f10-q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q


x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 2010


Commission file number 1-7349

BALL CORPORATION

 
State of Indiana
35-0160610
 

10 Longs Peak Drive, P.O. Box 5000
Broomfield, CO 80021-2510
303/469-3131


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o

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

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

 
Class
 
Outstanding at October 24, 2010
 
 
Common Stock,
without par value
 
 
88,320,593 shares
 

 
 

 


Ball Corporation and Subsidiaries
QUARTERLY REPORT ON FORM 10-Q
For the period ended September 26, 2010




INDEX


   
Page
Number
     
PART I.
FINANCIAL INFORMATION:
 
     
Item 1.
Financial Statements
 
     
 
Unaudited Condensed Consolidated Statements of Earnings for the Three and Nine Months Ended September 26, 2010, and September 27, 2009
1
     
 
Unaudited Condensed Consolidated Balance Sheets at September 26, 2010, and December 31, 2009
2
     
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 26, 2010, and September 27, 2009
3
     
 
Notes to Unaudited Condensed Consolidated Financial Statements
4
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
27
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
35
     
Item 4.
Controls and Procedures
36
     
PART II.
OTHER INFORMATION
38


 
 

 
 

PART I.
FINANCIAL INFORMATION

Item 1.
FINANCIAL STATEMENTS

BALL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

   
Three Months Ended
   
Nine Months Ended
 
 
($ in millions, except per share amounts)
 
September 26,
2010
   
September 27,
2009
   
September 26,
2010
   
September 27,
2009
 
                         
Net sales
  $ 2,035.0     $ 1,812.3     $ 5,634.8     $ 4,982.8  
                                 
Costs and expenses
                               
Cost of sales (excluding depreciation)
    1,653.4       1,471.6       4,614.7       4,082.0  
Depreciation and amortization (Notes 9 and 11)
    67.1       59.9       192.2       174.3  
Selling, general and administrative
    93.0       83.2       249.9       225.1  
Business consolidation and other activities (Note 6)
    (11.6 )     10.1       (9.8 )     22.3  
Gain on sale of investment (Note 5)
                      (34.8 )
      1,801.9       1,624.8       5,047.0       4,468.9  
                                 
Earnings before interest and taxes
    233.1       187.5       587.8       513.9  
                                 
                                 
Interest expense
    (36.2 )     (28.9 )     (106.7 )     (79.4 )
Debt refinancing costs (Note 12)
                (8.1 )      
Total interest expense
    (36.2 )     (28.9 )     (114.8 )     (79.4 )
                                 
Earnings before taxes
    196.9       158.6       473.0       434.5  
Tax provision
    (60.5 )     (55.1 )     (142.2 )     (131.7 )
Equity in results of affiliates, net of tax (Note 4)
    85.8       5.5       118.5       8.0  
Net earnings from continuing operations
    222.2       109.0       449.3       310.8  
Discontinued operations, net of tax (Note 5)
    5.3       (5.2 )     (73.4 )     (3.9 )
                                 
Net earnings
    227.5       103.8       375.9       306.9  
Less net earnings attributable to noncontrolling interests
          (0.1 )     (0.1 )     (0.4 )
                                 
Net earnings attributable to Ball Corporation
  $ 227.5     $ 103.7     $ 375.8     $ 306.5  
                                 
                                 
Amounts attributable to Ball Corporation:
                               
Continuing operations
  $ 222.2     $ 108.9     $ 449.2     $ 310.4  
Discontinued operations
    5.3       (5.2 )     (73.4 )     (3.9 )
Net earnings
  $ 227.5     $ 103.7     $ 375.8     $ 306.5  
                                 
                                 
Earnings per share (Note 16):
                               
Basic – continuing operations
  $ 2.48     $ 1.16     $ 4.90     $ 3.31  
Basic – discontinued operations
    0.06       (0.06 )     (0.80 )     (0.04 )
Total basic earnings per share
  $ 2.54     $ 1.10     $ 4.10     $ 3.27  
                                 
Diluted – continuing operations
  $ 2.44     $ 1.14     $ 4.84     $ 3.27  
Diluted – discontinued operations
    0.06       (0.05 )     (0.79 )     (0.04 )
Total diluted earnings per share
  $ 2.50     $ 1.09     $ 4.05     $ 3.23  

See accompanying notes to unaudited condensed consolidated financial statements.

Page 1

 
 

 


BALL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

($ in millions)
 
September 26,
2010
   
December 31,
2009
 
Assets
           
Current assets
           
Cash and cash equivalents
  $ 168.7     $ 210.6  
Receivables, net (Note 7)
    1,121.3       534.9  
Inventories, net (Note 8)
    898.9       881.2  
Current derivative contracts (Note 17)
    56.0       100.1  
Deferred taxes and other current assets
    113.2       119.1  
Assets held for sale (Note 5)
          416.3  
Total current assets
    2,358.1       2,262.2  
                 
Property, plant and equipment, net (Note 9)
    1,996.1       1,751.5  
Goodwill (Note 10)
    2,111.5       2,008.3  
Noncurrent derivative contracts (Note 17)
    81.8       80.6  
Intangibles and other assets, net (Note 11)
    431.6       385.7  
Total Assets
  $ 6,979.1     $ 6,488.3  
                 
Liabilities and Shareholders’ Equity
               
Current liabilities
               
Short-term debt and current portion of long-term debt (Notes 7 and 12)
  $ 592.5     $ 312.3  
Accounts payable
    811.4       581.8  
Accrued employee costs
    235.8       212.0  
Current derivative contracts (Note 17)
    49.0       83.2  
Other current liabilities
    246.6       187.8  
Liabilities held for sale (Note 5)
          53.1  
Total current liabilities
    1,935.3       1,430.2  
                 
Long-term debt (Note 12)
    2,054.8       2,283.9  
Employee benefit obligations (Note 13)
    1,001.0       1,013.2  
Noncurrent derivative contracts (Note 17)
    25.9       48.0  
Deferred taxes and other liabilities
    221.7       130.0  
Total liabilities
    5,238.7       4,905.3  
                 
Contingencies (Note 18)
               
                 
Shareholders’ equity (Notes 14 and 15)
               
Common stock (162,496,348 shares issued – 2010; 161,513,274 shares issued – 2009)
    876.5       830.8  
Retained earnings
    2,745.3       2,397.1  
Accumulated other comprehensive earnings (loss)
    (88.2 )     (63.8 )
Treasury stock, at cost (73,748,244 shares – 2010; 67,492,705 shares – 2009)
    (1,927.8 )     (1,582.8 )
Total Ball Corporation shareholders’ equity
    1,605.8       1,581.3  
Noncontrolling interests (Note 4)
    134.6       1.7  
Total shareholders’ equity
    1,740.4       1,583.0  
Total Liabilities and Shareholders’ Equity
  $ 6,979.1     $ 6,488.3  


See accompanying notes to unaudited condensed consolidated financial statements.

