Derivative Instruments and Fair Value Measurements | 9 Months Ended |
Sep. 27, 2014 |
Derivative Instruments and Fair Value Measurements [Abstract] | ' |
Derivative Instruments and Fair Value Measurements [Text Block] | ' |
Note 9 Derivative instruments and fair value measurements |
The Company is exposed to certain market risks such as changes in interest rates, foreign currency exchange rates, and commodity prices, which exist as a part of its ongoing business operations. Management uses derivative and non-derivative financial instruments and commodity instruments, including futures, options, and swaps, where appropriate, to manage these risks. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged. |
The Company designates derivatives as cash flow hedges, fair value hedges, net investment hedges, and uses other contracts to reduce volatility in interest rates, foreign currency and commodities. As a matter of policy, the Company does not engage in trading or speculative hedging transactions. |
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Total notional amounts of the Company's derivative instruments as of September 27, 2014 and December 28, 2013 were as follows: |
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| | September 27, | | | December 28, | | | | | | | | | | | | | | |
(millions) | | 2014 | | | 2013 | | | | | | | | | | | | | | |
Foreign currency exchange contracts | $ | 735 | | $ | 517 | | | | | | | | | | | | | | |
Interest rate contracts | | 2,997 | | | 2,400 | | | | | | | | | | | | | | |
Commodity contracts | | 519 | | | 361 | | | | | | | | | | | | | | |
Total | $ | 4,251 | | $ | 3,278 | | | | | | | | | | | | | | |
Following is a description of each category in the fair value hierarchy and the financial assets and liabilities of the Company that were included in each category at September 27, 2014 and December 28, 2013, measured on a recurring basis. |
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Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market. For the Company, level 1 financial assets and liabilities consist primarily of commodity derivative contracts. |
Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. For the Company, level 2 financial assets and liabilities consist of interest rate swaps and over-the-counter commodity and currency contracts. |
The Company's calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve. Over-the-counter commodity derivatives are valued using an income approach based on the commodity index prices less the contract rate multiplied by the notional amount. Foreign currency contracts are valued using an income approach based on forward rates less the contract rate multiplied by the notional amount. The Company's calculation of the fair value of level 2 financial assets and liabilities takes into consideration the risk of nonperformance, including counterparty credit risk. |
Level 3 – Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management's own assumptions about the assumptions a market participant would use in pricing the asset or liability. The Company did not have any level 3 financial assets or liabilities as of September 27, 2014 or December 28, 2013. |
The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet on a recurring basis as of September 27, 2014 and December 28, 2013: | |
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Derivatives designated as hedging instruments | | | | | | | | | | | |
| | | 27-Sep-14 | | | 28-Dec-13 | |
| | Level | | | Level | | | Total | | | Level | | | Level | | | Total | |
(millions) | | 1 | | | 2 | | | | | | 1 | | | 2 | | | | |
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Assets: | | | | | | | | | | | | | | | | | | |
Foreign currency exchange contracts: | | | | | | | | | | | | | | | | | | |
| Other prepaid assets | $ | - | | $ | 14 | | $ | 14 | | $ | - | | $ | 7 | | $ | 7 | |
Total assets | $ | - | | $ | 14 | | $ | 14 | | $ | - | | $ | 7 | | $ | 7 | |
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Liabilities: | | | | | | | | | | | | | | | | | | |
Foreign currency exchange contracts: | | | | | | | | | | | | | | | | | | |
| Other current liabilities | $ | - | | $ | -6 | | $ | -6 | | $ | - | | $ | -8 | | $ | -8 | |
Interest rate contracts: | | | | | | | | | | | | | | | | | | |
| Other current liabilities | | - | | | -25 | | | -25 | | | - | | | - | | | - | |
| Other liabilities (a) | | - | | | -38 | | | -38 | | | - | | | -59 | | | -59 | |
Commodity contracts: | | | | | | | | | | | | | | | | | | |
| Other current liabilities | | - | | | -10 | | | -10 | | | - | | | -9 | | | -9 | |
| Other liabilities | | - | | | -12 | | | -12 | | | - | | | -19 | | | -19 | |
Total liabilities | $ | - | | $ | -91 | | $ | -91 | | $ | - | | $ | -95 | | $ | -95 | |
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(a) The fair value of the related hedged portion of the Company's long-term debt, a level 2 liability, was $2.5 billion as of September 27, 2014 and December 28, 2013. | |
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Derivatives not designated as hedging instruments | | | | | | | | | | | |
| | | 27-Sep-14 | | | 28-Dec-13 | |
