Derivative Financial Instruments

9 Months Ended

Sep. 30, 2011

Summary of Derivative Instruments [Abstract]

Derivative Financial Instruments

DERIVATIVE FINANCIAL INSTRUMENTS

We utilize derivative financial instruments to mitigate our exposure to certain market risks associated with our ongoing operations. The primary risks that we seek to manage through the use of derivative financial instruments include interest rate risk, currency exchange risk, and commodity price risk. All derivative financial instruments are recorded at fair value on our Condensed Consolidated Balance Sheets. We do not use derivative financial instruments for trading or speculative purposes. While certain of our derivative instruments are designated as hedging instruments, we also enter into derivative instruments that are designed to hedge a risk, but are not designated as hedging instruments (referred to as an “economic hedge” or “non-designated hedges”). Changes in the fair value of these non-designated hedging instruments are recognized in the expense line item on our Condensed Consolidated Statements of Operations that is consistent with the nature of the hedged risk. We are exposed to counterparty credit risk on all of our derivative financial instruments. We have established and maintain strict counterparty credit guidelines and enter into hedges only with financial institutions that are investment grade or better. We continuously monitor our counterparty credit risk and utilize numerous counterparties to minimize our exposure to potential defaults. We do not require collateral under these agreements.

The fair value of our forward contracts (including cross currency swaps) and option contracts is determined using standard valuation models. The significant inputs used in these models are readily available in public markets or can be derived from observable market transactions and, therefore, our derivative contracts have been classified as Level 2. Inputs used in these standard valuation models include the applicable exchange or market rate, forward rates, and discount rates. The standard valuation model for our option contracts also uses implied volatility as an additional input. The discount rates are based on the historical rates for the currencies specific to the instrument being valued, and the implied volatility specific to individual options is based on quoted rates from a widely used third party resource.

The following table summarizes the fair value of our assets and liabilities related to derivative financial instruments and the respective line items in which they were recorded on our Condensed Consolidated Balance Sheets as of the dates presented (in millions):

	Location – Balance Sheets	September 30, 2011		December 31, 2010
Assets:
Derivatives designated as hedging instruments:
Non-U.S. currency contracts(A)	Prepaid expenses and other current assets	$	40	$	11
Non-U.S. currency contracts	Other noncurrent assets, net	31		13
Total		71		24
Derivatives not designated as hedging instruments:
Non-U.S. currency contracts	Prepaid expenses and other current assets	5		—
Commodity contracts	Prepaid expenses and other current assets	3		4
Commodity contracts	Other noncurrent assets, net	—		1
Total		8		5
Total Assets		$	79	$	29
Liabilities:
Derivatives designated as hedging instruments:
Non-U.S. currency contracts(A)	Accounts payable and accrued expenses	$	27	$	17
Non-U.S. currency contracts	Other noncurrent liabilities, net	—		1
Total		27		18
Derivatives not designated as hedging instruments:
Non-U.S. currency contracts	Accounts payable and accrued expenses	—		7
Total Liabilities		$	27	$	25

___________________________ 

^(A)  Amounts include the gross interest receivable or payable on our cross currency swap agreements.

Fair Value Hedges

We utilized certain interest rate swap agreements designated as fair value hedges to mitigate our exposure to changes in the fair value of fixed-rate debt resulting from fluctuations in interest rates. The gain or loss on the derivative and the offsetting gain or loss on the hedged item attributable to the hedged risk were recognized immediately in interest expense, net – third party on our Condensed Consolidated Statements of Operations. As of September 30, 2011 and December 31, 2010, we had no fair value hedges outstanding. The following table summarizes the effect of our derivative financial instruments designated as fair value hedges on our Condensed Consolidated Statements of Operations for the periods presented (in millions):

		Third Quarter					First Nine Months
Fair Value Hedging Instruments(A)	Location - Statements of Operations	2011		2010			2011		2010
Interest rate swap agreements	Interest expense, net – third party	$	—	$	(3	)	$	—	$	(10	)
Fixed-rate debt	Interest expense, net – third party	—		3			—		10

 ___________________________

^(A)  The amount of ineffectiveness associated with these hedging instruments was not material.

Cash Flow Hedges

We use cash flow hedges to mitigate our exposure to changes in cash flows attributable to currency fluctuations associated with certain forecasted transactions, including purchases of raw materials and services denominated in non-functional currencies, the receipt of interest and principal on intercompany loans denominated in non-functional currencies, and the payment of interest and principal on third party debt denominated in a non-functional currency. Effective changes in the fair value of these cash flow hedging instruments are recognized in accumulated other comprehensive income (loss) (AOCI) on our Condensed Consolidated Balance Sheets. The effective changes are then recognized in the period that the forecasted purchases or payments impact earnings in the expense line item on our Condensed Consolidated Statements of Operations that is consistent with the nature of the underlying hedged item. Any changes in the fair value of these cash flow hedges that are the result of ineffectiveness are recognized immediately in the expense line item on our Condensed Consolidated Statements of Operations that is consistent with the nature of the underlying hedged item. The following table summarizes our outstanding cash flow hedges as of the dates presented (all contracts denominated in a non-U.S. currency have been converted into USD using the period end spot rate):

	September 30, 2011		December 31, 2010
Type	Notional Amount	Latest Maturity	Notional Amount	Latest Maturity
Non-U.S. currency hedges	USD 1.6 billion	June 2021	USD 1.3 billion	June 2021

The following tables summarize the net of tax effect of our derivative financial instruments designated as cash flow hedges on our AOCI and Condensed Consolidated Statements of Operations for the periods presented (in millions):

	Amount of Gain (Loss) Recognized in AOCI on  Derivative Instruments(A)
	Third Quarter				First Nine Months
Cash Flow Hedging Instruments	2011		2010		2011		2010
Non-U.S. currency contracts	$	38	$	2	$	21	$	(21	)

		Amount of Gain (Loss) Reclassified from  AOCI into Earnings(B)
		Third Quarter					First Nine Months
Cash Flow Hedging Instruments	Location - Statements of Operations	2011		2010			2011		2010
Non-U.S. currency contracts	Cost of sales	$	1	$	(2	)	$	2	$	(4	)
Non-U.S. currency contracts(C)	Other nonoperating income (expense), net	51		(6		)	9		(16		)
Total		$	52	$	(8	)	$	11	$	(20	)

 ___________________________

^(A)  The amount of ineffectiveness associated with these hedging instruments was not material.

