consolidation activities for each
period, earnings in 2008 exceeded 2007 by approximately 88 percent primarily
related to improved pricing, better manufacturing performance and the settlement
of a claim in the amount of almost $7 million offset by the negative impact of 3
percent lower sales volumes in 2008. The 4 percent lower earnings in 2007
compared to 2006, excluding the business consolidation charges, were primarily
related to increased steel and coating material costs, partially offset by
improved manufacturing performance in 2007 and higher cost of sales in the
second quarter of 2006 related to $6.1 million of purchase accounting
adjustments for inventory valuations associated with the acquired U.S. Can
finished goods inventory. While pricing pressures continue on all of our raw
materials, other direct materials and freight and utility costs, we continue to
seek price increases in the market place.
In
October 2007, Ball announced plans to close aerosol manufacturing plants in
Tallapoosa, Georgia, and Commerce, California, and announced its intent to exit
the custom and decorative tinplate can business located in Baltimore, Maryland.
A pretax charge of $44.2 million ($26.8 million after tax) was
recorded in the fourth quarter of 2007 primarily related to these closures. Ball
incurred additional net pretax charges of $3.5 million primarily related to
lease cancellation costs for the closure of the Commerce facility during 2008.
Additionally, during the fourth quarter of 2008, it was determined, based on
market conditions that we would remain in the custom and decorative tinplate can
business, which resulted in the reversal of $5.4 million in business
consolidation charges previously recorded. We closed the Tallapoosa facility
early in the first quarter of 2009 and do not anticipate further charges related
to this closure. When completed in 2009, the actions are expected to yield
annualized pretax cost savings in excess of $15 million and improve the
aerosol plant utilization rate to more than 85 percent from about
70 percent. The cash costs of these actions are expected to be offset by
proceeds on asset dispositions and tax recoveries.
In the
fourth quarter of 2006, as part of the realignment of the metal food and
household products packaging, Americas, segment, a charge of $35.5 million
($28.7 million after tax) was recorded primarily related to the closure of
a plant in Burlington, Ontario, for employee termination and pension costs,
plant decommissioning costs and fixed asset impairment charges. The Burlington
plant was sold during the third quarter of 2008 completing the restructuring
plan, except for pension costs, which resulted in an additional $0.3 million in
business consolidation charges.
As
reported in our second quarter Form 10-Q, during the third quarter our aerosol
business experienced a tinplate supply issue due to a major supplier’s failure
to deliver committed metal. While this matter affected a limited, seasonal part
of this segment’s product mix, it caused a supply disruption with some of our
customers that resulted in lost sales and profitability for Ball during the
year. We have made every effort to fulfill our customers’ requests and minimize
the impact on our customer base. We are now receiving the necessary tinplate to
produce products for our customers, and future raw material supply arrangements
are scheduled.
Plastic
Packaging, Americas
The
plastic packaging, Americas, segment consists of operations located in the U.S.
and Canada (through most of the third quarter of 2008), which manufacture PET
and polypropylene plastic container products used mainly in beverage and food
packaging, as well as high density polyethylene and polypropylene containers for
industrial and household product applications. On March 28, 2006, Ball acquired
certain North American plastic bottle container
Page 24
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assets
from Alcan Packaging (Alcan), including two plastic container manufacturing
plants in the U.S. and one in Canada, as well as certain manufacturing equipment
and other assets from other Alcan facilities. Effective January 1, 2007,
the plastic packaging, Americas, segment assumed responsibility for plastic pail
assets acquired as part of the U.S. Can acquisition. Accordingly, 2006 segment
amounts have been retrospectively adjusted to reflect the transfer.
Manufacturing operations ceased in Canada during the third quarter of 2008 with
the closure of the Brampton, Ontario, plant.
This
segment accounted for 9 percent of consolidated net sales in 2008
(10 percent in both 2007 and 2006). Segment sales in 2008 decreased 2
percent, or approximately $17 million, as compared to 2007 due to a decrease of
approximately 9 percent in sales volume offset by higher raw material cost
increases passed through to customers during 2008. The volume loss included
decreases in carbonated soft drink and water bottle sales due, in part, to lower
convenience store sales by our customers, which were partially offset by higher
sales in specialty business markets (e.g., custom hot-fill, alcohol, food and
juice drinks). Reduced preform sales also contributed to the 2008 sales decrease
due, in part, to the bankruptcy filing of a preform customer. Segment sales in
2007 increased 8 percent as compared to 2006 primarily due to an increase
in sales of 7 percent related to the March 2006 acquisition of Alcan and
the inclusion of the acquired U.S. Can plastic pail business, as well as an
increase of 3 percent for higher sales volumes related to the legacy
business.
Segment
earnings were $7.5 million in 2008,
$25.9 million in 2007 and $28.3 million in 2006. Excluding the
business consolidation charges of $8.3 million in 2008 (further details are
provided below) and $0.4 million in 2007, earnings in 2008 were lower than in
2007 by approximately 40 percent primarily due to the previously mentioned
volume losses and a $1.8 million charge due to a customer bankruptcy filing
during the second quarter of 2008. Earnings in 2007 were lower than in 2006
primarily due to lower sales margins related to approximately $5 million of
customer pricing concessions and $2 million of higher labor and overhead
costs. The earnings inhibitors were partially offset by approximately
$2 million from volume growth in specialty PET sales combined with the
incremental margin impact of sales in the first quarter of 2007 related to the
acquired Alcan and U.S. Can plants. In view of the low 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.
