Derivative Instruments and Hedging Activities

6 Months Ended

Jun. 30, 2015

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

G. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We are exposed to global market risk as part of our normal daily business activities.  To manage these risks, we enter into various derivative contracts.  These contracts include interest rate swap agreements, foreign currency contracts and metals contracts intended to hedge our exposure to copper and zinc. We review our hedging program, derivative positions and overall risk management on a regular basis.

Interest Rate Swap Agreements.  In March 2012, in connection with the issuance of $400 million of debt, we terminated the interest rate swap hedge relationships that we had entered into in August 2011.  These interest rate swaps were designated as cash flow hedges and effectively fixed interest rates on the forecasted debt issuance to variable rates based on 3-month LIBOR.  Upon termination, the ineffective portion of the cash flow hedges of approximately $2 million loss was recognized in our consolidated statement of operations in other, net.  The remaining loss of approximately $23 million from the termination of these swaps is being amortized as an increase to interest expense over the remaining term of the debt, through March 2022.

Foreign Currency Contracts.  Our 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, we, including certain of our European operations, entered into foreign currency forward contracts and foreign currency exchange contracts.

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

Metals Contracts.  We have entered into several contracts to manage our exposure to increases in the price of copper and zinc.  Gains (losses) related to these contracts are recorded in our condensed consolidated statements of operations in cost of sales.

The pre-tax (losses) gains included in our condensed consolidated statements of operations are as follows, in millions:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
Foreign currency contracts
Exchange contracts	$	(1	)	$	(1	)	$	3		$	(3	)
Forward contracts	—			—			(4		)	(1		)
Metal contracts	(3		)	3			(5		)	—
Interest rate swaps	(1		)	(1		)	(1		)	(1		)
Total (loss) gain	$	(5	)	$	1		$	(7	)	$	(5	)

We present our derivatives, net by counterparty due to the right of offset under master netting arrangements in the condensed consolidated balance sheet.  The notional amounts being hedged and the fair value of those derivative instruments are as follows, in millions:

	At June 30, 2015
	Notional
	Amount		Balance Sheet
Foreign currency contracts
Exchange contracts	$	18
Receivables			$	1
Forward contracts	49
Accrued liabilities			(3		)
Other liabilities			(1		)
Metals contracts	75
Accrued liabilities			(6		)

	At December 31, 2014
	Notional
	Amount		Balance Sheet
Foreign currency contracts
Exchange contracts	$	55
Receivables			$	6
Forward contracts	79
Other assets			2
Accrued liabilities			(1		)
Metals contracts	70
Accrued liabilities			(2		)

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