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DERIVATIVES AND HEDGING TRANSACTIONS | 12 Months Ended
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Dec. 31, 2023
DERIVATIVES AND HEDGING TRANSACTIONS |
DERIVATIVES AND HEDGING TRANSACTIONS | 8. DERIVATIVES AND HEDGING TRANSACTIONS ​ The Company uses foreign currency forward contracts, interest rate swap agreements, cross-currency swap derivative contracts and foreign currency debt to manage risks associated with foreign currency exchange rates, interest rates and net investments in foreign operations. The Company does not hold derivative financial instruments of a speculative nature or for trading purposes. The Company records derivatives as assets and liabilities in the Consolidated Balance Sheets at fair value. Changes in fair value are recognized immediately in earnings unless the derivative qualifies and is designated as a hedge. Cash flows from derivatives are classified in the Consolidated Statements of Cash Flows in the same category as the cash flows from the items subject to designated hedge or undesignated (economic) hedge relationships. The Company evaluates hedge effectiveness at inception and on an ongoing basis. If a derivative is no longer expected to be effective, hedge accounting is discontinued. ​ The Company is exposed to credit risk in the event of nonperformance of counterparties for foreign currency forward exchange contracts and interest rate swap agreements. The Company monitors its exposure to credit risk by using credit approvals and credit limits and by selecting major global banks and financial institutions as counterparties. The Company does not anticipate nonperformance by any of these counterparties, and therefore, recording a valuation allowance against the Company’s derivative balance is not considered necessary. ​ Derivative Positions Summary ​ Certain of the Company’s derivative transactions are subject to master netting arrangements that allow the Company to net settle contracts with the same counterparties. These arrangements generally do not call for collateral and as of the applicable dates presented in the following table, no cash collateral had been received or pledged related to the underlying derivatives. ​ The respective net amounts are included in other current assets, other assets, other current liabilities and other liabilities on the Consolidated Balance Sheets. ​ The following table summarizes the gross fair value and the net value of the Company’s outstanding derivatives: ​ ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | Derivative Assets | Derivative Liabilities
​ | ​ | ​ | December 31 | ​ | December 31 | ​ | December 31 | ​ | December 31 | ​
(millions) |  | ​ | 2023 | ​ | 2022 |  | 2023 | ​ | 2022 |
Derivatives designated as hedging instruments | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Foreign currency forward contracts | ​ | ​ | ​ | $6.7 | ​ | ​ | ​ | $78.6 | ​ | ​ | $5.2 | ​ | ​ | ​ | $9.2 | ​
Interest rate swap agreements | ​ | ​ | ​ | - | ​ | ​ | ​ | - | ​ | ​ | 146.5 | ​ | ​ | ​ | 181.4 | ​
Cross-currency swap derivative contracts | ​ | ​ | ​ | 29.1 | ​ | ​ | ​ | 58.7 | ​ | ​ | 24.9 | ​ | ​ | ​ | 14.5 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Derivatives not designated as hedging instruments | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Foreign currency forward contracts | ​ | ​ | ​ | 19.9 | ​ | ​ | ​ | 40.3 | ​ | ​ | 21.8 | ​ | ​ | ​ | 74.1 | ​
Gross value of derivatives | ​ | ​ | ​ | 55.7 | ​ | ​ | ​ | 177.6 | ​ | ​ | 198.4 | ​ | ​ | ​ | 279.2 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Gross amounts offset in the Consolidated Balance Sheets | ​ | ​ | ​ | (28.8) | ​ | ​ | ​ | (75.6) | ​ | ​ | (28.8) | ​ | ​ | ​ | (75.6) | ​
Net value of derivatives | ​ | ​ | ​ | $26.9 | ​ | ​ | ​ | $102.0 | ​ | ​ | $169.6 | ​ | ​ | ​ | $203.6 | ​
​ ​ The following table summarizes the notional values of the Company’s outstanding derivatives: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Notional Values
​ | ​ | ​ | December 31 | ​ | ​ | December 31
(millions) | ​ |  | 2023 | ​ |  | 2022
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Foreign currency forward contracts | ​ | ​ | $3,745 | ​ | ​ | ​ | $5,745 | ​
Interest rate swap agreements | ​ | ​ | 1,500 | ​ | ​ | ​ | 1,500 | ​
Cross-currency swap derivative contracts | ​ | ​ | 998 | ​ | ​ | ​ | 650 | ​
