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
January 28, 2018
 
 
 
1-3822

logo.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 Data 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, a 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 300,633,988 shares of capital stock outstanding as of February 28, 2018.








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
 
Six Months Ended
 
January 28,
2018
 
January 29,
2017
 
January 28,
2018
 
January 29,
2017
Net sales
$
2,180

 
$
2,171

 
$
4,341

 
$
4,373

Costs and expenses
 
 
 
 
 
 
 
Cost of products sold
1,414

 
1,360

 
2,792

 
2,711

Marketing and selling expenses
228

 
240

 
447

 
470

Administrative expenses
165

 
141

 
314

 
266

Research and development expenses
27

 
25

 
57

 
52

Other expenses / (income)
70

 
201

 
41

 
212

Restructuring charges
33

 
(1
)
 
35

 

Total costs and expenses
1,937

 
1,966

 
3,686

 
3,711

Earnings before interest and taxes
243

 
205

 
655

 
662

Interest expense
32

 
29

 
63

 
58

Interest income

 
1

 
1

 
2

Earnings before taxes
211

 
177

 
593

 
606

Taxes on earnings
(74
)
 
76

 
33

 
213

Net earnings
285

 
101

 
560

 
393

Less: Net earnings (loss) attributable to noncontrolling interests

 

 

 

Net earnings attributable to Campbell Soup Company
$
285

 
$
101

 
$
560

 
$
393

Per Share — Basic
 
 
 
 
 
 
 
Net earnings attributable to Campbell Soup Company
$
.95

 
$
.33

 
$
1.86

 
$
1.28

Dividends
$
.35

 
$
.35

 
$
.70

 
$
.70

Weighted average shares outstanding — basic
301

 
306

 
301

 
307

Per Share — Assuming Dilution
 
 
 
 
 
 
 
Net earnings attributable to Campbell Soup Company
$
.95

 
$
.33

 
$
1.85

 
$
1.27

Weighted average shares outstanding — assuming dilution
301

 
309

 
302

 
309

See accompanying Notes to Consolidated Financial Statements.



3






CAMPBELL SOUP COMPANY
Consolidated Statements of Comprehensive Income
(unaudited)
(millions)
 
Three Months Ended
 
January 28, 2018
 
January 29, 2017
 
Pre-tax amount
 
Tax (expense) benefit
 
After-tax amount
 
Pre-tax amount
 
Tax (expense) benefit
 
After-tax amount
Net earnings
 
 
 
 
$
285

 
 
 
 
 
$
101

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
66

 
$

 
66

 
$
(16
)
 
$

 
(16
)
Cash-flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
2

 
(2
)
 

 
17

 
(6
)
 
11

Reclassification adjustment for (gains) losses included in net earnings
3

 

 
3

 
5

 
(2
)
 
3

Pension and other postretirement benefits:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost arising during the period
(3
)
 
1

 
(2
)
 

 

 

Reclassification of prior service credit included in net earnings
(6
)
 
2

 
(4
)
 
(7
)
 
3

 
(4
)
Other comprehensive income (loss)
$
62

 
$
1

 
63

 
$
(1
)
 
$
(5
)
 
(6
)
Total comprehensive income (loss)
 
 
 
 
$
348

 
 
 
 
 
$
95

Total comprehensive income (loss) attributable to noncontrolling interests
 
 
 
 
(1
)
 
 
 
 
 

Total comprehensive income (loss) attributable to Campbell Soup Company
 
 
 
 
$
349

 
 
 
 
 
$
95

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
January 28, 2018
 
January 29, 2017
 
Pre-tax amount
 
Tax (expense) benefit
 
After-tax amount
 
Pre-tax amount
 
Tax (expense) benefit
 
After-tax amount
Net earnings
 
 
 
 
$
560

 
 
 
 
 
$
393

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
34

 
$

 
34

 
$
(24
)
 
$

 
(24
)
Cash-flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
11

 
(4
)
 
7

 
30

 
(11
)
 
19

Reclassification adjustment for (gains) losses included in net earnings
1

 

 
1

 
7

 
(2
)
 
5

Pension and other postretirement benefits:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost arising during the period
(3
)
 
1

 
(2
)
 

 

 

Reclassification of prior service credit included in net earnings
(13
)
 
4

 
(9
)
 
(13
)
 
5

 
(8
)
Other comprehensive income (loss)
$
30

 
$
1

 
31

 
$

 
$
(8
)
 
(8
)
Total comprehensive income (loss)
 
 
 
 
$
591

 
 
 
 
 
$
385

Total comprehensive income (loss) attributable to noncontrolling interests
 
 
 
 
(1
)
 
 
 
 
 
1

Total comprehensive income (loss) attributable to Campbell Soup Company
 
 
 
 
$
592

 
 
 
 
 
$
384

See accompanying Notes to Consolidated Financial Statements.

4






CAMPBELL SOUP COMPANY
Consolidated Balance Sheets
(unaudited)
(millions, except per share amounts)
 
January 28,
2018
 
July 30,
2017
Current assets
 
 
 
Cash and cash equivalents
$
196

 
$
319

Accounts receivable, net
738

 
605

Inventories
869

 
902

Other current assets
125

 
74

Total current assets
1,928

 
1,900

Plant assets, net of depreciation
2,518

 
2,454

Goodwill
2,259

 
2,115

Other intangible assets, net of amortization
1,485

 
1,118

Other assets ($70 as of 2018 and $51 as of 2017 attributable to variable interest entity)
146

 
139

Total assets
$
8,336

 
$
7,726

Current liabilities
 
 
 
Short-term borrowings
$
1,659

 
$
1,037

Payable to suppliers and others
707

 
666

Accrued liabilities
523

 
561

Dividends payable
106

 
111

Accrued income taxes
17

 
20

Total current liabilities
3,012

 
2,395

Long-term debt
2,247

 
2,499

Deferred taxes
383

 
490

Other liabilities
745

 
697

Total liabilities
6,387

 
6,081

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
321

 
359

Earnings retained in the business
2,734

 
2,385

Capital stock in treasury, at cost
(1,104
)
 
(1,066
)
Accumulated other comprehensive loss
(21
)
 
(53
)
Total Campbell Soup Company shareholders' equity
1,942

 
1,637

Noncontrolling interests
7

 
8

Total equity
1,949

 
1,645

Total liabilities and equity
$
8,336

 
$
7,726

See accompanying Notes to Consolidated Financial Statements.


