XML 35 R20.htm IDEA: XBRL DOCUMENT v3.22.2.2
Financial Instruments
 12 Months Ended
Jul. 31, 2022
General Discussion of Derivative Instruments and Hedging Activities [Abstract]  
Financial Instruments 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, 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 July 31, 2022, or August 1, 2021.
We are also exposed to credit risk from our customers. During 2022, our largest customer accounted for approximately 22% of consolidated net sales from continuing operations. Our five largest customers accounted for approximately 47% of our consolidated net sales from continuing operations in 2022.
We closely monitor credit risk associated with counterparties and customers.
Foreign Currency Exchange Risk
We are exposed to foreign currency exchange risk, primarily the Canadian dollar, related to third-party transactions and intercompany transactions. 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. The notional amount of foreign exchange forward contracts accounted for as cash-flow hedges was $140 million as of July 31, 2022, and $134 million 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 $13 million as of July 31, 2022, and 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 we may utilize 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. Changes in the fair value on the portion of the derivative included in the assessment of hedge effectiveness of a fair-value hedge, along with the gain or loss on the underlying hedged asset or liability, are recorded in current-period earnings. 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 anticipated debt issuances. The contracts are either designated as cash-flow hedging instruments or are undesignated. 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 Accumulated other comprehensive income (loss), and reclassified into Interest expense over the life of the debt. The change in fair value on undesignated instruments is recorded in Interest expense. There were no interest rate swaps outstanding as of July 31, 2022, 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, diesel fuel, natural gas, soybean oil, aluminum, cocoa, corn, soybean meal 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 $3 million as of July 31, 2022, and $18 million 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 $254 million as of July 31, 2022, and $190 million 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 $39 million as of July 31, 2022, and $38 million 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 Extended Market Index Plus Fund, the Vanguard Institutional Index Institutional Plus Fund, the Vanguard Short-Term Bond Index Fund and the Vanguard Total International Stock Index Fund. 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 July 31, 2022, and August 1, 2021, we no longer hedge 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 as of July 31, 2022, and August 1, 2021, were $50 million and $29 million, respectively.
The following tables summarize the fair value of derivative instruments on a gross basis as recorded in the Consolidated Balance Sheets as of July 31, 2022, and August 1, 2021:
(Millions)Balance Sheet Classification20222021
Asset Derivatives
Derivatives designated as hedges:
Commodity contractsOther current assets$3 $4 
Foreign exchange forward contractsOther current assets2 1 
Total derivatives designated as hedges$5 $5 
Derivatives not designated as hedges:
Commodity contractsOther current assets$20 $49 
Deferred compensation contractsOther current assets— 3 
Total derivatives not designated as hedges$20 $52 
Total asset derivatives$25 $57 
(Millions)Balance Sheet Classification20222021
Liability Derivatives
Derivatives designated as hedges:
Foreign exchange forward contractsAccrued liabilities$— $3 
Total derivatives designated as hedges$— $3 
Derivatives not designated as hedges:
Commodity contractsAccrued liabilities$30 $— 
Deferred compensation contractsAccrued liabilities4 — 
Total derivatives not designated as hedges$34 $— 
Total liability derivatives$34 $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 July 31, 2022, and August 1, 2021, would be adjusted as detailed in the following table:
20222021
(Millions)Gross Amounts Presented in the Consolidated Balance SheetGross Amounts Not Offset in the Consolidated Balance Sheet Subject to Netting AgreementsNet AmountGross Amounts Presented in the Consolidated Balance SheetGross Amounts Not Offset in the Consolidated Balance Sheet Subject to Netting AgreementsNet Amount
Total asset derivatives$25 $(17)$8 $57 $(1)$56 
Total liability derivatives$34 $(17)$17 $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. A cash margin asset balance of $8 million at July 31, 2022, and a liability balance of $14 million at August 1, 2021, were included in Other current assets and Accrued liabilities, respectively, in the Consolidated Balance Sheets.
The following tables show the effect of our derivative instruments designated as cash-flow hedges for the years ended July 31, 2022, August 1, 2021, and August 2, 2020 in other comprehensive income (loss) (OCI) and the Consolidated Statements of Earnings:

 Total Cash-Flow Hedge
OCI Activity
(Millions) 202220212020
OCI derivative gain (loss) at beginning of year$(5)$(8)$(11)
Effective portion of changes in fair value recognized in OCI:
Commodity contracts13 4 — 
Foreign exchange forward contracts4 (9)3 
Amount of loss (gain) reclassified from OCI to earnings:Location in Earnings
Commodity contractsCost of products sold(14)— — 
Foreign exchange forward contractsCost of products sold1 6 (2)
Foreign exchange forward contractsOther expenses / (income)— 1 — 
Foreign exchange forward contractsEarnings (loss) from discontinued operations— — 1 
Forward starting interest rate swapsInterest expense1 1 1 
OCI derivative gain (loss) at end of year$— $(5)$(8)
Based on current valuations, the amount expected to be reclassified from OCI into earnings within the next 12 months is a gain of $4 million.
The following table shows the total amounts of line items presented in the Consolidated Statements of Earnings for the years ended 2022, 2021, and 2020 in which the effects of derivative instruments designated as cash-flow hedges are recorded and the total effect of hedge activity on these line items are as follows:
202220212020
(Millions)Cost of products soldInterest expenseCost of products soldOther expenses / (income)Interest expenseCost of products soldInterest expenseEarnings (loss) from discontinued operations
Consolidated Statements of Earnings:$5,935 $189 $5,665 $(254)$210 $5,692 $345 $1,036 
Loss (gain) on cash-flow hedges:
Amount of loss (gain) reclassified from OCI to earnings$(13)$1 $6 $1 $1 $(2)$1 $1 
The amount excluded from effectiveness testing recognized in each line item of earnings using an amortization approach was not material in all periods presented.
The following table shows the effects of our derivative instruments not designated as hedges in the Consolidated Statements of Earnings:
(Millions)Location of Loss (Gain)
Recognized in Earnings		202220212020
Foreign exchange forward contractsCost of products sold$— $2 $(1)
Foreign exchange forward contractsOther expenses / (income)— — 2 
Commodity contractsCost of products sold8 (55)12 
Deferred compensation contractsAdministrative expenses3 (8)(2)
Treasury rate lock contractsInterest expense— — (3)
Total$11 $(61)$8