We
estimate our 2008 shipments of PET plastic bottles to be approximately
10 percent of total U.S. and Canadian PET container shipments. In addition
the plastic packaging, Americas, segment shipped approximately 750 million
polypropylene food and specialty containers during 2008.
On June
26, 2008, Ball announced the closure of a plastic packaging manufacturing plant
in Brampton, Ontario, which ceased operations in the third quarter of 2008. A
pretax charge of $8.3 million ($7.8 million after tax) was recorded during 2008
for employee termination and other benefit costs, lease cancellation costs and
fixed asset impairment. The Brampton operations have been consolidated into the
company’s other plastic packaging manufacturing facilities in the United States,
and the closure of this facility is expected to result in annual, fixed-cost
savings of approximately $4 million beginning in 2009.
Aerospace
and Technologies
Aerospace
and technologies segment sales represented 10 percent of consolidated net
sales in 2008 (11 percent in 2007 and 10 percent in 2006). Segment sales in
2008 were 5 percent lower as compared to 2007 as a result of a combination of
large programs nearing completion, program terminations, delays in program
awards and government funding constraints. The reductions were partially offset
by new program starts and increased scope on previously awarded contracts.
Segment sales in 2007 were 17 percent higher than in 2006 due to new
programs, cost overruns on fixed-price contracts, increased scope on previously
awarded contracts and growth in our commercial contracts.
Some of
the segment’s high-profile contracts include: the WorldView 2 advanced
commercial remote sensing satellites; the James Webb Space Telescope, a
successor to the Hubble Space Telescope; the Space-Based Space Surveillance
System, which will detect and track space objects such as satellites and orbital
debris; NPOESS, the next-generation satellite weather monitoring system; and a
number of antennas for the Joint Strike Fighter.
Page 25
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Segment
earnings in 2008 were $83.3 million ($76.2 million excluding the sale of an
Australian subsidiary discussed in more detail below), $64.6 million in
2007 and $50 million in 2006. Excluding the pretax gain on the sale of BSG
of $7.1 million in the first quarter of 2008, earnings in 2008 were up 18
percent in comparison to 2007. Earnings improved year over year as the sales
volume decline described above was more than offset by improved margins on
contracts due to improvements in program execution, risk retirement on several
fixed price programs, as well as a reduction of unreimbursable pension and
benefit expenses. Earnings improvement in 2007 as compared to 2006 was primarily
due to higher net sales, particularly related to the WorldView and other
commercial space contracts, an improved contract mix and better program
execution.
On
February 15, 2008, Ball completed the sale of its shares in BSG to QinetiQ
Pty Ltd for approximately $10.5 million, including cash sold of $1.8
million. BSG 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.
Sales to
the U.S. government, either directly as a prime contractor or indirectly as a
subcontractor, represented 91 percent of segment sales in 2008,
84 percent in 2007 and 90 percent in 2006. Contracted backlog for the
aerospace and technologies segment at December 31, 2008 and 2007, was
$597 million and $774 million, respectively.
Additional
Segment Information
For
additional information regarding the company’s segments, see the summary of
business segment information in Note 2 accompanying the consolidated financial
statements within Item 8 of this report. The charges recorded for business
consolidation activities were based on estimates by Ball management and were
developed from information available at the time. If actual outcomes vary from
the estimates, the differences will be reflected in current period earnings in
the consolidated statement of earnings and identified as business consolidation
gains and losses. Additional details about our business consolidation activities
and associated costs are provided in Note 6 accompanying the consolidated
financial statements within Item 8 of this report.
Undistributed
Corporate Expenses, Net
Undistributed
corporate expenses, net, were $39.6 million, $38.3 million and $37.5 million for
2008, 2007 and 2006, respectively. Included in the undistributed corporate
expenses for 2008 was $11.5 million for mark-to-market losses related to
aluminum derivative instruments that will reverse and result in a gain in 2009.
These aluminum derivative instruments are fully matched with customer sales
arrangements that mature in 2009; therefore, the mark-to-market losses will
reverse in 2009 resulting in $11.5 million of pretax earnings.
Selling,
General and Administrative Expenses
Selling, general and
administrative (SG&A) expenses were $288.2 million, $323.7 million
and $287.2 million for 2008, 2007 and 2006, respectively. The
decreases in SG&A expenses in 2008 compared to 2007 were due to
$7.6 million of lower general and administrative costs as a result of the
sale in February 2008 of the aerospace and technologies segment’s Australian
subsidiary, lower aerospace research and development costs and bid and proposal
costs of $3.7 million, life insurance death benefits of $6.5 million, settlement
of a claim for approximately $7 million, the favorable net year-over-year
change in foreign currency hedges and exchange impacts of $11.6 million and
other miscellaneous net cost reductions.
The
increase in SG&A expenses in 2007 compared to 2006 were $4.5 million of
additional SG&A from the U.S. Can acquisition, higher research and
development costs and aerospace bid and proposal costs of $9.4 million,
increased sales and marketing efforts of $5.4 million and
$15.8 million of compensation and benefit increases, including
year-over-year incentive compensation costs.
