Notes to Consolidated Financial Statements
(unaudited)
(currency in millions, except per share amounts)
1. Basis of Presentation and Significant Accounting Policies
In this Form 10-Q, unless otherwise stated, the terms "we," "us," "our" and the "company" refer to Campbell Soup Company and its consolidated subsidiaries.
The consolidated financial statements include our accounts and entities in which we maintain a controlling financial interest and a variable interest entity (VIE) for which we were the primary beneficiary. Intercompany transactions are eliminated in consolidation. See Note 3 for a discussion of Discontinued Operations.
The financial statements reflect all adjustments which are, in our opinion, necessary for a fair statement of the results of operations, financial position, and cash flows for the indicated periods. The accounting policies we used in preparing these financial statements are substantially consistent with those we applied in our Annual Report on Form 10-K for the year ended August 2, 2020.
The results for the period are not necessarily indicative of the results to be expected for other interim periods or the full year. Our fiscal year ends on the Sunday nearest July 31, which is August 1, 2021. There are 52 weeks in 2021. There were 53 weeks in 2020.
2. Recent Accounting Pronouncements
Recently Adopted
In August 2018, the Financial Accounting Standards Board (FASB) issued guidance that eliminates, adds, and modifies certain disclosure requirements for fair value measurements. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those years. We adopted the new guidance at the beginning of the first quarter of 2021. The adoption did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued guidance on accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance is effective for fiscal years beginning after December 15, 2019. Entities have the option to apply the guidance prospectively to all implementation costs incurred after the date of adoption or retrospectively. Early adoption is permitted. We adopted the new guidance on a prospective basis at the beginning of the first quarter of 2021. The adoption did not have a material impact on our consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In August 2018, the FASB issued guidance that changes the disclosure requirements related to defined benefit pension and postretirement plans. The guidance is effective for fiscal years beginning after December 15, 2020. The guidance is to be applied on a retrospective basis. Early adoption is permitted. We are currently evaluating the impact that the new guidance will have on our disclosures.
In December 2019, the FASB issued guidance on simplifying the accounting for income taxes. The guidance removes certain exceptions to the general principles of accounting for income taxes and also improves consistent application of accounting by clarifying or amending existing guidance. The guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those years. Early adoption is permitted. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.
In March 2020, the FASB issued guidance that provides optional expedients and exceptions for a limited period of time for accounting for contracts, hedging relationships, and other transactions affected by the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued. Optional expedients can be applied from March 12, 2020 through December 31, 2022. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.
3. Divestitures
Discontinued Operations
We completed the sale of our Kelsen business on September 23, 2019, for $322. We also completed the sale of our Arnott’s business and certain other international operations, including the simple meals and shelf-stable beverages businesses in Australia and Asia Pacific (the Arnott's and other international operations), on December 23, 2019, for $2,286. The purchase price was subject to certain post-closing adjustments, which resulted in $4 of additional proceeds in the third quarter of 2020. Beginning in the fourth quarter of 2019, we have reflected the results of operations of the Kelsen business and the Arnott’s and
other international operations (collectively referred to as Campbell International) as discontinued operations in the Consolidated Statements of Earnings for all periods presented. These businesses were historically included in the Snacks reportable segment.
Results of Campbell International were as follows:
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Three Months Ended
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October 27, 2019
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Net sales
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$
|
223
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Earnings before taxes from operations
|
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$
|
37
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|
Taxes on earnings from operations
|
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13
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|
Loss on sale of business / costs associated with selling the businesses
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(51)
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|
|
Tax benefit on loss of sale / costs associated with selling the businesses
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(24)
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|
Earnings (loss) from discontinued operations
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$
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(3)
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|
Under the terms of the sale of the Arnott's and other international operations, we entered into a long-term licensing arrangement for the exclusive rights to certain Campbell brands in certain non-U.S. markets. We provide certain transition services to support the divested business.
Cash flow activity of Campbell International included the following:
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Three Months Ended
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October 27, 2019
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Cash flows from discontinued operating activities:
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Loss on sale of discontinued operations business
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$
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40
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|
Cash flows from discontinued investing activities:
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Capital expenditures
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$
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21
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Sale of discontinued operations business, net of cash divested
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297
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Other Divestitures
On October 11, 2019, we completed the sale of our European chips business for £63, or $77. The pre-tax loss recognized in the first quarter of 2020 on the sale was $64, which included the impact of allocated goodwill and foreign currency translation adjustments. For tax purposes, in the first quarter of 2020, the capital loss on the sale was offset by a valuation allowance. The European chips business had net sales of $25 for the three-month period ended October 27, 2019. Earnings were not material in the period. The results of the European chips business through the date of sale were reflected in continuing operations within the Snacks reportable segment.
