Notes to Consolidated Financial Statements
(unaudited)
(currency in millions, except per share amounts)
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1.
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Basis of Presentation and Significant Accounting Policies
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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 are the primary beneficiary. Intercompany transactions are eliminated in consolidation. Certain amounts in prior-year financial statements were reclassified to conform to the current-year presentation.
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 July 30, 2017, except as described in Note 2.
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.
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2.
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Recent Accounting Pronouncements
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In May 2014, the Financial Accounting Standards Board (FASB) issued revised guidance on the recognition of revenue from contracts with customers. The guidance is designed to create greater comparability for financial statement users across industries and jurisdictions. The guidance also requires enhanced disclosures. The guidance was originally effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. In July 2015, the FASB decided to delay the effective date of the new revenue guidance by one year to fiscal years, and interim periods within those years, beginning after December 15, 2017. Entities will be permitted to adopt the new revenue standard early, but not before the original effective date. The guidance permits the use of either a full retrospective or modified retrospective transition method. We are currently performing a diagnostic review of our arrangements with customers across our significant businesses, including our practices of offering rebates, refunds, discounts and other price allowances, and trade and consumer promotion programs. We are evaluating our methods of estimating the amount and timing of these various forms of variable consideration. We are continuing to evaluate the impact that the new guidance will have on our consolidated financial statements, as well as which transition method we will use. We will adopt the new guidance in 2019.
In January 2016, the FASB issued guidance that amends the recognition and measurement of financial instruments. The changes primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. Under the new guidance, equity investments in unconsolidated entities that are not accounted for under the equity method will generally be measured at fair value through earnings. When the fair value option has been elected for financial liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.
In February 2016, the FASB issued guidance that amends accounting for leases. Under the new guidance, a lessee will recognize assets and liabilities for most leases but will recognize expenses similar to current lease accounting. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The new guidance must be adopted using a modified retrospective transition, and provides for certain practical expedients. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.
In August 2016, the FASB issued guidance on the classification of certain cash receipts and payments in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. The guidance must be applied retrospectively to all periods presented but may be applied prospectively if retrospective application would be impracticable. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.
In October 2016, the FASB issued guidance on tax accounting for intra-entity asset transfers. Under current guidance, the tax effects of intra-entity asset transfers (intercompany sales) are deferred until the transferred asset is sold to a third party or otherwise recognized. The new guidance requires companies to account for the income tax effects on intercompany transfers of assets other than inventory when the transfer occurs. The new guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted in the first interim period of a fiscal year. The modified retrospective approach is required upon adoption, with a cumulative-effect adjustment recorded in retained earnings as of the beginning of the period of adoption. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.
In January 2017, the FASB issued guidance that revises the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set of transferred assets and activities is not a business. If it is not met, the entity then evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. We will prospectively apply the guidance to applicable transactions.
In March 2017, the FASB issued guidance that changes the presentation of net periodic pension cost and net periodic postretirement benefit cost. Under the revised guidance, the service cost component of benefit cost is classified in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost (such as interest expense, return on assets, amortization of prior service credit, actuarial gains and losses, settlements and curtailments) are required to be presented in the income statement separately from the service cost component. The guidance also allows only the service cost component to be eligible for capitalization when applicable (for example, as a cost of internally manufactured inventory). The guidance should be applied retrospectively for the presentation of the service cost component and the other components of benefit cost in the income statement, and applied prospectively on and after the effective date for the capitalization of the service cost component. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. We elected to early adopt the guidance in the first quarter of 2018. The retrospective impact of presenting net periodic benefit cost in accordance with the new guidance is as follows:
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Three Months Ended
|
Increase / (decrease) in expense
|
|
October 30,
2016
|
Cost of products sold
|
|
$
|
(10
|
)
|
Marketing and selling expenses
|
|
$
|
2
|
|
Administrative expenses
|
|
$
|
2
|
|
Research and development expenses
|
|
$
|
1
|
|
Other expenses / (income)
|
|
$
|
5
|
|
In May 2017, the FASB issued guidance that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under the new guidance, modification accounting is required only if the value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The guidance is effective prospectively for fiscal years beginning after December 15, 2017. Early adoption is permitted. We will apply the guidance in evaluating future changes to terms or conditions of share-based payment awards.
In August 2017, the FASB issued guidance that amends hedge accounting. Under the new guidance, more hedging strategies will be eligible for hedge accounting and the application of hedge accounting is simplified. The new guidance amends presentation and disclosure requirements, and how effectiveness is assessed. The guidance is effective for fiscal years beginning after December 15, 2018, 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.
On July 6, 2017, we entered into an agreement to acquire Pacific Foods of Oregon, Inc. (Pacific Foods) for
$700
, subject to customary purchase price adjustments related to the amount of Pacific Foods' cash, debt, working capital and transaction expenses. The closing of the transaction is subject to customary closing conditions and termination rights. The agreement provides that if we fail to close the transaction when all conditions to closing have been satisfied or if we are in breach of the agreement, we will be required to pay Pacific Foods a
$50
termination fee. On August 21, 2017, the estate of a
former Pacific Foods
shareholder, Edward C. Lynch, filed a lawsuit against Pacific Foods and certain of its directors, among others, seeking in excess of
$250
in damages. On September 27, 2017, we notified Pacific Foods
that it had
60
days under the terms of the agreement to resolve the issues arising from the
suit in order for the transaction to close. Pacific Foods has resolved the issues arising from the suit, and we expect the acquisition to close in December 2017.
