Financial Instruments

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, 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. 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 do not have credit-risk-related contingent features in our derivative instruments as of February 1, 2015. During 2014, our largest customer accounted for approximately 19% of consolidated net sales. 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, foreign exchange forward purchase and sale contracts, as well as cross-currency swap contracts, are entered into for periods consistent with the underlying debt. As of February 1, 2015, cross-currency swap contracts mature between 6 and 30 months. The notional amount of foreign exchange forward and cross-currency swap contracts accounted for as cash-flow hedges was $45 at February 1, 2015 and $58 at August 3, 2014. 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 $419 and $561 at February 1, 2015 and August 3, 2014, respectively.

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 to lock in the rate on the interest payments related to anticipated debt issuances. These pay fixed rate/receive variable rate forward starting interest rate swaps are accounted for as cash-flow hedges. 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 over the life of the debt. The notional amount of outstanding forward starting interest rate swaps totaled $550 at February 1, 2015, of which $250 relates to an anticipated issuance in 2015 and $300 relates to an anticipated issuance in 2018. The notional amount of outstanding forward starting interest rate swaps totaled $250 at August 3, 2014.

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 diesel fuel, wheat, soybean oil, natural gas, aluminum, dairy, cocoa and corn, 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. 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 February 1, 2015 or August 3, 2014. The notional amount of commodity contracts not designated as accounting hedges was $101 at February 1, 2015 and $146 at August 3, 2014.

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, 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; 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 and are entered into for periods typically not exceeding 12 months. The notional amounts of the contracts were $56 as of February 1, 2015 and August 3, 2014.

The following table summarizes the fair value of derivative instruments on a gross basis as recorded in the Consolidated Balance Sheets as of February 1, 2015 and August 3, 2014:



	Balance Sheet Classification	February 1, 2015		August 3, 2014
Asset Derivatives
Derivatives designated as hedges:
Foreign exchange forward contracts	Other current assets	$	3	$	1
Forward starting interest rate swaps	Other current assets	—		11
Total derivatives designated as hedges		$	3	$	12
Derivatives not designated as hedges:
Commodity derivative contracts	Other current assets	$	—	$	2
Cross-currency swap contracts	Other current assets	4		—
Deferred compensation derivative contracts	Other current assets	1		—
Foreign exchange forward contracts	Other current assets	10		1
Cross-currency swap contracts	Other assets	36		—
Total derivatives not designated as hedges		$	51	$	3
Total asset derivatives		$	54	$	15



	Balance Sheet Classification	February 1, 2015		August 3, 2014
Liability Derivatives
Derivatives designated as hedges:
Foreign exchange forward contracts	Accrued liabilities	$	—	$	1
Forward starting interest rate swaps	Accrued liabilities	15		—
Forward starting interest rate swaps	Other liabilities	23		—
Total derivatives designated as hedges		$	38	$	1
Derivatives not designated as hedges:
Commodity derivative contracts	Accrued liabilities	$	20	$	10
Cross-currency swap contracts	Accrued liabilities	—		1
Deferred compensation derivative contracts	Accrued liabilities	1		3
Foreign exchange forward contracts	Accrued liabilities	2		2
Commodity derivative contracts	Other liabilities	—		1
Cross-currency swap contracts	Other liabilities	—		5
Total derivatives not designated as hedges		$	23	$	22
Total liability derivatives		$	61	$	23

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 February 1, 2015 and August 3, 2014 would be adjusted as detailed in the following table:



	February 1, 2015							August 3, 2014
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	$	54	$	(40	)	$	14	$	15	$	(4	)	$	11

Total liability derivatives	$	61	$	(40	)	$	21	$	23	$	(4	)	$	19

We do not offset fair value amounts recognized for exchange-traded commodity derivative instruments and cash margin accounts executed with the same counterparty that are subject to enforceable netting agreements. We are required to maintain cash margin accounts in connection with funding the settlement of open positions. At February 1, 2015 and August 3, 2014, a cash margin account balance of $24 and $14, 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- and six-month periods ended February 1, 2015, and January 26, 2014, in other comprehensive income (loss) (OCI) and the Consolidated Statements of Earnings:



		Total Cash-Flow Hedge OCI Activity
Derivatives Designated as Cash-Flow Hedges		February 1, 2015			January 26, 2014
Three Months Ended
OCI derivative gain (loss) at beginning of quarter		$	(4	)	$	5
Effective portion of changes in fair value recognized in OCI:
Foreign exchange forward contracts		10			2
Forward starting interest rate swaps		(42		)	2
Amount of (gain) loss reclassified from OCI to earnings:	Location in Earnings
Foreign exchange forward contracts	Other expenses / (income)	(1		)	(1		)
Forward starting interest rate swaps	Interest expense	1			1
OCI derivative gain (loss) at end of quarter		$	(36	)	$	9

Six Months Ended
OCI derivative gain (loss) at beginning of year		$	(4	)	$	8
Effective portion of changes in fair value recognized in OCI:
Foreign exchange forward contracts		13			3
Forward starting interest rate swaps		(46		)	(2		)
Amount of (gain) loss reclassified from OCI to earnings:	Location in Earnings
Foreign exchange forward contracts	Cost of products sold	—			(1		)
Foreign exchange forward contracts	Other expenses / (income)	(1		)	(1		)
Forward starting interest rate swaps	Interest expense	2			2
OCI derivative gain (loss) at end of quarter		$	(36	)	$	9

Based on current valuations, the amount expected to be reclassified from OCI into earnings within the next 12 months is a gain of $7. The ineffective portion and amount excluded from effectiveness testing were not material.

The following table shows the effect of our derivative instruments designated as fair-value hedges in the Consolidated Statements of Earnings:



		Amount of Gain (Loss) Recognized in Earnings on Derivatives					Amount of Gain (Loss) Recognized in Earnings on Hedged Item
Derivatives Designated as Fair-Value Hedges	Location of Gain (Loss) Recognized in Earnings	February 1, 2015		January 26, 2014			February 1, 2015		January 26, 2014
Three Months Ended
Interest rate swaps	Interest expense	$	—	$	—		$	—	$	—

Six Months Ended
Interest rate swaps	Interest expense	$	—	$	(1	)	$	—	$	1

The following table shows the effects of our derivative instruments not designated as hedges 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	Three Months Ended					Six Months Ended
Derivatives not Designated as Hedges	Location of Gain (Loss) Recognized in Earnings	February 1, 2015			January 26, 2014		February 1, 2015			January 26, 2014
Foreign exchange forward contracts	Cost of products sold	$	(1	)	$	3	$	—		$	5
Foreign exchange forward contracts	Other expenses/income	—			2		—			(12		)
Commodity derivative contracts	Cost of products sold	(13		)	2		(18		)	—
Cross-currency swap contracts	Other expenses/income	38			24		52			21
Deferred compensation derivative contracts	Administrative expenses	1			—		3			(1		)
Total		$	25		$	31	$	37		$	13