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 April 2, 2000
----------------------
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 [ ]
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 April 30, 2000
------------------- ---------------------------------
Common Stock, 29,718,632 shares
without par value
Ball Corporation and Subsidiaries
QUARTERLY REPORT ON FORM 10-Q
For the period ended April 2, 2000
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Unaudited Condensed Consolidated Statements
of Earnings for the Three-Month Periods
Ended April 2, 2000, and April 4, 1999 3
Unaudited Condensed Consolidated Balance
Sheets at April 2, 2000, and December 31, 1999 4
Unaudited Condensed Consolidated Statements of
Cash Flows for the Three-Month Periods Ended
April 2, 2000, and April 4, 1999 5
Notes to Unaudited Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
PART II. OTHER INFORMATION 17
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Ball Corporation and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
($ in millions, except per share amounts)
Three Months Ended
---------------------------------------
April 2, 2000 April 4, 1999
----------------- -----------------
- ----------------------------------------------------------------------------------------------------------------------
Net sales $ 817.6 $ 820.3
- ----------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales (excluding depreciation and amortization) 680.9 691.9
Depreciation and amortization (Notes 6 and 7) 40.4 41.5
Selling and administrative 33.5 30.5
Receivable securitization fees and product development (Note 8) 3.7 3.6
----------------- -----------------
758.5 767.5
- ----------------------------------------------------------------------------------------------------------------------
Earnings before interest and taxes 59.1 52.8
- ----------------------------------------------------------------------------------------------------------------------
Interest expense 23.4 28.2
----------------- -----------------
Earnings before taxes 35.7 24.6
Provision for taxes (13.8) (9.7)
Minority interests (0.2) 0.5
Equity in earnings of affiliates (1.7) 0.3
----------------- -----------------
Net earnings 20.0 15.7
Preferred dividends, net of tax (0.6) (0.7)
- ----------------------------------------------------------------------------------------------------------------------
Earnings attributable to common shareholders $ 19.4 $ 15.0
- ----------------------------------------------------------------------------------------------------------------------
Earnings per common share (Note 10) $ 0.65 $ 0.50
================= =================
Diluted earnings per share (Note 10) $ 0.62 $ 0.47
================= =================
Cash dividends declared per common share $ 0.15 $ 0.15
================= =================
See accompanying notes to unaudited condensed consolidated financial statements.
Ball Corporation and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions)
April 2, 2000 December 31, 1999
----------------- -----------------
ASSETS
Current assets
Cash and temporary investments $ 42.5 $ 35.8
Accounts receivable, net 278.3 220.2
Inventories, net (Note 5) 639.9 565.9
Deferred taxes and prepaid expenses 77.1 73.9
----------------- -----------------
Total current assets 1,037.8 895.8
Property, plant and equipment, net (Note 6) 1,093.3 1,121.2
Goodwill and other assets (Note 7) 695.0 715.1
----------------- -----------------
Total Assets $ 2,826.1 $ 2,732.1
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt and current portion of long-term debt (Note 8) $ 150.9 $ 104.0
Accounts payable 336.0 345.5
Salaries, wages and accrued employee benefits 78.6 114.7
Other current liabilities 95.6 105.9
----------------- -----------------
Total current liabilities 661.1 670.1
Long-term debt (Note 8) 1,176.3 1,092.7
Employee benefit obligations, deferred income taxes and other
noncurrent liabilities 266.1 258.7
----------------- -----------------
Total liabilities 2,103.5 2,021.5
----------------- -----------------
Contingencies (Note 11)
Minority interests 19.1 19.7
----------------- -----------------
Shareholders' equity (Note 9)
Series B ESOP Convertible Preferred Stock 55.3 56.2
Unearned compensation - ESOP (20.5) (20.5)
----------------- -----------------
Preferred shareholder's equity 34.8 35.7
----------------- -----------------
Common stock (36,309,782 shares issued - 2000;
35,849,778 shares issued - 1999) 428.5 413.0
Retained earnings 496.1 481.2
Accumulated other comprehensive loss (28.0) (26.7)
Treasury stock, at cost (6,528,930 shares - 2000;
6,032,651 shares - 1999) (227.9) (212.3)
----------------- -----------------
Common shareholders' equity 668.7 655.2
----------------- -----------------
Total shareholders' equity 703.5 690.9
----------------- -----------------
Total Liabilities and Shareholders' Equity $ 2,826.1 $ 2,732.1
================= =================
See accompanying notes to unaudited condensed consolidated financial statements.
