FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2023

FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

DERIVATIVES AND HEDGING.

Our primary objective in executing and holding derivative contracts is to reduce the volatility of earnings and cash flows associated with risks related to foreign currency exchange rates, interest rates, equity prices, and commodity prices. These derivative contracts reduce, but do not entirely eliminate, the aforementioned risks. Our policy is to use derivative contracts solely for managing risks and not for speculative purposes.

The fair values of derivative contracts are recognized within All other current assets, All other assets, All other current liabilities, and All other liabilities in the Consolidated and Combined Statements of Financial Position based upon the contractual timing of settlements for these contracts. We designate certain derivative contracts as hedging instruments in cash flow, fair value, or net investment hedges. We evaluate the effectiveness of our derivative contracts designated as hedging instruments on a quarterly basis.

Cash Flow Hedges

We use foreign currency forward contracts to hedge the volatility of cash flows related to forecasted transactions and firm commitments, including intercompany transactions, denominated in foreign currencies other than a subsidiary’s functional currency. The maximum length of time over which we hedge forecasted transactions is two years. As of December 31, 2023, these contracts have a maximum remaining maturity of 12 months.

For derivative instruments designated as cash flow hedges, changes in the fair value of designated hedging instruments are initially recorded as a component of AOCI and subsequently reclassified to earnings in the period in which the hedged transaction occurs and to the same financial statement line item impacted by the hedged transaction. We expect to reclassify $21 million of pre-tax net deferred losses associated with designated cash flow hedges to earnings in the next 12 months, contemporaneously with the impact on earnings of the related hedged transactions.

The cash flows associated with derivatives designated as cash flow hedges are recorded in Cash from (used for) operating activities in the Consolidated and Combined Statements of Cash Flows.

Net Investment Hedges

We use cross-currency interest rate swaps and foreign currency forward contracts in combination with foreign currency option contracts to hedge the foreign currency risk associated with our net investment in foreign operations. The maximum length of time over which we are hedging our net investment in foreign operations is approximately five years. As of December 31, 2023, these contracts have a maximum remaining maturity of 52 months and were designated as hedges of our net investment in foreign operations with Euro, Japanese Yen, and Chinese Renminbi functional currencies.

We use the spot method to assess hedge effectiveness for our net investment hedges. Changes in the fair value of the designated hedging instruments attributable to fluctuations in foreign currency to USD spot exchange rates are initially recorded and held as a component of the CTA portion of AOCI until the hedged foreign operation is either sold or substantially liquidated. Changes in fair value of the portion of net investment hedging derivatives excluded from the assessment of effectiveness are recorded in CTA and then recognized within Interest and other financial charges – net in the Consolidated and Combined Statements of Income using a systematic and rational method over the life of the hedge. Excluded components on the cross-currency swaps designated as net investment hedges, in the form of accrued interest, are recorded within Interest and other financial charges – net in the Consolidated and Combined Statements of Income.

The cash flows associated with derivatives designated as net investment hedges are recorded in Cash from (used for) investing activities in the Consolidated and Combined Statements of Cash Flows. Cash flows from the periodic interest settlements on the cross-currency swaps are recorded in Cash from (used for) operating activities in the Consolidated and Combined Statements of Cash Flows.

Fair Value Hedges

We use interest rate swaps to hedge the interest rate risk on our fixed rate borrowings. These derivatives are designated as fair value hedges. In the fourth quarter of 2023, we executed interest-rate swap contracts to hedge the benchmark interest rate risk of specific designated cash flows of a senior unsecured note.

We record the changes in fair value on the swap contracts in Interest and other financial charges – net in our Consolidated and Combined Statements of Income, the same line item where the offsetting change in the fair value of the designated cash flows of the senior unsecured note is recorded as a basis adjustment.

Cash flows for the periodic interest settlements on the interest rate swaps are recorded in Cash from (used for) operating activities in the Consolidated and Combined Statements of Cash Flows.

Derivatives Not Designated as Hedging Instruments

We also execute derivative instruments, such as foreign currency forward contracts, equity-linked total return swaps, and commodity forward contracts that are not designated as qualifying hedges. These derivatives serve as economic hedges of the foreign currency rate risk, equity price risk and commodity price risk. We identify foreign currency-related features in our purchase or sales contracts where the currency is not the local or functional currency of a substantive party to the contract and record them as embedded derivatives.

The changes in fair value of derivatives not designated in qualifying hedge transactions are recorded in Cost of products, Cost of services, SG&A, and Other (income) expense – net in the Consolidated and Combined Statements of Income based on the nature of the underlying hedged transaction. Changes in fair value of embedded derivatives are recognized in Other (income) expense – net in the Consolidated and Combined Statements of Income.

