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Derivatives and Currency Exchange Risk Management | 6 Months Ended
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Oct. 30, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivatives and Currency Exchange Risk Management | Derivatives and Currency Exchange Risk Management The Company uses operational and economic hedges, including 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. Currencies of our derivative instruments include the Euro, Japanese Yen, Chinese Yuan, and others. 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 was $18.5 billion and $11.9 billion at October 30, 2020 and April 24, 2020, respectively. The Company also uses derivative and non-derivative instruments to manage the impact of currency exchange rate changes on net investments in foreign currency-denominated operations. The information that follows explains the various types of derivatives and financial instruments used by the Company, reasons the Company uses such instruments, and the impact such instruments have on the Company’s consolidated balance sheets and statements of income. Freestanding Derivative Contracts Freestanding derivative contracts are primarily 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 foreign currencies. The gross notional amount of the Company's freestanding currency exchange rate contracts outstanding at October 30, 2020 and April 24, 2020 was $10.7 billion and $4.9 billion, respectively. The Company's freestanding currency exchange rate contracts are not designated as hedges, and therefore, changes in the value of these contracts are recognized in earnings, thereby offsetting the current earnings effect of the related change in value of foreign-currency-denominated assets, liabilities, and cash flows. The Company also uses total return swaps to hedge the liability of a non-qualified, deferred compensation plan. The gross notional amount of the Company's total return swaps outstanding at October 30, 2020 and April 24, 2020 was $197 million and $181 million, respectively. The Company's total return swaps are not designated as hedges, and therefore, changes in the value of these instruments are recognized in earnings. The cash flows related to the Company's freestanding derivative contracts are reported as operating activities in the consolidated statements of cash flows. The amounts and classification of the (gains) losses in the consolidated statements of income related to derivative instruments not designated as hedging instruments for the three and six months ended October 30, 2020 and October 25, 2019 were as follows:
|  |  |  | Three months ended |  | Six months ended
(in millions) |  | Classification |  | October 30, 2020 |  | October 25, 2019 |  | October 30, 2020 |  | October 25, 2019
Currency exchange rate contracts |  | Other operating expense, net |  | $ | (2) |  |  | $ | (12) |  |  | $ | 125 |  |  | $ | (6) |
Total return swaps |  | Other operating expense, net |  | (1) |  |  | 1 |  |  | (28) |  |  | (4) |
Total |  |  |  | $ | (3) |  |  | $ | (11) |  |  | $ | 97 |  |  | $ | (10) |
Cash Flow Hedges 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. The gross notional amount of these contracts, designated as cash flow hedges, outstanding at October 30, 2020 and April 24, 2020 was $7.8 billion and $7.0 billion, respectively, and will mature within the subsequent three-year period. For derivative instruments that are designated and qualify as a cash flow hedge, the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive loss. The gain or loss on the derivative instrument is reclassified into earnings and is included in other operating expense, net in the consolidated statements of income in the same period or periods during which the hedged transaction affects earnings. Amounts excluded from the measurement of hedge effectiveness are recognized in earnings in the current period. The cash flows related to all of the Company's derivative instruments designated as cash flow hedges are reported as operating activities in the consolidated statements of cash flows. No components of the hedge contracts were excluded in the measurement of hedge effectiveness, and no forward contracts designated as cash flow hedges were derecognized or discontinued during the three and six months ended October 30, 2020 and October 25, 2019. The amount of the (gains) losses recognized in accumulated other comprehensive loss (AOCI) related to the currency exchange rate contract derivative instruments designated as cash flow hedges for the three and six months ended October 30, 2020 and October 25, 2019 were as follows:
|  | Three months ended |  | Six months ended
(in millions) |  | October 30, 2020 |  | October 25, 2019 |  | October 30, 2020 |  | October 25, 2019
Currency exchange rate contracts |  | $ | 63 |  |  | $ | (76) |  |  | $ | 451 |  |  | $ | (103) |
The amount of the (gains) losses recognized in the consolidated statements of income related to derivative instruments designated as cash flow hedges for the three and six months ended October 30, 2020 and October 25, 2019 were as follows:
|  | Three months ended |  | Six months ended
|  | October 30, 2020 |  | October 25, 2019 |  | October 30, 2020 |  | October 25, 2019
(in millions) |  | Other operating expense, net |  | Other operating expense, net |  | Other operating expense, net |  | Other operating expense, net
Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of cash flow hedges are recorded |  | $ | 149 |  |  | $ | 149 |  |  | $ | 35 |  |  | $ | 127 |
Currency exchange rate contracts designated as cash flow hedges: |  |  |  |  |  |  |  |
Amount of gain reclassified from AOCI into income |  | (2) |  |  | (68) |  |  | (55) |  |  | (125) |
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. The gains or losses on forward starting interest rate derivative instruments that are designated and qualify as cash flow hedges are reported as a component of accumulated other comprehensive loss. Beginning in the period in which the planned debt issuance occurs and the related derivative instruments are terminated, the gains or losses are then reclassified into interest expense over the term of the related debt. For the three and six months ended October 30, 2020 and October 25, 2019, the reclassifications of net (gains) losses on forward starting interest rate derivative instruments from accumulated other comprehensive loss to interest expense were not significant. At October 30, 2020 and April 24, 2020, the Company had $129 million in after-tax net unrealized losses and $266 million in after-tax net unrealized gains, respectively, associated with cash flow hedging instruments recorded in accumulated other comprehensive loss. The Company expects that $34 million of after-tax net unrealized losses at October 30, 2020 will be recognized in the consolidated statements of income over the next 12 months. Net Investment Hedges The Company has designated Euro-denominated and Japanese Yen-denominated debt as net investment hedges of certain of its European and Japanese operations to manage the exposure to currency and exchange rate movements for foreign currency-denominated net investments in foreign operations. At October 30, 2020, the Company had €16.0 billion, or $18.9 billion, of outstanding Euro-denominated debt designated as a hedge of its net investment in certain of its European operations, and ¥300 billion, or $2.9 billion, of outstanding Yen-denominated debt designated as a hedge of its net investment in certain of its Japanese operations. The Euro-denominated debt will mature in fiscal years 2023 through 2051 and the Yen-denominated debt will mature in fiscal year 2022. Additionally, during the first quarter of fiscal year 2020, the Company entered into and settled forward currency exchange rate contracts to manage the exposure to exchange rate movements in anticipation of the issuance of Euro-denominated senior notes. Certain of these forward currency exchange rate contracts were designated as a net investment hedge of certain of the Company's European operations. These contracts matured in conjunction with the issuance of Euro-denominated debt in the first quarter of fiscal year 2020. For instruments that are designated and qualify as net investment hedges, the gains or losses are reported as a component of accumulated other comprehensive loss. The gains or losses are reclassified into earnings upon a liquidation event or deconsolidation of the foreign subsidiary. Amounts excluded from the assessment of effectiveness are recognized in other operating expense, net. The cash flows related to the Company's derivative instruments designated as net investment hedges are reported as investing activities in the consolidated statements of cash flows. At October 30, 2020 and April 24, 2020, the Company had $1.0 billion in after-tax unrealized losses and $236 million in after-tax unrealized gains, respectively, associated with net investment hedges recorded in accumulated other comprehensive loss. The Company does not expect any of the after-tax unrealized gains at October 30, 2020 to be recognized in the consolidated statements of income over the next 12 months. The Company did not recognize any gains or losses during the three and six months ended October 30, 2020 or October 25, 2019 on instruments that no longer qualify as net investment hedges. The amount and classifications of the (gains) losses recognized in the consolidated statements of income for the portion of the net investment hedges excluded from the measurement of hedge effectiveness were as follows:
|  |  |  | Three months ended |  | Six months ended
(in millions) |  | Classification |  | October 30, 2020 |  | October 25, 2019 |  | October 30, 2020 |  | October 25, 2019
Net investment hedges |  | Other operating expense, net |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 7 |
The amount of the (gains) losses recognized in AOCI related to instruments designated as net investment hedges for the three and six months ended October 30, 2020 and October 25, 2019 were as follows:
|  | Three months ended |  | Six months ended
(in millions) |  | October 30, 2020 |  | October 25, 2019 |  | October 30, 2020 |  | October 25, 2019
Net investment hedges |  | $ | 164 |  |  | $ | (53) |  |  | $ | 1,276 |  |  | $ | (152) |
Balance Sheet Presentation The following tables summarize the balance sheet classification and fair value of derivative instruments included in the consolidated balance sheets at October 30, 2020 and April 24, 2020. 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 designated and do not qualify as hedging instruments and are further segregated by type of contract within those two categories.