Ball Corporation and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
($ in millions)
Three Months Ended
---------------------------------------
April 2, 2000 April 4, 1999
----------------- -----------------
Cash Flows from Operating Activities
Net earnings $ 20.0 $ 15.7
Noncash charges to net earnings:
Depreciation and amortization 40.4 41.5
Other, net (2.0) 15.0
Changes in working capital components (186.4) (181.5)
----------------- -----------------
Net cash used in operating activities (128.0) (109.3)
----------------- -----------------
Cash Flows from Investing Activities
Additions to property, plant and equipment (23.5) (21.5)
Incentive loan receipts and other, net 34.4 3.2
----------------- -----------------
Net cash provided by (used in) investing activities 10.9 (18.3)
----------------- -----------------
Cash Flows from Financing Activities
Long-term borrowings 110.5 84.0
Repayments of long-term borrowings (23.1) (17.5)
Change in short-term borrowings 43.3 76.0
Common and preferred dividends (4.5) (4.5)
Proceeds from issuance of common stock under
various employee and shareholder plans 15.2 7.0
Acquisitions of treasury stock (15.6) (8.8)
Other, net (2.0) (0.5)
----------------- -----------------
Net cash provided by financing activities 123.8 135.7
----------------- -----------------
Net Change in Cash and Temporary Investments 6.7 8.1
Cash and temporary investments - beginning of period 35.8 34.0
----------------- -----------------
Cash and Temporary Investments - End of Period $ 42.5 $ 42.1
================= =================
See accompanying notes to unaudited condensed consolidated financial statements.
Ball Corporation and Subsidiaries
April 2, 2000
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying condensed consolidated financial statements include the
accounts of Ball Corporation and its controlled affiliates in which it holds a
majority equity position (collectively, Ball or the Company) and have been
prepared by the Company without audit. Certain information and footnote
disclosures, including significant accounting policies, normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. 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 assets and liabilities at
the date of the financial statements, and reported amounts of revenues and
expenses during the reporting period. Future events could affect these
estimates. However, the Company believes that the financial statements reflect
all adjustments which are of a normal recurring nature and are necessary for a
fair statement of the results for the interim period.
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
segment. It is suggested that these unaudited condensed consolidated financial
statements and accompanying notes be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's latest
annual report.
Certain prior-year amounts have been reclassified in order to conform with the
current-year presentation.
2. New Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
essentially requires all derivatives to be recorded on the balance sheet at fair
value and establishes new accounting practices for hedge instruments. In June
1999 SFAS No. 137 was issued to defer the effective date of SFAS No. 133 by one
year. As a result, SFAS No. 133 will not be effective for Ball until 2001. The
effect, if any, of adopting this standard has not yet been determined.
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of Accounting Principles Board Opinion No. 25,"
clarifies certain issues related to the accounting for stock compensation and is
effective for Ball as of July 1, 2000. The effect, if any, of adopting this
standard has not yet been determined.
3. Business Segment Information
Ball's operations are organized along its product lines in two segments - the
packaging segment and the aerospace and technologies segment. The accounting
policies of the segments are the same as those in the condensed consolidated
financial statements.
The packaging segment includes the lines of businesses that manufacture metal
and PET (polyethylene terephthalate) containers, primarily for use in beverage
and food packaging. The Company's consolidated packaging operations are located
in and serve North America (the U.S. and Canada) and Asia, primarily the
People's Republic of China (PRC). Ball also has investments, which are accounted
for under the equity method, in packaging companies largely in the PRC, Brazil
and Thailand.
The aerospace and technologies segment includes civil space systems, defense
systems, commercial space operations, commercial products and technologies,
systems engineering services, advanced antenna and video systems and products
and technology.
