Fair Value Measurements and Financial Instruments

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, 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. Hedge ineffectiveness, if any, is not material for any period presented. Provided below are details of the Company’s exposures by type of risk and derivative instruments by type of hedge designation.

Valuation Considerations

Assets and liabilities carried at fair value are classified as follows:

Level 1: Based upon quoted market prices in active markets for identical assets or liabilities.

Level 2: Based upon observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Based upon unobservable inputs reflecting the reporting entity’s own assumptions.

Foreign Exchange Risk

As the Company markets its products in over 200 countries and territories, it is exposed to currency fluctuations related to manufacturing and selling its products in currencies other than the U.S. dollar. The Company manages its foreign currency exposures through a combination of cost-containment measures, selling price increases and the hedging of certain costs in an effort to minimize the impact on earnings of foreign currency rate movements.

The Company primarily utilizes foreign currency contracts, including forward, option and swap contracts, local currency deposits and local currency borrowings to hedge portions of its exposures relating to foreign currency purchases, assets and liabilities created in the normal course of business and the net investment in certain foreign subsidiaries. The duration of foreign currency contracts generally does not exceed 12 months and the contracts are valued using observable market rates (Level 2 valuation).

Interest Rate Risk

The Company manages its targeted mix of fixed and floating rate debt with debt issuances and by entering into interest rate swaps in order to mitigate fluctuations in earnings and cash flows that may result from interest rate volatility. The notional amount, interest payment and maturity date of the swaps match the principal, interest payment and maturity date of the related debt in all cases, and the swaps are valued using observable benchmark rates (Level 2 valuation).

Commodity Price Risk

The Company is exposed to price volatility related to raw materials used in production, such as resins, tropical oils, essential oils, tallow, corn and soybeans. The Company manages its raw material exposures through a combination of cost containment measures, ongoing productivity initiatives and the limited use of commodity hedging contracts. Futures contracts are used on a limited basis, primarily in the Pet Nutrition segment, to manage volatility related to raw material inventory purchases of certain traded commodities, and these contracts are measured using quoted commodity exchange prices (Level 1 valuation). The duration of the commodity contracts generally does not exceed 12 months.

Credit Risk

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 with highly rated, diverse counterparties.

The following summarizes the fair value of the Company’s derivative instruments and other financial instruments at December 31, 2011 and December 31, 2010:



	Assets					Liabilities
	Account	Fair Value				Account	Fair Value
Designated derivative instruments		12/31/11		12/31/10			12/31/11		12/31/10
Interest rate swap contracts	Other current assets	$	2	$	—	Other accruals	$	—	$	—
Interest rate swap contracts	Other assets	40		22		Other liabilities	2		7
Foreign currency contracts	Other current assets	8		10		Other accruals	6		10
Foreign currency contracts	Other assets	28		—		Other liabilities	—		—
Commodity contracts	Other current assets	—		4		Other accruals	1		—
Total designated		$	78	$	36		$	9	$	17

Derivatives not designated
Foreign currency contracts	Other assets	$	3	$	—	Other accruals	$	—	$	2
Total not designated		$	3	$	—		$	—	$	2

Total derivative instruments		$	81	$	36		$	9	$	19

Other financial instruments
Marketable securities	Other current assets	$	72	$	74
Available-for-sale securities	Other assets	236		228
Total other financial instruments		$	308	$	302

The carrying amount of cash, cash equivalents, accounts receivable and short-term debt approximated fair value as of December 31, 2011 and 2010. The estimated fair value of the Company’s long-term debt, including the current portion, as of December 31, 2011 and 2010, was $5,121 and $3,613, respectively, and the related carrying value was $4,776 and $3,376, 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).

Fair value hedges

The Company has designated all interest rate swap contracts and certain foreign currency forward and option contracts as fair value hedges, for which the gain or loss on the derivative and the offsetting loss or gain on the hedged item are recognized in current earnings. The impact of foreign currency contracts is primarily recognized in Selling, general and administrative expenses and the impact of interest rate swap contracts is recognized in Interest expense, net. Activity related to fair value hedges recorded during each period presented was as follows:



	2011									2010
	Foreign Currency Contracts			Interest Rate Swaps			Total			Foreign Currency Contracts		Interest Rate Swaps			Total
Notional Value at December 31,	$	670		$	1,668		$	2,338		$	769	$	788		$	1,557
Gain (loss) on derivative	5			25			30			—		(2		)	(2		)
Gain (loss) on hedged items	(5		)	(25		)	(30		)	—		2			2

