Derivative Instruments

12 Months Ended

Dec. 31, 2020

Derivative Instruments

Derivative Instruments

9. Derivative Instruments

The Company has certain derivative assets and liabilities which consist of foreign exchange option and forward contracts, interest rate swaps and cross currency swaps. The valuation of these instruments is determined primarily using the income approach, including discounted cash flow analysis on the expected cash flows of each derivative. Foreign exchange rates and interest rates are the significant inputs into the valuation models. The Company also evaluates counterparty risk in determining fair values. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. These inputs are observable in active markets over the terms of the instruments the Company holds, and accordingly, the Company classifies its derivative assets and liabilities as Level 2 in the hierarchy.

Cash Flow Hedges of Foreign Exchange Risk

The Company has variable-interest rate borrowings denominated in currencies other than the functional currency of the borrowing subsidiaries. As a result, the Company is exposed to fluctuations in the currency of the borrowing against the subsidiaries’ functional currency.  The Company uses derivatives to manage these exposures and designates these derivatives as cash flow hedges of foreign exchange risk.

During the second and third quarters of 2020, the Company terminated a portion of its cross-currency swaps, which resulted in a net $3 million cash outflow recognized in the Cash flows from financing activities section of the Consolidated Cash Flows. During the second quarter of 2019, the Company terminated a portion of its cross-currency swaps, which resulted in a $15 million cash inflow recognized in the Cash flows from financing activities section of the Consolidated Cash Flows.

An unrecognized gain of $9 million at December 31, 2020, related to these cross-currency swaps, was included in Accumulated OCI, and will be reclassified into earnings within the next twelve months.

Interest Rate Swaps Designated as Fair Value Hedges

The Company enters into interest rate swaps in order to maintain a capital structure containing targeted amounts of fixed and floating-rate debt and manage interest rate risk. The Company’s fixed-to-variable interest rate swaps are accounted for as fair value hedges. The relevant terms of the swap agreements match the corresponding terms of the notes and therefore there is no hedge ineffectiveness. The Company recorded the net of the fair market values of the swaps as a long-term liability and short-term asset along with a corresponding net decrease in the carrying value of the hedged debt.

During the second quarter of 2019, the Company terminated a portion of its interest rate swaps, which resulted in a $13 million cash inflow recognized in the Cash flows from financing activities section of the Consolidated Cash Flows.

Cash Flow Hedges of Interest Rate Risk

The Company enters into interest rate swaps in order to maintain a capital structure containing targeted amounts of fixed and floating-rate debt and manage interest rate risk. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments. These interest rate swap agreements were used to hedge the variable cash flows associated with variable-rate debt.

An unrecognized loss of less than $1 million at year ended December 31, 2020 related to these interest rate swaps was included in Accumulated OCI, and will be reclassified into earnings within the next twelve months.

Net Investment Hedges

The Company is exposed to fluctuations in foreign exchange rates on investments it holds in non-U.S. subsidiaries and uses cross currency swaps to partially hedge this exposure.

During the third quarter of 2020, the Company terminated a portion of its cross-currency swaps designated as net investment hedges, which resulted in a $5 million outflow recognized in the Cash flows from financing section of the Consolidated Cash Flows.

Foreign Exchange Derivative Contracts Not Designated as Hedging Instruments

The Company uses short-term forward exchange or option agreements to purchase foreign currencies at set rates in the future. These agreements are used to limit exposure to fluctuations in foreign currency exchange rates for significant planned purchases of fixed assets or commodities that are denominated in currencies other than the subsidiaries’ functional currency. The Company also uses foreign exchange agreements to offset the foreign currency exchange rate risk for receivables and payables, including intercompany receivables, payables, and loans, not denominated in, or indexed to, their functional currencies.

Balance Sheet Classification

The following table shows the amount and classification (as noted above) of the Company’s derivatives at December 31, 2020 and 2019:

	Fair Value of
	Hedge Assets				Hedge Liabilities
	2020		2019		2020		2019
Derivatives designated as hedging instruments:
Interest rate swaps - fair value hedges (a)	$	17	$	8	$	—	$	2
Cash flow hedges of foreign exchange risk (b)		6		25		115		21
Interest rate swaps - cash flow hedges (c)								1
Net investment hedges (d)		1		2		52
Total derivatives accounted for as hedges	$	24	$	35	$	167	$	24
Derivatives not designated as hedges:
Foreign exchange derivative contracts (e)		1		3		3
Total derivatives	$	25	$	38	$	170	$	24
Current	$	13	$	8	$	15	$	—
Noncurrent		12		30		155		24
Total derivatives	$	25	$	38	$	170	$	24

(a) The notional amounts of the interest rate swaps designated as fair value hedges were €725 million at December 31, 2020 and December 31, 2019. The maximum maturity dates were in 2024 at December 31, 2020 and December 31, 2019.

(b) The notional amounts of the cash flow hedges of foreign exchange risk were $978 million and $1.424 billion at December 31, 2020 and December 31, 2019, respectively. The maximum maturity dates were in 2023 at December 31, 2020 and December 31, 2019.

(c) The notional amounts of the interest rate swaps designated as cash flow hedges were $0 million and $105 million at December 31, 2020 and December 31, 2019, respectively. The maximum maturity date was 2020 at December 31, 2019.

(d) The notional amounts of the net investment hedges were €311 million at December 31, 2020 and December 31, 2019, and maximum maturity dates were 2027 at December 31, 2020 and 2020 at December 31, 2019.

(e) The notional amounts of the foreign exchange derivative contracts were $247 million and $283 million and maximum maturity dates were 2021 and 2020 at December 31, 2020 and December 31, 2019, respectively.

The effects of derivative instruments on the Company’s Consolidated Statements of Results of Operations and Comprehensive Income (Loss) for OCI for the years ended December 31, 2020, 2019 and 2018 are as follows:

	Gain (Loss) Recognized in OCI (Effective Portion)						Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) (1)
Derivatives designated as hedging instruments:	2020		2019		2018		2020		2019		2018
Cash Flow Hedges
Cash flow hedges of foreign exchange risk (a)	$	(99)	$	28	$	12	$	(115)	$	(30)	$	9
Cash flow hedges of interest rate risk (b)				(1)		(1)		(1)
Net Investment Hedges
Net Investment Hedges		(54)		10		5		4		(7)		1
	$	(153)	$	37	$	16	$	(112)	$	(37)	$	10
	Amount of Gain (Loss) Recognized in Other income (expense), net
Derivatives not designated as hedges:	2020		2019		2018
Foreign exchange derivative contracts	$	9	$	10	$	1
(1) Gains and losses reclassified from accumulated OCI and recognized in income are recorded to (a) other income (expense), net or (b) interest expense, net.