Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
 
 
 
Commission File Number
April 30, 2017
 
 
 
1-3822

logoa05.jpg
CAMPBELL SOUP COMPANY 
New Jersey
21-0419870
State of Incorporation
I.R.S. Employer Identification No.

1 Campbell Place
Camden, New Jersey 08103-1799
Principal Executive Offices

Telephone Number: (856) 342-4800


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ☐
Non-accelerated filer ☐
(Do not check if a smaller reporting company)
Smaller reporting company ☐
Emerging growth company ☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes þ No

There were 303,065,427 shares of capital stock outstanding as of June 1, 2017.







TABLE OF CONTENTS

 
 
 
 
 
 
 
 



2





PART I - FINANCIAL INFORMATION

Item 1. Financial Statements
CAMPBELL SOUP COMPANY
Consolidated Statements of Earnings
(unaudited)
(millions, except per share amounts)
 
 
Three Months Ended
 
Nine Months Ended
 
April 30,
2017
 
May 1,
2016
 
April 30,
2017
 
May 1,
2016
Net sales
$
1,853

 
$
1,870

 
$
6,226

 
$
6,274

Costs and expenses
 
 
 
 
 
 
 
Cost of products sold
1,175

 
1,210

 
3,882

 
4,040

Marketing and selling expenses
209

 
228

 
674

 
677

Administrative expenses
140

 
154

 
402

 
456

Research and development expenses
27

 
31

 
78

 
86

Other expenses / (income)
4

 
(23
)
 
230

 
(14
)
Restructuring charges
—

 
2

 
—

 
32

Total costs and expenses
1,555

 
1,602

 
5,266

 
5,277

Earnings before interest and taxes
298

 
268

 
960

 
997

Interest expense
29

 
29

 
87

 
86

Interest income
1

 
1

 
3

 
3

Earnings before taxes
270

 
240

 
876

 
914

Taxes on earnings
94

 
55

 
307

 
270

Net earnings
176

 
185

 
569

 
644

Less: Net earnings (loss) attributable to noncontrolling interests
—

 
—

 
—

 
—

Net earnings attributable to Campbell Soup Company
$
176

 
$
185

 
$
569

 
$
644

Per Share — Basic
 
 
 
 
 
 
 
Net earnings attributable to Campbell Soup Company
$
.58

 
$
.60

 
$
1.86

 
$
2.08

Dividends
$
.35

 
$
.312

 
$
1.05

 
$
.936

Weighted average shares outstanding — basic
304

 
309

 
306

 
309

Per Share — Assuming Dilution
 
 
 
 
 
 
 
Net earnings attributable to Campbell Soup Company
$
.58

 
$
.59

 
$
1.85

 
$
2.07

Weighted average shares outstanding — assuming dilution
306

 
311

 
308

 
311

See accompanying Notes to Consolidated Financial Statements.



3





CAMPBELL SOUP COMPANY
Consolidated Statements of Comprehensive Income
(unaudited)
(millions)
 
Three Months Ended
 
April 30, 2017
 
May 1, 2016
 
Pre-tax amount
 
Tax (expense) benefit
 
After-tax amount
 
Pre-tax amount
 
Tax (expense) benefit
 
After-tax amount
Net earnings
 
 
 
 
$
176

 
 
 
 
 
$
185

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
(4
)
 
$
—

 
(4
)
 
$
101

 
$
(1
)
 
100

Cash-flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
2

 
—

 
2

 
(25
)
 
7

 
(18
)
Reclassification adjustment for (gains) losses included in net earnings
2

 
(1
)
 
1

 
(3
)
 
1

 
(2
)
Pension and other postretirement benefits:
 
 
 
 
 
 
 
 
 
 
 
Reclassification of prior service credit included in net earnings
(5
)
 
1

 
(4
)
 
(1
)
 
—

 
(1
)
Other comprehensive income (loss)
$
(5
)
 
$
—

 
(5
)
 
$
72

 
$
7

 
79

Total comprehensive income (loss)
 
 
 
 
$
171

 
 
 
 
 
$
264

Total comprehensive income (loss) attributable to noncontrolling interests
 
 
 
 
—

 
 
 
 
 
—

Total comprehensive income (loss) attributable to Campbell Soup Company
 
 
 
 
$
171

 
 
 
 
 
$
264

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
April 30, 2017
 
May 1, 2016
 
Pre-tax amount
 
Tax (expense) benefit
 
After-tax amount
 
Pre-tax amount
 
Tax (expense) benefit
 
After-tax amount
Net earnings
 
 
 
 
$
569

 
 
 
 
 
$
644

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
(28
)
 
$
—

 
(28
)
 
$
58

 
$
—

 
58

Cash-flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
32

 
(11
)
 
21

 
(35
)
 
11

 
(24
)
Reclassification adjustment for (gains) losses included in net earnings
9

 
(3
)
 
6

 
(9
)
 
3

 
(6
)
Pension and other postretirement benefits:
 
 
 
 
 
 
 
 
 
 
 
Reclassification of prior service credit included in net earnings
(18
)
 
6

 
(12
)
 
(2
)
 
—

 
(2
)
Other comprehensive income (loss)
$
(5
)
 
$
(8
)
 
(13
)
 
$
12

 
$
14

 
26

Total comprehensive income (loss)
 
 
 
 
$
556

 
 
 
 
 
$
670

Total comprehensive income (loss) attributable to noncontrolling interests
 
 
 
 
1

 
 
 
 
 
2

Total comprehensive income (loss) attributable to Campbell Soup Company
 
 
 
 
$
555

 
 
 
 
 
$
668

See accompanying Notes to Consolidated Financial Statements.

