Note 12 - Fair Value Measurements and Derivatives

9 Months Ended

Sep. 30, 2020

Notes to Financial Statements

Fair Value Disclosures [Text Block]

In measuring the fair value of our assets and liabilities, we use market data or assumptions that we believe market participants would use in pricing an asset or liability including assumptions about risk when appropriate. Our valuation techniques include a combination of observable and unobservable inputs.

Fair value measurements on a recurring basis — Assets and liabilities that are carried in our balance sheet at fair value are as follows:

			Fair Value
Category	Balance Sheet Location	Fair Value Level	September 30, 2020		December 31, 2019
Certificates of deposit	Marketable securities	2	$	22	$	19
Currency forward contracts
Cash flow hedges	Accounts receivable - Other	2		3		14
Cash flow hedges	Other accrued liabilities	2		8		2
Undesignated	Accounts receivable - Other	2		5		1
Undesignated	Other accrued liabilities	2		5		1
Interest rate collars	Other accrued liabilities	2		9		3
Currency swaps
Cash flow hedges	Other noncurrent liabilities	2		62		71

Fair Value Level 1 assets and liabilities reflect quoted prices in active markets. Fair Value Level 2 assets and liabilities reflect the use of significant other observable inputs.

Fair value of financial instruments — The financial instruments that are not carried in our balance sheet at fair value are as follows:

			September 30, 2020				December 31, 2019
	Fair Value Level		Carrying Value		Fair Value		Carrying Value		Fair Value
Long term debt		2	$	2,832	$	2,884	$	2,384	$	2,450

Interest rate derivatives — Our portfolio of derivative financial instruments periodically includes interest rate swaps and interest rate collars designed to mitigate our interest rate risk. As of September 30, 2020, no fixed-to-floating interest rate swaps remain outstanding. However, a $4 fair value adjustment to the carrying amount of our December 2024 Notes, associated with a fixed-to-floating interest rate swap that had been executed but was subsequently terminated during 2015, remains deferred at September 30, 2020. This amount is being amortized as a reduction of interest expense through the period ending December 2024, the scheduled maturity date of the December 2024 Notes. The amount amortized as a reduction of interest expense was not material during the three months and nine months ended  September 30, 2020. We have outstanding interest rate collars with a notional value of $425 that will mature in December 2021. For interest rate collars, no payments or receipts are exchanged unless interest rates rise or fall in excess of a predetermined ceiling or floor rate.

Foreign currency derivatives — Our foreign currency derivatives include forward contracts associated with forecasted transactions, primarily involving the purchases and sales of inventory through the next fifteen months, as well as currency swaps associated with certain recorded external notes payable and intercompany loans receivable and payable. Periodically, our foreign currency derivatives also include net investment hedges of certain of our investments in foreign operations.

We have executed fixed-to-fixed cross-currency swaps in conjunction with the issuance of certain notes to eliminate the variability in the functional-currency-equivalent cash flows due to changes in exchange rates associated with the forecasted principal and interest payments. All of the underlying designated financial instruments, and any subsequent replacement debt, have been designated as the hedged items in each respective cash flow hedge relationship, as shown in the table below. Designated as cash flow hedges of the forecasted principal and interest payments of the underlying designated financial instruments, or subsequent replacement debt, all of the swaps economically convert the underlying designated financial instruments into the functional currency of each respective holder. The impact of the interest rate differential between the inflow and outflow rates on all fixed-to-fixed cross-currency swaps is recognized during each period as a component of interest expense.

