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FINANCIAL INSTRUMENTS AND DERIVATIVES | 3 Months Ended
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Mar. 31, 2024
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 cash flows. 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 vice versa. The Company does not hold derivative instruments for trading or speculative purposes. 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 March 31, 2024 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 |  | $ | 10 |  |  | $ | 10 |
Total derivative instruments designated as cash flow hedges |  | $ | 10 |  |  | $ | 10 |
Hedges of Net Investments |  |  |  |
Foreign exchange forward contracts |  | $ | 839 |  |  | $ | 86 |
Cross currency basis swaps |  | 288 |  |  | — |
Total derivative instruments designated as hedges of net investments |  | $ | 1,127 |  |  | $ | 86 |
Fair Value Hedges |  |  |  |
Interest rate swaps |  | $ | 150 |  |  | $ | — |
Foreign exchange forward contracts |  | 28 |  |  | 28 |
Total derivative instruments designated as fair value hedges |  | $ | 178 |  |  | $ | 28 |
Derivative Instruments not Designated as Hedges |  |  |  |
Foreign exchange forward contracts |  | $ | 803 |  |  | $ | 803 |
Total derivative instruments not designated as hedges |  | $ | 803 |  |  | $ | 803 |
Cash Flow Hedges Foreign Exchange Risk Management The Company hedges select anticipated foreign currency cash flows to reduce volatility in both cash flows and reported earnings. The Company designates certain foreign exchange forward contracts as cash flow hedges. As a result, the Company records the fair value of the contracts 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 is 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 large international financial institutions. Interest Rate Risk Management The Company enters into interest rate swap contracts 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. On May 26, 2020, the Company paid $31 million to settle the $150 million notional Treasury rate lock contract, which partially hedged the interest rate risk of the $750 million Senior Notes due June 2030. This loss is amortized over the ten-year life of the notes. As of both March 31, 2024 and December 31, 2023, $19 million of this loss is remaining to be amortized from AOCI in future periods. AOCI Release Overall, the derivatives designated as cash flow hedges are considered to be highly effective for accounting purposes. At March 31, 2024, the Company expects to reclassify $3 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 4, Comprehensive Income (Loss). 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 foreign currency exchange rates. The Company employs both derivative and non-derivative financial instruments to hedge a portion of these exposures. 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 the aforementioned instruments, which are designated as hedges of net investments and the intrinsic value changes in these instruments are recorded on AOCI, net of tax effects. The time-value component of the fair value of the derivative instrument is amortized on a straight-line basis in Other (income) expense, 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 currency 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 and foreign exchange rates. The effective portion of the change in the value of these derivatives is recorded in AOCI, net of tax effects. Fair Value Hedges Foreign Exchange Risk Management The Company has intercompany loans denominated in Swedish kronor that are exposed to volatility in foreign 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 Other (income) expense, net 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 (income) expense, 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. Interest Rate Risk Management On February 13, 2024, the Company paid $9 million to settle the variable interest rate swap with a notional amount of $100 million which was originally set to mature on June 1, 2026. This closure of the interest rate swap will result in a loss of $8 million being amortized over the remaining life of the Senior Notes due June 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 (income) expense, net in the Consolidated Statements of Operations. Any cash flows associated with these instruments are included in 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 months ended March 31, 2024 and 2023 were not significant. Derivative Instrument Activity The effect of derivative hedging instruments on the Consolidated Statements of Operations and Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2024 and 2023 were as follows:
|  | Three Months Ended
|  | 2024 |  |  |  | 2023
(in millions) |  | Cost of products sold |  | Interest expense, net |  | Other (income) expense, net |  |  |  | Cost of products sold |  | Interest expense, net |  | Other (income) expense, net
Total amounts of line items presented in the Statement of Operations in which the effects of cash flow, net investment or fair value hedges are recorded |  | $ | 447 |  |  | $ | 18 |  |  | $ | (7) |  |  |  |  | $ | 459 |  |  | $ | 20 |  |  | $ | 6 |