5






CAMPBELL SOUP COMPANY
Consolidated Statements of Cash Flows
(unaudited)
(millions)
 
Six Months Ended
 
January 28,
2018
 
January 29,
2017
Cash flows from operating activities:
 
 
 
Net earnings
$
560

 
$
393

Adjustments to reconcile net earnings to operating cash flow
 
 
 
Impairment charges
75

 
212

Restructuring charges
35

 

Stock-based compensation
32

 
32

Noncurrent income taxes
52

 

Pension and postretirement benefit income
(32
)
 
(23
)
Depreciation and amortization
161

 
154

Deferred income taxes
(106
)
 

Other, net
18

 
6

Changes in working capital, net of acquisition
 
 
 
Accounts receivable
(113
)
 
(95
)
Inventories
84

 
117

Prepaid assets
(25
)
 
(9
)
Accounts payable and accrued liabilities
(10
)
 
(100
)
Net receipts from (payments of) hedging activities
(31
)
 
1

Other
(40
)
 
(21
)
Net cash provided by operating activities
660

 
667

Cash flows from investing activities:
 
 
 
Purchases of plant assets
(132
)
 
(119
)
Business acquired, net of cash acquired
(682
)
 

Other, net
(11
)
 
(13
)
Net cash used in investing activities
(825
)
 
(132
)
Cash flows from financing activities:
 
 
 
Net short-term borrowings
379

 
2

Long-term repayments
(16
)
 
(61
)
Dividends paid
(216
)
 
(207
)
Treasury stock purchases
(86
)
 
(234
)
Treasury stock issuances

 
2

Payments related to tax withholding for stock-based compensation
(23
)
 
(20
)
Net cash provided by (used in) financing activities
38

 
(518
)
Effect of exchange rate changes on cash
4

 
(4
)
Net change in cash and cash equivalents
(123
)
 
13

Cash and cash equivalents — beginning of period
319

 
296

Cash and cash equivalents — end of period
$
196

 
$
309

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 31, 2016
323

 
$
12

 
(15
)
 
$
(664
)
 
$
354

 
$
1,927

 
$
(104
)
 
$
8

 
$
1,533

Net earnings (loss)

 

 

 

 

 
393

 

 

 
393

Other comprehensive income (loss)

 

 

 

 

 

 
(9
)
 
1

 
(8
)
Dividends ($.70 per share)

 

 

 

 

 
(218
)
 

 

 
(218
)
Treasury stock purchased

 

 
(4
)
 
(234
)
 

 

 

 

 
(234
)
Treasury stock issued under management incentive and stock option plans
 
 
 
 
1

 
33

 
(20
)
 
 
 
 
 
 
 
13

Balance at January 29, 2017
323

 
$
12

 
(18
)
 
$
(865
)
 
$
334

 
$
2,102

 
$
(113
)
 
$
9

 
$
1,479

Balance at July 30, 2017
323

 
$
12

 
(22
)
 
$
(1,066
)
 
$
359

 
$
2,385

 
$
(53
)
 
$
8

 
$
1,645

Net earnings (loss)

 

 

 

 

 
560

 

 

 
560

Other comprehensive income (loss)

 

 

 

 

 

 
32

 
(1
)
 
31

Dividends ($.70 per share)

 

 

 

 

 
(211
)
 

 

 
(211
)
Treasury stock purchased

 

 
(2
)
 
(86
)
 

 

 

 

 
(86
)
Treasury stock issued under management incentive and stock option plans


 


 
2

 
48

 
(38
)
 


 


 

 
10

Balance at January 28, 2018
323

 
$
12

 
(22
)
 
$
(1,104
)
 
$
321

 
$
2,734

 
$
(21
)
 
$
7

 
$
1,949

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 statement of the results of operations, financial position, and cash flows for the indicated periods. The accounting policies we used in preparing these financial statements are substantially consistent with those we applied in our Annual Report on Form 10-K for the year ended July 30, 2017, except as described in Note 2.
The results for the period are not necessarily indicative of the results to be expected for other interim periods or the full year. Our fiscal year ends on the Sunday nearest July 31.
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. We will adopt the new guidance in 2019.
In January 2016, the FASB issued guidance that amends the recognition and measurement of financial instruments. The changes primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. Under the new guidance, equity investments in unconsolidated entities that are not accounted for under the equity method will generally be measured at fair value through earnings. When the fair value option has been elected for financial liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.
In February 2016, the FASB issued guidance that amends accounting for leases. Under the new guidance, a lessee will recognize assets and liabilities for most leases but will recognize expenses similar to current lease accounting. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The new guidance must be adopted using a modified retrospective transition, and provides for certain practical expedients. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.
In August 2016, the FASB issued guidance on the classification of certain cash receipts and payments in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. The guidance must be applied retrospectively to all periods presented but may be applied prospectively if retrospective application would be impracticable. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.
In October 2016, the FASB issued guidance on tax accounting for intra-entity asset transfers. Under current guidance, the tax effects of intra-entity asset transfers (intercompany sales) are deferred until the transferred asset is sold to a third party or otherwise recognized. The new guidance requires companies to account for the income tax effects on intercompany transfers of assets other than inventory when the transfer occurs. The new guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted in the first interim period of a fiscal year. The modified retrospective approach is required upon adoption, with a cumulative-effect adjustment recorded in retained earnings as of the beginning of the period of adoption. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.

8






In January 2017, the FASB issued guidance that revises the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set of transferred assets and activities is not a business. If it is not met, the entity then evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. We will prospectively apply the guidance to applicable transactions.
In March 2017, the FASB issued guidance that changes the presentation of net periodic pension cost and net periodic postretirement benefit cost. Under the revised guidance, the service cost component of benefit cost is classified in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost (such as interest expense, return on assets, amortization of prior service credit, actuarial gains and losses, settlements and curtailments) are required to be presented in the income statement separately from the service cost component. The guidance also allows only the service cost component to be eligible for capitalization when applicable (for example, as a cost of internally manufactured inventory). The guidance should be applied retrospectively for the presentation of the service cost component and the other components of benefit cost in the income statement, and applied prospectively on and after the effective date for the capitalization of the service cost component. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. We elected to early adopt the guidance in the first quarter of 2018. The retrospective impact of presenting net periodic benefit cost in accordance with the new guidance is as follows:
 
 
Three Months Ended
 
Six Months Ended
 Increase / (decrease) in expense
 
January 29,
2017
 
January 29,
2017
Cost of products sold
 
$
14

 
$
4

Marketing and selling expenses
 
$
3

 
$
5

Administrative expenses
 
$
2

 
$
4

Research and development expenses
 
$

 
$
1

Other expenses / (income)
 
