Financial Instruments | Financial InstrumentsThe 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 January 31, 2021, or August 2, 2020. We are also exposed to credit risk from our customers. During 2020, our largest customer accounted for approximately 21% of consolidated net sales from continuing operations. Our five largest customers accounted for approximately 44% of our consolidated net sales from continuing operations in 2020. We closely monitor credit risk associated with counterpartie s 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 and, prior to the sale of Arnott's and other international operations, the Australian 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 $98 as of January 31, 2021, and $164 as of August 2, 2020. 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 contracts that are not designated as accounting hedges was $20 as of January 31, 2021, and $19 as of August 2, 2020. 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 or treasury rate lock contracts to lock in the rate on the interest payments related to the anticipated debt issuances. The contracts are either designated as cash-flow hedging instruments or are undesignated. The effective portion of the changes in fair value on designated instruments is recorded in 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 forward starting interest rate swaps or treasury rate lock contracts outstanding as of January 31, 2021, or August 2, 2020. 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, cocoa, aluminum, soybean meal and corn. 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 $5 as of January 31, 2021. There were no commodity contracts designated as cash flow hedges as of August 2, 2020. The notional amount of commodity contracts not designated as accounting hedges was $121 as of January 31, 2021, and $137 as of August 2, 2020. In 2017, we entered into 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 value was approximately $84 as of January 31, 2021, and $34 as of August 2, 2020. Unrealized gains (losses) and settlements are included in Cost of products sold in our Consolidated Statements of Earnings. 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 Institutional Plus Shares, 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 Institutional Plus Shares; 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. 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 $22 as of January 31, 2021, and August 2, 2020. The following table summarizes the fair value of derivative instruments on a gross basis as recorded in the Consolidated Balance Sheets as of January 31, 2021, and August 2, 2020: Balance Sheet Classification January 31, August 2, Asset Derivatives Derivatives designated as hedges: Foreign exchange forward contracts Other current assets $ — $ 1 Total derivatives designated as hedges $ — $ 1 Derivatives not designated as hedges: Commodity derivative contracts Other current assets $ 16 $ 7 Deferred compensation derivative contracts Other current assets 3 4 Commodity derivative contracts Other assets 1 — Total derivatives not designated as hedges $ 20 $ 11 Total asset derivatives $ 20 $ 12 Balance Sheet Classification January 31, August 2, Liability Derivatives Derivatives designated as hedges: Foreign exchange forward contracts Accrued liabilities $ 4 $ 2 Total derivatives designated as hedges $ 4 $ 2 Derivatives not designated as hedges: Commodity derivative contracts Accrued liabilities $ 2 $ 9 Total derivatives not designated as hedges $ 2 $ 9 Total liability derivatives $ 6 $ 11 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 January 31, 2021, and August 2, 2020, would be adjusted as detailed in the following table: January 31, 2021 August 2, 2020 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 $ 20 $ — $ 20 $ 12 $ (4) $ 8 Total liability derivatives $ 6 $ — $ 6 $ 11 $ (4) $ 7 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 liability balance of $5 at January 31, 2021, and an asset balance of $8 at August 2, 2020, were included in Accrued liabilities and Other current assets, respectively, 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 January 31, 2021, and January 26, 2020, in other comprehensive income (loss) (OCI) and the Consolidated Statements of Earnings: Total Cash-Flow Hedge Derivatives Designated as Cash-Flow Hedges January 31, January 26, Three Months Ended OCI derivative gain (loss) at beginning of quarter $ (9) $ (9) Effective portion of changes in fair value recognized in OCI: Foreign exchange forward contracts (6) 1 Amount of (gain) loss reclassified from OCI to earnings: Location in Earnings Foreign exchange forward contracts Cost of products sold 2 (1) Forward starting interest rate swaps Interest expense 1 — OCI derivative gain (loss) at end of quarter $ (12) $ (9) Six Months Ended OCI derivative gain (loss) at beginning of year $ (8) $ (11) Effective portion of changes in fair value recognized in OCI: Foreign exchange forward contracts (7) 1 Amount of (gain) loss reclassified from OCI to earnings: Location in Earnings Foreign exchange forward contracts Cost of products sold 2 (1) Foreign exchange forward contracts Earnings (loss) from discontinued operations — 1 Forward starting interest rate swaps Interest expense 1 1 OCI derivative gain (loss) at end of quarter $ (12) $ (9) Based on current valuations, the amount expected to be reclassified from OCI into earnings within the next 12 months is a loss of $6. The following tables show the effect of our derivative instruments designated as cash-flow hedges for the three- and six-month periods ended January 31, 2021, and January 26, 2020, in the Consolidated Statements of Earnings: Three Months Ended January 31, 2021 January 26, 2020 Cost of products sold Interest expense Cost of products sold Earnings from discontinued operations Interest expense Consolidated Statements of Earnings: $ 1,496 $ 55 $ 1,420 $ 1,037 $ 149 (Gain) loss on Cash Flow Hedges: Amount of (gain) loss reclassified from OCI to earnings $ 2 $ 1 $ (1) $ — $ — Amount excluded from effectiveness testing recognized in earnings using an amortization approach $ — $ — $ — $ — $ — Six Months Ended January 31, 2021 January 26, 2020 Cost of products sold Interest Cost of product sold Earnings from discontinued operations Interest Consolidated Statements of Earnings: $ 3,023 $ 110 $ 2,865 $ 1,034 $ 229 (Gain) loss on Cash Flow Hedges: Amount of (gain) loss reclassified from OCI to earnings $ 2 $ 1 $ (1) $ 1 $ 1 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- and six-month periods ended January 31, 2021, and January 26, 2020, in the Consolidated Statements of Earnings: Amount of (Gain) Loss Recognized in Earnings on Derivatives Derivatives not Designated as Hedges Location of (Gain) Loss Three Months Ended Six Months Ended January 31, January 26, January 31, 2021 January 26, 2020 Foreign exchange forward contracts Cost of products sold $ — $ — $ 1 $ — Foreign exchange forward contracts Other expenses / (income) — — — 2 Commodity derivative contracts Cost of products sold (13) — (15) (4) Deferred compensation derivative contracts Administrative expenses (3) (3) (3) (4) Treasury rate lock contracts Interest expense — (3) — (3) Total (gain) loss at end of quarter $ (16) $ (6) $ (17) $ (9) |