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FINANCIAL INSTRUMENTS AND DERIVATIVES | 9 Months Ended
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Sep. 30, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
FINANCIAL INSTRUMENTS AND DERIVATIVES | FINANCIAL INSTRUMENTS AND DERIVATIVES Derivative Instruments and Hedging Activities The Company’s activities expose it to a variety of market risks, which primarily include the risks related to the effects of changes in foreign currency exchange rates and interest rates. These financial exposures are monitored and managed by the Company as part of its overall risk management program. The objective of this risk management program is to reduce the volatility that these market risks may have on the Company’s operating results and equity. The Company employs derivative financial instruments to hedge certain anticipated transactions, firm commitments, or assets and liabilities denominated in foreign currencies. Additionally, the Company utilizes interest rate swaps to convert fixed rate debt into variable rate debt or variable rate debt to fixed rate debt. The Company does not hold derivative instruments for trading or speculative purposes. Derivative Instruments The following summarizes the notional amounts of cash flow hedges, hedges of net investments, fair value hedges, and derivative instruments not designated as hedges for accounting purposes by derivative instrument type at September 30, 2021 and the notional amounts expected to mature during the next 12 months.
(in millions) |  | Aggregate Notional Amount |  | Aggregate Notional Amount Maturing within 12 Months
Cash Flow Hedges |  |  |  |
Foreign exchange forward contracts |  | $ | 323 |  |  | $ | 246 |
Total derivative instruments designated as cash flow hedges |  | $ | 323 |  |  | $ | 246 |
Hedges of Net Investments |  |  |  |
Foreign exchange forward contracts |  | $ | 185 |  |  | $ | 93 |
Cross currency basis swaps |  | 309 |  |  | — |
Total derivative instruments designated as hedges of net investments |  | $ | 494 |  |  | $ | 93 |
Fair Value Hedges |  |  |  |
Interest Rate Swaps |  | $ | 250 |  |  | $ | — |
Foreign exchange forward contracts |  | 217 |  |  | 134 |
Total derivative instruments designated as fair value hedges |  | $ | 467 |  |  | $ | 134 |
Derivative Instruments not Designated as Hedges |  |  |  |
Foreign exchange forward contracts |  | $ | 342 |  |  | $ | 342 |
Total derivative instruments not designated as hedges |  | $ | 342 |  |  | $ | 342 |
Cash Flow Hedges Foreign Exchange Risk Management The Company uses a program to hedge select anticipated foreign currency cash flows to reduce volatility in both cash flows and reported earnings. The Company accounts for the designated foreign exchange forward contracts as cash flow hedges. As a result, the Company records the fair value of the contracts primarily through AOCI based on the assessed effectiveness of the foreign exchange forward contracts. The Company measures the effectiveness of cash flow hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be deferred in AOCI and released and recorded in the Consolidated Statements of Operations in the same period that the hedged transaction is recorded. The time-value component of the fair value of the derivative is reported on a straight-line basis in Cost of products sold in the Consolidated Statements of Operations in the period which it is applicable. Any cash flows associated with these instruments are included in operating activities in the Consolidated Statements of Cash Flows. These foreign exchange forward contracts generally have maturities up to 18 months, which is the period over which the Company is hedging exposures to variability of cash flows and the counterparties to the transactions are typically large international financial institutions. Interest Rate Risk Management The Company enters into interest rate swap contracts infrequently as they are only used to manage interest rate risk on long-term debt instruments and not for speculative purposes. Any cash flows associated with these instruments are included in operating activities in the Consolidated Statements of Cash Flows. AOCI Release Overall, the derivatives designated as cash flow hedges are considered to be highly effective for accounting purposes. At September 30, 2021, the Company expects to reclassify $1 million of deferred net losses on cash flow hedges recorded in AOCI in the Consolidated Statements of Operations during the next 12 months. For the rollforward of derivative instruments designated as cash flow hedges in AOCI see Note 3, Comprehensive (Loss) Income. Hedges of Net Investments in Foreign Operations The Company has significant investments in foreign subsidiaries. The net assets of these subsidiaries are exposed to volatility in currency exchange rates. The Company employs both derivative and non-derivative financial instruments to hedge a portion of this exposure. The derivative instruments consist of foreign exchange forward contracts and cross currency basis swaps. The non-derivative instruments consist of foreign currency denominated debt held at the parent company level. Translation gains and losses related to the net assets of the foreign subsidiaries are offset by gains and losses in derivative and non-derivative financial instruments; which are designated as hedges of net investments and are included in AOCI. The time-value component of the fair value of the derivative is reported on a straight-line basis in Other expense (income), net in the Consolidated Statements of Operations in the applicable period. Any cash flows associated with these instruments are included in investing activities in the Consolidated Statements of Cash Flows except for derivative instruments that include an other-than-insignificant financing element, for which all cash flows are classified as financing activities in the Consolidated Statements of Cash Flows.
