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Derivative Instruments | 6 Months Ended
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Jul. 01, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments | Derivative Instruments In the normal course of business, the Company is exposed to global market risks, including the effects of changes in foreign currency exchange rates and interest rates. The Company uses derivative instruments to manage its exposure to such risks and may elect to designate certain derivatives as hedging instruments under ASC Topic 815, Derivatives and Hedging (“ASC 815”). The Company formally documents all relationships between designated hedging instruments and hedged items as well as its risk management objectives and strategies for undertaking hedge transactions. The Company does not hold or issue derivatives for trading or speculative purposes. In accordance with ASC 815, the Company recognizes derivative instruments as either assets or liabilities on the Consolidated Balance Sheets and measures them at fair value. The following table presents the fair value of its derivative instruments (in millions):
| Asset (Liability)
|  |  | Fair Values as of
| Balance Sheets Classification |  | July 1, 2023 |  | December 31, 2022
Derivative instruments designated as hedges: |  |  |  |  |
Foreign exchange contracts | Accrued liabilities |  | $ | (13) |  |  | $ | (14) |
Total derivative instruments designated as hedges |  |  | $ | (13) |  |  | $ | (14) |
Derivative instruments not designated as hedges: |  |  |  |  |
Forward interest rate swaps | Prepaid expenses and other current assets |  | $ | 40 |  |  | $ | 25 |
Forward interest rate swaps | Other long-term assets |  | 68 |  |  | 47 |
Foreign exchange contracts | Accrued liabilities |  | (2) |  |  | (5) |
Forward interest rate swaps | Accrued liabilities |  | (14) |  |  | — |
Forward interest rate swaps | Other long-term liabilities |  | (22) |  |  | — |
Total derivative instruments not designated as hedges |  |  | $ | 70 |  |  | $ | 67 |
Total net derivative asset |  |  | $ | 57 |  |  | $ | 53 |
The following table presents the net gains (losses) from changes in fair values of derivatives that are not designated as hedges (in millions):
| Gains (Losses) Recognized in Income
|  |  | Three Months Ended |  | Six Months Ended
| Statements of Operations Classification |  | July 1, 2023 |  | July 2, 2022 |  | July 1, 2023 |  | July 2, 2022
Derivative instruments not designated as hedges: |  |  |  |  |  |  |  |  |
Foreign exchange contracts | Foreign exchange gain (loss) |  | $ | 1 |  |  | $ | 9 |  |  | $ | (4) |  |  | $ | 8 |
Forward interest rate swaps | Interest income (expense), net |  | 18 |  |  | 11 |  |  | 11 |  |  | 45 |
Total net gain recognized in income |  |  | $ | 19 |  |  | $ | 20 |  |  | $ | 7 |  |  | $ | 53 |
Activities related to derivative instruments are reflected within Net cash (used in) provided by operating activities on the Consolidated Statements of Cash Flows. Credit and Market Risk Management Financial instruments, including derivatives, expose the Company to counterparty credit risk of nonperformance and to market risk related to currency exchange rate and interest rate fluctuations. The Company manages its exposure to counterparty credit risk by establishing minimum credit standards, diversifying its counterparties, and monitoring its concentrations of credit. The Company’s counterparties are commercial banks with expertise in derivative financial instruments. The Company evaluates the impact of market risk on the fair value and cash flows of its derivative and other financial instruments by considering reasonably possible changes in interest rates and currency exchange rates. The Company continually monitors the creditworthiness of the customers to which it grants credit terms in the normal course of business. The terms and conditions of the Company’s credit policies are designed to mitigate concentrations of credit risk. The Company’s master netting and other similar arrangements with the respective counterparties allow for net settlement under certain conditions, which are designed to reduce credit risk by permitting net settlement with the same counterparty. We present the assets and liabilities of our derivative financial instruments, for which we have net settlement agreements in place, on a net basis on the Consolidated Balance Sheets. If the derivative financial instruments had been presented gross on the Consolidated Balance Sheets, the asset and liability positions would have been increased by $1 million and $4 million as of July 1, 2023 and December 31, 2022, respectively. Foreign Currency Exchange Risk Management The Company conducts business on a multinational basis in a variety of foreign currencies. Exposure