f10q.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 27, 2009


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 o  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 25, 2009
 
 
Common Stock,
without par value
 
 
94,103,151shares
 
 
 
 
 

 


Ball Corporation and Subsidiaries
QUARTERLY REPORT ON FORM 10-Q
For the period ended September 27, 2009




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 27, 2009, and September 28, 2008
 
1
     
 
Unaudited Condensed Consolidated Balance Sheets at September 27, 2009, and December 31, 2008
2
     
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 27, 2009, and September 28, 2008
 
3
     
 
Notes to Unaudited Condensed Consolidated Financial Statements
4
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
32
     
Item 4.
Controls and Procedures
34
     
PART II.
OTHER INFORMATION
36


 
 

 


PART I.
FINANCIAL INFORMATION

Item 1.
FINANCIAL STATEMENTS

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Ball Corporation and Subsidiaries
 

   
Three Months Ended
   
Nine Months Ended
 
($ in millions, except per share amounts)
 
September 27,
2009
   
September 28,
2008
   
September 27,
2009
   
September 28,
2008
 
                         
Net sales
  $ 1,969.1     $ 2,008.2     $ 5,480.9     $ 5,828.7  
                                 
Costs and expenses
                               
Cost of sales (excluding depreciation)
    1,609.7       1,679.9       4,515.4       4,856.1  
Depreciation and amortization (Notes 8
and 10)
    70.4       73.9       206.5       224.7  
Selling, general and administrative
    86.8       67.5       239.9       227.6  
Business consolidation and other activities (Note 4)
    22.7       9.1       46.8       20.6  
Gain on sales of investments (Note 5)
                (34.8 )     (7.1 )
      1,789.6       1,830.4       4,973.8       5,321.9  
                                 
Earnings before interest and taxes
    179.5       177.8       507.1       506.8  
                                 
Interest expense
    (28.9 )     (33.1 )     (79.4 )     (104.0 )
                                 
Earnings before taxes
    150.6       144.7       427.7       402.8  
Tax provision
    (52.3 )     (45.8 )     (128.8 )     (128.4 )
Equity in results of affiliates
    5.5       3.1       8.0       11.6  
                                 
Net earnings
    103.8       102.0       306.9       286.0  
                                 
Less net earnings attributable to noncontrolling interests
    (0.1 )     (0.1 )     (0.4 )     (0.3 )
                                 
Net earnings attributable to Ball Corporation
  $ 103.7     $ 101.9     $ 306.5     $ 285.7  
                                 
Earnings per share (Note 14):
                               
Basic
  $ 1.10     $ 1.07     $ 3.27     $ 2.96  
Diluted
  $ 1.09     $ 1.05     $ 3.23     $ 2.92  
                                 
Weighted average shares outstanding (000s) (Note 14):
                               
Basic
    93,976       95,368       93,763       96,491  
Diluted
    95,351       96,604       94,950       97,796  
                                 
Cash dividends declared and paid, per common share
  $ 0.10     $ 0.10     $ 0.30     $ 0.30  
                                 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 
Page 1

 

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
Ball Corporation and Subsidiaries

($ in millions)
 
September 27,
2009
   
December 31,
2008
 
             
Assets
           
Current assets
           
Cash and cash equivalents
  $ 418.1     $ 127.4  
Receivables, net (Note 6)
    1,058.7       507.9  
Inventories, net (Note 7)
    906.9       974.2  
Cash collateral – receivable (Note 15)
    67.5       229.5  
Current derivative contracts (Note 15)
    113.4       197.0  
Current deferred taxes and other current assets
    112.5       129.3  
Total current assets
    2,677.1       2,165.3  
                 
Property, plant and equipment, net (Note 8)
    1,812.1       1,866.9  
Goodwill (Note 9)
    1,867.9       1,825.5  
Noncurrent derivative contracts (Note 15)
    71.3       139.0  
Intangibles and other assets, net (Note 10)
    363.7       372.0  
Total Assets
  $ 6,792.1     $ 6,368.7  
                 
Liabilities and Shareholders’ Equity
               
Current liabilities
               
Short-term debt and current portion of long-term debt (Note 11)
  $ 253.1     $ 303.0  
Accounts payable
    688.6       763.7  
Accrued employee costs
    210.7       232.7  
Income taxes payable and current deferred taxes
    44.3       8.9  
Cash collateral – liability (Note 15)
    47.7       124.0  
Current derivative contracts (Note 15)
    125.2       268.4  
Other current liabilities
    182.5       161.7  
Total current liabilities
    1,552.1       1,862.4  
                 
Long-term debt (Note 11)
    2,532.7       2,107.1  
Employee benefit obligations (Note 12)
    992.0       981.4  
Noncurrent derivative contracts (Note 15)
    116.5       189.7  
Deferred taxes and other liabilities
    119.7       140.8  
Total liabilities
    5,313.0       5,281.4  
                 
Contingencies (Note 16)
           
                 
Shareholders’ equity (Note 13)
               
Common stock (161,390,377 shares issued – 2009; 160,916,672 shares issued – 2008)
    820.8       788.0  
Retained earnings
    2,325.2       2,047.1  
Accumulated other comprehensive earnings (loss)
    (94.7 )     (182.5 )
Treasury stock, at cost (67,342,069 shares – 2009; 67,184,722 shares – 2008)
    (1,573.8 )     (1,566.8 )
Total Ball Corporation shareholders’ equity
    1,477.5       1,085.8  
                 
Noncontrolling interests
    1.6       1.5  
Total shareholders’ equity
    1,479.1       1,087.3  
Total Liabilities and Shareholders’ Equity
  $ 6,792.1     $ 6,368.7  


See accompanying notes to unaudited condensed consolidated financial statements.

