Derivative Instruments

9 Months Ended

Jul. 02, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company manages its exposure to various risks relating to its ongoing business operations according to a risk management policy. The primary risks managed with derivative instruments are interest rate risk and foreign exchange risk.

The Company’s derivative positions measured at fair value are summarized in the following tables:


	As of July 2, 2022
	Current Assets		Other Assets		Other Current Liabilities		Other Long- Term Liabilities
Derivatives designated as hedges
Foreign exchange	$	581	$	645	$	(142)	$	(222)
Interest rate	—		1		(1,228)		—
Other	28		4		(3)		(1)
Derivatives not designated as hedges
Foreign exchange	166		181		(204)		(221)

Other	2		—		—		—
Gross fair value of derivatives	777		831		(1,577)		(444)
Counterparty netting	(496)		(520)		681		335
Cash collateral (received) paid	(165)		(54)		896		74
Net derivative positions	$	116	$	257	$	—	$	(35)


	As of October 2, 2021
	Current Assets		Other Assets		Other Current Liabilities		Other Long- Term Liabilities
Derivatives designated as hedges
Foreign exchange	$	165	$	240	$	(122)	$	(83)
Interest rate	—		186		(287)		—
Other	10		—		—		—
Derivatives not designated as hedges
Foreign exchange	183		119		(208)		(205)

Other	(8)		—		—		—
Gross fair value of derivatives	350		545		(617)		(288)
Counterparty netting	(301)		(360)		460		201
Cash collateral (received) paid	(3)		(51)		157		73
Net derivative positions	$	46	$	134	$	—	$	(14)

Interest Rate Risk Management

The Company is exposed to the impact of interest rate changes primarily through its borrowing activities. The Company’s objective is to mitigate the impact of interest rate changes on earnings and cash flows and on the market value of its borrowings. In accordance with its policy, the Company targets its fixed-rate debt as a percentage of its net debt between a

minimum and maximum percentage. The Company primarily uses pay-floating and pay-fixed interest rate swaps to facilitate its interest rate risk management activities.

The Company designates pay-floating interest rate swaps as fair value hedges of fixed-rate borrowings effectively converting fixed-rate borrowings to variable-rate borrowings indexed to LIBOR. The total notional amount of the Company’s pay-floating interest rate swaps at both July 2, 2022 and October 2, 2021, was $15.1 billion.

The following table summarizes fair value hedge adjustments to hedged borrowings:


	Carrying Amount of Hedged Borrowings				Fair Value Adjustments Included in Hedged Borrowings
	July 2, 2022		October 2, 2021		July 2, 2022		October 2, 2021
Borrowings:
Current	$	1,496	$	505	$	(4)	$	5
Long-term	12,993		15,136		(1,224)		(103)
	$	14,489	$	15,641	$	(1,228)	$	(98)

The following amounts are included in “Interest expense, net” in the Condensed Consolidated Statements of Income:


	Quarter Ended				Nine Months Ended
	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Gain (loss) on:
Pay-floating swaps	$	(210)	$	165	$	(1,129)	$	(559)
Borrowings hedged with pay-floating swaps	210		(165)		1,129		559
Benefit (expense) associated with interest accruals on pay-floating swaps	6		36		76		107

The Company may designate pay-fixed interest rate swaps as cash flow hedges of interest payments on floating-rate borrowings. Pay-fixed interest rate swaps effectively convert floating-rate borrowings to fixed-rate borrowings. The unrealized gains or losses from these cash flow hedges are deferred in AOCI and recognized in interest expense as the interest payments occur. The Company did not have pay-fixed interest rate swaps that were designated as cash flow hedges of interest payments at July 2, 2022 or at October 2, 2021, and gains and losses related to pay-fixed interest rate swaps recognized in earnings for the quarter ended July 2, 2022 and July 3, 2021 were not material.

Foreign Exchange Risk Management

The Company transacts business globally and is subject to risks associated with changing foreign currency exchange rates. The Company’s objective is to reduce earnings and cash flow fluctuations associated with foreign currency exchange rate changes, enabling management to focus on core business issues and challenges.

The Company enters into option and forward contracts that change in value as foreign currency exchange rates change to protect the value of its existing foreign currency assets, liabilities, firm commitments and forecasted but not firmly committed foreign currency transactions. In accordance with policy, the Company hedges its forecasted foreign currency transactions for periods generally not to exceed four years within an established minimum and maximum range of annual exposure. The gains and losses on these contracts offset changes in the U.S. dollar equivalent value of the related forecasted transaction, asset, liability or firm commitment. The principal currencies hedged are the euro, Japanese yen, British pound, Chinese yuan and Canadian dollar. Cross-currency swaps are used to effectively convert foreign currency denominated borrowings into U.S. dollar denominated borrowings.