$
(19
)
 
$
(14
)
In May 2017, the FASB issued guidance that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under the new guidance, modification accounting is required only if the value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The guidance is effective prospectively for fiscal years beginning after December 15, 2017. Early adoption is permitted. We will apply the guidance in evaluating future changes to terms or conditions of share-based payment awards.
In August 2017, the FASB issued guidance that amends hedge accounting. Under the new guidance, more hedging strategies will be eligible for hedge accounting and the application of hedge accounting is simplified. The new guidance amends presentation and disclosure requirements, and how effectiveness is assessed. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.
In February 2018, the FASB issued guidance that provides entities an option to reclassify the tax effects of the Tax Cuts and Jobs Act of 2017 on items within accumulated other comprehensive income to retained earnings. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those years. Entities are able to early adopt the guidance in any interim or annual period for which financial statements have not yet been issued and apply it either in the period of adoption or retrospectively to each period in which the tax effects of the Tax Cuts and Jobs Act of 2017 related to items in accumulated other comprehensive income are recognized. New disclosures are required regardless of whether an entity elects to reclassify the tax effects. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.
3.
Acquisitions
On December 18, 2017, we entered into an agreement to acquire Snyder's-Lance, Inc. (Snyder's-Lance) for $50.00 per share. The closing of the transaction is subject to customary closing conditions and termination rights, including the approval of Snyder's-Lance shareholders. We expect to finance the acquisition through $6,200 of debt, which includes the payoff of Snyder's-Lance indebtedness. We are a party to a bridge facility commitment letter with a group of lenders, which initially provided up to $6,200 under a 364-day senior unsecured bridge term loan credit facility. On December 29, 2017, we entered into a single draw, unsecured, senior term loan facility equal to $1,200 to finance a portion of the Snyder’s-Lance acquisition and reduce the commitment under the bridge facility commitment letter to $5,000. Debt issued under the term loan facility has a maturity date of three years from the initial funding date and will bear interest at the rates specified in the term loan facility, which vary based on the type of loan and certain other customary conditions. The term loan facility contains customary covenants and events of default for credit

9






facilities of this type. We plan to replace or refinance the remaining $5,000 under the bridge loan facility through an offering of senior unsecured notes. In the three-month period ended January 28, 2018, we recognized transaction costs of $24 associated with the pending acquisition. These costs were recorded in Other expenses / (income).
On December 12, 2017, we completed the acquisition of Pacific Foods of Oregon, LLC (Pacific Foods) for $689, subject to customary post-closing adjustments. Pacific Foods produces broth, soups, non-dairy beverages and other simple meals. The excess of the purchase price over the estimated fair values of identifiable net assets was recorded as $202 of goodwill. The goodwill is expected to be deductible for tax purposes. The goodwill was primarily attributable to future growth opportunities, anticipated synergies, and intangible assets that did not qualify for separate recognition. The goodwill is included in the Americas Simple Meals and Beverages segment.
For the three-month period ended January 28, 2018, the contribution of the Pacific Foods acquisition to Net sales was $28. The contribution to Net earnings was not material.
The acquired assets and assumed liabilities include the following:
 
 
Pacific Foods
Cash
 
$
7

Accounts receivable
 
16

Inventories
 
50

Other current assets
 
1

Plant assets
 
78

Goodwill
 
202

Other intangible assets
 
366

Accounts payable
 
(25
)
Accrued liabilities
 
(6
)
Total assets acquired and liabilities assumed
 
$
689

The identifiable intangible assets of Pacific Foods consist of $280 in non-amortizable trademarks, and $86 in customer relationships to be amortized over 20 years.
The purchase price allocation is preliminary and is subject to the finalization of appraisals, which will be completed in 2018.
The following unaudited summary information is presented on a consolidated pro forma basis as if the Pacific Foods acquisition had occurred on August 1, 2016:
 
Three Months Ended
 
Six Months Ended
 
January 28,
2018
 
January 29,
2017
 
January 28,
2018
 
January 29,
2017
Net sales
$
2,210

 
$
2,234

 
$
4,449

 
$
4,506

Net earnings attributable to Campbell Soup Company
$
285

 
$
102

 
$
563

 
$
394

Net earnings per share attributable to Campbell Soup Company - assuming dilution
$
0.95

 
$
0.33

 
$
1.86

 
$
1.28

The pro forma amounts include additional interest expense on the debt issued to finance the purchase, amortization and depreciation expense based on the estimated fair value and useful lives of intangible assets and plant assets, and related tax effects. The pro forma results are not necessarily indicative of the combined results had the Pacific Foods acquisition been completed on August 1, 2016, nor are they indicative of future combined results.

10






4.
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
 
(25
)
 
19

 

 
(6
)
Amounts reclassified from accumulated other comprehensive income (loss)
 

 
5

 
(8
)
 
(3
)
Net current-period other comprehensive income (loss)
 
(25
)
 
24

 
(8
)
 
(9
)
Balance at January 29, 2017
 
$
(149
)
 
$
(17
)
 
$
53

 
$
(113
)
Balance at July 30, 2017
 
$
(84
)
 
$
(22
)
 
$
53

 
$
(53
)
Other comprehensive income (loss) before reclassifications
 
35

 
7

 
(2
)
 
40

Amounts reclassified from accumulated other comprehensive income (loss)
 

 
1

 
(9
)
 
(8
)
Net current-period other comprehensive income (loss)
 
35

 
8

 
(11
)
 
32

Balance at January 28, 2018
 
$
(49
)
 
$
(14
)
 
$
42

 
$
(21
)
_____________________________________
(1) 
Included a tax expense of $6 as of January 28, 2018, July 30, 2017, January 29, 2017, and July 31, 2016.
(2) 
Included a tax benefit of $8 as of January 28, 2018, $12 as of July 30, 2017, $10 as of January 29, 2017, and $23 as of July 31, 2016.
(3) 
Included a tax expense of $25 as of January 28, 2018, $30 as of July 30, 2017, and January 29, 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
 
Six Months Ended
 
 
Details about Accumulated Other Comprehensive Income (Loss) Components
 
January 28, 2018
 
January 29, 2017
 
January 28, 2018
 
January 29, 2017
 
Location of (Gain) Loss Recognized in Earnings
(Gains) losses on cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
2

