Financial Instruments and Risk Management

9 Months Ended

Sep. 30, 2013

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 options and forward contracts as economic and cash flow hedges of commodity price risk where there is not an arrangement in the sales contract to match underlying purchase volumes and pricing with sales volumes and pricing.

The company had aluminum contracts limiting its aluminum exposure with notional amounts of approximately $515 million at September 30, 2013. The aluminum contracts include economic derivative instruments that are undesignated and receive mark to fair value accounting treatment, 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, 2013, within accumulated other comprehensive earnings (loss), is a net after-tax loss of $31.3 million associated with these contracts. A net loss of $20.0 million is expected to be recognized in the consolidated statement of earnings during the next 12 months, substantially all 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 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, 2013, included pay-fixed interest rate swaps, which effectively convert variable rate obligations to fixed-rate instruments.

At September 30, 2013, the company had outstanding interest rate swap contracts with notional amounts of approximately $147 million paying fixed rates expiring within the next five years. The net after-tax loss associated with these contracts included in shareholders’ equity at September 30, 2013, within accumulated other comprehensive earnings (loss), is insignificant.

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 our global operations as a result of various factors including intercompany currency denominated loans, selling our products in various currencies, purchasing raw materials 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 may use forward and option contracts to manage currency exposures. At September 30, 2013, the company had outstanding exchange forward contracts and option contracts with notional amounts totaling approximately $723 million, of which approximately $93 million used hedge accounting treatment. Approximately $0.6 million of net after-tax loss related to these contracts is included in accumulated other comprehensive earnings at September 30, 2013, of which a net loss of $0.9 million is expected to be recognized in the consolidated statement of earnings during the next 12 months. The contracts outstanding at September 30, 2013, expire within the next two years.

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. Based on current share levels in the program, each $1 change in the company’s stock price has an impact of $1.4 million on pretax earnings. During March and September 2011, the company entered into total return swaps to reduce the company’s earnings exposure to these fair value fluctuations that, after renewals, will be outstanding until March 2014 and September 2014, respectively. The swaps have a notional value of 1 million shares and 300,000 shares, respectively. As of September 30, 2013, the combined fair value of these swaps was a $1.0 million loss. All gains and losses on the total return swaps are recorded in the consolidated statement 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 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, 2013, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position was $42.9 million and no collateral was required to be posted. As of December 31, 2012, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position was $11.0 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 fair value assets and liabilities and their placement within the fair value hierarchy levels.

Fair Value of Derivative Instruments as of September 30, 2013

($ in millions)	Derivatives Designated As Hedging Instruments		Derivatives Not Designated As Hedging Instruments		Total
Assets:
Commodity contracts	$	3.5	$	2.4	$	5.9
Foreign currency contracts	0.3		2.0		2.3
Total current derivative contracts	$	3.8	$	4.4	$	8.2
Noncurrent commodity contracts	$	0.3	$	—	$	0.3
Liabilities:
Commodity contracts	$	13.2	$	2.7	$	15.9
Foreign currency contracts	1.6		10.5		12.1
Interest rate and other contracts	0.8		1.0		1.8
Total current derivative contracts	$	15.6	$	14.2	$	29.8
Noncurrent commodity contracts	$	20.2	$	0.4	$	20.6
Foreign currency contracts	0.2		—		0.2
Total noncurrent derivative contracts	$	20.4	$	0.4	$	20.8

Fair Value of Derivative Instruments as of December 31, 2012

($ in millions)	Derivatives Designated As Hedging Instruments		Derivatives Not Designated As Hedging Instruments		Total
Assets:
Commodity contracts	$	9.2	$	1.0	$	10.2
Foreign currency contracts	0.1		2.3		2.4
Other current contracts	—		0.6		0.6
Total current derivative contracts	$	9.3	$	3.9	$	13.2
Noncurrent commodity contracts	$	4.2	$	—	$	4.2
Liabilities:
Commodity contracts	$	9.0	$	0.7	$	9.7
Foreign currency contracts	2.5		5.2		7.7
Interest rate and other contracts	1.0		—		1.0
Total current derivative contracts	$	12.5	$	5.9	$	18.4
Noncurrent commodity contracts	$	5.4	$	—	$	5.4
Interest rate contracts	0.5		—		0.5
Foreign currency contracts	0.4		—		0.4
Total noncurrent derivative contracts	$	6.3	$	—	$	6.3

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 its aluminum, currency, energy 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. The company values each financial instrument 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, 2013, has not identified any circumstances requiring that the reported values of our financial instruments be adjusted.

