CPB-10.27.2013-10Q


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
October 27, 2013
Commission File Number
1-3822


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. R Yes o 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). R Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller  reporting company)
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes R No


There were 315,012,736 shares of capital stock outstanding as of November 29, 2013.






TABLE OF CONTENTS

 
 
 
 
 
 
 
 


2





PART I


ITEM 1. FINANCIAL INFORMATION
CAMPBELL SOUP COMPANY
Consolidated Statements of Earnings
(unaudited)
(millions, except per share amounts)
 
 
Three Months Ended
 
October 27,
2013
 
October 28,
2012
Net sales
$
2,165

 
$
2,205

Costs and expenses
 
 
 
Cost of products sold
1,388

 
1,384

Marketing and selling expenses
261

 
236

Administrative expenses
148

 
155

Research and development expenses
31

 
27

Other expenses / (income)
11

 
13

Restructuring charges
21

 
22

Total costs and expenses
1,860

 
1,837

Earnings before interest and taxes
305

 
368

Interest expense
31

 
36

Interest income
1

 
3

Earnings before taxes
275

 
335

Taxes on earnings
95

 
105

Earnings from continuing operations
180

 
230

Earnings (loss) from discontinued operations
(9
)
 
13

Net earnings
171

 
243

Less: Net earnings (loss) attributable to noncontrolling interests
(1
)
 
(2
)
Net earnings attributable to Campbell Soup Company
$
172

 
$
245

Per Share — Basic
 
 
 
Earnings from continuing operations attributable to Campbell Soup Company
$
.58

 
$
.74

Earnings (loss) from discontinued operations
(.03
)
 
.04

Net earnings attributable to Campbell Soup Company
$
.55

 
$
.78

Dividends
$
.312

 
$
.29

Weighted average shares outstanding — basic
314

 
314

Per Share — Assuming Dilution
 
 
 
Earnings from continuing operations attributable to Campbell Soup Company
$
.57

 
$
.73

Earnings (loss) from discontinued operations
(.03
)
 
.04

Net earnings attributable to Campbell Soup Company
$
.54

 
$
.78

Weighted average shares outstanding — assuming dilution
317

 
316

The sum of the individual per share amounts may not add due to rounding.
See accompanying Notes to Consolidated Financial Statements.





3





CAMPBELL SOUP COMPANY
Consolidated Statements of Comprehensive Income
(unaudited)
(millions)
 
Three Months Ended
 
October 27, 2013
 
October 28, 2012
 
Pre-tax amount
 
Tax (expense) benefit
 
After-tax amount
 
Pre-tax amount
 
Tax (expense) benefit
 
After-tax amount
Net earnings
 
 
 
 
$
171

 
 
 
 
 
$
243

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
48

 
$
(2
)
 
46

 
$
12

 
$
—

 
12

Cash-flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
(3
)
 
1

 
(2
)
 
—

 
—

 
—

Pension and other postretirement benefits:
 
 
 
 
 
 
 
 
 
 
 
Reclassification of net actuarial loss included in net earnings
22

 
(8
)
 
14

 
30

 
(11
)
 
19

Other comprehensive income (loss)
$
67

 
$
(9
)
 
$
58

 
$
42

 
$
(11
)
 
$
31

Total comprehensive income (loss)
 
 
 
 
229

 
 
 
 
 
274

Total comprehensive income (loss) attributable to noncontrolling interests
 
 
 
 
(2
)
 
 
 
 
 
(2
)
Total comprehensive income (loss) attributable to Campbell Soup Company
 
 
 
 
$
231

 
 
 
 
 
$
276

See accompanying Notes to Consolidated Financial Statements.

4





CAMPBELL SOUP COMPANY
Consolidated Balance Sheets
(unaudited)
(millions, except per share amounts)
 
October 27,
2013
 
July 28,
2013
Current assets
 
 
 
Cash and cash equivalents
$
305

 
$
333

Accounts receivable, net
804

 
635

Inventories
1,079

 
925

Other current assets
206

 
135

Current assets of discontinued operations held for sale
193

 
193

Total current assets
2,587

 
2,221

Plant assets, net of depreciation
2,283

 
2,260

Goodwill
2,461

 
2,297

Other intangible assets, net of amortization
1,194

 
1,021

Other assets
123

 
131

Non-current assets of discontinued operations held for sale
407

 
393

Total assets
$
9,055

 
$
8,323

Current liabilities
 
 
 
Short-term borrowings
$
2,585

 
$
1,909

Payable to suppliers and others
630

 
523

Accrued liabilities
598

 
617

Dividend payable
101

 
100

Accrued income taxes
38

 
19

Current liabilities of discontinued operations held for sale
152

 
114

Total current liabilities
4,104

 
3,282

Long-term debt
2,247

 
2,544

Deferred taxes
595

 
489

Other liabilities
741

 
776

Non-current liabilities of discontinued operations held for sale
23

 
22

Total liabilities
7,710

 
7,113

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
301

 
362

Earnings retained in the business
1,847

 
1,772

Capital stock in treasury, at cost
(305
)
 
(364
)
Accumulated other comprehensive loss
(506
)
 
(565
)
Total Campbell Soup Company shareholders' equity
1,349

 
1,217

Noncontrolling interests
(4
)
 
(7
)
Total equity
1,345

 
1,210

Total liabilities and equity
$
9,055

 
$
8,323

See accompanying Notes to Consolidated Financial Statements.


