Derivative Instruments

9 Months Ended

Oct. 02, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

In the normal course of business, the Company is exposed to global market risks, including the effects of changes in foreign currency exchange rates and interest rates. The Company uses derivative instruments to manage its exposure to such risks and may elect to designate certain derivatives as hedging instruments under ASC Topic 815, Derivatives and Hedging (“ASC 815”). The Company formally documents all relationships between designated hedging instruments and hedged items as well as its risk management objectives and strategies for undertaking hedge transactions. The Company does not hold or issue derivatives for trading or speculative purposes.

In accordance with ASC 815, the Company recognizes derivative instruments as either assets or liabilities on the Consolidated Balance Sheets and measures them at fair value. The following table presents the fair value of its derivative instruments (in millions):


	Asset (Liability)
		Fair Values as of
	Balance Sheet Classification	October 2, 2021		December 31, 2020
Derivative instruments designated as hedges:
Foreign exchange contracts	Prepaid expenses and other current assets	$	22	$	—
Foreign exchange contracts	Accrued liabilities	—		(34)


Total derivative instruments designated as hedges		$	22	$	(34)

Derivative instruments not designated as hedges:



Foreign exchange contracts	Accrued liabilities	$	(1)	$	(3)
Forward interest rate swaps	Accrued liabilities	(17)		(17)
Forward interest rate swaps	Other long-term liabilities	(12)		(29)
Total derivative instruments not designated as hedges		$	(30)	$	(49)
Total net derivative liability		$	(8)	$	(83)

The following table presents the net gains (losses) from changes in fair values of derivatives that are not designated as hedges (in millions):


	Gains (Losses) Recognized in Income
		Three Months Ended				Nine Months Ended
	Statements of Operations Classification	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Derivative instruments not designated as hedges:
Foreign exchange contracts	Foreign exchange loss	$	1	$	(1)	$	1	$	(9)
Forward interest rate swaps	Interest expense, net	(1)		(4)		4		(46)
Total gains (losses) recognized in income		$	—	$	(5)	$	5	$	(55)

Activities related to derivative instruments are reflected within Net cash provided by operating activities on the Consolidated Statements of Cash Flows.

Credit and Market Risk Management

Financial instruments, including derivatives, expose the Company to counterparty credit risk of nonperformance and to market risk related to currency exchange rate and interest rate fluctuations. The Company manages its exposure to counterparty credit risk by establishing minimum credit standards, diversifying its counterparties, and monitoring its concentrations of credit. The Company’s counterparties are commercial banks with expertise in derivative financial instruments. The Company evaluates the impact of market risk on the fair value and cash flows of its derivative and other financial instruments by considering reasonably possible changes in interest rates and currency exchange rates. The Company continually monitors the creditworthiness of the customers to which it grants credit terms in the normal course of business. The terms and conditions of the Company’s credit policies are designed to mitigate concentrations of credit risk.

The Company’s master netting and other similar arrangements with the respective counterparties allow for net settlement under certain conditions, which are designed to reduce credit risk by permitting net settlement with the same counterparty. We present the assets and liabilities of our derivative financial instruments, for which we have net settlement agreements in place, on a net basis on the Consolidated Balance Sheets. If the derivative financial instruments had been presented gross on the Consolidated Balance Sheets, the asset and liability positions each would have been unchanged as of October 2, 2021 and December 31, 2020.

Foreign Currency Exchange Risk Management

The Company conducts business on a multinational basis in a variety of foreign currencies. Exposure to market risk for changes in foreign currency exchange rates arises primarily from Euro-denominated external revenues, cross-border financing activities between subsidiaries, and foreign currency denominated monetary assets and liabilities. The Company manages its objective of preserving the economic value of non-functional currency denominated cash flows by initially hedging transaction exposures with natural offsets to the fullest extent possible and, once these opportunities have been exhausted, through foreign exchange forward and option contracts, as deemed appropriate.

The Company manages the exchange rate risk of anticipated Euro-denominated sales using forward contracts, which typically mature within twelve months of execution. The Company designates these derivative contracts as cash flow hedges. Unrealized gains and losses on these contracts are deferred in Accumulated other comprehensive income (loss) (“AOCI”) on the Consolidated Balance Sheets until the contract is settled and the hedged sale is realized. The realized gain or loss is then recorded as an adjustment to Net sales on the Consolidated Statements of Operations. Realized amounts reclassified to Net sales were $5 million of gains and $8 million of losses for the three months ended October 2, 2021 and September 26, 2020, respectively. Realized amounts reclassified to Net sales were $15 million of losses and $6 million of gains for the nine months ended October 2, 2021 and September 26, 2020, respectively. As of October 2, 2021 and December 31, 2020, the notional amounts of the Company’s foreign exchange cash flow hedges were €637 million and €585 million, respectively. The Company has reviewed its cash flow hedges for effectiveness and determined that they are highly effective.

The Company uses forward contracts, which are not designated as hedging instruments, to manage its exposures related to net assets denominated in foreign currencies. These forward contracts typically mature within one month after execution. Monetary gains and losses on these forward contracts are recorded in income and are generally offset by the transaction gains and losses related to their net asset positions. The notional values and the net fair value of these outstanding contracts are as follows (in millions):


	October 2, 2021		December 31, 2020
Notional balance of outstanding contracts:
British Pound/U.S. Dollar	£	2	£	10
Euro/U.S. Dollar	€	91	€	123


Euro/Czech Koruna	€	17	€	—



Japanese Yen/U.S. Dollar	¥	—	¥	354
Singapore Dollar/U.S. Dollar	S$	15	S$	12
Mexican Peso/U.S. Dollar	Mex$	85	Mex$	36


Polish Zloty/U.S. Dollar	zł	96	zł	—
Net fair value of liabilities of outstanding contracts	$	1	$	3

Interest Rate Risk Management

The Company’s debt consists of borrowings under a term loan (“Term Loan A”), Revolving Credit Facility, and Receivables Financing Facilities, which bear interest at variable rates plus applicable margins. As a result, the Company is exposed to market risk associated with the variable interest rate payments on these borrowings. See Note 10, Long-Term Debt for further details about these borrowings.

The Company manages its exposure to changes in interest rates by utilizing interest rate swaps to hedge this exposure and to achieve a desired proportion of fixed versus floating-rate debt, based on current and projected market conditions.

In December 2017, the Company entered into a long-term forward interest rate swap agreement with a notional amount of $800 million to lock into a fixed LIBOR interest rate base for its debt facilities subject to monthly interest payments. Under the terms of the agreement, $800 million in variable-rate debt will be swapped for a fixed interest rate with net settlement terms starting in December 2018 and ending in December 2022. During the third quarter of 2019, the Company entered into additional long-term forward interest rate swap agreements with a total notional amount of $800 million, containing net settlement terms, which start in December 2022 and end in August 2024. The additional interest rate swap agreements effectively extend the risk management initiative of the Company to coincide with the maturities of Term Loan A and the Revolving Credit Facility. These interest rate swaps are not designated as hedges and changes in fair value are recognized immediately as Interest expense, net on the Consolidated Statements of Operations.