Derivatives and Hedging Activities

12 Months Ended

Dec. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company is exposed to market risk, such as fluctuations in foreign currency exchange rates, commodity prices, equity compensation liabilities, and changes in interest rates, which may result in cash flow risks. For exposures not offset within its operations, the Company may enter into various derivative transactions pursuant to its risk management policies, which prohibit holding or issuing derivative financial instruments for speculative purposes. Designation of derivative instruments is performed on a transaction basis to support hedge accounting. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the fair value or cash flows of the underlying exposures being hedged. The Company assesses the initial and ongoing effectiveness of its hedging relationships in accordance with its documented policy.

Market Risks

Foreign Currency Exchange Rate Risk

The Company manufactures and sells its products in North America, South America, Asia, Europe, and Africa. As a result, the Company’s financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets in which the Company manufactures and sells its products. The Company generally tries to use natural hedges within its foreign currency activities, including the matching of revenues and costs, to minimize foreign currency risk. Where natural hedges are not in place, the Company considers managing certain aspects of its foreign currency activities and larger transactions through the use of foreign currency options or forward contracts. Principal currencies hedged have historically included the U.S. dollar, euro, British pound, Polish zloty, Singapore dollar, Thailand bhat, South African rand, Mexican peso, and Canadian dollar.

Concentrations of Credit Risk

Financial instruments including cash equivalents and derivative contracts expose the Company to counterparty credit risk for non-performance. The Company’s counterparties for cash equivalents and derivative contracts are banks and financial institutions that meet the Company’s requirement of high credit standing. The Company’s counterparties for derivative contracts are substantial investment and commercial banks with significant experience using such derivatives. The Company manages its credit risk through policies requiring minimum credit standing and limiting credit exposure to any one counterparty and through monitoring counterparty credit risks. The Company’s concentration of credit risk related to derivative contracts at December 31, 2020 and 2019 is not material.

Other

The Company presents its derivative positions and any related material collateral under master netting agreements on a net basis. For derivatives designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness. Unrealized gains and losses associated with ineffective hedges, determined using the hypothetical derivative method, are recognized in “Cost of sales (exclusive of depreciation and amortization)” in the consolidated statements of income (loss). Derivative gains and losses included in “Accumulated other comprehensive income (loss)” for effective hedges are reclassified into operations upon recognition of the hedged transaction. Derivative gains and losses associated with undesignated hedges are recognized in “Cost of sales (exclusive of depreciation and amortization)” in the consolidated statements of income (loss).

Derivative Instruments

Foreign currency forward contracts

The Company enters into foreign currency forward purchase and sale contracts to mitigate its exposure to changes in exchange rates on certain intercompany and third-party trade receivables and payables. In managing its foreign currency exposures, the Company identifies and aggregates existing offsetting positions and then hedges residual exposures through third-party derivative contracts. The gains or losses on these contracts are recognized as foreign currency gains (losses) in “Cost of sales (exclusive of depreciation and amortization)” in the consolidated statements of income (loss). The fair value of foreign currency forward contracts is recognized in “Prepayments and other current assets” or “Accrued expenses and other current liabilities” in the consolidated balance sheets. The fair value of these derivative instruments is not considered material to the consolidated financial statements, refer to Note 10, “Fair Value of Financial Instruments” for additional information.

The following table summarizes by position the notional amounts for foreign currency forward contracts at December 31, 2020, all of which mature in the next twelve months (amounts in millions):


	Notional Amount
Long positions	$	180
Short positions	$	(176)

Cash-settled Share and Index Swap Transactions

The Company selectively uses swaps to reduce market risk associated with its deferred compensation liabilities, which increase as the Company's stock price increases and decrease as the Company's stock price decreases. The Company has entered into a cash-settled share swap agreement that moves in the opposite direction of these liabilities, allowing us to fix a portion of the liabilities at a stated amount. At December 31, 2020, the Company hedged its deferred compensation liability related to approximately 1,700,000 common share equivalents, an increase of 1,100,000 common share equivalents from December 31, 2019. In the first quarter of 2020, the Company entered into an S&P 500 index fund ETF swap agreement to further reduce its market risk, which will act as a natural hedge offsetting an equivalent amount of indexed investments in the Company's deferred compensation plans. The fair value of these swap agreements is recorded in “Prepayments and other current assets” or “Accrued expenses and other current liabilities” in the consolidated balance sheets. The fair value of these derivative instruments is not considered material to the consolidated financial statements, refer to Note 10, “Fair Value of Financial Instruments” for additional information.

Hedging Instruments

Cash Flow Hedges—Commodity Price Risk

The Company’s production processes are dependent upon the supply of certain raw materials that are exposed to price fluctuations on the open market. Commodity price forward contracts are executed to offset a portion of the exposure to potential change in prices for raw materials. Commodities hedged include copper, nickel, tin, zinc, and aluminum. The primary purpose of the Company’s commodity price forward contract activity is to manage the volatility associated with forecasted purchases for up to 18 months in the future. The Company monitors its commodity price risk exposures regularly to maximize the overall effectiveness of its commodity forward contracts. In certain instances, within this program, foreign currency forwards may be used in order to match critical terms for commodity exposure.

The Company has designated these contracts as cash flow hedging instruments. The Company records unrecognized gains and losses in other comprehensive income (loss) (“OCI or OCL”) and makes regular reclassifying adjustments into “Cost of sales (exclusive of depreciation and amortization)” within the consolidated statements of income (loss) when the underlying hedged transaction is recognized in earnings. The Company had commodity derivatives outstanding with an equivalent notional amount of $10 million and $19 million at December 31, 2020 and 2019. Substantially all of the commodity price hedge contracts mature within one year.

Net Investment Hedge – Foreign Currency Borrowings

The Company has foreign currency denominated debt, €344 million of which was designated as a net investment hedge in certain foreign subsidiaries and affiliates of the Company. Changes to its carrying value are included in the consolidated statements of changes in shareholders' equity in the foreign currency translation component of OCL and offset against the translation adjustments on the underlying net assets of those foreign subsidiaries and affiliates, which are also recorded in OCL. The Company’s debt instruments are discussed further in Note 11, “Debt and Other Financing Arrangements”.

The following table is a summary of the carrying value of derivative and non-derivative instruments designated as hedges at December 31, 2020 and 2019:


		December 31
	Balance sheets classification	2020		2019
Commodity price hedge contracts designated as cash flow hedges	Prepayments and other current assets	$	3	$	—
Foreign currency borrowings designated as net investment hedges	Long-term debt	$	420	$	850

The following table represents the amount of gain (loss) recognized in accumulated other comprehensive income (loss) before any reclassifications into net income (loss) of derivative and non-derivative instruments designated as hedges for the years ended December 31, 2020, 2019 and 2018:


	Year Ended December 31
	2020		2019		2018
Commodity price hedge contracts designated as cash flow hedges	$	4	$	1	$	—
Foreign currency borrowings designated as net investment hedges	$	(74)	$	20	$	(3)

The Company estimates approximately $4 million included in OCI or OCL at December 31, 2020 will be reclassified into net income (loss) within the following twelve months. Refer to Note 19, “Changes in Accumulated Other Comprehensive Income (Loss) by Component” for further information.