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, 1998
Commission file number 1-7349
BALL CORPORATION
State of Indiana 35-0160610
10 Longs Peak Drive, P.O. Box 5000
Broomfield, CO 80038-5000
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 October 25, 1998
------------- -------------------------------
Common Stock,
without par value 30,818,526 shares
Ball Corporation and Subsidiaries
QUARTERLY REPORT ON FORM 10-Q
For the period ended September 27, 1998
INDEX
Page Number
--------------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Unaudited Condensed Consolidated Statement of
Income for the three and nine month periods
ended September 27, 1998 and September 28, 1997 3
Unaudited Condensed Consolidated Balance Sheet at
September 27, 1998 and December 31, 1997 4
Unaudited Condensed Consolidated Statement of
Cash Flows for the nine month periods ended
September 27, 1998 and September 28, 1997 5
Notes to Unaudited Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
PART II. OTHER INFORMATION 24
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Ball Corporation and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Millions of dollars except per share amounts)
Three months ended Nine months ended
-------------------------------- -------------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
---------------- --------------- --------------- ---------------
Net sales $ 859.2 $ 690.2 $ 2,054.5 $ 1,813.7
---------------- --------------- --------------- ---------------
Costs and expenses
Cost of sales 757.3 605.2 1,817.3 1,609.6
General and administrative expenses 34.6 28.2 88.4 82.8
Selling and product development expenses 5.0 3.9 15.0 12.8
Relocation costs 4.7 -- 15.0 --
Net gain on dispositions -- -- -- (8.7)
Interest expense 22.4 14.3 48.5 39.6
---------------- --------------- --------------- ---------------
824.0 651.6 1,984.2 1,736.1
---------------- --------------- --------------- ---------------
Income before taxes on income 35.2 38.6 70.3 77.6
Provision for taxes on income (12.1) (14.1) (27.4) (28.8)
Minority interests 1.1 (0.1) 5.1 3.8
Equity in earnings (losses) of affiliates 0.7 (1.7) 1.2 (2.1)
---------------- --------------- --------------- ---------------
Net income before extraordinary item 24.9 22.7 49.2 50.5
Extraordinary loss from early debt
extinguishment, net of tax (12.1) -- (12.1) --
---------------- --------------- --------------- ---------------
Net income 12.8 22.7 37.1 50.5
Preferred dividends, net of tax benefit (0.7) (0.7) (2.1) (2.1)
---------------- --------------- --------------- ---------------
Earnings attributable to common
shareholders $ 12.1 $ 22.0 $ 35.0 $ 48.4
================ =============== =============== ===============
Net earnings per common share:
Net income before extraordinary item $ 0.80 $ 0.73 $ 1.55 $ 1.60
Extraordinary loss from early debt
extinguishment, net of tax (0.40) -- (0.40) --
---------------- --------------- --------------- ---------------
Earnings per common share $ 0.40 $ 0.73 $ 1.15 $ 1.60
================ =============== =============== ===============
Diluted earnings per share:
Net income before extraordinary item $ 0.75 $ 0.68 $ 1.46 $ 1.51
Extraordinary loss from early debt
extinguishment, net of tax (0.37) -- (0.37) --
---------------- --------------- --------------- ---------------
Diluted earnings per share $ 0.38 $ 0.68 $ 1.09 $ 1.51
================ =============== =============== ===============
Cash dividends declared per common share $ 0.15 $ 0.15 $ 0.45 $ 0.45
================ =============== =============== ===============
See accompanying notes to unaudited condensed consolidated financial statements.
Ball Corporation and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
(Millions of dollars)
September 27, December 31,
1998 1997
------------------ -------------------
ASSETS
Current assets
Cash and temporary investments $ 34.0 $ 25.5
Accounts receivable, net 480.0 301.4
Inventories, net
Raw materials and supplies 150.5 184.9
Work in process and finished goods 290.1 228.4
Deferred income tax benefits and prepaid expenses 56.2 57.9
------------------ ------------------
Total current assets 1,010.8 798.1
------------------ ------------------
Property, plant and equipment, at cost 2,004.2 1,556.1
Accumulated depreciation (709.5) (636.6)
------------------ ------------------
1,294.7 919.5
------------------ ------------------
Investment in affiliates 74.7 74.5
Goodwill, net 519.2 194.8
Other assets 143.8 103.2
------------------ ------------------
$ 3,043.2 $ 2,090.1
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt and current portion of long-term debt $ 204.8 $ 407.0
Accounts payable 407.6 258.6
Salaries and wages 85.4 78.3
Other current liabilities 114.6 93.9
------------------ ------------------
Total current liabilities 812.4 837.8
------------------ ------------------
Noncurrent liabilities
Long-term debt 1,259.9 366.1
Deferred income taxes 20.7 60.5
Employee benefit obligations and other 249.8 139.8
------------------ ------------------
Total noncurrent liabilities 1,530.4 566.4
------------------ ------------------
Contingencies
Minority interests 35.7 51.7
------------------ ------------------
Shareholders' equity
Series B ESOP Convertible Preferred Stock 59.4 59.9
Unearned compensation - ESOP (33.6) (37.0)
------------------ ------------------
Preferred shareholder's equity 25.8 22.9
------------------ ------------------
Common stock (issued 34,676,545 shares - 1998;
33,759,234 shares - 1997) 362.1 336.9
Retained earnings 423.6 402.3
Accumulated other comprehensive loss (29.1) (22.8)
Treasury stock, at cost (3,874,847 shares - 1998;
3,539,574 shares - 1997) (117.7) (105.1)
------------------ ------------------
Common shareholders' equity 638.9 611.3
------------------ ------------------
Total shareholders' equity 664.7 634.2
------------------ ------------------
$ 3,043.2 $ 2,090.1
================== ==================
See accompanying notes to unaudited condensed consolidated financial statements.
Ball Corporation and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED
STATEMENT OF CASH FLOWS
(Millions of dollars)
Nine months ended
------------------------------------------
September 27, September 28,
1998 1997
------------------- -------------------
Cash flows from operating activities
Net income $ 37.1 $ 50.5
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization 105.3 86.0
Relocation costs 8.0 --
Other, net 1.2 (1.0)
Changes in working capital components,
excluding effect of acquisitions 48.4 (61.4)
------------------- -------------------
Net cash provided by operating activities 200.0 74.1
------------------- -------------------
Cash flows from investing activities
Additions to property, plant and equipment (51.7) (83.5)
Acquisition of Reynolds' net assets, including transaction and other
costs, net of cash acquired (794.3) --
Acquisition of M. C. Packaging, net of cash acquired -- (159.4)
Acquisition of PET manufacturing assets -- (40.4)
Investments in and advances to affiliates (0.9) (14.2)
Proceeds from sale of equity investment 1.1 26.2
Net cash from company-owned life insurance 1.4 14.0
Other, net (5.5) 11.2
------------------- -------------------
Net cash used in investing activities (849.9) (246.1)
------------------- -------------------
Cash flows from financing activities
Net change in long-term debt 844.9 (45.9)
Net change in short-term debt (148.3) 102.5
Debt issuance costs (28.9) --
Common and preferred dividends (15.9) (16.1)
Net proceeds from issuance of common stock under
various employee and shareholder plans 25.2 15.6
Acquisitions of treasury stock (12.6) (25.8)
Other, net (6.0) 0.6
------------------- -------------------
Net cash provided by financing activities 658.4 30.9
------------------- -------------------
Net increase (decrease) in cash 8.5 (141.1)
Cash and temporary investments:
Beginning of period 25.5 169.2
=================== ===================
End of period $ 34.0 $ 28.1
=================== ===================
See accompanying notes to unaudited condensed consolidated financial statements.
Ball Corporation and Subsidiaries
September 27, 1998
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
General.