Summary of Business by Segment Three Months Ended
---------------------------------------
April 2, 2000 April 4, 1999
($ in millions) ----------------- -----------------
Net Sales
Packaging $ 730.1 $ 724.8
Aerospace and technologies 87.5 95.5
----------------- -----------------
Consolidated net sales $ 817.6 $ 820.3
================= =================
Operating Earnings
Packaging $ 59.2 $ 50.8
Aerospace and technologies 5.4 6.2
----------------- -----------------
Segment earnings before interest and taxes 64.6 57.0
Corporate undistributed expenses, net (5.5) (4.2)
----------------- -----------------
Earnings before interest and taxes 59.1 52.8
Interest expense (23.4) (28.2)
Provision for taxes on income (13.8) (9.7)
Minority interests (0.2) 0.5
Equity in earnings of affiliates (1.7) 0.3
----------------- -----------------
Consolidated net earnings $ 20.0 $ 15.7
================= =================
April 2, 2000 December 31, 1999
----------------- -----------------
Net Investment
Packaging $ 1,339.7 $ 1,319.7
Aerospace and technologies 165.5 161.6
----------------- -----------------
Segment net investment 1,505.2 1,481.3
Consolidating eliminations and other (801.7) (790.4)
----------------- -----------------
Consolidated net investment $ 703.5 $ 690.9
================= =================
4. Acquisitions and Plant Closures
On August 10, 1998, Ball acquired substantially all the assets and assumed
certain liabilities of the North American beverage can manufacturing business of
Reynolds Metals Company (Acquisition). In connection with the Acquisition, the
Company provided $51.3 million in the opening balance sheet for the costs of
integrating the acquired business, which included the closure of a headquarters
facility and three plants. The $51.3 million included $22.8 million which was
transferred to pension and other postretirement benefit liability accounts. The
plants and certain equipment are for sale. Employees of the closed facilities,
primarily comprised of manufacturing and support personnel, have been
terminated. The carrying value of the fixed assets held for sale was
approximately $21.5 million at April 2, 2000. Subsequent increases in actual
costs, if any, will be included in current-period earnings, and decreases, if
any, will result in a further reduction of goodwill.
The following table summarizes the first quarter activity related to the
remaining integration costs associated with the Acquisition:
($ in millions) Employee Other Exit
Severance Costs Total
------------- ------------- -------------
Balance at December 31, 1999 $ 12.8 $ 2.2 $ 15.0
Payments made (1.8) (0.3) (2.1)
Reclassification of prior-period payments - 1.6 1.6
------------- ------------- -------------
Balance at April 2, 2000 $ 11.0 $ 3.5 $ 14.5
============= ============= =============
During the last quarter of 1998, the Company announced the closure of two of its
plants located in the PRC and removed from service manufacturing equipment at a
third plant. The actions resulted in a $56.2 million, largely noncash, charge in
1998, primarily for the write-down to net realizable value of fixed assets,
goodwill and other assets. The carrying value of the remaining fixed assets held
for sale was $10 million at April 2, 2000.
5. Inventories
($ in millions) April 2, 2000 December 31, 1999
----------------- -----------------
Raw materials and supplies $ 218.6 $ 238.0
Work in process and finished goods 421.3 327.9
----------------- -----------------
$ 639.9 $ 565.9
================= =================
6. Property, Plant and Equipment
($ in millions) April 2, 2000 December 31, 1999
----------------- -----------------
Land $ 62.1 $ 61.6
Buildings 432.5 433.6
Machinery and equipment 1,444.6 1,439.4
----------------- -----------------
1,939.2 1,934.6
Accumulated depreciation (845.9) (813.4)
----------------- -----------------
$ 1,093.3 $ 1,121.2
================= =================
Depreciation expense amounted to $36.1 million and $35.5 million for the
three-month periods ended April 2, 2000, and April 4, 1999, respectively.
7. Goodwill and Other Assets
($ in millions) April 2, 2000 December 31, 1999
----------------- -----------------
Goodwill $ 464.3 $ 482.9
Investments in affiliates 78.6 81.3
Other 152.1 150.9
----------------- -----------------
$ 695.0 $ 715.1
================= =================
Goodwill is net of accumulated amortization of $46.1 million at April 2, 2000
(including the reclassification of prior-year amortization), and $41.9 million
at December 31, 1999. Total amortization expense amounted to $4.3 million and
$6 million for the three-month periods ended April 2, 2000, and April 4, 1999,
respectively, of which $3.2 million and $3.5 million related to the amortization
of goodwill.
8. Debt and Guarantees of Subsidiaries
Debt includes $300 million of 7.75% Senior Notes due in 2006, $250 million of
8.25% Senior Subordinated Notes due in 2008 and borrowings under a Senior Credit
Facility, which bears interest at variable rates. At April 2, 2000,
approximately $452 million was available under the revolving credit facility
portion of the Senior Credit Facility.
The Senior Notes, Senior Subordinated Notes and Senior Credit Facility
agreements are guaranteed on a full, unconditional, and joint and several basis
by certain of the Company's domestic wholly owned subsidiaries and contain
certain covenants and restrictions including, among other things, limits on the
incurrence of additional indebtedness and increases in dividends. Exhibit 20.1
contains 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.
A receivables sales agreement provides for the ongoing, revolving sale of a
designated pool of trade accounts receivable of Ball's U.S. packaging
operations, up to $125 million. Net funds received from the sale of the accounts
receivable totaled $122.5 million and $119.5 million at April 2, 2000, and
April 4, 1999, respectively. Fees incurred in connection with the sale of
accounts receivable, which are included in other expenses, totaled $2 million
and $1.7 million for the first three months of 2000 and 1999, respectively.
