Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 8 of this Annual Report on Form 10-K (annual report), which include additional information about our accounting policies, practices and the transactions underlying our financial results. The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires us to make estimates and assumptions that affect the reported amounts in our consolidated financial statements and the accompanying notes including various claims and contingencies related to lawsuits, taxes, environmental and other matters arising during the normal course of business. We apply our best judgment, our knowledge of existing facts and circumstances and actions that we may undertake in the future in determining the estimates that affect our consolidated financial statements. We evaluate our estimates on an ongoing basis using our historical experience, as well as other factors we believe appropriate under the circumstances, such as current economic conditions, and adjust or revise our estimates as circumstances change. As future events and their effects cannot be determined with precision, actual results may differ from these estimates. Ball Corporation and its subsidiaries are referred to collectively as “Ball Corporation,” “Ball,” “the company,” “we” or “our” in the following discussion and analysis.

OVERVIEW

Business Overview and Industry Trends

Ball Corporation is one of the world’s leading suppliers of metal packaging to the beverage, personal care and household products industries. Our packaging products are produced for a variety of end uses, are manufactured in facilities around the world and are competitive with other substrates, such as plastics and glass. In the rigid packaging industry, sales and earnings can be increased by reducing costs, increasing prices, developing new products, expanding volumes and making strategic acquisitions. We also provide aerospace and other technologies and services to governmental and commercial customers, including national defense hardware, antenna and video tactical solutions, civil and operational space hardware and system engineering services.

We sell our packaging products mainly to large, multinational beverage, personal care and household products companies with which we have developed long-term relationships. This is evidenced by our high customer retention and our large number of long-term supply contracts. While we have a diversified customer base, we sell a significant portion of our packaging products to major companies and brands, as well as to numerous regional customers. The overall global beverage and aerosol metal container industries are growing and are expected to continue to grow in the medium to long term. The primary customers for the products and services provided by our aerospace segment are U.S. government agencies or their prime contractors.

We purchase our raw materials from relatively few suppliers. We also have exposure to inflation, in particular the rising costs of raw materials, as well as other direct cost inputs. We mitigate our exposure to the changes in the costs of metal through the inclusion of provisions in contracts covering the majority of our volumes to pass through metal price changes, as well as through the use of derivative instruments. The pass-through provisions generally result in proportional increases or decreases in sales and costs with a greatly reduced impact, if any, on net earnings. Because of our customer and supplier concentration, our business, financial condition and results of operations could be adversely affected by the loss, insolvency or bankruptcy of a major customer or supplier or a change in a supply agreement with a major customer or supplier, although our contract provisions generally mitigate the risk of customer loss, and our long-term relationships represent a known, stable customer base.

The majority of the aerospace business involves work under contracts, generally from one to five years in duration, as a prime contractor or subcontractor for various U.S. government agencies. Intense competition and long operating cycles are key characteristics of the company’s aerospace and defense industry where it is common for work on major programs to be shared among a number of companies. A company competing to be a prime contractor may, upon ultimate award of the contract to a competitor, become a subcontractor for the ultimate prime contracting company.

Corporate Strategy

Our Drive for 10 vision encompasses five strategic levers that are key to growing our business and achieving long-term success. Since launching Drive for 10 in 2011, we have made progress on each of the levers as follows:

	·		Maximizing value in our existing businesses by rationalizing standard beverage container and end capacity in North America, South America and Europe, and expanding specialty container production to meet current demand; leveraging plant floor systems in our beverage facilities to improve efficiencies and reduce costs; consolidating and/or closing multiple beverage packaging facilities to gain efficiencies; and in the aerosol business, installing new extruded aluminum aerosol lines in our European, Mexican and Indian facilities while also implementing cost-out and value-in initiatives across all of our businesses;

	·		Expanding further into new products and capabilities through commercializing extruded aluminum aerosol packaging that utilizes proprietary technology to significantly lightweight the can; and successfully commercializing the next-generation aluminum bottle-shaping technology;

	·		Aligning ourselves with the right customers and markets by investing capital to meet continued growth for specialty beverage containers throughout our global network, which represent approximately 40 percent of our global beverage packaging mix; aligning with craft brewers, sparkling water fillers, wine producers and other new beverage producers who continue to use beverage containers to grow their business;

	·		Broadening our geographic reach with our acquisition of Rexam and our new investments in beverage manufacturing facilities in Spain, Mexico, Myanmar and Panama, as well as an extruded aluminum aerosol manufacturing facility in India; and

	·		Leveraging our technological expertise in packaging innovation, including the introduction of next-generation aluminum bottle-shaping technologies and the increased production of lightweight ReAl® containers, which utilize technology that increases the strength of aluminum used in the manufacturing process while lightweighting the can by up to 20 percent over a standard aluminum aerosol can, as well as our investment in cyber, data analytics and LIDAR capabilities to further enhance our aerospace technical expertise across a broader customer portfolio.

These ongoing business developments and our successful acquisition of Rexam in 2016 help us stay close to our customers while expanding and/or sustaining our industry positions and global reach with major beverage, personal care, household products and aerospace customers.

RESULTS OF OPERATIONS

Management’s discussion and analysis for our results of operations on a consolidated and segment basis include a quantification of factors that had a material impact. Other factors that did not have a material impact, but that are significant to understand the results, are qualitatively described.