The fair value of the foreign exchange forward contracts and cross currency basis swaps is the estimated amount the Company would receive or pay at the reporting date, taking into account the effective interest rates, cross currency swap basis rates, and foreign exchange rates. The effective portion of the change in the value of these derivatives is recorded in AOCI, net of tax effects. On May 25, 2021, the Company re-established its euro net investment hedge portfolio by entering into eight foreign exchange forward contracts, each with a notional amount of 10 million euro. The contracts have quarterly maturity dates through March 31, 2023. On July 2, 2021, the Company entered into a cross currency basis swap totaling a notional amount of $300 million which matures on June 3, 2030. The cross currency basis swap is designated as a hedge of net investments. This contract effectively converts a portion of the $750 million bond coupon from 3.3% to 1.7%, which will result in a net reduction of interest expense in 2021. Fair Value Hedges Foreign Exchange Risk Management The Company has intercompany loans denominated in Swedish kronor that are exposed to volatility in currency exchange rates. The Company employs derivative financial instruments to hedge these exposures. The Company accounts for these designated foreign exchange forward contracts as fair value hedges. The Company measures the effectiveness of fair value hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be recorded in the Consolidated Statements of Operations. The time-value component of the fair value of the derivative is reported on a straight-line basis in Other expense (income), net in the Consolidated Statements of Operations in the applicable period. Any cash flows associated with these instruments are included in operating activities in the Consolidated Statements of Cash Flows. On January 6, 2021 the Company entered into foreign exchange forward contracts with a notional value of SEK 1.3 billion as a result of an increase in intercompany loans denominated in Swedish kronor. The foreign exchange forwards are designated as fair value hedges. On July 1, 2021, the Company entered into variable interest rate swaps with a notional amount of $250 million, which effectively converts a portion of the underlying fixed rate of 3.3% on the $750 million Senior Notes due June 2030 to a variable interest rate. Of the $250 million notional amount, $100 million has a term of five-years maturing on June 1, 2026 and $150 million has a term of nine years maturing on March 1, 2030. Derivative Instruments Not Designated as Hedges The Company enters into derivative instruments with the intent to partially mitigate the foreign exchange revaluation risk associated with recorded assets and liabilities that are denominated in a non-functional currency. The Company primarily uses foreign exchange forward contracts to hedge these risks. The gains and losses on these derivative transactions offset the gains and losses generated by the revaluation of the underlying non-functional currency balances and are recorded in Other expense (income), net in the Consolidated Statements of Operations. Any cash flows associated with these instruments are included in cash from operating activities in the Consolidated Statements of Cash Flows. Gains and (losses) recorded in the Company’s Consolidated Statements of Operations related to the economic hedges not designated as hedges for the three and nine months ended September 30, 2021 and 2020 were insignificant. Derivative Instrument Activity The amount of gains and losses recorded in the Company’s Consolidated Balance Sheets and Consolidated Statements of Operations related to all derivative instruments for the three months ended September 30, 2021 and 2020 were as follows:
|  | Three Months Ended September 30, 2021
(in millions) |  | Gain (Loss) recognized in AOCI |  | Consolidated Statements of Operations Location |  | Effective Portion Reclassified from AOCI into Income (Expense) |  |  |  | Recognized in Income (Expense)
Cash Flow Hedges |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | 6 |  |  | Cost of products sold |  | $ | (2) |  |  |  |  | $ | — |