5





CAMPBELL SOUP COMPANY
Consolidated Statements of Cash Flows
(unaudited)
(millions)
 
Three Months Ended
 
October 27,
2013
 
October 28,
2012
Cash flows from operating activities:
 
 
 
Net earnings
$
171

 
$
243

Adjustments to reconcile net earnings to operating cash flow
 
 
 
Restructuring charges
21

 
22

Stock-based compensation
21

 
25

Depreciation and amortization
74

 
98

Deferred income taxes
43

 
(2
)
Other, net
27

 
35

Changes in working capital
 
 
 
Accounts receivable
(186
)
 
(258
)
Inventories
(110
)
 
(125
)
Prepaid assets
(25
)
 
(14
)
Accounts payable and accrued liabilities
77

 
143

Pension fund contributions
(40
)
 
(76
)
Receipts from (payments of) hedging activities
(23
)
 
1

Other
(12
)
 
(11
)
Net cash provided by operating activities
38

 
81

Cash flows from investing activities:
 
 
 
Purchases of plant assets
(52
)
 
(41
)
Sales of plant assets
—

 
3

Businesses acquired, net of cash acquired
(329
)
 
(1,567
)
Other, net
—

 
(9
)
Net cash used in investing activities
(381
)
 
(1,614
)
Cash flows from financing activities:
 
 
 
Net short-term borrowings
641

 
411

Long-term borrowings
—

 
1,250

Repayments of notes payable
(300
)
 
—

Dividends paid
(97
)
 
(92
)
Treasury stock purchases
(2
)
 
(17
)
Treasury stock issuances
4

 
20

Excess tax benefits on stock-based compensation
10

 
3

Contribution from noncontrolling interest
5

 
—

Other, net
—

 
(17
)
Net cash provided by financing activities
261

 
1,558

Effect of exchange rate changes on cash
—

 
1

Net change in cash and cash equivalents
(82
)
 
26

Cash and cash equivalents — beginning of period
333

 
335

Cash balance of discontinued operations — beginning of period
68

 
—

Cash balance of discontinued operations — end of period
(14
)
 
—

Cash and cash equivalents — end of period
$
305

 
$
361

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 July 29, 2012
542

 
$
20

 
(230
)
 
$
(8,259
)
 
$
329

 
$
9,584

 
$
(776
)
 
$
—

 
$
898

Net earnings (loss)

 

 

 

 

 
245

 

 
(2
)
 
243

Other comprehensive income (loss)

 

 

 

 

 

 
31

 
—

 
31

Dividends ($.29 per share)

 

 

 

 

 
(93
)
 

 

 
(93
)
Treasury stock purchased

 

 
—

 
(17
)
 

 

 

 

 
(17
)
Treasury stock issued under management incentive and stock option plans
 
 
 
 
1

 
53

 
(18
)
 
 
 
 
 
 
 
35

Balance at October 28, 2012
542

 
$
20

 
(229
)
 
$
(8,223
)
 
$
311

 
$
9,736

 
$
(745
)
 
$
(2
)
 
$
1,097

Balance at July 28, 2013
323

 
$
12

 
(11
)
 
$
(364
)
 
$
362

 
$
1,772

 
$
(565
)
 
$
(7
)
 
$
1,210

Contribution from noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5

 
5

Net earnings (loss)

 

 

 

 

 
172

 

 
(1
)
 
171

Other comprehensive income (loss)

 

 

 

 

 

 
59

 
(1
)
 
58

Dividends ($.312 per share)

 

 

 

 

 
(97
)
 

 

 
(97
)
Treasury stock purchased

 

 
—

 
(2
)
 

 

 

 

 
(2
)
Treasury stock issued under management incentive and stock option plans


 


 
2

 
61

 
(61
)
 


 


 

 
—

Balance at October 27, 2013
323

 
$
12

 
(9
)
 
$
(305
)
 
$
301

 
$
1,847

 
$
(506
)
 
$
(4
)
 
$
1,345

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
The financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations, financial position, and cash flows for the indicated periods. The accounting policies used in preparing these financial statements are consistent with those applied in the Annual Report on Form 10-K for the year ended July 28, 2013. The results for the period are not necessarily indicative of the results to be expected for other interim periods or the full year.
2.
Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (FASB) issued guidance related to disclosures about offsetting (netting) of assets and liabilities in the statement of financial position. The guidance requires entities to disclose gross information and net information about both instruments and transactions that are offset in the statement of financial position, and instruments and transactions subject to an agreement similar to a master netting arrangement. The scope includes financial instruments and derivative instruments. In January 2013, the FASB issued an amendment to the guidance to limit the scope of the new balance sheet offsetting disclosures to derivatives, repurchase agreements, and securities lending transactions to the extent that they are offset in the financial statements or subject to an enforceable master netting arrangement or similar arrangement. The disclosures are required for fiscal years and interim periods within those years beginning on or after January 1, 2013. Disclosures required under the guidance were provided for all comparative periods presented. The company adopted the guidance in the first quarter of 2013. The adoption resulted in additional disclosures, but did not have an impact on the company’s consolidated financial statements. See Note 12.
In July 2012, the FASB issued revised guidance intended to simplify how an entity tests indefinite-lived intangible assets for impairment. The amendments will allow an entity first to assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. An entity will no longer be required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative test unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments are effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The company does not expect the adoption to have a material impact on the company’s consolidated financial statements.
In February 2013, the FASB issued guidance for the recognition, measurement, and disclosure of certain obligations resulting from joint and several liability arrangements for which the total amount is fixed. Such obligations may include debt arrangements, legal settlements, and other contractual arrangements. The guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2013 and should be applied retrospectively to all prior periods presented for those obligations within scope that existed as of the beginning of the fiscal year of adoption. Early adoption is permitted. The company is currently evaluating the new guidance.
In March 2013, the FASB issued guidance on the accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. The guidance is effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2013. Early adoption is permitted. The company will prospectively apply the guidance to applicable transactions.
In July 2013, the FASB issued guidance which permits an entity to designate the Fed Funds Effective Swap Rate, also referred to as the overnight index swap rate, as a benchmark interest rate in a hedge accounting relationship. In addition, the guidance removes the restriction on using different benchmark interest rates for similar hedges. The guidance was effective in July 2013. The company will prospectively apply the guidance to applicable transactions.
In July 2013, the FASB issued guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance requires the netting of unrecognized tax benefits (UTBs) against a deferred tax asset for a loss or other carryforward that would apply in settlement of uncertain tax positions. Under the new standard, UTBs will be netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the UTBs. The guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2013, and should be applied prospectively to all UTBs that exist at the effective date. Retrospective application is permitted. The company is currently evaluating the new guidance.

