10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 17, 1999
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 1999
Commission file number 1-7349
BALL CORPORATION
State of Indiana 35-0160610
10 Longs Peak Drive, P.O. Box 5000
Broomfield, CO 80021-2510
303/469-3131
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1999
------------- -------------------------------
Common Stock,
without par value 30,269,874 shares
Ball Corporation and Subsidiaries
QUARTERLY REPORT ON FORM 10-Q
For the period ended October 3, 1999
INDEX
Page Number
-----------------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Unaudited Condensed Consolidated Statement of
Income for the Three- and Nine-Month Periods
Ended October 3, 1999, and September 27, 1998 3
Unaudited Condensed Consolidated Balance Sheet
at October 3, 1999, and December 31, 1998 4
Unaudited Condensed Consolidated Statement of
Cash Flows for the Nine-Month Periods Ended
October 3, 1999, and September 27, 1998 5
Notes to Unaudited Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 21
PART II. OTHER INFORMATION 22
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Ball Corporation and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Millions of dollars except per share amounts)
See accompanying notes to unaudited condensed consolidated financial statements.
Ball Corporation and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
(Millions of dollars)
See accompanying notes to unaudited condensed consolidated financial statements.
Ball Corporation and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED
STATEMENT OF CASH FLOWS
(Millions of dollars)
See accompanying notes to unaudited condensed consolidated financial statements.
Ball Corporation and Subsidiaries
October 3, 1999
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
General.
The accompanying condensed consolidated financial statements include the
accounts of Ball Corporation and its controlled affiliates in which it holds a
majority equity position (collectively, Ball or the Company) and have been
prepared by the Company without audit. Certain information and footnote
disclosures, including significant accounting policies, normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and reported amounts of revenues and
expenses during the reporting period. Future events could affect these
estimates. However, the Company believes that the financial statements reflect
all adjustments which are of a normal recurring nature and are necessary for a
fair statement of the results for the interim period.
Results of operations for the periods shown are not necessarily indicative of
results for the year, particularly in view of the seasonality in the Packaging
Segment. It is suggested that these unaudited condensed consolidated financial
statements and accompanying notes be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's latest
annual report.
Reclassifications.
Certain prior-year amounts have been reclassified in order to conform with the
current year presentation.
New Accounting Standards.
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure about
Segments of an Enterprise and Related Information," establishes standards for
reporting information about operating segments in annual and interim financial
statements. Annual reporting under this pronouncement was effective for Ball in
1998. Interim reporting became effective for Ball in 1999, and that information
is included on page 7 of this report.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
essentially requires all derivatives to be recorded on the balance sheet at fair
value and establishes new accounting practices for hedge instruments. In June
1999 SFAS No. 137 was issued to defer the effective date of SFAS No. 133 by one
year. As a result, SFAS No. 133 will not be effective for Ball until 2001. The
effect, if any, of adopting this standard has not yet been determined.
Statement of Position (SOP) No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," establishes new accounting and
reporting standards for the costs of computer software developed or obtained for
internal use and was adopted by Ball as of January 1, 1999. The adoption of SOP
No. 98-1 has not had, nor is it expected to have, a significant impact on the
Company's results of operations or financial condition in 1999.
During the fourth quarter of 1998, Ball adopted SOP No. 98-5, "Reporting on the
Costs of Start-Up Activities," in advance of its required 1999 implementation
date. SOP No. 98-5 requires that costs of start-up activities and organizational
costs, as defined, be expensed as incurred. In accordance with this statement,
the Company recorded an after-tax charge to earnings of approximately
$3.3 million (11 cents per share), retroactive to January 1, 1998, representing
the cumulative effect of this change in accounting on prior years. As a result
of this change in accounting, certain amounts previously reported in 1998 have
been restated.
Business Segment Information.
Ball's operations are organized along its product lines in two reportable
segments: (1) packaging and (2) aerospace and technologies. The accounting
policies of the segments are the same as those in the condensed consolidated
financial statements. Prior-year segment information has been restated to
conform to the requirements of SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information."
The Packaging Segment includes the lines of businesses that manufacture metal
and PET (polyethylene terephthalate) containers, primarily for use in beverage
and food packaging. The Company's consolidated packaging operations are located
in and serve North America (the U.S. and Canada) and Asia, primarily the
People's Republic of China (PRC). Ball also has direct and indirect investments,
which are accounted for under the equity method, in packaging companies largely
in the PRC, Brazil and Thailand.
The Aerospace and Technologies Segment includes advanced antenna and video
systems, communication and video products and the aerospace systems area which
is comprised of civil space systems, technology operations, defense systems,
commercial space operations and systems engineering.
Acquisitions.