The following fixed-to-fixed cross-currency swaps were outstanding at September 30, 2020:

Underlying Financial Instrument							Derivative Financial Instrument
Description	Type	Face Amount		Rate			Designated Notional Amount		Traded Amount		Inflow Rate			Outflow Rate
June 2026 Notes	Payable	$	375		6.50	%	$	375	€	338		6.50	%		5.14	%
April 2025 Notes	Payable	$	400		5.75	%	$	400	€	371		5.75	%		3.85	%
Luxembourg Intercompany Notes	Receivable	€	278		3.70	%	€	278	$	300		5.38	%		3.70	%

All of the swaps are expected to be highly effective in offsetting the corresponding currency-based changes in cash outflows related to the underlying designated financial instruments. Based on our qualitative assessment that the critical terms of all of the underlying designated financial instruments and all of the associated swaps match and that all other required criteria have been met, we do not expect to incur any ineffectiveness. As effective cash flow hedges, changes in the fair value of the swaps will be recorded in OCI during each period. Additionally, to the extent the swaps remain effective, the appropriate portion of AOCI will be reclassified to earnings each period as an offset to the foreign exchange gain or loss resulting from the remeasurement of the underlying designated financial instruments. See Note 11 for additional information about the June 2026 Notes and the April 2025 Notes. To the extent the swaps are no longer effective, changes in their fair values will be recorded in earnings.

The total notional amount of outstanding foreign currency forward contracts, involving the exchange of various currencies, was $263 at September 30, 2020 and $508 at December 31, 2019. The total notional amount of outstanding foreign currency swaps, including the fixed-to-fixed cross-currency swaps, was $1,105 at September 30, 2020 and $1,090 at December 31, 2019.

The following currency derivatives were outstanding at September 30, 2020:

		Notional Amount (U.S. Dollar Equivalent)
Functional Currency	Traded Currency	Designated		Undesignated		Total		Maturity
U.S. dollar	Mexican peso, euro	$	54	$	43	$	97	Jun-2021
Euro	U.S. dollar, Canadian dollar, Hungarian forint, British pound, Swiss franc, Indian rupee, Russian ruble, Mexican peso, Australian dollar, Singapore dollar, Japanese yen, Chinese renminbi		55		29		84	Jan-2024
British pound	U.S. dollar, euro				6		6	Nov-2020
South African rand	U.S. dollar, Thai baht		1		5		6	Dec-2020
Canadian dollar	U.S. dollar		1				1	Feb-2021
Brazilian real	U.S. dollar, euro		32		11		43	Jun-2021
Indian rupee	U.S. dollar, British pound, euro				21		21	Jun-2021
Chinese renminbi	Canadian dollar, euro				5		5	Oct-2020
Total forward contracts			143		120		263
U.S. dollar	euro		330				330	Nov-2027
Euro	U.S. dollar		775				775	Jun-2026
Total currency swaps			1,105		—		1,105
Total currency derivatives		$	1,248	$	120	$	1,368

Designated cash flow hedges — With respect to contracts designated as cash flow hedges, changes in fair value during the period in which the contracts remain outstanding are reported in OCI to the extent such contracts remain effective. Effectiveness is measured by using regression analysis to determine the degree of correlation between the change in the fair value of the derivative instrument and the change in the associated foreign currency exchange rates. Changes in fair value of contracts not designated as cash flow hedges or as net investment hedges are recognized in other income (expense), net in the period in which the changes occur. Realized gains and losses from currency-related forward contracts associated with forecasted transactions or from other derivative instruments, including those that have been designated as cash flow hedges and those that have not been designated, are recognized in the same line item in the consolidated statement of operations in which the underlying forecasted transaction or other hedged item is recorded. Accordingly, amounts are potentially recorded in sales, cost of sales or, in certain circumstances, other income (expense), net.

The following table provides a summary of deferred gains (losses) reported in AOCI as well as the amount expected to be reclassified to income in one year or less:

	Deferred Gain (Loss) in AOCI
	September 30, 2020			December 31, 2019			Gain (loss) expected to be reclassified into income in one year or less
Forward Contracts	$	(5	)	$	6		$	(5	)
Collar		(9	)		(3	)
Cross-Currency Swaps		20			(36	)
Total	$	6		$	(33	)	$	(5	)

The following table provides a summary of the location and amount of gains or losses recognized in the consolidated statement of operations associated with cash flow hedging relationships:

	Three Months Ended September 30, 2020
Derivatives Designated as Cash Flow Hedges	Net sales		Cost of sales		Other income (expense), net
Total amounts of income and expense line items presented in the consolidated statement of operations in which the effects of cash flow hedges are recorded	$	1,994	$	1,780	$	(8	)
(Gain) or loss on cash flow hedging relationships
Foreign currency forwards
Amount of (gain) loss reclassified from AOCI into income				3
Cross-currency swaps
Amount of (gain) loss reclassified from AOCI into income						49

	Nine Months Ended September 30, 2020
Derivatives Designated as Cash Flow Hedges	Net sales		Cost of sales		Other income (expense), net
Total amounts of income and expense line items presented in the consolidated statement of operations in which the effects of cash flow hedges are recorded	$	4,998	$	4,588	$	(5	)
(Gain) or loss on cash flow hedging relationships
Foreign currency forwards
Amount of (gain) loss reclassified from AOCI into income		1		15		1
Cross-currency swaps
Amount of (gain) loss reclassified from AOCI into income						51

	Three Months Ended September 30, 2019
Derivatives Designated as Cash Flow Hedges	Net sales		Cost of sales			Other income (expense), net
Total amounts of income and expense line items presented in the consolidated statement of operations in which the effects of cash flow hedges are recorded	$	2,164	$	1,882		$	(8	)
(Gain) or loss on cash flow hedging relationships
Foreign currency forwards
Amount of (gain) loss reclassified from AOCI into income				(2	)
Cross-currency swaps
Amount of (gain) loss reclassified from AOCI into income							(47	)

	Nine Months Ended September 30, 2019
Derivatives Designated as Cash Flow Hedges	Net sales		Cost of sales			Other income (expense), net
Total amounts of income and expense line items presented in the consolidated statement of operations in which the effects of cash flow hedges are recorded	$	6,633	$	5,725		$	(31	)
(Gain) or loss on cash flow hedging relationships
Foreign currency forwards
Amount of (gain) loss reclassified from AOCI into income				(7	)
Cross-currency swaps
Amount of (gain) loss reclassified from AOCI into income							(55	)

The amounts reclassified from AOCI into income for the cross-currency swaps represent an offset to a foreign exchange loss on our foreign currency-denominated intercompany and external debt instruments.

Certain of our hedges of forecasted transactions have not formally been designated as cash flow hedges. As undesignated forward contracts, the changes in the fair value of such contracts are included in earnings for the duration of the outstanding forward contract. Any realized gain or loss on the settlement of such contracts is recognized in the same period and in the same line item in the consolidated statement of operations as the underlying transaction. The following table provides a summary of the location and amount of gains or losses recognized in the consolidated statement of operations associated with undesignated hedging relationships.

	Amount of Gain (Loss) Recognized in Income
Derivatives Not Designated as Hedging Instruments	Three Months Ended September 30, 2020		Three Months Ended September 30, 2019		Location of Gain or (Loss) Recognized in Income
Foreign currency forward contracts	$	(2)	$	(3)	Other income (expense), net

	Amount of Gain (Loss) Recognized in Income
Derivatives Not Designated as Hedging Instruments	Nine Months Ended September 30, 2020			Nine Months Ended September 30, 2019			Location of Gain or (Loss) Recognized in Income
Foreign currency forward contracts	$	(8	)	$	(15	)	Other income (expense), net

During the first quarter of 2019 we settled the outstanding undesignated Swiss franc notional deal contingent forward related to the ODS acquisition for $21, resulting in a realized loss of $13 included in other income (expense), net in the first quarter of 2019.

Net investment hedges — We periodically designate derivative contracts or underlying non-derivative financial instruments as net investment hedges. With respect to contracts designated as net investment hedges, we apply the forward method, but for non-derivative financial instruments designated as net investment hedges, we apply the spot method. Under both methods, we report changes in fair value in the cumulative translation adjustment (CTA) component of OCI during the period in which the contracts remain outstanding to the extent such contracts and non-derivative financial instruments remain effective.