DERIVATIVES AND HEDGING TRANSACTIONS

12 Months Ended

Dec. 31, 2022

DERIVATIVES AND HEDGING TRANSACTIONS

DERIVATIVES AND HEDGING TRANSACTIONS

9. DERIVATIVES AND HEDGING TRANSACTIONS

The Company uses foreign currency forward contracts, interest rate swap agreements, cross-currency swap derivative contracts and foreign currency debt to manage risks associated with foreign currency exchange rates, interest rates and net investments in foreign operations. The Company does not hold derivative financial instruments of a speculative nature or for trading purposes. The Company records derivatives as assets and liabilities on the balance sheet at fair value. Changes in fair value are recognized immediately in earnings unless the derivative qualifies and is designated as a hedge. Cash flows from derivatives are classified in the statement of cash flows in the same category as the cash flows from the items subject to designated hedge or undesignated (economic) hedge relationships. The Company evaluates hedge effectiveness at inception and on an ongoing basis. If a derivative is no longer expected to be effective, hedge accounting is discontinued.

The Company is exposed to credit risk in the event of nonperformance of counterparties for foreign currency forward exchange contracts and interest rate swap agreements. The Company monitors its exposure to credit risk by using credit approvals and credit limits and by selecting major global banks and financial institutions as counterparties. The Company does not anticipate nonperformance by any of these counterparties, and therefore, recording a valuation allowance against the Company’s derivative balance is not considered necessary.

Derivative Positions Summary

Certain of the Company’s derivative transactions are subject to master netting arrangements that allow the Company to net settle contracts with the same counterparties. These arrangements generally do not call for collateral and as of the applicable dates presented in the following table, no cash collateral had been received or pledged related to the underlying derivatives.

The respective net amounts are included in other current assets, other assets, other current liabilities and other liabilities on the Consolidated Balance Sheets.

The following table summarizes the gross fair value and the net value of the Company’s outstanding derivatives:

	Derivative Assets				Derivative Liabilities
	December 31		December 31		December 31		December 31
(millions)	2022		2021		2022		2021
Derivatives designated as hedging instruments
Foreign currency forward contracts		$78.6		$44.7		$9.2		$2.6
Interest rate swap agreements		-		1.8		181.4		10.1
Cross-currency swap derivative contracts		58.7		9.4		14.5		1.6
Derivatives not designated as hedging instruments
Foreign currency forward contracts		40.3		49.8		74.1		10.0
Gross value of derivatives		177.6		105.7		279.2		24.3
Gross amounts offset in the Consolidated Balance Sheets		(75.6)		(14.9)		(75.6)		(14.9)
Net value of derivatives		$102.0		$90.8		$203.6		$9.4

The following table summarizes the notional values of the Company’s outstanding derivatives:

	Notional Values
		December 31	December 31
(millions)		2022	2021
Foreign currency forward contracts		$5,745		$4,059
Interest rate swap agreements		1,500		1,250
Cross-currency swap derivative contracts		650		482

Cash Flow Hedges

The Company utilizes foreign currency forward contracts to hedge the effect of foreign currency exchange rate fluctuations on forecasted foreign currency transactions, including inventory purchases and intercompany royalty, intercompany loans, management fee and other payments. These forward contracts are designated as cash flow hedges. The changes in fair value of these contracts are recorded in accumulated other comprehensive income (loss) (“AOCI”) until the hedged items affect earnings, at which time the gain or loss is reclassified into the same line item in the Consolidated Statements of Income as the underlying exposure being hedged. Cash flow hedged transactions impacting AOCI are forecasted to occur within the next year. For forward contracts designated as hedges of foreign currency exchange rate risk associated with forecasted foreign currency transactions, the Company excludes the changes in fair value attributable to time value from the assessment of hedge effectiveness. The initial value of the excluded component (i.e., the forward points) is amortized on a straight-line basis over the life of the hedging instrument and recognized in the same line item in the Consolidated Statements of Income as the underlying exposure being hedged for intercompany loans. For all other cash flow hedge types, the forward points are mark-to-market monthly and recognized in the same line item in the Consolidated Statements of Income as the underlying exposure being hedged. The difference between fair value changes of the excluded component and the amount amortized in the Consolidated Statements of Income is recorded in AOCI.

Fair Value Hedges

The Company manages interest expense using a mix of fixed and floating rate debt. To help manage exposure to interest rate movements and to reduce borrowing costs, the Company may enter into interest rate swaps under which the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed upon notional principal amount. The mark-to-market of these fair value hedges is recorded as gains or losses in interest (income) expense and is offset by the gain or loss of the underlying debt instrument, which also is recorded in interest (income) expense. These fair value hedges are highly effective and thus, there is no impact on earnings due to hedge ineffectiveness.

