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 4, 1999
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 May 2, 1999
--------------- ---------------------------
Common Stock,
without par value 30,643,454 shares
Ball Corporation and Subsidiaries
QUARTERLY REPORT ON FORM 10-Q
For the period ended April 4, 1999
INDEX
Page Number
---------------------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Unaudited Condensed Consolidated Statement of Income for the
Three Months Ended April 4, 1999, and March 29, 1998 3
Unaudited Condensed Consolidated Balance Sheet at April 4, 1999,
and December 31, 1998 4
Unaudited Condensed Consolidated Statement of Cash Flows for
the Three Months Ended April 4, 1999, and March 29, 1998 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION 20
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
------------------------------------------
April 4, March 29,
1999 1998
------------------- -------------------
Net sales $ 820.3 $ 549.7
------------------- ------------------
Costs and expenses
Cost of sales (excluding depreciation and amortization) 691.9 466.2
Depreciation and amortization 41.5 29.4
Selling and administrative expenses 30.5 25.4
Product development and other 3.6 3.3
Headquarters relocation costs - 6.3
Interest expense 28.2 12.7
------------------- ------------------
795.7 543.3
------------------- ------------------
Income before taxes on income 24.6 6.4
Provision for income tax expense (9.7) (3.2)
Minority interests 0.5 2.6
Equity in earnings (losses) of affiliates 0.3 (0.3)
------------------- ------------------
Net income before accounting change 15.7 5.5
Cumulative effect of change in accounting for start-up costs, net
of tax benefit - (3.3)
------------------- ------------------
Net income 15.7 2.2
Preferred dividends, net of tax benefit (0.7) (0.7)
------------------- ------------------
Net earnings attributable to common shareholders $ 15.0 $ 1.5
=================== ==================
Net earnings per common share:
Net income before accounting change $ 0.50 $ 0.16
Cumulative effect of change in accounting for start-up costs, net
of tax benefit - (0.11)
------------------- ------------------
Earnings per common share $ 0.50 $ 0.05
=================== ==================
Diluted earnings per share:
Net income before accounting change $ 0.47 $ 0.15
Cumulative effect of change in accounting for start-up costs, net
of tax benefit - (0.10)
------------------- ------------------
Diluted earnings per share $ 0.47 $ 0.05
=================== ==================
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 SHEET
(Millions of dollars)
April 4, December 31,
1999 1998
------------------ -------------------
ASSETS
Current assets
Cash and temporary investments $ 42.1 $ 34.0
Accounts receivable, net 313.3 273.5
Inventories, net 581.9 483.8
Deferred income tax benefits and prepaid expenses 85.4 94.3
------------------ ------------------
Total current assets 1,022.7 885.6
------------------ ------------------
Property, plant and equipment, net 1,158.1 1,174.4
Goodwill and other assets 770.6 794.8
------------------ ------------------
$ 2,951.4 $ 2,854.8
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt and current portion of long-term debt $ 178.8 $ 126.8
Accounts payable 348.1 350.3
Salaries, wages and accrued employee benefits 70.1 97.1
Other current liabilities 106.8 113.4
------------------ ------------------
Total current liabilities 703.8 687.6
------------------ ------------------
Long-term debt 1,320.3 1,229.8
Employee benefit obligations, deferred income taxes and other noncurrent
liabilities 272.5 290.7
------------------ ------------------
Total noncurrent liabilities 1,592.8 1,520.5
------------------ ------------------
Contingencies
Minority interests 20.6 24.4
------------------ ------------------
Shareholders' equity
Series B ESOP Convertible Preferred Stock 58.3 57.2
Unearned compensation - ESOP (29.5) (29.5)
------------------ ------------------
Preferred shareholder's equity 28.8 27.7
------------------ ------------------
Common stock (35,062,827 shares issued - 1999;
34,859,636 shares issued - 1998) 375.5 368.4
Retained earnings 408.4 397.9
Accumulated other comprehensive loss (29.7) (31.7)
Treasury stock, at cost (4,613,905 shares - 1999;
4,404,758 shares - 1998) (148.8) (140.0)
------------------ ------------------
Common shareholders' equity 605.4 594.6
------------------ ------------------
Total shareholders' equity 634.2 622.3
------------------ ------------------
$ 2,951.4 $ 2,854.8
================== ==================
See accompanying notes to unaudited condensed consolidated financial statements.