The accompanying condensed consolidated financial statements 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 some seasonality in packaging
operations. 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.
Reclassifications.
Certain prior year amounts have been reclassified in order to conform with the
1998 presentation.
New Accounting Standards.
Effective January 1, 1998, Ball adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." See the
"Shareholders' Equity" note for information regarding SFAS No. 130.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," establishes standards for reporting information about operating
segments in annual financial statements and is effective for Ball in the 1998
year-end reporting. Interim reporting under this pronouncement will be effective
for Ball in 1999.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," standardizes disclosure requirements for pensions and other
postretirement benefit plans and will be effective for Ball in the 1998 year-end
reporting. This statement does not affect the measurement or recognition of such
plans.
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. The
statement will be effective for Ball in 2000. The effect, if any, of adopting
this standard has not yet been determined.
Statement of Position (SOP) No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," establishes new accounting and
reporting standards for the costs of computer software developed or obtained for
internal use and is effective for Ball in 1999. The effect, if any, of adopting
this standard has not yet been determined.
SOP No. 98-5, "Reporting on the Costs of Start-Up Activities," requires costs of
start-up activities and organizational costs, as defined, to be expensed as
incurred and is effective for Ball in 1999. The effect, if any, of adopting this
standard has not yet been determined.
Acquisitions and Related Debt Refinancing.
On August 10, 1998, Ball acquired substantially all the assets and assumed
certain liabilities of the domestic beverage can manufacturing business of
Reynolds Metals Company (Reynolds) for a total purchase price of approximately
$745.4 million, subject to certain adjustments. The acquisition of Reynolds has
been accounted for as a purchase and, accordingly, its results of operations are
included in the consolidated financial statements since the date of acquisition.
The assets acquired consist largely of 16 plants in 12 states and Puerto Rico,
as well as a headquarters facility in Richmond, Virginia. The Company has
announced that it will close the Richmond facility and consolidate headquarters
operations at its offices near Denver, Colorado. In addition, the Company is
assessing possible further integration opportunities and has initially recorded
a $52.0 million liability, before tax effects, as a part of the valuation
process. Upon finalization of the plan, adjustments to the liability will be
reflected in the allocation of the purchase price.
In connection with the acquisition, the Company refinanced approximately $521.9
million of its existing debt and, as a result, recorded an extraordinary charge
from the early extinguishment of debt of approximately $12.1 million (40 cents
per share), net of related income tax benefit.
The acquisition and the refinancing, including related costs, were financed with
a placement of $300.0 million in 7.75% Senior Notes, $250.0 million in 8.25%
Senior Subordinated Notes and approximately $808.2 million from a Senior Credit
Facility.
The Senior Notes, which are due August 1, 2006, are unsecured, rank senior to
the Company's subordinated debt and are guaranteed on a senior basis by certain
of the Company's domestic subsidiaries (see the "Subsidiary Guarantees of Debt"
note). The Senior Subordinated Notes, which are due August 1, 2008, are also
unsecured, rank subordinate to existing and future senior debt of the Company
and are guaranteed by certain subsidiaries of the Company (see the "Subsidiary
Guarantees of Debt" note). Both note agreements contain certain covenants and
restrictions including, among other things, restrictions on the incurrence of
additional indebtedness and the payment of dividends.
The Company will offer to exchange the Senior Notes and the Senior Subordinated
Notes. The terms of the new notes will be substantially identical in all
respects (including principal amount, interest rate, maturity, ranking and
covenant restrictions) to the terms of the notes for which they will be
exchanged except that the new notes will be registered under the Securities Act
of 1933, as amended, and therefore will not be subject to certain restrictions
on transfer except as described in the Prospectus. The note agreements provide
that if the new notes are assigned investment grade ratings and the Company is
not in default, certain covenant restrictions will be suspended.
The Senior Credit Facility is comprised of three separate facilities, two term
loans and a revolving credit facility. The first term loan provides the Company
with up to $350.0 million and matures in August, 2004. The second term loan
provides the Company with up to $200.0 million and matures in March, 2006. Both
term loans are payable in quarterly installments beginning in March, 1999. The
revolving credit facility provides the Company with up to $650.0 million, of
which $150.0 million is available for a period of 364 days, renewable for
another 364 days from the current termination date at the option of the Company
and the participating lenders. The remainder is comprised of letters of credit
with an expiration date of up to one year and revolving loans which mature in
August, 2004. The Senior Credit Facility bears interest at variable rates, is
guaranteed by certain subsidiaries of the Company (see the "Subsidiary
Guarantees of Debt" note) and contains certain covenants and restrictions
including, among other things, restrictions on the incurrence of additional
indebtedness and the payment of dividends. In addition, all amounts outstanding
under the Senior Credit Facility are secured by (1) a pledge of 100 percent of
the stock of the Company's direct and indirect majority-owned domestic
subsidiaries and (2) a pledge of 65 percent of the stock of certain foreign
subsidiaries.
The following unaudited pro forma consolidated results of operations have been
prepared as if the acquisition of Reynolds had occurred as of January 1, 1997.
The pro forma consolidated results are not necessarily indicative of the actual
results that would have occurred had the acquisition been in effect for the
periods presented, nor are they necessarily indicative of the results that may
be obtained in the future:
Nine months ended
-----------------------------------------
(in millions of dollars except September 27, September 28,
per share amounts) 1998 1997
------------------ -------------------
Net sales $ 2,826.0 $ 2,741.4
Net income 48.1 41.0
Net earnings attributable to
common shareholders 46.0 38.9
Earnings per common share 1.52 1.29
Diluted earnings per share 1.43 1.22
During 1998, FTB Packaging Limited purchased substantially all of the remaining
direct and indirect minority interest in M.C. Packaging (Hong Kong) Limited
which represented less than ten percent of the outstanding shares of M.C.
Packaging (Hong Kong) Limited.
Subsidiary Guarantees of Debt.
The Senior Notes and the Senior Subordinated Notes issued in conjunction with
the Reynolds acquisition (see the "Acquisitions and Related Debt Refinancing"
note) are guaranteed by certain of the Company's domestic, wholly owned
subsidiaries on a full, unconditional, and joint and several basis. The
following is summarized condensed consolidating financial information for the
Company, segregating the guarantor subsidiaries and non-guarantor subsidiaries,
as of September 27, 1998 and December 31, 1997 and for the nine-month periods
ended September 27, 1998 and September 28, 1997 (in millions of dollars).