4. Accumulated Other Comprehensive Income (Loss)
The components of Accumulated other comprehensive income (loss) consisted of the following:
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|
|
|
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|
|
Foreign Currency Translation Adjustments(1)
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|
Gains (Losses) on Cash Flow Hedges(2)
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Pension and Postretirement Benefit Plan Adjustments(3)
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Total Accumulated Comprehensive Income (Loss)
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Balance at July 28, 2019
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$
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(218)
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|
$
|
(9)
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|
|
$
|
29
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|
|
$
|
(198)
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Other comprehensive income (loss) before reclassifications
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|
(5)
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—
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|
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—
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|
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(5)
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|
Amounts reclassified from accumulated other comprehensive income (loss)(4)
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82
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|
|
1
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|
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(6)
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|
77
|
|
Net current-period other comprehensive income (loss)
|
|
77
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|
|
1
|
|
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(6)
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|
|
72
|
|
Balance at Octoboer 27, 2019
|
|
$
|
(141)
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|
|
$
|
(8)
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|
|
$
|
23
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|
|
$
|
(126)
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|
|
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|
|
|
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|
Balance at August 2, 2020
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|
$
|
(10)
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|
|
$
|
(7)
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|
|
$
|
7
|
|
|
$
|
(10)
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|
Other comprehensive income (loss) before reclassifications
|
|
2
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|
|
—
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|
|
—
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|
|
2
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
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—
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|
|
—
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|
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(1)
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|
|
(1)
|
|
Net current-period other comprehensive income (loss)
|
|
2
|
|
|
—
|
|
|
(1)
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|
|
1
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|
Balance at November 1, 2020
|
|
$
|
(8)
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|
|
$
|
(7)
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|
|
$
|
6
|
|
|
$
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(9)
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_____________________________________
(1)Included no tax as of November 1, 2020, and August 2, 2020, and tax expense of $4 as of October 27, 2019, and July 28, 2019.
(2)Included a tax benefit of $2 as of November 1, 2020, $1 as of August 2, 2020, and October 27, 2019, and $2 as of July 28, 2019.
(3)Included tax expense of $2 as of November 1, 2020, $2 as of August 2, 2020, $7 as of October 27, 2019, and $8 as of July 28, 2019.
(4)Reflects amounts reclassified from sale of businesses. See Note 3 for additional information.
Amounts related to noncontrolling interests were not material.
The amounts reclassified from Accumulated other comprehensive income (loss) consisted of the following:
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Three Months Ended
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Details about Accumulated Other Comprehensive Income (Loss) Components
|
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|
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|
|
November 1, 2020
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October 27, 2019
|
|
Location of (Gain) Loss Recognized in Earnings
|
Foreign currency translation adjustments:
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|
|
|
|
|
|
|
|
Currency translation (gains) losses realized upon disposal of businesses
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|
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$
|
—
|
|
|
$
|
23
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|
|
Other expenses / (income)
|
Currency translation (gains) losses realized upon disposal of businesses
|
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|
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|
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—
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|
59
|
|
|
Earnings (loss) from discontinued operations
|
Total before tax
|
|
|
|
|
|
—
|
|
|
82
|
|
|
|
Tax expense (benefit)
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
(Gain) loss, net of tax
|
|
|
|
|
|
$
|
—
|
|
|
$
|
82
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gains) losses on cash flow hedges:
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|
|
Foreign exchange forward contracts
|
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|
|
$
|
—
|
|
|
$
|
1
|
|
|
Earnings (loss) from discontinued operations
|
Forward starting interest rate swaps
|
|
|
|
|
|
—
|
|
|
1
|
|
|
Interest expense
|
Total before tax
|
|
|
|
|
|
—
|
|
|
2
|
|
|
|
Tax expense (benefit)
|
|
|
|
|
|
—
|
|
|
(1)
|
|
|
|
(Gain) loss, net of tax
|
|
|
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and postretirement benefit adjustments:
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|
|
|
|
|
|
|
|
|
|
Prior service credit
|
|
|
|
|
|
$
|
(1)
|
|
|
$
|
(7)
|
|
|
Other expenses / (income)
|
Tax expense (benefit)
|
|
|
|
|
|
—
|
|
|
1
|
|
|
|
(Gain) loss, net of tax
|
|
|
|
|
|
$
|
(1)
|
|
|
$
|
(6)
|
|
|
|
5. Goodwill and Intangible Assets
Goodwill
The following table shows the changes in the carrying amount of goodwill by business segment:
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|
Meals & Beverages
|
|
Snacks
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance at August 2, 2020
|
$
|
975
|
|
|
$
|
3,011
|
|
|
$
|
3,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
1
|
|
|
—
|
|
|
1
|
|
Net balance at November 1, 2020
|
$
|
976
|
|
|
$
|
3,011
|
|
|
$
|
3,987
|
|
Intangible Assets
The following table summarizes balance sheet information for intangible assets, excluding goodwill, subject to amortization and intangible assets not subject to amortization:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1, 2020
|
|
August 2, 2020
|
Intangible Assets
|
|
Cost
|
Accumulated Amortization
|
Net
|
|
Cost
|
Accumulated Amortization
|
Net
|
Amortizable intangible assets
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
851
|
|
$
|
(122)
|
|
$
|
729
|
|
|
$
|
851
|
|
$
|
(112)
|
|
$
|
739
|
|
Non-amortizable intangible assets
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
2,611
|
|
|
|
|
2,611
|
|
Total net intangible assets
|
|
|
|
$
|
3,340
|
|
|
|
|
$
|
3,350
|
|
Non-amortizable intangible assets consist of trademarks. As of November 1, 2020, trademarks primarily included $1,978 associated with Snyder's-Lance. Of the carrying values of all indefinite-lived trademarks, $620 related to Snyder's of Hanover trademark, $292 related to the Pace trademark, and $280 related to the Pacific Foods trademark.
Amortization of intangible assets in Earnings from continuing operations was $10 and $11 for the three-month periods ended November 1, 2020, and October 27, 2019, respectively. As of November 1, 2020, amortizable intangible assets had a weighted-average remaining useful life of 18 years. Amortization expense for the next 5 years is estimated to be approximately $42 per year.
