Derivatives

3 Months Ended

Mar. 31, 2024

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 settlement of interest rate swaps is included in interest expense.

Fair Value Hedges

At March 31, 2024, the Company had approximately $1.1 billion notional amount of interest rate swaps that exchange a fixed rate of interest for a variable rate of interest plus a weighted average spread. These floating rate swaps are designated as fair value hedges against $500 million of principal on the 6.375% senior notes due 2027, $500 million of principal on the 6.625% senior notes due 2029 and $100 million of principal on the 4.000% senior notes due 2024 for the remaining life of the notes. The benchmark interest rate for the $100 million floating swap and associated fair value hedge was amended for a change in benchmark interest rate from LIBOR to Secured Overnight Financing Rate (“SOFR”), effective June 1, 2023, accounted for in accordance with ASC 848. See Footnote 1 for further information. 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 has three cross-currency swaps, maturing in January 2025, February 2025 and September 2027, with an aggregate notional amount of $1.3 billion. Each of these cross-currency swaps was designated as a net investment hedge 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 two additional cross-currency swaps, maturing in September 2027 and September 2029, with an aggregate notional amount of $1.0 billion. These swaps were also 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 floating rate of Euro-based interest and receives a floating 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 March 31, 2024 and 2023, the Company recognized income of $9 million and $11 million, 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 December 2024. 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 Company’s Condensed Consolidated Statement of Operations as the underlying hedged item. At March 31, 2024, the Company had approximately $331 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 March 31, 2024, 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 January 2025. Fair market value gains or losses are included in the results of operations and are classified in other 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	March 31, 2024		December 31, 2023
Derivatives designated as effective hedges:
Cash Flow Hedges
Foreign currency contracts	Prepaid expenses and other current assets	$	2	$	1
Foreign currency contracts	Other accrued liabilities	(8)		(13)
Fair Value Hedges

Interest rate swaps	Other accrued liabilities	(19)		(15)
Interest rate swaps	Other noncurrent liabilities	(18)		(4)
Net Investment Hedges
Cross-currency swaps	Prepaid expenses and other current assets	30		22
Cross-currency swaps	Other assets	20		15
Cross-currency swaps	Other noncurrent liabilities	(83)		(119)

Derivatives not designated as effective hedges:
Foreign currency contracts	Prepaid expenses and other current assets	5		7
Foreign currency contracts	Other accrued liabilities	(10)		(14)

Total		$	(81)	$	(120)

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 March 31, 2024				Three Months Ended March 31, 2023
		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	5		(3)		(5)		10

Cross-currency swaps	Other expense, net	48		—		(21)		—
Total		$	53	$	(4)	$	(26)	$	9

At March 31, 2024, net deferred losses of approximately $6 million within AOCL are expected to be reclassified to earnings over the next twelve months.

During the three months ended March 31, 2024 and 2023, the Company recognized in other expense, net, expense of $1 million and $10 million, respectively, 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 derivative agreements that require collateral to be posted prior to settlement. See Footnote 8 for further information describing the guarantee of certain hedging obligations granted pursuant to the Second Amendment of the Credit Revolver.