Our primary objective in executing and holding derivatives is to reduce the earnings and cash flow volatility associated with fluctuations in foreign currency exchange rates and commodity prices and hedge the volatility associated with the translation of the assets and liabilities of subsidiaries with a different functional currency than the USD. These hedge contracts reduce, but do not entirely eliminate, the impact of foreign currency rate and commodity price movements. The Company does not enter into or hold derivative instruments for speculative trading purposes.

The total amount in AOCI related to cash flow hedges of foreign currency-denominated forecasted transactions was a net $20 million loss as of June 30, 2023. We expect to reclassify $14 million of pre-tax net deferred losses associated with designated cash flow hedges to earnings in the next 12 months, contemporaneously with the earnings effects of the related forecasted transactions. Pre-tax gains (losses) reclassified from AOCI into earnings were $(6) million and $6 million, for the three months ended June 30, 2023 and 2022, respectively and $27 million and $17 million for the six months ended June 30, 2023 and 2022, respectively. As of June 30, 2023, the maximum length of time over which we are hedging our forecasted transactions was approximately two years.

The Company uses derivative instruments to hedge the currency risk associated with its net investment in foreign operations. The derivative instruments include cross-currency swaps and foreign currency forward contracts in combination with foreign currency options contracts. As of June 30, 2023 and December 31, 2022, the Company had $2,296 million and $2,132 million notional, respectively, of derivatives consisting mainly of receive-fixed USD, pay-fixed Euro (“EUR”) cross-currency swaps, each designated as the hedging instruments in net investment hedging relationships in order to mitigate the foreign currency risk attributable to the translation of its net investment in certain EUR-functional subsidiaries.


Fair Value of Derivatives
	June 30, 2023						December 31, 2022
	Gross Notional		Fair Value – Assets		Fair Value – Liabilities		Gross Notional		Fair Value – Assets		Fair Value – Liabilities
Foreign currency exchange contracts	$	1,206	$	34	$	56	$	1,240	$	32	$	53
Derivatives accounted for as cash flow hedges	1,206		34		56		1,240		32		53
Cross-currency swaps	2,197		29		211		2,132		—		111
Foreign currency exchange contracts and options	99		3		2		—		—		—
Derivatives accounted for as net investment hedges	2,296		32		213		2,132		—		111
Foreign currency exchange contracts	5,269		34		24		4,456		9		20
Embedded derivatives	683		20		13		604		24		18
Equity contracts	198		31		3		8		—		6
Commodity derivatives	77		1		3		48		1		1
Derivatives not designated as hedges	6,227		86		43		5,116		34		45
Total derivatives	$	9,729	$	152	$	312	$	8,488	$	66	$	209

Under the master arrangements with the respective counterparties to our derivative contracts, in certain circumstances and subject to applicable requirements, we are allowed to net settle transactions with a single net amount payable by one party to the other. However, we have elected to present the derivative assets and derivative liabilities on a gross basis on our Condensed Consolidated and Combined Statements of Financial Position and in the table above. The fair value of the derivatives contracts is recognized within All other current assets, All other assets, All other current liabilities, and All other liabilities in the Condensed Consolidated and Combined Statements of Financial Position based upon the contractual timing of settlements for these contracts.

As of June 30, 2023, the potential effect of rights of offset associated with the derivative contracts would be an offset to both assets and liabilities by $64 million.


Pre-tax Gains (Losses) Recognized in OCI Related to Cash Flow and Net Investment Hedges
	For the three months ended June 30				For the six months ended June 30
	2023		2022		2023		2022
Cash flow hedges	$	7	$	(7)	$	(10)	$	34
Net investment hedges	(36)		—		(71)		—


Derivative Financial Instruments
	For the three months ended June 30, 2023								For the three months ended June 30, 2022
	Cost of products		Cost of services		Selling, general and administrative		Other (a)		Cost of products		Cost of services		Selling, general and administrative		Other (a)

Foreign currency exchange contracts	$	(5)	$	(1)	$	—	$	—	$	5	$	1	$	—	$	—
Effects of cash flow hedges	(5)		(1)		—		—		5		1		—		—



Foreign currency exchange contracts	3		1		—		4		(60)		(11)		—		7
Embedded derivatives	—		—		—		2		—		—		—		5
Equity contracts	—		—		18		—		—		—		—		(1)
Commodity derivatives	—		—		—		(2)		—		—		—		5
Effects of derivatives not designated as hedges	$	3	$	1	$	18	$	4	$	(60)	$	(11)	$	—	$	16


Derivative Financial Instruments
	For the six months ended June 30, 2023								For the six months ended June 30, 2022
	Cost of products		Cost of services		Selling, general and administrative		Other (a)		Cost of products		Cost of services		Selling, general and administrative		Other (a)

Foreign currency exchange contracts	$	22	$	5	$	—	$	—	$	14	$	3	$	—	$	—
Effects of cash flow hedges	22		5		—		—		14		3		—		—



Foreign currency exchange contracts	10		3		—		5		(61)		(11)		—		7
Embedded derivatives	—		—		—		1		—		—		—		8
Equity contracts	—		—		33		3		—		—		—		(1)
Commodity derivatives	—		—		—		(4)		—		—		—		15
Effects of derivatives not designated as hedges	$	10	$	3	$	33	$	5	$	(61)	$	(11)	$	—	$	29

(a) Amounts inclusive of Other income (expense) – net on the Condensed Consolidated and Combined Statements of Income.


Fair Value of Financial Assets and Liabilities
	As of June 30, 2023								As of December 31, 2022
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Investment securities	$	30	$	—	$	—	$	30	$	21	$	—	$	—	$	21
Derivatives	—		152		—		152		—		66		—		66
Liabilities:
Deferred compensation(a)	243		3		—		246		62		2		—		64
Derivatives	—		309		3		312		—		203		6		209
Contingent consideration	—		—		65		65		—		—		42		42

The contingent consideration liabilities as of June 30, 2023 and December 31, 2022 were recorded in connection with business acquisitions. Changes in the Level 3 fair value measurement of contingent consideration were not material during the six months ended June 30, 2023.

The estimated fair value of long-term debt (including the current portion) as of June 30, 2023 and December 31, 2022, was $10,630 million and $8,512 million compared to a carrying value (which includes a reduction for amortized debt issuance costs and discounts) of $10,238 million and $8,241 million, respectively. The fair value of our borrowings is determined based on observable and quoted prices and spreads of comparable debt and benchmark securities and is considered Level 2 in the fair value hierarchy. See Note 8, “Borrowings” for further information.