Fair Value Measurements and Financial Instruments

3 Months Ended

Mar. 31, 2020

Fair Value Measurements and Financial Instruments

The Company uses available market information and other valuation methodologies in assessing the fair value of financial instruments. Judgment is required in interpreting market data to develop the estimates of fair value and, accordingly, changes in assumptions or the estimation methodologies may affect the fair value estimates. The Company is exposed to the risk of credit loss in the event of nonperformance by counterparties to financial instrument contracts; however, nonperformance is considered unlikely and any nonperformance is unlikely to be material, as it is the Company’s policy to contract only with diverse, credit-worthy counterparties based upon both strong credit ratings and other credit considerations.

The Company is exposed to market risk from foreign currency exchange rates, interest rates and commodity price fluctuations. Volatility relating to these exposures is managed on a global basis by utilizing a number of techniques, including working capital management, sourcing strategies, selling price increases, selective borrowings in local currencies and entering into selective derivative instrument transactions, issued with standard features, in accordance with the Company’s treasury and risk management policies, which prohibit the use of derivatives for speculative purposes and leveraged derivatives for any purpose. It is the Company’s policy to enter into derivative instrument contracts with terms that match the underlying exposure being hedged.

The Company’s derivative instruments include interest rate swap contracts, foreign currency contracts and commodity contracts. The Company utilizes interest rate swap contracts to manage its targeted mix of fixed and floating rate debt, and these swaps are valued using observable benchmark rates (Level 2 valuation). The Company utilizes foreign currency contracts, including forward and swap contracts, option contracts, local currency deposits and local currency borrowings to hedge portions of its foreign currency purchases, assets and liabilities arising in the normal course of business and the net investment in certain foreign subsidiaries. These contracts are valued using observable market rates (Level 2 valuation). Commodity futures contracts are utilized to hedge the purchases of raw materials used in production. These contracts are measured using quoted commodity exchange prices (Level 1 valuation). The duration of foreign currency and commodity contracts generally does not exceed 12 months.

The following table summarizes the fair value of the Company’s derivative instruments and other financial instruments which are carried at fair value in the Company’s Consolidated Balance Sheets at March 31, 2020 and December 31, 2019:



	Assets					Liabilities
	Account	Fair Value				Account	Fair Value
Designated derivative instruments		March 31, 2020		December 31, 2019			March 31, 2020		December 31, 2019
Interest rate swap contracts	Other current assets	$	—	$	—	Other accruals	$	—	$	—
Interest rate swap contracts	Other assets	16		4		Other liabilities	—		—
Foreign currency contracts	Other current assets	58		6		Other accruals	8		15
Foreign currency contracts	Other assets	—		—		Other liabilities	9		14
Commodity contracts	Other current assets	—		—		Other accruals	1		—
Total designated		$	74	$	10		$	18	$	29

Other financial instruments
Marketable securities	Other current assets	$	43	$	23
Total other financial instruments		$	43	$	23

The carrying amount of cash, cash equivalents, marketable securities, accounts receivable and short-term debt approximated fair value as of March 31, 2020 and December 31, 2019. The estimated fair value of the Company’s long-term debt, including the current portion, as of March 31, 2020 and December 31, 2019, was $7,909 and $8,056, respectively, and the related carrying value was $7,591 and $7,587, respectively. The estimated fair value of long-term debt was derived principally from quoted prices on the Company’s outstanding fixed-term notes (Level 2 valuation).

The following amounts were recorded on the Condensed Consolidated Balance Sheet related to cumulative basis adjustment for fair value hedges as of:



	March 31, 2020		December 31, 2019
Long-term debt:
Carrying amount of hedged item	$	415	$	403
Cumulative hedging adjustment included in the carrying amount	16		4

The following tables present the notional values as of:



	March 31, 2020
	Foreign Currency Contracts		Foreign Currency Debt		Interest Rate Swaps		Commodity Contracts		Total
Fair Value Hedges	$	535	$	—	$	400	$	—	$	935
Cash Flow Hedges	718		—		—		21		739
Net Investment Hedges	473		3,752		—		—		4,225



	December 31, 2019
	Foreign Currency Contracts		Foreign Currency Debt		Interest Rate Swaps		Commodity Contracts		Total
Fair Value Hedges	$	388	$	—	$	400	$	—	$	788
Cash Flow Hedges	761		—		—		20		781
Net Investment Hedges	478		3,856		—		—		4,334

The following table presents the location and amount of gains (losses) recognized on the Company’s Condensed Consolidated Statements of Income:



	Three Months Ended March 31,
	2020								2019
	Cost of sales		Selling, general and administrative expenses			Interest (income) expense, net			Cost of sales		Selling, general and administrative expenses			Interest (income) expense, net
Gain (loss) on hedges recognized in income:
Interest rate swaps designated as fair value hedges:
Derivative instrument	$	—	$	—		$	(12	)	$	—	$	—		$	(3	)
Hedged items	—		—			12			—		—			3
Foreign currency contracts designated as fair value hedges:
Derivative instrument	—		24			—			—		(1		)	—
Hedged items	—		(24		)	—			—		1			—
Foreign currency contracts designated as cash flow hedges:
Amount reclassified from OCI	2		—			—			3		—			—
Commodity contracts designated as cash flow hedges:
Amount reclassified from OCI	1		—			—			1		—			—
Total gain (loss) on hedges recognized in income	$	3	$	—		$	—		$	4	$	—		$	—

The following table presents the location and amount of unrealized gains (losses) included in OCI:



	Three Months Ended
	March 31,
	2020			2019
Foreign currency contracts designated as cash flow hedges:
Gain (loss) recognized in OCI	$	25		$	(3	)
Commodity contracts designated as cash flow hedges:
Gain (loss) recognized in OCI	—			1
Foreign currency contracts designated as net investment hedges:
Gain (loss) on instruments	25			6
Gain (loss) on hedged items	(25		)	(6		)
Foreign currency debt designated as net investment hedges:
Gain (loss) on instruments	65			29
Gain (loss) on hedged items	(65		)	(29		)
Total unrealized gain (loss) on hedges recognized in OCI	$	25		$	(2	)