6. Segment Information
Our reportable segments are as follows:
•Meals & Beverages, which includes the retail and foodservice businesses in the U.S. and Canada. The segment includes the following products: Campbell’s condensed and ready-to-serve soups; Swanson broth and stocks; Pacific Foods broth, soups and non-dairy beverages; Prego pasta sauces; Pace Mexican sauces; Campbell’s gravies, pasta, beans and dinner sauces; Swanson canned poultry; Plum baby food and snacks; V8 juices and beverages; and Campbell’s tomato juice; and
•Snacks, which consists of Pepperidge Farm cookies, crackers, fresh bakery and frozen products in U.S. retail, including Milano cookies and Goldfish crackers; and Snyder’s of Hanover pretzels, Lance sandwich crackers, Cape Cod and Kettle Brand potato chips, Late July snacks, Snack Factory Pretzel Crisps, Pop Secret popcorn, Emerald nuts, and other snacking products in the U.S. and Canada. The segment includes the retail business in Latin America. The segment also included the results of our European chips business, which was sold on October 11, 2019.
We evaluate segment performance before interest, taxes and costs associated with restructuring activities and impairment charges. Unrealized gains and losses on undesignated commodity hedging activities are excluded from segment operating earnings and are recorded in Corporate as these open positions represent hedges of future purchases. Upon closing of the contracts, the realized gain or loss is transferred to segment operating earnings, which allows the segments to reflect the economic effects of the hedge without exposure to quarterly volatility of unrealized gains and losses. Only the service cost component of pension and postretirement expense is allocated to segments. All other components of expense, including interest cost, expected return on assets, amortization of prior service credits and recognized actuarial gains and losses are reflected in Corporate and not included in segment operating results. Asset information by segment is not discretely maintained for internal reporting or used in evaluating performance.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
November 1,
2020
|
|
October 27,
2019
|
Net sales
|
|
|
|
|
|
|
|
|
Meals & Beverages
|
|
|
|
|
|
$
|
1,342
|
|
|
$
|
1,194
|
|
Snacks
|
|
|
|
|
|
998
|
|
|
989
|
|
Total
|
|
|
|
|
|
$
|
2,340
|
|
|
$
|
2,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
November 1,
2020
|
|
October 27,
2019
|
Earnings before interest and taxes
|
|
|
|
|
|
|
|
|
Meals & Beverages
|
|
|
|
|
|
$
|
333
|
|
|
$
|
282
|
|
Snacks
|
|
|
|
|
|
139
|
|
|
125
|
|
Corporate(1)
|
|
|
|
|
|
(10)
|
|
|
(87)
|
|
Restructuring charges(2)
|
|
|
|
|
|
(1)
|
|
|
(3)
|
|
Total
|
|
|
|
|
|
$
|
461
|
|
|
$
|
317
|
|
_______________________________________
(1)Represents unallocated items. Pension benefit settlement adjustments are included in Corporate. There were settlement gains of $4 in the three-month period ended November 1, 2020. A loss of $64 on the sale of our European chips business was included in the three-month period ended October 27, 2019. Costs related to the cost savings initiatives were $5 and $8 in the three-month periods ended November 1, 2020, and October 27, 2019, respectively.
(2)See Note 7 for additional information.
Our net sales based on product categories are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
November 1,
2020
|
|
October 27,
2019
|
Net sales
|
|
|
|
|
|
|
|
|
Soup
|
|
|
|
|
|
$
|
826
|
|
|
$
|
708
|
|
Snacks
|
|
|
|
|
|
1,008
|
|
|
1,010
|
|
Other simple meals
|
|
|
|
|
|
311
|
|
|
283
|
|
Beverages
|
|
|
|
|
|
195
|
|
|
182
|
|
Total
|
|
|
|
|
|
$
|
2,340
|
|
|
$
|
2,183
|
|
Soup includes various soup, broths and stock products. Snacks include cookies, pretzels, crackers, popcorn, nuts, potato chips, tortilla chips and other salty snacks and baked products. Other simple meals include sauces and Plum products. Beverages include V8 juices and beverages, Campbell’s tomato juice and Pacific Foods non-dairy beverages.
7. Restructuring Charges and Cost Savings Initiatives
Multi-year Cost Savings Initiatives and Snyder's-Lance Cost Transformation Program and Integration
Beginning in fiscal 2015, we implemented initiatives to reduce costs and to streamline our organizational structure.
In recent years, we expanded these initiatives by further optimizing our supply chain and manufacturing networks, including closing our manufacturing facility in Toronto, Ontario, as well as our information technology infrastructure.
On March 26, 2018, we completed the acquisition of Snyder's-Lance. Prior to the acquisition, Snyder's-Lance launched a cost transformation program following a comprehensive review of its operations with the goal of significantly improving its financial performance. We continue to implement this program. In addition, we have identified opportunities for additional cost synergies as we integrate Snyder's-Lance.
Cost estimates, as well as timing for certain activities, are continuing to be developed.
A summary of the pre-tax charges recorded in Earnings from continuing operations related to these initiatives is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
November 1,
2020
|
|
October 27,
2019
|
|
Recognized as of November 1, 2020
|
Restructuring charges
|
|
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
239
|
|
Administrative expenses
|
|
|
|
|
4
|
|
|
8
|
|
|
315
|
|
Cost of products sold
|
|
|
|
|
1
|
|
|
—
|
|
|
77
|
|
Marketing and selling expenses
|
|
|
|
|
—
|
|
|
—
|
|
|
12
|
|
Research and development expenses
|
|
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Total pre-tax charges
|
|
|
|
|
$
|
6
|
|
|
$
|
11
|
|
|
$
|
647
|
|
A summary of the pre-tax costs in Earnings (loss) from discontinued operations associated with these initiatives is as follows:
|
|
|
|
|
|
|
Recognized as of November 1, 2020
|
Severance pay and benefits
|
$
|
19
|
|
Implementation costs and other related costs
|
4
|
|
Total
|
$
|
23
|
|
As of April 28, 2019, we incurred substantially all of the costs for actions associated with discontinued operations. All of the costs were cash expenditures.
