Financial Instruments

3 Months Ended

Oct. 27, 2019

General Discussion of Derivative Instruments and Hedging Activities [Abstract]

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

Concentration of Credit Risk

We are exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate counterparty credit risk, we enter into contracts only with carefully selected, leading, credit-worthy financial institutions, and distribute contracts among several financial institutions to reduce the concentration of credit risk. We did not have credit-risk-related contingent features in our derivative instruments as of October 27, 2019, or July 28, 2019.

We are also exposed to credit risk from our customers. During 2019, our largest customer accounted for approximately 20% of consolidated net sales from continuing operations. Our five largest customers accounted for approximately 43% of our consolidated net sales from continuing operations in 2019.

We closely monitor credit risk associated with counterparties and customers.

Foreign Currency Exchange Risk

We are exposed to foreign currency exchange risk related to our international operations, including non-functional currency intercompany debt and net investments in subsidiaries. We are 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 Canadian dollar, Australian dollar and U.S. dollar. We utilize 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. We hedge portions of our 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, we enter into foreign exchange forward purchase and sale contracts, as well as cross-currency swap contracts, for periods consistent with the underlying debt. The notional amount of foreign exchange forward contracts accounted for as cash-flow hedges was $98 at October 27, 2019, and $146 at July 28, 2019. Of these amounts, $33 at October 27, 2019, and $80 at July 28, 2019 relate to discontinued operations. 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 contracts that are not designated as accounting hedges was $200 and $177 at October 27, 2019, and July 28, 2019, respectively. Of these amounts, $4 at October 27, 2019, and $3 at July 28, 2019, relate to discontinued operations. There were no cross-currency swap contracts outstanding as of October 27, 2019, or July 28, 2019.

Interest Rate Risk

We manage our 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 our variable-to-total debt ratio within targeted guidelines. Receive fixed rate/pay variable rate interest rate swaps are accounted for as fair-value hedges. We manage our exposure to interest rate volatility on future debt issuances by entering into forward starting interest rate swaps or treasury rate lock contracts to lock in the rate on the interest payments related to the anticipated debt issuances. The contracts are either designated as cash-flow hedging instruments or are undesignated. The effective portion of the changes in fair value on designated instruments is recorded in other comprehensive income (loss) and reclassified into the Consolidated Statements of Earnings over the life of the debt. The change in fair value on undesignated instruments is recorded in interest expense. There were no forward starting interest rate swaps or treasury rate lock contracts outstanding as of October 27, 2019, or July 28, 2019.

Commodity Price Risk

We principally use 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. We also enter into commodity futures, options and swap contracts to reduce the volatility of price fluctuations of wheat, diesel fuel, soybean oil, natural gas, aluminum, cocoa, corn, soybean meal, butter, and cheese, which impact the cost of raw materials. Commodity futures, options, and swap contracts are either designated as cash-flow hedging instruments or are undesignated. We hedge a portion of commodity requirements for periods typically up to 18 months. There were no commodity contracts accounted for as cash-flow hedges as of October 27, 2019, or July 28, 2019. The notional amount of commodity contracts not designated as accounting hedges was $181 at October 27, 2019, and $183 at July 28, 2019. Of these amounts, $6 at October 27, 2019, and $3 at July 28, 2019, relate to discontinued operations.

In 2017, we entered into a supply contract under which prices for certain raw materials are established based on anticipated volume requirements over a twelve-month period. Certain prices under the contract are based in part on certain component parts of the raw materials that are in excess of our needs or not required for our operations, thereby creating an embedded derivative requiring bifurcation. We net settle amounts due under the contract with our counterparty. The notional value was approximately $10 as of October 27, 2019, and $27 as of July 28, 2019. The fair value was not material as of October 27, 2019, and July 28, 2019. Unrealized gains (losses) and settlements are included in Cost of products sold in our Consolidated Statements of Earnings.

Equity Price Risk

We enter into swap contracts which hedge a portion of exposures relating to certain deferred compensation obligations linked to the total return of our capital stock, the total return of the Vanguard Institutional Index Institutional Plus Shares, and the total return of the Vanguard Total International Stock Index. Under these contracts, we pay variable interest rates and receive from the counterparty either: the total return on our 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 Institutional Plus Shares; or the total return of the iShares MSCI EAFE Index, which is expected to approximate the total return of the Vanguard Total International Stock Index. These contracts were not designated as hedges for accounting purposes. We enter into these contracts for periods typically not exceeding 12 months. The notional amounts of the contracts were $31 as of October 27, 2019, and July 28, 2019.

