Derivative Instruments

3 Months Ended

Apr. 03, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Note 8–Derivative Instruments

We manage our risk to changes in interest rates and foreign currency exchange rates through the use of derivative instruments. We do not hold derivative instruments for trading or speculative purposes. For fixed rate borrowings, we use variable interest rate swaps, effectively converting fixed rate borrowings to variable rate borrowings. These swaps are designated as fair value hedges. For variable rate borrowings, we use fixed interest rate swaps, effectively converting a portion of the variable interest rate payments to fixed interest rate payments. These swaps are designated as cash flow hedges. We transact business globally and are subject to risks associated with changing foreign currency exchange rates. We enter into foreign currency forward contracts in order to mitigate fluctuations in our earnings and cash flows due to changes in foreign currency exchange rates. The foreign currency forward contracts are not designated as hedges and do not qualify for hedge accounting.

The fair value of the interest rate swaps and foreign currency forward contracts was as follows:


	Asset derivatives
	Balance sheet line item	April 3, 2020		January 3, 2020
		(in millions)
Fair value interest rate swaps	Other current assets⁽¹⁾	$	4	$	2
Foreign currency forward contracts	Other current assets	1		—
		$	5	$	2
⁽¹⁾The carrying amount of the fair value interest rate swaps were recorded within "Other assets" as of January 3, 2020.

	Liability derivatives
	Balance sheet line item	April 3, 2020		January 3, 2020
		(in millions)
Cash flow interest rate swaps	Other long-term liabilities	$	125	$	75

The cash flows associated with the interest rate swaps are classified as operating activities in the condensed consolidated statements of cash flows.

Fair Value Hedge

We have interest rate swap agreements to hedge the fair value of the $450 million fixed rate 4.45% senior unsecured notes maturing in December 2020 (the "Notes"). The objective of these instruments is to hedge the Notes against changes in fair value due to the variability in the six-month LIBOR rate (the benchmark interest rate). Under the terms of the interest rate swap agreements, we will receive semi-annual interest payments at the coupon rate of 4.45% and will pay variable interest based on the six-month LIBOR rate.

The interest rate swaps were accounted for as a fair value hedge of the Notes and qualified for the shortcut method of hedge accounting, which allows for the assumption of no ineffectiveness. The resulting changes in the fair value of the interest rate swaps are fully offset by the changes in the fair value of the underlying debt (the hedged item) (See "Note 9–Debt").

The fair value of the Notes is stated at an amount that reflects changes in the six-month LIBOR rate subsequent to the inception of the interest rate swaps through the reporting date.

The following amounts were recorded on the condensed consolidated balance sheets related to cumulative basis adjustments for fair value hedges:


	Carrying amount of hedged item						Cumulative amount of fair value adjustment included within the hedged item
Balance sheet line item of hedged item	April 3, 2020		January 3, 2020		April 3, 2020		January 3, 2020
	(in millions)
Long-term debt, current portion⁽¹⁾	$	454	$	452	$	4	$	2

⁽¹⁾The carrying amount of the hedged item and cumulative amount of fair value adjustments were recorded within "Long-term debt, net of current portion" as of January 3, 2020.

Cash Flow Hedges

We have interest rate swap agreements to hedge the cash flows of $1.5 billion of the variable rate senior unsecured term loan (the "Variable Rate Loan"). These interest rate swap agreements have a maturity date of August 2025 and a fixed interest rate of 3.00%. The objective of these instruments is to reduce variability in the forecasted interest payments of the Variable Rate Loan, which are based on the LIBOR rate. Under the terms of the interest rate swap agreements, we will receive monthly variable interest payments based on the one-month LIBOR rate and will pay interest at a fixed rate.

The interest rate swap transactions were accounted for as cash flow hedges. The gain/loss on the swap is reported as a component of other comprehensive income (loss) and is reclassified into earnings when the interest payments on the underlying hedged items impact earnings. A qualitative assessment of hedge effectiveness is performed on a quarterly basis, unless facts and circumstances indicate the hedge may no longer be highly effective.

The effect of the cash flow hedges on other comprehensive loss and earnings for the periods presented was as follows:


	Three Months Ended
	April 3, 2020		March 29, 2019
	(in millions)
Total interest expense, net presented in the condensed consolidated statements of income in which the effects of cash flow hedges are recorded	$	48	$	38

Amount recognized in other comprehensive loss	$	(55)	$	(18)
Amount reclassified from accumulated other comprehensive loss to interest expense, net	—		(2)

We expect to reclassify net losses of $8 million from accumulated other comprehensive loss into earnings during the next 12 months.

We terminated interest rate swaps in September 2018. The net derivative gain of $60 million related to the discontinued cash flow hedges remained in accumulated other comprehensive loss and is being reclassified into earnings over the remaining life of the original hedges as the hedged variable rate debt impacts earnings.