Financial Instruments

3 Months Ended

Mar. 31, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Note 9. Financial Instruments

Fair Value of Derivative Instruments:

Derivative instruments were recorded at fair value in the condensed consolidated balance sheets as follows:


	As of March 31, 2022				As of December 31, 2021
	Asset Derivatives		Liability Derivatives		Asset Derivatives		Liability Derivatives
	(in millions)
Derivatives designated as accounting hedges:
Currency exchange contracts	$	1	$	3	$	—	$	—
Interest rate contracts	27		3		27		17
Net investment hedge derivative contracts (1)	137		51		117		45
	$	165	$	57	$	144	$	62
Derivatives not designated as accounting hedges:
Currency exchange contracts	$	135	$	124	$	156	$	40
Commodity contracts	589		220		387		137
Equity method investment contracts(2)	—		3		—		3
	$	724	$	347	$	543	$	180
Total fair value	$	889	$	404	$	687	$	242

(1)Net investment hedge derivative contracts consist of cross-currency interest rate swaps, forward contracts and options. We also designate some of our non-U.S. dollar denominated debt to hedge a portion of our net investments in our non-U.S. operations. This debt is not reflected in the table above, but is included in long-term debt discussed in Note 8, Debt and Borrowing Arrangements. Both net investment hedge derivative contracts and non-U.S. dollar denominated debt acting as net investment hedges are also disclosed in the Derivative Volume table and the Hedges of Net Investments in International Operations section appearing later in this footnote.

(2)Equity method investment contracts consist of the bifurcated embedded derivative option that was a component of the September 20, 2021 €300 million exchangeable bonds issuance. Refer to Note 8, Debt and Borrowing Arrangements.

Derivatives designated as accounting hedges include cash flow and net investment hedge derivative contracts. Our currency exchange, commodity derivative and equity method investment contracts are economic hedges that are not designated as accounting hedges. We record derivative assets and liabilities on a gross basis on our condensed consolidated balance sheets. The fair value of our asset derivatives is recorded within other current assets and other assets and the fair value of our liability derivatives is recorded within other current liabilities and other liabilities.

The fair values (asset/(liability)) of our derivative instruments were determined using:


	As of March 31, 2022
	Total Fair Value of Net Asset/(Liability)		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in millions)
Currency exchange contracts	$	9	$	—	$	9	$	—
Commodity contracts	369		213		156		—
Interest rate contracts	24		—		24		—
Net investment hedge contracts	86		—		86		—
Equity method investment contracts	(3)		—		(3)		—
Total derivatives	$	485	$	213	$	272	$	—


	As of December 31, 2021
	Total Fair Value of Net Asset/(Liability)		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in millions)
Currency exchange contracts	$	116	$	—	$	116	$	—
Commodity contracts	251		161		90		—
Interest rate contracts	10		—		10		—
Net investment hedge contracts	71		—		71		—
Equity method investment contracts	(3)		—		(3)		—
Total derivatives	$	445	$	161	$	284	$	—

Level 1 financial assets and liabilities consist of exchange-traded commodity futures and listed options. The fair value of these instruments is determined based on quoted market prices on commodity exchanges.

Level 2 financial assets and liabilities consist primarily of over-the-counter (“OTC”) currency exchange forwards, options and swaps; commodity forwards and options; net investment hedge contracts; and interest rate swaps. Our currency exchange contracts are valued using an income approach based on observable market forward rates less the contract rate multiplied by the notional amount. Commodity derivatives are valued using an income approach based on the observable market commodity index prices less the contract rate multiplied by the notional amount or based on pricing models that rely on market observable inputs such as commodity prices. Our bifurcated exchange options are valued, as derivative instrument liabilities, using the Black-Scholes option pricing model. This model requires assumptions related to the market price of the underlying note and associated credit spread combined with the share of price, expected dividend yield, and expected volatility of the JDE Peet’s shares over the life of the option. Our calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the observable market interest rate curve. Our calculation of the fair value of financial instruments takes into consideration the risk of nonperformance, including counterparty credit risk. Our OTC derivative transactions are governed by International Swap Dealers Association agreements and other

standard industry contracts. Under these agreements, we do not post nor require collateral from our counterparties. The majority of our derivative contracts do not have a legal right of set-off. We manage the credit risk in connection with these and all our derivatives by entering into transactions with counterparties with investment grade credit ratings, limiting the amount of exposure with each counterparty and monitoring the financial condition of our counterparties.