​ ​ ​ Cash Flow Hedges ​ The Company utilizes foreign currency forward contracts to hedge the effect of foreign currency exchange rate fluctuations on forecasted foreign currency transactions, including inventory purchases and intercompany royalty, intercompany loans, management fee and other payments. These forward contracts are designated as cash flow hedges. The changes in fair value of these contracts are recorded in accumulated other comprehensive income (loss) (“AOCI”) until the hedged items affect earnings, at which time the gain or loss is reclassified into the same line item in the Consolidated Statements of Income as the underlying exposure being hedged. Cash flow hedged transactions impacting AOCI are forecasted to occur within the next year. For forward contracts designated as hedges of foreign currency exchange rate risk associated with forecasted foreign currency transactions, the Company excludes the changes in fair value attributable to time value from the assessment of hedge effectiveness. The initial value of the excluded component (i.e., the forward points) is amortized on a straight-line basis over the life of the hedging instrument and recognized in the same line item in the Consolidated Statements of Income as the underlying exposure being hedged for intercompany loans. For all other cash flow hedge types, the forward points are mark-to-market monthly and recognized in the same line item in the Consolidated Statements of Income as the underlying exposure being hedged. The difference between fair value changes of the excluded component and the amount amortized in the Consolidated Statements of Income is recorded in AOCI. ​ Fair Value Hedges ​ The Company manages interest expense using a mix of fixed and floating rate debt. To help manage exposure to interest rate movements and to reduce borrowing costs, the Company may enter into interest rate swaps under which the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed upon notional principal amount. The mark-to-market of these fair value hedges is recorded as gains or losses in interest (income) expense and is offset by the gain or loss of the underlying debt instrument, which also is recorded in interest (income) expense. These fair value hedges are highly effective and thus, there is no impact on earnings due to hedge ineffectiveness. ​ In aggregate, the Company has entered into a series of interest rate swap agreements to convert $1.5 billion of its debt from a fixed interest rate to a floating interest rate. The fixed interest rates range from 1.3% to 4.8% and mature between 2026 and 2031. These interest rate swap agreements are designated as fair value hedges. ​ The following amounts were recorded in the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges as of December 31 2023 and 2022: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Line item in which the hedged item is included | ​ | Carrying amount of the hedged liabilities | ​ | Cumulative amount of the fair value hedging adjustment included in the carrying amount of the hedged liabilities
(millions) | ​ | 2023 |  | 2022 | ​ | 2023 |  | 2022
Long-term debt | ​ | ​ | $1,353.7 | ​ | ​ | ​ | $1,317.5 | ​ | ​ | ($148.6) | ​ | ​ | ​ | ($184.8)
​ Net Investment Hedges ​ In November 2023, the Company elected to de-designate as a net investment hedge €316 million of its Euro debt maturing on January 15, 2024. The Company designates its remaining outstanding €834 million ($908 million as of year-end 2023) senior notes (“Euronotes”) and related accrued interest as a hedge of its Euro denominated exposures from the Company’s investments in certain of its Euro denominated functional currency subsidiaries. ​ The Company entered into a series of Euro cross-currency swap derivative contracts maturing in 2026 and 2030. These cross-currency swap derivative contracts are designated as net investment hedges of the Company’s Euro denominated exposures from the Company’s investments in certain of its Euro denominated functional currency subsidiaries. The cross-currency swap derivative contracts exchange fixed-rate payments in one currency for fixed-rate payments in another currency. As of December 31, 2023, the Company had a €625 million ($690 million) cross-currency swap derivative contracts outstanding as a hedge of the Company’s net investment in foreign operations. The changes in the spot rate of these instruments are recorded in AOCI in stockholders’ equity, partially offsetting the foreign currency translation adjustment of the Company’s related net investment that is also recorded in AOCI. Any ineffective portions of net investment hedges are reclassified from AOCI into earnings during the period of change. The interest income or expense from these swaps are recorded in interest expense on the accompanying Consolidated Statements of Income consistent with the