The cash flows associated with derivatives not designated as hedges are recorded in Cash from (used for) operating activities and Cash from (used for) investing activities in the Consolidated and Combined Statements of Cash Flows based on the nature of the underlying hedged transaction.

The following table presents the gross fair values of our outstanding derivative instruments.


Fair Value of Derivatives
	December 31, 2023						December 31, 2022
	Gross Notional		Fair Value – Assets		Fair Value – Liabilities		Gross Notional		Fair Value – Assets		Fair Value – Liabilities
Foreign currency exchange contracts	$	1,356	$	8	$	30	$	1,240	$	32	$	53
Derivatives accounted for as cash flow hedges	1,356		8		30		1,240		32		53
Cross-currency swaps(1)	2,209		—		204		2,132		—		111
Foreign currency exchange contracts and options	991		9		11		—		—		—
Derivatives accounted for as net investment hedges	3,200		9		215		2,132		—		111
Interest rate swaps(1)	1,000		35		10		—		—		—
Derivatives accounted for as fair value hedges	1,000		35		10		—		—		—
Foreign currency exchange contracts	3,597		19		12		4,456		9		20
Other derivatives(2)	438		57		2		660		25		25



Derivatives not designated as hedging instruments	4,035		76		14		5,116		34		45
Total derivatives	$	9,591	$	128	$	269	$	8,488	$	66	$	209

(1) Accrued interest was immaterial for the periods presented and is excluded from fair value. These amounts are recognized within All other current assets and All other current liabilities in the Consolidated and Combined Statements of Financial Position.

(2) Other derivatives are comprised of embedded derivatives, derivatives related to equity contracts, and commodity derivatives.

The following table presents amounts recorded in Long-term borrowings on the Consolidated Statement of Financial Position related to cumulative basis adjustment for fair value hedges.


	December 31, 2023
	Carrying amount		Cumulative basis adjustment included in the carrying amount
Long-term borrowings designated in fair value hedges	$	1,023	$	25

Under the master arrangements with the respective counterparties to our derivative contracts, in certain circumstances and subject to applicable requirements, we are allowed to net settle transactions with a single net amount payable by one party to the other. However, we have elected to present the derivative assets and derivative liabilities on a gross basis on our Consolidated and Combined Statements of Financial Position and in the table above.

As of December 31, 2023, the potential effect of rights of offset associated with the derivative contracts would be an offset to both assets and liabilities by $41 million.

The table below presents the pre-tax gains (losses) recognized in OCI associated with the Company’s cash flow and net investment hedges.


Pre-tax Gains (Losses) Recognized in OCI Related to Cash Flow and Net Investment Hedges
	For the years ended December 31
		2023		2022		2021
Cash flow hedges		$	(6)	$	37	$	40
Net investment hedges(1)		(97)		(111)		—

(1) Amounts recognized in OCI for excluded components for the periods presented were immaterial.

The tables below present the effects of our derivative financial instruments and hedging activity in the Consolidated and Combined Statements of Income.


Derivative Financial Instruments and Hedging Activity
	For the year ended December 31, 2023
	Cost of products		Cost of services		SG&A		Interest and other financial charges – net		Other(3)

Foreign currency exchange contracts	$	23	$	6	$	—	$	—	$	—
Effects of cash flow hedges	23		6		—		—		—
Cross-currency swaps	—		—		—		34		—
Foreign currency exchange contracts and options	—		—		—		3		—
Effects of net investment hedges(1)	—		—		—		37		—
Foreign currency exchange contracts	—		—		—		—		—
Interest rate swaps	—		—		—		24		—
Debt basis adjustment on Long-term borrowings	—		—		—		(25)		—
Other derivatives(2)	—		—		—		—		—
Effects of fair value hedges	—		—		—		(1)		—
Foreign currency exchange contracts	3		2		—		—		5



Other derivatives(2)	—		—		10		—		47
Effects of derivatives not designated as hedging instruments	$	3	$	2	$	10	$	—	$	52

	For the year ended December 31, 2022
	Cost of products		Cost of services		SG&A		Interest and other financial charges – net		Other(3)

