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Derivative Instruments and Fair Value Measurements | 9 Months Ended
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Sep. 28, 2019
Derivative Instruments and Fair Value Measurements [Abstract] |
Derivative Instruments and Fair Value Measurements | Derivative instruments and fair value measurements The Company is exposed to certain market risks such as changes in interest rates, foreign currency exchange rates, and commodity prices, which exist as a part of its ongoing business operations. Management uses derivative and nonderivative financial instruments and commodity instruments, including futures, options, and swaps, where appropriate, to manage these risks. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged. The Company designates derivatives and nonderivative hedging instruments as cash flow hedges, fair value hedges, net investment hedges, and uses other contracts to reduce volatility in interest rates, foreign currency and commodities. As a matter of policy, the Company does not engage in trading or speculative hedging transactions. Total notional amounts of the Company’s derivative instruments as of September 28, 2019 and December 29, 2018 were as follows:
(millions) | September 28, 2019 | December 29, 2018
Foreign currency exchange contracts | $ | 2,250 |  | $ | 1,863 |
Cross-currency contracts | 1,480 |  | 1,197 |
Interest rate contracts | 1,856 |  | 1,608 |
Commodity contracts | 319 |  | 417 |
Total | $ | 5,905 |  | $ | 5,085 |
Following is a description of each category in the fair value hierarchy and the financial assets and liabilities of the Company that were included in each category at September 28, 2019 and December 29, 2018, measured on a recurring basis. Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market. For the Company, level 1 financial assets and liabilities consist primarily of commodity derivative contracts. Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. For the Company, level 2 financial assets and liabilities consist of interest rate swaps, cross-currency swaps and over-the-counter commodity and currency contracts. The Company’s 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 interest rate curve. Over-the-counter commodity derivatives are valued using an income approach based on the commodity index prices less the contract rate multiplied by the notional amount. Foreign currency contracts are valued using an income approach based on forward rates less the contract rate multiplied by the notional amount. Cross-currency contracts are valued based on changes in the spot rate at the time of valuation compared to the spot rate at the time of execution, as well as the change in the interest differential between the two currencies. The Company’s calculation of the fair value of level 2 financial assets and liabilities takes into consideration the risk of nonperformance, including counterparty credit risk. Level 3 – Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. The Company did not have any level 3 financial assets or liabilities as of September 28, 2019 or December 29, 2018. The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet on a recurring basis as of September 28, 2019 and December 29, 2018: Derivatives designated as hedging instruments
| September 28, 2019 |  | December 29, 2018
(millions) | Level 1 | Level 2 | Total |  | Level 1 | Level 2 | Total
Assets: |  |  |  |  |  |  |
Cross-currency contracts: |  |  |  |  |  |  |
Other assets | $ | — |  | $ | 143 |  | $ | 143 |  |  | $ | — |  | $ | 79 |  | $ | 79 |
Interest rate contracts: |  |  |  |  |  |  |
Other assets (a) | — |  | 11 |  | 11 |  |  | — |  | 17 |  | 17 |
Total assets | $ | — |  | $ | 154 |  | $ | 154 |  |  | $ | — |  | $ | 96 |  | $ | 96 |
Liabilities: |  |  |  |  |  |  |
Interest rate contracts: |  |  |  |  |  |  |
Other liabilities (a) | — |  | (13 | ) | (13 | ) |  | — |  | (22 | ) | (22 | )
Total liabilities | $ | — |  | $ | (13 | ) | $ | (13 | ) |  | $ | — |  | $ | (22 | ) | $ | (22 | )
(a) The fair value of the related hedged portion of the Company's long-term debt, a level 2 liability, was $0.7 billion and $1.6 billion as of September 28, 2019 and December 29, 2018, respectively. Derivatives not designated as hedging instruments