 
Page 2

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Ball Corporation and Subsidiaries


   
Nine Months Ended
 
($ in millions)
 
September 27, 2009
   
September 28, 2008
 
             
Cash Flows from Operating Activities
           
Net earnings
  $ 306.9     $ 286.0  
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    206.5       224.7  
Business consolidation and other activities, net of cash payments (Note 4)
    36.2       20.6  
Gain on sales of investments (Note 5)
    (34.8 )     (7.1 )
Legal settlement
          (70.3 )
Deferred taxes
    (14.6 )     5.5  
Other, net
    7.3       18.3  
Changes in working capital components, excluding effects of dispositions
    (501.4 )     (339.3 )
Cash provided by operating activities
    6.1       138.4  
                 
Cash Flows from Investing Activities
               
Additions to property, plant and equipment
    (141.3 )     (230.8 )
Cash collateral, net (Note 15)
    85.7        
Proceeds from sales of investments, net of cash sold (Note 5)
    37.0       8.7  
Other, net
    0.7       9.8  
Cash used in investing activities
    (17.9 )     (212.3 )
                 
Cash Flows from Financing Activities
               
Long-term borrowings
    1,283.2       459.4  
Repayments of long-term borrowings
    (878.2 )     (186.7 )
Change in short-term borrowings
    (73.3 )     43.4  
Debt issuance costs
    (12.1 )      
Proceeds from issuances of common stock
    24.4       22.1  
Acquisitions of treasury stock
    (22.2 )     (279.6 )
Common dividends
    (28.1 )     (28.3 )
Other, net
    6.5       3.5  
Cash provided by financing activities
    300.2       33.8  
                 
Effect of exchange rate changes on cash
    2.3       2.4  
                 
Change in cash and cash equivalents
    290.7       (37.7 )
Cash and cash equivalents – beginning of period
    127.4       151.6  
Cash and cash equivalents – end of period
  $ 418.1     $ 113.9  


See accompanying notes to unaudited condensed consolidated financial statements.

 
Page 3

 

Notes to Unaudited Condensed Consolidated Financial Statements
Ball Corporation and Subsidiaries

1.
Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Ball Corporation and its controlled affiliates (collectively, Ball, the company, we or our) and have been prepared by the company without audit. 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.  The interim financial statements reflect all adjustments necessary, in the opinion of management, for a fair statement of results for the periods presented.

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 pursuant to Section 13 of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2008 (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 period. 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 unaudited condensed consolidated financial statements reflect all adjustments that are of a normal recurring nature and are necessary for a fair statement of the results for the interim period.

Certain prior-year amounts have been reclassified in order to conform to the current-year presentation.

2.
Accounting Guidance

On July 1, 2009, Ball adopted on a prospective basis the Financial Accounting Standards Board’s (FASB) accounting standards codification, which establishes the exclusive authoritative reference for accounting principles generally accepted in the United States of America (U.S. GAAP) for use in financial statements, except for SEC rules and interpretive releases, which are also authoritative U.S. GAAP for SEC registrants. Although the codification makes no changes to U.S. GAAP itself, it supersedes all previously existing non-SEC accounting and reporting standards.

Recently Adopted Accounting Guidance

Effective January 1, 2009, Ball adopted on a prospective basis new accounting guidance issued by the FASB that establishes a framework for measuring fair value of all nonfinancial assets and liabilities measured on a nonrecurring basis, and expands disclosures about fair value measurements. Although it does not require any new fair value measurements, the guidance emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and should be determined based on the assumptions that market participants would use in pricing the asset or liability. Details regarding the adoption of this guidance and its effects on the company’s unaudited condensed consolidated financial statements are available in Note 15, “Financial Instruments and Risk Management.”

Also effective January 1, 2009, Ball adopted new guidance which amends accounting and reporting standards for the noncontrolling interest in a subsidiary, requiring that such interests be reported as a discrete component of shareholders’ equity and net earnings allocable to the noncontrolling interests be presented separately from net earnings attributable to the company’s shareholders in the consolidated statements of earnings. The adoption of this guidance did not have a significant impact on the unaudited condensed consolidated financial statements of the company.


 
Page 4

 

Notes to Unaudited Condensed Consolidated Financial Statements
Ball Corporation and Subsidiaries

2.
Accounting Guidance (continued)

Also effective January 1, 2009, Ball adopted new accounting guidance that requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation, as well as information about credit-risk-related contingent features. It also requires more transparent disclosure of where fair values, as well as gains and losses of derivative instruments, are reflected in the financial statements. Details regarding the adoption of this guidance and its effects on the company’s unaudited condensed consolidated financial statements are available in Note 15, “Financial Instruments and Risk Management.”

Also effective January 1, 2009, Ball adopted on a prospective basis guidance previously disclosed in the Annual Report related to business combinations. While the adoption of such guidance did not have a significant impact on the unaudited condensed consolidated financial statements of the company, it will apply to the acquisition of certain assets of a subsidiary of Anheuser-Busch InBev n.v./s.a (AB InBev) announced on July 1, 2009. The transaction closed on October 1, 2009. (See Note 18.)

In April 2009, Ball applied on a prospective basis additional guidance issued by the FASB concerning fair value measurements, specifically adjustments to fair value estimates required when observable transaction prices, or quoted prices in markets, have become less active. The adoption of this accounting guidance did not have a significant impact on our unaudited condensed consolidated financial statements.

Also applied on a prospective basis beginning in April 2009, was new accounting guidance requiring additional quantitative and qualitative disclosures for loans and long-term receivables that provide a comparison of the carrying value to the fair value, measurement policies and significant assumptions used to estimate fair value. The adoption of this accounting guidance did not have a significant impact on our unaudited condensed consolidated financial statements.

Also in April 2009, the FASB amended existing guidance for other-than-temporary impairments related to debt and equity securities and expanded required quantitative and qualitative disclosures. This guidance has been applied on a prospective basis beginning in April. The adoption of this accounting guidance did not have a significant impact on our unaudited condensed consolidated financial statements.

In May 2009, the FASB established general standards of accounting for and disclosure of events that occur after the balance sheet date but prior to the issuance of financial statements. All events occurring on and through November 5, 2009, which is the date the financial statements were issued, were evaluated and considered as to whether any occurrence should affect the unaudited condensed consolidated financial statements. The results of the evaluation had no impact on our unaudited condensed consolidated financial statements.

New Accounting Guidance

In December 2008, the FASB amended postretirement benefit plan assets guidance, now requiring disclosure of how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies, the major categories of plan assets, significant concentrations of risk within plan assets, inputs and valuation techniques to measure fair value and the effect of significant unobservable inputs on changes in plan assets for the period. The requirements of this new guidance are effective for Ball for the fiscal year ending December 31, 2009, and will be applied on a prospective basis beginning with the company’s Annual Report on Form 10-K. Compliance will include appropriate footnote disclosures, and any financial statement impacts, of which nothing significant is expected, will be reflected in the year-end financial statements.

In June 2009, the FASB updated accounting guidance changing the way entities account for securitizations, special-purpose entities, and variable interest entities. The company is in the process of evaluating the impact adoption of this guidance, which will be adopted effective January 1, 2010, will have on our consolidated financial statements.