For the
U.S. pension plans, we intend to maintain our current return on asset assumption
of 8.25 percent and our discount rate assumption of 6.25 percent for 2009. Based
on these assumptions and excluding 2008 curtailment expense, U.S. pension
expense for 2009 is anticipated to increase $3.9 million compared to 2008, most
of which will be included in cost of sales. Pension expense in Europe and Canada
combined is expected to be comparable to the 2008 expense. A reduction of
the expected return on pension assets assumption by one quarter of a
percentage
Page 26
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point
would result in an approximate $2.4 million increase in the 2009 pension
expense, while a quarter of a percentage point reduction in the discount rate
applied to the pension liability would result in an estimated $2.8 million of
additional pension expense in 2009. Additional information regarding the
company’s pension plans is provided in Note 17 accompanying the consolidated
financial statements within Item 8 of this report.
Interest
and Taxes
Consolidated
interest expense was $137.7 million in 2008, $149.4 million in 2007
and $134.4 million in 2006. The reduced expense in 2008 was primarily due
to lower interest rates on floating rate debt, as U.S. and European Central
Banks cut interest rates amid the global financial crisis. The higher expense in
2007 as compared to 2006 was primarily due to the additional borrowings used to
finance the acquisitions of U.S. Can and the Alcan assets, combined with higher
interest rates in 2007.
Ball’s
consolidated effective income tax rate for 2008 was 32.6 percent compared
to 26.3 percent in 2007 and 29.4 percent in 2006. The lower tax
rate in 2007 as compared to 2008 and 2006 was primarily the result of earnings
mix (higher foreign earnings taxed at lower rates) and net tax benefit
adjustments of $17.2 million recorded in 2007. Additionally, the inability to
fully use Canadian net operating losses on plant closures in 2008 and 2006
contributed to higher rates in those years. The 2008 rate was partially reduced
by a $4.5 million tax benefit recognized during the third quarter of 2008 for an
enacted tax law change in the United Kingdom, which was offset by the impact of
non-deductible losses in the cash surrender value of certain company-owned life
insurance plans. The $17.2 million net reduction in the 2007 tax provision was
primarily a result of enacted income tax rate reductions in Germany and the
United Kingdom and a tax loss related to the company’s Canadian operations,
which were offset by an increase in the tax provision in 2007 to adjust for the
final settlement negotiations concluded with the Internal Revenue Service (IRS)
related to a company-owned life insurance plan (discussed below). Based on current
estimates, the 2009 effective income tax rate is expected to be around
33.5 percent.
During 2007 the company
concluded final settlement negotiations with the IRS on the deductibility of
interest expense on incurred loans from a company-owned life insurance plan. An
additional accrual of $7 million was made in the third quarter of 2007 to adjust
the accrued liability to the final settlement of $18.4 million, including
interest, for the years 2000-2004, which were under examination, and for
the unaudited years 2005-2006. This settlement included agreement on the
prospective treatment of interest deductibility on the policy loans, which will
not have a significant impact on earnings per share, cash flow or liquidity in
future periods. Further details are available in Note 16 to the consolidated
financial statements within Item 8 of this report.
Results
of Equity Affiliates
Equity in
the earnings of affiliates is primarily attributable to our 50 percent
ownership in packaging investments in the U.S. and Brazil. Earnings were
$14.5 million in 2008, $12.9 million in 2007 and $14.7 million in
2006.
CRITICAL
AND SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING
PRONOUNCEMENTS
For
information regarding the company’s critical and significant accounting
policies, as well as recent accounting pronouncements, see Note 1 to the
consolidated financial statements within Item 8 of this
report.
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash
Flows and Capital Expenditures
Our
primary sources of liquidity are cash provided by operating activities and
external committed borrowings. We believe that cash flows from operations and
cash provided by short-term and committed 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. We had in excess of half a billion dollars of available
funds under committed multi-currency revolving credit facilities at December 31,
2008. However, our liquidity could be impacted significantly by a decrease in
demand for our products, which could arise from competitive
circumstances, the current global credit, financial and economic crisis or any
of the other factors we describe in Item 1A, “Risk
Factors.”
Page 27
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In our
worldwide beverage can business, we use financial derivative contracts as
discussed in “Quantitative and Qualitative Disclosures About Market Risk” within
Item 7A of this report to manage future aluminum price volatility for our
customers. As these derivative contracts are matched to customer sales
contracts, they have little or no economic impact on our earnings. Ball’s
financial counterparties to these derivative contracts require Ball to post
collateral in certain circumstances when the negative mark-to-market value of
the contracts exceeds specified levels. Additionally, Ball has similar
collateral posting arrangements with certain customers and other financial
counterparties on these derivative contracts. At December 31, 2008, Ball had
$229.5 million of cash posted as collateral and had received $124 million of
cash from customers for a net amount of $105.5 million. The cash flows of the
collateral postings are shown in the investing section of our consolidated
statements of cash flows. Assuming aluminum prices remain unchanged, we would
expect to recover all of these cash deposits in 2009.
Cash flows provided by
operations were $627.6 million in 2008 compared to $673 million in
2007 and $401.4 million in 2006. The reduction in 2008 as compared
to 2007 was primarily due to the payment of approximately $70 million in January
2008 of a legal settlement to a customer. This reduction was partially offset by
the net impact of increases in net earnings and depreciation, lower tax
payments, lower pension contributions and a net increase in working capital
during the year. The improvement in 2007 as compared to 2006 was primarily due
to higher net earnings before the legal settlement in 2007 and the insurance
gain in 2006 related to the Hassloch fire. The improvement in 2007 was also the
result of reduced changes in working capital components and lower income tax
payments, partially offset by higher pension contributions.