Consolidated Sales and Earnings

		Years Ended December 31,
($ in millions)		2018			2017			2016
Net sales		$	11,635		$	10,983		$	9,061
Net earnings attributable to Ball Corporation			454			374			263
Net earnings attributable to Ball Corporation as a % of consolidated net sales			4	%		3	%		3	%

Sales in 2018 were $652 million higher compared to 2017 primarily as a result of increased sales volumes for our South America and Europe segments, pass through of higher metal prices, higher pricing and favorable product mix for our North and Central America segment, favorable foreign exchange rate changes in our Europe segment and increased sales in the aerospace segment driven by significant U.S. national defense contracts.

Net earnings attributable to Ball Corporation in 2018 were $80 million higher than 2017 primarily due to increased sales volumes in our Europe and North and Central America segments, favorable manufacturing performance and lower business consolidation and other costs, partially offset by higher tax expense, freight costs and interest expense.

Sales and operating earnings for 2018 were impacted by the loss of sales from our U.S. steel food and steel aerosol business, which was sold on July 31, 2018.

Sales in 2017 were $1.9 billion higher compared to 2016 primarily as a result of increased sales volumes for our North and Central America, South America and Europe segments, increased pass through of higher metal prices for our North and Central America and South America segments, favorable currency exchange effects for our Europe segment, favorable product mix for our South America segment and increased sales in our aerospace segment. Sales volumes for the year ended December 31, 2017 for our North and Central America, South America and Europe segments were higher compared to the same period in 2016 primarily as a result of 2017 including twelve months of sales volumes from the acquired Rexam business, while 2016 included six months of sales volumes from the acquired Rexam business and six months of sales volumes from the company’s legacy business, a significant portion of which was sold in connection with the June 2016 acquisition of Rexam (Divestment Business). The South America segment experienced organic sales growth, and increased sales from significant U.S. national defense contracts drove revenue growth in the aerospace segment.

Net earnings attributable to Ball Corporation in 2017 were $111 million higher than 2016 primarily due to increased earnings related to higher sales volumes in the South America, Europe and North and Central America beverage can segments, synergy realizations, lower cost of sales in 2017 compared to 2016 which included $84 million for the step-up of inventory related to the acquired Rexam business, lower debt refinancing and other costs in 2017 and a decrease in business consolidation and other activities in 2017, partially offset by higher incremental depreciation. These impacts on net earnings were partially offset by higher tax expense in 2017, due principally to provisional charges from the U.S. Tax Cuts and Jobs Act which was signed into law on December 22, 2017, income tax benefits in 2016 associated with the restructure of Brazil legal entities as a result of the sale of the Divestment Business, the tax benefit on transaction costs and derivative costs of the Rexam acquisition and sale of the Divestment Business in 2016.

Debt refinancing and other costs in 2016 included costs on debt associated with the Rexam acquisition. See Note 15 located in Item 8 of this annual report for additional information on the activity in debt refinancing and other costs.

Cost of Sales (Excluding Depreciation and Amortization)

Cost of sales, excluding depreciation and amortization, was $9,329 million in 2018 compared to $8,717 million in 2017 and $7,296 million in 2016. These amounts represented 80 percent, 79 percent and 81 percent of consolidated net sales for the years ended 2018, 2017 and 2016, respectively. Cost of sales in 2016 included expense of $84 million for the step-up of inventory related to the acquired Rexam business.

Depreciation and Amortization

Depreciation and amortization expense was $702 million in 2018 compared to $729 million in 2017 and $453 million in 2016. These amounts represented 6 percent, 7 percent and 5 percent of consolidated net sales for 2018, 2017 and 2016, respectively. The expense was lower in 2018 compared to 2017 due to the absence of catch-up depreciation of fixed assets and amortization of intangible assets following the Rexam acquisition, which was recorded during 2017. The expense was higher in 2017 compared to 2016 due to increased depreciation of fixed assets and amortization of intangible assets related to 2016 following the Rexam acquisition. During 2017, the company finalized the valuation and useful lives of the assets acquired in the Rexam acquisition. As a result, depreciation and amortization expense for 2017 included a cumulative catch-up adjustment of $35 million related to the last six months of 2016. Amortization expense in 2018, 2017 and 2016 included, $164 million, $162 million and $65 million, respectively, for the amortization of acquired Rexam intangibles.

Selling, General and Administrative

Selling, general and administrative (SG&A) expenses were $478 million in 2018 compared to $514 million in 2017 and $512 million in 2016. These amounts represented 4 percent, 5 percent and 6 percent of consolidated net sales for those three years, respectively. Contributing to the lower SG&A expenses in 2018 were reduced employee compensation costs, favorable currency exchange rate effects, lower costs due to office closures and other cost-out initiatives implemented by the company in relation to the acquired Rexam business. The lower percentage of SG&A expense in 2017 as compared to 2016 was primarily due to office closures and various other cost-out initiatives implemented by the company in relation to the acquired Rexam business and the lack of foreign exchange losses of $27 million for the devaluation of the Egyptian pound in the fourth quarter of 2016.

Business Consolidation Costs and Other Activities

Business consolidation and other activities were $191 million in 2018 compared to $221 million in 2017 and $337 million in 2016. These amounts represented 2 percent, 2 percent and 4 percent of consolidated net sales for the three years, respectively.