classification of interest expense attributable to the underlying debt. ​ In August and October of 2023, the Company entered into CNH cross-currency swap derivative contracts with a notional amount of CNH 1,094 million and CNH 1,098 million, respectively, both maturing in 2032. The cross-currency swap derivative contracts are designated as net investment hedges of its Chinese Yuan (“CNY”) denominated exposures from the Company’s investments in certain CNY denominated functional currency subsidiaries. The cross-currency swap derivative contracts exchange fixed-rate payments in USD for fixed-rate payments in CNH. As of December 31, 2023, the Company had in aggregate, CNH 2,192 million ($308 million) cross-currency swap derivative contracts outstanding as a hedge of the Company’s net investment in foreign operations. The changes in the spot rate of these instruments are recorded in AOCI in stockholders’ equity, partially offsetting the foreign currency translation adjustment of the Company’s related net investment that is also recorded in AOCI. The interest income or expense from these swaps is recorded in interest expense on the accompanying Consolidated Statements of Income consistent with the classification of interest expense attributable to the underlying debt. ​ The revaluation gains and losses on the Euronotes and cross-currency swap derivative contracts, which are designated and effective as hedges of the Company’s net investments, have been included as a component of the cumulative translation adjustment account, and were as follows: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
(millions) | ​ | 2023 |  | 2022 |  | 2021
Revaluation (loss) gain, net of tax: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Euronotes | ​ | ​ | ($42.3) | ​ | ​ | ​ | $81.9 | ​ | ​ | ​ | $45.3 | ​
Cross-currency swap derivative contracts | ​ | ​ | (30.8) | ​ | ​ | ​ | 26.4 | ​ | ​ | ​ | 6.3 | ​
Total revaluation (loss) gain, net of tax | ​ | ​ | ($73.1) | ​ | ​ | ​ | $108.3 | ​ | ​ | ​ | $51.6 | ​
​ Derivatives Not Designated as Hedging Instruments ​ The Company also uses foreign currency forward contracts to offset its exposure to the change in value of certain foreign currency denominated assets and liabilities held at foreign subsidiaries, primarily receivables and payables, which are remeasured at the end of each period. Although the contracts are effective economic hedges, they are not designated as accounting hedges. Therefore, changes in the value of these derivatives are recognized immediately in earnings, thereby offsetting the current earnings effect of the related foreign currency denominated assets and liabilities. ​ Effect of all Derivative Instruments on Income ​ The gain (loss) of all derivative instruments recognized in product and equipment cost of sales (“COS”), selling, general and administrative expenses (“SG&A”) and interest expense, net (“interest”) is summarized below: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | 2023 | ​ | ​ | 2022 | ​ | 2021
(millions) | ​ | COS | ​ | SG&A | ​ | Interest | ​ |  | ​ | COS | ​ | SG&A | ​ | Interest | ​ | ​ | COS | ​ | SG&A | ​ | Interest
Gain (loss) on derivatives in cash flow hedging relationship: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Foreign currency forward contracts | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Amount of gain (loss) reclassified from AOCI to income | ​ | $10.6 | ​ | ($18.9) | ​ | $- | ​ | ​ | ​ | $6.4 | ​ | $95.0 | ​ | $- | ​ | ​ | ($11.0) | ​ | $47.6 | ​ | $-
Amount excluded from the assessment of effectiveness recognized in earnings based on changes in fair value | ​ | - | ​ | - | ​ | 7.7 | ​ | ​ | ​ | - | ​ | - | ​ | 13.9 | ​ | ​ | - | ​ | - | ​ | 21.0
Interest rate swap agreements | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Amount of (loss) gain reclassified from AOCI to income | ​ | - | ​ | - | ​ | (1.9) | ​ | ​ | ​ | - | ​ | - | ​ | (2.3) | ​ | ​ | - | ​ | - | ​ | (2.3)
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Gain (loss) on derivatives not designated as hedging instruments: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Foreign currency forward contracts | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Amount of (loss) gain recognized in income | ​ | - | ​ | (26.2) | ​ | - | ​ | ​ | ​ | - | ​ | 62.0 | ​ | - | ​ | ​ | - | ​ | 73.7 | ​ | -
Total gain (loss) of all derivative instruments | ​ | $10.6 | ​ | ($45.1) | ​ | $5.8 | ​ | ​ | ​ | $6.4 | ​ | $157.0 | ​ | $11.6 | ​ | ​ | ($11.0) | ​ | $121.3 | ​ | $18.7
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
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