BALL

Ball Corporation 10-K Summary: Fiscal Year Ended December 31, 2005

Business Context and Reporting Period

This Form 10-K covers Ball Corporation for the fiscal year ended December 31, 2005. Ball is a global manufacturer of metal and plastic packaging for beverages and foods, as well as a supplier of aerospace and technologies to government and commercial customers. The company operates five reportable segments: North American metal beverage packaging, North American metal food packaging, North American plastic packaging, international packaging, and aerospace and technologies. As of February 3, 2006, there were 104,286,147 shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 5.7% to $5.75 billion, driven by higher aluminum prices passed through to customers and volume growth in plastic and international segments, partially offset by lower metal beverage volumes in North America due to weather and market softness.
• Earnings Decline: Net earnings decreased 11.5% to $261.5 million. This was primarily due to business consolidation charges of $21.2 million (including a $19.3 million charge for a North American beverage can end manufacturing upgrade) and higher raw material, freight, and utility costs.
• Segment Performance:
  • North American Metal Beverage: Earnings fell to $229.8 million from $279.1 million due to the $19.3 million restructuring charge and higher costs.
  • North American Metal Food: Earnings dropped significantly to $11.6 million from $44.3 million due to plant closures in Canada ($8.8 million charge) and workforce reductions ($4.6 million charge).
  • International Packaging: Earnings decreased 8% to $181.8 million, impacted by start-up costs for a new Serbia plant and line conversions, though partially offset by a $9.3 million gain from tax settlements in China.
  • Aerospace: Earnings increased 12% to $54.7 million due to higher sales and improved program performance.
• Liquidity: Working capital tightened significantly from $249.3 million to $49.8 million, and the current ratio declined to 1.04. Cash and cash equivalents decreased from $198.7 million to $61.0 million, largely due to increased share repurchases ($358.1 million net) and capital expenditures ($291.7 million).

Guidance, Outlook, and Risks

• Outlook: Management estimates 2006 operating cash flow to be approximately $550 million, capital spending around $300 million, and free cash flow in the $250 million range. Volumes in North American metal beverage are expected to recover in 2006.
• Subsequent Event: On February 14, 2006, Ball agreed to acquire U.S. Can Corporation's U.S. and Argentinean operations for 1.1 million shares of Ball stock and the assumption of $550 million in debt. The deal is expected to close in Q1 2006.
• Key Risks:
  • Customer Concentration: SABMiller and PepsiCo accounted for 11% and 10% of sales, respectively. Loss of a major customer could materially impact results.
  • Raw Materials: Profitability is sensitive to aluminum, steel, and resin prices. While North American contracts often pass costs through, European contracts do not, creating margin risk.
  • German Deposit Legislation: A mandatory 25 eurocent deposit on non-refillable containers in Germany (effective May 2006) previously caused demand drops; the company is adapting to the new return system.
  • Debt: Total debt of $1.59 billion requires significant cash flow for service. A substantial portion bears variable interest rates.

Investor Verification Checklist

• Verify the impact of the $21.2 million in business consolidation charges on core operating margins.
• Monitor the execution of the U.S. Can Corporation acquisition and the associated $550 million debt assumption.
• Assess the effectiveness of cost-pass-through mechanisms in Europe given rising raw material costs.
• Review the status of the German mandatory deposit system implementation and its effect on European beverage can volumes.
• Track the company's ability to maintain liquidity with a current ratio of 1.04 and significant debt service obligations.
• Confirm the recovery of North American metal beverage volumes in 2006 as projected by management.