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Derivative Financial Instruments | 3 Months Ended
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Mar. 31, 2025
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments | Derivative Financial Instruments: The company operates in multiple functional currencies and is a significant lender and borrower in the global markets. In the normal course of business, the company is exposed to the impact of interest rate changes and foreign currency fluctuations, and to a lesser extent equity risk. The company limits these risks by following established risk management policies and procedures, including the use of derivatives, and, where cost effective, financing with debt in the currencies in which assets are denominated. For interest rate exposures, derivatives are used to better align rate movements between the interest rates associated with the company’s lease and other financial assets and the interest rates associated with its financing debt. Derivatives are also used to manage the related cost of debt. For foreign currency exposures, derivatives are used to better manage the cash flow volatility arising from foreign exchange rate fluctuations. In the Consolidated Balance Sheet, the company does not offset derivative assets against liabilities in master netting arrangements nor does it offset receivables or payables recognized upon payment or receipt of cash collateral against the fair values of the related derivative instruments. The amount recognized in other accounts receivables for the right to reclaim cash collateral was $4 million and $29 million at March 31, 2025 and December 31, 2024, respectively. At March 31, 2025, there was no amount recognized in accounts payable for the obligation to return cash collateral. At December 31, 2024, the amount recognized in accounts payable for such obligation was $3 million. The company restricts the use of cash collateral received to rehypothecation, and therefore reports it in restricted cash in the Consolidated Balance Sheet. At March 31, 2025, there was no amount rehypothecated. At December 31, 2024, the rehypothecated amount was $3 million. Additionally, if derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Balance Sheet at March 31, 2025 and December 31, 2024, the total derivative asset and liability positions each would have been reduced by $296 million and $352 million, respectively. On July 1, 2024, the company completed the acquisition of StreamSets and webMethods from Software AG. Prior to the acquisition, beginning in December 2023, the company entered into foreign currency derivative contracts which were accounted for as non-hedge derivatives and expired by June 28, 2024. For the three months ended March 31, 2024, the company recorded an unrealized loss of $50 million in other (income) and expense in the Consolidated Income Statement. There were no associated derivatives outstanding at March 31, 2025 and December 31, 2024. In its hedging programs, the company may use forward contracts, futures contracts, interest-rate swaps, cross-currency swaps, equity swaps, and options depending upon the underlying exposure. The company is not a party to leveraged derivative instruments. A brief description of the major hedging programs, categorized by underlying risk, follows. Interest Rate Risk Fixed and Variable Rate Borrowings The company issues debt in the global capital markets to fund its operations and financing business. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company may use interest-rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At both March 31, 2025 and December 31, 2024, the total notional amount of the company’s interest-rate swaps was $6.7 billion. The weighted-average remaining maturity of these instruments at March 31, 2025 and December 31, 2024 was approximately 4.2 years and 4.5 years, respectively. These interest-rate contracts were accounted for as fair value hedges. The company did not have any cash flow hedges relating to this program outstanding at March 31, 2025 and December 31, 2024. Foreign Exchange Risk Long-Term Investments in Foreign Subsidiaries (Net Investment) A large portion of the company’s foreign currency denominated debt portfolio is designated as a hedge of net investment in major foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the subsidiaries' functional currency with respect to the U.S. dollar. At March 31, 2025 and December 31, 2024, the carrying value of debt designated as hedging instruments was $15.2 billion and $14.0 billion, respectively. The company also uses foreign currency derivatives, which may include forward contracts, long-term cross currency swaps, and options, for this risk management purpose. At March 31, 2025 and December 31, 2024, the total notional