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

For the Quarterly Period Ended	Commission File Number
January 26, 2003	1-3822

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

Telephone Number: (856) 342-4800

Yes  [X]      No[ ].

There were 410,394,677 shares of Capital Stock outstanding as of March 5, 2002.

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PART I.

ITEM 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

(unaudited)

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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:

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January 26, 2003

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January 27, 2002

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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 of $231 million for the second quarter ended January 26, 2003 versus $203 million in the comparable quarter a year ago. Earnings per share were $.56, compared to $.49 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 such amortization been eliminated as of the beginning of the prior year, net earnings for the second quarter ended January 27, 2002 would have been $216 million, or $.53 per share. Net earnings for the second quarter of the prior year were impacted by costs of approximately $3 million (slightly less than $.01 per share) related to the Australian manufacturing reconfiguration. The increase in earnings was due to higher sales during the quarter and a lower effective tax rate compared to the prior year, partially offset by higher pension expense in 2003.

For the six months ended January 26, 2003, earnings before the cumulative effect of accounting change were $423 million compared to $374 million in the year-ago period. Excluding amortization of $26 million eliminated under SFAS No. 142 and costs of $6 million related to the Australian reconfiguration, net earnings for the six months ended January 27, 2002 were $406 million. Earnings per share before the cumulative effect of accounting change rose to $1.03 from $.91 as reported in 2002. Earnings per share for the year-ago period were $.99 when adjusted for amortization expense of approximately $.06 per share eliminated under SFAS No. 142, and approximately $.02 per share of costs related to the Australian reconfiguration. The increase over the prior year in earnings before the cumulative effect of accounting change is due to higher sales, lower interest expense, and a reduction in the tax rate, partially offset by higher pension expense in 2003.

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 first quarter of fiscal 2003, 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 (d) to the Consolidated Financial Statements.

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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.

SECOND QUARTER

Sales

Net sales in the quarter increased 6% to $1.92 billion from $1.81 billion last year. The net change was attributed to a 1% increase in volume and mix, a 2% increase from higher selling prices, a 1% decrease due to higher trade promotion and consumer coupon redemption expenses, a 2% increase from acquisitions and a 2% increase due to currency. Worldwide wet soup volume increased 2% this quarter compared to last year. U.S. wet soup shipments increased 4%, while shipments outside the U.S. declined 1%.

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 2% increase in volume and mix, partially offset by a 1% decrease due to increased trade promotion and consumer coupon redemption expenses. The sales increase was due to a 4% increase in ready-to-serve volume, driven by growth inCampbell’s Chunky and Select, and the introduction of Soup at Hand, a new convenient portable sipping soup designed for out-of-home consumption.Campbell’s Chunky had increased sales volume due primarily to new varieties and continued promotional and advertising investment. The ongoing quality improvements in Campbell’s Select helped drive growth. Swanson broth shipments rose 20% behind a strong holiday season and the later timing of the

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Thanksgiving holiday. Condensed soup volume declined 3%. During the quarter, the company launched consumer marketing in support of the improved condensed vegetable varieties and the expanded line of Fun Favorites soups for kids. Since the marketing commenced, these condensed products have experienced an improvement in shipment and consumer purchase trends. Canada reported sales growth versus last year, while Away From Home sales were flat as double-digit soup shipment growth was offset by declines in frozen entrees and other product lines.

North America Sauces and Beverages reported flat sales with prior year. Volume and mix declined 2%, offset by a 2% increase in reported sales due to decreased trade promotion and consumer coupon redemption expenses. Pace volume grew double-digits from the prior year, driven by new marketing initiatives and product introductions. V8 vegetable juice andCampbell’s tomato juice reported sales increases driven by advertising and consumer marketing campaigns. The Latin America region also reported sales growth. These sales gains were offset by declines in Prego pasta sauces, V8 Splash juice drinks, and Franco-American canned pasta. Prego pasta sauce shipments declined due to the comparison with the year-ago quarter when introductory marketing behindPrego pasta bake sauce drove growth.

Biscuits and Confectionery reported a 14% increase in sales due to a 7% increase from the acquisition of Snack Foods Limited in Australia, a 1% increase from volume and mix, a 3% increase from higher selling prices, and a 3% increase from currency. The favorable currency impact principally reflects the strengthening of the Australian dollar. Pepperidge Farm reported sales increases due to volume gains in cookies, crackers, fresh bread and frozen products. The introduction of Goldfish Colors crackers and promotional display activity for the Super Bowl were the primary drivers of the growth in the cracker line, which reported a double-digit sales increase. Sales at Arnotts were even with a year ago, excluding the impact of the acquisition and currency, as supply issues associated with the start-up of the newly reconfigured manufacturing network were offset by the introduction of new products. Godiva Chocolatier’s worldwide sales increased due to growth in Europe and Asia, partially offset by continued weakness in same store sales in North America.