The year-over-year decrease in business consolidation and other activities in 2018 compared to 2017 was primarily due to lower severance and facility shut down costs, lower costs related to lower settlement charges related to certain Ball U.S. defined pension plans, a gain on Brazilian indirect taxes and a gain on the sale of our former Chatsworth, California, beverage packing facility, partially offset by the loss on sale of the U.S. steel food and steel aerosol business. See Note 6 located in Item 8 of this annual report for additional information on the activity in business consolidation and other activities.

The year-over-year decrease in business consolidation and other activities in 2017 compared to 2016 was primarily due to a decrease of $322 million in Rexam transaction related costs and $83 million of Rexam acquisition related compensation arrangements and a decrease of $173 million in foreign currency exchange losses associated with the Rexam transaction. These impacts were partially offset by a decrease of $289 million in the gain recognized in connection with the sale of the Ball portion of the Divestment Business, an increase of $99 million related to completed and pending plant closures, an increase of $44 million related to the settlement of certain Ball U.S. defined benefit pension plans and an increase of $34 million for indemnification of certain tax matters provided to the buyer in the sale of the Divestment Business. See Note 6 located in Item 8 of this annual report for additional information on the activity in business consolidation and other activities.

Interest Expense

Total interest expense was $302 million in 2018 compared to $288 million in 2017 and $338 million in 2016. Excluding debt refinancing and other costs, interest expense in 2018 was higher than in 2017 due to higher interest rates, partially offset by lower average debt. Interest expense was higher in 2017 as compared to 2016 as the average level of debt held was higher than the period preceding it. Interest expense, excluding the effect of debt refinancing and other costs, as a percentage of average monthly borrowings was 4 percent in each of the years 2018, 2017 and 2016.

Debt refinancing and other costs were $1 million for the year ended December 31, 2018, $3 million for the year ended December 31, 2017, and $109 million for the year ended December 31, 2016. The amount for the year ended 2016 consisted mainly of costs incurred to fund the Rexam acquisition. See Notes 15 and 21 in Item 8 of this annual report for additional information on these instruments and the transactions flowing through debt refinancing and other costs.

Tax Provision

The effective tax rate is affected by recurring items such as income earned in foreign jurisdictions with tax rates that differ from the U.S. tax rate and by discrete items that may occur in any given year but are not consistent from year to year.

The 2018 effective income tax rate was 29.2 percent compared to 32.1 percent for 2017. The 2018 effective rate was reduced by 7.2 percent for the final adjustments related to the enactment of U.S. tax reform in 2017, including the impact of the transition tax and remeasurement of the company’s net deferred tax asset in the U.S., and increased by 8.8 percent for discrete tax costs associated with certain business dispositions. The effective rate was also increased by 2.4 percent for the new tax on GILTI established with U.S. tax reform. The effective rate was increased by 3.2 percent for the impact of the foreign tax rate differential, net of valuation allowance impact, and tax holidays versus the U.S. tax rate, and further increased by 4.0 percent for the impact of foreign currency fluctuations on the company’s deferred tax assets in Brazil. The 2018 effective rate was also reduced by 2.1 percent for the excess tax benefit for stock-based compensation and by 1.2 percent for the impact of the U.S. R&D credit. The impact of U.S. tax reform (excluding GILTI), and discrete tax costs associated with certain business dispositions are primarily related to discrete transactions or changes in tax law that are not expected to recur in future periods.

The 2017 effective income tax rate was 32.1 percent compared to negative 100.8 percent for 2016. The 2017 effective rate was increased by 16.1 percent for U.S. tax reform, including the impact of the transition tax and remeasurement of the company’s net deferred tax asset in the U.S., and by 3.5 percent for discrete tax costs associated with certain business dispositions. The effective rate was reduced by 7.2 percent for the impact of the foreign tax rate differential, net of valuation allowance impact, and tax holidays versus the U.S. tax rate and by 5.4 percent for the impact of current year changes in various foreign tax laws including the U.K. The 2017 effective rate was also reduced by 3.1 percent for the discrete tax benefit associated with the adoption in the first quarter of 2017 of amendments to existing accounting guidance for stock-based compensation, by 1.8 percent for the impact of the U.S. R&D credit, and by 1.6 percent for the impact of the U.S. domestic manufacturing deduction.

Further details of taxes on income and the impacts of the U.S. tax reform are included in Note 16 to the consolidated financial statements within Item 8 of this annual report.

RESULTS OF BUSINESS SEGMENTS

Segment Results

Ball’s operations are organized and reviewed by management along its product lines and geographical areas and its operating results are presented in the four reportable segments discussed below.

Beverage Packaging, North and Central America

			Years Ended December 31,
($ in millions)			2018			2017			2016
Net sales			$	4,626		$	4,178		$	3,612
Comparable operating earnings				551			533			469
Business consolidation and other activities (a)				(6)			(47)			(20)
Amortization of acquired Rexam intangibles				(31)			(32)			(11)
Catch-up depreciation and amortization for 2016 from finalization of Rexam valuation (b)				—			(6)			—
Cost of sales associated with Rexam inventory step-up				—			—			(10)
Total segment earnings			$	514		$	448		$	428
Comparable operating earnings as a % of segment net sales				12	%		13	%		13	%

	(a)		Further details of these items are included in Note 6 to the consolidated financial statements within Item 8 of this annual report.

