FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2023

FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

DERIVATIVES AND HEDGING.

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, equity prices, and commodity prices and hedge the volatility associated with the translation of the assets and liabilities of subsidiaries with a different functional currency than USD. These hedge contracts reduce, but do not entirely eliminate, the impact of foreign currency rate, equity price, and commodity price movements. The Company does not enter into or hold derivative instruments for speculative trading purposes.

Cash Flow Hedges

The total amount in AOCI related to cash flow hedges of foreign currency-denominated forecasted transactions was a $2 million gain, net of taxes, as of September 30, 2023. We expect to reclassify $10 million of pre-tax net deferred gains 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 $(5) million and $17 million, for the three months ended September 30, 2023 and 2022, respectively, and $22 million and $34 million for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, the maximum length of time over which we are hedging our forecasted transactions was approximately two years.

Net Investment Hedges

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 option contracts. As of September 30, 2023, the Company had $3,093 million gross notional of derivatives consisting mainly of $2,126 million receive-fixed USD, pay-fixed Euro (“EUR”) cross-currency swaps and $871 million notional Chinese renminbi-denominated foreign currency forward and options contracts. The Company entered into each of the forward contracts concurrently with two separate foreign currency option contracts for the same notional amounts and expiration dates as the forward contracts. These instruments were 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 and Chinese renminbi-functional subsidiaries.

The following table presents the gross fair values of our outstanding derivative instruments as of the dates indicated:


Fair Value of Derivatives
	September 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	$	1,113	$	41	$	35	$	1,240	$	32	$	53
Derivatives accounted for as cash flow hedges	1,113		41		35		1,240		32		53
Cross-currency swaps	2,126		22		141		2,132		—		111
Foreign currency exchange contracts and options	967		10		9		—		—		—
Derivatives accounted for as net investment hedges	3,093		32		150		2,132		—		111
Foreign currency exchange contracts	4,436		13		29		4,456		9		20
Other derivatives(1)	441		40		1		660		25		25



Derivatives not designated as hedging instruments	4,877		53		30		5,116		34		45
Total derivatives	$	9,083	$	126	$	215	$	8,488	$	66	$	209

(1) Other derivatives are comprised of embedded derivatives, equity contracts, and commodity derivatives.

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 September 30, 2023, the potential effect of rights of offset associated with the derivative contracts would be an offset to both assets and liabilities by $56 million.

The table below presents the pre-tax gains (losses) recognized in OCI associated with the Company’s cash flow and net investment hedges.


Pre-tax Gains (Losses) Recognized in OCI Related to Cash Flow and Net Investment Hedges
	For the three months ended September 30				For the nine months ended September 30
	2023		2022		2023		2022
Cash flow hedges	$	24	$	31	$	14	$	65
Net investment hedges	64		—		(7)		—

The tables below present the gains (losses) of our derivative financial instruments in the Condensed Consolidated and Combined Statements of Income.


Derivative Financial Instruments
	For the three months ended September 30, 2023								For the three months ended September 30, 2022
	Cost of products		Cost of services		Selling, general and administrative		Other(2)		Cost of products		Cost of services		Selling, general and administrative		Other(2)

Foreign currency exchange contracts	$	(5)	$	(1)	$	—	$	—	$	13	$	4	$	—	$	—
Effects of cash flow hedges	(5)		(1)		—		—		13		4		—		—

Foreign currency exchange contracts and options	—		—		—		1		—		—		—		—
Effects of net investment hedges	—		—		—		1		—		—		—		—
Foreign currency exchange contracts	(38)		(9)		—		4		(25)		(5)		—		5



Other derivatives(1)	—		—		(2)		10		—		—		—		7
Effects of derivatives not designated as hedging instruments	$	(38)	$	(9)	$	(2)	$	14	$	(25)	$	(5)	$	—	$	12


	For the nine months ended September 30, 2023								For the nine months ended September 30, 2022
	Cost of products		Cost of services		Selling, general and administrative		Other(2)		Cost of products		Cost of services		Selling, general and administrative		Other(2)

Foreign currency exchange contracts	$	18	$	4	$	—	$	—	$	27	$	7	$	—	$	—
Effects of cash flow hedges	18		4		—		—		27		7		—		—

Foreign currency exchange contracts and options	—		—		—		1		—		—		—		—
Effects of net investment hedges	—		—		—		1		—		—		—		—
Foreign currency exchange contracts	(28)		(6)		—		10		(86)		(16)		—		12



Other derivatives(1)	—		—		5		36		—		—		—		29
Effects of derivatives not designated as hedging instruments	$	(28)	$	(6)	$	5	$	46	$	(86)	$	(16)	$	—	$	41

(1) Other derivatives are comprised of embedded derivatives, equity contracts, and commodity derivatives.

(2) Amounts inclusive of Other income (expense) – net and Interest and other financial charges – net on the Condensed Consolidated and Combined Statements of Income.

FAIR VALUE MEASUREMENTS.

The following table represents financial assets and liabilities that are recorded and measured at fair value on a recurring basis.


Fair Value of Financial Assets and Liabilities
	As of September 30, 2023								As of December 31, 2022
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Investment securities	$	28	$	—	$	—	$	28	$	21	$	—	$	—	$	21
Derivatives	—		126		—		126		—		66		—		66
Liabilities:
Deferred compensation(1)	236		3		—		239		62		2		—		64
Derivatives	—		215		—		215		—		203		6		209
Contingent consideration	—		—		49		49		—		—		42		42

(1) Certain deferred compensation plans whose value is derived from market-based securities values were transferred from GE as part of the Spin-Off.

Contingent Consideration

The contingent consideration liabilities as of September 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 nine months ended September 30, 2023.

Fair Value of Other Financial Instruments

The estimated fair value of long-term debt (including the current portion) as of September 30, 2023 and December 31, 2022 was $10,465 million and $8,512 million compared to a carrying value (which includes a reduction for amortized debt issuance costs and discounts) of $10,260 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.

Non-recurring Fair Value Measurements

Equity investments without readily determinable fair value as of September 30, 2023 and December 31, 2022 were $129 million and $117 million, respectively.