Campbell's - 10-Q quarterly report FY

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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

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.

There were 410,418,902 shares of Capital Stock outstanding as of December 4, 2002.

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ITEM I.

PART 1. FINANCIAL INFORMATION

CAMPBELL SOUP COMPANY CONSOLIDATED

Statements of Earnings

(unaudited)
(millions, except per share amounts)

See Notes to Financial Statements

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CAMPBELL SOUP COMPANY CONSOLIDATED

Balance Sheets

(unaudited)
(millions, except per share amounts)

See Notes to Financial Statements

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CAMPBELL SOUP COMPANY CONSOLIDATED

Statements of Cash Flows

(unaudited)
(millions)

See Notes to Financial Statements

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CAMPBELL SOUP COMPANY CONSOLIDATED

Statements of Shareowners’ Equity (Deficit)

(unaudited)
(millions, except per share amounts)

See Notes to Financial Statements

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CAMPBELL SOUP COMPANY CONSOLIDATED

Notes to Consolidated Financial Statements

(unaudited)
(dollars in millions, except per share amounts)

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The following table sets forth balance sheet information for intangible assets, excluding goodwill, subject to amortization and intangible assets not subject to amortization:

* Amortization related to these assets was approximately $1 for the periods ended October 27, 2002 and October 28, 2001. The estimated aggregated amortization expense for each of the five succeeding fiscal years is less than $2 per year.

** Total carrying amount is net of accumulated amortization through July 28, 2002.

Changes in the carrying amount for goodwill for the period ended October 27, 2002 are as follows:

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Three Months Ended
October 27, 2002

Three Months Ended
October 28, 2001

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ITEM 2.

CAMPBELL SOUP COMPANY CONSOLIDATED
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Results of Operations

Overview

The company reported net earnings, before the cumulative effect of the accounting change, of $192 million for the first quarter ended October 27, 2002 versus $171 million in the comparable quarter a year ago. Earnings per share before the cumulative effect of accounting change were $.47, compared to $.42 a year ago. (All earnings per share amounts included in Management’s Discussion and Analysis are presented on a diluted basis.) Comparisons to the prior year are impacted by the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” as of the beginning of this fiscal year. In accordance with the provisions of this standard, the company discontinued amortization of goodwill and indefinite-lived intangible assets on a prospective basis from the date of adoption. Had the standard been adopted as of the beginning of the prior year, net earnings for the period ended October 28, 2001 would have been $184 million, or $.45 per share. Earnings per share for the first quarter of the prior year were $.46, excluding $.03 related to amortization and approximately $.01 from charges resulting from the Australian manufacturing reconfiguration.

In connection with the adoption of SFAS No. 142, the company also recognized a one-time non-cash charge of $31 million (net of a $17 million tax benefit) in the quarter, or $.08 per share, as a cumulative effect of accounting change. This charge relates to impaired goodwill associated with the Stockpot business, a foodservice business acquired in August 1998. See also Note (c) to the Consolidated Financial Statements.

Although SFAS No. 142 precludes restatement of prior period results, segment operating earnings have been adjusted to reflect the pro forma impact of amortization eliminated under the standard.

During the first quarter ended October 27, 2002, the company acquired two businesses for cash consideration of approximately $170 million and assumed debt of approximately $20 million. The company acquired Snack Foods Limited, a leader in the Australian salty snack category, and Erin Foods, the number two dry soup manufacturer in Ireland. Snack Foods Limited is included in the Biscuits and Confectionery segment. Erin Foods is included in International Soup and Sauces. The allocation of the purchase price of these businesses is based on preliminary estimates and assumptions and is subject to revision. The businesses have annual sales of approximately $160 million.

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Sales

Net sales decreased 1% to $1.71 billion from $1.73 billion last year. The net change was attributed to a 3% decrease in volume and mix, a 1% increase from higher selling prices, a 1% decrease due to higher trade promotion and consumer coupon redemption expenses, a 1% increase from acquisitions and a 1% increase due to currency. Volume and mix declined 3% this quarter compared to growth of 6% a year ago due to strong shipment growth in U. S. soup and sauces following the events of September 11, 2001. Worldwide wet soup volume declined 6% this quarter compared to growth of 7% a year ago.

An analysis of net sales by reportable segment follows:

The decrease in sales from North America Soup and Away From Home was due to a 6% decrease in volume and mix, and a 1% decrease due to increased trade promotion and consumer coupon redemption expenses. U.S. wet soup volume declined 8%. Condensed soup declined 14%, ready-to-serve soup declined 1%, and broth declined 6%. The volume declines were due in part to the comparison against 6% growth last year following the events of September 11, 2001, when strong consumer purchases drove higher sales. Aggressive competitive activity in the quarter, including price promotions, and a lower than normal build in retailer inventories also contributed to the volume declines. Condensed volume performance was also affected by some shifting of consumer advertising and promotional programs to the second quarter relative to a year ago. The decline in broth was due to the later timing of Thanksgiving this year. Canada soup volume was flat with last year, while Away From Home sales increased from the prior year.