CONSOLIDATED BALANCE SHEET
-----------------------------------------------------------------------------
September 27, 1998
-----------------------------------------------------------------------------
Ball Guarantor Non-Guarantor Eliminating Consolidated
Corporation Subsidiaries Subsidiaries Adjustments Total
------------- -------------- ---------------- -------------- --------------
ASSETS
Current assets
Cash and temporary investments $ 10.5 $ 0.4 $ 23.1 $ -- $ 34.0
Accounts receivable, net 4.4 389.0 86.6 -- 480.0
Inventories, net
Raw materials and supplies -- 92.2 58.3 -- 150.5
Work in process and finished goods -- 239.7 50.4 -- 290.1
Deferred income tax benefits and
prepaid expenses (16.3) 60.4 12.1 -- 56.2
------------- -------------- ---------------- -------------- --------------
Total current assets (1.4) 781.7 230.5 -- 1,010.8
------------- -------------- ---------------- -------------- --------------
Property, plant and equipment, at cost 38.3 1,510.9 455.0 -- 2,004.2
Accumulated depreciation (22.8) (580.0) (106.7) -- (709.5)
------------- -------------- ---------------- -------------- --------------
15.5 930.9 348.3 -- 1,294.7
------------- -------------- ---------------- -------------- --------------
Investment in subsidiaries 1,281.2 -- -- (1,281.2) --
Investment in affiliates 2.8 2.7 69.2 -- 74.7
Goodwill, net -- 369.2 150.0 -- 519.2
Other assets 80.3 44.4 19.1 -- 143.8
============= ============== ================ ============== ==============
$ 1,378.4 $ 2,128.9 $ 817.1 $ (1,281.2) $ 3,043.2
============= ============== ================ ============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt and current portion
of long-term debt $ 69.1 $ -- $ 135.7 $ -- $ 204.8
Accounts payable 62.5 292.4 52.7 -- 407.6
Salaries and wages 11.6 65.4 8.4 -- 85.4
Other current liabilities (22.9) 88.1 49.4 -- 114.6
------------- -------------- ---------------- -------------- --------------
Total current liabilities 120.3 445.9 246.2 -- 812.4
------------- -------------- ---------------- -------------- --------------
Noncurrent liabilities
Long-term debt 1,220.8 10.3 28.8 -- 1,259.9
Intercompany borrowings (728.1) 639.2 88.9 -- --
Deferred income taxes 7.9 (30.3) 43.1 -- 20.7
Employee benefit obligations and
other 92.8 143.3 13.7 -- 249.8
------------- -------------- ---------------- -------------- --------------
Total noncurrent liabilities 593.4 762.5 174.5 -- 1,530.4
------------- -------------- ---------------- -------------- --------------
Contingencies
Minority interests -- -- 35.7 -- 35.7
------------- -------------- ---------------- -------------- --------------
Shareholders' equity
Series B ESOP Convertible Preferred
Stock 59.4 -- -- -- 59.4
Convertible preferred stock -- -- 169.8 (169.8) --
Unearned compensation - ESOP (33.6) -- -- -- (33.6)
------------- -------------- ---------------- -------------- --------------
Preferred shareholders' equity 25.8 -- 169.8 (169.8) 25.8
------------- -------------- ---------------- -------------- --------------
Common stock (34,676,545 shares
issued) 362.1 821.9 188.0 (1,009.9) 362.1
Retained earnings 423.6 100.7 26.2 (126.9) 423.6
Accumulated other comprehensive loss (29.1) (2.1) (23.3) 25.4 (29.1)
Treasury stock, at cost (3,874,847
shares) (117.7) -- -- -- (117.7)
------------- -------------- ---------------- -------------- --------------
Common shareholders' equity 638.9 920.5 190.9 (1,111.4) 638.9
------------- -------------- ---------------- -------------- --------------
Total shareholders' equity 664.7 920.5 360.7 (1,281.2) 664.7
------------- -------------- ---------------- -------------- --------------
$ 1,378.4 $ 2,128.9 $ 817.1 $ (1,281.2) $ 3,043.2
============= ============== ================ ============== ==============
CONSOLIDATED BALANCE SHEET
-----------------------------------------------------------------------------
December 31, 1997
-----------------------------------------------------------------------------
Ball Guarantor Non-Guarantor Eliminating Consolidated
Corporation Subsidiaries Subsidiaries Adjustments Total
------------- -------------- ---------------- -------------- --------------
ASSETS
Current assets
Cash and temporary investments $ 4.2 $ 0.5 $ 20.8 $ -- $ 25.5
Accounts receivable, net 2.8 191.5 107.1 -- 301.4
Inventories, net
Raw materials and supplies -- 113.5 71.4 -- 184.9
Work in process and finished goods -- 161.1 67.3 -- 228.4
Deferred income tax benefits and
prepaid expenses (22.0) 62.9 17.0 -- 57.9
------------- -------------- ---------------- -------------- --------------
Total current assets (15.0) 529.5 283.6 -- 798.1
------------- -------------- ---------------- -------------- --------------
Property, plant and equipment, at cost 36.6 1,049.6 469.9 -- 1,556.1
Accumulated depreciation (21.7) (525.3) (89.6) -- (636.6)
------------- -------------- ---------------- -------------- --------------
14.9 524.3 380.3 -- 919.5
------------- -------------- ---------------- -------------- --------------
Investment in subsidiaries 1,094.0 -- -- (1,094.0) --
Investment in affiliates 5.1 -- 69.4 -- 74.5
Goodwill, net -- 50.0 144.8 -- 194.8
Other assets 53.4 34.4 15.4 -- 103.2
============= ============== ================ ============== ==============
$ 1,152.4 $ 1,138.2 $ 893.5 $ (1,094.0) $ 2,090.1
============= ============== ================ ============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt and current portion
of long-term debt $ 93.4 $ 39.1 $ 274.5 $ -- $ 407.0
Accounts payable 7.1 179.4 72.1 -- 258.6
Salaries and wages 16.1 55.2 7.0 -- 78.3
Other current liabilities (39.2) 85.4 47.7 -- 93.9
------------- -------------- ---------------- -------------- --------------
Total current liabilities 77.4 359.1 401.3 -- 837.8
------------- -------------- ---------------- -------------- --------------
Noncurrent liabilities
Long-term debt 46.5 294.1 25.5 -- 366.1
Intercompany borrowings 302.7 (364.2) 61.5 -- --
Deferred income taxes 7.3 10.4 42.8 -- 60.5
Employee benefit obligations and
other 84.3 42.0 13.5 -- 139.8
------------- -------------- ---------------- -------------- --------------
Total noncurrent liabilities 440.8 (17.7) 143.3 -- 566.4
------------- -------------- ---------------- -------------- --------------
Contingencies
Minority interests -- -- 51.7 -- 51.7
------------- -------------- ---------------- -------------- --------------
Shareholders' equity
Series B ESOP Convertible Preferred
Stock 59.9 -- -- -- 59.9
Convertible preferred stock -- -- 94.3 (94.3) --
Unearned compensation - ESOP (37.0) -- -- -- (37.0)
------------- -------------- ---------------- -------------- --------------
Preferred shareholders' equity 22.9 -- 94.3 (94.3) 22.9
------------- -------------- ---------------- -------------- --------------
Common stock (33,759,234 shares
issued) 336.9 756.1 188.0 (944.1) 336.9
Retained earnings 402.3 41.4 33.3 (74.7) 402.3
Accumulated other comprehensive loss
(22.8) (0.7) (18.4) 19.1 (22.8)
Treasury stock, at cost (3,539,574
shares) (105.1) -- -- -- (105.1)
------------- -------------- ---------------- -------------- --------------
Common shareholders' equity 611.3 796.8 202.9 (999.7) 611.3
------------- -------------- ---------------- -------------- --------------
Total shareholders' equity 634.2 796.8 297.2 (1,094.0) 634.2
------------- -------------- ---------------- -------------- --------------
$ 1,152.4 $ 1,138.2 $ 893.5 $ (1,094.0) $ 2,090.1
============= ============== ================ ============== ==============
CONSOLIDATED STATEMENT OF INCOME
-----------------------------------------------------------------------------
For the Nine Months Ended September 27, 1998
-----------------------------------------------------------------------------
Ball Guarantor Non-Guarantor Eliminating Consolidated
Corporation Subsidiaries Subsidiaries Adjustments Total
------------- -------------- ---------------- -------------- --------------
Net sales $ -- $ 1,886.2 $ 355.2 $ (186.9) $ 2,054.5
Costs and expenses
Cost of sales -- 1,684.9 319.3 (186.9) 1,817.3
General and administrative expenses 1.1 60.6 26.7 -- 88.4
Selling and product development
expenses -- 12.8 2.2 -- 15.0
Relocation costs 15.0 -- -- -- 15.0
Interest expense 36.5 (2.9) 14.9 -- 48.5
Equity in earnings of subsidiaries (52.2) -- -- 52.2 --
