Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2015

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 September 30, 2015 and December 31, 2014:



	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
(dollars in millions)	2015		2014		2015			2014			2015			2014

Cash and cash equivalents:
Cash	$	703	$	616	$	—		$	—		$	703		$	616
Money market funds	827		842		—			—			827			842
Commercial paper	—		—		48			13			48			13
U.S. Treasury securities	—		5		—			—			—			5
U.S. corporate obligations	10		4		—			—			10			4
Non-U.S. bank and other obligations	39		33		—			—			39			33
Short-term investments:
Commercial paper	—		—		96			11			96			11
U.S. Treasury securities	32		51		—			—			32			51
U.S. corporate obligations	140		51		—			—			140			51
U.S. non-governmental agency asset-backed securities	—		—		53			—			53			—
Non-qualified plan assets:
Money market funds	—		1		—			—			—			1
Domestic bond funds	3		3		—			—			3			3
Domestic equity funds	5		5		—			—			5			5
International equity funds	3		3		—			—			3			3
Blended equity funds	5		5		—			—			5			5
Common stock	2		2		—			—			2			2
Derivatives, net asset (liability):
Foreign currency contracts	—		—		(58		)	(99		)	(58		)	(99		)
Total	$	1,769	$	1,621	$	139		$	(75	)	$	1,908		$	1,546

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 both September 30, 2015 and December 31, 2014, the fair value of the Company’s fixed-rate debt (based on Level 1 quoted market rates) were approximately $2.9 billion as compared to the $2.7 billion face value of the debt recorded, net of discounts, in the Company’s Consolidated Condensed Balance Sheet.

Derivative Contracts

In order to mitigate the effect of exchange rate changes, the Company will often 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 September 30, 2015. 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 for accounting purposes 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.

Total gross volume bought (sold) by notional currency and maturity date on open derivative contracts at September 30, 2015 was as follows:



	Notional Amount - Buy				Notional Amount - Sell
(amounts in millions)	2015	2016	2017	Total	2015		2016		2017		2018		Total
Foreign exchange forward contracts -
Notional currency in:
Euro	65	69	37	171	(23	)	(10	)	—		—		(33	)
Malaysian ringgit	143	76	—	219	(16	)	—		—		—		(16	)
Norwegian krone	187	598	32	817	(51	)	(74	)	(4	)	—		(129	)
Pound Sterling	94	22	2	118	(5	)	(1	)	—		—		(6	)
U.S. dollar	16	44	4	64	(282	)	(327	)	(101	)	(1	)	(711	)

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. The fair values of derivative financial instruments recorded in the Company’s Consolidated Condensed Balance Sheets at September 30, 2015 and December 31, 2014 were as follows:



	September 30, 2015				December 31, 2014
(dollars in millions)	Assets		Liabilities		Assets		Liabilities

Derivatives designated as hedging instruments:
Current	$	10	$	62	$	8	$	83
Non-current	4		4		1		12
Total derivatives designated as hedging instruments	14		66		9		95

Derivatives not designated as hedging instruments:
Current	—		6		1		14
Non-current	—		—		—		—
Total derivatives not designated as hedging instruments	—		6		1		14

Total derivatives	$	14	$	72	$	10	$	109

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



	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in millions)	2015		2014		2015		2014

Derivatives designated as hedging instruments -
Cost of sales	$	1	$	4	$	—	$	3

Derivatives not designated as hedging instruments -
Cost of sales	11		6		20		4
Other costs	—		4		11		4
Total pre-tax loss	$	12	$	14	$	31	$	11

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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