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Financial Instruments and Risk Management | 6 Months Ended
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Jun. 30, 2017
Financial Instruments and Risk Management |
Financial Instruments and Risk Management | 17. 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 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 offset 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 June 30, 2017, the company had aluminum contracts limiting its aluminum exposure with notional amounts of approximately $985 million, of which approximately $922 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 will occur within the next three years. Included in shareholders’ equity at June 30, 2017, within accumulated other comprehensive earnings (loss), is a net after-tax gain of $23 million associated with these contracts. A net after-tax gain of $17 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. There was no after-tax gain included in shareholders’ equity at June 30, 2017, within accumulated other comprehensive earnings (loss). There were no contracts outstanding at June 30, 2017. Currency Exchange Rate Risk The company’s objective in managing exposure to currency fluctuations is to limit the exposure of cash flows and earnings from 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 its 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. At June 30, 2017, the company had outstanding exchange rate forward contracts and option contracts with notional amounts totaling approximately $2 billion. Approximately $5 million of net after-tax gain related to these contracts is included in accumulated other comprehensive earnings at June 30, 2017, of which a net gain of $5 million is expected to be recognized in the unaudited condensed consolidated statement of earnings during the next 12 months. The contracts outstanding at June 30, 2017, expire within the next two years. Additionally, the company entered into a $1 billion cross-currency swap contract to partially mitigate the risk associated with foreign currency denominated intercompany debt incurred in the three months ended June 30, 2016. Approximately, $13 million of net after-tax loss related to this contract is included in accumulated other comprehensive earnings at June 30, 2017, the amount of which expected to be recognized during the next 12 months is dependent on fluctuations in currency exchange rates. As of June 30, 2017, the fair value of the cross-currency swap was a $39 million loss. The contract expires in December 2020. 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 total return swaps to reduce the company’s earnings exposure to these fair value fluctuations that will be outstanding until March 2018 and August 2017 and that have a combined notional value of 2.7 million shares. Based on the current number of shares in the program, each $1 change in the company’s stock price has an insignificant impact on pretax earnings, net of the impact of related derivatives. As of June 30, 2017, the fair value of the swap was a $3.4 million gain. 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 June 30, 2017, and December 31, 2016, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position was $24 million and $44 million, respectively, and no collateral was required to be posted. Fair Value Measurements The company has classified all applicable financial derivative assets and liabilities as Level 2 within the fair value hierarchy as of June 30, 2017, and December 31, 2016, and presented those values in the tables below. The company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
|  | June 30, 2017 |  | December 31, 2016
($ 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 |  | $ | 29 |  | $ | 2 |  | $ | 31 |  | $ | 17 |  | $ | 1 |  | $ | 18
Foreign currency contracts |  |  | 2 |  |  | 9 |  |  | 11 |  |  | 1 |  |  | — |  |  | 1
Interest rate and other contracts |  |  | — |  |  | 3 |  |  | 3 |  |  | — |  |  | 21 |  |  | 21
Total current derivative contracts |  | $ | 31 |  | $ | 14 |  | $ | 45 |  | $ | 18 |  | $ | 22 |  | $ | 40
Commodity contracts |  | $ | 6 |  | $ | — |  | $ | 6 |  | $ | 7 |  | $ | — |  | $ | 7
Interest rate and other contracts |  |  | — |  |  | — |  |  | — |  |  | 39 |  |  | — |  |  | 39
Total noncurrent derivative contracts |  | $ | 6 |  | $ | — |  | $ | 6 |  | $ | 46 |  | $ | — |  | $ | 46
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts |  | $ | 6 |  | $ | 2 |  | $ | 8 |  | $ | 3 |  | $ | — |  | $ | 3
Foreign currency contracts |  |  | — |  |  | 31 |  |  | 31 |  |  | — |  |  | 22 |  |  | 22
Total current derivative contracts |  | $ | 6 |  | $ | 33 |  | $ | 39 |  | $ | 3 |  | $ | 22 |  | $ | 25
Commodity contracts |  | $ | 1 |  | $ | — |  | $ | 1 |  | $ | — |  | $ | — |  | $ | —
Foreign currency contracts |  |  | 39 |  |  | — |  |  | 39 |  |  | — |  |  | — |  |  | —
Total noncurrent derivative contracts |  | $ | 40 |  | $ | — |  | $ | 40 |  | $ | — |  | $ | — |  | $ | —
