Derivative and Other Financial Instruments

9 Months Ended

Sep. 30, 2012

General Discussion of Derivative Instruments and Hedging Activities [Abstract]

Derivative Financial Instruments

Derivative and Other Financial Instruments

Fair Value Measurements

Under GAAP a framework exists for measuring fair value, providing a three-tier hierarchy of pricing inputs used to report assets and liabilities that are adjusted to fair value. Level 1 includes inputs such as quoted prices which are available in active markets for identical assets or liabilities as of the report date. Level 2 includes inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 3 includes unobservable pricing inputs that are not corroborated by market data or other objective sources. The Company has no items valued using Level 3 inputs other than certain pension plan assets.

The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability. 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 measured at fair value and their placement within the fair value hierarchy.

The Company applies a market approach to value its commodity price hedge contracts. Prices from observable markets are used to develop the fair value of these financial instruments and they are reported under Level 1. The Company uses an income approach to value its foreign exchange forward contracts. These contracts are valued using a discounted cash flow model that calculates the present value of future cash flows under the terms of the contracts using market information as of the reporting date, such as foreign exchange spot and forward rates, and are reported under Level 2 of the fair value hierarchy.

Fair value disclosures for financial assets and liabilities that were accounted for at fair value on a recurring basis are provided later in this note. In addition, see Note H for fair value disclosures related to debt.

Derivative Financial Instruments

In the normal course of business the Company is subject to risk from adverse fluctuations in currency exchange rates, interest rates and commodity prices. The Company manages these risks through a program that includes the use of derivative financial instruments, primarily swaps and forwards. Counter-parties to these contracts are major financial institutions. The Company is exposed to credit loss in the event of nonperformance by these counter-parties. The Company does not use derivative instruments for trading or speculative purposes.

The Company’s objective in managing exposure to market risk is to limit the impact on earnings and cash flow. The extent to which the Company uses such instruments is dependent upon its access to these contracts in the financial markets and its success using other methods, such as netting exposures in the same currencies to mitigate foreign exchange risk and using sales agreements that permit the pass-through of commodity price and foreign exchange rate risk to customers.

For derivative financial instruments accounted for in hedging relationships, the Company formally designates and documents, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective and the manner in which effectiveness will be assessed. The Company formally assesses, both at inception and at least quarterly thereafter, whether the hedging relationships are effective in offsetting changes in fair value or cash flows of the related underlying exposures. Any ineffective portion of the change in fair value of the instruments is recognized immediately in earnings.

Cash Flow Hedges

The Company designates certain derivative financial instruments as cash flow hedges. No components of the hedging instruments are excluded from the assessment of hedge effectiveness. Changes in fair value of outstanding derivatives accounted for as cash flow hedges, except any ineffective portion, are recorded in other comprehensive income until earnings are impacted by the hedged transaction. Classification of the gain or loss in the Consolidated Statements of Operations upon release from comprehensive income is the same as that of the underlying exposure. Contracts outstanding at September 30, 2012 mature between one and thirty-six months.

When the Company discontinues hedge accounting because it is no longer probable that an anticipated transaction will occur in the originally specified period, changes to fair value accumulated in other comprehensive income are recognized immediately in earnings.

The Company uses commodity forwards to hedge anticipated purchases of various commodities, including aluminum, fuel oil and natural gas and these exposures are hedged by a central treasury unit.

The Company also designates certain foreign exchange contracts as cash flow hedges of anticipated foreign currency denominated sales or purchases. The Company manages these risks at the operating unit level. Often the hedging of foreign currency risk is performed in concert with related commodity price hedges.

The following table sets forth financial information about the impact on Accumulated Other Comprehensive Income (“AOCI”) and earnings from changes in fair value related to derivative instruments.

	Amount of gain/(loss)						Amount of gain/(loss)
	recognized in AOCI						reclassified from AOCI
	(effective portion)						into earnings
	Quarter			Nine months			Quarter			Nine months
	ended			ended			ended			ended
Derivatives in cash flow hedges	September 30, 2012			September 30, 2012			September 30, 2012			September 30, 2012
Foreign exchange	$	—		$	(3	)	$	—		$	—		(1)
Commodities	(58		)	(73		)	(21		)	(39		)	(2)
Total	$	(58	)	$	(76	)	$	(21	)	$	(39	)

	Amount of gain/(loss)						Amount of gain/(loss)
	recognized in AOCI						reclassified from AOCI
	(effective portion)						into earnings
	Quarter			Nine months			Quarter			Nine months
	ended			ended			ended			ended
Derivatives in cash flow hedges	September 30, 2011			September 30, 2011			September 30, 2011			September 30, 2011
Foreign exchange	$	(1	)	$	(5	)	$	(2	)	$	(3	)	(3)
Commodities	(41		)	(41		)	6			22			(4)
Total	$	(42	)	$	(46	)	$	4		$	19

(1) Within the Statement of Operations for the three months ended September 30, 2012, a gain of $3 was recognized in cost of products sold and a loss of $3 was recognized in net sales. During the nine months ended September 30, 2012, a gain of $10 was recognized in cost of products sold and a loss of $10 recognized in net sales.