A summary of the pre-tax costs in Earnings from continuing operations associated with the initiatives is as follows:
|
|
|
|
|
|
|
Recognized as of November 1, 2020
|
Severance pay and benefits
|
$
|
215
|
|
Asset impairment/accelerated depreciation
|
67
|
|
Implementation costs and other related costs
|
365
|
|
Total
|
$
|
647
|
|
The total estimated pre-tax costs for actions associated with continuing operations that have been identified are approximately $700 to $730 and we expect to incur the costs through 2022. This estimate will be updated as costs for the expanded initiatives are developed.
We expect the costs for actions associated with continuing operations that have been identified to date to consist of the following: approximately $220 to $225 in severance pay and benefits; approximately $90 in asset impairment and accelerated depreciation; and approximately $390 to $415 in implementation costs and other related costs. We expect these pre-tax costs to be associated with our segments as follows: Meals & Beverages - approximately 32%; Snacks - approximately 44%; and Corporate - approximately 24%.
Of the aggregate $700 to $730 of pre-tax costs associated with continuing operations identified to date, we expect approximately $595 to $625 will be cash expenditures. In addition, we expect to invest approximately $455 in capital expenditures through 2022, of which we invested $351 as of November 1, 2020. The capital expenditures primarily relate to a U.S. warehouse optimization project, improvement of quality, safety and cost structure across the Snyder’s-Lance manufacturing network, implementation of an SAP enterprise-resource planning system for Snyder's-Lance, optimization of information technology infrastructure and applications, transition of production of the Toronto manufacturing facility to our U.S. thermal plants, insourcing of manufacturing for certain simple meal products, and optimization of the Snyder’s-Lance warehouse and distribution network.
A summary of the restructuring activity and related reserves associated with continuing operations at November 1, 2020, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance Pay and Benefits
|
|
|
|
|
|
Implementation Costs and Other Related
Costs(2)
|
|
|
|
|
|
Total Charges
|
Accrued balance at August 2, 2020(1)
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 charges
|
|
1
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
$
|
6
|
|
2021 cash payments
|
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued balance at November 1, 2020(1)
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
__________________________________
(1)Includes $3 of severance pay and benefits recorded in Other liabilities in the Consolidated Balance Sheet.
(2)Includes other costs recognized as incurred that are not reflected in the restructuring reserve in the Consolidated Balance Sheet. The costs are included in Administrative expenses and Cost of products sold in the Consolidated Statements of Earnings.
Segment operating results do not include restructuring charges, implementation costs and other related costs because we evaluate segment performance excluding such charges. A summary of the pre-tax costs in Earnings from continuing operations associated with segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1, 2020
|
|
|
|
Three Months
Ended
|
|
Costs Incurred to Date
|
Meals & Beverages
|
|
|
$
|
—
|
|
|
$
|
220
|
|
Snacks
|
|
|
5
|
|
|
256
|
|
Corporate
|
|
|
1
|
|
|
171
|
|
Total
|
|
|
$
|
6
|
|
|
$
|
647
|
|
8. Earnings per Share (EPS)
For the periods presented in the Consolidated Statements of Earnings, the calculations of basic EPS and EPS assuming dilution vary in that the weighted average shares outstanding assuming dilution include the incremental effect of stock options and other share-based payment awards, except when such effect would be antidilutive. The earnings per share calculation for the three-month periods ended November 1, 2020 and October 27, 2019, excludes approximately 1 million stock options that would have been antidilutive.
9. Pension and Postretirement Benefits
Components of net benefit expense (income) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Pension
|
|
Postretirement
|
|
November 1,
2020
|
|
October 27,
2019
|
|
November 1,
2020
|
|
October 27,
2019
|
Service cost
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
10
|
|
|
17
|
|
|
1
|
|
|
2
|
|
Expected return on plan assets
|
(31)
|
|
|
(34)
|
|
|
—
|
|
|
—
|
|
Amortization of prior service cost
|
—
|
|
|
—
|
|
|
(1)
|
|
|
(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement gains
|
(4)
|
|
|
(1)
|
|
|
—
|
|
|
—
|
|
Net periodic benefit expense (income)
|
$
|
(20)
|
|
|
$
|
(13)
|
|
|
$
|
—
|
|
|
$
|
(5)
|
|
The components of net periodic benefit expense (income) other than the service cost component associated with continuing operations are included in Other expenses / (income) in the Consolidated Statements of Earnings.
The settlement gains of $4 for three-month period ended November 1, 2020 resulted from the level of lump sum distributions associated with a U.S. pension plan and a Canadian pension plan. The settlement gain of $1 for the three-month period ended October 27, 2019 resulted from the level of lump sum distributions associated with a Canadian pension plan.
Net periodic pension benefit expense (income) associated with discontinued operations was not material for the three-month period ended October 27, 2019.