Corporate allocations (22.0) 22.0 -- -- --
------------- -------------- ---------------- -------------- --------------
(21.6) 1,777.4 363.1 (134.7) 1,984.2
------------- -------------- ---------------- -------------- --------------
Income (loss) before taxes on income 21.6 108.8 (7.9) (52.2) 70.3
Provision for taxes on income 16.4 (38.4) (5.4) -- (27.4)
Minority interests -- -- 5.1 -- 5.1
Equity in earnings (losses) of 0.1 -- 1.1 -- 1.2
affiliates
------------- -------------- ---------------- -------------- --------------
Net income (loss) before extraordinary
item 38.1 70.4 (7.1) (52.2) 49.2
Extraordinary loss from early debt
extinguishment, net of tax (1.0) (11.1) -- -- (12.1)
------------- -------------- ---------------- -------------- --------------
Net income (loss) 37.1 59.3 (7.1) (52.2) 37.1
Preferred dividends, net of tax benefit (2.1) -- -- -- (2.1)
------------- -------------- ---------------- -------------- --------------
Earnings (loss) attributable to common
shareholders $ 35.0 $ 59.3 $ (7.1) $ (52.2) $ 35.0
============= ============== ================ ============== ==============
CONSOLIDATED STATEMENT OF INCOME
-----------------------------------------------------------------------------
For the Nine Months Ended September 28, 1997
-----------------------------------------------------------------------------
Ball Guarantor Non-Guarantor Eliminating Consolidated
Corporation Subsidiaries Subsidiaries Adjustments Total
------------- -------------- ---------------- -------------- --------------
Net sales $ -- $ 1,635.9 $ 391.0 $ (213.2) $ 1,813.7
Costs and expenses
Cost of sales -- 1,476.3 346.5 (213.2) 1,609.6
General and administrative expenses (1.2) 64.4 19.6 -- 82.8
Selling and product development
expenses -- 10.8 2.0 -- 12.8
Net gain on dispositions -- (8.7) -- -- (8.7)
Interest expense 23.7 (0.5) 16.4 -- 39.6
Equity in earnings of subsidiaries (49.4) -- -- 49.4 --
Corporate allocations (19.3) 19.3 -- -- --
------------- -------------- ---------------- -------------- --------------
(46.2) 1,561.6 384.5 (163.8) 1,736.1
------------- -------------- ---------------- -------------- --------------
Income (loss) before taxes on income 46.2 74.3 6.5 (49.4) 77.6
Provision for taxes on income 4.2 (25.4) (7.6) -- (28.8)
Minority interests -- -- 3.8 -- 3.8
Equity in earnings (losses) of
affiliates 0.1 1.0 (3.2) -- (2.1)
------------- -------------- ---------------- -------------- --------------
Net income (loss) 50.5 49.9 (0.5) (49.4) 50.5
Preferred dividends, net of tax benefit (2.1) -- -- -- (2.1)
------------- -------------- ---------------- -------------- --------------
Earnings (loss) attributable to common
shareholders $ 48.4 $ 49.9 $ (0.5) $ (49.4) $ 48.4
============= ============== ================ ============== ==============
CONSOLIDATED STATEMENT OF CASH FLOWS
-----------------------------------------------------------------------------
For the Nine Months Ended September 27, 1998
-----------------------------------------------------------------------------
Ball Guarantor Non-Guarantor Eliminating Consolidated
Corporation Subsidiaries Subsidiaries Adjustments Total
------------- -------------- ---------------- -------------- --------------
Cash flows from operating activities
Net income (loss) $ 37.1 $ 59.3 $ (7.1) $ (52.2) $ 37.1
Reconciliation of net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 2.2 78.7 24.4 -- 105.3
Relocation costs 8.0 -- -- -- 8.0
Equity earnings of subsidiaries (52.2) -- -- 52.2 --
Other, net 5.6 0.2 (4.6) -- 1.2
Changes in working capital
components, excluding effect of
acquisitions 51.4 (44.5) 41.5 -- 48.4
------------- -------------- ---------------- -------------- --------------
Net cash provided by (used in)
operating activities 52.1 93.7 54.2 -- 200.0
------------- -------------- ---------------- -------------- --------------
Cash flows from investing activities
Additions to property, plant and
equipment (2.2) (39.4) (10.1) -- (51.7)
Acquisitions, net of cash acquired (14.6) (779.7) -- -- (794.3)
Investments in and advances to
affiliates, net (1,074.9) 1,048.9 25.1 -- (0.9)
Intercompany capital contributions
and transactions (75.5) -- 75.5 -- --
Proceeds from sale of equity
investments -- -- 1.1 -- 1.1
Net cash from company-owned life
insurance 0.7 0.7 -- -- 1.4
Other, net (0.1) (1.4) (4.0) -- (5.5)
------------- -------------- ---------------- -------------- --------------
Net cash provided by (used in)
investing activities (1,166.6) 229.1 87.6 -- (849.9)
------------- -------------- ---------------- -------------- --------------
Cash flows from financing activities
Net change in long-term debt 1,194.2 (322.9) (26.4) -- 844.9
Net change in short-term debt (40.7) -- (107.6) -- (148.3)
Debt issuance costs (28.9) -- -- -- (28.9)
Common and preferred dividends (15.9) -- -- -- (15.9)
Net proceeds from issuance of common
stock under various employee and
shareholder plans 25.2 -- -- -- 25.2
Acquisitions of treasury stock (12.6) -- -- -- (12.6)
Other, net (0.5) -- (5.5) -- (6.0)
------------- -------------- ---------------- -------------- --------------
Net cash provided by (used in)
financing activities 1,120.8 (322.9) (139.5) -- 658.4
------------- -------------- ---------------- -------------- --------------
Net increase (decrease) in cash 6.3 (0.1) 2.3 -- 8.5
Cash and temporary investments:
Beginning of period 4.2 0.5 20.8 -- 25.5
============= ============== ================ ============== ==============
End of period $ 10.5 $ 0.4 $ 23.1 $ -- $ 34.0
============= ============== ================ ============== ==============
CONSOLIDATED STATEMENT OF CASH FLOWS
-----------------------------------------------------------------------------
For the Nine Months Ended September 28, 1997
-----------------------------------------------------------------------------
Ball Guarantor Non-Guarantor Eliminating Consolidated
Corporation Subsidiaries Subsidiaries Adjustments Total
------------- -------------- ---------------- -------------- --------------
Cash flows from operating activities
Net income (loss) $ 50.5 $ 49.9 $ (0.5) $ (49.4) $ 50.5
Reconciliation of net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 1.1 63.4 21.5 -- 86.0
Equity earnings of subsidiaries (49.4) -- -- 49.4 --
Other, net (0.6) (7.5) 7.1 -- (1.0)
Changes in working capital
components, excluding effect of
acquisitions 15.3 (72.8) (3.9) -- (61.4)
------------- -------------- ---------------- -------------- --------------
Net cash provided by (used in)
operating activities 16.9 33.0 24.2 -- 74.1
------------- -------------- ---------------- -------------- --------------
Cash flows from investing activities
Additions to property, plant and
equipment (2.8) (51.9) (28.8) -- (83.5)
Acquisitions, net of cash acquired -- (40.4) (159.4) -- (199.8)
Investments in and advances to
affiliates, net (57.3) 79.8 (36.7) -- (14.2)
Intercompany capital contributions
and transactions (185.5) -- 185.5 -- --
Proceeds from sale of equity
investments -- 26.2 -- -- 26.2
Net cash from company-owned life
insurance 11.0 3.0 -- -- 14.0
Other, net 17.4 (14.6) 8.4 -- 11.2
------------- -------------- ---------------- -------------- --------------
Net cash provided by (used in)
investing activities (217.2) 2.1 (31.0) -- (246.1)
------------- -------------- ---------------- -------------- --------------
Cash flows from financing activities
Net change in long-term debt (0.4) (35.1) (10.4) -- (45.9)
Net change in short-term debt 73.0 -- 29.5 -- 102.5
Common and preferred dividends (16.2) -- 0.1 -- (16.1)
Net proceeds from issuance of common
stock under various employee and
shareholder plans 15.6 -- -- -- 15.6
Acquisitions of treasury stock (25.8) -- -- -- (25.8)
Other, net (0.9) -- 1.5 -- 0.6
------------- -------------- ---------------- -------------- --------------
Net cash provided by (used in)
financing activities 45.3 (35.1) 20.7 -- 30.9
------------- -------------- ---------------- -------------- --------------
Net increase (decrease) in cash (155.0) -- 13.9 -- (141.1)
Cash and temporary investments:
Beginning of period 159.6 0.5 9.1 -- 169.2
============= ============== ================ ============== ==============
End of period $ 4.6 $ 0.5 $ 23.0 $ -- $ 28.1
============= ============== ================ ============== ==============
Relocation Costs.
