Financial Instruments and Fair Value Measures

9 Months Ended

Sep. 30, 2011

Financial Instruments And Fair Value Measures [Abstract]

Financial Instruments and Fair Value Measures

Note11. Financial Instruments and Fair Value Measures

Credit and Market Risk—Financial instruments, including derivatives, expose us to counterparty credit risk for nonperformance and to market risk related to changes in interest and currency exchange rates and commodity prices. We manage our exposure to counterparty credit risk through specific minimum credit standards, diversification of counterparties, and procedures to monitor concentrations of credit risk. Our counterparties in derivative transactions are substantial investment and commercial banks with significant experience using such derivative instruments. We monitor the impact of market risk on the fair value and cash flows of our derivative and other financial instruments considering reasonably possible changes in interest rates, currency exchange rates and commodity prices and restrict the use of derivative financial instruments to hedging activities.

We continually monitor the creditworthiness of our customers to which we grant credit terms in the normal course of business. The terms and conditions of our credit sales are designed to mitigate or eliminate concentrations of credit risk with any single customer. Our sales are not materially dependent on a single customer or a small group of customers.

Foreign Currency Risk Management—We conduct our business on a multinational basis in a wide variety of foreign currencies. Our exposure to market risk for changes in foreign currency exchange rates arises from international financing activities between subsidiaries, foreign currency denominated monetary assets and liabilities and transactions arising from international trade. Our objective is to preserve the economic value of non-functional currency denominated cash flows. We attempt to hedge transaction exposures with natural offsets to the fullest extent possible and, once these opportunities have been exhausted, through foreign currency exchange forward and option contracts with third parties.

We hedge monetary assets and liabilities denominated in non-functional currencies. Prior to conversion into U.S. dollars, these assets and liabilities are remeasured at spot exchange rates in effect on the balance sheet date. The effects of changes in spot rates are recognized in earnings and included in Other (Income) Expense. We partially hedge forecasted sales and purchases, which predominantlyoccur in the next twelve months and are denominated in non-functional currencies, with currency forward contracts. Changes in the forecasted non-functional currency cash flows due to movements in exchange rates are substantially offset by changes in the fair value of the currency forward contracts designated as hedges. Market value gains and losses on these contracts are recognized in earnings when the hedged transaction is recognized. Open foreign currency exchange forward contracts mature predominantlyin the next twelve months. At September 30, 2011 and December 31, 2010, we had contracts with notional amounts of $4,631million and $5,733million respectively, to exchange foreign currencies, principally the U.S. dollar, Euro, British pound, Canadian dollar, Hong Kong dollar, Mexican peso, Swiss franc, Czech koruna, Chinese renminbi, Indian rupee, Singapore dollar, Swedish krona, Korean won and Thai baht.

Commodity Price Risk Management—Our exposure to market risk for commodity prices can result in changes in our cost of production. We primarily mitigate our exposure to commodity price risk through the use of long-term, fixed-price contracts with our suppliers and formula price agreements with suppliers and customers. We also enter into forward commodity contracts with third parties designated as hedges of anticipated purchases of several commodities. Forward commodity contracts are marked-to-market, with the resulting gains and losses recognized in earnings when the hedged transaction is recognized.At September 30, 2011and December 31, 2010, we had contracts with notional amounts of $45 millionand $23 million, respectively, related to forward commodity agreements, principally base metals and natural gas.

Interest Rate Risk Management—We use a combination of financial instruments, including long-term, medium-term and short-term financing, variable-rate commercial paper, and interest rate swaps to manage the interest rate mix of our total debt portfolio and related overall cost of borrowing. At September 30, 2011 and December 31, 2010, interest rate swap agreements designated as fair value hedges effectively changed $1,400and $600 million, respectively, of fixed rate debt at an average rate of 4.09and 3.88 percent, respectively, to LIBOR based floating rate debt. Our interest rate swaps mature at various dates through 2021.

Fair Value of Financial Instruments— The FASB's accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The FASB's guidance classifies the inputs used to measure fair value into the following hierarchy:

Level 1	Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2	Unadjusted quoted prices in active markets for similar assets or liabilities, or
	Unadjusted quoted prices for identical or similar assets or liabilities in markets
	that are not active, or
	Inputs other than quoted prices that are observable for the asset or liability
Level 3	Unobservable inputs for the asset or liability

The Company endeavors to utilize the best available information in measuring fair value. Financial and nonfinancial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company has determined that our available for sale investments in marketable equity securities are level 1 and our remaining financial assets and liabilities are level 2 in the fair value hierarchy. The following table sets forth the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as ofSeptember 30, 2011 and December 31, 2010:

		September 30,		December 31,
		2011		2010
Assets:
Foreign currency exchange contracts	$	16	$	16
Available for sale investments		332		322
Interest rate swap agreements		135		22
Forward commodity contracts		1		2
Liabilities:
Foreign currency exchange contracts	$	40	$	14
Forward commodity contracts		3		2

The foreign currency exchange contracts, interest rate swap agreements, and forward commodity contracts are valued using broker quotations, or market transactions in either the listed or over-the-counter markets. As such, these derivative instruments are classified within level 2. The Company also holds investments in commercial paper, certificates of deposits, and time deposits that are designated as available for sale and are valued using market transactions in over-the-counter markets. As such, these investments are classified within level 2.