On August 10, 1998, Ball acquired substantially all the assets and assumed
certain liabilities of the North American beverage can manufacturing business of
Reynolds Metals Company (Acquisition). The assets acquired consisted largely of
16 plants in 12 states and Puerto Rico. In connection with the Acquisition, the
Company has provided $51.3 million in the opening balance sheet for the costs of
the integration of the acquired business, including capacity consolidations. The
Company finalized its integration plan during the third quarter of 1999, which
includes the closure of the acquired Richmond headquarters facility in 1998, the
closure of two plants in the first quarter of 1999 and the closure of a third
plant which commenced during the fourth quarter of 1999. The plants and certain
equipment are for sale. Employees of the facilities to be closed, primarily
comprised of manufacturing and support personnel, have been terminated or
notified of the plant closures. Integration costs included $23.3 million of
severance, supplemental unemployment, medical, relocation and other related
termination benefits; $22.8 million of contractual pension and retirement
obligations; and $5.2 million of other plant closure costs. The decrease of
$5.5 million from the previously reported estimate was the result of finalizing
actuarial calculations of employee termination costs and refining other exit
costs based upon economic factors within the geographic regions where the plants
are located. These changes have been reflected as a reduction of goodwill.
Subsequent increases in actual costs, if any, will be included in current period
earnings and decreases, if any, will result in a further reduction of goodwill.
As of October 3, 1999, the Company has made payments of $10.5 million related to
severance, supplemental unemployment, relocation and other termination costs and
$2.2 million related to other plant closure costs.
Headquarters Relocation, Plant Closures and Other Costs.
In February 1998 Ball announced that it would relocate its corporate
headquarters to an existing company-owned building in Broomfield, Colorado. In
connection with the relocation, which has been completed, the Company recorded
pretax charges of $4.7 million ($2.9 million after tax or 9 cents per share) in
the third quarter of 1998 and $15.0 million ($9.1 million after tax or 30 cents
per share) during the first nine months of 1998, primarily for employee-related
costs, substantially all of which were paid by December 31, 1998.
During the last quarter of 1998, the Company announced the closure of two of its
plants located in the PRC and removed from service manufacturing equipment at a
third plant. The actions were taken largely to address industry overcapacity and
were completed in the first half of 1999. The Company's preliminary estimates
included a $56.2 million, largely noncash, charge in the fourth quarter of 1998
to write down to net realizable value certain buildings and equipment by
$22.8 million, goodwill by $15.3 million and inventory by $6 million as well as
$12.1 million for other assets and related costs. The carrying value of the
fixed assets held for sale is $10.4 million at October 3, 1999. Any adjustments
to the preliminary estimates will be reflected as an adjustment to current
period earnings.
Inventories.
Inventories consisted of the following:
(in millions of dollars)
October 3, December 31,
1999 1998
----------------- -----------------
Raw materials and supplies $ 218.1 $ 131.2
Work in process and finished goods 279.6 352.6
----------------- -----------------
$ 497.7 $ 483.8
================= =================
Property, Plant and Equipment.
Property, plant and equipment consisted of the following:
(in millions of dollars)
October 3, December 31,
1999 1998
----------------- -----------------
Land $ 61.4 $ 62.2
Buildings 432.6 410.5
Machinery and equipment 1,407.4 1,410.2
----------------- -----------------
1,901.4 1,882.9
Accumulated depreciation (782.7) (708.5)
----------------- -----------------
$ 1,118.7 $ 1,174.4
================= =================
Goodwill and Other Assets.
The composition of goodwill and other assets was as follows:
(in millions of dollars)
October 3, December 31,
1999 1998
----------------- -----------------
Goodwill(1) $ 486.7 $ 555.9
Other 219.3 238.9
----------------- -----------------
$ 706.0 $ 794.8
================= =================
(1) Goodwill is net of accumulated amortization of $39.4 million and
$28.9 million at October 3, 1999, and December 31, 1999, respectively.
Debt and Guarantees of Subsidiaries.
In connection with the Acquisition, the Company refinanced approximately
$521.9 million of its existing debt. The Acquisition and the refinancing,
including related costs, were financed with a placement of $300 million in
7.75% Senior Notes due in 2006, $250 million in 8.25% Senior Subordinated Notes
due in 2008 and approximately $808.2 million from a Senior Credit Facility.
The Senior Credit Facility bears interest at variable rates and is comprised
of three separate facilities: (1) a term loan for $350 million due in 2004,
(2) a second term loan for $200 million due in 2006 and (3) a revolving credit
facility which provides the Company with up to $600 million, comprised of a
$150 million, 364-day annually renewable facility and a $450 million long-term
committed facility expiring in 2004. At October 3, 1999, approximately
$405 million was available under the revolving credit facility.
The Senior Notes, Senior Subordinated Notes and Senior Credit Facility
agreements are guaranteed on a full, unconditional, and joint and several basis
by certain of the Company's domestic wholly owned subsidiaries and contain
certain covenants and restrictions including, among other things, limits on the
incurrence of additional indebtedness and increases in dividends. However, the
note agreements provide that if the new notes are assigned investment grade
ratings and the Company is not in default, certain covenant restrictions will be
suspended. All amounts outstanding under the Senior Credit Facility are secured
by (1) a pledge of 100 percent of the stock owned by the Company of its direct
and indirect majority-owned domestic subsidiaries and (2) a pledge of 65 percent
of the stock owned directly and indirectly by the Company of certain foreign
subsidiaries. Exhibit 20.1 contains condensed, consolidating financial
information for the Company, segregating the guarantor subsidiaries and
non-guarantor subsidiaries. Separate financial statements for the guarantor
subsidiaries and the non-guarantor subsidiaries are not presented because
management has determined that such financial statements would not be material
to investors.