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. Additionally, the company evaluates counterparty creditworthiness and, as of June 30, 2017, has not identified any circumstances requiring the reported values of our financial instruments be adjusted. The following table provides the effects of derivative instruments in the consolidated statement of earnings and on accumulated other comprehensive earnings (loss):
|  |  |  | Three Months Ended June 30, |
|  |  |  | 2017 |  | 2016 |
($ 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 supplier pricing |  | Cost of sales |  | $ | 9 |  | $ | (4) |  | $ | (3) |  | $ | — |
Interest rate contracts - manage exposure for forecasted Rexam financing |  | Debt refinancing and other costs |  |  | — |  |  | — |  |  | — |  |  | (4) |
Foreign currency contracts - manage general exposure with the business |  | Selling, general and administrative |  |  | — |  |  | (14) |  |  | (1) |  |  | 36 |
Foreign currency contracts - manage exposure for proposed acquisition of Rexam |  | Business consolidation and other activities |  |  | — |  |  | — |  |  | — |  |  | 1 |
Cross-currency swaps - manage exposure for proposed acquisition of Rexam |  | Business consolidation and other activities |  |  | — |  |  | — |  |  | — |  |  | 32 |
Cross-currency swaps - manage intercompany currency exposure within the business |  | Selling, general and administrative |  |  | (71) |  |  | — |  |  | 1 |  |  | — |
Cross-currency swaps - manage intercompany currency exposure within the business |  | Interest expense |  |  | 5 |  |  | — |  |  | — |  |  | — |
Commodity contracts and currency exchange contracts - attributed to the divestment business |  | Business consolidation and other activities |  |  | — |  |  | — |  |  | (4) |  |  | — |
Equity and inflation contracts |  | Selling, general and administrative |  |  | — |  |  | 13 |  |  | — |  |  | 1 |
Total |  |  |  | $ | (57) |  | $ | (5) |  | $ | (7) |  | $ | 66 |
|  |  |  | Six Months Ended June 30,
|  |  |  | 2017 |  | 2016
($ 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 |  | $ | (3) |  | $ | (2) |  | $ | 3 |  | $ | —
Commodity contracts - manage exposure to supplier pricing |  | Cost of sales |  |  | 17 |  |  | (3) |  |  | (10) |  |  | —
Interest rate contracts - manage exposure for forecasted Rexam financing |  | Debt refinancing and other costs |  |  | — |  |  | — |  |  | — |  |  | (20)
Foreign currency contracts - manage general exposure with the business |  | Selling, general and administrative |  |  | — |  |  | (29) |  |  | (1) |  |  | 36
Foreign currency contracts - manage exposure for acquisition of Rexam |  | Business consolidation and other activities |  |  | — |  |  | — |  |  | — |  |  | (87)
Cross-currency swaps - manage exposure for acquisition of Rexam |  | Business consolidation and other activities |  |  | — |  |  | — |  |  | — |  |  | (4)
Cross-currency swaps - manage intercompany currency exposure within the business |  | Selling, general and administrative |  |  | (84) |  |  | — |  |  | 1 |  |  | —
Cross-currency swaps - manage intercompany currency exposure within the business |  | Interest expense |  |  | 10 |  |  | — |  |  | — |  |  | —
Commodity contracts and currency exchange contracts - attributed to the Divestment Business |  | Business consolidation and other activities |  |  | — |  |  | — |  |  | (4) |  |  | —
Equity contracts |  | Selling, general and administrative |  |  | — |  |  | 10 |  |  | — |  |  | (1)
Total |  |  |  | $ | (60) |  | $ | (24) |  | $ | (11) |  | $ | (76)
The changes in accumulated other comprehensive earnings (loss) for effective derivatives were as follows:
|  | Three Months Ended June 30, |  | Six Months Ended June 30,
($ in millions) |  | 2017 |  | 2016 |  | 2017 |  | 2016
Amounts reclassified into earnings: |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts |  | $ | (9) |  | $ | 3 |  | $ | (14) |  | $ | 7
Cross-currency swap contracts |  |  | 66 |  |  | (1) |  |  | 74 |  |  | (1)
Commodity and currency exchange contracts attributed to the divestment business |  |  | — |  |  | 4 |  |  | — |  |  | 4
Currency exchange contracts |  |  | — |  |  | 1 |  |  | — |  |  | 1
Change in fair value of cash flow hedges: |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts |  |  | (28) |  |  | 13 |  |  | 23 |  |  | 6
Interest rate contracts |  |  |  |  |  | 1 |  |  | 1 |  |  | —
Cross-currency swap contracts |  |  | (66) |  |  | (6) |  |  | (69) |  |  | (6)
Currency exchange contracts |  |  | 2 |  |  | (3) |  |  | 1 |  |  | 1
Foreign currency and tax impacts |  |  | 15 |  |  | (2) |  |  | 21 |  |  | (2)
|  | $ | (20) |  | $ | 10 |  | $ | 37 |  | $ | 10

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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=66048111&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=73719730&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=73719730&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=73719730&loc=d3e13433-108611 + Details
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