(2) Within the Statement of Operations for the three months ended September 30, 2012, a loss of $28 was recognized in cost of products sold and a tax benefit of $7 was recognized in income tax expense. During the nine months ended September 30, 2012, a loss of $51 was recognized in cost of products sold and a tax benefit of $12 was recognized in income tax expense.

(3) Within the Statement of Operations for the three months ended September 30, 2011, a gain of $1 was recognized in cost of products sold and a loss of $3 was recognized in net sales. During the nine months ended September 30, 2011, a loss of $2 was recognized in net sales and a loss of $1 was recognized in cost of products sold.

(4) Within the Statement of Operations for the three months ended September 30, 2011, a gain of $8 was recognized in cost of products sold and $2 was recognized as additional income tax expense. During the nine months ended September 30, 2011, a gain of $30 was recognized in cost of products sold and $8 was recognized as additional income tax expense.

For the twelve month period ending September 30, 2013, a net loss of $19 ($14, net of tax) is expected to be reclassified to earnings. No amounts were reclassified during the nine months ended September 30, 2012 and 2011 in connection with anticipated transactions that were no longer considered probable. For the nine months ended September 30, 2012, the ineffective portion of the Company's hedges recorded in earnings was a loss of $4 ($3, net of tax).

Fair Value Hedges and Contracts Not Designated as Hedges

The Company designates certain derivative financial instruments as fair value hedges of recognized foreign-denominated assets and liabilities, generally trade accounts receivable and payable and unrecognized firm commitments. The notional values and maturity dates of the derivative instruments coincide with those of the hedged items. Changes in fair value of the derivative financial instruments, excluding time value, are offset by changes in fair value of the related hedged items.

Other than for firm commitments, amounts related to time value are excluded from the assessment and measurement of hedge effectiveness and are reported in earnings. Less than $1 was reported in earnings for the nine months ended September 30, 2012.

Certain derivative financial instruments, including foreign exchange contracts related to intercompany debt, were not designated or did not qualify for hedge accounting; however, they are effective economic hedges as the changes in their fair value, except for time value, are offset by changes in re-measurement of the related hedged items. The Company’s primary use of these derivative instruments is to offset the earnings impact that fluctuations in foreign exchange rates have on certain monetary assets and liabilities denominated in nonfunctional currencies. Changes in fair value of these derivative instruments are immediately recognized in earnings as foreign exchange adjustments.

The impact on earnings from foreign exchange contracts designated as fair value hedges were gains of $3 and $4 for the three and nine months ended September 30, 2012 and a loss of $4 for the three months ended September 30, 2011. The impact on earnings from foreign exchange contracts not designated as hedges were losses of $3 and $6 for the three and nine months ended September 30, 2012 and losses of $25 and $6 for the same periods in 2011. These adjustments were reported within translation and foreign exchange in the Consolidated Statements of Operations and were offset by changes in the fair values of the related hedged item.

Net Investment Hedges

During the nine months ended September 30, 2012, the Company designated certain derivative and non-derivative financial instruments (debt) as hedges of its net investment in a euro-based subsidiary to offset €417 ($532 as of September 30, 2012) of foreign currency exposure related to the investment. The change in value of the hedging instruments is reported in accumulated other comprehensive income within shareholders' equity. The net assets of the Company's euro-based subsidiary are re-measured using the foreign currency exchange rate in effect at the balance sheet date with any adjustment reported in cumulative translation adjustments within accumulated other comprehensive income. As of September 30, 2012, the unrealized foreign currency transaction gain from the re-measurement of the non-derivative financial instruments was a loss of approximately $4 ($3, net of tax) and the aggregate fair value of the derivative financial instruments was less than $1 with both amounts reported in accumulated other comprehensive income.

The following table sets forth the fair value hierarchy for the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2012 and December 31, 2011, respectively.

Derivative Assets	Balance Sheet Classification	Fair Value Hierarchy	September 30, 2012		December 31, 2011
Derivatives designated as hedges:
Foreign exchange	Other current assets	2	$	12	$	9
Commodities	Other current assets	1	9		4
Commodities	Other non-current assets	1	3		—
Derivatives not designated as hedges:
Foreign exchange	Other current assets	2	6		6
	Total		$	30	$	19
Derivative Liabilities	Balance Sheet Classification
Derivatives designated as hedges:
Foreign exchange	Accounts payable and accrued liabilities	2	$	11	$	10
Commodities	Accounts payable and accrued liabilities	1	19		56
Commodities	Other non-current liabilities	1	3		6
Derivatives not designated as hedges:
Foreign exchange	Accounts payable and accrued liabilities	2	5		10
	Total		$	38	$	82

The aggregate U.S. dollar-equivalent notional values of outstanding derivative instruments in the Consolidated Balance Sheets at September 30, 2012 and December 31, 2011 were:

	September 30, 2012		December 31, 2011
Derivatives in cash flow hedges:
Foreign exchange	$	357	$	480
Commodities	428		528
Derivatives in fair value hedges:
Foreign exchange	127		123
Derivatives in net investment hedges:
Foreign exchange	38		—
Derivatives not designated as hedges:
Foreign exchange	359		965