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Financial Instruments | 12 Months Ended
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Dec. 26, 2020
Derivative Instruments and Hedges, Assets [Abstract] |
Financial Instruments | Financial Instruments Derivatives and Hedging We are exposed to market risks arising from adverse changes in: •commodity prices, affecting the cost of our raw materials and energy; •foreign exchange rates and currency restrictions; and •interest rates. In the normal course of business, we manage commodity price, foreign exchange and interest rate risks through a variety of strategies, including productivity initiatives, global purchasing programs and hedging. Ongoing productivity initiatives involve the identification and effective implementation of meaningful cost-saving opportunities or efficiencies, including the use of derivatives. We do not use derivative instruments for trading or speculative purposes. Our global purchasing programs include fixed-price contracts and purchase orders and pricing agreements. Our hedging strategies include the use of derivatives and, in the case of our net investment hedges, debt instruments. Certain derivatives are designated as either cash flow or fair value hedges and qualify for hedge accounting treatment, while others do not qualify and are marked to market through earnings. The accounting for qualifying hedges allows changes in a hedging instrument’s fair value to offset corresponding changes in the hedged item in the same reporting period that the hedged item impacts earnings. Gains or losses on derivatives designated as cash flow hedges are recorded in accumulated other comprehensive loss and reclassified to our income statement when the hedged transaction affects earnings. If it becomes probable that the hedged transaction will not occur, we immediately recognize the related hedging gains or losses in earnings; such gains or losses reclassified during the year ended December 26, 2020 were not material. Cash flows from derivatives used to manage commodity price, foreign exchange or interest rate risks are classified as operating activities in the cash flow statement. We classify both the earnings and cash flow impact from these derivatives consistent with the underlying hedged item. Credit Risk We perform assessments of our counterparty credit risk regularly, including reviewing netting agreements, if any, and a review of credit ratings, credit default swap rates and potential nonperformance of the counterparty. Based on our most recent assessment of our counterparty credit risk, we consider this risk to be low. In addition, we enter into derivative contracts with a variety of financial institutions that we believe are creditworthy in order to reduce our concentration of credit risk. Certain of our agreements with our counterparties require us to post full collateral on derivative instruments in a net liability position if our credit rating is at A2 (Moody’s Investors Service, Inc.) or A (S&P Global Ratings) and we have been placed on credit watch for possible downgrade or if our credit rating falls below these levels. The fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position as of December 26, 2020 was $283 million. We have posted no collateral under these contracts and no credit-risk-related contingent features were triggered as of December 26, 2020. Commodity Prices We are subject to commodity price risk because our ability to recover increased costs through higher pricing may be limited in the competitive environment in which we operate. This risk is managed through the use of fixed-price contracts and purchase orders, pricing agreements and derivative instruments, which primarily include swaps and futures. In addition, risk to our supply of certain raw materials is mitigated through purchases from multiple geographies and suppliers. We use derivatives, with terms of no more than three years, to hedge price fluctuations related to a portion of our anticipated commodity purchases, primarily for agricultural products, energy and metals. Derivatives used to hedge commodity price risk that do not qualify for hedge accounting treatment are marked to market each period with the resulting gains and losses recorded in corporate unallocated expenses as either cost of sales or selling, general and administrative expenses, depending on the underlying commodity. These gains and losses are subsequently reflected in division results when the divisions recognize the cost of the underlying commodity in operating profit. Our commodity derivatives had a total notional value of $1.1 billion as of December 26, 2020 and December 28, 2019. Foreign Exchange We are exposed to foreign exchange risks in the international markets in which our products are made, manufactured, distributed or sold. Additionally, we are exposed to foreign exchange risk from net investments in foreign subsidiaries, foreign currency purchases and foreign currency assets and liabilities created in the normal course of business. We manage this risk through sourcing purchases from local suppliers, negotiating contracts in local currencies with foreign suppliers and through the use of derivatives, primarily forward contracts with terms of no more than two years. Exchange rate gains or losses related to foreign currency transactions are recognized as transaction gains or losses on our income statement as incurred. We