Fair Value Measurements and Financial Instruments

Fair Value Measurements

The Company uses a three-level fair value hierarchy that categorizes assets and liabilities measured at fair value based on the observability of the inputs utilized in the valuation. The fair value hierarchy gives the highest priority to the quoted prices in active markets for identical assets and liabilities and lowest priority to unobservable inputs.


•	Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has the ability to access.


•	Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable for substantially the full term of the asset or liability.


•	Level 3 – Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.

Items Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis. The fair value measurements are generally determined using unobservable inputs and are classified within Level 3 of the fair value hierarchy. These assets include long-lived assets, intangible assets and investments in affiliates, which may be written down to fair value as a result of impairment. During the first quarter there were no items measured at fair value on a nonrecurring basis.

Items Not Carried at Fair Value

The Company's fair value of debt was approximately $388 million and $401 million as of March 31, 2018 and December 31, 2017, respectively. Fair value estimates were based on the current rates offered to the Company for debt of the same remaining maturities. Accordingly, the Company's debt fair value disclosures are classified as Level 2, "Other Observable Inputs" in the fair value hierarchy.

The Company is exposed to various market risks including, but not limited to, changes in currency exchange rates and market interest rates. The Company manages these risks, in part, through the use of derivative financial instruments. The maximum length of time over which the Company hedges the variability in the future cash flows related to transactions, excluding those transactions as related to the payment of variable interest on existing debt, is eighteen months. The maximum length of time over which the Company hedges forecasted transactions related to variable interest payments is the term of the underlying debt. The use of financial derivative instruments may pose risk of loss in the event of nonperformance by the transaction counter-party.

The Company presents its derivative positions and any related material collateral under master netting arrangements that provide for the net settlement of contracts, by counterparty, in the event of default or termination. Derivative financial instruments designated and non-designated as hedging instruments are included in the Company’s consolidated balance sheets. There is no cash collateral on any of these derivatives.

Items Measured at Fair Value on a Recurring Basis

Foreign currency hedge instruments are measured at fair value on a recurring basis under an income approach using industry-standard models that consider various assumptions, including time value, volatility factors, current market and contractual prices for the underlying and non-performance risk. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. Accordingly, the Company's foreign currency instruments are classified as Level 2, "Other Observable Inputs" in the fair value hierarchy.

Interest rate swaps are valued under an income approach using industry-standard models that consider various assumptions, including time value, volatility factors, current market and contractual prices for the underlying and non-performance risk. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, and can be derived from observable data or supported by observable levels at which transactions are executed in the marketplace. Accordingly, the Company's interest rate swaps are classified as Level 2, "Other Observable Inputs" in the fair value hierarchy.

Foreign Exchange Risk: The Company’s net cash inflows and outflows exposed to the risk of changes in foreign currency exchange rates arise from the sale of products in countries other than the manufacturing source, foreign currency denominated supplier payments, debt and other payables, subsidiary dividends and investments in subsidiaries. The Company primarily uses foreign currency derivative instruments, including forward and option contracts, to mitigate the variability of the value of cash flows denominated in currency other than the hedging entity's functional currency. Foreign currency exposures are reviewed periodically and any natural offsets are considered prior to entering into a derivative financial instrument. The Company’s current hedged foreign currency exposures include the Euro, Japanese Yen, Thailand Bhat and Mexican Peso.

As of March 31, 2018, and December 31, 2017, the Company had foreign currency derivative instruments with aggregate notional value of approximately $125 million and $119 million, respectively. At March 31, 2018, approximately $109 million of the hedge instruments have been designated as cash flow hedges. Accordingly, the total change in fair value of the transactions are initially recognized in other comprehensive income, a component of shareholders' equity, if considered highly effective. Upon settlement of the transactions, the accumulated gains and losses are reclassified to income in the same periods during which the hedged cash flows impact earnings. The fair value of these derivatives is an asset of $1 million and a liability of $2 million, as of March 31, 2018, and December 31, 2017. respectively. The difference between the gross and net value of these derivatives after offset by counter party is not material. The estimated AOCI that is expected to be reclassified into earnings within the next 12 months is an approximate gain of less than $1 million. The terms of the hedges range from 12 to 18 months.