The Company was not in default of any loan agreement at April 2, 2000, and has
met all payment obligations. Latapack-Ball Embalagens Ltda. (Latapack-Ball), the
Company's 50 percent-owned equity affiliate in Brazil, was in noncompliance with
certain financial provisions, including current and debt-to-equity ratios, under
a fixed-term loan agreement of which $44 million was outstanding at the quarter
end. Latapack-Ball has received waivers from the lender in respect of the
noncompliance covering the periods prior to January 1, 2000, and has requested a
further waiver in respect of the noncompliance during the first quarter.
9. Shareholders' Equity
The composition of the accumulated other comprehensive loss at April 2, 2000,
and December 31, 1999, is primarily the cumulative effect of foreign currency
translation and additional minimum pension liability. Total comprehensive income
was $18.7 million for the quarter ended April 2, 2000, and $17.7 million for the
quarter ended April 4, 1999. The difference between net income and comprehensive
income for each period represents the effects of foreign currency translation.
Issued and outstanding shares of the Series B ESOP Convertible Preferred Stock
were 1,503,177 shares at April 2, 2000, and 1,530,411 shares at December 31,
1999.
10. Earnings Per Share
The following table provides additional information on the computation of
earnings per share amounts:
($ in millions, except per share amounts) Three Months Ended
---------------------------------------
April 2, 2000 April 4, 1999
----------------- -----------------
Earnings per Common Share
Net earnings $ 20.0 $ 15.7
Preferred dividends, net of tax (0.6) (0.7)
----------------- -----------------
Earnings attributable to common shareholders $ 19.4 $ 15.0
================= =================
Weighted average common shares (000s) 29,707 30,240
================= =================
Earnings per common share $ 0.65 $ 0.50
================= =================
Diluted Earnings per Share
Net earnings 20.0 15.7
Adjustment for deemed ESOP cash contribution in
lieu of the ESOP Preferred dividend (0.5) (0.5)
----------------- -----------------
Earnings attributable to common shareholders $ 19.5 $ 15.2
================= =================
Weighted average common shares (000s) 29,707 30,240
Effect of dilutive stock options 251 438
Common shares issuable upon conversion of
the ESOP Preferred stock 1,762 1,833
----------------- -----------------
Weighted average shares applicable
to diluted earnings per share 31,720 32,511
================= =================
Diluted earnings per share $ 0.62 $ 0.47
================= =================
11. Contingencies
The Company is subject to various risks and uncertainties in the ordinary course
of business due, in part, to the competitive nature of the industries in which
Ball participates, its operations in developing markets outside the U.S.,
changing commodity prices for the materials used in the manufacture of its
products and changing capital markets. Where practicable, the Company attempts
to reduce these risks and uncertainties through the establishment of risk
management policies and procedures, including, at times, the use of certain
derivative financial instruments.
The U.S. government disputed the Company's claim to recoverability (by means of
allocation to government contracts) of reimbursed costs associated with Ball's
ESOP for fiscal years 1989 through 1995, as well as the corresponding
prospective costs accrued after 1995. The government has not reimbursed the
Company for certain disputed ESOP expenses incurred or accrued after 1995. A
deferred payment agreement for the costs reimbursed through 1995 was entered
into between the government and Ball. On October 10, 1995, the Company filed its
complaint before the Armed Services Board of Contract Appeals (ASBCA) seeking
final adjudication of this matter. Trial before the ASBCA was conducted in
January 1997. Since that time, the Defense Contract Audit Agency (DCAA) has
issued a Draft Audit Report disallowing a portion of the Company's ESOP costs
for 1994 through 1997 on the asserted basis that the Company's dividend
contributions to the ESOP do not constitute allowable deferred compensation. The
Draft Audit Report takes the position that the disallowance is not covered by
the pending decision by the ASBCA. However, more recently, the Corporate
Administrative Contracting Officer assigned to Ball has resolved the DCAA's
disallowance in Ball's favor and has incorporated this favorable resolution into
a Memorandum of Agreement with Ball to close out cost claims for years 1994
through 1997. On April 3, 2000, the ASBCA, in a formal decision, sustained the
Company's appeal. At this time, the U.S. government has not indicated whether or
not it will appeal. The Company's information at this time does not indicate
that this matter will have a material adverse effect upon the liquidity, results
of operations or financial condition of the Company.
