(5) Risk Management

Foreign Currency Risk

At September 30, 2011 and December 31, 2010, we had net outstanding foreign currency exchange contracts not designated as accounting hedges with notional amounts totaling approximately $125 million and $187 million, respectively, which are accounted for at fair value. These forward contracts have original maturities of less than three months. The fair value of the forward contracts was a net unrealized gain/(loss) of $(1) million and less than $1 million at September 30, 2011 and December 31, 2010, respectively. Forward contract (losses)/gains of $(3) million and $5 million for the third quarter 2011 and 2010, respectively, and $2 million and $(1) million for the first nine months of 2011 and 2010, respectively, were recorded in other expense, net in the accompanying Condensed Consolidated Statements of Operations related to our realized and unrealized results associated with these foreign exchange contracts. Management believes that these financial instruments will not subject us to undue risk due to foreign exchange movements because gains and losses on these contracts should offset losses and gains on the assets and liabilities being hedged. The following table shows, in millions of U.S. dollars, the notional amounts of the most significant net foreign exchange hedge positions for outstanding foreign exchange contracts not designated as accounting hedges:

 

Buy (Sell)		September 30, 2011				December 31, 2010
Euro		$	38			$	54
Malaysian Ringgit		$	19			$	69
Swedish Krona		$	8			$	6
Israeli Shekel		$	6			$	16
Taiwan Dollar		$	(12	)		$	(12	)
Japanese Yen		$	(25	)		$	39

 

Cash Flow Hedges

At September 30, 2011, we had Malaysian Ringgit forward contracts designated as cash flow hedges with an aggregate notional amount of $61 million and a fair value of a net unrealized loss of less than $1 million. At December 31, 2010, we had Malaysian Ringgit forward and option contracts designated as cash flow hedges with an aggregate notional amount of $114 million and a fair value of a net unrealized gain of $3 million. These forward and option contracts have original maturities of less than one year. Gains of $1 million for both the third quarter and first nine months of 2011 were recorded in cost of sales in the accompanying Condensed Consolidated Statements of Operations related to our realized results associated with these cash flow hedges. Management believes that these financial instruments will not subject us to undue risk due to foreign exchange movements because gains and losses on these contracts should offset losses and gains on the forecasted expenses being hedged.

Commodity Price Risk

We operate facilities that consume commodities, and we have established forecasted transaction risk management programs to mitigate fluctuations in fair value and the volatility of future cash flows caused by changes in commodity prices. These programs reduce, but do not always entirely eliminate, the impact of commodity price movements.

During the first nine months of 2011, we entered into gold swap contracts in order to hedge our exposure to increases in the price of gold bullion. During the third quarter of 2011, our gold swap contracts were designated as accounting hedges under ASC Topic 815. At September 30, 2011, these contracts had outstanding notional amounts totaling 27,200 ounces which were accounted for at fair value. All of these outstanding gold swap contracts had original maturities of 15 months or less. The fair value of these gold swap contracts was a net unrealized loss of $3 million at September 30, 2011. A net gain of $3 million was recorded in other expense, net in the accompanying Condensed Consolidated Statements of Operations related to our realized results attributable to, as well as the change in fair value associated with, these gold swap contracts up to the date of designation. In addition, a net loss of $4 million was recorded in other comprehensive expense related to our unrealized results attributable to these gold swap contracts after the date of designation and through September 30, 2011. Management believes that these financial instruments will not subject us to undue risk due to fluctuations in the price of gold bullion because gains and losses on these swap contracts should offset losses and gains on the forecasted gold wire expense being hedged.

We have provided $4 million in collateral to two of our counterparties in connection with our foreign exchange and gold hedging programs as of September 30, 2011. This amount is classified as a component of other current assets on the accompanying Condensed Consolidated Balance Sheet. We do not offset the fair value of our derivative instruments against any rights to reclaim cash collateral.

Interest Rate Risk

We use interest rate swap agreements to assist in managing the floating rate portion of our debt portfolio. At September 30, 2011, we had effectively fixed our interest rate on $200 million of our variable interest rate debt through December 1, 2012 with interest rate swaps. We are required to pay the counterparties a stream of fixed interest payments at an average rate of 3.76%, and in turn, receive variable interest payments based on 3-month LIBOR (0.35% at September 30, 2011) from the counterparties. In the third quarter and first nine months of 2011, in accordance with ASC Topic 815, we recognized losses of less than $1 million and $ 1 million, respectively, and in the third quarter and first nine months of 2010, we recognized losses of $2 million and $8 million, respectively, in other expense, net in the accompanying Condensed Consolidated Statements of Operations associated with the change in fair value of our interest rate swaps.

In addition to interest rate swap agreements, we also use interest rate cap agreements to manage our floating rate debt. At September 30, 2011, we had effectively capped our interest rate on $400 million of our variable interest rate debt through December 1, 2012 with interest rate caps. In both the third quarter and first nine months of 2011, in accordance with ASC Topic 815, we recognized losses of less than $1 million, and in the third quarter and first nine months of 2010, we recognized losses of $1 million and $6 million, respectively, in other expense, net in the accompanying Condensed Consolidated Statements of Operations associated with the change in fair value of these interest rate caps.

Counterparty Risk

Outstanding financial derivative instruments expose us to credit loss in the event of nonperformance by the counterparties to the agreements. We also enter into master netting arrangements with counterparties when possible to mitigate credit risk in derivative transactions. A master netting arrangement may allow counterparties to net settle amounts owed to each other as a result of multiple, separate derivative transactions. The credit exposure related to these financial instruments is represented by the fair value of contracts with a positive fair value at the reporting date. On a periodic basis, we review the credit ratings of our counterparties and adjust our exposure as deemed appropriate. As of September 30, 2011, we believe that our exposure to counterparty risk is immaterial.

Refer to Note 3, "Fair Value Measurement," for further information on our foreign currency and commodity derivatives and our interest rate swap and cap agreements.