Derivative Volume:

The notional values of our hedging instruments were:


	Notional Amount
	As of March 31, 2022		As of December 31, 2021
	(in millions)
Currency exchange contracts:
Intercompany loans and forecasted interest payments	$	3,073	$	1,891
Forecasted transactions	4,822		4,831
Commodity contracts	10,281		9,694
Interest rate contracts	1,850		1,850
Net investment hedges:
Net investment hedge derivative contracts	7,306		3,915
Non-U.S. dollar debt designated as net investment hedges
Euro notes	3,525		3,622
British pound sterling notes	346		356
Swiss franc notes	802		811
Canadian dollar notes	480		475

Cash Flow Hedges:

Cash flow hedge activity, net of taxes, within accumulated other comprehensive earnings/(losses) included:


	For the Three Months Ended March 31,
	2022		2021
	(in millions)
Accumulated (loss)/gain at beginning of period	$	(148)	$	(161)
Transfer of realized losses/(gains) in fair value to earnings	25		5
Unrealized (loss)/gain in fair value	27		(3)
Accumulated (loss)/gain at end of period	$	(96)	$	(159)

After-tax gains/(losses) reclassified from accumulated other comprehensive earnings/(losses) to net earnings were:


	For the Three Months Ended March 31,
	2022		2021
	(in millions)
Currency exchange contracts – forecasted transactions	$	(2)	$	—
Interest rate contracts	(23)		(5)
Total	$	(25)	$	(5)

After-tax gains/(losses) recognized in other comprehensive earnings/(losses) were:


	For the Three Months Ended March 31,
	2022		2021
	(in millions)
Currency exchange contracts – forecasted transactions	$	2	$	(1)
Interest rate contracts	25		(2)
Total	$	27	$	(3)

Cash flow hedge ineffectiveness was not material for all periods presented.

We record pre-tax (i) gains or losses reclassified from accumulated other comprehensive earnings/(losses) into earnings, (ii) gains or losses on ineffectiveness and (iii) gains or losses on amounts excluded from effectiveness testing in interest and other expense, net for interest rate contracts.

Based on current market conditions, we would expect to transfer losses of $9 million (net of taxes) for interest rate cash flow hedges to earnings during the next 12 months.

Cash Flow Hedge Coverage:

As of March 31, 2022, our longest dated cash flow hedges were interest rate swaps that hedge forecasted interest rate payments over the next 4 years, 5 months.

Hedges of Net Investments in International Operations:

Net investment hedge ("NIH") derivative contracts:

We enter into cross-currency interest rate swaps, forwards and options to hedge certain investments in our non-U.S. operations against movements in exchange rates. The aggregate notional value as of March 31, 2022 was $7.3 billion.

The impacts of the net investment hedge derivative contracts on other comprehensive earnings and net earnings were as follows:


	For the Three Months Ended March 31,
	2022		2021
	(in millions)
After-tax gain/(loss) on NIH contracts(1)	$	41	$	59

(1)Amounts recorded for unsettled and settled NIH derivative contracts are recorded in the cumulative translation adjustment within other comprehensive earnings. The cash flows from the settled contracts are reported within other investing activities in the condensed consolidated statement of cash flows.


	For the Three Months Ended March 31,
	2022		2021
	(in millions)
Amounts excluded from the assessment of hedge effectiveness(1)	$	22	$	20

(1)We elected to record changes in the fair value of amounts excluded from the assessment of effectiveness in net earnings within interest and other expense, net.

Non-U.S. dollar debt designated as net investment hedges:

After-tax gains/(losses) related to hedges of net investments in international operations in the form of euro, British pound sterling, Swiss franc and Canadian dollar-denominated debt were recorded within the cumulative translation adjustment section of other comprehensive income and were:


	For the Three Months Ended March 31,
	2022		2021
	(in millions)
Euro notes	$	74	$	124
British pound sterling notes	8		(2)
Swiss franc notes	6		56
Canadian notes	(4)		(5)

Economic Hedges:

Pre-tax gains/(losses) recorded in net earnings for economic hedges were:


	For the Three Months Ended March 31,				Location of Gain/(Loss) Recognized in Earnings
	2022		2021
	(in millions)
Currency exchange contracts:
Intercompany loans and forecasted interest payments	$	(11)	$	70		Interest and other expense, net
Forecasted transactions	(7)		50			Cost of sales
Forecasted transactions	21		(16)			Interest and other expense, net
Forecasted transactions	2		2			Selling, general and administrative expenses
Commodity contracts	237		94			Cost of sales
Equity method investment contracts	—		—			Gain on equity method investment transactions
Total	$	242	$	200

Early settlement of forecasted currency exchange contracts comprise $74 million in cost of sales, $5 million in selling, general and administrative expenses and $20 million in interest and other expense, net in the three months ended March 31, 2022.