 
$
3

 
$

 
$
4

 
Cost of products sold
Foreign exchange forward contracts
 

 
1

 

 
1

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

 
1

 
1

 
2

 
Interest expense
Total before tax
 
3

 
5

 
1

 
7

 
 
Tax expense (benefit)
 

 
(2
)
 

 
(2
)
 
 
(Gain) loss, net of tax
 
$
3

 
$
3

 
$
1

 
$
5

 
 
 
 
 
 
 
 
 
 
 
 
 
Pension and postretirement benefit adjustments:
 
 
 
 
 
 
 
 
 
 
Prior service credit
 
$
(6
)
 
$
(7
)
 
$
(13
)
 
$
(13
)
 
Other expenses / (income)
Tax expense (benefit)
 
2

 
3

 
4

 
5

 
 
(Gain) loss, net of tax
 
$
(4
)
 
$
(4
)
 
$
(9
)
 
$
(8
)
 
 

11






5.
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
Net balance at July 30, 2017(1)
$
780

 
$
795

 
$
540

 
$
2,115

Acquisition
202

 

 

 
202

Impairment charges

 

 
(75
)
 
(75
)
Foreign currency translation adjustment

 
17

 

 
17

Net balance at January 28, 2018(1)
$
982

 
$
812

 
$
465

 
$
2,259

_____________________________________
(1) 
The Campbell Fresh segment includes accumulated impairment charges of $372 as of January 28, 2018, and $297 as of July 30, 2017 related to the Bolthouse Farms carrot and carrot ingredients reporting unit and the Garden Fresh Gourmet reporting unit.
In 2018, we acquired Pacific Foods for $689 and goodwill related to the acquisition was $202. See Note 3 for additional information.
During the second quarter of 2018, we performed an interim impairment assessment as of December 31, 2017, on the intangible assets of the Bolthouse Farms carrot and carrot ingredients reporting unit as operating performance was below expectations. The business was impacted by adverse weather conditions and the implementation of enhanced quality protocols, which impacted crop yields and resulted in higher costs. This cost volatility continued to be higher than expected and caused us to reassess our short- and long-term margin expectations for this business. Based on recent performance, we reduced our outlook for future operating margins and discounted cash flows, which resulted in a $75 impairment charge, representing a write-down of all of the remaining goodwill in the reporting unit.
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
 
January 28,
2018
 
July 30,
2017
Amortizable intangible assets
 
 
 
 
Customer relationships
 
$
311

 
$
223

Technology
 
40

 
40

Other
 
35

 
35

Total gross amortizable intangible assets
 
$
386

 
$
298

Accumulated amortization
 
(101
)
 
(92
)
Total net amortizable intangible assets
 
$
285

 
$
206

Non-amortizable intangible assets
 
 
 
 
Trademarks
 
1,200

 
912

Total net intangible assets
 
$
1,485

 
$
1,118

Non-amortizable intangible assets consist of trademarks, which include Bolthouse Farms, Pace, Pacific Foods, Plum, Kjeldsens, Garden Fresh Gourmet and Royal Dansk. Other amortizable intangible assets consist of recipes, patents, trademarks and distributor relationships.
Amortization of intangible assets was $8 and $10 for the six-month periods ended January 28, 2018, and January 29, 2017, respectively. Amortization expense for the next 5 years is estimated to be $18 in 2018, $20 in 2019 through 2021, and $19 in 2022. Asset useful lives range from 5 to 20 years.
Due to the factors described above regarding the Bolthouse Farms carrot and carrot ingredients reporting unit, we performed an interim impairment assessment on the trademark in the reporting unit. The fair value of the trademark exceeded the carrying value, which was $48, as of December 31, 2017.

12






6.
Segment Information
We manage our businesses in three segments focused mainly on product categories. The segments are as follows:
Americas Simple Meals and Beverages segment includes the retail and food service businesses in the U.S. and Canada. The segment includes the following products: Campbell’s condensed and ready-to-serve soups; Swanson broth and stocks; Prego pasta sauces; Pace Mexican sauces; Campbell’s gravies, pasta, beans and dinner sauces; Swanson canned poultry; Plum food and snacks; V8 juices and beverages; Campbell’s tomato juice; and as of December 12, 2017, Pacific Foods broth, soups, non-dairy beverages and other simple meals;
Global Biscuits and Snacks segment includes Pepperidge Farm cookies, crackers, bakery and frozen products in U.S. retail, Arnott’s biscuits in Australia and Asia Pacific, and Kelsen cookies globally. The segment also includes the simple meals and shelf-stable beverages business in Australia and Asia Pacific, and beginning in 2018, the business in Latin America; and
Campbell Fresh segment includes Bolthouse Farms fresh carrots, carrot ingredients, refrigerated beverages and refrigerated salad dressings, Garden Fresh Gourmet salsa, hummus, dips and tortilla chips, and the U.S. refrigerated soup business.
Prior to 2018, the business in Latin America was managed as part of the Americas Simple Meals and Beverages segment. Segment results have been adjusted retrospectively to reflect this change.
We evaluate segment performance before interest, taxes and costs associated with restructuring activities. Unrealized gains and losses on commodity hedging activities are excluded from segment operating earnings and are recorded in Corporate as these open positions represent hedges of future purchases. Upon closing of the contracts, the realized gain or loss is transferred to segment operating earnings, which allows the segments to reflect the economic effects of the hedge without exposure to quarterly volatility of unrealized gains and losses. Only the service cost component of pension and postretirement expense is allocated to segments. All other components of expense, including interest cost, expected return on assets, amortization of prior service credits and recognized actuarial gains and losses are reflected in Corporate and not included in segment operating results. Asset information by segment is not discretely maintained for internal reporting or used in evaluating performance.
 