Ball Corporation and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED
STATEMENT OF CASH FLOWS
(Millions of dollars)
Three Months Ended
------------------------------------------
April 4, March 29,
1999 1998
------------------- -------------------
Cash flows from operating activities
Net income $ 15.7 $ 2.2
Reconciliation of net income to net cash used in
operating activities:
Depreciation and amortization 41.5 29.4
Relocation costs - 6.3
Other, net 15.0 7.2
Changes in working capital components (181.5) (57.4)
------------------- -------------------
Net cash used in operating activities (109.3) (12.3)
------------------- -------------------
Cash flows from investing activities
Additions to property, plant and equipment (21.5) (16.9)
Other, net 3.2 (0.4)
------------------- -------------------
Net cash used in investing activities (18.3) (17.3)
------------------- -------------------
Cash flows from financing activities
Net change in long-term debt 92.5 (7.7)
Net change in short-term debt 50.0 56.5
Common and preferred dividends (4.5) (4.5)
Net proceeds from issuance of common stock under
various employee and shareholder plans 7.0 5.1
Acquisitions of treasury stock (8.8) (2.5)
Other, net (0.5) (1.5)
------------------- -------------------
Net cash provided by financing activities 135.7 45.4
------------------- -------------------
Net increase in cash and temporary investments 8.1 15.8
Cash and temporary investments:
Beginning of period 34.0 25.5
------------------- -------------------
End of period $ 42.1 $ 41.3
=================== ===================
See accompanying notes to unaudited condensed consolidated financial statements.
Ball Corporation and Subsidiaries
April 4, 1999
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 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
current year presentation.
New Accounting Standards.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," establishes standards for reporting information about operating
segments in annual and interim financial statements. Annual reporting under this
pronouncement was effective for Ball in 1998. Interim reporting became effective
for Ball in 1999, and that information is included on page 7 of this report.
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 was adopted by Ball as of January 1, 1999. The adoption of SOP
No. 98-1 is not expected to have a significant impact on the Company's
operations or financial condition.
During the fourth quarter of 1998, Ball adopted Statement of Position (SOP) No.
98-5, "Reporting on the Costs of Start-Up Activities," in advance of its
required 1999 implementation date. SOP No. 98-5 requires that costs of start-up
activities and organizational costs, as defined, be expensed as incurred. In
accordance with this statement, the Company recorded an after-tax charge to
earnings of approximately $3.3 million (11 cents per share), retroactive to
January 1, 1998, representing the cumulative effect of this change in accounting
on prior years. As a result of this change in accounting, certain amounts
previously reported in the first quarter of 1998 have been restated.
Business Segment Information.
Ball's operations are organized along its product lines and include two
segments: (1) packaging and (2) aerospace and technologies. The accounting
policies of the segments are the same as those in the condensed consolidated
financial statements. Prior year segment information has been restated to
conform to the requirements of SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information."
The packaging segment includes the 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 direct and indirect 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: the aerospace systems division,
comprised of civil space systems, technology operations, defense systems,
commercial space operations and systems engineering; and the telecommunication
products division, comprised of advanced antenna and video systems and
communication and video products.
Summary of Business by Segment Three Months Three Months
(dollars in millions) Ended Ended
April 4, 1999 March 29, 1998
----------------- -----------------
Net Sales
Packaging $ 724.8 $ 461.0
Aerospace and technologies 95.5 88.7
----------------- -----------------
Consolidated net sales $ 820.3 $ 549.7
================= =================
Earnings before interest and taxes
Packaging $ 50.8 $ 21.1
Aerospace and technologies 6.2 8.2
----------------- -----------------
Segment earnings before interest and taxes 57.0 29.3
Headquarters relocation costs - (6.3)
Corporate undistributed expenses, net (4.2) (3.9)
----------------- -----------------
Earnings before interest and taxes 52.8 19.1
Interest expense (28.2) (12.7)
Provision for income tax expense (9.7) (3.2)
Minority interests 0.5 2.6
Equity in earnings (losses) of affiliates 0.3 (0.3)
----------------- -----------------
Consolidated net income before the cumulative effect of
an accounting change in 1998 $ 15.7 $ 5.5
================= =================
April 4, December 31,
1999 1998
----------------- -----------------
Net Investment
Packaging $ 1,183.6 $ 1,164.3
Aerospace and technologies 146.8 143.5
----------------- -----------------
Segment net investment 1,330.4 1,307.8
Corporate net investment and eliminations (696.2) (685.5)
----------------- -----------------
Consolidated net investment $ 634.2 $ 622.3
================= =================
Acquisitions.