(Gain) loss on Cash Flow Hedges reclassified from AOCI into income |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | — |  |  | $ | — |  |  | $ | — |  |  |  |  | $ | (1) |  |  | $ | — |  |  | $ | — |
Interest rate swaps |  | — |  |  | — |  |  | — |  |  |  |  | — |  |  | 1 |  |  | — |
(Gain) loss on Hedges of Net Investment |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cross currency basis swaps |  | $ | — |  |  | $ | — |  |  | $ | (1) |  |  |  |  | $ | — |  |  | $ | — |  |  | $ | 1 |
Foreign exchange forward contracts |  | — |  |  | — |  |  | (6) |  |  |  |  | — |  |  | — |  |  | 1 |
(Gain) loss on Fair Value Hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | — |  |  | $ | 2 |  |  | $ | — |  |  |  |  | $ | — |  |  | $ | 2 |  |  | $ | — |
Foreign exchange forward contracts |  | — |  |  | — |  |  | (1) |  |  |  |  | — |  |  | — |  |  | — |
(Gain) loss on Derivative Instruments not Designated as Hedges |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | — |  |  | $ | — |  |  | $ | (1) |  |  |  |  | $ | — |  |  | $ | — |  |  | $ | 2 |
|  | Amount of Gain or (Loss) Recognized in AOCI |  |  |  | Amount of Gain or (Loss) Reclassified from AOCI into Income
|  | Three Months Ended |  | Consolidated Statements of Operations Location |  | Three Months Ended
(in millions) |  | 2024 |  | 2023 |  |  | 2024 |  |  |  | 2023
Cash Flow Hedges |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | — |  |  | $ | (1) |  |  | Cost of products sold |  | $ | — |  |  |  |  | $ | 1 |
Interest rate swaps |  | — |  |  | — |  |  | Interest expense, net |  | — |  |  |  |  | (1) |
Hedges of Net Investments |  |  |  |  |  |  |  |  |  |  |  |
Cross currency basis swaps |  | $ | 4 |  |  | $ | 1 |  |  | Other expense (income), net |  | $ | — |  |  |  |  | $ | — |
Foreign exchange forward contracts |  | 38 |  |  | (2) |  |  | Other expense (income), net |  | — |  |  |  |  | — |
Fair Value Hedges |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | — |  |  | 1 |  |  | Other expense (income), net |  | — |  |  |  |  | — |
Consolidated Balance Sheets Location of Derivative Fair Values The fair value and the financial statement presentation of the Company's derivatives in the Consolidated Balance Sheets were as follows:
|  | March 31, 2024
(in millions) |  | Prepaid Expenses and Other Current Assets |  | Other Noncurrent Assets |  | Accrued Liabilities |  | Other Noncurrent Liabilities
Designated as Hedges: |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | 1 |  |  | $ | 1 |  |  | $ | 2 |  |  | $ | 5 |
Interest rate swaps |  | — |  |  | — |  |  | 7 |  |  | 16 |
Cross currency basis swaps |  | 3 |  |  | 8 |  |  | — |  |  | — |
Total |  | $ | 4 |  |  | $ | 9 |  |  | $ | 9 |  |  | $ | 21 |
Not Designated as Hedges: |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | 7 |  |  | $ | — |  |  | $ | 7 |  |  | $ | — |
Total |  | $ | 7 |  |  | $ | — |  |  | $ | 7 |  |  | $ | — |
|  | December 31, 2023
(in millions) |  | Prepaid Expenses and Other Current Assets |  | Other Noncurrent Assets |  | Accrued Liabilities |  | Other Noncurrent Liabilities
Designated as Hedges: |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | 3 |  |  | $ | — |  |  | $ | 4 |  |  | $ | 47 |
Interest rate swaps |  | — |  |  | — |  |  | 9 |  |  | 19 |
Cross currency basis swaps |  | 4 |  |  | 4 |  |  | — |  |  | — |
Total |  | $ | 7 |  |  | $ | 4 |  |  | $ | 13 |  |  | $ | 66 |
Not Designated as Hedges: |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | 5 |  |  | $ | — |  |  | $ | 5 |  |  | $ | — |
Total |  | $ | 5 |  |  | $ | — |  |  | $ | 5 |  |  | $ | — |
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 March 31, 2024 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 |  | $ | 10 |  |  | $ | — |  |  | $ | 10 |  |  | $ | (8) |  |  | $ | — |  |  | $ | 2 |
Cross currency basis swaps |  | 11 |  |  | — |  |  | 11 |  |  | (5) |  |  | — |  |  | 6 |
Total assets |  | $ | 21 |  |  | $ | — |  |  | $ | 21 |  |  | $ | (13) |  |  | $ | — |  |  | $ | 8 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | 15 |  |  | $ | — |  |  | $ | 15 |  |  | $ | (8) |  |  | $ | — |  |  | $ | 7 |
Interest rate swaps |  | 23 |  |  | — |  |  | 23 |  |  | (5) |  |  | — |  |  | 18 |
Total liabilities |  | $ | 38 |  |  | $ | — |  |  | $ | 38 |  |  | $ | (13) |  |  | $ | — |  |  | $ | 25 |
Offsetting of financial assets and liabilities under netting arrangements at December 31, 2023 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 |  | $ | 8 |  |  | $ | — |  |  | $ | 8 |  |  | $ | (5) |  |  | $ | — |  |  | $ | 3 |
Cross currency basis swaps |  | 8 |  |  | — |  |  | 8 |  |  | (4) |  |  | — |  |  | 4 |
Total assets |  | $ | 16 |  |  | $ | — |  |  | $ | 16 |  |  | $ | (9) |  |  | $ | — |  |  | $ | 7 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | 56 |  |  | $ | — |  |  | $ | 56 |  |  | $ | (7) |  |  | $ | — |  |  | $ | 49 |
Interest rate swaps |  | 28 |  |  | — |  |  | 28 |  |  | (2) |  |  | — |  |  | 26 |
Total liabilities |  | $ | 84 |  |  | $ | — |  |  | $ | 84 |  |  | $ | (9) |  |  | $ | — |  |  | $ | 75 |

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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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