BALL

Business Context and Reporting Period

Company: Ball Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended September 29, 2002
Business Overview: Ball operates two primary segments: Packaging (metal and plastic containers for beverage and food) and Aerospace & Technologies (defense and space products). The company is headquartered in Broomfield, Colorado.

Key Financial Metrics

Margins: Packaging segment operating margins improved to 10.0% for the quarter and 9.2% for the nine-month period, compared to 8.3% and 7.7% in the prior year periods (excluding 2001 consolidation charges).

Material Changes vs. Prior Period

• Profitability Turnaround: The company reported a net loss of $107.3 million for the first nine months of 2001, driven largely by $253.7 million in business consolidation costs. In contrast, the first nine months of 2002 yielded net earnings of $127.4 million.
• Revenue Growth: Consolidated net sales increased 3.8% year-over-year for the nine-month period ($2,948.7M vs. $2,843.1M). The Packaging segment saw a 2% increase, while Aerospace & Technologies grew 16%.
• Segment Performance:
  • Packaging: North American metal beverage sales rose 4% in the quarter due to price increases and a new contract with Coors Brewing Company. Plastic container sales surged 24% in the quarter, aided by the Wis-Pak acquisition.
  • Aerospace: Sales increased due to new government contracts, including selection for NASA's James Webb Space Telescope.
• Restructuring Impact: The 2001 restructuring charges (PRC reorganization and plant closures) are no longer impacting 2002 earnings. Management estimates these actions will generate approximately $29 million in positive cash flow upon completion.

Guidance, Outlook, and Risks

• Major Acquisition: On August 29, 2002, Ball agreed to acquire Schmalbach-Lubeca AG (Europe's second-largest metal beverage can manufacturer) for an estimated €900 million. The deal is expected to close by early 2003 and will be financed through new borrowings.
• Capital Expenditures: Full-year 2002 capital spending is projected between $150 million and $160 million, with increased investment in metal food and PET production lines.
• Accounting Changes: The adoption of SFAS No. 142 (Goodwill) eliminated goodwill amortization, increasing diluted EPS by $0.12 in the first nine months of 2002. Full-year earnings are expected to increase by approximately $8 million due to this change.
• Risks and Contingencies:
  • Commodity Prices: Exposure to aluminum, steel, and resin prices. A hypothetical 10% adverse change in aluminum prices could impact earnings by $1 million.
  • Legal: Ongoing toxic tort litigation in California (San Gabriel Valley) and an appeal regarding a leukemia claim in New York. Management does not believe these will have a material adverse effect.
  • Pension Plans: Management anticipates additional contributions to pension plans in Q4 2002 and potential minimum liability adjustments.

Investor Verification Checklist

• Acquisition Financing: Verify the final purchase price and financing terms for the Schmalbach-Lubeca AG acquisition, including the impact on leverage ratios.
• Restructuring Completion: Confirm the timeline and actual cash flow realization from the PRC reorganization and U.S. plant closures.
• Pension Obligations: Monitor Q4 financials for the magnitude of additional pension contributions and minimum liability adjustments.
• Coors Contract: Assess the long-term revenue stability provided by the new Coors Brewing Company supply agreement.
• Legal Exposure: Track the status of the California toxic tort litigation and the New York leukemia appeal for potential liability updates.