Derivative Instruments and Hedging Activities

6 Months Ended

Jun. 30, 2014

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

F. The Company is exposed to global market risk as part of its normal daily business activities.  To manage these risks, the Company enters into various derivative contracts.  These contracts include interest rate swap agreements, foreign currency exchange contracts and metals contracts intended to hedge the Company’s exposure to copper and zinc.  The Company reviews its hedging program, derivative positions and overall risk management on a regular basis.

Foreign Currency Contracts.  The Company’s net cash inflows and outflows exposed to the risk of changes in foreign currency exchange rates arise from the sale of products in countries other than the manufacturing source, foreign currency denominated supplier payments, debt and other payables, and investments in subsidiaries.  To mitigate this risk during the year, the Company, including certain European operations, enters into foreign currency forward contracts and foreign currency exchange contracts.

Gains (losses) related to foreign currency forward and exchange contracts are recorded in the Company’s condensed consolidated statements of operations in other income (expense), net.  In the event that the counterparties fail to meet the terms of the foreign currency forward contracts, the Company’s exposure is limited to the aggregate foreign currency rate differential with such institutions.

Metals Contracts.  The Company has entered into several contracts to manage its exposure to increases in the price of copper and zinc.  (Losses) gains related to these contracts are recorded in the Company’s condensed consolidated statements of operations in cost of sales.

The pre-tax (losses) gains included in the Company’s condensed consolidated statements of operations is as follows, in millions:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
Foreign Currency Contracts
Exchange Contracts	$	(1	)	$	—		$	(3	)	$	7
Forward Contracts	—			—			(1		)	2
Metal Contracts	3			(5		)	—			(9		)
Total gain (loss)	$	2		$	(5	)	$	(4	)	$	—

The Company presents its derivatives, net by counterparty due to the right of offset under master netting arrangements in current assets or current liabilities in the condensed consolidated balance sheet.  The notional amounts being hedged and the fair value of those derivative instruments, on a gross basis, are as follows, in millions:

	At June 30, 2014
	Notional
	Amount		Assets		Liabilities
Foreign Currency Contracts
Exchange Contracts	$	96
Current liabilities			$	—	$	2
Forward Contracts	50
Current liabilities			—		1
Metals Contracts	56
Current assets			2		1
Total			$	2	$	4

	At December 31, 2013
	Notional
	Amount		Assets		Liabilities
Foreign Currency Contracts
Exchange Contracts	$	53
Current liabilities			$	—	$	2
Forward Contracts	88
Current liabilities			—		1
Metals Contracts	48
Current liabilities			—		2
Total			$	—	$	5

The fair value of all metals and foreign currency derivative contracts is estimated on a recurring basis, using Level 2 inputs (significant other observable inputs).