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). The assets acquired consisted largely of
16 plants in 12 states and Puerto Rico. In connection with the Acquisition, the
Company initially provided $56.8 million in the opening balance sheet as an
estimate of integration-related costs, including capacity consolidations. During
the first quarter of 1999, the Company closed two of the acquired plants and
announced in April 1999 that it intends to close a third plant. Capacity is
expected to be redirected to other Ball plants. Upon finalization of the
integration plan, which is expected in the third quarter of 1999, adjustments to
the estimated costs through August 9, 1999, if any, will be reflected as a
change in goodwill. Subsequent to that date, any increases in actual costs will
be reflected as an adjustment to current period earnings and any decreases will
result in a reduction of goodwill.
Headquarters Relocation, Plant Closures and Other Costs.
In February 1998 Ball announced that it would relocate its corporate
headquarters to an existing company-owned building in Broomfield, Colorado. In
connection with the relocation, the Company recorded a charge in the first
quarter of 1998 of $6.3 million ($3.8 million after tax or 13 cents per share),
primarily for employee-related costs. The relocation costs were substantially
complete by the end of 1998.
During the first quarter of 1999, the Company closed two of its plants located
in the PRC and removed from service manufacturing equipment at a third plant.
The actions were taken to address industry overcapacity, as well as uncertainty
in the Asian financial markets which has resulted in a decrease in exports of
Company products from Hong Kong to other Asian countries. The Company's
preliminary estimates included a $52.0 million, largely noncash, charge in the
fourth quarter of 1998 to write down equipment, goodwill and other assets to net
realizable values and $4.2 million of other costs. Any adjustments to the
preliminary estimates will be reflected as an adjustment to current period
earnings.
Inventories.
Inventories consisted of the following:
(in millions of dollars) April 4, December 31,
1999 1998
----------------- ------------------
Raw materials and supplies $ 136.8 $ 131.2
Work in process and finished goods 445.1 352.6
----------------- ------------------
$ 581.9 $ 483.8
================= ==================
Property, Plant and Equipment.
Property, plant and equipment consisted of the following:
(in millions of dollars) April 4, December 31,
1999 1998
----------------- ------------------
Land $ 61.4 $ 62.2
Buildings 418.9 410.5
Machinery and equipment 1,408.7 1,410.2
----------------- ------------------
1,889.0 1,882.9
Accumulated depreciation (730.9) (708.5)
----------------- ------------------
$ 1,158.1 $ 1,174.4
================= ==================
Goodwill and Other Assets.
The composition of other assets was as follows:
(in millions of dollars) April 4, December 31,
1999 1998
----------------- ------------------
Goodwill $ 533.8 $ 555.9
Other 236.8 238.9
----------------- ------------------
$ 770.6 $ 794.8
================= ==================
Debt and Guarantees of Subsidiaries.
In connection with the Acquisition, the Company refinanced approximately $521.9
million of its existing debt. The Acquisition and the refinancing, including
related costs, were financed with a placement of $300.0 million in 7.75% Senior
Notes due in 2006, $250.0 million in 8.25% Senior Subordinated Notes due in 2008
and approximately $808.2 million from a Senior Credit Facility. The Senior
Credit Facility bears interest at variable rates and is comprised of three
separate facilities: (1) a term loan for $350.0 million due in 2004, (2) a
second term loan for $200.0 million due in 2006 and (3) a revolving credit
facility which provides the Company with up to $600.0 million, of which $450.0
million matures in 2004. At April 4, 1999, approximately $339 million was
available under the revolving credit facility.
