Derivative Instruments

9 Months Ended

Sep. 30, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

9. Derivative Instruments

We use derivative instruments to manage selected commodity price and foreign currency exposures as described below. We do not use derivative instruments for speculative trading purposes, and we typically do not hedge beyond two years. Cash flows from derivative instruments are included in net cash used for operating activities in the condensed consolidated statements of cash flows.

COMMODITY DERIVATIVE INSTRUMENTS

As of September 30, 2012, we had swap and option contracts to hedge $27 million notional amounts of natural gas. All of these contracts mature by December 31, 2013. For contracts designated as cash flow hedges, the unrealized loss that remained in AOCI as of September 30, 2012 was $1 million. AOCI also included $1 million of losses related to closed derivative contracts hedging underlying transactions that have not yet affected earnings. No ineffectiveness was recorded on contracts designated as cash flow hedges in the first nine months of 2012. Gains and losses on contracts designated as cash flow hedges are reclassified into earnings when the underlying forecasted transactions affect earnings. For contracts designated as cash flow hedges, we reassess the probability of the underlying forecasted transactions occurring on a regular basis. Changes in fair value on contracts not designated as cash flow hedges are recorded to earnings. The fair value of those contracts not designated as cash flow hedges was a $1 million unrealized gain as of September 30, 2012.

FOREIGN EXCHANGE DERIVATIVE INSTRUMENTS

We have foreign exchange forward contracts to hedge changes in the value of an intercompany loan between certain foreign subsidiaries due to changes in foreign exchange rates. The notional amount of these contracts was $32 million as of September 30, 2012, and they mature on March 27, 2013. We do not apply hedge accounting for these contracts and all changes in the fair value are recorded to earnings. As of September 30, 2012, the fair value of these contracts was an immaterial unrealized gain.

We have foreign exchange forward contracts to hedge purchases of products and services denominated in foreign currencies. The notional amount of these contracts was $104 million as of September 30, 2012, and they mature by December 23, 2013. These forward contracts are designated as cash flow hedges and no ineffectiveness was recorded in the first nine months of 2012. Gains and losses on the contracts are reclassified into earnings when the underlying transactions affect earnings. The fair value of these contracts that remained in AOCI was a $1 million unrealized gain as of September 30, 2012.

During the third quarter of 2012, we entered into foreign exchange forward contracts to hedge a portion of our net investment in one of our European subsidiaries. The notional amount of these contracts was $25 million, and they mature on October 29, 2012. These forward contracts are designated as net investment hedges and no ineffectiveness was recorded in the third quarter of 2012. Gains and losses on derivatives designated as net investment hedges, to the extent they are effective as hedges, remain in AOCI until such point when the investment is either sold or liquidated. The fair value of these contracts that remained in AOCI was a $1 million unrealized loss as of September 30, 2012.

COUNTERPARTY RISK

We are exposed to credit losses in the event of nonperformance by the counterparties to our derivative instruments. As of September 30, 2012, our derivatives were in a net asset position of $1 million. All of our counterparties have investment grade credit ratings; accordingly, we anticipate that they will be able to fully satisfy their obligations under the contracts. Additionally, the derivatives are governed by master netting agreements negotiated between us and the counterparties that reduce our counterparty credit exposure. The agreements outline the conditions (such as credit ratings and net derivative fair values) upon which we, or the counterparties, are required to post collateral. As required by certain of our agreements, we had $1 million of collateral provided to our counterparties related to our derivatives. No additional collateral is required under these agreements. We have not adopted an accounting policy to offset fair value amounts related to derivative contracts under our master netting arrangements. Amounts paid as cash collateral are included in receivables on our condensed consolidated balance sheets.

FINANCIAL STATEMENT INFORMATION

The following are the pretax effects of derivative instruments on the condensed consolidated statements of operations for the three months ended September 30,2012 and 2011.

	Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives (Effective Portion)						Location of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
(millions)	2012			2011				2012			2011
Derivatives in Cash Flow Hedging Relationships
Commodity contracts	$	1		$	(1	)	Cost of products sold	$	(3	)	$	(4	)
Foreign exchange contracts	—			8			Cost of products sold	1			(2		)
Derivatives in Net Investment Hedging Relationships
Foreign exchange contracts	(1		)	$	—		Other income, net	—			$	—
Total	$	—		$	7			$	(2	)	$	(6	)

	Location of Gain or (Loss)  Recognized in Income on Derivatives	Amount of Gain or (Loss) Recognized in Income on Derivatives
(millions)		2012		2011
Derivatives Not Designated as Hedging Instruments
Commodity contracts	Cost of products sold	$	—	$	(2	)
Foreign exchange contracts	Other income, net	1		—
Total		$	1	$	(2	)

The following are the pretax effects of derivative instruments on the condensed consolidated statements of operations for the nine months ended September 30,2012 and 2011.

	Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives (Effective Portion)						Location of Gain or (Loss)  Reclassified from AOCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
(millions)	2012			2011				2012			2011
Derivatives in Cash Flow Hedging Relationships
Commodity contracts	$	(2	)	$	(2	)	Cost of products sold	$	(8	)	$	(13	)
Foreign exchange contracts	(1		)	5			Cost of products sold	1			(4		)
Derivatives in Net Investment Hedging Relationships
Foreign exchange contracts	(1		)	—			Other income, net	—			—
Total	$	(4	)	$	3			$	(7	)	$	(17	)

	Location of Gain or (Loss)  Recognized in Income on Derivatives	Amount of Gain or (Loss) Recognized in Income on Derivatives
(millions)		2012		2011
Derivatives Not Designated as Hedging Instruments
Commodity contracts	Cost of products sold	$	—	$	(3	)
Foreign exchange contracts	Other income, net	—		(1		)
Total		$	—	$	(4	)

The following are the fair values of derivative instruments and the location on our condensed consolidated balance sheets as of September 30, 2012 and December 31, 2011.

	Balance Sheet Location	Fair Value				Balance Sheet Location	Fair Value
(millions)		9/30/12		12/31/11			9/30/12		12/31/11
Derivatives in Cash Flow Hedging Relationships
Commodity contracts	Other current assets	$	2	$	1	Accrued expenses	$	2	$	8
Foreign exchange contracts	Other current assets	1		3		Accrued expenses	—		—
Derivatives in Net Investment Hedging Relationships
Foreign exchange contracts	Other current assets	—		—		Accrued expenses	1		—
Total derivatives in hedging relationships		$	3	$	4		$	3	$	8

Derivatives Not Designated as Hedging Instruments
Commodity contracts	Other current assets	$	1	$	—	Accrued expenses	$	—	$	—
Foreign exchange contracts	Other current assets	—		—		Accrued expenses	—		—
Total derivatives not designated as hedging instruments		$	1	$	—		$	—	$	—
Total derivatives	Total assets	$	4	$	4	Total liabilities	$	3	$	8

As of September 30, 2012, we had no derivatives designated as fair value hedges.