Net receivables related to the European scrap metal program totaling $14.1 million at September 30, 2013, and $16.7 million at December 31, 2012, were classified as Level 2 within the fair value hierarchy.

Impact on Earnings from Derivative Instruments

	Three Months Ended September 30,
	2013						2012
($ in millions)	Cash Flow Hedge -  Reclassified Amount From Other Comprehensive Earnings (Loss) -  Gain (Loss)			Gain (Loss) on Derivatives Not Designated As Hedge Instruments			Cash Flow Hedge -  Reclassified Amount From Other Comprehensive Earnings (Loss) -  Gain (Loss)			Gain (Loss) on Derivatives Not Designated As Hedge Instruments
Commodity contracts (a)	$	(10.0	)	$	(0.4	)	$	(19.2	)	$	—
Interest rate contracts (b)	(0.3		)	—			(0.1		)	—
Foreign currency contracts (c)	(0.4		)	0.3			(0.3		)	(10.2		)
Equity contracts (d)	—			0.3			—			0.5
Inflation option contracts (e)	—			—			—			0.2
Total	$	(10.7	)	$	0.2		$	(19.6	)	$	(9.5	)

	Nine Months Ended September 30,
	2013						2012
($ in millions)	Cash Flow Hedge -  Reclassified Amount From Other Comprehensive Earnings (Loss) -  Gain (Loss)			Gain (Loss) on Derivatives Not Designated As Hedge Instruments			Cash Flow Hedge -  Reclassified Amount From Other Comprehensive Earnings (Loss) -  Gain (Loss)			Gain (Loss) on Derivatives Not Designated As Hedge Instruments
Commodity contracts (a)	$	(17.7	)	$	(1.9	)	$	(36.2	)	$	2.2
Interest rate contracts (b)	(0.8		)	—			(0.2		)	—
Foreign currency contracts (c)	(0.7		)	3.7			(1.4		)	(21.6		)
Equity contracts (d)	—			(1.5		)	—			1.4
Inflation option contracts (e)	—			—			—			—
Total	$	(19.2	)	$	0.3		$	(37.8	)	$	(18.0	)

(a) Gains and losses on commodity contracts are recorded in sales and cost of sales in the statements of earnings. A significant majority of these expenses were passed through to our customers, resulting in no significant impact to earnings.

(b) Gains and losses on interest contracts are recorded in interest expense in the statements of earnings.

(c) Gains and losses on foreign currency contracts to hedge the sales of products are recorded in cost of sales in the statements of earnings. Gains and losses on foreign currency hedges used for translation between segments are reflected in selling, general and administrative expenses in the statements of earnings.

(d) Gains and losses on equity contracts are recorded in selling, general and administrative expenses in the statements of earnings.

(e) Gains and losses on inflation option contracts are recorded in selling, general and administrative expenses in the statements of earnings.

The changes in accumulated other comprehensive earnings (loss) for effective derivatives were as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
($ in millions)	2013			2012			2013			2012
Amounts reclassified into earnings:
Commodity contracts	$	10.0		$	19.2		$	17.7		$	36.2
Interest rate contracts	0.3			0.1			0.8			0.2
Currency exchange contracts	0.4			0.3			0.7			1.4
Change in fair value of cash flow hedges:
Commodity contracts	(1.7		)	26.0			(46.1		)	8.6
Interest rate contracts	(0.5		)	(0.5		)	0.4			(1.3		)
Currency exchange contracts	(1.4		)	(1.1		)	1.9			(3.5		)
Foreign currency and tax impacts	(3.4		)	(15.3		)	1.5			(15.9		)
	$	3.7		$	28.7		$	(23.1	)	$	25.7