Derivative Instruments
The Company manages its exposure to various risks relating to its ongoing business operations according to a risk management policy. The primary risks managed with derivative instruments are interest rate risk and foreign exchange risk.
The Company's derivative positions measured at fair value are summarized in the following tables:
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| | | | | | | | | | | | | | | |
| As of September 28, 2013 |
| Current Assets | | Other Assets | | Other Accrued Liabilities | | Other Long- Term Liabilities |
Derivatives designated as hedges | | | | | | | |
Foreign exchange | $ | 146 |
| | $ | 106 |
| | $ | (68 | ) | | $ | (24 | ) |
Interest rate | — |
| | 170 |
| | (94 | ) | | — |
|
Derivatives not designated as hedges | | | | | | | |
Foreign exchange | 15 |
| | — |
| | (82 | ) | | (27 | ) |
Gross fair value of derivatives | 161 |
| | 276 |
| | (244 | ) | | (51 | ) |
Counterparty netting | (137 | ) | | (34 | ) | | 143 |
| | 28 |
|
Total Derivatives (1) | $ | 24 |
| | $ | 242 |
| | $ | (101 | ) | | $ | (23 | ) |
|
| | | | | | | | | | | | | | | |
| As of September 29, 2012 |
| Current Assets | | Other Assets | | Other Accrued Liabilities | | Other Long- Term Liabilities |
Derivatives designated as hedges | | | | | | | |
Foreign exchange | $ | 84 |
| | $ | 30 |
| | $ | (94 | ) | | $ | (50 | ) |
Interest rate | 1 |
| | 238 |
| | — |
| | — |
|
Derivatives not designated as hedges | | | | | | | |
Foreign exchange | 258 |
| | 18 |
| | (91 | ) | | — |
|
Gross fair value of derivatives | 343 |
| | 286 |
| | (185 | ) | | (50 | ) |
Counterparty netting | (117 | ) | | (36 | ) | | 117 |
| | 36 |
|
Total Derivatives (1) | $ | 226 |
| | $ | 250 |
| | $ | (68 | ) | | $ | (14 | ) |
| |
(1) | Refer to Note 15 for further information on derivative fair values and counterparty netting. |
Interest Rate Risk Management
The Company is exposed to the impact of interest rate changes primarily through its borrowing activities. The Company’s objective is to mitigate the impact of interest rate changes on earnings and cash flows and on the market value of its borrowings. In accordance with its policy, the Company targets its fixed-rate debt as a percentage of its net debt between a minimum and maximum percentage. The Company typically uses pay-floating and pay-fixed interest rate swaps to facilitate its interest rate management activities.
The Company designates pay-floating interest rate swaps as fair value hedges of fixed-rate borrowings effectively converting fixed-rate borrowings to variable rate borrowings indexed to LIBOR. As of September 28, 2013 and September 29, 2012, the total notional amount of the Company’s pay-floating interest rate swaps was $5.6 billion and $3.1 billion, respectively. The following table summarizes adjustments related to fair value hedges included in net interest expense in the Consolidated Statements of Income.
|
| | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
Gain (loss) on interest rate swaps | $ | (180 | ) | | $ | 23 |
| | $ | 17 |
|
Gain (loss) on hedged borrowings | 180 |
| | (23 | ) | | (17 | ) |
In addition, the Company realized net benefits of $80 million, $58 million and $66 million for fiscal years 2013, 2012 and 2011, respectively, in net interest expense related to the pay-floating interest rate swaps.
The Company may designate pay-fixed interest rate swaps as cash flow hedges of interest payments on floating-rate borrowings. Pay-fixed swaps effectively convert floating rate borrowings to fixed-rate borrowings. The unrealized gains or losses from these cash flow hedges are deferred in AOCI and recognized in interest expense as the interest payments occur. The Company did not have pay-fixed interest rate swaps that were designated as cash flow hedges of interest payments at September 28, 2013 or at September 29, 2012.
Foreign Exchange Risk Management
The Company transacts business globally and is subject to risks associated with changing foreign currency exchange rates. The Company’s objective is to reduce earnings and cash flow fluctuations associated with foreign currency exchange rate changes, enabling management to focus on core business issues and challenges.
