Financial Instruments

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Instruments

Financial Instruments

Interest Rate Risk Management

We use interest rate swap agreements to manage our interest rate exposure and to achieve a desired proportion of variable and fixed rate debt. These derivatives may be designated as fair value hedges or cash flow hedges depending on the nature of the risk being hedged.

Fair Value Hedges

As of September 30, 2019, pay variable/receive fixed interest rate swaps with notional amounts of $200 and net asset fair value of $2 were designated and accounted for as fair value hedges. The swaps were structured to hedge the fair value of related debt by converting them from fixed rate instruments to variable rate instruments. No ineffective portion was recorded to earnings for the nine months ended September 30, 2019.

The following is a summary of our fair value hedges at September 30, 2019:

Debt Instrument	Year First Designated	Notional Amount		Net Fair Value		Weighted Average Interest Rate Paid		Interest Rate Received		Basis	Maturity
Senior Note 2021	2014	$	200	$	2	3.32	%	4.5	%	Libor	2021

Foreign Exchange Risk Management

We are a global company that is exposed to foreign currency exchange rate fluctuations in the normal course of our business. As a part of our foreign exchange risk management strategy, we use derivative instruments, primarily forward contracts and purchased option contracts, to hedge the following foreign currency exposures, thereby reducing volatility of earnings or protecting fair values of assets and liabilities:

•Foreign currency-denominated assets and liabilities

• Forecasted purchases and sales in foreign currency

At September 30, 2019 and December 31, 2018, we had outstanding forward exchange and purchased option contracts with gross notional values of $982 and $1,103 respectively, with terms of less than 12 months. Approximately 80% of the contracts at September 30, 2019 mature within three months, 10% mature in three to six months and 10% in six to twelve months. The associated currency exposures being hedged at September 30, 2019 were materially consistent with our year-end currency exposures. There has not been any material change in our hedging strategy.

Foreign Currency Cash Flow Hedges

We designate a portion of our foreign currency derivative contracts as cash flow hedges of our foreign currency-denominated inventory purchases, sales and expenses. The net asset fair value of these contracts were $4 and $8 as of September 30, 2019 and December 31, 2018, respectively.

Summary of Derivative Instruments Fair Value

The following table provides a summary of the fair value amounts of our derivative instruments:

Designation of Derivatives	Balance Sheet Location	September 30, 2019			December 31, 2018
Derivatives Designated as Hedging Instruments
Foreign exchange contracts - forwards	Other current assets	$	6		$	7
	Accrued expenses and other current liabilities	(2		)	—
Foreign currency options	Other current assets	—			1
Interest rate swaps	Other long-term assets	2			—
	Other long-term liabilities	—			(3		)
	Net designated derivative asset	$	6		$	5
Derivatives NOT Designated as Hedging Instruments
Foreign exchange contracts – forwards	Other current assets	$	1		$	7
	Accrued expenses and other current liabilities	(4		)	(1		)
	Net undesignated derivative asset	$	(3	)	$	6
Summary of Derivatives	Total Derivative assets	$	9		$	15
	Total Derivative liabilities	(6		)	(4		)
	Net Derivative asset	$	3		$	11

Summary of Derivative Instruments Gains (Losses)

Derivative gains and (losses) affect the income statement based on whether such derivatives are designated as hedges of underlying exposures. The following is a summary of derivative gains (losses).

Designated Derivative Instruments Gains (Losses)

The following table provides a summary of gains (losses) on derivative instruments:

	Three Months Ended September 30,					Nine Months Ended September 30,
Gain (Loss) on Derivative Instruments	2019		2018			2019			2018
Fair Value Hedges - Interest Rate Contracts
Derivative gain (loss) recognized in interest expense	$	—	$	(1	)	$	5		$	(7	)
Hedged item (loss) gain recognized in interest expense	—		1			(5		)	7
Cash Flow Hedges - Foreign Exchange Forward Contracts and Options
Derivative gain (loss) recognized in OCI (effective portion)	$	4	$	(13	)	$	10		$	(3	)
Derivative gain (loss) reclassified from AOCL to income - Cost of sales (effective portion)	3		(1		)	6			(13		)

During the three and nine months ended September 30, 2019 and 2018, no amount of ineffectiveness was recorded in the Condensed Consolidated Statements of Income for these designated cash flow hedges and all components of each derivative’s gain or (loss) were included in the assessment of hedge effectiveness. In addition, no amount was recorded for an underlying exposure that did not occur or was not expected to occur.

As of September 30, 2019, a net after-tax gain of $7 was recorded in Accumulated other comprehensive loss associated with our cash flow hedging activity. The entire balance is expected to be reclassified into Net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.

Non-Designated Derivative Instruments Gains (Losses)

Non-designated derivative instruments are primarily instruments used to hedge foreign currency-denominated assets and liabilities. They are not designated as hedges since there is a natural offset for the remeasurement of the underlying foreign currency-denominated asset or liability.

The following table provides a summary of gains (losses) on non-designated derivative instruments:

Derivatives NOT Designated as Hedging Instruments		Three Months Ended September 30,					Nine Months Ended September 30,
	Location of Derivative Gain (Loss)	2019		2018			2019		2018
Foreign exchange contracts – forwards	Other expense – Currency gain (loss), net	$	2	$	(7	)	$	3	$	11

For the three and nine months ended September 30, 2019 currency losses, net were $4 and $6, respectively, and for the three and nine months ended September 30, 2018 were $3 and $2, respectively. Net currency gains and losses include the mark-to-market adjustments of the derivatives not designated as hedging instruments and the related cost of those derivatives as well as the remeasurement of foreign currency-denominated assets and liabilities and are included in Other expenses, net.