Financial Instruments (Notes)

9 Months Ended

Sep. 28, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

See our consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 29, 2018 for additional information on our overall risk management strategies, our use of derivatives, and our related accounting policies.

Derivative Volume:

The notional values of our outstanding derivative instruments were (in millions):



	Notional Amount
	September 28, 2019		December 29, 2018
Commodity contracts	$	587	$	478
Foreign exchange contracts	2,602		3,263
Cross-currency contracts	10,146		10,146

Fair Value of Derivative Instruments:

The fair values and the levels within the fair value hierarchy of derivative instruments recorded on the consolidated balance sheets were (in millions):



	September 28, 2019
	Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)				Significant Other Observable Inputs (Level 2)				Total Fair Value
	Assets		Liabilities		Assets		Liabilities		Assets		Liabilities
Derivatives designated as hedging instruments:
Foreign exchange contracts^(a)	$	—	$	—	$	23	$	12	$	23	$	12
Cross-currency contracts^(b)	—		—		348		98		348		98
Derivatives not designated as hedging instruments:
Commodity contracts^(c)	17		11		1		1		18		12
Foreign exchange contracts^(a)	—		—		4		25		4		25
Cross-currency contracts^(b)	—		—		593		144		593		144
Total fair value	$	17	$	11	$	969	$	280	$	986	$	291


(a)	At September 28, 2019, the fair value of our derivative assets was recorded in other current assets ($23 million) and other non-current assets ($4 million) the fair value of our derivative liabilities was recorded in other current liabilities ($35 million) and other non-current liabilities ($2 million).


(b)	At September 28, 2019, the fair value of our derivative assets was recorded in other current assets ($593 million) and other non-current assets ($348 million), and the fair value of our derivative liabilities was recorded in other current liabilities ($144 million) and other non-current liabilities ($98 million).


(c)	At September 28, 2019, the fair value of our derivative assets was recorded in other current assets ($17 million) and other non-current assets ($1 million) and the fair value of derivative liabilities was recorded in other current liabilities.



	December 29, 2018
	Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)				Significant Other Observable Inputs (Level 2)				Total Fair Value
	Assets		Liabilities		Assets		Liabilities		Assets		Liabilities
Derivatives designated as hedging instruments:
Foreign exchange contracts^(a)	$	—	$	—	$	51	$	26	$	51	$	26
Cross-currency contracts^(b)	—		—		139		3		139		3
Derivatives not designated as hedging instruments:
Commodity contracts^(a)	5		27		—		2		5		29
Foreign exchange contracts^(a)	—		—		5		42		5		42
Cross-currency contracts^(b)	—		—		557		119		557		119
Total fair value	$	5	$	27	$	752	$	192	$	757	$	219


(a)	The fair value of derivative assets was recorded in other current assets and the fair value of derivative liabilities was recorded in other current liabilities.


(b)	The fair value of derivative assets was recorded in other current assets ($557 million) and other non-current assets ($139 million), and the fair value of derivative liabilities was recorded within other current liabilities ($119 million) and other non-current liabilities ($3 million).

Our derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. We elect to record the gross assets and liabilities of our derivative financial instruments on the consolidated balance sheets. If the derivative financial instruments had been netted on the consolidated balance sheets, the asset and liability positions each would have been reduced by $221 million at September 28, 2019 and $124 million at December 29, 2018. No significant amounts of collateral were received or posted on our derivative assets and liabilities at September 28, 2019.

Level 1 financial assets and liabilities consist of commodity future and options contracts and are valued using quoted prices in active markets for identical assets and liabilities.

Level 2 financial assets and liabilities consist of commodity swaps, foreign exchange forwards, options, and swaps, and cross-currency swaps. Commodity swaps are valued using an income approach based on the observable market commodity index prices less the contract rate multiplied by the notional amount. Foreign exchange forwards and swaps are valued using an income approach based on observable market forward rates less the contract rate multiplied by the notional amount. Foreign exchange options are valued using an income approach based on a Black-Scholes-Merton formula. This formula uses present value techniques and reflects the time value and intrinsic value based on observable market rates. Cross-currency swaps are valued based on observable market spot and swap rates.

We did not have any Level 3 financial assets or liabilities in any period presented.

Our calculation of the fair value of financial instruments takes into consideration the risk of nonperformance, including counterparty credit risk.

Net Investment Hedging:

At September 28, 2019, we had the following items designated as net investment hedges:


•	Non-derivative foreign denominated debt with principal amounts of €2,550 million and £400 million;


•	Cross-currency contracts with notional amounts of £1.0 billion ($1.4 billion), C$2.1 billion ($1.6 billion), and ¥9.6 billion ($85 million); and


•	Foreign exchange contracts denominated in Chinese renminbi with an aggregate notional amount of $161 million.

We periodically use non-derivative instruments such as non-U.S. dollar financing transactions or non-U.S. dollar assets or liabilities, including intercompany loans, to hedge the exposure of changes in underlying foreign currency denominated subsidiary net assets, and they are designated as net investment hedges. At September 28, 2019, we had a euro intercompany loan with aggregate notional amount of $120 million.

The component of the gains and losses on our net investment in these designated foreign operations, driven by changes in foreign exchange rates, are economically offset by fair value movements on the effective portion of our cross-currency contracts and foreign exchange contracts and remeasurements of our foreign denominated debt.

Cash Flow Hedge Coverage:

At September 28, 2019, we had entered into foreign exchange contracts designated as cash flow hedges for periods not exceeding the next two years and into cross-currency contracts designated as cash flow hedges for periods not exceeding the next five years.