Page 2

 
 

 


BALL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Nine Months Ended
 
 
($ in millions)
 
September 26,
2010
   
September 27,
2009
 
             
Cash Flows from Operating Activities
           
Net earnings
  $ 375.9     $ 306.9  
Discontinued operations, net of tax
    73.4       3.9  
Adjustments to reconcile net earnings to net cash used in continuing operating activities:
               
Depreciation and amortization
    192.2       174.3  
Business consolidation and other activities, net of cash payments (Note 6)
    (11.4 )     12.9  
Gain and equity earnings related to acquisitions (Note 4)
    (118.5 )     (8.0 )
Gain on sale of investment (Note 5)
          (34.8 )
Deferred taxes
    (51.2 )     (14.6 )
Other, net
    103.7       15.4  
Changes in working capital components (Note 7)
    (208.2 )     (511.0 )
Cash provided by (used in) continuing operating activities
    355.9       (55.0 )
Cash provided by (used in) discontinued operating activities
    15.5       61.1  
Total cash provided by (used in) operating activities
    371.4       6.1  
                 
Cash Flows from Investing Activities
               
Additions to property, plant and equipment
    (131.1 )     (117.0 )
Acquisition of business (Note 4)
    (60.0 )      
Acquisitions of equity affiliates (Note 4)
    (63.8 )      
Proceeds from sale of business (Note 5)
    280.0        
Proceeds from sale of investment (Note 5)
          37.0  
Cash collateral, net (Note 17)
    0.1       85.7  
Other, net
    (10.2 )     (1.0 )
Cash provided by (used in) continuing investing activities
    15.0       (4.7 )
Cash provided by (used in) discontinued investing activities
    (9.2 )     (22.6 )
Total cash provided by (used in) investing activities
    5.8       (17.9 )
                 
Cash Flows from Financing Activities
               
Long-term borrowings (Note 12)
    1,199.3       1,283.2  
Repayments of long-term borrowings
    (1,270.1 )     (878.2 )
Net change in short-term borrowings (Note 7)
    5.2       (73.3 )
Proceeds from issuances of common stock
    35.0       24.4  
Acquisitions of treasury stock
    (353.0 )     (22.2 )
Common dividends
    (27.2 )     (28.1 )
Other, net
    (5.8 )     (5.6 )
Cash provided by (used in) financing activities
    (416.6 )     300.2  
                 
Effect of exchange rate changes on cash
    (2.5 )     2.3  
                 
Change in cash and cash equivalents
    (41.9 )     290.7  
Cash and cash equivalents - beginning of period
    210.6       127.4  
Cash and cash equivalents - end of period
  $ 168.7     $ 418.1  


See accompanying notes to unaudited condensed consolidated financial statements.

Page 3

 
 

 


Ball Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

1.
Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Ball Corporation and its controlled affiliates, including its consolidated variable interest entities (collectively Ball, the company, we or our) and have been prepared by the company. Certain information and footnote disclosures, including critical and significant accounting policies normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted for this presentation.

Results of operations for the periods shown are not necessarily indicative of results for the year, particularly in view of the seasonality in the packaging segments and the irregularity of contract revenues in the aerospace and technologies segment. These unaudited condensed consolidated financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and the notes thereto included in the company’s Annual Report on Form 10-K filed on February 25, 2010, pursuant to Section 13 of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2009 (annual report).

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

Certain prior-year amounts have been reclassified in order to conform to the current-year presentation. In addition, amounts in prior periods have been retrospectively adjusted to reflect the divestiture of the plastics packaging, Americas, segment as discontinued operations. Further details of the divestiture are available in Note 5.

2.
Accounting Pronouncements

Recently Adopted Accounting Standards

Effective January 1, 2010, Ball adopted accounting guidance that modifies the way entities account for securitizations and special-purpose entities. In connection with the adoption of the guidance, the company determined that its existing accounts receivable securitization program should be recorded on the balance sheet as of January 1, 2010. Further details of this change in accounting are provided in Note 7.

Also effective January 1, 2010, the company adopted additional guidance regarding variable interest entities (VIE). The new guidance requires a company to perform an analysis to determine whether its variable interest or interests give it a controlling financial interest in a VIE and whether it is the primary beneficiary of a VIE. It also amends previous guidance to require ongoing reassessments of whether a company is the primary beneficiary of a VIE. The adoption of the guidance did not change the accounting for VIEs in Ball’s consolidated financial statements. The company has a financial interest in a VIE of which Ball is not deemed to be the primary beneficiary. Additionally, the company has financial interests in other entities that are not considered VIEs under the current accounting guidance.

In January 2010, the FASB issued additional guidance regarding fair value measurements, specifically requiring the disclosure of transfers in and out of Level 1 and 2 assets and liabilities (previously only required for those in Level 3) and more specific detailed disclosure of the activity in Level 3 fair value measurements (on a gross basis rather than a net basis). The new guidance also clarifies existing disclosure requirements regarding the level of disaggregation of asset and liability classes, as well as the valuation techniques and inputs used to measure fair value for Level 2 and Level 3 fair value measurements. The disclosure requirement for transfers in and out of Level 1 and 2 assets and liabilities was effective for Ball on January 1, 2010, and had no impact on the unaudited condensed consolidated financial statements. The reporting of Level 3 activity on a gross basis will be effective for Ball as of January 1, 2011, and is expected to affect only the Level 3 pension plan assets, which do not represent a significant component of the total pension assets.


Page 4

 
 

 


Ball Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

2.
Accounting Pronouncements (continued)

In February 2010, the FASB issued revised guidance on subsequent events. Under revised guidance, SEC filers are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. This guidance was effective upon issuance.
 
New Accounting Guidance
 
In July 2010, accounting guidance was issued to enhance disclosures about a company’s allowance for doubtful accounts receivable and the credit quality of its financing receivables. In general it amends existing disclosure guidance to require a company to provide a greater level of disaggregated information and to disclose credit quality indicators, past due information and modifications of its financing receivables. The disclosures required at the end of a reporting period will be effective for Ball as of December 31, 2010, and will be included in the company’s annual report. The disclosures about activity occurring during a reporting period will be effective for Ball on a prospective basis as of January 1, 2011. The company is evaluating the impact the guidance will have on its consolidated financial statements.

In April 2010, accounting guidance was issued to outline the criteria that should be met for determining when the milestone method of revenue recognition is appropriate in research or development transactions. The new guidance will be effective as of January 1, 2011. Ball is evaluating the impact of the new guidance.

3.
Business Segment Information

Effective June 2010, with the announced sale of the company’s plastics packaging, Americas, business (discussed in Note 5), segment information was retrospectively adjusted. Ball’s operations are organized and reviewed by management along its product lines and presented in four reportable segments.

Metal beverage packaging, Americas and Asia: Consists of the metal beverage packaging, Americas, operations in the U.S., Canada and Brazil (since August 2010, as discussed in Note 4), and the metal beverage packaging, Asia, operations in the People’s Republic of China (PRC). The Americas and Asia segments have been aggregated based on similar economic and qualitative characteristics. The operations in this reporting segment manufacture and sell metal beverage containers, and also manufacture and sell non-beverage plastic containers in the PRC.

Metal beverage packaging, Europe: Consists of operations in several countries in Europe, which manufacture and sell metal beverage containers.

Metal food and household products packaging, Americas: Consists of operations in the U.S., Canada and Argentina, which manufacture and sell metal food, aerosol, paint and general line containers, as well as decorative specialty containers and aluminum slugs.

