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comprehensive income (“AOCI”) and reclassified
into interest expense over the life of the underlying
debt. The ineffective portion for both cash flow and
fair value hedges, which is not material for any year
presented, is immediately recognized in earnings.
FOREIGN CURRENCY RISK MANAGEMENT
We manufacture and sell our products and finance
operations in a number of countries throughout the
world and, as a result, are exposed to movements in
foreign currency exchange rates. The purpose of our
foreign currency hedging program is to manage the
volatility associated with the changes in exchange
rates.
To manage this exchange rate risk, we have histor-
ically utilized a combination of forward contracts,
options and currency swaps. Contracts that qualify
are designated as cash flow hedges of certain fore-
casted transactions denominated in foreign curren-
cies. The effective portion of the changes in fair value
of these instruments is reported in AOCI and
reclassified into earnings in the same financial
statement line item and in the same period or peri-
ods during which the related hedged transactions
affect earnings. The ineffective portion, which is not
material for any year presented, is immediately
recognized in earnings.
In the second quarter of 2012, the Company added
zero-cost collar option contracts to its portfolio to
manage its exposure to U.S. dollar / Brazilian real
exchange rates. These zero-cost collar instruments
qualify as cash flow hedges of certain forecasted
transactions denominated in U.S. dollars. The effec-
tive portion of the changes in fair value of these
instruments is reported in AOCI and reclassified into
earnings in the same financial statement line item
and in the same period or periods during which the
related hedged transactions affect earnings. The
ineffective portion is immediately recognized in
earnings.
The change in value of certain non-qualifying instru-
ments used to manage foreign exchange exposure
of intercompany financing transactions and certain
balance sheet items subject to revaluation is
immediately recognized in earnings, substantially
offsetting the foreign currency mark-to-market
impact of the related exposure.
COMMODITY RISK MANAGEMENT
Certain raw materials used in our production proc-
esses are subject to price volatility caused by weath-
er, supply conditions, political and economic
variables and other unpredictable factors. To man-
age the volatility in earnings due to price fluctua-
tions, we may utilize swap contracts. These contracts
are designated as cash flow hedges of forecasted
commodity purchases. The effective portion of the
changes in fair value for these instruments is
reported in AOCI and reclassified into earnings in the
same financial statement line item and in the same
period or periods during which the hedged trans-
actions affect earnings. The ineffective and non-
qualifying portions, which are not material for any
year presented, are immediately recognized in earn-
ings.
The notional amounts of qualifying and non-
qualifying instruments used in hedging transactions
were as follows:
In millions
December 31,
2012
December 31,
2011
Derivatives in Cash Flow Hedging
Relationships:
Foreign exchange contracts (Sell / Buy;
denominated in sell notional): (a)
British pounds / Brazilian real –
Forward 13 26
European euro / Brazilian real –
Forward 13 16
European euro / Polish zloty –
Forward 149 233
U.S. dollar / Brazilian real – Forward 238 344
U.S. dollar / Brazilian real – Zero-cost
collar 18 —
U.S. dollar / European euro – Forward —13
Natural gas contracts (in MMBTUs) —3
Derivatives Not Designated as Hedging
Instruments:
Embedded derivative (in USD) 150 150
Foreign exchange contracts (Sell / Buy;
denominated in sell notional):
Indian rupee / U.S. dollar 140 904
Thai baht / U.S. dollar 261 —
U.S. dollar / Turkish lira 56 —
Interest rate contracts (in USD) 150(b) 150(b)
(a) These contracts had maturities of three years or less as of
December 31, 2012.
(b) Includes $150 million floating-to-fixed interest rate swap
notional to offset the embedded derivative.
The following table shows gains or losses recog-
nized in AOCI, net of tax, related to derivative
instruments:
Gain (Loss)
Recognized in AOCI on Derivatives
(Effective Portion)
In millions 2012 2011 2010
Foreign exchange contracts $16 $(39) $ 37
Fuel oil contracts —2(1)
Natural gas contracts (1) (6) (13)
Total $ 15 $(43) $ 23
During the next 12 months, the amount of the
December 31, 2012 AOCI balance, after tax, that is
expected to be reclassified to earnings is a loss of $9
million.
74