Interest rate swaps |  | — |  |  | Interest expense, net |  | (1) |  |  |  |  | — |
Total for cash flow hedging |  | $ | 6 |  |  |  |  | $ | (3) |  |  |  |  | $ | — |
Hedges of Net Investments |  |
Cross currency basis swaps |  | $ | (1) |  |  | Interest expense, net |  | $ | — |  |  |  |  | $ | 1 |
Foreign exchange forward contracts |  | 4 |  |  | Other expense (income), net |  | — |  |  |  |  | — |
Total for net investment hedging |  | $ | 3 |  |  |  |  | $ | — |  |  |  |  | $ | 1 |
Fair Value Hedges |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | — |  |  | Interest expense, net |  | $ | — |  |  |  |  | $ | 1 |
Foreign exchange forward contracts |  | — |  |  | Other expense (income), net |  | — |  |  |  |  | 6 |
Total for fair value hedging |  | $ | — |  |  |  |  | $ | — |  |  |  |  | $ | 7 |
|  | Three Months Ended September 30, 2020
(in millions) |  | Gain (Loss) recognized in AOCI |  | Consolidated Statements of Operations Location |  | Effective Portion Reclassified from AOCI into Income (Expense) |  | Recognized in Income (Expense)
Cash Flow Hedges |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | (6) |  |  | Cost of products sold |  | $ | 1 |  |  | $ | 1 |
Interest rate swaps |  | 3 |  |  | Interest expense, net |  | (2) |  |  | — |
Total for cash flow hedging |  | $ | (3) |  |  |  |  | $ | (1) |  |  | $ | 1 |
Hedges of Net Investments |  |
Cross currency basis swaps |  | $ | (17) |  |  | Interest expense, net |  | $ | — |  |  | $ | 2 |
Total for net investment hedging |  | $ | (17) |  |  |  |  | $ | — |  |  | $ | 2 |
The amount of gains and losses recorded in AOCI in the Consolidated Balance Sheets and Consolidated Statement of Operations related to all derivative instruments for the nine months ended September 30, 2021 and 2020 were as follows:
|  | Nine Months Ended September 30, 2021
(in millions) |  | Gain (Loss) recognized in AOCI |  | Consolidated Statements of Operations Location |  | Effective Portion Reclassified from AOCI into Income (Expense) |  |  |  | Recognized in Income (Expense)
Cash Flow Hedges |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | 3 |  |  | Cost of products sold |  | $ | (4) |  |  |  |  | $ | 1 |
Interest rate swaps |  | — |  |  | Interest expense, net |  | (4) |  |  |  |  | — |
Total for cash flow hedging |  | $ | 3 |  |  |  |  | $ | (8) |  |  |  |  | $ | 1 |
Hedges of Net Investments |  |
Cross currency basis swaps |  | $ | 6 |  |  | Interest expense, net |  | $ | — |  |  |  |  | $ | 5 |
Foreign exchange forward contracts |  | 7 |  |  | Other expense (income), net |  | — |  |  |  |  | — |
Total for net investment hedging |  | $ | 13 |  |  |  |  | $ | — |  |  |  |  | $ | 5 |
Fair Value Hedges |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | — |  |  | Interest expense, net |  | $ | — |  |  |  |  | $ | 1 |
Foreign exchange forward contracts |  | — |  |  | Other expense (income), net |  | — |  |  |  |  | 18 |
Total for fair value hedging |  | $ | — |  |  |  |  | $ | — |  |  |  |  | $ | 19 |
|  | Nine Months Ended September 30, 2020
(in millions) |  | Gain (Loss) recognized in AOCI |  | Consolidated Statements of Operations Location |  | Effective Portion Reclassified from AOCI into Income (Expense) |  | Recognized in Income (Expense)
Cash Flow Hedges |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | (2) |  |  | Cost of products sold |  | $ | 2 |  |  | $ | 2 |
Interest rate swaps |  | (17) |  |  | Interest expense, net |  | (3) |  |  | — |
Total for cash flow hedging |  | $ | (19) |  |  |  |  | $ | (1) |  |  | $ | 2 |
Hedges of Net Investments |  |
Cross currency basis swaps |  | $ | (13) |  |  | Interest expense, net |  | $ | — |  |  | $ | 7 |
Foreign exchange forward contracts |  | 6 |  |  | Other expense (income), net |  | — |  |  | 6 |
Total for net investment hedging |  | $ | (7) |  |  |  |  | $ | — |  |  | $ | 13 |
Consolidated Balance Sheets Location of Derivative Fair Values The fair value and the location of the Company’s derivatives in the Consolidated Balance Sheets were as follows:
|  | September 30, 2021
