Financial Instruments and Risk Management

9 Months Ended

Sep. 30, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Instruments and Risk Management

Financial Instruments and Risk Management The Company is exposed to certain financial risks relating to its ongoing business operations. The primary financial risks that are managed by using derivative instruments are foreign currency risk and interest rate risk.

Foreign Currency Risk Management

In order to manage certain foreign currency risks, the Company enters into foreign exchange forward contracts to mitigate risk associated with changes in spot exchange rates of mainly non-functional currency denominated assets or liabilities. The foreign exchange forward contracts are measured at fair value and reported as current assets or current liabilities in the condensed consolidated balance sheets. Any gains or losses on the foreign exchange forward contracts are recognized in earnings in the period incurred in the condensed consolidated statements of operations.

The Company has also entered into forward contracts to hedge forecasted foreign currency denominated sales from certain international subsidiaries and a portion of forecasted intercompany inventory sales denominated in Euro, Japanese Yen, Chinese Renminbi and Indian Rupee for up to eighteen months. These contracts are designated as cash flow hedges to manage foreign currency transaction risk and are measured at fair value and reported as current assets or current liabilities in the condensed consolidated balance sheets. Any changes in the fair value of designated cash flow hedges are deferred in AOCE and are reclassified into earnings when the hedged item impacts earnings.

Net Investment Hedges

The Company may hedge the foreign currency risk associated with certain net investment positions in foreign subsidiaries by either borrowing directly in foreign currencies and designating all or a portion of the foreign currency debt as a hedge of the applicable net investment position or entering into foreign currency swaps that are designated as hedges of net investments.

The Company has designated certain Euro and Yen borrowings as a hedge of its investment in certain Euro-functional and Yen-functional currency subsidiaries in order to manage foreign currency translation risk. Borrowings designated as net investment hedges are marked-to-market using the current spot exchange rate as of the end of the period, with gains and losses included in the foreign currency translation component of AOCE until the sale or substantial liquidation of the underlying net investments. In addition, the Company manages the related foreign exchange risk of the Euro and Yen borrowings not designated as net investment hedges through certain Euro and Yen denominated financial assets and forward currency swaps.

The following table summarizes the principal amounts of the Company’s outstanding Euro and Yen borrowings and the notional amounts of the Euro and Yen borrowings designated as net investment hedges:

			Notional Amount Designated as a Net Investment Hedge
(In millions)	Principal Amount		September 30, 2022		December 31, 2021
2.250% Euro Senior Notes due 2024	€	1,000.0	€	1,000.0	€	1,000.0
3.125% Euro Senior Notes due 2028	750.0		750.0		750.0
2.125% Euro Senior Notes due 2025	500.0		500.0		500.0
0.816% Euro Senior Notes due 2022 (1)	750.0		—		750.0
1.023% Euro Senior Notes due 2024	750.0		750.0		750.0
1.362% Euro Senior Notes due 2027	850.0		850.0		850.0
1.908% Euro Senior Notes due 2032	1,250.0		1,250.0		1,250.0
Total	€	5,850.0	€	5,100.0	€	5,850.0
Yen
YEN Term Loan	¥	40,000.0	¥	40,000.0	¥	40,000.0
Yen Total	¥	40,000.0	¥	40,000.0	¥	40,000.0

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(1)The Senior Notes were repaid at maturity during the second quarter of 2022.

At September 30, 2022, the principal amount of the Company’s outstanding Yen borrowings and the notional amount of the Yen borrowings designated as net investment hedge was $276.4 million.

Interest Rate Risk Management

The Company enters into interest rate swaps from time to time in order to manage interest rate risk associated with the Company’s fixed-rate and floating-rate debt. Interest rate swaps that meet specific accounting criteria are accounted for as fair value or cash flow hedges. All derivative instruments used to manage interest rate risk are measured at fair value and reported as current assets or current liabilities in the condensed consolidated balance sheets. For fair value hedges, the changes in the fair value of both the hedging instrument and the underlying debt obligations are included in interest expense. For cash flow hedges, the change in fair value of the hedging instrument is deferred through AOCE and is reclassified into earnings when the hedged item impacts earnings.

