| BALL CORP Item 1A Risk Factors Any of the following risks could materially and adversely affect our business, financial condition or results of operations |
| The loss of a key customer could have a significant negative impact on our sales |
| While we have diversified our customer base, we do sell a majority of our packaging products to relatively few major beverage and packaged food companies, some of which operate in North America, Europe and Asia |
| Although approximately 70 percent of our customer contracts are long-term, these contracts are terminable under certain circumstances, such as our failure to meet quality or volume requirements |
| Because we depend on relatively few major customers, our business, financial condition or results of operations could be adversely affected by the loss of any of these customers, a reduction in the purchasing levels of these customers, a strike or work stoppage by a significant number of these customers &apos employees or an adverse change in the terms of the supply agreements with these customers |
| The primary customers for our aerospace work are US government agencies or their prime contractors |
| Our contracts with these customers are subject to, among other things, the following risks: · unilateral termination for convenience by the customers; · reduction or modification in the scope of the contracts due to changes in the customerapstas requirements or budgetary constraints; · under fixed-price contracts, increased or unexpected costs causing losses or reduced profits; and · under cost reimbursement contracts, unallowable costs causing losses or reduced profits |
| Page 7 of 97 _________________________________________________________________ We face competitive risks from many sources that may negatively impact our profitability |
| Competition within the packaging industry is intense |
| Increases in productivity, combined with surplus capacity in the industry, have maintained competitive pricing pressures |
| The principal methods of competition in the general packaging industry are price, service and quality |
| Some of our competitors may have greater financial, technical and marketing resources |
| Our current or potential competitors may offer products at a lower price or products that are deemed superior to ours |
| We are subject to competition from alternative products which could result in lower profits and reduced cash flows |
| The metal beverage can is subject to significant competition from substitute products, particularly plastic carbonated soft drink bottles made from PET, single serve beer bottles, and containers made of glass, cardboard or other materials |
| Competition from plastic carbonated soft drink bottles is particularly intense in the United States and the United Kingdom |
| There can be no assurance that we will successfully compete against alternative beverage containers which could result in a reduction in our profits or cash flow |
| We have a narrow product range and our business would suffer if usage of our products decreased |
| For the 12 months ended December 31, 2005, 42 percent of our consolidated net sales were from the sale of metal beverage cans, and we expect to derive a significant portion of our future revenues from the sale of metal beverage cans |
| Our business would suffer if the use of metal beverage cans decreased |
| Accordingly, broad acceptance by consumers of aluminum and steel cans for a wide variety of beverages is critical to our future success |
| If demand for glass and PET bottles increases relative to cans, or the demand for aluminum and steel cans does not develop as expected, our business, financial condition or results of operations could be materially adversely affected |
| Our business, financial condition and results of operations are subject to risks resulting from increased international operations |
| We derived 24 percent of our total net sales from outside of North America in the year ended December 31, 2005 |
| The increased scope of international operations may lead to more volatile financial results and make it more difficult for us to manage our business |
| Reasons for this include, but are not limited to, the following: · political and economic instability in foreign markets; · foreign governments &apos restrictive trade policies; · the imposition of duties, taxes or government royalties; · foreign exchange rate risks; · difficulties in enforcement of contractual obligations and intellectual property rights; and · the geographic, time zone, language and cultural differences between personnel in different areas of the world |
| Any of these factors could materially adversely affect our business, financial condition or results of operations |
| We are exposed to exchange rate fluctuations |
| For the 12 months ended December 31, 2005, 72 percent of our net sales were attributable to operations with US dollars as their functional currency, and 28 percent of our net sales were attributable to operations having other functional currencies, with 12 percent of net sales attributable to the euro |
| Historically, Ballapstas foreign operations, including assets and liabilities and revenues and expenses, have been denominated in various currencies other than the US dollar, and we expect that our foreign operations will continue to be so denominated |
| As a result, the US dollar value of Ballapstas foreign operations have varied, and will continue to vary, with exchange rate fluctuations |
| In this respect, historically Ball has been primarily exposed to fluctuations in the exchange rate of the euro, British pound, Canadian dollar, Polish zloty, Chinese renminbi, Brazilian real and Serbian dinar |
