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)
	Balance Sheets Classification	Fair Values as of December 31,
		2018		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	—		(2		)
Forward interest rate swaps	Other long-term liabilities	—		(8		)
Total derivative instruments designated as hedges		$	15	$	(19	)

Derivative instruments not designated as hedges:
Foreign exchange contracts	Prepaid expenses and other current assets	$	1	$	—
Forward interest rate swaps	Prepaid expenses and other current assets	2		—
Forward interest rate swaps	Other long-term assets	3		—
Foreign exchange contracts	Accrued liabilities	—		(2		)
Forward interest rate swaps	Accrued liabilities	—		(1		)
Forward interest rate swaps	Other long-term liabilities	—		(7		)
Total derivative instruments not designated as hedges		6		(10		)
Total net derivative asset (liability)		$	21	$	(29	)

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



	Gain (Loss) Recognized in Income
		Year Ended December 31,
	Statements of Operations Classification	2018		2017			2016
Derivative instruments not designated as hedges:
Foreign exchange contracts	Foreign exchange loss	$	1	$	(24	)	$	5
Forward interest rate swaps	Interest expense, net	8		2			—
Total gain (loss) recognized in income		$	9	$	(22	)	$	5

Activities related to derivative instruments are included 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 and $11 million as of December 31, 2018 and 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 generally seeks to preserve the economic value of non-functional currency denominated cash flows by reducing transaction exposures with natural offsets, and secondarily through foreign exchange forward and option contracts, as deemed appropriate.

The Company manages the exchange rate risk of anticipated euro denominated sales by 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 AOCI on the 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 Statement of Operations. Realized gains or (losses) reclassified to Net sales were $13 million, $(8) million, and $(7) million for the years ending December 31, 2018, 2017 and 2016, respectively. As of December 31, 2018 and 2017, the notional amounts of the Company’s foreign exchange cash flow hedges were €496 million and €389 million, respectively. The Company has reviewed its 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 exposures related to net assets denominated in foreign currencies. 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):



	December 31,
	2018		2017
Notional balance of outstanding contracts:
British Pound/U.S. Dollar	£	1	£	13
Euro/U.S. Dollar	€	45	€	108
British Pound/Euro	£	6	£	5
Canadian Dollar/U.S. Dollar	C$	6	C$	12
Czech Koruna/U.S. Dollar	Kč		Kč	361
Brazilian Real/U.S. Dollar	R$	—	R$	34
Australian Dollar/U.S. Dollar	A$	47	A$	55
Swedish Krona/U.S. Dollar	kr	—	kr	13
Japanese Yen/U.S. Dollar	¥	396	¥	151
Singapore Dollar/U.S. Dollar	S$	7	S$	4
Mexican Peso/U.S. Dollar	Mex$	225	Mex$
Chinese Yuan/U.S. Dollar	¥	71	¥
South African Rand/U.S. Dollar	$	42	$	—
Net fair value of asset (liability) outstanding contracts	$	1	$	(2	)

Beginning in the third quarter of 2018, the Company significantly reduced the use of non-designated forward contracts to manage Euro exposure with the commencement of Euro denominated borrowings on the Revolving Credit Facility. See Note 11, Long-Term Debt.

Interest Rate Risk Management

The Company’s debt consists of borrowings under two term loans (“Term Loan A” and “Term Loan B”, also referred to collectively as the “Term Loans”), the Revolving Credit Facility and the Receivables Financing Facility which bear interest at variable rates plus an applicable margin. See Note 11, 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 a forward long-term interest rate swap agreement with a notional amount of $800 million 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 starting in December 2018 and ending in December 2022. The changes in fair value of these swaps are not designated as hedges and are recognized immediately as Interest expense, net on the Consolidated Statement 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 $2 million of pretax losses remaining in AOCI as of December 31, 2018, which will be reclassified into Interest expense, net on the Consolidated Statements of Operations through June 2021. There was $2 million expensed by the Company in the year ended December 31, 2018.

During the fourth quarter of 2018, the Company terminated three interest rate swaps. 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 offset the first swap, causing interest payments to again be exposed to rate fluctuations. Neither of these instruments were designated as accounting hedges, with changes in fair value recognized in Interest expense, net on the Consolidated Statements of Operations. The third interest rate swap converted the floating-rate debt to fixed-rate debt and was designated as a cash flow hedge. As part of the termination, the Company settled all three swaps resulting in $7 million cash payment to counterparties that was classified within Net cash provided by operating activities. Hedge accounting treatment was discontinued on the third swap, which has less than $1 million of pretax losses remaining in AOCI as of December 31, 2018. This $1 million will be reclassified into Interest expense, net on the Consolidated Statements of Operations through June 2021.