Management
internally uses a free cash flow measure: (1) to evaluate the company’s
operating results, (2) to plan stock-buy back levels, (3) to evaluate
strategic investments and (4) to evaluate the company’s ability to incur and
service debt. Free cash flow is not a defined term under U.S. generally accepted
accounting principles, and it should not be inferred that the entire free cash
flow amount is available for discretionary expenditures. The company defines
free cash flow as cash flow from operating activities less additions to
property, plant and equipment (capital spending). Free cash flow is typically
derived directly from the company’s cash flow statements; however, it may be
adjusted for items that affect comparability between periods. An example of such
an item included the company’s decision in 2007 to contribute an additional
$44.5 million ($27.3 million after tax) to its pension
plans. Additional examples include property insurance proceeds for
the replacement of the fire-damaged assets in our Hassloch, Germany, plant,
which are included in capital spending amounts in 2006.
Based on
this, our consolidated free cash flow is summarized as follows:
|
($
in millions)
|
2008
|
2007
|
2006
|
|||||||||
|
Cash
flows from operating activities
|
$ | 627.6 | $ | 673.0 | $ | 401.4 | ||||||
|
Capital
spending
|
(306.9 | ) | (308.5 | ) | (279.6 | ) | ||||||
|
Proceeds
for replacement of fire-damaged assets
|
– | 48.6 | 61.3 | |||||||||
|
Incremental
pension funding, net of tax
|
– | 27.3 | – | |||||||||
|
Free
cash flow
|
$ | 320.7 | $ | 440.4 | $ | 183.1 | ||||||
Based on
information currently available, we estimate cash flows from operating
activities for 2009 to be approximately $625 million, capital spending to
be approximately $250 million and free cash flow to be in the
$375 million range. Capital spending of $306.9 million in 2008
exceeded depreciation and amortization expense of $297.4 million. We have
reduced our expected capital spending year over year, and we do not intend to
buy back stock until the capital markets show sufficient signs of recovery.
Initially in 2009 we will focus on reducing our debt and growing our cash
balances.
Debt
Facilities and Refinancing
Interest-bearing
debt at December 31, 2008, increased $51.5 million to
$2.41 billion from $2.36 billion at December 31, 2007. The 2008
debt increase from 2007 was primarily due to the financing of $105.5 million in
net cash collateral deposits. In 2009 we intend to allocate our operating cash
flow to reducing our debt and growing our cash balances while covering our
capital spending programs, dividends and incremental pension
funding.
At
December 31, 2008, $502 million was available under the company’s
multi-currency revolving credit facilities. The company also had
$332 million of short-term uncommitted credit facilities available at the
end of the year, of which $155.6 million was outstanding. The committed
credit facilities are available until October 2011.
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Given our
free cash flow projections and unused credit facilities that are available until
October 2011, the company’s liquidity is strong and is expected to meet its
ongoing operating cash flow and debt service requirements. While the current
financial and economic conditions have raised concerns about credit risk with
counterparties to derivative transactions, the company mitigates its exposure by
spreading the risk among various counterparties, thus limiting exposure with any
one party. The company also monitors the credit ratings of its suppliers,
customers, lenders and counterparties on a regular basis.
The
current financial and economic environment has exacerbated liquidity and credit
risks with some of our customers and suppliers. In October 2008, we advanced
interest-bearing funding of $22 million in support of one of our key suppliers,
which advance is secured by accounts receivable and
inventory.
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 and $170 million at December 31, 2008 and 2007, respectively, and are reflected as a reduction of accounts receivable in the consolidated balance sheets.
The
company was in compliance with all loan agreements at December 31, 2008,
and all prior years presented, and has met all debt payment obligations. The
U.S. note agreements, bank credit agreement and industrial development revenue
bond agreements contain certain restrictions relating to dividends, investments,
financial ratios, guarantees and the incurrence of additional indebtedness.
Additional details about the company’s debt and receivables sales agreements are
available in Notes 15 and 9, respectively, accompanying the consolidated
financial statements within Item 8 of this report.
Other
Liquidity Items
Cash
payments required for long-term debt maturities, rental payments under
noncancellable operating leases, purchase obligations and other commitments in
effect at December 31, 2008, are summarized in the following
table:
|
Payments
Due By Period (a)
|
||||||||||||||||||||
|
($
in millions)
|
Total
|
Less
than
1 Year |
1-3
Years
|
3-5
Years
|
More
than
5 Years |
|||||||||||||||
|
Long-term
debt
|
$ | 2,250.7 | $ | 147.3 | $ | 1,140.5 | $ | 509.3 | $ | 453.6 | ||||||||||
|
Capital
lease obligations
|
3.8 | 0.5 | 0.8 | 0.8 | 1.7 | |||||||||||||||
|
Interest
payments on long-term debt (b)
|
485.2 | 98.7 | 166.4 | 93.3 | 126.8 | |||||||||||||||
|
Operating
leases
|
187.3 | 46.7 | 66.0 | 36.7 | 37.9 | |||||||||||||||
|
Purchase
obligations (c)
|
3,818.9 | 2,004.9 | 1,632.3 | 181.7 | – | |||||||||||||||
|
Total
payments on contractual obligations
|
$ | 6,745.9 | $ | 2,298.1 | $ | 3,006.0 | $ | 821.8 | $ | 620.0 | ||||||||||
|
(a)
|
Amounts
reported in local currencies have been translated at the year-end exchange
rates.
