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Derivative Financial Instruments

9 Months Ended

Sep. 01, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

We may use derivatives to partially offset our business exposure to foreign currency and interest rate risk on expected future cash flows and certain existing assets and liabilities. We do not use any of our derivative instruments for trading purposes.

We enter into master netting arrangements to mitigate credit risk in derivative transactions by permitting net settlement of transactions with the same counterparty. We do not offset fair value amounts recognized for derivative instruments under master netting arrangements. We also enter into collateral security agreements with certain of our counterparties to exchange cash collateral when the net fair value of certain derivative instruments fluctuates from contractually established thresholds.

Cash Flow Hedges

In countries outside the United States, we transact business in U.S. Dollars and in various other currencies. We may use foreign exchange option contracts and forward contracts to hedge a portion of our forecasted foreign currency denominated revenue and expenses. These foreign exchange contracts, carried at fair value, have maturities of up to 12 months.

In June 2019, we entered into Treasury lock agreements with large financial institutions which fixed benchmark U.S. Treasury rates for an aggregate notional amount of $1 billion of our future debt issuance. These derivative instruments hedged the impact of changes in the benchmark interest rate to future interest payments and were settled upon debt issuance in the first quarter of fiscal 2020. We incurred a loss related to the settlement of the instruments which is amortized to interest expense over the term of our debt due February 1, 2030. See Note 14 for further details regarding our debt.

As of September 1, 2023, we had net derivative gains on our foreign exchange option contracts expected to be recognized within the next 18 months, of which $5 million of net gains are expected to be recognized into revenue within the next 12 months. In addition, we had net derivative losses on our Treasury lock agreements, of which $5 million is expected to be recognized into interest expense within the next 12 months.

Non-Designated Hedges

Our derivatives not designated as hedging instruments consist of foreign currency forward contracts that we primarily use to hedge monetary assets and liabilities denominated in non-functional currencies.

Fair value asset derivatives are included in prepaid expenses and other current assets and fair value liability derivatives are included in accrued expenses on our condensed consolidated balance sheets. The fair value of derivative instruments as of September 1, 2023 and December 2, 2022 were as follows:


(in millions)	2023				2022
	Fair Value Asset Derivatives		Fair Value Liability Derivatives		Fair Value Asset Derivatives		Fair Value Liability Derivatives
Derivatives designated as hedging instruments:
Foreign exchange option contracts	$	79	$	—	$	36	$	—
Foreign exchange forward contracts	—		—		—		7


Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	3		8		15		8
Total derivatives	$	82	$	8	$	51	$	15

Gains and losses on derivative instruments, net of tax, recognized in our condensed consolidated statements of comprehensive income for the three and nine months ended September 1, 2023 and September 2, 2022 were primarily

associated with our foreign exchange option contracts. For the three and nine months ended September 1, 2023, we recognized $7 million of net gains and $5 million of net losses, respectively, in our condensed consolidated statements of comprehensive income from our foreign exchange option contracts. For the three and nine months ended September 2, 2022, we recognized $107 million and $193 million of net gains, respectively, in our condensed consolidated statements of comprehensive income from our foreign exchange option contracts.The effects of derivative instruments on our condensed consolidated statements of income for the three and nine months ended September 1, 2023 and September 2, 2022 were primarily associated with foreign exchange option contracts. For the three and nine months ended September 1, 2023, we reclassified $5 million and $36 million of net gains, respectively, from accumulated other comprehensive income into revenue resulting from our foreign exchange option contracts. Comparatively, for the three and nine months ended September 2, 2022, we reclassified $54 million and $105 million of net gains, respectively, from accumulated other comprehensive income into revenue resulting from our foreign exchange option contracts.