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Financial Instruments and Risk Management | 9 Months Ended
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Sep. 30, 2015
Financial Instruments and Risk Management |
Financial Instruments and Risk Management | 16. Financial Instruments and Risk Management The company employs established risk management policies and procedures, which seek to reduce the company’s commercial risk exposure to fluctuations in commodity prices, interest rates, currency exchange rates and prices of the company’s common stock with regard to common share repurchases and the company’s deferred compensation stock plan. However, there can be no assurance that these policies and procedures will be successful. Although the instruments utilized involve varying degrees of credit, market and interest risk, the counterparties to the agreements are expected to perform fully under the terms of the agreements. The company monitors counterparty credit risk, including lenders, on a regular basis, but Ball cannot be certain that all risks will be discerned or that its risk management policies and procedures will always be effective. Additionally, in the event of default under the company’s master derivative agreements, the non-defaulting party has the option to set-off any amounts owed with regard to open derivative positions. Commodity Price Risk Aluminum The company manages commodity price risk in connection with market price fluctuations of aluminum ingot through two different methods. First, the company enters into container sales contracts that include aluminum ingot-based pricing terms that generally reflect the same price fluctuations under commercial purchase contracts for aluminum sheet. The terms include fixed, floating or pass-through aluminum ingot component pricing. Second, the company uses certain derivative instruments such as option and forward contracts as economic and cash flow hedges of commodity price risk where there are material differences between sales and purchase contracted pricing and volume. At September 30, 2015, the company had aluminum contracts limiting its aluminum exposure with notional amounts of approximately $336 million, of which approximately $130 million received hedge accounting treatment. The aluminum contracts, which are recorded at fair value, include economic derivative instruments that are undesignated, as well as cash flow hedges that offset sales and purchase contracts of various terms and lengths. Cash flow hedges relate to forecasted transactions that expire within the next four years. Included in shareholders’ equity at September 30, 2015, within accumulated other comprehensive earnings (loss) is a net after-tax loss of $15.5 million associated with these contracts. A net loss of $12.5 million is expected to be recognized in the consolidated statement of earnings during the next 12 months, the majority of which will be offset by pricing changes in sales and purchase contracts, thus resulting in little or no earnings impact to Ball. Steel Most sales contracts involving our steel products either include provisions permitting the company to pass through some or all steel cost changes incurred, or they incorporate annually negotiated steel prices. Interest Rate Risk The company’s objective in managing exposure to interest rate changes is to minimize the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, the company may use a variety of interest rate swaps, collars and options to manage our mix of floating and fixed-rate debt. Interest rate instruments held by the company at September 30, 2015, included pay-fixed interest rate swaps, which effectively convert variable rate obligations to fixed-rate instruments. At September 30, 2015, the company had outstanding interest rate swap contracts with notional amounts of approximately $146 million paying fixed rates expiring within the next four years. The after-tax loss included in shareholders’ equity at September 30, 2015, within accumulated other comprehensive earnings (loss) is insignificant. Interest Rate Risk—Rexam Acquisition The company entered into interest rate swaps to hedge against rising U.S. and European interest rates to minimize its interest rate exposure associated with anticipated debt issuances