Derivative and Other Financial Instruments

Fair Value Measurements

Under GAAP a framework exists for measuring fair value, providing a three-tier hierarchy of pricing inputs used to report assets and liabilities that are adjusted to fair value. Level 1 includes inputs such as quoted prices which are available in active markets for identical assets or liabilities as of the report date. Level 2 includes inputs other than those available in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 3 includes unobservable pricing inputs that are not corroborated by market data or other objective sources. The Company has no recurring items valued using Level 3 inputs other than certain pension plan assets.

The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities measured at fair value and their placement within the fair value hierarchy.

The Company applies a market approach to value its commodity price hedge contracts. Prices from observable markets are used to develop the fair value of these financial instruments and they are reported under Level 2. The Company uses an income approach to value its foreign exchange forward contracts. These contracts are valued using a discounted cash flow model that calculates the present value of future cash flows under the terms of the contracts using market information as of the reporting date, such as foreign exchange spot and forward rates, and are reported under Level 2 of the fair value hierarchy.

Fair value disclosures for financial assets and liabilities that were accounted for at fair value on a recurring basis are provided later in this note. In addition, see Note L for fair value disclosures related to debt.

Derivative Financial Instruments

In the normal course of business the Company is subject to risk from adverse fluctuations in currency exchange rates, interest rates and commodity prices. The Company manages these risks through a program that includes the use of derivative financial instruments, primarily swaps and forwards. Counterparties to these contracts are major financial institutions. The Company is exposed to credit loss in the event of nonperformance by these counterparties. The Company does not use derivative instruments for trading or speculative purposes.

The Company’s objective in managing exposure to market risk is to limit the impact on earnings and cash flow. The extent to which the Company uses such instruments is dependent upon its access to these contracts in the financial markets and its success using other methods, such as netting exposures in the same currencies to mitigate foreign exchange risk and using sales agreements that permit the pass-through of commodity price and foreign exchange rate risk to customers.

For derivative financial instruments accounted for in hedging relationships, the Company formally designates and documents, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective and the manner in which effectiveness will be assessed. The Company formally assesses, both at inception and at least quarterly thereafter, whether the hedging relationships are effective in offsetting changes in fair value or cash flows of the related underlying exposures. When a hedge no longer qualifies for hedge accounting, the change in fair value from the date of the last effectiveness test is recognized in earnings. Any gain or loss which has accumulated in other comprehensive income at the date of the last effectiveness test is reclassified into earnings at the same time of the underlying exposure.

Cash Flow Hedges

The Company designates certain derivative financial instruments as cash flow hedges. No components of the hedging instruments are excluded from the assessment of hedge effectiveness. Changes in fair value of outstanding derivatives accounted for as cash flow hedges are recorded in other comprehensive income until earnings are impacted by the hedged transaction. Classification of the gain or loss in the Consolidated Statements of Operations upon reclassification from comprehensive income is the same as that of the underlying exposure. Contracts outstanding at September 30, 2018 mature between one and twenty-five months.

When the Company discontinues hedge accounting because it is no longer probable that an anticipated transaction will occur in the originally specified period, changes to the fair value accumulated in other comprehensive income are recognized immediately in earnings.

The Company uses forward contracts to hedge anticipated purchases of various commodities, including aluminum, fuel oil and natural gas, and these exposures are hedged by a central treasury unit.

The Company also designates certain foreign exchange contracts as cash flow hedges of anticipated foreign currency denominated sales or purchases. The Company manages these risks at the operating unit level. Often, foreign currency risk is hedged together with the related commodity price risk.

The following tables set forth financial information about the impact on other comprehensive income ("OCI"), accumulated other comprehensive income (“AOCI”) and earnings from changes in the fair value of derivative instruments.



