BALL

Ball Corporation 10-Q Summary: Period Ended July 2, 2006

Business Context and Reporting Period

This is an unaudited quarterly report (Form 10-Q) for Ball Corporation, a leading global supplier of metal and plastic packaging and aerospace technologies. The reporting period covers the three and six months ended July 2, 2006. The company operates five reportable segments: Metal Beverage Packaging (Americas and Europe/Asia), Metal Food & Household Products Packaging (Americas), Plastic Packaging (Americas), and Aerospace and Technologies.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 18.7% year-over-year for the quarter and 11.5% for the six-month period. Growth was driven by the acquisitions of U.S. Can Corporation and Alcan Packaging assets, higher sales volumes, and price increases to offset raw material costs.
• Profitability: Net earnings surged 68% for the quarter and 29% for the six-month period. A significant driver was a $74.1 million pretax property insurance gain recorded in the Europe/Asia segment following a fire at the Hassloch, Germany plant.
• Acquisitions: The company acquired U.S. Can (March 27) and Alcan plastic assets (March 28). These transactions added approximately $750 million in annual sales capacity and significantly increased goodwill and intangible assets.
• Debt Levels: Total interest-bearing debt increased by approximately $1.06 billion to finance the acquisitions and refinance U.S. Can debt at lower rates. Interest expense rose 55% for the quarter.
• Cash Flow: Operating cash flow turned negative ($66.2 million used) for the first six months of 2006, compared to $70.2 million generated in the prior year, due to higher working capital requirements and pension funding.

Guidance, Outlook, and Risks

• Outlook: Management expects to reduce debt by $400 million to $450 million by year-end 2006. Capital spending is estimated at $300 million for the full year, excluding insurance-reimbursed rebuild costs for the German plant.
• Rebuilding: The Hassloch plant fire damaged the majority of the facility. Rebuilding is underway with two steel lines and an aluminum line addition in Hermsdorf, Germany, expected to be operational in Q2 2007.
• Cost Pressures: The company faces continued year-over-year increases in energy, freight, and raw material costs (aluminum, steel, resin). While price escalations are being passed to customers, cost growth has outpaced price increases in some segments.
• Risks:
  • Integration Risk: Successful integration of U.S. Can and Alcan operations is critical; failure could negatively impact financial results.
  • Commodity Prices: A 10% adverse change in metal prices could reduce net earnings by an estimated $17 million annually.
  • Foreign Exchange: A 10% adverse change in foreign currency rates could reduce net earnings by an estimated $26.4 million annually.
  • Legal: Ongoing patent litigation with Crown Packaging Technology (trial set for May 2007) and a recently settled case with Constar International.
  • Tax Contingency: The IRS has proposed disallowing interest deductions on a company-owned life insurance plan, potentially resulting in a $27 million tax liability plus penalties, though no provision has been accrued.

Investor Verification Checklist

• Insurance Proceeds: Verify the timing and sufficiency of remaining insurance recoveries for the Hassloch fire and the timeline for plant reconstruction.
• Acquisition Integration: Monitor the realization of synergies and cost savings from the U.S. Can and Alcan acquisitions against the increased debt service costs.
• Commodity Hedging: Assess the effectiveness of hedging strategies given the rapid increase in aluminum and steel prices and the ability to pass these costs to customers.
• Working Capital: Review the drivers behind the negative operating cash flow and the sustainability of current inventory and receivable levels.
• Tax Position: Track the status of the IRS examination regarding the company-owned life insurance plan interest deductions.