DERIVATIVE INSTRUMENTS

9 Months Ended

Jul. 31, 2022

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS

(17)  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 and foreign currency exposures for sales incentive programs.

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. The cash flows from these contracts are recorded in operating activities in the statements of consolidated cash flows. 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 July 31, 2022, October 31, 2021, and August 1, 2021 were $2,350 million, $2,700 million, and $1,750 million, respectively. Fair value gains or losses on cash flow hedges were recorded in other comprehensive income (OCI) and are subsequently reclassified into interest expense in the same periods during which the hedged transactions affects earnings. These amounts offset the effects of interest rate changes on the related borrowings.

The amount of gain recorded in OCI at July 31, 2022 that is expected to be reclassified to interest expense in the next twelve months if interest rates remain unchanged is approximately $31 million after-tax. No gains or losses were 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 July 31, 2022, October 31, 2021, and August 1, 2021 were $8,303 million, $8,043 million, and $8,658 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 were as follows in millions of dollars. Fair value hedging adjustments are included in the carrying amount of the hedged item.

	Active Hedging Relationships				Discontinued Hedging Relationships
	Carrying Amount		Cumulative Fair Value		Carrying Amount of		Cumulative Fair Value
	of Hedged Item		Hedging Amount		Formerly Hedged Item		Hedging Amount
July 31, 2022
Short-term borrowings					$	2,605	$	5
Long-term borrowings	$	7,835	$	(430)		5,728		39
October 31, 2021
Short-term borrowings	$	191	$	3	$	1,997	$	(2)
Long-term borrowings		7,847		29		6,287		223
August 1, 2021
Short-term borrowings	$	189	$	4	$	1,898	$	(1)
Long-term borrowings		8,698		263		5,831		190

Derivatives Not Designated as Hedging Instruments

The Company has certain interest rate contracts (swaps), foreign currency 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 sales incentive programs. The total notional amounts of these interest rate swaps at July 31, 2022, October 31, 2021, and August 1, 2021 were $9,880 million, $10,848 million, and $9,195 million, the foreign exchange contracts were $7,457 million, $7,584 million, and $6,328 million, and the cross-currency interest rate contracts were $276 million, $238 million, and $197 million, respectively. The fair value gains or losses from derivatives not designated as hedging instruments were recorded in the statements of consolidated income, generally offsetting over time the exposure on the hedged item.

Fair values of derivative instruments in the condensed consolidated balance sheets were as follows in millions of dollars:

	July 31		October 31		August 1
Other Assets	2022		2021		2021
Designated as hedging instruments:
Interest rate contracts	$	82	$	166	$	332
Not designated as hedging instruments:
Interest rate contracts		163		73		57
Foreign exchange contracts		30		31		41
Cross-currency interest rate contracts		5		5		2
Total not designated		198		109		100
Total derivative assets	$	280	$	275	$	432
Accounts Payable and Accrued Expenses
Designated as hedging instruments:
Interest rate contracts	$	434	$	99	$	40
Not designated as hedging instruments:
Interest rate contracts		79		33		43
Foreign exchange contracts		149		94		67
Cross-currency interest rate contracts		5		2		2
Total not designated		233		129		112
Total derivative liabilities	$	667	$	228	$	152

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

	Three Months Ended				Nine Months Ended
	July 31		August 1		July 31		August 1
	2022		2021		2022		2021
Fair Value Hedges:
Interest rate contracts - Interest expense	$	149	$	146	$	(507)	$	(79)
Cash Flow Hedges:
Recognized in OCI
Interest rate contracts - OCI (pretax)	$	1	$	(1)	$	52	$	(1)
Reclassified from OCI
Interest rate contracts - Interest expense		3		(3)				(11)
Not Designated as Hedges:
Interest rate contracts - Net sales			$	(2)	$	44	$	3
Interest rate contracts - Interest expense *	$	(18)		(2)		41		(6)
Foreign exchange contracts - Net sales		(1)				(2)
Foreign exchange contracts - Cost of sales		(29)		(7)		(109)		(107)
Foreign exchange contracts - Other operating expenses *		(20)		(5)		153		(209)
Total not designated	$	(68)	$	(16)	$	127	$	(319)

* 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 July 31, 2022, October 31, 2021, and August 1, 2021, was $518 million, $135 million, and $87 million, respectively. In accordance with the limits established in these agreements, the Company posted $238 million of cash collateral at July 31, 2022. The Company posted no cash collateral in accordance with the limits established in those agreements at either October 31, 2021 or August 1, 2021. In addition, the Company paid $8 million of cash collateral that was outstanding at July 31, 2022, October 31, 2021, and August 1, 2021 to participate in an international futures market to hedge currency exposure, not included in the table below.

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 was as follows in millions of dollars:

	Gross Amounts		Netting
July 31, 2022	Recognized		Arrangements		Collateral		Net Amount
Assets	$	280	$	(125)	$	(40)	$	115
Liabilities		667		(125)		(238)		304

	Gross Amounts		Netting
October 31, 2021	Recognized		Arrangements		Collateral		Net Amount
Assets	$	275	$	(105)			$	170
Liabilities		228		(105)	$	(5)		118

	Gross Amounts		Netting
August 1, 2021	Recognized		Arrangements		Collateral		Net Amount
Assets	$	432	$	(94)	$	(88)	$	250
Liabilities		152		(94)		(2)		56