Derivative Financial Instruments | 9 Months Ended |
Sep. 27, 2013 |
Summary of Derivative Instruments [Abstract] | |
Derivative Financial Instruments | DERIVATIVE FINANCIAL INSTRUMENTS |
We utilize derivative financial instruments to mitigate our exposure to certain market risks associated with our ongoing operations. The primary risks that we seek to manage through the use of derivative financial instruments include currency exchange risk, commodity price risk, and interest rate risk. All derivative financial instruments are recorded at fair value on our Condensed Consolidated Balance Sheets. We do not use derivative financial instruments for trading or speculative purposes. While certain of our derivative instruments are designated as hedging instruments, we also enter into derivative instruments that are designed to hedge a risk, but are not designated as hedging instruments (referred to as an “economic hedge” or “non-designated hedges”). Changes in the fair value of these non-designated hedging instruments are recognized in each reporting period in the expense line item on our Condensed Consolidated Statements of Income that is consistent with the nature of the hedged risk. We are exposed to counterparty credit risk on all of our derivative financial instruments. We have established and maintain strict counterparty credit guidelines and enter into hedges only with financial institutions that are investment grade or better. We continuously monitor our counterparty credit risk and utilize numerous counterparties to minimize our exposure to potential defaults. We do not require collateral under these agreements. |
The fair value of our derivative contracts (including forwards, options, cross currency swaps, and interest rate swaps) is determined using standard valuation models. The significant inputs used in these models are readily available in public markets or can be derived from observable market transactions and, therefore, our derivative contracts have been classified as Level 2. Inputs used in these standard valuation models include the applicable spot, forward, and discount rates which are current as of the valuation date. The standard valuation model for our option contracts also includes implied volatility which is specific to individual options and is based on rates quoted from a widely used third-party resource. Refer to Note 16. |
The following table summarizes the fair value of our assets and liabilities related to derivative financial instruments and the respective line items in which they were recorded on our Condensed Consolidated Balance Sheets as of the dates presented (in millions): |
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Hedging Instruments | | Location – Balance Sheets | | September 27, | | December 31, | | | | | | | | |
2013 | 2012 | | | | | | | | |
Assets: | | | | | | | | | | | | |
Derivatives designated as hedging instruments: | | | | | | | | | | |
Foreign currency contracts(A) | | Other current assets | | $ | 17 | | | $ | 31 | | | | | | | | | |
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Interest rate swap agreements(B) | | Other current assets | | 2 | | | 2 | | | | | | | | | |
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Foreign currency contracts | | Other noncurrent assets | | 1 | | | 3 | | | | | | | | | |
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Total | | | | 20 | | | 36 | | | | | | | | | |
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Derivatives not designated as hedging instruments: | | | | | | | | | | | | |
Commodity contracts | | Other current assets | | — | | | 1 | | | | | | | | | |
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Commodity contracts | | Other noncurrent assets | | — | | | 1 | | | | | | | | | |
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Total | | | | — | | | 2 | | | | | | | | | |
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Total Assets | | | | $ | 20 | | | $ | 38 | | | | | | | | | |
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Liabilities: | | | | | | | | | | | | |
Derivatives designated as hedging instruments: | | | | | | | | | | | | |
Foreign currency contracts(A) | | Accounts payable and accrued expenses | | $ | 49 | | | $ | 41 | | | | | | | | | |
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Foreign currency contracts | | Other noncurrent liabilities | | 28 | | | 33 | | | | | | | | | |
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Total | | | | 77 | | | 74 | | | | | | | | | |
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Derivatives not designated as hedging instruments: | | | | | | | | | | | | |
Foreign currency contracts | | Accounts payable and accrued expenses | | — | | | 1 | | | | | | | | | |
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Commodity contracts | | Accounts payable and accrued expenses | | 11 | | | 6 | | | | | | | | | |
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Commodity contracts | | Other noncurrent liabilities | | 2 | | | — | | | | | | | | | |
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Total | | | | 13 | | | 7 | | | | | | | | | |
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Total Liabilities | | | | $ | 90 | | | $ | 81 | | | | | | | | | |
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___________________________ |
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(A) | Amounts include the gross interest receivable or payable on our cross currency swap agreements. | | | | | | | | | | | | | | | | | |
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(B) | Amount includes the gross interest receivable on our interest rate swap agreements. | | | | | | | | | | | | | | | | | |
Fair Value Hedges |