From time to time, the Company is subject to routine litigation incident to its
business. Additionally, the U.S. Environmental Protection Agency has designated
Ball as a potentially responsible party, along with numerous other companies,
for the cleanup of several hazardous waste sites. However, the Company's
information at this time does not indicate that these matters will have a
material adverse effect upon the liquidity, results of operations or financial
condition of the Company.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements and the accompanying
notes. Ball Corporation and subsidiaries are referred to collectively as "Ball"
or the "Company" in the following discussion and analysis.
RESULTS OF OPERATIONS
Consolidated Sales and Earnings
Ball's operations are organized along its product lines in two segments:
(1) packaging and (2) aerospace and technologies. The following table summarizes
the results of these two segments:
($ in millions) Three Months Ended
---------------------------------------
April 2, 2000 April 4, 1999
----------------- -----------------
Net Sales
Packaging $ 730.1 $ 724.8
Aerospace and technologies 87.5 95.5
----------------- -----------------
Consolidated net sales $ 817.6 $ 820.3
================= =================
Earnings Before Interest and Taxes
Packaging $ 59.2 $ 50.8
Aerospace and technologies 5.4 6.2
----------------- -----------------
Consolidated segment earnings
before interest and taxes $ 64.6 $ 57.0
================= =================
Packaging Segment
The packaging segment includes metal and PET (polyethylene terephthalate)
container products, primarily used in beverage and food packaging. The Company's
packaging operations are located in and serve North America (the U.S. and
Canada) and Asia, primarily the People's Republic of China (PRC). While the
Company closed three plants during the past year, largely eliminating the
associated costs, packaging segment sales remained comparable to the first
quarter of 1999. Segment operating margins for the first quarter increased to
8.1 percent from 7 percent, reflecting improved production efficiencies and cost
reductions, including the effects of the consolidation actions taken in 1999 and
1998.
North American metal beverage container sales, which represented approximately
70 percent of segment sales in the first quarter of 2000, decreased
approximately 3 percent in comparison to the first quarter of 1999. The decrease
was primarily due to lower soft drink container shipments. During the first
quarter of 2000, Ball closed an acquired aluminum beverage can plant in Tampa
and began operation of a new, high-speed production line in its other Tampa
plant.
North American metal food container sales, which comprised approximately
15 percent of segment sales in the first three months of 2000, increased
approximately 14 percent over the same period in 1999. This increase was the
result of volume gains with several customers.
During the latter part of the first quarter of 2000, Ball and ConAgra Grocery
Products Company (ConAgra), a unit of ConAgra, Inc., formed a joint venture
company called Ball Western Can Company (Ball Western) to acquire and operate
certain ConAgra can manufacturing assets in California. The transaction closed
on April 10, 2000. Under a separate agreement, Ball will purchase certain
ConAgra manufacturing equipment (for $4 million) which will be utilized at an
existing Ball plant in Tennessee. Ball Western and Ball will supply metal food
cans and ends under long-term agreements to ConAgra, whose requirements are
currently about one billion cans and ends per year.
Plastic container sales, which comprised approximately 8 percent of segment
sales in the first quarter of 2000, increased approximately 6 percent compared
to the same period in 1999. The increase was primarily due to the pass-through
of increased resin prices, as unit volumes were comparable year over year. The
sales mix continues to be weighted primarily toward carbonated soft drinks and
water. Plastic beer containers, which utilize a multi-layer technology, are
currently being tested by several of Ball's customers.
Sales were up nearly 5 percent in China and Hong Kong. Operating earnings were
considerably improved compared to 1999, due largely to prior-year plant
consolidations which helped improve operating efficiencies.
Aerospace and Technologies Segment
The aerospace and technologies segment had lower sales and earnings in the first
three months of 2000 as a result of a large program reaching completion, as well
as delays in expected contract awards. Backlog at the end of the first quarter
was approximately $337 million compared to $346 million at December 31, 1999,
and $271 million at April 4, 1999. Year-to-year comparisons of backlog are not
necessarily indicative of the trend of future operations.
Selling and Administrative Expenses
Higher consolidated selling and administrative expenses in 2000 compared to 1999
were due in large part to higher accruals for employee benefit costs.
Interest and Taxes
Consolidated interest expense for the first three months of 2000 was
$23.4 million compared to $28.2 million for the same period in 1999. The
decrease is primarily attributable to a lower level of average borrowings during
the period, as well as increased capitalization of interest, largely in
connection with the Tampa plant expansion, and a higher percentage of fixed,
lower rate debt in 2000 compared to 1999, partially as a result of fixing the
Company's floating debt using interest rate swaps.