 
Page 5

 

Notes to Unaudited Condensed Consolidated Financial Statements
Ball Corporation and Subsidiaries

2.
Accounting Guidance (continued)

In August 2009, the FASB issued guidance to clarify acceptable valuation techniques for fair value measurements of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available. This guidance requires an entity to measure fair value using quoted prices for similar liabilities or another valuation technique that is consistent with U.S. GAAP, such as an income approach to present value the liability or a market approach whereby the liability would be valued at the amount that an entity would pay to transfer an identical liability or would receive to enter into an identical liability. The company is in the process of evaluating the impact this guidance will have on our consolidated financial statements upon adoption in the fourth quarter of this year.

In September 2009, additional guidance was issued by the FASB concerning fair value measurements, specifically guidelines for measuring the fair value of certain “alternative investments” and disclosure, by major category of investment, about the attributes of those investments, such as restrictions on the investor’s ability to redeem its investments, unfunded commitments and investment strategies of the investees. This accounting guidance is to be applied prospectively and is effective for Ball for the fourth quarter of this fiscal year.  The company is in the process of evaluating the impact this guidance will have on our consolidated financial statements.

3.
Business Segment Information

Ball’s operations are organized and reviewed by management along its product lines resulting in five reportable segments.

Metal beverage packaging, Americas and Asia:  Consists of operations, which have been aggregated along product lines and similar economic characteristics, in the U.S., Canada and the People’s Republic of China (PRC). These operations manufacture and sell metal beverage containers in North America and the PRC, as well as 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 & household products packaging, AmericasConsists of operations in the U.S., Canada and Argentina, which manufacture and sell metal food cans, aerosol cans, paint cans and decorative specialty cans.

Plastic packaging, Americas:  Consists of operations in the U.S., which manufacture and sell polyethylene terephthalate (PET) and polypropylene containers, primarily for use in beverage and food packaging. Through September 27, 2009, this segment also includes the manufacture and sale of plastic containers used for industrial and household products. (See Note 18.)

Aerospace and technologies:  Consists of the manufacture and sale of aerospace and other related products and the provision 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., PRC and Brazil, which are accounted for under the equity method of accounting and, accordingly, those results are not included in segment sales or earnings.


 
Page 6

 

Notes to Unaudited Condensed Consolidated Financial Statements
Ball Corporation and Subsidiaries

3.
Business Segment Information (continued)

Summary of Business by Segment
   
Three Months Ended
   
Nine Months Ended
 
($ in millions)
 
September 27,
2009
   
September 28,
2008
   
September 27,
2009
   
September 28,
2008
 
                         
Net Sales
                       
Metal beverage packaging, Americas & Asia
  $ 706.4     $ 767.0     $ 2,075.9     $ 2,304.8  
Metal beverage packaging, Europe
    478.0       511.3       1,312.4       1,487.9  
Metal food & household products packaging, Americas
    459.5       365.0       1,066.5       912.0  
Plastic packaging, Americas
    156.8       184.1       498.1       574.0  
Aerospace & technologies
    168.4       180.8       528.0       550.0  
Net sales
  $ 1,969.1     $ 2,008.2     $ 5,480.9     $ 5,828.7  
                                 
Net Earnings
                               
Metal beverage packaging, Americas & Asia
  $ 102.9     $ 77.0     $ 223.9     $ 228.4  
Business consolidation activities (Note 4)
    (1.0 )     (0.6 )     (9.3 )     (4.0 )
Total metal beverage packaging, Americas & Asia
    101.9       76.4       214.6       224.4  
                                 
Metal beverage packaging, Europe
    68.8       76.7       164.5       201.9  
                                 
Metal food & household products packaging, Americas
    27.8       15.8       112.5       44.9  
Business consolidation activities (Note 4)
          (4.5 )           (4.5 )
Total metal food & household products packaging, Americas
    27.8       11.3       112.5       40.4  
                                 
Plastic packaging, Americas
    3.8       5.3       15.2       15.8  
Business consolidation activities (Note 4)
    (12.6 )     (4.0 )     (24.5 )     (8.3 )
Total plastic packaging, Americas
    (8.8 )     1.3       (9.3 )     7.5  
                                 
Aerospace & technologies
    16.2       18.4       45.6       56.0  
Gain on sale of investment (Note 5)
                      7.1  
Total aerospace & technologies
    16.2       18.4       45.6       63.1  
                                 
Segment earnings before interest and taxes
    205.9       184.1       527.9       537.3  
                                 
Undistributed corporate expenses, net
    (17.3 )     (6.3 )     (42.6 )     (26.7 )
Gain on sale of investment (Note 5)
                34.8        
Business consolidation and other activities (Note 4)
    (9.1 )           (13.0 )     (3.8 )
Total undistributed corporate expenses, net
    (26.4 )     (6.3 )     (20.8 )     (30.5 )
Earnings before interest and taxes
    179.5       177.8       507.1       506.8  
Interest expense
    (28.9 )     (33.1 )     (79.4 )     (104.0 )
Tax provision
    (52.3 )     (45.8 )     (128.8 )     (128.4 )
Equity in results of affiliates
    5.5       3.1       8.0       11.6  
Less net earnings attributable to noncontrolling interests
    (0.1 )     (0.1 )     (0.4 )     (0.3 )
Net earnings attributable to Ball Corporation
  $ 103.7     $ 101.9     $ 306.5     $ 285.7  


 
Page 7

 

Notes to Unaudited Condensed Consolidated Financial Statements
Ball Corporation and Subsidiaries

3.
Business Segment Information (continued)

($ in millions)
 
September 27,
2009
   
December 31,
2008
 
             
Total Assets
           
Metal beverage packaging, Americas & Asia
  $ 1,751.6     $ 1,873.0  
Metal beverage packaging, Europe
    2,460.6       2,434.5  
Metal food & household products packaging, Americas
    1,252.1       972.9  
Plastic packaging, Americas
    495.4       502.6  
Aerospace & technologies
    258.3       280.2  
Segment assets
    6,218.0       6,063.2  
Corporate assets, net of eliminations
    574.1       305.5  
Total assets
  $ 6,792.1     $ 6,368.7  

4.
Business Consolidation and Other Activities

Following is a summary of business consolidation and other activities included in the unaudited condensed consolidated statements of earnings for the third quarter and year-to-date ended:

   
Three Months Ended
   
Nine Months Ended
 
($ in millions)
 
September 27,
2009
   
September 28,
2008
   
September 27,
2009
   
September 28,
2008
 
                         
Metal beverage packaging, Americas & Asia
  $ 1.0     $ 0.6     $ 9.3     $ 4.0  
Metal food & household products packaging, Americas
          4.5             4.5  
Plastic packaging, Americas
    12.6       4.0       24.5       8.3  
Corporate other costs
    9.1             13.0       3.8  
    $ 22.7     $ 9.1     $ 46.8     $ 20.6  

2009

Metal beverage packaging, Americas and Asia

During the third quarter, a charge of $1 million ($0.6 million after tax) was recorded, primarily for winding down the Puerto Rico and Kansas City plants, the closures of which were announced in the fourth quarter of 2008.