| Page 8 of 97 _________________________________________________________________ A decrease in the value of any of these currencies, especially the euro, relative to the US dollar could reduce our profits from foreign operations and the value of the net assets of our foreign operations when reported in US dollars in our financial statements |
| This could have a material adverse effect on our business, financial condition or results of operations as reported in US dollars |
| In addition, fluctuations in currencies relative to currencies in which the earnings are generated may make it more difficult to perform period-to-period comparisons of our reported results of operations |
| For purposes of accounting, the assets and liabilities of our foreign operations, where the local currency is the functional currency, are translated using period-end exchange rates, and the revenues and expenses of our foreign operations are translated using average exchange rates during each period |
| Translation gains and losses are reported in accumulated other comprehensive loss as a component of shareholders &apos equity |
| We actively manage our exposure to foreign currency fluctuations in order to mitigate the effect of foreign cash flow and reduce earnings volatility associated with foreign exchange rate changes |
| We primarily use forward contracts and options to manage our foreign currency exposures and, as a result, we experience gains and losses on these derivative positions offset, in part, by the impact of currency fluctuations on existing assets and liabilities |
| Our business, operating results and financial condition are subject to particular risks in certain regions of the world |
| We may experience an operating loss in one or more regions of the world for one or more periods, which could have a material adverse effect on our business, operating results or financial condition |
| Moreover, overcapacity, which often leads to lower prices, exists in a number of regions, including Asia and Latin America, and may persist even if demand grows |
| Our ability to manage such operational fluctuations and to maintain adequate long-term strategies in the face of such developments will be critical to our continued growth and profitability |
| If we fail to retain key management and personnel we may be unable to implement our key objectives |
| We believe that our future success depends, in large part, on our experienced management team |
| Losing the services of key members of our management team could make it difficult for us to manage our business and meet our objectives |
| Decreases in our ability to apply new technology and know-how may affect our competitiveness |
| Our success depends in part on our ability to improve production processes and services |
| We must also introduce new products and services to meet changing customer needs |
| If we are unable to implement better production processes or to develop new products, we may not be able to remain competitive with other manufacturers |
| As a result, our business, financial condition or results of operations could be adversely affected |
| Bad weather and climate changes may result in lower sales |
| We manufacture packaging products primarily for beverages and foods |
| Unseasonably cool weather can reduce demand for certain beverages packaged in our containers |
| In addition, poor weather conditions or changes in climate that reduce crop yields of fruits and vegetables can adversely affect demand for our food containers, creating potentially adverse effects on our business |
| Page 9 of 97 _________________________________________________________________ We are vulnerable to fluctuations in the supply and price of raw materials |
| We purchase aluminum, steel, plastic resin and other raw materials and packaging supplies from several sources |
| While all such materials are available from numerous independent suppliers, raw materials are subject to fluctuations in price attributable to a number of factors, including general economic conditions, the demand by other industries for the same raw materials and the availability of complementary and substitute materials |
| Although we enter into commodities purchase agreements from time to time and use derivative instruments to hedge our risk, we cannot ensure that our current suppliers of raw materials will be able to supply us with sufficient quantities or at reasonable prices |
| Increases in raw material costs could have a material adverse effect on our business, financial condition or results of operations |
| Because our North American contracts often pass raw material costs directly on to the customer, increasing raw materials costs may not impact our near-term profitability but could decrease our sales volume over time |
| In Europe, our contracts do not typically allow us to pass on increased raw material costs and we regularly use derivative agreements to manage this risk; however, our hedging procedures may be insufficient and our results could be materially impacted if materials costs increase suddenly in Europe |
| Prolonged work stoppages at plants with union employees could jeopardize our financial position |
| As of December 31, 2005, approximately one-third of our employees in North America and most of our employees in Europe were covered by one or more collective bargaining agreements |
| These collective bargaining agreements have staggered expirations over the next three years |
