Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2014

Fair Value of Financial Instruments [Abstract]

Fair Value of Financial Instruments

Note 14: Fair Value of Financial Instruments

Fair Value of Financial Instruments

The Company's financial instruments consist primarily of cash and cash equivalents, short-term investments, trade receivables, trade payables, derivative instruments and debt instruments. The book values of trade receivables, trade payables and floating-rate debt instruments are considered to be representative of their respective fair values.

Following is a summary of the Company's financial instruments which have been valued at fair value in the Company's Consolidated Balance Sheets at June 30, 2014 and December 31, 2013:

	Fair Value Based on Quoted Prices in Active Markets for Identical Assets (Level 1)				Fair Value Based on Significant Other Observable Inputs (Level 2)				Total
(in millions)	2014		2013		2014		2013		2014		2013
Cash and cash equivalents:
Cash	$	536	$	618	$	–	$	–	$	536	$	618
Money market funds		960		1,172		–		–		960		1,172
Commercial paper		–		–		10		4		10		4
Non-U.S. bank and other obligations		19		19		–		–		19		19
Short-term investments:
U.S. Treasury securities		56		41		–		–		56		41
Non-qualified plan assets:
Money market funds		1		1		–		–		1		1
Domestic bond funds		3		3		–		–		3		3
Domestic equity funds		6		5		–		–		6		5
International equity funds		3		3		–		–		3		3
Blended equity funds		5		4		–		–		5		4
Common stock		2		2		–		–		2		2
Derivatives, net asset (liability):
Foreign currency contracts		–		–		5		19		5		19
	$	1,591	$	1,868	$	15	$	23	$	1,606	$	1,891

Fair values for financial instruments utilizing level 2 inputs were determined from information obtained from third party pricing sources, broker quotes or calculations involving the use of market indices.

At June 30, 2014, the fair value of the Company's fixed-rate debt (based on Level 1 quoted market rates) was approximately $3.3 billion as compared to the $3.0 billion face value of the debt recorded, net of original issue discounts, in the Company's Consolidated Condensed Balance Sheet.  At December 31, 2013, the fair value of the Company's fixed-rate debt (based on Level 1 quoted market rates) was approximately $2.7 billion as compared to the $2.5 billion face value of the debt.

Derivative Contracts

In order to mitigate the effect of exchange rate changes, the Company will often attempt to structure sales contracts to provide for collections from customers in the currency in which the Company incurs its manufacturing costs. In certain instances, the Company will enter into foreign currency forward contracts to hedge specific large anticipated receipts or disbursements in currencies for which the Company does not expect to have fully offsetting local currency expenditures or receipts. The Company was party to a number of short- and long-term foreign currency forward contracts at June 30, 2014. The purpose of the majority of these contracts was to hedge large anticipated non-functional currency cash flows on major subsea, drilling, valve or other equipment contracts. Many of these contracts have been designated as and are accounted for as cash flow hedges with changes in the fair value of those contracts recorded in accumulated other comprehensive income (loss) in the period such change occurs.  Certain other contracts, many of which are centrally managed, are intended to offset other foreign currency exposures but have not been designated as hedges for accounting purposes and, therefore, any change in the fair value of those contracts is reflected in earnings in the period such change occurs.  The Company determines the fair value of its outstanding foreign currency forward contracts based on quoted exchange rates for the respective currencies applicable to similar instruments.

The Company manages its debt portfolio to achieve an overall desired position of fixed and floating rates and employs from time to time interest rate swaps as a tool to achieve that goal.

Total gross volume bought (sold) by notional currency and maturity date on open derivative contracts at June 30, 2014 was as follows (in millions):

	Notional Amount - Buy								Notional Amount - Sell
	2014		2015		2016		Total		2014			2015			2016			Total
Foreign exchange forward contracts -
Notional currency in:
Australian dollar		17		–		–		17		(17	)		–			–			(17	)
Chinese yuan		20		–		–		20		–			–			–			–
Euro		107		28		10		145		(23	)		(4	)		(1	)		(28	)
Malaysian ringgit		51		215		3		269		(14	)		–			–			(14	)
Norwegian krone		612		513		54		1,179		(159	)		(64	)		–			(223	)
Pound sterling		52		17		1		70		(37	)		(17	)		(1	)		(55	)
U.S. dollar		56		7		–		63		(389	)		(215	)		(47	)		(651	)

While the Company reports and generally settles its individual derivative financial instruments on a gross basis, the agreements between the Company and its third party financial counterparties to the derivative contracts generally provide both the Company and its counterparties with the legal right to net settle contracts that are in an asset position with other contracts that are in an offsetting liability position, if required.  The fair values of derivative financial instruments recorded in the Company's Consolidated Condensed Balance Sheets at June 30, 2014 and December 31, 2013 were as follows (in millions):

	June 30, 2014				December 31, 2013
	Assets		Liabilities		Assets		Liabilities
Derivatives designated as hedging instruments:
Current	$	18	$	13	$	28	$	10
Non-current		3		2		3		2
Total derivatives designated as hedging instruments		21		15		31		12
Derivatives not designated as hedging instruments:
Current		2		3		6		6
Non-current		–		–		–		–
Total derivatives not designated as hedging instruments		2		3		6		6
Total derivatives	$	23	$	18	$	37	$	18

The amount of pre-tax gain (loss) from the ineffective portion of derivatives designated as hedging instruments and from derivatives not designated as hedging instruments was (in millions):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014		2013
Derivatives designated as hedging instruments -
Cost of sales	$	(1	)	$	(1	)	$	1	$	(5	)
Derivatives not designated as hedging instruments -
Cost of sales		1			–			2		–
Other costs		–			3			–		–
	$	–		$	2		$	3	$	(5	)