8






3.
Acquisitions
On August 8, 2013, the company completed the acquisition of Kelsen Group A/S (Kelsen). The purchase price was $331. Kelsen is a producer of quality baked snacks that are sold in 85 countries around the world. Its primary brands include Kjeldsens and Royal Dansk. Kelsen has established distribution networks in markets in Asia, the U.S., Europe, the Middle East, South America and Africa.
The excess of the purchase price over the estimated fair values of the identifiable tangible and intangible assets was recorded as $136 of goodwill. The goodwill is not expected to be deductible for tax purposes. The goodwill was primarily attributable to future growth opportunities and any intangible assets that did not qualify for separate recognition. The goodwill is included in the Global Baking and Snacking segment.
The acquisition of Kelsen contributed $52 to Net sales and there was no impact on Net earnings for the three-month period ended October 27, 2013.
On June 13, 2013, the company completed the acquisition of Plum, PBC (formerly Plum Inc.) (Plum) for $249, subject to customary purchase price adjustments.
The acquisition of Plum contributed $15 to Net sales and resulted in a Net loss of $13 for the three-month period ended October 27, 2013. The Net loss included $11 of costs incurred from a voluntary product recall (see Note 18 for additional details).
The acquired assets and assumed liabilities include the following:
 
 
Kelsen
 
Plum
Cash
 
$
2

 
$
1

Accounts receivable
 
20

 
15

Inventories
 
50

 
20

Other current assets
 
2

 
1

Plant assets
 
51

 
2

Goodwill
 
136

 
128

Other intangible assets
 
173

 
133

Short-term debt
 
(32
)
 
—

Accounts payable
 
(11
)
 
(12
)
Accrued liabilities
 
(11
)
 
(5
)
Long-term debt
 
(4
)
 
—

Deferred income taxes
 
(45
)
 
(34
)
Total of assets acquired and liabilities assumed
 
$
331

 
$
249

The purchase price allocations are preliminary and are subject to the finalization of tax balances for both Kelsen and Plum, as well as final purchase price adjustments for Plum.
The identifiable intangible assets of Kelsen consist of $147 in non-amortizable trademarks, $4 in amortizable trademarks to be amortized over 10 years, and $22 in customer relationships to be amortized over 10 to 15 years. The identifiable intangible assets of Plum consist of $115 in non-amortizable trademarks and $18 in customer relationships to be amortized over 15 years.
On August 6, 2012, the company completed the acquisition of BF Bolthouse Holdco LLC (Bolthouse Farms) from a fund managed by Madison Dearborn Partners, LLC, a private equity firm, for $1,550 in cash, subject to customary purchase price adjustments. On August 6, 2012, the preliminary purchase price adjustments resulted in an increase in the purchase price of $20. In the third quarter of 2013, the purchase price adjustments were finalized and reduced to $11. The company incurred transactions costs of $10 ($7 after tax) in the three-month period ended October 28, 2012 related to this acquisition. The costs were recorded in Other expenses/(income).

9





The following unaudited summary information is presented on a consolidated pro forma basis as if the Kelsen acquisition had occurred on July 30, 2012 and the Plum and Bolthouse acquisitions had occurred on August 1, 2011:
 
Three Months Ended
 
October 27, 2013
 
October 28, 2012
Net sales
$
2,169

 
$
2,299

Earnings from continuing operations attributable to Campbell Soup Company
$
182

 
$
231

Earnings per share from continuing operations attributable to Campbell Soup Company
$
.57

 
$
.73

The pro forma amounts include additional interest expense on the debt issued to finance the purchases, amortization and depreciation expense based on the estimated fair value and useful lives of intangible assets, plant assets, and related tax effects. The pro forma results are not necessarily indicative of the combined results had the Kelsen acquisition been completed on July 30, 2012, and the Plum and Bolthouse acquisitions been completed on August 1, 2011, nor are they indicative of future combined results.
4.
Discontinued Operations
On October 28, 2013, subsequent to the end of the first quarter, the company completed the sale of its European simple meals business to Soppa Investments S.à r.l., an affiliate of CVC Capital Partners. The transaction was completed pursuant to a sale and purchase agreement dated September 30, 2013, for approximately €400, or approximately $550, subject to certain post-closing adjustments. The European business includes Erasco and Heisse Tasse soups in Germany; Liebig and Royco soups in France; Devos Lemmens mayonnaise and cold sauces and Royco soups in Belgium; and Blå Band and Isomitta soups and sauces in Sweden. The company used the proceeds from the sale to pay down debt and for other general corporate purposes and expects the after-tax proceeds to be approximately $455.
The company has reflected the results of the European simple meals business as discontinued operations in the Consolidated Statements of Earnings for all periods presented. The business was historically included in the International Simple Meals and Beverages segment.
Results of discontinued operations were as follows:
 
Three Months Ended
 
October 27, 2013
 
October 28, 2012
Net sales
$
137

 
$
131

 
 
 
 
Earnings before taxes
$
9

 
$
17

Taxes on earnings
18

 
4

Earnings (loss) from discontinued operations
$
(9
)
 
$
13

In the three-month period ended October 27, 2013, earnings before taxes included approximately $6 of costs associated with the sale of the business. Taxes on earnings included incremental expense of $14 representing taxes on the difference between the book value and tax basis of the business as a result of a reorganization of the capital and ownership structure that occurred during the first quarter of 2014.

10





The assets and liabilities of the European business have been reflected in assets and liabilities held for sale in the Consolidated Balance Sheets, and are comprised of the following:
 
October 27, 2013
 
July 28,
 2013
Cash
$
14

 
$
68

Accounts receivable
98

 
54

Inventories
78

 
68

Prepaid expenses
3

 
3

Current assets
$
193

 
$
193

 
 
 
 
Plant assets
$
102

 
$
98

Goodwill
115

 
110

Intangible assets
156

 
150

Other assets
34

 
35

Non-current assets
$
407

 
$
393

 
 
 
 
Accounts payable
$
81

 
$
60

Accrued liabilities
71

 
54

Current liabilities
$
152

 
$
114

 
 
 
 
Non-current pension obligation
$
11

 
$
11

Other liabilities
12

 
11

Non-current liabilities
$
23

 
$
22


5.
Accumulated Other Comprehensive Income (Loss)
The components of Accumulated other comprehensive income (loss) consisted of the following:
 
 
Foreign Currency Translation Adjustment (1)
 
Gains (Losses) on Cash Flow Hedges (2)
 
Pension and Postretirement Benefit Plan Adjustments (3)
 
Total Accumulated Comprehensive Income (Loss)
Balance at July 28, 2013
 
$
170

 
$
5

 
$
(740
)
 
$
(565
)
Other comprehensive income (loss) before reclassifications
 
47

 
(2
)
 
—

 
45

Amounts reclassified from accumulated other comprehensive income
 
—

 
—

 
14

 
14

Net current-period other comprehensive income
 
47

 
(2
)
 
14

 
59

Balance at October 27, 2013
 
$
217

 
$
3

 
$
(726
)
 
$
(506
)
_____________________________________
(1) 
Included a tax expense of $11 as of October 27, 2013, and $9 as of July 28, 2013. The amount related to noncontrolling interests was not material.
(2) 
Included a tax expense of $2 as of October 27, 2013, and $3 as of July 28, 2013.
(3) 
Included a tax benefit of $416 as of October 27, 2013, and $424 as of July 28, 2013.