In the second quarter of 2009, a charge of $3.3 million ($2 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. Most of the costs were paid in the second and third quarters, and it is anticipated that the remainder of the costs will be paid by the end of 2009.

In the first quarter of 2009, a charge of $5 million ($3.1 million after tax) was taken related to accelerated depreciation for operations that ceased in the quarter at the Kansas City plant.

 
Page 8

 

Notes to Unaudited Condensed Consolidated Financial Statements
Ball Corporation and Subsidiaries

4.
Business Consolidation and Other Activities (continued)

Plastic packaging, Americas

In the third quarter and second quarter of 2009, charges of $12.6 million ($8.2 million after tax) and $11.9 million ($7.2 million after tax), respectively, were recorded related primarily to the closure of plastic packaging manufacturing plants in Brampton, Ontario; Baldwinsville, New York; and Watertown, Wisconsin. Manufacturing operations have ceased in all three locations. The third quarter charge included $4.2 million for accelerated depreciation and $8.4 million for lease termination costs. The second quarter charge was comprised of $3 million of severance and other employee benefit costs, accelerated depreciation of $5.7 million, $2.2 million primarily for the write down of assets to net realizable value and $1 million of other business consolidation charges.

The majority of the remaining reserves are expected to be utilized during 2009, with the balance, consisting of lease payments (net of subleases) to continue to be paid in future years over the lease terms.

Corporate 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 acquisition of three metal beverage can plants and one beverage can end plant from AB InBev. (See Note 18.) In addition, a $1 million pretax charge ($0.6 million after tax) was taken in the second quarter related to previously closed and sold facilities.

2008

Metal Food & Household Products Packaging, Americas

In the third quarter of 2008, the company recorded a pretax charge of $4.5 million ($2.8 million after tax) for previously announced closed facilities. The charge included $4.2 million related to lease cancellation costs for the Commerce, California, facility and $0.3 million for additional environmental cleanup costs related to the sale of the Burlington, Ontario, facility. Other than lease termination costs, all amounts have been incurred and paid as of September 27, 2009.

Plastic packaging, Americas

A charge of $4 million (before and after tax) was recorded during the third quarter of 2008 in addition to a pretax charge of $4.3 million ($3.8 million after tax) recorded in the second quarter related to the closure of the Brampton, Ontario, plant. The charges recorded in the two quarters included $1.9 million for severance costs, $2.5 million for lease cancellation costs related to the property and $3.9 million for accelerated depreciation and the write down of fixed assets to net realizable value. The plant was shut down in the third quarter of 2008, and, other than lease termination costs, the remaining reserves are expected to be utilized during 2009.

Metal beverage packaging, Americas and Asia

A pretax charge of $0.6 million ($0.4 million after tax) was recorded in the third quarter of 2008 in addition to a pretax charge of $10.6 million ($6.4 million after tax) recorded in the second quarter for the closure of the plant in Kent, Washington. The charges recorded in the two quarters were primarily comprised of $9.1 million for employee severance, pension and other employee benefit costs and $1.5 million related to the write down to net realizable value of certain fixed assets and related spare parts and tooling. The plant was shut down in the third quarter of 2008 and all remaining costs, excluding pension liabilities, are expected to be paid by the end of 2009.

A pretax gain of $7.2 million ($4.4 million after tax) was recorded in the second quarter for the recovery of previously expensed costs in a prior metal beverage business consolidation charge. The gain reflected the decision to continue to operate existing end-making equipment and not install a new beverage can end module that would have been part of a multi-year project.

 
Page 9

 


Notes to Unaudited Condensed Consolidated Financial Statements
Ball Corporation and Subsidiaries

4.
Business Consolidation and Other Activities (continued)

Corporate other costs

A pretax charge of $3.8 million ($2.3 million after tax) was recorded in the second quarter for estimated costs related to previously closed and sold facilities.

Following is a summary of activity by segment related to business consolidation activities for the nine-month period ended September 27, 2009:

($ in millions)
 
Metal
Beverage
Packaging,
Americas &
Asia
   
Metal Food
& Household
Products
Packaging,
Americas
   
Plastic
Packaging,
Americas
   
Corporate
Other Costs
   
Total
 
                               
Balance at December 31, 2008
  $ 28.2     $ 11.1     $ 2.9     $ 4.8     $ 47.0  
Charges
    9.3             24.5       13.0       46.8  
Cash payments
    (17.2 )     (6.7 )     (3.6 )     (6.7 )     (34.2 )
Fixed asset disposals and transfer activity
    (8.1 )     1.7       (12.1 )     (0.3 )     (18.8 )
Balance at September 27, 2009
  $ 12.2     $ 6.1     $ 11.7     $ 10.8     $ 40.8  
                                         
Carrying value of assets held for sale at September 27, 2009, related to business consolidation activities
  $ 5.3     $ 1.3     $ 2.7     $     $ 9.3  


Summary

Since the fourth quarter of 2007, we have ceased operations or announced our intent to cease operations at eight manufacturing plants in North America as we align our packaging businesses with the current realities of market demand. During that period and including the third quarter activities for 2009 discussed above, we have recorded net business consolidation costs of $143.5 million. The charges consist of $38.4 million of employee severance and other benefit costs; $65 million of accelerated depreciation and the write down to net realizable value of certain fixed assets, related spare parts and tooling; $28.1 million of lease cancellation and other business consolidation costs and $12 million of acquisition transaction costs.

5.
Gain on Sales of Investments

On May 19, 2009, the company sold seventy-five percent of its investment in DigitalGlobe Inc. (DigitalGlobe), a provider of commercial high resolution earth imagery products and services, in conjunction with its initial public offering. The sale generated proceeds of $37 million and a non-operating pretax gain of $34.8 million ($30.7 million after tax), which is reflected in the company’s second quarter unaudited condensed consolidated financial statements.  The remaining investment in DigitalGlobe, classified as an other long-term asset, has been accounted for as a marketable equity investment and, as such, marked-to-market, with the unrealized gain being held in accumulated other comprehensive earnings (loss). (See Note 13.)

The company’s financial results for the nine months ended September 28, 2008, include Ball Aerospace & Technologies Corp.’s sale of an Australian subsidiary for $8.7 million, net of cash sold, that resulted in a pretax gain of $7.1 million ($4.4 million after tax).


