XML 29 R25.htm IDEA: XBRL DOCUMENT

DERIVATIVE INSTRUMENTS

3 Months Ended

Feb. 02, 2020

(18) Derivative Instruments

It is the Company’s policy that derivative transactions are executed only to manage exposures arising in the normal course of business and not for the purpose of creating speculative positions or trading. The Company’s financial services operations manage the relationship of the types and amounts of their funding sources to their receivable and lease portfolio in an effort to diminish risk due to interest rate and foreign currency fluctuations, while responding to favorable financing opportunities. The Company also has foreign currency exposures at some of its foreign and domestic operations related to buying, selling, and financing in currencies other than the functional currencies. In addition, the Company has interest rate exposure at certain

equipment operations units for below market retail financing programs that are used as sales incentives and are offered for extended periods.

All derivatives are recorded at fair value on the balance sheet. Cash collateral received or paid is not offset against the derivative fair values on the balance sheet. Each derivative is designated as a cash flow hedge, a fair value hedge, or remains undesignated. All designated hedges are formally documented as to the relationship with the hedged item as well as the risk-management strategy. Both at inception and on an ongoing basis the hedging instrument is assessed as to its effectiveness. If and when a derivative is determined not to be highly effective as a hedge, the underlying hedged transaction is no longer likely to occur, the hedge designation is removed, or the derivative is terminated, hedge accounting is discontinued.

Cash Flow Hedges

Certain interest rate contracts (swaps) were designated as hedges of future cash flows from borrowings. The total notional amounts of the receive-variable/pay-fixed interest rate contracts at February 2, 2020, November 3, 2019, and January 27, 2019 were $2,900 million, $3,150 million, and $2,800 million, respectively. Fair value gains or losses on cash flow hedges were recorded in OCI and are subsequently reclassified into interest expense in the same periods during which the hedged transactions affected earnings. These amounts offset the effects of interest rate changes on the related borrowings. The cash flows from these contracts were recorded in operating activities in the statement of consolidated cash flows.

The amount of loss recorded in OCI at February 2, 2020 that is expected to be reclassified to interest expense or other operating expenses in the next twelve months if interest rates or exchange rates remain unchanged is approximately $9 million after-tax. There were no gains or losses reclassified from OCI to earnings based on the probability that the original forecasted transaction would not occur.

Fair Value Hedges

Certain interest rate contracts (swaps) were designated as fair value hedges of borrowings. The total notional amounts of the receive-fixed/pay-variable interest rate contracts at February 2, 2020, November 3, 2019, and January 27, 2019 were $9,424 million, $8,717 million, and $8,622 million, respectively. The fair value gains or losses on these contracts were generally offset by fair value gains or losses on the hedged items (fixed-rate borrowings) with both items recorded in interest expense.

The amounts recorded in the consolidated balance sheet related to borrowings designated in fair value hedging relationships in millions of dollars follow:


			Cumulative Increase (Decrease) of Fair
			Value Hedging Adjustments Included in
			the Carrying Amount
	Carrying		Active
	Amount of		Hedging		Discontinued
	Hedged Item		Relationships		Relationships		Total
February 2, 2020
Long-term borrowings due within one year*	$	220	$	(1)	$	(5)	$	(6)
Long-term borrowings		9,521		379		(21)		358

November 3, 2019
Long-term borrowings due within one year*	$	412	$	(1)	$	(4)	$	(5)
Long-term borrowings		8,532		295		(32)		263

January 27, 2019
Long-term borrowings due within one year*	$	192	$	1	$	(4)	$	(3)
Long-term borrowings		8,177		(179)		(41)		(220)

* Presented in short-term borrowings

Derivatives not designated as hedging instruments

The Company has certain interest rate contracts (swaps and caps), foreign exchange contracts (futures, forwards, and swaps), and cross-currency interest rate contracts (swaps), which were not formally designated as hedges. These derivatives were held as economic hedges for underlying interest rate or foreign currency exposures, primarily for certain borrowings, purchases or sales of inventory, and below market retail

financing programs. The total notional amounts of these interest rate swaps at February 2, 2020, November 3, 2019, and January 27, 2019 were $9,102 million, $9,166 million, and $8,225 million, the foreign exchange contracts were $5,249 million, $4,962 million, and $6,500 million, and the cross-currency interest rate contracts were $102 million, $92 million, and $87 million, respectively. The fair value gains or losses from the interest rate contracts were recognized currently in interest expense and the gains or losses from foreign exchange contracts in cost of sales or other operating expenses, generally offsetting over time the expenses on the exposures being hedged. The cash flows from these non-designated contracts were recorded in operating activities in the statement of consolidated cash flows.

