BALL

Business Context and Reporting Period

Company: Ball Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended September 28, 2003
Business Overview: Ball operates in three segments: North American packaging (metal and plastic containers), International packaging (metal beverage containers in Europe and Asia, plastic in Asia), and Aerospace and technologies. The period includes the integration of the Ball Packaging Europe acquisition (completed Dec 2002) and the impact of a mandatory deposit on non-refillable containers in Germany.

Key Financial Metrics

Margins (9 Months 2003): Net margin was approximately 4.6% ($174.6M / $3,783.5M). EBIT margin was approximately 9.5%.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 31% in the quarter and 28% year-to-date, primarily driven by the inclusion of Ball Packaging Europe sales ($291.4M in Q3, $783.3M YTD) which were not present in the prior year.
• Profitability: Net earnings rose 38% in the quarter and 37% YTD. However, operating margins in North American packaging were slightly lower due to start-up costs for a new food can line and competitive pricing pressures.
• Interest Expense: Total interest expense increased significantly to $46.1M (Q3) and $111.5M (YTD) compared to $18.8M and $55.1M in 2002. This includes a one-time $15.2M charge for early debt extinguishment costs in Q3 2003.
• Cash Flow: Operating cash flow for the nine months dropped to $38.2M from $251.4M in 2002. This decline was largely due to a $138.3M payment of a withholding tax liability related to the European acquisition and increased working capital needs in Europe.
• Debt Reduction: Total debt decreased slightly to $1,951.1M. The company redeemed $250M of 8.25% Senior Subordinated Notes in August 2003, replacing them with lower-cost 6.875% Senior Notes.

Guidance, Outlook, and Risks

• German Deposit Legislation: A mandatory deposit on non-refillable containers in Germany (effective Jan 1, 2003) has caused a sharp decline in sales (approx. 1.8 billion cans down YTD). Ball is reducing production in Germany, increasing exports, and converting production lines. A price increase for the German market is planned for 2004. The long-term impact remains uncertain.
• Capital Spending: Total capital spending for 2003 is expected to be approximately $150 million. YTD spending was $98.5 million.
• Dividends: Dividends were increased by 67% to $0.15 per share for the third and fourth quarters of 2003.
• Aerospace Backlog: Contracted backlog reached a record $681 million, up from $497 million at year-end 2002, driven by defense and commercial space contracts.
• Risks: Key risks include commodity price fluctuations (aluminum, steel, resin), foreign exchange rates (stronger Euro), potential plant closures in the UK and Germany, and the resolution of the German deposit return system.

Investor Verification Checklist

• German Market Recovery: Verify the timeline and effectiveness of the new container return system in Germany and the success of the planned 2004 price increase.
• Debt Refinancing Impact: Confirm the net interest savings from the August 2003 debt exchange and the subsequent Q4 refinancing of Term Loan B.
• Working Capital Trends: Monitor accounts receivable and inventory levels in the European segment to ensure cash flow stabilizes in Q4 as historically expected.
• Restructuring Costs: Track the execution of plant closures (Runcorn, UK; Blytheville, AR) and associated cost savings versus the recorded charges.
• Aerospace Contract Awards: Verify the finalization of the DigitalGlobe satellite contract and its contribution to future backlog and revenue.