The Company enters into option and forward contracts that change in value as foreign currency exchange rates change to protect the value of its existing foreign currency assets, liabilities, firm commitments and forecasted but not firmly committed foreign currency transactions. In accordance with policy, the Company hedges its forecasted foreign currency transactions for periods generally not to exceed four years within an established minimum and maximum range of annual exposure. The gains and losses on these contracts offset changes in the U.S. dollar equivalent value of the related forecasted transaction, asset, liability or firm commitment. The principal currencies hedged are the euro, Japanese yen, Canadian dollar and British pound. Cross-currency swaps are used to effectively convert foreign currency-denominated borrowings into U.S. dollar denominated borrowings.
The Company designates foreign exchange forward and option contracts as cash flow hedges of firmly committed and forecasted foreign currency transactions. As of September 28, 2013 and September 29, 2012, the notional amounts of the Company’s net foreign exchange cash flow hedges were $4.3 billion and $4.6 billion, respectively. Mark-to-market gains and losses on these contracts are deferred in AOCI and are recognized in earnings when the hedged transactions occur, offsetting changes in the value of the foreign currency transactions. Gains and losses recognized related to ineffectiveness for fiscal years 2013, 2012 and 2011 were not material. Net deferred gains recorded in AOCI for contracts that will be reclassified to earnings in the next twelve months totaled $64 million.
Foreign exchange risk management contracts with respect to foreign currency assets and liabilities are not designated as hedges and do not qualify for hedge accounting. The notional amounts of these foreign exchange contracts at September 28, 2013 and September 29, 2012 were $4.3 billion and $4.1 billion, respectively. The following table summarizes the net foreign exchange gains or losses recognized on foreign currency denominated assets and liabilities and the offsetting net foreign exchange gains or losses on the related foreign exchange contracts for fiscal years 2013, 2012 and 2011 by corresponding line item in which they are recorded in the Consolidated Statements of Income:
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| | | | | | | | | | | | | | | | | | | | | | | |
| Costs and Expenses | | Interest Expense |
| 2013 | | 2012 | | 2011 | | 2013 | | 2012 | | 2011 |
Net gains (losses) on foreign currency denominated assets and liabilities | $ | (33 | ) | | $ | (63 | ) | | $ | 15 |
| | $ | 199 |
| | $ | (9 | ) | | $ | (40 | ) |
Net gains (losses) on foreign exchange risk management contracts not designated as hedges | (8 | ) | | 9 |
| | (16 | ) | | (194 | ) | | — |
| | 40 |
|
Net gains (losses) | $ | (41 | ) | | $ | (54 | ) | | $ | (1 | ) | | $ | 5 |
| | $ | (9 | ) | | $ | — |
|
Commodity Price Risk Management
The Company is subject to the volatility of commodities prices and the Company designates certain commodity forward contracts as cash flow hedges of forecasted commodity purchases. Mark-to-market gains and losses on these contracts are deferred in AOCI and are recognized in earnings when the hedged transactions occur, offsetting changes in the value of commodity purchases. The fair value of commodity hedging contracts at September 28, 2013 and September 29, 2012 were not material. The related gains and losses recognized in earnings were not material for fiscal years 2013, 2012 and 2011.
Risk Management – Other Derivatives Not Designated as Hedges
The Company enters into certain other risk management contracts that are not designated as hedges and do not qualify for hedge accounting. These contracts, which include certain commodity swap contracts, are intended to offset economic exposures of the Company and are carried at market value with any changes in value recorded in earnings. The fair value of these contracts at September 28, 2013 and September 29, 2012 were not material. The related gains and losses recognized in earnings were not material for fiscal years 2013, 2012 and 2011.
At October 1, 2011, the notional amount of pay fixed interest rate swaps not designated as hedges was $184 million. On June 5, 2012, the Company terminated these pay fixed interest rate swaps in connection with the repurchase of securitized vacation ownership mortgage receivables.
Contingent Features
The Company’s derivative financial instruments may require the Company to post collateral in the event that a net liability position with a counterparty exceeds limits defined by contract and that vary with the Company’s credit rating. If the Company’s credit ratings were to fall below investment grade, such counterparties would also have the right to terminate our derivative contracts, which could lead to a net payment to or from the Company for the aggregate net value by counterparty of our derivative contracts. The aggregate fair values of derivative instruments with credit-risk-related contingent features in a net liability position by counterparty were $124 million and $82 million at September 28, 2013 and September 29, 2012, respectively. The Company had posted collateral of $54 million at September 28, 2013. There was no collateral posted at September 29, 2012.
