Derivative Financial Instruments

6 Months Ended

Sep. 28, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Forward Foreign Currency Exchange Contracts

The Company uses forward foreign currency exchange contracts to manage its exposure to fluctuations in foreign currency for certain of its transactions. The Company, in its normal course of business, enters into transactions with foreign suppliers and seeks to minimize risks related to certain forecasted inventory purchases by using forward foreign currency exchange contracts. The Company only enters into derivative instruments with highly credit-rated counterparties. The Company does not enter into derivative contracts for trading or speculative purposes.

In connection with the September 24, 2018 definitive agreement to acquire all of the outstanding shares of Versace, the Company entered into forward foreign currency exchange contracts in September 2018 with notional amounts totaling €1.680 billion (approximately $2.001 billion) to mitigate its foreign currency exchange risk through the closing date of the acquisition, which were settled on December 21, 2018. These derivative contracts were not designated as accounting hedges. Therefore, changes in fair value were recorded to foreign currency (gain) loss in the Company’s consolidated statements of operations and comprehensive income. The Company’s accounting policy is to classify cash flows from derivative instruments that are accounted for as cash flow hedges in the same category as the cash flows from the items being hedged. Accordingly, the Company classified the unrealized gains and losses relating to these derivative instruments within cash flows from investing activities.

Net Investment Hedges

As of September 28, 2019, the Company had multiple fixed-to-fixed cross-currency swap agreements with aggregate notional amounts of $3.190 billion to hedge its net investment in Euro-denominated subsidiaries and $44 million to hedge its net investment in Japanese Yen-denominated subsidiaries against future volatility in the exchange rates between U.S. Dollar and these currencies. Under the terms of these contracts, which have maturity dates between January 2022 and June 2026, the Company will exchange the semi-annual fixed rate payments on U.S. denominated debt for fixed rate payments of 0% to 1.674% in Euros and 0.89% in Japanese Yen. These contracts have been designated as net investment hedges.

When a cross-currency swap is used as a hedging instrument in a net investment hedge assessed under the spot method, the cross-currency basis spread is excluded from the assessment of hedge effectiveness and is recognized as a reduction in interest expense in the Company’s consolidated statements of operations and comprehensive income. Accordingly, the Company recorded a reduction in interest expense of $19 million and $34 million, respectively, during the three and six months ended September 28, 2019 and $3 million and $4 million, respectively, during the three and six months ended September 29, 2018.

The following table details the fair value of the Company’s derivative contracts, which are recorded on a gross basis in the consolidated balance sheets as of September 28, 2019 and March 30, 2019 (in millions):



					Fair Values
	Notional Amounts				Assets						Liabilities
	September 28, 2019		March 30, 2019		September 28, 2019			March 30, 2019			September 28, 2019			March 30, 2019
Designated forward foreign currency exchange contracts	$	150	$	166	$	6	⁽¹⁾	$	5	⁽¹⁾	$	—		$	—
Designated net investment hedge	3,234		2,234		109		⁽²⁾	37		⁽²⁾	—			—
Total designated hedges	3,384		2,400		115			42			—			—
Undesignated derivative contracts ⁽⁴⁾	170		199		1		⁽¹⁾	—			4		⁽³⁾	5		⁽³⁾
Total	$	3,554	$	2,599	$	116		$	42		$	4		$	5


⁽¹⁾	Recorded within prepaid expenses and other current assets in the Company’s consolidated balance sheets.


⁽²⁾	Recorded within other assets in the Company’s consolidated balance sheets.


⁽³⁾	Recorded within accrued expenses and other current liabilities in the Company’s consolidated balance sheets.


⁽⁴⁾	Primarily includes undesignated hedges of foreign currency denominated intercompany balances and inventory purchases.

The Company records and presents the fair values of all of its derivative assets and liabilities in its consolidated balance sheets on a gross basis, as shown in the previous table. However, if the Company were to offset and record the asset and liability balances for its derivative instruments on a net basis in accordance with the terms of its master netting arrangements, which provide for the right to set-off amounts for similar transactions denominated in the same currencies, the resulting impact as of September 28, 2019 and March 30, 2019 would be as follows (in millions):



	Forward Currency Exchange Contracts				Net Investment Hedges
	September 28, 2019		March 30, 2019		September 28, 2019		March 30, 2019
Assets subject to master netting arrangements	$	7	$	5	$	109	$	37
Liabilities subject to master netting arrangements	$	4	$	5	$	—	$	—
Derivative assets, net	$	6	$	5	$	109	$	37
Derivative liabilities, net	$	3	$	5	$	—	$	—

The Company’s master netting arrangements do not require cash collateral to be pledged by the Company or its counterparties.

Changes in the fair value of the Company’s forward foreign currency exchange contracts that are designated as accounting hedges are recorded in equity as a component of accumulated other comprehensive income (loss), and are reclassified from accumulated other comprehensive income (loss) into earnings when the items underlying the hedged transactions are recognized into earnings, as a component of cost of sales within the Company’s consolidated statements of operations and comprehensive income. The net gain or loss on net investment hedges are reported within foreign currency translation gains and losses (“CTA”) as a component of accumulated other comprehensive income (loss) on the Company’s consolidated balance sheets. Upon discontinuation of the hedge, such amounts remain in CTA until the related investment is sold or liquidated.

The following table summarizes the gains and losses on the Company’s designated forward foreign currency exchange contracts and net investment hedges (in millions):



	Three Months Ended				Six Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
	Gains Recognized in OCI		Gains Recognized in OCI		Gains Recognized in OCI		Gains Recognized in OCI
Designated forward foreign currency exchange contracts	$	6	$	1	$	6	$	10
Designated net investment hedges	$	129	$	—	$	104	$	5

The following tables summarize the impact of the gains and losses within the consolidated statements of operations and comprehensive income related to the designated forward foreign currency exchange contracts for the three and six months ended September 28, 2019 and September 29, 2018 (in millions):



	Three Months Ended
	(Gain) Loss Reclassified from Accumulated OCI					Location of (Gain) Loss recognized	Total Cost of goods sold
	September 28, 2019			September 29, 2018		Location of (Gain) Loss recognized	September 28, 2019		September 29, 2018
Designated forward foreign currency exchange contracts	$	(2	)	$	2	Cost of goods sold	$	568	$	490



	Six Months Ended
	(Gain) Loss Reclassified from Accumulated OCI					Location of (Gain) Loss recognized	Total Cost of goods sold
	September 28, 2019			September 29, 2018		Location of (Gain) Loss recognized	September 28, 2019		September 29, 2018
Designated forward foreign currency exchange contracts	$	(5	)	$	7	Cost of goods sold	$	1,080	$	942

The Company expects that substantially all of the amounts currently recorded in accumulated other comprehensive income (loss) for its forward foreign currency exchange contracts will be reclassified into earnings during the next 12 months, based upon the timing of inventory purchases and turnover.

Undesignated Hedges

During the three and six months ended September 28, 2019, the net impact of changes in the fair value of undesignated forward foreign currency exchange contracts recognized within foreign currency loss (gain) in the Company’s consolidated statement of operations and comprehensive income was not material.

During the three and six months ended September 29, 2018, the Company recognized a net loss of $30 million and $29 million, respectively, related to changes in the fair value of undesignated forward foreign currency exchange contracts within foreign currency loss (gain) in the Company’s consolidated statement of operations and comprehensive income. These amounts were primarily comprised of a $30 million loss related to the derivative contracts entered into on September 25, 2018 to mitigate foreign currency exchange risk associated with the Versace acquisition that were settled on December 21, 2018.