SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE ACT OF 1934
Campbell PlaceCamden, New Jersey 08103-1799Principal Executive Offices
Telephone Number: (856) 342-4800
Yes No
There were 409,663,297 shares of Capital Stock outstanding as of December 5, 2001.
ITEM 1.
PART I. FINANCIAL INFORMATION
CAMPBELL SOUP COMPANY CONSOLIDATED
Statements of Earnings
(unaudited)(millions, except per share amounts)
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Balance Sheets
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Statements of Cash Flows
(unaudited)(millions)
See Notes to Financial Statements
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Statements of Shareowners’ Equity
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Notes to Financial Statements
(unaudited)(dollars in millions, except per share amounts)
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Three Months EndedOctober 28, 2001
Three Months EndedOctober 29, 2000
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Historical information of the reporting segments, including reclassifications as described in note (d) is as follows:
Net Sales:
Earnings Before Interest and Taxes:
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ITEM 2.
CAMPBELL SOUP COMPANY CONSOLIDATEDMANAGEMENT’S DISCUSSION AND ANALYSIS OFRESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Overview
The company reported net earnings of $171 million for the first quarter ended October 28, 2001 versus $204 million in the comparable quarter a year ago. The decline was primarily due to increased advertising and marketing programs. Diluted earnings per share decreased 11% to $.42 per share from $.47. (All earnings per share amounts included in Management’s Discussion and Analysis are presented on a diluted basis.)
Certain reclassifications were made to the financial statements to comply with new accounting standards. In the fourth quarter fiscal 2001, the company adopted the Emerging Issues Task Force (EITF) consensus on Issue No. 00-10 “Accounting for Shipping and Handling Fees and Costs.” In the first quarter ended October 28, 2001, the company adopted EITF Issue No. 00-14 “Accounting for Certain Sales Incentives” and Issue No. 00-25 “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products.” Under these Issues, the EITF concluded that certain consumer and trade sales promotion expenses, such as coupon redemption costs, cooperative advertising programs, new product introduction fees, feature price discounts and in-store display incentives, should be classified as a reduction of sales rather than as marketing expenses. The adoption of these issues resulted in the following reclassifications to the first quarter fiscal 2001 (period ended October 29, 2000) statement of earnings: Net sales were reduced by $197 million; Cost of products sold was increased by $49 million; and Marketing and selling expenses were reduced by $246 million. As reclassifications, these changes had no impact on net earnings.
Beginning in fiscal 2002, the company changed its organizational structure such that operations are managed and reported in four segments: North America Soup and Away From Home, North America Sauces and Beverages, Biscuits and Confectionery, and International Soup and Sauces. Comparative periods have been restated to conform to the current year presentation. For a description of the segments, refer to note (e) to the Consolidated Financial Statements.
Sales
Net sales increased 9% to $1.73 billion from $1.58 billion last year. The net change was attributed to a 6% increase in volume and mix, a 1% increase from higher selling prices, a 2% decrease due to higher trade promotion and consumer coupon redemption expenses, a
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5% increase from the European acquisition and a 1% decrease due to currency. The volume and mix increase was due primarily to increased volume of soup and sauce products in the U.S. especially during the period following September 11, 2001.
An analysis of net sales by reportable segment follows:
The increase in sales from North America Soup and Away From Home was due to a 6% increase in volume, driven by a 6% increase in U.S. wet soup volume, a 1% increase in selling prices and a 3% decrease due to increased trade promotion and consumer coupon expenses. The increase in sales volume was due primarily to the performance of ready-to-serve varieties, includingCampbell’s Chunky andSelect, and Swanson broths, and to a lesser extent, by an increase in volume of the company’s Red & White condensed icons, Chicken Noodle, Tomato and Cream of Mushroom soups. The sales performance was due in part to significantly increased marketing investments, including advertising, trade and consumer promotions and product improvements. The national launch of Campbell’s Supper Bakes in the U.S. also contributed to sales growth.