Credit Risk Management

The Company regularly reviews the creditworthiness of its financial counterparties and does not expect to incur a significant loss from the failure of any counterparties to perform under any agreements. The Company is not subject to any obligations to post collateral under derivative instrument contracts. Certain derivative instrument contracts entered into by the Company are governed by master agreements, which contain credit-risk-related contingent features that would allow the counterparties to terminate the contracts early and request immediate payment should the Company trigger an event of default on other specified borrowings. The Company records all derivative instruments on a gross basis in the condensed consolidated balance sheets. Accordingly, there are no offsetting amounts that net assets against liabilities.

The following table summarizes the classification and fair values of derivative instruments in our condensed consolidated balance sheets:

	Asset Derivatives					Liability Derivatives
(In millions)	Balance Sheet Location	September 30, 2022 Fair Value		December 31, 2021 Fair Value		Balance Sheet Location	September 30, 2022 Fair Value		December 31, 2021 Fair Value
Derivatives designated as hedges:
Foreign currency forward contracts	Prepaid expenses & other current assets	$	99.9	$	62.0	Other current liabilities	$	18.4	$	4.3
Total derivatives designated as hedges		99.9		62.0			18.4		4.3
Derivatives not designated as hedges:
Foreign currency forward contracts	Prepaid expenses & other current assets	156.9		82.6		Other current liabilities	138.9		56.7
Total derivatives not designated as hedges		156.9		82.6			138.9		56.7
Total derivatives		$	256.8	$	144.6		$	157.3	$	61.0

The following table summarizes information about the gains/(losses) incurred to hedge or offset operational foreign exchange or interest rate risk:

		Amount of Gains/(Losses) Recognized in Earnings				Amount of Gains/(Losses) Recognized in AOCE (Net of Tax) on Derivatives				Amount of Gains/(Losses) Reclassified from AOCE into Earnings
		Three months ended September 30,				Three months ended September 30,				Three months ended September 30,
(In millions)	Location of Gain/(Loss)	2022		2021		2022		2021		2022		2021
Derivative Financial Instruments in Cash Flow Hedging Relationships (1) :
Foreign currency forward contracts	Net sales (2)	$	—	$	—	$	35.3	$	15.5	$	32.2	$	10.2
Interest rate swaps	Interest expense (2)	—		—		(0.9)		(0.8)		(1.2)		(1.1)
Non-derivative Financial Instruments in Net Investment Hedging Relationships:
Foreign currency borrowings		—		—		292.9		130.4		—		—
Derivative Financial Instruments Not Designated as Hedging Instruments:
Foreign currency option and forward contracts	Other (income) expense, net (3)	(82.7)		37.6		—		—		—		—
Total		$	(82.7)	$	37.6	$	327.3	$	145.1	$	31.0	$	9.1

		Amount of Gains/(Losses) Recognized in Earnings				Amount of Gains/(Losses) Recognized in AOCE (Net of Tax) on Derivatives				Amount of Gains/(Losses) Reclassified from AOCE into Earnings
		Nine months ended September 30,				Nine months ended September 30,				Nine months ended September 30,
(In millions)	Location of Gain/(Loss)	2022		2021		2022		2021		2022		2021
Derivative Financial Instruments in Cash Flow Hedging Relationships (1) :
Foreign currency forward contracts	Net sales (2)	$	—	$	—	$	78.1	$	32.4	$	74.5	$	19.9
Interest rate swaps	Interest expense (2)	—		—		(2.6)		(2.5)		(3.4)		(3.2)
Non-derivative Financial Instruments in Net Investment Hedging Relationships:
Foreign currency borrowings		—		—		747.8		329.4		—		—
Derivative Financial Instruments Not Designated as Hedging Instruments:
Foreign currency option and forward contracts	Other (income) expense, net (3)	(7.9)		58.3		—		—		—		—
Total		$	(7.9)	$	58.3	$	823.3	$	359.3	$	71.1	$	16.7

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(1)At September 30, 2022, the Company expects that approximately $53.0 million of pre-tax net gains on cash flow hedges will be reclassified from AOCE into earnings during the next twelve months.

(2)Represents the location of the gain/(loss) reclassified from AOCE into earnings.

(3)Represents the location of the gain/(loss) recognized in earnings on derivatives.

Fair Value Measurement

Fair value is based on the price that would be received from the sale of an identical asset or paid to transfer an identical liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, a fair value hierarchy has been established that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

•Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

•Level 2: Observable market-based inputs other than quoted prices in active markets for identical assets or liabilities.

•Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as considers counterparty credit risk in its assessment of fair value.

Financial assets and liabilities carried at fair value are classified in the tables below in one of the three categories described above:

	September 30, 2022						December 31, 2021
(In millions)	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Recurring fair value measurements
Financial Assets
Cash equivalents:
Money market funds	$	140.0	$	—	$	—	$	50.9	$	—	$	—
Total cash equivalents	140.0		—		—		50.9		—		—
Equity securities:
Exchange traded funds	39.6		—		—		50.3		—		—
Marketable securities	0.2		—		—		0.7		—		—
Total equity securities	39.8		—		—		51.0		—		—
Available-for-sale fixed income investments:
Corporate bonds	—		15.1		—		—		16.6		—
U.S. Treasuries	—		11.9		—		—		14.6		—
Agency mortgage-backed securities	—		3.7		—		—		2.0		—
Asset backed securities	—		3.4		—		—		4.6		—
Other	—		0.4		—		—		0.4		—
Total available-for-sale fixed income investments	—		34.5		—		—		38.2		—
Foreign exchange derivative assets	—		256.8		—		—		144.6		—
Total assets at recurring fair value measurement	$	179.8	$	291.3	$	—	$	101.9	$	182.8	$	—
Financial Liabilities
Foreign exchange derivative liabilities	—		157.3		—		—		61.0		—
Contingent consideration	—		—		163.3		—		—		199.7
Total liabilities at recurring fair value measurement	$	—	$	157.3	$	163.3	$	—	$	61.0	$	199.7

For financial assets and liabilities that utilize Level 2 inputs, the Company utilizes both direct and indirect observable price quotes, including the LIBOR yield curve, foreign exchange forward prices and bank price quotes. Below is a summary of valuation techniques for Level 1 and Level 2 financial assets and liabilities:

•Cash equivalents — valued at observable net asset value prices.

•Equity securities, exchange traded funds — valued at the active quoted market prices from broker or dealer quotations or transparent pricing sources at the reporting date. Unrealized gains and losses attributable to changes in fair value are included in other (income) expense, net, in the condensed consolidated statements of operations.

•Equity securities, marketable securities — valued using quoted stock prices from public exchanges at the reporting date. Unrealized gains and losses attributable to changes in fair value are included in other (income) expense, net, in the condensed consolidated statements of operations.

•Available-for-sale fixed income investments — valued at the quoted market prices from broker or dealer quotations or transparent pricing sources at the reporting date. Unrealized gains and losses attributable to changes in fair value, net of income taxes, are included in accumulated other comprehensive loss as a component of shareholders’ equity.

•Foreign exchange derivative assets and liabilities — valued using quoted forward foreign exchange prices and spot rates at the reporting date. Counterparties to these contracts are highly rated financial institutions.

Contingent Consideration

The fair value measurement of contingent consideration is determined using Level 3 inputs. The Company’s contingent consideration represents a component of the total purchase consideration for Pfizer’s respiratory delivery platform and certain other acquisitions. The measurement is calculated using unobservable inputs based on the Company’s own assumptions primarily related to the probability and timing of future development and commercial milestones and future profit sharing payments which are discounted using a market rate of return. At September 30, 2022 and December 31, 2021, discount rates ranging from 8.0% to 9.0% were utilized in the valuations. Significant changes in unobservable inputs could result in material changes to the contingent consideration liability.

A rollforward of the activity in the Company’s fair value of contingent consideration from December 31, 2021 to September 30, 2022 is as follows:

(In millions)	Current Portion (1)		Long-Term Portion (2)		Total Contingent Consideration
Balance at December 31, 2021	$	66.7	$	133.0	$	199.7
Payments	(50.9)		—		(50.9)
Reclassifications	54.9		(54.9)		—
Accretion	—		5.4		5.4
Fair value loss (3)	—		9.1		9.1
Balance at September 30, 2022	$	70.7	$	92.6	$	163.3

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(1)Included in other current liabilities in the condensed consolidated balance sheets.

(2)Included in other long-term obligations in the condensed consolidated balance sheets.

(3)Included in litigation settlements and other contingencies, net in the condensed consolidated statements of operations.

Although the Company has not elected the fair value option for other financial assets and liabilities, any future transacted financial asset or liability will be evaluated for the fair value election.