Financial Instruments and Risk Management

6 Months Ended

Jun. 30, 2020

Financial Instruments and Risk Management

Financial Instruments and Risk Management

20.    Financial Instruments and Risk Management

Policies and Procedures

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 which 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, including 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, 2020, the company had aluminum contracts limiting its aluminum exposure with notional amounts of approximately $1.5 billion, of which $1.4 billion received hedge accounting treatment. Cash flow hedges relate to forecasted transactions that will occur within the next four years. Included in shareholders’ equity at June 30, 2020, within accumulated other comprehensive earnings (loss), is a net after-tax loss of $38 million associated with these contracts. A net loss of $39 million is expected to be recognized in 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.

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 its overall borrowing costs. To achieve these objectives, the company may use a variety of interest rate swaps, collars and options to manage its mix of floating and fixed-rate debt. At June 30, 2020, the company had outstanding interest rate swap and option contracts with notional amounts of approximately $1.3 billion paying fixed rates expiring within the next two years. Approximately $1 million of net after-tax loss related to these contracts is included in accumulated other comprehensive earnings at June 30, 2020, and is expected to be recognized in earnings during the next 12 months

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. At June 30, 2020, the company had outstanding exchange rate forward and option contracts with notional amounts totaling approximately $2.8 billion. Approximately $44 million of net after-tax gain related to these contracts is included in accumulated other comprehensive earnings at June 30, 2020, of which a net gain of $19 million is expected to be recognized in earnings during the next 12 months. The contracts outstanding at June 30, 2020, expire within the next five 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 2016. The company fully settled this contract during 2019. Approximately $2 million of net after-tax loss related to this contract is included in accumulated other comprehensive earnings at June 30, 2020, and is expected to be recognized in earnings during the next 12 months.

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 through May 2021 and have a combined notional value of 2.8 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.

Collateral Calls

The company’s agreements with its financial counterparties require the posting of 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, if any, are shown within the investing section of the company’s unaudited condensed consolidated statements of cash flows. As of June 30, 2020, and December 31, 2019, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position was $54 million and $35 million, respectively, and no collateral was required to be posted.

Fair Value Measurements

Ball has classified all applicable financial derivative assets and liabilities as Level 2 within the fair value hierarchy as of June 30, 2020, and December 31, 2019, 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, 2020
($ in millions)	Balance Sheet Location	Derivatives Designated as Hedging Instruments		Derivatives not Designated as Hedging Instruments		Total
Assets:
Commodity contracts		$	26	$	—	$	26
Foreign currency contracts			—		11		11
Other contracts			—		4		4
Total current derivative contracts	Other current assets	$	26	$	15	$	41
Commodity contracts		$	4	$	—	$	4
Foreign currency contracts			68		1		69
Total noncurrent derivative contracts	Other noncurrent assets	$	72	$	1	$	73
Liabilities:
Commodity contracts		$	66	$	1	$	67
Foreign currency contracts			—		17		17
Other contracts			2		3		5
Total current derivative contracts	Other current liabilities	$	68	$	21	$	89
Commodity contracts		$	4	$	—	$	4
Foreign currency contracts			—		1		1
Total noncurrent derivative contracts	Other noncurrent liabilities	$	4	$	1	$	5

		December 31, 2019
		Derivatives Designated as Hedging Instruments		Derivatives not Designated as Hedging Instruments		Total
Assets:
Commodity contracts		$	7	$	1	$	8
Foreign currency contracts			4		43		47
Other contracts			2		—		2
Total current derivative contracts	Other current assets	$	13	$	44	$	57
Foreign currency contracts		$	15	$	—	$	15
Other contracts			1		—		1
Total noncurrent derivative contracts	Other noncurrent assets	$	16	$	—	$	16
Liabilities:
Commodity contracts		$	26	$	1	$	27
Foreign currency contracts			—		18		18
Other contracts			—		19		19
Total current derivative contracts	Other current liabilities	$	26	$	38	$	64
Commodity contracts		$	1	$	—	$	1
Total noncurrent derivative contracts	Other noncurrent liabilities	$	1	$	—	$	1

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. The company values each of its financial instruments either internally using a single valuation technique, from a reliable observable market source or from third-party software. 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. The present value discounting factor is based on the comparable time period LIBOR rate or 12-month LIBOR. Ball performs validations of the company’s internally derived fair values reported for the company’s financial instruments on a quarterly basis utilizing counterparty valuation statements. The company additionally evaluates counterparty creditworthiness and, as of June 30, 2020, has not identified any circumstances requiring the reported values of the company’s 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,
		2020				2019
($ 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	$	37	$	—	$	4	$	—
Commodity contracts - manage exposure to supplier pricing	Cost of sales		(39)		10		(11)		2
Interest rate contracts - manage exposure for outstanding debt	Interest expense		(2)		(1)		4		—
Foreign currency contracts - manage currency exposure	Selling, general and administrative		(11)		18		(1)		(15)
Cross-currency swaps - manage intercompany currency exposure	Selling, general and administrative		—		—		(14)		—
Equity contracts	Selling, general and administrative		—		12		—		33
Total		$	(15)	$	39	$	(18)	$	20

		Six Months Ended June 30,
		2020				2019
($ 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	$	37	$	1	$	6	$	—
Commodity contracts - manage exposure to supplier pricing	Cost of sales		(35)		9		(16)		3
Interest rate contracts - manage exposure for outstanding debt	Interest expense		(3)		—		8		—
Foreign currency contracts - manage currency exposure	Selling, general and administrative		7		40		(1)		43
Cross-currency swaps - manage intercompany currency exposure	Selling, general and administrative		(1)		—		9		—
Equity contracts	Selling, general and administrative		—		10		—		63
Total		$	5	$	60	$	6	$	109

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

	Three Months Ended June 30,				Six Months Ended June 30,
($ in millions)	2020		2019		2020		2019
Amounts reclassified into earnings:
Commodity contracts	$	2	$	7	$	(2)	$	10
Cross-currency swap contracts		—		14		1		(9)
Interest rate contracts		2		(4)		3		(8)
Currency exchange contracts		11		1		(7)		1
Change in fair value of cash flow hedges:
Commodity contracts		1		(19)		(29)		(5)
Interest rate contracts		(2)		—		(4)		—
Cross-currency swap contracts		—		(3)		1		40
Currency exchange contracts		(3)		6		55		4
Foreign currency and tax impacts		(1)		1		(3)		(8)
Stranded tax effects reclassified into retained earnings:
Commodity contracts		—		—		—		2
Cross-currency swap contracts		—		—		—		(5)
	$	10	$	3	$	15	$	22