Canada contributed to the segment sales growth with volume increases across soup and V8 product lines. Away From Home sales were up slightly from the prior year.
North America Sauces and Beverages reported a 5% increase in sales due to a 7% increase in volume, a 1% increase from higher selling prices, offset by a 3% decline due to increased trade and consumer coupon expenses. Prego reported double-digit volume gains due to the introduction of the new Prego pasta bake sauce in the fourth quarter fiscal 2001. In addition, increased marketing and advertising behind the core Prego sauce helped the sales performance. Pacecontributed to the sales growth responding positively to renewed advertising.V8 Splash continued to show weak performance versus the prior year.
Biscuits and Confectionery reported a 3% increase in sales, 6% before the impact of currency, driven by volume gains across the portfolio. Increased trade and consumer coupon expenses negatively affected the net sales change by 1%. The adverse currency impact principally reflects the weakening of the Australian dollar. Pepperidge Farm reported sales increases across the portfolio, including Milano cookies, and through new product introductions such as Dessert Bliss Cookies and Goldfish Sandwich Crackers. Arnotts also contributed to the volume gains. Godiva sales were negatively impacted by
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the events of September 11, 2001, with two New York retail boutiques destroyed or damaged. While worldwide Godiva sales were up slightly due to new store openings around the world, same store sales in the U.S. declined in the quarter and operating earnings were lower.
International Soup and Sauces reported an increase in sales of 64% with the base business reporting a 3% increase. The European acquisition in May 2001 accounted for 60% of the increase and the favorable impact of currency accounted for a 1% increase. New product launches of Homepride stir fry sauces in the UK and Liebig Delisoup in Belgium contributed to the base sales growth.
Gross Margin
Gross margin, defined as net sales less cost of products sold, increased $33 million in the quarter. As a percent of sales, gross margin declined from 45.9% in 2001 to 43.8% in 2002. The percentage decline was attributed to increased trade promotional and coupon redemption expenses, which are classified as deductions from sales, a shift in sales mix in the U.S. business, and the cost of quality improvements across a number of products. In addition, costs associated with the Australian manufacturing strategy negatively impacted the gross margin.
Marketing and Selling Expenses
Marketing and selling expenses increased $45 million to $278 million in 2002. The increase is principally due to higher advertising investments across the portfolio, particularly in U.S. soup. As a percent of sales, marketing and selling expenses increased from 14.7% in 2001 to 16.1% in 2002.
Administrative Expenses
Administrative expenses increased by approximately 31% due primarily to costs associated with the previously announced infrastructure enhancements, and the impact of the European acquisition.
Operating Earnings
Segment operating earnings declined 11% from the prior year. As a percent of sales, operating earnings declined from 23.0% to 18.2% reflecting the decline in gross margin as a percent of sales, increased advertising and higher administrative expenses.
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An analysis of operating earnings by reportable segment follows:
Earnings from North America Soup and Away From Home declined 11% due to planned increases in trade and consumer promotion and advertising expenses, particularly on U.S. Soup and new Campbell's Supper Bakes.
Earnings from North America Sauces and Beverages declined 18% due to planned increases in total marketing support, particularly on new Prego pasta bake sauce and Pace products.
Earnings from Biscuits and Confectionery declined 24% as reported, 16% excluding costs associated with the Australian manufacturing reconfiguration, and 13% excluding currency and the reconfiguration costs. The decline was due to planned increases in marketing support at Pepperidge Farm and Arnotts and higher selling and administrative expenses at Godiva reflecting new store openings.
As reported earnings from International Soup and Sauces increased 64%. Excluding the impact of the European acquisition and currency, operating profit declined 14% due to increased investments in consumer marketing, research and development and infrastructure.
Non-Operating Items
Interest expense increased slightly to $53 million from $52 million in the prior year. Higher interest expense due to the European acquisition was substantially offset by lower short-term interest rates.
The effective tax rate remained at 34.5%.
