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Derivatives and Foreign Exchange Risk Management | 9 Months Ended
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Jan. 29, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivatives and Foreign Exchange Risk Management | Derivatives and Foreign Exchange Risk Management The Company uses operational and economic hedges, as well as currency exchange rate derivative contracts and interest rate derivative instruments, to manage the impact of currency exchange and interest rate changes on earnings and cash flows. In addition, the Company uses cross currency interest rate swaps to manage currency risk related to certain debt. In order to minimize earnings and cash flow volatility resulting from currency exchange rate changes, the Company enters into derivative instruments, principally forward currency exchange rate contracts. These contracts are designed to hedge anticipated foreign currency transactions and changes in the value of specific assets and liabilities. At inception of the contract, the derivative is designated as either a freestanding derivative or a cash flow hedge. The primary currencies of the derivative instruments are the Euro and Japanese Yen. The Company does not enter into currency exchange rate derivative contracts for speculative purposes. The gross notional amount of all currency exchange rate derivative instruments outstanding at January 29, 2016 and April 24, 2015 was $10.739 billion and $9.782 billion, respectively. The aggregate currency exchange rate gains for the three and nine months ended January 29, 2016 were $69 million and $167 million, respectively. The aggregate currency exchange rate gains for the three and nine months ended January 23, 2015 were $27 million and $29 million, respectively. The information that follows explains the various types of derivatives and financial instruments used by the Company, how and why the Company uses such instruments, and how such instruments impact the Company’s condensed consolidated balance sheets, statements of income, and statements of cash flows. Freestanding Derivative Contracts Freestanding derivative contracts are used to offset the Company’s exposure to the change in value of specific foreign currency denominated assets and liabilities and to offset variability of cash flows associated with forecasted transactions denominated in a foreign currency. The gross notional amount of these contracts, not designated as hedging instruments, outstanding at January 29, 2016 and April 24, 2015, was $4.939 billion and $4.713 billion, respectively. The amount and location of the gains (losses) in the condensed consolidated statements of income related to derivative instruments, not designated as hedging instruments, for the three and nine months ended January 29, 2016 and January 23, 2015 are as follows:
(in millions) |  |  |  | Three months ended
Derivatives Not Designated as Hedging Instruments |  | Location |  | January 29, 2016 |  | January 23, 2015
Foreign currency exchange rate contracts gains (losses) |  | Other expense, net |  | $ | 19 |  |  | $ | 153 |
(in millions) |  |  |  | Nine months ended
Derivatives Not Designated as Hedging Instruments |  | Location |  | January 29, 2016 |  | January 23, 2015
Foreign currency exchange rate contracts gains (losses) |  | Other expense, net |  | $ | 35 |  |  | $ | 202 |
Cash Flow Hedges Foreign Currency Exchange Rate Risk Forward contracts designated as cash flow hedges are designed to hedge the variability of cash flows associated with forecasted transactions denominated in a foreign currency that will take place in the future. No gains or losses relating to ineffectiveness of foreign currency cash flow hedges were recognized in earnings during the three or nine months ended January 29, 2016 or January 23, 2015. No components of the hedge contracts were excluded in the measurement of hedge ineffectiveness and no hedges were derecognized or discontinued during the three or nine months ended January 29, 2016 or January 23, 2015. The gross notional amount of these contracts, designated as cash flow hedges, outstanding at January 29, 2016 and April 24, 2015, were $5.800 billion and $5.069 billion, respectively, and will mature within the subsequent three-year period. The amount of gains (losses) and location of the gains (losses) in the condensed consolidated statements of income and other comprehensive (loss) income (OCI) related to foreign currency exchange rate contract derivative instruments designated as cash flow hedges for the three months ended January 29, 2016 and January 23, 2015 are as follows:
Three months ended January 29, 2016 |  |  |  |  |  |  |  |
|  | Gross Gains (Losses) Recognized in OCI on Effective Portion of Derivative |  | Effective Portion of Gains (Losses) on Derivative Reclassified from AOCI into Income
(in millions) |  |
Derivatives in Cash Flow Hedging Relationships |  | Amount |  | Location |  | Amount
Foreign currency exchange rate contracts |  | $ | 104 |  |  | Other expense, net |  | $ | 111 |
|  |  |  |  | Cost of products sold |  | (9 | )
Total |  | $ | 104 |  |  |  |  | $ | 102 |
Three months ended January 23, 2015 |  |  |  |  |  |  |  |
|  | Gross Gains (Losses) Recognized in OCI on Effective Portion of Derivative |  | Effective Portion of Gains (Losses) on Derivative Reclassified from AOCI into Income
(in millions) |  |
Derivatives in Cash Flow Hedging Relationships |  | Amount |  | Location |  | Amount
Foreign currency exchange rate contracts |  | $ | 265 |  |  | Other expense, net |  | $ | 65 |
|  |  |  |  | Cost of products sold |  | (27 | )
Total |  | $ | 265 |  |  |  |  | $ | 38 |
Nine months ended January 29, 2016 |  |  |  |  |  |  |  |
|  | Gross Gains (Losses) Recognized in OCI on Effective Portion of Derivative |  | Effective Portion of Gains (Losses) on Derivative Reclassified from AOCI into Income
(in millions) |  |
Derivatives in Cash Flow Hedging Relationships |  | Amount |  | Location |  | Amount
Foreign currency exchange rate contracts |  | $ | 108 |  |  | Other expense, net |  | $ | 295 |
|  |  |  |  | Cost of products sold |  | (45 | )
Total |  | $ | 108 |  |  |  |  | $ | 250 |
Nine months ended January 23, 2015 |  |  |  |  |  |  |  |
|  | Gross Gains (Losses) Recognized in OCI on Effective Portion of Derivative |  | Effective Portion of Gains (Losses) on Derivative Reclassified from AOCI into Income
(in millions) |  |
Derivatives in Cash Flow Hedging Relationships |  | Amount |  | Location |  | Amount
Foreign currency exchange rate contracts |  | $ | 556 |  |  | Other expense, net |  | $ | 86 |
|  |  |  |  | Cost of products sold |  | (28 | )
Total |  | $ | 556 |  |  |  |  | $ | 58 |
Forecasted Debt Issuance Interest Rate Risk Forward starting interest rate derivative instruments designated as cash flow hedges are designed to manage the exposure to interest rate volatility with regard to future issuances of fixed-rate debt. No gains or losses relating to ineffectiveness of forward starting interest rate derivative instruments were recognized in earnings during the three or nine months ended January 29, 2016 or January 23, 2015. No components of the hedge contracts were excluded in the measurement of hedge ineffectiveness during the three or nine months ended January 29, 2016 or January 23, 2015. During the third quarter of fiscal year 2015, the company issued the 2015 Senior Notes for which the Company had previously entered into forward starting interest rate derivatives with a notional amount of $5.850 billion. Upon issuance of the 2015 Senior Notes, these swaps were terminated with no material ineffectiveness on the contracts which were in a net liability position, resulting in cash payment of $79 million. As of January 29, 2016, the Company had $300 million of fixed pay, forward starting interest rate swaps with a weighted average fixed-rate of 3.10 percent in anticipation of planned debt issuances in fiscal year 2017. For the three and nine months ended January 29, 2016, the Company reclassified $3 million and $9 million, respectively, of the effective portion of the net losses on forward starting interest rate derivative instruments from accumulated other comprehensive loss to interest expense, net. For the three and nine months ended January 23, 2015, the Company reclassified $4 million and $8 million, respectively, of the effective portion of the net losses on forward starting interest rate derivative instruments from accumulated other comprehensive loss to interest expense, net. The unrealized