Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2015

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, 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
(in millions)	2015		2014		2015			2014			2015			2014
Cash and cash equivalents:
Cash	$	685	$	616	$	–		$	–		$	685		$	616
Money market funds		338		842		–			–			338			842
Commercial paper		–		–		55			13			55			13
U.S. Treasury securities		–		5		–			–			–			5
U.S. corporate obligations		14		4		–			–			14			4
Non-U.S. bank and other obligations		203		33		–			–			203			33
Short-term investments:
Commercial paper		–		–		114			11			114			11
U.S. Treasury securities		63		51		–			–			63			51
U.S. corporate obligations		193		51		–			–			193			51
U.S. non-governmental agency asset-backed securities		–		–		66			–			66			–
Non-qualified plan assets:
Money market funds		–		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		6		5		–			–			6			5
Common stock		2		2		–			–			2			2
Derivatives, net asset (liability):
Foreign currency contracts		–		–		(50	)		(99	)		(50	)		(99	)
Total	$	1,516	$	1,621	$	185		$	(75	)	$	1,701		$	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 June 30, 2015, the fair value of the Company’s fixed-rate debt (based on Level 1 quoted market rates) was approximately $2.8 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. At December 31, 2014, the fair value of the Company’s fixed-rate debt (based on Level 1 quoted market rates) was approximately $2.9 billion as compared to the $2.7 billion face value of the debt.

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 June 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 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 June 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:
Australian dollar		–		–		–		–		(1	)		–			–			–			(1	)
Euro		143		60		36		239		(49	)		(11	)		–			–			(60	)
Malaysian ringgit		275		61		–		336		(16	)		–			–			–			(16	)
Norwegian krone		412		579		31		1,022		(31	)		(64	)		(4	)		–			(99	)
Pound Sterling		140		9		–		149		(25	)		(1	)		–			–			(26	)
U.S. dollar		11		30		2		43		(411	)		(260	)		(101	)		(1	)		(773	)

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, 2015 and December 31, 2014 were as follows:

	June 30, 2015				December 31, 2014
(dollars in millions)	Assets		Liabilities		Assets		Liabilities
Derivatives designated as hedging instruments:
Current	$	15	$	67	$	8	$	83
Non-current		5		8		1		12
Total derivatives designated as hedging instruments		20		75		9		95
Derivatives not designated as hedging instruments:
Current		10		5		1		14
Non-current		–		–		–		–
Total derivatives not designated as hedging instruments		10		5		1		14
Total derivatives	$	30	$	80	$	10	$	109

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:

	Three Months Ended June 30,					Six Months Ended June 30,
(dollars in millions)	2015		2014			2015			2014
Derivatives designated as hedging instruments -
Cost of sales	$	4	$	(1	)	$	1		$	1
Derivatives not designated as hedging instruments -
Cost of sales		10		1			(9	)		2
Other (costs) gains		1		–			(11	)		–
Total pre-tax gain (loss)	$	15	$	–		$	(19	)	$	3