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

The accounting policies of the segments are the same as those in the unaudited condensed consolidated financial statements. A discussion of the company’s critical and significant accounting policies can be found in Ball’s annual report. We also have investments in companies in the U.S. and the PRC, which are accounted for under the equity method of accounting and, accordingly, those results are not included in segment sales or earnings. Until August 2010, we also accounted for our investment in a Brazilian joint venture using the equity method of accounting. In August we acquired an additional economic interest in the joint venture and its results are now consolidated. Further details of the Brazilian transaction are available in Note 4.


Page 5

 
 

 


Ball Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

3.
Business Segment Information (continued)

Summary of Business by Segment
   
Three Months Ended
   
Nine Months Ended
 
($ in millions)
 
September 26,
2010
   
September 27,
2009
   
September 26,
2010
   
September 27,
2009
 
                         
Net Sales
                       
Metal beverage packaging, Americas & Asia
  $ 1,004.7     $ 706.4     $ 2,815.1     $ 2,075.9  
Metal beverage packaging, Europe
    442.3       478.0       1,289.1       1,312.4  
Metal food & household products packaging, Americas
    420.1       459.5       1,017.5       1,066.5  
Aerospace & technologies
    167.9       168.4       513.1       528.0  
Net sales
  $ 2,035.0     $ 1,812.3     $ 5,634.8     $ 4,982.8  
                                 
Net Earnings
                               
Metal beverage packaging, Americas & Asia
  $ 112.8     $ 102.9     $ 301.3     $ 223.9  
Business consolidation activities (Note 6)
    (0.9 )     (1.0 )     0.4       (9.3 )
Total metal beverage packaging, Americas & Asia
    111.9       101.9       301.7       214.6  
                                 
Metal beverage packaging, Europe
    63.1       68.8       170.6       164.5  
                                 
Metal food & household products packaging, Americas
    49.4       27.8       104.5       112.5  
Business consolidation activities (Note 6)
    13.2             13.2        
Total metal food & household products packaging, Americas
    62.6       27.8       117.7       112.5  
                                 
Aerospace & technologies
    18.4       16.2       50.5       45.6  
                                 
Segment earnings before interest and taxes
    256.0       214.7       640.5       537.2  
                                 
Undistributed corporate expenses, net
    (22.2 )     (18.1 )     (48.9 )     (45.1 )
Gain on sale of investment (Note 5)
                      34.8  
Business consolidation and other activities (Note 6)
    (0.7 )     (9.1 )     (3.8 )     (13.0 )
Total undistributed corporate expenses, net
    (22.9 )     (27.2 )     (52.7 )     (23.3 )
Earnings before interest and taxes
    233.1       187.5       587.8       513.9  
Interest expense
    (36.2 )     (28.9 )     (114.8 )     (79.4 )
Tax provision
    (60.5 )     (55.1 )     (142.2 )     (131.7 )
Equity in results of affiliates, net of tax (Note 4)
    85.8       5.5       118.5       8.0  
Net earnings from continuing operations
    222.2       109.0       449.3       310.8  
Discontinued operations, net of tax (Note 5)
    5.3       (5.2 )     (73.4 )     (3.9 )
Net earnings
    227.5       103.8       375.9       306.9  
Less net earnings attributable to noncontrolling interests
          (0.1 )     (0.1 )     (0.4 )
Net earnings attributable to Ball Corporation
  $ 227.5     $ 103.7     $ 375.8     $ 306.5  




 
Page 6

 
 

 


Ball Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

3.
Business Segment Information (continued)
 
Summary of Business by Segment (continued)
 
($ in millions)
 
September 26,
2010
   
December 31,
2009
 
             
Total Assets
           
Metal beverage packaging, Americas & Asia
  $ 2,902.4     $ 2,111.8  
Metal beverage packaging, Europe
    2,244.0       2,357.9  
Metal food & household products packaging, Americas
    1,263.6       932.9  
Aerospace & technologies
    286.1       268.2  
Segment assets from continuing operations
    6,696.1       5,670.8  
Corporate assets, net of eliminations
    283.0       401.2  
Assets held for sale
          416.3  
Total assets
  $ 6,979.1     $ 6,488.3  

4.
Acquisitions
 
Latapack-Ball Embalagens, Ltda. (Latapack-Ball)
 
In August 2010, the company paid $46.2 million to acquire an additional 10.1 percent economic interest in its Brazilian beverage packaging joint venture, Latapack-Ball, through a transaction with the joint venture partner, Latapack S.A. This transaction increased the company’s overall economic interest in the joint venture to 60.1 percent and expands and strengthens Ball's presence in the growing Brazilian market. As a result of the transaction, Latapack-Ball became a variable interest entity (VIE) under consolidation accounting guidelines with Ball being identified as the primary beneficiary of the VIE and consolidating the joint venture. Latapack-Ball operates metal beverage packaging manufacturing plants in Tres Rios, Jacarei and Salvador, Brazil and has been included in the metal beverage packaging, Americas and Asia, reporting segment. In connection with the acquisition, the company recorded a gain of $81.8 million on its previously held equity investment in Latapack-Ball as a result of required purchase accounting.

The following table summarizes the preliminary fair values of the Latapack-Ball assets acquired, liabilities assumed and non-controlling interest recognized, as well as the related investment in Latapack S.A., as of the acquisition date. The valuation, which is based on market and income approaches, is still in process and is expected to be complete by the end of 2010.

Cash
  $ 69.3  
Current assets
    85.1  
Property, plant and equipment
    265.9  
Goodwill
    96.9  
Intangible asset
    56.0  
Current liabilities
    (53.2 )
Long-term liabilities
    (174.1 )
Net assets acquired
  $ 345.9  
         
Noncontrolling interests
  $ (132.8 )

The customer relationships were identified as a valuable intangible asset by the company and assigned an estimated life of 13.4 years. The intangible asset is being amortized on a straight-line basis.


Page 7

 
 

 


Ball Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

4.
Acquisitions (continued)
 
Neuman Aluminum (Neuman)
 
In July 2010, the company acquired Neuman for approximately $60 million in cash. Neuman had sales of approximately $128 million in 2009 and is the leading North American manufacturer of aluminum slugs used to make extruded aerosol cans, beverage bottles, aluminum collapsible tubes and technical impact extrusions. Neuman operates two plants, one in the United States and one in Canada, that employ approximately 180 people. The acquisition of Neuman is not material to the metal food and household products packaging, Americas, segment, in which its results of operations have been included since the acquisition date.
 
Guangdong Jianlibao Group Co., Ltd (Jianlibao)

In June 2010, the company acquired Jianlibao’s 65 percent interest in a joint venture metal beverage can and end plant in Sanshui, PRC. Ball has owned 35 percent of the joint venture plant since 1992. Ball acquired the 65 percent interest for $86.9 million in cash (net of cash acquired) and assumed debt, and also entered into a long-term supply agreement with Jianlibao and one of its affiliates. The company recorded equity earnings of $24.1 million, which was composed of equity earnings and a gain realized on the fair value of Ball’s previous 35 percent equity investment as a result of required purchase accounting. The purchase accounting was completed during the third quarter of 2010. The acquisition of the remaining interest is not material to the metal beverage packaging, Americas and Asia, segment.
 
Anheuser-Busch InBev n.v./s.a. (AB InBev)
 
In October 2009, the company acquired three of AB InBev’s beverage can manufacturing plants and one of its beverage can end manufacturing plants, all of which are located in the U.S., for $574.7 million in cash. The additional plants, which employ approximately 635 people, enhance Ball’s ability to serve its customers. The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition had occurred as of January 1, 2009.

