Derivative Financial Instruments

6 Months Ended

May 29, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

We may use derivatives to partially offset our business exposure to foreign currency and interest rate risk on expected future cash flows, and certain existing assets and liabilities. We do not use any of our derivative instruments for trading purposes.

We enter into master netting arrangements to mitigate credit risk in derivative transactions by permitting net settlement of transactions with the same counterparty. We do not offset fair value amounts recognized for derivative instruments under master netting arrangements. We also enter into collateral security agreements with certain of our counterparties to exchange cash collateral when the net fair value of certain derivative instruments fluctuates from contractually established thresholds. Collateral posted is included in prepaid expenses and other current assets and collateral received is included in accrued expenses on our condensed consolidated balance sheets.

Cash Flow Hedges

In countries outside the United States, we transact business in U.S. Dollars and in various other currencies. We may use foreign exchange option contracts or forward contracts to hedge a portion of our forecasted foreign currency denominated revenue. These foreign exchange contracts, carried at fair value, have maturities of up to twelve months.

In June 2019, in anticipation of refinancing our $2.25 billion term loan due April 30, 2020 (“Term Loan”) and $900 million 4.75% fixed interest rate senior notes due February 1, 2020 (“2020 Notes”), we entered into Treasury lock agreements with large financial institutions which fixed benchmark U.S. Treasury rates for an aggregate notional amount of $1 billion of our future debt issuance. These derivative instruments hedged the impact of changes in the benchmark interest rate to future interest payments and were settled upon debt issuance in the first quarter of fiscal 2020. We incurred a loss related to the settlement of the instruments which is amortized to interest expense over the term of our debt due February 1, 2030. See Note 15 for further details regarding our debt.

To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. We record changes in fair value of these cash flow hedges in accumulated other comprehensive income (loss) in our condensed consolidated balance sheets, until the forecasted transaction occurs. When the forecasted transaction affects earnings, we reclassify the related gain or loss on the foreign currency and Treasury lock cash flow hedges to revenue and interest expense, respectively. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income (loss) to the same income statement line item as the hedged item. We evaluate hedge effectiveness at the inception of the hedge prospectively, and on an ongoing basis both retrospectively and prospectively. If we do not elect hedge accounting, or the contract does not qualify for hedge accounting treatment, the changes in fair value from period to period are recorded in the same income statement line item as the hedged item.

Effective in the third quarter of fiscal 2019, all changes in fair value of our foreign currency cash flow hedges are recorded in accumulated other comprehensive income (loss). Prior to this, we recorded the time value of purchased contracts in other income (expense), net in our condensed consolidated statements of income.

Fair Value Hedges

During the third quarter of fiscal 2014, we entered into interest rate swaps designated as fair value hedge related to our 2020 Notes. The interest rate swaps converted the fixed interest rate on the 2020 Notes to a floating interest rate based on the London Interbank Offered Rate (“LIBOR”). See Note 15 for further details regarding our debt.

The interest rate swaps were accounted for as fair value hedges and substantially offset the changes in fair value of the hedged portion of the underlying debt that were attributable to the changes in market risk. Therefore, the gains and losses related to changes in the fair value of the interest rate swaps were included in other income (expense), net in our condensed consolidated statements of income.

During the first quarter of fiscal 2020, our 2020 Notes became due and were paid in conjunction with our debt refinancing. As of May 29, 2020, the interest rate swap agreements had matured and were no longer recognized in our condensed consolidated financial statements.

Non-Designated Hedges

Our derivatives not designated as hedging instruments consist of foreign currency forward contracts that we primarily use to hedge monetary assets and liabilities denominated in non-functional currencies. The changes in fair value of these contracts is recorded to other income (expense), net in our condensed consolidated statements of income. Changes in the fair value of the underlying assets and liabilities associated with the hedged risk are generally offset by the changes in the fair value of the related contracts.

The fair value of derivative instruments on our condensed consolidated balance sheets as of May 29, 2020 and November 29, 2019 were as follows:



(in millions)	2020				2019
	Fair Value Asset Derivatives		Fair Value Liability Derivatives		Fair Value Asset Derivatives		Fair Value Liability Derivatives
Derivatives designated as hedging instruments:
Foreign exchange option contracts^{(1) (2)}	$	32	$	—	$	26	$	—
Treasury lock⁽¹⁾	—		—		—		30
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts⁽¹⁾	6		5		3		3
Total derivatives	$	38	$	5	$	29	$	33

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⁽¹⁾	Fair value asset derivatives are included in prepaid expenses and other current assets and fair value liability derivatives are included in accrued expenses on our condensed consolidated balance sheets.


⁽²⁾	Includes net derivatives gain expected to be recognized into revenue within the next 18 months, of which $5 million is expected within the next 12 months.

Gains (losses) on derivative instruments, net of tax, recognized in our condensed consolidated statements of comprehensive income for the three and six months ended May 29, 2020 and May 31, 2019 were as follows:



	Three Months				Six Months
(in millions)	2020		2019		2020			2019
Derivatives in cash flow hedging relationships:
Foreign exchange option contracts	$	1	$	17	$	3		$	8
Treasury lock	$	—	$	—	$	(1	)	$	—

The effects of derivative instruments on our condensed consolidated statements of income for the three months ended May 29, 2020 and May 31, 2019 were as follows:



(in millions)	2020								2019
	Revenue		Interest Expense			Other Income (Expense), Net			Revenue		Other Income (Expense), Net
Derivatives in cash flow hedging relationships:
Foreign exchange option contracts⁽¹⁾
Net gain (loss) reclassified from accumulated other comprehensive income into income, net of tax	$	5	$	—		$	—		$	9	$	—
Amount excluded from effectiveness testing and ineffective portion	$	—	$	—		$	—		$	—	$	(12	)
Treasury lock
Net gain (loss) reclassified from accumulated other comprehensive income into income, net of tax	$	—	$	(1	)	$	—		$	—	$	—
Derivatives not designated as hedging relationships:
Foreign exchange forward contracts	$	—	$	—		$	(5	)	$	—	$	3

The effects of derivative instruments on our condensed consolidated statements of income for the six months ended May 29, 2020 and May 31, 2019 were as follows:



(in millions)	2020								2019
	Revenue		Interest Expense			Other Income (Expense), Net			Revenue		Other Income (Expense), Net
Derivatives in cash flow hedging relationships:
Foreign exchange option contracts⁽¹⁾
Net gain (loss) reclassified from accumulated other comprehensive income into income, net of tax	$	12	$	—		$	—		$	17	$	—
Amount excluded from effectiveness testing and ineffective portion	$	—	$	—		$	—		$	—	$	(24	)
Treasury lock
Net gain (loss) reclassified from accumulated other comprehensive income into income, net of tax	$	—	$	(1	)	$	—		$	—	$	—
Derivatives not designated as hedging relationships:
Foreign exchange forward contracts	$	—	$	—		$	(7	)	$	—	$	1

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⁽¹⁾

Starting the third quarter of fiscal 2019, all changes in the fair value of our foreign currency cash flow hedges are recorded in accumulated other comprehensive income.