 
Page 10

 

Notes to Unaudited Condensed Consolidated Financial Statements
Ball Corporation and Subsidiaries

6.
Receivables

($ in millions)
 
September 27,
2009
   
December 31,
2008
 
             
Trade accounts receivable, net
  $ 978.3     $ 435.7  
Other receivables
    80.4       72.2  
    $ 1,058.7     $ 507.9  

Trade accounts receivable are shown net of an allowance for doubtful accounts of $14.2 million at September 27, 2009, and $12.8 million at December 31, 2008. Other receivables primarily include a note due from a supplier, property and sales tax receivables, certain supplier rebate receivables and other miscellaneous receivables.

A trade receivables sales agreement, which qualifies as off-balance sheet financing, 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. There were no net funds received from the sale of the accounts receivable at September 27, 2009, which contributed to the balance at that date being higher than at the prior year end. At December 31, 2008, there were $250 million of net funds received, which were reflected as a reduction of trade accounts receivable.

7.
Inventories

($ in millions)
 
September 27,
2009
   
December 31,
2008
 
             
Raw materials and supplies
  $ 420.4     $ 461.4  
Work in process and finished goods
    486.5       512.8  
    $ 906.9     $ 974.2  

8.
Property, Plant and Equipment

($ in millions)
 
September 27,
2009
   
December 31,
2008
 
             
Land
  $ 90.1     $ 89.0  
Buildings
    839.1       798.5  
Machinery and equipment
    3,075.2       2,992.9  
Construction in progress
    133.0       151.2  
      4,137.4       4,031.6  
Accumulated depreciation
    (2,325.3 )     (2,164.7 )
    $ 1,812.1     $ 1,866.9  

Property, plant and equipment are stated at historical cost. Depreciation expense amounted to $66 million and $193.7 million for the three months and nine months ended September 27, 2009, respectively, and $69.5 million and $211.2 million for the comparable periods in 2008, respectively.

 
Page 11

 

Notes to Unaudited Condensed Consolidated Financial Statements
Ball Corporation and Subsidiaries

9.
Goodwill

($ in millions)
 
Metal
Beverage
Packaging,
Americas
& Asia
   
Metal
Beverage
Packaging,
Europe
   
Metal
Food &
Household
Products
Packaging,
Americas
   
Plastic
Packaging,
Americas
   
Total
 
                               
Balance at December 31, 2008
  $ 310.0     $ 1,048.3     $ 353.6     $ 113.6     $ 1,825.5  
Effects of foreign currency exchange rates and other
    (0.5 )     42.6             0.3       42.4  
Balance at September 27, 2009
  $ 309.5     $ 1,090.9     $ 353.6     $ 113.9     $ 1,867.9  

Since January 1, 2002, goodwill is not amortized but instead tested annually for impairment. There has been no goodwill impairment since that time.

10.
Intangibles and Other Assets

($ in millions)
 
September 27,
2009
   
December 31,
2008
 
             
Investments in affiliates
  $ 81.6     $ 76.4  
Intangible assets (net of accumulated amortization of $124.1 at September 27, 2009,
    and $108.2 at December 31, 2008)
    92.4       104.4  
Company-owned life insurance
    104.2       94.2  
Long-term deferred tax assets
    17.3       26.0  
Other
    68.2       71.0  
    $ 363.7     $ 372.0  

Total amortization expense of intangible assets amounted to $4.4 million and $12.8 million for the three months and nine months ended September 27, 2009, respectively, and $4.4 million and $13.5 million for the comparable periods in 2008, respectively.

 
Page 12

 


Notes to Unaudited Condensed Consolidated Financial Statements
Ball Corporation and Subsidiaries

11.
Long-Term Debt

Long-term debt consisted of the following:
   
September 27, 2009
   
December 31, 2008
 
($ in millions)
 
In Local
Currency
   
In U.S. $
   
In Local
Currency
   
In U.S. $
 
                         
Notes Payable
                       
6.875% Senior Notes, due December 2012 (excluding premium of $1.4 at September 27, 2009, and $1.8 at December 31, 2008)
  $ 509.0     $  509.0     $ 509.0     $  509.0  
6.625% Senior Notes, due March 2018 (excluding discount of $0.6 at September 27, 2009, and $0.7 at December 31, 2008)
  $ 450.0         450.0     $ 450.0         450.0  
7.125% Senior Notes, due September 2016 (excluding discount of $7.5 at September 27, 2009)
  $ 375.0       375.0              
7.375% Senior Notes, due September 2019 (excluding discount of $8.3 at September 27, 2009)
  $ 325.0       325.0              
Senior Credit Facilities, due October 2011 (at variable rates)
                               
Term A Loan, British sterling denominated
  70.1       112.1     74.4       109.5  
Term B Loan, euro denominated
  288.8       423.6     306.3       431.6  
Term C Loan, Canadian dollar denominated
  C$ 114.0       104.4     C$ 120.4       98.5  
Term D Loan, U.S. dollar denominated
  $ 375.0       375.0     $ 437.5       437.5  
U.S. dollar multi-currency revolver borrowings
  $ 2.3       2.3     $ 2.3       2.3  
Euro multi-currency revolver borrowings
            128.2       180.8  
British sterling multi-currency revolver borrowings
  14.7       23.5     10.5       15.5  
Industrial Development Revenue Bonds
                               
Floating rates due through 2015
  $ 9.4       9.4     $ 9.4       9.4  
Other, including new issue premiums and discounts
 
Various
      (7.7 )  
Various
      10.4  
              2,701.6               2,254.5  
Less: Current portion of long-term debt
            (168.9 )             (147.4 )
            $ 2,532.7             $ 2,107.1  

On August 20, 2009, Ball issued, at a price of 97.975 percent, $375 million of new 7.125 percent senior notes (effective yield to maturity of 7.5 percent) due in September 2016. Also on that date, Ball issued, at a price of 97.414 percent, $325 million of 7.375 percent senior notes (effective yield to maturity of 7.75 percent) due in September 2019. The majority of the proceeds from these financings was used to acquire certain assets from AB InBev on October 1, 2009. (See Note 18.) The remainder will be used for general corporate purposes.

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 at $2.67 billion as of September 27, 2009, which approximated its carrying value of $2.7 billion. The fair value was $2.2 billion on December 31, 2008, as compared to its then carrying value of $2.3 billion. The fair value reflects the estimated amount that we would pay to transfer these obligations to an entity with a credit standing consistent with ours at September 27, 2009. 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.

At September 27, 2009, the company had approximately $671.2 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 also had short-term uncommitted credit facilities of up to $316 million at September 27, 2009, of which $84.2 million was outstanding and due on demand.