4





CAMPBELL SOUP COMPANY
Consolidated Balance Sheets
(unaudited)
(millions, except per share amounts)
 
April 30,
2017
 
July 31,
2016
Current assets
 
 
 
Cash and cash equivalents
$
313

 
$
296

Accounts receivable, net
618

 
626

Inventories
791

 
940

Other current assets
68

 
46

Total current assets
1,790

 
1,908

Plant assets, net of depreciation
2,372

 
2,407

Goodwill
2,057

 
2,263

Other intangible assets, net of amortization
1,113

 
1,152

Other assets ($46 and $34 attributable to variable interest entity)
119

 
107

Total assets
$
7,451

 
$
7,837

Current liabilities
 
 
 
Short-term borrowings
$
1,122

 
$
1,219

Payable to suppliers and others
568

 
610

Accrued liabilities
538

 
604

Dividends payable
111

 
100

Accrued income taxes
13

 
22

Total current liabilities
2,352

 
2,555

Long-term debt
2,270

 
2,314

Deferred taxes
412

 
396

Other liabilities
927

 
1,039

Total liabilities
5,961

 
6,304

Commitments and contingencies

 

Campbell Soup Company shareholders' equity
 
 
 
Preferred stock; authorized 40 shares; none issued
—

 
—

Capital stock, $.0375 par value; authorized 560 shares; issued 323 shares
12

 
12

Additional paid-in capital
348

 
354

Earnings retained in the business
2,173

 
1,927

Capital stock in treasury, at cost
(934
)
 
(664
)
Accumulated other comprehensive loss
(118
)
 
(104
)
Total Campbell Soup Company shareholders' equity
1,481

 
1,525

Noncontrolling interests
9

 
8

Total equity
1,490

 
1,533

Total liabilities and equity
$
7,451

 
$
7,837

See accompanying Notes to Consolidated Financial Statements.


5





CAMPBELL SOUP COMPANY
Consolidated Statements of Cash Flows
(unaudited)
(millions)
 
Nine Months Ended
 
April 30,
2017
 
May 1,
2016
Cash flows from operating activities:
 
 
 
Net earnings
$
569

 
$
644

Adjustments to reconcile net earnings to operating cash flow
 
 
 
Impairment charges
212

 
—

Restructuring charges
—

 
32

Stock-based compensation
48

 
50

Pension and postretirement benefit expense (income)
(35
)
 
167

Depreciation and amortization
234

 
228

Deferred income taxes
11

 
4

Other, net
15

 
2

Changes in working capital
 
 
 
Accounts receivable
1

 
5

Inventories
144

 
172

Prepaid assets
(20
)
 
7

Accounts payable and accrued liabilities
(116
)
 
(59
)
Receipts from hedging activities
1

 
5

Other
(53
)
 
(46
)
Net cash provided by operating activities
1,011

 
1,211

Cash flows from investing activities:
 
 
 
Purchases of plant assets
(195
)
 
(225
)
Sales of plant assets
—

 
5

Other, net
(14
)
 
(14
)
Net cash used in investing activities
(209
)
 
(234
)
Cash flows from financing activities:
 
 
 
Net short-term repayments
(66
)
 
(425
)
Long-term repayments
(76
)
 
—

Dividends paid
(314
)
 
(294
)
Treasury stock purchases
(305
)
 
(118
)
Treasury stock issuances
2

 
2

Payments related to tax withholding for stock-based compensation
(21
)
 
(21
)
Net cash used in financing activities
(780
)
 
(856
)
Effect of exchange rate changes on cash
(5
)
 
9

Net change in cash and cash equivalents
17

 
130

Cash and cash equivalents — beginning of period
296

 
253

Cash and cash equivalents — end of period
$
313

 
$
383

See accompanying Notes to Consolidated Financial Statements.