North America Sauces and Beverages reported a 2% decrease in sales due to flat volume and mix and a 2% decline due to increased trade promotion and consumer coupon redemption expenses. Sales were up 5% in the year ago period driven by strong growth across the portfolio following the events of September 11, 2001 and the launch of Prego pasta bake sauces. Prego pasta sauce declined this quarter. V8 Splash and Franco-American canned pasta and gravies showed continued weakness. These declines were offset by increases in sales in V8vegetable juices, Pace Mexican sauces, and in the Latin American region.

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Biscuits and Confectionery reported an 8% increase in sales due to a 5% increase from the acquisition of Snack Foods Limited in Australia during the quarter, a 1% increase from volume and mix, a 2% increase from higher selling prices, a 1% increase from currency, offset by a 1% decrease due to increased trade promotion and consumer coupon redemption expenses. The favorable currency impact principally reflects the strengthening of the Australian dollar. Pepperidge Farm reported sales increases due to volume gains in cookies, crackers, and fresh bread. Arnotts also contributed to the volume gains inKettle chips, Tim Tam biscuits, and growth in Indonesia. Godiva sales increased due to new store openings in North America and Japan, and better performance in Europe. The weak U.S. specialty retail environment and lower tourism worldwide continue to negatively impact Godiva’s same store sales.

International Soup and Sauces reported an increase in sales of 5% with the base business reporting a 3% decrease. The favorable impact of currency accounted for a 7% increase and the acquisition of Erin Foods in Ireland during the quarter accounted for a 1% increase. Weakness in condensed soup and Homepridesauces in the United Kingdom and soft wet soup sales in Germany offset wet soup sales gains in France and Belgium. The decline in condensed soup in the United Kingdom was due in part to fewer trade promotions offered during the period. The European dry soup business reported an increase in sales due to the performance in Sweden, Belgium, and France, partially offset by lower sales in the United Kingdom.

Gross Margin

Gross margin, defined as net sales less cost of products sold, decreased $24 million. As a percent of sales, gross margin declined from 43.8% in 2002 to 43% in 2003. The percentage decline was due to changes in sales mix across the portfolio, principally driven by the lower sales of U.S. wet soup.

Marketing and Selling Expenses

Marketing and selling expenses were approximately 16% of sales in both 2003 and 2002.

General and Administrative Expenses

Administrative expenses decreased by approximately 7% due primarily to the impact of costs associated with infrastructure investments incurred in the comparable period last year.

Other expenses declined $28 million from the prior year due to the elimination of $17 million of amortization of goodwill and indefinite-lived intangible assets upon adoption of SFAS No. 142 as of the beginning of this fiscal year. In addition, stock based incentive compensation costs declined as compared to the prior year as the company shifted elements of compensation programs from stock based towards a higher cash component. Cash compensation costs are classified by function on the Statements of Earnings.

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Operating Earnings

As previously noted, operating segment results for the period ended October 28, 2001 have been restated to reflect the pro forma impact of SFAS No. 142. Amortization expense of $17 million has been eliminated from the prior period results. Segment operating earnings, on a comparable basis, declined 3% from the prior year.

An analysis of operating earnings by reportable segment follows.

Earnings from North America Soup and Away From Home declined 12% due primarily to lower volume of Campbell’s condensed soup.

Earnings from North America Sauces and Beverages increased 20% compared to the year-ago period which included introductory marketing costs associated with the launch of Prego pasta bake sauces.

Earnings from Biscuits and Confectionery increased 14% as reported, 5% excluding costs associated with the Australian manufacturing reconfiguration, and 2% excluding currency and the reconfiguration costs. The increase was due primarily to the increase in sales compared to the year-ago quarter.

Earnings from International Soup and Sauces decreased 10%. Excluding the impact of currency and the acquisition of Erin Foods in Ireland, operating earnings declined 18%. The earnings decline was due primarily to severance costs associated with the closure of a dry soup plant in Ireland and costs related to a strategic procurement initiative in Europe.

Nonoperating Items

Interest expense decreased to $45 million from $53 million in the prior year primarily due to lower interest rates.

The effective tax rate was 32.6% for 2003 and 34.5% for 2002, as reported. The comparable tax rate for 2002 would be 33.8%, based on a pro forma adjustment for the

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adoption of SFAS No. 142. The reduction from the prior year is due primarily to favorable resolution of certain state tax issues.