A receivables sales agreement provides for the ongoing, revolving sale of a
designated pool of trade accounts receivable of Ball's U.S. packaging
operations. In December 1998 the designated pool of receivables was increased to
provide for sales of receivables up to $125 million from the previous amount of
$75 million. Net funds received from the sale of the accounts receivable totaled
$122.5 million and $65.9 million at October 3, 1999, and September 27, 1998,
respectively. Fees incurred in connection with the sale of accounts receivable,
which are included in other expenses, totaled $1.8 million and $5.1 million for
the third quarter and nine months of 1999, respectively, and $0.9 million and
$2.8 million for the same periods in 1998, respectively.
The Company was not in default of any loan agreement at October 3, 1999, and has
met all payment obligations. Latapack-Ball Embalagens Ltda. (Latapack-Ball), the
Company's 50 percent-owned equity affiliate in Brazil, was in noncompliance with
certain financial provisions, including current and debt-to-equity ratios, under
a fixed term loan agreement of which $47.4 million was outstanding at the
quarter end. Latapack-Ball has received waivers from the lender in respect of
the noncompliance covering the periods prior to July 1, 1999, and has requested
a further waiver in respect of the noncompliance during the third quarter.
Shareholders' Equity.
The composition of the accumulated other comprehensive loss at October 3, 1999,
and December 31, 1998, is primarily the cumulative effect of foreign currency
translation and additional minimum pension liability. Total comprehensive income
for the third quarter and first nine months of 1999 was $35.7 million and
$87.0 million, respectively, and $9.6 million and $28.2 million for the
comparative periods of 1998, respectively. The difference between net income and
comprehensive income for each period represents the effects of foreign currency
translation.
Issued and outstanding shares of the Series B ESOP Convertible Preferred Stock
were 1,531,681 shares at October 3, 1999, and 1,586,916 shares at December 31,
1998.
Earnings Per Share.
The following table provides additional information on the computation of
earnings per share amounts:
Contingencies.
The Company is subject to various risks and uncertainties in the ordinary course
of business due, in part, to the competitive nature of the industries in which
Ball participates, its operations in developing markets outside the U.S.,
changing commodity prices for the materials used in the manufacture of its
products and changing capital markets. Where practicable, the Company attempts
to reduce these risks and uncertainties through the establishment of risk
management policies and procedures, including, at times, the use of certain
derivative financial instruments.
The U.S. government is disputing the Company's claim to recoverability (by means
of allocation to government contracts) of reimbursed costs associated with
Ball's ESOP for fiscal years 1989 through 1995, as well as the corresponding
prospective costs accrued after 1995. The government will not reimburse the
Company for disputed ESOP expenses incurred or accrued after 1995. A deferred
payment agreement for the costs reimbursed through 1995 was entered into between
the government and Ball. On October 10, 1995, the Company filed its complaint
before the Armed Services Board of Contract Appeals (ASBCA) seeking final
adjudication of this matter. Trial before the ASBCA was conducted in January
1997. Since that time, the Defense Contract Audit Agency (DCAA) has issued a
Draft Audit Report disallowing a portion of the Company's ESOP costs for 1994
through 1997 on the asserted basis that the Company's dividend contributions to
the ESOP do not constitute allowable deferred compensation. The Draft Audit
Report takes the position that the disallowance is not covered by the pending
decision by the ASBCA. However, more recently, Ball's Corporate Administrative
Contracting Officer has resolved the DCAA's disallowance in Ball's favor and has
incorporated this favorable resolution into a Memorandum of Agreement with Ball
to close out cost claims for years 1994 through 1997. While the outcome of the
trial is not yet known, the Company's information at this time does not indicate
that this matter will have a material adverse effect upon the liquidity, results
of operations or financial condition of the Company.
From time to time, the Company is subject to routine litigation incident to its
business. Additionally, the U.S. Environmental Protection Agency has designated
Ball as a potentially responsible party, along with numerous other companies,
for the cleanup of several hazardous waste sites. However, the Company's
information at this time does not indicate that these matters will have a
material adverse effect upon the liquidity, results of operations or financial
condition of the Company.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements and the accompanying
notes. Ball Corporation and subsidiaries are referred to collectively as "Ball"
or the "Company" in the following discussion and analysis.
ACQUISITIONS
On August 10, 1998, Ball acquired substantially all the assets and assumed
certain liabilities of the North American beverage can manufacturing business of
Reynolds Metals Company (Acquisition). The assets acquired consisted largely of
16 plants in 12 states and Puerto Rico. In connection with the Acquisition, the
Company has provided $51.3 million in the opening balance sheet for the costs of
the integration of the acquired business, including capacity consolidations. The
Company finalized its integration plan during the third quarter of 1999, which
includes the closure of the acquired Richmond headquarters facility in 1998, the
closure of two plants in the first quarter of 1999 and the closure of a third
plant which commenced during the fourth quarter of 1999. The plants and certain
equipment are for sale. Employees of the facilities to be closed, primarily
comprised of manufacturing and support personnel, have been terminated or
notified of the plant closures. Integration costs included $23.3 million of
severance, supplemental unemployment, medical, relocation and other related
termination benefits; $22.8 million of contractual pension and retirement
obligations; and $5.2 million of other plant closure costs. The decrease of
$5.5 million from the previously reported estimate was the result of finalizing
actuarial calculations of employee termination costs and refining other exit
costs based upon economic factors within the geographic regions where the plants
are located. These changes have been reflected as a reduction of goodwill.