In February 1998, Ball announced that it would relocate its corporate
headquarters to an existing company-owned building in Broomfield, Colorado. The
total cost of the headquarters relocation is estimated to be approximately $19.0
million ($11.5 million after tax or 38 cents per share). Generally accepted
accounting principles do not permit financial statement recognition of certain
costs, such as employee relocation, until they are paid or incurred. Therefore,
the Company recorded pretax charges of $4.7 million ($2.9 million after tax or 9
cents per share) and $15.0 million ($9.1 million after tax or 30 cents per
share), primarily for relocation costs paid or incurred in the three and nine
month periods ended September 27, 1998, respectively. It is anticipated that the
remainder of the relocation costs will be paid and recorded largely by the end
of the year.
Dispositions.
The Company sold its equity investment in a technology business during the first
half of 1997 and included a pretax gain of $11.7 million ($7.1 million after tax
or 23 cents per share). In the second quarter of 1997, the Company recorded a
pretax charge of $3.0 million ($1.8 million after tax or six cents per share) to
close a small PET container manufacturing plant in connection with the
acquisition of certain PET container manufacturing assets.
Shareholders' Equity.
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," effective
January 1, 1998 which requires the Company to report the changes in
shareholders' equity from all sources during the period other than those
resulting from investments by shareholders (i.e., issuance or repurchase of
common shares and dividends). Although adoption of this standard has not
resulted in any change to the historic basis of the determination of earnings or
shareholders' equity, the comprehensive income components recorded under
generally accepted accounting principles and previously included under the
category "retained earnings" are displayed as "accumulated other comprehensive
loss" within the unaudited condensed consolidated balance sheet. The composition
of accumulated other comprehensive loss at September 27, 1998 and December 31,
1997 is primarily the cumulative adjustment for foreign currency translation and
additional minimum pension liability.
Total comprehensive income for the three and nine month periods ended September
27, 1998 is $9.3 million and $30.8 million, respectively, and $21.1 million and
$50.3 million, for the comparative periods of 1997, respectively. The difference
between net income and comprehensive income is primarily the adjustment for
foreign currency translation.
Issued and outstanding shares of the Series B ESOP Convertible Preferred Stock
were 1,616,667 shares at September 27, 1998, and 1,635,410 shares at December
31, 1997.
Earnings Per Share.
The following table provides additional information on the computation of
earnings per share amounts:
(Millions of dollars except Three months ended Nine months ended
per share amounts) ------------------------------- -------------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
Earnings per Common Share
Net income before extraordinary item $ 24.9 $ 22.7 $ 49.2 $ 50.5
Extraordinary loss from early debt
extinguishment, net of tax (12.1) -- (12.1) --
--------------- --------------- --------------- ---------------
Net income 12.8 22.7 37.1 50.5
Preferred dividends, net of tax benefit (0.7) (0.7) (2.1) (2.1)
=============== =============== =============== ===============
Net earnings attributable to common
shareholders $ 12.1 $ 22.0 $ 35.0 $ 48.4
=============== =============== =============== ===============
Weighted average common shares (000s) 30,505 30,135 30,345 30,263
=============== =============== =============== ===============
Earnings per common share before
extraordinary item $ 0.80 $ 0.73 $ 1.55 $ 1.60
Extraordinary loss from early debt
extinguishment, net of tax (0.40) -- (0.40) --
=============== =============== =============== ===============
Earnings per common share $ 0.40 $ 0.73 $ 1.15 $ 1.60
=============== =============== =============== ===============
Diluted Earnings per Share
Net income before extraordinary item $ 24.9 $ 22.7 $ 49.2 $ 50.5
Extraordinary loss from early debt
extinguishment, net of tax (12.1) -- (12.1) --
--------------- --------------- --------------- ---------------
Net income 12.8 22.7 37.1 50.5
Adjustment for deemed ESOP cash
contribution in lieu of the ESOP
Preferred dividend (0.5) (0.6) (1.6) (1.6)
=============== =============== =============== ===============
Net earnings attributable to common
shareholders $ 12.3 $ 22.1 $ 35.5 $ 48.9
=============== =============== =============== ===============
Weighted average common shares (000s) 30,505 30,135 30,345 30,263
Effect of dilutive stock options 292 228 246 114
Common shares issuable upon conversion
of the ESOP Preferred stock 1,868 1,911 1,875 1,920
=============== =============== =============== ===============
Weighted average shares applicable
to diluted earnings per share 32,665 32,274 32,466 32,297
=============== =============== =============== ===============
Earnings per common share before
extraordinary item $ 0.75 $ 0.68 $ 1.46 $ 1.51
Extraordinary loss from early debt
extinguishment, net of tax (0.37) -- (0.37) --
--------------- --------------- --------------- ---------------
Diluted earnings per share $ 0.38 $ 0.68 $ 1.09 $ 1.51
=============== =============== =============== ===============
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 Company was not in default of any loan agreement at September 27, 1998, and
has met all payment obligations.
The U.S. government is disputing the Company's claim to recoverability of
reimbursed costs associated with Ball's Employee Stock Ownership Plan for fiscal
years 1989 through 1995, as well as the corresponding prospective costs accrued
after 1995. In October 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. While the outcome
of the trial is not yet known, the Company's information at this time does not
indicate that this matter will have a material, adverse effect upon the
financial condition, results of operations or competitive position of the
Company. For additional information regarding this matter, refer to the
Company's latest annual report.
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 financial condition, results of operations,
capital expenditures or competitive position 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.
ACQUISITIONS
On August 10, 1998, Ball acquired substantially all the assets and assumed
certain liabilities of the domestic beverage can manufacturing business of
Reynolds Metals Company (Reynolds) for a total purchase price of approximately
$745.4 million, subject to certain adjustments. The acquisition of Reynolds has
been accounted for as a purchase and, accordingly, its results of operations are
included in the consolidated financial statements since the date of acquisition.
The assets acquired consist largely of 16 plants in 12 states and Puerto Rico,
as well as a headquarters facility in Richmond, Virginia. The Company has
announced that it will close the Richmond facility and consolidate headquarters
operations at its offices near Denver, Colorado. In addition, the Company is
assessing possible further integration opportunities and has initially recorded
a $52.0 million liability, before tax effects, as a part of the valuation
process. Upon finalization of the plan, adjustments to the liability will be
reflected in the allocation of the purchase price.
During 1998, FTB Packaging Limited purchased substantially all of the remaining
direct and indirect minority interest in M.C. Packaging (Hong Kong) Limited
which represented less than ten percent of the outstanding shares of M.C.
Packaging (Hong Kong) Limited.
