Fair Value Measurements and Financial Instruments | 9 Months Ended |
Sep. 30, 2014 |
Financial Instruments and Fair Value Measurements [Abstract] | ' |
Fair Value Measurements and Financial Instruments | ' |
Fair Value Measurements and Financial Instruments |
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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. |
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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. Hedge ineffectiveness, if any, is not material for any period presented. |
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The Company’s derivative instruments include interest rate swap contracts, 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 foreign currency contracts, including forward, option and swap 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 summarizes the fair value of the Company’s derivative instruments and other financial instruments at September 30, 2014 and December 31, 2013: |
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| Assets | | Liabilities | | | | |
| | | Fair Value | | Account | | Fair Value | | | | |
Account | | | | |
Designated derivative instruments | | 9/30/14 | | 12/31/13 | | | | 9/30/14 | | 12/31/13 | | | | |
Interest rate swap contracts | Other current assets | | $ | — | | | $ | 1 | | | Other accruals | | $ | — | | | $ | — | | | | | |
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Interest rate swap contracts | Other assets | | 13 | | | 20 | | | Other liabilities | | 6 | | | 1 | | | | | |
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Foreign currency contracts | Other current assets | | 17 | | | 14 | | | Other accruals | | 7 | | | 8 | | | | | |
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Foreign currency contracts | Other assets | | 37 | | | — | | | Other liabilities | | — | | | 10 | | | | | |
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Commodity contracts | Other current assets | | — | | | — | | | Other accruals | | 3 | | | — | | | | | |
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Total designated | | | $ | 67 | | | $ | 35 | | | | | $ | 16 | | | $ | 19 | | | | | |
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Derivatives not designated | | | | | | | | | | | | | | | | | | |
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Foreign currency contracts | Other current assets | | $ | — | | | $ | — | | | Other accruals | | $ | — | | | $ | 3 | | | | | |
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Foreign currency contracts | Other assets | | 4 | | | — | | | Other liabilities | | — | | | — | | | | | |
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Total not designated | | | $ | 4 | | | $ | — | | | | | $ | — | | | $ | 3 | | | | | |
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Total derivative instruments | | $ | 71 | | | $ | 35 | | | | | $ | 16 | | | $ | 22 | | | | | |
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Other financial instruments | | | | | | | | | | | | | | | | | | |
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Marketable securities | Other current assets | | $ | 124 | | | $ | 173 | | | | | | | | | | | | | |
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Available-for-sale securities | Other assets | | 337 | | | 685 | | | | | | | | | | | | | |
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Total other financial instruments | | $ | 461 | | | $ | 858 | | | | | | | | | | | | | |
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The carrying amount of cash, cash equivalents, accounts receivable and short-term debt approximated fair value as of September 30, 2014 and December 31, 2013. The estimated fair value of the Company’s long-term debt, including the current portion, as of September 30, 2014 and December 31, 2013, was $6,170 and $5,690, respectively, and the related carrying value was $6,041 and $5,644, 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 |
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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 (income) expense, net. |
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Activity related to fair value hedges recorded during the three and nine months ended September 30, 2014 and 2013 was as follows: |
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| 2014 | | 2013 |
| Foreign | | Interest | | | | Foreign | | Interest | | |
Currency | Rate | Total | Currency | Rate | Total |
Contracts | Swaps | | Contracts | Swaps | |
Notional Value at September 30, | $ | 1,372 | | | $ | 1,438 | | | $ | 2,810 | | | $ | 1,568 | | | $ | 1,088 | | | $ | 2,656 | |
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Three months ended September 30: | | | | | | | | | | | |
Gain (loss) on derivative | 7 | | | (9 | ) | | (2 | ) | | (9 | ) | | 2 | | | (7 | ) |
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Gain (loss) on hedged items | (7 | ) | | 9 | | | 2 | | | 9 | | | (2 | ) | | 7 | |
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Nine months ended September 30: | | | | | | | | | | | |
Gain (loss) on derivative | 9 | | | (12 | ) | | (3 | ) | | 3 | | | (18 | ) | | (15 | ) |
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Gain (loss) on hedged items | (9 | ) | | 12 | | | 3 | | | (3 | ) | | 18 | | | 15 | |
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Cash Flow Hedges |
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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. |
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Activity related to cash flow hedges recorded during the three and nine months ended September 30, 2014 and 2013 was as follows: |
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| 2014 | | 2013 |
| Foreign | | Commodity | | | | Foreign | | Commodity | | |
Currency | Contracts | Total | Currency | Contracts | Total |
Contracts | | | Contracts | | |
Notional Value at September 30, | $ | 509 | | | $ | 11 | | | $ | 520 | | | $ | 441 | | | $ | 15 | | | $ | 456 | |
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Three months ended September 30: | | | | | | | | | | | |
Gain (loss) recognized in OCI | 8 | | | (3 | ) | | 5 | | | 2 | | | — | | | 2 | |
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Gain (loss) reclassified into Cost of sales | (1 | ) | | (1 | ) | | (2 | ) | | 8 | | | — | | | 8 | |
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Nine months ended September 30: | | | | | | | | | | | |