 
Three Months Ended
 
Six Months Ended
 
 
January 28,
2018
 
January 29,
2017
 
January 28,
2018
 
January 29,
2017
Net sales
 
 
 
 
 
 
 
 
Americas Simple Meals and Beverages
 
$
1,196

 
$
1,215

 
$
2,414

 
$
2,493

Global Biscuits and Snacks
 
726

 
696

 
1,435

 
1,386

Campbell Fresh
 
257

 
260

 
491

 
494

Corporate
 
1

 

 
1

 

Total
 
$
2,180

 
$
2,171

 
$
4,341

 
$
4,373

 
 
Three Months Ended
 
Six Months Ended
 
 
January 28,
2018
 
January 29,
2017
 
January 28,
2018
 
January 29,
2017
Earnings before interest and taxes
 
 
 
 
 
 
 
 
Americas Simple Meals and Beverages
 
$
282

 
$
311

 
$
610

 
$
691

Global Biscuits and Snacks
 
139

 
137

 
259

 
252

Campbell Fresh
 
(11
)
 
(3
)
 
(17
)
 
(2
)
Corporate(1)
 
(134
)
 
(241
)
 
(162
)
 
(279
)
Restructuring charges(2)
 
(33
)
 
1

 
(35
)
 

Total
 
$
243

 
$
205

 
$
655

 
$
662

_______________________________________
(1) 
Represents unallocated items. Pension and postretirement benefit mark-to-market adjustments are included in Corporate. There were gains of $14 in the six-month period ended January 28, 2018, and losses of $20 in the six-month period ended January 29, 2017. Costs related to the implementation of our new organizational structure and cost savings initiatives were $27 in the three-month period ended January 28, 2018, and $44 and $11 in the six-month periods ended January 28, 2018, and January 29, 2017, respectively. Transaction costs of $24 associated with the pending acquisition of Snyder's-Lance were in the three- and six-month periods ended January 28, 2018. Impairment charge of $75 on the intangible assets of the Bolthouse

13






Farms carrot and carrot ingredients reporting unit was included in the three- and six-month periods ended January 28, 2018, and 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 three- and six-month periods ended January 29, 2017.
(2) 
See Note 7 for additional information.
Our global net sales based on product categories are as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
January 28,
2018
 
January 29,
2017
 
January 28,
2018
 
January 29,
2017
Net sales
 
 
 
 
 
 
 
 
Soup
 
$
814

 
$
831

 
$
1,621

 
$
1,694

Baked snacks
 
690

 
661

 
1,367

 
1,314

Other simple meals
 
434

 
436

 
869

 
865

Beverages
 
241

 
243

 
483

 
500

Other
 
1

 

 
1

 

Total
 
$
2,180

 
$
2,171

 
$
4,341

 
$
4,373

Soup includes various soup, broths and stock products. Baked snacks include cookies, crackers, biscuits and other baked products. Other simple meals include sauces, carrot products, refrigerated salad dressings, refrigerated salsa, hummus, dips and Plum foods and snacks.
7.
Restructuring Charges and Cost Savings Initiatives
2015 Initiatives
On January 29, 2015, we announced plans to implement a new enterprise design focused mainly on product categories. Under the new structure, which we fully implemented at the beginning of 2016, our businesses are organized in the following divisions: Americas Simple Meals and Beverages, Global Biscuits and Snacks, and Campbell Fresh.
In support of the new structure, we designed and implemented a global shared services organization. We also streamlined our organizational structure, implemented an initiative to reduce overhead across the organization and are pursuing other initiatives to reduce costs and increase effectiveness. As part of these initiatives, we commenced a voluntary employee separation program available to certain U.S.-based salaried employees nearing retirement who met age, length-of-service and business unit/function criteria. A total of 471 employees elected the program. The electing employees remained with us through at least July 31, 2015, with some remaining beyond that date.
In February 2017, we announced that we were 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 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 continuing to be developed. In January 2018, as part of the expanded initiatives, we authorized additional pre-tax costs to improve the operational efficiency of our thermal supply chain network in North America by closing our manufacturing facility in Toronto, Ontario, and to optimize our information technology infrastructure by migrating certain applications to the latest cloud technology platform.
A summary of the restructuring charges we recorded and charges incurred in Administrative expenses and Cost of products sold related to the implementation of the new organizational structure and costs savings initiatives is as follows:
 
Three Months Ended
 
Six Months Ended
 
Year Ended
 
January 28, 2018
 
January 29, 2017
 
January 28, 2018
 
January 29, 2017
 
July 30, 2017
 
July 31, 2016
 
August 2, 2015
Restructuring charges
$
33

 
$
(1
)
 
$
35

 
$

 
$
18

 
$
35

 
$
102

Administrative expenses
26

 
3

 
38

 
11

 
36

 
47

 
22

Cost of products sold
1

 

 
6

 

 
4

 

 

Total pre-tax charges
$
60

 
$
2

 
$
79

 
$
11

 
$
58

 
$
82

 
$
124


14






A summary of the pre-tax costs associated with the initiatives is as follows:
 
Recognized as of
January 28, 2018
Severance pay and benefits
$
167

Asset impairment/accelerated depreciation
19

Implementation costs and other related costs
157

Total
$
343

The total estimated pre-tax costs for actions that have been identified are approximately $515 to $560. We expect to incur substantially all of the costs through 2019. This estimate will be updated as costs for the expanded initiatives are developed.
We expect the costs for actions that have been identified to date to consist of the following: approximately $170 in severance pay and benefits; approximately $85 in asset impairment and accelerated depreciation; and approximately $260 to $305 in implementation costs and other related costs. We expect these pre-tax costs to be associated with our segments as follows: Americas Simple Meals and Beverages - approximately 39%; Global Biscuits and Snacks - approximately 30%; Campbell Fresh - approximately 3%; and Corporate - approximately 28%.
Of the aggregate $515 to $560 of pre-tax costs identified to date, we expect approximately $415 to $460 will be cash expenditures. In addition, we expect to invest approximately $250 in capital expenditures through 2020 primarily related to the U.S. warehouse optimization project, transition of production of the Toronto manufacturing facility to our U.S. thermal plants, insourcing of manufacturing for certain simple meal products and optimization of information technology infrastructure and applications, of which we invested approximately $37 as of January 28, 2018.
A summary of the restructuring activity and related reserves associated with the initiatives at January 28, 2018, is as follows:
 
 
Severance Pay and Benefits
 
Non-Cash Benefits(3)
 
Implementation Costs and Other Related Costs(4)
 
Asset Impairment/Accelerated Depreciation
 
Other Non-Cash Exit Costs(5)
 
Total Charges
Accrued balance at July 30, 2017(1)
 
$
26

 
 
 
 
 
 
 
 
 
 
     2018 charges
 
30

 
2

 
37

 
7

 
3

 
$
79

     2018 cash payments
 
(18
)
 
 
 
 
 
 
 
 
 
 
Accrued balance at January 28, 2018(2)
 
$
38

 
 
 
 
 
 
 
 
 
 
