Financial Instruments

3 Months Ended

Oct. 31, 2021

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 for hedge accounting treatment and instruments that are not designated as accounting hedges.

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 31, 2021, or August 1, 2021.

We are also exposed to credit risk from our customers. During 2021, our largest customer accounted for approximately 21% of consolidated net sales from continuing operations. Our five largest customers accounted for approximately 46% of our consolidated net sales from continuing operations in 2021.

We closely monitor credit risk associated with counterparties and customers.

Foreign Currency Exchange Risk

We are exposed to foreign currency exchange risk related to third-party transactions and intercompany transactions, including intercompany debt. Principal currencies hedged include the Canadian dollar. We utilize foreign exchange forward purchase and sale contracts 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 for periods consistent with the underlying debt. The notional amount of foreign exchange forward contracts accounted for as cash-flow hedges was $144 as of October 31, 2021, and $134 as of August 1, 2021. Changes in the fair value on the portion of the derivative included in the assessment of hedge effectiveness of cash-flow hedges are recorded in other comprehensive income (loss), until earnings are affected by the variability of cash flows. For derivatives that are designated and qualify as hedging instruments, the initial fair value of hedge components excluded from the assessment of effectiveness is recognized in earnings under a systematic and rational method over the life of the hedging instrument and is presented in the same statement of earnings line item as the earnings effect of the hedged item. Any difference between the change in the fair value of the hedge components excluded from the assessment of effectiveness and the amounts recognized in earnings is recorded as a component of other comprehensive income (loss). The notional amount of foreign exchange forward contracts that are not designated as accounting hedges was $18 as of October 31, 2021, and $13 as of August 1, 2021.

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. There were no interest rate swaps or treasury rate lock contracts outstanding as of October 31, 2021, or August 1, 2021.

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, soybean oil, diesel fuel, natural gas, aluminum, cocoa, soybean meal, corn and butter. 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. The notional amount of commodity contracts designated as cash-flow hedges was $19 as of October 31, 2021, and $18 as of August 1, 2021. Changes in the fair value on the portion of the derivative included in the assessment of hedge effectiveness of cash-flow hedges are recorded in other comprehensive income (loss), until earnings are affected by the variability of cash flows. The notional amount of commodity contracts not designated as accounting hedges was $174 as of October 31, 2021, and $190 as of August 1, 2021. The change in fair value on undesignated instruments is recorded in Cost of products sold.

We have 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 amount was approximately $14 as of October 31, 2021, and $38 as of August 1, 2021. The change in fair value on the embedded derivative is recorded in Cost of products sold.

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 the Vanguard Institutional Index Institutional Plus Shares and the total return of the Vanguard Total International Stock Index. Prior to 2022, we had entered into swap contracts which hedged a portion of exposures linked to the total return of our capital stock. As of October 31, 2021, and August 1, 2021, there were no swap contracts outstanding hedging our exposure linked to the total return of our capital stock. These contracts are not designated as hedges for accounting purposes. Unrealized gains (losses) and settlements are included in Administrative expenses in the Consolidated Statements of Earnings. We enter into these contracts for periods typically not exceeding 12 months. The notional amounts of the contracts were $29 as of October 31, 2021, and August 1, 2021.

The following table summarizes the fair value of derivative instruments on a gross basis as recorded in the Consolidated Balance Sheets as of October 31, 2021, and August 1, 2021:


	Balance Sheet Classification	October 31, 2021		August 1, 2021
Asset Derivatives
Derivatives designated as hedges:
Commodity contracts	Other current assets	$	7	$	4
Foreign exchange forward contracts	Other current assets	—		1




Total derivatives designated as hedges		$	7	$	5
Derivatives not designated as hedges:
Commodity contracts	Other current assets	$	47	$	49

Deferred compensation contracts	Other current assets	2		3



Total derivatives not designated as hedges		$	49	$	52
Total asset derivatives		$	56	$	57


	Balance Sheet Classification	October 31, 2021		August 1, 2021
Liability Derivatives
Derivatives designated as hedges:

Foreign exchange forward contracts	Accrued liabilities	$	2	$	3



Total derivatives designated as hedges		$	2	$	3
Derivatives not designated as hedges:
Commodity derivative contracts	Accrued liabilities	$	1	$	—


Foreign exchange forward contracts	Accrued liabilities	—		—



Total derivatives not designated as hedges		$	1	$	—
Total liability derivatives		$	3	$	3

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 31, 2021, and August 1, 2021, would be adjusted as detailed in the following table:


	October 31, 2021						August 1, 2021
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	$	56	$	—	$	56	$	57	$	(1)	$	56
Total liability derivatives	$	3	$	—	$	3	$	3	$	(1)	$	2

We are required to maintain cash margin accounts in connection with funding the settlement of open positions for exchange-traded commodity derivative instruments. Cash margin liability balances of $13 at October 31, 2021, and $14 at August 1, 2021, were included in Accrued liabilities 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 31, 2021, and November 1, 2020, 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 31, 2021		November 1, 2020
Three Months Ended
OCI derivative gain (loss) at beginning of quarter		$	(5)	$	(8)
Effective portion of changes in fair value recognized in OCI:
Commodity contracts		3		—
Foreign exchange forward contracts		—		(1)


Amount of loss (gain) reclassified from OCI to earnings:	Location in Earnings
Commodity contracts	Cost of products sold	(1)		—
Foreign exchange forward contracts	Cost of products sold	1		—



OCI derivative gain (loss) at end of quarter		$	(2)	$	(9)

Based on current valuations, the amount expected to be reclassified from OCI into earnings within the next 12 months is a gain of $4.

The following table shows the total amounts of line items presented in the Consolidated Statements of Earnings for the three-month periods ended October 31, 2021, and November 1, 2020, in which the effects of derivative instruments designated as cash-flow hedges are recorded. The total effect of hedge activity on these line items are as follows:


	Three Months Ended
	October 31, 2021		November 1, 2020
	Cost of products sold			Cost of products sold
Consolidated Statements of Earnings:	$	1,514		$	1,527

Loss (gain) on cash-flow hedges:
Amount of loss (gain) reclassified from OCI to earnings	$	—		$	—
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 31, 2021, and November 1, 2020, in the Consolidated Statements of Earnings:


Derivatives not Designated as Hedges	Location of Loss (Gain) Recognized in Earnings	Three Months Ended
		October 31, 2021		November 1, 2020
Foreign exchange forward contracts	Cost of products sold	$	—	$	1



Commodity contracts	Cost of products sold	(9)		(2)

Deferred compensation derivative contracts	Administrative expenses	(1)		—

Total loss (gain) at end of quarter		$	(10)	$	(1)