Ball's lower consolidated effective income tax rate for the first quarter of
2000, as compared to the same period in 1999, is primarily due to the favorable
effects of an election late in the first quarter of 1999 to treat certain
investments in Hong Kong and the PRC as partnerships for U.S. tax purposes.
Results of Equity Affiliates and Minority Interests
Equity earnings and losses in affiliates are largely attributable to those from
investments in the PRC, Thailand and Brazil. Results were a loss of $1.7 million
in the first quarter of 2000 compared to earnings of $0.3 million for the same
period in 1999. Results in Brazil were hampered by the effects of a weakened
Brazilian real and slower sales.
Minority interests' share of income, which was $0.2 million for the first three
months of 2000 compared to their share of losses of $0.5 million for the same
period in 1999, reflected improved results.
Other Items
In connection with an acquisition in 1998, the Company provided $51.3 million in
the opening balance sheet for the costs of integrating the acquired business,
which included the closure of a headquarters facility and three plants. The
employees have been terminated, and the plants and certain equipment are for
sale. During the first quarter of 2000, the Company made payments of
$2.1 million and reclassified prior-period payments totaling $1.6 million.
The carrying value of the fixed assets held for sale was approximately
$21.5 million at April 2, 2000.
During the last quarter of 1998, the Company announced the closure of two of its
plants located in the PRC and removed from service manufacturing equipment at a
third plant. The actions resulted in a $56.2 million, largely noncash, charge in
1998, primarily for the write-down to net realizable value of fixed assets,
goodwill and other assets. The carrying value of the remaining fixed assets held
for sale was $10 million at April 2, 2000.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
essentially requires all derivatives to be recorded on the balance sheet at fair
value and establishes new accounting practices for hedge instruments. In June
1999 SFAS No. 137 was issued to defer the effective date of SFAS No. 133 by one
year. As a result, SFAS No. 133 will not be effective for Ball until 2001. The
effect, if any, of adopting this standard has not yet been determined.
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of Accounting Principles Board Opinion No. 25,"
clarifies certain issues related to the accounting for stock compensation and is
effective for Ball as of July 1, 2000. The effect, if any, of adopting this
standard has not yet been determined.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The $128 million of cash used in operations for the first quarter reflected
seasonally increased working capital partially offset by improved earnings.
Capital spending of $23.5 million in the first quarter of 2000 was well below
depreciation of $40.4 million. Capital spending is expected to be approximately
$140 million for the year.
Total debt increased to $1,327.2 million at April 2, 2000, compared to
$1,196.7 million at December 31, 1999, primarily due to seasonal financing for
the normal increase in accounts receivable and inventories. The debt-to-total
capitalization ratio of 64.7 percent at April 2, 2000, rose from 62.7 percent at
December 31, 1999.
Debt includes $300 million of 7.75% Senior Notes due in 2006, $250 million of
8.25% Senior Subordinated Notes due in 2008 and borrowings under a Senior Credit
Facility, which bear interest at variable rates. At April 2, 2000, approximately
$452 million was available under the revolving credit facility portion of the
Senior Credit Facility.
The Senior Notes, Senior Subordinated Notes and Senior Credit Facility
agreements are guaranteed on a full, unconditional, and joint and several basis
by certain of the Company's domestic wholly owned subsidiaries and contain
certain covenants and restrictions including, among other things, limits on the
incurrence of additional indebtedness and increases in dividends. Exhibit 20.1
contains 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.
Ball Asia Pacific Holdings Limited and its consolidated subsidiaries had
short-term uncommitted credit facilities of approximately $136 million at the
end of the first quarter, of which $62 million was outstanding at April 2, 2000.
A receivables sales agreement provides for the ongoing, revolving sale of a
designated pool of trade accounts receivable of Ball's U.S. packaging
operations, up to $125 million. Net funds received from the sale of the accounts
receivable totaled $122.5 million and $119.5 million at April 2, 2000, and
April 4, 1999, respectively. Fees incurred in connection with the sale of
accounts receivable, which are included in other expenses, totaled $2 million
and $1.7 million for the first three months of 2000 and 1999, respectively.
The Company was not in default of any loan agreement at April 2, 2000, and has
met all payment obligations. Latapack-Ball Embalagens Ltda. (Latapack-Ball), the
Company's 50 percent-owned equity affiliate in Brazil, was in noncompliance with
certain financial provisions, including current and debt-to-equity ratios, under
a fixed-term loan agreement of which $44 million was outstanding at the quarter
end. Latapack-Ball has received waivers from the lender in respect of the
noncompliance covering the periods prior to January 1, 2000, and has requested a
further waiver in respect of the noncompliance during the first quarter.
