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Derivative Instruments | 9 Months Ended
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Sep. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments | 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) Derivatives
|  |  | Fair Value
| Balance Sheet Classification |  | September 30, 2017 |  | December 31, 2016
Derivative instruments designated as hedges: |  |  |  |  |
Foreign exchange contracts | Prepaid expenses and other current assets |  | $ | — |  |  | $ | 12 |
Foreign exchange contracts | Accrued liabilities |  | (7 | ) |  | — |
Forward interest rate swaps | Accrued liabilities |  | (4 | ) |  | (3 | )
Forward interest rate swaps | Other long-term liabilities |  | (11 | ) |  | (13 | )
Total derivative instruments designated as hedges |  |  | $ | (22 | ) |  | $ | (4 | )
Derivative instruments not designated as hedges: |  |  |  |  |
Foreign exchange contracts | Prepaid expenses and other current assets |  | $ | — |  |  | $ | 11 |
Foreign exchange contracts | Accrued liabilities |  | (6 | ) |  | — |
Forward interest rate swaps | Accrued liabilities |  | (2 | ) |  | (1 | )
Forward interest rate swaps | Other long-term liabilities |  | (6 | ) |  | (10 | )
Total derivative instruments not designated as hedges |  |  | (14 | ) |  | — |
Total Net Derivative Liability |  |  | $ | (36 | ) |  | $ | (4 | )
See also Note 6, Fair Value Measurements. The following table presents the (losses) gains from changes in fair values of derivatives that are not designated as hedges (in millions):
| (Loss) Gain Recognized in Income
|  | Three Months Ended |  | Nine Months Ended
| Statements of Operations Classification | September 30, 2017 |  | October 1, 2016 |  | September 30, 2017 |  | October 1, 2016
Derivative instruments not designated as hedges: |  |  |  |  |  |  |  |
Foreign exchange contracts | Foreign exchange loss | $ | (6 | ) |  | $ | (3 | ) |  | $ | (22 | ) |  | $ | (6 | )
Forward interest rate swaps | Interest expense, net | 1 |  |  | — |  |  | 2 |  |  | 2 |
Total loss recognized in income |  | $ | (5 | ) |  | $ | (3 | ) |  | $ | (20 | ) |  | $ | (4 | )
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 credit risk 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 sales are designed to mitigate or eliminate concentrations of credit risk with any single customer. 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 realizes 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 put options, forward contracts, and participating forwards, all of which typically mature within twelve months of execution. The Company designates these derivative contracts as cash flow hedges. Gains and losses on these contracts are deferred in Accumulated Other Comprehensive loss on the Company’s Consolidated Balance Sheets until the contract is settled and the hedged sale is realized. The gain or loss is then reported as an increase or decrease to net sales. As of September 30, 2017 and December 31, 2016, the notional amounts of the Company’s foreign exchange cash flow hedges were €382 million and €341 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 exposures related to its Brazilian real, British pound, Canadian dollar, Czech koruna, Euro, Australian dollar, Swedish krona, Japanese yen, and Singapore dollars denominated net assets. These forward contracts typically mature within three-months 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 follow (in millions):
| September 30, 2017 |  | December 31, 2016
Notional balance of outstanding contracts: |  |  |
British Pound/U.S. dollar | £ | 10 |  |  | £ | 3 |
Euro/U.S. dollar | € | 93 |  |  | € | 148 |
British Pound/Euro | £ | 5 |  |  | £ | 8 |
Canadian Dollar/U.S. dollar | $ | 14 |  |  | $ | 13 |
Czech Koruna/U.S. dollar | Kč | 417 |  |  | Kč | 147 |
Brazilian Real/U.S. dollar | R$ | 56 |  |  | R$ | 56 |
Malaysian Ringgit/U.S. dollar | RM | — |  |  | RM | 16 |
Australian Dollar/U.S. dollar | $ | 16 |  |  | $ | 50 |
Swedish Krona/U.S. dollar | kr | 11 |  |  | kr | 7 |
Japanese yen/U.S. dollar | ¥ | 461 |  |  | ¥ | 48 |
Singapore dollar/U.S. dollar | S$ | 5 |  |  | S$ | 15 |