losses on outstanding forward starting interest rate swap derivative instruments as of January 29, 2016 and April 24, 2015 were $41 million and $71 million, respectively. Unrealized losses on outstanding forward starting interest rate swap derivative instruments were recorded in other long-term liabilities, with the offset recorded in accumulated other comprehensive loss in the condensed consolidated balance sheets. As of January 29, 2016 and April 24, 2015, the Company had $148 million and $210 million, respectively, in after-tax net unrealized gains associated with cash flow hedging instruments recorded in accumulated other comprehensive loss. The Company expects that $174 million of after-tax net unrealized gains as of January 29, 2016 will be reclassified into the condensed consolidated statements of income over the next 12 months. Fair Value Hedges Interest rate derivative instruments designated as fair value hedges are designed to manage the exposure to interest rate movements and to reduce borrowing costs by converting fixed-rate debt into floating-rate debt. Under these agreements, the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. As of both January 29, 2016 and April 24, 2015, the Company had interest rate swaps in gross notional amounts of $1.425 billion and $2.025 billion, respectively, designated as fair value hedges of underlying fixed-rate senior note obligations. For additional information regarding the terms of the Company’s interest rate swap agreements, refer to Note 9 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended April 24, 2015. The market value of outstanding interest rate swap agreements was a net $47 million unrealized gain, and the market value of the hedged item was a net $47 million unrealized loss at January 29, 2016, which were recorded in other assets, prepaid expenses and other current assets, and other long-term liabilities with the offsets recorded in long-term debt and short-term borrowings in the condensed consolidated balance sheets. No hedge ineffectiveness was recorded as a result of these fair value hedges for the three or nine months ended January 29, 2016 or January 23, 2015. During the three and nine months ended January 29, 2016 and January 23, 2015, the Company did not have any significant ineffective fair value hedging instruments. In addition, the Company did not recognize any significant gains or losses during the three or nine months ended January 29, 2016 or January 23, 2015 on firm commitments that no longer qualify as fair value hedges. Balance Sheet Presentation The following tables summarize the location and fair value amounts of derivative instruments reported in the condensed consolidated balance sheets as of January 29, 2016 and April 24, 2015. The fair value amounts are presented on a gross basis and are segregated between derivatives that are designated and qualify as hedging instruments and those that are not and are further segregated by type of contract within those two categories.
January 29, 2016 |  |  |  |  |  |  |  |  |
| Asset Derivatives |  | Liability Derivatives
(in millions) | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value
Derivatives designated as hedging instruments |  |  |  |  |  |  |  |  |
Interest rate contracts | Prepaid expenses and other current assets |  | $ | 1 |  |  | Other accrued expenses |  | $ | — |
Foreign currency exchange rate contracts | Prepaid expenses and other current assets |  | 281 |  |  | Other accrued expenses |  | 13 |
Interest rate contracts | Other assets |  | 87 |  |  | Other long-term liabilities |  | 41 |
Foreign currency exchange rate contracts | Other assets |  | 85 |  |  | Other long-term liabilities |  | 8 |
Total derivatives designated as hedging instruments |  |  | $ | 454 |  |  |  |  | $ | 62 |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |
Commodity derivatives | Prepaid expenses and other current assets |  | $ | — |  |  | Other accrued expenses |  | $ | 5 |
Foreign currency exchange rate contracts | Prepaid expenses and other current assets |  | 21 |  |  | Other accrued expenses |  | 19 |
Cross currency interest rate contracts | Other assets |  | 21 |  |  | Other long-term liabilities |  | 5 |
Total derivatives not designated as hedging instruments |  |  | $ | 42 |  |  |  |  | $ | 29 |
