Derivative Financial Instruments

6 Months Ended

Jun. 30, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Risk Management Objective of Using Derivatives

We are exposed to certain risks arising from both our business operations and economic conditions, and we principally manage our exposures to these risks through management of our core business activities. Certain of our foreign operations expose us to fluctuations of foreign interest rates and exchange rates that may impact revenue, expenses, cash receipts, cash payments, and the value of our stockholders' equity. We enter into derivative financial instruments to protect the value or fix the amount of certain cash flows in terms of the functional currency of the business unit with that exposure and also reduce the volatility in stockholders' equity.

Cash Flow Hedges of Foreign Exchange Risk

We are exposed to fluctuations in various foreign currencies against our functional currencies. We use foreign currency derivatives, including currency forward agreements, to manage our exposure to fluctuations in the various exchange rates. Currency forward agreements involve fixing the foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date.

Certain business units with exposure to foreign currency exchange risks have designated certain currency forward agreements as cash flow hedges of forecasted intercompany inventory purchases and sales. Our principal currency exposures relate to the Euro, Swedish Krona, British Pound, Canadian Dollar, Polish Zloty and Australian Dollar. We had foreign exchange contracts with purchased notional amounts totaling $270 million and $0 million as of June 30, 2021 and December 31, 2020, respectively. As of June 30, 2021, our most significant foreign currency derivatives included contracts to sell U.S. Dollar and purchase Euro, purchase Swedish Krona and sell Euro, sell British Pound and purchase Euro, purchase Polish Zloty and sell Euro, purchase U.S. Dollar and sell Canadian Dollar, and to sell Canadian Dollar and purchase Euro. The purchased notional amounts associated with these currency derivatives are $97 million, $88 million, $36 million, $14 million, $13 million and $12 million, respectively.

Hedges of Net Investments in Foreign Operations

We are exposed to changes in foreign currencies impacting our net investments held in foreign subsidiaries.

Cross-Currency Swaps

Beginning in 2015, we entered into cross-currency swaps to manage our exposure to fluctuations in the Euro-U.S. Dollar exchange rate. During the second quarter of 2019 and third quarter of 2020 we entered into additional cross-currency swaps. The total notional amount of derivative instruments designated as net investment hedges was $1,208 million and $1,249 million as of June 30, 2021 and December 31, 2020, respectively.

Foreign Currency Denominated Debt

On March 11, 2016, we issued 2.250% Senior Notes of €500 million aggregate principal amount due March 2023. We designated the entirety of the outstanding balance, or $591 million and $610 million as of June 30, 2021 and December 31, 2020, respectively, net of unamortized discount, as a hedge of a net investment in certain foreign subsidiaries.

The table below presents the effect of our derivative financial instruments on the Condensed Consolidated Income Statements and Statements of Comprehensive Income:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)	2021		2020		2021		2020
Cash Flow Hedges
Foreign Exchange Contracts
Amount of (loss) gain recognized in OCI	$	4	$	6	$	(7)	$	4
Amount of (gain) loss reclassified from OCI into revenue	1		(1)		(1)		1
Amount of (gain) loss reclassified from OCI into cost of revenue	—		1		(1)		2

Net Investment Hedges
Cross-Currency Swaps
Amount of gain (loss) recognized in OCI	$	2	$	(22)	$	32	$	23
Amount of income recognized in Interest Expense	5		5		$	10	$	9
Foreign Currency Denominated Debt
Amount of gain (loss) recognized in OCI	$	(6)	$	(15)	$	20	$	(5)

As of June 30, 2021, $6 million of net losses on cash flow hedges are expected to be reclassified into earnings in the next 12 months.

As of June 30, 2021, no gains or losses on the net investment hedges are expected to be reclassified into earnings over their duration.

The fair values of our derivative assets and liabilities are measured on a recurring basis using Level 2 inputs and are determined through the use of models that consider various assumptions including yield curves, time value and other measurements.

The fair values of our derivative contracts currently included in our hedging program were as follows:


(in millions)	June 30, 2021		December 31, 2020
Derivatives designated as hedging instruments





Liabilities
Cash Flow Hedges
Other current liabilities	$	(5)	$	—
Net Investment Hedges
Other non-current accrued liabilities	$	(82)	$	(117)

The fair value of our long-term debt, due in 2023, designated as a net investment hedge was $614 million and $640 million as of June 30, 2021 and December 31, 2020, respectively.