($ in millions)
 
Three Months Ended
September 27,
2009
   
Nine Months Ended
September 27,
2009
 
             
Net sales
  $ 1,980.3     $ 5,486.8  
Net earnings from continuing operations
    112.0       316.8  
Basic earnings per share from continuing operations
    1.19       3.38  
Diluted earnings per share from continuing operations
    1.17       3.34  

The pro forma results are not necessarily indicative of the actual results that would have occurred had the acquisition been in effect for the three and nine months ended September 27, 2009, nor are they necessarily indicative of the results that may be obtained in the future. The pro forma adjustments primarily include the after-tax effect of increased interest expense related to incremental borrowings used to finance the acquisition. The adjustments also include the after-tax effects of amortization of the customer relationship intangible asset, inventory step-up adjustment and decreased depreciation expense on plant and equipment based on extended useful lives partially offset by increased fair values.


Page 8

 
 

 


Ball Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

5.
Dispositions

Plastics Packaging, Americas
 
In June 2010, the company agreed to sell its plastics packaging, Americas, business to Amcor Limited. In August 2010, Ball completed the sale and received proceeds of $280 million, including $15 million of contingent consideration recognized at closing, subject to normal closing adjustments of approximately $20 million. The sale of Ball’s plastics packaging business included five U.S. plants that manufacture polyethylene terephthalate (PET) bottles and preforms and polypropylene bottles, as well as associated customer contracts and other related assets.

Ball’s plastics business employed approximately 1,000 people and had sales of $635 million in 2009. The manufacturing plants were located in Ames, Iowa; Batavia, Illinois; Bellevue, Ohio; Chino, California; and Delran, New Jersey. The research and development operations were based in Broomfield and Westminster, Colorado.
 
The following tables summarize the operating results for, and the assets and liabilities of, the discontinued operations:
 
   
Three Months Ended
   
Nine Months Ended
 
($ in millions)
 
September 26,
2010
   
September 27,
2009
   
September 26,
2010
   
September 27,
2009
 
                         
Net sales
  $ 55.3     $ 156.8     $ 318.5     $ 498.1  
                                 
Earnings from operations
  $ 1.9     $ 4.6     $ 3.3     $ 17.7  
Gain on sale of business
    9.9             9.9        
Loss on asset impairment
                (107.1 )      
Loss on business consolidation activities (a)
    (2.8 )     (12.6 )     (10.1 )     (24.5 )
Tax benefit (provision)
    (3.7 )     2.8       30.6       2.9  
Discontinued operations, net of tax
  $ 5.3     $ (5.2 )   $ (73.4 )   $ (3.9 )

(a)  
The first nine months of 2010 include net charges of $10.1 million to reflect individually insignificant costs and gains related to previously announced plastics plant closures. The second and third quarters of 2009 include charges totaling $24.5 million related primarily to the closure of plastics packaging manufacturing plants in New York, Wisconsin and Ontario.

($ in millions)
 
December 31,
2009
 
       
Assets:
     
Receivables
  $ 13.3  
Inventories
    62.9  
Property, plant and equipment
    197.5  
Goodwill
    106.5  
Other assets
    36.1  
Total assets held for sale
  $ 416.3  
         
Liabilities:
       
Accounts payable
  $ 41.4  
Other liabilities
    11.7  
Total liabilities held for sale
  $ 53.1  

Investment in DigitalGlobe Inc. (DigitalGlobe)
 
In May 2009, the company sold 75 percent of its investment in DigitalGlobe, a provider of commercial high resolution earth imagery products and services, in conjunction with DigitalGlobe’s initial public offering. The sale generated proceeds of $37.0 million and a non-operating pretax gain of $34.8 million ($30.7 million after tax). The remaining investment in DigitalGlobe, classified as an other long-term asset, has been accounted for as a marketable equity investment and, as such, is marked to market, with the unrealized gain being held in accumulated other comprehensive earnings (loss). (See Note 14.)


Page 9
 
 

 


Ball Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

6.
Business Consolidation Activities

2010
 
Metal Beverage Packaging, Americas and Asia

Net earnings of $0.4 million ($0.3 million after tax) were recorded in the first nine months of 2010 to reflect individually insignificant costs and gains related to previously announced plant closures.
 
Metal Food and Household Products Packaging, Americas

In September 2010, Ball announced the closure of its metal food container manufacturing plant in Richmond, British Columbia. The plant, which produces steel cans for the Alaskan and Canadian salmon industry, will cease production in the first quarter of 2011, and its production capacity will be consolidated into other Ball facilities. In connection with the closure, the company recorded a charge of $4.6 million ($2.8 million after tax) primarily for severance and other employee benefits.
 
During the third quarter of 2010, the company identified an accrual of a pension liability related to a Canadian plant closure that occurred in 2006. The amount of the accrual was $17.8 million ($14.5 million after tax) and was the result of recognizing the final settlement of the pension plan prior to the actual settlement of the pension obligation as defined in the pension accounting guidance. A third quarter 2010 out-of-period adjustment eliminated the excess pension liability balance related to the final settlement. The accrual for the pension settlement liability, as determined at that time, will be charged to earnings from accumulated other comprehensive earnings (loss) upon final settlement of the related pension obligation when the criteria in the accounting guidance are deemed to have been met and all regulatory clearances have been given. Management has assessed the impact of this adjustment and does not believe these amounts were quantitatively or qualitatively material, individually or in the aggregate, to any previously issued financial statements, including the results of operations for 2006, or to the third quarter, first nine months or expected full year of 2010.

Corporate and Other Costs

In the third quarter, $0.7 million ($0.4 million after tax) of transaction costs were recorded in connection with the acquisition of Neuman (discussed in Note 4). In the second quarter, charges of $3.1 million ($1.9 million after tax) were recorded primarily to establish a reserve associated with an environmental matter at a previously owned facility.
 
2009

Metal Beverage Packaging, Americas and Asia

During the third quarter, a charge of $1.0 million ($0.6 million after tax) was recorded, primarily for winding down operations at the Puerto Rico and Kansas City plants. In the second quarter of 2009, a charge of $3.3 million ($2.0 million after tax) was taken for severance and other employee benefits related to a reduction of personnel in the plants and headquarters of the Americas portion of this segment. In the first quarter of 2009, a charge of $5.0 million ($3.1 million after tax) was taken related to accelerated depreciation for operations that ceased in the quarter at the company’s Kansas City plant.
 
Corporate and Other Costs

Pretax charges of $9.1 million ($5.5 million after tax) and $2.9 million ($1.8 million after tax) were recorded in the third quarter and second quarter of 2009, respectively, for transaction costs required to be expensed for the October 2009, acquisition of four plants from AB InBev (see Note 4). In addition, a $1.0 million pretax charge ($0.6 million after tax) was taken in the second quarter related to previously closed and sold facilities.