The following table summarizes the fair value of derivative instruments on a gross basis as recorded in the Consolidated Balance Sheets as of October 27, 2019, and July 28, 2019:


	Balance Sheet Classification	October 27, 2019		July 28, 2019
Asset Derivatives
Derivatives designated as hedges:

Foreign exchange forward contracts	Current assets of discontinued operations	$	1	$	—



Total derivatives designated as hedges		$	1	$	—
Derivatives not designated as hedges:
Commodity derivative contracts	Other current assets	$	5	$	3

Deferred compensation derivative contracts	Other current assets	—		1
Foreign exchange forward contracts	Other current assets	—		1
Commodity derivative contracts	Other assets	1		—

Total derivatives not designated as hedges		$	6	$	5
Total asset derivatives		$	7	$	5


	Balance Sheet Classification	October 27, 2019		July 28, 2019
Liability Derivatives
Derivatives designated as hedges:

Foreign exchange forward contracts	Accrued liabilities	$	1	$	—
Foreign exchange forward contracts	Current liabilities of discontinued operations	—		2


Total derivatives designated as hedges		$	1	$	2
Derivatives not designated as hedges:
Commodity derivative contracts	Accrued liabilities	$	4	$	6


Foreign exchange forward contracts	Accrued liabilities	2		2



Total derivatives not designated as hedges		$	6	$	8
Total liability derivatives		$	7	$	10

We do 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 we were to offset and record the asset and liability balances of derivatives on a net basis, the amounts presented in the Consolidated Balance Sheets as of October 27, 2019, and July 28, 2019, would be adjusted as detailed in the following table:


	October 27, 2019										July 28, 2019
Derivative Instrument	Gross Amounts Presented in the Consolidated Balance Sheet		Gross Amounts Not Offset in the Consolidated Balance Sheet Subject to Netting Agreements		Net Amount		Gross Amounts Presented in the Consolidated Balance Sheet		Gross Amounts Not Offset in the Consolidated Balance Sheet Subject to Netting Agreements		Net Amount
Total asset derivatives	$	7	$	(3)	$	4	$	5	$	(2)	$	3
Total liability derivatives	$	7	$	(3)	$	4	$	10	$	(2)	$	8

We are required to maintain cash margin accounts in connection with funding the settlement of open positions for exchange-traded commodity derivative instruments. At October 27, 2019, and July 28, 2019, a cash margin account balance of $3 and $7, respectively, was included in Other current assets in the Consolidated Balance Sheets.

The following tables show the effect of our derivative instruments designated as cash-flow hedges for the three-month periods ended October 27, 2019, and October 28, 2018, in other comprehensive income (loss) (OCI) and the Consolidated Statements of Earnings:


		Total Cash-Flow Hedge OCI Activity
Derivatives Designated as Cash-Flow Hedges		October 27, 2019		October 28, 2018
OCI derivative gain (loss) at beginning of year		$	(11)	$	(8)




Amount of (gain) loss reclassified from OCI to earnings:	Location in Earnings


Foreign exchange forward contracts	Earnings (loss) from discontinued operations	1		—
Forward starting interest rate swaps	Interest expense	1		1
OCI derivative gain (loss) at end of quarter		$	(9)	$	(7)

Based on current valuations, the amount expected to be reclassified from OCI into earnings within the next 12 months is a loss of $2. The ineffective portion was not material.

The following table shows the effect of our derivative instruments designated as cash-flow hedges for the three-month periods ended October 27, 2019, and October 28, 2018, in the Consolidated Statements of Earnings:


	October 27, 2019						October 28, 2018
	Earnings (Loss) from Discontinued Operations		Interest Expense		Interest Expense
Consolidated Statements of Earnings:	$	(3)	$	80	$	91

(Gain) loss on Cash Flow Hedges:
Amount of (gain) loss reclassified from OCI to earnings	$	1	$	1	$	1
Amount excluded from effectiveness testing recognized in earnings using an amortization approach	$	—	$	—	$	—

The following table shows the effects of our derivative instruments not designated as hedges for the three-month periods ended October 27, 2019, and October 28, 2018, in the Consolidated Statements of Earnings:


		Amount of (Gain) Loss Recognized in Earnings on Derivatives


Derivatives not Designated as Hedges	Location of (Gain) Loss Recognized in Earnings	October 27, 2019		October 28, 2018

Foreign exchange forward contracts	Other expenses / (income)	$	2	$	—


Commodity derivative contracts	Cost of products sold	(4)		1

Deferred compensation derivative contracts	Administrative expenses	(1)		3

Total (gain) loss at end of quarter		$	(3)	$	4