Ball Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. Ball primarily supplies metal beverage packaging and also operates an aerospace business. Packaging generated about 90% of 2018 sales; aerospace about 10%. The filing is an annual report, with fourth-quarter results also disclosed.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change or context |
|---|---|---|---|
| Net sales | $11.635 billion | $10.983 billion | Up 5.9% |
| GAAP EBIT | $935 million | $802 million | EBIT margin 8.0%, up from 7.3% |
| Net earnings attributable to Ball | $454 million | $374 million | Net margin 3.9%, up from 3.4% |
| Diluted EPS, GAAP | $1.29 | $1.05 | Up 22.9% |
| Comparable net earnings | $775 million | $728 million | Non-GAAP measure |
| Comparable diluted EPS | $2.20 | $2.04 | Up 7.8%; non-GAAP measure |
| Cash from operations | $1.566 billion | $1.478 billion | Higher earnings and lower pension contributions were partly offset by lower working-capital inflows |
| Capital expenditures / free cash flow | $816 million / $750 million | $556 million / $922 million | Free cash flow is company-defined and non-GAAP |
| Interest-bearing debt | $6.729 billion | $6.971 billion | Debt declined |
| Cash and cash equivalents | $721 million | $448 million | At year end |
Current assets were $3.940 billion and current liabilities $4.095 billion at year end (current ratio about 0.96). Ball reported approximately $1.5 billion available under committed revolvers through March 2021; $211 million was drawn under $1 billion of short-term uncommitted facilities and was due on demand. The company stated liquidity was strong and it was compliant with debt covenants.
Fourth-quarter 2018 sales were $2.803 billion versus $2.747 billion in Q4 2017. Quarterly net earnings attributable to Ball were $151 million versus $159 million, and diluted EPS was $0.44 versus $0.45. Q4 gross profit was $431 million versus $481 million.
Material changes versus the prior year
- Sales rose on higher volumes in Europe and South America, higher metal-price pass-through, pricing and mix in North and Central America, favorable European foreign exchange, and increased aerospace sales from U.S. defense contracts.
- Net earnings increased mainly on higher beverage volumes, improved manufacturing performance and lower business-consolidation costs; higher taxes, freight costs and interest expense were offsets.
- Comparable operating earnings increased to $1.290 billion from $1.220 billion. North and Central America, Europe and aerospace improved; South America declined to $313 million from $333 million, reflecting pricing pressure, loss of certain business and a Brazilian trucking strike.
- Cash from operations increased, but free cash flow fell as capital expenditures rose to $816 million, including capacity and growth investment.
- Ball repurchased $711 million of shares net of issuances, compared with $76 million in 2017; cash dividends were $0.40 per share versus $0.365.
- On July 31, 2018, Ball sold its U.S. steel food and steel aerosol business for approximately $600 million cash and retained a 49% interest in the Ball Metalpack joint venture. The sale generated a $41 million loss. The sale reduced reported sales and operating results.
Outlook, commentary, risks and unusual items
- For 2019, management estimated operating cash flow above $1.6 billion, capital expenditures of approximately $600 million and free cash flow above $1 billion. Approximately $250 million of estimated 2019 capital expenditures was contractually committed at year end. Planned cash uses included debt service, growth investment, dividends and buybacks.
- Ball’s long-term strategy targets comparable diluted EPS growth of 10%–15% annually and emphasizes free cash flow generation and shareholder returns; this is a long-term objective, not a specific 2019 earnings forecast.
- Aerospace contracted backlog was $2.2 billion at year end, up from $1.75 billion. About $1.1 billion was expected to be recognized as 2019 revenue. Backlog includes $1.4 billion of unfunded government orders and may be affected by budget delays or cancellations.
- Ball agreed to sell its China beverage packaging facilities for approximately $225 million plus potential additional consideration; closing was expected in the second half of 2019, subject to regulatory approvals. China industry oversupply and Saudi Arabia’s weaker business climate put goodwill at risk. 2018 impairment-test fair value headroom was 11% for Asia Pacific and 15% for AMEA.
- Material risks include substantial debt and interest-rate exposure, customer concentration, packaging substitution and competition, raw-material supply and pricing, foreign exchange and geopolitical conditions, labor stoppages, and U.S. government funding and contract risks in aerospace. The filing also identifies risks from Rexam integration, tax changes, environmental regulation, cyber threats and pension assumptions.
- Unusual or nonrecurring items included $191 million of business consolidation and other costs, $164 million of acquired Rexam intangible amortization, and a $45 million tax benefit from final U.S. tax-reform adjustments. The 2018 effective tax rate was 29.2%, including discrete disposition-related tax costs.
- Environmental liabilities for known matters were estimated at approximately $30 million. Management did not expect identified litigation and environmental matters to materially affect results or liquidity. Potential Brazilian indirect-tax reimbursements could be material but were not estimable; $18 million of related gains was recorded in 2018.
- PwC issued unqualified opinions on the financial statements and internal controls; management reported effective controls and no material weaknesses.
Important facts for investors to verify
- Reconcile GAAP earnings and EPS with comparable, non-GAAP measures, including the exclusions for restructuring, Rexam amortization and tax items.
- Assess whether the 2019 cash-flow and free-cash-flow outlook is achievable alongside planned capital spending, dividends and buybacks.
- Review debt maturities, variable-rate exposure, covenant headroom and reliance on short-term facilities due on demand.
- Track execution and proceeds from the China divestiture, as well as the implications of the U.S. steel packaging sale and Ball Metalpack investment.
- Monitor aerospace backlog funding and conversion to revenue, South American pricing and operating conditions, and goodwill headroom in Asia Pacific and AMEA.
- Examine the quality and sustainability of working-capital cash flow, pension funding needs, and unresolved tax, environmental and litigation exposures.