Derivative Instruments

In the normal course of business, the Company is exposed to global market risks, including the effects of changes in foreign currency exchange rates and interest rates. The Company uses derivative instruments to manage its exposure to such risks and may elect to designate certain derivatives as hedging instruments under ASC 815, Derivatives and Hedging. The Company formally documents all relationships between designated hedging instruments and hedged items as well as its risk management objectives and strategies for undertaking hedge transactions. The Company does not hold or issue derivatives for trading or speculative purposes.

In accordance with ASC 815, the Company recognizes derivative instruments as either assets or liabilities on the Consolidated Balance Sheets and measures them at fair value. The following table presents the fair value of its derivative instruments (in millions):



	Asset / (Liability)
		Fair Values as of
	Balance Sheet Classification	September 29, 2018			December 31, 2017
Derivative instruments designated as hedges:
Foreign exchange contracts	Prepaid expenses and other current assets	$	15		$	—
Foreign exchange contracts	Accrued liabilities	—			(9		)
Forward interest rate swaps	Accrued liabilities	(1		)	(2		)
Forward interest rate swaps	Other long-term liabilities	—			(8		)
Total derivative instruments designated as hedges		$	14		$	(19	)

Derivative instruments not designated as hedges:
Foreign exchange contracts	Prepaid expenses and other current assets	$	1		$	—
Forward interest rate swaps	Other long-term assets	17			—
Foreign exchange contracts	Accrued liabilities	—			(2		)
Forward interest rate swaps	Accrued liabilities	(2		)	(1		)
Forward interest rate swaps	Other long-term liabilities	—			(7		)
Total derivative instruments not designated as hedges		$	16		$	(10	)
Total net derivative asset (liability)		$	30		$	(29	)

The following table presents the gains (losses) from changes in fair values of derivatives that are not designated as hedges (in millions):



	Gain (Loss) Recognized in Income
		Three Months Ended					Nine Months Ended
	Statements of Operations Classification	September 29, 2018		September 30, 2017			September 29, 2018		September 30, 2017
Derivative instruments not designated as hedges:
Foreign exchange contracts	Foreign exchange (loss) gain	$	1	$	(6	)	$	2	$	(22	)
Forward interest rate swaps	Interest expense, net	6		1			24		2
Total gain (loss) recognized in income		$	7	$	(5	)	$	26	$	(20	)

Activities related to derivative instruments are reflected within Net cash provided by operating activities within the Statements of Cash Flows.

Credit and Market Risk Management

Financial instruments, including derivatives, expose the Company to counterparty credit risk of nonperformance and to market risk related to currency exchange rate and interest rate fluctuations. The Company manages its exposure to counterparty credit risk by establishing minimum credit standards, diversifying its counterparties, and monitoring its concentrations of credit. The Company’s counterparties are commercial banks with expertise in derivative financial instruments. The Company evaluates the impact of market risk on the fair value and cash flows of its derivative and other financial instruments by considering reasonably possible changes in interest rates and currency exchange rates. The Company continually monitors the creditworthiness of the customers to which it grants credit terms in the normal course of business. The terms and conditions of the Company’s credit policies are designed to mitigate or eliminate concentrations of credit risk with any single customer.

The Company’s master netting and other similar arrangements with the respective counterparties allow for net settlement under certain conditions, which are designed to reduce credit risk by permitting net settlement with the same counterparty. We elect to present the assets and liabilities of our derivative financial instruments on a net basis on the Consolidated Balance Sheets. If the derivative financial instruments had been presented gross on the Consolidated Balance Sheets, the asset and liability positions each would have been increased by $1 million as of September 29, 2018 and $11 million at December 31, 2017, respectively.

Foreign Currency Exchange Risk Management

The Company conducts business on a multinational basis in a wide variety of foreign currencies. Exposure to market risk for changes in foreign currency exchange rates arises from euro denominated external revenues, cross-border financing activities between subsidiaries, and foreign currency denominated monetary assets and liabilities. The Company manages its objective of preserving the economic value of non-functional currency denominated cash flows by initially hedging transaction exposures with natural offsets to the fullest extent possible and, once these opportunities have been exhausted, through foreign exchange forward and option contracts.

The Company manages the exchange rate risk of anticipated euro denominated sales using forward contracts which typically mature within twelve months of execution. The Company designates these derivative contracts as cash flow hedges. Unrealized gains and losses on these contracts are deferred in Accumulated other comprehensive income (loss) (“AOCI”) on the Company’s Consolidated Balance Sheets until the contract is settled and the hedged sale is realized. The realized gain or loss is then recorded as an adjustment to Net sales on the Consolidated Statements of Operations. Realized amounts reclassified to Net sales were a $7 million gain and a $5 million loss for the quarter ending September 29, 2018 and September 30, 2017, respectively. For the comparable nine-month period ended September 29, 2018 and September 30, 2017, realized amounts reclassified to Net sales were a $1 million gain and a $4 million loss, respectively. As of September 29, 2018, and December 31, 2017, the notional amounts of the Company’s foreign exchange cash flow hedges were €449 million and €389 million, respectively. The Company has reviewed cash flow hedges for effectiveness and determined they are highly effective.