|
| (b) | For variable rate facilities, amounts are based on interest rates in effect at year end and do not contemplate the effects of hedging instruments. |
| (c) | The company’s purchase obligations include contracted amounts for aluminum, steel, plastic resin and other direct materials. Also included are commitments for purchases of natural gas and electricity, aerospace and technologies contracts and other less significant items. In cases where variable prices and/or usage are involved, management’s best estimates have been used. Depending on the circumstances, early termination of the contracts may not result in penalties and, therefore, actual payments could vary significantly. |
Page 29
of 96
Contributions
to the company’s defined benefit pension plans, not including the unfunded
German plans, may be in the range of $88 million to $93 million in 2009.
This estimate may change based on changes in the Pension Protection Act and
actual plan asset performance, among other factors. Benefit payments related to
these plans are expected to be $69.5 million, $73.7 million,
$76.4 million, $81 million and $84.5 million for the years ending
December 31, 2009 through 2013, respectively, and a total of
$482.7 million for the years 2014 through 2018. Payments to participants in
the unfunded German plans are expected to be approximately $24 million to
$25 million in each of the years 2009 through 2013 and a total of
$125.6 million for the years 2014 through 2018.
Our share
repurchases in 2008 aggregated $299.6 million, net of issuances, compared
to $211.3 million net of repurchases in 2007 and $45.7 million in
2006. The net repurchases in 2008 included a $31 million settlement on January
7, 2008, of a forward contract entered into in December 2007 for the repurchase
of 675,000 shares. Additionally, in 2007 net repurchases included a
$51.9 million settlement on January 5, 2007, of a forward contract
entered into in December 2006 for the repurchase of 1,200,000 shares.
We do not expect to repurchase a significant number of common shares in
2009.
On
December 12, 2007, in a privately negotiated transaction, Ball entered into
an accelerated share repurchase agreement to buy $100 million of its common
shares using cash on hand and available borrowings. The company advanced the
$100 million on January 7, 2008, and received 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.
Annual
cash dividends paid on common stock were 40 cents per share in 2008, 2007
and 2006. Total dividends paid were $37.5 million in 2008,
$40.6 million in 2007 and $41 million in 2006.
Contingencies
The
company is subject to various risks and uncertainties in the ordinary course of
business due, in part, to the competitive nature of the industries in which the
company participates. We do business in countries outside the U.S., have
changing commodity prices for the materials used in the manufacture of our
packaging products and participate in changing capital markets. We attempt to
reduce these risks and uncertainties through the establishment of risk
management policies and procedures, including, at times, the use of certain
derivative financial instruments as explained in Item 7A of this
report.
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 with the former shareholders of U.S. Can, 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 was to be
used for the settlement of certain post-acquisition claims, pursuant to the
terms of the merger agreement. During the second quarter of 2007, Ball asserted
claims against the former shareholders of U.S. Can, which were disputed. 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. This
matter was settled during the fourth quarter of 2008.
Our
information at this time does not indicate that these matters will have a
material adverse effect upon the liquidity, results of operations or financial
condition of the company.
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingencies at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Future events could affect
these estimates. See Note 1 to the consolidated financial statements within
Item 8 of this report for a summary of the company’s critical and
significant accounting policies.
Management
believes that evaluation of Ball’s performance during the periods covered by
these consolidated financial statements should be based upon historical
financial statements.
Page 30
of 96
Forward-Looking
Statements
The
company has made or implied certain forward-looking statements in this report
which are made as of the end of the time frame covered by this report. These
forward-looking statements represent the company’s goals, and results could vary
materially from those expressed or implied. From time to time we also provide
oral or written forward-looking statements in other materials we release to the
public. As time passes, the relevance and accuracy of forward-looking statements
may change. Some factors that could cause the company’s actual results or
outcomes to differ materially from those discussed in the forward-looking
statements include, but are not limited to: fluctuation in customer and consumer
growth, demand and preferences; loss of one or more major customers or changes
to contracts with one or more customers; insufficient production capacity;
changes in senior management; the current global credit crisis and its effects
on liquidity, credit risk, asset values and the economy; 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,
particularly the recent publicity concerning Bisphenol-A, or BPA, a chemical
used in the manufacture of many types of containers (including certain of those
produced by the company); technological developments and innovations;
successful or unsuccessful acquisitions, joint ventures or divestitures and the
integration activities associated therewith; changes to unaudited results due to
statutory audits of our financial statements or management’s evaluation of the
company’s internal controls over financial reporting; and loss contingencies
related to income and other tax matters, including those arising from audits
performed by U.S. and foreign tax authorities. If the company is unable to
achieve its goals, then the company’s actual performance could vary materially
from those goals expressed or implied in the forward-looking statements. The
company currently does not intend to publicly update forward-looking statements
except as it deems necessary in quarterly or annual earnings reports. You are
advised, however, to consult any further disclosures we make on related subjects
in our 10-K, 10-Q and 8-K reports to the Securities and Exchange
Commission.