As of December 31, 2017, the Company had cross currency swaps to mitigate the variability of the value of the Company's investment in certain non-U.S. entities with an aggregate notional value of $150 million, designated as a net investment hedge. The Company elected to assess effectiveness under the forward method and therefore changes in the fair value of the transactions are recognized in other comprehensive income, a component of shareholders' equity, if considered highly effective. As of December 31, 2017, and the fair value of the derivative was a non-current liability of $23 million.

In connection with the Company's early adoption of ASU 2017-12, on March 29, 2018 the Company re-designated the hedging relationships involving its cross currency swap transactions. The transactions continue to be designated as net investment hedges of certain of the Company's European affiliates. However, the Company changed its hedge effectiveness assessment methodology to the spot rate method. Accordingly, periodic changes in the fair value of the hedging transactions are recognized in other comprehensive income, a component of shareholders' equity, if considered highly effective. Amortization of the excluded components as determined at the re-designation date will be recognized on a straight line basis in interest expense beginning in the second quarter of 2018. The fair value of such derivatives was a non-current liability of $30 million as of March 31, 2018.

Interest Rate Risk: The Company is subject to interest rate risk in relation to variable-rate debt. The Company uses financial derivative instruments to manage exposure to fluctuations in interest rates in connection with its risk management policies.

As of December 31, 2017, the Company had interest rate swaps to manage interest rate risk associated with the Term Facility with an aggregate notional value of $150 million to effectively convert designated interest payments related to the amended Term Facility from variable to fixed cash flows. The maturities of these swaps do not exceed the underlying obligations under the amended Term Facility. The instruments have been designated as cash flow hedges and the changes in the fair value of the swap transactions is recognized in other comprehensive income, a component of shareholders' equity, if considered highly effective. Subsequently, the accumulated gains and losses recorded in equity are reclassified to income in the period during which the hedged cash transaction impacts earnings. As of March 31, 2018 and December 31, 2017, the fair value of the derivative was an asset of $3 million and $1 million, respectively. AOCI expected to be reclassified into earnings within the next 12 months is a loss of $1 million.

Financial Statement Presentation

Gains and losses on derivative financial instruments for the three months ended March 31, 2018 and 2017 are as follows:



	Recorded Income (Loss) into AOCI, net of tax						Reclassified from AOCI into Income (Loss)					Recorded in Income (Loss)
	2018			2017			2018		2017			2018		2017
	(Dollars in Millions)
Three Months Ended March 31, 2018
Foreign currency risk - Sales:
Cash flow hedges	$	1		$	—		$	—	$	—		$	—	$	—
Non-designated cash flow hedges	—			—			—		—			1		—
Foreign currency risk - Cost of sales:
Cash flow hedges	1			2			—		(2		)	—		—
Non-designated cash flow hedges	—			—			—		—			—		1
Interest rate risk - Interest expense, net:
Interest rate swap	1			—			—		—			—		—
Net investment hedges	(6		)	(1		)	—		—			—		—
	$	(3	)	$	1		$	—	$	(2	)	$	1	$	1

Concentrations of Credit Risk

Financial instruments including cash equivalents, derivative contracts, and accounts receivable, expose the Company to counter-party credit risk for non-performance. The Company’s counterparties for cash equivalents and derivative contracts are banks and financial institutions that meet the Company’s credit rating requirements. The Company’s counterparties for derivative contracts are substantial investment and commercial banks with significant experience using such derivatives. The Company manages its credit risk through policies requiring minimum credit standing and limiting credit exposure to any one counter-party and through monitoring counter-party credit risks.

The Company's credit risk with any individual customer does not exceed ten percent of total accounts receivable except for Ford and its affiliates which represent 29% and 28%, Mazda which represents 17% and 17% and Renault/Nissan which represents 13% and 14%, of the balance as of March 31, 2018 and December 31, 2017, respectively.