Derivative instruments and fair value measurements

The Company is exposed to certain market risks such as changes in interest rates, foreign currency exchange rates, and commodity prices, which exist as a part of its ongoing business operations. Management uses derivative and nonderivative financial instruments and commodity instruments, including futures, options, and swaps, where appropriate, to manage these risks. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged.

The Company designates derivatives and nonderivative hedging instruments as cash flow hedges, fair value hedges, net investment hedges, and uses other contracts to reduce volatility in interest rates, foreign currency and commodities. As a matter of policy, the Company does not engage in trading or speculative hedging transactions.

Total notional amounts of the Company’s derivative instruments as of March 31, 2018 and December 30, 2017 were as follows:



(millions)	March 31, 2018		December 30, 2017
Foreign currency exchange contracts	$	1,277	$	2,172
Cross-currency contracts	736		—
Interest rate contracts	1,710		2,250
Commodity contracts	550		544
Total	$	4,273	$	4,966

Following is a description of each category in the fair value hierarchy and the financial assets and liabilities of the Company that were included in each category at March 31, 2018 and December 30, 2017, measured on a recurring basis.

Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market. For the Company, level 1 financial assets and liabilities consist primarily of commodity derivative contracts.

Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. For the Company, level 2 financial assets and liabilities consist of interest rate swaps, cross-currency swaps and over-the-counter commodity and currency contracts.

The Company’s calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve. Over-the-counter commodity derivatives are valued using an income approach based on the commodity index prices less the contract rate multiplied by the notional amount. Foreign currency contracts are valued using an income approach based on forward rates less the contract rate multiplied by the notional amount. The Company’s calculation of the fair value of level 2 financial assets and liabilities takes into consideration the risk of nonperformance, including counterparty credit risk.

Level 3 – Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. The Company did not have any level 3 financial assets or liabilities as of March 31, 2018 or December 30, 2017.

The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet on a recurring basis as of March 31, 2018 and December 30, 2017:

Derivatives designated as hedging instruments



	March 31, 2018								December 30, 2017
(millions)	Level 1		Level 2			Total			Level 1		Level 2			Total
Liabilities:
Cross-currency contracts:
Other Liabilities			$	(8	)	$	(8	)
Interest rate contracts:
Other liabilities (a)	—		(32		)	(32		)	—		(54		)	(54		)
Total liabilities	$	—	$	(40	)	$	(40	)	$	—	$	(54	)	$	(54	)

(a) The fair value of the related hedged portion of the Company's long-term debt, a level 2 liability, was $1.4 billion and $2.3 billion as of March 31, 2018 and December 30, 2017, respectively.

Derivatives not designated as hedging instruments



	March 31, 2018									December 30, 2017
(millions)	Level 1			Level 2			Total			Level 1			Level 2			Total
Assets:
Foreign currency exchange contracts:
Other prepaid assets	$	—		$	9		$	9		$	—		$	10		$	10
Commodity contracts:
Other prepaid assets	5			—			5			6			—			6
Total assets	$	5		$	9		$	14		$	6		$	10		$	16
Liabilities:
Foreign currency exchange contracts:
Other current liabilities	$	—		$	(6	)	$	(6	)	$	—		$	(14	)	$	(14	)
Commodity contracts:
Other current liabilities	(7		)	—			(7		)	$	(7	)	$	—		$	(7	)
Total liabilities	$	(7	)	$	(6	)	$	(13	)	$	(7	)	$	(14	)	$	(21	)

The Company has designated its outstanding foreign currency denominated long-term debt as a net investment hedge of a portion of the Company’s investment in its subsidiaries’ foreign currency denominated net assets. The carrying value of this debt was approximately $2.8 billion and $2.7 billion as of March 31, 2018 and December 30, 2017, respectively.

The following amounts were recorded on the Consolidated Balance Sheet related to cumulative basis adjustments for existing fair value hedges as of March 31, 2018 and December 30, 2017.



(millions)	Line Item in the Consolidated Balance Sheet in which the hedged item is included	Carrying amount of the hedged liabilities				Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged liabilities (a)
		March 31, 2018		December 30, 2017		March 31, 2018			December 30, 2017
Interest rate contracts	Current maturities of long-term debt	$	401	$	402	$	1		$	2
Interest rate contracts	Long-term debt	$	3,406	$	3,481	$	(53	)	$	(22	)

(a) The current maturities of hedged long-term debt includes $1 million and $2 million of hedging adjustment on discontinued hedging relationships as of March 31, 2018 and December 30, 2017, respectively. The hedged long-term debt includes $(20) million and $32 million of hedging adjustment on discontinued hedging relationships as of March 31, 2018 and December 30, 2017, respectively.