| | Level | | | Level | | | Total | | | Level | | | Level | | | Total | |
(millions) | | 1 | | | 2 | | | | | | 1 | | | 2 | | | | |
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Assets: | | | | | | | | | | | | | | | | | | |
Commodity contracts: | | | | | | | | | | | | | | | | | | |
| Other prepaid assets | $ | - | | $ | - | | $ | - | | $ | 3 | | $ | - | | $ | 3 | |
Total assets | $ | - | | $ | - | | $ | - | | $ | 3 | | $ | - | | $ | 3 | |
Liabilities: | | | | | | | | | | | | | | | | | | |
Commodity contracts: | | | | | | | | | | | | | | | | | | |
| Other current liabilities | $ | -35 | | $ | - | | $ | -35 | | $ | -7 | | $ | - | | $ | -7 | |
Total liabilities | $ | -35 | | $ | - | | $ | -35 | | $ | -7 | | $ | - | | $ | -7 | |
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During the second quarter of 2014, the Company designated a portion of its outstanding foreign currency denominated long-term debt as a net investment hedge of a portion of the Company's investment in its subsidiaries foreign currency denominated net assets. The carrying value of this debt was $639 million as of September 27, 2014. |
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The Company has elected to not offset the fair values of derivative assets and liabilities executed with the same counterparty that are generally subject to enforceable netting agreements. However, if the Company were to offset and record the asset and liability balances of derivatives on a net basis, the amounts presented in the Consolidated Balance Sheet as of September 27, 2014 and December 28, 2013 would be adjusted as detailed in the following table: |
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As of September 27, 2014: | | | | | | | | | | | | | | | |
| | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | | | | | | | | | | |
| | | | Amounts Presented in the Consolidated Balance Sheet | | Financial Instruments | | Cash Collateral Received/ Posted | | Net Amount | | | | | | | | | |
Total asset derivatives | $ | 14 | $ | -11 | $ | - | $ | 3 | | | | | | | | | |
Total liability derivatives | $ | -126 | $ | 11 | $ | 64 | $ | -51 | | | | | | | | | |
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As of December 28, 2013: | | | | | | | | | | | | | | | |
| | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | | | | | | | | | | |
| | | | Amounts Presented in the Consolidated Balance Sheet | | Financial Instruments | | Cash Collateral Received/ Posted | | Net Amount | | | | | | | | | |
Total asset derivatives | $ | 10 | $ | -10 | $ | - | $ | 0 | | | | | | | | | |
Total liability derivatives | $ | -102 | $ | 10 | $ | 21 | $ | -71 | | | | | | | | | |
The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the quarters ended September 27, 2014 and September 28, 2013 was as follows: |
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Derivatives in fair value hedging relationships |
| | | | | | | | | | | | | | Location of gain | | Gain (loss) |
| | | | | | | | | | | | | | (loss) recognized | | recognized in |
(millions) | | | | | | | | | | | | | | in income | | income (a) |
| | | | | | | | | | | | | | | | Sep. 27, | | | Sep. 28, |
| | | | | | | | | | | | | | | | 2014 | | | 2013 |
Foreign currency exchange contracts | | | | | | | | | | | | | | Other income (expense), net | $ | 1 | | $ | -1 |
Interest rate contracts | | | | | | | | | | | | | | Interest expense | | 4 | | | -3 |
Total | | | | | | | | | | | | | | | $ | 5 | | $ | -4 |
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(a) Includes the ineffective portion and amount excluded from effectiveness testing. | | | | | | | | |
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Derivatives in cash flow hedging relationships |
| | | | Location of gain | | Gain (loss) | | Location of gain | | Gain (loss) |
| | Gain (loss) | | (loss) reclassified | | reclassified from | | (loss) recognized | | recognized in |
(millions) | | recognized in AOCI | | from AOCI | | AOCI into income | | in income (a) | | income (a) |
| | Sep. 27, | | | Sep. 28, | | | | Sep. 27, | | | Sep. 28, | | | | Sep. 27, | | | Sep. 28, |
| | 2014 | | | 2013 | | | | 2014 | | | 2013 | | | | 2014 | | | 2013 |
Foreign currency exchange contracts | $ | 16 | | $ | -4 | | COGS | $ | - | | $ | 2 | | Other income (expense), net | $ | -1 | | $ | - |
Foreign currency exchange contracts | | 3 | | | -3 | | SGA expense | | 2 | | | 1 | | Other income (expense), net | | - | | | - |
Interest rate contracts | | -20 | | | - | | Interest expense | | - | | | 1 | | N/A | | - | | | - |
Commodity contracts | | -1 | | | - | | COGS | | -2 | | | -2 | | Other income (expense), net | | - | | | - |
Total | $ | -2 | | $ | -7 | | | $ | - | | $ | 2 | | | $ | -1 | | $ | - |
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(a) Includes the ineffective portion and amount excluded from effectiveness testing. | | | | | | | | |
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Derivatives and non-derivatives in net investment hedging relationships |
| | | | | | | | | | Gain (loss) |
| | | | | | | | | | | | | | | | recognized in |
(millions) | | | | | | | | | AOCI |