Page 10

 
 

 


Ball Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

6.
Business Consolidation Activities (continued)

Following is a summary of activity by segment related to business consolidation and other activities for the nine months ended September 26, 2010:

($ in millions)
 
Metal Beverage Packaging, Americas & Asia
   
Metal Food & Household Products Packaging, Americas
   
Corporate and Other Costs
   
Total
 
                         
Balance at December 31, 2009
  $ 10.4     $ 7.3     $ 10.2     $ 27.9  
Charges (gains) in continuing operations
    (0.4 )     (13.2 )     3.8       (9.8 )
Cash payments and other activity
    (2.4 )     14.0       (0.7 )     10.9  
Balance at September 26, 2010
  $ 7.6     $ 8.1     $ 13.3     $ 29.0  

The carrying value of fixed assets remaining for sale in connection with previous plant closures was approximately $6 million at September 26, 2010.

7.
Receivables

($ in millions)
 
September 26,
2010
   
December 31,
2009
 
             
Trade accounts receivable, net
  $ 1,038.6     $ 439.9  
Other receivables
    82.7       95.0  
    $ 1,121.3     $ 534.9  

Trade accounts receivable are shown net of an allowance for doubtful accounts of $12.9 million at September 26, 2010, and $13.6 million at December 31, 2009. Other receivables primarily include property and sales tax receivables and certain vendor rebate receivables.

A receivables sales agreement provides for the ongoing, revolving sale of a designated pool of trade accounts receivable of Ball’s North American packaging operations up to $250 million. At December 31, 2009, the amount of accounts receivable sold under the securitization program was $250 million and, under the previous accounting guidance, this amount was presented in the consolidated balance sheet as a reduction of accounts receivable as a result of the true sale of receivables. However, upon the company’s prospective adoption of new accounting guidance effective January 1, 2010, the amount of accounts receivable sold is not reflected as a reduction of accounts receivable on the balance sheet at September 26, 2010, resulting in a $250 million increase in accounts receivable as compared to December 31, 2009, as well as a corresponding working capital outflow from operating activities in the statement of cash flows. There were no accounts receivable sold under the securitization program at September 26, 2010.

In October 2010, the company renewed its receivables sales agreement for a period of one year. The size of the new program will vary from up to $125 million for settlement dates in January through April and up to $175 million for settlement dates in the remaining months.


 
Page 11

 
 

 


Ball Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

8.
Inventories

($ in millions)
 
September 26,
2010
   
December 31,
2009
 
             
Raw materials and supplies
  $ 351.4     $ 426.2  
Work in process and finished goods
    547.5       455.0  
    $ 898.9     $ 881.2  

In the fourth quarter of 2009, the company identified that ending inventory was not properly valued in its metal beverage packaging, Americas and Asia, segment. An adjustment was required in the normal inventory review process to properly value ending inventory, and an evaluation of the inventory valuation process was performed. This evaluation indicated that under the historic method used to value inventory in this segment, including determining appropriate deferred variances, the quarterly estimates of the deferred pricing variances did not adequately consider the impact of extreme price volatility and inventory turnover in ending inventories. Ball has modified its controls for capitalization of inventory variances. The modifications include a more timely review of variance calculations and a detailed metal price analysis. Additionally, the calculation methodology was modified to more accurately take into account the fluctuations in the London Metal Exchange (LME) pricing and inventory balances.

As a result of the evaluation, a cumulative $15.9 million pretax out-of-period adjustment was recorded in cost of sales in the fourth quarter of 2009, which should have impacted the prior three quarters of 2009 and the fourth quarter of 2008. Had the inventory been valued under the revised method, pretax earnings in the third quarter of 2009 would have been higher by $7.3 million ($4.4 million after tax or $0.04 per diluted share) and year-to-date pretax earnings would have been lower by $8.8 million ($5.4 million after tax or $0.06 per diluted share). Management has assessed the impact of these adjustments and does not believe these amounts were quantitatively or qualitatively material, individually or in the aggregate, to any previously issued financial statements or to the full-year results of operations for 2009.

9.
Property, Plant and Equipment

($ in millions)
 
September 26,
2010
   
December 31,
2009
 
             
Land
  $ 92.0     $ 86.3  
Buildings
    864.7       788.2  
Machinery and equipment
    2,937.7       2,675.1  
Construction in progress
    163.6       132.7  
      4,058.0       3,682.3  
Accumulated depreciation
    (2,061.9 )     (1,930.8 )
    $ 1,996.1     $ 1,751.5  

Property, plant and equipment are stated at historical cost. Depreciation expense amounted to $63.4 million and $183.1 million for the three and nine months ended September 26, 2010, respectively, and $56.3 million and $163.8 million for the comparable periods in 2009, respectively.


Page 12

 
 

 


Ball Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

10.
Goodwill

($ in millions)
 
Metal Beverage Packaging, Americas & Asia
   
Metal Beverage Packaging, Europe
   
Metal Food & Household Products Packaging, Americas
   
Total
 
                         
Balance at December 31, 2009
  $ 588.8     $ 1,065.9     $ 353.6     $ 2,008.3  
Business acquisition (Note 4)
                23.7       23.7  
Acquisition of equity affiliates (Note 4)
    147.4                   147.4  
Effects of foreign currency exchange rates
          (67.9 )           (67.9 )
                                 
Balance at September 26, 2010
  $ 736.2     $ 998.0     $ 377.3     $ 2,111.5  

Ball’s policy is to perform its annual goodwill impairment testing in the fourth quarter of each year, as well as on an interim basis when circumstances dictate. As a result of the sale of the plastics packaging, Americas, segment, Ball determined that an update of the goodwill impairment testing was necessary for that segment. Based on the contractual sales price and the net book value of the segment it was determined that an impairment charge of $107.1 million ($75.2 million after tax) was necessary during the second quarter of 2010. The impairment charge included impairment of both plastics packaging goodwill ($106.5 million) and long-lived assets ($0.6 million). The impairment charge was recorded during the second quarter and is included in the discontinued operations line item of the statement of earnings for the nine months ended September 26, 2010. See Note 5 for further details regarding the disposition of the plastics packaging business.

11.
Intangibles and Other Assets

($ in millions)
 
September 26,
2010
   
December 31,
2009
 
             
Investments in affiliates
  $ 12.7     $ 86.2  
Intangible assets (net of accumulated amortization of $110.1 at September 26, 2010, and $105.8 at December 31, 2009)
    158.7       94.6  
Company and trust-owned life insurance
    122.8       111.0  
Long-term deferred tax assets
    64.9       29.0  
Other
    72.5       64.9  
    $ 431.6     $ 385.7  

Total amortization expense of intangible assets amounted to $3.7 million and $9.1 million for the three and nine months ended September 26, 2010, respectively, and $3.6 million and $10.5 million for the comparable periods in 2009, respectively.