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4.
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Accumulated Other Comprehensive Income (Loss)
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The components of Accumulated other comprehensive income (loss) consisted of the following:
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|
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|
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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)
|
Balance at July 31, 2016
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|
$
|
(124
|
)
|
|
$
|
(41
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)
|
|
$
|
61
|
|
|
$
|
(104
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(9
|
)
|
|
8
|
|
|
—
|
|
|
(1
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)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
—
|
|
|
2
|
|
|
(4
|
)
|
|
(2
|
)
|
Net current-period other comprehensive income (loss)
|
|
(9
|
)
|
|
10
|
|
|
(4
|
)
|
|
(3
|
)
|
Balance at October 30, 2016
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|
$
|
(133
|
)
|
|
$
|
(31
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)
|
|
$
|
57
|
|
|
$
|
(107
|
)
|
Balance at July 30, 2017
|
|
$
|
(84
|
)
|
|
$
|
(22
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)
|
|
$
|
53
|
|
|
$
|
(53
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)
|
Other comprehensive income (loss) before reclassifications
|
|
(32
|
)
|
|
7
|
|
|
—
|
|
|
(25
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)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
—
|
|
|
(2
|
)
|
|
(5
|
)
|
|
(7
|
)
|
Net current-period other comprehensive income (loss)
|
|
(32
|
)
|
|
5
|
|
|
(5
|
)
|
|
(32
|
)
|
Balance at October 29, 2017
|
|
$
|
(116
|
)
|
|
$
|
(17
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)
|
|
$
|
48
|
|
|
$
|
(85
|
)
|
_____________________________________
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(1)
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Included a tax expense of
$6
as of
October 29, 2017
,
July 30, 2017
,
October 30, 2016
, and
July 31, 2016
.
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(2)
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Included a tax benefit of
$10
as of
October 29, 2017
,
$12
as of
July 30, 2017
,
$18
as of
October 30, 2016
, and
$23
as of July 31, 2016.
|
|
|
(3)
|
Included a tax expense of
$28
as of
October 29, 2017
,
$30
as of
July 30, 2017
,
$33
as of
October 30, 2016
, and
$35
as of
July 31, 2016
.
|
Amounts related to noncontrolling interests were not material.
The amounts reclassified from Accumulated other comprehensive income (loss) consisted of the following:
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Three Months Ended
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Details about Accumulated Other Comprehensive Income (Loss) Components
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|
October 29, 2017
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October 30, 2016
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Location of (Gain) Loss Recognized in Earnings
|
(Gains) losses on cash flow hedges:
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|
|
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Foreign exchange forward contracts
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$
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(2
|
)
|
|
$
|
1
|
|
|
Cost of products sold
|
Forward starting interest rate swaps
|
|
—
|
|
|
1
|
|
|
Interest expense
|
Total before tax
|
|
(2
|
)
|
|
2
|
|
|
|
Tax expense (benefit)
|
|
—
|
|
|
—
|
|
|
|
(Gain) loss, net of tax
|
|
$
|
(2
|
)
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
Pension and postretirement benefit adjustments:
|
|
|
|
|
|
|
Prior service credit
|
|
$
|
(7
|
)
|
|
$
|
(6
|
)
|
|
Other expenses / (income)
|
Tax expense (benefit)
|
|
2
|
|
|
2
|
|
|
|
(Gain) loss, net of tax
|
|
$
|
(5
|
)
|
|
$
|
(4
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)
|
|
|
|
|
5.
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Goodwill and Intangible Assets
|
Goodwill
The following table shows the changes in the carrying amount of goodwill by business segment:
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Americas
Simple
Meals and Beverages
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|
Global
Biscuits
and
Snacks
|
|
Campbell Fresh
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Total
|
Net balance at July 30, 2017
(1)
|
$
|
780
|
|
|
$
|
795
|
|
|
$
|
540
|
|
|
$
|
2,115
|
|
Foreign currency translation adjustment
|
(3
|
)
|
|
(26
|
)
|
|
—
|
|
|
(29
|
)
|
Net balance at October 29, 2017
(1)
|
$
|
777
|
|
|
$
|
769
|
|
|
$
|
540
|
|
|
$
|
2,086
|
|
_____________________________________
|
|
(1)
|
The Campbell Fresh segment includes accumulated impairment charges of
$297
as of
October 29, 2017
, and July 30, 2017.
|
Intangible Assets
The following table sets forth balance sheet information for intangible assets, excluding goodwill, subject to amortization and intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
Intangible Assets
|
|
October 29,
2017
|
|
July 30,
2017
|
Amortizable intangible assets
|
|
|
|
|
Customer relationships
|
|
$
|
223
|
|
|
$
|
223
|
|
Technology
|
|
40
|
|
|
40
|
|
Other
|
|
35
|
|
|
35
|
|
Total gross amortizable intangible assets
|
|
$
|
298
|
|
|
$
|
298
|
|
Accumulated amortization
|
|
(96
|
)
|
|
(92
|
)
|
Total net amortizable intangible assets
|
|
$
|
202
|
|
|
$
|
206
|
|
Non-amortizable intangible assets
|
|
|
|
|
Trademarks
|
|
910
|
|
|
912
|
|
Total net intangible assets
|
|
$
|
1,112
|
|
|
$
|
1,118
|
|
Non-amortizable intangible assets consist of trademarks, which include
Bolthouse Farms, Pace
,
Plum, Kjeldsens, Garden Fresh Gourmet
and
Royal Dansk
. Other amortizable intangible assets consist of recipes, patents, trademarks and distributor relationships.