RESULTS OF OPERATIONS
Consolidated Results
Consolidated net sales of $859.2 million for the third quarter of 1998 increased
approximately 25 percent compared to the third quarter of 1997. For the first
nine months of 1998, consolidated net sales were $2.1 billion, an increase of
approximately 13 percent over the same period for 1997. The increase in sales
resulted primarily from the acquisition of Reynolds. Excluding the effect of
Reynolds, net sales for the first nine months of 1998 increased nearly five
percent reflecting increased volume from both the plastic and metal beverage
container operations, partially offset by lower sales from the aerospace and
technologies segment.
Net earnings attributable to common shareholders (before extraordinary item) of
$24.2 million, or 80 cents per share, for the third quarter of 1998 included a
pretax charge of $4.7 million ($2.9 million after tax or nine cents per share)
for the relocation of the Company's corporate office. Net earnings attributable
to common shareholders were $22.0 million, or 73 cents per share, for the third
quarter of 1997. Excluding the 1998 charges taken for the extraordinary item and
the relocation, net earnings attributable to common shareholders increased 23
percent over the 1997 third quarter.
For the first nine months of 1998, earnings attributable to common shareholders
(before extraordinary item) were $47.1 million, or $1.55 per share, including an
after-tax charge of $9.1 million, or 30 cents per share, for costs incurred in
connection with the relocation of the corporate headquarters. In the first nine
months of 1997, earnings were $48.4 million, or $1.60 cents per share, including
a net after-tax gain of $5.3 million, or 17 cents per share, largely
attributable to the sale of the interest in a technology business.
In February 1998, Ball announced that it would relocate its corporate
headquarters to an existing company-owned building in Broomfield, Colorado. The
total cost of the headquarters relocation is estimated to be $19.0 million
($11.5 million after tax or 38 cents per share). Generally accepted accounting
principles do not permit financial statement recognition of certain costs, such
as employee relocation, until they are paid or incurred. Therefore, the Company
recorded pretax charges of $4.7 million ($2.9 million after tax or nine cents
per share) and $15.0 million ($9.1 million after tax or 30 cents per share),
primarily for relocation costs paid or incurred in the third quarter and first
nine months of 1998, respectively. It is anticipated that the remainder of the
relocation costs will be paid and recorded largely by the end of the year.
The Company sold its investment in a technology business during the first half
of 1997 and included a pretax gain of $11.7 million ($7.1 million after tax or
23 cents per share). In the second quarter of 1997, the Company recorded a
pretax charge of $3.0 million ($1.8 million after tax or six cents per share) to
close a small PET container manufacturing plant in connection with the
acquisition of certain PET container manufacturing assets.
Interest and Taxes
Consolidated interest expense for the third quarter and the first nine months of
1998 was $22.4 million and $48.5 million, respectively, compared to $14.3
million and $39.6 million, for the same periods of 1997, respectively. The
increase in both periods is attributable to the additional debt associated with
the Reynolds acquisition.
Ball's consolidated effective income tax rate was 34.4 percent for the third
quarter of 1998 compared to 36.5 percent for the third quarter of 1997. For the
first nine months of 1998, the effective tax rate was approximately 39 percent
compared to 37.1 percent for 1997. The effective tax rates for the first nine
months reflect a reduction in taxes attributable to creditable costs of U.S.
research and development of $2.9 million (nine cents per share) and $2.5 million
(eight cents per share) for 1998 and 1997, respectively. Excluding the tax
credits, the consolidated effective income tax rates for the third quarter and
first nine months of 1998 would have been 42.6 percent and 43.1 percent,
respectively, and 40.3 percent for the first nine months of 1997, which largely
reflect the tax effects of foreign operations.
Results of Equity Affiliates
Equity in earnings of affiliates for the third quarter of 1998 were $0.7 million
compared to a loss of $1.7 million for the third quarter of 1997. For the nine
month periods, equity in earnings of affiliates was $1.2 million and a loss of
$2.1 million for 1998 and 1997, respectively. Equity earnings in affiliates are
largely attributable to equity investments in China, Thailand and Brazil. The
improved results in 1998 reflect the effects of the strengthening of the Thai
baht and reduced start-up costs compared to 1997 when operations in Brazil,
Thailand and China began. Although there has been improvement during 1998, the
Thai baht remains volatile, and there can be no assurance that the current trend
will continue. Both 1997 and 1998 results include lower earnings from certain
equity affiliates reflecting the soft China market which are expected to
continue throughout 1998.
Extraordinary Loss on Early Debt Extinguishment
In connection with the acquisition, the Company refinanced approximately $521.9
million of its existing debt and, as a result, recorded a pre-tax charge for
early extinguishment of the debt of approximately $19.9 million ($12.1 million
after tax or 40 cents per share).
Business Segments
Packaging
Packaging segment net sales were $772.8 million for the third quarter of 1998
compared to $588.0 million in the third quarter of 1997. Net sales for the nine
month periods were $1,795.9 million and $1,510.3 million for 1998 and 1997,
respectively. The increase in both periods reflects the acquisition of Reynolds.
Segment operating earnings for the third quarter and the first nine months of
1998 increased from 1997 due to the additional earnings from the Reynolds
business and improved earnings in the metal beverage and plastic container
businesses which were partially offset by lower results within the metal food
can business in North America and packaging operations in China.
Within the packaging segment, sales in the North American metal container
business increased 40.4 percent and 19.3 percent for the three and nine month
periods, respectively. Excluding the effect of the business acquired, sales
increased 5.9 percent and 6.2 for the 1998 quarter and year-to-date periods,
respectively, resulting from higher shipments of metal beverage and food
containers in both periods. Increased metal beverage can operating earnings
reflect the higher shipment levels as well as improved operating efficiencies.
Metal food container operating earnings declined from 1997 results due in large
part to reduced salmon can volumes (primarily the result of a government imposed
ban on commercial salmon fishing) and the effects of a strike in a Canadian
facility.
Plastic container sales as a percentage of consolidated sales increased to 8.3
percent in 1998 from 5.9 percent in 1997. The 1998 third quarter and
year-to-date results of plastic container operations were significantly improved
over the same periods in 1997 and included the first full-year of operations of
an East Coast plant. Costs associated with the start-up of new plants in the
eastern United States and the Midwest, and the closure of a small PET container
manufacturing facility contributed to the operating loss in 1997. Ball acquired
certain manufacturing assets in early July 1997 and began supplying PET bottles
to an East Coast bottler under a multi-year contract.
Sales within Ball's FTB Packaging operations decreased for the three and nine
month periods of 1998 compared to the same periods in 1997. Quarter and
year-to-date earnings were also down from the prior year, due in large part to
the effects on the marketplace of economic disruption in Asia. The unit sold a
record number of cans during the quarter, but pricing remains under pressure due
to excess manufacturing capacity in China. FTB has taken steps to substantially
reduce its headquarters staffing and the Company is examining its operations in
China in order to improve results there while maintaining its leading market
position.
Aerospace and Technologies
Sales in the aerospace and technologies segment for the third quarter and first
nine months of 1998 decreased to $86.4 million and $258.6 million, respectively,
compared to $102.3 million and $303.3 million in 1997. The sales reduction from
1997 to 1998 reflects, in large part, reduced activity in connection with
government programs and the unusually strong demand in the first half of 1997
for certain telecommunications equipment and related products. Demand for those
products in 1998 returned to more normal levels. The operating earnings decrease
in 1998 reflected the effect of lower sales in 1998 and the inclusion, in the
first half of 1997, of one-time early delivery incentives earned in connection
with telecommunication products. Backlog at the end of September 1998 was
approximately $326.3 million compared to approximately $267 million at December
31, 1997, and $287 million at the end of the September 1997. Year-to-year
comparisons of backlog are not necessarily indicative of the trend of future
operations.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations in 1998 of $200.0 million improved significantly
compared to 1997, due in part to a reduction in the amount of cash used for
normal seasonal working capital requirements and higher depreciation in
connection with the Reynolds acquisition. Capital spending of $51.7 million in
the first nine months of 1998 is below depreciation of $96.1 million. Total 1998
capital spending is expected to be approximately $97 million.