_______________________________________
(1)  
Includes $2 of severance pay and benefits recorded in Other liabilities in the Consolidated Balance Sheet.
(2) 
Includes $27 of severance pay and benefits recorded in Other liabilities in the Consolidated Balance Sheet.
(3) 
Represents pension termination benefits. See Note 10.
(4)  
Includes other costs recognized as incurred that are not reflected in the restructuring reserve in the Consolidated Balance Sheet. The costs are included in Administrative expenses and Cost of products sold in the Consolidated Statements of Earnings.
(5) 
Includes non-cash costs that are not reflected in the restructuring reserve in the Consolidated Balance Sheet.
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:
 
January 28, 2018
 
Three Months Ended
 
Six Months Ended
 
Costs Incurred to Date
Americas Simple Meals and Beverages
$
33

 
$
40

 
$
132

Global Biscuits and Snacks
21

 
27

 
105

Campbell Fresh
2

 
3

 
9

Corporate
4

 
9

 
97

Total
$
60

 
$
79

 
$
343


15






8.
Earnings per Share (EPS)
For the periods presented in the Consolidated Statements of Earnings, the calculations of basic EPS and EPS assuming dilution vary in that the weighted average shares outstanding assuming dilution include the incremental effect of stock options and other share-based payment awards, except when such effect would be antidilutive. The earnings per share calculation for the three-month period ended January 28, 2018, excludes approximately 2 million stock options that would have been antidilutive. The earnings per share calculation for the six-month period ended January 28, 2018, excludes approximately 1 million stock options that would have been antidilutive. The earnings per share calculation for the three- and six-month periods ended January 29, 2017, excludes less than 1 million stock options that would have been antidilutive.
9.
Taxes on Earnings
The Tax Cuts and Jobs Act of 2017 (the Act) was enacted into law on December 22, 2017, and made significant changes to corporate taxation. Changes under the Act include:
Reducing the federal corporate tax rate from 35% to 21% effective January 1, 2018;
Eliminating the deduction for domestic manufacturing activities, which impacts us beginning in 2019;
Repealing the exception for deductibility of performance-based compensation to covered employees, which impacts us beginning in 2019, along with expanding the number of covered employees;
Transitioning to a territorial system for taxation on foreign earnings along with the imposition of a transition tax in 2018 on the deemed repatriation of unremitted foreign earnings;
Limiting the deductibility of interest expense to 30% of adjusted taxable income, which is effective for us beginning in 2019 ;
Immediate expensing of machinery and equipment placed into service after September 27, 2017; and
Changes to the taxation of multinational companies, including a new minimum tax on Global Intangible Low-Taxed Income, a new Base Erosion Anti-Abuse Tax, and a new U.S. corporate deduction for Foreign-Derived Intangible Income, all of which are effective for us beginning in 2019.
The U.S. Securities and Exchange Commission recently released Staff Accounting Bulletin (SAB) 118, which allows for a measurement period while a company obtains, prepares, and analyzes the information necessary to finalize its accounting for the effects of the Act. Specifically, SAB 118 details a three-step process that should apply to each reporting period:
First, report the effects of the Act for which the accounting is complete;
Second, report provisional amounts for which the accounting is not complete, but a reasonable estimate can be determined; and
Third, do not report a provisional amount for which a reasonable estimate cannot be made.
Based on the Act and SAB 118, the following items are reflected in this quarter:
The corporate rate reduction as of January 1, 2018, resulted in a blended U.S. statutory tax rate of approximately 27%;
Remeasurement of deferred tax assets and liabilities resulted in a tax benefit of $183; and
Imposition of a transition tax on unremitted foreign earnings resulted in a tax charge of $59.
The amounts recorded represent provisional amounts based on our best estimates and current interpretation of the provisions of the Act and may change as additional guidance is issued.
During the first quarter of 2018, we settled a state tax audit which resulted in the recognition of a $15 benefit that impacted the effective tax rate, and a $33 reduction in unrecognized tax benefits. The balance of unrecognized tax benefits as of January 28, 2018, was $32, of which $21 would impact the effective tax rate if recognized. The total amount of unrecognized tax benefits can change due to audit settlements, tax examination activities, statute expirations and the recognition and measurement criteria under accounting for uncertainty in income taxes.

16






10.
Pension and Postretirement Benefits
Components of net benefit expense (income) were as follows:
 
Three Months Ended
 
Six Months Ended
 
Pension
 
Postretirement
 
Pension
 
Postretirement
 
January 28,
2018
 
January 29,
2017
 
January 28,
2018
 
January 29,
2017
 
January 28,
2018
 
January 29,
2017
 
January 28,
2018
 
January 29,
2017
Service cost
$
6

 
$
7

 
$

 
$
1

 
$
12

 
$
13

 
$

 
$
1

Interest cost
18

 
21

 
2

 
2

 
37

 
43

 
4

 
5

Expected return on plan assets
(36
)
 
(36
)
 

 

 
(72
)
 
(72
)
 

 

Amortization of prior service credit

 

 
(6
)
 
(7
)
 

 

 
(13
)
 
(13
)
Special termination benefits
2

 

 

 

 
2

 

 

 

Net periodic benefit income
$
(10
)
 
$
(8
)
 
$
(4
)
 
$
(4
)
 
$
(21
)
 
$
(16
)
 
$
(9
)
 
$
(7
)
The special termination benefits of $2 related to the planned closure of the manufacturing facility in Toronto, Ontario, and were included in Restructuring charges. See Note 7.
The components of net periodic benefit expense (income) other than the service cost component are included in Other expenses / (income) in the Consolidated Statements of Earnings. Beginning in 2018, under the revised FASB guidance adopted in the first quarter, only the service cost component of net periodic benefit expense (income) is eligible for capitalization.
Beginning in 2018, we changed the method we use to estimate the service and interest cost components of net periodic benefit expense (income). We elected to use a full yield curve approach to estimate service cost and interest cost by applying the specific spot rates along the yield curve used to determine the benefit obligation of the relevant projected cash flows. Previously, we estimated service cost and interest cost using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. We are making this change to provide a more precise measurement of service cost and interest cost by improving the correlation between projected benefit cash flows and the corresponding spot yield curve rates. This change will not affect the measurement of our benefit obligations. We accounted for this change prospectively in 2018 as a change in accounting estimate. As a result of this change, net periodic benefit income increased by approximately $4 and $8 in the three- and six-month periods ended January 28, 2018, respectively, compared to what the net periodic benefit income would have been under the previous method.
11.
Financial Instruments
The principal market risks to which we are exposed are changes in foreign currency exchange rates, interest rates, and commodity prices. In addition, we are exposed to equity price changes related to certain deferred compensation obligations. In order to manage these exposures, we follow established risk management policies and procedures, including the use of derivative contracts such as swaps, rate locks, options, forwards and commodity futures. We enter into these derivative contracts for periods consistent with the related underlying exposures, and the contracts do not constitute positions independent of those exposures. We do not enter into derivative contracts for speculative purposes and do not use leveraged instruments. Our derivative programs include instruments that qualify and others that do not qualify for hedge accounting treatment.
Concentration of Credit Risk
We are exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate counterparty credit risk, we enter into contracts only with carefully selected, leading, credit-worthy financial institutions, and distribute contracts among several financial institutions to reduce the concentration of credit risk. We did not have credit-risk-related contingent features in our derivative instruments as of January 28, 2018, or July 30, 2017.
We are also exposed to credit risk from our customers. During 2017, our largest customer accounted for approximately 20% of consolidated net sales. Our five largest customers accounted for approximately 39% of our consolidated net sales in 2017.
We closely monitor credit risk associated with counterparties and customers.
Foreign Currency Exchange Risk
We are exposed to foreign currency exchange risk related to our international operations, including non-functional currency intercompany debt and net investments in subsidiaries. We are also exposed to foreign exchange risk as a result of transactions in currencies other than the functional currency of certain subsidiaries. Principal currencies hedged include the Canadian dollar,