Amortization of intangible assets was
$4
and
$5
for the three-month periods ended
October 29, 2017
, and
October 30, 2016
, respectively. Amortization expense for the next 5 years is estimated to be
$16
in 2018 and 2019, and
$15
in 2020 through 2022. Asset useful lives range from
5
to
20
years.
We manage our businesses in three segments focused mainly on product categories. The segments are as follows:
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•
|
Americas Simple Meals and Beverages segment includes the retail and food service 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;
Prego
pasta sauces;
Pace
Mexican sauces;
Campbell’s
gravies, pasta, beans and dinner sauces;
Swanson
canned poultry;
Plum
food and snacks;
V8
juices and beverages; and
Campbell’s
tomato juice;
|
|
|
•
|
Global Biscuits and Snacks segment includes Pepperidge Farm cookies, crackers, bakery and frozen products in U.S. retail, Arnott’s biscuits in Australia and Asia Pacific, and Kelsen cookies globally. The segment also includes the simple meals and shelf-stable beverages business in Australia and Asia Pacific, and beginning in 2018, the business in Latin America; and
|
|
|
•
|
Campbell Fresh segment includes Bolthouse Farms fresh carrots, carrot ingredients, refrigerated beverages and refrigerated salad dressings, Garden Fresh Gourmet salsa, hummus, dips and tortilla chips, and the U.S. refrigerated soup business.
|
Prior to 2018, the business in Latin America was managed as part of the Americas Simple Meals and Beverages segment. Segment results have been adjusted retrospectively to reflect this change.
We evaluate segment performance before interest, taxes and costs associated with restructuring activities. Unrealized gains
and losses on 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.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
October 29,
2017
|
|
October 30,
2016
|
Net sales
|
|
|
|
|
Americas Simple Meals and Beverages
|
|
$
|
1,218
|
|
|
$
|
1,278
|
|
Global Biscuits and Snacks
|
|
709
|
|
|
690
|
|
Campbell Fresh
|
|
234
|
|
|
234
|
|
Total
|
|
$
|
2,161
|
|
|
$
|
2,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
October 29,
2017
|
|
October 30,
2016
|
Earnings before interest and taxes
|
|
|
|
|
Americas Simple Meals and Beverages
|
|
$
|
328
|
|
|
$
|
380
|
|
Global Biscuits and Snacks
|
|
120
|
|
|
115
|
|
Campbell Fresh
|
|
(6
|
)
|
|
1
|
|
Corporate
(1)
|
|
(28
|
)
|
|
(38
|
)
|
Restructuring charges
(2)
|
|
(2
|
)
|
|
(1
|
)
|
Total
|
|
$
|
412
|
|
|
$
|
457
|
|
_______________________________________
|
|
(1)
|
Represents unallocated items. Pension and postretirement benefit mark-to-market adjustments are included in Corporate. There were gains of
$14
and losses of
$20
in the three-month periods ended
October 29, 2017
, and
October 30, 2016
, respectively. Costs related to the implementation of our new organizational structure and cost savings initiatives were
$17
and
$8
in the three-month periods ended
October 29, 2017
, and
October 30, 2016
, respectively.
|
|
|
(2)
|
See Note 7 for additional information.
|
Our global net sales based on product categories are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
October 29,
2017
|
|
October 30,
2016
|
Net sales
|
|
|
|
|
Soup
|
|
$
|
807
|
|
|
$
|
863
|
|
Baked snacks
|
|
677
|
|
|
653
|
|
Other simple meals
|
|
435
|
|
|
429
|
|
Beverages
|
|
242
|
|
|
257
|
|
Total
|
|
$
|
2,161
|
|
|
$
|
2,202
|
|
Soup includes various soup, broths and stock products. Baked Snacks include cookies, crackers, biscuits and other baked products. Other simple meals include sauces, carrot products, refrigerated salad dressings, refrigerated salsa, hummus, dips and Plum foods and snacks.
|
|
7.
|
Restructuring Charges and Cost Savings Initiatives
|
2015 Initiatives
On January 29, 2015, we announced plans to implement a new enterprise design focused mainly on product categories. Under the new structure, which we fully implemented at the beginning of 2016, our businesses are organized in the following divisions: Americas Simple Meals and Beverages, Global Biscuits and Snacks, and Campbell Fresh.
In support of the new structure, we designed and implemented a new Integrated Global Services organization to deliver shared services across the company. We also streamlined our organizational structure, implemented an initiative to reduce overhead across the organization and are pursuing other initiatives to reduce costs and increase effectiveness. As part of these initiatives, we commenced a voluntary employee separation program available to certain U.S.-based salaried employees nearing retirement who met age, length-of-service and business unit/function criteria. A total of
471
employees elected the program. The electing employees remained with us through at least July 31, 2015, with some remaining beyond that date.
In February 2017, we announced that we are expanding these cost savings initiatives by further optimizing our supply chain network, primarily in North America, continuing to evolve our operating model to drive efficiencies, and more fully integrating our recent acquisitions. We have extended the time horizon for the initiatives from 2018 to 2020. Cost estimates for these expanded initiatives, as well as timing for certain activities, are being developed.