also use net investment hedges to partially offset the effects of foreign currency on our investments in certain of our foreign subsidiaries. Our foreign currency derivatives had a total notional value of $1.9 billion as of December 26, 2020 and December 28, 2019. The total notional amount of our debt instruments designated as net investment hedges was $2.7 billion as of December 26, 2020 and $2.5 billion as of December 28, 2019. For foreign currency derivatives that do not qualify for hedge accounting treatment, gains and losses were offset by changes in the underlying hedged items, resulting in no material net impact on earnings. Interest Rates We centrally manage our debt and investment portfolios considering investment opportunities and risks, tax consequences and overall financing strategies. We use various interest rate derivative instruments including, but not limited to, interest rate swaps, cross-currency interest rate swaps, Treasury locks and swap locks to manage our overall interest expense and foreign exchange risk. These instruments effectively change the interest rate and currency of specific debt issuances. Certain of our fixed rate indebtedness have been swapped to floating rates. The notional amount, interest payment and maturity date of the interest rate and cross-currency interest rate swaps match the principal, interest payment and maturity date of the related debt. Our cross-currency interest rate swaps have terms of no more than twelve years. Our Treasury locks and swap locks are entered into to protect against unfavorable interest rate changes relating to forecasted debt transactions. Our interest rate derivatives had a total notional value of $3.0 billion as of December 26, 2020 and $5.0 billion as of December 28, 2019. As of December 26, 2020, approximately 3% of total debt, after the impact of the related interest rate derivative instruments, was subject to variable rates, compared to approximately 9% as of December 28, 2019. Held-to-Maturity Debt Securities Investments in debt securities that we have the positive intent and ability to hold until maturity are classified as held-to-maturity. Highly liquid debt securities with original maturities of three months or less are recorded as cash equivalents. Our held-to-maturity debt securities consist of U.S. Treasury securities and commercial paper. As of December 26, 2020, we had $2.1 billion of investments in U.S. Treasury securities with $2.0 billion recorded in cash and cash equivalents and $0.1 billion in short-term investments. We had no investments in U.S. Treasury securities as of December 28, 2019. As of December 26, 2020, we had $260 million of investments in commercial paper with $75 million recorded in cash and cash equivalents and $185 million in short-term investments. As of December 28, 2019, we had $130 million of investments in commercial paper recorded in cash and cash equivalents. Held-to-maturity debt securities are recorded at amortized cost, which approximates fair value, and realized gains or losses are reported in earnings. Our investments mature in less than one year. As of December 26, 2020 and December 28, 2019, gross unrecognized gains and losses and the allowance for expected credit losses were not material. Fair Value Measurements The fair values of our financial assets and liabilities as of December 26, 2020 and December 28, 2019 are categorized as follows:
|  |  | 2020 |  | 2019
| Fair Value Hierarchy Levels(a) |  | Assets(a) |  | Liabilities(a) |  | Assets(a) |  | Liabilities(a)
Index funds (b) | 1 |  | $ | 231 |  |  | $ | — |  |  | $ | 229 |  |  | $ | — |
Prepaid forward contracts (c) | 2 |  | $ | 18 |  |  | $ | — |  |  | $ | 17 |  |  | $ | — |
Deferred compensation (d) | 2 |  | $ | — |  |  | $ | 477 |  |  | $ | — |  |  | $ | 468 |
Contingent consideration (e) | 3 |  | $ | — |  |  | $ | 861 |  |  | $ | — |  |  | $ | — |
Derivatives designated as fair value hedging instruments: |  |  |  |  |  |  |  |  |
Interest rate (f) | 2 |  | $ | 2 |  |  | $ | — |  |  | $ | — |  |  | $ | 5 |
Derivatives designated as cash flow hedging instruments: |  |  |  |  |  |  |  |  |
Foreign exchange (g) | 2 |  | $ | 9 |  |  | $ | 71 |  |  | $ | 5 |  |  | $ | 32 |
Interest rate (g) | 2 |  | 13 |  |  | 307 |  |  | — |  |  | 390 |
Commodity (h) | 1 |  | — |  |  | — |  |  | 2 |  |  | 5 |
Commodity (i) | 2 |  | 32 |  |  | — |  |  | 2 |  |  | 5 |
|  |  | $ | 54 |  |  | $ | 378 |  |  | $ | 9 |  |  | $ | 432 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |
Foreign exchange (g) | 2 |  | $ | 4 |  |  | $ | 8 |  |  | $ | 3 |  |  | $ | 2 |
Commodity (h) | 1 |  | — |  |  | — |  |  | 23 |  |  | 7 |
Commodity (i) | 2 |  | 19 |  |  | 7 |  |  | 6 |  |  | 24 |
|  |  | $ | 23 |  |  | $ | 15 |  |  | $ | 32 |  |  | $ | 33 |
Total derivatives at fair value (j) |  |  | $ | 79 |  |  | $ | 393 |  |  | $ | 41 |  |  | $ | 470 |
Total |  |  | $ | 328 |  |  | $ | 1,731 |  |  | $ | 287 |  |  | $ | 938 |