^(B)  Over the next 12 months, deferred gains totaling $2 million are expected to be reclassified from AOCI on our Condensed Consolidated Balance Sheets into the expense line item on our Condensed Consolidated Statements of Operations that is consistent with the nature of the underlying hedged item as the forecasted transactions occur.

^(C)  The gain (loss) recognized on these currency contracts is offset by the gain (loss) recognized on the remeasurement of the underlying debt instruments; therefore, there is a minimal consolidated net effect in other nonoperating expense, net on our Condensed Consolidated Statements of Operations.

Economic (Non-designated) Hedges

We periodically enter into derivative instruments that are designed to hedge various risks, but are not designated as hedging instruments. These hedged risks include those related to currency and commodity price fluctuations associated with certain forecasted transactions, including purchases of aluminum, sugar, and vehicle fuel. At times, we also enter into other short-term non-designated hedges to mitigate our exposure to changes in cash flows attributable to currency fluctuations associated with short-term intercompany loans and certain cash equivalents denominated in non-functional currencies. The following table summarizes our outstanding economic hedges as of the dates presented:

	September 30, 2011		December 31, 2010
Type	Notional Amount	Latest Maturity	Notional Amount	Latest Maturity
Non-U.S. currency hedges	USD 285 million	December 2011	USD 371 million	February 2011
Commodity hedges	USD 59 million	December 2012	USD 35 million	October 2012

Changes in the fair value of outstanding economic hedges are recognized each reporting period in the expense line item on our Condensed Consolidated Statements of Operations that is consistent with the nature of the hedged risk. The following table summarizes the gains (losses) recognized from our non-designated derivative financial instruments on our Condensed Consolidated Statements of Operations for the periods presented (in millions):

	Third Quarter					First Nine Months
Location - Statements of Operations	2011			2010		2011			2010
Cost of sales	$	(2	)	$	3	$	(1	)	$	—
Selling, delivery, and administrative expenses	—			2		4			1
Other nonoperating expense, net(A)	36			—		20			—
Total	$	34		$	5	$	23		$	1

 ___________________________

^(A)  The gain recognized on these currency contracts is offset by the loss recognized on the remeasurement of the underlying hedged items; therefore, there is a minimal consolidated net effect in other nonoperating expense, net on our Condensed Consolidated Statements of Operations.

Mark-to-market gains/losses related to our non-designated commodity hedges are recognized in the earnings of our Corporate segment until such time as the underlying hedged transaction affects the earnings of our Europe operating segment. In the period the underlying hedged transaction occurs, the accumulated mark-to-market gains/losses related to the hedged transaction are reclassified from the earnings of our Corporate segment into the earnings of our Europe operating segment. This treatment allows our Europe operating segment to reflect the true economic effects of the underlying hedged transaction in the period the hedged transaction occurs without experiencing the mark-to-market volatility associated with these non-designated commodity hedges.

As of September 30, 2011, the amount of net mark-to-market gains included in our Corporate segment on non-designated commodity hedges was not significant. Gains/losses held at the Corporate segment are reclassified into the earnings of our Europe operating segment when the underlying hedged transactions occur. For additional information about our segment reporting, refer to Note 12. The following table summarizes the deferred gain (loss) activity in our Corporate segment during the first nine months of 2011 (in millions):

Gains (Losses) Deferred at Corporate Segment	Cost of Sales			SD&A			Total
Balance at December 31, 2010	$	1		$	1		$	2
Gains recognized during the period and recorded in the Corporate segment, net	—			3			3
Less: Gains transferred to the Europe operating segment, net	(1		)	(4		)	(5		)
Balance at September 30, 2011	$	—		$	—		$	—

Net Investment Hedges

In 2011, we entered into currency forwards designated as net investment hedges of our non-U.S. subsidiaries. Changes in the fair value of these hedges resulting from currency exchange rate changes are recognized in AOCI on our Condensed Consolidated Balance Sheets to offset the change in the carrying value of the net investment being hedged. Any changes in the fair value of these hedges that are the result of ineffectiveness are recognized immediately in other nonoperating expense, net on our Condensed Consolidated Statements of Operations. At September 30, 2011, these hedges were an asset of $22 million, which was recorded in prepaid expenses and other current assets on our Condensed Consolidated Balance Sheets. During the third quarter and first nine months of 2011, we recorded a net of tax gain of $20 million and $14 million, respectively, in AOCI on our Condensed Consolidated Balance Sheets related to these hedges. During the third quarter and first nine months of 2011, the amount of ineffectiveness associated with these hedges was not material. The following table summarizes our outstanding instruments designated as net investment hedges as of the dates presented:

	September 30, 2011		December 31, 2010
Type	Notional Amount	Maturity Date	Notional Amount	Maturity Date
Non-U.S. currency hedges	USD 400 million	December 2011	n/a	n/a