A summary of the restructuring charges we recorded and charges incurred in Administrative expenses and Cost of products sold related to the implementation of the new organizational structure and costs savings initiatives is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Year Ended
|
|
October 29, 2017
|
|
October 30, 2016
|
|
July 30, 2017
|
|
July 31, 2016
|
|
August 2, 2015
|
Restructuring charges
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
18
|
|
|
$
|
35
|
|
|
$
|
102
|
|
Administrative expenses
|
12
|
|
|
8
|
|
|
36
|
|
|
47
|
|
|
22
|
|
Cost of products sold
|
5
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
Total pre-tax charges
|
$
|
19
|
|
|
$
|
9
|
|
|
$
|
58
|
|
|
$
|
82
|
|
|
$
|
124
|
|
A summary of the pre-tax costs associated with the initiatives is as follows:
|
|
|
|
|
|
Recognized as of
October 29, 2017
|
Severance pay and benefits
|
$
|
137
|
|
Asset impairment/accelerated depreciation
|
17
|
|
Implementation costs and other related costs
|
129
|
|
Total
|
$
|
283
|
|
The total estimated pre-tax costs for actions that have been identified are approximately
$380
to
$420
. We expect to incur substantially all of the costs through 2019. This estimate will be updated as costs for the expanded initiatives are developed.
We expect the costs for actions that have been identified to date to consist of the following: approximately
$140
in severance pay and benefits; approximately
$20
in asset impairment and accelerated depreciation; and approximately
$220
to
$260
in implementation costs and other related costs.We expect these pre-tax costs to be associated with our segments as follows: Americas Simple Meals and Beverages - approximately
30%
; Global Biscuits and Snacks - approximately
38%
; Campbell Fresh - approximately
4%
; and Corporate - approximately
28%
.
Of the aggregate
$380
to
$420
of pre-tax costs identified to date, we expect approximately
$350
to
$390
will be cash expenditures. In addition, we expect to invest approximately
$180
in capital expenditures through 2019 primarily related to the construction of a network of distribution centers for our U.S. thermal plants and insourcing of manufacturing for certain simple meal products, of which we invested approximately
$22
as of
October 29, 2017
.
A summary of the restructuring activity and related reserves associated with the initiatives at
October 29, 2017
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance Pay and Benefits
|
|
Implementation Costs and Other Related Costs
(3)
|
|
Asset Impairment/Accelerated Depreciation
|
|
Total Charges
|
Accrued balance at July 30, 2017
(1)
|
|
$
|
26
|
|
|
|
|
|
|
|
2018 charges
|
|
2
|
|
|
12
|
|
|
5
|
|
|
$
|
19
|
|
2018 cash payments
|
|
(10
|
)
|
|
|
|
|
|
|
Accrued balance at October 29, 2017
(2)
|
|
$
|
18
|
|
|
|
|
|
|
|
_______________________________________
|
|
(1)
|
Includes
$2
of severance pay and benefits recorded in Other liabilities in the Consolidated Balance Sheet.
|
|
|
(2)
|
Includes
$2
of severance pay and benefits recorded in Other liabilities in the Consolidated Balance Sheet.
|
|
|
(3)
|
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 associated with segments is as follows:
|
|
|
|
|
|
|
|
|
|
October 29, 2017
|
|
Three Months Ended
|
|
Costs Incurred to Date
|
Americas Simple Meals and Beverages
|
$
|
7
|
|
|
$
|
99
|
|
Global Biscuits and Snacks
|
6
|
|
|
84
|
|
Campbell Fresh
|
1
|
|
|
7
|
|
Corporate
|
5
|
|
|
93
|
|
Total
|
$
|
19
|
|
|
$
|
283
|
|
|
|
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 period ended
October 29, 2017
, excludes approximately
1 million
stock options that would have been anti-dilutive. The earnings per share calculation for the three-month period ended
October 30, 2016
, excludes less than
1 million
stock options that would have been antidilutive.
During the first quarter of 2018, we settled a state tax audit which resulted in the recognition of a
$15
benefit that impacted the effective rate, and a
$33
reduction in unrecognized tax benefits. The balance of unrecognized tax benefits as of October 29, 2017, was
$32
, of which
$21
would impact the effective tax rate if recognized.
The total amount of unrecognized tax benefits can change due to audit settlements, tax examination activities, statute expirations and the recognition and measurement criteria under accounting for uncertainty in income taxes.
|
|
10.
|
Pension and Postretirement Benefits
|
Components of net benefit expense (income) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Pension
|
|
Postretirement
|
|
October 29,
2017
|
|
October 30,
2016
|
|
October 29,
2017
|
|
October 30,
2016
|
Service cost
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
19
|
|
|
22
|
|
|
2
|
|
|
3
|
|
Expected return on plan assets
|
(36
|
)
|
|
(36
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
—
|
|
|
—
|
|
|
(7
|
)
|
|
(6
|
)
|
Net periodic benefit income
|
$
|
(11
|
)
|
|
$
|
(8
|
)
|
|
$
|
(5
|
)
|
|
$
|
(3
|
)
|
The components of net periodic benefit expense (income) other than the service cost component are included in Other expenses / (income) in the Consolidated Statements of Earnings. Beginning in 2018, under the revised FASB guidance adopted in the first quarter, only the service cost component of net periodic benefit expense (income) is eligible for capitalization.