| October 30, 2020
| Derivative Assets |  | Derivative Liabilities
(in millions) | Balance Sheet Classification |  | Fair Value |  | Balance Sheet Classification |  | Fair Value
Derivatives designated as hedging instruments |  |  |  |  |  |  |
Currency exchange rate contracts | Other current assets |  | $ | 44 |  |  | Other accrued expenses |  | $ | 88 |
Currency exchange rate contracts | Other assets |  | 6 |  |  | Other liabilities |  | 70 |
Total derivatives designated as hedging instruments |  |  | 50 |  |  |  |  | 158 |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |
Currency exchange rate contracts | Other current assets |  | 33 |  |  | Other accrued expenses |  | 43 |
Total return swaps | Other current assets |  | 2 |  |  | Other accrued expenses |  | — |
Cross-currency interest rate contracts | Other current assets |  | 2 |  |  | Other accrued expenses |  | — |
Total derivatives not designated as hedging instruments |  |  | 37 |  |  |  |  | 43 |
Total derivatives |  |  | $ | 87 |  |  |  |  | $ | 201 |
| April 24, 2020
| Derivative Assets |  | Derivative Liabilities
(in millions) | Balance Sheet Classification |  | Fair Value |  | Balance Sheet Classification |  | Fair Value
Derivatives designated as hedging instruments |  |  |  |  |  |  |
Currency exchange rate contracts | Other current assets |  | $ | 271 |  |  | Other accrued expenses |  | $ | 2 |
Currency exchange rate contracts | Other assets |  | 103 |  |  | Other liabilities |  | 2 |
Total derivatives designated as hedging instruments |  |  | 374 |  |  |  |  | 4 |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |
Currency exchange rate contracts | Other current assets |  | 25 |  |  | Other accrued expenses |  | 13 |
Total return swaps | Other current assets |  | — |  |  | Other accrued expenses |  | 25 |
Cross-currency interest rate contracts | Other current assets |  | 3 |  |  | Other accrued expenses |  | — |
Total derivatives not designated as hedging instruments |  |  | 28 |  |  |  |  | 38 |
Total derivatives |  |  | $ | 402 |  |  |  |  | $ | 42 |
The following table provides information by level for the derivative assets and liabilities that are measured at fair value on a recurring basis.
| October 30, 2020 |  | April 24, 2020
(in millions) | Level 1 |  | Level 2 |  |  |  | Level 1 |  | Level 2 |  |
Derivative assets | $ | 83 |  |  | $ | 4 |  |  |  |  | $ | 399 |  |  | $ | 3 |  |  |
Derivative liabilities | 201 |  |  | — |  |  |  |  | 17 |  |  | 25 |  |  |
The Company has elected to present the fair value of derivative assets and liabilities within the 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 cash flows related to collateral posted and received are reported gross as investing and financing activities, respectively, in the consolidated statements of cash flows. The following tables provide 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.
|  | October 30, 2020
|  |  |  | Gross Amount Not Offset on the Balance Sheet |  |  |  |
(in millions) |  | Gross Amount of Recorded Assets (Liabilities) |  | Financial Instruments |  | Cash Collateral Posted (Received) |  |  |  | Net Amount
Derivative assets: |  |  |  |  |  |  |  |  |  |
Currency exchange rate contracts |  | $ | 83 |  |  | $ | (80) |  |  | $ | — |  |  |  |  | $ | 3 |
Cross-currency interest rate contracts |  | 2 |  |  | — |  |  | — |  |  |  |  | 2 |
Total return swaps |  | 2 |  |  | — |  |  | — |  |  |  |  | 2 |
|  | 87 |  |  | (80) |  |  | — |  |  |  |  | 7 |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |
Currency exchange rate contracts |  | (201) |  |  | 80 |  |  | 17 |  |  |  |  | (104) |
Total |  | $ | (114) |  |  | $ | — |  |  | $ | 17 |  |  |  |  | $ | (97) |
|  | April 24, 2020
|  |  |  | Gross Amount Not Offset on the Balance Sheet |  |  |  |
(in millions) |  | Gross Amount of Recorded Assets (Liabilities) |  | Financial Instruments |  | Cash Collateral Posted (Received) |  |  |  | Net Amount
Derivative assets: |  |  |  |  |  |  |  |  |  |
Currency exchange rate contracts |  | $ | 399 |  |  | $ | (17) |  |  | $ | (48) |  |  |  |  | $ | 334 |
Cross-currency interest rate contracts |  | 3 |  |  | — |  |  | — |  |  |  |  | 3 |
|  | 402 |  |  | (17) |  |  | (48) |  |  |  |  | 337 |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |
Currency exchange rate contracts |  | (17) |  |  | 17 |  |  | — |  |  |  |  | — |
Total return swaps |  | (25) |  |  | — |  |  | — |  |  |  |  | (25) |
|  | (42) |  |  | 17 |  |  | — |  |  |  |  | (25) |
Total |  | $ | 360 |  |  | $ | — |  |  | $ | (48) |  |  |  |  | $ | 312 |

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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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