| | | | | | | | | | | | | | | | Sep. 27, | | | Sep. 28, |
| | | | | | | | | | | | | | | | 2014 | | | 2013 |
Foreign currency denominated long-term debt | | | | | | | | | | | | | | | $ | 42 | | $ | - |
Total | | | | | | | | | | | | | | $ | 42 | | $ | - |
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Derivatives not designated as hedging instruments |
| | | | | | | | | | | | | | Location of gain | | Gain (loss) |
| | | | | | | | | | | | | | (loss) recognized | | recognized in |
(millions) | | | | | | | | | | | | | | in income | | income |
| | | | | | | | | | | | | | | | Sep. 27, | | | Sep. 28, |
| | | | | | | | | | | | | | | | 2014 | | | 2013 |
Foreign currency exchange contracts | | | | | | | | | | | | | | Other income (expense), net | $ | 1 | | $ | 1 |
Commodity contracts | | | | | | | | | | | | | | COGS | | -61 | | | -2 |
Total | | | | | | | | | | | | | | | $ | -60 | | $ | -1 |
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The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the year-to-date periods ended September 27, 2014 and September 28, 2013 were as follows: |
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Derivatives in fair value hedging relationships |
| | | | | | | | | | | | | | Location of gain | | Gain (loss) |
| | | | | | | | | | | | | | (loss) recognized | | recognized in |
(millions) | | | | | | | | | | | | | | in income | | income(a) |
| | | | | | | | | | | | | | | | Sep. 27, | | | Sep. 28, |
| | | | | | | | | | | | | | | | 2014 | | | 2013 |
Foreign currency exchange contracts | | | | | | | | | | | | | | Other income (expense), net | $ | 3 | | $ | 2 |
Interest rate contracts | | | | | | | | | | | | | | Interest expense | | 13 | | | -2 |
Total | | | | | | | | | | | | | | | $ | 16 | | $ | - |
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(a) Includes the ineffective portion and amount excluded from effectiveness testing. |
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Derivatives in cash flow hedging relationships |
| | | | Location of gain | | Gain (loss) | | Location of gain | | Gain (loss) |
| | Gain (loss) | | (loss) reclassified | | reclassified from | | (loss) recognized | | recognized in |
(millions) | | recognized in AOCI | | from AOCI | | AOCI into income | | in income (a) | | income(a) |
| | Sep. 27, | | | Sep. 28, | | | | Sep. 27, | | | Sep. 28, | | | | Sep. 27, | | | Sep. 28, |
| | 2014 | | | 2013 | | | | 2014 | | | 2013 | | | | 2014 | | | 2013 |
Foreign currency exchange contracts | $ | 13 | | $ | 8 | | COGS | $ | 2 | | $ | 7 | | Other income (expense), net | $ | -3 | | $ | - |
Foreign currency exchange contracts | | 4 | | | -2 | | SGA expense | | 5 | | | 1 | | Other income (expense), net | | - | | | - |
Interest rate contracts | | -43 | | | - | | Interest expense | | 9 | | | 3 | | N/A | | - | | | - |
Commodity contracts | | - | | | -1 | | COGS | | -5 | | | -7 | | Other income (expense), net | | - | | | - |
Total | $ | -26 | | $ | 5 | | | $ | 11 | | $ | 4 | | | $ | -3 | | $ | - |
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(a) Includes the ineffective portion and amount excluded from effectiveness testing. |
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Derivatives and non-derivatives in net investment hedging relationships |
| | | | | | | | | | | | | | | | Gain (loss) |
| | | | | | | | | | | | | | | | recognized in |
(millions) | | | | | | | | | | | | | | | | AOCI |
| | | | | | | | | | | | | | | | Sep. 27, | | | Sep. 28, |
| | | | | | | | | | | | | | | | 2014 | | | 2013 |
Foreign currency denominated long-term debt | | | | | | | | | | | | | | | $ | 47 | | $ | - |
Total | | | | | | | | | | | | | | | $ | 47 | | $ | - |
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Derivatives not designated as hedging instruments |
| | | | | | | | | | | | | | Location of gain | | Gain (loss) |
| | | | | | | | | | | | | | (loss) recognized | | recognized in |
(millions) | | | | | | | | | | | | | | in income | | income |
| | | | | | | | | | | | | | | | Sep. 27, | | | Sep. 28, |
| | | | | | | | | | | | | | | | 2014 | | | 2013 |
Foreign currency exchange contracts | | | | | | | | | | | | | | COGS | $ | - | | $ | 2 |
Foreign currency exchange contracts | | | | | | | | | | | | | | Other income (expense), net | | -1 | | | - |
Interest rate contracts | | | | | | | | | | | | | | Interest expense | | -4 | | | - |
Commodity contracts | | | | | | | | | | | | | | COGS | | -66 | | | -26 |
Total | | | | | | | | | | | | | | | $ | -71 | | $ | -24 |
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During the next 12 months, the Company expects $2 million of net deferred losses reported in AOCI at September 27, 2014 to be reclassified to income, assuming market rates remain constant through contract maturities. |