Fair values of derivative instruments in the condensed consolidated balance sheet in millions of dollars follow:


	February 2		November 3		January 27
Other Assets	2020		2019		2019
Designated as hedging instruments:
Interest rate contracts	$	409	$	332	$	47
Total designated		409		332		47

Not designated as hedging instruments:
Interest rate contracts		34		31		29
Foreign exchange contracts		37		20		59
Cross-currency interest rate contracts		1		1		3
Total not designated		72		52		91

Total derivative assets	$	481	$	384	$	138

Accounts Payable and Accrued Expenses
Designated as hedging instruments:
Interest rate contracts	$	17	$	28	$	205
Total designated		17		28		205

Not designated as hedging instruments:
Interest rate contracts		40		37		27
Foreign exchange contracts		40		71		64
Cross-currency interest rate contracts		4		3		2
Total not designated		84		111		93

Total derivative liabilities	$	101	$	139	$	298

The classification and gains (losses) including accrued interest expense related to derivative instruments on the statement of consolidated income consisted of the following in millions of dollars:


	Three Months Ended
	February 2		January 27
	2020		2019
Fair Value Hedges:
Interest rate contracts - Interest expense	$	96	$	133

Cash Flow Hedges:
Recognized in OCI
Interest rate contracts - OCI (pretax)		(2)		(9)

Reclassified from OCI
Interest rate contracts - Interest expense		(2)		2

Not Designated as Hedges:
Interest rate contracts - Net sales	$	(4)	$	(10)
Interest rate contracts - Interest expense *		2		(8)
Foreign exchange contracts - Cost of sales		11		(5)
Foreign exchange contracts - Other operating *		(1)		20
Total not designated	$	8	$	(3)

* Includes interest and foreign exchange gains (losses) from cross-currency interest rate contracts.

Counterparty Risk and Collateral

Derivative instruments are subject to significant concentrations of credit risk to the banking sector. The Company manages individual counterparty exposure by setting limits that consider the credit rating of the counterparty, the credit default swap spread of the counterparty, and other financial commitments and exposures between the Company and the counterparty banks. All interest rate derivatives are transacted under International Swaps and Derivatives Association (ISDA) documentation. Some of these agreements include credit support provisions. Each master agreement permits the net settlement of amounts owed in the event of default or termination.

Certain of the Company’s derivative agreements contain credit support provisions that may require the Company to post collateral based on the size of the net liability positions and credit ratings. The aggregate fair value of all derivatives with credit-risk-related contingent features that were in a net liability position at February 2, 2020, November 3, 2019, and January 27, 2019, was $60 million, $68 million, and $233 million, respectively. In accordance with the limits established in these agreements, the Company received $26 million in cash collateral at February 2, 2020 and posted $8 million in cash collateral at January 27, 2019. No cash collateral was posted or received at November 3, 2019.

Derivatives are recorded without offsetting for netting arrangements or collateral. The impact on the derivative assets and liabilities related to netting arrangements and any collateral received or paid in millions of dollars follows:


	Gross Amounts		Netting		Collateral
February 2, 2020	Recognized		Arrangements		Received		Net Amount
Assets	$	481	$	(60)	$	(26)	$	395
Liabilities		101		(60)				41


	Gross Amounts		Netting		Collateral
November 3, 2019	Recognized		Arrangements		Received/Paid	Net Amount
Assets	$	384	$	(70)		$	314
Liabilities		139		(70)			69


	Gross Amounts		Netting		Collateral
January 27, 2019	Recognized		Arrangements		Paid		Net Amount
Assets	$	138	$	(75)			$	63
Liabilities		298		(75)	$	(8)		215