	Amount of gain/(loss)						Amount of gain/(loss)
	recognized in OCI						recognized in OCI
	Three Months Ended						Nine Months Ended
Derivatives in cash flow hedges	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017
Derivatives in cash flow hedges	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017
Foreign exchange	$	(3	)	$	(2	)	$	(5	)	$	1
Commodities	(2		)	11			(4		)	26
	$	(5	)	$	9		$	(9	)	$	27

	Amount of gain/						Amount of gain/
	(loss) reclassified from						(loss) reclassified from
	AOCI into income						AOCI into income
	Three Months Ended						Nine Months Ended
Derivatives in cash flow hedges	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017			Affected line item in the
Derivatives in cash flow hedges	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017			statement of operations
Foreign exchange	$	(6	)	$	(3	)	$	(7	)	$	(6	)	Net sales
Commodities	(1		)	—			(6		)	—			Net sales
Foreign exchange	5			2			4			5			Cost of products sold
Commodities	9			7			33			22			Cost of products sold
	7			6			24			21			Income before taxes
	(1		)	(1		)	(6		)	(6		)	Provision for income taxes
	$	6		$	5		$	18		$	15		Net Income

For the three and nine months ended September 30, 2017, the Company recognized a loss of $1 (less than $1, net of tax) and a loss of $2 ($1, net of tax) in earnings related to hedge ineffectiveness caused by volatility in the metal premium component of aluminum prices. There is no ineffectiveness in the current year as the Company has designated its hedges as a hedge of the variability in cash flows for contractually specified components of its aluminum purchases.

For the twelve-month period ending September 30, 2019, a net loss of $2 ($1, net of tax) is expected to be reclassified to earnings. No amounts were reclassified during the nine months ended September 30, 2018 and 2017 in connection with anticipated transactions that were no longer considered probable.

Fair Value Hedges and Contracts Not Designated as Hedges

The Company designates certain derivative financial instruments as fair value hedges of recognized foreign-denominated assets and liabilities, generally trade accounts receivable and payable and unrecognized firm commitments. The notional values and maturity dates of the derivative instruments coincide with those of the hedged items. Changes in fair value of the derivative financial instruments, excluding time value, are offset by changes in fair value of the related hedged items.

Certain derivative financial instruments, including foreign exchange contracts related to intercompany debt, were not designated in hedge relationships; however, they are effective economic hedges as the changes in their fair value, except for time value, are offset by changes arising from re-measurement of the related hedged items. The Company’s primary use of these derivative instruments is to offset the earnings impact that fluctuations in foreign exchange rates have on certain monetary assets and liabilities denominated in currencies other than the entity's functional currency.

For the three and nine months ended September 30, 2018, the Company recorded a loss of $1 from foreign exchange contracts designated as fair value hedges. For the three and nine months ended September 30, 2017, the Company recorded a gain of less than $1 and a loss of less than $1 from foreign exchange contracts designated as fair value hedges. These adjustments were reported within foreign exchange in the Consolidated Statements of Operations.

The following table sets forth the impact on earnings from derivatives not designated as hedges.



	Pre-tax amount of gain/					Pre-tax amount of gain/
	(loss) recognized in income					(loss) recognized in income
	on derivative					on derivative
	Three Months Ended			Three Months Ended		Nine Months Ended			Nine Months Ended
Derivatives not designated as hedges	September 30, 2018			September 30, 2017		September 30, 2018			September 30, 2017		Affected line item in the
Derivatives not designated as hedges	September 30, 2018			September 30, 2017		September 30, 2018			September 30, 2017		statement of operations
Foreign exchange	$	4		$	—	$	7		$	1	Net sales
Foreign exchange	(4		)	1		(6		)	2		Cost of products sold
Foreign exchange	(8		)	8		(17		)	26		Foreign exchange
Commodities	—			2		—			—		Cost of products sold
	$	(8	)	$	11	$	(16	)	$	29

For the three and nine months ended September 30, 2017, certain commodity hedges did not meet the criteria for hedge accounting and therefore the changes in their fair value were recognized in earnings.

Net Investment Hedges

The Company designates certain debt and derivative instruments as net investment hedges to manage foreign currency risk relating to net investments in subsidiaries denominated in foreign currencies and reduce the variability in the functional currency equivalent cash flows.

During the three and nine months ended September 30, 2018, the Company recorded a gain of $9 ($9, net of tax) and a gain of $22 ($26, net of tax) in other comprehensive income for certain debt instruments that are designated as hedges of its net investment in a euro-based subsidiary. For the three and nine months ended September 30, 2017, the Company recorded losses of $38 ($30, net of tax) and $134 ($107, net of tax) in other comprehensive income for these net investment hedges. As of September 30, 2018 and December 31, 2017, cumulative losses of $84 and $106 ($62 and $88, net of tax) were recognized in accumulated other comprehensive income related to these net investment hedges. As of September 30, 2018 the carrying amount of the hedged net investment was approximately €1,127 ($1,308 at September 30, 2018).

