Financial Instruments (Notes)

3 Months Ended

Mar. 28, 2020

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 28, 2019 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
	March 28, 2020		December 28, 2019
Commodity contracts	$	772	$	475
Foreign exchange contracts	2,495		3,045
Cross-currency contracts	4,035		4,035

Fair Value of Derivative Instruments:

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


	March 28, 2020
	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)	$	—	$	—	$	58	$	4	$	58	$	4
Cross-currency contracts^(b)	—		—		378		27		378		27
Derivatives not designated as hedging instruments:
Commodity contracts^(c)	10		104		—		16		10		120
Foreign exchange contracts^(a)	—		—		11		40		11		40
Total fair value	$	10	$	104	$	447	$	87	$	457	$	191

(a) At March 28, 2020, the fair value of our derivative assets was recorded in other current assets ($58 million) and other non-current assets ($11 million), and the fair value of our derivative liabilities was recorded in other current liabilities ($43 million) and other non-current liabilities ($1 million).

(b) At March 28, 2020, the fair value of our derivative assets was recorded in other non-current assets and the fair value of our derivative liabilities was recorded within other non-current liabilities.

(c) At March 28, 2020, the fair value of our derivative assets was recorded in other current assets ($9 million) and other non-current assets ($1 million), and the fair value of derivative liabilities was recorded in other current liabilities ($109 million) and other non-current liabilities ($11 million).


	December 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)	$	—	$	—	$	7	$	20	$	7	$	20
Cross-currency contracts^(b)	—		—		200		88		200		88
Derivatives not designated as hedging instruments:
Commodity contracts^(c)	42		6		—		2		42		8
Foreign exchange contracts^(a)	—		—		6		3		6		3
Total fair value	$	42	$	6	$	213	$	113	$	255	$	119

(a) At December 28, 2019, the fair value of derivative assets was recorded in other current assets ($12 million) and other current non-current assets ($1 million), and the fair value of derivative liabilities was recorded in other current liabilities.

(b) At December 28, 2019, the fair value of derivative assets was recorded in other non-current assets and the fair value of derivative liabilities was recorded within other non-current liabilities.

(c) At December 28, 2019, the fair value of derivative assets was recorded in other current assets and the fair value of derivative liabilities was recorded within other current liabilities.

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 condensed consolidated balance sheets. If the derivative financial instruments had been netted on the condensed consolidated balance sheets, the asset and liability positions each would have been reduced by $77 million at March 28, 2020 and $108 million at December 28, 2019. At March 28, 2020, we had posted collateral of $90 million related to commodity derivative margin requirements which was included in prepaid expenses on our condensed consolidated balance sheet. At December 28, 2019, we had collected collateral of $25 million related to commodity derivative margin requirements which was included in other current liabilities on our condensed consolidated balance sheet.

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 March 28, 2020, 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 $160 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 March 28, 2020, we had euro intercompany loans with an aggregate notional amount of $122 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 March 28, 2020, 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 four years.

Deferred Hedging Gains and Losses on Cash Flow Hedges:

Based on our valuation at March 28, 2020 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 approximately $34 million. 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
	March 28, 2020		March 30, 2019
Cash flow hedges:
Foreign exchange contracts	$	1	$	(1)	Net sales
Foreign exchange contracts	72		(19)		Cost of products sold
Foreign exchange contracts (excluded component)	(1)		(1)		Cost of products sold
Foreign exchange contracts	—		(22)		Other expense/(income)
Cross-currency contracts	41		24		Other expense/(income)
Cross-currency contracts (excluded component)	6		7		Other expense/(income)
Net investment hedges:
Foreign exchange contracts	2		9		Other expense/(income)
Foreign exchange contracts (excluded component)	(1)		(1)		Interest expense
Cross-currency contracts	186		(72)		Other expense/(income)
Cross-currency contracts (excluded component)	8		7		Interest expense
Total gains/(losses) recognized in statements of comprehensive income	$	314	$	(69)

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
	March 28, 2020										March 30, 2019
	Cost of products sold		Interest expense		Other expense/ (income)		Cost of products sold		Interest expense		Other expense/ (income)
Total amounts presented in the condensed consolidated statements of income in which the following effects were recorded	$	4,299	$	310	$	(81)	$	3,948	$	321	$	(380)

Gains/(losses) related to derivatives designated as hedging instruments:
Cash flow hedges:
Foreign exchange contracts	$	1	$	—	$	—	$	9	$	—	$	(22)
Foreign exchange contracts (excluded component)	—		—		—		(1)		—		—
Interest rate contracts	—		(1)		—		—		(1)		—
Cross-currency contracts	—		—		3		—		—		20
Cross-currency contracts (excluded component)	—		—		7		—		—		7
Net investment hedges:
Foreign exchange contracts	—		—		—		—		—		(6)
Foreign exchange contracts (excluded component)	—		—		—		—		(1)		—
Cross-currency contracts (excluded component)	—		8		—		—		7		—
Gains/(losses) related to derivatives not designated as hedging instruments:
Commodity contracts	(150)		—		—		21		—		—
Foreign exchange contracts	—		—		(28)		—		—		8
Cross-currency contracts	—		—		—		—		—		4
Total gains/(losses) recognized in statements of income	$	(149)	$	7	$	(18)	$	29	$	5	$	11

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 $34 million for the three months ended March 28, 2020 and $44 million for the three months ended March 30, 2019. These amounts were recognized in other comprehensive income/(loss).

Other Financial Instruments:

The carrying amounts of cash equivalents approximated fair values at March 28, 2020 and December 28, 2019. Money market funds are included in cash and cash equivalents on the condensed consolidated balance sheets. The fair value of money market funds were $3.3 billion at March 28, 2020 and $94 million at December 28, 2019. These are considered Level 1 financial assets and are valued using quoted prices in active markets for identical assets.