Subsequent increases in actual costs, if any, will be included in current period
earnings and decreases, if any, will result in a further reduction of goodwill.
As of October 3, 1999, the Company has made payments of $10.5 million related to
severance, supplemental unemployment, relocation and other related termination
benefits and $2.2 million related to other plant closure costs.
RESULTS OF OPERATIONS
Consolidated Sales and Earnings
Ball's operations are organized along its product lines in two reportable
segments: (1) packaging and (2) aerospace and technologies. The following table
summarizes the results of these two segments:
Packaging Segment
The Packaging Segment includes metal and PET (polyethylene terephthalate)
container products, primarily used in beverage and food packaging. The Company's
packaging operations are located in and serve North America (the U.S. and
Canada) and Asia, primarily the People's Republic of China (PRC). Packaging
Segment sales increased largely as a result of the plants acquired in 1998 as
part of the Acquisition. Segment operating margins for the third quarter
increased to 9.9 percent from 7.6 percent, reflecting increased volume in each
line of business, improved production efficiencies and cost reductions.
North American metal beverage container sales, which represented approximately
66 percent of segment sales in the third quarter and 70 percent in the first
nine months of 1999, increased approximately 24 percent and 64 percent,
respectively, in comparison to the same periods in 1998. The increase was
primarily due to the additional sales volume from the acquired plants, as well
as Ball's original plants running at full capacity, partially offset by the
effect on revenues of lower aluminum commodity prices. The Company's metal
beverage container shipments were up slightly over what Ball's original plants
and the acquired plants shipped in the first nine months of 1998, while overall
industry shipments were lower. During the first quarter, two of the acquired
plants were closed, with certain related production requirements redirected to
other Ball plants.
North American metal food container sales, which comprised approximately
21 percent of segment sales in the third quarter and 16 percent in the first
nine months of 1999, increased 8 and 5 percent, respectively, over the same
periods in 1998. This increase was the result of stronger sales in seasonal
and nonseasonal lines. The Alaskan salmon catch and the harvest and pack
conditions in the Midwest were both better during the third quarter of 1999.
Plastic container sales for the third quarter and first nine months of 1999
increased 8 percent and 6 percent, respectively, compared to the same periods in
1998, largely due to additional volume from a recently expanded facility. The
sales mix continues to be weighted primarily toward carbonated soft drinks and
water. Despite increased resin prices, the plastics operations results for the
third quarter and first nine months of 1999 were significantly improved over the
same periods in 1998.
Internationally, the closure of two plants in the PRC during the first quarter
of 1999 contributed to lower sales for the third quarter and nine months of 1999
in comparison to the same periods in 1998.
Aerospace and Technologies Segment
Aerospace systems had sales and earnings well above the third quarter and first
nine months of 1998 as a result of increased program activity. Sales and
earnings results in other areas were lower due largely to costs to develop
antennas which employ Ball technology for wireless personal communications
systems. The related sales had not yet been realized to offset the costs, which
were planned as part of the Company's strategy to extend into commercial markets
key technologies it has developed in governmental business. Backlog at the end
of the third quarter was approximately $351 million compared to $296 million at
December 31, 1998, and $326 million at the end of the 1998 third quarter.
Year-to-year comparisons of backlog are not necessarily indicative of the trend
of future operations.
Selling and Administrative Expenses
Higher consolidated selling and administrative expenses in 1999 compared to 1998
were due partially to the additional costs associated with the acquired plants,
including salaries and interim administrative support. Also contributing to the
increase were higher incentive compensation costs and a nonrecurring charge in
the second quarter for $4.7 million associated with an executive stock option
grant which vested in April when the Company's closing stock price reached
specified levels. The offset to the charge was recorded as common stock.
Interest and Taxes
Consolidated interest expense for the third quarter and first nine months of
1999 was $26.5 million and $82.0 million, respectively, compared to
$22.4 million and $48.5 million for the same periods in 1998. The increase is
primarily attributable to the additional debt associated with the Acquisition.
Ball's lower consolidated effective income tax rate for the first nine months of
1999, as compared to the same period in 1998, is primarily due to increased U.S.
earnings and the reduced tax effects of foreign operations, partially offset by
the final phase-in effects of the previously reported 1996 legislated changes in
the tax treatment of the costs of company-owned life insurance. Increased
research and development tax credits contributed to the reduced rate in the
first nine months of 1999. During the third quarter of 1998, the Company
finalized its determination of available credits consistent with Internal
Revenue Service guidance established during the course of its normal audit
process. The Company recorded a credit of $2.9 million in the third quarter of
1998 resulting in a lower effective tax rate for that period compared to the
third quarter of 1999.