Primarily as a result of the Reynolds acquisition, total debt increased to
$1,464.7 million at September 27, 1998 compared to $773.1 million at December
31, 1997. The debt-to-total capitalization ratio rose to 67.7 percent at
September 27, 1998 from 53.0 percent at December 31, 1997.
In connection with the acquisition, the Company refinanced approximately $521.9
million of its existing debt and, as a result, recorded an extraordinary charge
from the early extinguishment of debt of approximately $12.1 million (40 cents
per share), net of related income tax benefit.
The acquisition and the refinancing, including related costs, were financed with
a placement of $300.0 million in 7.75% Senior Notes, $250.0 million in 8.25%
Senior Subordinated Notes and approximately $808.2 million from a Senior Credit
Facility.
The Senior Notes, which are due August 1, 2006, are unsecured, rank senior to
the Company's subordinated debt and are guaranteed on a senior basis by certain
of the Company's domestic subsidiaries (see Subsidiary Guarantees of Debt
footnote). The Senior Subordinated Notes, which are due August 1, 2008, are also
unsecured, rank subordinate to existing and future senior debt of the Company
and are guaranteed by certain subsidiaries of the Company (see the "Subsidiary
Guarantees of Debt" note). Both note agreements contain certain covenants and
restrictions including, among other things, restrictions on the incurrence of
additional indebtedness and the payment of dividends.
The Company will offer to exchange the Senior Notes and the Senior Subordinated
Notes. The terms of the new notes will be substantially identical in all
respects (including principal amount, interest rate, maturity, ranking and
covenant restrictions) to the terms of the notes for which they will be
exchanged except that the new notes will be registered under the Securities Act
of 1933, as amended, and therefore will not be subject to certain restrictions
on transfer except as provided in the Prospectus. The note agreements provide
that if the new notes are assigned investment grade ratings and the Company is
not in default, certain covenant restrictions will be suspended.
The Senior Credit Facility is comprised of three separate facilities, two term
loans and a revolving credit facility. The first term loan provides the Company
with up to $350.0 million and matures in August, 2004. The second term loan
provides the Company with up to $200.0 million and matures in March, 2006. Both
term loans are payable in quarterly installments beginning in March, 1999. The
revolving credit facility provides the Company with up to $650.0 million, of
which $150.0 million is available for a period of 364 days, renewable for
another 364 days from the current termination date at the option of the Company
and the participating lenders. The remainder is comprised of letters of credit
with an expiration date of up to one year and revolving loans which mature in
August, 2004. The Senior Credit Facility bears interest at variable rates, is
guaranteed by certain subsidiaries of the Company (see the "Subsidiary
Guarantees of Debt" note) and contains certain covenants and restrictions
including, among other things, restrictions on the incurrence of additional
indebtedness and the payment of dividends. In addition, all amounts outstanding
under the Senior Credit Facility are secured by (1) a pledge of 100 percent of
the stock of the Company's direct and indirect majority-owned subsidiaries and
(2) a pledge of 65 percent of the stock of the Company's material foreign
subsidiaries.
The Company has a Canadian dollar credit facility for committed short-term funds
of up to $50.0 million at September 27, 1998. At quarter end, approximately
$26.4 million was outstanding under this facility. The Company's Asian
subsidiary and related investments had short-term uncommitted credit facilities
of approximately $226.9 million at the end of the third quarter, of which $80.8
million was outstanding at September 27, 1998.
The Company's accounts receivable sales agreement provides for the ongoing,
revolving sale of up to $75.0 million of a designated pool of trade accounts
receivable of Ball's domestic packaging businesses. Net funds received from the
sale of the accounts receivable totaled $65.9 million and $66.5 million as of
September 27, 1998 and September 28, 1997, respectively. Fees related to this
agreement for the three and nine month periods of 1998 were $0.9 million and
$2.8 million, respectively, and $0.9 million and $2.8 million for the same
periods in 1997. These fees are included in general and administrative expenses.
YEAR 2000 UPDATE
Many computer systems and other equipment with embedded chips or processors use
only two digits to represent the year and, as a result, they may be unable to
process accurately certain data before, during or after the year 2000. As a
result, business and governmental entities are at risk for possible
miscalculations or system failures causing disruptions in their operations. This
is commonly known as the Year 2000 issue and can arise at any point in the
Company's supply, manufacturing, processing, distribution and financial chains.
Most of Ball's critical systems and related software are Year 2000 compliant or
are not adversely impacted by the Year 2000 issue. However, a program is in
progress to make the remaining software and systems Year 2000 compliant, or
verify that the Year 2000 issue will not adversely impact the software and
systems, in time to minimize any significant negative effects on operations. The
program covers information systems infrastructure, financial and administrative
systems, process control and manufacturing operating systems and the compliance
profiles of significant vendors, lenders and customers. Completion of the
programs already identified is on target for mid-1999.
In addition, Ball relies on third party suppliers for raw materials, water,
utilities, transportation, banking and other key services, the interruption of
which could affect its operations. The program identified above includes efforts
to evaluate the status of suppliers' and customers' efforts as a means of
managing risk but cannot eliminate the potential for disruption due to third
party failure.
The Company is also developing contingency plans intended to mitigate the
possible disruption in business operations that may result from external third
party Year 2000 issues. Such plans may include stockpiling raw materials,
increasing inventory levels, securing alternate sources of supply, adjusting
facility shut-down and start-up schedules and other appropriate measures. The
contingency plans and related cost estimates will be refined as additional
information becomes available.
Over the course of the past several years, systems installations, upgrades and
enhancements were performed with specific attention given to the Company
becoming Year 2000 compliant. As a result, when a formal Year 2000 program was
instituted in 1996, much of the Company's Year 2000 matters had either been
resolved or were near resolution. Given the actions to date as well as the
results of the compliance program, the Company believes, at this time, that
costs specifically resulting from completing the internal Year 2000 program will
not be significant to its results of operations or financial condition.
Due to the general uncertainty inherent in the Year 2000 problem, resulting in
part from the uncertainty of the Year 2000 readiness of the third-party
suppliers and customers, the Company is unable to determine at this time whether
the consequences of Year 2000 failures will have a material impact on the
Company's results of operations, liquidity or financial condition. The Company's
Year 2000 issue program is reducing the level of uncertainty about the Year 2000
issue and, in particular, about the Year 2000 compliance and readiness of
material external third parties dealing with Ball. The Company believes that,
with the recent implementation of new business systems and completion of the
program as scheduled, the possibility of significant interruptions of normal
operations should be reduced.
The discussion of the Company's efforts, and management's expectations, relating
to Year 2000 compliance contain forward-looking statements. The Company's
ability to achieve Year 2000 compliance and the level of associated incremental
costs could be adversely impacted by, among other things, the availability and
cost of programming and testing resources, the ability of suppliers and
customers to bring their systems into Year 2000 compliance, and unanticipated
problems identified in the ongoing compliance review.
The information contained herein (including the attached Exhibit 99.1) regarding
the Company's efforts to deal with the Year 2000 problem apply to all of the
Company's products and services. Such statements are intended as Year 2000
Statements and Year 2000 Readiness Disclosures and are subject to the Year 2000
Information Readiness Disclosure Act.
OTHER
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 Company was not in default of any loan agreement at September 27, 1998, and
has met all payment obligations.
