Ball Corporation 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017; filed February 28, 2018. This is an annual filing, not a standalone fourth-quarter report. Unless otherwise noted, amounts are U.S. dollars.
Business context
Ball supplies metal packaging, principally aluminum beverage cans, and aerospace products and services. Packaging contributed 91% of 2017 sales and aerospace 9%. Results are reported across beverage packaging in North and Central America, South America and Europe; food and aerosol packaging; and aerospace, with additional non-reportable businesses. The June 2016 Rexam acquisition materially changed the scale and composition of the company.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $10.983 billion | $9.061 billion |
| EBIT | $802 million | $463 million |
| Net earnings attributable to Ball | $374 million | $263 million |
| Diluted GAAP EPS | $1.05 | $0.81 |
| Comparable operating earnings (non-GAAP) | $1.220 billion | $976 million |
| Comparable diluted EPS (non-GAAP) | $2.04 | $1.74 |
| Cash from operating activities | $1.478 billion | $194 million |
| Capital expenditures | $556 million | $606 million |
| Free cash flow (company-defined, non-GAAP) | $922 million | ($412 million) |
| Interest-bearing debt and capital leases | $6.971 billion | $7.532 billion |
Calculated GAAP net margin was approximately 3.4% in 2017 versus 2.9% in 2016; comparable operating earnings were approximately 11.1% of sales versus 10.8%. Cash and cash equivalents were $448 million at year-end. Current assets of $3.758 billion were below current liabilities of $4.107 billion. Ball reported approximately $1.2 billion available under its long-term revolving facilities and said it was compliant with its debt covenants; the most restrictive covenant capped its defined leverage ratio at 4.0x.
Sales rose about 21% and net earnings attributable to Ball rose about 42% year over year. Much of the sales increase reflects 12 months of acquired Rexam volumes in 2017 versus six months in 2016, as well as higher volumes, metal-price pass-through and currency effects; South America also had organic growth. Operating cash flow improved substantially with earnings and working-capital changes, including higher days payable outstanding. Annual 2017 fourth-quarter sales were $2.747 billion, net earnings attributable to Ball were $159 million and diluted EPS was $0.45.
Segment trends and material changes
- North and Central America beverage: Sales of $4.178 billion and comparable operating earnings of $533 million; earnings increased with volume, mix, cost savings and synergies, partly offset by freight and depreciation costs. Ball announced closures of three plants during 2018 and planned a Goodyear, Arizona facility for specialty-can demand.
- South America beverage: Sales of $1.692 billion and comparable operating earnings of $333 million. Growth reflected acquired Rexam volumes, organic growth, favorable mix and higher metal-price pass-through. The comparable operating margin improved to 20% from 18%.
- Europe beverage: Sales of $2.360 billion and comparable operating earnings of $233 million. Earnings rose modestly, but the comparable margin declined to 10% from 11%; increased depreciation and closure costs weighed on reported segment earnings. A plant near Madrid was under construction, while Recklinghausen ceased production in 2017.
- Food and aerosol: Sales fell to $1.138 billion from $1.171 billion and comparable operating earnings declined to $102 million from $109 million, reflecting lower food-can volumes, price/cost pressure and plant sales, partly offset by aerosol mix and cost actions.
- Aerospace: Sales increased to $991 million from $818 million and comparable operating earnings to $98 million from $88 million, primarily due to U.S. national defense contracts. Contracted backlog was $1.75 billion versus $1.4 billion, including $844 million expected to be recognized as revenue in 2018; backlog includes unfunded government orders and is subject to funding and award timing.
Outlook, risks and unusual items
- Management estimated 2018 operating cash flow of about $1.5 billion, capital expenditures of about $600 million and free cash flow of about $900 million. It expected to use operating cash flow for debt service, growth investment, dividends, share repurchases and, if suitable, acquisitions. About $465 million of 2018 capital expenditures was contractually committed at year-end 2017.
- Ball’s long-term financial strategy targets comparable diluted EPS growth of 10%–15% annually, alongside free-cash-flow generation and increased EVA dollars. Management expected the 2017 U.S. tax law changes to benefit future earnings and cash flows, principally from the lower federal corporate tax rate, but did not quantify the expected benefit.
- The 2017 effective tax rate was 32.1%, compared with negative 100.8% in 2016. Ball recorded $83 million of provisional tax expense related to U.S. tax reform, including $52 million for deferred-tax remeasurement and $31 million for transition tax; estimates remained subject to refinement. The company had not yet estimated the effects of GILTI and BEAT provisions.
- Reported 2017 results included $221 million of business consolidation and other charges, $162 million of acquired Rexam intangible amortization and a $35 million catch-up depreciation and amortization charge relating to finalizing Rexam purchase accounting. Comparable results exclude specified items; investors should review the company’s reconciliation before relying on these non-GAAP measures.
- Key risks include substantial debt, customer and supplier concentration, competition and packaging substitution, raw-material and energy costs, foreign-exchange exposure, Rexam integration and synergy delivery, and U.S. government funding and contract risks in aerospace. China beverage-packaging oversupply and pricing pressure could lead to impairment of up to the $78 million Asia Pacific goodwill balance; the reporting unit’s estimated fair value exceeded carrying value by 24% at the 2017 test.
- Environmental liabilities for known matters were estimated at approximately $37 million. A $55 million liability was recorded for certain tax indemnifications provided in the sale of the Divestment Business; the filing says maximum potential payments are not limited and excess exposure cannot be reasonably estimated. A Brazilian indirect-tax case could produce a material reimbursement, but the amount and outcome were uncertain.
- A 2016 material weakness in income-tax controls related to the Rexam transaction and divestitures was considered remediated in 2017. Management and the auditor concluded internal control over financial reporting was effective as of year-end.
Important facts for investors to verify
- Separate acquisition-driven growth, organic volume and price/mix contributions, particularly in beverage packaging.
- Progress against the 2018 cash-flow, capital-spending and free-cash-flow estimates, and the sustainability of the 2017 working-capital benefit.
- Debt reduction, interest costs, covenant headroom and the effect of variable rates and refinancing needs.
- Delivery of Rexam synergies and restructuring savings alongside continuing amortization, plant-closure costs and capacity transitions.
- Final tax-reform accounting, including the provisional $83 million charge, and any effects on foreign-earnings repatriation.
- Aerospace backlog funding and conversion to revenue, China market conditions and goodwill impairment headroom, and developments in tax indemnity and environmental matters.