The Company uses forward contracts, which are not designated as hedging instruments, to manage its balance sheet exposures related to its Brazilian real, British pound, Euro, Canadian dollar, Czech koruna, Australian dollar, Swedish krona, Japanese yen Singapore dollars, Mexican Peso and Chinese Yuan denominated net assets. These forward contracts typically mature within one-month after execution. Monetary gains and losses on these forward contracts are recorded in income each quarter and are generally offset by the transaction gains and losses related to their net asset positions. The notional values and the net fair value of these outstanding contracts are as follows (in millions):



	September 29, 2018		December 31, 2017
Notional balance of outstanding contracts:
British Pound/U.S. Dollar	£	7	£	13
Euro/U.S. Dollar	€	—	€	108
British Pound/Euro	£	—	£	5
Canadian Dollar/U.S. Dollar	$	2	$	12
Czech Koruna/U.S. Dollar	Kč		Kč	361
Brazilian Real/U.S. Dollar	R$	—	R$	34
Australian Dollar/U.S. Dollar	A$	26	A$	55
Swedish Krona/U.S. Dollar	kr	—	kr	13
Japanese Yen/U.S. Dollar	¥	166	¥	151
Singapore Dollar/U.S. Dollar	S$	6	S$	4
Mexican Peso/U.S. Dollar	Mex$	124	Mex$
Chinese Yuan/U.S. Dollar	¥	59	¥
Net fair value of asset (liability) of outstanding contracts	$	1	$	(2	)

The Company has significantly reduced the use of non-designated forward contracts to manage Euro exposure in the current period. In August 2018, the Company made a Euro denominated borrowing on the Revolving Credit Facility. See Note 9, Long-Term Debt. The Euro borrowing will predominately function as the hedge on the Euro exposure.

Interest Rate Risk Management

The Company’s debt consists of borrowings under two term loans (“Term Loan A” and “Term Loan B”), the Revolving Credit Facility and the receivables financing facility which bear interest at variable rates plus an applicable margin. See Note 9, Long-Term Debt. As a result, the Company is exposed to market risk associated with the variable interest rate payments on the term loans, revolving credit facility and receivables financing facility.

The Company manages its exposure to changes in interest rates by utilizing interest rate swaps to hedge this exposure and to achieve a desired proportion of fixed versus floating-rate debt, based on current and projected market conditions. The Company does not enter into derivative instruments for trading or speculative purposes.

In December 2017, the Company entered into an $800 million forward long-term interest rate swap agreement to lock into a fixed LIBOR interest rate base for debt facilities subject to monthly interest payments, including Term Loan A, the Revolving Credit Facility and receivables financing facility. Under the terms of the agreement, $800 million in variable-rate debt will be swapped for a fixed interest rate with net settlement terms due effective in December 2018. The changes in fair value of these swaps are not designated as hedges and are recognized immediately as Interest expense, net on the Consolidated Statements of Operations.

The Company previously had a floating-to-fixed interest rate swap, which was designated as a cash flow hedge. This swap was terminated and hedge accounting treatment was discontinued in 2014. The terminated swap has approximately $3 million remaining to be amortized through AOCI on the Consolidated Balance Sheets and subsequently reclassified into Interest expense, net, on the Consolidated Statements of Operations through June 2021. There was less than $1 million expensed by the Company in the third quarter of 2018 and $1 million expensed for the nine-month period ended September 29, 2018.

The Company has three interest rate swaps related to Term Loan B previously entered into for the purpose of converting floating-rate debt to fixed-rate debt. The first swap was entered into with a syndicated group of commercial banks for the purpose of fixing the interest rate on the Company’s floating-rate debt. The second swap largely offsets the first swap, causing interest payments to again be exposed to rate fluctuations. Neither of these instruments are designated as accounting hedges and changes in fair value are recognized in Interest expense, net on the Consolidated Statements of Operations. The third interest rate swap converting the floating-rate debt to fixed-rate debt was designated as a cash flow hedge and receives hedge accounting treatment. All three swaps have a termination date in June 2021. The Company has determined the third swap to be highly effective. At September 29, 2018, the Company estimated that approximately $1 million in losses on the third swap will be reclassified from AOCI on the Consolidated Balance Sheets into Interest expense, net during the next twelve months.

The interest rate swaps have future maturities consisting of the following notional amounts per year (in millions):



Year 2018	$	—
Year 2019	1,344
Year 2020	1,072
Year 2021	1,072
Year 2022	800
Notional balance of outstanding contracts	$	4,288