Page 31
of 96
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
Financial
Instruments and Risk Management
In the
ordinary course of business, we employ established risk management policies and
procedures, which seek 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 there can be no assurance
that these policies and procedures will be successful. 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. The company monitors counterparty credit risk, including
lenders, on a regular basis, but we cannot be certain that all risks will be
discerned or that its risk management policies and procedures will always be
effective.
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 most 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 to match underlying purchase volumes and pricing with sales
volumes and pricing.
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. We anticipate at this time that we will be able to pass through the
majority of the steel price increases that occur over the next 12
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 to
match underlying purchase volumes and pricing with sales volumes and pricing for
those sales contracts where there is not a pass-through arrangement to minimize
the company’s exposure to significant price changes.
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 $6 million
after-tax reduction in net earnings over a one-year period. Additionally, if
foreign currency exchange rates were to change adversely by 10 percent, we
estimate there could be an $8 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
Page 32
of 96
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. Subsequent to year end, the company has taken further steps to
reduce its exposure to natural gas and diesel fuel prices in 2009.
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 December 31,
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.
Based on
our interest rate exposure at December 31, 2008, assumed floating rate debt
levels throughout the next 12 months and the effects of derivative instruments,
a 100-basis point increase in interest rates could result in an estimated
$7 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 various derivative contracts. 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 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.
Considering
the company’s derivative financial instruments outstanding at December 31,
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 $18 million after-tax reduction in net
earnings over a one-year period. This amount includes the $8 million
currency exposure discussed above in the “Commodity Price Risk” section. This
hypothetical adverse change in foreign currency exchange rates would also reduce
our forecasted average debt balance by $84 million. Actual changes in
market prices or rates may differ from hypothetical changes.
Common
Share Repurchases
As part
of the company’s ongoing share repurchase program and as a way to partially
reduce the earnings volatility of the company’s variable deferred compensation
stock program, from time to time the company sells equity put options on its
common stock. The company currently has 500,000 shares of equity put options
outstanding at a strike price of $40 per share that expire in less than 12
months.
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 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.
Page 33
of 96
Item
8. Financial Statements and Supplementary Data
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Shareholders of Ball Corporation:
In our
opinion, the consolidated financial statements listed in the index appearing
under Item 15(a)(1) present fairly, in all material respects, the financial
position of Ball Corporation and its subsidiaries at December 31, 2008 and
2007, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible for these
financial statements, for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in Management’s Report on Internal Control Over
Financial Reporting appearing under Item 9A. Our responsibility is to express
opinions on these financial statements and on the Company's internal control
over financial reporting based on our integrated audits. We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
PricewaterhouseCoopers
LLP
Denver,
Colorado
February
25, 2009
Page 34
of 96
Consolidated
Statements of Earnings
Ball
Corporation and Subsidiaries
|
Years
ended December 31,
|
||||||||||||
|
($
in millions, except per share amounts)
|
2008
|
2007
|
2006
|
|||||||||
|
Net
sales
|
$ | 7,561.5 | $ | 7,475.3 | $ | 6,621.5 | ||||||