Results of Equity Affiliates and Minority Interests
Equity earnings in affiliates are largely attributable to those from investments
in the PRC, Thailand and Brazil. Results were essentially flat for the quarter
and were $0.2 million for the first nine months of 1999 compared to $1.2 million
for the same period in 1998. Results in Thailand were hampered by slow domestic
sales coupled with the disruption of that business' export sales to Malaysia.
The change in amounts attributable to minority interests in 1999 versus 1998
for both the quarter and nine months reflects the improved operating results in
1999 for those businesses in China having minority shareholders.
Other Items
In February 1998 Ball announced that it would relocate its corporate
headquarters to an existing company-owned building in Broomfield, Colorado. In
connection with the relocation, which has been completed, the Company recorded
pretax charges of $4.7 million ($2.9 million after tax or 9 cents per share) in
the third quarter of 1998 and $15.0 million ($9.1 million after tax or 30 cents
per share) in the first nine months of 1998, primarily for employee-related
costs, substantially all of which were paid by December 31, 1998.
Statement of Position (SOP) No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," establishes new accounting and
reporting standards for the costs of computer software developed or obtained for
internal use and was adopted by Ball as of January 1, 1999. The adoption of SOP
No. 98-1 has not had, nor is it expected to have, a significant impact on the
Company's results of operations or financial condition in 1999.
During 1998 Ball adopted Statement of Position (SOP) No. 98-5, "Reporting on the
Costs of Start-Up Activities," in advance of its required 1999 implementation
date. SOP No. 98-5 requires that costs of start-up activities and organizational
costs, as defined, be expensed as incurred. In accordance with this statement,
the Company recorded an after-tax charge to earnings of approximately
$3.3 million (11 cents per share), retroactive to January 1, 1998, representing
the cumulative effect of this change in accounting on prior years.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations in 1999 of $115.7 million decreased compared to
1998, due largely to seasonal working capital requirements, partially offset by
improved earnings. Capital spending of $69.1 million in the first nine months of
1999 was well below depreciation of $107.5 million. Total 1999 capital spending
is expected to be under $115 million.
Total debt increased to $1,334.0 million at October 3, 1999, compared to
$1,356.6 million at December 31, 1998, primarily due to the cash effects of
improved results partially offset by the normal increase in accounts receivable
and inventories for seasonal and peak period demands. The debt-to-total
capitalization ratio of 65.3 percent at October 3, 1999, was reduced from
67.7 percent at December 31, 1998.
In connection with the Acquisition, the Company refinanced approximately
$521.9 million of its existing debt. The Acquisition and the refinancing,
including related costs, were financed with a placement of $300 million in
7.75% Senior Notes due in 2006, $250 million in 8.25% Senior Subordinated Notes
due in 2008 and approximately $808.2 million from a Senior Credit Facility. The
Senior Credit Facility bears interest at variable rates and is comprised of
three separate facilities: (1) a term loan for $350 million due in 2004, (2) a
second term loan for $200 million due in 2006 and (3) a revolving credit
facility which provides the Company with up to $600 million, comprised of a
$150 million, 364-day annually renewable facility and a $450 million long-term
committed facility expiring in 2004. At October 3, 1999, approximately
$405 million was available under the revolving credit facility.
The Senior Notes, Senior Subordinated Notes and Senior Credit Facility
agreements are guaranteed on a full, unconditional, and joint and several basis
by certain of the Company's domestic wholly owned subsidiaries and contain
certain covenants and restrictions including, among other things, limits on the
incurrence of additional indebtedness and increases in dividends. However, the
note agreements provide that if the new notes are assigned investment grade
ratings and the Company is not in default, certain covenant restrictions will be
suspended. All amounts outstanding under the Senior Credit Facility are secured
by (1) a pledge of 100 percent of the stock owned by the Company of its direct
and indirect majority-owned domestic subsidiaries and (2) a pledge of 65 percent
of the stock owned directly and indirectly by the Company of certain foreign
subsidiaries. Exhibit 20.1 contains condensed, consolidating financial
information for the Company, segregating the guarantor subsidiaries and
non-guarantor subsidiaries. Separate financial statements for the guarantor
subsidiaries and the non-guarantor subsidiaries are not presented because
management has determined that such financial statements would not be material
to investors.
The Company's consolidated operations in Asia had short-term uncommitted credit
facilities of approximately $134 million at the end of the third quarter, of
which $55 million was outstanding at October 3, 1999.
A receivables sales agreement provides for the ongoing, revolving sale of a
designated pool of trade accounts receivable of Ball's U.S. packaging
operations. In December 1998 the designated pool of receivables was increased to
provide for sales of receivables up to $125 million from the previous amount of
$75 million. Net funds received from the sale of the accounts receivable totaled
$122.5 million and $65.9 million at October 3, 1999, and September 27, 1998,
respectively. Fees incurred in connection with the sale of accounts receivable,
which are included in other expenses, totaled $1.8 million and $5.1 million for
the third quarter and first nine months of 1999, respectively, and $0.9 million
and $2.8 million for the same periods in 1998, respectively.