in connection with the announced, proposed acquisition of Rexam. At September 30, 2015, the company had outstanding interest rate swaps with notional amounts totaling approximately $250 million and €1,750 million. In addition, the company entered into interest rate option contracts to hedge negative Euribor rates with an aggregate notional amount of €750 million. Subsequent to the third quarter of 2015, the company entered into additional interest rate swap contracts to hedge against rising U.S. interest rates with aggregate notional amounts of approximately $100 million. These contracts were not designated as hedges, and therefore, changes in the fair value of these interest swap and option contracts are recognized in the unaudited condensed consolidated statements of earnings in debt refinancing and other costs, a component of total interest expense. The loss included in debt refinancing and other costs during the first nine months of 2015 associated with these contracts was $10 million. The contracts outstanding at September 30, 2015, expire within the next five years. Currency Exchange Rate Risk The company’s objective in managing exposure to currency fluctuations is to limit the exposure of cash flows and earnings to changes associated with currency exchange rate changes through the use of various derivative contracts. In addition, at times the company manages earnings translation volatility through the use of currency option strategies, and the change in the fair value of those options is recorded in the company’s net earnings. The company’s currency translation risk results from the currencies in which we transact business. The company faces currency exposures in our global operations as a result of various factors including intercompany currency denominated loans, selling our products in various currencies, purchasing raw materials and equipment in various currencies and tax exposures not denominated in the functional currency. Sales contracts are negotiated with customers to reflect cost changes and, where there is not an exchange pass-through arrangement, the company uses forward and option contracts to manage currency exposures. Additionally, at September 30, 2015, the company had outstanding exchange forward contracts and option contracts with notional amounts totaling approximately $449 million. Included in shareholders’ equity at September 30, 2015, within accumulated other comprehensive earnings (loss) is a net after-tax loss of $2.2 million associated with these contracts. A net loss of $2.3 million is expected to be recognized in the consolidated statement of earnings during the next 12 months. The contracts outstanding at September 30, 2015, expire within the next year. Currency Exchange Rate Risk — Rexam Acquisition In connection with the announced, proposed acquisition of Rexam, the company entered into collar and option contracts to partially mitigate its currency exchange rate risk from February 19, 2015, through the expected closing date of the acquisition. At September 30, 2015, the company had outstanding collar and option contracts with notional amounts totaling approximately £2.3 billion ($3.4 billion). These contracts were not designated as hedges, and therefore, changes in the fair value of these contracts are recognized in the unaudited condensed consolidated statements of earnings in business consolidation and other activities (see Note 5). During the third quarter and first nine months of 2015, the company recognized losses of $104.6 million and of $36.3 million, respectively, associated with these contracts. The contracts outstanding at September 30, 2015, expire within the next year. Common Stock Price Risk The company’s deferred compensation stock program is subject to variable plan accounting and, accordingly, is marked to fair value using the company’s closing stock price at the end of the related reporting period. The company entered into a total return swap to reduce the company’s earnings exposure to these fair value fluctuations that will be outstanding until March 2016 and has a notional amount of 1 million shares. As of September 30, 2015, the fair value of the swap was a $4.8 million loss. All gains and losses on the total return swap are recorded in the unaudited condensed consolidated