Net fair value (liability) asset of outstanding contracts | $ | (6 | ) |  | $ | 11 |
Interest Rate Risk Management On July 26, 2017, the Company entered into an Amended and Restated Credit Agreement (the “A&R Credit Agreement”), which amends, modifies and adds provisions to the Company’s previous credit agreement and provided for an additional term loan of $688 million (“Term Loan A”) and increased the existing revolving credit facility (“Revolving Credit Facility”) from $250 million to $500 million. See Note 8, Long-Term Debt. Borrowings under the existing term loan (“Term Loan B”) and the new Term Loan A bear interest at a variable rate plus an applicable margin. As a result, the Company is exposed to market risk associated with the variable interest rate payments on both term loans. The Company has entered into forward interest rate swaps to hedge a portion of this interest rate risk. Upon receiving a commitment in June 2014 for the Term Loan B, the Company entered into floating-to-fixed forward interest rate swaps. In July 2014, these swaps were designated as cash flow hedges of interest rate exposure associated with variability in future cash flows on this variable rate loan commitment. Upon funding in October 2014, the Company terminated these swaps and discontinued hedge accounting treatment. The change in fair value of the terminated swaps which had been included in other comprehensive loss up to termination will continue to be amortized to interest expense, net as the interest payments under the Term Loan affect earnings. The Company then issued new floating-to-fixed forward interest rate swaps to a syndicated group of commercial banks. These swaps were not designated as hedges and the changes in fair value are recognized in Interest expense, net on the Company’s Consolidated Statements of Operations. To offset this impact to earnings, the Company, in November 2014, entered into fixed-to-floating forward interest rate swaps, which were also not designated in a hedging relationship and thus the changes in the fair value are recognized in interest expense, net. At the same time, the Company entered into additional floating-to-fixed interest rate swaps and designated them as cash flow hedges for hedge accounting treatment. The changes in fair value of the swaps designated as cash flow hedges are recognized in accumulated other comprehensive loss, with any ineffectiveness immediately recognized in earnings. At September 30, 2017, the Company estimated that approximately $7 million in losses on the forward interest rate swaps designated as cash flow hedges will be reclassified from accumulated other comprehensive loss into earnings during the next four quarters. 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. The following table presents the gross fair values and related offsetting counterparty fair values as well as the net fair value amounts at September 30, 2017 (in millions):
| Gross Fair Value |  | Counterparty Offsetting |  | Net Fair Value in the Consolidated Balance Sheets
Counterparty A | $ | 10 |  |  | $ | 6 |  |  | $ | 4 |
Counterparty B | 4 |  |  | 2 |  |  | 2 |
Counterparty C | 3 |  |  | 1 |  |  | 2 |
Counterparty D | 7 |  |  | 3 |  |  | 4 |
Counterparty E | 4 |  |  | 1 |  |  | 3 |
Counterparty F | 4 |  |  | 1 |  |  | 3 |
Counterparty G | 5 |  |  | — |  |  | 5 |
Total | $ | 37 |  |  | $ | 14 |  |  | $ | 23 |
The notional amount of the designated interest rate swaps effective in each year of the cash flow hedge relationships does not exceed the principal amount of Term Loan B, which is hedged. The Company has reviewed the interest rate swap hedges for effectiveness and determined they are 100% effective. The interest rate swaps have future maturities consisting of the following notional amounts per year (in millions):
Year 2017 | $ | — |
Year 2018 | 544 |
Year 2019 | 544 |
Year 2020 | 272 |
Year 2021 | 272 |
Notional balance of outstanding contracts | $ | 1,632 |

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- References No definition available. + Details
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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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