We utilize certain interest rate swap agreements designated as fair value hedges to mitigate our exposure to changes in the fair value of fixed-rate debt resulting from fluctuations in interest rates. The gain or loss on the derivative and the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized immediately in interest expense, net on our Condensed Consolidated Statements of Income. |
The following table summarizes our outstanding interest rate swap agreements designated as fair value hedges as of the dates presented: |
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| | September 27, 2013 | | December 31, 2012 | | | | | | | | | | |
Type | | Notional Amount | | Latest Maturity | | Notional Amount | | Latest Maturity | | | | | | | | | | |
Fixed-to-floating interest rate swap | | USD 400 million | | Nov-13 | | USD 400 million | | Nov-13 | | | | | | | | | | |
Cash Flow Hedges |
We use cash flow hedges to mitigate our exposure to changes in cash flows attributable to currency fluctuations associated with certain forecasted transactions, including purchases of raw materials and services denominated in non-functional currencies, the receipt of interest and principal on intercompany loans denominated in non-functional currencies, and the payment of interest and principal on debt issuances in a non-functional currency. Effective changes in the fair value of these cash flow hedging instruments are recognized in AOCI on our Condensed Consolidated Balance Sheets. The effective changes are then recognized in the period that the forecasted purchases or payments impact earnings in the expense line item on our Condensed Consolidated Statements of Income that is consistent with the nature of the underlying hedged item. Any changes in the fair value of these cash flow hedges that are the result of ineffectiveness are recognized immediately in the expense line item on our Condensed Consolidated Statements of Income that is consistent with the nature of the underlying hedged item. |
The following table summarizes our outstanding cash flow hedges as of the dates presented (all contracts denominated in a foreign currency have been converted into U.S. dollars using the period end spot rate): |
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| | September 27, 2013 | | December 31, 2012 | | | | | | | | | | |
Type | | Notional Amount | | Latest Maturity | | Notional Amount | | Latest Maturity | | | | | | | | | | |
Foreign currency contracts | | USD 1.7 billion | | Jun-21 | | USD 1.8 billion | | Jun-21 | | | | | | | | | | |
The following tables summarize the net of tax effect of our derivative financial instruments designated as cash flow hedges on our AOCI and Condensed Consolidated Statements of Income for the periods presented (in millions): |
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| | Amount of Gain (Loss) Recognized in AOCI on | | |
Derivative Instruments(A) | | |
| | Third Quarter | | First Nine Months | | |
Cash Flow Hedging Instruments | | 2013 | | 2012 | | 2013 | | 2012 | | |
Foreign currency contracts | | $ | (41 | ) | | $ | (30 | ) | | $ | 9 | | | $ | (35 | ) | | |
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| | | | Amount of Gain (Loss) Reclassified from |
AOCI into Earnings |
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Cash Flow Hedging Instruments | | Location - Statements of Income | | 2013 | | 2012 | | 2013 | | 2012 |
Foreign currency contracts | | Cost of sales | | $ | 1 | | | $ | (4 | ) | | $ | 2 | | | $ | (10 | ) |
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Foreign currency contracts(B) | | Other nonoperating income (expense) | | (35 | ) | | (15 | ) | | (6 | ) | | (11 | ) |
Total | | | | $ | (34 | ) | | $ | (19 | ) | | $ | (4 | ) | | $ | (21 | ) |
___________________________ |
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(A) | The amount of ineffectiveness associated with these hedging instruments was not material. | | | | | | | | | | | | | | | | | |
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(B) | The gain (loss) recognized on these currency contracts is offset by the gain (loss) recognized on the remeasurement of the underlying debt instruments; therefore, there is a minimal consolidated net effect in other nonoperating income (expense) on our Condensed Consolidated Statements of Income. | | | | | | | | | | | | | | | | | |
Economic (Non-designated) Hedges |
We periodically enter into derivative instruments that are designed to hedge various risks, but are not designated as hedging instruments. These hedged risks include those related to commodity price fluctuations associated with forecasted purchases of aluminum, sugar, and vehicle fuel. At times, we also enter into other short-term non-designated hedges to mitigate our exposure to changes in cash flows attributable to currency fluctuations associated with short-term intercompany loans and certain cash equivalents denominated in non-functional currencies. |
The following table summarizes our outstanding economic hedges as of the dates presented (all contracts denominated in a foreign currency have been converted into U.S. dollars using the period end spot rate): |
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| | September 27, 2013 | | December 31, 2012 | | | | | | | | | | |
Type | | Notional Amount | | Latest Maturity | | Notional Amount | | Latest Maturity | | | | | | | | | | |
Foreign currency contracts | | n/a | | n/a | | USD 85 million | | Mar-13 | | | | | | | | | | |
Commodity contracts | | USD 148 million | | Dec-15 | | USD 171 million | | Dec-14 | | | | | | | | | | |
Changes in the fair value of outstanding economic hedges are recognized each reporting period in the expense line item on our Condensed Consolidated Statements of Income that is consistent with the nature of the hedged risk. |
The following table summarizes the gains (losses) recognized from our non-designated derivative financial instruments on our Condensed Consolidated Statements of Income for the periods presented (in millions): |