	(b)		Catch-up depreciation and amortization of $6 million related to the six months ended December 31, 2016, was recorded during 2017, as a result of the finalization of fixed asset and intangible asset valuations and useful lives for the Rexam acquisition.

The beverage packaging, North and Central America, segment consists of operations located in the U.S., Canada and Mexico that manufacture aluminum containers used in beverage packaging. In order to serve growing customer demand for specialty cans in the southwestern U.S., the company constructed a four-line beverage packaging facility in Goodyear, Arizona, which began production in the second quarter of 2018. Our Birmingham, Alabama, facility ceased production during the second quarter of 2018 and the Chatsworth, California, and Longview, Texas, facilities ceased production during the third quarter of 2018. Our beverage can manufacturing facility in Reidsville, North Carolina, ceased production at the end of June 2017. The company’s Bristol, Virginia, beverage end-making facility ceased production at the end of June 2016, and its capacity was transitioned to existing North American Ball end-making facilities. These facilities produced beverage cans and ends in a variety of sizes and their customers are now supplied by the company’s other U.S. facilities. During the first quarter of 2016, our beverage manufacturing facility in Monterrey, Mexico, began production.

Segment sales in 2018 were $448 million higher compared to 2017. The increase in 2018 was primarily due to higher metal input prices of $285 million, higher pricing, favorable sales mix, and other pass-through items. We cannot predict the impact on sales that will result from future changes in metal input prices.

Segment sales in 2017 were $566 million higher compared to 2016. The increase in 2017 was primarily due to $350 million of higher volumes, primarily attributed to the Rexam acquisition, and $176 million from the pass through of higher metal prices. Sales in 2017 included twelve months of sales volumes from the acquired Rexam business compared to 2016 which included six months of sales volumes from the acquired Rexam business.

Comparable operating earnings in 2018 were $18 million higher compared to 2017 primarily due to favorable sales mix, higher pricing and savings from plant closures, partially offset by higher freight charges, costs associated with our multi-plant network optimization program, costs associated with a U.S. aluminum can sheet quality issue and plant start-up costs.

Comparable operating earnings in 2017 were $64 million higher compared to 2016 primarily due to higher sales volume, largely attributed to the Rexam acquisition, favorable product mix, cost savings from the closure of the Reidsville facility and other synergy-related activities, partially offset by higher freight costs and increased depreciation. Earnings in 2017 included twelve months of sales volumes from the acquired Rexam business compared to 2016 which included six months of sales volumes from the acquired Rexam business.

Beverage Packaging, South America

		Years Ended December 31,
($ in millions)		2018			2017			2016
Net sales		$	1,701		$	1,692		$	1,014
Comparable operating earnings			313			333			185
Business consolidation and other activities (a)			11			(5)			(15)
Amortization of acquired Rexam intangibles			(56)			(56)			(17)
Catch-up depreciation and amortization for 2016 from finalization of Rexam valuation (b)			—			(14)			—
Cost of sales associated with Rexam inventory step-up			—			—			(20)
Total segment earnings		$	268		$	258		$	133
Comparable operating earnings as a % of segment net sales			18	%		20	%		18	%

	(a)		Further details of these items are included in Note 6 to the consolidated financial statements within Item 8 of this annual report.

	(b)		Catch-up depreciation and amortization of $14 million related to the six months ended December 31, 2016, was recorded during 2017, as a result of the finalization of fixed asset and intangible asset valuations and useful lives for the Rexam acquisition.

The beverage packaging, South America, segment consists of operations located in Brazil, Argentina and Chile that manufacture aluminum containers used in beverage packaging in most countries in South America. To support contracted volumes for aluminum beverage packaging across Paraguay, Argentina and Bolivia, the company is constructing a one-line beverage can and end manufacturing facility in Paraguay, and is adding capacity to our Buenos Aires, Argentina, and Santiago, Chile, facilities. The Paraguay facility is expected to begin production in the second half of 2019. The company ceased operations at its Cuiabá, Brazil, beverage packaging facility in July 2018 and has relocated equipment from the Cuiabá facility to other existing facilities in South America.

Segment sales in 2018 were $9 million higher compared to 2017. The increase in 2018 was primarily related to higher can volumes and favorable product mix, partially offset by loss of certain business and the loss of several days of sales resulting from a Brazilian trucking labor strike.

Comparable operating earnings in 2018 were $20 million lower compared to 2017 primarily related to the conclusion of the end sales agreement with the business divested in 2016, regional pricing pressures and the loss of sales resulting from the Brazilian trucking labor strike, offset by an increase in can volumes and favorable manufacturing performance.

Segment sales and comparable operating earnings in 2017 included twelve months of sales volumes from the acquired Rexam business compared to 2016 which included six months of sales volumes from the acquired Rexam business and six months of sales volumes from the company’s legacy business, the significant portion of which was sold with the Divestment Business.

Segment sales in 2017 were $678 million higher compared to 2016. The increase in 2017 was primarily due to $545 million in higher volumes, largely attributed to the Rexam acquisition, to organic growth and to additional revenue from the end sales agreement with a business associated with the June 2016 acquisition of Rexam that transitioned to the divested business during the first half of 2018. The higher sales also included $158 million from the pass-through of higher metal prices.