 
Page 13

 


Notes to Unaudited Condensed Consolidated Financial Statements
Ball Corporation and Subsidiaries

11.
Long-Term Debt (continued)

The notes payable are guaranteed on a full, unconditional and joint and several basis by certain of the company’s wholly owned domestic subsidiaries. Exhibit 20 contains unaudited condensed consolidating financial information for the company, segregating the guarantor subsidiaries and non-guarantor subsidiaries. Separate financial statements for the guarantor subsidiaries and the non-guarantor subsidiaries are not presented, because management has determined that such financial statements would not be material to investors.

The company was in compliance with all loan agreements at September 27, 2009, and during all prior periods 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 dividend payments, share repurchases, investments, financial ratios, guarantees and the incurrence of additional indebtedness.

12.
Employee Benefit Obligations

($ in millions)
 
September 27,
2009
   
December 31,
2008
 
             
Total defined benefit pension liability
  $ 604.9     $ 622.3  
Less current portion
    (25.6 )     (26.3 )
Long-term defined benefit pension liability
    579.3       596.0  
Retiree medical and other postemployment benefits
    181.5       178.4  
Deferred compensation plans
    190.8       176.3  
Other
    40.4       30.7  
    $ 992.0     $ 981.4  

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

   
Three Months Ended
 
   
September 27, 2009
   
September 28, 2008
 
($ in millions)
 
U.S.
   
Foreign
   
Total
   
U.S.
   
Foreign
   
Total
 
                                     
Service cost
  $ 10.5     $ 1.6     $ 12.1     $ 10.7     $ 2.3     $ 13.0  
Interest cost
    13.4       8.1       21.5       12.7       8.5       21.2  
Expected return on plan assets
    (16.0 )     (3.8 )     (19.8 )     (15.9 )     (4.6 )     (20.5 )
Employee contributions
                            (0.7 )     (0.7 )
Amortization of prior service cost
    0.2       (0.1 )     0.1       0.2       (0.1 )     0.1  
Recognized net actuarial loss
    3.1       1.0       4.1       2.6       0.9       3.5  
Subtotal
    11.2       6.8       18.0       10.3       6.3       16.6  
Non-company sponsored plans
    0.4             0.4       0.3             0.3  
Net periodic benefit cost
  $ 11.6     $ 6.8     $ 18.4     $ 10.6     $ 6.3     $ 16.9  


 
Page 14

 


Notes to Unaudited Condensed Consolidated Financial Statements
Ball Corporation and Subsidiaries

12.
Employee Benefit Obligations (continued)

   
Nine Months Ended
 
   
September 27, 2009
   
September 28, 2008
 
($ in millions)
 
U.S.
   
Foreign
   
Total
   
U.S.
   
Foreign
   
Total
 
                                     
Service cost
  $ 31.5     $ 4.3     $ 35.8     $ 32.2     $ 7.0     $ 39.2  
Interest cost
    40.2       22.6       62.8       38.1       25.8       63.9  
Expected return on plan assets
    (47.9 )     (10.4 )     (58.3 )     (47.9 )     (14.1 )     (62.0 )
Employee contributions
                            (0.7 )     (0.7 )
Amortization of prior service cost
    0.6       (0.3 )     0.3       0.8       (0.4 )     0.4  
Recognized net actuarial loss
    9.3       2.7       12.0       7.7       2.8       10.5  
Subtotal
    33.7       18.9       52.6       30.9       20.4       51.3  
Non-company sponsored plans
    1.2             1.2       1.0             1.0  
Net periodic benefit cost
  $ 34.9     $ 18.9     $ 53.8     $ 31.9     $ 20.4     $ 52.3  


Contributions to the company’s defined global benefit pension plans, not including the unfunded German plans, were $54.9 million in the first nine months of 2009 ($43.5 million in the same period of 2008). The total contributions to these funded plans are expected to be approximately $80 million in 2009. Payments to participants in the unfunded German plans were €13.1 million ($17.9 million) in the first nine months of 2009 (€13.2 million, or $20.1 million, in the first nine months of 2008) and are expected to be approximately €18 million (approximately $25 million) for fiscal 2009.

As reported in the company’s 2008 Annual Report, a reduction of the assumed expected return on pension assets by one quarter of a percentage 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.

 
Page 15

 


Notes to Unaudited Condensed Consolidated Financial Statements
Ball Corporation and Subsidiaries

13.
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, realized and unrealized gains and losses on derivative instruments receiving cash flow hedge accounting treatment and unrealized gains and losses on a marketable equity investment.
 

($ in millions)
 
Foreign
Currency
Translation
   
Pension
and Other
Postretirement
Items
(Net of Tax)
   
Effective
Financial
Derivatives
(Net of Tax)
   
Unrealized
Gain on
Marketable
Investment
(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 )

 
(a)      The change in accumulated other comprehensive earnings (loss) for effective financial derivatives was as follows:
 
       
Three Months
Ended
September 27,
2009
   
Nine Months
Ended
September 27,
2009
 
     
Losses recognized in earnings (Note 15):
           
     
Commodity contracts
  $ 35.2     $ 77.7  
     
Interest rate and foreign currency contracts
    1.9       5.4  
     
Change in fair value of cash flow hedges:
               
     
Commodity contracts
    7.9       (4.3 )
     
Interest rate and foreign currency contracts
    0.9       (5.8 )
     
Foreign currency and tax impacts
    (17.1 )     (26.9 )
          $ 28.8     $ 46.1  
 
 
Comprehensive Earnings (Loss)

   
Three Months Ended
   
Nine Months Ended
 
($ in millions)
 
September 27,
2009
   
September 28,
2008
   
September 27,
2009
   
September 28,
2008
 
                         
Net earnings attributable to Ball Corporation
  $ 103.7     $ 101.9     $ 306.5     $ 285.7  
Foreign currency translation adjustment
    47.4       (88.7 )     28.5       6.8  
Pension and other postretirement items
    2.6       2.1       7.4       6.1  
Effect of derivative instruments
    28.8       (49.1 )     46.1       6.0  
Unrealized gain (loss) on marketable investment (Note 5)
    (2.2 )           5.8        
Comprehensive earnings (loss)
  $ 180.3     $ (33.8 )   $ 394.3     $ 304.6  

 
Page 16

 


Notes to Unaudited Condensed Consolidated Financial Statements
Ball Corporation and Subsidiaries

13.
Shareholders’ Equity and Comprehensive Earnings (continued)

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 directors, 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 27, 2009, follows:

   
Outstanding Options
   
Nonvested Options
 
   
Number of
Shares
   
Weighted
Average
Exercise Price
   
Number of
Shares
   
Weighted
Average
Grant Date
Fair Value
 
                         
Beginning of year
    5,227,647     $ 35.72       1,927,197     $ 11.78  
Granted
    1,236,300       40.08       1,236,300       10.65  
Vested
                    (619,516 )     11.54  
Exercised
    (449,299 )     20.57                  
Canceled/forfeited
    (66,151 )     46.44       (66,151 )     11.52  
End of period
    5,948,497       37.65       2,477,830       11.29  
                                 
Vested and exercisable, end of period
    3,470,667                          
Reserved for future grants
    2,240,897                          

The options granted in January 2009 included 740,584 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 27, 2009, was 6.3 years and the aggregate intrinsic value (difference in exercise price and closing price at that date) was $67.2 million. The weighted average remaining contractual term for options vested and exercisable at September 27, 2009, was 4.7 years and the aggregate intrinsic value was $56.2 million.