amount of derivative instruments designated as net investment hedges was $7.2 billion and $6.2 billion, respectively. At both March 31, 2025 and December 31, 2024, the weighted-average remaining maturity of these instruments was approximately 0.8 years. Anticipated Royalties and Cost Transactions The company’s operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the company’s non-U.S. subsidiaries and with the company. In anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk. These forward contracts are accounted for as cash flow hedges. At March 31, 2025, the maximum remaining length of time over which the company hedged its exposure is approximately two years. At March 31, 2025 and December 31, 2024, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was $10.4 billion and $9.7 billion, respectively. At March 31, 2025 and December 31, 2024, the weighted-average remaining maturity of these instruments was approximately 0.5 years and 0.6 years, respectively. At March 31, 2025 and December 31, 2024, in connection with cash flow hedges of anticipated royalties and cost transactions, there were unrealized net gains (before taxes) of $100 million and $415 million, respectively, deferred in AOCI. The company estimates that $44 million of the deferred net gains (before taxes) on derivatives in AOCI at March 31, 2025 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions. Foreign Currency Denominated Borrowings The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company may employ forward contracts or cross-currency swaps to convert the principal, or principal and interest payments of foreign currency denominated debt, to debt denominated in the functional currency of the borrowing entity. These derivatives are accounted for as cash flow hedges. At March 31, 2025, the maximum length of time remaining over which the company hedged its exposure was approximately six years. At March 31, 2025 and December 31, 2024, the total notional amount of derivative instruments designated as cash flow hedges of foreign-currency denominated debt was $7.0 billion and $5.0 billion, respectively. At March 31, 2025 and December 31, 2024, in connection with forward contracts, there were unrealized net gains (before taxes) of $10 million and $84 million, respectively, deferred in AOCI. Approximately $104 million of losses (before taxes) related to the initial forward points excluded from the assessment of hedge effectiveness is expected to be amortized to other (income) and expense within the next 12 months. Subsidiary Cash and Foreign Currency Asset/Liability Management The company uses its Global Treasury Centers to manage the cash of its subsidiaries. These centers principally use currency swaps to convert cash flows in a cost-effective manner. In addition, the company uses forward contracts to economically hedge, on a net basis, the foreign currency exposure of a portion of the company’s nonfunctional currency assets and liabilities. The terms of these forward and swap contracts are generally less than one year. The changes in the fair values of these contracts and of the underlying hedged exposures are generally offsetting and are recorded in other (income) and expense in the Consolidated Income Statement. At March 31, 2025 and December 31, 2024, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $6.3 billion and $7.4 billion, respectively. Equity Risk Management The company is exposed to market price changes in certain broad market indices and in the company’s own stock primarily related to certain obligations to employees. Changes in the overall value of these employee compensation obligations are recorded in SG&A expense in the Consolidated Income Statement. Although not designated as accounting hedges, the company utilizes derivatives, including equity swaps and futures, to economically hedge the exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the company’s common stock, and are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Income Statement. At March 31, 2025 and December 31, 2024, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.3 billion and $1.5 billion, respectively. Cumulative Basis Adjustments for Fair Value Hedges At March 31, 2025 and December 31, 2024, the following amounts were recorded in the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:
(Dollars in millions) |  | March 31, 2025 |  | December 31, 2024
Short-term debt: |  |  |  |
Carrying amount of the hedged item |  | $ | (9) |  |  | $ | (13) |
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities) |  | $ | (9) |  |  | $ | (13) |
Long-term debt: |  |  |  |
Carrying amount of the hedged item |  | $ | (6,589) |  |  | $ | (6,497) |
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities) (1) |  | $ | 99 |  |  | $ | 190 |
