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Derivative Instruments and Fair Value Measurements | 3 Months Ended
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Sep. 30, 2023
Derivative Instruments and Fair Value Measurements [Abstract] |
Derivative Instruments and Fair Value Measurements | Derivative instruments and fair value measurements The Company is exposed to certain market risks such as changes in interest rates, foreign currency exchange rates, and commodity prices, which exist as a part of its ongoing business operations. Management uses derivative and nonderivative financial instruments and commodity instruments, including futures, options, and swaps, where appropriate, to manage these risks. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged. The Company designates derivatives and nonderivative hedging instruments as cash flow hedges, fair value hedges, net investment hedges, and uses other contracts to reduce volatility in interest rates, foreign currency and commodities. As a matter of policy, the Company does not engage in trading or speculative hedging transactions. Derivative instruments are classified on the Consolidated Balance Sheet based on the contractual maturity of the instrument or the timing of the underlying cash flows of the instrument for derivatives with contractual maturities beyond one year. Any collateral associated with derivative instruments is classified as other assets or other current liabilities on the Consolidated Balance Sheet depending on whether the counterparty collateral is in an asset or liability position. Margin deposits related to exchange-traded commodities are recorded in accounts receivable, net on the Consolidated Balance Sheet. On the Consolidated Statement of Cash Flows, cash flows associated with derivative instruments are classified according to the nature of the underlying hedged item. Cash flows associated with collateral and margin deposits on exchange-traded commodities are classified as investing cash flows when the collateral account is in an asset position and as financing cash flows when the collateral account is in a liability position. Total notional amounts of the Company’s derivative instruments as of September 30, 2023 and December 31, 2022 were as follows:
(millions) | September 30, 2023 | December 31, 2022
Foreign currency exchange contracts | $ | 2,826 |  | $ | 2,502 |
Cross-currency contracts | 1,925 |  | 1,983 |
Interest rate contracts | 2,251 |  | 2,657 |
Commodity contracts | 376 |  | 230 |
Total | $ | 7,378 |  | $ | 7,372 |
Following is a description of each category in the fair value hierarchy and the financial assets and liabilities of the Company that were included in each category at September 30, 2023 and December 31, 2022, measured on a recurring basis. Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market. For the Company, level 1 financial assets and liabilities consist primarily of commodity derivative contracts. Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. For the Company, level 2 financial assets and liabilities consist of interest rate swaps, cross-currency swaps and over-the-counter commodity and currency contracts. The Company’s calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve. Over-the-counter commodity derivatives are valued using an income approach based on the commodity index prices less the contract rate multiplied by the notional amount. Foreign currency contracts are valued using an income approach based on forward rates less the contract rate multiplied by the notional amount. Cross-currency contracts are valued based on changes in the spot rate at the time of valuation compared to the spot rate at the time of execution, as well as the change in the interest differential between the two currencies. The Company’s calculation of the fair value of level 2 financial assets and liabilities takes into consideration the risk of nonperformance, including counterparty credit risk. Level 3 – Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. The Company did not have any level 3 financial assets or liabilities as of September 30, 2023 or December 31, 2022. The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet on a recurring basis as of September 30, 2023 and December 31, 2022: Derivatives designated as hedging instruments