11





The amounts reclassified from Accumulated other comprehensive income (loss) consisted of the following:
 
 
Three Months Ended
 
 
Details about Accumulated Other Comprehensive Income Components
 
October 27, 2013
 
October 28, 2012
 
Location of (Gain) Loss Recognized in Earnings
 
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
 
(Gains) losses on cash flow hedges:
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
(1
)
 
$
(1
)
 
Cost of products sold
Forward starting interest rate swaps
 
1

 
1

 
Interest expense
Total before tax
 
—

 
—

 
 
Tax expense (benefit)
 
—

 
—

 
 
(Gain) loss, net of tax
 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
Amortization of pension and postretirement benefit adjustments:
 
 
 
 
 
 
Prior service credits
 
$
—

 
$
—

 
(1) 
Net actuarial losses
 
22

 
30

 
(1) 
Total before tax
 
22

 
30

 
 
Tax expense (benefit)
 
(8
)
 
(11
)
 
 
(Gain) loss, net of tax
 
$
14

 
$
19

 
 
_____________________________________
(1) 
These items are included in the components of net periodic benefit costs (see Note 11 for additional details).
6.
Goodwill and Intangible Assets
The following table shows the changes in the carrying amount of goodwill by business segment:
 
U.S.    
Simple
Meals
 
Global
Baking
and
Snacking
 
International
Simple Meals
and
Beverages
 
U.S.
Beverages
 
Bolthouse and Foodservice
 
Total    
Balance at July 28, 2013
$
450

 
$
775

 
$
122

 
$
112

 
$
838

 
$
2,297

Acquisition
—

 
136

 
—

 
—

 
—

 
136

Foreign currency translation adjustment
—

 
30

 
(2
)
 
—

 
—

 
28

Balance at October 27, 2013
$
450

 
$
941

 
$
120

 
$
112

 
$
838

 
$
2,461

In 2014, the company acquired Kelsen for $331 and goodwill related to the acquisition was $136. See Note 3.
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 27,
2013
 
July 28,
2013
Non-amortizable intangible assets
 
 
 
 
Trademarks
 
$
961

 
$
810

Amortizable intangible assets
 
 
 
 
Customer relationships
 
$
179

 
$
156

Technology
 
40

 
40

Other
 
36

 
32

Total gross amortizable intangible assets
 
$
255

 
$
228

Accumulated amortization
 
(22
)
 
(17
)
Total net intangible assets
 
$
1,194

 
$
1,021


12





Non-amortizable intangible assets consist of trademarks, which include Bolthouse Farms, Pace, Plum Organics, Kjeldsens and Royal Dansk. Other amortizable intangible assets consist substantially of recipes, patents, trademarks and distributor relationships.
Amortization of intangible assets in Earnings from continuing operations was $4 and $3 for the three-month periods ended October 27, 2013 and October 28, 2012, respectively. The estimated aggregated amortization expense is estimated to be $17 in each of the fiscal periods 2014 through 2017 and $13 in 2018. Asset useful lives range from 5 to 20 years.
7.
Business and Geographic Segment Information
The company manages operations through 10 operating segments based on product type and geographic location and has aggregated the operating segments into the appropriate reportable segment based on similar economic characteristics; products; production processes; types or classes of customers; distribution methods; and regulatory environment. The reportable segments are discussed in greater detail below.
The U.S. Simple Meals 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 canned gravies, pasta and beans; Swanson canned poultry; and as of June 13, 2013, Plum Organics food and snacks.
The Global Baking and Snacking segment aggregates the following operating segments: Pepperidge Farm cookies, crackers, bakery and frozen products in U.S. retail; Arnott’s biscuits in Australia and Asia Pacific; and as of August 8, 2013, Kelsen cookies globally.
The International Simple Meals and Beverages segment aggregates the following operating segments: the retail business in Canada and the simple meals and beverages business in Asia Pacific, Latin America, and China. See also Note 4 for information on the sale of the simple meals business in Europe. This business was historically included in this segment. The results of operations of this business have been reflected as discontinued operations for the periods presented. Prior periods were reclassified to conform to the current presentation.
The U.S. Beverages segment represents the U.S. retail beverages business, including the following products: V8 juices and beverages; and Campbell’s tomato juice.
Bolthouse and Foodservice comprises the Bolthouse Farms carrot products operating segment, including fresh carrots, juice concentrate and fiber; the Bolthouse Farms super-premium refrigerated beverages and refrigerated salad dressings operating segment; and the North America Foodservice operating segment. The North America Foodservice operating segment represents the distribution of products such as soup, specialty entrées, beverage products, other prepared foods and Pepperidge Farm products through various food service channels in the U.S. and Canada. None of these operating segments meets the criteria for aggregation nor the thresholds for separate disclosure.
The company evaluates 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 expenses 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. Certain manufacturing, warehousing and distribution activities of the segments are integrated in order to maximize efficiency and productivity. As a result, asset information by segment is not discretely maintained for internal reporting or used in evaluating performance.
 