In April 2022, the Company entered into an interest rate swap agreement that converted $250 million of its 4.8% debt from a fixed interest rate to a floating interest rate. In aggregate, the Company has entered into a series of interest rate swap agreements to convert $1.5 billion of its debt from a fixed interest rate to a floating interest rate. The fixed interest rates range from 1.3% to 4.8% and mature between 2026 and 2031. All of these interest rate swaps are designated as fair value hedges.

The following amounts were recorded in the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges:

Line item in which the hedged item is included	Carrying amount of the hedged liabilities						Cumulative amount of the fair value hedging adjustment included in the carrying amount of the hedged liabilities
(millions)	2022		2021		2020		2022		2021		2020
Long-term debt		$1,317.5		$1,235.6		$-		($184.8)		($12.1)		$-

Net Investment Hedges

The Company designates its outstanding €1,150 million ($1,194 million as of year-end 2022) senior notes (“Euronotes”) and related accrued interest as a hedge of its Euro denominated exposures from the Company’s investments in certain of its Euro denominated functional currency subsidiaries.

In October of 2022, the Company entered into a cross-currency swap derivative contract with a notional amount of €200 million maturing in 2026. In aggregate, the Company has entered into a series of cross-currency swap derivative contracts with a notional amount of €625 million maturing between 2026 and 2030. These cross-currency swap derivative contracts are designated as net investment hedge of the Company’s Euro denominated exposures from the Company’s investments in certain of its Euro denominated functional currency subsidiaries. The cross-currency swap derivative contracts exchange fixed-rate payments in one currency for fixed-rate payments in another currency. As of December 31, 2022, the Company had a €625 million ($650 million) cross-currency swap derivative contracts outstanding as a hedge of the Company’s net investment in foreign operations. The changes in the spot rate of these instruments are recorded in AOCI in stockholders’ equity, partially offsetting the foreign currency translation adjustment of the Company’s related net investment that is also recorded in AOCI. Any ineffective portions of net investment hedges are reclassified from AOCI into earnings during the period of change. The interest income or expense from these swaps are recorded in interest expense on the accompanying Consolidated Statements of Income consistent with the classification of interest expense attributable to the underlying debt.

The revaluation gains and losses on the Euronotes and cross-currency swap derivative, which are designated and effective as hedges of the Company’s net investments, have been included as a component of the cumulative translation adjustment account, and were as follows:

(millions)	2022		2021		2020
Revaluation gain (loss), net of tax:
Euronotes		$81.9		$45.3		($87.7)
Cross-currency swap derivative contracts		26.4		6.3		-
Total revaluation gain (loss), net of tax		$108.3		$51.6		($87.7)

Derivatives Not Designated as Hedging Instruments

The Company also uses foreign currency forward contracts to offset its exposure to the change in value of certain foreign currency denominated assets and liabilities held at foreign subsidiaries, primarily receivables and payables, which are remeasured at the end of each period. Although the contracts are effective economic hedges, they are not designated as accounting hedges. Therefore, changes in the value of these derivatives are recognized immediately in earnings, thereby offsetting the current earnings effect of the related foreign currency denominated assets and liabilities.

Effect of all Derivative Instruments on Income

The gain (loss) of all derivative instruments recognized in product and equipment cost of sales (“COS”), selling, general and administrative expenses (“SG&A”) and interest expense, net (“interest”) is summarized below:

	2022				2021				2020
(millions)		COS	SG&A	Interest		COS	SG&A	Interest		COS	SG&A	Interest
Gain (loss) on derivatives in cash flow hedging relationship:
Foreign currency forward contracts
Amount of gain (loss) reclassified from AOCI to income		$6.4	$95.0	$-		($11.0)	$47.6	$-		$10.1	($108.3)	$-
Amount excluded from the assessment of effectiveness recognized in earnings based on changes in fair value		-	-	13.9		-	-	21.0		-	-	27.5
Interest rate swap agreements
Amount of gain (loss) reclassified from AOCI to income		-	-	(2.3)		-	-	(2.3)		-	-	(2.4)
Gain (loss) on derivatives not designated as hedging instruments:
Foreign currency forward contracts
Amount of gain (loss) recognized in income (a)		-	62.0	-		-	73.7	-		-	(12.3)	-
Total gain (loss) of all derivative instruments		$6.4	$157.0	$11.6		($11.0)	$121.3	$18.7		$10.1	($120.6)	$25.1

(a) Gain (loss) on derivatives not designated as hedging instruments recognized in income recorded in SG&A includes discontinued operations of $(2.5) for the year ended December 31, 2020.