| September 28, 2019 |  | December 29, 2018
(millions) | Level 1 | Level 2 | Total |  | Level 1 | Level 2 | Total
Assets: |  |  |  |  |  |  |
Foreign currency exchange contracts: |  |  |  |  |  |  |
Other current assets | $ | — |  | $ | 23 |  | $ | 23 |  |  | $ | — |  | $ | 3 |  | $ | 3 |
Commodity contracts: |  |  |  |  |  |  |
Other current assets | 4 |  | — |  | 4 |  |  | 3 |  | — |  | 3 |
Total assets | $ | 4 |  | $ | 23 |  | $ | 27 |  |  | $ | 3 |  | $ | 3 |  | $ | 6 |
Liabilities: |  |  |  |  |  |  |
Foreign currency exchange contracts: |  |  |  |  |  |  |
Other current liabilities | $ | — |  | $ | (14 | ) | $ | (14 | ) |  | $ | — |  | $ | (4 | ) | $ | (4 | )
Interest rate contracts: |  |  |  |  |  |  |
Other liabilities | — |  | (13 | ) | (13 | ) |  | — |  | — |  | — |
Commodity contracts: |  |  |  |  |  |  |
Other current liabilities | (2 | ) | — |  | (2 | ) |  | (9 | ) | — |  | (9 | )
Total liabilities | $ | (2 | ) | $ | (27 | ) | $ | (29 | ) |  | $ | (9 | ) | $ | (4 | ) | $ | (13 | )
The Company has designated its outstanding foreign currency denominated long-term debt as a net investment hedge of a portion of the Company’s investment in its subsidiaries’ foreign currency denominated net assets. The carrying value of this debt was approximately $2.5 billion and $2.6 billion as of September 28, 2019 and December 29, 2018, respectively. The following amounts were recorded on the Consolidated Balance Sheet related to cumulative basis adjustments for existing fair value hedges as of September 28, 2019 and December 29, 2018.
(millions) |  | Line Item in the Consolidated Balance Sheet in which the hedged item is included |  | Carrying amount of the hedged liabilities |  | Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged liabilities (a)
|  |  |  | September 28, 2019 | December 29, 2018 |  | September 28, 2019 | December 29, 2018
Interest rate contracts |  | Current maturities of long-term debt |  | $ | — |  | $ | 503 |  |  | $ | — |  | $ | 3 |
Interest rate contracts |  | Long-term debt |  | $ | 3,114 |  | $ | 3,354 |  |  | $ | 27 |  | $ | (18 | )
(a) The current maturities of hedged long-term debt includes $3 million of hedging adjustment on discontinued hedging relationships as of December 29, 2018. The hedged long-term debt includes $16 million and $(12) million of hedging adjustment on discontinued hedging relationships as of September 28, 2019 and December 29, 2018, respectively. The Company has elected to not offset the fair values of derivative assets and liabilities executed with the same counterparty that are generally subject to enforceable netting agreements. However, if the Company were to offset and record the asset and liability balances of derivatives on a net basis, the amounts presented in the Consolidated Balance Sheet as of September 28, 2019 and December 29, 2018 would be adjusted as detailed in the following table:
As of September 28, 2019: |  | Gross Amounts Not Offset in the Consolidated Balance Sheet |
| Amounts Presented in the Consolidated Balance Sheet | Financial Instruments | Cash Collateral Received/ Posted | Net Amount
Total asset derivatives | $ | 181 |  | $ | (38 | ) | $ | (9 | ) | $ | 134 |
Total liability derivatives | $ | (42 | ) | $ | 38 |  | $ | — |  | $ | (4 | )
As of December 29, 2018: |  | Gross Amounts Not Offset in the Consolidated Balance Sheet |
| Amounts Presented in the Consolidated Balance Sheet | Financial Instruments | Cash Collateral Received/ Posted | Net Amount
Total asset derivatives | $ | 102 |  | $ | (27 | ) | $ | (2 | ) | $ | 73 |
Total liability derivatives | $ | (35 | ) | $ | 27 |  | $ | — |  | $ | (8 | )
The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the quarters ended September 28, 2019 and September 29, 2018 was as follows: Derivatives and non-derivatives in net investment hedging relationships
(millions) | Gain (loss) recognized in AOCI |  | Gain (loss) excluded from assessment of hedge effectiveness | Location of gain (loss) in income of excluded component
| September 28, 2019 |  | September 29, 2018 |  | September 28, 2019 |  | September 29, 2018 |