Restructuring Programs

Costs of approximately $1 million in 2003 and $4 million ($3 million after tax) in 2002 were recorded related to the reconfiguration of the manufacturing network of Arnotts in Australia. The costs were recorded as Cost of products sold, primarily representing accelerated depreciation on assets to be taken out of service. These costs were related to a previously announced program designed to drive greater manufacturing efficiency resulting from the closure of the Melbourne plant. Approximately 550 jobs were eliminated due to the plant closure. As a result of this reconfiguration, the company expects annual pre-tax cost savings of approximately $10 million, a portion of which will be realized in 2003. See also Note (i) to the Consolidated Financial Statements.

Liquidity and Capital Resources

The company generated cash from operations of $70 million compared to $146 million last year as the seasonal increase in working capital during the period was larger than a year ago. This principally reflects the low levels of working capital achieved at July 28, 2002.

Capital expenditures were $37 million compared to $24 million a year ago due to spending against the new Pepperidge Farm bakery and soup quality projects. As previously announced, capital expenditures are expected to be approximately $285 million in fiscal 2003 due to the new Pepperidge Farm bakery, as well as planned process improvements and product quality enhancements.

Businesses acquired, as presented in the Statements of Cash Flows, represents the acquisitions of Snack Foods Limited and Erin Foods.

The company did not purchase shares in the first quarter of either 2003 or 2002. The company expects to repurchase sufficient shares over time to offset the impact of dilution from shares issued under incentive stock compensation plans.

In September 2002, the company entered into a committed $900 million 364-day revolving credit facility, which replaced an existing facility that matured in September 2002. The company also has a committed $900 million revolving credit facility that matures in September 2006. These agreements support the company’s commercial paper program.

The company believes that foreseeable liquidity and capital resource requirements are expected to be met through anticipated cash flows from operations, management of working capital, long-term borrowings under its shelf registration, and short-term borrowings, including commercial paper. The company believes that its sources of financing are adequate to meet its liquidity and capital resource requirements. The cost and terms of any future financing arrangements depend on the market conditions and the company’s financial position at that time.

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At October 27, 2002, the company had approximately $2 billion of notes payable due within one year and $48 million of standby letters of credit issued on behalf of the company. The company maintains $1.8 billion of committed revolving credit facilities, which remain unused at October 27, 2002, except for the $48 million of stand-by letters of credit issued on behalf of the company. The company is in compliance with the covenants contained in its revolving credit facilities and debt securities.

Significant Accounting Estimates

The consolidated financial statements of the company are prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates and assumptions. The company’s accounting principles are described in the 2002 Annual Report on Form 10-K.

The following areas all require the use of subjective or complex judgments, estimates and assumptions:

Trade and consumer promotion expenses — The company offers various sales incentive programs to customers and consumers, such as cooperative advertising programs, feature price discounts, in-store display incentives and coupons. The recognition of expense for these programs involves use of judgment related to performance and redemption estimates. Estimates are made based on historical experience and other factors. Actual expenses may differ if the level of redemption rates and performance vary from estimates.

Valuation of long-lived assets — Long-lived assets, including fixed assets and intangibles, are reviewed for impairment as events or changes in circumstances occur, indicating that the carrying amount of the asset may not be recoverable. Discounted cash flow analyses are used to assess nonamortizable intangible asset impairment, while undiscounted cash flow analyses are used to assess long-lived asset impairment. The estimates of future cash flows involve considerable management judgment and are based upon assumptions about expected future operating performance. Assumptions used in these forecasts are consistent with internal planning. The actual cash flows could differ from management’s estimates due to changes in business conditions, operating performance, and economic conditions.

Pension and postretirement medical benefits — The company provides certain pension and postretirement benefits to employees and retirees. Determining the cost associated with such benefits is dependent on various actuarial assumptions, including discount rates, expected return on plan assets, compensation increases, turnover rates and health care trend rates. Independent actuaries, in accordance with accounting principles generally accepted in the United States, perform the required calculations to determine expense.

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Actual results that differ from the actuarial assumptions are generally accumulated and amortized over future periods.

Income taxes — The effective tax rate and the tax bases of assets and liabilities reflect management’s estimate of the ultimate outcome of various tax audits and issues. In addition, valuation allowances are established for deferred tax assets where the amount of expected future taxable income from operations does not support the realization of the asset.

Recently Issued Accounting Pronouncements

The company adopted SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” on July 29, 2002. This standard addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This standard supersedes SFAS 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. Long-lived assets are tested for impairment if certain triggers occur. This standard is generally effective for the company on a prospective basis. The company does not expect the adoption of this standard to have a material impact on the financial statements.