On January 27, 1999, the Company exchanged the Senior Notes and Senior
Subordinated Notes. The new notes are substantially identical in all respects
(including principal amount, interest rate, maturity, ranking and covenant
restrictions) to the terms of the notes for which they were exchanged, except
that the new notes are registered under the Securities Act of 1933, as amended,
and therefore are not subject to certain restrictions on transfer except as
described in the Prospectus for the Exchange Offer. 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 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 subsidiaries and contain certain covenants
and restrictions including, among other things, limits on the incurrence of
additional indebtedness and increases in dividends. In addition, all amounts
outstanding under the Senior Credit Facility are secured by (1) a pledge of
100 percent of the stock owned by the Company of its direct and indirect
majority-owned domestic subsidiaries and (2) a pledge of 65 percent of the stock
owned directly and indirectly by the Company of certain foreign subsidiaries.
Exhibit 20.1 contains condensed, consolidating financial information for the
Company segregating the guarantor subsidiaries and non-guarantor subsidiaries.
A receivables sales agreement provides for the ongoing, revolving sale of a
designated pool of trade accounts receivable of Ball's U.S. packaging
businesses. In December 1998 the designated pool of receivables was increased to
provide for sales of receivables up to $125 million from the previous amount of
$75 million. Net funds received from the sale of the accounts receivable totaled
$119.5 million and $65.9 million at April 4, 1999, and March 29, 1998,
respectively. Fees incurred in connection with the sale of accounts receivable,
which are included in other expenses, totaled $1.7 million in the first three
months of 1999 and $0.9 million in the first three months of 1998.
The Company was not in default of any loan agreement at April 4, 1999, and has
met all payment obligations. However, 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 $50.8 million was
outstanding at the quarter end. Latapack-Ball has requested a waiver from the
lender in respect of the noncompliance.
Shareholders' Equity.
The composition of the accumulated other comprehensive loss at April 4, 1999,
and December 31, 1998, is primarily the cumulative effect of foreign currency
translation and additional minimum pension liability. Total comprehensive income
was $17.7 million for the quarter ended April 4, 1999, and $1.5 million for the
quarter ended March 29, 1998. 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 1,586,916 shares at both April 4, 1999, and December 31, 1998.
Earnings Per Share.
The following table provides additional information on the computation of
earnings per share amounts:
(Millions of dollars except Three months ended
per share amounts) --------------------------------------
April 4, March 29,
1999 1998
---------------- -----------------
Earnings per Common Share
Net income before accounting change $ 15.7 $ 5.5
Cumulative effect of change in accounting for start-up costs, net
of tax benefit - (3.3)
---------------- ----------------
Net income 15.7 2.2
Preferred dividends, net of tax benefit (0.7) (0.7)
---------------- ----------------
Net earnings attributable to common shareholders $ 15.0 $ 1.5
================ ================
Weighted average common shares outstanding (000s) 30,240 30,203
================ ================
Earnings per common share:
Earnings per common share before accounting change $ 0.50 $ 0.16
Cumulative effect of change in accounting for start-up costs,
net of tax benefit - (0.11)
---------------- ----------------
Earnings per common share $ 0.50 $ 0.05
================ ================
Diluted Earnings Per Share
Net income before accounting change $ 15.7 $ 5.5
Cumulative effect of change in accounting for start-up costs, net
of tax benefit - (3.3)
---------------- ----------------
Net income 15.7 2.2
Adjustment for deemed ESOP cash contribution in lieu of the
ESOP Preferred dividend (0.5) (0.5)
---------------- ----------------
Net earnings attributable to common shareholders $ 15.2 $ 1.7
================ ================
Weighted average common shares outstanding (000s) 30,240 30,203
Effect of dilutive stock options 438 174
Common shares issuable upon conversion of the ESOP Preferred Stock 1,833 1,889
---------------- ----------------
Weighted average shares applicable to diluted earnings per share 32,511 32,266
================ ================
Diluted earnings per share:
Net income before accounting change $ 0.47 $ 0.15
Cumulative effect of change in accounting for start-up costs,
net of tax benefit - (0.10)
---------------- ----------------
Diluted earnings per share $ 0.47 $ 0.05
================ ================
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 is disputing 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 will not reimburse the
Company for 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. While the outcome of the trial or the audit 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.