The Company has elected to not offset the fair values of derivative assets and liabilities executed with the same counterparty that are generally subject to enforceable netting agreements. However, if the Company were to offset and record the asset and liability balances of derivatives on a net basis, the amounts presented in the Consolidated Balance Sheet as of March 31, 2018 and December 30, 2017 would be adjusted as detailed in the following table:



As of March 31, 2018:
				Gross Amounts Not Offset in the Consolidated Balance Sheet
	Amounts Presented in the Consolidated Balance Sheet			Financial Instruments			Cash Collateral Received/ Posted		Net Amount
Total asset derivatives	$	14		$	(12	)	$	—	$	2
Total liability derivatives	$	(53	)	$	12		$	30	$	(11	)



As of December 30, 2017:
				Gross Amounts Not Offset in the Consolidated Balance Sheet
	Amounts Presented in the Consolidated Balance Sheet			Financial Instruments			Cash Collateral Received/ Posted		Net Amount
Total asset derivatives	$	16		$	(15	)	$	—	$	1
Total liability derivatives	$	(75	)	$	15		$	37	$	(23	)

The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the quarters ended March 31, 2018 and April 1, 2017 was as follows:

Derivatives and non-derivatives in net investment hedging relationships



(millions)	Gain (loss) recognized in AOCI						Gain (loss) excluded from assessment of hedge effectiveness				Location of gain (loss) in income of excluded component
	March 31, 2018			April 1, 2017			March 31, 2018		April 1, 2017
Foreign currency denominated long-term debt	$	(73	)	$	(25	)	$	—	$	—
Cross-currency contracts	(8		)	—			3		—		Other income (expense), net
Total	$	(81	)	$	(25	)	$	3	$	—

Derivatives not designated as hedging instruments



(millions)	Location of gain (loss) recognized in income	Gain (loss) recognized in income
		March 31, 2018			April 1, 2017
Foreign currency exchange contracts	COGS	$	3		$	(9	)
Foreign currency exchange contracts	Other income (expense), net	(4		)	(5		)
Foreign currency exchange contracts	SG&A	1			—
Commodity contracts	COGS	5			(13		)
Commodity contracts	SG&A	—			1
Total		$	5		$	(26	)

The effect of fair value and cash flow hedge accounting on the Consolidated Income Statement for the quarters ended March 31, 2018 and April 1, 2017:



		March 31, 2018			April 1, 2017
(millions)		Interest Expense			COGS		Interest Expense
Total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of fair value or cash flow hedges are recorded		$	69		$	2,088	$	61
	Gain (loss) on fair value hedging relationships:
	Interest contracts:
	Hedged items	32			—		9
	Derivatives designated as hedging instruments	(28		)	—		(4		)

	Gain (loss) on cash flow hedging relationships:
	Interest contracts:
	Amount of gain (loss) reclassified from AOCI into income	(2		)	—		(2		)
	Foreign exchange contracts:
	Amount of gain (loss) reclassified from AOCI into income	—			1		—

During the next 12 months, the Company expects $7 million of net deferred losses reported in AOCI at March 31, 2018 to be reclassified to income, assuming market rates remain constant through contract maturities.

Certain of the Company’s derivative instruments contain provisions requiring the Company to post collateral on those derivative instruments that are in a liability position if the Company’s credit rating is at or below BB+ (S&P), or Baa1 (Moody’s). The fair value of all derivative instruments with credit-risk-related contingent features in a liability position on March 31, 2018 was $39 million. If the credit-risk-related contingent features were triggered as of March 31, 2018, the Company would be required to post additional collateral of $23 million. In addition, certain derivative instruments contain provisions that would be triggered in the event the Company defaults on its debt agreements. There were no collateral posting as of March 31, 2018 triggered by credit-risk-related contingent features.

Financial instruments

The carrying values of the Company’s short-term items, including cash, cash equivalents, accounts receivable, accounts payable, notes payable and current maturities of long-term debt approximate fair value. The fair value of the Company’s long-term debt, which are level 2 liabilities, is calculated based on broker quotes. The fair value and carrying value of the Company's long-term debt was $8.1 billion and $7.9 billion, respectively, as of March 31, 2018.

Counterparty credit risk concentration and collateral requirements

The Company is exposed to credit loss in the event of nonperformance by counterparties on derivative financial and commodity contracts. Management believes a concentration of credit risk with respect to derivative counterparties is limited due to the credit ratings and use of master netting and reciprocal collateralization agreements with the counterparties and the use of exchange-traded commodity contracts.

Master netting agreements apply in situations where the Company executes multiple contracts with the same counterparty. Certain counterparties represent a concentration of credit risk to the Company. If those counterparties fail to perform according to the terms of derivative contracts, this would result in a loss to the Company. As of March 31, 2018, the Company was not in a significant net asset position with any counterparties with which a master netting agreement would apply.

For certain derivative contracts, reciprocal collateralization agreements with counterparties call for the posting of collateral in the form of cash, treasury securities or letters of credit if a fair value loss position to the Company or its counterparties exceeds a certain amount. In addition, the Company is required to maintain cash margin accounts in connection with its open positions for exchange-traded commodity derivative instruments executed with the counterparty that are subject to enforceable netting agreements. As of March 31, 2018, the Company posted $16 million related to reciprocal collateralization agreements. As of March 31, 2018 the Company posted $14 million in margin deposits for exchange-traded commodity derivative instruments, which was reflected as an increase in accounts receivable, net on the Consolidated Balance Sheet.

Management believes concentrations of credit risk with respect to accounts receivable is limited due to the generally high credit quality of the Company’s major customers, as well as the large number and geographic dispersion of smaller customers. However, the Company conducts a disproportionate amount of business with a small number of large multinational grocery retailers, with the five largest accounts encompassing approximately 21% of consolidated trade receivables at March 31, 2018.