CONTINGENCIES
The Company is subject to various risks and uncertainties in the ordinary course
of business due, in part, to the competitive nature of the industries in which
Ball participates, its operations in developing markets outside the U.S.,
changing commodity prices for the materials used in the manufacture of its
products and changing capital markets. Where practicable, the Company attempts
to reduce these risks and uncertainties through the establishment of risk
management policies and procedures, including, at times, the use of certain
derivative financial instruments.
The U.S. government disputed the Company's claim to recoverability (by means of
allocation to government contracts) of reimbursed costs associated with Ball's
ESOP for fiscal years 1989 through 1995, as well as the corresponding
prospective costs accrued after 1995. The government has not reimbursed the
Company for certain disputed ESOP expenses incurred or accrued after 1995. A
deferred payment agreement for the costs reimbursed through 1995 was entered
into between the government and Ball. On October 10, 1995, the Company filed its
complaint before the Armed Services Board of Contract Appeals (ASBCA) seeking
final adjudication of this matter. Trial before the ASBCA was conducted in
January 1997. Since that time, the Defense Contract Audit Agency (DCAA) has
issued a Draft Audit Report disallowing a portion of the Company's ESOP costs
for 1994 through 1997 on the asserted basis that the Company's dividend
contributions to the ESOP do not constitute allowable deferred compensation. The
Draft Audit Report takes the position that the disallowance is not covered by
the pending decision by the ASBCA. However, more recently, the Corporate
Administrative Contracting Officer assigned to Ball has resolved the DCAA's
disallowance in Ball's favor and has incorporated this favorable resolution into
a Memorandum of Agreement with Ball to close out cost claims for years 1994
through 1997. On April 3, 2000, the ASBCA, in a formal decision, sustained the
Company's appeal. At this time, the U.S. government has not indicated whether or
not it will appeal. The Company's information at this time does not indicate
that this matter will have a material adverse effect upon the liquidity, results
of operations or financial condition of the Company.
From time to time, the Company is subject to routine litigation incident to its
business. Additionally, the U.S. Environmental Protection Agency has designated
Ball as a potentially responsible party, along with numerous other companies,
for the cleanup of several hazardous waste sites. However, the Company's
information at this time does not indicate that these matters will have a
material adverse effect upon the liquidity, results of operations or financial
condition of the Company.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of business, the Company employs established risk
management policies and procedures to reduce its exposure to commodity price
changes, changes in interest rates, fluctuations in foreign currencies and the
Company's common share repurchase program. The Company's objective in managing
its exposure to commodity price changes is to limit the impact of raw material
price changes on earnings and cash flow through arrangements with customers and
suppliers and, at times, through the use of certain derivative instruments, such
as options and forward contracts, designated as hedges. The Company's objective
in managing its exposure to interest rate changes is to limit the impact of
interest rate changes on earnings and cash flow and to lower its overall
borrowing costs. To achieve these objectives, the Company primarily uses
interest rate swaps, collars and options to manage the Company's mix of floating
and fixed-rate debt between a minimum and maximum percentage, which is set by
policy. The Company's objective in managing its exposure to foreign currency
fluctuations is to protect foreign cash flow and reduce earnings volatility
associated with foreign exchange rate changes.
The Company primarily manages the commodity price risk in connection with market
price fluctuations of aluminum by entering into customer sales contracts for
cans and ends which include aluminum-based pricing terms which consider price
fluctuations under its commercial supply contracts for aluminum purchases. The
terms include "band" pricing where there is an upper and lower limit, a fixed
price or only an upper limit to the aluminum component pricing. This matched
pricing affects substantially all of the Company's North American metal beverage
packaging net sales. The Company also, at times, uses certain derivative
instruments such as option and forward contracts to hedge commodity price risk.
Unrealized losses on foreign exchange forward contracts are recorded in the
balance sheet as other current liabilities. Realized gains/losses from hedges
are classified in the income statement consistent with the accounting treatment
of the item being hedged. The Company accrues the differential for interest rate
swaps to be paid or received under these agreements as adjustments to interest
expense over the lives of the swaps. Gains and losses upon the early termination
of swap agreements are deferred in long-term liabilities and amortized as an
adjustment to interest expense over the remaining term of the agreement.
The Company has estimated its market risk exposure using sensitivity analysis.
Market risk exposure has been defined as the changes in fair value of a
derivative instrument assuming a hypothetical 10 percent adverse change in
market prices or rates. The results of the sensitivity analyses as of April 2,
2000, did not differ materially from the amounts reported as of December 31,
1999. Actual changes in market prices or rates may differ from hypothetical
changes.