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 North American beverage can manufacturing business of
Reynolds Metals Company (Acquisition). The assets acquired consisted largely of
16 plants in 12 states and Puerto Rico. In connection with the Acquisition, the
Company initially provided $56.8 million in the opening balance sheet as an
estimate of integration-related costs, including capacity consolidations. During
the first quarter of 1999, the Company closed two of the acquired plants and
announced in April 1999 that it intends to close a third plant. Capacity is
expected to be redirected to other Ball plants. Upon finalization of the
integration plan, which is expected in the third quarter of 1999, adjustments to
the estimated costs through August 9, 1999, if any, will be reflected as a
change in goodwill. Subsequent to that date, any increases in actual costs will
be reflected as an adjustment to current period earnings and any decreases will
result in a reduction of goodwill.
RESULTS OF OPERATIONS
Consolidated Sales and Earnings
Ball's operations are organized along its product lines and include two
segments: (1) the packaging segment and (2) the aerospace and technologies
segment. The following table summarizes the results of these two segments:
Three Months Ended
-----------------------------------
April 4, March 29,
(dollars in millions) 1999 1998
-------------- --------------
Net Sales
North American metal beverage $ 525.0 $ 261.0
North American metal food 97.4 94.8
Plastics 53.6 48.5
International 48.8 56.7
-------------- --------------
Total packaging segment 724.8 461.0
Aerospace and technologies segment 95.5 88.7
-------------- --------------
Consolidated net sales $ 820.3 $ 549.7
============== ==============
Operating Earnings
Packaging $ 50.8 $ 21.1
Aerospace and technologies 6.2 8.2
-------------- --------------
Consolidated operating earnings $ 57.0 $ 29.3
============== ==============
Packaging Segment
The packaging segment includes the businesses that manufacture metal and PET
(polyethylene terephthalate) containers, primarily for use 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). Packaging operations in North America have increased as a result of the
plants acquired in 1998.
North American metal beverage container sales, which represented approximately
72 percent of segment sales in the first quarter of 1999, increased
significantly in comparison to the same period in 1998. The increase was
primarily due to the additional sales from the acquired plants as well as the
legacy plants running at full capacity, partially offset by lower aluminum
commodity prices. During the quarter, two of the acquired plants were closed,
with certain related production capacity redirected to other Ball plants.
Earnings attributable to North American metal beverage containers also improved
in 1999 as a result of the higher sales combined with lower production costs per
unit.
North American metal food container sales, which comprised approximately
13 percent of segment sales in the first quarter of 1999, increased slightly
over the same period in 1998. This increase was a combination of sales to a new
nutriceutical customer and stronger sales in seasonal and nonseasonal lines.
Increased production volumes and manufacturing efficiency gains resulted in
lower production costs per unit, which, along with the increase in sales,
provided improved earnings over the first quarter of 1998.
Plastic container sales continued to increase with sales in the first quarter of
1999 approximately 11 percent above the same period in 1998 when the business
was still emerging from start-up. The increase in sales was largely due to
additional soft drink production in a recently expanded facility. The sales mix
continued to be heavily weighted toward carbonated soft drinks, although water
bottle demand and preform sales appear to be developing. The 1999 first quarter
results of plastic container operations were significantly improved over the
same period in 1998 when it operated at a loss. The improved results were a
combination of increased sales, improved production efficiencies and
manufacturing cost control.
Internationally, results in the PRC, although not yet at desired levels, were
improved as the supply of beverage cans has begun to come more in balance with
demand after several years of overcapacity. The closure of two plants in the PRC
during the first quarter of 1999 contributed to lower sales. Despite the
decrease in sales, however, earnings were improved due largely to lower
operating costs, partially the result of reduced headcount and other fixed cost
reductions related to plant closures.
Aerospace and Technologies Segment
The aerospace and technologies segment recorded increased sales during the first
quarter of 1999 and was recently awarded several new contracts in the aerospace
area. Higher aerospace sales and earnings in 1999 were the result of increased
program activity. Sales and earnings results were lower in the telecommunication
products area due in large part to costs to develop antennas which employ Ball
technology for wireless personal communications systems. The related sales had
not yet been realized to offset the costs, which were planned as part of the
Company's strategy to extend into commercial markets key technologies it has
developed in governmental business. Backlog at the end of the first quarter was
approximately $270 million compared to $296 million at December 31, 1998, and
$271 million at the end of the 1998 first quarter. Year-to-year comparisons of
backlog are not necessarily indicative of the trend of future operations.