Foreign currency denominated long-term debt | $ | 99 |  |  | $ | 16 |  |  | $ | — |  |  | $ | — |  |
Cross-currency contracts | 49 |  |  | 9 |  |  | 9 |  |  | 4 |  | Interest expense
Total | $ | 148 |  |  | $ | 25 |  |  | $ | 9 |  |  | $ | 4 |  |
Derivatives not designated as hedging instruments
(millions) | Location of gain (loss) recognized in income | Gain (loss) recognized in income
|  | September 28, 2019 |  | September 29, 2018
Foreign currency exchange contracts | COGS | $ | 7 |  |  | $ | 1 |
Foreign currency exchange contracts | Other income (expense), net | — |  |  | 2 |
Commodity contracts | COGS | (21 | ) |  | (2 | )
Total |  | $ | (14 | ) |  | $ | 1 |
The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the year-to-date periods ended September 28, 2019 and September 29, 2018 was as follows: Derivatives and non-derivatives in net investment hedging relationships
(millions) | Gain (loss) recognized in AOCI |  | Gain (loss) excluded from assessment of hedge effectiveness | Location of gain (loss) in income of excluded component
| September 28, 2019 |  | September 29, 2018 |  | September 28, 2019 |  | September 29, 2018 |
Foreign currency denominated long-term debt | $ | 115 |  |  | $ | 89 |  |  | $ | — |  |  | $ | — |  |
Cross-currency contracts | 64 |  |  | 36 |  |  | 25 |  |  | 10 |  | Interest expense
Total | $ | 179 |  |  | $ | 125 |  |  | $ | 25 |  |  | $ | 10 |  |
Derivatives not designated as hedging instruments
(millions) | Location of gain (loss) recognized in income | Gain (loss) recognized in income
|  | September 28, 2019 |  | September 29, 2018
Foreign currency exchange contracts | COGS | $ | (3 | ) |  | $ | 8 |
Foreign currency exchange contracts | Other income (expense), net | (1 | ) |  | (2 | )
Foreign currency exchange contracts | SGA | — |  |  | 1 |
Commodity contracts | COGS | (13 | ) |  | (5 | )
Total |  | $ | (17 | ) |  | $ | 2 |
The effect of fair value and cash flow hedge accounting on the Consolidated Income Statement for the quarters ended September 28, 2019 and September 29, 2018:
|  |  |  | September 28, 2019 |  | September 29, 2018
(millions) |  | Interest Expense |  | Interest Expense
Total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of fair value or cash flow hedges are recorded |  | $ | 72 |  |  | $ | 72 |
| Gain (loss) on fair value hedging relationships: |  |  |  |
| Interest contracts: |  |  |  |
| Hedged items |  | (5 | ) |  | 9 |
| Derivatives designated as hedging instruments |  | 7 |  |  | (9 | )
| Gain (loss) on cash flow hedging relationships: |  |  |  |
| Interest contracts: |  |  |  |
| Amount of gain (loss) reclassified from AOCI into income |  | 1 |  |  | (2 | )
The effect of fair value and cash flow hedge accounting on the Consolidated Income Statement for the year-to-date periods ended September 28, 2019 and September 29, 2018:
|  |  |  | September 28, 2019 |  | September 29, 2018
(millions) |  | Interest Expense |  | Interest Expense
Total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of fair value or cash flow hedges are recorded |  | $ | 221 |  |  | $ | 213 |
| Gain (loss) on fair value hedging relationships: |  |  |  |
| Interest contracts: |  |  |  |
| Hedged items |  | (42 | ) |  | 34 |
| Derivatives designated as hedging instruments |  | 44 |  |  | (30 | )
| Gain (loss) on cash flow hedging relationships: |  |  |  |
| Interest contracts: |  |  |  |
| Amount of gain (loss) reclassified from AOCI into income |  | (2 | ) |  | (6 | )
During the next 12 months, the Company expects $9 million of net deferred losses reported in AOCI at September 28, 2019 to be reclassified to income, assuming market rates remain constant through contract maturities. Certain of the Company’s derivative instruments contain provisions requiring the Company to post collateral on those derivative instruments that are in a liability position if the Company’s credit rating is at or below BB+ (S&P), or Baa1 (Moody’s). The fair value of all derivative instruments with credit-risk-related contingent features in a liability position on September 28, 2019 was not material. In addition, certain derivative instruments contain provisions that would be triggered in the event the Company defaults on its debt agreements. There were no collateral posting as of September 28, 2019 triggered by credit-risk-related contingent features. Other fair value measurements The following is a summary of the carrying and market values of the Company's available for sale securities:
| September 28, 2019 |  | December 29, 2018
|  | Unrealized |  |  |  | Unrealized |
(millions) | Cost | Gain (Loss) | Market Value |  | Cost | Gain (Loss) | Market Value
Corporate bonds | $ | — |  | $ | — |  | $ | — |  |  | $ | 59 |  | $ | — |  | $ | 59 |
During the third quarter of 2019, the Company's investments in level 2 corporate bonds were sold for $63 million resulting in a gain of $4 million, recorded in Other income and (expense). The market values of the Company's investments in level 2 corporate bonds were based on matrices or models from pricing vendors. Unrealized gains and losses were included in the Consolidated Statement of Comprehensive Income. Additionally, these investments were recorded within Other current assets and Other assets on the Consolidated Balance Sheet, based on the maturity of the individual security. Financial instruments The carrying values of the Company’s short-term items, including cash, cash equivalents, accounts receivable, accounts payable, notes payable and current maturities of long-term debt approximate fair value. The fair value of the Company’s long-term debt, which are level 2 liabilities, is calculated based on broker quotes. The fair value and carrying value of the Company's long-term debt was $8.3 billion and $7.7 billion, respectively, as of September 28, 2019. The fair value and carrying value of the Company's long-term debt were both $8.2 billion as of December 29, 2018. Counterparty credit risk concentration and collateral requirements The Company is exposed to credit loss in the event of nonperformance by counterparties on derivative financial and commodity contracts. Management believes a concentration of credit risk with respect to derivative counterparties is limited due to the credit ratings and use of master netting and reciprocal collateralization agreements with the counterparties and the use of exchange-traded commodity contracts. Master netting agreements apply in situations where the Company executes multiple contracts with the same counterparty. Certain counterparties represent a concentration of credit risk to the Company. If those counterparties fail to perform according to the terms of derivative contracts, this would result in a loss to the Company of approximately $112 million, net of collateral already received from those counterparties, as of September 28, 2019. For certain derivative contracts, reciprocal collateralization agreements with counterparties call for the posting of collateral in the form of cash, treasury securities or letters of credit if a fair value loss position to the Company or its counterparties exceeds a certain amount. In addition, the Company is required to maintain cash margin accounts in connection with its open positions for exchange-traded commodity derivative instruments executed with the counterparty that are subject to enforceable netting agreements. As of September 28, 2019, the Company had no collateral posting requirements related to reciprocal collateralization agreements and collected approximately $19 million of collateral related to reciprocal collaterization agreements which is reflected as an increase in other liabilities. As of September 28, 2019 the Company posted $10 million in margin deposits for exchange-traded commodity derivative instruments, which was reflected as an increase in accounts receivable, net on the Consolidated Balance Sheet. Management believes concentrations of credit risk with respect to accounts receivable is limited due to the generally high credit quality of the Company’s major customers, as well as the large number and geographic dispersion of smaller customers. However, the Company conducts a disproportionate amount of business with a small number of large multinational grocery retailers, with the five largest accounts encompassing approximately 19% of consolidated trade receivables at September 28, 2019.

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