|
Legal
settlement (Note 5)
|
– | (85.6 | ) | – | ||||||||
|
Total
net sales
|
7,561.5 | 7,389.7 | 6,621.5 | |||||||||
|
Costs
and expenses
|
||||||||||||
|
Cost
of sales (excluding depreciation)
|
6,340.4 | 6,226.5 | 5,540.4 | |||||||||
|
Depreciation
and amortization (Notes 2, 11 and 13)
|
297.4 | 281.0 | 252.6 | |||||||||
|
Selling,
general and administrative
|
288.2 | 323.7 | 287.2 | |||||||||
|
Business
consolidation and other costs (Note 6)
|
52.1 | 44.6 | 35.5 | |||||||||
|
Gain
on sale of subsidiary (Note 7)
|
(7.1 | ) | – | – | ||||||||
|
Property
insurance gain (Note 8)
|
– | – | (75.5 | ) | ||||||||
| 6,971.0 | 6,875.8 | 6,040.2 | ||||||||||
|
Earnings
before interest and taxes
|
590.5 | 513.9 | 581.3 | |||||||||
|
Interest
expense (Note 15)
|
(137.7 | ) | (149.4 | ) | (134.4 | ) | ||||||
|
Earnings
before taxes
|
452.8 | 364.5 | 446.9 | |||||||||
|
Tax
provision (Note 16)
|
(147.4 | ) | (95.7 | ) | (131.6 | ) | ||||||
|
Minority
interests
|
(0.4 | ) | (0.4 | ) | (0.4 | ) | ||||||
|
Equity
in results of affiliates
|
14.5 | 12.9 | 14.7 | |||||||||
|
Net
earnings
|
$ | 319.5 | $ | 281.3 | $ | 329.6 | ||||||
|
Earnings per share
(Notes 18 and 19):
|
||||||||||||
|
Basic
|
$ | 3.33 | $ | 2.78 | $ | 3.19 | ||||||
|
Diluted
|
$ | 3.29 | $ | 2.74 | $ | 3.14 | ||||||
|
Weighted average shares
outstanding (000s) (Note 19):
|
||||||||||||
|
Basic
|
95,857 | 101,186 | 103,338 | |||||||||
|
Diluted
|
97,019 | 102,760 | 104,951 | |||||||||
|
Cash
dividends declared and paid, per share
|
$ | 0.40 | $ | 0.40 | $ | 0.40 | ||||||
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
Page 35
of 96
Consolidated
Balance Sheets
Ball
Corporation and Subsidiaries
|
December
31,
|
||||||||
|
($
in millions)
|
2008
|
2007
|
||||||
|
Assets
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 127.4 | $ | 151.6 | ||||
|
Receivables,
net (Note 9)
|
507.9 | 582.7 | ||||||
|
Inventories,
net (Note 10)
|
974.2 | 998.1 | ||||||
|
Cash
collateral – receivable (Note 3)
|
229.5 | – | ||||||
|
Deferred
taxes and other current assets (Notes 16 and 20)
|
326.3 | 110.5 | ||||||
|
Total
current assets
|
2,165.3 | 1,842.9 | ||||||
|
Property,
plant and equipment, net (Notes 8 and 11)
|
1,866.9 | 1,941.2 | ||||||
|
Goodwill
(Notes 4 and 12)
|
1,825.5 | 1,863.1 | ||||||
|
Intangibles
and other assets, net (Notes 13 and 16)
|
511.0 | 373.4 | ||||||
|
Total
Assets
|
$ | 6,368.7 | $ | 6,020.6 | ||||
|
Liabilities
and Shareholders’ Equity
|
||||||||
|
Current
liabilities
|
||||||||
|
Short-term
debt and current portion of long-term debt (Note 15)
|
$ | 303.0 | $ | 176.8 | ||||
|
Accounts
payable
|
763.7 | 763.6 | ||||||
|
Accrued
employee costs
|
232.7 | 238.0 | ||||||
|
Income
taxes payable (Note 16)
|
8.9 | 15.7 | ||||||
|
Cash
collateral – liability (Note 3)
|
124.0 | – | ||||||
|
Other
current liabilities (Note 20)
|
430.1 | 319.0 | ||||||
|
Total
current liabilities
|
1,862.4 | 1,513.1 | ||||||
|
Long-term
debt (Note 15)
|
2,107.1 | 2,181.8 | ||||||
|
Employee
benefit obligations (Note 17)
|
981.4 | 799.0 | ||||||
|
Deferred
taxes and other liabilities (Note 16)
|
330.5 | 183.1 | ||||||
|
Total
liabilities
|
5,281.4 | 4,677.0 | ||||||
|
Contingencies
(Note 25)
|
– | – | ||||||
|
Minority
interests
|
1.5 | 1.1 | ||||||
|
Shareholders’
equity (Note 18)
|
||||||||
|
Common
stock (160,916,672 shares issued – 2008; 160,678,695 shares issued –
2007)
|
788.0 | 760.3 | ||||||
|
Retained
earnings
|
2,047.1 | 1,765.0 | ||||||
|
Accumulated
other comprehensive earnings (loss)
|
(182.5 | ) | 106.9 | |||||
|
Treasury
stock, at cost (67,184,722 shares – 2008; 60,454,245 shares –
2007)
|
(1,566.8 | ) | (1,289.7 | ) | ||||
|
Total
shareholders’ equity
|
1,085.8 | 1,342.5 | ||||||
|
Total
Liabilities and Shareholders’ Equity
|
$ | 6,368.7 | $ | 6,020.6 | ||||
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
Page 36
of 96
Consolidated
Statements of Cash Flows
Ball
Corporation and Subsidiaries
|
|
Years
ended December 31,
|
|||||||||||
| ($ in millions) |
2008
|
2007
|
2006
|
|||||||||
|
Cash
Flows from Operating Activities
|
||||||||||||
|
Net
earnings
|
$ | 319.5 | $ | 281.3 | $ | 329.6 | ||||||
|
Adjustments
to reconcile net earnings to cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
297.4 | 281.0 | 252.6 | |||||||||
|
Gain
on sale of subsidiary (Note 7)
|
(7.1 | ) | – | – | ||||||||
|
Legal
settlement (Note 5)
|
(70.3 | ) | 85.6 | – | ||||||||
|
Property
insurance gain (Note 8)
|
– | – | (75.5 | ) | ||||||||
|
Business
consolidation and other costs (Note 6)
|
47.9 | 42.3 | 34.2 | |||||||||
|
Deferred
taxes (Note 16)
|
