BALL

Business Context and Reporting Period

Company: Ball Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 27, 1998
Key Event: On August 10, 1998, Ball acquired substantially all assets of the domestic beverage can manufacturing business of Reynolds Metals Company for approximately $745.4 million. This acquisition significantly impacts the financial results for the period.

Key Financial Metrics

Note: Q3 1998 Net Income includes a $12.1 million extraordinary loss from early debt extinguishment. Excluding this item, Q3 1998 Net Income was $24.9 million.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 25% in Q3 and 13% for the nine-month period compared to 1997, primarily driven by the Reynolds acquisition. Organic sales growth (excluding Reynolds) was approximately 5% for the nine-month period.
• Profitability Impact: Reported Net Income declined due to a $12.1 million extraordinary loss from debt refinancing and $15.0 million in relocation costs for the corporate headquarters. Excluding these items, earnings attributable to common shareholders increased 23% in Q3 and remained relatively flat for the nine-month period compared to 1997.
• Debt Structure: Total debt increased from $773.1 million (Dec 31, 1997) to $1,464.7 million (Sep 27, 1998) to finance the Reynolds acquisition. The debt-to-total capitalization ratio rose to 67.7% from 53.0%.
• Segment Performance:
  • Packaging: Sales increased significantly due to Reynolds. Metal beverage can earnings improved; metal food can earnings declined due to reduced salmon volumes and a Canadian strike. FTB Packaging earnings declined due to Asian economic disruption.
  • Aerospace & Technologies: Sales decreased due to reduced government program activity and normalized demand for telecommunications equipment.

Guidance, Outlook, and Risks

• Capital Expenditures: Total 1998 capital spending is expected to be approximately $97 million.
• Relocation Costs: Remaining costs for the corporate headquarters relocation (estimated total $19.0 million) are expected to be paid and recorded largely by the end of the year.
• Year 2000 Compliance: Most critical systems are compliant. The program to ensure full compliance is on target for mid-1999. Management believes costs will not be significant, though third-party supplier risks remain.
• Legal Contingencies:
  • Daiei Lawsuit: A Japanese retailer sued for approximately $6.0 million regarding defective beer cans. Management does not believe this will have a material adverse effect.
  • Environmental: Ball is a potentially responsible party for several hazardous waste sites. Estimated cleanup costs could range up to $25 million, but final allocation is pending.
  • Patent Litigation: Ongoing dispute regarding vision inspection system patents; indemnification responsibilities are being evaluated.
• Forward-Looking Risks: Fluctuations in commodity prices, currency devaluation (specifically Thai Baht volatility), labor strikes, and the ability to achieve Year 2000 compliance.

Investor Verification Checklist

• Reynolds Integration: Verify the realization of synergies and the final allocation of the $52.0 million initial liability recorded for integration costs.
• Debt Covenants: Confirm compliance with new debt covenants (Senior Notes and Credit Facility) regarding additional indebtedness and dividend payments.
• Relocation Costs: Monitor the finalization of the $19.0 million headquarters relocation cost estimate in Q4 1998.
• FTB Packaging Performance: Assess the impact of Asian economic disruption and excess capacity in China on FTB Packaging earnings.
• Year 2000 Readiness: Review progress on third-party supplier and customer compliance to mitigate operational disruption risks.