The Company was not in default of any loan agreement at October 3, 1999, and has
met all payment obligations. Latapack-Ball Embalagens Ltda. (Latapack-Ball), the
Company's 50 percent-owned equity affiliate in Brazil, was in noncompliance with
certain financial provisions, including current and debt-to-equity ratios, under
a fixed term loan agreement of which $47.4 million was outstanding at the
quarter end. Latapack-Ball has received waivers from the lender in respect of
the noncompliance covering the periods prior to July 1, 1999, and has requested
a further waiver in respect of the noncompliance during the third quarter.
CONTINGENCIES
Year 2000 Systems Review
Many computer systems and other equipment with embedded chips or processors use
only two digits to represent the year and, as a result, they may be unable to
process accurately certain data before, during or after the year 2000. As a
result, business and governmental entities are at risk for possible
miscalculations or system failures causing disruptions in their operations. This
is commonly known as the Year 2000 issue and can arise at any point in the
Company's supply, manufacturing, processing, distribution and financial chains.
Over the course of the past several years, systems installations, upgrades and
enhancements were performed by the Company in the ordinary course of business
with attention given to Year 2000 matters. As a result, when the formal Year
2000 program was instituted in 1996, many of the Year 2000 matters potentially
affecting the Company had either been resolved or were near resolution. The
program currently in effect was instituted to make the remaining software and
systems Year 2000 compliant in time to minimize significant negative effects on
operations and is divided into five major phases: (1) project initiation,
(2) awareness, (3) assessment, (4) remediation and (5) testing and
implementation.
The program is divided into two major efforts: (1) corporate and the Packaging
Segment (both North America and international) and (2) the Aerospace and
Technologies Segment. The following table summarizes the information technology
systems the Company has identified as significant and their related project
status:
* All phases, including testing, have been completed.
Phase 5 includes structured testing, compilation and interpretation of results
and communication to project management regarding the testing processes. It also
encompasses the coordination of the production release of applications/systems
within the applicable environment and the coordination and monitoring of systems
modifications or upgrades required by external sources.
The foreign technology licensees and the Company's 50 percent or less joint
ventures were provided with Ball's formal compliance program and encouraged to
follow the North American procedures.
The Company had originally estimated that the corporate and Packaging Segment
portion of the Year 2000 program would be complete by December 1998. With the
Acquisition undertaken in August 1998, this deadline was extended into the
latter half of 1999 to allow the necessary time to integrate the newly acquired
plants into the Ball systems. For the Aerospace and Technologies Segment, the
only delay involved the human resources system because of a decision to replace
the database management system software. The human resources system should be
Year 2000 ready in December 1999.
Because most of the Company's efforts were initiated to address specific
business requirements or to stay technologically current, it is difficult to
quantify costs incurred solely in conjunction with the Year 2000 project.
However, certain incremental costs of approximately $3 million have been
identified, including contractor assistance, the purchase of software to manage
the project and software to check personal computer hardware and software
compliance. All such costs are being funded through operating cash flows and as
of October 3, 1999, totaled approximately $2.7 million.
Ball relies on third-party suppliers for raw materials, water, utilities,
transportation, banking and other key services. The inability of principal
suppliers, including utilities, to be Year 2000 ready could result in delays in
product or service deliveries from such suppliers and disrupt the Company's
ability to supply its products or services. To assess the risks associated with
both customers and vendors not being ready, Ball assigned each supplier a level
of importance (critical, important or not important). "Critical" third parties
are defined as those who are sole-source suppliers or who most likely would have
an impact on Ball's ability to conduct business if interruptions of supplies
occurred for less than 10 days. "Important" third parties are defined as those
which would only have an impact on the Company's ability to conduct business if
interruptions of supplies or services were to exceed 10 days.
The Company provided "critical" and "important" third parties with
questionnaires. Telephone interviews were conducted with "critical" parties who
either did not respond to the questionnaires or provided inadequate responses.
"Important" parties who did not respond or provided inadequate responses were
sent letters and additional questionnaires. Additionally, Ball contacted its
larger customers in the Packaging Segment through meetings, teleconferences or
videoconferences. As of October 3, 1999, all "critical" and "important" third
parties have responded to the questionnaires or been interviewed by telephone.
Based on these procedures and the Company's meetings with its larger customers,
there has been no indication that the third parties will not be Year 2000
compliant. However, neither the U.S. federal government nor the PRC government
has confirmed Year 2000 readiness.
A worst-case scenario for the Company with respect to the Year 2000 issue could
be the failure of either a critical vendor or the Company's manufacturing and
information systems. Such failures could result in production outages and lost
sales and profits.
The Company is developing contingency plans intended to mitigate the possible
disruption of business operations that may result from external third-party Year
2000 issues. Such plans may include accelerating raw material delivery
schedules, increasing finished goods inventory levels, securing alternate
sources of supply, adjusting facility shutdown and start-up schedules and other
appropriate measures. The Company's contingency planning effort is approximately
90 percent complete and is scheduled to be complete by the end of November 1999.
Due to the general uncertainty inherent in the Year 2000 issue, resulting in
part from the uncertainty of the Year 2000 readiness of the third-party
suppliers and customers, the Company is unable to determine whether the
consequences of Year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition. However, the Company
believes that, with the recent implementation of new business systems and
completion of the program as scheduled, the possibility of significant
interruptions of normal operations should be reduced.