Page 13

 
 

 


Ball Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

12.
Debt

Long-term debt consisted of the following:
 
   
September 26, 2010
   
December 31, 2009
 
(in millions)
 
In Local Currency
   
In U.S. $
   
In Local Currency
   
In U.S. $
 
                         
Notes Payable
                       
6.625% Senior Notes, due March 2018 (excluding discount of $0.6 in 2010 and $0.6 in 2009)
  $ 450.0     $ 450.0     $ 450.0     $ 450.0  
7.125% Senior Notes, due September 2016 (excluding discount of $6.4 in 2010 and $7.2 in 2009)
  $ 375.0       375.0     $ 375.0       375.0  
7.375% Senior Notes, due September 2019 (excluding discount of $7.5 in 2010 and $8.1 in 2009)
  $ 325.0       325.0     $ 325.0       325.0  
6.75% Senior Notes, due September 2020
  $ 500.0       500.0              
6.875% Senior Notes, due December 2012 (excluding premium of $1.3 in 2009)
  $           $ 509.0       509.0  
Senior Credit Facilities, due October 2011 (at variable rates)
                               
Term A Loan, British sterling denominated
  ₤   55.3       87.0     ₤   63.8       101.5  
Term B Loan, euro denominated
  157.5       211.4     227.5       326.1  
Term C Loan, Canadian dollar denominated
  C$ 110.8       107.6     C$ 114.0       108.6  
Term D Loan, U.S. dollar denominated
  $ 300.0       300.0     $ 300.0       300.0  
U.S. dollar multi-currency revolver borrowings
  $           $ 2.3       2.3  
British sterling multi-currency revolver borrowings
  ₤   29.2       46.0     ₤   20.9       33.3  
Latapack-Ball Note Payable
  $ 135.0       135.0                  
Industrial Development Revenue Bonds
                               
Floating rates due through 2015
  $ 9.4       9.4     $ 9.4       9.4  
Other (including discounts and premiums)
 
Various
      34.0    
Various
      (7.5 )
              2,580.4               2,532.7  
Less: Current portion of long-term debt
            (525.6 )             (248.8 )
            $ 2,054.8             $ 2,283.9  

In March 2010, Ball issued $500 million of new 6.75 percent senior notes due in September 2020. On that same date, the company issued a notice of redemption to call $509 million of 6.875 percent senior notes due December 2012 at a redemption price of 101.146 percent of the outstanding principal amount plus accrued interest. The redemption of these bonds occurred on April 21, 2010, and resulted in a charge of $8.1 million ($4.9 million after tax) for the call premium and the write off of unamortized financing costs and unamortized premiums. The charge is included as a component of interest expense in the consolidated financial statements.

In connection with the acquisition of an additional economic interest in Latapack-Ball (see Note 4), the company consolidated approximately $149 million of long-term debt, including a $135 million bank loan. The $135 million facility bears interest at variable rates and is due in October 2017. The Latapack-Ball debt facilities contain various covenants and restrictions but are non-recourse to Ball Corporation and its wholly owned subsidiaries.

As permitted, the company’s long-term debt is not carried in the company’s consolidated financial statements at fair value. The fair value of the long-term debt was estimated to be $2.70 billion at September 26, 2010, which approximated its carrying value of $2.58 billion. The fair value was $2.54 billion at December 31, 2009, which approximated its then carrying value of $2.53 billion. The fair value reflects the market rates at each period end for debt with credit ratings similar to the company’s ratings. Rates currently available to the company for loans with similar terms and maturities are used to estimate the fair value of long-term debt based on discounted cash flows.


Page 14

 
 

 


Ball Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

12.
Debt (continued)

At September 26, 2010, taking into account outstanding letters of credit, the company had approximately $659 million available for borrowing under the multi-currency revolving credit facilities that provide for up to $735 million in U.S. dollar equivalent borrowings. The company’s PRC operations also had approximately $20 million available under a committed credit facility of approximately $50 million, and Latapack-Ball had approximately $54 million available under a facility of approximately $200 million. In addition to the long-term committed credit facilities, the company had short-term uncommitted credit facilities of up to $325 million at September 26, 2010, of which $66.9 million was outstanding and due on demand, as well as approximately $222 million of available borrowings under its accounts receivable securitization program.

The notes payable are guaranteed on a full, unconditional and joint and several basis by certain of the company’s wholly owned domestic subsidiaries. The notes payable also contain certain covenants and restrictions including, among other things, limits on the incurrence of additional indebtedness and limits on the amount of restricted payments, such as dividends and share repurchases.

The company was in compliance with all loan agreements at September 26, 2010, and all prior periods presented and has met all debt payment obligations. The U.S. note agreements, bank credit agreements and industrial development revenue bond agreements contain certain restrictions relating to dividend payments, share repurchases, investments, financial ratios, guarantees and the incurrence of additional indebtedness.

13.
Employee Benefit Obligations

 
($ in millions)
 
September 26,
2010
   
December 31,
2009
 
             
Total defined benefit pension liability
  $ 592.0     $ 603.7  
Less current portion
    (23.0 )     (26.1 )
Long-term defined benefit pension liability
    569.0       577.6  
Retiree medical and other postemployment benefits
    187.5       193.0  
Deferred compensation plans
    213.8       199.9  
Other
    30.7       42.7  
    $ 1,001.0     $ 1,013.2  

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

   
Three Months Ended
 
   
September 26, 2010
   
September 27, 2009
 
($ in millions)
 
U.S.
   
Foreign
   
Total
   
U.S.
   
Foreign
   
Total
 
                                     
Service cost
  $ 10.6     $ 1.7     $ 12.3     $ 10.5     $ 1.6     $ 12.1  
Interest cost
    14.1       7.2       21.3       13.4       8.1       21.5  
Expected return on plan assets
    (16.8 )     (3.8 )     (20.6 )     (16.0 )     (3.8 )     (19.8 )
Amortization of prior service cost
    0.3             0.3       0.2       (0.1 )     0.1  
Recognized net actuarial loss
    5.4       1.3       6.7       3.1       1.0       4.1  
Curtailment loss (gain)
    (0.1 )     1.8       1.7                    
Subtotal
    13.5       8.2       21.7       11.2       6.8       18.0  
Multi-employer plans
    0.6             0.6       0.4             0.4  
Net periodic benefit cost
  $ 14.1     $ 8.2     $ 22.3     $ 11.6     $ 6.8     $ 18.4  



Page 15

 
 

 


Ball Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

13.
Employee Benefit Obligations (continued)

   
Nine Months Ended
 
   
September 26, 2010
   
September 27, 2009
 
($ in millions)
 
U.S.
   
Foreign
   
Total
   
U.S.
   
Foreign
   
Total
 
                                     
Service cost
  $ 32.8     $ 5.3     $ 38.1     $ 31.5     $ 4.3     $ 35.8  
Interest cost
    42.4       21.9       64.3       40.2       22.6       62.8  
Expected return on plan assets
    (50.8 )     (11.2 )     (62.0 )     (47.9 )     (10.4 )     (58.3 )
Amortization of prior service cost
    1.0       (0.2 )     0.8       0.6       (0.3 )     0.3  
Recognized net actuarial loss
    14.0       3.7       17.7       9.3       2.7       12.0  
Curtailment loss (gain)
    (0.1 )     1.8       1.7                    
Subtotal
    39.3       21.3       60.6       33.7       18.9       52.6  
Multi-employer plans
    1.4             1.4       1.2             1.2  
Net periodic benefit cost
  $ 40.7     $ 21.3     $ 62.0     $ 34.9     $ 18.9     $ 53.8  

Contributions to the company’s defined global benefit pension plans, not including the unfunded German plans, were $51.9 million in the first nine months of 2010 ($54.9 million in the same period of 2009). The total contributions to these funded plans are expected to be in the range of $55 million to $60 million in 2010. This estimate may change based on changes in the Pension Protection Act and actual plan asset performance, among other factors. Payments to participants in the unfunded German plans were $17.1 million (€13.0 million) in the first nine months of 2010 and are expected to be approximately $23 million (approximately €18 million) for the full year.