Interest and Taxes
Consolidated interest expense for the first quarter of 1999 was $28.2 million
compared to $12.7 million for the first quarter of 1998. The increase is
primarily attributable to the additional debt associated with the Acquisition.
Ball's lower consolidated effective income tax rate for the first quarter of
1999, as compared to the same period in 1998, is primarily due to increased U.S.
earnings and the reduced tax effects of foreign operations, partially offset by
the final phase-in effects of the previously reported 1996 legislated changes in
the tax treatment of the costs of company-owned life insurance.
Results of Equity Affiliates and Minority Interests
Equity earnings in affiliates are largely attributable to those from investments
in the PRC, Thailand and Brazil and were $0.3 million compared to a loss of
$0.3 million for the first quarter of 1998. Results in Brazil, although
profitable for the first quarter of 1999, were hampered by the Brazilian
government's change in its monetary policy in January 1999, which caused the
Brazilian real to devalue. Results in Thailand were also negatively impacted
by currency exchange losses in that country.
Minority interests' share of losses were $0.5 million for the first quarter of
1999 compared to $2.6 million for the same period in 1998. The decrease is due
primarily to the increase in Ball's direct and indirect ownership in M.C.
Packaging (Hong Kong) Limited (M.C. Packaging). During the latter part of 1998,
the Company's subsidiary, FTB Packaging Limited, purchased substantially all of
the remaining direct and indirect minority interests in M.C. Packaging.
Other Items
In February 1998 Ball announced that it would relocate its corporate
headquarters to an existing company-owned building in Broomfield, Colorado. In
connection with the relocation, the Company recorded a charge in the first
quarter of 1998 of $6.3 million ($3.8 million after tax or 13 cents per share),
primarily for employee-related costs. The relocation costs were substantially
complete by the end of 1998.
During 1998, Ball adopted Statement of Position (SOP) No. 98-5, "Reporting on
the Costs of Start-Up Activities," in advance of its required 1999
implementation date. SOP No. 98-5 requires that costs of start-up activities and
organizational costs, as defined, be expensed as incurred. In accordance with
this statement, the Company recorded an after-tax charge to earnings of
approximately $3.3 million (11 cents per share), retroactive to January 1, 1998,
representing the cumulative effect of this change in accounting on prior years.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash used by operations in 1999 of $109.3 million increased compared to 1998,
due largely to higher working capital requirements, partially offset by higher
depreciation in connection with the Reynolds acquisition. Capital spending of
$21.5 million in the first three months of 1999 was below depreciation of
$35.5 million. Total 1999 capital spending is expected to be below $150 million.
Total debt increased to $1,499.1 million at April 4, 1999, compared to
$1,356.6 million at December 31, 1998, primarily due to an increase in
inventories to meet seasonal and peak period demands. The debt-to-total
capitalization ratio rose to 69.6 percent at April 4, 1999, from 67.7 percent
at December 31, 1998.
In connection with the Acquisition, the Company refinanced approximately
$521.9 million of its existing debt. The Acquisition and the refinancing,
including related costs, were financed with a placement of $300.0 million in
7.75% Senior Notes due in 2006, $250.0 million in 8.25% Senior Subordinated
Notes due in 2008 and approximately $808.2 million from a Senior Credit
Facility. The Senior Credit Facility bears interest at variable rates and is
comprised of three separate facilities: (1) a term loan for $350.0 million due
in 2004, (2) a second term loan for $200.0 million due in 2006 and (3) a
revolving credit facility which provides the Company with up to $600.0 million,
of which $450.0 million matures in 2004. At April 4, 1999, approximately
$339 million was available under the revolving credit facility.
