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Financial Instruments, Risk Management and Fair Value Measurements

12 Months Ended

Dec. 31, 2019

Financial Instruments, Risk Management and Fair Value Measurements

Our financial instruments include cash and cash equivalents, trade receivables, other current assets, certain receivables classified as other long-term assets, accounts payable, and amounts included in investments and accruals meeting the definition of financial instruments. The carrying value of these financial instruments approximates their fair value. Our other financial instruments include the following:


Financial Instrument						Valuation Method

Foreign exchange forward contracts						Estimated amounts that would be received or paid to terminate the contracts at the reporting date based on current market prices for applicable currencies.

Commodity forward and option contracts						Estimated amounts that would be received or paid to terminate the contracts at the reporting date based on quoted market prices for applicable commodities.

Debt						Our estimates and information obtained from independent third parties using market data, such as bid/ask spreads for the last business day of the reporting period.

The estimated fair value of the financial instruments in the above table have been determined using standard pricing models which take into account the present value of expected future cash flows discounted to the balance sheet date. These standard pricing models utilize inputs derived from, or corroborated by, observable market data such as interest rate yield curves and currency and commodity spot and forward rates. In addition, we test a subset of our valuations against valuations received from the transaction's counterparty to validate the accuracy of our standard pricing models. Accordingly, the estimates presented may not be indicative of the amounts that we would realize in a market exchange at settlement date and do not represent potential gains or losses on these agreements. The estimated fair values of foreign exchange forward contracts, commodity forward and option contracts and interest rate contracts are included in the tables within this Note. The estimated fair value of debt is $3,393.8 million and $2,715.2 million and the carrying amount is $3,258.8 million and $2,692.7 million as of December 31, 2019 and December 31, 2018, respectively.

Use of Derivative Financial Instruments to Manage Risk

We mitigate certain financial exposures, including currency risk, commodity purchase exposures and interest rate risk through a program of risk management that includes the use of derivative financial instruments. We enter into foreign exchange contracts, including forward and purchased option contracts, to reduce the effects of fluctuating foreign currency exchange rates.

We formally document all relationships between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. This process includes relating derivatives that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. We also assess both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged item. If we determine that a derivative is not highly effective as a hedge, or if a derivative ceases to be a highly effective hedge, we discontinue hedge accounting with respect to that derivative prospectively.

Foreign Currency Exchange Risk Management

We conduct business in many foreign countries, exposing earnings, cash flows, and our financial position to foreign currency risks. The majority of these risks arise as a result of foreign currency transactions. Our policy is to minimize exposure to adverse changes in currency exchange rates. This is accomplished through a controlled program of risk management that includes the use of foreign currency debt and forward foreign exchange contracts. We also use forward foreign exchange contracts to hedge firm and highly anticipated foreign currency cash flows, with an objective of balancing currency risk to provide adequate protection from significant fluctuations in the currency markets.

The primary currencies for which we have exchange rate exposure are the U.S. dollar versus the Brazilian Real, the Euro, the Chinese yuan, the Mexican peso, Indian rupee and the Argentine peso.

Commodity Price Risk

We are exposed to risks in energy costs due to fluctuations in energy prices, particularly natural gas. We attempt to mitigate our exposure to increasing energy costs by hedging the cost of future deliveries of natural gas.

Interest Rate Risk

We use various strategies to manage our interest rate exposure, including entering into interest rate swap agreements to achieve a targeted mix of fixed and variable-rate debt. In the agreements we exchange, at specified intervals, the difference between fixed and variable-interest amounts calculated on an agreed-upon notional principal amount.

Concentration of Credit Risk

Our counterparties to derivative contracts are primarily major financial institutions. We limit the dollar amount of contracts entered into with any one financial institution and monitor counterparties’ credit ratings. We also enter into master netting agreements with each financial institution, where possible, which helps mitigate the credit risk associated with our financial instruments. While we may be exposed to credit losses due to the nonperformance of counterparties, we consider this risk remote.

Financial Guarantees and Letter-of-Credit Commitments

We enter into various financial instruments with off-balance sheet risk as part of the normal course of business. These off-balance sheet instruments include financial guarantees and contractual commitments to extend financial guarantees under letters of credit and other assistance to customers. See Notes 1 and 20 for more information. Decisions to extend financial guarantees to customers, and the amount of collateral required under these guarantees, is based on our evaluation of creditworthiness on a case-by-case basis.

Accounting for Derivative Instruments and Hedging Activities

Cash Flow Hedges

We recognize all derivatives on the balance sheet at fair value. On the date we enter into the derivative instrument, we generally designate the derivative as a hedge of the variability of cash flows to be received or paid related to a forecasted transaction (cash flow hedge). We record in AOCI changes in the fair value of derivatives that are designated as, and meet all the required criteria for, a cash flow hedge. We then reclassify these amounts into earnings as the underlying hedged item affects earnings. In contrast we immediately record in earnings changes in the fair value of derivatives that are not designated as cash flow hedges.