 
Three Months Ended
 
 
October 27,
2013
 
October 28,
2012
Net sales
 
 
 
 
U.S. Simple Meals
 
$
860

 
$
896

Global Baking and Snacking
 
609

 
574

International Simple Meals and Beverages
 
193

 
223

U.S. Beverages
 
173

 
189

Bolthouse and Foodservice
 
330

 
323

Total
 
$
2,165

 
$
2,205


13





 
 
Three Months Ended
 
 
October 27,
2013
 
October 28,
2012
Earnings before interest and taxes
 
 
 
 
U.S. Simple Meals
 
$
211

 
$
274

Global Baking and Snacking
 
78

 
85

International Simple Meals and Beverages
 
20

 
33

U.S. Beverages
 
24

 
30

Bolthouse and Foodservice
 
29

 
34

Corporate(1)
 
(36
)
 
(66
)
Restructuring charges(2)
 
(21
)
 
(22
)
Total
 
$
305

 
$
368

_______________________________________
(1) 
Represents unallocated corporate expenses. Restructuring-related costs of $2 and an unrealized loss of $9 on foreign exchange forward contracts related to the sale of the European simple meals business were included in unallocated corporate expenses for the three-month period ended October 27, 2013. Acquisition costs of $10 and restructuring-related costs of $21 were included in unallocated corporate expenses for the three-month period ended October 28, 2012.
(2) 
See Note 8 for additional information.

The company’s global net sales based on product categories are as follows:
 
 
Three Months Ended
 
 
October 27,
2013
 
October 28,
2012
Net sales
 
 
 
 
Simple Meals
 
$
1,234

 
$
1,292

Baked Snacks
 
645

 
612

Beverages
 
286

 
301

Total
 
$
2,165

 
$
2,205

Simple Meals include condensed and ready-to-serve soups, broths, sauces, carrot products, refrigerated salad dressings and Plum foods and snacks for babies, toddlers and children. Baked Snacks include cookies, crackers, biscuits, and other baked products.
8.
Restructuring Charges
2014 Initiative
In the first quarter of 2014, the company streamlined its salaried workforce in North America and in the Asia Pacific region. Approximately 200 positions were eliminated. The actions were substantially completed in October 2013. The company recorded a restructuring charge of $20 ($13 after tax or $.04 per share) associated with the 2014 initiative for severance and benefit costs. The company does not expect any additional charges.
The company expects the total pre-tax costs of the 2014 initiative to represent cash expenditures, the majority of which will be spent in 2014.
A summary of the restructuring reserve associated with the 2014 initiative at October 27, 2013 is as follows:
 
 
 
 
Three Months Ended
 
 
 
 
 
 
October 27, 2013
 
 
 
 
Accrued
Balance at
 
 
 
Cash
 
Foreign  Currency
Translation
 
Accrued
Balance at
 
 
July 28, 2013
 
Charges
 
Payments
 
Adjustment
 
October 27, 2013
Severance pay and benefits
 
$
—

 
$
20

 
$
—

 
$
—

 
$
20

The total pre-tax costs of $20 associated with each segment are as follows: U.S. Simple Meals - $5; Global Baking and Snacking - $9; International Simple Meals and Beverages - $3; U.S. Beverages - $1; Bolthouse and Foodservice - $1; and Corporate - $1. Segment operating results do not include restructuring charges as segment performance is evaluated excluding such charges.

14





2013 Initiatives
In 2013, the company implemented the following initiatives to improve supply chain efficiency, expand access to manufacturing and distribution capabilities, and reduce costs:
•
The company implemented initiatives to improve its U.S. supply chain cost structure and increase asset utilization across its U.S. thermal plant network, including closing its thermal plant in Sacramento, California, which produced soups, sauces and beverages. The closure resulted in the elimination of approximately 700 full-time positions and was completed in phases. Most of the positions were eliminated in 2013 and operations ceased in August 2013. The company shifted the majority of Sacramento's soup, sauce and beverage production to its thermal plants in Maxton, North Carolina; Napoleon, Ohio; and Paris, Texas. The company also closed its spice plant in South Plainfield, New Jersey, which resulted in the elimination of 27 positions. The company consolidated spice production at its Milwaukee, Wisconsin, plant in 2013.
•
In Mexico, the company entered into commercial arrangements with third-party providers to expand access to manufacturing and distribution capabilities. The third-party providers will produce and distribute the company's beverages, soups, broths and sauces throughout the Mexican market. As a result of these agreements, the company announced that it would close its plant in Villagrán, Mexico and eliminate approximately 260 positions. In the first quarter of 2014, operations at the plant ceased and the positions were eliminated.
•
The company will improve its Pepperidge Farm bakery supply chain cost structure by closing its plant in Aiken, South Carolina, in 2014. The company will shift the majority of Aiken's bread production to its bakery plant in Lakeland, Florida. Approximately 110 positions will be eliminated as a result of the plant closure.
•
The company streamlined its salaried workforce in U.S. Simple Meals, North America Foodservice and U.S. Beverages by approximately 70 positions. This action was substantially completed in August 2013.
In the three-month period ended October 27, 2013, the company recorded a restructuring charge of $1 related to the 2013 initiatives. In addition, approximately $2 of costs related to the 2013 initiatives were recorded this quarter in Cost of products sold, representing other exit costs. The aggregate after-tax impact of restructuring charges and related costs recorded in this quarter was $2, or $.01 per share. In 2013, the company recorded a restructuring charge of $51. In addition, approximately $91 of costs related to these initiatives were recorded in 2013 in Cost of products sold, representing accelerated depreciation and other exit costs. The aggregate after-tax impact of restructuring charges and related costs recorded in 2013 was $90, or $.28 per share. Of the amounts recorded in 2013, $22 of restructuring charges were recorded in the first quarter, and approximately $21 of costs related to these initiatives were recorded in the first quarter in Cost of products sold, representing accelerated depreciation and other exit costs. The aggregate after-tax impact of restructuring charges and related costs recorded in the first quarter of 2013 was $27, or $.09 per share. A summary of the pre-tax costs and remaining costs associated with the initiatives is as follows:
 
Total
Program
 
Recognized
as of
October 27, 2013
 
Remaining
Costs to be
Recognized
Severance pay and benefits
$
36

 
$
(36
)
 
$
—

Accelerated depreciation/asset impairment
99

 
(99
)
 
—

Other exit costs
15

 
(10
)
 
5

Total
$
150

 
$
(145
)
 
$
5

Of the aggregate $150 of pre-tax costs, the company expects approximately $47 will be cash expenditures. In addition, the company expects to invest approximately $31 in capital expenditures, primarily to relocate and refurbish a beverage filling and packaging line, and relocate bread production, of which approximately $20 has been invested as of October 27, 2013. The outstanding aspects of these restructuring initiatives are expected to be completed in 2014.