On January 27, 1999, the Company exchanged the Senior Notes and Senior
Subordinated Notes. The new notes are substantially identical in all respects
(including principal amount, interest rate, maturity, ranking and covenant
restrictions) to the terms of the notes for which they were exchanged, except
that the new notes are registered under the Securities Act of 1933, as amended,
and therefore are not subject to certain restrictions on transfer except as
described in the Prospectus for the Exchange Offer. 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 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 subsidiaries and contain certain covenants
and restrictions including, among other things, limits on the incurrence of
additional indebtedness and increases in dividends. In addition, all amounts
outstanding under the Senior Credit Facility are secured by (1) a pledge of
100 percent of the stock owned by the Company of its direct and indirect
majority-owned domestic subsidiaries and (2) a pledge of 65 percent of the stock
owned directly and indirectly by the Company of certain foreign subsidiaries.
The Company's consolidated operations in Asia had short-term uncommitted credit
facilities of approximately $131 million at the end of the first quarter, of
which $95 million was outstanding at April 4, 1999.
A receivables sales agreement provides for the ongoing, revolving sale of a
designated pool of trade accounts receivable of Ball's U.S. packaging
businesses. In December 1998 the designated pool of receivables was increased to
provide for sales of receivables up to $125 million from the previous amount of
$75 million. Net funds received from the sale of the accounts receivable totaled
$119.5 million and $65.9 million at April 4, 1999, and March 29, 1998,
respectively. Fees incurred in connection with the sale of accounts receivable,
which are included in other expenses, totaled $1.7 million in the first three
months of 1999 and $0.9 million in the first three months of 1998.
The Company was not in default of any loan agreement at April 4, 1999, and has
met all payment obligations. However, 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 $50.8 million was
outstanding at the quarter end. Latapack-Ball has requested a waiver from the
lender in respect of the noncompliance.
CONTINGENCIES
Year 2000 Systems Review
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.
Over the course of the past several years, systems installations, upgrades and
enhancements were performed by the Company in the ordinary course of business
with attention given to Year 2000 matters. As a result, when the formal Year
2000 program was instituted in 1996, many of the Year 2000 matters potentially
affecting the Company had either been resolved or were near resolution. The
program currently in effect was instituted to make the remaining software and
systems Year 2000 compliant in time to minimize any significant negative effects
on operations and is divided into six major phases: (1) project initiation,
(2) awareness, (3) assessment, (4) remediation, (5) testing and (6) contingency
planning. 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. As of
April 1999, the Company estimated that the program was approximately 90 percent
complete with regard to critical systems, and completion of the entire project
is on target for mid- to late 1999. International operations, for the most part,
are following the U.S. program, and international joint venture operations are
being assessed.
Because most of the Company's efforts were initiated to address specific
business requirements or to stay technologically current, it is difficult to
quantify costs incurred solely in conjunction with the Year 2000 project.
However, certain incremental costs of approximately $2 million have been
identified, including the purchase of software to manage the project, software
to check personal computer hardware and software compliance, and contractor
assistance. All such costs are being funded through operating cash flows.
Ball relies on third-party suppliers for raw materials, water, utilities,
transportation, banking and other key services. The inability of principal
suppliers, including utilities, to be Year 2000 ready could result in delays in
product deliveries from such suppliers and disrupt the Company's ability to
supply its products. Ball's review program includes efforts to evaluate the
status of suppliers' and customers' efforts, including, but not limited to,
questionnaires as a means of identifying risk. None of the suppliers contacted
to date have indicated any compliance issues. However, the replies indicate that
most suppliers, vendors and customers will not provide any assurance that they
will be Year 2000 compliant.
A worst-case scenario for the Company with respect to the Year 2000 issue could
be the failure of either a critical vendor or the Company's manufacturing and
information systems. Such failures could result in production outages and lost
sales and profits.
The Company is developing contingency plans intended to mitigate the possible
disruption of business operations that may result from external third-party Year
2000 issues. Such plans may include accelerating raw material delivery
schedules, increasing finished goods inventory levels, securing alternate
sources of supply, adjusting facility shutdown and start-up schedules and other
appropriate measures. The Company is currently prioritizing critical systems and
intends to have its contingency plans in place by the end of the second quarter
of 1999. The contingency plans and related cost estimates will be refined as
additional information becomes available.
