Financial Instruments

6 Months Ended

Jan. 27, 2013

General Discussion of Derivative Instruments and Hedging Activities [Abstract]

Financial Instruments

Financial Instruments

The principal market risks to which the company is exposed are changes in foreign currency exchange rates, interest rates, and commodity prices. In addition, the company is exposed to equity price changes related to certain deferred compensation obligations. In order to manage these exposures, the company follows established risk management policies and procedures, including the use of derivative contracts such as swaps, options, forwards and commodity futures. These derivative contracts are entered into for periods consistent with the related underlying exposures and do not constitute positions independent of those exposures. The company does not enter into derivative contracts for speculative purposes and does not use leveraged instruments. The company’s derivative programs include both instruments that qualify and that do not qualify for hedge accounting treatment.

Concentration of Credit Risk

The company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations.  To mitigate counterparty credit risk, the company only enters into contracts with carefully selected, leading, credit-worthy financial institutions, and distributes contracts among several financial institutions to reduce the concentration of credit risk. The company does not have credit-risk-related contingent features in its derivative instruments as of January 27, 2013. During 2012, the company's largest customer accounted for approximately 17% of consolidated net sales. The company closely monitors credit risk associated with counterparties and customers.

Foreign Currency Exchange Risk

The company is exposed to foreign currency exchange risk related to its international operations, including non-functional currency intercompany debt and net investments in subsidiaries. The company is also exposed to foreign exchange risk as a result of transactions in currencies other than the functional currency of certain subsidiaries. Principal currencies hedged include the Australian dollar, Canadian dollar, euro, Swedish krona, New Zealand dollar, British pound and Japanese yen. The company utilizes foreign exchange forward purchase and sale contracts as well as cross-currency swaps to hedge these exposures. The contracts are either designated as cash-flow hedging instruments or are undesignated. The company hedges portions of its forecasted foreign currency transaction exposure with foreign exchange forward contracts for periods typically up to 18 months. To hedge currency exposures related to intercompany debt, cross-currency swap contracts are entered into for periods consistent with the underlying debt. As of January 27, 2013, cross-currency swap contracts mature between 2 and 30 months. The notional amount of foreign exchange forward and cross-currency swap contracts accounted for as cash-flow hedges was $152 at January 27, 2013 and $156 at July 29, 2012. The effective portion of the changes in fair value on these instruments is recorded in other comprehensive income (loss) and is reclassified into the Consolidated Statements of Earnings on the same line item and the same period in which the underlying hedged transaction affects earnings. The notional amount of foreign exchange forward and cross-currency swap contracts that are not designated as accounting hedges was $850 and $908 at January 27, 2013 and July 29, 2012, respectively.

Interest Rate Risk

The company manages its exposure to changes in interest rates by optimizing the use of variable-rate and fixed-rate debt and by utilizing interest rate swaps in order to maintain its variable-to-total debt ratio within targeted guidelines. Receive fixed rate/pay variable rate interest rate swaps are accounted for as fair-value hedges. The notional amount of outstanding fair-value interest rate swaps totaled $200 at January 27, 2013 and $500 at July 29, 2012. These swaps mature in 8 months. The company manages its exposure to interest rate volatility on future debt issuances by entering into forward starting interest rate swaps to lock in the rate on the interest payments related to the forecasted debt issuances. Pay fixed rate/receive variable rate forward starting interest rate swaps are accounted for as cash-flow hedges. The notional amount of outstanding forward starting interest rate swaps totaled $250 at January 27, 2013 and $600 at July 29, 2012. Forward starting interest rate swaps with a notional value of $400 were settled in August 2012, at a loss of $2, which was recorded in other comprehensive income (loss). The loss on the forward starting interest rate swaps will be amortized over the life of the 10-year debt issued in August 2012.

Commodity Price Risk

The company principally uses a combination of purchase orders and various short- and long-term supply arrangements in connection with the purchase of raw materials, including certain commodities and agricultural products. The company also enters into commodity futures, options and swap contracts to reduce the volatility of price fluctuations of diesel fuel, soybean oil, aluminum, wheat, natural gas and cocoa, which impact the cost of raw materials. Commodity futures, options, and swap contracts are either accounted for as cash-flow hedges or are not designated as accounting hedges. The company hedges a portion of commodity requirements for periods typically up to 12 months. There were no commodity contracts accounted for as cash-flow hedges as of January 27, 2013 and July 29, 2012. The notional amount of commodity contracts not designated as accounting hedges was $85 at January 27, 2013 and $95 at July 29, 2012.

Equity Price Risk

The company enters into swap contracts which hedge a portion of exposures relating to certain deferred compensation obligations linked to the total return of the company’s capital stock, the total return of the Vanguard Institutional Index, the total return of the Vanguard Total International Stock Index and, beginning in April 2012, the total return of the Vanguard Short-Term Bond Index. Under these contracts, the company pays variable interest rates and receives from the counterparty either the total return on company capital stock; the total return of the Standard & Poor's 500 Index, which is expected to approximate the total return of the Vanguard Institutional Index; the total return of the iShares MSCI EAFE Index, which is expected to approximate the total return of the Vanguard Total International Stock Index; or the total return of the Vanguard Short-Term Bond Index. These contracts were not designated as hedges for accounting purposes and are entered into for periods typically not exceeding 12 months. The notional amounts of the contracts as of January 27, 2013 and July 29, 2012 were $77 and $75, respectively.