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Certain of the Company's derivative instruments contain provisions requiring the Company to post collateral on those derivative instruments that are in a liability position if the Company's credit rating is at or below BB+ (S&P), or Baa1 (Moody's). The fair value of all derivative instruments with credit-risk-related contingent features in a liability position on September 27, 2014 was $79 million. If the credit-risk-related contingent features were triggered as of September 27, 2014, the Company would be required to post additional collateral of $64 million. In addition, certain derivative instruments contain provisions that would be triggered in the event the Company defaults on its debt agreements. There were no collateral posting requirements as of September 27, 2014 triggered by credit-risk-related contingent features, however, there was $15 million of collateral posted in connection with reciprocal collateralization agreements as discussed under “Counterparty credit risk concentration and collateral requirements” below. |
Fair Value Measurements on a Nonrecurring Basis |
As part of Project K the Company will be consolidating the usage of and disposing certain long-lived assets, including manufacturing facilities and Corporate owned assets over the term of the program. See Note 3 for more information regarding Project K. |
In the quarter ended September 27, 2014, long-lived assets of $24 million, related to a manufacturing facility in our U.S. Snacks segment, were written down to an estimated fair value of $3 million due to Project K activities. The Company's calculation of the fair value of long-lived assets is based on Level 3 inputs, including market comparables, market trends and the condition of the assets. |
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The following table presents level 3 assets that were measured at fair value on the Consolidated Balance Sheet on a nonrecurring basis as of September 27, 2014: | | | | | | | | | | | | | | |
(millions) | | Fair Value | | | Total Loss | | | | | | | | | | | | | | |
Description: | | | | | | | | | | | | | | | | | | | |
Long-lived assets | $ | 3 | | $ | -21 | | | | | | | | | | | | | | |
Total | $ | 3 | | $ | -21 | | | | | | | | | | | | | | |
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Financial instruments |
The carrying values of the Company's short-term items, including cash, cash equivalents, accounts receivable, accounts payable and notes payable approximate fair value. The fair value of the Company's long-term debt, which are level 2 liabilities, is calculated based on broker quotes and was as follows at September 27, 2014: |
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(millions) | | Fair Value | | | Carrying Value | | | | | | | | | | | | | | |
Current maturities of long-term debt | $ | 607 | | $ | 607 | | | | | | | | | | | | | | |
Long-term debt | | 6,471 | | | 5,963 | | | | | | | | | | | | | | |
Total | $ | 7,078 | | $ | 6,570 | | | | | | | | | | | | | | |
Counterparty credit risk concentration and collateral requirements |
The Company is exposed to credit loss in the event of nonperformance by counterparties on derivative financial and commodity contracts. Management believes a concentration of credit risk with respect to derivative counterparties is limited due to the credit ratings and use of master netting and reciprocal collateralization agreements with the counterparties and the use of exchange-traded commodity contracts. |
Master netting agreements apply in situations where the Company executes multiple contracts with the same counterparty. Certain counterparties represent a concentration of credit risk to the Company. If those counterparties fail to perform according to the terms of derivative contracts, this would result in a loss to the Company. As of September 27, 2014, the Company was not in a significant net asset position with any counterparties with which a master netting agreement would apply. |
For certain derivative contracts, reciprocal collateralization agreements with counterparties call for the posting of collateral in the form of cash, treasury securities or letters of credit if a fair value loss position to the Company or its counterparties exceeds a certain amount. In addition, the Company is required to maintain cash margin accounts in connection with its open positions for exchange-traded commodity derivative instruments executed with the counterparty that are subject to enforceable netting agreements. As of September 27, 2014 the Company had posted collateral of $15 million in the form of cash, which was reflected as an increase in accounts receivable, net on the Consolidated Balance Sheet. As of September 27, 2014 the Company posted $49 million in margin deposits for exchange-traded commodity derivative instruments, which was reflected as an increase in accounts receivable, net. |
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Management believes concentrations of credit risk with respect to accounts receivable is limited due to the generally high credit quality of the Company's major customers, as well as the large number and geographic dispersion of smaller customers. However, the Company conducts a disproportionate amount of business with a small number of large multinational grocery retailers, with the five largest accounts encompassing approximately 27% of consolidated trade receivables at September 27, 2014. |
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