The Company designates foreign exchange forward and option contracts as cash flow hedges of firmly committed and forecasted foreign currency transactions. As of July 2, 2022 and October 2, 2021, the notional amounts of the Company’s net foreign exchange cash flow hedges were $8.2 billion and $6.9 billion, respectively. Mark-to-market gains and losses on these contracts are deferred in AOCI and are recognized in earnings when the hedged transactions occur, offsetting changes in the value of the foreign currency transactions. Net deferred gains recorded in AOCI for contracts that will mature in the next twelve months total $444 million. The following table summarizes the effect of foreign exchange cash flow hedges on AOCI:


	Quarter Ended				Nine Months Ended
	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Gain (loss) recognized in Other Comprehensive Income	$	583	$	(6)	$	704	$	(65)
Gain (loss) reclassified from AOCI into the Statements of Operations(1)	16		(8)		42		32

(1)Primarily recorded in revenue.

The Company designates cross currency swaps as fair value hedges of foreign currency denominated borrowings. The impact from the change in foreign currency on both the cross currency swap and borrowing is recorded to “Interest expense, net.” The impact from interest rate changes is recorded in AOCI and is amortized over the life of the cross currency swap. As of both July 2, 2022 and October 2, 2021, the total notional amounts of the Company’s designated cross currency swaps were Canadian $1.3 billion ($1.0 billion).

The following amounts are included in “Interest expense, net” in the Condensed Consolidated Statements of Income:


	Quarter Ended				Nine Months Ended
	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Gain (loss) on:
Cross currency swaps	$	(30)	$	19	$	(18)	$	75
Borrowings hedged with cross currency swaps	30		(19)		18		(75)

Foreign exchange risk management contracts with respect to foreign currency denominated assets and liabilities are not designated as hedges and do not qualify for hedge accounting. The notional amounts of these foreign exchange contracts at July 2, 2022 and October 2, 2021 were $4.5 billion and $3.5 billion, respectively. The following table summarizes the net foreign exchange gains or losses recognized on foreign currency denominated assets and liabilities and the net foreign exchange gains or losses on the foreign exchange contracts we entered into to mitigate our exposure with respect to foreign currency denominated assets and liabilities by the corresponding line item in which they are recorded in the Condensed Consolidated Statements of Income:


	Costs and Expenses				Interest expense, net				Income Tax Expense
Quarter Ended:	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Net gains (losses) on foreign currency denominated assets and liabilities	$	(275)	$	16	$	29	$	(19)	$	96	$	5
Net gains (losses) on foreign exchange risk management contracts not designated as hedges	257		(42)		(28)		20		(89)		—
Net gains (losses)	$	(18)	$	(26)	$	1	$	1	$	7	$	5

Nine Months Ended:
Net gains (losses) on foreign currency denominated assets and liabilities	$	(420)	$	77	$	17	$	(74)	$	141	$	(29)
Net gains (losses) on foreign exchange risk management contracts not designated as hedges	327		(138)		(18)		75		(132)		30
Net gains (losses)	$	(93)	$	(61)	$	(1)	$	1	$	9	$	1

Commodity Price Risk Management

The Company is subject to the volatility of commodities prices and the Company designates certain commodity forward contracts as cash flow hedges of forecasted commodity purchases. Mark-to-market gains and losses on these contracts are deferred in AOCI and are recognized in earnings when the hedged transactions occur, offsetting changes in the value of commodity purchases. The notional amount of these commodities contracts at July 2, 2022 and October 2, 2021 and related gains or losses recognized in earnings for the quarter and nine months ended July 2, 2022 and July 3, 2021 were not material.

Risk Management – Other Derivatives Not Designated as Hedges

The Company enters into certain other risk management contracts that are not designated as hedges and do not qualify for hedge accounting. These contracts, which include certain total return swap contracts, are intended to offset economic exposures of the Company and are carried at market value with any changes in value recorded in earnings. The notional amounts of these contracts at July 2, 2022 and October 2, 2021 were $0.3 billion and $0.4 billion, respectively. The related gains or losses recognized in earnings were not material for the quarters ended July 2, 2022 and July 3, 2021.

Contingent Features and Cash Collateral

The Company has master netting arrangements by counterparty with respect to certain derivative financial instrument contracts. The Company may be required to post collateral in the event that a net liability position with a counterparty exceeds limits defined by contract and that vary with the Company’s credit rating. In addition, these contracts may require a counterparty to post collateral to the Company in the event that a net receivable position with a counterparty exceeds limits defined by contract and that vary with the counterparty’s credit rating. If the Company’s or the counterparty’s credit ratings were to fall below investment grade, such counterparties or the Company would also have the right to terminate our derivative contracts, which could lead to a net payment to or from the Company for the aggregate net value by counterparty of our derivative contracts. The aggregate fair values of derivative instruments with credit-risk-related contingent features in a net liability position by counterparty were $1,005 million and $244 million on July 2, 2022 and October 2, 2021, respectively.