6





CAMPBELL SOUP COMPANY
Consolidated Statements of Equity
(unaudited)
(millions, except per share amounts)
 
Campbell Soup Company Shareholders’ Equity
 
 
 
 
 
Capital Stock
 
Additional Paid-in
Capital
 
Earnings Retained in the
Business
 
Accumulated Other Comprehensive
Income (Loss)
 
Noncontrolling
Interests
 
 
 
Issued
 
In Treasury
 
 
 
 
 
Total
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
Balance at August 2, 2015
323

 
$
12

 
(13
)
 
$
(556
)
 
$
339

 
$
1,754

 
$
(168
)
 
$
(4
)
 
$
1,377

Net earnings (loss)

 

 

 

 

 
644

 

 
—

 
644

Other comprehensive income (loss)

 

 

 

 

 

 
24

 
2

 
26

Dividends ($.936 per share)

 

 

 

 

 
(293
)
 

 

 
(293
)
Treasury stock purchased

 

 
(2
)
 
(118
)
 

 

 

 

 
(118
)
Treasury stock issued under management incentive and stock option plans
 
 
 
 
1

 
35

 
3

 
 
 
 
 
 
 
38

Balance at May 1, 2016
323

 
$
12

 
(14
)
 
$
(639
)
 
$
342

 
$
2,105

 
$
(144
)
 
$
(2
)
 
$
1,674

Balance at July 31, 2016
323

 
$
12

 
(15
)
 
$
(664
)
 
$
354

 
$
1,927

 
$
(104
)
 
$
8

 
$
1,533

Net earnings (loss)

 

 

 

 

 
569

 

 
—

 
569

Other comprehensive income (loss)

 

 

 

 

 

 
(14
)
 
1

 
(13
)
Dividends ($1.05 per share)

 

 

 

 

 
(323
)
 

 

 
(323
)
Treasury stock purchased

 

 
(5
)
 
(305
)
 

 

 

 

 
(305
)
Treasury stock issued under management incentive and stock option plans


 


 
1

 
35

 
(6
)
 


 


 

 
29

Balance at April 30, 2017
323

 
$
12

 
(19
)
 
$
(934
)
 
$
348

 
$
2,173

 
$
(118
)
 
$
9

 
$
1,490

See accompanying Notes to Consolidated Financial Statements.

7





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 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 presentation 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 31, 2016, except as described in Note 2.
In the fourth quarter of 2016, an out-of-period adjustment of $13 ($.04 per share) to increase taxes on earnings was recorded. The adjustment related to deferred tax expense that should have been provided on certain cross-currency swap contracts associated with intercompany debt. Most of the adjustment related to the third quarter of 2016. Management does not believe the adjustment is material to the consolidated financial statements for any period.
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.
2.
Recent Accounting Pronouncements
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.
In April 2015, the FASB issued guidance to clarify the accounting for fees paid by a customer in a cloud computing arrangement. The guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those years. Early adoption is permitted. The new guidance should be applied either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. In 2017, we prospectively adopted the guidance. The adoption did not have a material impact on our consolidated financial statements.
In September 2015, the FASB issued guidance that eliminates the requirement to restate prior period financial statements for measurement period adjustments for business combinations. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those years and should be applied prospectively to measurement period adjustments that occur after the effective date. We will prospectively apply the guidance to applicable transactions.
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

8





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 March 2016, the FASB issued guidance that amends accounting for share-based payments, including the accounting for income taxes, forfeitures, and statutory withholding requirements, as well as classification in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted. We adopted the guidance in 2017. In accordance with the prospective adoption of the recognition of excess tax benefits and deficiencies in the Consolidated Statements of Earnings, we recognized a $6 tax benefit in Taxes on earnings in the nine-month period ended April 30, 2017. We elected to continue to estimate forfeitures expected to occur. In addition, we elected to adopt retrospectively the amendment to present excess tax benefits on share-based compensation as an operating activity, which resulted in a reclassification of $7 from Net cash used in financing activities to Net cash provided by operating activities in the Consolidated Statement of Cash Flows for the nine-month period ended May 1, 2016. We also adopted retrospectively the amendment to present cash payments to tax authorities in connection with shares withheld to meet statutory tax withholding requirements as a financing activity. As a result, there was a reclassification of $21 from Net cash provided by operating activities to Net cash used in financing activities in the Consolidated Statement of Cash Flows for the nine-month period ended May 1, 2016.
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 January 2017, the FASB issued guidance that simplifies the test for goodwill impairment. Under the revised guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The revised guidance eliminates the current requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure the goodwill impairment. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted. We will apply the new guidance in performing future impairment assessments.
In March 2017, the FASB issued guidance that improves 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 are currently evaluating the impact that the new guidance will have on our consolidated financial statements.
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.

9





3.
Accumulated Other Comprehensive Income (Loss)
The components of Accumulated other comprehensive income (loss) consisted of the following:
 
 
Foreign Currency Translation Adjustments(1)
 
Gains (Losses) on Cash Flow Hedges(2)
 
Pension and Postretirement Benefit Plan Adjustments(3)
 
Total Accumulated Comprehensive Income (Loss)
Balance at July 31, 2016
 
$
(124
)
 
$
(41
)
 
$
61

 
$
(104
)
Other comprehensive income (loss) before reclassifications
 
(29
)
 
21

 
—

 
(8
)
Amounts reclassified from accumulated other comprehensive income (loss)
 
—

 
6

 
(12
)
 
(6
)
Net current-period other comprehensive income (loss)
 
(29
)
 
27

 
(12
)
 
(14
)
Balance at April 30, 2017
 
$
(153
)
 
$
(14
)
 