17






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 $70 at January 28, 2018, and $84 at July 30, 2017. The effective portion of the changes in fair value on these instruments is recorded in other comprehensive income (loss) and is reclassified into the Consolidated Statements of Earnings on the same line item and the same period in which the underlying hedged transaction affects earnings. The notional amount of foreign exchange forward contracts that are not designated as accounting hedges was $148 and $336 at January 28, 2018, and July 30, 2017, respectively. There were no cross-currency swap contracts outstanding as of January 28, 2018, or July 30, 2017.
Interest Rate Risk
We manage our exposure to changes in interest rates by optimizing the use of variable-rate and fixed-rate debt and by utilizing interest rate swaps in order to maintain our variable-to-total debt ratio within targeted guidelines. Receive fixed rate/pay variable rate interest rate swaps are designated as fair-value hedges. We manage our exposure to interest rate volatility on future debt issuances by entering into forward starting interest rate swaps or treasury rate lock contracts to lock in the rate on the interest payments related to the anticipated debt issuances. The contracts are either designated as cash-flow hedging instruments or are undesignated.The effective portion of the changes in fair value on designated instruments is recorded in other comprehensive income (loss) and reclassified into the Consolidated Statements of Earnings over the life of the debt. The change in fair value on undesignated instruments is recorded in interest expense. At January 28, 2018, and July 30, 2017, we had forward starting interest rate swaps accounted for as cash flow hedges with a notional value of $300, which relate to an anticipated debt issuance in 2018. We settled forward starting interest rate swaps with a notional value of $300 in October 2017 at a loss of $22. The effective portion of the loss was recorded in other comprehensive income (loss) and will be recognized as additional interest expense over the 10-year life of the anticipated debt issuance in 2018. The notional amount of treasury rate lock contracts accounted for as undesignated hedges was $200 at January 28, 2018, which relate to an anticipated debt issuance in 2018.
Subsequent to January 28, 2018, we entered into additional treasury rate lock contracts which relate to an anticipated debt issuance in 2018 with a notional amount of $2,100 as of February 28, 2018. These instruments are undesignated.
Commodity Price Risk
We principally use a combination of purchase orders and various short- and long-term supply arrangements in connection with the purchase of raw materials, including certain commodities and agricultural products. We also enter into commodity futures, options and swap contracts to reduce the volatility of price fluctuations of wheat, soybean oil, diesel fuel, cocoa, natural gas, aluminum, soybean meal, corn, butter and cheese, which impact the cost of raw materials. Commodity futures, options, and swap contracts are either designated as cash-flow hedging instruments or are undesignated. We hedge a portion of commodity requirements for periods typically up to 18 months. There were no commodity contracts accounted for as cash-flow hedges as of January 28, 2018, or July 30, 2017. The notional amount of commodity contracts not designated as accounting hedges was $84 at January 28, 2018, and $90 at July 30, 2017.
In 2017, we entered into a supply contract under which prices for certain raw materials are established based on anticipated volume requirements over a twelve-month period. Certain prices under the contract are based in part on certain component parts of the raw materials that are in excess of our needs or not required for our operations, thereby creating an embedded derivative requiring bifurcation. We net settle amounts due under the contract with our counterparty. The notional value was approximately $75 at January 28, 2018, and $35 at July 30, 2017. The fair value was not material as of January 28, 2018, and July 30, 2017. Unrealized gains (losses) and settlements are included in Cost of products sold in our Consolidated Statements of Earnings.
Equity Price Risk
We enter into swap contracts which hedge a portion of exposures relating to certain deferred compensation obligations linked to the total return of our capital stock, the total return of the Vanguard Institutional Index, and the total return of the Vanguard Total International Stock Index. Under these contracts, we pay variable interest rates and receive from the counterparty either the total return on our capital stock; the total return of the Standard & Poor's 500 Index, which is expected to approximate the total return of the Vanguard Institutional Index; or the total return of the iShares MSCI EAFE Index, which is expected to approximate the total return of the Vanguard Total International Stock Index. These contracts were not designated as hedges for accounting purposes. We enter into these contracts for periods typically not exceeding 12 months. The notional amounts of the contracts as of January 28, 2018, and July 30, 2017, were $42 and $43, respectively.

18






The following table summarizes the fair value of derivative instruments on a gross basis as recorded in the Consolidated Balance Sheets as of January 28, 2018, and July 30, 2017:
 
Balance Sheet Classification
 
January 28,
2018
 
July 30,
2017
Asset Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Foreign exchange forward contracts
Other current assets
 
$
1

 
$
3

Forward starting interest rate swaps
Other current assets
 
10

 

Total derivatives designated as hedges
 
 
$
11

 
$
3

Derivatives not designated as hedges:
 
 
 
 
 
Commodity derivative contracts
Other current assets
 
$
5

 
$
5

Deferred compensation derivative contracts
Other current assets
 
3

 
1

Treasury rate lock contracts
Other current assets
 
1

 

Commodity derivative contracts
Other assets
 

 
1

Total derivatives not designated as hedges
 
 
$
9

 
$
7

Total asset derivatives
 
 
$
20

 
$
10

 
Balance Sheet Classification
 
January 28,
2018
 
July 30,
2017
Liability Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Foreign exchange forward contracts
Accrued liabilities
 
