Derivative Instruments

9 Months Ended

Nov. 02, 2019

6. Derivative Instruments

We manage our economic and transaction exposure to certain risks by using foreign currency derivative instruments and interest rate swaps. Our objective in holding derivatives is to reduce the volatility of net earnings, cash flows and net asset value associated with changes in foreign currency exchange rates and interest rates. We do not hold derivative instruments for trading or speculative purposes. We have no derivatives that have credit risk-related contingent features and we mitigate our credit risk by engaging with financial institutions with investment-grade credit ratings as our counterparties.

We record all derivative instruments on our Condensed Consolidated Balance Sheets at fair value and evaluate hedge effectiveness prospectively or retrospectively when electing to apply hedge accounting. We formally document all hedging relations at inception for derivative hedges and the underlying hedged items, as well as the risk management objectives and strategies for undertaking the hedge transaction. In addition, we have derivatives which are not designated as hedging instruments.

Net Investment Hedges

We use foreign exchange forward contracts to hedge against the effect of Canadian dollar exchange rate fluctuations on a portion of our net investment in our Canadian operations. The contracts have terms of up to 12 months. For a net investment hedge, we recognize changes in the fair value of the derivative as a component of foreign currency translation within other comprehensive income to offset a portion of the change in translated value of the net investment being hedged, until the investment is sold or liquidated. We limit recognition in net earnings of amounts previously recorded in other comprehensive income to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. We report the gains and losses, if any, related to the amount excluded from the assessment of hedge effectiveness in net earnings.

Interest Rate Swaps

We utilized "receive fixed-rate, pay variable-rate" interest rate swaps to mitigate the effect of interest rate fluctuations on our $500 million principal amount of notes due August 1, 2018, prior to their maturity, and currently have swaps outstanding on our $650 million principal amount of notes due March 15, 2021, and $500 million principal amount of notes due October 1, 2028. Our interest rate swap contracts are considered perfect hedges because the critical terms and notional amounts match those of our fixed-rate debt being hedged and are, therefore, accounted for as fair value hedges using the shortcut method. Under the shortcut method, we recognize the change in the fair value of the derivatives with an offsetting change to the carrying value of

the debt. Accordingly, there is no impact on our Condensed Consolidated Statements of Earnings from the fair value of the derivatives.

Derivatives Not Designated as Hedging Instruments

We use foreign currency forward contracts to manage the impact of fluctuations in foreign currency exchange rates relative to recognized receivable and payable balances denominated in non-functional currencies. The contracts generally have terms of up to 12 months. These derivative instruments are not designated in hedging relationships and, therefore, we record gains and losses on these contracts directly to net earnings.

Summary of Derivative Balances

Gross fair values of our outstanding derivative instruments and the corresponding classifications were as follows ($ in millions):


		Assets
Contract Type	Balance Sheet Location	November 2, 2019		February 2, 2019		November 3, 2018
Derivatives designated as net investment hedges	Other current assets	$	-	$	-	$	1
Derivatives designated as interest rate swaps	Other assets		70		26		-
Total		$	70	$	26	$	1



		Liabilities
Contract Type	Balance Sheet Location	November 2, 2019		February 2, 2019		November 3, 2018
Derivatives designated as interest rate swaps	Long-term liabilities	$	-	$	1	$	22

Effects of derivative instruments on other comprehensive income ("OCI") were as follows ($ in millions):



	Three Months Ended				Nine Months Ended
Derivatives designated as net investment hedges	November 2, 2019		November 3, 2018		November 2, 2019		November 3, 2018
Pre-tax gain recognized in OCI	$	-	$	2	$	-	$	21

Effects of derivatives not designated as hedging instruments on our Condensed Consolidated Statements of Earnings were as follows ($ in millions):



		Gain Recognized				Gain Recognized
		Three Months Ended				Nine Months Ended
Contract Type	Statement of Earnings Location	November 2, 2019		November 3, 2018		November 2, 2019		November 3, 2018
No hedge designation (foreign exchange contracts)	SG&A	$	-	$	-	$	-	$	2

Effects of interest rate derivatives and adjustments to the carrying value of long-term debt on our Condensed Consolidated Statements of Earnings were as follows ($ in millions):


		Gain (Loss) Recognized				Gain (Loss) Recognized
		Three Months Ended				Nine Months Ended
Contract Type	Statement of Earnings Location	November 2, 2019		November 3, 2018		November 2, 2019		November 3, 2018
Interest rate swap contracts	Interest expense	$	(8)	$	(15)	$	45	$	(16)
Adjustments to carrying value of long-term debt	Interest expense		8		15		(45)		16
Total		$	-	$	-	$	-	$	-

Notional amounts of our derivative instruments were as follows ($ in millions):



	Notional Amount
Contract Type	November 2, 2019		February 2, 2019		November 3, 2018
Derivatives designated as net investment hedges	$	30	$	15	$	16
Derivatives designated as interest rate swaps		1,150		1,150		1,150
No hedge designation (foreign exchange contracts)		62		9		67
Total	$	1,242	$	1,174	$	1,233