(in millions) |  | Prepaid Expenses and Other Current Assets |  | Other Noncurrent Assets |  | Accrued Liabilities |  | Other Noncurrent Liabilities
Designated as Hedges: |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | 13 |  |  | $ | 11 |  |  | $ | 2 |  |  | $ | — |
Interest rate swaps |  | 3 |  |  | — |  |  | — |  |  | 5 |
Cross currency basis swaps |  | 3 |  |  | — |  |  | — |  |  | 14 |
Total |  | $ | 19 |  |  | $ | 11 |  |  | $ | 2 |  |  | $ | 19 |
Not Designated as Hedges: |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | 1 |  |  | $ | — |  |  | $ | 2 |  |  | $ | — |
Total |  | $ | 1 |  |  | $ | — |  |  | $ | 2 |  |  | $ | — |
|  | December 31, 2020
(in millions) |  | Prepaid Expenses and Other Current Assets |  | Other Noncurrent Assets |  | Accrued Liabilities |  | Other Noncurrent Liabilities
Designated as Hedges: |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | 5 |  |  | $ | 2 |  |  | $ | 10 |  |  | $ | 3 |
Cross currency basis swaps |  | — |  |  | — |  |  | 20 |  |  | — |
Total |  | $ | 5 |  |  | $ | 2 |  |  | $ | 30 |  |  | $ | 3 |
Not Designated as Hedges: |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | 3 |  |  | $ | — |  |  | $ | 2 |  |  | $ | — |
Total |  | $ | 3 |  |  | $ | — |  |  | $ | 2 |  |  | $ | — |
Balance Sheet Offsetting Substantially all of the Company’s derivative contracts are subject to netting arrangements; whereby the right to offset occurs in the event of default or termination in accordance with the terms of the arrangements with the counterparty. While these contracts contain the enforceable right to offset through netting arrangements with the same counterparty, the Company elects to present them on a gross basis in the Consolidated Balance Sheets. Offsetting of financial assets and liabilities under netting arrangements at September 30, 2021 were as follows:
|  |  |  |  |  |  |  | Gross Amounts Not Offset in the Consolidated Balance Sheets |  |
(in millions) |  | Gross Amounts Recognized |  | Gross Amount Offset in the Consolidated Balance Sheets |  | Net Amounts Presented in the Consolidated Balance Sheets |  | Financial Instruments |  | Cash Collateral Received/Pledged |  | Net Amount
Assets |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | 25 |  |  | $ | — |  |  | $ | 25 |  |  | $ | (10) |  |  | $ | — |  |  | $ | 15 |
Interest rate swaps |  | 3 |  |  | — |  |  | 3 |  |  | (3) |  |  | — |  |  | — |
Cross currency basis swaps |  | 3 |  |  | — |  |  | 3 |  |  | (3) |  |  | — |  |  | — |
Total assets |  | $ | 31 |  |  | $ | — |  |  | $ | 31 |  |  | $ | (16) |  |  | $ | — |  |  | $ | 15 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | 4 |  |  | $ | — |  |  | $ | 4 |  |  | $ | (3) |  |  | $ | — |  |  | $ | 1 |
Interest rate swaps |  | 5 |  |  | — |  |  | 5 |  |  | (3) |  |  | — |  |  | 2 |
Cross currency basis swaps |  | 14 |  |  | — |  |  | 14 |  |  | (10) |  |  | — |  |  | 4 |
Total liabilities |  | $ | 23 |  |  | $ | — |  |  | $ | 23 |  |  | $ | (16) |  |  | $ | — |  |  | $ | 7 |
Offsetting of financial assets and liabilities under netting arrangements at December 31, 2020 were as follows:
|  |  |  |  |  |  |  | Gross Amounts Not Offset in the Consolidated Balance Sheets |  |
(in millions) |  | Gross Amounts Recognized |  | Gross Amount Offset in the Consolidated Balance Sheets |  | Net Amounts Presented in the Consolidated Balance Sheets |  | Financial Instruments |  | Cash Collateral Received/Pledged |  | Net Amount
Assets |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | 9 |  |  | $ | — |  |  | $ | 9 |  |  | $ | (9) |  |  | $ | — |  |  | $ | — |
Total assets |  | $ | 9 |  |  | $ | — |  |  | $ | 9 |  |  | $ | (9) |  |  | $ | — |  |  | $ | — |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | 15 |  |  | $ | — |  |  | $ | 15 |  |  | $ | — |  |  | $ | — |  |  | $ | 15 |
Interest rate swaps |  | 20 |  |  | — |  |  | 20 |  |  | (7) |  |  | — |  |  | 13 |
Total liabilities |  | $ | 35 |  |  | $ | — |  |  | $ | 35 |  |  | $ | (7) |  |  | $ | — |  |  | $ | 28 |

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI http://asc.fasb.org/extlink&oid=123477628&loc=d3e90205-114008 + Details
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