10. Leases
The components of lease costs were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
November 1,
2020
|
|
October 27,
2019
|
Operating lease cost
|
|
|
|
|
|
$
|
20
|
|
|
$
|
19
|
|
Finance lease - amortization of right-of-use (ROU) assets
|
|
|
|
|
|
1
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Short-term lease cost
|
|
|
|
|
|
10
|
|
|
10
|
|
Variable lease cost(1)
|
|
|
|
|
|
46
|
|
|
43
|
|
Sublease income
|
|
|
|
|
|
(1)
|
|
|
—
|
|
Total(2)
|
|
|
|
|
|
$
|
76
|
|
|
$
|
72
|
|
__________________________________________
(1)Includes labor and other overhead in our service contracts with embedded leases.
(2)Total lease cost in the three-month period ended October 27, 2019, included $2 related to discontinued operations.
The following tables summarize the lease amounts recorded in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
Balance Sheet Location
|
|
November 1,
2020
|
|
August 2,
2020
|
ROU assets, net
|
|
Other assets
|
|
$
|
241
|
|
|
$
|
254
|
|
Lease liabilities (current)
|
|
Accrued liabilities
|
|
$
|
57
|
|
|
$
|
67
|
|
Lease liabilities (noncurrent)
|
|
Other liabilities
|
|
$
|
180
|
|
|
$
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance Leases
|
|
|
Balance Sheet Location
|
|
November 1,
2020
|
|
August 2,
2020
|
ROU assets, net
|
|
Plant assets, net of depreciation
|
|
$
|
11
|
|
|
$
|
10
|
|
Lease liabilities (current)
|
|
Short-term borrowings
|
|
$
|
4
|
|
|
$
|
3
|
|
Lease liabilities (noncurrent)
|
|
Long-term debt
|
|
$
|
8
|
|
|
$
|
7
|
|
The following table summarizes cash flow and other information related to leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
November 1,
2020
|
|
October 27,
2019
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
|
|
$
|
21
|
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing cash flows from finance leases
|
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
ROU assets obtained in exchange for lease obligations:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
|
$
|
6
|
|
|
$
|
46
|
|
|
|
Finance leases
|
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
ROU assets divested with businesses sold:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
|
11. 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 November 1, 2020, 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 counterparties 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 $124 at November 1, 2020, and $164 at 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 $26 at November 1, 2020, and $19 at 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 November 1, 2020, 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. There were no commodity contracts accounted for as cash-flow hedges as of November 1, 2020, or August 2, 2020. The notional amount of commodity contracts not designated as accounting hedges was $116 at November 1, 2020, and $137 at 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 $13 as of November 1, 2020, 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 November 1, 2020, 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 November 1, 2020, and August 2, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification
|
|
November 1,
2020
|
|
August 2,
2020
|
Asset Derivatives
|
|
|
|
|
|
Derivatives designated as hedges:
|
|
|
|
|
|
Foreign exchange forward contracts
|
Other current assets
|
|
$
|
1
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedges
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
Commodity derivative contracts
|
Other current assets
|
|
$
|
11
|
|
|
$
|
7
|
|
|
|
|
|
|
|
Deferred compensation derivative contracts
|
Other current assets
|
|
—
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedges
|
|
|
$
|
11
|
|
|
$
|
11
|
|
Total asset derivatives
|
|
|
$
|
12
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification
|
|
November 1,
2020
|
|
August 2,
2020
|
Liability Derivatives
|
|
|
|
|
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
Accrued liabilities
|
|
$
|
2
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedges
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
Commodity derivative contracts
|
Accrued liabilities
|
|
$
|
7
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedges
|
|
|
$
|
7
|
|
|
$
|
9
|
|
Total liability derivatives
|
|
|
$
|
9
|
|
|
$
|
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 November 1, 2020, and August 2, 2020, would be adjusted as detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1, 2020
|
|
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
|
|
$
|
12
|
|
|
$
|
(4)
|
|
|
$
|
8
|
|
|
$
|
12
|
|
|
$
|
(4)
|
|
|
$
|
8
|
|
Total liability derivatives
|
|
$
|
9
|
|
|
$
|
(4)
|
|
|
$
|
5
|
|
|
$
|
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. The cash margin account balance was not material at November 1, 2020, and $8 at August 2, 2020, which 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-month periods ended November 1, 2020, and October 27, 2019, in other comprehensive income (loss) (OCI) and the Consolidated Statements of Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cash-Flow Hedge
OCI Activity
|
|
Derivatives Designated as Cash-Flow Hedges
|
|
|
November 1,
2020
|
|
October 27,
2019
|
|
Three 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
|
|
|
(1)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (gain) loss reclassified from OCI to earnings:
|
Location in Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
Earnings (loss) from discontinued operations
|
|
—
|
|
|
1
|
|
|
Forward starting interest rate swaps
|
Interest expense
|
|
—
|
|
|
1
|
|
|
OCI derivative gain (loss) at end of quarter
|
|
|
$
|
(9)
|
|
|
$
|
(9)
|
|
|
Based on current valuations, the amount expected to be reclassified from OCI into earnings within the next 12 months is a loss of $3.