| September 30, 2023 |  | December 31, 2022
(millions) | Level 1 | Level 2 | Total |  | Level 1 | Level 2 | Total
Assets: |  |  |  |  |  |  |
Cross-currency contracts: |  |  |  |  |  |  |
Other current assets | $ | — |  | $ | 77 |  | $ | 77 |  |  | $ | — |  | $ | 88 |  | $ | 88 |
Other assets | — |  | 25 |  | 25 |  |  | — |  | 36 |  | 36 |
Interest rate contracts: |  |  |  |  |  |  |
Other current assets | — |  | 23 |  | 23 |  |  | — |  | 45 |  | 45 |
Other assets | — |  | — |  | — |  |  | — |  | 25 |  | 25 |
Total assets | $ | — |  | $ | 125 |  | $ | 125 |  |  | $ | — |  | $ | 194 |  | $ | 194 |
Liabilities: |  |  |  |  |  |  |
Cross-currency contracts: |  |  |  |  |  |  |
Other current liabilities | $ | — |  | $ | — |  | $ | — |  |  | $ | — |  | $ | — |  | $ | — |
Other liabilities | — |  | — |  | — |  |  | — |  | — |  | — |
Interest rate contracts(a): |  |  |  |  |  |  |
Other current liabilities | — |  | (16) |  | (16) |  |  | — |  | — |  | — |
Other liabilities | — |  | (62) |  | (62) |  |  | — |  | (86) |  | (86) |
Total liabilities | $ | — |  | $ | (78) |  | $ | (78) |  |  | $ | — |  | $ | (86) |  | $ | (86) |
(a) The fair value of the related hedged portion of the Company's long-term debt, a level 2 liability, was $1.0 billion as of September 30, 2023 and $1.1 billion as of December 31, 2022. Derivatives not designated as hedging instruments
| September 30, 2023 |  | December 31, 2022
(millions) | Level 1 | Level 2 | Total |  | Level 1 | Level 2 | Total
Assets: |  |  |  |  |  |  |
Foreign currency exchange contracts: |  |  |  |  |  |  |
Other current assets | $ | — |  | $ | 56 |  | $ | 56 |  |  | $ | — |  | $ | 74 |  | $ | 74 |
Other assets | — |  | 7 |  | 7 |  |  | — |  | 14 |  | 14 |
Interest rate contracts: |  |  |  |  |  |  |
Other current assets | — |  | 9 |  | 9 |  |  | — |  | 4 |  | 4 |
Other assets | — |  | 11 |  | 11 |  |  | — |  | 14 |  | 14 |
Commodity contracts: |  |  |  |  |  |  |
Other current assets | 4 |  | — |  | 4 |  |  | 4 |  | — |  | 4 |
Total assets | $ | 4 |  | $ | 83 |  | $ | 87 |  |  | $ | 4 |  | $ | 106 |  | $ | 110 |
Liabilities: |  |  |  |  |  |  |
Foreign currency exchange contracts: |  |  |  |  |  |  |
Other current liabilities | $ | — |  | $ | (49) |  | $ | (49) |  |  | $ | — |  | $ | (50) |  | $ | (50) |
Other liabilities | — |  | (3) |  | (3) |  |  | — |  | (9) |  | (9) |
Interest rate contracts: |  |  |  |  |  |  |
Other current liabilities | — |  | (11) |  | (11) |  |  | — |  | (7) |  | (7) |
Other liabilities | — |  | (14) |  | (14) |  |  | — |  | (18) |  | (18) |
Commodity contracts: |  |  |  |  |  |  |
Other current liabilities | (12) |  | — |  | (12) |  |  | (2) |  | — |  | (2) |
Total liabilities | $ | (12) |  | $ | (77) |  | $ | (89) |  |  | $ | (2) |  | $ | (84) |  | $ | (86) |
The Company has designated its outstanding foreign currency denominated debt as a net investment hedge of a portion of the Company’s investment in its subsidiaries’ foreign currency denominated net assets. The carrying value of this debt, including current and long-term, was approximately $1.6 billion as of September 30, 2023 and December 31, 2022, respectively. The following amounts were recorded on the Consolidated Balance Sheet related to cumulative basis adjustments for existing fair value hedges as of September 30, 2023 and December 31, 2022.