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| | | | Third Quarter | | First Nine Months |
Non-Designated Hedging Instruments | | Location - Statements of Income | | 2013 | | 2012 | | 2013 | | 2012 |
Commodity contracts | | Cost of sales | | $ | (3 | ) | | $ | 8 | | | $ | (16 | ) | | $ | 3 | |
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Commodity contracts | | Selling, delivery, and administrative expenses | | — | | | 4 | | | — | | | 3 | |
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Foreign currency contracts | | Other nonoperating income (expense)(A) | | (6 | ) | | (16 | ) | | 1 | | | (21 | ) |
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| | Total | | $ | (9 | ) | | $ | (4 | ) | | $ | (15 | ) | | $ | (15 | ) |
___________________________ |
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(A) | The gain (loss) recognized on these currency contracts is offset by the gain (loss) recognized on the remeasurement of the underlying hedged items; therefore, there is a minimal consolidated net effect in other nonoperating income (expense) on our Condensed Consolidated Statements of Income. | | | | | | | | | | | | | | | | | |
Mark-to-market gains/losses related to our non-designated commodity hedges are recognized in the earnings of our Corporate segment until such time as the underlying hedged transaction affects the earnings of our Europe operating segment. In the period the underlying hedged transaction occurs, the accumulated mark-to-market gains/losses related to the hedged transaction are reclassified from the earnings of our Corporate segment into the earnings of our Europe operating segment. This treatment allows our Europe operating segment to reflect the true economic effects of the underlying hedged transaction in the period the hedged transaction occurs without experiencing the mark-to-market volatility associated with these non-designated commodity hedges. |
As of September 27, 2013, our Corporate segment earnings included net mark-to-market losses on non-designated commodity hedges totaling $13 million. These amounts will be reclassified into the earnings of our Europe operating segment when the underlying hedged transactions occur. For additional information about our segment reporting, refer to Note 12. |
The following table summarizes the deferred gain (loss) activity in our Corporate segment during the period presented (in millions): |
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Gains (Losses) Deferred at Corporate Segment(A) | | Cost of Sales | | SD&A | | Total | | | | | | |
Balance at December 31, 2012 | | $ | (5 | ) | | $ | — | | | $ | (5 | ) | | | | | | |
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Amounts recognized during the period and recorded in our Corporate segment, net | | (15 | ) | | — | | | (15 | ) | | | | | | |
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Amounts transferred from our Corporate segment to our Europe operating segment, net | | 7 | | | — | | | 7 | | | | | | | |
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Balance at September 27, 2013 | | $ | (13 | ) | | $ | — | | | $ | (13 | ) | | | | | | |
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___________________________ |
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(A) | Over the next 12 months, deferred losses totaling $11 million are expected to be reclassified from our Corporate segment earnings into the earnings of our Europe operating segment as the underlying hedged transactions occur. | | | | | | | | | | | | | | | | | |
Net Investment Hedges |
We have entered into currency forwards, options, and foreign currency denominated borrowings designated as net investment hedges of our foreign subsidiaries. Changes in the fair value of these hedges resulting from currency exchange rate changes are recognized in AOCI on our Condensed Consolidated Balance Sheets to offset the change in the carrying value of the net investment being hedged. Any changes in the fair value of these hedges that are the result of ineffectiveness are recognized immediately in other nonoperating income (expense) on our Condensed Consolidated Statements of Income. |
The following table summarizes our outstanding instruments designated as net investment hedges as of the dates presented: |
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| | September 27, 2013 | | December 31, 2012 | | | | | | | | | | |
Type | | Notional Amount | | Latest Maturity | | Notional Amount | | Latest Maturity | | | | | | | | | | |
Foreign currency contracts | | USD 450 million | | Nov-14 | | USD 360 million | | Dec-13 | | | | | | | | | | |
Foreign currency denominated debt | | USD 947 million | | May-25 | | USD 462 million | | Dec-19 | | | | | | | | | | |
The following table summarizes the net of tax effect of our derivative financial instruments designated as net investment hedges on our AOCI for the periods presented (in millions): |
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| | Amount of Gain (Loss) Recognized in AOCI on | | |
Derivative Instruments(A) | | |
| | Third Quarter | | First Nine Months | | |
Net Investment Hedging Instruments | | 2013 | | 2012 | | 2013 | | 2012 | | |
Foreign currency contracts | | $ | (11 | ) | | $ | (22 | ) | | $ | (5 | ) | | $ | (14 | ) | | |
Foreign currency denominated debt | | (23 | ) | | — | | | (17 | ) | | — | | | |
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Total | | $ | (34 | ) | | $ | (22 | ) | | $ | (22 | ) | | $ | (14 | ) | | |
___________________________ |
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(A) | The amount of ineffectiveness associated with these hedging instruments was not material. | | | | | | | | | | | | | | | | | |