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Restructuring Programs
A restructuring charge of $10 million ($7 million after tax) was recorded in the fourth quarter fiscal 2001 for severance costs associated with the reconfiguration of the manufacturing network of Arnotts in Australia. Costs of approximately $4 million ($3 million after tax) were recorded in the first quarter fiscal 2002 as Cost of products sold, representing accelerated depreciation on assets to be taken out of service. This program is designed to drive greater manufacturing efficiency and will result in the closure of the Melbourne plant. The company expects to incur additional pre-tax costs of $15-$20 million during the remainder of fiscal 2002 related to this program for accelerated depreciation, employee benefit costs and other one-time expenses. The expected net cash outflows related to this program will not have a material impact on the company’s liquidity. As a result of this reconfiguration, the company expects annual pre-tax cost savings of approximately $10 million, beginning in fiscal 2003. Approximately 550 jobs will be eliminated due to the plant closure.
Liquidity and Capital Resources
The company generated cash from operations of $146 million compared to $259 million last year. This decrease is principally due to lower net earnings due to increased marketing investments and a volume-driven increase in working capital during the quarter from the historical low level at July 2001.
Capital expenditures at $24 million were the same as year ago. As previously announced, capital expenditures are expected to be approximately $300 million in fiscal 2002 due to planned process improvements, product quality enhancements and innovation.
The company did not purchase shares in the quarter because the strategic share repurchase plan was suspended in 2001. In the first quarter last year, the company purchased 1.1 million shares.
In September 2001, the company issued $300 million seven-year 5.875% fixed-rate notes. The proceeds were used to repay short-term borrowings. While planning for the issuance of these notes, the company entered into forward-starting interest rate swaps with a notional value of approximately $138 million that effectively fixed a portion of the interest rate on the debt prior to issuance. In conjunction with the issuance of these notes, the company also entered into a $75 million seven-year interest rate swap that converts the fixed-rate debt to variable.
In October 2001, the company issued $300 million two-year variable-rate notes. The proceeds were also used to repay short-term borrowings. In connection with this issuance, the company entered into a $300 million two-year interest rate swap that converts the variable-rate debt to fixed.
In September 2001, the company entered into $1.8 billion in committed revolving credit facilities, comprised of a $900 million 364-day revolving credit facility, which replaced an existing facility that matured in September 2001, and a $900 million 5-year
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revolving credit facility that replaced a facility scheduled to mature in October 2002. These agreements support the company’s commercial paper program.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 141 “Business Combinations” and Statement No. 142 “Goodwill and Other Intangible Assets.” In addition to requiring that all business combinations be accounted for under the purchase method, Statement No. 141 requires intangible assets that meet certain criteria to be recognized as assets apart from goodwill. The provisions of Statement No. 142 indicate that goodwill and indefinite life intangible assets should no longer be amortized but rather be tested for impairment annually. Intangible assets with a finite life shall continue to be amortized over the estimated useful life. Statement No. 141 is effective for business combinations initiated after June 30, 2001. Statement No. 142 is effective for fiscal years beginning after December 15, 2001. The elimination of amortization is to be applied on a prospective basis and prior periods are not to be restated. However, the impact of amortization of goodwill and indefinite life intangible assets is to be disclosed for prior periods.
The company is currently evaluating the impact of the new standards. The total after-tax amortization expense related to goodwill and other intangible assets was approximately $13 million for the period ended October 28, 2001 and $9 million for the period ended October 29, 2000. The company will adopt Statement No. 142 in the first quarter fiscal 2003.
In June 2001, the FASB issued Statement No. 143 “Accounting for Asset Retirement Obligations.” This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement is effective for fiscal years beginning after June 15, 2002. The company is currently evaluating the impact of this Statement.
In August 2001, the FASB issued Statement No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, for the disposal of a segment of a business. The provisions of this Statement are effective for fiscal years beginning after December 15, 2001. The company is currently evaluating the impact of this Statement.