The discussion of the Company's efforts and management's expectations relating
to Year 2000 compliance contains forward-looking statements. The Company's
ability to achieve Year 2000 compliance and the level of associated incremental
costs could be adversely impacted by, among other things, the availability and
cost of programming and testing resources, the ability of suppliers and
customers to bring their systems into Year 2000 compliance, the U.S., PRC and
other governmental readiness and unanticipated problems identified in the
ongoing compliance program.
The information contained herein regarding the Company's efforts to deal with
the Year 2000 problem applies to all of the Company's products and services.
Such statements are intended as Year 2000 Statements and Year 2000 Readiness
Disclosures and are subject to the Year 2000 Information Readiness Disclosure
Act.
Other
The Company is subject to various risks and uncertainties in the ordinary course
of business due, in part, to the competitive nature of the industries in which
Ball participates, its operations in developing markets outside the U.S.,
changing commodity prices for the materials used in the manufacture of its
products and changing capital markets. Where practicable, the Company attempts
to reduce these risks and uncertainties through the establishment of risk
management policies and procedures, including, at times, the use of certain
derivative financial instruments.
The U.S. government is disputing the Company's claim to recoverability (by means
of allocation to government contracts) of reimbursed costs associated with
Ball's ESOP for fiscal years 1989 through 1995, as well as the corresponding
prospective costs accrued after 1995. The government will not reimburse the
Company for disputed ESOP expenses incurred or accrued after 1995. A deferred
payment agreement for the costs reimbursed through 1995 was entered into between
the government and Ball. On October 10, 1995, the Company filed its complaint
before the Armed Services Board of Contract Appeals (ASBCA) seeking final
adjudication of this matter. Trial before the ASBCA was conducted in January
1997. Since that time, the Defense Contract Audit Agency (DCAA) has issued a
Draft Audit Report disallowing a portion of the Company's ESOP costs for 1994
through 1997 on the asserted basis that the Company's dividend contributions to
the ESOP do not constitute allowable deferred compensation. The Draft Audit
Report takes the position that the disallowance is not covered by the pending
decision by the ASBCA. However, more recently, Ball's Corporate Administrative
Contracting Officer has resolved the DCAA's disallowance in Ball's favor and has
incorporated this favorable resolution into a Memorandum of Agreement with Ball
to close out cost claims for years 1994 through 1997. While the outcome of the
trial is not yet known, the Company's information at this time does not indicate
that this matter will have a material adverse effect upon the liquidity, results
of operations or financial condition of the Company.
From time to time, the Company is subject to routine litigation incident to its
business. Additionally, the U.S. Environmental Protection Agency has designated
Ball as a potentially responsible party, along with numerous other companies,
for the cleanup of several hazardous waste sites. However, the Company's
information at this time does not indicate that these matters will have a
material adverse effect upon the liquidity, results of operations or financial
condition of the Company.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of business, the Company employs established risk
management policies and procedures to reduce its exposure to commodity price
changes, changes in interest rates and fluctuations in foreign currencies. The
Company's objective in managing its exposure to commodity price changes is to
limit the impact of aluminum price changes on earnings and cash flow through
arrangements with customers and suppliers and, at times, through the use of
certain derivative instruments, such as options and forward contracts,
designated as hedges. The Company's objective in managing its exposure to
interest rate changes is to limit the impact of interest rate changes on
earnings and cash flow and to lower its overall borrowing costs. To achieve
these objectives, the Company primarily uses interest rate swaps, collars and
options to manage the Company's mix of floating and fixed-rate debt between a
minimum and maximum percentage, which is set by policy. The Company's objective
in managing its exposure to foreign currency fluctuations is to protect foreign
cash flow and reduce earnings volatility associated with foreign exchange rate
changes.
The Company primarily manages the commodity price risk in connection with market
price fluctuations of aluminum by entering into customer sales contracts for
cans and ends which include aluminum-based pricing terms which consider price
fluctuations under its commercial supply contracts for aluminum purchases. The
terms include "band" pricing where there is an upper and lower limit, a fixed
price or only an upper limit to the aluminum component pricing. This pricing
affects over 75 percent of our North American metal beverage packaging net
sales. The Company also, at times, uses certain derivative instruments such as
option and forward contracts to hedge commodity price risk. At December 31, 1998
and 1997, the Company did not have any outstanding commodity option or forward
contracts.
Unrealized losses on foreign exchange forward contracts are recorded in the
balance sheet as other current liabilities. Realized gains/losses from hedges
are classified in the income statement consistent with accounting treatment of
the item being hedged. The Company accrues the differential for interest rate
swaps to be paid or received under these agreements as adjustments to interest
expense over the lives of the swaps. Gains and losses upon the early termination
of swap agreements are deferred in long-term liabilities and amortized as an
adjustment to interest expense over the remaining term of the agreement.
The Company has estimated its market risk exposure using sensitivity analysis.
Market risk exposure has been defined as the changes in fair value of a
derivative instrument assuming a hypothetical 10 percent adverse change in
market prices or rates. The results of the sensitivity analyses as of October 3,
1999, did not differ materially from the amounts reported as of December 31,
1998. Actual changes in market prices or rates may differ from hypothetical
changes.
