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.

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. Provided below are details of the Company’s exposures by type of risk and derivative instruments by type of hedge designation.

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 classified as follows:

As the Company markets its products in over 200 countries and territories, it is exposed to currency fluctuations related to manufacturing and selling its products in currencies other than the U.S. dollar. The Company manages its foreign currency exposures through a combination of cost containment measures, sourcing strategies, selling price increases and the hedging of certain costs in an effort to minimize the impact on earnings of foreign currency rate movements.

The Company primarily utilizes foreign currency contracts, including forward and swap contracts, option contracts, foreign and 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. The duration of foreign currency contracts generally does not exceed 12 months and the contracts are valued using observable market rates (Level 2 valuation).

The Company manages its targeted mix of fixed and floating rate debt with debt issuances and by entering into interest rate swaps in order to mitigate fluctuations in earnings and cash flows that may result from interest rate volatility. The notional amount, interest payment and maturity date of the swaps generally match the principal, interest payment and maturity date of the related debt, and the swaps are valued using observable benchmark rates (Level 2 valuation).

The Company is exposed to price volatility related to raw materials used in production, such as resins, essential oils, pulp, tropical oils, tallow, poultry, corn and soybeans. The Company manages its raw material exposures through a combination of cost containment measures, sourcing strategies, ongoing productivity initiatives and the limited use of commodity hedging contracts. Futures contracts are used on a limited basis, primarily in the Hill’s Pet Nutrition segment, to manage volatility related to raw material inventory purchases of certain traded commodities, and these contracts are measured using quoted commodity exchange prices (Level 1 valuation). The duration of the commodity contracts generally does not exceed 12 months.

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 with diverse, credit-worthy counterparties based upon both strong credit ratings and other credit considerations.

The company adopted ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," beginning on January 1, 2019. Refer to Note 2, Summary of Significant Accounting Policies.

The following table summarizes the fair value of the Company’s derivative instruments and other financial instruments which are carried at fair value in the Company’s Consolidated Balance Sheets as of December 31, 2019 and December 31, 2018:



	Assets					Liabilities
	Account	Fair Value				Account	Fair Value
Designated derivative instruments		December 31, 2019		December 31, 2018			December 31, 2019		December 31, 2018
Interest rate swap contracts	Other current assets	$	—	$	—	Other accruals	$	—	$	1
Interest rate swap contracts	Other assets	4		—		Other liabilities	—		8
Foreign currency contracts	Other current assets	6		20		Other accruals	15		8
Foreign currency contracts	Other assets	—		—		Other liabilities	14		21
Commodity contracts	Other current assets	—		—		Other accruals	—		—
Total designated		$	10	$	20		$	29	$	38

Other financial instruments
Marketable securities	Other current assets	23		10
Total other financial instruments		$	23	$	10

The carrying amount of cash, cash equivalents, accounts receivable and short-term debt approximated fair value as of December 31, 2019 and 2018. The estimated fair value of the Company’s long-term debt, including the current portion, as of December 31, 2019 and 2018, was $8,056 and $6,434, respectively, and the related carrying value was $7,587 and $6,354, 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).



	December 31, 2019
	Foreign Currency Contracts		Foreign Currency Debt		Interest Rate Swaps		Commodity Contracts		Total
Fair Value Hedges	$	388	$	—	$	400	$	—	$	788
Cash Flow Hedges	$	761	$	—	$	—	$	20	$	781
Net Investment Hedges	$	478	$	3,856	$	—	$	—	$	4,334



	December 31, 2018
	Foreign Currency Contracts		Foreign Currency Debt		Interest Rate Swaps		Commodity Contracts		Total
Fair Value Hedges	$	327	$	—	$	900	$	—	$	1,227
Cash Flow Hedges	$	782	$	—	$	—	$	14	$	796
Net Investment Hedges	$	482	$	1,396	$	—	$	—	$	1,878

The following table presents the location and amount of gains (losses) recognized on the Company’s Consolidated Statements of Income:



	Twelve Months Ended December 31,
	2019								2018
	Cost of sales		Selling, general and administrative expenses			Interest (income) expense, net			Cost of sales			Selling, general and administrative expenses			Interest (income) expense, net
Gain (loss) on hedges recognized in income:
Interest rate swaps designated as fair value hedges:
Derivative instrument	$	—	$	—		$	(11	)	$	—		$	—		$	(2	)
Hedged items	—		—			11			—			—			2
Foreign currency contracts designated as fair value hedges:
Derivative instrument	—		10			—			—			(1		)	—
Hedged items	—		(10		)	—			—			1			—
Foreign currency contracts designated as cash flow hedges:
Amount reclassified from OCI	5		—			—			(4		)	—			—
Commodity contracts designated as cash flow hedges:
Amount reclassified from OCI	1		—			—			1			—			—
Total gain (loss) on hedges recognized in income	$	6	$	—		$	—		$	(3	)	$	—		$	—



	Twelve Months Ended
	December 31,
	2019			2018
Foreign currency contracts designated as cash flow hedges:
Gain (loss) recognized in OCI	(9		)	10
Commodity contracts designated as cash flow hedges:
Gain (loss) recognized in OCI	—			—
Foreign currency contracts designated as net investment hedges:
Gain (loss) on instruments	4			33
Gain (loss) on hedged items	(4		)	(33		)
Foreign currency debt designated as net investment hedges:
Gain (loss) on instruments	12			93
Gain (loss) on hedged items	(12		)	(93		)
Total unrealized gain (loss) on hedges recognized in OCI	$	(9	)	$	10