$
49

 
$
(118
)
_____________________________________
(1) 
Included a tax expense of $6 as of April 30, 2017, and July 31, 2016.
(2) 
Included a tax benefit of $9 as of April 30, 2017, and $23 as of July 31, 2016.
(3) 
Included a tax expense of $29 as of April 30, 2017, 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:
 
 
Three Months Ended
 
Nine Months Ended
 
 
Details about Accumulated Other Comprehensive Income (Loss) Components
 
April 30, 2017
 
May 1, 2016
 
April 30, 2017
 
May 1, 2016
 
Location of (Gain) Loss Recognized in Earnings
(Gains) losses on cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
1

 
$
(4
)
 
$
5

 
$
(10
)
 
Cost of products sold
Foreign exchange forward contracts
 
—

 
—

 
1

 
(2
)
 
Other expenses / (income)
Forward starting interest rate swaps
 
1

 
1

 
3

 
3

 
Interest expense
Total before tax
 
2

 
(3
)
 
9

 
(9
)
 
 
Tax expense (benefit)
 
(1
)
 
1

 
(3
)
 
3

 
 
(Gain) loss, net of tax
 
$
1

 
$
(2
)
 
$
6

 
$
(6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension and postretirement benefit adjustments:
 
 
 
 
 
 
 
 
 
 
Prior service credit
 
$
(5
)
 
$
(1
)
 
$
(18
)
 
$
(2
)
 
(1) 
Tax expense (benefit)
 
1

 
—

 
6

 
—

 
 
(Gain) loss, net of tax
 
$
(4
)
 
$
(1
)
 
$
(12
)
 
$
(2
)
 
 
_____________________________________
(1) 
This is included in the components of net periodic benefit (income) / expense (see Note 8 for additional details).

10





4.
Goodwill and Intangible Assets
Goodwill
The following table shows the changes in the carrying amount of goodwill by business segment:
 
Americas    
Simple
Meals and Beverages
 
Global
Biscuits
and
Snacks
 
Campbell Fresh
 
Total
Gross balance at July 31, 2016
$
775

 
$
757

 
$
837

 
$
2,369

Accumulated impairment charges
—

 
—

 
(106
)
 
(106
)
Net balance at July 31, 2016
$
775

 
$
757

 
$
731

 
$
2,263

Impairment
—

 
—

 
(191
)
 
(191
)
Foreign currency translation adjustment
(4
)
 
(11
)
 
—

 
(15
)
Balance at April 30, 2017
$
771

 
$
746

 
$
540

 
$
2,057

In the fourth quarter of 2016, as part of our annual review of intangible assets, an impairment charge of $106 was recorded on goodwill for the Bolthouse Farms carrot and carrot ingredients reporting unit within the Campbell Fresh segment. In 2016, carrot performance primarily reflected the adverse impact of weather conditions on crop yields, and execution issues in response to those conditions, which led to customer dissatisfaction, a loss of business, and higher carrot costs in the second half of the year. The impairment was attributable to a decline in profitability in the second half of 2016 and a revised outlook for the business, with reduced expectations for sales, operating margins, and discounted cash flows. During the second quarter of 2017, sales and operating profit performance for the reporting unit were well below our revised expectations due to difficulty with regaining market share lost during 2016 and higher carrot costs from the adverse impact of heavy rains on crop yields. During the quarter, we also lowered our forecast for sales and earnings for the reporting unit for the second half of 2017 based on revised market share recovery expectations and the continuing effect of unusual weather conditions on carrot costs. In addition, as part of a strategic review initiated by a new leadership team of Campbell Fresh during the second quarter, we decided to reduce emphasis on growing sales of carrot ingredients, which are a by-product of the manufacturing process, and to manage carrots sold at retail for modest sales growth consistent with the category while improving profitability. Accordingly, we reduced our expectations for recovery of retail carrot market share. As a consequence of current-year performance and the strategic review, we lowered our sales outlook for future fiscal years. We also lowered our average margin expectations due in part to cost volatility, which has been higher than expected. Based upon the business performance in the second quarter of 2017, our reduced near-term outlook, and reduced expectations for sales, operating margins and discounted cash flows, we performed an interim goodwill impairment assessment as of December 31, 2016, which resulted in a $127 impairment charge to reduce the carrying amount to $75. The updated cash flow projections include expectations that operating margins will improve from reduced levels in 2016 and 2017.
Garden Fresh Gourmet was acquired in June 2015 and is a reporting unit within the Campbell Fresh segment. During 2017, sales and operating profit performance for Garden Fresh Gourmet were well below expectations, and we lowered our outlook for the second half of 2017 due to customer losses and failure to meet product distribution goals. We expected to expand distribution of salsa beyond our concentration in the Midwest region, however this proved to be challenging as differentiated recipes are required to meet taste profiles in other parts of the country. In addition, as part of a strategic review initiated by a new leadership team of Campbell Fresh during the second quarter, we lowered our distribution and category growth expectations and, therefore, future sales outlook. Based upon the business performance in 2017, our reduced near-term outlook, and reduced expectations for sales, operating margins and discounted cash flows, we performed an interim goodwill impairment assessment on this reporting unit as of December 31, 2016, which resulted in a $64 impairment charge to reduce the carrying amount to $52. The updated cash flow projections include expectations that we will build distribution in the U.S., operating margins will expand partly driven by the benefits from further integration, and sales growth rates will exceed the company's overall sales growth rates.
The impairment charges were recorded in Other expenses / (income) in the Consolidated Statements of Earnings.

