BALL

Ball Corporation 10-Q Summary: Period Ended July 4, 1999

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended July 4, 1999, and the six-month period ended on the same date. Ball Corporation operates in two primary segments: Packaging (metal and PET containers for beverage and food) and Aerospace and Technologies (antenna systems, video products, and aerospace systems). The reporting period reflects the integration of the Reynolds Metals Company beverage can business acquired in August 1998.

Key Financial Metrics

Note: Operating earnings are defined as segment earnings before interest and taxes. Total debt includes short-term debt and current portion of long-term debt ($123.7M) plus long-term debt ($1,295.9M).

Material Changes vs. Prior Period

• Revenue Growth: Consolidated net sales increased 52% year-over-year for the quarter and 50% for the six-month period. This growth is primarily driven by the Reynolds Metals acquisition, which nearly doubled North American metal beverage container sales.
• Profitability: Operating earnings more than doubled in both periods. The Packaging segment operating earnings rose from $38.1M to $83.4M (quarterly) and $59.2M to $134.2M (six-month), driven by higher sales volumes and lower production costs per unit.
• Interest Expense: Interest expense increased significantly (from $13.4M to $27.3M quarterly) due to debt incurred to finance the Reynolds acquisition.
• Cash Flow: Net cash provided by operating activities dropped from $72.3M to $7.2M for the six-month period, attributed to seasonal working capital requirements (inventory buildup) despite improved earnings.
• Accounting Changes: The 1998 comparative figures include a retroactive charge of $3.3 million (after-tax) for the cumulative effect of adopting SOP No. 98-5 regarding start-up costs.

Guidance, Outlook, and Risks

• Capital Expenditures: Total capital spending for 1999 is expected to be approximately $130 million. First-half spending was $44.4 million.
• Integration: The company is closing two acquired plants and intends to close a third by the end of 1999 to consolidate capacity. Final integration cost adjustments are expected in the third quarter.
• Year 2000 Compliance: The company estimates the program is nearly complete for critical systems with incremental costs of approximately $3 million. Contingency plans are being developed to mitigate risks from third-party supplier failures.
• Legal and Contingencies:
  • ESOP Dispute: A dispute with the U.S. government regarding ESOP cost recoverability is pending; however, a recent favorable resolution regarding 1994-1997 costs was reached.
  • Environmental: The EPA selected a pump-and-treat remedy for the San Gabriel Valley Superfund Sites estimated at $25 million; final cost allocation among responsible parties is pending.
  • Brazil Affiliate: Latapack-Ball (50% owned) is in noncompliance with certain loan covenants but has received waivers for periods prior to April 1, 1999.

Investor Verification Checklist

• Integration Costs: Verify the finalization of the Reynolds Metals integration plan in Q3 1999 to confirm if estimated costs ($56.8M initial estimate) will be adjusted against goodwill or current earnings.
• Working Capital Trends: Monitor the reversal of seasonal inventory buildup in subsequent quarters to confirm the recovery of operating cash flow.
• Debt Covenants: Confirm the status of the Latapack-Ball waiver request for the second quarter of 1999 and ensure no defaults occur on the Senior Credit Facility.
• Year 2000 Readiness: Assess the status of critical third-party suppliers and the implementation of contingency plans by the end of 1999.
• Environmental Liability: Track the final allocation of the $25 million San Gabriel Valley cleanup cost to determine Ball's specific exposure.