Total derivatives |  |  | $ | 496 |  |  |  |  | $ | 91 |
April 24, 2015 |  |  |  |  |  |  |  |  |
| Asset Derivatives |  | Liability Derivatives
(in millions) | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value
Derivatives designated as hedging instruments |  |  |  |  |  |  |  |  |
Interest rate contracts | Prepaid expenses and other current assets |  | $ | 10 |  |  | Other accrued expenses |  | $ | — |
Foreign currency exchange rate contracts | Prepaid expenses and other current assets |  | 382 |  |  | Other accrued expenses |  | 12 |
Interest rate contracts | Other assets |  | 79 |  |  | Other long-term liabilities |  | 71 |
Foreign currency exchange rate contracts | Other assets |  | 143 |  |  | Other long-term liabilities |  | 3 |
Total derivatives designated as hedging instruments |  |  | $ | 614 |  |  |  |  | $ | 86 |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |
Foreign currency exchange rate contracts | Prepaid expenses and other current assets |  | $ | 119 |  |  | Other accrued expenses |  | $ | 30 |
Total derivatives not designated as hedging instruments |  |  | $ | 119 |  |  |  |  | $ | 30 |
Total derivatives |  |  | $ | 733 |  |  |  |  | $ | 116 |
The following table provides information by level for the derivative assets and liabilities that are measured at fair value on a recurring basis as of October 30, 2015 and April 24, 2015:
(in millions) | January 29, 2016 |  | April 24, 2015
| Level 1 |  | Level 2 |  | Level 3 |  | Level 1 |  | Level 2 |  | Level 3
Derivative Assets | $ | 387 |  |  | $ | 109 |  |  | $ | — |  |  | $ | 644 |  |  | $ | 89 |  |  | $ | — |
Derivative Liabilities | 40 |  |  | 51 |  |  | — |  |  | 45 |  |  | 71 |  |  | — |
The Company has elected to present the fair value of derivative assets and liabilities within the condensed consolidated balance sheets on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. The following table provides information as if the Company had elected to offset the asset and liability balances of derivative instruments, netted in accordance with various criteria as stipulated by the terms of the master netting arrangements with each of the counterparties. Derivatives not subject to master netting arrangements are not eligible for net presentation.
January 29, 2016 |  |  |  | Gross Amount Not Offset on the Balance Sheet |  |
(in millions) |  | Gross Amount of Recognized Assets (Liabilities) |  | Financial Instruments |  | Collateral (Received) or Posted |  | Net Amount
Derivative Assets |  |  |  |  |  |  |  |
Foreign currency exchange rate contracts |  | $ | 387 |  |  | $ | (63 | ) |  | $ | (197 | ) |  | $ | 127 |
Interest rate contracts |  | 88 |  |  | (6 | ) |  | (15 | ) |  | 67 |
Cross currency interest rate contracts |  | 21 |  |  | — |  |  | — |  |  | 21 |
|  | $ | 496 |  |  | $ | (69 | ) |  | $ | (212 | ) |  | $ | 215 |
Derivative Liabilities |  |  |  |  |  |  |  |
Foreign currency exchange rate contracts |  | $ | (40 | ) |  | $ | 33 |  |  | $ | — |  |  | $ | (7 | )
Interest rate contracts |  | (41 | ) |  | 36 |  |  | — |  |  | (5 | )
Cross currency interest rate contracts |  | (5 | ) |  | — |  |  | — |  |  | (5 | )
Commodity derivatives |  | (5 | ) |  | — |  |  | — |  |  | (5 | )
|  | $ | (91 | ) |  | $ | 69 |  |  | $ | — |  |  | $ | (22 | )
Total |  | $ | 405 |  |  | $ | — |  |  | $ | (212 | ) |  | $ | 193 |
April 24, 2015 |  |  |  | Gross Amount Not Offset on the Balance Sheet |  |
(in millions) |  | Gross Amount of Recognized Assets (Liabilities) |  | Financial Instruments |  | Collateral (Received) or Posted |  | Net Amount
Derivative Assets |  |  |  |  |  |  |  |
Foreign currency exchange rate contracts |  | $ | 644 |  |  | $ | (61 | ) |  | $ | (325 | ) |  | $ | 258 |
Interest rate contracts |  | 89 |  |  | (10 | ) |  | (13 | ) |  | 66 |
|  | $ | 733 |  |  | $ | (71 | ) |  | $ | (338 | ) |  | $ | 324 |
Derivative Liabilities |  |  |  |  |  |  |  |
Foreign currency exchange rate contracts |  | $ | (45 | ) |  | $ | 31 |  |  | $ | — |  |  | $ | (14 | )
Interest rate contracts |  | (71 | ) |  | 40 |  |  | 8 |  |  | (23 | )
|  | $ | (116 | ) |  | $ | 71 |  |  | $ | 8 |  |  | $ | (37 | )
Total |  | $ | 617 |  |  | $ | — |  |  | $ | (330 | ) |  | $ | 287 |

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