11





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
 
April 30,
2017
 
July 31,
2016
Amortizable intangible assets
 
 
 
 
Customer relationships
 
$
222

 
$
222

Technology
 
40

 
40

Other
 
35

 
35

Total gross amortizable intangible assets
 
$
297

 
$
297

Accumulated amortization
 
(86
)
 
(72
)
Total net amortizable intangible assets
 
$
211

 
$
225

Non-amortizable intangible assets
 
 
 
 
Trademarks
 
902

 
927

Total net intangible assets
 
$
1,113

 
$
1,152

Non-amortizable intangible assets consist of trademarks, which include Bolthouse Farms, Pace, Plum, Kjeldsens, Garden Fresh Gourmet and Royal Dansk. Amortizable intangible assets consist of recipes, patents, trademarks and distributor relationships.
Amortization of intangible assets was $15 for the nine-month periods ended April 30, 2017, and May 1, 2016. Amortization expense for the next 5 years is estimated to be $20 in 2017, and $15 in 2018 through 2021. Asset useful lives range from 5 to 20 years.
In the fourth quarter of 2016, as part of our annual review of intangible assets, an impairment charge of $35 was recognized on the Bolthouse Farms carrot and carrot ingredients reporting unit trademark as a result of the factors previously described. Due to the factors previously described, we performed an interim impairment assessment as of December 31, 2016, which resulted in a $20 impairment charge on the trademark to reduce the carrying amount to $48.
Due to the factors previously described, we also performed an interim impairment assessment as of December 31, 2016 on the trademark in the Garden Fresh Gourmet reporting unit, which resulted in a $1 impairment charge to reduce the carrying amount to $37.
The impairment charges were recorded in Other expenses / (income) in the Consolidated Statements of Earnings.
The estimates of future cash flows used in determining the fair value of goodwill and intangible assets involve significant management judgment and are based upon assumptions about expected future operating performance, economic conditions, market conditions and cost of capital. Inherent in estimating the future cash flows are uncertainties beyond our control, such as changes in capital markets. The actual cash flows could differ materially from management’s estimates due to changes in business conditions, operating performance and economic conditions.
5.
Business and Geographic Segment Information
We manage our businesses in three segments focused mainly on product categories. The segments are:
•
Americas Simple Meals and Beverages segment includes the retail and food service businesses in the U.S., Canada and Latin America. 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
•
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.
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

12





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
 
Nine Months Ended
 
 
April 30,
2017
 
May 1,
2016
 
April 30,
2017
 
May 1,
2016
Net sales
 
 
 
 
 
 
 
 
Americas Simple Meals and Beverages
 
$
982

 
$
999

 
$
3,510

 
$
3,538

Global Biscuits and Snacks
 
623

 
608

 
1,974

 
1,942

Campbell Fresh
 
248

 
263

 
742

 
794

Total
 
$
1,853

 
$
1,870

 
$
6,226

 
$
6,274

 
 
Three Months Ended
 
Nine Months Ended
 
 
April 30,
2017
 
May 1,
2016
 
April 30,
2017
 
May 1,
2016
Earnings before interest and taxes
 
 
 
 
 
 
 
 
Americas Simple Meals and Beverages
 
$
226

 
$
225

 
$
922

 
$
878

Global Biscuits and Snacks
 
98

 
86

 
345

 
341

Campbell Fresh
 
1

 
13

 
(1
)
 
52

Corporate(1)
 
(27
)
 
(54
)
 
(306
)
 
(242
)
Restructuring charges(2)
 
—

 
(2
)
 
—

 
(32
)
Total
 
$
298

 
$
268

 
$
960

 
$
997

(1) 
Represents unallocated items. Pension and postretirement benefit mark-to-market adjustments are included in Corporate. Losses were $54 in the three-month period ended May 1, 2016, and $20 and $175 in the nine-month periods ended April 30, 2017, and May 1, 2016, respectively. Costs related to the implementation of our new organizational structure and cost savings initiatives were $7 and  $13 in the three-month periods ended April 30, 2017, and May 1, 2016, respectively, and  $18 and $35 in the nine-month periods ended April 30, 2017, and May 1, 2016, respectively. Impairment charges of $212 on the intangible assets of the Bolthouse Farms carrot and carrot ingredients reporting unit and the Garden Fresh Gourmet reporting unit were also included in the nine-month period ended April 30, 2017. See Note 4 for additional information. A gain of $25 from a settlement of a claim related to the Kelsen acquisition was also included in the three- and nine-month periods ended May 1, 2016. 
(2) 
See Note 6 for additional information.
Our global net sales based on product categories are as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
April 30,
2017
 
May 1,
2016
 
April 30,
2017
 
May 1,
2016
Net sales
 
 
 
 
 
 
 
 
Soup
 
$
557

 
$
575

 
$
2,251

 
$
2,253

Baked snacks
 
600

 
584

 
1,914

 
1,886

Other simple meals
 
434

 
424

 
1,299

 
1,300

Beverages
 
262

 
287

 
762

 
835

Total
 
$
1,853

 
$
1,870

 
$
6,226

 
$
6,274

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.

