Derivatives and Hedging Activities

3 Months Ended

Mar. 31, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Hedging Activities

8. Derivatives and Hedging Activities

The Company is exposed to market risk, such as fluctuations in foreign currency exchange rates, commodity prices, equity compensation liabilities, and changes in interest rates, which may result in cash flow risks. For exposures not offset within its operations, the Company may enter into various derivative transactions pursuant to its risk management policies, which prohibit holding or issuing derivative financial instruments for speculative purposes. In certain cases, the Company may or may not designate these derivatives instruments as hedges for accounting purposes. Designation of derivative instruments is performed on a transaction basis to support hedge accounting. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the fair value or cash flows of the underlying exposures being hedged. The Company assesses the initial and ongoing effectiveness of its hedging relationships in accordance with its documented policy.

Market Risks

Foreign Currency Exchange Rate Risk

The Company manufactures and sells its products globally. As a result, the Company’s financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets in which the Company manufactures and sells its products. The Company generally tries to use natural hedges within its foreign currency activities to minimize foreign currency risk. Where natural hedges are not in place, the Company considers managing certain aspects of its foreign currency activities and larger transactions through the use of foreign currency options or forward contracts.

Concentrations of Credit Risk

Financial instruments including cash equivalents and derivative contracts expose the Company to counterparty credit risk for non-performance. The Company’s counterparties for cash equivalents and derivative contracts are banks and financial institutions that meet the Company’s requirement of high credit standing. The Company’s concentration of credit risk related to derivative contracts at March 31, 2021 and December 31, 2020 is not considered material to the condensed consolidated financial statements.

Derivative Instruments

The Company presents its derivative positions and any related material collateral under master netting agreements on a net basis. Derivative gains and losses associated with undesignated hedges are recognized in “Cost of sales (exclusive of depreciation and amortization)” in the condensed consolidated statements of income (loss).

Foreign Currency Forward Contracts

The Company enters into foreign currency forward purchase and sale contracts to mitigate its exposure to changes in exchange rates on certain intercompany and third-party trade receivables and payables. The fair value of these derivative instruments is not considered material to the condensed consolidated financial statements, refer to Note 9, “Fair Value” for additional information.

The following table summarizes by position the notional amounts for foreign currency forward contracts at March 31, 2021, all of which mature in the next twelve months:

	Notional Amount
Long positions	$	273
Short positions	$	(276)

Cash-Settled Share and Index Swap Transactions

The Company selectively uses swaps to reduce market risk associated with its deferred compensation liabilities, which increase as the Company’s stock price increases and decrease as the Company’s stock price decreases. The Company has a cash-settled share swap agreement that moves in the opposite direction of these liabilities, allowing the Company to fix a portion of the liabilities at a stated amount. At both March 31, 2021 and December 31, 2020, the Company hedged its deferred compensation liability related to approximately 1,700,000 common share equivalents. In addition, the Company has an S&P 500 index fund ETF swap agreement to further reduce its market risk, which acts as a natural hedge offsetting an equivalent amount of indexed investments in the Company's deferred compensation plans. The fair value of these derivative instruments is not considered material to the condensed consolidated financial statements, refer to Note 9, “Fair Value” for additional information.

Hedging Instruments

Cash Flow Hedges — Commodity Price Risk

The Company’s production processes are dependent upon the supply of certain raw materials that are exposed to price fluctuations on the open market. Commodity rate price forward contracts are executed to offset a portion of the exposure to potential change in prices for raw materials. The Company monitors its commodity price risk exposures regularly to maximize the overall effectiveness of its commodity forward contracts.

The Company has designated these contracts as cash flow hedging instruments. The Company records unrecognized gains and losses in other comprehensive income (loss) (“OCI” or “OCL”) and makes reclassifying adjustments into “Cost of sales (exclusive of depreciation and amortization)” within the condensed consolidated statements of income (loss) when the underlying hedged transaction is recognized in earnings. The Company had commodity derivatives outstanding with an equivalent notional amount of $17 million and $10 million at March 31, 2021 and December 31, 2020. Substantially all of the commodity price hedge contracts mature within one year. The carrying value of these commodity price hedge contracts designated as cash flow hedges is not considered material to the condensed consolidated financial statements.

Net Investment Hedge — Foreign Currency Borrowings

At December 31, 2020, the Company had foreign currency denominated debt, of which €344 million or $420 million, was designated as a net investment hedge in certain foreign subsidiaries and affiliates of the Company and is included in “Long-term debt” in the condensed consolidated balance sheets. Changes to its carrying value are included in the condensed consolidated statements of changes in shareholders’ equity in the foreign currency translation component of OCL and offset against the translation adjustments on the underlying net assets of those foreign subsidiaries and affiliates, which are also recorded in OCL. All of the outstanding foreign currency borrowings related to the net investment hedge were discharged on March 17, 2021, as a result, there are no outstanding foreign currency borrowings designated as a net investment hedge at March 31, 2021. The Company’s debt instruments are discussed further in Note 10, “Debt and Other Financing Arrangements”.

The following table represents the amount of gain (loss) recognized in accumulated other comprehensive income (loss) before any reclassifications into net income (loss) for derivative and non-derivative instruments designated as hedges for the three months ended March 31, 2021 and 2020:

	Three Months Ended March 31,
	2021		2020
Commodity price hedge contracts designated as cash flow hedges	$	2	$	(3)
Foreign currency borrowings designated as a net investment hedge	$	11	$	14

The Company estimates approximately $3 million included in accumulated OCI or OCL at March 31, 2021 will be reclassified into net income (loss) within the following twelve months. Refer to Note 15, “Shareholders' Equity” for further information.