Comparable operating earnings in 2017 were $148 million higher compared to 2016 primarily due to higher sales volumes, largely attributed to the Rexam acquisition, the end sales agreement with a business associated with the June 2016 acquisition of Rexam, and favorable product mix.

Beverage Packaging, Europe

		Years Ended December 31,
($ in millions)		2018			2017			2016
Net sales		$	2,619		$	2,360		$	1,915
Comparable operating earnings			282			233			217
Business consolidation and other activities (a)			(49)			(89)			(24)
Amortization of acquired Rexam intangibles			(70)			(67)			(31)
Catch-up depreciation and amortization for 2016 from finalization of Rexam valuation (b)			—			(19)			—
Cost of sales associated with Rexam inventory step-up			—			—			(47)
Total segment earnings		$	163		$	58		$	115
Comparable operating earnings as a % of segment net sales			11	%		10	%		11	%

	(a)		Further details of these items are included in Note 6 to the consolidated financial statements within Item 8 of this annual report.

	(b)		Catch-up depreciation and amortization of $19 million related to the six months ended December 31, 2016, was recorded during 2017, as a result of the finalization of fixed asset and intangible asset valuations and useful lives for the Rexam acquisition.

The beverage packaging, Europe, segment includes the manufacture and sale of metal beverage containers in facilities located throughout Europe, including Russia. To support growth for beverage cans in the Iberian Peninsula, the company constructed a two-line, aluminum beverage can manufacturing facility near Madrid, Spain, with a majority of the facility’s capacity secured under a long-term customer contract. The facility is fully operational and produces multiple can sizes utilizing both lines. In the third quarter of 2017, our beverage packaging container and end production facilities in Recklinghausen, Germany, ceased production. In December 2018, we closed our beverage packaging facility located in San Martino, Italy.

Segment sales in 2018 were $259 million higher compared to 2017. The increase in 2018 was primarily due to increased sales volumes of $189 million and favorable currency exchange rates, partially offset by a continuation of previously contracted price decreases.

Comparable operating earnings in 2018 were $49 million higher compared to 2017 primarily due to increased sales volumes, cost savings from the closure of the Recklinghausen, Germany, facility and other synergy-related and production efficiency activities.

Segment sales and comparable operating earnings in 2017 included twelve months of sales volumes from the acquired Rexam business compared to 2016 which included six months of sales volumes from the acquired Rexam business and six months of sales volumes from the company’s legacy European business, the significant portion of which was sold with the Divestment Business.

Segment sales in 2017 were $445 million higher compared to 2016. The increase in 2017 was primarily due to $388 million from increased sales volumes, largely attributed to the Rexam acquisition, and favorable currency exchange effects.

Comparable operating earnings in 2017 were $16 million higher compared to 2016 primarily due to increased sales volumes largely attributed to the Rexam acquisition, cost savings from the closure of the Recklinghausen, Germany, facility and other synergy-related and production efficiency activities, partially offset by increased incremental depreciation related to the finalization of the fixed asset valuations and useful lives for the Rexam acquisition.

Aerospace

		Years Ended December 31,
($ in millions)		2018			2017			2016
Net sales		$	1,196		$	991		$	818
Comparable operating earnings			113			98			88
Comparable operating earnings as a % of segment net sales			9	%		10	%		11	%

The aerospace segment consists of the manufacture and sale of aerospace and other related products and services provided for the defense, civil space and commercial space industries.

Segment sales in 2018 were $205 million higher compared to 2017, and comparable operating earnings were $15 million higher. The increase in sales and operating earnings for 2018 was primarily the result of increases from significant U.S. national defense contracts.

Segment sales in 2017 were $173 million higher compared to 2016, and comparable operating earnings were $10 million higher. The increase in sales and operating earnings for 2017 was primarily the result of increases from significant U.S. national defense contracts.

Sales to the U.S. government, either directly as a prime contractor or indirectly as a subcontractor, represented 99 percent of segment sales in 2018 compared to 98 percent of segment sales in 2017 and 97 percent in 2016. The aerospace contract mix in 2018 consisted of 67 percent cost-type contracts, which are billed at our costs plus an agreed upon and/or earned profit component, and 30 percent fixed-price contracts. The remaining sales were for time and materials contracts.

Contracted backlog for the aerospace segment at December 31, 2018 and 2017, was $2.2 billion and $1.75 billion, respectively. The year-over-year increase reflects several major contract awards during 2018. The segment has numerous outstanding bids for future contract awards. The backlog at December 31, 2018, consisted of 70 percent cost-type contracts. Comparisons of backlog are not necessarily indicative of the trend of future operations due to the nature of varying delivery and milestone schedules on contracts, funding of programs and the uncertainty of timing of future contract awards.

Additional Segment Information

For additional information regarding our segments, see the business segment information in Note 3 accompanying the consolidated financial statements within Item 8 of this annual report. The charges recorded for business consolidation and other activities were based on estimates by Ball management and were developed from information available at the time. If actual outcomes vary from the estimates, the differences will be reflected in current period earnings in the consolidated statement of earnings and identified as business consolidation gains and losses. Additional details about our business consolidation and other activities are provided in Note 6 accompanying the consolidated financial statements within Item 8 of this annual report.

