Derivatives and Hedging Instruments

9 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVES AND HEDGING INSTRUMENTS

13. DERIVATIVES AND HEDGING INSTRUMENTS

The Company is exposed to certain risks arising from both our business operations and economic conditions. We principally manage exposures to a wide variety of business and operational risk through management of core business activities. We manage interest rate risk associated with our vault cash rental obligations and floating rate-debt by managing the amount, sources, and duration of debt funding and the use of derivative financial instruments. The Company uses interest rate cap agreements or interest rate swap contracts (“Interest Rate Derivatives”) to manage differences in the amount, timing and duration of known or expected cash payments related to our existing TLA Facility and vault cash agreements.

Further, a substantial portion of our operations and revenue occur outside the United States and, as such, the Company has exposure to approximately 45 functional currencies. Our results can be significantly impacted, both positively and negatively, by changes in foreign currency exchange rates. The Company seeks to mitigate such impact by hedging its foreign currency transaction exposure using foreign currency forward and option contracts. We do not enter into hedges for speculative purposes.

The Company assesses, both at inception of the hedge and on an ongoing basis, whether derivatives used as hedging instruments are highly effective in offsetting the changes in the fair value or cash flow of the hedged items. If it is determined that a derivative is not highly effective as a hedge or ceases to be highly effective, the Company discontinues hedge accounting prospectively.

Foreign Currency Exchange Risk

The accounting guidance for derivatives and hedging requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the Condensed Consolidated Balance Sheets. The Company designates foreign exchange contracts as cash flow hedges of forecasted transactions when they are determined to be highly effective at inception.

Our risk management strategy includes hedging, on behalf of certain subsidiaries, a portion of our forecasted, non-functional currency denominated cash flows for a period of up to 15 months. As a result, some of the impact of currency fluctuations on non-functional currency denominated transactions (and hence on subsidiary operating income, as stated in the functional currency), is mitigated in the near term. In the longer term (greater than 15 months), the subsidiaries are still subject to the effect of translating the functional currency results to United States Dollars. To manage our exposures and mitigate the impact of currency fluctuations on the operations of our foreign subsidiaries, we hedge our main transactional exposures through the use of foreign exchange forward and option contracts. This is primarily done through the hedging of foreign currency denominated inter-company inventory purchases by the Company’s marketing units and the foreign currency denominated inputs to our manufacturing units. If the hedge is designated as a highly effective cash flow hedge, the gains or losses are deferred into accumulated other comprehensive income (“AOCI”). The gains or losses from derivative contracts that are designated as highly effective cash flow hedges related to inventory purchases are recorded in cost of products when the inventory is sold to an unrelated third party. Otherwise, they are recorded in earnings when the exchange rates change. As of September 30, 2023 and December 31, 2022, the balance in AOCI related to foreign exchange derivative transactions was zero.

We also utilize foreign exchange contracts to hedge our exposure of assets and liabilities denominated in non-functional currencies. We recognize the gains and losses on these types of hedges in earnings as exchange rates change.

Interest Rate Risk The Company designates Interest Rate Derivative contracts as cash flow hedges of forecasted transactions when they are determined to be highly effective at inception.

We utilize interest rate swap contracts or interest rate cap agreements to add stability to interest cost and to manage exposure to interest rate movements as part of our interest rate risk management strategy. Payments and receipts related to Interest Rate Derivatives are included in cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows.

In June 2022, the Company executed $2.4 billion aggregate notional amount interest rate swap contracts effective June 1, 2022 and terminating on April 1, 2025. These interest rate swap contracts had fixed rates ranging from 2.790% to 3.251%, and were designated as cash flow hedges of the floating rate interest associated with the Company’s U.S. Dollar and U.K. Pound Sterling vault cash agreements. On June 14, 2023, the Company terminated all open interest rate swap contracts for cash proceeds of $71 million. At the time of termination, based on the assessed “reasonably possible” probability of the future separation of Atleos from the Company, further discussed in Note 1, “Basis of Presentation and Summary of Significant Accounting Policies”, the net derivative-related gains associated with these swaps were deferred into Accumulated other comprehensive

income to be reclassified into earnings from Accumulated other comprehensive income through April 1, 2025, corresponding to the term of the original interest rate swap agreements.

On June 14, 2023, the Company executed new $2.4 billion aggregate notional amount interest rate swap contracts effective June 14, 2023 and terminating on December 31, 2025. These interest rate swap contracts have fixed rates ranging from 4.2395% to 5.2740% and were designed to hedge the floating rate interest associated with the Company’s U.S. Dollar and U.K. Pound Sterling vault cash agreements. However, due to the assessed probability of the future separation of Atleos from the Company at the time of execution, the interest rate swap contracts did not qualify for cash flow hedge accounting treatment and are considered ineffective. As a result, changes in the fair value of the interest rate swaps are recorded to Cost of services in the accompanying Condensed Consolidated Statements of Operations. In the three and nine months ended September 30, 2023, the Company recognized a gain of $5 million and $19 million, respectively, in Cost of services related to the active interest rate swaps.

As of September 30, 2023, it was determined that the transactions underlying the unrealized gains on terminated interest rate swap and cap agreements reported in Accumulated other comprehensive income are probable of not occurring under ASC 815, Derivatives and Hedging. As such, for the three and nine months ended September 30, 2023, $85 million and $18 million of unrealized gains were recognized in Cost of services and Interest expense, respectively, on the Condensed Consolidated Statement of Operations. As of September 30, 2023 and December 31, 2022, the balance in AOCI related to Interest Rate Derivatives was zero and $109 million, respectively.

