Fair Value Measurements and Financial Instruments

9 Months Ended

Sep. 30, 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, forward-starting interest rate swaps, 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 forward-starting interest rate swaps to mitigate the risk of variability in interest rate for future debt issuances 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 September 30, 2020 and December 31, 2019:


	Assets					Liabilities
	Account	Fair Value				Account	Fair Value
Designated derivative instruments		September 30, 2020		December 31, 2019			September 30, 2020		December 31, 2019
Interest rate swap contracts	Other current assets	$	—	$	—	Other accruals	$	—	$	—
Interest rate swap contracts	Other assets	15		4		Other liabilities	—		—
Forward-starting interest rate swaps	Other current assets	—		—		Other accruals	—		—
Forward-starting interest rate swaps	Other assets	—		—		Other liabilities	4		—
Foreign currency contracts	Other current assets	14		6		Other accruals	28		15
Foreign currency contracts	Other assets	—		—		Other liabilities	29		14
Commodity contracts	Other current assets	1		—		Other accruals	—		—
Total designated		$	30	$	10		$	61	$	29

Other financial instruments
Marketable securities	Other current assets	$	80	$	23
Total other financial instruments		$	80	$	23

The carrying amount of cash, cash equivalents, marketable securities, accounts receivable and short-term debt approximated fair value as of September 30, 2020 and December 31, 2019. The estimated fair value of the Company’s long-term debt, including the current portion, as of September 30, 2020 and December 31, 2019, was $8,070 and $8,056, respectively, and the related carrying value was $7,227 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 the cumulative basis adjustment for fair value hedges as of:


	September 30, 2020		December 31, 2019
Long-term debt:
Carrying amount of hedged item	$	414	$	403
Cumulative hedging adjustment included in the carrying amount	15		4

The following tables present the notional values as of:


	September 30, 2020
	Foreign Currency Contracts		Foreign Currency Debt		Interest Rate Swaps		Forward-Starting Interest Rate Swaps		Commodity Contracts		Total
Fair Value Hedges	$	586	$	—	$	400	$	—	$	—	$	986
Cash Flow Hedges	797		—		—		300		16		1,113
Net Investment Hedges	585		3,487		—		—		—		4,072


	December 31, 2019
	Foreign Currency Contracts		Foreign Currency Debt		Interest Rate Swaps		Forward-Starting 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 tables present the location and amount of gains (losses) recognized on the Company’s Condensed Consolidated Statements of Income:


	Three Months Ended September 30,
	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	$	—	$	—	$	2	$	—	$	—	$	(2)
Hedged items	—		—		(2)		—		—		2
Foreign currency contracts designated as fair value hedges:
Derivative instrument	—		(10)		—		—		—		—
Hedged items	—		10		—		—		—		—
Foreign currency contracts designated as cash flow hedges:
Amount reclassified from OCI	(1)		—		—		1		—		—
Commodity contracts designated as cash flow hedges:
Amount reclassified from OCI	(1)		—		—		—		—		—
Total gain (loss) on hedges recognized in income	$	(2)	$	—	$	—	$	1	$	—	$	—


	Nine Months Ended September 30,
	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	$	—	$	—	$	(11)	$	—	$	—	$	(15)
Hedged items	—		—		11		—		—		15
Foreign currency contracts designated as fair value hedges:
Derivative instrument	—		29		—		—		10		—
Hedged items	—		(29)		—		—		(10)		—
Foreign currency contracts designated as cash flow hedges:
Amount reclassified from OCI	6		—		—		5		—		—
Commodity contracts designated as cash flow hedges:
Amount reclassified from OCI	(2)		—		—		1		—		—
Total gain (loss) on hedges recognized in income	$	4	$	—	$	—	$	6	$	—	$	—

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


	Three Months Ended
	September 30,
	2020		2019
Foreign currency contracts designated as cash flow hedges:
Gain (loss) recognized in OCI	$	(7)	$	7

Forward-starting interest rate swaps designated as cash flow hedges:
Gain (loss) recognized in OCI	4		—

Commodity contracts designated as cash flow hedges:
Gain (loss) recognized in OCI	2		(1)
Foreign currency contracts designated as net investment hedges:
Gain (loss) on instruments	(21)		23
Gain (loss) on hedged items	21		(23)
Foreign currency debt designated as net investment hedges:
Gain (loss) on instruments	(171)		100
Gain (loss) on hedged items	171		(100)
Total unrealized gain (loss) on hedges recognized in OCI	$	(1)	$	6


	Nine Months Ended
	September 30,
	2020		2019
Foreign currency contracts designated as cash flow hedges:
Gain (loss) recognized in OCI	$	6	$	2
Forward-starting interest rate swaps designated as cash flow hedges:
Gain (loss) recognized in OCI	(4)		—
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	(8)		22
Gain (loss) on hedged items	8		(22)
Foreign currency debt designated as net investment hedges:
Gain (loss) on instruments	(174)		105
Gain (loss) on hedged items	174		(105)
Total unrealized gain (loss) on hedges recognized in OCI	$	2	$	3