15





A summary of the restructuring activity and related reserves associated with the 2013 initiatives at October 27, 2013 is as follows:
 
 
 
 
Three Months Ended
 
 
 
 
 
October 27, 2013
 
 
 
Accrued
Balance at
 
 
 
Cash
 
Accrued
Balance at
 
 
July 28, 2013
 
Charges
 
Payments
 
October 27, 2013
Severance pay and benefits
 
$
17

 
$
1

 
$
(6
)
 
$
12

Other exit costs (1)
 
 
 
2

 
 
 
 
Total charges
 
 
 
$
3

 
 
 
 
_______________________________________
(1) 
Includes non-cash costs and other exit costs recognized as incurred that are not reflected in the restructuring reserve in the Consolidated Balance Sheet.
A summary of restructuring charges and related costs incurred to date associated with segments is as follows:
 
U.S.
Simple
Meals
 
Global Baking and Snacking
 
International Simple Meals and Beverages
 
U.S.
Beverages
 
Bolthouse and Foodservice
 
Total
Severance pay and benefits
$
20

 
$
2

 
5

 
$
7

 
2

 
$
36

Accelerated depreciation/asset impairment
64

 
10

 
3

 
22

 
—

 
99

Other exit costs
6

 
1

 
1

 
2

 
—

 
10

 
$
90

 
$
13

 
$
9

 
$
31

 
$
2

 
$
145

The company expects to incur additional pre-tax costs of approximately $5 by segment as follows: U.S. Simple Meals - $2; and Global Baking and Snacking - $3. Segment operating results do not include restructuring charges as segment performance is evaluated excluding such charges.
2011 Initiatives
In the fourth quarter of 2011, the company announced a series of initiatives to improve supply chain efficiency and reduce overhead costs across the organization to help fund plans to drive the growth of the business. The company also announced its exit from the Russian market. Details of the 2011 initiatives include:
•
In Australia, the company is investing in a new system to automate packing operations at its biscuit plant in Virginia. This investment continued through the first quarter of 2014 and will result in the elimination of approximately 190 positions, which is expected to occur by December 2013. The company expects to continue investing in the new system through the third quarter of 2014. Further, the company improved asset utilization in the U.S. by shifting production of ready-to-serve soups from Paris, Texas, to other facilities in 2012. In addition, the manufacturing facility in Marshall, Michigan, was closed in 2011, and manufacturing of Campbell’s Soup at Hand microwavable products was consolidated at the Maxton, North Carolina, plant in 2012.
•
The company streamlined its salaried workforce by approximately 510 positions around the world, including approximately 130 positions at its world headquarters in Camden, New Jersey. These actions were substantially completed in 2011. As part of this action, the company outsourced a larger portion of its U.S. retail merchandising activities to its retail sales agent, Acosta Sales and Marketing, and eliminated approximately 190 positions.
•
In connection with exiting the Russian market, the company eliminated approximately 50 positions. The exit process commenced in 2011 and was substantially completed in 2012.

16





In 2012, the company recorded a restructuring charge of $10 ($6 after tax or $.02 per share) related to the 2011 initiatives. Of the amount recorded in 2012, $3 related to discontinued operations. In the fourth quarter of 2011, the company recorded a restructuring charge of $63 ($41 after tax or $.12 per share). Of the amount recorded in 2011, $3 related to discontinued operations. A summary of the pre-tax charges and remaining costs associated with the initiatives is as follows:
 
Total
Program
 
Recognized
as of
October 27, 2013
 
Remaining
Costs to be
Recognized
Severance pay and benefits
$
41

 
$
(41
)
 
$
—

Asset impairment/accelerated depreciation
23

 
(23
)
 
—

Other exit costs
10

 
(9
)
 
1

Total
$
74

 
$
(73
)
 
$
1

Of the aggregate $74 of pre-tax costs, approximately $50 represents cash expenditures, the majority of which was spent in 2012. In addition, the company expects to invest approximately $40 in capital expenditures in connection with the actions, of which approximately $34 has been invested as of October 27, 2013.
A summary of the restructuring activity and related reserves associated with the 2011 initiatives at October 27, 2013 is as follows:
 
 
 
 
Three Months Ended
 
 
 
 
 
 
October 27, 2013
 
 
 
 
Accrued
Balance at
 
 
 
Cash
 
Foreign  Currency
Translation
 
Accrued
Balance at
 
 
July 28, 2013
 
Charges
 
Payments
 
Adjustment
 
October 27, 2013
Severance pay and benefits
 
$
3

 
$
—

 
$
—

 
$
—

 
$
3

Other exit costs
 
1

 
—

 
—

 
—

 
1

 
 
$
4

 
$
—

 
$
—

 
$
—

 
$
4

A summary of restructuring charges incurred to date associated with each segment is as follows:
 
U.S.
Simple
Meals
 
Global
Baking
and
Snacking
 
International
Simple Meals
and
Beverages
 
U.S.
Beverages
 
Bolthouse and Foodservice
 
Corporate
 
Total
Severance pay and benefits
$
10

 
$
14

 
$
11

 
$
3

 
$
1

 
$
2

 
$
41

Asset impairment/accelerated depreciation
20

 
—

 
3

 
—

 
—

 
—

 
23

Other exit costs
2

 
—

 
3

 
—

 
—

 
4

 
9

 
$
32

 
$
14

 
$
17

 
$
3

 
$
1

 
$
6

 
$
73

The company expects to incur additional pre-tax costs of approximately $1 in the U.S. Simple Meals segment. Segment operating results do not include restructuring charges as segment performance is evaluated excluding such charges.
9.
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. There were no antidilutive stock options for the three-month periods ended October 27, 2013 and October 28, 2012.
10.
Noncontrolling Interests
The company owns a 60% controlling interest in a joint venture formed with Swire Pacific Limited to support the development of the company’s business in China. The joint venture began operations on January 31, 2011. In August 2013, the company and joint venture partner contributed additional cash of $7 and $5, respectively. The noncontrolling interest’s share in the net loss was included in Net earnings (loss) attributable to noncontrolling interests in the Consolidated Statements of Earnings.
The company owns a 70% controlling interest in a Malaysian food products manufacturing company. The noncontrolling interest’s share in the net earnings was included in Net earnings (loss) attributable to noncontrolling interests in the Consolidated Statements of Earnings and was not material in the three-month periods ended October 27, 2013 or October 28, 2012.

