Ball Corporation 2016 Form 10-K Summary
Business context and reporting period
Ball Corporation reported for the fiscal year ended December 31, 2016. It supplies metal packaging to beverage, food, personal care and household-products markets and provides aerospace products and services. Packaging accounted for 91% of 2016 sales; aerospace contributed 9%. The year includes only six months of Rexam results, following its acquisition on June 30, 2016.
Ball acquired Rexam for approximately $6.1 billion in cash and stock and concurrently sold required beverage-packaging businesses and assets to Ardagh for $3.42 billion, subject to adjustments. The transaction expanded Ball’s global beverage-can footprint; acquired Rexam sales included in 2016 were $2.3 billion.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $9.061 billion | $7.997 billion |
| EBIT | $463 million | $606 million |
| Net earnings attributable to Ball | $263 million | $281 million |
| Diluted EPS, reported | $1.63 | $1.99 |
| Comparable operating earnings (non-GAAP) | $976 million | $801 million |
| Comparable net earnings (non-GAAP) | $563 million | $490 million |
| Comparable diluted EPS (non-GAAP) | $3.49 | $3.48 |
| Cash from operating activities | $194 million | $1.007 billion |
| Capital expenditures | $606 million | $528 million |
| Free cash flow (company-defined, non-GAAP) | ($412 million) | $479 million |
| Interest-bearing debt and capital leases | $7.532 billion | $5.051 billion |
Reported net margin was approximately 2.9% (2015: 3.5%); EBIT margin was approximately 5.1% (2015: 7.6%). Cost of sales excluding depreciation and amortization was 81% of sales in both years. Sales rose 13%, primarily from Rexam, partly offset by lower metal input costs passed through to customers. Reported earnings fell as acquisition-related costs, higher depreciation and amortization, inventory step-up expense and higher interest costs outweighed the divestiture gain and other benefits.
Comparable measures exclude specified items and are not U.S. GAAP measures. The $344 million pretax gain on the Divestment Business sale, $337 million of business consolidation and other activities, $84 million inventory step-up expense, $65 million of acquired-intangible amortization and $109 million of debt-refinancing and other costs are among the significant items affecting comparability.
At December 31, 2016, cash was $597 million, total current assets were $3.653 billion and current liabilities were $2.969 billion. Ball reported $1.2 billion available on committed revolving facilities and $821 million of short-term uncommitted facilities, of which $143 million was outstanding and due on demand. The company said liquidity was strong and it was compliant with debt covenants. The $7.5 billion debt balance was substantially higher than in 2015 following the acquisition. Annual dividends remained $0.52 per share.
Material changes and fourth-quarter results
- Reported sales increased $1.064 billion year over year, principally due to Rexam; reported net earnings declined $18 million.
- Comparable operating earnings increased $175 million and comparable net earnings increased $73 million. Comparable diluted EPS was nearly flat, reflecting a larger weighted-average share count after the stock consideration for Rexam.
- Operating cash flow fell $813 million. Management cited acquisition and divestiture-related payments, additional pension funding, reduced working-capital inflows, derivative settlements and higher interest payments.
- Q4 2016 sales were $2.523 billion, net earnings attributable to Ball were $52 million and diluted EPS was $0.29. Q4 2015 sales were $1.805 billion, net earnings were $55 million and diluted EPS was $0.39. Quarterly figures are unaudited.
- Ball revised previously issued second- and third-quarter 2016 financial information for errors involving tax accounting, transaction-related items and gross-versus-net revenue presentation. The company said the errors were not material to those interim statements; the revisions changed certain quarterly reported amounts.
Outlook, commentary, risks and unusual items
Management estimated 2017 operating cash flow of approximately $1.3 billion, capital expenditures of approximately $500 million and free cash flow of approximately $800 million. Approximately $200 million of estimated 2017 capital expenditures was contractually committed at year-end. Ball described a long-term objective of 10% to 15% annual growth in comparable diluted EPS; this is a long-term strategic target, not a specific 2017 earnings forecast.
Management expects to use cash flow for debt service, growth investment, dividends and share repurchases, and expects Rexam-related SG&A costs to decline in 2017 through cost-out initiatives. Integration, realization of anticipated synergies and the effects of regulatory divestitures remain significant uncertainties. Other risks include customer concentration, competition from alternative packaging, raw-material costs and supply, foreign exchange, pension obligations, government funding and contract estimates in aerospace, and possible goodwill impairment. China beverage-packaging oversupply and pricing pressure put $78 million of Asia Pacific goodwill at risk; the 2016 impairment test showed fair value 23% above carrying value.
The effective tax rate was negative 100.8% in 2016, driven by significant discrete tax benefits, including tax-deductible goodwill from a Brazilian legal-entity restructuring. Management cautioned that the tax-rate benefits may not recur. Ball also disclosed a material weakness in income-tax controls related to the divestiture and Rexam acquisition; management and the auditor concluded internal control over financial reporting was ineffective at year-end. The auditor nevertheless gave an unqualified opinion on the consolidated financial statements. The retained Rexam business, representing 30% of year-end assets and 25% of annual sales, was excluded from the company’s internal-control assessment.
Ball guaranteed a minimum 2017 sales volume for the divested business and could owe Ardagh up to $75 million if an agreed threshold is missed. The company recorded approximately $45 million of estimated environmental liabilities and reported various legal and environmental proceedings, which it did not expect to materially affect its financial condition or results. A March 2017 announcement contemplated ceasing production at the Recklinghausen, Germany facility after negotiations and agreement with the Works Council.
Most important facts for investors to verify
- Whether Ball delivers on Rexam integration, cost savings and other synergies, and how the divestitures affect the combined business.
- Whether operating cash flow and free cash flow recover toward management’s 2017 estimates, and whether debt reduction proceeds as planned.
- The trajectory of reported versus comparable earnings, including the recurrence of acquisition, restructuring, pension and tax-related items.
- Remediation of the income-tax control weakness and the outcome of the remaining Rexam purchase-price allocation and quarterly reporting revisions.
- Exposure to the $75 million Ardagh volume guarantee, pension funding requirements, environmental and other contingencies, and China goodwill impairment risk.