(a)Fair value hierarchy levels are defined in Note 7. Unless otherwise noted, financial assets are classified on our balance sheet within prepaid expenses and other current assets and other assets. Financial liabilities are classified on our balance sheet within accounts payable and other current liabilities and other liabilities. (b)Based on the price of index funds. These investments are classified as short-term investments and are used to manage a portion of market risk arising from our deferred compensation liability. (c)Based primarily on the price of our common stock. (d)Based on the fair value of investments corresponding to employees’ investment elections. (e)In connection with our acquisition of Rockstar, we recorded a liability for tax-related contingent consideration payable over up to 15 years, with an option to accelerate all remaining payments, with estimated maximum payments of approximately $1.1 billion, using current tax rates. The fair value of the liability is estimated using probability-weighted, discounted future cash flows at current tax rates. The significant unobservable inputs (Level 3) used to estimate the fair value include the expected future tax benefits associated with the acquisition, the probability that the option to accelerate all remaining payments will be exercised and discount rates. The expected annual future tax benefits range from approximately $40 million to $110 million, with an average of $70 million. The probability, in any given year, that the option to accelerate will be exercised ranges from 3 to 25 percent, with a weighted-average payment period of approximately 4 years. The discount rates range from less than 1 percent to 5 percent, with a weighted average of 3 percent. The contingent consideration measured at fair value using unobservable inputs as of December 26, 2020 is $861 million, comprised of an $882 million liability recognized at the acquisition date of Rockstar and a fair value decrease of $21 million in the year ended December 26, 2020, recorded in selling, general and administrative expenses. (f)Based on London Interbank Offered Rate forward rates. As of December 26, 2020 and December 28, 2019, the carrying amount of hedged fixed-rate debt was $0.2 billion and $2.2 billion, respectively, and classified on our balance sheet within short-term and long-term debt obligations. As of December 26, 2020 and December 28, 2019, the cumulative amount of fair value hedging adjustments to hedged fixed-rate debt was a $2 million gain and $5 million loss, respectively. As of December 26, 2020, the cumulative amount of fair value hedging adjustments on discontinued hedges was a $19 million loss, which is being amortized over the remaining life of the related debt obligations. (g)Based on recently reported market transactions of spot and forward rates. (h)Based on quoted contract prices on futures exchange markets. (i)Based on recently reported market transactions of swap arrangements. (j)Derivative assets and liabilities are presented on a gross basis on our balance sheet. Amounts subject to enforceable master netting arrangements or similar agreements which are not offset on the balance sheet as of December 26, 2020 and December 28, 2019 were not material. Collateral received or posted against our asset or liability positions was not material. Exchange-traded commodity futures are cash-settled on a daily basis and, therefore, not included in the table as of December 26, 2020. The carrying amounts of our cash and cash equivalents and short-term investments approximate fair value due to their short-term maturity. Our cash equivalents and short-term investments are classified as Level 2 in the fair value hierarchy. The fair value of our debt obligations as of December 26, 2020 and December 28, 2019 was $50 billion and $34 billion, respectively, based upon prices of similar instruments in the marketplace, which are considered Level 2 inputs. Losses/(gains) on our hedging instruments are categorized as follows:
| Fair Value/Non- designated Hedges |  | Cash Flow and Net Investment Hedges
| Losses/(Gains) Recognized in Income Statement(a) |  | Losses/(Gains) Recognized in Accumulated Other Comprehensive Loss |  | Losses/(Gains) Reclassified from Accumulated Other Comprehensive Loss into Income Statement(b)
2020 |  | 2019 |  | 2020 |  | 2019 |  | 2020 |  | 2019
Foreign exchange | $ | — |  |  | $ | (1) |  |  | $ | (9) |  |  | $ | 57 |  |  | $ | (43) |  |  | $ | 3 |
Interest rate | (6) |  |  | (64) |  |  | (96) |  |  | 67 |  |  | (129) |  |  | 7 |
Commodity | 53 |  |  | (17) |  |  | (21) |  |  | 7 |  |  | 56 |  |  | 4 |
Net investment | — |  |  | — |  |  | 235 |  |  | (30) |  |  | — |  |  | — |
Total | $ | 47 |  |  | $ | (82) |  |  | $ | 109 |  |  | $ | 101 |  |  | $ | (116) |  |  | $ | 14 |
(a)Foreign exchange derivative losses/gains are primarily included in selling, general and administrative expenses. Interest rate derivative losses/gains are primarily from fair value hedges and are included in net interest expense and other. These losses/gains are substantially offset by decreases/increases in the value of the underlying debt, which are also included in net interest expense and other. Commodity derivative losses/gains are included in either cost of sales or selling, general and administrative expenses, depending on the underlying commodity. (b)Foreign exchange derivative losses/gains are included in cost of sales. Interest rate derivative losses/gains are included in net interest expense and other. Commodity derivative losses/gains are included in either cost of sales or selling, general and administrative expenses, depending on the underlying commodity. Based on current market conditions, we expect to reclassify net losses of $7 million related to our cash flow hedges from accumulated other comprehensive loss into net income during the next 12 months.

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