The following tables provide information on the location and amounts of derivative fair values in the Condensed Consolidated Balance Sheets:

	Fair Values of Derivative Instruments
	September 30, 2023
In millions	Balance Sheet Location	Notional Amount		Fair Value		Balance Sheet Location	Notional Amount		Fair Value
Derivatives not designated as hedging instruments
Interest rate swap contracts	Prepaid and other current assets			$	20	Other current liabilities			$	—
Interest rate swap contracts	Other assets			2		Other liabilities			(3)
Total interest rate swap contracts		$	2,000	$	22		$	426	$	(3)
Foreign exchange contracts	Prepaid and other current assets			$	1	Other current liabilities			$	(1)
Total foreign exchange contracts		$	644	$	1		$	413	$	(1)
Total derivatives not designated as hedging instruments				$	23				$	(4)
	Fair Values of Derivative Instruments
	December 31, 2022
In millions	Balance Sheet Location	Notional Amount		Fair Value		Balance Sheet Location	Notional Amount		Fair Value
Derivatives designated as hedging instruments
Interest rate swap contracts	Prepaid and other current assets			$	36	Other current liabilities			$	—
Interest rate swap contracts	Other assets			27		Other liabilities			—
Total derivatives designated as hedging instruments		$	2,423	$	63		$	—	$	—
Derivatives not designated as hedging instruments
Foreign exchange contracts	Prepaid and other current assets			$	1	Other current liabilities			$	(2)
Total derivatives not designated as hedging instruments		$	376	$	1		$	373	$	(2)
Total derivatives				$	64				$	(2)

    

The effects of derivative instruments on the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2023 and 2022 were as follows:

In millions	Amount of Gain (Loss) Recognized in Other Comprehensive Income (OCI) on Derivative Contracts					Amount of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations
Derivatives in Cash Flow Hedging Relationships	For the three months ended September 30, 2023		For the three months ended September 30, 2022		Location of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations	For the three months ended September 30, 2023		For the three months ended September 30, 2022
Interest rate contracts	$	—	$	77	Cost of services	$	(100)	$	(4)
Interest rate contracts	$	—	$	—	Interest expense	$	(22)	$	(5)
In millions	Amount of Gain (Loss) Recognized in Other Comprehensive Income (OCI) on Derivative					Amount of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations
Derivatives in Cash Flow Hedging Relationships	For the nine months ended September 30, 2023		For the nine months ended September 30, 2022		Location of (Gain) Loss Reclassified from AOCI into the Condensed Consolidated Statement of Operations	For the nine months ended September 30, 2023		For the nine months ended September 30, 2022
Interest rate contracts	$	24	$	119	Cost of services	$	(134)	$	2
Interest rate contracts	$	—	$	36	Interest expense	$	(31)	$	(5)

In millions		Amount of Gain (Loss) Recognized in the Condensed Consolidated Statement of Operations
		Three months ended September 30				Nine months ended September 30
Derivatives not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in the Condensed Consolidated Statement of Operations	2023		2022		2023		2022
Foreign exchange contracts	Other income (expense), net	$	(3)	$	(2)	$	(11)	$	(20)
Interest rate contracts	Cost of services	$	5	$	—	$	19	$	—

The following tables show the impact of the Company’s cash flow hedge accounting relationships on the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2023 and 2022.

	Location and Amount of (Gain) Loss Recognized in Income on Cash Flow Hedging Relationships for the three months ended September 30:
In millions	Cost of Services				Interest Expense
	2023		2022		2023		2022
Total amount of expense presented in the Condensed Consolidated Statements of Operations in which the effects of cash flow hedges are recorded	$	925	$	957	$	85	$	74
Amount of (gain) loss reclassified from Accumulated other comprehensive loss, net of expense	$	(100)	$	(4)	$	(22)	$	(5)

	Location and Amount of (Gain) Loss Recognized in Income on Cash Flow Hedging Relationships for the nine months ended September 30:
In millions	Cost of Services				Interest Expense
	2023		2022		2023		2022
Total amount of expense presented in the Condensed Consolidated Statements of Operations in which the effects of cash flow hedges are recorded	$	2,864	$	2,902	$	259	$	204
Amount of (gain) loss reclassified from Accumulated other comprehensive loss, net of expense	$	(134)	$	2	$	(31)	$	(5)

Refer to Note 14, “Fair Value of Assets and Liabilities”, for further information on derivative assets and liabilities recorded at fair value on a recurring basis.

Concentration of Credit Risk

The Company is potentially subject to concentrations of credit risk on accounts receivable and financial instruments such as hedging instruments and cash and cash equivalents. Credit risk includes the risk of nonperformance by counterparties. The maximum potential loss may exceed the amount recognized on the Condensed Consolidated Balance Sheets. Exposure to credit risk is managed through credit approvals, credit limits, selecting major international financial institutions as counterparties to hedging transactions and monitoring procedures. The Company’s business often involves large transactions with customers, and if one or more of those customers were to default on its obligations under applicable contractual arrangements, the Company could be exposed to potentially significant losses. However, management believes that the reserves for potential losses are adequate. As of September 30, 2023 and December 31, 2022, we did not have any major concentration of credit risk related to financial instruments.