Financial Instruments

8 Months Ended

Sep. 05, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

We are exposed to market risks arising from adverse changes in:

•commodity prices, affecting the cost of our raw materials and energy;

•foreign exchange rates and currency restrictions; and

•interest rates.

There have been no material changes during the 36 weeks ended September 5, 2020 with respect to our risk management policies or strategies and valuation techniques used in measuring the fair value of the financial assets or liabilities disclosed in Note 9 to our consolidated financial statements in our 2019 Form 10-K.

Certain of our agreements with our counterparties require us to post full collateral on derivative instruments in a net liability position if our credit rating is at A2 (Moody’s Investors Service, Inc.) or A (S&P Global Ratings) and we have been placed on credit watch for possible downgrade or if our credit rating falls below these levels. The fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position as of September 5, 2020 was $376 million. We have posted no collateral under these contracts and no credit-risk-related contingent features were triggered as of September 5, 2020.

The notional amounts of our financial instruments used to hedge the above risks as of September 5, 2020 and December 28, 2019 are as follows:


	Notional Amounts^(a)
	9/5/2020		12/28/2019
Commodity	$	1.0	$	1.1
Foreign exchange	$	2.0	$	1.9
Interest rate	$	4.2	$	5.0
Net investment ^(b)	$	2.6	$	2.5

(a)In billions.

(b)The total notional of our net investment hedge consists of non-derivative debt instruments.

As of September 5, 2020, approximately 10% of total debt, after the impact of the related interest rate derivative instruments, was subject to variable rates, compared to approximately 9% as of December 28, 2019.

Fair Value Measurements

The fair values of our financial assets and liabilities as of September 5, 2020 and December 28, 2019 are categorized as follows:


		9/5/2020						12/28/2019
	Fair Value Hierarchy Levels	Assets^(a)		Liabilities^(a)		Assets^(a)		Liabilities^(a)

Short-term investments:
Index funds ^(b)	1	$	211	$	—	$	229	$	—
Time deposits ^(c)	2	400		—		—		—
		$	611	$	—	$	229	$	—
Prepaid forward contracts ^(d)	2	$	17	$	—	$	17	$	—
Deferred compensation ^(e)	2	$	—	$	449	$	—	$	468
Contingent consideration ^(f)	3	$	—	$	874	$	—	$	—
Derivatives designated as fair value hedging instruments:
Interest rate ^(g)	2	$	4	$	—	$	—	$	5
Derivatives designated as cash flow hedging instruments:
Foreign exchange ^(h)	2	$	21	$	41	$	5	$	32
Interest rate ^(h)	2	—		366		—		390
Commodity ⁽ⁱ⁾	1	—		—		2		5
Commodity ^(j)	2	8		6		2		5
		$	29	$	413	$	9	$	432
Derivatives not designated as hedging instruments:
Foreign exchange ^(h)	2	$	26	$	3	$	3	$	2
Commodity ⁽ⁱ⁾	1	—		—		23		7
Commodity ^(j)	2	11		24		6		24
		$	37	$	27	$	32	$	33
Total derivatives at fair value ^(k)		$	70	$	440	$	41	$	470
Total		$	698	$	1,763	$	287	$	938

(a)Unless otherwise noted, financial assets are classified on our balance sheet within prepaid expenses and other current assets and other assets. Financial liabilities are classified on our balance sheet within accounts payable and other current liabilities and other liabilities.

(b)Based on the price of index funds. These investments are classified as short-term investments and are used to manage a portion of market risk arising from our deferred compensation liability.

(c)Time deposits classified as short-term investments approximate fair value due to their short-term maturity.

(d)Based primarily on the price of our common stock.

(e)Based on the fair value of investments corresponding to employees’ investment elections.

(f)In connection with our acquisition of Rockstar, we recorded a liability for tax-related contingent consideration payable over up to 15 years, with an option to accelerate all remaining payments, with estimated maximum payments of approximately $1.1 billion, using current tax rates. The fair value of the liability is estimated using probability-weighted, discounted future cash flows at current tax rates. The significant unobservable inputs (Level 3) used to estimate the fair value include the expected future tax benefits associated with the acquisition, the probability that the option to accelerate all remaining payments will be exercised and discount rates. The expected annual future tax benefits range from approximately $40 million to $100 million, with an average of $70 million. The probability, in any given year, that the option to accelerate will be exercised ranges from 0 to 10 percent, with a weighted-average payment period of approximately 7 years. The discount rates range from less than 1 percent to 5 percent, with a weighted average of 2 percent. The contingent consideration measured at fair value using unobservable inputs as of September 5, 2020 is $874 million, comprised of an $848 million liability recognized at the acquisition date of Rockstar and a fair value increase of $10 million and $26 million in the 12 and 36 weeks ended September 5, 2020, respectively, recorded in selling, general and administrative expenses.

