Ball (BALL) - 2018 Q4 - Annual Report

PART I Business Ball Corporation is a global leader in metal packaging and aerospace systems, with packaging accounting for 90% of its $12 billion net sales in 2018, driven by its "Drive for 10" strategy and organized into four key segments 2018 Net Sales Breakdown | Business Segment | Percentage of Net Sales | | :--- | :--- | | Packaging | 90% | | Aerospace | 10% | - The company's core business strategy is defined by its "Drive for 10" vision, which encompasses five key levers: maximizing value in existing businesses, expanding into new products, aligning with the right customers and markets, broadening geographic reach, and leveraging technological expertise[11] - Ball Corporation's financial strategy aims for long-term comparable diluted earnings per share growth of 10% to 15% per annum and maximizing free cash flow generation[11] - The company operates through four reportable segments: (1) beverage packaging, North and Central America; (2) beverage packaging, South America; (3) beverage packaging, Europe; and (4) aerospace[17] Beverage Packaging, North and Central America Segment This segment is Ball's largest, contributing 40% of consolidated net sales in 2018 and producing approximately 46 billion recyclable aluminum beverage containers - This is Ball's largest segment, accounting for 40% of consolidated net sales in 2018[19] - The segment produced approximately 46 billion recyclable aluminum beverage containers in 2018, representing about 44% of the aggregate production in the U.S., Canada, and Mexico[22] - A new facility in Goodyear, Arizona, began production in Q2 2018 to meet growing demand for specialty cans, while facilities in Birmingham, AL, Chatsworth, CA, and Longview, TX, ceased production in 2018 as part of network optimization[21][25] Beverage Packaging, South America Segment This segment accounted for 15% of consolidated net sales in 2018, is the largest producer in the region, and is expanding capacity with a new facility in Paraguay - This segment accounted for 15% of consolidated net sales in 2018 and is the largest producer in the region with an estimated 53% of shipments[26] - The company is expanding capacity in South America by constructing a new facility in Paraguay (expected to begin production in H2 2019) and adding capacity in Argentina and Chile, while ceasing operations at its Cuiabá, Brazil facility in July 2018[28] Beverage Packaging, Europe Segment The Europe segment contributed 23% of consolidated net sales in 2018, is the largest producer in the region, and has expanded with a new facility near Madrid, Spain - The Europe segment contributed 23% of consolidated net sales in 2018 and is the largest producer in the region with an estimated 43% of shipments[30] - The company constructed a new two-line facility near Madrid, Spain, to support growth, while ceasing production at facilities in Recklinghausen, Germany (Q3 2017) and San Martino, Italy (December 2018)[33] Aerospace Segment The Aerospace segment accounted for 10% of consolidated net sales in 2018, with 99% of sales from U.S. government contracts, and reported a $2.2 billion contracted backlog - The Aerospace segment accounted for 10% of consolidated net sales in 2018, with 99% of its sales derived from contracts with the U.S. government and its agencies[34] Aerospace Segment Contracted Backlog | Year End | Contracted Backlog (in billions) | | :--- | :--- | | Dec 31, 2018 | $2.2 | | Dec 31, 2017 | $1.75 | Risk Factors The company identifies several key risks, including potential difficulties in realizing the full benefits of the Rexam acquisition, a significant debt level of $6.7 billion, and dependence on a limited number of major customers - The company may not realize all anticipated benefits from the Rexam acquisition due to the complexity of integrating the two businesses, which could lead to unanticipated problems, expenses, and diversion of management's attention[48][49] - As of December 31, 2018, the company had $6.7 billion of interest-bearing debt, which could increase vulnerability to adverse economic conditions and limit cash flow for operations and investments[52] - The company faces significant competition from substitute products, particularly PET plastic bottles in the U.S., Europe, and China, which could result in lower profits[60] - The aerospace segment's primary customers are U.S. government agencies, making it subject to risks from funding cuts, delays, budget changes, and government shutdowns[57][75] - There is a risk of noncash goodwill impairment for the beverage packaging, Asia Pacific, and beverage packaging, AMEA, reporting units, with goodwill balances of $78 million and $100 million, respectively, at year-end 2018[86] Properties The company's corporate headquarters and aerospace management offices are located in Broomfield, Colorado, with detailed lists of global manufacturing facilities provided - Ball's corporate headquarters and aerospace segment management offices are located in Broomfield, Colorado, with the aerospace segment occupying approximately 1.8 million square feet of space[107] - The report lists the approximate floor space for manufacturing locations across all significant packaging operations, including North and Central America, South America, Europe, AMEA, Asia Pacific, and Aerosol Packaging[109][111][112] Legal Proceedings This section refers to Note 23 of the consolidated financial statements for detailed information regarding the company's legal proceedings - Details of the company's legal proceedings are included in Note 23 to the consolidated financial statements within Item 8 of this annual report[113] PART II Market for the Registrant's Common Stock and Related Stockholder Matters Ball Corporation's common stock (BLL) is traded on the NYSE, with over 6 million shares repurchased in Q4 2018, and its 5-year total shareholder return significantly outperformed benchmarks Common Stock Repurchases (Q4 2018) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 1 - Dec 31, 2018 | 6,029,927 | $47.07 | 5-Year Cumulative Total Shareholder Return (2013-2018) | Company/Index | 12/31/2013 | 12/31/2018 | Cumulative Return | | :--- | :--- | :--- | :--- | | Ball Corporation (BLL) | $100.00 | $185.62 | 85.6% | | S&P 500 | $100.00 | $135.63 | 35.6% | | DJ US Containers & Packaging | $100.00 | $115.42 | 15.4% | Selected Financial Data This section provides a five-year overview of Ball Corporation's key financial metrics, showing net sales growth from $8.6 billion in 2014 to $11.6 billion in 2018 and a 2018 free cash flow of $750 million Five-Year Selected Financial Data (in millions, except per share amounts) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $11,635 | $10,983 | $9,061 | $7,997 | $8,570 | | Net earnings (GAAP) | $454 | $374 | $263 | $281 | $470 | | Diluted EPS (GAAP) | $1.29 | $1.05 | $0.81 | $1.00 | $1.65 | | Comparable net earnings (Non-GAAP) | $775 | $728 | $563 | $490 | $553 | | Diluted EPS (Comparable) | $2.20 | $2.04 | $1.74 | $1.74 | $1.94 | | Total interest bearing debt | $6,729 | $6,971 | $7,532 | $5,051 | $3,133 | | Free cash flow (Non-GAAP) | $750 | $922 | $(413) | $509 | $669 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2018, consolidated sales increased by $652 million to $11.6 billion, with net earnings rising by $80 million to $454 million, supported by strong liquidity and $750 million in free cash flow Consolidated Financial Highlights (2017 vs 2018) | Metric (in millions) | 2018 | 2017 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $11,635 | $10,983 | +$652 | | Net Earnings | $454 | $374 | +$80 | 2018 Segment Performance vs. 2017 (in millions) | Segment | 2018 Sales | Change vs. 2017 | 2018 Comparable Operating Earnings | Change vs. 2017 | | :--- | :--- | :--- | :--- | :--- | | Bev. Packaging, N. & C. America | $4,626 | +$448 | $551 | +$18 | | Bev. Packaging, South America | $1,701 | +$9 | $313 | -$20 | | Bev. Packaging, Europe | $2,619 | +$259 | $282 | +$49 | | Aerospace | $1,196 | +$205 | $113 | +$15 | Cash Flow and Liquidity Summary (in millions) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Cash from Operating Activities | $1,566 | $1,478 | | Capital Expenditures | $(816) | $(556) | | Free Cash Flow | $750 | $922 | - The company projects cash flows from operating activities for 2019 to be in excess of $1.6 billion, with capital expenditures of approximately $600 million, resulting in expected free cash flow exceeding $1 billion[197] Quantitative and Qualitative Disclosures About Market Risk The company manages market risks related to commodity prices, interest rates, and currency exchange rates, with sensitivity analyses showing potential after-tax earnings reductions from adverse changes - A hypothetical 10% adverse change in aluminum prices would result in an estimated $8 million after-tax reduction in net earnings over one year[208] - A 100-basis point increase in interest rates would result in an estimated $2 million after-tax reduction in net earnings over one year[210] - A hypothetical 10% strengthening of the U.S. dollar against other currencies would result in an estimated $15 million after-tax reduction in net earnings over one year[212] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for 2016-2018, including statements of earnings, balance sheets, and cash flows, along with detailed notes on accounting policies and significant transactions Consolidated Statement of Earnings Highlights (in millions) | Line Item | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net Sales | $11,635 | $10,983 | $9,061 | | Earnings Before Interest and Taxes | $935 | $802 | $463 | | Net Earnings Attributable to Ball | $454 | $374 | $263 | Consolidated Balance Sheet Highlights (in millions) | Line Item | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Total Current Assets | $3,940 | $3,758 | | Total Assets | $16,554 | $17,169 | | Total Current Liabilities | $4,095 | $4,107 | | Long-Term Debt | $6,510 | $6,518 | | Total Liabilities | $12,992 | $13,123 | | Total Shareholders' Equity | $3,562 | $4,046 | - In 2018, the company adopted new accounting standards for Revenue from Contracts with Customers and the Statement of Cash Flows, applying the modified retrospective and retrospective methods, respectively[215][261][270] - On July 31, 2018, Ball sold its U.S. steel food and steel aerosol packaging business, receiving approximately $600 million in cash and a 49% ownership interest in the newly formed joint venture, Ball Metalpack, recording a $41 million loss on the sale[300][301] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2018 - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[541] - Management concluded that internal control over financial reporting was effective as of December 31, 2018, based on the COSO framework (2013)[542] PART III Directors, Executive Officers and Corporate Governance of the Registrant This section lists the executive officers as of February 22, 2019, including their ages, positions, and tenure, with further information on directors and corporate governance incorporated by reference - The report lists the names, ages, and positions of eight executive officers, including John A. Hayes (Chairman, President and CEO) and Scott C. Morrison (Senior Vice President and CFO)[544][547][548] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's proxy statement to be filed within 120 days after the fiscal year-end - Detailed information on executive compensation is incorporated by reference from the company's proxy statement[552] Security Ownership of Certain Beneficial Owners and Management Information regarding security ownership is incorporated by reference from the company's proxy statement, with a table summarizing over 22 million securities available for future issuance under equity compensation plans Equity Compensation Plan Information | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 22,371,159 | $27.45 | 22,371,159 | PART IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K report, including consolidated financial statements and a comprehensive list of corporate and debt documents - The financial statements included in Part II, Item 8 are listed, along with a statement that financial statement schedules have been omitted as they are not applicable or the required information is included elsewhere[558][559] - A detailed list of exhibits filed with the report is provided, including corporate governance documents, debt agreements, management compensation plans, and required SEC certifications[560][561][562][563]