19.6 | (21.0 | ) | 38.2 | ||||||||
|
Other,
net
|
25.7 | (30.9 | ) | (40.4 | ) | |||||||
|
Working
capital changes, excluding effects of acquisitions:
|
||||||||||||
|
Receivables
|
37.0 | 26.9 | (57.0 | ) | ||||||||
|
Inventories
|
2.4 | (41.0 | ) | (132.2 | ) | |||||||
|
Other
current assets
|
(112.3 | ) | (0.7 | ) | 4.7 | |||||||
|
Accounts
payable
|
15.7 | 27.4 | 121.6 | |||||||||
|
Accrued
employee costs
|
(17.2 | ) | 32.7 | 53.1 | ||||||||
|
Other
current liabilities
|
69.6 | (44.8 | ) | (19.9 | ) | |||||||
|
Income
taxes payable and current deferred tax assets, net
|
3.3 | 32.2 | (62.4 | ) | ||||||||
|
Other,
net
|
(3.6 | ) | 2.0 | (45.2 | ) | |||||||
|
Cash
provided by operating activities
|
627.6 | 673.0 | 401.4 | |||||||||
|
Cash
Flows from Investing Activities
|
||||||||||||
|
Additions
to property, plant and equipment
|
(306.9 | ) | (308.5 | ) | (279.6 | ) | ||||||
|
Cash
collateral, net (Note 3)
|
(105.5 | ) | – | – | ||||||||
|
Business
acquisitions, net of cash acquired (Note 4)
|
(2.3 | ) | – | (791.1 | ) | |||||||
|
Proceeds
from sale of subsidiary, net of cash sold (Note 7)
|
8.7 | – | – | |||||||||
|
Property
insurance proceeds (Note 8)
|
– | 48.6 | 61.3 | |||||||||
|
Other,
net
|
(12.0 | ) | (5.9 | ) | 16.0 | |||||||
|
Cash
used in investing activities
|
(418.0 | ) | (265.8 | ) | (993.4 | ) | ||||||
|
Cash
Flows from Financing Activities
|
||||||||||||
|
Long-term
borrowings
|
753.7 | 299.1 | 1,423.7 | |||||||||
|
Repayments
of long-term borrowings
|
(734.5 | ) | (373.3 | ) | (679.3 | ) | ||||||
|
Change
in short-term borrowings
|
108.1 | (95.8 | ) | 23.0 | ||||||||
|
Proceeds
from issuances of common stock
|
27.2 | 46.5 | 38.4 | |||||||||
|
Acquisitions
of treasury stock
|
(326.8 | ) | (257.8 | ) | (84.1 | ) | ||||||
|
Common
dividends
|
(37.5 | ) | (40.6 | ) | (41.0 | ) | ||||||
|
Other,
net
|
4.3 | 9.5 | (0.5 | ) | ||||||||
|
Cash
provided by (used in) financing activities
|
(205.5 | ) | (412.4 | ) | 680.2 | |||||||
|
Effect
of exchange rate changes on cash
|
(28.3 | ) | 5.3 | 2.3 | ||||||||
|
Change
in cash and cash equivalents
|
(24.2 | ) | 0.1 | 90.5 | ||||||||
|
Cash
and Cash Equivalents – Beginning of Year
|
151.6 | 151.5 | 61.0 | |||||||||
|
Cash
and Cash Equivalents – End of Year
|
$ | 127.4 | $ | 151.6 | $ | 151.5 | ||||||
The accompanying notes are an integral
part of the consolidated financial statements.
Page 37
of 96
Consolidated
Statements of Shareholders’ Equity and Comprehensive Earnings
Ball
Corporation and Subsidiaries
|
($
in millions, except share amounts)
|
Years
ended December 31,
|
|||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Number of Common Shares
Outstanding (000s)
|
||||||||||||
|
Balance,
beginning of year
|
160,679 | 160,027 | 158,383 | |||||||||
|
Shares
issued for stock options, other stock plans and business acquisitions, net
of shares exchanged (a)
|
238 | 652 | 1,644 | |||||||||
|
Balance,
end of year
|
160,917 | 160,679 | 160,027 | |||||||||
|
Number of Treasury Shares
Outstanding (000s)
|
||||||||||||
|
Balance,
beginning of year
|
(60,454 | ) | (55,890 | ) | (54,183 | ) | ||||||
|
Shares
purchased, net of shares reissued (a)(c)(d)
|
(6,731 | ) | (4,564 | ) | (1,707 | ) | ||||||
|
Balance,
end of year
|
(67,185 | ) | (60,454 | ) | (55,890 | ) | ||||||
|
Common
Stock
|
||||||||||||
|
Balance,
beginning of year
|
$ | 760.3 | $ | 703.4 | $ | 633.6 | ||||||
|
Shares
issued for stock options and other stock plans, net of shares exchanged
(cash and noncash)
|
23.4 | 47.4 | 28.7 | |||||||||
|
Shares
issued for business acquisitions (a)
|
– | – | 33.6 | |||||||||
|
Tax
benefit from option exercises
|
4.3 | 9.5 | 7.5 | |||||||||
|
Balance,
end of year
|
$ | 788.0 | $ | 760.3 | $ | 703.4 | ||||||
|
Retained
Earnings
|
||||||||||||
|
Balance,
beginning of year
|
$ | 1,765.0 | $ | 1,535.3 | $ | 1,246.0 | ||||||
|
Net
earnings
|
319.5 | 281.3 | 329.6 | |||||||||
|
Common
dividends, net of tax benefits
|
(37.4 | ) | (40.2 | ) | (40.3 | ) | ||||||
|
Adoption
of new accounting standard (Note 16)
|
– | (11.4 | ) | – | ||||||||
|
Balance,
end of year
|
$ | 2,047.1 | $ | 1,765.0 | $ | 1,535.3 | ||||||
|
Accumulated Other Comprehensive
Earnings (Loss) (Note 18)
|
||||||||||||
|
Balance,
beginning of year
|
$ | 106.9 | $ | (29.5 | ) | $ | (100.7 | ) | ||||
|
Foreign
currency translation adjustment
|
(48.2 | ) | 90.0 | 57.2 | ||||||||
|
Pension
and other postretirement items, net of tax (b)
|
(147.8 | ) | 57.9 | 55.9 | ||||||||
|
Effective
financial derivatives, net of tax
|
(93.4 | ) | (11.5 | ) | 6.0 | |||||||
|
Net
other comprehensive earnings (loss) adjustments
|
||||||||||||