In January 2018, the Company entered into a series of cross-currency swaps with an aggregate notional of $875 (€718). The swaps are designated as a hedge of net investment for financial reporting purposes. Under the cross-currency interest rate contracts, the Company will receive semi-annual fixed U.S. dollar payments at a rate of 4.75% of the U.S. notional value and pay 2.50% on the euro notional value.

Gains or losses on net investment hedges remain in accumulated other comprehensive income until disposal of the underlying assets.

The following tables set forth financial information about the impact on OCI from changes in the fair value of derivative instruments.

Amount of gain/(loss)

recognized in OCI

Three Months Ended

Nine Months Ended

Derivatives designated as net investment hedges

September 30, 2018

September 30, 2017

September 30, 2018

September 30, 2017

Foreign exchange

)

—

Gains and losses representing components excluded from the assessment of effectiveness on derivatives designated as net investment hedges are recognized in accumulated other comprehensive income.

Fair Values of Derivative Financial Instruments and Valuation Hierarchy

The following table sets forth the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2018 and December 31, 2017, respectively. The fair values of these financial instruments were reported under Level 2 of the fair value hierarchy.



	Balance Sheet classification	September 30, 2018		December 31, 2017		Balance Sheet classification	September 30, 2018		December 31, 2017
Derivatives designated as hedging instruments
Foreign exchange contracts cash flow	Other current assets	$	6	$	5	Accrued liabilities	$	9	$	6
	Other non-current assets	1		—		Other non-current liabilities	1		—
Foreign exchange contracts fair value	Other current assets	1		1		Accrued liabilities	1		1
Commodities contracts cash flow	Other current assets	8		25		Accrued liabilities	7		—
	Other non-current assets	2		4		Other non-current liabilities	1		—
Net investment hedge	Other non-current assets	8		—		Other non-current liabilities	—		—
		$	26	$	35		$	19	$	7
Derivatives not designated as hedging instruments
Foreign exchange contracts cash flow	Other current assets	—		$	1	Accrued liabilities	$	—	$	1
	Other non-current assets	$	1	—		Other non-current liabilities	—		—
Foreign exchange contracts fair value	Other current assets	2		5		Accrued liabilities	4		—
Commodities contracts cash flow	Other current assets	—		22		Accrued liabilities	—		15
		$	3	$	28		$	4	$	16

Total derivatives		$	29	$	63		$	23	$	23

Fair Value Hedge Carrying Amounts



	Carrying amount of the hedged
Line item in the statement of	assets/(liabilities)
financial position in which the	September 30, 2018			December 31, 2017
hedge item is included	September 30, 2018			December 31, 2017
Cash and cash equivalents	$	9		$	1
Receivables, net	11			15
Accrued liabilities	(9		)	(12		)

As of September 30, 2018 and December 31, 2017, the cumulative amounts of fair value hedging adjustments included in the carrying amount of the hedge assets and liabilities were less than $1.

Offsetting of Derivative Assets and Liabilities

Certain derivative financial instruments are subject to agreements with counterparties similar to master netting arrangements and are eligible for offset. The Company has made an accounting policy election not to offset the fair values of these instruments within the statement of financial position. In the table below, the aggregate fair values of the Company's derivative assets and liabilities are presented on both a gross and net basis, where appropriate.



	Gross amounts recognized in the Balance Sheet	Gross amounts not offset in the Balance Sheet	Net amount
Balance at September 30, 2018
Derivative assets	$29	$8	$21
Derivative liabilities	23	8	15

Balance at December 31, 2017
Derivative assets	63	17	46
Derivative liabilities	23	17	6

Notional Values of Outstanding Derivative Instruments

The aggregate U.S. dollar-equivalent notional values of outstanding derivative instruments in the Consolidated Balance Sheets at September 30, 2018 and December 31, 2017 were:



	September 30, 2018		December 31, 2017
Derivatives in cash flow hedges:
Foreign exchange	$	490	$	864
Commodities	317		276
Derivatives in fair value hedges:
Foreign exchange	68		60
Derivatives not designated as hedges:
Foreign exchange	873		575
Commodities	—		40