The following table summarizes the fair value of derivative instruments recorded in the Consolidated Balance Sheets as of January 27, 2013, and July 29, 2012:

	Balance Sheet Classification	January 27, 2013		July 29, 2012
Asset Derivatives
Derivatives designated as hedges:
Foreign exchange forward contracts	Other current assets	$	—	$	1
Forward starting interest rate swaps	Other current assets	—		1
Interest rate swaps	Other current assets	6		4
Forward starting interest rate swaps	Other assets	9		1
Interest rate swaps	Other assets	—		9
Total derivatives designated as hedges		$	15	$	16
Derivatives not designated as hedges:
Commodity derivative contracts	Other current assets	$	5	$	8
Cross-currency swap contracts	Other current assets	2		19
Deferred compensation derivative contracts	Other current assets	2		1
Foreign exchange forward contracts	Other current assets	1		1
Total derivatives not designated as hedges		10		29
Total asset derivatives		$	25	$	45

	Balance Sheet Classification	January 27, 2013		July 29, 2012
Liability Derivatives
Derivatives designated as hedges:
Cross-currency swap contracts	Accrued liabilities	$	24	$	—
Foreign exchange forward contracts	Accrued liabilities	1		—
Cross-currency swap contracts	Other liabilities	—		25
Total derivatives designated as hedges		$	25	$	25
Derivatives not designated as hedges:
Commodity derivative contracts	Accrued liabilities	$	3	$	4
Cross-currency swap contracts	Accrued liabilities	53		25
Cross-currency swap contracts	Other liabilities	3		29
Total derivatives not designated as hedges		$	59	$	58
Total liability derivatives		$	84	$	83

The following tables show the effect of the company’s derivative instruments designated as cash-flow hedges for the three- and six-month periods ended January 27, 2013 and January 29, 2012, in other comprehensive income (loss) (OCI) and the Consolidated Statements of Earnings:

Derivatives Designated as Cash-Flow Hedges

		Total Cash-Flow Hedge OCI Activity
Three Months Ended January 27, 2013, and January 29, 2012		2013			2012
OCI derivative gain/(loss) at beginning of quarter		$	(16	)	$	(22	)
Effective portion of changes in fair value recognized in OCI:
Foreign exchange forward contracts		(1		)	(2		)
Forward starting interest rate swaps		5			—
Amount of (gain) or loss reclassified from OCI to earnings:	Location in Earnings
Foreign exchange forward contracts	Cost of products sold	—			5
Foreign exchange forward contracts	Other expenses/income	—			(1		)
Forward starting interest rate swaps	Interest expense	1			1
OCI derivative gain/(loss) at end of quarter		$	(11	)	$	(19	)

		Total Cash-Flow Hedge OCI Activity
Six Months Ended January 27, 2013, and January 29, 2012		2013			2012
OCI derivative gain/(loss) at beginning of year		$	(16	)	$	(31	)
Effective portion of changes in fair value recognized in OCI:
Foreign exchange forward contracts		(1		)	5
Cross-currency swap contracts		—			(1		)
Forward starting interest rate swaps		5			—
Amount of (gain) or loss reclassified from OCI to earnings:	Location in Earnings
Foreign exchange forward contracts	Cost of products sold	(1		)	6
Forward starting interest rate swaps	Interest expense	2			2
OCI derivative gain/(loss) at end of quarter		$	(11	)	$	(19	)

Based on current valuations, the amount expected to be reclassified from OCI into earnings within the next 12 months is a loss of $3. The ineffective portion and amount excluded from effectiveness testing were not material.

The following tables show the effect of the company’s derivative instruments designated as fair-value hedges in the Consolidated Statements of Earnings:

		Amount of Gain or (Loss) Recognized in Earnings on Derivatives						Amount of Gain or (Loss) Recognized in Earnings on Hedged Item
Derivatives Designated as Fair-Value Hedges	Location of Gain or (Loss) Recognized in Earnings	January 27, 2013			January 29, 2012			January 27, 2013		January 29, 2012
Three Months Ended
Interest rate swaps	Interest expense	$	(3	)	$	(5	)	$	3	$	5
Six Months Ended
Interest rate swaps	Interest expense	$	(7	)	$	(10	)	$	7	$	10

The following table shows the effects of the company’s derivative instruments not designated as hedges in the Consolidated Statements of Earnings:

		Amount of Gain or (Loss) Recognized in Earnings on Derivatives
		Three Months Ended						Six Months Ended
Derivatives not Designated as Hedges	Location of Gain or (Loss) Recognized in Earnings	January 27, 2013			January 29, 2012			January 27, 2013			January 29, 2012
Foreign exchange forward contracts	Cost of products sold	$	(1	)	$	3		$	(1	)	$	4
Foreign exchange forward contracts	Other expenses/income	—			1			—			1
Cross-currency swap contracts	Other expenses/income	(10		)	16			(18		)	39
Commodity derivative contracts	Cost of products sold	(1		)	(2		)	(1		)	(7		)
Deferred compensation derivative contracts	Administrative expenses	4			(2		)	6			(1		)
Total		$	(8	)	$	16		$	(14	)	$	36