Beginning in 2018, we changed the method we use to estimate the service and interest cost components of net periodic benefit expense (income). We elected to use a full yield curve approach to estimate service cost and interest cost by applying the specific spot rates along the yield curve used to determine the benefit obligation of the relevant projected cash flows. Previously, we estimated service cost and interest cost using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. We are making this change to provide a more precise measurement of service cost and interest cost by improving the correlation between projected benefit cash flows and the corresponding spot yield curve rates. This change will not affect the measurement of our benefit obligations. We accounted for this change prospectively in 2018 as a change in accounting estimate. As a result of this change, net periodic benefit income increased by approximately
$4
in the three-month period ended October 29, 2017, compared to what the net periodic benefit income would have been under the previous method.
|
|
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, 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 and others that do not qualify for hedge accounting treatment.
Concentration of Credit Risk
We are exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate counterparty credit risk, we enter into contracts only with carefully selected, leading, credit-worthy financial institutions, and distribute contracts among several financial institutions to reduce the concentration of credit risk. We did not have credit-risk-related contingent features in our derivative instruments as of
October 29, 2017
, or
July 30, 2017
.
We are also exposed to credit risk from our customers. During 2017, our largest customer accounted for approximately
20%
of consolidated net sales. Our five largest customers accounted for approximately
39%
of our consolidated net sales in 2017.
We closely monitor credit risk associated with counterparties and customers.
Foreign Currency Exchange Risk
We are exposed to foreign currency exchange risk related to our international operations, including non-functional currency intercompany debt and net investments in subsidiaries. We are also exposed to foreign exchange risk as a result of transactions in currencies other than the functional currency of certain subsidiaries. Principal currencies hedged include the Canadian dollar, Australian dollar and U.S. dollar. We utilize foreign exchange forward purchase and sale contracts, as well as cross-currency swaps, to hedge these exposures. The contracts are either designated as cash-flow hedging instruments or are undesignated. We hedge portions of our forecasted foreign currency transaction exposure with foreign exchange forward contracts for periods typically up to
18
months. To hedge currency exposures related to intercompany debt, we enter into foreign exchange forward purchase and sale contracts, as well as cross-currency swap contracts, for periods consistent with the underlying debt. The notional amount of foreign exchange forward contracts accounted for as cash-flow hedges was
$66
at
October 29, 2017
, and
$84
at
July 30, 2017
. 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
$176
and
$336
at
October 29, 2017
, and
July 30, 2017
, respectively. There were no cross-currency swap contracts outstanding as of
October 29, 2017
, or
July 30, 2017
.
Interest Rate Risk
We manage our exposure to changes in interest rates by optimizing the use of variable-rate and fixed-rate debt and by utilizing interest rate swaps in order to maintain our variable-to-total debt ratio within targeted guidelines. Receive fixed rate/pay variable rate interest rate swaps are accounted for as fair-value hedges. We manage our exposure to interest rate volatility on future debt issuances by entering into forward starting interest rate swaps to lock in the rate on the interest payments related to the anticipated debt issuances. These pay fixed rate/receive variable rate forward starting interest rate swaps are accounted for as cash-flow hedges. The effective portion of the changes in fair value on these instruments is recorded in other comprehensive income (loss) and is reclassified into the Consolidated Statements of Earnings over the life of the debt. The notional amount of outstanding forward starting interest rate swaps totaled
$300
at
October 29, 2017
, and
July 30, 2017
, which relates to an anticipated debt issuance in 2018. We settled forward starting interest rate swaps with a notional value of
$300
in October 2017, at a loss of
$22
. The effective
portion of the loss was recorded in other comprehensive income (loss) and will be recognized as additional interest expense over the 10-year life of the anticipated debt issuance in 2018.
Commodity Price Risk
We principally use a combination of purchase orders and various short- and long-term supply arrangements in connection with the purchase of raw materials, including certain commodities and agricultural products. We also enter into commodity futures, options and swap contracts to reduce the volatility of price fluctuations of wheat, diesel fuel, natural gas, cocoa, soybean oil, aluminum, corn, soybean meal, butter and cheese, which impact the cost of raw materials. 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
October 29, 2017
, or
July 30, 2017
. The notional amount of commodity contracts not designated as accounting hedges was
$76
at
October 29, 2017
, and
$90
at
July 30, 2017
.
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
at
October 29, 2017
, and
$35
at
July 30, 2017
. The fair value was not material as of
October 29, 2017
, and
July 30, 2017
. 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, and the total return of the Vanguard Total International Stock Index. Under these contracts, we pay variable interest rates and receive from the counterparty either the total return on our capital stock; the total return of the Standard & Poor's 500 Index, which is expected to approximate the total return of the Vanguard Institutional Index; or the total return of the iShares MSCI EAFE Index, which is expected to approximate the total return of the Vanguard Total International Stock Index. These contracts were not designated as hedges for accounting purposes. We enter into these contracts for periods typically not exceeding
12
months. The notional amounts of the contracts as of
October 29, 2017
, and
July 30, 2017
, were
$42
and
$43
, respectively.