Deferred Hedging Gains and Losses on Cash Flow Hedges:

Based on our valuation at September 28, 2019 and assuming market rates remain constant through contract maturities, we expect transfers to net income/(loss) of unrealized gains on foreign currency cash flow hedges and cross-currency cash flow hedges during the next 12 months to be insignificant. Additionally, we expect transfers to net income/(loss) of unrealized losses on interest rate cash flow hedges during the next 12 months to be insignificant.

Derivative Impact on the Statements of Comprehensive Income:

The following table presents the pre-tax amounts of derivative gains/(losses) deferred into accumulated other comprehensive income/(losses) and the income statement line item that will be affected when reclassified to net income/(loss) (in millions):



Accumulated Other Comprehensive Income/(Losses) Component	Gains/(Losses) Recognized in Other Comprehensive Income/(Losses) Related to Derivatives Designated as Hedging Instruments											Location of Gains/(Losses) When Reclassified to Net Income/(Loss)
	For the Three Months Ended					For the Nine Months Ended
	September 28, 2019		September 29, 2018			September 28, 2019			September 29, 2018
Cash flow hedges:
Foreign exchange contracts	$	—	$	—		$	(1	)	$	—		Net sales
Foreign exchange contracts	8		(5		)	(19		)	27			Cost of products sold
Foreign exchange contracts (excluded component)	1		(2		)	1			(2		)	Cost of products sold
Foreign exchange contracts	—		(12		)	(22		)	19			Other expense/(income)
Foreign exchange contracts (excluded component)	—		2			—			2			Other expense/(income)
Cross-currency contracts	43		—			62			—			Other expense/(income)
Cross-currency contracts (excluded component)	7		—			21			—			Other expense/(income)
Net investment hedges:
Foreign exchange contracts	5		8			18			10			Other expense/(income)
Foreign exchange contracts (excluded component)	—		1			(1		)	1			Interest expense
Cross-currency contracts	66		(18		)	28			78			Other expense/(income)
Cross-currency contracts (excluded component)	8		6			22			6			Interest expense
Total gains/(losses) recognized in statements of comprehensive income	$	138	$	(20	)	$	109		$	141

Derivative Impact on the Statements of Income:

The following tables present the pre-tax amounts of derivative gains/(losses) reclassified from accumulated other comprehensive income/(losses) to net income/(loss) and the affected income statement line items (in millions):



	For the Three Months Ended
	September 28, 2019									September 29, 2018
										(As Restated)
	Cost of products sold			Interest expense			Other expense/ (income)			Cost of products sold			Interest expense			Other expense/ (income)
Total amounts presented in the consolidated statements of income in which the following effects were recorded	$	4,129		$	398		$	(380	)	$	4,289		$	326		$	(71	)

Gains/(losses) related to derivatives designated as hedging instruments:
Cash flow hedges:
Foreign exchange contracts	$	5		$	—		$	—		$	1		$	—		$	(12	)
Foreign exchange contracts (excluded component)	1			—			—			(1		)	—			2
Interest rate contracts	—			(1		)	—			—			(1		)	—
Cross-currency contracts	—			—			38			—			—			—
Cross-currency contracts (excluded component)	—			—			7			—			—			—
Net investment hedges:
Cross-currency contracts (excluded component)	—			8			—			—			6			—
Gains/(losses) related to derivatives not designated as hedging instruments:
Commodity contracts	(13		)	—			—			(17		)	—			—
Foreign exchange contracts	—			—			(10		)	—			—			(12		)
Cross-currency contracts	—			—			3			—			—			2
Total gains/(losses) recognized in statements of income	$	(7	)	$	7		$	38		$	(17	)	$	5		$	(20	)



	For the Nine Months Ended
	September 28, 2019									September 29, 2018
										(As Restated)
	Cost of products sold			Interest expense			Other expense/ (income)			Cost of products sold			Interest expense			Other expense/ (income)
Total amounts presented in the consolidated statements of income in which the following effects were recorded	$	12,401		$	1,035		$	(893	)	$	12,672		$	959		$	(181	)

Gains/(losses) related to derivatives designated as hedging instruments:
Cash flow hedges:
Foreign exchange contracts	$	22		$	—		$	(22	)	$	(8	)	$	—		$	19
Foreign exchange contracts (excluded component)	(1		)	—			—			(1		)	—			2
Interest rate contracts	—			(3		)	—			—			(3		)	—
Cross-currency contracts	—			—			44			—			—			—
Cross-currency contracts (excluded component)	—			—			21			—			—			—
Net investment hedges:
Foreign exchange contracts	—			—			(6		)	—			—			—
Foreign exchange contracts (excluded component)	—			(1		)	—			—			—			—
Cross-currency contracts (excluded component)	—			22			—			—			6			—
Gains/(losses) related to derivatives not designated as hedging instruments:
Commodity contracts	13			—			—			(32		)	—			—
Foreign exchange contracts	—			—			(16		)	—			—			(56		)
Cross-currency contracts	—			—			10			—			—			1
Total gains/(losses) recognized in statements of income	$	34		$	18		$	31		$	(41	)	$	3		$	(34	)

Non-Derivative Impact on Statements of Comprehensive Income:

Related to our non-derivative, foreign denominated debt instruments designated as net investment hedges, we recognized pre-tax gains of $128 million for the three months and $147 million for the nine months ended September 28, 2019 and $26 million for the three months and $118 million for the nine months ended September 29, 2018. These amounts were recognized in other comprehensive income/(loss).