statements of earnings in selling, general and administrative expenses. Collateral Calls The company’s agreements with its financial counterparties require the company to post collateral in certain circumstances when the negative mark to fair value of the derivative contracts exceeds specified levels. Additionally, the company has collateral posting arrangements with certain customers on these derivative contracts. The cash flows of the margin calls are shown within the investing section of the company’s consolidated statements of cash flows. As of September 30, 2015, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position was $63.5 million and $2.7 million of collateral was required to be posted. As of December 31, 2014, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position was $12.4 million and no collateral was required to be posted. Fair Value Measurements The company has classified all applicable financial derivative assets and liabilities as Level 2 within the fair value hierarchy and presented those values in the tables below. The company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy levels. The fair values of the company’s derivative instruments were as follows:
|  | September 30, 2015 |  | December 31, 2014 |
($ in millions) |  | Derivatives Designated as Hedging Instruments |  | Derivatives not Designated as Hedging Instruments |  | Total |  | Derivatives Designated as Hedging Instruments |  | Derivatives not Designated as Hedging Instruments |  | Total |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts |  | $ | 5.7 |  | $ | 4.7 |  | $ | 10.4 |  | $ | 3.8 |  | $ | 1.3 |  | $ | 5.1 |
Foreign currency contracts |  | 0.1 |  | 13.1 |  | 13.2 |  | 0.8 |  | 3.5 |  | 4.3 |
Total current derivative contracts |  | $ | 5.8 |  | $ | 17.8 |  | $ | 23.6 |  | $ | 4.6 |  | $ | 4.8 |  | $ | 9.4 |
Commodity contracts |  | $ | 0.2 |  | $ | 0.8 |  | $ | 1.0 |  | $ | 2.2 |  | $ | 0.5 |  | $ | 2.7 |
Foreign currency contracts |  | — |  | — |  | — |  | — |  | — |  | — |
Interest rate and other contracts |  | — |  | 1.5 |  | 1.5 |  | 0.4 |  | — |  | 0.4 |
Total noncurrent derivative contracts |  | $ | 0.2 |  | $ | 2.3 |  | $ | 2.5 |  | $ | 2.6 |  | $ | 0.5 |  | $ | 3.1 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts |  | $ | 14.0 |  | $ | 6.5 |  | $ | 20.5 |  | $ | 6.9 |  | $ | 1.6 |  | $ | 8.5 |
Foreign currency contracts |  | 2.2 |  | 29.2 |  | 31.4 |  | 1.6 |  | 1.3 |  | 2.9 |
Interest rate and other contracts |  | 0.5 |  | 4.7 |  | 5.2 |  | 0.5 |  | 0.4 |  | 0.9 |
Total current derivative contracts |  | $ | 16.7 |  | $ | 40.4 |  | $ | 57.1 |  | $ | 9.0 |  | $ | 3.3 |  | $ | 12.3 |
Commodity contracts |  | $ | 7.8 |  | $ | 1.5 |  | $ | 9.3 |  | $ | 6.8 |  | $ | 0.5 |  | $ | 7.3 |
Interest rate and other contracts |  | 0.4 |  | 9.2 |  | 9.6 |  | 0.3 |  | — |  | 0.3 |
Total noncurrent derivative contracts |  | $ | 8.2 |  | $ | 10.7 |  | $ | 18.9 |  | $ | 7.1 |  | $ | 0.5 |  | $ | 7.6 |
The company uses closing spot and forward market prices as published by the London Metal Exchange, the Chicago Mercantile Exchange, Reuters and Bloomberg to determine the fair value of any outstanding aluminum, currency, energy, inflation and interest rate spot and forward contracts. Option contracts are valued using a Black-Scholes model with observable market inputs for aluminum, currency and interest rates. We value each of our financial instruments either internally using a single valuation technique or from a reliable observable market source. The company does not adjust the value of its financial instruments except in determining the fair value of a trade that settles in the future by discounting the value to its present value using 12-month LIBOR as the discount factor. Ball performs validations of our internally derived fair values reported for our financial instruments on a quarterly basis utilizing counterparty valuation statements. The company additionally evaluates counterparty creditworthiness and, as of September 30, 2015, has not identified any circumstances requiring that the reported values of our financial instruments be adjusted. Impact on Earnings from Derivative Instruments
|  |  |  | Three Months Ended September 30, |
|  |  |  | 2015 |  | 2014 |
