Financial Instruments and Fair Value Measurements

9 Months Ended

Jun. 29, 2019

Financial Instruments and Fair Value Measurements [Abstract]

Financial Instruments and Fair Value Measurements

9.  Financial Instruments and Fair Value Measurements

In the normal course of business, the Company is exposed to certain risks arising from business operations and economic factors.  The Company may use derivative financial instruments to help manage market risk and reduce the exposure to fluctuations in interest rates and foreign currencies.  These financial instruments are not used for trading or other speculative purposes.  For those derivative instruments that are designated and qualify as hedging instruments, the Company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

To the extent hedging relationships are found to be effective, as determined by FASB guidance, changes in the fair value of the derivatives are offset by changes in the fair value of the related hedged item and recorded to Accumulated other comprehensive loss. Any identified ineffectiveness, or changes in the fair value of a derivative not designated as a hedge, is recorded to the Consolidated Statements of Income.

Cross-Currency Swaps

The Company is party to certain cross-currency swap agreements with a notional amount of €250 million to effectively convert a portion of our fixed-rate U.S. dollar denominated term loans, including the monthly interest payments, to fixed-rate euro-denominated debt.  The swap agreements mature in May 2022.  The risk management objective is to manage foreign currency risk relating to net investments in certain European subsidiaries denominated in foreign currencies and reduce the variability in the functional currency cash flows of a portion of the Company’s term loans.  Changes in fair value of the derivative instruments are recognized in a component of Accumulated other comprehensive loss, to offset the changes in the values of the net investments being hedged.

In preparation of the July 2019 RPC acquisition, the Company entered into certain foreign exchange forward contracts to partially mitigate the currency exchange rate risk associated with the GBP denominated purchase price.  At June 29, 2019, the Company had outstanding forward contracts totaling £2.7 billion. For the quarter ended June 29, 2019, the Company recognized an unrealized loss of $120 million in Other expense, net in the Consolidated Statement of Income associated with the forward contracts.

The primary purpose of the Company’s interest rate swap activities is to manage cash flow variability associated with our outstanding variable rate term loan debt.

During fiscal 2017, the Company modified various term loan rates and maturities.  In conjunction with these modifications the Company realigned existing swap agreements which resulted in the de-designation of the original hedge and re-designation of the modified swaps as effective cash flow hedges.  The amounts included in Accumulated other comprehensive loss at the date of de-designation are being amortized to Interest expense through the terms of the original swaps.

As of June 29, 2019, the Company effectively had (i) a $450 million interest rate swap transaction that swaps a one month variable LIBOR contract for a fixed annual rate of 2.000%, with an effective date in May 2017 and expiration in May 2022, (ii) a $1 billion interest rate swap transaction that swaps a one month variable LIBOR contract for a fixed annual rate of 2.808% with an effective date in June 2018 and expiration in September 2021, (iii) a $400 million interest rate swap transaction that swaps a one month variable LIBOR contract for a fixed annual rate of 2.533% with an effective date in February 2019 and expiration in July 2023, (iv) a $884 million interest rate swap transaction that swaps a one month variable LIBOR contract plus 250 basis point spread for a fixed annual rate of 4.357%, with an effective date in July 2019 and expiration in June 2024, and (v) a $473 million interest rate swap transaction that swaps a one month variable LIBOR contract plus 250 basis point spread for a fixed annual rate of 4.550%, with an effective date in July 2019 and expiration in June 2024.

The Company records the fair value positions of all derivative financial instruments on a net basis by counterparty for which a master netting arrangement is utilized. The categorization of the framework used to value the instruments is considered Level 2, due to the analysis that incorporates observable market inputs including foreign currency spot and forward rates, various interest rate curves, and obtained from pricing data quoted by various banks, third party sources and foreign currency dealers. Balances on a gross basis are as follows:

Derivatives Instruments	Hedge Designation	Balance Sheet Location	June 29, 2019		September 29, 2018
Cross-currency swaps	Designated	Other assets	$	4	$	—
Cross-currency swaps	Designated	Other long-term liabilities		—		11
Cross-currency swaps	Not designated	Other long-term liabilities		18		—
Interest rate swaps	Designated	Other assets		—		16
Interest rate swaps	Designated	Other long-term liabilities		61		—
Interest rate swaps	Not designated	Other long-term liabilities		—		1
Foreign exchange forward contracts	Not designated	Other current liabilities		138		—

		Quarterly Period Ended						Three Quarterly Periods Ended
Derivative Instruments	Statements of Income Location	June 29, 2019			June 30, 2018			June 29, 2019			June 30, 2018
Cross-currency swaps (a)	Interest expense, net	$	(2	)	$	(2	)	$	(5	)	$	(4	)
Cross-currency swaps (b)	Other expense, net		18			—			18			—
Foreign exchange forward contracts	Other expense, net		120			—			138			—
Interest rate swaps	Interest expense, net		(4	)		(1	)		(13	)		2

^(a) Designated   ^(b) Not designated

The amortization related to unrealized losses in Accumulated other comprehensive loss is expected to be $5 million in the next 12 months.

Non-recurring Fair Value Measurements

The Company has certain assets that are measured at fair value on a non-recurring basis when impairment indicators are present or when the Company completes an acquisition.  The Company adjusts certain long-lived assets to fair value only when the carrying values exceed the fair values.  The categorization of the framework used to value the assets is considered Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value.  These assets that are subject to our annual impairment analysis primarily include our definite lived and indefinite lived intangible assets, including Goodwill and our property, plant and equipment.  The Company reviews Goodwill and other indefinite lived assets for impairment as of the first day of the fourth fiscal quarter each year and more frequently if impairment indicators exist.  The Company determined Goodwill and other indefinite lived assets were not impaired in our annual fiscal 2018 assessment.  No impairment indicators were identified in the current quarter.

Included in the following table are the major categories of assets measured at fair value on a non-recurring basis as of June 29, 2019 and September 29, 2018, along with the impairment loss recognized on the fair value measurement during the period:

	As of June 29, 2019
	Level 1		Level 2		Level 3		Total		Impairment
Indefinite-lived trademarks	$	—	$	—	$	248	$	248	$	—
Goodwill		—		—		2,911		2,911		—
Definite lived intangible assets		—		—		956		956		—
Property, plant, and equipment		—		—		2,451		2,451		7
Total	$	—	$	—	$	6,566	$	6,566	$	7

	As of September 29, 2018
	Level 1		Level 2		Level 3		Total		Impairment
Indefinite-lived trademarks	$	—	$	—	$	248	$	248	$	—
Goodwill		—		—		2,944		2,944		—
Definite lived intangible assets		—		—		1,092		1,092		—
Property, plant, and equipment		—		—		2,488		2,488		—
Total	$	—	$	—	$	6,772	$	6,772	$	—

The Company's financial instruments consist primarily of cash and cash equivalents, long-term debt, interest rate and cross-currency swap agreements, foreign exchange forward contracts, and capital lease obligations.  The fair value of our marketable long-term indebtedness exceeded book value by $29 million as of June 29, 2019.  The Company's long-term debt fair values were determined using Level 2 inputs as other significant observable inputs were not available.