Due to the general uncertainty inherent in the Year 2000 issue, resulting in
part from the uncertainty of the Year 2000 readiness of the third-party
suppliers and customers, the Company is unable to determine whether the
consequences of Year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition. However, 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 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 U.S. government is disputing 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 will not reimburse the
Company for 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. While the outcome of the trial or the audit 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.
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 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 and fluctuations in foreign currencies. The
Company's objective in managing its exposure to commodity price changes is to
limit the impact of commodity price changes on earnings and cash flow through
arrangements with suppliers, and, at times, through the use of certain
derivative instruments 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
currency exchange rate changes.
The Company has estimated its market risk exposure using sensitivity analysis.
Market risk exposure has been defined as the change 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 4,
1999, did not differ materially from the amounts reported as of December 31,
1998. 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; the weather; fuel
costs and availability; 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 the satellite launches and business of EarthWatch; the devaluation of
international currencies; 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
On January 27, 1999, Plastic Solutions of Texas, Inc. (PST) and Kurt H. Ruppman,
Sr. (Ruppman) filed a Statement of Claim with the American Arbitration
Association alleging the Company breached a contract between the Company and PST
and Ruppman relating to the grant of a license under certain patents and
technology owned by PST and Ruppman relating to the use of cryogenics in the
manufacture of hot fill PET bottles. The claim seeks termination of the contract
and damages for breach of the contract. The Statement of Claim seeks
compensatory damages of not less than $4.1 million and punitive damages of not
less than $1 million. The Company has filed an answer and counterclaim. Based on
the information, or lack thereof, 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 the matter.
In 1998 various consumers filed toxic tort litigation in the Superior Court for
Los Angeles County (Trial Court) against various water companies operating in
the San Gabriel Valley Basin. The water companies petitioned the Trial Court to
remove this action to the California Public Utilities Commission. The Trial
Court agreed. The plaintiffs appealed this decision to the California Court of
Appeals. Pending completion of the appellate process, the Trial Court stayed
further action in this litigation except that the plaintiffs were permitted to
add additional defendants. The Trial Court consolidated the six separate
lawsuits in the Northeast District (Pasadena) and designated the case of Adler,
et al. v. Southern California Water Company, et al., as the lead case. In late
March 1999, Ball-Foster Glass Container Co., L.L.C. (Ball-Foster Glass), which
the Company no longer owns, received a summons and amended complaint based on
its ownership of the El Monte glass plant. Ball-Foster Glass tendered the
lawsuit to the Company for defense and indemnity. The Company has in turn
tendered this lawsuit to its liability carrier, Commercial Union, for defense
and indemnity. Based on the information, or lack thereof, 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. Plaintiffs appear to be
proceeding to join all companies which are alleged to be Potentially Responsible
Parties in the various operable units in the San Gabriel Valley Superfund Site.
On March 19, 1999, the Lemelson Medical, Education & Research Foundation,
Limited Partnership (Lemelson) gave notice to the Company that the Company
allegedly infringed certain patents owned by that entity which are alleged to
cover machine vision and automatic identification equipment (Auto ID). Lemelson
alleges that the patented machine vision methods cover product inspection and
production control operations including inspection for flaws or defects and
conformance with specifications and standards. Auto ID allegedly covers bar code
recognition. Lemelson also claims that it has patents pending that broadly cover
something that is referred to as flexible manufacturing.
Lemelson has offered the Company a license under all patents owned or controlled
by Lemelson, with certain exceptions. Through the purchase of the North American
beverage can manufacturing business of Reynolds Metals Company, the Company has
also been granted an option for a license, which the Company is considering.
Based on the information, or lack thereof, 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.
Item 2. Changes in securities
There were no events required to be reported under Item 2 for the quarter ending
April 4, 1999.
Item 3. Defaults upon senior securities
There were no events required to be reported under Item 3 for the quarter ending
April 4, 1999.
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
April 4, 1999.
Item 5. Other information
There were no events required to be reported under Item 5 for the quarter ending
April 4, 1999.
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
There were no Current Reports on Form 8-K filed during the quarter
ending April 4, 1999.
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: May 14, 1999
Ball Corporation and Subsidiaries
QUARTERLY REPORT ON FORM 10-Q
April 4, 1999
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