DERIVATIVE INSTRUMENTS

6 Months Ended

Apr. 30, 2023

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS

(18)  Derivative Instruments

The Company’s policy is to execute derivative transactions to manage exposures arising in the normal course of business and not for the purpose of creating speculative positions or trading. The 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 exposure at certain equipment operations units for sales incentive programs.

All derivatives are recorded at fair value on the balance sheets. Cash collateral received or paid is not offset against the derivative fair values on the balance sheet. The cash flows from the derivative contracts were 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 April 30, 2023, October 30, 2022, and May 1, 2022 were $2,250 million, $1,950 million, and $2,450 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 impact earnings. These amounts offset the effects of interest rate changes on the related borrowings.

The amount of gain recorded in OCI at April 30, 2023 that is expected to be reclassified to interest expense in the next twelve months if interest rates remain unchanged is approximately $30 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 April 30, 2023, October 30, 2022, and May 1, 2022 were $10,943 million, $10,112 million, and $8,655 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
April 30, 2023
Short-term borrowings					$	1,213	$	14
Long-term borrowings	$	10,334	$	(562)		5,657		(132)
October 30, 2022
Short-term borrowings					$	2,515	$	15
Long-term borrowings	$	9,060	$	(1,006)		5,520		(19)
May 1, 2022
Short-term borrowings	$	178	$	1	$	2,607	$	7
Long-term borrowings		7,827		(613)		5,120		106

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 for certain borrowings, purchases or sales of inventory, and sales incentive programs. The total notional amounts of these interest rate swaps at April 30, 2023, October 30, 2022, and May 1, 2022 were $11,956 million, $10,568 million, and $9,912 million, the foreign exchange contracts were $9,163 million, $8,185 million, and $7,640 million, and the cross-currency interest rate contracts were $163 million, $260 million, and $264 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:

	April 30		October 30		May 1
Other Assets	2023		2022		2022
Designated as hedging instruments:
Interest rate contracts	$	104	$	87	$	63
Not designated as hedging instruments:
Interest rate contracts		171		212		180
Foreign exchange contracts		91		66		125
Cross-currency interest rate contracts		1		8		39
Total not designated		263		286		344
Total derivative assets	$	367	$	373	$	407
Accounts Payable and Accrued Expenses
Designated as hedging instruments:
Interest rate contracts	$	611	$	1,004	$	591
Not designated as hedging instruments:
Interest rate contracts		91		107		75
Foreign exchange contracts		42		118		114
Cross-currency interest rate contracts		14		2
Total not designated		147		227		189
Total derivative liabilities	$	758	$	1,231	$	780

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

	Three Months Ended				Six Months Ended
	April 30		May 1		April 30		May 1
	2023		2022		2023		2022
Fair Value Hedges:
Interest rate contracts - Interest expense	$	(10)	$	(514)	$	229	$	(656)
Cash Flow Hedges:
Recognized in OCI
Interest rate contracts - OCI (pretax)	$	(4)	$	35	$	(5)	$	50
Reclassified from OCI
Interest rate contracts - Interest expense		19		(1)		34		(3)
Not Designated as Hedges:
Interest rate contracts - Net sales	$	1	$	31	$	(6)	$	44
Interest rate contracts - Interest expense *		5		61		(3)		59
Foreign exchange contracts - Net sales		(2)		(1)		(1)		(1)
Foreign exchange contracts - Cost of sales		59		(79)		64		(80)
Foreign exchange contracts - Other operating expenses *		127		26		(15)		173
Total not designated	$	190	$	38	$	39	$	195

* 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 April 30, 2023, October 30, 2022, and May 1, 2022, was $716 million, $1,113 million, and $673 million, respectively. In accordance with the limits established in these agreements, the Company posted $308 million, $701 million, and $254 million of cash collateral at April 30, 2023, October 30, 2022, and May 1, 2022, respectively. In addition, the Company paid $8 million of collateral that was outstanding at April 30, 2023, October 30, 2022, and May 1, 2022 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 in millions of dollars follows:

	Gross Amounts		Netting
April 30, 2023	Recognized		Arrangements		Collateral		Net Amount
Assets	$	367	$	(168)	$	(29)	$	170
Liabilities		758		(168)		(308)		282

	Gross Amounts		Netting
October 30, 2022	Recognized		Arrangements		Collateral		Net Amount
Assets	$	373	$	(179)	$	(54)	$	140
Liabilities		1,231		(179)		(701)		351

	Gross Amounts		Netting
May 1, 2022	Recognized		Arrangements		Collateral		Net Amount
Assets	$	407	$	(110)			$	297
Liabilities		780		(110)	$	(254)		416