($ in millions) |  | Location of Gain (Loss) Recognized in Earnings on Derivatives |  | Cash Flow Hedge - Reclassified Amount from Accumulated Other Comprehensive Earnings (Loss) |  | Gain (Loss) on Derivatives not Designated as Hedge Instruments |  | Cash Flow Hedge - Reclassified Amount from Accumulated Other Comprehensive Earnings (Loss) |  | Gain (Loss) on Derivatives not Designated as Hedge Instruments |
Commodity contracts - manage exposure to customer pricing |  | Net sales |  | $ | 1.3 |  | $ | 0.2 |  | $ | (2.5 | ) | $ | 3.2 |
Commodity contracts - manage exposure to supplier pricing |  | Cost of sales |  | (8.4 | ) | (2.1 | ) | (20.2 | ) | 1.5 |
Interest rate contracts - manage exposure for outstanding debt |  | Interest expense |  | — |  | — |  | 0.1 |  | — |
Interest rate contracts - manage exposure for forecasted Rexam financing |  | Debt refinancing and other costs |  | — |  | (15.0 | ) | — |  | — |
Foreign currency contracts - manage exposure to sales of products |  | Cost of sales |  | 0.3 |  | 1.6 |  | — |  | (0.7 | )
Foreign currency contracts - manage exposure for transactions between segments |  | Selling, general and administrative |  | — |  | 17.0 |  | (0.1 | ) | (13.7 | )
Foreign currency contracts - manage exposure for proposed acquisition of Rexam |  | Business consolidation and other activities |  | — |  | (104.6 | ) | — |  | — |
Equity contracts |  | Selling, general and administrative |  | — |  | (8.2 | ) | — |  | (3.6 | )
Total |  |  |  | $ | (6.8 | ) | $ | (111.1 | ) | $ | (22.7 | ) | $ | (13.3 | )
|  |  |  | Nine Months Ended September 30, |
|  |  |  | 2015 |  | 2014 |
($ in millions) |  | Location of Gain (Loss) Recognized in Earnings on Derivatives |  | Cash Flow Hedge - Reclassified Amount From Other Comprehensive Earnings (Loss) |  | Gain (Loss) on Derivatives Not Designated As Hedge Instruments |  | Cash Flow Hedge - Reclassified Amount From Other Comprehensive Earnings (Loss) |  | Gain (Loss) on Derivatives Not Designated As Hedge Instruments |
Commodity contracts - manage exposure to customer pricing |  | Net sales |  | $ | 2.1 |  | $ | 0.9 |  | $ | (3.0 | ) | $ | 3.4 |
Commodity contracts - manage exposure to supplier pricing |  | Cost of sales |  | (10.6 | ) | (4.8 | ) | (34.4 | ) | 2.1 |
Interest rate contracts - manage exposure for outstanding debt |  | Interest expense |  | (0.1 | ) | — |  | (0.2 | ) | — |
Interest rate contracts - manage exposure for forecasted Rexam financing |  | Debt refinancing and other costs |  | — |  | (10.0 | ) | — |  | — |
Foreign currency contracts - manage exposure to sales of products |  | Cost of sales |  | (0.2 | ) | 2.2 |  | 0.2 |  | (0.2 | )
Foreign currency contracts - manage exposure for transactions between segments |  | Selling, general and administrative |  | — |  | (4.4 | ) | — |  | (19.3 | )
Foreign currency contracts - manage exposure for proposed acquisition of Rexam |  | Business consolidation and other activities |  | — |  | (36.3 | ) | — |  | — |
Equity contracts |  | Selling, general and administrative |  | — |  | (6.4 | ) | — |  | (3.9 | )
Total |  |  |  | $ | (8.8 | ) | $ | (58.8 | ) | $ | (37.4 | ) | $ | (17.9 | )
The changes in accumulated other comprehensive earnings (loss) for effective derivatives were as follows:
|  | Three Months Ended September 30, |  | Nine Months Ended September 30, |
($ in millions) |  | 2015 |  | 2014 |  | 2015 |  | 2014 |
Amounts reclassified into earnings: |  |  |  |  |  |  |  |  |
Commodity contracts |  | $ | 7.1 |  | $ | 22.7 |  | $ | 8.5 |  | $ | 37.4 |
Interest rate contracts |  | — |  | (0.1 | ) | 0.1 |  | 0.2 |
Currency exchange contracts |  | (0.3 | ) | 0.1 |  | 0.2 |  | (0.2 | )
Change in fair value of cash flow hedges: |  |  |  |  |  |  |  |  |
Commodity contracts |  | (11.9 | ) | 1.4 |  | (22.9 | ) | 8.1 |
Interest rate contracts |  | (0.3 | ) | 0.2 |  | (0.6 | ) | (0.2 | )
Currency exchange contracts |  | 4.1 |  | (0.7 | ) | (1.9 | ) | (1.9 | )
Foreign currency and tax impacts |  | (1.0 | ) | (2.0 | ) | 2.3 |  | (5.3 | )
|  | $ | (2.3 | ) | $ | 21.6 |  | $ | (14.3 | ) | $ | 38.1 |

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13537-108611 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13504-108611 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13433-108611 + Details
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