

Financial Instruments

We are exposed to market risks arising from adverse changes in:


•	commodity prices, affecting the cost of our raw materials and energy,


•	foreign exchange rates and currency restrictions, and


•	interest rates.

In the normal course of business, we manage these risks through a variety of strategies, including productivity initiatives, global purchasing programs and hedging strategies. Our hedging strategies include the use of derivatives. Certain derivatives are designated as either cash flow or fair value hedges and qualify for hedge accounting treatment, while others do not qualify and are marked to market through earnings. Cash flows from derivatives used to manage commodity, foreign exchange or interest risks are classified as operating activities. We classify both the earnings and cash flow impact from these derivatives consistent with the underlying hedged item. See “Our Business Risks” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for further unaudited information on our business risks.

For cash flow hedges, changes in fair value are deferred in accumulated other comprehensive loss within common shareholders’ equity until the underlying hedged item is recognized in net income. For fair value hedges, changes in fair value are recognized immediately in earnings, consistent with the underlying hedged item. Hedging transactions are limited to an underlying exposure. As a result, any change in the value of our derivative instruments would be substantially offset by an opposite change in the value of the underlying hedged items. Hedging ineffectiveness and a net earnings impact occur when the change in the value of the hedge does not offset the change in the value of the underlying hedged item. If the derivative instrument is terminated, we continue to defer the related gain or loss and then include it as a component of the cost of the underlying hedged item. Upon determination that the underlying hedged item will not be part of an actual transaction, we recognize the related gain or loss in net income immediately.

We also use derivatives that do not qualify for hedge accounting treatment. We account for such derivatives at market value with the resulting gains and losses reflected in our income statement. We do not use derivative instruments for trading or speculative purposes. We perform assessments of our counterparty credit risk regularly, including a review of credit ratings, credit default swap rates and potential nonperformance of the counterparty. Based on our most recent assessment of our counterparty credit risk, we consider this risk to be low. In addition, we enter into derivative contracts with a variety of financial institutions that we believe are creditworthy in order to reduce our concentration of credit risk.

Commodity Prices

We are subject to commodity price risk because our ability to recover increased costs through higher pricing may be limited in the competitive environment in which we operate. This risk is managed through the use of fixed-price purchase orders, pricing agreements and derivatives. In addition, risk to our supplies of certain raw materials is mitigated through purchases from multiple geographies and suppliers. We use derivatives, with terms of no more than three years, to economically hedge price fluctuations related to a portion of our anticipated commodity purchases, primarily for metals, energy and agricultural products. For those derivatives that qualify for hedge accounting, any ineffectiveness is recorded immediately in corporate unallocated expenses. Ineffectiveness is not material. During the next 12 months, we expect to reclassify net losses of $23 million related to these hedges from accumulated other comprehensive loss into net income. Derivatives used to hedge commodity price risk that do not qualify for hedge accounting are marked to market each period and reflected in our income statement.

Our open commodity derivative contracts that qualify for hedge accounting had a face value of $488 million as of September 8, 2012 and $586 million as of September 3, 2011.

Our open commodity derivative contracts that do not qualify for hedge accounting had a face value of $636 million as of September 8, 2012 and $537 million as of September 3, 2011.

Foreign Exchange

Financial statements of foreign subsidiaries are translated into U.S. dollars using period-end exchange rates for assets and liabilities and weighted-average exchange rates for revenues and expenses. Adjustments resulting from translating net assets are reported as a separate component of accumulated other comprehensive loss within common shareholders’ equity as currency translation adjustment.

We enter into derivatives, primarily forward contracts with terms of no more than two years, to manage our exposure to foreign currency transaction risk. Exchange rate gains or losses related to foreign currency transactions are recognized as transaction gains or losses in our income statement as incurred.

Our foreign currency derivatives had a total face value of $2.5 billion as of September 8, 2012 and September 3, 2011. During the next 12 months, we expect to reclassify net losses of $17 million related to foreign currency contracts that qualify for hedge accounting from accumulated other comprehensive loss into net income. Additionally, ineffectiveness is not material. For foreign currency derivatives that do not qualify for hedge accounting treatment, all losses and gains were offset by changes in the underlying hedged items, resulting in no net material impact on earnings.

Interest Rates

We centrally manage our debt and investment portfolios considering investment opportunities and risks, tax consequences and overall financing strategies. We use various interest rate derivative instruments including, but not limited to, interest rate swaps, cross currency interest rate swaps, Treasury locks and swap locks to manage our overall interest expense and foreign exchange risk. These instruments effectively change the interest rate and currency of specific debt issuances. Certain of our fixed rate indebtedness has been swapped to floating rates. The notional amount, interest payment and maturity date of the interest rate and cross-currency swaps match the principal, interest payment and maturity date of the related debt. Our Treasury locks and swap locks are entered into to protect against unfavorable interest rate changes relating to forecasted debt transactions.