(g)Based on London Interbank Offered Rate forward rates. As of September 5, 2020 and December 28, 2019, the carrying amount of hedged fixed-rate debt was $1.5 billion and $2.2 billion, respectively, and classified on our balance sheet within short-term and long-term debt obligations. As of September 5, 2020 and December 28, 2019, the cumulative amount of fair value hedging adjustments to hedged fixed-rate debt was a $4 million gain and a $5 million loss, respectively. As of September 5, 2020 and December 28, 2019, the cumulative amount of fair value hedging adjustments on discontinued hedges was a $28 million loss and a $49 million loss, respectively, which is being amortized over the remaining life of the related debt obligations.

(h)Based on recently reported market transactions of spot and forward rates.

(i)Based on quoted contract prices on futures exchange markets.

(j)Based on recently reported market transactions of swap arrangements.

(k)Derivative assets and liabilities are presented on a gross basis on our balance sheet. Amounts subject to enforceable master netting arrangements or similar agreements which are not offset on the balance sheet as of September 5, 2020 and December 28, 2019 were not material. Collateral received or posted against our asset or liability positions was not material. Collateral posted of $61 million and $58 million as of September 5, 2020 and December 28, 2019, respectively, is classified as restricted cash.

The carrying amounts of our cash and cash equivalents approximate fair value due to their short-term maturity. The fair value of our debt obligations as of September 5, 2020 and December 28, 2019 was $50 billion and $34 billion, respectively, based upon prices of similar instruments in the marketplace, which are considered Level 2 inputs.

Losses/(gains) on our hedging instruments are categorized as follows:


	12 Weeks Ended
	Fair Value/Non- designated Hedges						Cash Flow and Net Investment Hedges
	Losses/(Gains) Recognized in Income Statement^(a)						Losses/(Gains) Recognized in Accumulated Other Comprehensive Loss						Losses/(Gains) Reclassified from Accumulated Other Comprehensive Loss into Income Statement^(b)
	9/5/2020		9/7/2019		9/5/2020		9/7/2019		9/5/2020		9/7/2019
Foreign exchange	$	(10)	$	11	$	31	$	(2)	$	(22)	$	4
Interest rate	4		(12)		(117)		65		(102)		38
Commodity	(37)		27		(29)		32		24		1
Net investment	—		—		118		(40)		—		—
Total	$	(43)	$	26	$	3	$	55	$	(100)	$	43


	36 Weeks Ended
	Fair Value/Non- designated Hedges						Cash Flow and Net Investment Hedges
	Losses/(Gains) Recognized in Income Statement^(a)						Losses/(Gains) Recognized in Accumulated Other Comprehensive Loss						Losses/(Gains) Reclassified from Accumulated Other Comprehensive Loss into Income Statement^(b)
	9/5/2020		9/7/2019		9/5/2020		9/7/2019		9/5/2020		9/7/2019
Foreign exchange	$	(11)	$	15	$	(47)	$	16	$	(37)	$	—
Interest rate	(8)		(62)		(24)		117		(73)		54
Commodity	120		16		48		19		40		3
Net investment	—		—		159		(55)		—		—
Total	$	101	$	(31)	$	136	$	97	$	(70)	$	57

(a)Foreign exchange derivative losses/gains are primarily included in selling, general and administrative expenses. Interest rate derivative losses/gains are primarily from fair value hedges and are included in net interest expense and other. These losses/gains are substantially offset by decreases/increases in the value of the underlying debt, which are also included in net interest expense and other. Commodity derivative losses/gains are included in either cost of sales or selling, general and administrative expenses, depending on the underlying commodity.

(b)Foreign exchange derivative losses/gains are included in cost of sales. Interest rate derivative losses/gains are included in net interest expense and other. Commodity derivative losses/gains are included in either cost of sales or selling, general and administrative expenses, depending on the underlying commodity.

Based on current market conditions, we expect to reclassify net losses of $46 million related to our cash flow hedges from accumulated other comprehensive loss into net income during the next 12 months.