13





6.
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, such as adopting zero-based budgeting over time. 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 related to the implementation of the new organizational structure and costs savings initiatives is as follows:
 
Three Months Ended
 
Nine Months Ended
 
Year Ended
 
April 30,
2017
 
May 1,
2016
 
April 30,
2017
 
May 1,
2016
 
July 31,
2016
 
August 2,
2015
Restructuring charges
$
—

 
$
2

 
$
—

 
$
35

 
$
35

 
$
102

Administrative expenses
7

 
13

 
18

 
35

 
47

 
22

Total pre-tax charges
$
7

 
$
15

 
$
18

 
$
70

 
$
82

 
$
124

 
 
 
 
 
 
 
 
 
 
 
 
Aggregate after-tax impact
$
4

 
$
9

 
$
11

 
$
44

 
$
52

 
$
78

Per share impact
$
.01

 
$
.03

 
$
.04

 
$
.14

 
$
.17

 
$
.25

A summary of the pre-tax costs associated with the initiatives is as follows:
 
Recognized as of
April 30, 2017
Severance pay and benefits
$
128

Implementation costs and other related costs
96

Total
$
224

The total estimated pre-tax costs for the initiatives for actions that have been identified are approximately $250 to $270. We expect to incur these costs through 2019. The estimates 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 approximately $130 in severance pay and benefits, and approximately $120 to $140 in implementation costs and other related costs.We expect these total pre-tax costs related to the initiatives will be associated with segments as follows: Americas Simple Meals and Beverages - approximately 33%; Global Biscuits and Snacks - approximately 32%; Campbell Fresh - approximately 3%; and Corporate - approximately 32%.
We expect substantially all costs to be cash expenditures, except for $7 of non-cash postretirement and pension curtailment costs incurred in 2015. In addition, we expect to invest approximately $105 in capital expenditures through 2019 related to the construction of a network of distribution centers for our U.S. thermal plants, of which we invested approximately $1 as of April 30, 2017.

14





A summary of the restructuring activity and related reserves associated with the initiatives at April 30, 2017, is as follows:
 
 
Severance Pay and Benefits
 
Implementation Costs and Other Related Costs(3)
 
Total Charges
Accrued balance at July 31, 2016(1)
 
$
73

 
 
 
 
2017 charges
 
—

 
18

 
$
18

2017 cash payments
 
(42
)
 
 
 
 
Accrued balance at April 30, 2017(2)
 
$
31

 
 
 
 
_______________________________________
(1)
Includes $17 of severance pay and benefits recorded in Other liabilities in the Consolidated Balance Sheet.
(2)  
Includes $3 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 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:
 
April 30, 2017
 
Three Months Ended
 
Nine Months Ended
 
Costs Incurred to Date
Americas Simple Meals and Beverages
$
1

 
$
1

 
$
72

Global Biscuits and Snacks
2

 
4

 
70

Campbell Fresh
—

 
—

 
2

Corporate
4

 
13

 
80

Total
$
7

 
$
18

 
$
224

2014 Initiatives
In 2016, we recorded a reduction to restructuring charges of $4 ($3 after tax, or $.01 per share) related to the 2014 initiatives. Of the amounts recorded in 2016, $3 ($2 after tax, or $.01 per share) was recorded in the nine-month period ended May 1, 2016 related to the 2014 initiative to improve supply chain efficiency in Australia. As of July 31, 2016, we incurred substantially all of the costs related to the 2014 initiatives.
A summary of the pre-tax costs associated with the 2014 initiatives is as follows:
 
Total Program(1)
 
Change in Estimate
 
Recognized as of July 31, 2016
Severance pay and benefits
$
41

 
$
(4
)
 
$
37

Asset impairment
12

 
—

 
12

Other exit costs
1

 
—

 
1

Total
$
54

 
$
(4
)
 
$
50

_______________________________________
(1) 
Recognized as of August 2, 2015.
7.
Earnings per Share
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 and nine-month periods ended April 30, 2017, and May 1, 2016, excludes less than 1 million stock options that would have been antidilutive.
8.
Pension and Postretirement Benefits
We sponsor certain defined benefit pension and postretirement plans for employees. Actuarial gains and losses are recognized immediately in our Consolidated Statements of Earnings as of the measurement date, which is our fiscal year end, or more frequently if an interim remeasurement is required. Components of net benefit (income) / expense were as follows:

15





 
Three Months Ended
 
Nine Months Ended
 
Pension
 
Postretirement
 
Pension
 
Postretirement
 
April 30,
2017
 
May 1,
2016
 
April 30,
2017
 
May 1,
2016
 
April 30,
2017
 
May 1,
2016
 
April 30,
2017
 
May 1,
2016
Service cost
$
6

 
$
6

 
$
—

 
$
—

 
$
19

 
$
20

 
$
1

 
$
1

Interest cost
21

 
24

 
2

 
4

 
64

 
74

 
7

 
12

Expected return on plan assets
(36
)
 
(36
)
 
—

 
—

 
(108
)
 
(111
)
 
—

 
—

Amortization of prior service credit
—

 
(1
)
 
(5
)
 
—

 
—

 
(1
)
 
(18
)
 
(1
)
Recognized net actuarial loss
—

 
61

 
—

 
—

 
—

 
173

 
—

 
—

Net periodic benefit (income) / expense
$
(9
)
 
$
54

 
$
(3
)
 
$
4

 
$
(25
)
 
$
155

 
$
(10
)
 
$
12

In July 2016, the retirement medical program was amended and beginning on January 1, 2017, we no longer sponsor our own medical coverage for certain Medicare-eligible retirees. Instead, we offer these Medicare-eligible retirees access to health care coverage through a private exchange and offer a health reimbursement account to subsidize benefits for a select group of retirees. The prior service credit is primarily related to the amendment in July 2016.
The recognized net actuarial loss in 2016 resulted from the quarterly remeasurement of certain U.S. plans. The remeasurement was required due to a high level of lump sum payments to certain vested plan participants arising primarily out of a limited-time offer to accept a single lump sum in lieu of future annuity payments.
No contributions are expected to be made to U.S. pension plans in 2017. Contributions to non-U.S. pension plans during the nine-month period ended April 30, 2017, were $4. We expect contributions to non-U.S. pension plans during the remainder of the year to be approximately $1.
9.
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 do not have credit-risk-related contingent features in our derivative instruments as of April 30, 2017, or July 31, 2016.
We are also exposed to credit risk from our customers. During 2016, our largest customer accounted for approximately 20% of consolidated net sales. Our five largest customers accounted for approximately 40% of our consolidated net sales in 2016.
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 $79 at April 30, 2017, and $91 at July 31, 2016. 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 in the same period in which the underlying

16





hedged transaction affects earnings. The notional amount of foreign exchange forward contracts that are not designated as accounting hedges was $123 and $175 at April 30, 2017, and July 31, 2016, respectively. There were no cross-currency swap contracts outstanding as of April 30, 2017, or July 31, 2016.
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 April 30, 2017 and at July 31, 2016, which relates to an 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, soybean oil, natural gas, cocoa, aluminum, butter, corn 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 April 30, 2017, or July 31, 2016. The notional amount of commodity contracts not designated as accounting hedges was $89 at April 30, 2017, and $88 at July 31, 2016.
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 is approximately $56 as of April 30, 2017. The fair value was not material as of April 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 April 30, 2017, and July 31, 2016, were $43 and $44, respectively.

17





The following table summarizes the fair value of derivative instruments on a gross basis as recorded in the Consolidated Balance Sheets as of April 30, 2017, and July 31, 2016:
 
Balance Sheet Classification
 
April 30,
2017
 
July 31,
2016
Asset Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Foreign exchange forward contracts
Other current assets
 
$
2

 
$
1

Total derivatives designated as hedges
 
 
$
2

 
$
1

Derivatives not designated as hedges:
 
 
 
 
 
Commodity derivative contracts
Other current assets
 
$
3

 
$
3

Deferred compensation derivative contracts
Other current assets
 
1

 
1

Foreign exchange forward contracts
Other current assets
 
3

 
—

Total derivatives not designated as hedges
 
 
$
7

 
$
4

Total asset derivatives
 
 
$
9

 
$
5

 
Balance Sheet Classification
 
April 30,
2017
 
July 31,
2016
Liability Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Foreign exchange forward contracts
Accrued liabilities
 
$
—

 
$
4

Forward starting interest rate swaps
Accrued liabilities
 
20

 
—

Forward starting interest rate swaps
Other liabilities
 
—

 
44

Total derivatives designated as hedges
 
 
$
20

 
$
48

Derivatives not designated as hedges:
 
 
 
 
 
Commodity derivative contracts
Accrued liabilities
 
$
3

 
$
4

Deferred compensation derivative contracts
Accrued liabilities
 
—

 
1

Foreign exchange forward contracts
Accrued liabilities
 
—

 
7

Commodity derivative contracts
Other liabilities
 
1

 
—

Total derivatives not designated as hedges
 
 
$
4

 
$
12

Total liability derivatives
 
 
$
24

 
$
60

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 April 30, 2017, and July 31, 2016, would be adjusted as detailed in the following table:
 
 
April 30, 2017
 
July 31, 2016
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
 
$
9

 
$
(3
)
 
$
6

 
$
5

 
$
(4
)
 
$
1

Total liability derivatives
 
$
24

 
$
(3
)
 
$
21

 
$
60

 
$
(4
)
 
$
56

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 April 30, 2017, and July 31, 2016, a cash margin account balance of $5 was included in Other current assets in the Consolidated Balance Sheets.