(millions) |  | Line Item in the Consolidated Balance Sheet in which the hedged item is included |  | Carrying amount of the hedged liabilities |  | Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged liabilities (a)
|  |  |  | September 30, 2023 | December 31, 2022 |  | September 30, 2023 | December 31, 2022
Interest rate contracts |  | Current maturities of long-term debt |  | $ | 897 |  | $ | 483 |  |  | $ | 3 |  | $ | (3) |
Interest rate contracts |  | Long-term debt |  | $ | 1,623 |  | $ | 2,250 |  |  | $ | (59) |  | $ | (74) |
(a) The fair value adjustment related to current maturities of long-term debt includes $3 million and ($3) million from discontinued hedging relationships as of September 30, 2023 and December 31, 2022, respectively. The fair value adjustment related to long-term debt includes $3 million and $13 million from discontinued hedging relationships as of September 30, 2023 and December 31, 2022, respectively. The Company has elected to not offset the fair values of derivative assets and liabilities executed with the same counterparty that are generally subject to enforceable netting agreements. However, if the Company were to offset and record the asset and liability balances of derivatives on a net basis, the amounts presented in the Consolidated Balance Sheet as of September 30, 2023 and December 31, 2022 would be adjusted as detailed in the following table:
As of September 30, 2023: |  | Gross Amounts Not Offset in the Consolidated Balance Sheet |
| Amounts Presented in the Consolidated Balance Sheet | Financial Instruments | Cash Collateral Received/ Posted | Net Amount
Total asset derivatives | $ | 212 |  | $ | (138) |  | $ | 25 |  | $ | 99 |
Total liability derivatives | $ | (167) |  | $ | 138 |  | $ | 29 |  | $ | — |
As of December 31, 2022: |  | Gross Amounts Not Offset in the Consolidated Balance Sheet |
| Amounts Presented in the Consolidated Balance Sheet | Financial Instruments | Cash Collateral Received/ Posted | Net Amount
Total asset derivatives | $ | 304 |  | $ | (153) |  | $ | (33) |  | $ | 118 |
Total liability derivatives | $ | (172) |  | $ | 153 |  | $ | 19 |  | $ | — |
During the quarter and year-to-date periods ended September 30, 2023, the Company settled certain interest rate contracts resulting in a net realized gain of approximately $14 million and $85 million, respectively. During the quarter and year-to-date periods ended October 1, 2022, the Company settled certain interest rate contracts resulting in a net realized gain of approximately $83 million and $165 million, respectively. These derivatives were accounted for as cash flow hedges and the related net gains were recorded in accumulated other comprehensive income and will be amortized to interest expense over the term of the related forecasted fixed rate debt, once issued. During the quarter ended October 1, 2022, the Company recognized an $18 million gain related to a portion of certain forward-starting interest rate swaps no longer designated as cash flow hedges due to changes in forecasted debt issuance. During the quarter and year-to-date periods ended September 30, 2023, the Company settled certain cross currency swaps resulting in a net realized gain of approximately $12 million and $29 million, respectively. During the year-to-date period ended October 1, 2022, the Company settled certain cross currency swaps resulting in a net realized gain of approximately $37 million. T hese cross currency swaps were accounted for as net investment hedges and the related net gain was recorded in accumulated other comprehensive income. The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the quarters ended September 30, 2023 and October 1, 2022 was as follows: Derivatives and non-derivatives in net investment hedging relationships
(millions) | Gain (loss) recognized in AOCI |  | Gain (loss) excluded from assessment of hedge effectiveness | Location of gain (loss) in income of excluded component
| September 30, 2023 |  | October 1, 2022 |  | September 30, 2023 |  | October 1, 2022 |
Foreign currency denominated long-term debt | $ | 44 |  |  | $ | 137 |  |  | $ | — |  |  | $ | — |  |
Cross-currency contracts | 67 |  |  | 123 |  |  | 14 |  |  | 11 |  | Interest expense
Total | $ | 111 |  |  | $ | 260 |  |  | $ | 14 |  |  | $ | 11 |  |
Derivatives not designated as hedging instruments
(millions) | Location of gain (loss) recognized in income | Gain (loss) recognized in income
|  | September 30, 2023 |  | October 1, 2022
Foreign currency exchange contracts | COGS | $ | 10 |  |  | $ | 14 |
Foreign currency exchange contracts | Other income (expense), net | (1) |  |  | (9) |
Foreign currency exchange contracts | SG&A | 1 |  |  | 3 |
Interest rate contracts | Interest expense | — |  |  | 1 |
Commodity contracts | COGS | (22) |  |  | (1) |
Total |  | $ | (12) |  |  | $ | 8 |