Cash flow hedges

All of the Company’s commodity contracts and certain foreign currency forward contracts have been designated as cash flow hedges, for which the effective portion of the gain or loss is reported as a component of Other comprehensive income (OCI) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Activity related to cash flow hedges recorded during each period presented was as follows:



	2011									2010
	Foreign Currency Contracts			Commodity Contracts			Total			Foreign Currency Contracts			Commodity Contracts		Total
Notional Value at December 31,	$	403		$	32		$	435		$	371		$	18	$	389
Gain (loss) recognized in OCI	(9		)	(1		)	(10		)	(3		)	5		2
Gain (loss) reclassified into Cost of sales	(13		)	4			(9		)	3			1		4

The net gain (loss) recognized in OCI for both foreign currency contracts and commodity contracts is expected to be recognized in Cost of sales within the next twelve months.

Net investment hedges

The Company has designated certain foreign currency forward and option contracts and certain foreign currency-denominated debt as net investment hedges, for which the gain or loss on the instrument is reported as a component of Currency translation adjustments within OCI, along with the offsetting gain or loss on the hedged items. Activity related to net investment hedges recorded during each period presented was as follows:



	2011									2010
	Foreign Currency Contracts			Foreign Currency Debt			Total			Foreign Currency Contracts			Foreign Currency Debt			Total
Notional Value at December 31,	$	485		$	194		$	679		$	131		$	312		$	443
Gain (loss) on instruments	8			1			9			(8		)	2			(6		)
Gain (loss) on hedged items	(8		)	(1		)	(9		)	8			(2		)	6

Derivatives Not Designated as Hedging Instruments

Derivatives not designated as hedging instruments for each period consist of a cross-currency swap that serves as an economic hedge of a foreign currency deposit, for which the gain or loss on the instrument and the offsetting gain or loss on the hedged item are recognized in Other (income) expense, net for each period. The cross-currency swap outstanding at December 31, 2010 was settled during the second quarter of 2011, resulting in a realized loss of $6 which was offset by a corresponding gain on an underlying deposit. A new cross-currency swap with similar terms and an underlying foreign currency deposit was entered into during June 2011. Activity related to these contracts during each period presented was as follows:



	2011			2010
	Cross-currency Swap			Cross-currency Swap
Notional Value at December 31,	$	96		$	90
Gain (loss) on instrument	(1		)	4
Gain (loss) on hedged item	1			(4		)

The cross-currency swap outstanding at December 31, 2010 replaced a swap with similar terms that settled in June 2010, resulting in a realized gain of $9.

Other Financial Instruments

Marketable securities consist of bank deposits with original maturities greater than 90 days (Level 1 valuation).

Available-for-sale securities consist of the fixed income investments discussed below.

In 2010, the Company invested in a portfolio of euro-denominated investment grade fixed income securities, including corporate bonds, with maturities generally ranging from one to three years. During the second quarter of 2011, the Company liquidated the investment portfolio as part of the cash management strategy to fund the acquisition of the Sanex business. The portfolio was considered a Level 1 investment as all of the securities had quoted prices on an active exchange with daily liquidity. At December 31, 2010, the portfolio’s fair value was $132 and was reported in Other assets in the Consolidated Balance Sheet.

Through its subsidiary in Venezuela, the Company has also invested in U.S. dollar-linked, devaluation-protected bonds issued by the Venezuelan government. As of December 31, 2010, these bonds were considered Level 3 as there was no trading activity in the market at the end of 2010 and their value was determined using unobservable inputs reflecting the Company’s own assumptions. As of December 31, 2011, these bonds are actively traded and, therefore, are considered Level 2 as their value is determined based upon observable market-based inputs or unobservable inputs that are corroborated by market data. The following table presents a reconciliation of the Venezuelan investments at fair value for the years ended December 31:



	2011		2010
Beginning balance as of January 1	$	96	$	46
Unrealized gain (loss) on investment	61		(17		)
Purchases and sales during the period	79		67
Ending balance as of December 31	$	236	$	96

As a result of the Venezuelan government’s elimination of the two-tier exchange rate structure effective January 1, 2011, these bonds have revalued and the Company recorded an unrealized gain of $62 in the first quarter of 2011. For further information regarding Venezuela, refer to Note 13.