As of December 31, 2019, we had open foreign currency forward contracts in AOCI in a net after-tax loss position of $0.4 million designated as cash flow hedges of underlying forecasted sales and purchases. Current open contracts hedge forecasted transactions until December 31, 2020. At December 31, 2019, we had open forward contracts with various expiration dates to buy, sell or exchange foreign currencies with a U.S. dollar equivalent of approximately $1,633 million.

As of December 31, 2019, we had open interest rate contracts in AOCI in a net after-tax loss position of $0.7 million designated as cash flow hedges of underlying floating rate interest payments on a portion of our variable-rate debt. At December 31, 2019 we had interest rate swap contracts outstanding with a total aggregate notional value of approximately $200 million.

In conjunction with the issuance of the Senior Notes, on September 20, 2019 we settled on various interest rate swap agreements which were entered into to hedge the variability in treasury rates. This settlement resulted in a loss of $83.1 million which was recorded in other comprehensive income and will be amortized over the various terms of the Senior Notes. Refer to Note 14 for further details on the Senior Notes.

As of December 31, 2019, we had no open commodity contracts in AOCI designated as cash flow hedges of underlying forecasted purchases. At December 31, 2019, we had no mmBTUs (millions of British Thermal Units) in aggregate notional volume of outstanding natural gas commodity forward contracts.

Approximately $1.0 million of net after-tax losses, representing open foreign currency exchange contracts, option contracts and interest rate contracts will be realized in earnings during the twelve months ending December 31, 2020 if spot rates in the future are consistent with forward rates as of December 31, 2019. The actual effect on earnings will be dependent on the actual spot rates when the forecasted transactions occur. We recognize derivative gains and losses in the “Costs of sales and services” line in the consolidated statements of income (loss).

Derivatives Not Designated As Hedging Instruments

We hold certain forward contracts that have not been designated as cash flow hedging instruments for accounting purposes. Contracts used to hedge the exposure to foreign currency fluctuations associated with certain monetary assets and liabilities are not designated as cash flow hedging instruments, and changes in the fair value of these items are recorded in earnings.

We had open forward contracts not designated as cash flow hedging instruments for accounting purposes with various expiration dates to buy, sell or exchange foreign currencies with a U.S. dollar equivalent of approximately $1,264 million at December 31, 2019.

Fair Value of Derivative Instruments

The following tables provide the gross fair value and net balance sheet presentation of our derivative instruments as of December 31, 2019 and 2018.


	December 31, 2019
	Gross Amount of Derivatives
(in Millions)	Designated as Cash Flow Hedges		Not Designated as Hedging Instruments		Total Gross Amounts		Gross Amounts Offset in the Consolidated Balance Sheet ⁽³⁾		Net Amounts
Derivatives
Foreign exchange contracts	$	8.0	$	0.3	$	8.3	$	(8.1)	$	0.2




Total derivative assets⁽¹⁾	$	8.0	$	0.3	$	8.3	$	(8.1)	$	0.2

Foreign exchange contracts	$	(12.1)	$	(4.2)	$	(16.3)	$	8.1	$	(8.2)


Interest rate contracts	(0.9)		—		(0.9)		$	—	(0.9)
Total derivative liabilities⁽²⁾	$	(13.0)	$	(4.2)	$	(17.2)	$	8.1	$	(9.1)

Net derivative assets (liabilities)	$	(5.0)	$	(3.9)	$	(8.9)	$	—	$	(8.9)


	December 31, 2018
	Gross Amount of Derivatives
(in Millions)	Designated as Cash Flow Hedges		Not Designated as Hedging Instruments		Total Gross Amounts		Gross Amounts Offset in the Consolidated Balance Sheet ⁽³⁾		Net Amounts
Derivatives
Foreign exchange contracts	$	18.3	$	1.5	$	19.8	$	(8.1)	$	11.7



Total derivative assets⁽¹⁾	$	18.3	$	1.5	$	19.8	$	(8.1)	$	11.7

Foreign exchange contracts	$	(8.0)	$	(0.2)	$	(8.2)	$	8.1	$	(0.1)
Interest rate contracts	(0.2)		—		(0.2)		—		(0.2)


Total derivative liabilities⁽²⁾	$	(8.2)	$	(0.2)	$	(8.4)	$	8.1	$	(0.3)

Net derivative assets (liabilities)	$	10.1	$	1.3	$	11.4	$	—	$	11.4

____________________

(1) Net balance is included in “Prepaid and other current assets” in the consolidated balance sheets.

(2) Net balance is included in “Accrued and other liabilities” in the consolidated balance sheets.

(3) Represents net derivatives positions subject to master netting arrangements.

The following tables summarize the gains or losses related to our cash flow hedges and derivatives not designated as hedging instruments.