Management Performance Measures

Management internally uses various measures to evaluate company performance such as comparable operating earnings (earnings before interest, taxes and business consolidation and other non-comparable costs); comparable net earnings (earnings before business consolidation costs and other non-comparable costs after tax); return on average invested capital (net operating earnings after tax over the relevant performance period divided by average invested capital over the same period); economic value added (EVA®) dollars (net operating earnings after tax less a capital charge on average invested capital employed); earnings before interest and taxes (EBIT); earnings before interest, taxes, depreciation and amortization (EBITDA); and diluted earnings per share. Management also uses free cash flow (generally defined by the company as cash flow from operating activities less capital expenditures) as a measure to evaluate the company’s liquidity. We believe this information is also useful to investors as it provides insight into the earnings and cash flow criteria management uses to make strategic decisions. These financial measures may be adjusted at times for items that affect comparability between periods such as business consolidation costs and gains or losses on acquisitions and dispositions.

Nonfinancial measures in the packaging businesses include production efficiency and spoilage rates; quality control figures; environmental, health and safety statistics; production and sales volumes; asset utilization rates; and measures of sustainability. Additional measures used to evaluate financial performance in the aerospace segment include contract revenue realization, award and incentive fees realized, proposal win rates and backlog (including awarded, contracted and funded backlog).

Many of the above noted financial measurements are on a non-U.S. GAAP basis and should be considered in connection with the consolidated financial statements within Item 8 of this annual report. Non-U.S. GAAP measures should not be considered in isolation and should not be considered superior to, or a substitute for, financial measures calculated in accordance with U.S. GAAP. A presentation of earnings in accordance with U.S. GAAP is available in Item 8 of this annual report.

Based on the above definitions, our calculations of comparable operating earnings and comparable net earnings are summarized in the tables included within Item 6 of this Annual Report on Form 10-K.

CRITICAL AND SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS

For information regarding the company’s critical and significant accounting policies, as well as recent accounting pronouncements, see Notes 1 and 2 to the consolidated financial statements within Item 8 of this annual report.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash Flows and Capital Expenditures

Our primary sources of liquidity are cash provided by operating activities and external committed borrowings. We believe that cash flows from operations and cash provided by short-term, long-term and committed revolver borrowings, when necessary, will be sufficient to meet our ongoing operating requirements, scheduled principal and interest payments on debt, dividend payments and anticipated capital expenditures. The following table summarizes our cash flows:

		Years Ended December 31,
($ in millions)		2018			2017			2016
Cash flows provided by (used in) operating activities (a)		$	1,566		$	1,478		$	193
Cash flows provided by (used in) investing activities			(206)			(545)			(1,283)
Cash flows provided by (used in) financing activities			(1,040)			(1,073)			(387)

	(a)		Amounts in 2017 and 2016 have been retrospectively adjusted to reflect the adoption of new accounting guidance that was effective January 1, 2018. See Notes 2 and 7 to the consolidated financial statements within Item 8 of this Annual Report on Form 10-K for further details.

Cash flows provided by operations were higher in 2018 compared to 2017, primarily due to higher earnings and lower pension contributions, partially offset by lower working capital inflows. Excluding the impact of the new revenue recognition standard and the sale of the U.S. steel food and steel aerosol packaging business, the impact of a reduction of days sales outstanding from 45 to 32 days, a reduction of inventory days on hand from 61 to 58 days and an increase in days payable outstanding from 110 to 112 days was partially offset by increases in other receivables.

Cash flows from operations in 2017 were higher compared to 2016 primarily due to improved earnings and working capital. Working capital changes in 2017 included a decrease in inventory days on hand from 68 to 61 days, a decrease in days sales outstanding from 46 to 45 days and an increase in days payable outstanding from 97 to 110 days. The continuing increase in days payable outstanding is a result of longer negotiated contractual terms with suppliers.

We have entered into several regional committed and uncommitted accounts receivable factoring programs with various financial institutions for certain of our accounts receivable. Programs accounted for as true sales of the receivables, without recourse to Ball, had combined limits of approximately $1.2 billion and $1.0 billion at December 31, 2018, and December 31, 2017, respectively. A total of $178 million and $439 million were available for sale under these programs at December 31, 2018 and 2017, respectively.

As of December 31, 2018, approximately $717 million of our cash was held outside of the U.S. In the event that we would need to utilize any of the cash held outside of the U.S. for purposes within the U.S., there are no material legal or other economic restrictions regarding the repatriation of cash from any of the countries outside the U.S. where we have cash, other than market liquidity constraints that limit the ability to convert Egyptian pounds held by the company in Egypt with a U.S. dollar equivalent value of $56 million into other currencies. The company believes its U.S. operating cash flows, as well as availability under its long-term, revolving credit facilities, uncommitted short-term credit facilities and committed and uncommitted accounts receivable factoring programs will be sufficient to meet the cash requirements of the U.S. portion of our ongoing operations, scheduled principal and interest payments on U.S. debt, dividend payments, capital expenditures and other U.S. cash requirements. If foreign funds would be needed for our U.S. cash requirements and we are unable to provide the funds through intercompany financing arrangements, we would be required to repatriate funds from foreign locations where the company has previously asserted indefinite reinvestment of funds outside the U.S.