The following table shows the effect of our derivative instruments designated as cash-flow hedges for the three-month periods ended November 1, 2020, and October 27, 2019, in the Consolidated Statements of Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
November 1,
2020
|
|
October 27,
2019
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) from Discontinued Operations
|
|
Interest
Expense
|
|
Earnings (Loss) from Discontinued Operations
|
|
Interest
Expense
|
Consolidated Statements of Earnings:
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
55
|
|
|
$
|
(3)
|
|
|
$
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss on Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (gain) loss reclassified from OCI to earnings
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
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-month periods ended November 1, 2020, and October 27, 2019, 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
|
|
|
|
|
November 1,
2020
|
|
October 27,
2019
|
|
|
|
|
Foreign exchange forward contracts
|
|
Cost of products sold
|
|
$
|
1
|
|
|
$
|
—
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other expenses / (income)
|
|
—
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative contracts
|
|
Cost of products sold
|
|
(2)
|
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation derivative contracts
|
|
Administrative expenses
|
|
—
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (gain) loss at end of quarter
|
|
|
|
$
|
(1)
|
|
|
$
|
(3)
|
|
|
|
|
|
12. Fair Value Measurements
We categorize financial assets and liabilities based on the following fair value hierarchy:
•Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
•Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with observable market data.
•Level 3: Unobservable inputs, which are valued based on our estimates of assumptions that market participants would use in pricing the asset or liability.
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. When available, we use unadjusted quoted market prices to measure the fair value and classify such items as Level 1. If quoted market prices are not available, we base fair value upon internally developed models that use current market-based or independently sourced market parameters such as interest rates and currency rates. Included in the fair value of derivative instruments is an adjustment for credit and nonperformance risk.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents our financial assets and liabilities that are measured at fair value on a recurring basis as of November 1, 2020, and August 2, 2020, consistent with the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
as of
November 1,
2020
|
|
Fair Value Measurements at
November 1, 2020 Using
Fair Value Hierarchy
|
|
Fair Value
as of
August 2,
2020
|
|
Fair Value Measurements at
August 2, 2020 Using
Fair Value Hierarchy
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts(1)
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Commodity derivative contracts(2)
|
11
|
|
|
6
|
|
|
4
|
|
|
1
|
|
|
7
|
|
|
3
|
|
|
2
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation derivative contracts(3)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
4
|
|
|
—
|
|
Deferred compensation investments(4)
|
3
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
3
|
|
|
—
|
|
|
—
|
|
Total assets at fair value
|
$
|
15
|
|
|
$
|
9
|
|
|
$
|
5
|
|
|
$
|
1
|
|
|
$
|
15
|
|
|
$
|
6
|
|
|
$
|
7
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
as of
November 1,
2020
|
|
Fair Value Measurements at
November 1, 2020 Using
Fair Value Hierarchy
|
|
Fair Value
as of
August 2,
2020
|
|
Fair Value Measurements at
August 2, 2020 Using
Fair Value Hierarchy
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts(1)
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
Commodity derivative contracts(2)
|
7
|
|
|
2
|
|
|
5
|
|
|
—
|
|
|
9
|
|
|
5
|
|
|
4
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation obligation(4)
|
98
|
|
|
98
|
|
|
—
|
|
|
—
|
|
|
92
|
|
|
92
|
|
|
—
|
|
|
—
|
|
Total liabilities at fair value
|
$
|
107
|
|
|
$
|
100
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
103
|
|
|
$
|
97
|
|
|
$
|
6
|
|
|
$
|
—
|
|
___________________________________
(1)Based on observable market transactions of spot currency rates and forward rates.
(2)Level 1 and 2 are based on quoted futures exchanges and on observable prices of futures and options transactions in the marketplace. Level 3 is based on unobservable inputs in which there is little or no market data, which requires management’s own assumptions within an internally developed model.
(3)Based on LIBOR and equity index swap rates.
(4)Based on the fair value of the participants’ investments.
The following table summarizes the changes in fair value of Level 3 assets for the three-month periods ended November 1, 2020, and October 27, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
November 1,
2020
|
|
October 27, 2019(1)
|
Fair value at beginning of year
|
|
$
|
2
|
|
|
$
|
76
|
|
Gains (losses)
|
|
—
|
|
|
(4)
|
|
|
|
|
|
|
Settlements
|
|
(1)
|
|
|
—
|
|
Fair value at end of quarter
|
|
$
|
1
|
|
|
$
|
72
|
|
___________________________________
(1)Primarily represented investments in equity securities that were not readily marketable and were accounted for under the fair value option. The investments were funded by Acre Venture Partners, L.P. (Acre), a limited partnership in which we were the sole limited partner. Fair value was based on analyzing recent transactions and transactions of comparable companies, and the discounted cash flow method. In addition, allocation methods, including the option pricing method, were used in distributing fair value among various equity holders according to rights and preferences. We entered into an agreement to sell our interest in Acre on April 26, 2020, and completed the sale on May 8, 2020.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximate fair value.
Cash equivalents were $200 at November 1, 2020, and $157 at August 2, 2020. Cash equivalents represent fair value as these highly liquid investments have an original maturity of three months or less. Fair value of cash equivalents is based on Level 2 inputs.
The fair value of short- and long-term debt was $6,635 at November 1, 2020, and $6,995 at August 2, 2020. The carrying value was $6,080 at November 1, 2020, and $6,196 at August 2, 2020. The fair value of long-term debt is principally estimated using Level 2 inputs based on quoted market prices or pricing models using current market rates.
13. Share Repurchases
In March 2017, the Board authorized a share repurchase program to purchase up to $1,500. The program has no expiration date, but it may be suspended or discontinued at any time. In addition to this publicly announced program, we have a separate Board authorization to purchase shares to offset the impact of dilution from shares issued under our stock compensation plans. We suspended our share repurchases as of the second quarter of 2018. Approximately $1,296 remained available under the March 2017 program as of November 1, 2020.
