Derivative Financial Instruments
Our primary market exposures are to foreign exchange rates and interest rates, and we use certain derivative financial instruments to help manage these exposures. We execute these instruments with financial institutions we judge to be credit-worthy, and the majority of our foreign currency forward contracts are denominated in currencies of major industrial countries. We do not hold or issue derivative financial instruments for trading or speculative purposes.
The fair value amounts of asset derivatives included in other assets, net and liability derivatives included in other accrued expenses in our consolidated balance sheets related to foreign currency forward contracts were as follows at December 31:
|
| | | | | | | | | | | | | | | |
| Asset Derivatives | | Liability Derivatives |
(In millions) | 2013 |
| | 2012 |
| | 2013 |
| | 2012 |
|
Derivatives designated as hedging instruments | $ | 20 |
| | $ | 13 |
| | $ | 23 |
| | $ | 12 |
|
Derivatives not designated as hedging instruments | 3 |
| | 4 |
| | 3 |
| | 2 |
|
Total | $ | 23 |
| | $ | 17 |
| | $ | 26 |
| | $ | 14 |
|
The fair values of these derivatives are Level 2 in the fair value hierarchy for 2013 and 2012 because they are determined based on a market approach utilizing externally quoted forward rates for similar contracts.
We recognized the following pretax gains (losses) related to foreign currency forward contracts designated as cash flow hedges:
|
| | | | | | | |
(In millions) | 2013 |
| | 2012 |
|
Effective Portion | | | |
Gain (loss) recognized in AOCL | $ | (1 | ) | | $ | 8 |
|
Gain (loss) reclassified from AOCL to operating income | 3 |
| | 1 |
|
Amount excluded from effectiveness assessment and ineffective portion | | | |
Gain (loss) recognized in operating income | — |
| | — |
|
Pretax gains (losses) related to foreign currency forward contracts not designated as cash flow hedges were not material at December 31, 2013 and 2012.
We use foreign currency forward contracts to fix the functional currency value of specific commitments, payments and receipts. The aggregate notional amount of the outstanding foreign currency forward contracts was $1,396 million and $1,305 million at December 31, 2013 and December 31, 2012, respectively. The foreign currency forward contracts at December 31, 2013 have maturities at various dates through 2028 as follows: $908 million in 2014; $219 million in 2015; $129 million in 2016; $108 million in 2017; and $32 million thereafter.
Our foreign currency forward contracts contain off-set or netting provisions to mitigate credit risk in the event of counterparty default, including payment default and cross default. At both December 31, 2013 and December 31, 2012, the fair value of our counterparty default exposure was less than $1 million and spread across numerous highly rated counterparties.
In December 2012, we issued $1.1 billion of fixed rate long-term debt with a maturity of 10 years. In conjunction with the debt issuance, we entered into interest rate lock agreements with a total notional value of $700 million to manage interest rate risk, which resulted in a decrease to AOCL of $3 million to be amortized over the term of the debt issued. As of December 31, 2012, the above referenced interest rate locks were closed out.
In November 2011, we issued $1.0 billion of fixed rate long-term debt with maturities ranging from 3 to 30 years. In conjunction with the debt issuance, we entered into interest rate lock agreements with a total notional value of $575 million to manage interest rate risk, which resulted in an increase to AOCL of $5 million to be amortized over the term of the debt issued. As of December 31, 2011, the above referenced interest rate locks were closed out.
