FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company uses derivative financial instruments to manage its exposure to market risks for changes in interest rates and, from time to time, foreign currencies. This strategy includes the use of interest rate swap agreements, forward-starting interest rate swap agreements, treasury lock agreements and foreign currency forward contracts to manage its exposure to movements in interest and currency rates. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. These policies prohibit holding or issuing derivative financial instruments for speculative purposes. The Company does not enter into derivative financial instruments that contain credit-risk-related contingent features or requirements to post collateral.

Interest Rate Risk

The Company is exposed to interest rate risk on its cash and cash equivalents and its debt obligations. Interest income earned on cash and cash equivalents may fluctuate as interest rates change; however, due to their relatively short maturities, the Company does not hedge these assets or their investment cash flows and the impact of interest rate risk is not material. The Company's debt obligations consist of fixed-rate and variable-rate debt instruments. The Company's primary objective is to achieve the lowest overall cost of funding while managing the variability in cash outflows within an acceptable range. In order to achieve this objective, the Company has entered into interest rate swaps.

Interest rate swaps involve the periodic exchange of payments without the exchange of underlying principal or notional amounts. Net settlements between the counterparties are recognized as an adjustment to interest expense.

Interest Rate Derivatives – Cash Flow Hedges

From time to time, the Company has entered into various interest rate lock agreements and forward-starting interest rate swap agreements to hedge part of the Company's interest rate exposure associated with the variability in future cash flows attributable to changes in interest rates.

During the first quarter of 2020, the Company entered into forward-starting interest rate swap agreements with financial institutions for a total notional amount of $25 million. The swap agreements, which are accounted for as cash flow hedges, were entered into in order to hedge a portion of the Company's interest rate exposure associated with variability in future cash flows attributable to changes in interest rates over a ten-year period related to an anticipated issuance of debt. The new debt will replace senior notes that are maturing during 2021. Prior to their maturity or settlement, the forward-starting interest rate swaps will be recognized as either an asset or liability, measured at their fair value. To the extent that they are effective, gains and losses related to recording the forward-starting interest rate swap agreements at fair value will be deferred in stockholders' equity, net of taxes, as a component of accumulated other comprehensive loss. Subsequent to the issuance of the debt and settlement of the forward-starting interest rate swaps, the deferred gain/loss will be amortized as an adjustment to interest expense over the term of such debt. The fair value of the outstanding forward-starting interest rate swaps as of March 31, 2020 was not material.

The total net loss, net of taxes, recognized in accumulated other comprehensive loss, related to the Company's cash flow hedges was $4 million as of both March 31, 2020 and December 31, 2019. The net amount of deferred losses on cash flow hedges that is expected to be reclassified from accumulated other comprehensive loss into interest expense, net within the next twelve months is $1 million.

Interest Rate Derivatives – Fair Value Hedges

The Company maintains various fixed-to-variable interest rate swaps to convert a portion of the Company's long-term debt into variable interest rate debt. A summary of the notional amounts of these interest rate swaps as of March 31, 2020 and December 31, 2019 was as follows:



	Notional Amount
Debt Instrument	March 31, 2020		December 31, 2019

4.25% Senior Notes due April 2024	$	250	$	250
3.50% Senior Notes due March 2025	600		600
3.45% Senior Notes due June 2026	350		350
	$	1,200	$	1,200

The fixed-to-variable interest rate swap agreements in the table above have variable interest rates ranging from one-month LIBOR plus 2.2% to one-month LIBOR plus 3.0%. In April 2020, the Company terminated its existing fixed-to-variable interest rate swap agreements. See Note 17 to the interim unaudited consolidated financial statements for further details.

As of March 31, 2020 and December 31, 2019, the following amounts were recorded on the consolidated balance sheets related to cumulative basis adjustments for fair value hedges included in the carrying amount of long-term debt:



	Carrying Amount of Hedged Long-Term Debt		Hedge Accounting Basis Adjustment (a)		Carrying Amount of Hedged Long-Term Debt		Hedge Accounting Basis Adjustment (a)
Balance Sheet Classification	March 31, 2020		March 31, 2020		December 31, 2019		December 31, 2019
Long-term debt	$	1,254	$	63	$	1,186	$	(3	)

(a) The balance includes $22 million and $25 million of remaining unamortized hedging adjustment on a discontinued relationship as of March 31, 2020 and December 31, 2019, respectively.

The following table presents the effect of fair value hedge accounting on the consolidated statements of operations for the three months ended March 31, 2020 and 2019:



	Three Months Ended March 31,
	2020			2019
	Other (expense) income, net			Other (expense) income, net
Total for line item in which the effects of fair value hedges are recorded	$	(16	)	$	9

Gain (loss) on fair value hedging relationships:
Hedged items (Long-term debt)	$	(69	)	$	(16	)
Derivatives designated as hedging instruments	$	69		$	16

A summary of the fair values of derivative instruments in the consolidated balance sheets was as follows:

March 31, 2020

December 31, 2019

Derivatives Designated as Hedging Instruments

Balance Sheet

Classification

Fair Value

Balance Sheet

Classification

Fair Value

Fixed-to-variable interest rate swaps

Other assets

Other liabilities

A detailed description regarding the Company's use of derivative financial instruments is contained in Note 15 to the audited consolidated financial statements in the Company's 2019 Annual Report on Form 10-K.