14. Stock-based Compensation
We provide compensation benefits by issuing stock options, unrestricted stock and restricted stock units (including time-lapse restricted stock units, EPS performance restricted stock units, total shareholder return (TSR) performance restricted stock units, and free cash flow (FCF) performance restricted stock units). In 2021, we issued time-lapse restricted stock units, unrestricted stock and TSR performance restricted stock units. We have not issued stock options, FCF performance restricted stock units, or EPS performance restricted stock units in 2021.
In determining stock-based compensation expense, we estimate forfeitures expected to occur. Total pre-tax stock-based compensation expense and tax-related benefits recognized in Earnings from continuing operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
November 1,
2020
|
|
October 27,
2019
|
Total pre-tax stock-based compensation expense
|
|
|
|
|
$
|
16
|
|
|
$
|
13
|
|
Tax-related benefits
|
|
|
|
|
$
|
3
|
|
|
$
|
3
|
|
Total pre-tax stock-based compensation expense and tax-related benefits recognized in Earnings (loss) from discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
October 27,
2019
|
Total pre-tax stock-based compensation expense
|
|
|
|
|
|
|
$
|
1
|
|
Tax-related benefits
|
|
|
|
|
|
|
$
|
—
|
|
The following table summarizes stock option activity as of November 1, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value
|
|
(Options in
thousands)
|
|
|
|
(In years)
|
|
|
Outstanding at August 2, 2020
|
1,423
|
|
|
$
|
45.42
|
|
|
|
|
|
Granted
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Exercised
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Terminated
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Outstanding at November 1, 2020
|
1,423
|
|
|
$
|
45.42
|
|
|
6.7
|
|
$
|
6
|
|
Exercisable at November 1, 2020
|
1,069
|
|
|
$
|
48.74
|
|
|
6.2
|
|
$
|
2
|
|
The total intrinsic value of options exercised during the three-month period ended October 27, 2019 was not material. We measured the fair value of stock options using the Black-Scholes option pricing model.
We expense stock options on a straight-line basis over the vesting period, except for awards issued to retirement eligible participants, which we expense on an accelerated basis. As of November 1, 2020, total remaining unearned compensation related to nonvested stock options was $1, which will be amortized over the weighted-average remaining service period of 1.2 years.
The following table summarizes time-lapse restricted stock units, EPS performance restricted stock units and FCF performance restricted stock units as of November 1, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Units
|
|
Weighted-Average Grant-Date Fair Value
|
|
(Restricted stock
units in thousands)
|
|
|
Nonvested at August 2, 2020
|
1,866
|
|
|
$
|
43.18
|
|
Granted
|
875
|
|
|
$
|
48.43
|
|
Vested
|
(715)
|
|
|
$
|
42.82
|
|
Forfeited
|
(62)
|
|
|
$
|
47.10
|
|
Nonvested at November 1, 2020
|
1,964
|
|
|
$
|
45.54
|
|
We determine the fair value of time-lapse restricted stock units and EPS performance restricted stock units based on the quoted price of our stock at the date of grant. We expense time-lapse restricted stock units on a straight-line basis over the vesting period, except for awards issued to retirement-eligible participants, which we expense on an accelerated basis. We expensed EPS performance restricted stock units on a graded-vesting basis, except for awards issued to retirement-eligible participants, which we expensed on an accelerated basis. The actual number of EPS performance restricted stock units issued at the vesting date was either 0% or 100% of the initial grant, depending on actual performance achieved. We estimated expense based on the number of awards expected to vest. As of November 1, 2020, there were no EPS performance target grants outstanding.
In 2019, we issued approximately 388 thousand FCF performance restricted stock units for which vesting is contingent upon achievement of free cash flow (defined as Net cash provided by operating activities less capital expenditures and certain investing and financing activities) compared to annual operating plan objectives over a three-year period. An annual objective was established each fiscal year for three consecutive years. Performance against these objectives will be averaged at the end of the three-year period to determine the number of underlying units that will vest at the end of the three years. The actual number of FCF performance restricted stock units issued at the vesting date could range from 0% to 200% of the initial grant depending on actual performance achieved. The fair value of FCF performance restricted stock units is based upon the quoted price of our stock at the date of grant. We expense FCF performance restricted stock units over the requisite service period of each objective. As of November 1, 2020, we have granted all of the issued FCF performance restricted stock units, which are included in the table above. There were 246 thousand FCF performance target grants outstanding at November 1, 2020, with a weighted-average grant-date fair value of $44.10.
As of November 1, 2020, total remaining unearned compensation related to nonvested time-lapse restricted stock units and FCF performance restricted units was $60, which will be amortized over the weighted-average remaining service period of 1.9 years. The fair value of restricted stock units vested during the three-month periods ended November 1, 2020, and October 27,
2019, was $34, and $30, respectively. The weighted-average grant-date fair value of the restricted stock units granted during the three-month period ended October 27, 2019 was $46.79.
The following table summarizes TSR performance restricted stock units as of November 1, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Units
|
|
Weighted-Average Grant-Date Fair Value
|
|
(Restricted stock
units in thousands)
|
|
|
Nonvested at August 2, 2020
|
1,254
|
|
|
$
|
47.83
|
|
Granted
|
521
|
|
|
$
|
54.93
|
|
Vested
|
(236)
|
|
|
$
|
39.39
|
|
Forfeited
|
(252)
|
|
|
$
|
40.35
|
|
Nonvested at November 1, 2020
|
1,287
|
|
|
$
|
53.71
|
|
We estimated the fair value of TSR performance restricted stock units at the grant date using a Monte Carlo simulation.
