Derivative Instruments

9 Months Ended

Oct. 02, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

Note 9–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 hedge accounting does not apply.

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

	Asset derivatives
	Balance sheet line item	October 2, 2020		January 3, 2020
		(in millions)
Fair value interest rate swaps	Other assets	$	—	$	2
	Liability derivatives
	Balance sheet line item	October 2, 2020		January 3, 2020
		(in millions)
Cash flow interest rate swaps	Other long-term liabilities	$	114	$	75
Foreign currency forward contracts	Accounts payable and accrued liabilities	1		—

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 held 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 "2020 Notes"). The objective of these instruments was to hedge the 2020 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 received semi-annual interest payments at the coupon rate of 4.45% and paid variable interest based on the six-month LIBOR rate.

On September 1, 2020, we repaid the 2020 Notes in full (see "Note 10–Debt"). In conjunction with the retirement of the 2020 Notes, we terminated our fair value hedge and received a final settlement of $2 million.

Cash Flow Hedges

We have interest rate swap agreements to hedge the cash flows of $1.4 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 swaps 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 income (loss) and earnings for the periods presented was as follows:

	Three Months Ended				Nine Months Ended
	October 2, 2020		September 27, 2019		October 2, 2020		September 27, 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	$	44	$	28	$	133	$	99
Amount recognized in other comprehensive income (loss)	$	—	$	(13)	$	(62)	$	(62)
Amount reclassified from accumulated other comprehensive loss to interest expense, net	5		(2)		9		(6)

We expect to reclassify net losses of $16 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.