The U.S. government is disputing the Company's claim to recoverability of
reimbursed costs associated with Ball's Employee Stock Ownership Plan for fiscal
years 1989 through 1995, as well as the corresponding prospective costs accrued
after 1995. In October 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. While the outcome
of the trial is not yet known, the Company's information at this time does not
indicate that this matter will have a material, adverse effect upon the
financial condition, results of operations or competitive position of the
Company. For additional information regarding this matter, refer to the
Company's latest annual report.
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 financial condition, results of operations,
capital expenditures or competitive position of the Company.
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; the
weather; fuel costs and availability; regulatory action; federal and state
legislation; interest rates; labor strikes; 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 the satellite launches and business of EarthWatch; the devaluation of
international currencies; and the ability to obtain adequate credit resources
for foreseeable financing requirements of the Company's businesses; the
inability of the Company to achieve year 2000 compliance; the ability of the
Company to acquire other businesses. 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
The Company previously reported that Chrysler Corporation ("Chrysler") notified
the Company that Chrysler, Ford Motor Company and General Motors Corporation
have been named in a lawsuit filed in the U.S. District Court in Reno, Nevada,
by Jerome Lemelson, alleging infringement of three of his vision inspection
system patents used by the defendants. One or more of the vision inspection
systems used by the defendants may have been supplied by the Company's former
Industrial Systems Division or its predecessors. The suit seeks injunctive
relief and unspecified damages. Chrysler notified the Company that the division
may have indemnification responsibilities to Chrysler. The Company responded to
Chrysler that the systems were sold to Chrysler before the patents were issued.
On June 16, 1995, the Magistrate of the U.S. District Court declared the patents
of Lemelson unenforceable because of the long delays in prosecution. On April
28, 1997, the U.S. District Court Judge vacated the report and recommendation of
the U.S. Magistrate and found that the patents were not invalid. On August 20,
1997, the U.S. Court of Appeals for the Federal Circuit denied Ford's petition
for permission to appeal. Mr. Lemelson died in October 1997. In January 1998,
the court permitted the Lemelson Medical, Education & Research Foundation,
Limited Partnership to be substituted as a party to the lawsuit. The Court
remanded the case back to the U.S. Magistrate for further proceedings on pending
motions. Based on that information, the Company is unable to express an opinion
as to the actual exposure of the Company for these matters. Under an agreement
in connection with the spin-off of Alltrista Corporation from Ball, Alltrista
has agreed to indemnify Ball for liabilities arising from this litigation.
On September 21 1998, The Daiei, Inc. (Daiei), a Japanese corporation, with its
principal place of business in Tokyo, Japan, sued the Company in U.S. District
Court, Southern District of Indiana, Evansville Division. Daiei alleges it is
engaged in the retail sale of consumer goods and food products at stores
throughout Japan. Daiei alleges that it purchased defective beer cans filled
with beer from Evansville Brewing Company, Inc. (EBC) between April 5, 1995 and
July 20, 1995. Daiei further alleges that the metal containers were defectively
assembled and sealed by EBC at its production facility in Evansville, Indiana,
upon a machine which was inspected by representatives of Ball. Daiei further
alleges that Ball breached its warranty to provide metal containers that
performed in a commercially reasonable manner, and that Ball's representatives
were negligent in the repair of the sealing equipment owned by EBC. Daiei seeks
damages for the lost containers and product in the amount of approximately $6.0
million. The Company has retained counsel and is defending this case. Based upon
the information available to the Company at the present time, the Company does
not believe that this matter will have a material adverse effect upon the
financial condition of the Company.
The Company previously disclosed in its Form 10-K for 1997 that, on or about
June 14, 1990, the El Monte plant of Ball-InCon Glass Packaging Corp., a then
wholly owned subsidiary of the Company (renamed Ball Glass) and now owned by
Ball-Foster Glass Container Co., L.L.C., which is wholly owned by Saint-Gobain,
received a general notification letter and information request from the EPA,
notifying Ball Glass that it may have a potential liability as defined in
Section 107(a) of CERCLA at the San Gabriel Valley areas 1-4 Superfund sites
located in Los Angeles, California. The EPA requested certain information from
Ball Glass, and Ball Glass responded. The Company received notice from the City
of El Monte that, under a proposed city economic redevelopment plan, the City
proposed to commence groundwater clean-up by a pump and treat remediation
process. A PRP group organized and drafted a PRP group agreement, which Ball
Glass signed. The PRP group retained an environment engineering firm to critique
the EPA studies and any proposed remediation.
The PRP group completed negotiations with the EPA over the terms of the
administrative consent order, statement of work for the remedial investigation
phase of the clean-up, and the interim allocation arrangement between group
members to fund the remedial investigation. The interim allocation approach
requires that any payment will be based upon contribution to pollution. The
group and the EPA signed the administrative consent order. The group retained an
environmental engineering consulting firm to perform the remedial investigation.
As required under the administrative consent order, the group submitted to the
EPA all copies of all environmental studies conducted by Ball at the plant, the
majority of which has already been furnished to the State of California. The EPA
approved the work plan, project management plan, and the data management plan
portions of the PRP group's proposed remedial investigation/feasibility study
(RI/FS). The group is currently funding the RI/FS. The group has proposed a
range of remedies. The EPA selected the most extensive remedy (shallow
groundwater remediation for the east and west plans and deep groundwater
remediation around City Wall No. 5) but will allow some discretion concerning
approaches to implementing the remedy. The group now estimates that the cost of
such remedies might range from minimal costs to $25 million for deep groundwater
remediation. The group has not made any final allocation.
Based on the information available to the Company at the present time, the
Company is unable to express an opinion as to the actual exposure of the Company
for this matter. However, Commercial Union, the Company's general liability
insurer, is defending the governmental action and is paying the cost of defense
including attorneys' fees.
Item 2. Changes in securities
There were no events required to be reported under Item 2 for the quarter ending
September 27, 1998.
Item 3. Defaults upon senior securities
There were no events required to be reported under Item 3 for the quarter ending
September 27, 1998.
Item 4. Submission of matters to a vote of security holders
There were no events required to be reported under Item 4 for the quarter ending
September 27, 1998.
Item 5. Other information
Shareholders should be advised that under Rule 14a-4(c)(1) that where a
shareholder has not sought inclusion of a proposal in the Company's Proxy
Statement, that if a shareholder fails to notify the Company at least forty-five
(45) days prior to the month and day of mailing the prior year's Proxy
Statement, then the management proxies would be allowed to use their
discretionary voting authority, if such proposal is raised at the Annual
Meeting, without any discussion of the matter in the Proxy Statement. The
Company's prior year Proxy Statement was mailed on March 16, 1998. Therefore,
any proposals must be received by the Company forty-five (45) days prior to that
date, or by January 30, 1999.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
3.2 Restated and Amended Bylaws of the Company
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
A Current Report on Form 8-K was filed July 29, 1998, reporting under
Item 5 an announcement by Ball Corporation and Reynolds Metals Company
which stated that the Hart-Scott-Rodino waiting period regarding Ball's
purchase of Reynolds' North American aluminum beverage can and end assets
expired on July 21, 1998.
A Current Report on Form 8-K was filed August 25, 1998, reporting
under Item 2 the acquisition on August 10, 1998 of substantially all of the
assets of Reynolds Metals Company by Ball Corporation and its Ball Metal
Beverage Container Corp. subsidiary.
A Current Report on Form 8-K/A was filed October 23, 1998, reporting
under Item 7 of Regulations S-X amended financial information in connection
with the August 10, 1998 acquisition of Reynolds Metals Company.
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/ R. David Hoover
------------------------------
R. David Hoover
Vice Chairman
and Chief Financial Officer
Date: November 5, 1998
Ball Corporation and Subsidiaries
QUARTERLY REPORT ON FORM 10-Q
September 27, 1998
EXHIBIT INDEX
Description Exhibit
--------------- -------------
Restated and Amended Bylaws of the Company (Filed herewith.) EX-3.2
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