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DERIVATIVE INSTRUMENTS | 3 Months Ended
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Jan. 31, 2021
DERIVATIVE INSTRUMENTS |
DERIVATIVE INSTRUMENTS | (18) Derivative Instruments It is the Company’s policy that derivative transactions are executed only to manage exposures arising in the normal course of business and not for the purpose of creating speculative positions or trading. The Company’s financial services operations manage the relationship of the types and amounts of their funding sources to their receivable and lease portfolio in an effort to diminish risk due to interest rate and foreign currency fluctuations, while responding to favorable financing opportunities. The Company also has foreign currency exposures at some of its foreign and domestic operations related to buying, selling, and financing in currencies other than the functional currencies. In addition, the Company has interest rate exposure at certain equipment operations units for below market retail financing programs that are used as sales incentives and are offered for extended periods. All derivatives are recorded at fair value on the balance sheet. Cash collateral received or paid is not offset against the derivative fair values on the balance sheet. Each derivative is designated as a cash flow hedge, a fair value hedge, or remains undesignated. All designated hedges are formally documented as to the relationship with the hedged item as well as the risk-management strategy. Both at inception and on an ongoing basis the hedging instrument is assessed as to its effectiveness. If and when a derivative is determined not to be highly effective as a hedge, the underlying hedged transaction is no longer likely to occur, the hedge designation is removed, or the derivative is terminated, hedge accounting is discontinued. Cash Flow Hedges Certain interest rate contracts (swaps) were designated as hedges of future cash flows from borrowings. The total notional amounts of the receive-variable/pay-fixed interest rate contracts at January 31, 2021, November 1, 2020, and February 2, 2020 were $2,350 million, $1,550 million, and $2,900 million, respectively. Fair value gains or losses on cash flow hedges were recorded in OCI and are subsequently reclassified into interest expense in the same periods during which the hedged transactions affected earnings. These amounts offset the effects of interest rate changes on the related borrowings. The cash flows from these contracts were recorded in operating activities in the statement of consolidated cash flows. The amount of loss recorded in OCI at January 31, 2021 that is expected to be reclassified to interest expense or other operating expenses in the next twelve months if interest rates or exchange rates remain unchanged is approximately $6 million after-tax. There were no gains or losses reclassified from OCI to earnings based on the probability that the original forecasted transaction would not occur. Fair Value Hedges Certain interest rate contracts (swaps) were designated as fair value hedges of borrowings. The total notional amounts of the receive-fixed/pay-variable interest rate contracts at January 31, 2021, November 1, 2020, and February 2, 2020 were $8,333 million, $7,239 million, and $9,424 million, respectively. The fair value gains or losses on these contracts were generally offset by fair value gains or losses on the hedged items (fixed-rate borrowings) with both items recorded in interest expense. The amounts recorded in the consolidated balance sheet related to borrowings designated in fair value hedging relationships in millions of dollars follow:
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | Cumulative Increase (Decrease) of Fair |
​ | ​ | ​ | ​ | ​ | Value Hedging Adjustments Included in | ​
​ | ​ | ​ | ​ | ​ | the Carrying Amount | ​
​ | ​ | Carrying | ​ | Active | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Amount of | ​ | Hedging | ​ | Discontinued | ​ | ​ | ​ |
​ | ​ | Hedged Item | ​ | Relationships | ​ | Relationships | ​ | Total |
January 31, 2021 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Long-term borrowings due within one year* |  | $ | 159 |  | $ | 2 |  | $ | 1 |  | $ | 3 | ​
Long-term borrowings | ​ | ​ | 8,713 | ​ | ​ | 435 | ​ | ​ | 137 | ​ | ​ | 572 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
November 1, 2020 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Long-term borrowings due within one year* | ​ | $ | 155 | ​ | $ | 2 | ​ | $ | 3 | ​ | $ | 5 | ​
Long-term borrowings | ​ | ​ | 7,725 | ​ | ​ | 543 | ​ | ​ | 122 | ​ | ​ | 665 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
February 2, 2020 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Long-term borrowings due within one year* | ​ | $ | 220 | ​ | $ | (1) | ​ | $ | (5) | ​ | $ | (6) | ​
Long-term borrowings | ​ | ​ | 9,521 | ​ | ​ | 379 | ​ | ​ | (21) | ​ | ​ | 358 | ​
* Presented in short-term borrowings Derivatives not designated as hedging instruments The Company has certain interest rate contracts (swaps and caps), foreign exchange contracts (futures, forwards, and swaps), and cross-currency interest rate contracts (swaps), which were not formally designated as hedges. These derivatives were held as economic hedges for underlying interest rate or foreign currency exposures, primarily for certain borrowings, purchases or sales of inventory, and below market retail financing programs. The total notional amounts of these interest rate swaps at January 31, 2021, November 1, 2020, and February 2, 2020 were $8,801 million, $8,514 million, and $9,102 million, the foreign exchange contracts were $5,478 million, $4,903 million, and $5,249 million, and the cross-currency interest rate contracts were $145 million, $113 million, and $102 million, respectively. The fair value gains or losses from the interest rate contracts were recognized currently in interest expense or net sales and the gains or losses from foreign exchange contracts in cost of sales or other operating expenses, generally offsetting over time the expenses on the exposures being hedged. The cash flows from these non-designated contracts were recorded in operating activities in the statement of consolidated cash flows. Fair values of derivative instruments in the condensed consolidated balance sheet in millions of dollars follow:
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | January 31 |  | November 1 |  | February 2 |
Other Assets | ​ | 2021 | ​ | 2020 | ​ | 2020 |
Designated as hedging instruments: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest rate contracts |  | $ | 491 | ​ | $ | 586 | ​ | $ | 409 | ​
Total designated | ​ | ​ | 491 | ​ |  | 586 | ​ |  | 409 | ​
| ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Not designated as hedging instruments: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest rate contracts | ​ | ​ | 77 | ​ |  | 83 | ​ |  | 34 | ​
Foreign exchange contracts | ​ | ​ | 34 | ​ |  | 48 | ​ |  | 37 | ​
Cross-currency interest rate contracts | ​ | ​ | 3 | ​ |  | 8 | ​ |  | 1 | ​
Total not designated | ​ | ​ | 114 | ​ |  | 139 | ​ |  | 72 | ​
| ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Total derivative assets |  | $ | 605 | ​ | $ | 725 | ​ | $ | 481 | ​
| ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Accounts Payable and Accrued Expenses | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Designated as hedging instruments: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest rate contracts |  | $ | 31 | ​ | $ | 14 | ​ | $ | 17 | ​
Total designated | ​ | ​ | 31 | ​ | ​ | 14 | ​ | ​ | 17 | ​
| ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Not designated as hedging instruments: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest rate contracts | ​ | ​ | 66 | ​ | ​ | 74 | ​ | ​ | 40 | ​
Foreign exchange contracts | ​ | ​ | 76 | ​ |  | 26 | ​ |  | 40 | ​
Cross-currency interest rate contracts | ​ | ​ | 2 | ​ |  | 1 | ​ |  | 4 | ​
Total not designated | ​ | ​ | 144 | ​ |  | 101 | ​ |  | 84 | ​
| ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Total derivative liabilities |  | $ | 175 | ​ | $ | 115 | ​ | $ | 101 | ​
​ The classification and gains (losses) including accrued interest expense related to derivative instruments on the statement of consolidated income consisted of the following in millions of dollars: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Three Months Ended |
​ | ​ | January 31 | ​ | February 2 |
​ | ​ | 2021 | ​ | 2020 |
Fair Value Hedges: |  |  |  |  | ​ | ​ |
Interest rate contracts - Interest expense |  | $ | (55) | ​ | $ | 96 | ​
| ​ | ​ | ​ | ​ | ​ | ​ | ​
Cash Flow Hedges: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Recognized in OCI | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest rate contracts - OCI (pretax) |  | ​ | ​ | ​ |  | (2) | ​
| ​ | ​ | ​ | ​ | ​ | ​ | ​
Reclassified from OCI | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest rate contracts - Interest expense |  | ​ | (5) | ​ |  | (2) | ​
| ​ | ​ | ​ | ​ | ​ | ​ | ​
Not Designated as Hedges: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest rate contracts - Net sales | ​ | ​ | ​ | ​ | $ | (4) | ​
Interest rate contracts - Interest expense * |  | $ | (4) | ​ | ​ | 2 | ​
Foreign exchange contracts - Cost of sales |  | ​ | (52) | ​ |  | 11 | ​
Foreign exchange contracts - Other operating * |  | ​ | (126) | ​ |  | (1) | ​
Total not designated | ​ | $ | (182) | ​ | $ | 8 | ​
* Includes interest and foreign exchange gains (losses) from cross-currency interest rate contracts. Counterparty Risk and Collateral Derivative instruments are subject to significant concentrations of credit risk to the banking sector. The Company manages individual counterparty exposure by setting limits that consider the credit rating of the counterparty, the credit default swap spread of the counterparty, and other financial commitments and exposures between the Company and the counterparty banks. All interest rate derivatives are transacted under International Swaps and Derivatives Association (ISDA) documentation. Some of these agreements include credit support provisions. Each master agreement permits the net settlement of amounts owed in the event of default or termination. Certain of the Company’s derivative agreements contain credit support provisions that may require the Company to post collateral based on the size of the net liability positions and credit ratings. The aggregate fair value of all derivatives with credit-risk-related contingent features that were in a net liability position at January 31, 2021, November 1, 2020, and February 2, 2020, was $99 million, $89 million, and $60 million, respectively. In accordance with the limits established in these agreements, the Company posted no cash collateral at January 31, 2021, November 1, 2020, and February 2, 2020. In addition, the Company paid $8 million of collateral either in cash or pledged securities that was outstanding at both January 31, 2021 and November 1, 2020 to participate in an international futures market to hedge currency exposure, not included in the table below. Derivatives are recorded without offsetting for netting arrangements or collateral. The impact on the derivative assets and liabilities related to netting arrangements and any collateral received or paid in millions of dollars follows: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Gross Amounts | ​ | Netting | ​ | ​ | ​ | ​ | ​ |
January 31, 2021 |  | Recognized |  | Arrangements |  | Collateral |  | Net Amount |
Assets |  | $ | 605 |  | $ | (106) |  | $ | (186) |  | $ | 313 | ​
Liabilities | ​ | ​ | 175 | ​ | ​ | (106) | ​ | ​ | ​ | ​ | ​ | 69 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Gross Amounts | ​ | Netting | ​ | ​ | ​ | ​ | ​ |
November 1, 2020 |  | Recognized |  | Arrangements |  | Collateral |  | Net Amount |
Assets | ​ | $ | 725 |  | $ | (93) |  | $ | (274) |  | $ | 358 | ​
Liabilities | ​ | ​ | 115 | ​ |  | (93) | ​ | ​ | ​ | ​ | ​ | 22 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | Gross Amounts |  | Netting |  | ​ |  | ​ | ​ |
February 2, 2020 | ​ | Recognized | ​ | Arrangements | ​ | Collateral | ​ | Net Amount |
Assets | ​ | $ | 481 | ​ | $ | (60) | ​ | $ | (26) | ​ | $ | 395 | ​
Liabilities | ​ |  | 101 | ​ |  | (60) | ​ | ​ | ​ | ​ |  | 41 | ​
​

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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