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Derivative Instruments and Fair Value Measurements

12 Months Ended

Dec. 31, 2011

Derivative Instruments and Fair Value Measurements [Abstract]

Derivative Instruments and Fair Value Measurements [Text Block]

NOTE 12

DERIVATIVE INSTRUMENTS AND FAIR VALUE MEASUREMENTS

The Company is exposed to certain market risks such as changes in interest rates, foreign currency exchange rates, and commodity prices, which exist as a part of its ongoing business operations. Management uses derivative financial and commodity instruments, including futures, options, and swaps, where appropriate, to manage these risks. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the contract.

The Company designates derivatives as cash flow hedges, fair value hedges, net investment hedges, and uses other contracts to reduce volatility in interest rates, foreign currency and commodities. As a matter of policy, the Company does not engage in trading or speculative hedging transactions.

Total notional amounts of the Company's derivative instruments as of December 31, 2011 and January 1, 2011 were as follows:


(millions)		2011		2010
Foreign currency exchange contracts	$	1,265	$	1,075
Interest rate contracts		600		1,900
Commodity contracts		175		379
Total	$	2,040	$	3,354

Following is a description of each category in the fair value hierarchy and the financial assets and liabilities of the Company that were included in each category at December 31, 2011 and January 1, 2011, measured on a recurring basis.

Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market. For the Company, level 1 financial assets and liabilities consist primarily of commodity derivative contracts.

Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. For the Company, level 2 financial assets and liabilities consist of interest rate swaps and over-the-counter commodity and currency contracts.

The Company's calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve. Over-the-counter commodity derivatives are valued using an income approach based on the commodity index prices less the contract rate multiplied by the notional amount. Foreign currency contracts are valued using an income approach based on forward rates less the contract rate multiplied by the notional amount. The Company's calculation of the fair value of level 2 financial assets and liabilities takes into consideration the risk of nonperformance, including counterparty credit risk.

Level 3 – Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management's own assumptions about the assumptions a market participant would use in pricing the asset or liability. The Company did not have any level 3 financial assets or liabilities as of December 31, 2011 or January 1, 2011.

The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet on a recurring basis as of December 31, 2011 and January 1, 2011:


			Level 1				Level 2				Total
(millions)			2011		2010		2011		2010		2011		2010

Derivatives designated as hedging instruments:

Assets:
Foreign currency exchange contracts:
	Other current assets	$	-	$	-	$	11	$	7	$	11	$	7
Interest rate contracts:
	Other current assets		-		-		-		5		-		5
	Other assets		-		-		23		69		23		69
Commodity contracts:
	Other current assets		2		23		-		-		2		23
Total assets		$	2	$	23	$	34	$	81	$	36	$	104

Liabilities:
Foreign currency exchange contracts:
	Other current liabilities	$	-	$	-	$	(18)	$	(27)	$	(18)	$	(27)
Commodity contracts:
	Other current liabilities		(4)		-		(12)		(10)		(16)		(10)
	Other liabilities		-		-		(34)		(29)		(34)		(29)
Total liabilities		$	(4)	$	-	$	(64)	$	(66)	$	(68)	$	(66)

The fair value of non designated hedging instruments as of December 31, 2011 and January 1, 2011 was immaterial.

The effect of derivative instruments on the Consolidated Statement of Income for the years ended December 31, 2011 and January 1, 2011 were as follows:


											Location of gain		Gain (loss)
											(loss) recognized		recognized in
Derivatives in fair value hedging relationships (millions)											in income		income (a)
													2011		2010

Foreign currency exchange contracts											Other income (expense), net		($12)		($51)

Interest rate contracts											Interest expense	$	(1)	$	-
Total												$	(13)	$	(51)
(a)	Includes the ineffective portion and amount excluded from effectiveness testing.


						Location of gain		Gain (loss)			Location of gain
Derivatives in cash flow hedging			Gain (loss)			(loss) reclassified		reclassified from			(loss) recognized		Gain (loss)
relationships (millions)			recognized in AOCI			from AOCI		AOCI into income			in income (a)		recognized in income(a)
			2011		2010			2011		2010			2011		2010

Foreign currency exchange contracts		$	-	$	(19)	COGS	$	(3)	$	(25)	Other income (expense), net	$	(2)	$	(1)
Foreign currency exchange contracts			1		-	SGA expense		-		(1)	Other income (expense), net		-		-
Interest rate contracts			(15)		67	Interest expense		4		(4)	N/A		-		-
Commodity contracts			(37)		3	COGS		1		(4)	Other income (expense), net		-		(1)
Total		$	(51)	$	51		$	2	$	(34)		$	(2)	$	(2)
(a)	Includes the ineffective portion and amount excluded from effectiveness testing.
During the next 12 months, the Company expects $8 million of net deferred losses reported in AOCI at December 31, 2011 to be reclassified to income, assuming market rates remain constant through contract maturities.