$

 
$
1

Forward starting interest rate swaps
Accrued liabilities
 

 
22

Total derivatives designated as hedges
 
 
$

 
$
23

Derivatives not designated as hedges:
 
 
 
 
 
Commodity derivative contracts
Accrued liabilities
 
$
2

 
$
1

Foreign exchange forward contracts
Accrued liabilities
 
6

 
19

Foreign exchange forward contracts
Other liabilities
 

 
1

Total derivatives not designated as hedges
 
 
$
8

 
$
21

Total liability derivatives
 
 
$
8

 
$
44

We do not offset the fair values of derivative assets and liabilities executed with the same counterparty that are generally subject to enforceable netting agreements. However, if we were to offset and record the asset and liability balances of derivatives on a net basis, the amounts presented in the Consolidated Balance Sheets as of January 28, 2018, and July 30, 2017, would be adjusted as detailed in the following table:
 
 
January 28, 2018
 
July 30, 2017
Derivative Instrument
 
Gross Amounts Presented in the Consolidated Balance Sheet
 
Gross Amounts Not Offset in the Consolidated Balance Sheet Subject to Netting Agreements
 
Net Amount
 
Gross Amounts Presented in the Consolidated Balance Sheet
 
Gross Amounts Not Offset in the Consolidated Balance Sheet Subject to Netting Agreements
 
Net Amount
Total asset derivatives
 
$
20

 
$
(6
)
 
$
14

 
$
10

 
$
(3
)
 
$
7

Total liability derivatives
 
$
8

 
$
(6
)
 
$
2

 
$
44

 
$
(3
)
 
$
41

We do not offset fair value amounts recognized for exchange-traded commodity derivative instruments and cash margin accounts executed with the same counterparty that are subject to enforceable netting agreements. We are required to maintain cash margin accounts in connection with funding the settlement of open positions. At January 28, 2018, and July 30, 2017, a cash margin account balance of $1 was included in Other current assets in the Consolidated Balance Sheets.

19






The following tables show the effect of our derivative instruments designated as cash-flow hedges for the three- and six-month periods ended January 28, 2018, and January 29, 2017, in other comprehensive income (loss) (OCI) and the Consolidated Statements of Earnings:
  
 
 
Total Cash-Flow Hedge
OCI Activity
Derivatives Designated as Cash-Flow Hedges
 
 
January 28, 2018
 
January 29, 2017
Three Months Ended
 
 
 
 
 
OCI derivative gain (loss) at beginning of quarter
 
 
$
(27
)
 
$
(49
)
Effective portion of changes in fair value recognized in OCI:
 
 
 
 
 
Foreign exchange forward contracts
 
 
(5
)
 
(2
)
Forward starting interest rate swaps
 
 
7

 
19

Amount of (gain) loss reclassified from OCI to earnings:
Location in Earnings
 
 
 
 
Foreign exchange forward contracts
Cost of products sold
 
2

 
3

Foreign exchange forward contracts
Other expenses / (income)
 

 
1

Forward starting interest rate swaps
Interest expense
 
1

 
1

OCI derivative gain (loss) at end of quarter
 
 
$
(22
)
 
$
(27
)
 
 
 
 
 
 
Six Months Ended
 
 
 
 
 
OCI derivative gain (loss) at beginning of year
 
 
$
(34
)
 
$
(64
)
Effective portion of changes in fair value recognized in OCI:
 
 
 
 
 
Foreign exchange forward contracts
 
 
1

 
1

Forward starting interest rate swaps
 
 
10

 
29

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

 
4

Foreign exchange forward contracts
Other expenses / (income)
 

 
1

Forward starting interest rate swaps
Interest expense
 
1

 
2

OCI derivative gain (loss) at end of quarter
 
 
$
(22
)
 
$
(27
)
Based on current valuations, the amount expected to be reclassified from OCI into earnings within the next 12 months is a loss of $8. 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
 
Six Months Ended
 
 
January 28, 2018
 
January 29, 2017
 
January 28, 2018
 
January 29, 2017
Foreign exchange forward contracts
 
Cost of products sold
 
$

 
$
(1
)
 
$

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

 

 
(1
)
 

Commodity derivative contracts
 
Cost of products sold
 
(2
)
 
(2
)
 

 
(6
)
Deferred compensation derivative contracts
 
Administrative expenses
 
(4
)
 
(4
)
 
(5
)
 
(2
)
Treasury rate lock contracts
 
Interest expense
 
(1
)
 

 
(1
)
 

Total
 
 
 
$
(7
)
 
$
(7
)
 
$
(7
)
 
$
(9
)
12.
Variable Interest Entity
In February 2016, we agreed to make a $125 capital commitment to Acre Venture Partners, L.P. (Acre), a limited partnership formed to make venture capital investments in innovative new companies in food and food-related industries. Acre is managed by its general partner, Acre Ventures GP, LLC, which is independent of us. We are the sole limited partner of Acre and own a 99.8% interest. Our share of earnings (loss) is calculated according to the terms of the partnership agreement. Acre is a VIE. We have determined that we are the primary beneficiary. Therefore, we consolidate Acre and account for the third party ownership as

20






a noncontrolling interest. Through January 28, 2018, we funded $71 of the capital commitment. Except for the remaining unfunded capital commitment of $54, 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 $70 and $51 as of January 28, 2018, and July 30, 2017, respectively, and are included in Other assets on the Consolidated Balance Sheets. Changes in the fair values of investments for which the fair value option was elected are included in Other expenses / (income) on the Consolidated Statements of Earnings. Current assets and liabilities of Acre were not material as of January 28, 2018, or July 30, 2017.
13.
Fair Value Measurements
We categorize financial assets and liabilities based on the following fair value hierarchy:
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with observable market data.
Level 3: Unobservable inputs, which are valued based on our estimates of assumptions that market participants would use in pricing the asset or liability.
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. When available, we use unadjusted quoted market prices to measure the fair value and classify such items as Level 1. If quoted market prices are not available, we base fair value upon internally developed models that use current market-based or independently sourced market parameters such as interest rates and currency rates. Included in the fair value of derivative instruments is an adjustment for credit and nonperformance risk.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents our financial assets and liabilities that are measured at fair value on a recurring basis as of January 28, 2018, and July 30, 2017, consistent with the fair value hierarchy:
 
Fair Value
as of
January 28,
2018
 
Fair Value Measurements at
January 28, 2018 Using
Fair Value Hierarchy