The notional amounts of the interest rate derivative instruments outstanding as of September 8, 2012 and September 3, 2011 were $7.3 billion and $8.9 billion, respectively. For those interest rate derivative instruments that qualify for cash flow hedge accounting, any ineffectiveness is recorded immediately. Ineffectiveness is not material. During the next 12 months, we expect to reclassify net losses of $23 million related to these hedges from accumulated other comprehensive loss into net income.

As of September 8, 2012, approximately 26% of total debt, after the impact of the related interest rate derivative instruments, was exposed to variable rates, compared to 38% as of December 31, 2011.

Fair Value Measurements

The fair values of our financial assets and liabilities as of September 8, 2012 and September 3, 2011 are categorized as follows:



	2012				2011
	Assets(a)		Liabilities(a)		Assets(a)		Liabilities(a)
Available-for-sale securities^(b)	$	61	$	—	$	61	$	—
Short-term investments – index funds^(c)	$	164	$	—	$	159	$	—
Prepaid forward contracts^(d)	$	41	$	—	$	38	$	—
Deferred compensation^(e)	$	—	$	503	$	—	$	519
Derivatives designated as fair value hedging instruments:
Interest rate derivatives^(f)	$	293	$	—	$	428	$	—
Derivatives designated as cash flow hedging instruments:
Foreign exchange contracts^(g)	$	10	$	31	$	12	$	23
Interest rate derivatives^(f)	—		—		—		56
Commodity contracts^(h)	13		38		28		17
	$	23	$	69	$	40	$	96
Derivatives not designated as hedging instruments:
Foreign exchange contracts^(g)	$	30	$	6	$	5	$	19
Interest rate derivatives^(f)	128		159		104		140
Commodity contracts^(h)	84		25		24		30
	$	242	$	190	$	133	$	189
Total derivatives at fair value	$	558	$	259	$	601	$	285
Total	$	824	$	762	$	859	$	804

(a)

Financial assets are classified on our balance sheet within prepaid expenses and other current assets and other assets, with the exception of available-for-sale securities and short-term investments. Financial liabilities are classified on our balance sheet within accounts payable and other current liabilities and other liabilities. Unless specifically indicated, all financial assets and liabilities are categorized as Level 2 assets or liabilities.


(b)	Based on the price of common stock. Categorized as a Level 1 asset.


(c)	Based on price changes in index funds used to manage a portion of market risk arising from our deferred compensation liability. Categorized as a Level 1 asset.


(d)	Based primarily on the price of our common stock.


(e)	Based on the fair value of investments corresponding to employees’ investment elections. As of September 8, 2012 and September 3, 2011, $11 million and $43 million, respectively, are categorized as Level 1 liabilities. The remaining balances are categorized as Level 2 liabilities.


(f)	Based on LIBOR forward rates.


(g)	Based on recently reported market transactions of spot and forward rates.


(h)	Based on recently reported market transactions, primarily swap arrangements.

The fair value of our debt obligations as of September 8, 2012 was $30 billion, based upon prices of similar instruments in the marketplace.

The effective portion of the pre-tax (gains)/losses on our derivative instruments are categorized in the tables below.



	12 Weeks Ended
	Fair Value/Non- designated Hedges						Cash Flow Hedges
	(Gains)/Losses Recognized in Income Statement^(a)						Losses/(Gains) Recognized in Accumulated Other Comprehensive Loss						Losses/(Gains) Reclassified from Accumulated Other Comprehensive Loss into Income Statement^(b)
	9/8/2012			9/3/2011			9/8/2012			9/3/2011			9/8/2012			9/3/2011
Foreign exchange contracts	$	(9	)	$	7		$	41		$	(9	)	$	(6	)	$	9
Interest rate derivatives	(5		)	(84		)	—			42			6			4
Commodity contracts	(99		)	29			(28		)	40			20			(12		)
Total	$	(113	)	$	(48	)	$	13		$	73		$	20		$	1



	36 Weeks Ended
	Fair Value/Non- designated Hedges						Cash Flow Hedges
	(Gains)/Losses Recognized in Income Statement^(a)						Losses/(Gains) Recognized in Accumulated Other Comprehensive Loss					Losses/(Gains) Reclassified from Accumulated Other Comprehensive Loss into Income Statement^(b)
	9/8/2012			9/3/2011			9/8/2012		9/3/2011			9/8/2012			9/3/2011
Foreign exchange contracts	$	(16	)	$	8		$	37	$	28		$	(4	)	$	30
Interest rate derivatives	3			(162		)	4		71			15			10
Commodity contracts	(76		)	(17		)	9		(15		)	47			(37		)
Total	$	(89	)	$	(171	)	$	50	$	84		$	58		$	3


(a)	Interest rate derivatives gains/losses are primarily from fair value hedges and are included in interest expense. These gains/losses are substantially offset by increases/decreases in the value of the underlying debt, which are also included in interest expense. All other gains/losses are from non-designated hedges and are included in corporate unallocated expenses.


(b)	Interest rate losses are included in interest expense. All other gains/losses are primarily included in cost of sales.