The carrying value of cash and cash equivalents, trade accounts and notes receivables, payables, commercial paper and short-term borrowings contained in the Consolidated Balance Sheet approximates fair value. The following table sets forth the Company's financial assets and liabilities that were not carried at fair value:

	September 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Assets
Long-term receivables	$	127	$	127	$	203	$	199
Liabilities
Long-term debt and related current maturities	$	7,395	$	8,395	$	6,278	$	6,835

In the three and nine months ended September 30, 2011, the Company had nonfinancial assets, specifically property, plant and equipment, with a net book value of $128 million and $143 million, respectively, which were accounted for at fair value on a nonrecurring basis. These assets were tested for impairment and based on the fair value of these assets the Company recognized losses of $74 million and $85 million, respectively, in the three and nine months ended September 30, 2011. The Company has determined that the fair value measurements of these nonfinancial assets are level 3 in the fair value hierarchy. In the three and nine months ended September 30, 2010, the Company had nonfinancial assets, specifically property, plant and equipment, software and intangible assets, with a net book value of $13 million and $31 million, respectively, that were accounted for at fair value on a nonrecurring basis. Based on the fair value of these assets the Company recognized losses of $12 million and $29 million, respectively, in the three and nine months endedSeptember 30, 2010.

The derivatives utilized for risk management purposes as detailed above are included on the Consolidated Balance Sheet and impacted the Statement of Operations as follows:

Fair value of derivatives classified as assets consist of the following:
			September 30,		December 31,
Designated as a Hedge	Balance Sheet Classification		2011		2010
Foreign currency exchange contracts	Accounts, notes, and other receivables	$	15	$	10
Interest rate swap agreements	Other assets		135		22
Commodity contracts	Accounts, notes, and other receivables		1		2
			September 30,		December 31,
Not Designated as a Hedge	Balance Sheet Classification		2011		2010
Foreign currency exchange contracts	Accounts, notes, and other receivables	$	1	$	6
Fair value of derivatives classified as liabilities consist of the following:
			September 30,		December 31,
Designated as a Hedge	Balance Sheet Classification		2011		2010
Foreign currency exchange contracts	Accrued liabilities	$	36	$	9
Commodity contracts	Accrued liabilities		3		2
			September 30,		December 31,
Not Designated as a Hedge	Balance Sheet Classification		2011		2010
Foreign currency exchange contracts	Accrued liabilities	$	4	$	5

Gains (losses) recognized in OCI (effective portions) consist of the following:
		Three Months Ended				Nine Months Ended
		September, 30				September, 30
Designated Cash Flow Hedge		2011		2010		2011		2010
Foreign currency exchange contracts	$	(30)	$	8	$	(14)	$	16
Commodity contracts		(3)		(3)		(1)		(6)

Gains (losses) reclassified from AOCI to income consist of the following:
			Three Months Ended				Nine Months Ended
Designated			September 30,				September 30,
Cash Flow Hedge	Income Statement Location		2011		2010		2011		2010
Foreign currency exchange contracts	Product sales	$	10	$	(7)	$	26	$	(13)
	Cost of products sold		(8)		11		(24)		20
	Selling & general administrative		(2)		1		4		(2)
Commodity contracts	Cost of products sold	$	1	$	(1)	$	1	$	(4)

Ineffective portions of commodity derivative instruments designated in cash flow hedge relationships were insignificant in the three and nine months ended September 30, 2011and 2010and are classifiedwithin cost of products sold.Foreign currency exchange contracts in cash flow hedge relationships qualify as critical matched terms hedge relationships and as a result have no ineffectiveness.

Interest rate swap agreements are designated as hedge relationships with gains or (losses) on the derivative recognized in Interest and other financial charges offsetting the gains and losses on the underlying debt being hedged. Gains on interest rate swap agreements recognized in earnings were $80and $113 million in the three and nine months ended September 30, 2011. Gains on interest rate swap agreements recognized in earnings were $10 million and $30million in both the three and nine months ended September 30, 2010. These gains were fully offset by losses on the underlying debt being hedged.

We also economically hedge our exposure to changes in foreign exchange rates principally with forward contracts. These contracts are marked-to-market with the resulting gains and losses recognized in earnings offsetting the gains and losses on the non-functional currency denominated monetary assets and liabilities being hedged. For the three and nine months ended September 30, 2011, we recognized $4 million of expense and $34 million of income, respectively, in Other (Income) Expense. For the three and nine months ended September 30, 2010, we recognized $18 million of income and $2 million of expense, respectively, in Other (Income) Expense.