BALL

Business Context and Reporting Period

Company: Ball Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended April 4, 1999
Business Overview: Ball operates in two primary segments: Packaging (metal and PET containers for beverage and food) and Aerospace and Technologies (civil space systems, defense, and telecommunications). The quarter reflects the integration of the Reynolds Metals Company beverage can business acquired in August 1998.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 49.2% to $820.3 million, driven primarily by the inclusion of the Reynolds Metals acquisition in the Packaging segment. North American metal beverage sales rose significantly due to acquired plants and full capacity utilization at legacy plants.
• Profitability: Net income surged to $15.7 million from $2.2 million. The prior year included a $3.3 million after-tax charge for a change in accounting for start-up costs and a $6.3 million headquarters relocation charge, neither of which impacted the current quarter.
• Interest Expense: Interest expense more than doubled to $28.2 million from $12.7 million, attributable to debt incurred to finance the Reynolds acquisition.
• Cash Flow: Operating cash flow turned negative at $109.3 million used, compared to $12.3 million used in the prior year. This was largely due to a $181.5 million increase in working capital requirements (primarily inventory buildup for seasonal demand) partially offset by higher depreciation.
• Segment Performance: The Packaging segment earnings before interest and taxes (EBIT) improved to $50.8 million from $21.1 million. The Aerospace segment EBIT declined slightly to $6.2 million from $8.2 million due to development costs for wireless antenna technology.

Guidance, Outlook, and Risks

• Capital Expenditures: Total capital spending for 1999 is expected to be below $150 million. First-quarter spending was $21.5 million.
• Acquisition Integration: Ball closed two acquired plants in Q1 and announced plans to close a third. Final integration cost adjustments are expected in Q3 1999; subsequent cost increases will hit current earnings, while decreases will reduce goodwill.
• Year 2000 Compliance: The company estimates its Y2K remediation program is 90% complete for critical systems, with full completion targeted for mid-to-late 1999. Incremental costs are estimated at approximately $2 million. Risks remain regarding third-party supplier compliance.
• Legal and Contingencies:
  • ESOP Dispute: The U.S. government disputes the recoverability of ESOP costs for fiscal years 1989-1995 and beyond. The company does not currently expect a material adverse effect.
  • Litigation: Active proceedings include a patent infringement claim by Plastic Solutions of Texas (seeking $4.1M+ damages) and a toxic tort suit regarding the San Gabriel Valley Superfund Site (tendered to insurance).
  • Brazil Affiliate: Latapack-Ball (50% owned) is in noncompliance with certain loan covenants due to currency devaluation; a waiver has been requested.
• Market Risk: The company uses derivatives to manage exposure to commodity prices, interest rates, and foreign currency fluctuations.

Investor Verification Checklist

• Working Capital Impact: Verify the sustainability of the $181.5 million cash outflow for working capital and the timing of inventory liquidation.
• Acquisition Integration Costs: Monitor Q3 1999 for finalization of the Reynolds integration plan and potential adjustments to goodwill or earnings.
• Debt Servicing: Assess the impact of the increased debt load ($1.5B) and higher interest rates on future cash flows, particularly given the variable rate portion of the Senior Credit Facility.
• Y2000 Readiness: Confirm the status of critical supplier and customer Y2000 compliance as the deadline approaches.
• Legal Exposure: Track the resolution of the ESOP government dispute and the Plastic Solutions patent litigation.