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Derivatives and Foreign Exchange Risk Management
 6 Months Ended
Oct. 26, 2012
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives and Foreign Exchange Risk Management Disclosure

Note 10 – Derivatives and Foreign Exchange Risk Management

 

The Company uses operational and economic hedges, as well as currency exchange rate derivative contracts and interest rate derivative instruments to manage the impact of currency exchange and interest rate changes on earnings and cash flows. In order to minimize earnings and cash flow volatility resulting from currency exchange rate changes, the Company enters into derivative instruments, principally forward currency exchange rate contracts. These contracts are designed to hedge anticipated foreign currency transactions and changes in the value of specific assets, liabilities, and probable commitments. At inception of the forward contract, the derivative is designated as either a freestanding derivative or a cash flow hedge. The primary currencies of the derivative instruments are the Euro and the Japanese Yen. The Company does not enter into currency exchange rate derivative contracts for speculative purposes. The gross notional amount of all currency exchange rate derivative instruments outstanding at October 26, 2012 and April 27, 2012 was $5.710 billion and $5.136 billion, respectively. The aggregate currency exchange rate losses for the three and six months ended October 26, 2012 were $25 million and $6 million, respectively. The aggregate currency exchange rate losses for the three and six months ended October 28, 2011 were $77 million and $133 million, respectively. These losses represent the net impact to the condensed consolidated statements of earnings for the derivative instruments presented below, offset by remeasurement gains on foreign currency denominated assets and liabilities.

 

The information that follows explains the various types of derivatives and financial instruments used by the Company, how and why the Company uses such instruments, how such instruments are accounted for, and how such instruments impact the Company's condensed consolidated balance sheets and statements of earnings.

 

Freestanding Derivative Forward Contracts

 

Freestanding derivative forward contracts are used to offset the Company's exposure to the change in value of specific foreign currency denominated assets and liabilities. These derivatives are not designated as hedges, and therefore, changes in the value of these forward contracts are recognized in earnings, thereby offsetting the current earnings effect of the related change in U.S. dollar value of foreign currency denominated assets and liabilities. The cash flows from these contracts are reported as operating activities in the condensed consolidated statements of cash flows. The gross notional amount of these contracts, not designated as hedging instruments, outstanding as of October 26, 2012 and April 27, 2012, was $1.759 billion and $2.039 billion, respectively.

 

The amount of (losses)/gains and location of the (losses)/gains in the condensed consolidated statements of earnings related to derivative instruments, not designated as hedging instruments, for the three and six months ended October 26, 2012 and October 28, 2011 are as follows:

(in millions)   Three months ended
Derivatives Not Designated as Hedging Instruments  Location October 26, 2012 October 28, 2011
Foreign currency exchange rate contracts Other expense, net $ (67) $ 37
         
(in millions)   Six months ended
Derivatives Not Designated as Hedging Instruments  Location October 26, 2012 October 28, 2011
Foreign currency exchange rate contracts Other expense, net $ (20) $ 20

Cash Flow Hedges

 

Foreign Currency Exchange Rate Risk

Forward contracts designated as cash flow hedges are designed to hedge the variability of cash flows associated with forecasted transactions denominated in a foreign currency that will take place in the future. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive loss and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. No gains or losses relating to ineffectiveness of cash flow hedges were recognized in earnings during the three and six months ended October 26, 2012 or October 28, 2011. No components of the hedge contracts were excluded in the measurement of hedge ineffectiveness and no hedges were derecognized or discontinued during the three and six months ended October 26, 2012 or October 28, 2011. The cash flows from these contracts are reported as operating activities in the condensed consolidated statements of cash flows. The gross notional amount of these contracts, designated as cash flow hedges, outstanding at October 26, 2012 and April 27, 2012, was $3.951 billion and $3.097 billion, respectively, and will mature within the subsequent three-year period.