Page 16

 
 

 


Ball Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

14.
Shareholders’ Equity and Comprehensive Earnings
      
Accumulated Other Comprehensive Earnings (Loss)

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

($ in millions)
 
Foreign Currency Translation
   
Pension and Other Postretirement Items (Net of Tax)
   
Effective Derivatives (Net of Tax)
   
Gain on Available for Sale Securities (Net of Tax)
   
Accumulated Other Comprehensive Earnings (Loss)
 
                               
December 31, 2008
  $ 173.6     $ (251.8 )   $ (104.3 )   $     $ (182.5 )
Change
    28.5       7.4       46.1 (a)     5.8       87.8  
September 27, 2009
  $ 202.1     $ (244.4 )   $ (58.2 )   $ 5.8     $ (94.7 )
                                         
December 31, 2009
  $ 180.2     $ (274.4 )   $ 23.4     $ 7.0     $ (63.8 )
Change
    (48.6 )     (7.2 )     28.4 (a)     3.0       (24.4 )
September 26, 2010
  $ 131.6     $ (281.6 )   $ 51.8     $ 10.0     $ (88.2 )

(a)
The change in accumulated other comprehensive earnings (loss) for effective derivatives was as follows:
 
     
Three Months Ended
   
Nine Months Ended
   
 
($ in millions)
 
September 26,
2010
   
September 27
2009
   
September 26,
2010
   
September 27
2009
   
                             
 
Amounts reclassified into earnings (Note 17):
                         
 
Commodity contracts
  $ (2.0 )   $ 35.2     $ 10.5     $ 77.7    
 
Interest rate and foreign currency contracts
    2.3       1.9       5.6       5.4    
 
Change in fair value of cash flow hedges:
                                 
 
Commodity contracts
    32.8       7.9       33.0       (4.3 )  
 
Interest rate and foreign currency contracts
    2.9       0.9       (4.1 )     (5.8 )  
 
Foreign currency and tax impacts
    (8.9 )     (17.1 )     (16.6 )     (26.9 )  
      $ 27.1     $ 28.8     $ 28.4     $ 46.1    

Comprehensive Earnings
 
   
Three Months Ended
   
Nine Months Ended
 
($ in millions)
 
September 26, 2010
   
September 27, 2009
   
September 26, 2010
   
September 27, 2009
 
                         
Net earnings
  $ 227.5     $ 103.8     $ 375.9     $ 306.9  
Foreign currency translation adjustment
    89.8       47.4       (48.6 )     28.5  
Pension and other postretirement items, net of tax
    (14.0 )     2.6       (7.2 )     7.4  
Effect of derivative instruments, net of tax
    27.1       28.8       28.4       46.1  
Gain on available for sale securities, net of tax
    1.6       (2.2 )     3.0       5.8  
Comprehensive earnings
  $ 332.0     $ 180.4     $ 351.5     $ 394.7  



Page 17

 
 

 


Ball Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

 
14.
Shareholders’ Equity and Comprehensive Earnings (continued)
 
Stock Repurchases

In February 2010, in a privately negotiated transaction, Ball entered into an accelerated share repurchase agreement to buy $125.0 million of its common shares using cash on hand and available borrowings. The company advanced the $125.0 million on February 22, 2010, and received 2,161,799 shares, which represented 90 percent of the total shares as calculated using the previous day’s closing price. The agreement was settled in May 2010, and the company received an additional 199,103 shares.

In addition to the $125.0 million of share repurchases made under the accelerated share repurchase agreement, the company repurchased a total of $228.0 million of Ball common stock during the nine months ended September 26, 2010. From September 27 through November 2, 2010, Ball repurchased an additional $140.6 million of common stock, including the private transaction described in Note 20.
 
15.
 Stock-Based Compensation Programs
 
The company has shareholder-approved stock option plans under which options to purchase shares of Ball common stock have been granted to officers and employees at the market value of the stock at the date of grant. Payment must be made at the time of exercise in cash or with shares of stock owned by the option holder, which are valued at fair market value on the date exercised. In general, options vest in four equal one-year installments commencing one year from the date of grant and terminating 10 years from the date of grant. A summary of stock option activity for the nine months ended September 26, 2010, follows:

   
Outstanding Options
   
Nonvested Options
 
   
Number of Shares
   
Weighted Average
Exercise Price
   
Number of Shares
   
Weighted Average
Grant Date Fair Value
 
                         
Beginning of year
    5,814,188     $ 37.92       2,470,267     $ 11.28  
Granted
    968,350       50.45       968,350       13.68  
Vested
                    (1,309,523 )     11.52  
Exercised
    (884,544 )     25.47                  
Canceled/forfeited
    (140,702 )     46.01       (140,252 )     11.78  
End of period
    5,757,292       41.75       1,988,842       12.26  
                                 
Vested and exercisable, end of period
    3,768,450                          
Reserved for future grants
    4,405,142                          

The options granted in January 2010 included 506,700 stock-settled stock appreciation rights, which have the same terms as the stock options. The weighted average remaining contractual term for all options outstanding at September 26, 2010, was 6.4 years and the aggregate intrinsic value (difference in exercise price and closing price at that date) was $106.3 million. The weighted average remaining contractual term for options vested and exercisable at September 26, 2010, was 5.3 years and the aggregate intrinsic value was $79.3 million.

The company received $8.0 million from options exercised during the three months ended September 26, 2010. The intrinsic value associated with these exercises was $10.5 million, and the associated tax benefit of $3.3 million was reported as other financing activities in the unaudited condensed consolidated statement of cash flows. During the nine months ended September 26, 2010, the company received $22.5 million from options exercised. The intrinsic value associated with exercises for that period was $25.8 million, and the associated tax benefit of $8.3 million was reported as other financing activities in the unaudited condensed consolidated statement of cash flows.


Page 18

 
 

 


Ball Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

15.
 Stock-Based Compensation Programs  (continued)
 
Based on the Black-Scholes option pricing model, options granted in January 2010 have an estimated weighted average fair value at the date of grant of $13.68 per share. The actual value an employee may realize will depend on the excess of the stock price over the exercise price on the date the option is exercised. Consequently, there is no assurance that the value realized by an employee will be at or near the value estimated. The fair values were estimated using the following weighted average assumptions:

Expected dividend yield
  0.79%
 
Expected stock price volatility
  28.99%
 
Risk-free interest rate
  2.47%
 
Expected life of options
  4.9 years
 

In addition to stock options, the company may issue to officers and certain employees restricted shares and restricted stock units, which vest over various periods. Other than the performance-contingent grants discussed below, such restricted shares and restricted stock units generally vest in equal installments over five years. Compensation cost is recorded based upon the fair value of the shares at the grant date.

In January 2010 and 2009, the company’s board of directors granted 181,150 and 193,450 performance-contingent restricted stock units, respectively, to key employees, which will cliff-vest if the company’s return on average invested capital during a 36-month performance period is equal to or exceeds the company’s cost of capital. If the performance goals are not met, the shares will be forfeited. Current assumptions are that the performance targets will be met and, accordingly, grants under the plan are being accounted for as equity awards and compensation expense is recorded based upon the closing market price of the shares at the grant date. On a quarterly basis, the company reassesses the probability of the goals being met and adjusts compensation expense as appropriate. No such adjustment was considered necessary at the end of the first, second or third quarter of 2010 for either grant.