Assumptions used in the Monte Carlo simulation were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
Risk-free interest rate
|
0.15%
|
|
1.48%
|
Expected dividend yield
|
2.85%
|
|
2.95%
|
Expected volatility
|
29.99%
|
|
27.01%
|
Expected term
|
3 years
|
|
3 years
|
We recognize compensation expense on a straight-line basis over the service period, except for awards issued to retirement eligible participants, which we expense on an accelerated basis. As of November 1, 2020, total remaining unearned compensation related to TSR performance restricted stock units was $41, which will be amortized over the weighted-average remaining service period of 2.2 years. In the first quarter of 2021, recipients of TSR performance restricted stock units earned 50% of the initial grants based upon our TSR ranking in a performance peer group during a three-year period ended July 31, 2020. In the first quarter of 2020, recipients of TSR performance restricted stock units earned 0% of the initial grants based upon our TSR ranking in a performance peer group during a three-year period ended July 26, 2019. The fair value of TSR performance restricted stock units vested during the three-month period ended November 1, 2020 was $11. The grant-date fair value of the TSR performance restricted stock units granted during 2020 was $63.06.
The excess tax benefits of $1 in the three-month periods ended November 1, 2020 and October 27, 2019 on the exercise of stock options and vested restricted stock were presented as cash flows from operating activities. Cash received from the exercise of stock options was $1 for the three-month period ended October 27, 2019 and is reflected in cash flows from financing activities in the Consolidated Statements of Cash Flows.
15. Commitments and Contingencies
Regulatory and Litigation Matters
We are involved in various pending or threatened legal or regulatory proceedings, including purported class actions, arising from the conduct of business both in the ordinary course and otherwise. Modern pleading practice in the U.S. permits considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the trial court. In addition, jurisdictions may permit plaintiffs to allege monetary damages in amounts well exceeding reasonably possible verdicts in the jurisdiction for similar matters. This variability in pleadings, together with our actual experiences in litigating or resolving through settlement numerous claims over an extended period of time, demonstrates to us that the monetary relief which may be specified in a lawsuit or claim bears little relevance to its merits or disposition value.
Due to the unpredictable nature of litigation, the outcome of a litigation matter and the amount or range of potential loss at particular points in time is normally difficult to ascertain. Uncertainties can include how fact finders will evaluate documentary evidence and the credibility and effectiveness of witness testimony, and how trial and appellate courts will apply the law in the context of the pleadings or evidence presented, whether by motion practice, or at trial or on appeal. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel will themselves view the relevant evidence and applicable law.
On January 7, 2019, three purported shareholder class action lawsuits pending in the United States District Court for the District of New Jersey (the Court) were consolidated under the caption, In re Campbell Soup Company Securities Litigation,
Civ. No. 1:18-cv-14385-NLH-JS (the Action). Oklahoma Firefighters Pension and Retirement System was appointed lead plaintiff in the Action and, on March 1, 2019, filed an amended consolidated complaint. The company, Denise Morrison (the company's former President and Chief Executive Officer), and Anthony DiSilvestro (the company's former Senior Vice President and Chief Financial Officer) are defendants in the Action. The consolidated complaint alleges that, in public statements between July 19, 2017 and May 17, 2018, the defendants made materially false and misleading statements and/or omitted material information about the company's business, operations, customer relationships, and prospects, specifically with regard to the Campbell Fresh segment. The consolidated complaint seeks unspecified monetary damages and other relief. On April 30, 2019, the defendants filed a motion to dismiss the consolidated complaint, which the Court granted on November 30, 2020, with leave to amend the complaint. We are vigorously defending against the Action.
We establish liabilities for litigation and regulatory loss contingencies when information related to the loss contingencies shows both that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. It is possible that some matters could require us to pay damages or make other expenditures or establish accruals in amounts that could not be reasonably estimated as of November 1, 2020. While the potential future charges could be material in a particular quarter or annual period, based on information currently known by us, we do not believe any such charges are likely to have a material adverse effect on our consolidated results of operations or financial condition.
16. Supplemental Financial Statement Data
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Balance Sheets
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November 1, 2020
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August 2,
2020
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Inventories
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Raw materials, containers and supplies
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$
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375
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$
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297
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Finished products
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535
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574
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$
|
910
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$
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871
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Statements of Earnings
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Three Months Ended
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November 1, 2020
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October 27, 2019
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Other expenses / (income)
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Amortization of intangible assets
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$
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10
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$
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11
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Net periodic benefit income other than the service cost
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(21)
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(22)
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Pension settlement gains
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(4)
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(1)
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Investment losses
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—
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4
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Loss on sale of business(1)
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—
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64
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Transition services fees
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(4)
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(1)
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Other
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1
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1
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$
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(18)
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$
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56
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____________________________
(1)See Note 3 for additional information.
17. Subsequent Event
As of November 1, 2020, we had a committed revolving credit facility totaling $1,850 scheduled to mature on December 9, 2021. The facility remained unused at November 1, 2020, except for $1 of standby letters of credit that we issued under it. On November 2, 2020, we replaced the current facility with a new $1,850 committed revolving facility that matures on November 2, 2023. The new facility contains customary covenants, including a financial covenant with respect to a minimum consolidated interest coverage ratio of consolidated adjusted EBITDA to consolidated interest expense (as each is defined in the credit facility) of not less than 3.25:1.00, measured quarterly, and customary events of default for credit facilities of this type. Loans under this facility will bear interest at the rates specified in the facility, which vary based on the type of loan and certain other customary conditions. The facility supports our commercial paper program and other general corporate purposes.