to market risk for changes in foreign currency exchange rates arises primarily from Euro-denominated external revenues, cross-border financing activities between subsidiaries, and foreign currency denominated monetary assets and liabilities. The Company manages its objective of preserving the economic value of non-functional currency denominated cash flows by initially hedging transaction exposures with natural offsets and, once these opportunities have been exhausted, through foreign exchange forward and option contracts, as deemed appropriate. The Company manages the exchange rate risk of anticipated Euro-denominated sales using forward contracts, which typically mature within twelve months of execution. The Company designates these derivative contracts as cash flow hedges. Unrealized gains and losses on these contracts are deferred in Accumulated other comprehensive income (loss) (“AOCI”) on the Consolidated Balance Sheets until the contract is settled and the hedged sale is realized. The realized gain or loss is then recorded as an adjustment to Net sales on the Consolidated Statements of Operations. Realized amounts reclassified to Net sales were $7 million of losses and $27 million of gains for the three months ended July 1, 2023 and July 2, 2022, respectively. Realized amounts reclassified to Net sales were $10 million of losses and $43 million of gains for the six months ended July 1, 2023 and July 2, 2022, respectively. As of July 1, 2023 and December 31, 2022, the notional amounts of the Company’s foreign exchange cash flow hedges were €754 million and €549 million, respectively. The Company has reviewed its cash flow hedges for effectiveness and determined that they are highly effective. The Company uses forward contracts, which are not designated as hedging instruments, to manage its exposures related to net assets denominated in foreign currencies. These forward contracts typically mature within one month after execution. Monetary gains and losses on these forward contracts are recorded in income and are generally offset by the transaction gains and losses related to their net asset positions. The notional values and the net fair values of these outstanding contracts were as follows (in millions):
| July 1, 2023 |  | December 31, 2022
Notional balance of outstanding contracts: |  |  |
British Pound/U.S. Dollar | £ | 9 |  |  | £ | 11 |
Euro/U.S. Dollar | € | 152 |  |  | € | 191 |
Euro/Czech Koruna | € | 16 |  |  | € | 15 |
Japanese Yen/U.S. Dollar | ¥ | 579 |  |  | ¥ | — |
Singapore Dollar/U.S. Dollar | S$ | 11 |  |  | S$ | 5 |
Mexican Peso/U.S. Dollar | Mex$ | 138 |  |  | Mex$ | 372 |
Polish Zloty/U.S. Dollar | zł | 84 |  |  | zł | 47 |
Net fair value of liabilities of outstanding contracts | $ | 2 |  |  | $ | 5 |
Interest Rate Risk Management The Company’s debt consists of borrowings under a term loan (“Term Loan A”), Revolving Credit Facility, and Receivables Financing Facilities, which bear interest at variable rates plus applicable margins. As a result, the Company is exposed to market risk associated with the variable interest rate payments on these borrowings. See Note 10, Long-Term Debt for further details related to these borrowings. The Company manages its exposure to changes in interest rates by utilizing long-term forward interest rate swaps to hedge this exposure and to achieve a desired proportion of fixed versus variable-rate debt, based on current and projected market conditions. The Company has interest rate swap agreements with a total notional amount of $800 million to lock into a fixed SOFR interest rate base, which are subject to monthly net cash settlements effective through October 2027. In the second quarter, the Company entered into new interest rate swap agreements that contain a total notional amount of $400 million to lock into a variable interest rate base designed to offset a portion of the Company’s existing swap agreements. These agreements are subject to monthly cash settlements effective through October 2027. At the same time, the Company entered into additional new interest rate swap agreements that contain a total notional amount of $400 million to lock into a fixed SOFR interest rate base, which are subject to monthly cash settlements effective through June 2030. As a result of these transactions, the Company maintained fixed interest rates on a total notional amount of $800 million through October 2027 and a total notional amount of $400 million through June 2030. There was no cash settlement, or significant impact on the Consolidated Statement of Operations, as a result of these transactions in the second quarter of 2023.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//815/tableOfContent + Details
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