The following table summarizes the fair value of derivative instruments on a gross basis as recorded in the Consolidated Balance Sheets as of
October 29, 2017
, and
July 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification
|
|
October 29,
2017
|
|
July 30,
2017
|
Asset Derivatives
|
|
|
|
|
|
Derivatives designated as hedges:
|
|
|
|
|
|
Foreign exchange forward contracts
|
Other current assets
|
|
$
|
2
|
|
|
$
|
3
|
|
Forward starting interest rate swaps
|
Other current assets
|
|
3
|
|
|
—
|
|
Total derivatives designated as hedges
|
|
|
$
|
5
|
|
|
$
|
3
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
Commodity derivative contracts
|
Other current assets
|
|
$
|
4
|
|
|
$
|
5
|
|
Deferred compensation derivative contracts
|
Other current assets
|
|
1
|
|
|
1
|
|
Foreign exchange forward contracts
|
Other current assets
|
|
1
|
|
|
—
|
|
Commodity derivative contracts
|
Other assets
|
|
—
|
|
|
1
|
|
Total derivatives not designated as hedges
|
|
|
$
|
6
|
|
|
$
|
7
|
|
Total asset derivatives
|
|
|
$
|
11
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification
|
|
October 29,
2017
|
|
July 30,
2017
|
Liability Derivatives
|
|
|
|
|
|
Derivatives designated as hedges:
|
|
|
|
|
|
Foreign exchange forward contracts
|
Accrued liabilities
|
|
$
|
—
|
|
|
$
|
1
|
|
Forward starting interest rate swaps
|
Accrued liabilities
|
|
—
|
|
|
22
|
|
Total derivatives designated as hedges
|
|
|
$
|
—
|
|
|
$
|
23
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
Commodity derivative contracts
|
Accrued liabilities
|
|
$
|
2
|
|
|
$
|
1
|
|
Foreign exchange forward contracts
|
Accrued liabilities
|
|
3
|
|
|
19
|
|
Foreign exchange forward contracts
|
Other liabilities
|
|
—
|
|
|
1
|
|
Total derivatives not designated as hedges
|
|
|
$
|
5
|
|
|
$
|
21
|
|
Total liability derivatives
|
|
|
$
|
5
|
|
|
$
|
44
|
|
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
October 29, 2017
, and
July 30, 2017
, would be adjusted as detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29, 2017
|
|
July 30, 2017
|
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
|
|
$
|
11
|
|
|
$
|
(3
|
)
|
|
$
|
8
|
|
|
$
|
10
|
|
|
$
|
(3
|
)
|
|
$
|
7
|
|
Total liability derivatives
|
|
$
|
5
|
|
|
$
|
(3
|
)
|
|
$
|
2
|
|
|
$
|
44
|
|
|
$
|
(3
|
)
|
|
$
|
41
|
|
We do not offset fair value amounts recognized for exchange-traded commodity derivative instruments and cash margin accounts executed with the same counterparty that are subject to enforceable netting agreements. We are required to maintain cash margin accounts in connection with funding the settlement of open positions. At
October 29, 2017
, and
July 30, 2017
, a cash margin account balance of
$2
and
$1
, respectively, was included in Other current assets in the Consolidated Balance Sheets.
The following tables show the effect of our derivative instruments designated as cash-flow hedges for the three-month periods ended
October 29, 2017
, and
October 30, 2016
, in other comprehensive income (loss) (OCI) and the Consolidated Statements of Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cash-Flow Hedge
OCI Activity
|
Derivatives Designated as Cash-Flow Hedges
|
|
|
October 29, 2017
|
|
October 30, 2016
|
OCI derivative gain (loss) at beginning of year
|
|
|
$
|
(34
|
)
|
|
$
|
(64
|
)
|
Effective portion of changes in fair value recognized in OCI:
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
|
6
|
|
|
3
|
|
Forward starting interest rate swaps
|
|
|
3
|
|
|
10
|
|
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
|
|
|
$
|
(27
|
)
|
|
$
|
(49
|
)
|
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 ineffective portion and amount excluded from effectiveness testing were not material.
The following table shows the effects of our derivative instruments not designated as hedges in the Consolidated Statements of Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Gain) Loss Recognized in Earnings on Derivatives
|
Derivatives not Designated as Hedges
|
|
Location of (Gain) Loss
Recognized in Earnings
|
|
Three Months Ended
|
|
|
October 29, 2017
|
|
October 30, 2016
|
Foreign exchange forward contracts
|
|
Other expenses / (income)
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
Commodity derivative contracts
|
|
Cost of products sold
|
|
2
|
|
|
(4
|
)
|
Deferred compensation derivative contracts
|
|
Administrative expenses
|
|
(1
|
)
|
|
2
|
|
Total
|
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
|
12.
|
Variable Interest Entity
|
In February 2016, we agreed to make a
$125
capital commitment to Acre Venture Partners, L.P. (Acre), a limited partnership formed to make venture capital investments in innovative new companies in food and food-related industries. Acre is managed by its general partner, Acre Ventures GP, LLC, which is independent of us. We are the sole limited partner of Acre and own a
99.8%
interest. Our share of earnings (loss) is calculated according to the terms of the partnership agreement. Acre is a VIE. We have determined that we are the primary beneficiary. Therefore, we consolidate Acre and account for the third party ownership as a noncontrolling interest. Through
October 29, 2017
, we funded
$64
of the capital commitment. Except for the remaining unfunded capital commitment of
$61
, we do not have obligations to provide additional financial or other support to Acre.
