Financial Instruments

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Instruments

Financial Instruments

We enter into derivative instruments primarily for risk management purposes, including derivatives designated as hedging instruments under ASC 820. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates and foreign exchange rates. These fluctuations can increase the costs of financing, investing and operating the business. We may use derivative instruments, including swaps, forward contracts and options, to manage certain foreign currency and interest rate exposures.

The average of the notional amount of foreign exchange contracts hedging foreign currency transactions was $2.9 billion at September 30, 2020.

The following table summarizes the fair value and presentation on the Condensed Consolidated Balance Sheets for derivative instruments as of September 30, 2020 and December 31, 2019:

(dollars in millions)	Balance Sheet Classification	September 30, 2020		December 31, 2019
Derivatives designated as Cash flow hedging instruments:
Foreign exchange contracts	Asset Derivatives:
	Other current assets	$	6	$	—
	Other assets	2		—
	Total asset derivatives	$	8	$	—
	Liability Derivatives:
	Accrued liabilities	$	(5)	$	(1)
	Other long-term liabilities	(2)		—
	Total liability derivatives	$	(7)	$	(1)
Derivatives not designated as Cash flow hedging instruments:
Foreign exchange contracts	Asset Derivatives:
	Other current assets	$	39	$	8
	Other assets	4		1
	Total asset derivatives	$	43	$	9
	Liability Derivatives:
	Accrued liabilities	(24)		(4)
	Other long-term liabilities	(2)		—
	Total liability derivatives	$	(26)	$	(4)

The effect of cash flow hedging relationships on Accumulated other comprehensive income (loss) for the quarters and nine months ended September 30, 2020 and 2019 are presented in the table below. The amounts of gain or (loss) are attributable to foreign exchange contract activity and are recorded as a component of Cost of products sold on the Condensed Consolidated Statements of Operations when reclassified from accumulated other comprehensive income (loss) and was immaterial for the quarters and nine months ended September 30, 2020 and 2019, respectively.

	Quarter Ended September 30,				Nine Months Ended September 30,
(dollars in millions)	2020		2019		2020		2019
Gain (loss) recorded in Accumulated other comprehensive income (loss)	$	6	$	(3)	$	5	$	(5)

The Company utilizes the critical terms match method in assessing firm commitment derivatives for hedge effectiveness. Accordingly, the hedged items and derivatives designated as hedging instruments are highly effective.

Assuming current market conditions continue, a $1 million pre-tax loss is expected to be reclassified from Accumulated other comprehensive loss into Product sales to reflect the fixed prices obtained from foreign exchange hedging within the next 12 months. At September 30, 2020, all derivative contracts accounted for as cash flow hedges will mature by November 2024.

The effect of derivatives not designated as Cash flow hedging instruments within Other income (expense) net, on the Condensed Consolidated Statements of Operations was as follows:

	Quarter Ended September 30,				Nine Months Ended September 30,
(dollars in millions)	2020		2019		2020		2019
Foreign exchange contracts	$	(10)	$	(6)	$	(8)	$	(9)