In July 2002, the FASB issued SFAS No. 146 “Accounting for Exit or Disposal Activities.” The provisions of this standard are effective for disposal activities initiated after December 31, 2002, with early application encouraged. The company does not expect the adoption of this standard to have a material impact on the financial statements.

Recent Developments

On November 13, 2002, the company issued a press release announcing results for the first quarter 2003 and commented on the outlook for earnings per share for the second quarter of 2003 and for the full year. In that release, the company maintained its previous earnings estimates of approximately $1.47 per share for 2003, before the cumulative effect of the accounting change, and announced that it expects diluted earnings to be in the range of $.53 to $.55 per share for the second quarter of 2003. This compares to $1.44 per share for 2002 and $.53 per share for the second quarter of 2002 after adjusting the prior year results for the pro forma impact of SFAS No. 142 and excluding costs related to the Australian reconfiguration.

On November 20, 2002, Campbell Soup Company received a Notice of Proposed Adjustment from the Internal Revenue Service challenging the treatment of gains and interest deductions claimed in the company’s fiscal 1995 federal income tax return, relating to transactions involving government securities. If the proposed adjustment were upheld, it would require the company to pay a net amount of $79 million in taxes and accumulated interest to date. The company believes these transactions were properly reported on its federal income tax return in accordance with applicable tax laws and regulations in effect during the period involved and intends to challenge these

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adjustments vigorously. While the outcome of proceedings of this type cannot be predicted with certainty, the company believes that the ultimate outcome of this matter will not have a material impact on the consolidated financial condition or results of operation.

In November 2002, the company terminated interest rate swap contracts with a notional value of $250 million that converted fixed-rate debt (6.75% notes due 2011) to variable and received $37 million. Of this, $3 million represented accrued interest earned on the swap prior to the termination date, and the remainder will be amortized over the remaining life of the notes as a reduction to interest expense.

On November 25, 2002, the company issued $400 million of 5.00% fixed-rate notes due December 2012. The proceeds were used to retire $300 million of 6.15% notes and to repay commercial paper borrowings. In connection with this issuance, the company entered into ten-year interest rate swaps that convert $300 million of the fixed-rate debt to variable.

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,” “will” 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 2002 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 made by the company in order to reflect new information, events or circumstances after the date they are made.

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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 2002. There have been no significant changes in the company’s portfolio of financial instruments or market risk exposures from the fiscal 2002 year-end except that in November 2002, the company terminated interest rate swap contracts with a notional value of $250 million that converted fixed-rate debt (6.75% notes due 2011) to variable and received $37 million. In November 2002, the company also entered into interest rate swaps that convert $300 million of the $400 million fixed-rate notes issued to variable. See the Recent Developments section of Management’s Discussion and Analysis of Results of Operations and Financial Condition for an additional discussion of these interest rate swap contracts.

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ITEM 4. CONTROLS AND PROCEDURES

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PART II

ITEM 1. LEGAL PROCEEDINGS

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 the company 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 also previously reported, on March 30, 1998, the company effected a spinoff of several of its non-core businesses to Vlasic Foods International Inc. (“VFI”). VFI and several of its affiliates (collectively, “Vlasic”) commenced cases under Chapter 11 of the Bankruptcy Code on January 29, 2001 in the United States Bankruptcy Court for the District of Delaware. Vlasic’s Second Amended Joint Plan of Distribution under Chapter 11 (the “Plan”) was confirmed by an order of the Bankruptcy Court dated November 16, 2001, and became effective on or about November 29, 2001. The Plan provides for the assignment of various causes of action allegedly belonging to the Vlasic estates, including claims against the company allegedly arising from the spinoff, to VFB LLC, a limited liability company (“VFB”) whose membership interests are to be distributed under the Plan to Vlasic’s general unsecured creditors.

On February 19, 2002, VFB commenced a lawsuit against the company and several of its subsidiaries in the United States District Court for the District of Delaware alleging, among other things, fraudulent conveyance, illegal dividends and breaches of fiduciary duty by Vlasic directors alleged to be under the company’s control. The lawsuit seeks to hold the company liable in an amount necessary to satisfy all unpaid claims against Vlasic (which VFB estimates in the complaint to be $250,000,000), plus unspecified exemplary and punitive damages. While this case is still in its early stages and the ultimate disposition of complex litigation is inherently difficult to assess, the company believes the action is without merit and intends to defend the case vigorously.

ITEM 5. OTHER INFORMATION

The Audit Committee of the Board of Directors of the company approved the categories of all non-audit services performed by the company’s independent accountants, PricewaterhouseCoopers LLP, during the period covered by this report.

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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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CERTIFICATIONS

I, Douglas R. Conant, certify that:

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Date: December 10, 2002

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I, Robert A. Schiffner, certify that:

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Date: December 10, 2002

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INDEX TO EXHIBITS

Exhibits

None.

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