Recent Developments
On November 14, 2001, the company issued a press release announcing results for the first quarter fiscal 2002 and commented on the outlook for earnings per share for the second quarter of fiscal 2002 and for the full year. In that release, the company maintained its previous earnings estimates of approximately $1.30 per share for fiscal
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2002 (excluding the impact of the Australian reconfiguration), and announced that it expects diluted earnings of between $0.48 and $0.52 per share for the second quarter of fiscal 2002 (excluding the impact of the Australian reconfiguration).
On November 23, 2001, the company redeemed $100 million 5.625% notes due in fiscal 2003. The notes were callable at par. This redemption was financed with lower rate commercial paper.
On December 11, 2001, the company issued an additional $200 million of its existing 6.75% fixed rate notes due February 2011, originally issued in February 2001. These additional notes were priced at a premium to reflect market conditions. The proceeds were used to repay short-term borrowings.
Forward-Looking Statements
This quarterly report contains certain statements which reflect the company’s current expectations regarding future results of operations, economic performance, financial condition and achievements of the company. The company tries, wherever possible, to identify these forward-looking statements by using words such as “anticipate,” “believe,” “estimate,” “expect” and similar expressions. These statements reflect the company’s current plans and expectations and are based on information currently available to it. They rely on a number of assumptions and estimates which could be inaccurate and which are subject to risks and uncertainties.
The company wishes to caution the reader that the following important factors, and those important factors described in other Securities and Exchange Commission filings of the company, or in the company’s 2001 Annual Report, could affect the company’s actual results and could cause such results to vary materially from those expressed in any forward-looking statements made by, or on behalf of, the company:
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This discussion of uncertainties is by no means exhaustive, but is designed to highlight important factors that may impact the company’s outlook. The company disclaims any obligation or intent to update forward-looking statements in order to reflect events or circumstances after the date of this report.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the company’s exposure to certain market risks, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Annual Report on Form 10-K for fiscal 2001. There have been no significant changes in the company’s portfolio of financial instruments or market risk exposures from the fiscal 2001 year-end except that the company entered into various interest rate swap instruments in connection with long-term refinancing. See note (h) of the Notes to Financial Statements and the Liquidity and Capital Resources section of Management’s Discussion and Analysis of Results of Operations for an additional discussion of these interest rate swap contracts.
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PART II
ITEM 1. LEGAL PROCEEDINGS
In management’s opinion, there are no pending claims or litigation, the outcome of which would have a material effect on the consolidated results of operations, financial position or cash flows of the company.
As previously reported, ten purported class action lawsuits were commenced against the company and certain of its officers in the United States District Court for the District of New Jersey. The lawsuits were subsequently consolidated, and an amended consolidated complaint was filed alleging, among other things, that Campbell and certain of its officers misrepresented the company’s financial condition between September 8, 1997 and January 8, 1999, by failing to disclose alleged shipping and revenue recognition practices in connection with the sale of certain company products at the end of the company’s fiscal quarters in violation of Section 10 (b) and 20 (a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The actions seek compensation and other damages, and costs and expenses associated with the litigation. The company believes the action is without merit and intends to defend the case vigorously.
As previously reported, the United States Environmental Protection Agency (the “EPA”) sent the company a special notice letter dated September 28, 2000 relating to the Puente Valley Operable Unit of the San Gabriel Valley Superfund Sites, Los Angeles County, California (the “Superfund Site”) for property located at 125 N. Orange Avenue, Industry, California, advising that the EPA considers Campbell to be a potentially responsible party due to the alleged release or threatened release of hazardous substances, and therefore, potentially responsible for the costs incurred in connection with contamination at the Superfund Site. Although the impact of this proceeding cannot be predicted at this time due to the large number of other potentially responsible parties and the uncertainty involved in estimating the cost of clean-up, the ultimate disposition is not expected to have a material effect on the consolidated results of operations, financial position, or cash flows of the company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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INDEX TO EXHIBITS
None.
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