 

The amount of (losses)/gains and location of the (losses)/gains in the condensed consolidated statements of earnings and other comprehensive income (OCI) related to foreign currency exchange rate contract derivative instruments designated as cash flow hedges for the three and six months ended October 26, 2012 and October 28, 2011 are as follows:

Three months ended         
October 26, 2012         
(in millions) Gross (Losses)/Gains Recognized in OCI on Effective Portion of Derivative  Effective Portion of (Losses)/Gains on Derivative Reclassified from Accumulated Other Comprehensive Loss into Income
Derivatives in Cash Flow Hedging Relationships  Amount  Location  Amount
Foreign currency exchange rate contracts $ (110)  Other expense, net $ 19
      Cost of products sold   3
Total $ (110)    $ 22
          
          
Three months ended         
October 28, 2011         
(in millions) Gross (Losses)/Gains Recognized in OCI on Effective Portion of Derivative  Effective Portion of (Losses)/Gains on Derivative Reclassified from Accumulated Other Comprehensive Loss into Income
Derivatives in Cash Flow Hedging Relationships  Amount  Location  Amount
Foreign currency exchange rate contracts $ 111  Other expense, net $ (55)
      Cost of products sold   7
Total $ 111    $ (48)
          
          
Six months ended         
October 26, 2012         
(in millions) Gross (Losses)/Gains Recognized in OCI on Effective Portion of Derivative  Effective Portion of (Losses)/Gains on Derivative Reclassified from Accumulated Other Comprehensive Loss into Income
Derivatives in Cash Flow Hedging Relationships  Amount  Location  Amount
Foreign currency exchange rate contracts $ (1)  Other expense, net $ 42
      Cost of products sold   1
Total $ (1)    $ 43
          
          
Six months ended         
October 28, 2011         
(in millions) Gross (Losses)/Gains Recognized in OCI on Effective Portion of Derivative  Effective Portion of (Losses)/Gains on Derivative Reclassified from Accumulated Other Comprehensive Loss into Income
Derivatives in Cash Flow Hedging Relationships  Amount  Location  Amount
Foreign currency exchange rate contracts $ 131  Other expense, net $ (109)
      Cost of products sold   15
Total $ 131    $ (94)

Forecasted Debt Issuance Interest Rate Risk

Forward starting interest rate derivative instruments designated as cash flow hedges are designed to manage the exposure to interest rate volatility with regard to future issuances of fixed-rate debt. For forward starting interest rate derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive loss and beginning in the period or periods in which the planned debt issuance occurs, the gain or loss is then reclassified into interest expense, net over the term of the related debt. As of October 26, 2012, the Company had $1.250 billion of pay fixed, forward starting interest rate swaps with a weighted average fixed rate of 2.78 percent, which were entered into in advance of planned debt issuances.

The market value of outstanding forward starting interest rate swap derivative instruments at October 26, 2012 and April 27, 2012 was an unrealized loss of $86 million and $45 million, respectively. These unrealized losses were recorded in other long-term liabilities with the offset recorded in OCI in the condensed consolidated balance sheets.

As of October 26, 2012 and April 27, 2012, the Company had $(23) million and $6 million, respectively, in after-tax net unrealized (losses)/gains associated with cash flow hedging instruments recorded in accumulated other comprehensive loss. The Company expects that $29 million of unrealized gains as of October 26, 2012 will be reclassified into the condensed consolidated statements of earnings over the next 12 months.

 

Fair Value Hedges

 

For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivatives as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings.

 

Interest rate derivative instruments designated as fair value hedges are designed to manage the exposure to interest rate movements and to reduce borrowing costs by converting fixed-rate debt into floating-rate debt. Under these agreements, the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount.

 

As of October 26, 2012 and April 27, 2012, the Company had interest rate swaps in gross notional amounts of $2.625 billion designated as fair value hedges of underlying fixed rate obligations. As of October 26, 2012, outstanding interest rate swap agreements were designated as fair value hedges of underlying fixed rate obligations including the Company's $1.250 billion 3.000 percent 2010 Senior Notes due 2015, the $600 million 4.750 percent 2005 Senior Notes due 2015, the $500 million 2.625 percent 2011 Senior Notes due 2016, the $500 million 4.125 percent 2011 Senior Notes due 2021, and the $675 million 3.125 percent 2012 Senior Notes due 2022. For additional information regarding the terms of the Company's interest rate swap agreements, refer to Note 10 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended April 27, 2012.

The market value of outstanding interest rate swap agreements was a $194 million unrealized gain and the market value of the hedged item was a $194 million unrealized loss at October 26, 2012, which were recorded in other assets with the offset recorded in long-term debt in the condensed consolidated balance sheet. No hedge ineffectiveness was recorded as a result of these fair value hedges for the three and six months ended October 26, 2012. No hedge ineffectiveness was recorded as a result of these fair value hedges for the three months ended October 28, 2011 and less than $1 million was recorded for the six months ended October 28, 2011, which was recorded as an increase in interest expense, net in the condensed consolidated statements of earnings.

