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Derivative Instruments | 3 Months Ended
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Mar. 31, 2018
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 Values as of
| Balance Sheet Classification |  | March 31, 2018 |  | December 31, 2017
Derivative instruments designated as hedges: |  |  |  |  |
Foreign exchange contracts | Accrued liabilities |  | $ | (11 | ) |  | $ | (9 | )
Forward interest rate swaps | Accrued liabilities |  | — |  |  | (2 | )
Forward interest rate swaps | Other long-term liabilities |  | (4 | ) |  | (8 | )
Total derivative instruments designated as hedges |  |  | $ | (15 | ) |  | $ | (19 | )
Derivative instruments not designated as hedges: |  |  |  |  |
Foreign exchange contracts | Accrued liabilities |  | $ | — |  |  | $ | (2 | )
Forward interest rate swaps | Accrued liabilities |  | (1 | ) |  | (1 | )
Forward interest rate swaps | Other long-term liabilities |  | 5 |  |  | (7 | )
Total derivative instruments not designated as hedges |  |  | 4 |  |  | (10 | )
Total net derivative liability |  |  | $ | (11 | ) |  | $ | (29 | )
The following table presents the gains (losses) from changes in fair values of derivatives that are not designated as hedges (in millions):
| (Loss) Gain Recognized in Income
|  |  | Three Months Ended
| Statements of Operations Classification |  | March 31, 2018 |  | April 1, 2017
Derivative instruments not designated as hedges: |  |  |  |  |
Foreign exchange contracts | Foreign exchange loss |  | $ | — |  |  | $ | (5 | )
Forward interest rate swaps | Interest expense, net |  | 13 |  |  | 1 |
Total gain (loss) recognized in income |  |  | $ | 13 |  |  | $ | (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. Unrealized gains and losses on these contracts are deferred in Accumulated other comprehensive income (loss) (“AOCI”) on the Company’s 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 Statements of Operations. Realized (losses) or gains were $(5) million and $1 million for the periods ending March 31, 2018, and April 1, 2017, respectively. As of March 31, 2018, and December 31, 2017, the notional amounts of the Company’s foreign exchange cash flow hedges were €387 million and €389 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 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):
| March 31, 2018 |  | December 31, 2017
Notional balance of outstanding contracts: |  |  |
British Pound/U.S. dollar | £ | 3 |  |  | £ | 13 |
Euro/U.S. dollar | € | 82 |  |  | € | 108 |
British Pound/Euro | £ | 5 |  |  | £ | 5 |
Canadian Dollar/U.S. dollar | $ | 1 |  |  | $ | 12 |
Czech Koruna/U.S. dollar | Kč | 368 |  |  | Kč | 361 |
Brazilian Real/U.S. dollar | R$ | 22 |  |  | R$ | 34 |
Australian Dollar/U.S. dollar | $ | 48 |  |  | $ | 55 |
Swedish Krona/U.S. dollar | kr | 13 |  |  | kr | 13 |
Japanese yen/U.S. dollar | ¥ | 250 |  |  | ¥ | 151 |
Singapore dollar/U.S. dollar | S$ | 3 |  |  | S$ | 4 |
Net fair value of (liability) asset of outstanding contracts | $ | — |  |  | $ | (2 | )
Interest Rate Risk Management The Company’s debt consists of borrowings under two term loans (“Term Loan A” and “Term Loan B”), the Revolving Credit Facility and the receivables financing facility which bear interest at variable rates plus an applicable margin. See Note 8, Long-Term Debt. As a result, the Company is exposed to market risk associated with the variable interest rate payments on both term loans. 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 an $800 million forward long-term interest rate swap agreement 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 in December 2018. The changes in fair value of these swaps are not designated as hedges and are recognized immediately as Interest expense, net on the Consolidated Statements 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 the hedge accounting treatment discontinued in 2014. The terminated swap has approximately $4 million remaining to be amortized through AOCI on the Consolidated Balance Sheets and subsequently reclassified into net earnings through June 2021. Approximately $2 million is expected to be amortized and expensed in 2018. There was less than $1 million expensed by the Company in the first quarter of 2018. The Company has three interest rate swaps previously entered into for the purpose of converting floating-to-fixed rate debt. The first swap was entered into with a syndicated group of commercial banks for the purpose of moving from floating-to-fixed rate debt. The second swap largely offsets the first swap, moving from fixed-to-floating rate debt. Both of these instruments are not designated as hedges with the changes in fair value recognized in Interest expense, net on the Consolidated Statements of Operations. The third swap entered into is an interest rate swap converting floating-to-fixed rate debt which was designated as a cash flow hedge and receives hedge accounting treatment. All three swaps have a termination date in June 2021. The changes in fair value of the active swap designated as a cash flow hedge are recognized in AOCI on the Consolidated Balance Sheets, with any ineffectiveness immediately recognized in earnings. At March 31, 2018, the Company estimated that approximately $2 million in losses on the forward interest rate swap designated as a cash flow hedge will be reclassified from AOCI on the Consolidated Balance Sheets 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 asset (liability) gross fair values and related offsetting counterparty fair values as well as the net fair value amounts at March 31, 2018 (in millions):
| Gross Fair Value |  | Offsetting Counterparty Fair Value |  | Net Fair Value in the Consolidated Balance Sheets
Counterparty A | $ | 4 |  |  | $ | 2 |  |  | $ | 2 |
Counterparty B | 2 |  |  | 1 |  |  | 1 |
Counterparty C | 2 |  |  | 1 |  |  | 1 |
Counterparty D | 3 |  |  | 1 |  |  | 2 |
Counterparty E | 2 |  |  | 1 |  |  | 1 |
Counterparty F | (10 | ) |  | (1 | ) |  | (9 | )
Counterparty G | 2 |  |  | — |  |  | 2 |
Total | $ | 5 |  |  | $ | 5 |  |  | $ | — |
The notional amount of the 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 2018 | $ | 544 |
Year 2019 | 1,344 |
Year 2020 | 1,072 |
Year 2021 | 1,072 |
Year 2022 | 800 |
Notional balance of outstanding contracts | $ | 4,832 |

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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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