Derivatives in net investment													Gain (loss)
hedging relationships (millions)													recognized in AOCI
													2011		2010

Foreign currency exchange contracts												$	6	$	-
Total												$	6	$	-


											Location of gain		Gain (loss)
											(loss) recognized		recognized in
Derivatives not designated as hedging instruments (millions)											in income		income
													2011		2010

Foreign currency exchange contracts											Other income (expense), net	$	(1)	$	0
Interest rate contracts											Interest expense	$	(1)	$	-
Total												$	(2)	$	-

Certain of the Company's derivative instruments contain provisions requiring the Company to post collateral on those derivative instruments that are in a liability position if the Company's credit rating falls below BB+ (S&P), or Baa1 (Moody's). The fair value of all derivative instruments with credit-risk-related contingent features in a liability position on December 31, 2011 was $46 million. If the credit-risk-related contingent features were triggered as of December 31, 2011, the Company would be required to post additional collateral of $44 million. In addition, certain derivative instruments contain provisions that would be triggered in the event the Company defaults on its debt agreements. There were no collateral posting requirements as of December 31, 2011 triggered by credit-risk-related contingent features, however, there was $2 million of collateral posted under the reciprocal collateralization agreements as discussed under counterparty credit risk concentration below.

Other fair value measurements

Level 3 assets measured on a nonrecurring basis at January 1, 2011 consisted of long-lived assets and goodwill.

The Company's calculation of the fair value of long-lived assets is based on market comparables, market trends and the condition of the assets. Long-lived assets with a carrying amount of $19 million were written down to their fair value of $10 million at January 1, 2011, resulting in an impairment charge of $9 million, which was included in earnings for the period.

Goodwill with a carrying amount of $20 million was written off at January 1, 2011 to reflect its implied fair value, resulting in an impairment charge of $20 million, which was included in earnings for the period. Please refer to the impairment discussion in Note 2.

The following table presents assets that were measured at fair value on the Consolidated Balance Sheet on a nonrecurring basis as of January 1, 2011:

(millions)		Fair Value		Level 3		Total Loss
Description:
Long-lived assets	$	10	$	10	$	(9)
Goodwill		-		-		(20)
Total	$	10	$	10	$	(29)

Financial instruments

The carrying values of the Company's short-term items, including cash, cash equivalents, accounts receivable, accounts payable and notes payable approximate fair value. The fair value of the Company's long-term debt is calculated based on broker quotes and was as follows at December 31, 2011:


(millions)		Fair Value		Carrying Value
Current maturities of long-term debt	$	778	$	761
Long-term debt		5,893		5,037
Total	$	6,671	$	5,798

Counterparty credit risk concentration

The Company is exposed to credit loss in the event of nonperformance by counterparties on derivative financial and commodity contracts. Management believes a concentration of credit risk with respect to derivative counterparties is limited due to the credit ratings and use of master netting and reciprocal collateralization agreements with the counterparties and the use of exchange-traded commodity contracts.

Master netting agreements apply in situations where the Company executes multiple contracts with the same counterparty. There were no counterparties representing a concentration of credit risk to the Company at December 31, 2011.

For certain derivative contracts, reciprocal collateralization agreements with counterparties call for the posting of collateral in the form of cash, treasury securities or letters of credit if a fair value loss position to the Company or its counterparties exceeds a certain amount. As of December 31, 2011, the Company had posted collateral of $2 million in the form of cash, which was reflected as an increase in accounts receivable, net on the Consolidated Balance Sheet.

Management believes concentrations of credit risk with respect to accounts receivable is limited due to the generally high credit quality of the Company's major customers, as well as the large number and geographic dispersion of smaller customers. However, the Company conducts a disproportionate amount of business with a small number of large multinational grocery retailers, with the five largest accounts encompassing approximately 31% of consolidated trade receivables at December 31, 2011.

Refer to Note 1 for disclosures regarding the Company's accounting policies for derivative instruments.

- Definition

The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items. The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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