The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the year-to-date periods ended September 30, 2023 and October 1, 2022 was as follows: Derivatives and non-derivatives in net investment hedging relationships
(millions) | Gain (loss) recognized in AOCI |  | Gain (loss) excluded from assessment of hedge effectiveness | Location of gain (loss) in income of excluded component
| September 30, 2023 |  | October 1, 2022 |  | September 30, 2023 |  | October 1, 2022 |
Foreign currency denominated long-term debt | $ | 10 |  |  | $ | 339 |  |  | $ | — |  |  | $ | — |  |
Cross-currency contracts | 7 |  |  | 277 |  |  | 42 |  |  | 28 |  | Interest expense
Total | $ | 17 |  |  | $ | 616 |  |  | $ | 42 |  |  | $ | 28 |  |
Derivatives not designated as hedging instruments
(millions) | Location of gain (loss) recognized in income | Gain (loss) recognized in income
|  | September 30, 2023 |  | October 1, 2022
Foreign currency exchange contracts | COGS | $ | (4) |  |  | $ | 34 |
Foreign currency exchange contracts | Other income (expense), net | (11) |  |  | (18) |
Foreign currency exchange contracts | SGA | (4) |  |  | 8 |
Interest rate contracts | Interest expense | — |  |  | 3 |
Commodity contracts | COGS | (85) |  |  | 33 |
Total |  | $ | (104) |  |  | $ | 60 |
The effect of fair value and cash flow hedge accounting on the Consolidated Income Statement for the quarters ended September 30, 2023 and October 1, 2022:
|  |  |  |  |  | September 30, 2023 |  |  |  | October 1, 2022
(millions) |  |  |  | Interest Expense |  |  |  | Interest Expense
Total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of fair value or cash flow hedges are recorded |  |  |  | $ | 83 |  |  |  |  | $ | 39 |
| Gain (loss) on fair value hedging relationships: |  |  |  |  |  |  |  |
| Interest contracts: |  |  |  |  |  |  |  |
| Hedged items |  |  |  | (1) |  |  |  |  | 35 |
| Derivatives designated as hedging instruments |  |  |  | 2 |  |  |  |  | (34) |
| Gain (loss) on cash flow hedging relationships: |  |  |  |  |  |  |  |
| Interest contracts: |  |  |  |  |  |  |  |
| Amount of gain (loss) reclassified from AOCI into income |  |  |  | (2) |  |  |  |  | 14 |
The effect of fair value and cash flow hedge accounting on the Consolidated Income Statement for the year-to-date periods ended September 30, 2023 and October 1, 2022:
|  |  |  |  |  | September 30, 2023 |  |  |  | October 1, 2022
(millions) |  |  |  | Interest Expense |  |  |  | Interest Expense
Total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of fair value or cash flow hedges are recorded |  |  |  | $ | 245 |  |  |  |  | $ | 149 |
| Gain (loss) on fair value hedging relationships: |  |  |  |  |  |  |  |
| Interest contracts: |  |  |  |  |  |  |  |
| Hedged items |  |  |  | (5) |  |  |  |  | 89 |
| Derivatives designated as hedging instruments |  |  |  | 8 |  |  |  |  | (85) |
| Gain (loss) on cash flow hedging relationships: |  |  |  |  |  |  |  |
| Interest contracts: |  |  |  |  |  |  |  |
| Amount of gain (loss) reclassified from AOCI into income |  |  |  | (7) |  |  |  |  | 6 |
During the next 12 months, the Company expects $10 million of net deferred losses reported in AOCI at September 30, 2023 to be reclassified to income, assuming market rates remain constant through contract maturities. Certain of the Company’s derivative instruments contain provisions requiring the Company to post collateral on those derivative instruments that are in a liability position when the value exceeds certain thresholds with each counterparty. In addition, certain derivative instruments contain provisions that would be triggered in the event the Company defaults on its debt agreements. The collateral posting requirements as of September 30, 2023, triggered by threshold contingent features was not material. Other fair value measurements Available for sale securities
| September 30, 2023 |  | December 31, 2022
|  | Unrealized |  |  |  | Unrealized |
(millions) | Cost | Gain (Loss) | Market Value |  | Cost | Gain (Loss) | Market Value
Corporate bonds | $ | 50 |  | $ | (4) |  | $ | 46 |  |  | $ | 52 |  | $ | (5) |  | $ | 47 |
During the year-to-date period ended September 30, 2023, the Company sold approximately $15 million of investments in level 2 corporate bonds. The resulting loss was approximately $1 million and recorded in Other income and (expense). Also during the year-to-date period ended September 30, 2023, the Company purchased approximately $15 million in level 2 corporate bonds. During the year-to-date period ended October 1, 2022, the Company sold level 2 corporate bonds for approximately $14 million. The resulting loss approximately $1 million and recorded in Other income and (expense). Also during the year-to-date period ended October 1, 2022, the Company purchased approximately $15 million in level 2 corporate bonds. The market values of the Company's investments in level 2 corporate bonds are based on matrices or models from pricing vendors. Unrealized gains and losses are included in the Consolidated Statement of Comprehensive Income. Additionally, these investments are recorded within Other current assets and Other assets on the Consolidated Balance Sheet, based on the maturity of the individual security. The maturity dates of the securities range from 2024 to 2036. The Company reviews its investment portfolio for any unrealized losses that would be deemed other-than-temporary and requires the recognition of an impairment loss in earnings. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the duration and extent to which the fair value is less than its cost, the Company's intent to hold the investment, and whether it is more likely than not that the Company will be required to sell the investment before recovery of the cost basis. The Company also considers the type of security, related industry and sector performance, and published investment ratings. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established. If conditions within individual markets, industry segments, or macro-economic environments deteriorate, the Company could incur future impairments. Equity investments We hold equity investments in certain companies that we do not have the ability to exercise significant influence. Equity investments without a readily determinable fair value are recorded at original cost. Investments with a readily determinable fair value, which are level 2 investments, are measured at fair value based on observable market price changes, with gains and losses recorded through net earnings. Equity investments were approximately $40 million as of September 30, 2023 and December 31, 2022. Additionally, these investments were recorded within Other noncurrent assets on the Consolidated Balance Sheet. Financial instruments The carrying values of the Company’s short-term items, including cash, cash equivalents, accounts receivable, accounts payable, notes payable and current maturities of long-term debt approximate fair value. The fair value of the Company’s long-term debt, which are level 2 liabilities, is calculated based on broker quotes. The fair value and carrying value of the Company's long-term debt was $5.2 billion and $5.5 billion, respectively, as of September 30, 2023. The fair value and carrying value of the Company's long-term debt was $5.1 billion and $5.3 billion, respectively, as of December 31, 2022. Counterparty credit risk concentration and collateral requirements The Company is exposed to credit loss in the event of nonperformance by counterparties on derivative financial and commodity contracts. Management believes a concentration of credit risk with respect to derivative counterparties is limited due to the credit ratings and use of master netting and reciprocal collateralization agreements with the counterparties and the use of exchange-traded commodity contracts. Master netting agreements apply in situations where the Company executes multiple contracts with the same counterparty. Certain counterparties represent a concentration of credit risk to the Company. If those counterparties fail to perform according to the terms of derivative contracts, this would result in a loss to the Company of approximately $43 million, net of collateral already received from those counterparties, as of September 30, 2023. For certain derivative contracts, reciprocal collateralization agreements with counterparties call for the posting of collateral in the form of cash, treasury securities or letters of credit if a fair value loss position to the Company or its counterparties exceeds a certain amount. In addition, the Company is required to maintain cash margin accounts in connection with its open positions for exchange-traded commodity derivative instruments executed with the counterparty that are subject to enforceable netting agreements. As of September 30, 2023, the Company posted $22 million in margin deposits for exchange-traded commodity derivative instruments, which was reflected as an increase in accounts receivable, net on the Consolidated Balance Sheet. Management believes concentrations of credit risk with respect to accounts receivable is limited due to the generally high credit quality of the Company’s major customers, as well as the large number and geographic dispersion of smaller customers.

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- Definition The entire disclosure for derivatives and fair value of assets and liabilities. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//815/tableOfContent Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 820 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//820/tableOfContent + Details
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