(1)Includes ($144) million and ($155) million of hedging adjustments on discontinued hedging relationships at March 31, 2025 and December 31, 2024, respectively. The Effect of Derivative Instruments in the Consolidated Income Statement The total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of fair value hedges, cash flow hedges, net investment hedges and derivatives not designated as hedging instruments are recorded and the total effect of hedge activity on these income and expense line items are as follows:
(Dollars in millions) |  | Total |  | Gains/(Losses) of Total Hedge Activity
For the three months ended March 31: |  | 2025 |  | 2024 |  | 2025 |  | 2024
Cost of services |  | $ | 5,002 |  |  | $ | 5,239 |  |  | $ | (2) |  |  | $ | 4 |
Cost of sales |  | $ | 1,404 |  |  | $ | 1,381 |  |  | $ | 8 |  |  | $ | 12 |
Cost of financing |  | $ | 104 |  |  | $ | 99 |  |  | $ | 0 |  |  | $ | (3) |
SG&A expense |  | $ | 4,886 |  |  | $ | 4,974 |  |  | $ | (31) |  |  | $ | 74 |
Other (income) and expense |  | $ | (165) |  |  | $ | (317) |  |  | $ | 442 |  |  | $ | (287) |
Interest expense |  | $ | 455 |  |  | $ | 432 |  |  | $ | 2 |  |  | $ | (15) |
|  | Gain (Loss) Recognized in Consolidated Income Statement
(Dollars in millions) |  | Consolidated Income Statement Line Item |  | Recognized on Derivatives |  | Attributable to Risk Being Hedged (1)
For the three months ended March 31: |  |  | 2025 |  | 2024 |  | 2025 |  | 2024
Derivative instruments in fair value hedges: (2) |  |  |  |  |  |  |  |  |  |
Interest rate contracts |  | Cost of financing |  | $ | 11 |  |  | $ | (27) |  |  | $ | (14) |  |  | $ | 22 |
|  | Interest expense |  | 59 |  |  | (138) |  |  | (72) |  |  | 110 |
Derivative instruments not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  | Other (income) and expense |  | 120 |  |  | (207) |  |  | N/A |  | N/A
Equity contracts |  | SG&A expense |  | (34) |  |  | 71 |  |  | N/A |  | N/A
Total |  |  |  | $ | 156 |  |  | $ | (302) |  |  | $ | (86) |  |  | $ | 131 |
(1)The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period. (2)The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts. N/A - not applicable
|  | Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income |
|  | Recognized in OCI |  | Consolidated Income Statement Line Item |  | Reclassified from AOCI |  | Amounts Excluded from Effectiveness Testing (1) |
(Dollars in millions) |  |  |  |  |
For the three months ended March 31: |  | 2025 |  | 2024 |  |  | 2025 |  | 2024 |  | 2025 |  | 2024 |
Derivative instruments in cash flow hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts |  | $ | — |  |  | $ | — |  |  | Cost of financing |  | $ | (1) |  |  | $ | (1) |  |  | N/A |  | N/A |
|  |  |  |  |  | Interest expense |  | (3) |  |  | (4) |  |  | N/A |  | N/A |
Foreign exchange contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Amount included in the assessment of effectiveness |  | 42 |  |  | 166 |  |  | Cost of services |  | (2) |  |  | 4 |  |  | N/A |  | N/A |
|  |  |  |  |  | Cost of sales |  | 8 |  |  | 12 |  |  | N/A |  | N/A |
|  |  |  |  |  | Cost of financing |  | (1) |  |  | (1) |  |  | N/A |  | N/A |
|  |  |  |  |  | SG&A expense |  | 3 |  |  | 3 |  |  | N/A |  | N/A |
|  |  |  |  |  | Other (income) and expense |  | 348 |  |  | (61) |  |  | N/A |  | N/A |
|  |  |  |  |  | Interest expense |  | (3) |  |  | (5) |  |  | N/A |  | N/A |
Amount excluded from the assessment of effectiveness |  | (101) |  |  | 10 |  |  | Other (income) and expense |  | N/A |  | N/A |  | (26) |  |  | (18) |  |
Instruments in net investment hedges: (2) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Amount included in the assessment of effectiveness |  | (820) |  |  | 612 |  |  |  |  | — |  |  | — |  |  | N/A |  | N/A |
Amount excluded from the assessment of effectiveness |  | 12 |  |  | — |  |  | Cost of financing |  | N/A |  | N/A |  | 4 |  |  | 4 |  |
|  |  |  |  |  | Interest expense |  | N/A |  | N/A |  | 22 |  |  | 22 |  |
Total |  | $ | (867) |  |  | $ | 787 |  |  |  |  | $ | 350 |  |  | $ | (52) |  |  | $ | 0 |  |  | $ | 8 |  |
(1)Amounts excluded from effectiveness testing for both net investment hedges and cash flow hedges of foreign currency debt are amortized to net income on a straight-line basis over the life of the relevant hedging instrument. (2)Instruments in net investment hedges include derivative and non-derivative instruments with the amounts recognized in OCI providing an offset to the translation of foreign subsidiaries. N/A - not applicable For the three months ended March 31, 2025 and 2024, there were no material gains or losses associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.

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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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