Derivative Financial Instruments

9 Months Ended

Jan. 31, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

Our multinational business exposes us to global market risks, including the effect of fluctuations in currency exchange rates, commodity prices, and interest rates. We use derivatives to help manage financial exposures that occur in the normal course of business. We formally document the purpose of each derivative contract, which includes linking the contract to the financial exposure it is designed to mitigate. We do not hold or issue derivatives for trading or speculative purposes.

We use currency derivative contracts to limit our exposure to the currency exchange risk that we cannot mitigate internally by using netting strategies. We designate most of these contracts as cash flow hedges of forecasted transactions (expected to occur within three years). We record all changes in the fair value of cash flow hedges (except any ineffective portion) in accumulated other comprehensive income (AOCI) until the underlying hedged transaction occurs, at which time we reclassify that amount into earnings. We assess the effectiveness of these hedges based on changes in forward exchange rates. The ineffective portion of the changes in fair value of our hedges (recognized immediately in earnings) during the periods presented in this report was not material.

We do not designate some of our currency derivatives as hedges because we use them to at least partially offset the immediate earnings impact of changes in foreign exchange rates on existing assets or liabilities. We immediately recognize the change in fair value of these contracts in earnings.

We had outstanding currency derivatives, related primarily to our euro, British pound, and Australian dollar exposures, with total notional amounts totaling $686 million at April 30, 2013 and $1,042 million at January 31, 2014.

We use forward purchase contracts with suppliers to protect against corn price volatility. We expect to physically take delivery of the corn underlying each contract and use it for production over a reasonable period of time. Accordingly, we account for these contracts as normal purchases rather than derivative instruments.

From time to time, we manage our interest rate risk with swap contracts. However, no such swaps were outstanding at

April 30, 2013 or January 31, 2014.

The following tables present the amounts affecting our consolidated statements of operations for the periods covered by this report:

		Three Months Ended
		January 31,
(Dollars in millions)	Classification	2013			2014
Currency derivatives designated as cash flow hedge:
Net gain (loss) recognized in AOCI	n/a	$	(4	)	$	10
Net gain (loss) reclassified from AOCI into income	Net sales	(1		)	(1		)
Derivatives not designated as hedging instruments:
Currency derivatives – net gain (loss) recognized in income	Net sales	(1		)	5
Currency derivatives – net gain (loss) recognized in income	Other income	1			2
		Nine Months Ended
		January 31,
(Dollars in millions)	Classification	2013			2014
Currency derivatives designated as cash flow hedge:
Net gain (loss) recognized in AOCI	n/a	$	(6	)	$	5
Net gain (loss) reclassified from AOCI into income	Net sales	(1		)	—
Interest rate swaps designated as fair value hedges:
Net gain (loss) recognized in income	Interest expense	1			—
Derivatives not designated as hedging instruments:
Currency derivatives – net gain (loss) recognized in income	Net sales	(2		)	4
Currency derivatives – net gain (loss) recognized in income	Other income	(1		)	4
Commodity derivatives – net gain (loss) recognized in income	Cost of sales	4			—

We expect to reclassify $4 million of deferred net gains recorded in AOCI as of January 31, 2014, to earnings during the next 12 months. This reclassification would offset the anticipated earnings impact of the underlying hedged exposures. The actual amounts that we ultimately reclassify to earnings will depend on the exchange rates in effect when the underlying hedged transactions occur. The maximum term of our outstanding derivative contracts was 24 months at April 30, 2013 and 27 months at January 31, 2014.

The following table presents the fair values of our derivative instruments as of April 30, 2013 and January 31, 2014.

(Dollars in millions)	Classification	Fair value of derivatives in a gain position		Fair value of derivatives in a loss position
April 30, 2013:
Designated as cash flow hedges:
Currency derivatives	Other current assets	$	6	$	(3	)
Currency derivatives	Other assets	2		—
Currency derivatives	Accrued expenses	2		(4		)
Currency derivatives	Other liabilities	—		(1		)
Not designated as hedges:
Currency derivatives	Accrued expenses	—		(1		)
January 31, 2014:
Designated as cash flow hedges:
Currency derivatives	Other current assets	11		(3		)
Currency derivatives	Other assets	3		(1		)
Currency derivatives	Accrued expenses	2		(4		)
Currency derivatives	Other liabilities	1		(1		)
Not designated as hedges:
Currency derivatives	Other current assets	1		—

The fair values reflected in the above table are presented on a gross basis. However, as discussed further below, the fair values of those instruments that are subject to net settlement agreements are presented on a net basis in the accompanying consolidated balance sheets.

Credit risk. We are exposed to credit-related losses if the counterparties to our derivative contracts default. This credit risk is limited to the fair value of the contracts. To manage this risk, we contract only with major financial institutions that have earned investment-grade credit ratings and with whom we have standard International Swaps and Derivatives Association (ISDA) agreements that allow for net settlement of the derivative contracts. Also, we have established counterparty credit guidelines that are regularly monitored and that provide for reports to senior management according to prescribed guidelines, and we monetize contracts when we believe it is warranted. Because of these safeguards, we believe the risk of loss from counterparty default to be immaterial.

Some of our derivative instruments require us to maintain a specific level of creditworthiness, which we have maintained. If our creditworthiness were to fall below that level, then the counterparties to our derivative instruments could request immediate payment or collateralization for derivative instruments in net liability positions. The aggregate fair value of all derivatives with creditworthiness requirements that were in a net liability position was $2 million at April 30, 2013 and $2 million at January 31, 2014.

Offsetting. As noted above, our derivative contracts are governed by ISDA agreements that allow for net settlement of derivative contracts with the same counterparty. It is our policy to present the fair values of current derivatives (i.e., those with a remaining term of 12 months or less) with the same counterparty on a net basis in the balance sheet. Similarly, we present the fair values of noncurrent derivatives with the same counterparty on a net basis. Current derivatives are not netted with noncurrent derivatives in the balance sheet. The following table summarizes the gross and net amounts of our derivative contracts.

(Dollars in millions)	Gross Amounts of Recognized Assets (Liabilities)			Gross Amounts Offset in Balance Sheet			Net Amounts Presented in Balance Sheet			Gross Amounts Not Offset in Balance Sheet			Net Amounts
April 30, 2013:
Derivative assets	$	10		$	(5	)	$	5		$	(2	)	$	3
Derivative liabilities	(9		)	5			(4		)	2			(2		)
January 31, 2014:
Derivative assets	17			(6		)	11			—			11
Derivative liabilities	(8		)	6			(2		)	—			(2		)

No cash collateral was received or pledged related to our derivative contracts as of April 30, 2013 and January 31, 2014.