17





The noncontrolling interests in these entities were included in Total equity in the Consolidated Balance Sheets and Consolidated Statements of Equity.
11.
Pension and Postretirement Benefits
The company sponsors certain defined benefit pension plans and postretirement benefit plans for employees. Components of benefit expense were as follows:
 
Three Months Ended
 
Pension
 
Postretirement
 
October 27,
2013
 
October 28,
2012
 
October 27,
2013
 
October 28,
2012
Service cost
$
11

 
$
14

 
$
1

 
$
1

Interest cost
29

 
27

 
4

 
4

Expected return on plan assets
(45
)
 
(44
)
 
—

 
—

Recognized net actuarial loss
19

 
27

 
3

 
3

Net periodic benefit expense
$
14

 
$
24

 
$
8

 
$
8

A contribution of $35 was made to U.S. pension plans and contributions of $5 were made to non-U.S. pension plans during the three-month period ended October 27, 2013. Additional contributions to U.S. pension plans are not expected this year. Contributions to non-U.S. pension plans are expected to be approximately $13 during the remainder of the year.
12.
Financial Instruments
The principal market risks to which the company is exposed are changes in foreign currency exchange rates, interest rates, and commodity prices. In addition, the company is exposed to equity price changes related to certain deferred compensation obligations. In order to manage these exposures, the company follows established risk management policies and procedures, including the use of derivative contracts such as swaps, options, forwards and commodity futures. These derivative contracts are entered into for periods consistent with the related underlying exposures and do not constitute positions independent of those exposures. The company does not enter into derivative contracts for speculative purposes and does not use leveraged instruments. The company’s derivative programs include both instruments that qualify and that do not qualify for hedge accounting treatment.
Concentration of Credit Risk
The company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations.  To mitigate counterparty credit risk, the company only enters into contracts with carefully selected, leading, credit-worthy financial institutions, and distributes contracts among several financial institutions to reduce the concentration of credit risk. The company does not have credit-risk-related contingent features in its derivative instruments as of October 27, 2013. During 2013, the company's largest customer accounted for approximately 19% of consolidated net sales. The company closely monitors credit risk associated with counterparties and customers.
Foreign Currency Exchange Risk
The company is exposed to foreign currency exchange risk related to its international operations, including non-functional currency intercompany debt and net investments in subsidiaries. The company is 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 Australian dollar, Canadian dollar, euro, Swedish krona, New Zealand dollar, British pound and Japanese yen. The company utilizes 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. The company hedges portions of its 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, foreign exchange forward purchase and sale contracts, as well as cross-currency swap contracts, are entered into for periods consistent with the underlying debt. As of October 27, 2013, cross-currency swap contracts mature between 1 and 33 months. The notional amount of foreign exchange forward and cross-currency swap contracts accounted for as cash-flow hedges was $47 at October 27, 2013 and $129 at July 28, 2013. 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 and cross-currency swap contracts that are not designated as accounting hedges was $951 and $895 at October 27, 2013 and July 28, 2013, respectively.
Interest Rate Risk
The company manages its 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 its variable-to-total debt ratio within targeted guidelines. Receive fixed rate/

18





pay variable rate interest rate swaps are accounted for as fair-value hedges. The notional amount of outstanding fair-value interest rate swaps totaled $200 at July 28, 2013. These swaps matured in October 2013. The company manages its 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 forecasted debt issuances. Pay fixed rate/receive variable rate forward starting interest rate swaps are accounted for as cash-flow hedges. The notional amount of outstanding forward starting interest rate swaps totaled $250 at October 27, 2013 and at July 28, 2013.
Commodity Price Risk
The company principally uses 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. The company also enters into commodity futures, options and swap contracts to reduce the volatility of price fluctuations of diesel fuel, soybean oil, wheat, aluminum, natural gas, cocoa and corn, which impact the cost of raw materials. Commodity futures, options, and swap contracts are either accounted for as cash-flow hedges or are not designated as accounting hedges. The company hedges 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 27, 2013 or July 28, 2013. The notional amount of commodity contracts not designated as accounting hedges was $100 at October 27, 2013 and $105 at July 28, 2013.
Equity Price Risk
The company enters into swap contracts which hedge a portion of exposures relating to certain deferred compensation obligations linked to the total return of the company’s capital stock, the total return of the Vanguard Institutional Index, and the total return of the Vanguard Total International Stock Index. Under these contracts, the company pays variable interest rates and receives from the counterparty either the total return on company 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 and are entered into for periods typically not exceeding 12 months. The notional amounts of the contracts as of October 27, 2013 and July 28, 2013 were $49 and $50, 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 27, 2013 and July 28, 2013:
 
Balance Sheet Classification
 
October 27,
2013
 
July 28,
2013
Asset Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Foreign exchange forward contracts
Other current assets
 
$
1

 
$
2

Forward starting interest rate swaps
Other current assets
 
19

 
—

Interest rate swaps
Other current assets
 
—

 
1

Forward starting interest rate swaps
Other assets
 
—

 
23

Total derivatives designated as hedges
 
 
$
20

 
$
26

Derivatives not designated as hedges:
 
 
 
 
 
Commodity derivative contracts
Other current assets
 
$
2

 
$
2

Cross-currency swap contracts
Other current assets
 
2

 
—

Deferred compensation derivative contracts
Other current assets
 
2

 
2

Foreign exchange forward contracts
Other current assets
 
2

 
2

Cross-currency swap contracts
Other assets
 
1

 
—

Total derivatives not designated as hedges
 
 
$
9

 
$
6

Total asset derivatives
 
 
$
29

 
$
32


19





 
Balance Sheet Classification
 
October 27,
2013
 
July 28,
2013
Liability Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Cross-currency swap contracts
Accrued liabilities
 
$
—

 
$
22

Foreign exchange forward contracts
Accrued liabilities
 
1

 
2

Total derivatives designated as hedges
 
 
$
1

 
$
24

Derivatives not designated as hedges:
 
 
 
 
 