The company received $6.8 million from options exercised during the three months ended September 27, 2009. The intrinsic value associated with these exercises was $9.4 million, and the associated tax benefit of $3.5 million was reported as other financing activities in the unaudited condensed consolidated statement of cash flows. During the nine months ended September 27, 2009, the company received $9.2 million from options exercised. The intrinsic value associated with exercises for that period was $12.1 million, and the associated tax benefit of $4.5 million was reported as other financing activities in the unaudited condensed consolidated statement of cash flows.

Based on the Black-Scholes option pricing model, options granted in January 2009 have an estimated weighted average fair value at the date of grant of $10.65 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 value was estimated using the following weighted average assumptions:

Expected dividend yield
1.00%
Expected stock price volatility
29.83%
Risk-free interest rate
1.74%
Expected life of options
5.25 years

 
Page 17

 


Notes to Unaudited Condensed Consolidated Financial Statements
Ball Corporation and Subsidiaries

13.
Shareholders’ Equity and Comprehensive Earnings (continued)

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.

To encourage certain senior management employees and outside directors to invest in Ball stock, Ball adopted a deposit share program in March 2001 (subsequently amended and restated in April 2004) that matches purchased shares with restricted shares. In general, restrictions on the matching shares lapse at the end of four years from date of grant, or earlier in stages if established share ownership guidelines are met, assuming the relevant qualifying purchased shares are not sold or transferred prior to that time. Grants under the plan are accounted for as equity awards and compensation expense is recorded based upon the closing market price of the shares at the grant date.

In January 2009 and April 2008, the company’s board of directors granted 193,450 and 246,650 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 as established at the beginning of the performance period. 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 third quarter 2009 for either grant.

For the three and nine months ended September 27, 2009, the company recognized in selling, general and administrative expenses pretax expense of $6.6 million ($4 million after tax) and $19.5 million ($11.8 million after tax) for share-based compensation arrangements, respectively, which represented $0.04 per basic and diluted share for the third quarter and $0.13 per basic share and $0.12 per diluted share for the first nine months, respectively. For the three and nine months ended September 28, 2008, the company recognized pretax expense of $5.3 million ($3.2 million after tax) and $15.3 million ($9.2 million after tax) for such arrangements, which represented $0.03 per both basic and diluted share for the third quarter and $0.10 per basic share and $0.09 per diluted share for the first nine months. At September 27, 2009, there was $42 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.

Stock Repurchase Agreements

Share repurchases in the first nine months of 2009 (on a settlement date basis) amounted to $22.2 million compared to $279.6 million during the same period in 2008. Share repurchases through the third quarter of 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.

Share repurchases in 2008 also included the settlement of an accelerated share repurchase agreement entered into in December 2007 to buy $100 million of the company’s common shares. Ball advanced the $100 million on January 7, 2008, and received 2,038,657 shares, which represented ninety 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.

 
Page 18

 


Notes to Unaudited Condensed Consolidated Financial Statements
Ball Corporation and Subsidiaries

14.
Earnings Per Share

   
Three Months Ended
   
Nine Months Ended
 
($ in millions, except per share amounts; shares in thousands)
 
September 27,
2009
   
September 28,
2008
   
September 27,
2009
   
September 28,
2008
 
                         
Diluted Earnings per Share:
                       
                         
Net earnings attributable to Ball Corporation
  $ 103.7     $ 101.9     $ 306.5     $ 285.7  
                                 
Weighted average common shares
    93,976       95,368       93,763       96,491  
Effect of dilutive securities
    1,375       1,236       1,187       1,305  
Weighted average shares applicable to diluted earnings per share
    95,351        96,604        94,950        97,796  
                                 
Diluted earnings per share
  $ 1.09     $ 1.05     $ 3.23     $ 2.92  

Information needed to compute basic earnings per share is provided in the unaudited condensed consolidated statements of earnings.

The following 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 average unrecognized compensation and windfall tax benefits, exceeded the average closing stock price for the period):

   
Three Months Ended
 
Nine Months Ended
Option Price
 
September 27,
2009
 
September 28,
2008
 
September 27,
2009
 
September 28,
2008
                 
$ 40.08
 
1,146,235
 
 –
 
1,146,235
 
 −
$ 43.69
 
 –
 
 355,050
 
 73,145
 
 −
$ 49.32
 
 883,179
 
 906,779
 
 883,179
 
 906,779
$ 50.11
 
 848,275
 
 871,600
 
 848,275
 
 871,600
   
2,877,689
 
2,133,429
 
2,950,834
 
 1,778,379

Although the exercise price for the $40.08 options shown in the table above is below the average trading price for Ball’s common stock during the third quarter and first nine months of 2009, the average unrecognized compensation related to them is relatively high. As a result, the assumed proceeds associated with them could be used to purchase more shares than would be outstanding upon exercise of the options outstanding at September 27, 2009. Therefore, the shares were anti-dilutive.
 
15.
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, inflation, interest rates, foreign currencies and prices of the company’s common stock in regard to common share repurchases and, to a lesser extent, variable deferred compensation stock programs, although there can be no assurance that these policies and procedures will be successful. Even though 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 our risk management policies and procedures will always be effective.

 
Page 19

 


Notes to Unaudited Condensed Consolidated Financial Statements
Ball Corporation and Subsidiaries

15.
Financial Instruments and Risk Management (continued)
 
Collateral Calls

Our agreements with our 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 similar collateral posting arrangements with certain customers and financial counterparties on these derivative contracts. The cash flows of the margin calls are shown within the investing section of our unaudited condensed consolidated statements of cash flows. As of September 27, 2009, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position was $220 million collateralized by $67.5 million. Collateral provided to counterparties has been offset by cash collateral receipts from our customers of $47.7 million, resulting in a net margin position of $19.8 million at September 27, 2009 ($105.5 million net was outstanding at December 31, 2008). The majority of these contracts will settle during 2009. If the company’s public credit rating was downgraded, there would be no impact to our net cash collateral postings as of September 27, 2009.