FORWARD-LOOKING STATEMENTS
The Company has made or implied certain forward-looking statements in this
report. These forward-looking statements represent the Company's goals and are
based on certain assumptions and estimates regarding the worldwide economy,
specific industry technological innovations, industry competitive activity,
interest rates, capital expenditures, pricing, currency movements, product
introductions and the development of certain domestic and international markets.
Some factors that could cause the Company's actual results or outcomes to differ
materially from those discussed in the forward-looking statements include, but
are not limited to, fluctuation in customer growth and demand; insufficient
production capacity; the weather; fuel costs and availability; shortages in and
pricing of raw materials; competition in pricing and the possible decrease in,
or loss of, sales resulting therefrom; loss of profitability and plant closures;
regulatory action; federal and state legislation; interest rates; labor strikes;
boycotts; litigation involving antitrust, intellectual property, consumer and
other issues; maintenance and capital expenditures; local economic conditions;
the authorization and control over the availability of government contracts and
the nature and continuation of those contracts and related services provided
thereunder; the success or lack of success of satellite launches and the
businesses and governments associated with the launches; international business
risks such as the devaluation of international currencies; the ability to obtain
adequate credit resources for foreseeable financing requirements of the
Company's businesses and to satisfy the resulting credit obligations; the
inability of the Company's customers and vendors to achieve year 2000 readiness;
and unsuccessful acquisitions, joint ventures or divestitures. If the Company's
assumptions and estimates are incorrect, or if it is unable to achieve its
goals, then the Company's actual performance could vary materially from those
goals expressed or implied in the forward-looking statements.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On March 3, 2000, Pechiney Plastic Packaging, Inc., and Pechiney Emballage
Flexible Europe (Pechiney) filed a lawsuit against Kortec, Inc.; Crown Cork &
Seal Company, Inc.; Crown Cork & Seal Technologies Corporation and Ball Plastic
Container Corp. in the U.S. District Court for the District of Massachusetts.
Pechiney alleges that the defendants have infringed two of its patents with
respect to methods and apparatus for injection molding and injection blow
molding multi-layer plastic containers. Pechiney seeks an injunction and
damages. Kortec is a supplier to Ball Plastic Container Corp. of equipment for
use in manufacturing multi-layered plastic bottles. Kortec has agreed to defend
Ball Plastic Container Corp. against the claims for infringement of patents
arising out of the purchase and use of such equipment purchased from Kortec and
has assumed the defense of the action. Based upon the information, or lack of
information available at the present time, the Company is unable to express an
opinion as to the actual exposure of the Company; however, the Company does not
believe that this matter will have a material adverse affect upon the liquidity,
results of operations or financial condition of the Company.
Item 2. Changes in Securities
There were no events required to be reported under Item 2 for the quarter ending
April 2, 2000.
Item 3. Defaults Upon Senior Securities
There were no events required to be reported under Item 3 for the quarter ending
April 2, 2000.
Item 4. Submission of Matters to a Vote of Security Holders
There were no events required to be reported under Item 5 for the quarter ending
April 2, 2000.
Item 5. Other Information
There were no events required to be reported under Item 5 for the quarter ending
April 2, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
20.1 Subsidiary Guarantees of Debt
27.1 Financial Data Schedule
99.1 Safe Harbor Statement Under the Private Securities Litigation
Reform Act of 1995, as amended.
(b) Reports on Form 8-K
The registrant filed or amended reports on Form 8-K as follows:
A Current Report on Form 8-K was filed March 6, 2000, reporting under Item 5 of
Regulation S-X an announcement by Ball Corporation and ConAgra Grocery Products
Company (a unit of ConAgra, Inc.) to form a joint venture company called Ball
Western Can Company. The new joint venture company and Ball Corporation will
supply metal food cans and ends under long-term agreements to ConAgra Grocery
Products.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ball Corporation
(Registrant)
By: /s/ Raymond J. Seabrook
------------------------------
Raymond J. Seabrook
Senior Vice President and
Chief Financial Officer
Date: May 17, 2000
Ball Corporation and Subsidiaries
QUARTERLY REPORT ON FORM 10-Q
April 2, 2000
EXHIBIT INDEX
Description Exhibit
- -------------------------------------------------- ---------
Subsidiary Guarantees of Debt (Filed herewith.) EX-20.1
Financial Data Schedule (Filed herewith.) EX-27.1
Safe Harbor Statement Under the Private Securities
Litigation Reform Act of 1995, as amended.
(Filed herewith.) EX-99.1