Commodity derivative contracts
Accrued liabilities
 
$
4

 
$
6

Cross-currency swap contracts
Accrued liabilities
 
—

 
1

Foreign exchange forward contracts
Accrued liabilities
 
18

 
4

Cross-currency swap contracts
Other liabilities
 
6

 
1

Total derivatives not designated as hedges
 
 
$
28

 
$
12

Total liability derivatives
 
 
$
29

 
$
36

The company has elected not to offset the fair values of derivative assets and liabilities executed with the same counterparty that are generally subject to enforceable netting agreements. However, if the company 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 27, 2013 and July 28, 2013 would be adjusted as detailed in the following table:
 
 
October 27, 2013
 
July 28, 2013
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
 
$
29

 
$
(13
)
 
$
16

 
$
32

 
$
(8
)
 
$
24

 
 
 
 
 
 

 
 
 
 
 

Total liability derivatives
 
$
29

 
$
(13
)
 
$
16

 
$
36

 
$
(8
)
 
$
28

The company has elected not to 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. The company is required to maintain cash margin accounts in connection with funding the settlement of open positions. At October 27, 2013 and July 28, 2013, cash margin account balances of $6 and $7, respectively, are included in Other current assets in the Consolidated Balance Sheets.
The following tables show the effect of the company’s derivative instruments designated as cash-flow hedges for the three-month periods ended October 27, 2013 and October 28, 2012, in other comprehensive income (loss) (OCI) and the Consolidated Statements of Earnings:
Derivatives Designated as Cash-Flow Hedges
  
 
 
Total
Cash-Flow
Hedge
OCI Activity
Three Months Ended October 27, 2013, and October 28, 2012
 
 
2014
 
2013
OCI derivative gain (loss) at beginning of year
 
 
$
8

 
$
(16
)
Effective portion of changes in fair value recognized in OCI:
 
 
 
 
 
Foreign exchange forward contracts
 
 
1

 
—

Forward starting interest rate swaps
 
 
(4
)
 
—

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

 
1

OCI derivative gain (loss) at end of quarter
 
 
$
5

 
$
(16
)

20





Based on current valuations, the amount expected to be reclassified from OCI into earnings within the next 12 months is a loss of $1. The ineffective portion and amount excluded from effectiveness testing were not material.
The following table shows the effect of the company’s derivative instruments designated as fair-value hedges in the Consolidated Statements of Earnings:
 
 
 
 
Amount of
Gain (Loss)
Recognized in Earnings
on Derivatives
 
Amount of
Gain (Loss)
Recognized in Earnings
on Hedged Item
Derivatives Designated
as Fair-Value Hedges
 
Location of Gain (Loss)
Recognized in Earnings
 
October 27,
2013
 
October 28,
2012
 
October 27,
2013
 
October 28,
2012
Three Months Ended
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest expense
 
$
(1
)
 
$
(4
)
 
$
1

 
$
4

The following table shows the effects of the company’s derivative instruments not designated as hedges in the Consolidated Statements of Earnings:
 
 
 
 
Amount of
Gain (Loss)
Recognized in Earnings
on Derivatives
 
 
 
 
Three Months Ended
Derivatives not Designated as Hedges
 
Location of Gain (Loss)
Recognized in Earnings
 
October 27,
2013
 
October 28,
2012
Foreign exchange forward contracts
 
Cost of products sold
 
$
2

 
$
—

Foreign exchange forward contracts
 
Other expenses/income
 
(14
)
 
—

Cross-currency swap contracts
 
Other expenses/income
 
(3
)
 
(8
)
Commodity derivative contracts
 
Cost of products sold
 
(2
)
 
—

Deferred compensation derivative contracts
 
Administrative expenses
 
(1
)
 
2

Total
 
 
 
$
(18
)
 
$
(6
)

13.
Fair Value Measurements
Financial assets and liabilities are categorized 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 the company's 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, the company uses unadjusted quoted market prices to measure the fair value and classifies such items as Level 1. If quoted market prices are not available, the company bases 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.

21





Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the company’s financial assets and liabilities that are measured at fair value on a recurring basis as of October 27, 2013, and July 28, 2013, consistent with the fair value hierarchy:
 
 
Fair Value
as of
October 27,
2013
 
Fair Value Measurements at
October 27, 2013 Using
Fair Value Hierarchy
 
Fair Value
as of
July 28,
2013
 
Fair Value Measurements at
July 28, 2013 Using
Fair Value Hierarchy
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps(1)
$
—

 
$
—

 
$
—

 
$
—

 
$
1

 
$
—

 
$
1

 
$
—

Forward starting interest rate swaps(1)
19

 
—

 
19

 
—

 
23

 
—

 
23

 
—

Foreign exchange forward contracts(2)
3

 
—

 
3

 
—

 
4

 
—

 
4

 
—

Cross-currency swap contracts(3)
3

 
—

 
3

 
—

 
—

 
—

 
—

 
—

Commodity derivative contracts(4)
2

 
2

 
—

 
—

 
2

 
2

 
—

 
—

Deferred compensation derivative contracts(5)
2

 
—

 
2

 
—

 
2

 
—

 
2

 
—

Total assets at fair value
$
29

 
$
2

 
$
27

 
$
—

 
$
32

 
$
2

 
$
30

 
$
—


 
Fair Value
as of
October 27,
2013
 
Fair Value Measurements at
October 27, 2013 Using
Fair Value Hierarchy
 
Fair Value
as of
July 28,
2013
 
Fair Value Measurements at
July 28, 2013 Using
Fair Value Hierarchy
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts(2)
$
19

 
$
—

 
$
19

 
$
—

 
$
6

 
$
—

 
$
6

 
$
—

Cross-currency swap contracts(3)
6

 
—

 
6

 
—

 
24

 
—

 
24

 
—

Commodity derivative contracts(4)
4

 
4

 
—

 
—

 
6

 
5

 
1

 
—

Deferred compensation obligation(6)
127

 
127

 
—

 
—

 
123

 
123

 
—

 
—

Total liabilities at fair value
$
156

 
$
131

 
$
25

 
$
—

 
$
159

 
$
128

 
$
31

 
$
—

___________________________________ 
(1) 
Based on LIBOR swap rates.
(2) 
Based on observable market transactions of spot currency rates and forward rates.
(3) 
Based on observable local benchmarks for currency and interest rates.
(4) 
Based on quoted futures exchanges and on observable prices of futures and options transactions in the marketplace.
(5) 
Based on LIBOR and equity index swap rates.
(6) 
Based on the fair value of the participants’ investments.

22