18





The following tables show the effect of our derivative instruments designated as cash-flow hedges for the three- and nine-month periods ended April 30, 2017, and May 1, 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
 
 
April 30,
2017
 
May 1,
2016
Three Months Ended
 
 
 
 
 
OCI derivative gain (loss) at beginning of quarter
 
 
$
(27
)
 
$
(26
)
Effective portion of changes in fair value recognized in OCI:
 
 
 
 
 
Foreign exchange forward contracts
 
 
7

 
(21
)
Forward starting interest rate swaps
 
 
(5
)
 
(4
)
Amount of (gain) loss reclassified from OCI to earnings:
Location in Earnings
 
 
 
 
Foreign exchange forward contracts
Cost of products sold
 
1

 
(4
)
Foreign exchange forward contracts
Other expenses / (income)
 
—

 
—

Forward starting interest rate swaps
Interest expense
 
1

 
1

OCI derivative gain (loss) at end of quarter
 
 
$
(23
)
 
$
(54
)
 
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
OCI derivative gain (loss) at beginning of year
 
 
$
(64
)
 
$
(10
)
Effective portion of changes in fair value recognized in OCI:
 
 
 
 
 
Foreign exchange forward contracts
 
 
8

 
(13
)
Forward starting interest rate swaps
 
 
24

 
(22
)
Amount of (gain) loss reclassified from OCI to earnings:
Location in Earnings
 
 
 
 
Foreign exchange forward contracts
Cost of products sold
 
5

 
(10
)
Foreign exchange forward contracts
Other expenses / (income)
 
1

 
(2
)
Forward starting interest rate swaps
Interest expense
 
3

 
3

OCI derivative gain (loss) at end of quarter
 
 
$
(23
)
 
$
(54
)
 
 
 
 
 
 
Based on current valuations, the amount expected to be reclassified from OCI into earnings within the next 12 months is a gain of $1. 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
 
Nine Months Ended
 
 
April 30, 2017
 
May 1,
2016
 
April 30, 2017
 
May 1,
2016
Foreign exchange forward contracts
 
Cost of products sold
 
$
—

 
$
(1
)
 
$
(1
)
 
$
—

Foreign exchange forward contracts
 
Other expenses / (income)
 
—

 
(2
)
 
—

 
(1
)
Cross-currency swap contracts
 
Other expenses / (income)
 
—

 
21

 
—

 
9

Commodity derivative contracts
 
Cost of products sold
 
3

 
(9
)
 
(3
)
 
—

Deferred compensation derivative contracts
 
Administrative expenses
 
—

 
(4
)
 
(2
)
 
(4
)
Total
 
 
 
$
3

 
$
5

 
$
(6
)
 
$
4

10.
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

19





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 April 30, 2017, we funded $51 of the capital commitment. Except for the remaining unfunded capital commitment of $74, 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 $46 and $34 as of April 30, 2017, and July 31, 2016, 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. Changes in the fair value were not material through April 30, 2017. Current assets and liabilities of Acre were not material as of April 30, 2017, or July 31, 2016.
11.
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 April 30, 2017, and July 31, 2016, consistent with the fair value hierarchy:
 
Fair Value
as of
April 30,
2017
 
Fair Value Measurements at
April 30, 2017 Using
Fair Value Hierarchy
 
Fair Value
as of
July 31,
2016
 
Fair Value Measurements at
July 31, 2016 Using
Fair Value Hierarchy
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts(1)
$
5

 
$
—

 
$
5

 
$
—

 
$
1

 
$
—

 
$
1

 
$
—

Commodity derivative contracts(2)
3

 
2

 
1

 
—

 
3

 
2

 
1

 
—

Deferred compensation derivative contracts(3)
1

 
—

 
1

 
—

 
1

 
—

 
1

 
—

Fair value option investments (4)
45

 
—

 
2

 
43

 
33

 
—

 
8

 
25

Total assets at fair value
$
54

 
$
2

 
$
9

 
$
43

 
$
38

 
$
2

 
$
11

 
$
25


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Fair Value
as of
April 30,
2017
 
Fair Value Measurements at
April 30, 2017 Using
Fair Value Hierarchy
 
Fair Value
as of
July 31,
2016
 
Fair Value Measurements at
July 31, 2016 Using
Fair Value Hierarchy
 
 
Level 1
 
Level 2
 
Level 3
 
 
Level 1
 
Level 2
 
Level 3
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Forward starting interest rate swaps(5)
$
20

 
$
—

 
$
20

 
$
—

 
$
44

 
$
—

 
$
44

 
$
—

Foreign exchange forward contracts(1)
—

 
—

 
—

 
—

 
11

 
—

 
11

 
—

Commodity derivative contracts(2)
4

 
4

 
—

 
—

 
4

 
4

 
—

 
—

Deferred compensation derivative contracts(3)
—

 
—

 
—

 
—

 
1