Due to the U.S. tax status of certain Ball subsidiaries in Canada and the PRC, the company annually provides U.S. taxes on foreign earnings in those subsidiaries, net of any estimated foreign tax credits or deductions for foreign taxes. Current taxes are also provided on certain other undistributed earnings that are currently taxable in the U.S. Management’s intention is to indefinitely reinvest the undistributed earnings of Ball’s other foreign subsidiaries. The indefinite reinvestment assertion is supported by both long-term and short-term forecasts and U.S. financial requirements, including, but not limited to, operating cash flows, capital expenditures, debt maturities and dividends. As a result, the company has not provided deferred taxes on earnings in certain non-U.S. subsidiaries because such earnings are intended to be indefinitely reinvested in its international operations. Retained earnings in non-U.S. subsidiaries were $3.2 billion as of December 31, 2018. Although $2.0 billion of such earnings have been subjected to U.S. federal income tax, incremental foreign and U.S. state income tax may be due upon distribution. At present, it is not practical to estimate the additional taxes that may become payable upon the eventual remittance of these foreign earnings to the U.S.; however, repatriation of these earnings could result in a material increase in the company’s effective tax rate.

Share Repurchases

The company’s share repurchases, net of issuances, totaled $711 million in 2018, $76 million in 2017 and $59 million in 2016. The repurchases were completed using cash on hand and available borrowings. Additional details about our share repurchase activities are provided in Note 18 to the consolidated financial statements within Item 8 of this annual report.

Debt Facilities and Refinancing

Given our cash flow projections and unused credit facilities that are available until 2021, our liquidity is strong and is expected to meet our ongoing cash and debt service requirements. Total interest-bearing debt was $6.7 billion at December 31, 2018, compared to $7.0 billion at December 31, 2017.

In March 2018, Ball issued $750 million of 4.875 percent senior notes and used the proceeds to repay $315 million of its Term A loan, as well as outstanding multi-currency revolver and short-term credit facility borrowings.

At December 31, 2018, taking into account outstanding letters of credit, approximately $1.5 billion was available under the company’s long-term, multi-currency committed revolving credit facilities, which are available until March 2021. In addition to these facilities, the company had $1billion of short-term uncommitted credit facilities available at December 31, 2018, of which $211 million was outstanding and due on demand. At December 31, 2017, the company had $340 million outstanding under short-term uncommitted credit facilities.

While ongoing financial and economic conditions in certain areas may raise concerns about credit risk with counterparties to derivative transactions, the company mitigates its exposure by allocating the risk among various counterparties and limiting exposure to any one party. We also monitor the credit ratings of our suppliers, customers, lenders and counterparties on a regular basis.

We were in compliance with all loan agreements at December 31, 2018, and for all prior years presented, and have met all debt payment obligations. The U.S. note agreements and bank credit agreement contain certain restrictions relating to dividends, investments, financial ratios, guarantees and the incurrence of additional indebtedness. The most restrictive of the company’s debt covenants requires the company to maintain a leverage ratio (as defined) of no greater than 4.25 times at December 31, 2018. The company was in compliance with all loan agreements and debt covenants at December 31, 2018 and 2017, and we have met all debt payment obligations. As of December 31, 2018, approximately $1.7 billion of the amounts disclosed as available under the company’s long-term multi-currency committed revolving facilities and short-term uncommitted credit facilities are available without violating our existing debt covenants. Additional details about our debt are available in Note 15 to the consolidated financial statements within Item 8 of this annual report.

Other Liquidity Measures

Free Cash Flow

Management internally uses a free cash flow measure to: (1) evaluate the company’s liquidity, (2) evaluate strategic investments, (3) plan stock buyback and dividend levels and (4) evaluate the company’s ability to incur and service debt. Free cash flow is not a defined term under U.S. GAAP, and it should not be inferred that the entire free cash flow amount is available for discretionary expenditures. The company defines free cash flow as cash flow from operating activities less capital expenditures. Free cash flow is typically derived directly from the company’s consolidated statement of cash flows; however, it may be adjusted for items that affect comparability between periods.

Based on the above definition, our consolidated free cash flow is summarized as follows:

			Years Ended December 31,
($ in millions)		2018			2017			2016
Total cash provided by operating activities (a)		$	1,566		$	1,478		$	193
Capital expenditures			(816)			(556)			(606)
Free cash flow (a)		$	750		$	922		$	(413)

	(a)		Amounts in 2017 and 2016 have been retrospectively adjusted to reflect the adoption of new accounting guidance that was effective January 1, 2018. See Notes 2 and 7 to the consolidated financial statements within Item 8 of this Annual Report on Form 10-K for further details.

Based on information currently available, we estimate cash flows from operating activities for 2019 to be in excess of $1.6 billion, capital expenditures to be approximately $600 million and free cash flow to exceed $1 billion. In 2019, we intend to utilize our operating cash flow to service debt and to fund our growth capital projects, dividend payments, stock buybacks and, to the extent available, acquisitions that meet our criteria. Of the total 2019 estimated capital expenditures, approximately $250 million was contractually committed as of December 31, 2018.

