Derivatives

6 Months Ended

Jun. 30, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

From time to time, the Company enters into derivative transactions to hedge its exposures to interest rate, foreign currency rate and commodity price fluctuations. The Company does not enter into derivative transactions for trading purposes.

Interest Rate Contracts

The Company manages its fixed and floating rate debt mix using interest rate swaps. The Company may use fixed and floating rate swaps to alter its exposure to the impact of changing interest rates on its consolidated results of operations and future cash outflows for interest. Floating rate swaps would be used, depending on market conditions, to convert the fixed rates of long-term debt into short-term variable rates. Fixed rate swaps would be used to reduce the Company’s risk of the possibility of increased interest costs. The cash paid and received from the settlement of interest rate swaps is included in interest expense.

Fair Value Hedges

At June 30, 2022, the Company had approximately $100 million notional amount of interest rate swaps that exchange a fixed rate of interest for a variable rate (LIBOR) of interest plus a weighted average spread. These floating rate swaps are designated as fair value hedges against $100 million of principal on the 4.00% senior notes due 2024 for the remaining life of the note. The effective portion of the fair value gains or losses on these swaps is offset by fair value adjustments in the underlying debt.

Cross-Currency Contracts

The Company uses cross-currency swaps to hedge foreign currency risk on certain financing arrangements. The Company previously entered into three cross-currency swaps, maturing in January 2025, February 2025 and September 2027, respectively, with an aggregate notional amount of $1.3 billion. Each of these cross-currency swaps were designated as net investment hedges of the Company's foreign currency exposure of its net investment in certain Euro-functional currency subsidiaries with Euro-denominated net assets, and the Company pays a fixed rate of Euro-based interest and receives a fixed rate of U.S. dollar interest. The Company has elected the spot method for assessing the effectiveness of these contracts. During the three months ended June 30, 2022 and 2021, the Company recognized income of $6 million and $3 million, respectively, and income of $11 million and $7 million for the six months ended June 30, 2022 and 2021, respectively, in interest expense, net, related to the portion of cross-currency swaps excluded from hedge effectiveness testing.

Foreign Currency Contracts

The Company uses forward foreign currency contracts to mitigate the foreign currency exchange rate exposure on the cash flows related to forecasted inventory purchases and sales with maturity dates through March 2023. The derivatives used to hedge these forecasted transactions that meet the criteria for hedge accounting are accounted for as cash flow hedges. The effective portion of the gains or losses on these derivatives is deferred as a component of AOCL until it is recognized in earnings at the same time that the hedged item affects earnings and is included in the same caption in the statements of operations as the underlying hedged item. At June 30, 2022, the Company had approximately $375 million notional amount outstanding of forward foreign currency contracts that are designated as cash flow hedges of forecasted inventory purchases and sales.

The Company also uses foreign currency contracts, primarily forward foreign currency contracts, to mitigate the foreign currency exposure of certain other foreign currency transactions. At June 30, 2022, the Company had approximately $1.5 billion notional amount outstanding of these foreign currency contracts that are not designated as effective hedges for accounting purposes and have maturity dates through May 2023. Fair market value gains or losses are included in the results of operations and are classified in other (income) expense, net in the Company's Condensed Consolidated Statement of Operations.

The following table presents the fair value of derivative financial instruments at the dates indicated (in millions):


		Fair Value of Derivatives
		Assets (Liabilities)
	Balance Sheet Location	June 30, 2022		December 31, 2021
Derivatives designated as effective hedges:
Cash Flow Hedges
Foreign currency contracts	Prepaid expenses and other current assets	$	14	$	12
Foreign currency contracts	Other accrued liabilities	(2)		(2)
Fair Value Hedges
Interest rate swaps	Other assets	—		3
Interest rate swaps	Other accrued liabilities	(2)		—
Net Investment Hedges
Cross-currency swaps	Prepaid expenses and other current assets	17		18
Cross-currency swaps	Other assets	42		—
Cross-currency swaps	Other noncurrent liabilities	—		(41)

Derivatives not designated as effective hedges:
Foreign currency contracts	Prepaid expenses and other current assets	21		7
Foreign currency contracts	Other accrued liabilities	(26)		(14)

Total		$	64	$	(17)

The following table presents gain and (loss) activity (on a pretax basis) related to derivative financial instruments designated or previously designated, as effective hedges (in millions):


		Three Months Ended June 30, 2022				Three Months Ended June 30, 2021
		Gain/(Loss)				Gain/(Loss)
	Location of gain/(loss) recognized in income	Recognized in OCI (effective portion)		Reclassified from AOCL to Income		Recognized in OCI (effective portion)		Reclassified from AOCL to Income
Interest rate swaps	Interest expense, net	$	—	$	(1)	$	—	$	(1)
Foreign currency contracts	Net sales and cost of products sold	20		5		(3)		(6)

Cross-currency swaps	Other (income) expense, net	78		—		(8)		—
Total		$	98	$	4	$	(11)	$	(7)

		Six Months Ended June 30, 2022				Six Months Ended June 30, 2021
		Gain/(Loss)				Gain/(Loss)
	Location of gain/(loss) recognized in income	Recognized in OCI (effective portion)		Reclassified from AOCL to Income		Recognized in OCI (effective portion)		Reclassified from AOCL to Income
Interest rate swaps	Interest expense, net	$	—	$	(3)	$	—	$	(3)
Foreign currency contracts	Net sales and cost of products sold	19		6		—		(8)

Cross-currency swaps	Other (income) expense, net	82		—		28		—
Total		$	101	$	3	$	28	$	(11)

At June 30, 2022, net deferred gains of approximately $23 million within AOCL are expected to be reclassified to earnings over the next twelve months.

During the three and six months ended June 30, 2022, the Company recognized income of $2 million and expense of $1 million respectively, and expense of $3 million and income of $4 million, during the three and six months ended June 30, 2021, respectively, in other (income) expense, net, related to derivatives that are not designated as hedging instruments. Gains and losses on these derivatives are mostly offset by foreign currency movement in the underlying exposure.

The Company is not a party to any derivatives that require collateral to be posted prior to settlement.