Foreign currency exchange contracts	$	54	$	—	$	—	$	—	$	—
Effects of cash flow hedges	54		—		—		—		—
Cross-currency swaps	—		—		—		—		—
Foreign currency exchange contracts and options	—		—		—		—		—
Effects of net investment hedges(1)	—		—		—		—		—
Foreign currency exchange contracts	—		—		—		—		—
Interest rate swaps	—		—		—		—		—
Debt basis adjustment on Long-term borrowings	—		—		—		—		—
Other derivatives(2)	—		—		—		—		—
Effects of fair value hedges	—		—		—		—		—
Foreign currency exchange contracts	(96)		—		—		—		11
Other derivatives(2)	—		—		—		—		11
Effects of derivatives not designated as hedging instruments	$	(96)	$	—	$	—	$	—	$	22

	For the year ended December 31, 2021
	Cost of products		Cost of services		SG&A		Interest and other financial charges – net		Other(3)

Foreign currency exchange contracts	$	(8)	$	—	$	—	$	—	$	—
Effects of cash flow hedges	(8)		—		—		—		—
Cross-currency swaps	—		—		—		—		—
Foreign currency exchange contracts and options	—		—		—		—		—
Effects of net investment hedges	—		—		—		—		—
Foreign currency exchange contracts	(12)		—		—		—		—
Interest rate swaps	—		—		—		—		—
Debt basis adjustment on Long-term borrowings	—		—		—		—		—
Other derivatives(2)	—		—		—		—		24
Effects of fair value hedges	(12)		—		—		—		24
Foreign currency exchange contracts	—		—		—		—		10



Other derivatives(2)	—		—		—		—		—
Effects of derivatives not designated as hedging instruments	$	—	$	—	$	—	$	—	$	10

(1) Amounts are excluded from effectiveness testing for 2023 and 2022.

(2) Other derivatives are comprised of embedded derivatives, derivatives related to equity contracts, and commodity derivatives.

(3) Amounts are inclusive of gains (losses) in Other (income) expense – net in the Consolidated and Combined Statements of Income.

Counterparty Credit Risk

The Company would be exposed to credit-related losses in the event of non-performance by counterparties on executed derivative instruments. The credit exposure of derivative contracts is represented by the fair value of contracts as of the reporting date. The fair value of the Company’s derivatives can change significantly from period to period based on, among other factors, market movements, and changes in our positions.

We manage concentration of counterparty credit risk by limiting acceptable counterparties to major financial institutions with investment grade credit ratings, by limiting the amount of credit exposure to individual counterparties, and by actively monitoring counterparty credit ratings and the amount of individual credit exposure.

We also employ master netting arrangements that limit the risk of counterparty non-payment on a particular settlement date to the net gain that would have otherwise been received from the counterparty. Although not completely eliminated, we do not consider the risk of counterparty default to be significant as a result of these protections. None of our derivative instruments are subject to collateral or other security arrangements, nor do they contain provisions that are dependent on our credit ratings from any credit rating agency.

FAIR VALUE MEASUREMENTS.

The following table represents assets and liabilities that are recorded and measured at fair value on a recurring basis.


Fair Value of Assets and Liabilities Measured on a Recurring Basis
	As of December 31, 2023								As of December 31, 2022
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Investment securities	$	31	$	—	$	—	$	31	$	21	$	—	$	—	$	21
Derivatives	—		128		—		128		—		66		—		66
Liabilities:
Deferred compensation	264		5		—		269		62		2		—		64
Derivatives	—		269		—		269		—		203		6		209
Contingent consideration	—		—		44		44		—		—		42		42

Contingent Consideration

The contingent consideration liabilities as of December 31, 2023 and 2022 were recorded in connection with business acquisitions. During the years ended December 31, 2023 and 2022, we recorded benefits of $17 million and $65 million, respectively, from fair value adjustments related to the remeasurement of contingent consideration liabilities. These benefits are recognized within SG&A in the Consolidated and Combined Statements of Income. Changes in the Level 3 fair value measurement of contingent consideration were not material during the year ended December 31, 2021.

Non-recurring Fair Value Measurements

Changes in fair value measurements of assets and liabilities measured at fair value on a non-recurring basis, such as equity method investments, equity investments without readily determinable fair value, financing receivables, and long-lived assets, were not material for the years ended December 31, 2023, 2022, and 2021.

Fair Value of Other Financial Instruments

The estimated fair value of borrowings as of December 31, 2023 and 2022 was $9,959 million and $8,521 million compared to a carrying value (which includes a reduction for amortized debt issuance costs and discounts) of $9,442 million and $8,249 million, respectively. The fair value of our borrowings includes accrued interest and is determined based on observable and quoted prices and spreads of comparable debt and benchmark securities and is considered Level 2 in the fair value hierarchy. See Note 9, “Borrowings” for further information.