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 hedges of commodity price risk where there is not a pass-through arrangement in the sales contract so as to match underlying purchase volumes and pricing with sales volumes and pricing.

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. Where there is not a pass-through arrangement, the company is at risk when the price of the aluminum we purchase does not match the price of aluminum included in the sales price to the customer. In these situations, we also use forward and option contracts as cash flow hedges to minimize future aluminum price risk, as well as foreign exchange exposures, to match underlying aluminum purchase volumes and pricing with the sales volumes and aluminum pricing for those sales contracts.

The company had aluminum contracts with notional amounts of approximately $1.2 billion and $1.4 billion at September 27, 2009, and December 31, 2008, respectively. The aluminum contracts include derivative instruments for which the company elects mark-to-market accounting, as well as cash flow hedges that offset sales contracts of various terms and lengths. Cash flow hedges related to forecasted transactions and firm commitments expire through November 2014. Included in shareholders’ equity at September 27, 2009, within accumulated other comprehensive earnings (loss) was a net after tax loss of $53.3 million associated with these contracts. A net loss of $41.4 million is expected to be recognized in the consolidated statement of earnings during the next 12 months, substantially all of which will be passed through to customers under our sales contracts resulting in little or no earnings impact to Ball.

Most of our plastic packaging, Americas, sales contracts include provisions to fully pass through changes in the cost of resin. As a result, we believe we have minimal exposure related to changes in the cost of plastic resin. Similarly, most of our metal food and household products packaging, Americas, sales contracts either include provisions permitting us to pass through some or all steel cost increases, or they incorporate annually negotiated steel costs. In 2008 and thus far in 2009, we have been able to pass through to our customers substantially all steel cost increases. We anticipate at this time that we will be able to pass through most of any steel cost increases that occur over the next 12 months.

 
Page 20

 


Notes to Unaudited Condensed Consolidated Financial Statements
Ball Corporation and Subsidiaries

15.
Financial Instruments and Risk Management (continued)

In our packaging businesses, we generally have the ability to pass commodity price increases onto customers; however, we are exposed to the risk of absorbing price declines between the time the commodity is purchased and when it is invoiced to the customer. The impact from holding the inventory will increase when there is significant movement in the pricing of the commodity, which occurred during the first half of 2009.

Interest Rate and Inflation 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, with interest payments and maturities concurrent with the principal, payment and maturity of the hedged debt. Interest rate instruments held by the company at September 27, 2009, included pay-fixed interest rate swaps and interest rate collars and were designated as cash flow hedges, because they protect us against changes in interest payments on our variable rate debt obligations. 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.

At September 27, 2009, the company had outstanding interest rate swap agreements in Europe with notional amounts of €135 million ($198 million) paying fixed rates and expiring within the next two years. An approximate €4.4 million ($6.5 million) net after tax loss associated with these contracts was included in accumulated other comprehensive earnings (loss) at September 27, 2009, of which €3.2 million ($4.7 million) of net loss is expected to be recognized in the consolidated statement of earnings during the next 12 months.

At September 27, 2009, the company had outstanding in the U.S. interest rate collars totaling $150 million and interest rate swaps totaling $100 million. The value of these contracts in accumulated other comprehensive earnings (loss) at September 27, 2009, was a loss of approximately $0.6 million, all of which is expected to be recognized in the consolidated statement of earnings during the next 12 months.

We also use European inflation option contracts to limit the impacts from spikes in inflation against certain multi-year sales contracts. At September 27, 2009, the company had inflation options in Europe with notional amounts of €115 million ($169 million). The company uses mark-to-market accounting for these options, and the market price of the options at September 27, 2009, amounted to €1 million ($1.5 million). The contracts expire within the next four years.

Approximately $2.5 million of net gain related to the termination or deselection of hedges was included in accumulated other comprehensive earnings (loss) at September 27, 2009. The amount recognized thus far in 2009 earnings related to these terminated hedges was insignificant. The balance will be recognized over the next seven years.

Equity Price Risk

As part of the company’s share repurchase program and as a way to partially reduce cash flow and earnings volatility, as well as stock price changes associated with the company’s variable deferred compensation stock program, from time to time the company sells equity put options on its common stock.  Mark-to-market accounting applies to these equity put options. The variance between the historical fair value and the current market value of outstanding equity put options has been included in earnings ($0.6 million and $3.2 million of income in the third quarter and in the first nine months of 2009, respectively). All of the outstanding options expired without value during August 2009.

Foreign Currency Exchange Rate Risk

At September 27, 2009, the company had outstanding foreign currency agreements with notional amounts of $241 million expiring during 2009 and 2010. Our objective in managing exposure to foreign currency fluctuations is to protect significant foreign cash flows and earnings from changes associated with foreign currency exchange rate fluctuations 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

 
Page 21

 


Notes to Unaudited Condensed Consolidated Financial Statements
Ball Corporation and Subsidiaries

15.
Financial Instruments and Risk Management (continued)

options, designated as cash flow hedges, is recorded in the company’s quarterly 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, coinciding in amount and maturity with the hedged items, to manage foreign currency exposures. We also use various option strategies to manage the earnings translation of the company’s European operations into U.S. dollars.

Certain forecasted cash flow contracts have not been designated for hedge accounting purposes.  Gains and losses on these contracts are currently recognized in income.
 
Fair Value Measurements

On January 1, 2008, Ball adopted new accounting guidance issued by the FASB related to fair value measurement for financial assets and liabilities and for nonfinancial assets and liabilities measured on a recurring basis. On January 1, 2009, Ball had not identified any significant impact to nonfinancial assets and liabilities as a result of the adoption of that guidance.

The guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value using the following definitions (from highest to lowest priority):

  
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

  
Level 2 – Observable inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data by correlation or other means.

  
Level 3 – Prices or valuation techniques requiring inputs that are both significant to the fair value measurement and unobservable.

We have classified all applicable financial derivative assets and liabilities as Level 2 within the fair value hierarchy as of September 27, 2009, 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. The fair value of debt is discussed in Note 11 to the unaudited condensed consolidated financial statements.

The company uses closing spot and forward market prices as published by the London Metal Exchange, the New York Mercantile Exchange, Reuters and Bloomberg to determine the fair value of its aluminum, currency, energy and interest rate spot and forward