Gain (loss) recognized in OCI | 1 | | | (2 | ) | | (1 | ) | | 13 | | | — | | | 13 | |
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Gain (loss) reclassified into Cost of sales | — | | | 1 | | | 1 | | | 12 | | | 1 | | | 13 | |
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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. |
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Net Investment Hedges |
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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. |
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Activity related to net investment hedges recorded during the three and nine months ended September 30, 2014 and 2013 was as follows: |
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| 2014 | | 2013 |
| Foreign | | Foreign | | | | Foreign | | Foreign | | |
Currency | Currency | Total | Currency | Currency | Total |
Contracts | Debt | | Contracts | Debt | |
Notional Value at September 30, | $ | 669 | | | $ | — | | | $ | 669 | | | $ | 557 | | | $ | 238 | | | $ | 795 | |
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Three months ended September 30: | | | | | | | | | | | |
Gain (loss) on instruments | 44 | | | 1 | | | 45 | | | (18 | ) | | (9 | ) | | (27 | ) |
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Gain (loss) on hedged items | (44 | ) | | (1 | ) | | (45 | ) | | 18 | | | 9 | | | 27 | |
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Nine months ended September 30: | | | | | | | | | | | |
Gain (loss) on instruments | 44 | | | 4 | | | 48 | | | (8 | ) | | — | | | (8 | ) |
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Gain (loss) on hedged items | (44 | ) | | (4 | ) | | (48 | ) | | 9 | | | — | | | 9 | |
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Derivatives Not Designated as Hedging Instruments |
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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. |
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Activity related to these contracts during the three and nine months ended September 30, 2014 and 2013 was as follows: |
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| 2014 | | 2013 | | | | | | | | | | | | | | | | |
| Cross-currency | | Cross-currency | | | | | | | | | | | | | | | | |
Swap | Swap | | | | | | | | | | | | | | | | |
Notional Value at September 30, | $ | 102 | | | $ | 96 | | | | | | | | | | | | | | | | | |
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Three months ended September 30: | | | | | | | | | | | | | | | | | | | |
Gain (loss) on instrument | 5 | | | (6 | ) | | | | | | | | | | | | | | | | |
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Gain (loss) on hedged item | (5 | ) | | 6 | | | | | | | | | | | | | | | | | |
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Nine months ended September 30: | | | | | | | | | | | | | | | | | | | |
Gain (loss) on instrument | 2 | | | — | | | | | | | | | | | | | | | | | |
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Gain (loss) on hedged item | (2 | ) | | — | | | | | | | | | | | | | | | | | |
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Other Financial Instruments |
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Other financial instruments are classified as Other current assets or Other assets. |
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Other financial instruments classified as Other current assets include marketable securities, which consist of bank deposits of $76 with original maturities greater than 90 days (Level 1 valuation) and the current portion of bonds issued by the Venezuelan government (Level 2 valuation) in the amount of $48. The long-term portion of these bonds in the amount of $337 is included in Other assets. |
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Through its subsidiary in Venezuela, the Company is invested in U.S. dollar-linked, devaluation-protected bonds and bolivar denominated fixed interest rate bonds, both of which are issued by the Venezuelan government. These bonds are actively traded and, therefore, are considered Level 2 investments as their values are determined based upon observable market-based inputs or unobservable inputs that are corroborated by market data. As of September 30, 2014, the fair market value of U.S. dollar-linked devaluation-protected bonds and bolivar denominated fixed interest rate bonds was $114 and $271, respectively. These bonds are considered available-for-sale securities and, as noted above, the long-term portion in the amount of $337 is included in Other assets. |
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The following table presents a reconciliation of the Venezuelan bonds at fair value for the nine months ended September 30, 2014 and 2013: |
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| 2014 | | 2013 | | | | | | | | | | | | | | | | |
Beginning balance as of January 1, | $ | 685 | | | $ | 642 | | | | | | | | | | | | | | | | | |
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Unrealized gain (loss) on investment | (354 | ) | | (124 | ) | | | | | | | | | | | | | | | | |
Purchases and sales during the period | 54 | | | 182 | | | | | | | | | | | | | | | | | |
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Ending balance as of September 30, | $ | 385 | | | $ | 700 | | | | | | | | | | | | | | | | | |
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Unrealized loss on investment for the nine months ended September 30, 2014 included a net loss of $324 primarily related to the remeasurement of the bolivar denominated fixed interest rate bonds and the devaluation-protected bonds in Venezuela as a result of the effective devaluations in the first and third quarters of 2014. |
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Unrealized loss on investment for the nine months ended September 30, 2013 consisted primarily of a charge of $133 related only to the remeasurement of the bolivar denominated fixed interest rate bonds in Venezuela as a result of the devaluation in the first quarter of 2013. No remeasurement charge was required on the devaluation-protected bonds in the first quarter of 2013 since the official exchange rate changed from 4.30 to 6.30 bolivares per dollar and the devaluation-protected bonds revalued to the official exchange rate. |
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For further information regarding Venezuela, refer to Note 15, Venezuela. |