Acre elected the fair value option to account for qualifying investments to more appropriately reflect the value of the investments in the financial statements. The investments were
$56
and
$51
as of
October 29, 2017
, and July 30, 2017, respectively, and are included in Other assets on the Consolidated Balance Sheets. Changes in the fair values of investments for which the fair value option was elected are included in Other expenses / (income) on the Consolidated Statements of Earnings. Current assets and liabilities of Acre were not material as of
October 29, 2017
, or July 30, 2017.
|
|
13.
|
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
October 29, 2017
, and
July 30, 2017
, consistent with the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
as of
October 29,
2017
|
|
Fair Value Measurements at
October 29, 2017 Using
Fair Value Hierarchy
|
|
Fair Value
as of
July 30,
2017
|
|
Fair Value Measurements at
July 30, 2017 Using
Fair Value Hierarchy
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward starting interest rate swaps
(1)
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign exchange forward contracts
(2)
|
3
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
|
—
|
|
Commodity derivative contracts
(3)
|
4
|
|
|
3
|
|
|
1
|
|
|
—
|
|
|
6
|
|
|
6
|
|
|
—
|
|
|
—
|
|
Deferred compensation derivative contracts
(4)
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Fair value option investments
(5)
|
56
|
|
|
—
|
|
|
—
|
|
|
56
|
|
|
50
|
|
|
—
|
|
|
1
|
|
|
49
|
|
Total assets at fair value
|
$
|
67
|
|
|
$
|
3
|
|
|
$
|
8
|
|
|
$
|
56
|
|
|
$
|
60
|
|
|
$
|
6
|
|
|
$
|
5
|
|
|
$
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
as of
October 29,
2017
|
|
Fair Value Measurements at
October 29, 2017 Using
Fair Value Hierarchy
|
|
Fair Value
as of
July 30,
2017
|
|
Fair Value Measurements at
July 30, 2017 Using
Fair Value Hierarchy
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward starting interest rate swaps
(1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22
|
|
|
$
|
—
|
|
|
$
|
22
|
|
|
$
|
—
|
|
Foreign exchange forward contracts
(2)
|
3
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
21
|
|
|
—
|
|
|
21
|
|
|
—
|
|
Commodity derivative contracts
(3)
|
2
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
Deferred compensation obligation
(6)
|
118
|
|
|
118
|
|
|
—
|
|
|
—
|
|
|
112
|
|
|
112
|
|
|
—
|
|
|
—
|
|
Total liabilities at fair value
|
$
|
123
|
|
|
$
|
120
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
156
|
|
|
$
|
113
|
|
|
$
|
43
|
|
|
$
|
—
|
|
___________________________________
|
|
(1)
|
Based on LIBOR swap rates.
|
|
|
(2)
|
Based on observable market transactions of spot currency rates and forward rates.
|
|
|
(3)
|
Based on quoted futures exchanges and on observable prices of futures and options transactions in the marketplace.
|
|
|
(4)
|
Based on LIBOR and equity index swap rates.
|
|
|
(5)
|
Primarily represents investments in equity securities that are not readily marketable and are accounted for under the fair value option. The investments were funded by Acre. See Note 12 for additional information. Fair value is 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, are used in distributing fair value among various equity holders according to rights and preferences. Changes in the fair value of investments were not material in 2018 or 2017.
|
|
|
(6)
|
Based on the fair value of the participants’ investments.
|
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings, excluding the current portion of long-term debt, approximate fair value.
Cash equivalents of
$9
at
October 29, 2017
, and
$8
at
July 30, 2017
, 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 long-term debt, including the current portion of long-term debt in Short-term borrowings, was
$2,549
at
October 29, 2017
, and
$2,582
at
July 30, 2017
. The carrying value was
$2,484
at
October 29, 2017
, and
$2,499
at
July 30, 2017
. 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.
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.
During the three-month period ended
October 29, 2017
, we repurchased
2 million
shares at a cost of
$86
. Of this amount,
$75
was used to repurchase shares pursuant to our March 2017 publicly announced share repurchase program. Approximately
$1,296
remained available under the March 2017 program as of
October 29, 2017
. During the three-month period ended
October 30, 2016
, we repurchased
2 million
shares at a cost of
$112
.
|
|
15.
|
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, strategic performance restricted stock units and special performance restricted stock units). In 2018, we issued stock options, time-lapse restricted stock units, EPS performance restricted stock units and TSR performance restricted stock units. We have not issued strategic performance restricted stock units or special performance restricted stock units in 2018.
Total pre-tax stock-based compensation expense and tax-related benefits recognized in the Consolidated Statements of Earnings were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
October 29,
2017
|
|
October 30,
2016
|
Total pre-tax stock-based compensation expense
|
$
|
14
|
|
|
$
|
14
|
|
Tax-related benefits
|
$
|
5
|
|
|
$
|
5
|
|
The following table summarizes stock option activity as of
October 29, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value
|
|
(Options in
thousands)
|
|
|
|
(In years)
|
|
|
Outstanding at July 30, 2017
|
1,042
|
|
|
$
|
52.08
|
|
|
|
|
|
Granted
|
575
|
|
|
$
|
47.19
|
|
|
|
|
|
Exercised
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Terminated
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Outstanding at October 29, 2017
|
1,617
|
|
|
$
|
50.34
|
|
|
8.9
|
|
$
|
1
|
|
Exercisable at October 29, 2017
|
544
|
|
|
$
|
51.40
|
|
|
8.2
|
|
$
|
—
|
|
No options were exercised during the three-month period ended
October 30, 2016
. We measure the fair value of stock options using the Black-Scholes option pricing model. The expected term of options granted was based on the weighted average time of vesting and the end of the contractual term. We utilized this simplified method as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term.
The assumptions and grant-date fair values for grants in 2018 and 2017 were as follows:
|
|
|
|
|
|
2018
|
|
2017
|
Risk-free interest rate
|
2.06%
|
|
1.28%
|
Expected dividend yield
|
2.95%
|
|
2.26%
|
Expected volatility
|
19.60%
|
|
18.64%
|
Expected term
|
6 years
|
|
6 years
|
Grant-date fair value
|
$6.67
|
|
$7.51
|
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
October 29, 2017
, total remaining unearned compensation related to nonvested stock options was
$4
, which will be amortized over the weighted-average remaining service period of
1.1 years
.