For the three and nine months ended September 26, 2010, the company recognized in selling, general and administrative expenses pretax expense of $5.5 million ($3.4 million after tax) and $19.3 million ($11.8 million after tax) for share-based compensation arrangements, respectively. For the three and nine months ended September 27, 2009, the company recognized pretax expense of $6.6 million ($4.0 million after tax) and $19.5 million ($11.8 million after tax) for such arrangements, respectively. At September 26, 2010, there was $41.3 million of total unrecognized compensation costs related to nonvested share-based compensation arrangements. This cost is expected to be recognized in earnings over a weighted average period of 2.3 years.

16.
 Earnings and Dividends Per Share

   
Three Months Ended
   
Nine Months Ended
 
($ in millions, except per share amounts; shares in thousands)
 
September 26,
2010
   
September 27,
2009
   
September 26,
2010
   
September 27,
2009
 
                         
Net earnings attributable to Ball Corporation
  $ 227.5     $ 103.7     $ 375.8     $ 306.5  
                                 
Basic weighted average common shares
    89,632       93,976       91,573       93,763  
Effect of dilutive securities
    1,447       1,375       1,324       1,187  
Weighted average shares applicable to diluted earnings per share
    91,079       95,351       92,897       94,950  
                                 
Basic earnings per share
  $ 2.54     $ 1.10     $ 4.10     $ 3.27  
Diluted earnings per share
  $ 2.50     $ 1.09     $ 4.05     $ 3.23  


Page 19

 
 

 


Ball Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

16.
 Earnings and Dividends Per Share (continued)
 
Certain outstanding options were excluded from the diluted earnings per share calculation because they were anti-dilutive (i.e., the sum of the proceeds, including the unrecognized compensation, exceeded the average closing stock price for the period). The options excluded totaled 987,630 and 939,950 in the three and nine months ended September 26, 2010, respectively; and 2,877,689 and 2,950,834 in the three and nine months ended September 27, 2009, respectively.

The company declared and paid dividends of $0.10 per share in the third quarters of both 2010 and 2009 and $0.30 per share in the first nine months of each year.

17.
 Financial Instruments and Risk Management
 
In the ordinary course of business, Ball employs established risk management policies and procedures, which seek to reduce the company’s exposure to fluctuations in commodity prices, interest rates, foreign currencies and prices of Ball 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 Ball cannot be certain that all risks will be discerned or that its risk management policies and procedures will always be effective.

Commodity Price Risk

Ball’s metal beverage container operations manage commodity price risk in connection with market price fluctuations of aluminum ingot through two different methods. First, the company enters 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 the majority of Ball’s North American metal beverage packaging net sales. Second, Ball uses certain derivative instruments such as option and forward contracts as cash flow 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 metal food and household products packaging, Americas, sales contracts either include provisions permitting Ball to pass through some or all steel cost changes incurred, or they incorporate annually negotiated steel costs.
 
The company had aluminum contracts limiting its aluminum exposure with notional amounts of approximately $1.0 billion and $1.1 billion at September 26, 2010, and December 31, 2009, respectively. The aluminum contracts include derivative instruments that are undesignated and receive mark-to-market accounting treatment, as well as cash flow hedges that offset sales contracts of various terms and lengths. Cash flow hedges relate to forecasted purchase and sales transactions that expire within the next four years. Included in shareholders’ equity at September 26, 2010, within accumulated other comprehensive earnings (loss) is a net after-tax gain of $54.2 million associated with these contracts. A net gain of $28.5 million is expected to be recognized in the consolidated statement of earnings during the next 12 months, the majority of which will be offset by pricing changes in sales and purchase contracts, thus resulting in little or no earnings impact to Ball.

Interest Rate Risk

Ball’s objective in managing 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, Ball uses 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 September 26, 2010, included pay-fixed interest rate swaps. Pay-fixed swaps effectively convert variable rate obligations to fixed rate instruments.


Page 20

 
 

 


Ball Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

17.
 Financial Instruments and Risk Management (continued)
 
At September 26, 2010, the company had outstanding interest rate swap agreements with notional amounts of $411 million paying fixed rates expiring within the next two years. An approximate $1.9 million net after-tax loss associated with these contracts is included in accumulated other comprehensive earnings at September 26, 2010, the majority of which is expected to be recognized in the consolidated statement of earnings during the next 12 months. Approximately $0.9 million of net gain related to the termination or dedesignation of hedges is included in accumulated other comprehensive earnings at September 26, 2010. The amount recognized in earnings in the third quarter and first nine months of both 2010 and 2009 related to the dedesignation of hedges was insignificant.

The fair value of derivatives generally reflects the estimated amounts that we would pay or receive upon termination of the contracts at the period end, taking into account any unrealized gains and losses on open contracts. The unrealized pretax loss on interest rate derivative contracts was $4.7 million at September 26, 2010, and $7.3 million at December 31, 2009.

Inflation Risk

Ball also uses inflation option contracts in Europe to limit the impacts from spikes in inflation against certain multi-year contracts. At September 26, 2010, the company had inflation options in Europe with notional amounts of $154 million. These options are undesignated for hedge accounting purposes and receive mark-to-market accounting. The fair value at September 26, 2010, was $0.6 million and the option contracts expire at various times within the next three years.

Foreign Currency Exchange Rate Risk

Ball’s 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, at times Ball manages foreign earnings translation volatility through the use of foreign currency option strategies, and the change in the fair value of those options is recorded in the company’s net earnings. Ball’s 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. Ball faces 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. At September 26, 2010, the company had outstanding foreign exchange forward contracts and option collar contracts with notional amounts totaling $508 million. Approximately $1.4 million of net loss related to these contracts is included in accumulated other comprehensive earnings at September 26, 2010, which is expected to be recognized in the consolidated statement of earnings during the next 12 months. The contracts outstanding at September 26, 2010, expire within the next three years.
 
Collateral Calls
 
The company’s agreements with its financial counterparties require Ball to post collateral in certain circumstances when the negative mark-to-market value of the contracts exceeds specified levels. Additionally, Ball has collateral posting arrangements with certain customers on these derivative contracts. The cash flows of the margin calls are shown within the investing section of the company’s unaudited condensed consolidated statements of cash flows. As of September 26, 2010, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position was $44.3 million and no collateral was required to be posted. As of December 31, 2009, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position was $98.8 million collateralized by $14.2 million, which was offset by cash collateral receipts from customers of $14.2 million. If the company’s public credit rating was downgraded, there would be a net increase of $10.8 million to our net cash collateral postings as of September 26, 2010.


 
Page 21

 
 

 


Ball Corporation
Notes to Unaudited Condensed Consolidated Financial Statements

17.
 Financial Instruments and Risk Management (continued)
 
Fair Value Measurements

The company has classified all applicable financial derivative assets and liabilities as Level 2 within the fair value hierarchy as of September 26, 2010, and presented those values in the table below. The company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

Fair Value of Derivative Instruments as of September 26, 2010

</
($ in millions)
 
Derivatives Designated As Hedging Instruments
   
Derivatives Not Designated As Hedging Instruments
   
Total
 
                   
Assets:
                 
Commodity contracts
  $ 22.2     $ 32.1     $ 54.3