During the three and six months ended October 26, 2012 and October 28, 2011, the Company did not have any ineffective fair value hedging instruments. In addition, the Company did not recognize any gains or losses during the three and six months ended October 26, 2012 or October 28, 2011 on firm commitments that no longer qualify as fair value hedges.

 

Balance Sheet Presentation

       

The following table summarizes the location and fair value amounts of derivative instruments reported in the condensed consolidated balance sheets as of October 26, 2012 and April 27, 2012. The fair value amounts are presented on a gross basis and are segregated between derivatives that are designated and qualify as hedging instruments and those that are not, and are further segregated by type of contract within those two categories.

October 26, 2012         
 Asset Derivatives Liability Derivatives
(in millions)Balance Sheet Location Fair Value Balance Sheet Location Fair Value
Derivatives designated as hedging instruments          
Foreign currency exchange rate contractsPrepaid expenses and other current assets $71 Other accrued expenses $33
Interest rate contractsOther assets  194 Other long-term liabilities  86
Foreign currency exchange rate contractsOther assets  17 Other long-term liabilities  12
Total derivatives designated as hedging instruments   $282   $131
          
Derivatives not designated as hedging instruments          
Foreign currency exchange rate contractsPrepaid expenses and other current assets $ 1 Other accrued expenses $ -
Total derivatives not designated as hedging instruments   $1   $ -
          
Total derivatives  $ 283   $131
          
          
April 27, 2012         
 Asset Derivatives Liability Derivatives
(in millions)Balance Sheet Location Fair Value Balance Sheet Location Fair Value
Derivatives designated as hedging instruments          
Foreign currency exchange rate contractsPrepaid expenses and other current assets $74 Other accrued expenses $33
Interest rate contractsOther assets  167 Other long-term liabilities  45
Foreign currency exchange rate contractsOther assets  13 Other long-term liabilities  2
Total derivatives designated as hedging instruments   $254   $80
          
Derivatives not designated as hedging instruments          
Foreign currency exchange rate contractsPrepaid expenses and other current assets $ - Other accrued expenses $2
Total derivatives not designated as hedging instruments   $ -   $2
          
Total derivatives  $ 254   $82

Concentrations of Credit Risk

 

Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist principally of interest-bearing investments, forward exchange derivative contracts, and trade accounts receivable.

 

The Company maintains cash and cash equivalents, investments, and certain other financial instruments (including currency exchange rate and interest rate derivative contracts) with various major financial institutions. The Company performs periodic evaluations of the relative credit standings of these financial institutions and limits the amount of credit exposure with any one institution. In addition, the Company has collateral credit agreements with its primary derivatives counterparties. Under these agreements, either party may be required to post eligible collateral when the market value of transactions covered by the agreement exceeds specific thresholds, thus limiting credit exposure for both parties. As of October 26, 2012 and April 27, 2012, no collateral was posted by either the Company or its counterparties.

 

Global concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of customers and their dispersion across many geographic areas. The Company monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business. However, a significant amount of trade receivables are with hospitals that are dependent upon governmental health care systems in many countries. The current economic conditions in many countries outside the U.S. (particularly the recent economic challenges faced by Italy, Spain, Portugal, and Greece), have deteriorated and may continue to increase the average length of time it takes the Company to collect on its outstanding accounts receivable in these countries as certain payment patterns have been impacted. Historically, accounts receivable balances with certain customers in these countries have accumulated over time and were subsequently settled as large lump-sum payments. As of October 26, 2012 and April 27, 2012, the Company's aggregate accounts receivable balance for Italy, Spain, Portugal, and Greece, net of the allowance for doubtful accounts, was $741 million and $967 million, respectively. In the first quarter of fiscal year 2013, the Company received a $212 million payment in Spain. Although the Company does not currently foresee a significant credit risk associated with the outstanding accounts receivable, repayment is dependent upon the financial stability of the economies of these countries. As of October 26, 2012 and April 27, 2012, no one customer represented more than 10 percent of the Company's outstanding accounts receivable.