The following table summarizes time-lapse restricted stock units and EPS performance restricted stock units as of
October 29, 2017
:
|
|
|
|
|
|
|
|
|
Units
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
(Restricted stock
units in thousands)
|
|
|
Nonvested at July 30, 2017
|
1,221
|
|
|
$
|
50.86
|
|
Granted
|
657
|
|
|
$
|
46.88
|
|
Vested
|
(602
|
)
|
|
$
|
48.33
|
|
Forfeited
|
(21
|
)
|
|
$
|
51.00
|
|
Nonvested at October 29, 2017
|
1,255
|
|
|
$
|
49.99
|
|
We determine the fair value of time-lapse restricted stock units, EPS performance restricted stock units, strategic performance restricted stock units and special 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 expense EPS performance restricted stock units on a graded-vesting basis, except for awards issued to retirement-eligible participants, which we expense on an accelerated basis. There were
150 thousand
EPS performance target grants outstanding at
October 29, 2017
, with a weighted-average grant-date fair value of
$49.58
. The actual number of EPS performance restricted stock units issued at the vesting date could range from
0%
or
100%
of the initial grant, depending on actual performance achieved. We estimate expense based on the number of awards expected to vest. In the first quarter of 2017, recipients of strategic performance restricted stock units earned
35%
of the initial grants based on actual performance achieved during a three-year period ended July 31, 2016. There were no strategic performance restricted stock units outstanding at
October 29, 2017
.
In 2015, we issued special performance restricted stock units for which vesting was contingent upon meeting various financial goals and performance milestones to support innovation and growth initiatives. These awards vested in the first quarter of 2017. Recipients of special performance restricted stock units earned
0%
of the initial grants based upon financial goals and
100%
of the initial grants based upon performance milestones to support innovation and growth initiatives.
As of
October 29, 2017
, total remaining unearned compensation related to nonvested time-lapse restricted stock units and EPS performance restricted stock units was
$42
, 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
October 29, 2017
, and
October 30, 2016
, was
$29
, and
$50
, respectively. The weighted-average grant-date fair value of the restricted stock units granted during the three-month period ended
October 30, 2016
, was
$54.72
.
The following table summarizes TSR performance restricted stock units as of
October 29, 2017
:
|
|
|
|
|
|
|
|
|
Units
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
(Restricted stock
units in thousands)
|
|
|
Nonvested at July 30, 2017
|
1,774
|
|
|
$
|
48.24
|
|
Granted
|
943
|
|
|
$
|
39.39
|
|
Vested
|
(815
|
)
|
|
$
|
43.39
|
|
Forfeited
|
(28
|
)
|
|
$
|
47.91
|
|
Nonvested at October 29, 2017
|
1,874
|
|
|
$
|
46.25
|
|
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:
|
|
|
|
|
|
2018
|
|
2017
|
Risk-free interest rate
|
1.58%
|
|
0.85%
|
Expected dividend yield
|
2.95%
|
|
2.26%
|
Expected volatility
|
19.07%
|
|
17.78%
|
Expected term
|
3 years
|
|
3 years
|
We recognize compensation expense on a straight-line basis over the service period. As of
October 29, 2017
, total remaining unearned compensation related to TSR performance restricted stock units was
$44
, which will be amortized over the weighted-average remaining service period of
2.2
years. In the first quarter of 2018, recipients of TSR performance restricted stock units earned
125%
of the initial grants based upon our TSR ranking in a performance peer group during a three-year period ended July 28, 2017. As a result, approximately
160,000
additional shares were awarded. In the first quarter of 2017, recipients of TSR performance restricted stock units earned
75%
of the initial grants based upon our TSR ranking in a performance peer group during a three-year period ended July 29, 2016. The fair value of TSR performance restricted stock units vested during the three-month periods ended
October 29, 2017
, and
October 30, 2016
, was
$38
and
$14
, respectively. The grant-date fair value of the TSR performance restricted stock units granted during 2017 was
$39.53
.
The excess tax benefits on the exercise of stock options and vested restricted stock presented as cash flows from operating activities for the three-month periods ended
October 29, 2017
, and
October 30, 2016
, were
$5
and
$6
, respectively.
|
|
16.
|
Commitments and Contingencies
|
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.
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
October 29, 2017
. 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.
|
|
17.
|
Supplemental Financial Statement Data
|
Balance Sheets
|
|
|
|
|
|
|
|
|
|
October 29,
2017
|
|
July 30,
2017
|
Inventories
|
|
|
|
Raw materials, containers and supplies
|
$
|
423
|
|
|
$
|
377
|
|
Finished products
|
578
|
|
|
525
|
|
Total
|
$
|
1,001
|
|
|
$
|
902
|
|
Statements of Earnings
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
October 29,
2017
|
|
October 30,
2016
|
Other expenses / (income)
|
|
|
|
Amortization of intangible assets
|
$
|
4
|
|
|
$
|
5
|
|
Net periodic benefit expense (income) other than the service cost
|
(42
|
)
|
|
5
|
|
Investment losses
|
8
|
|
|
—
|
|
Other
|
1
|
|
|
1
|
|
Total
|
$
|
(29
|
)
|
|
$
|
11
|
|