| Although we consider our employee relations to be generally good, a prolonged work stoppage or strike at any facility with union employees could have a material adverse effect on our business, financial condition or results of operations |
| In addition, we cannot assure you that upon the expiration of existing collective bargaining agreements new agreements will be reached without union action or that any such new agreements will be on terms satisfactory to us |
| Our business is subject to substantial environmental remediation and compliance costs |
| Our operations are subject to federal, state and local laws and regulations relating to environmental hazards, such as emissions to air, discharges to water, the handling and disposal of hazardous and solid wastes and the cleanup of hazardous substances |
| The US Environmental Protection Agency has designated us, along with numerous other companies, as a potentially responsible party for the cleanup of several hazardous waste sites |
| Based on available information, we do not believe that any costs incurred in connection with such sites will have a material adverse effect on our financial condition, results of operations, capital expenditures or competitive position |
| If we were required to write down all or part of our goodwill, our net earnings and net worth could be materially adversely affected |
| We have dlra1cmam258dtta6 million of net goodwill recorded on our consolidated balance sheet as of December 31, 2005 |
| We are required to periodically determine if our goodwill has become impaired, in which case we would write down the impaired portion of our goodwill |
| If we were required to write down all or part of our goodwill, our net earnings and net worth could be materially adversely affected |
| If the investments in Ballapstas pension plans do not perform as expected, we may have to contribute additional amounts to the plans, which would otherwise be available to cover operating expenses |
| Ball maintains noncontributory, defined benefit pension plans covering substantially all of its US employees, which we fund based on certain actuarial assumptions |
| The plans &apos assets consist primarily of common stocks and fixed income securities |
| If the investments in the plan do not perform at expected levels, then we will have to contribute additional funds to ensure that the program will be able to pay out benefits as scheduled |
| Such an increase in funding could result in a decrease in our available cash flow and net earnings and the recognition of such an increase could result in a reduction to our shareholders &apos equity |
| We recorded an increase in our minimum pension liability in the fourth quarter of 2005 largely as a reduction in the assumed discount rate |
| This increase in pension liability was reflected as an increase in other liabilities and a corresponding decrease in stockholders &apos equity |
| Page 10 of 97 _________________________________________________________________ Our significant debt could adversely affect our financial health and prevent us from fulfilling our obligations under the notes |
| We have a significant amount of debt |
| On December 31, 2005, we had total debt of dlra1cmam589dtta7 million |
| Our ratio of earnings to fixed charges as of that date was 3dtta4 times (see Exhibit 12 attached to this Annual Report) |
| Our high level of debt could have important consequences, including the following: · use of a large portion of our cash flow to pay principal and interest on our notes, the new credit facilities and our other debt, which will reduce the availability of our cash flow to fund working capital, capital expenditures, research and development expenditures and other business activities; · increase our vulnerability to general adverse economic and industry conditions; · limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; · restrict us from making strategic acquisitions or exploiting business opportunities; · place us at a competitive disadvantage compared to our competitors that have less debt; · limit our ability to make capital expenditures in order to maintain our manufacturing plants in good working order and repair; and · limit, along with the financial and other restrictive covenants in our debt, among other things, our ability to borrow additional funds, dispose of assets or pay cash dividends |
| In addition, a substantial portion of our debt bears interest at variable rates |
| While we sometimes enter into agreements limiting our exposure, any such agreements may not offer complete protection from this risk |
| We will require a significant amount of cash to service our debt |
| Our ability to generate cash depends on many factors beyond our control |
| Our ability to make payments on and to refinance our debt, including the notes, and to fund planned capital expenditures and research and development efforts, will depend on our ability to generate cash in the future |
| Based on our current level of operations, we believe our cash flow from operations, available cash and available borrowings under our new credit facilities, will be adequate to meet our future liquidity needs for the next several years barring any unforeseen circumstances which are beyond our control |
| We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our new credit facilities or otherwise in an amount sufficient to enable us to pay our debt, including the notes, or to fund our other liquidity needs |
| We cannot assure you that we will be able to refinance any of our debt, including our new credit facilities and our senior notes, on commercially reasonable terms or at all |