Commitments

Cash payments required for long-term debt maturities, rental payments under noncancellable operating leases, purchase obligations and other commitments in effect at December 31, 2018, are summarized in the following table:

		Payments Due By Period (a)
					Less than									More than
($ in millions)		Total			1 Year			1-3 Years			3-5 Years			5 Years
Long-term debt, including capital leases (b)		$	6,572		$	8		$	2,262		$	2,552		$	1,750
Interest payments on long-term debt (c)			1,260			294			477			330			159
Purchase obligations (d)			11,305			4,592			5,497			1,208			8
Operating leases			305			66			93			59			87
Total payments on contractual obligations		$	19,442		$	4,960		$	8,329		$	4,149		$	2,004

	(a)		Amounts reported in local currencies have been translated at year end 2018 exchange rates.

	(b)		Amounts represent future cash payments due and exclude future amortization of debt issuance costs of $54 million at December 31, 2018.

(c)For variable rate facilities, amounts are based on interest rates in effect at year end and do not contemplate the effects of any hedging instruments utilized by the company.

(d)The company’s purchase obligations include capital expenditures and contracted amounts for aluminum, steel and other direct materials. Also included are commitments for purchases of natural gas and electricity, expenses related to aerospace and technologies contracts and other less significant items. In cases where variable prices and/or usage are involved, management’s best estimates have been used. Depending on the circumstances, early termination of the contracts may or may not result in penalties and, therefore, actual payments could vary significantly.

The table above does not include $80 million of uncertain tax positions, the timing of resolution of which is unknown at this time.

Contributions to the company’s defined benefit pension plans are expected to be in the range of $92 million in 2019. This estimate may change based on changes in the Pension Protection Act, actual plan asset performance and available company cash flow, among other factors. Benefit payments related to these plans are expected to be $395 million, $390 million, $395 million, $400 million and $406 million for the years ending December 31, 2019 through 2023, respectively, and a total of $2.1 billion for the years ending December 31, 2024 through 2028.

Based on changes in return on asset and discount rate assumptions, as well as revisions based on plan experience studies, total pension expense in 2019, excluding settlement and curtailment losses, is anticipated to be approximately $20 million lower than in 2018. A reduction of the expected return on pension assets assumption by one quarter of a percentage point would result in an estimated $13 million increase in the 2019 pension expense, while a quarter of a percentage point reduction in the discount rate applied to the pension liability would result in an estimated $3 million reduction of pension expense in 2019. Additional details about our defined benefit pension plans are available in Note 17 to the consolidated financial statements within Item 8 of this annual report.

Contingencies

The company is routinely subject to litigation incident to operating its businesses, and has been designated by various federal and state environmental agencies as a potentially responsible party, along with numerous other companies, for the clean-up of several hazardous waste sites, including in respect of sites related to alleged activities of certain Rexam subsidiaries. The company believes the matters identified will not have a material adverse effect upon its liquidity, results of operations or financial condition. Details of the company’s legal proceedings are included in Note 23 to the consolidated financial statements within Item 8 of this annual report.

FORWARD-LOOKING STATEMENTS

This report contains “forward-looking” statements concerning future events and financial performance. Words such as “expects,” “anticipates,” “estimates,” “believes,” “targets,” “likely,” “positions” and similar expressions typically identify forward-looking statements, which are generally any statements other than statements of historical fact. Such statements are based on current expectations or views of the future and are subject to risks and uncertainties, which could cause actual results or events to differ materially from those expressed or implied. Readers of this report should therefore not place undue reliance upon any forward-looking statements and any of such statements should be read in conjunction with, and, qualified in their entirety by, the cautionary statements referenced below. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Key factors, risks and uncertainties that could cause actual outcomes and results to be different are summarized in filings with the Securities and Exchange Commission, including Exhibit 99 in our Form 10-K, which are available on our website and at www.sec.gov. Some factors that could cause the company’s actual results or outcomes to differ materially from those discussed include, but are not limited to the following: a) in our packaging segments: product demand fluctuations; availability/cost of raw materials and logistics; competitive packaging, pricing and substitution; changes in climate and weather; competitive activity; footprint adjustments and other manufacturing changes; failure to achieve synergies, productivity improvements or cost reductions; mandatory deposit or other restrictive packaging laws; customer and supplier consolidation, power and supply chain influence; changes in major customer or supplier contracts or a loss of a major customer or supplier; political instability and sanctions; currency controls; and changes in foreign exchange or tax rates, including due to the effects of the 2017 U.S. Tax Cuts and Jobs Act; and tariffs or other governmental actions in any country affecting goods produced by us or in our supply chain, including imported raw materials, such as pursuant to section 232 of the U.S. Trade Expansion Act of 1962; b) in our aerospace segment: funding, authorization, availability and returns of government and commercial contracts; and delays, extensions and technical uncertainties affecting segment contracts; c) in the company as a whole, those listed plus: changes in senior management; regulatory action or issues including tax, environmental, health and workplace safety, including U.S. FDA and other actions or public concerns affecting products filled in our containers, or chemicals or substances used in raw materials or in the manufacturing process; technological developments and innovations; litigation; strikes; labor cost changes; rates of return on assets of the company's defined benefit retirement plans; pension changes; uncertainties surrounding geopolitical events and governmental policies both in the U.S. and in other countries, including the U.S. government elections, budget, sequestration and debt limit, including the partial government shutdown; reduced cash flow; interest rates affecting our debt; and successful or unsuccessful joint ventures, acquisitions and divestitures, including with respect to the Rexam PLC acquisition and its integration, or the associated divestiture; the effect of the acquisition or the divestiture on our business relationships, operating results and business generally.