FORWARD-LOOKING STATEMENTS
The Company has made or implied certain forward-looking statements in this
report. These forward-looking statements represent the Company's goals and are
based on certain assumptions and estimates regarding the worldwide economy,
specific industry technological innovations, industry competitive activity,
interest rates, capital expenditures, pricing, currency movements, product
introductions and the development of certain domestic and international markets.
Some factors that could cause the Company's actual results or outcomes to differ
materially from those discussed in the forward-looking statements include, but
are not limited to, fluctuation in customer growth and demand; the weather; fuel
costs and availability; regulatory action; federal and state legislation;
interest rates; labor strikes; boycotts; litigation involving antitrust,
intellectual property, consumer and other issues; maintenance and capital
expenditures; local economic conditions; the authorization and control over the
availability of government contracts and the nature and continuation of those
contracts and related services provided thereunder; the success or lack of
success of the commercial space business of the Aerospace and Technologies
Segment, such as the satellites provided to EarthWatch; the devaluation of
international currencies; the ability to obtain adequate credit resources for
foreseeable financing requirements of the Company's businesses; the inability of
the Company to achieve Year 2000 compliance; the ability of the Company to
acquire other businesses. If the Company's assumptions and estimates are
incorrect, or if it is unable to achieve its goals, then the Company's actual
performance could vary materially from those goals expressed or implied in the
forward-looking statements.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On January 27, 1999, Plastic Solutions of Texas, Inc. (PST) and Kurt H. Ruppman,
Sr. (Ruppman) filed a Statement of Claim with the American Arbitration
Association alleging the Company breached a contract between the Company and PST
and Ruppman relating to the grant of a license under certain patents and
technology owned by PST and Ruppman relating to the use of cryogenics in the
manufacture of hot fill PET bottles. The claim seeks termination of the contract
and damages for breach of the contract. The Statement of Claim seeks
compensatory damages of not less than $4.1 million and punitive damages of not
less than $1 million. The Company has filed an answer and counterclaim. The
discovery process continues. Based on the information, or lack thereof,
available to the Company at the present time, the Company is unable to express
an opinion as to the actual exposure of the Company; however, the Company does
not believe that this matter will have a material adverse effect upon the
liquidity, results of operations or financial condition of the Company.
In 1998 various consumers filed toxic tort litigation in the Superior Court for
Los Angeles County (Trial Court) against various water companies operating in
the San Gabriel Valley Basin. The water companies petitioned the Trial Court to
remove this action to the California Public Utilities Commission. The Trial
Court agreed. The plaintiffs appealed this decision to the California Court of
Appeals which reversed the Trial Court. One nonregulated utility has appealed
this decision to the California Supreme Court. Pending completion of the
appellate process, the Trial Court stayed further action in this litigation
except that the plaintiffs were permitted to add additional defendants. The
Trial Court consolidated the six separate lawsuits in the Northeast District
(Pasadena) and designated the case of Adler, et al. v. Southern California Water
Company, et al., as the lead case. In late March 1999, Ball-Foster Glass
Container Co., L.L.C., which the Company no longer owns, received a summons and
amended complaint based on its ownership of the El Monte glass plant.
Ball-Foster Glass tendered the lawsuit to the Company for defense and indemnity.
The Company has in turn tendered this lawsuit to its liability carrier,
Commercial Union, for defense and indemnity. Plaintiffs appear to be proceeding
to join all companies which are alleged to be Potentially Responsible Parties in
the various operable units in the San Gabriel Valley Superfund Site. Based on
the information, or lack thereof, available to the Company at the present time,
the Company is unable to express an opinion as to the actual exposure of the
Company; however, the Company does not believe that this matter will have a
material adverse effect upon the liquidity, results of operations or financial
condition of the Company.
Item 2. Changes in Securities
There were no events required to be reported under Item 2 for the quarter ending
October 3, 1999.
Item 3. Defaults Upon Senior Securities
There were no events required to be reported under Item 3 for the quarter ending
October 3, 1999.
Item 4. Submission of Matters to a Vote of Security Holders
There were no events required to be reported under Item 5 for the quarter ending
October 3, 1999.
Item 5. Other Information
There were no events required to be reported under Item 5 for the quarter ending
October 3, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
20.1 Subsidiary Guarantees of Debt
27.1 Financial Data Schedule
99.1 Safe Harbor Statement Under the Private Securities Litigation
Reform Act of 1995, as amended.
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the quarter
ending October 3, 1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ball Corporation
(Registrant)
By: /s/ R. David Hoover
--------------------------------
R. David Hoover
Vice Chairman and
Chief Financial Officer
Date: November 17, 1999
Ball Corporation and Subsidiaries
QUARTERLY REPORT ON FORM 10-Q
October 3, 1999
EXHIBIT INDEX
Description Exhibit
- -------------------------------------------------------------- -------
Subsidiary Guarantees of Debt (Filed herewith.) EX-20.1
Financial Data Schedule (Filed herewith.) EX-27.1
Safe Harbor Statement Under the Private Securities Litigation
Reform Act of 1995, as amended. (Filed herewith.) EX-99.1