BALL

Ball Corporation 10-K Summary: Fiscal Year Ended December 31, 2006

Business Context and Reporting Period

This report covers Ball Corporation's operations for the fiscal year ended December 31, 2006. Ball is a global manufacturer of metal and plastic packaging for beverages, foods, and household products, as well as a supplier of aerospace and technologies to government and commercial customers. The company operates through five reportable segments: Metal Beverage Packaging (Americas and Europe/Asia), Metal Food & Household Products Packaging (Americas), Plastic Packaging (Americas), and Aerospace and Technologies.

Key strategic developments in 2006 included the acquisitions of U.S. Can Corporation (March 27) and certain plastic container assets from Alcan Packaging (March 28). Additionally, a fire at the Hassloch, Germany plant in April 2006 resulted in significant property damage but was largely covered by insurance.

Key Financial Metrics

Note: Financial data for 2005 and 2004 have been retrospectively adjusted for a change in inventory accounting from LIFO to FIFO.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 15.1% to $6.62 billion, driven primarily by the U.S. Can and Alcan acquisitions, higher volumes in the Europe/Asia segment, and favorable weather in North America.
• Earnings Increase: Net earnings rose 21.1% to $329.6 million. This growth was significantly aided by a $75.5 million pretax property insurance gain related to the Hassloch fire and higher segment volumes.
• Debt Expansion: Total debt increased by $862 million to $2.45 billion. This was primarily due to new borrowings ($450 million in senior notes and $500 million in bank debt) used to finance the U.S. Can and Alcan acquisitions and refinance existing debt.
• Operating Cash Flow Decline: Cash flow from operations decreased to $401.4 million from $558.8 million, attributed to higher cash pension funding, increased working capital requirements (inventories and receivables), and higher tax payments.
• Segment Performance:
  • Metal Beverage Americas: Sales up 9%; earnings up due to volume and price pass-throughs, though constrained by higher energy and freight costs.
  • Metal Beverage Europe/Asia: Sales up 12%; earnings significantly boosted by the insurance gain and strong demand in Europe and China.
  • Metal Food & Household Americas: Sales up 44% due to the U.S. Can acquisition; earnings were lower than 2005 due to $33.8 million in restructuring charges for plant closures.
  • Plastic Packaging Americas: Sales up 32% due to the Alcan acquisition; earnings improved despite higher energy costs.
  • Aerospace: Sales down 3% due to contract completions and government funding delays; earnings remained relatively stable.

Guidance, Outlook, and Risks

Outlook: Management expects a strong first quarter in 2007 as elevated raw material inventories are reduced. For 2007, the company estimates operating cash flow of approximately $600 million, capital spending (net of insurance recoveries) of $250 million, and free cash flow in the $350 million range. The company plans to repurchase approximately $175 million of stock and reduce debt levels by more than $125 million in 2007.

Management Commentary: The company is focused on integrating the U.S. Can and Alcan acquisitions to realize synergies. A multi-year project to upgrade North American beverage can end manufacturing capabilities is ongoing, with completion expected in 2008. The Hassloch plant is being rebuilt with new steel and aluminum lines expected to be operational in Q2 2007.

Risks and Contingencies:

• Raw Material Costs: Profitability is sensitive to aluminum, steel, and resin prices. While North American contracts often allow cost pass-through, European contracts do not, creating exposure managed via derivatives.
• Customer Concentration: Major customers (SABMiller, PepsiCo, Coca-Cola Enterprises) represented 29% of consolidated sales in 2006. Loss of a key customer could materially impact results.
• Government Contracts: The Aerospace segment relies heavily on U.S. government contracts (90% of segment sales), which are subject to budgetary constraints and termination for convenience.
• Foreign Exchange: Fluctuations in the Euro, British Pound, and other currencies impact reported earnings and asset values.
• Legal/Environmental: The company is a Potentially Responsible Party (PRP) for several hazardous waste sites, though management does not believe these will have a material adverse effect. An IRS audit regarding interest expense deductions on a life insurance plan poses a potential liability of approximately $31 million.

Investor Verification Checklist

• Acquisition Integration: Verify the progress of integrating U.S. Can and Alcan operations and the realization of projected synergies.
• Insurance Proceeds: Confirm the final settlement of the Hassloch fire insurance claims and the timeline for the plant rebuild.
• Debt Servicing: Monitor the company's ability to service its increased debt load ($2.45 billion) and the impact of variable interest rates on cash flow.
• Raw Material Hedging: Review the effectiveness of derivative instruments in managing commodity price volatility, particularly in Europe where pass-through mechanisms are limited.
• Working Capital: Track the normalization of working capital levels (inventories and receivables) which depressed 2006 operating cash flow.
• IRS Audit: Monitor the status of the IRS examination regarding the company-owned life insurance plan interest deductions.