Derivatives in Cash Flow Hedging Relationships


	Contracts
(in Millions)	Foreign exchange		Energy		Interest rate		Total
Accumulated other comprehensive income (loss), net of tax at December 31, 2016	$	4.6	$	1.4	$	1.1	$	7.1
2017 Activity
Unrealized hedging gains (losses) and other, net of tax	$	(0.4)	$	(0.8)	$	—	$	(1.2)
Reclassification of deferred hedging (gains) losses, net of tax ⁽¹⁾	0.2		(0.6)		(0.3)		(0.7)
Total derivative instrument impact on comprehensive income, net of tax	$	(0.2)	$	(1.4)	$	(0.3)	$	(1.9)

Accumulated other comprehensive income (loss), net of tax at December 31, 2017	$	4.4	$	—	$	0.8	$	5.2
2018 Activity
Unrealized hedging gains (losses) and other, net of tax	$	14.2	$	—	$	(0.5)	$	13.7
Reclassification of deferred hedging (gains) losses, net of tax ⁽¹⁾	(8.2)		—		0.5		(7.7)
Total derivative instrument impact on comprehensive income, net of tax	$	6.0	$	—	$	—	$	6.0

Accumulated other comprehensive income (loss), net of tax at December 31, 2018	$	10.4	$	—	$	0.8	$	11.2
2019 Activity
Unrealized hedging gains (losses) and other, net of tax	$	(3.1)	$	—	$	(65.9)	$	(69.0)
Reclassification of deferred hedging (gains) losses, net of tax ⁽¹⁾	(8.7)		—		0.5		(8.2)
Total derivative instrument impact on comprehensive income, net of tax	$	(11.8)	$	—	$	(65.4)	$	(77.2)

Accumulated other comprehensive income (loss), net of tax at December 31, 2019	$	(1.4)	$	—	$	(64.6)	$	(66.0)

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(1)Amounts are included in “Costs of sales and services” and "Interest expense" on the consolidated statements of income (loss).

Derivatives Not Designated as Hedging Instruments


	Amount of Pre-tax Gain (Loss) Recognized in Income on Derivatives ⁽¹⁾
	Year Ended December 31,
(in Millions)	2019		2018		2017
Foreign exchange contracts	$	(26.7)	$	(10.9)	$	(12.5)

Total	$	(26.7)	$	(10.9)	$	(12.5)

____________________

(1) Amounts in the columns represent the gain or loss on the derivative instrument offset by the gain or loss on the hedged item. These amounts are included in “Costs of sales and services” on the consolidated statements of income (loss).

Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Market participants are defined as buyers or sellers in the principle or most advantageous market for the asset or liability that are independent of the reporting entity, knowledgeable and able and willing to transact for the asset or liability.

Fair Value Hierarchy

We have categorized our assets and liabilities that are recorded at fair value, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets and liabilities fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Recurring Fair Value Measurements

The following tables present our fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis in our consolidated balance sheets.


(in Millions)	December 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets



Derivatives – Foreign exchange ⁽¹⁾	$	0.2	$	—	$	0.2	$	—

Other ⁽²⁾	20.2		20.2		—		—
Total Assets	$	20.4	$	20.2	$	0.2	$	—

Liabilities


Derivatives – Foreign exchange ⁽¹⁾	$	8.2	$	—	$	8.2	$	—
Derivatives - Interest Rate ⁽¹⁾	0.9		—		0.9		—
Other ⁽³⁾	32.8		29.7		3.1		—
Total Liabilities	$	41.9	$	29.7	$	12.2	$	—


(in Millions)	December 31, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets


Derivatives – Foreign exchange ⁽¹⁾	$	11.7	$	—	$	11.7	$	—
Other ⁽²⁾	17.7		17.7		—		—
Total Assets	$	29.4	$	17.7	$	11.7	$	—

Liabilities


Derivatives – Foreign exchange ⁽¹⁾	$	0.1	$	—	$	0.1	$	—
Derivatives - Interest Rate ⁽¹⁾	0.2		—		0.2		—
Other ⁽³⁾	27.4		24.3		3.1		—
Total Liabilities	$	27.7	$	24.3	$	3.4	$	—

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(1)See the Fair Value of Derivative Instruments table within this Note for classifications on our consolidated balance sheets.

(2)Consists of a deferred compensation arrangement, through which we hold various investment securities, recognized on our balance sheet. Both the asset and liability are recorded at fair value. Asset amounts included in “Other assets including long-term receivables, net” in the consolidated balance sheets.

(3)Primarily consists of a deferred compensation arrangement recognized on our balance sheet. Both the asset and liability are recorded at fair value. Liability amounts included in “Other long-term liabilities” in the consolidated balance sheets.

Nonrecurring Fair Value Measurements

The following table presents our fair value hierarchy for those assets and liabilities measured at fair value on a non-recurring basis in our consolidated balance sheets during the year ended December 31, 2018. There were no non-recurring fair value measurements in the consolidated balance sheets during the year ended December 31, 2019.


(in Millions)	December 31, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses) (Year Ended December 31, 2018)
Assets

Impairment of intangibles ⁽¹⁾	$	3.1	$	—	$	—	$	3.1	$	(1.8)
Total Assets	$	3.1	$	—	$	—	$	3.1	$	(1.8)

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(1) We recorded an impairment charge to write down the carrying value of the generic brand portfolio of approximately $2 million to its fair value.

- Definition

This element can be used to disclose the entity's entire derivative instruments and hedging activities disclosure as a single block of text. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising there from, and the amounts of and methodologies and assumptions used in determining the amounts of such items. This item also represents the complete disclosure regarding the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments, assets, and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the Company is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risk is are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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