International Soup and Sauces reported an increase in sales of 16%. The favorable impact of currency accounted for a 13% increase and the acquisition of Erin Foods in Ireland accounted for 3% of the increase. Excluding these items, sales were unchanged. Dry soup sales improved driven by strong performances in the Nordic region and in Germany. United Kingdom sauces showed positive results behind a relaunch of canned sauces compared to steep declines a year ago. These increases were offset by wet soup volume declines in the United Kingdom, France, and Germany. Sales in the Asia Pacific region were unchanged.

Gross Margin

Gross margin, defined as net sales less cost of products sold, increased $56 million. As a percent of sales, gross margin increased from 44.5% in 2002 to 44.9% in 2003. The percentage increase was due to productivity gains, moderate increases in selling prices, and the comparison to year ago which included costs related to the Australian

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manufacturing reconfiguration, partially offset by inflation in ingredients, packaging materials and manufacturing costs.

Marketing and Selling Expenses

Marketing and selling expenses increased 5% in 2003 driven by the impact of the acquisitions, currency and costs associated with U.S. Soup shelving initiatives. As a percent of sales, Marketing and selling expenses were approximately 17% in both 2003 and 2002.

General and Administrative Expenses

Administrative expenses increased by approximately 33% due primarily to the ongoing impact of costs associated with investments in both systems and people to improve executional capability.

Research and development expenses increased 18% reflecting additional product development and quality improvement efforts.

Other expenses declined $25 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 2003, Other expenses included the gain of approximately $8 million on the sale of the site of the recently closed facility in Australia. 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 toward a higher cash component. Cash compensation costs are classified by function on the Statements of Earnings.

Operating Earnings

As previously noted, operating segment results for the period ended January 27, 2002 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, increased 3% from the prior year.

An analysis of operating earnings by reportable segment follows.

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Earnings from North America Soup and Away From Home declined 4% reflecting increased promotional spending, principally behind the improved condensed soup vegetable varieties and the new Soup at Hand portable sipping soup, increased investments in U.S. product development initiatives and shelving initiatives, and continued investment in people and systems to enhance execution capability.

Earnings from North America Sauces and Beverages increased 20% primarily due to lower manufacturing costs and marketing spending compared to the prior year. The marketing spending in the comparable quarter last year included heavy spending associated with the introduction of Prego pasta bake sauce.

Earnings from Biscuits and Confectionery increased 10% as reported, 5% excluding costs associated with the Australian manufacturing reconfiguration, and 4% excluding currency and the reconfiguration costs. The increase was due to higher sales compared to the year-ago quarter. Arnotts’ earnings were favorably impacted by an $8 million gain on the sale of the recently closed Melbourne facility. However, this gain was substantially offset by start-up costs associated with the manufacturing reconfiguration and severance costs related to the integration of the Snack Foods Limited acquisition.

Earnings from International Soup and Sauces decreased 3%. Excluding the impact of currency and the acquisition of Erin Foods in Ireland, operating earnings declined 14%. The earnings decline was driven by costs related to strategy development, investments in infrastructure, and higher promotional spending primarily behind the dry soup business in Europe.

Nonoperating Items

Interest expense increased to $46 million from $45 million in the prior year.

The effective tax rate was 31.9% for 2003 and 33.9% for 2002, as reported. The comparable tax rate for 2002 would be 33.3%, based on a pro forma adjustment for the adoption of SFAS No. 142. The reduction from the prior year reflects a number of factors which favorably impact foreign and U.S. rates.

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SIX MONTHS

Sales

Sales for the six months increased 2% to $3.62 billion from $3.54 billion last year. The change in net sales was attributed to 1% decrease from volume/mix, a 1% increase from higher selling prices, a 1% decrease due to higher trade promotion and consumer coupon redemption expenses, a 2% increase from acquisitions, and a 1% increase due to currency. Wet soup shipments declined 2% in the U.S. and 1% in international, resulting in a 2% decrease worldwide.

An analysis of net sales by reportable segment follows:

North America Soup and Away From Home reported a 3% decline in sales compared to the prior year. Volume and mix declined 2% coupled with a 1% decrease due to an increase in trade and consumer coupon redemption expenses. Shipments of condensed products declined 9%, while shipments of ready-to-serve products increased 2%. The ready-to-serve performance was driven by the launch of Soup at Hand, the new portable sipping soup. Swanson broth shipments increased 7% over the prior year. Canada reported sales growth over last year, while Away From Home sales declined slightly.

North America Sauces and Beverages reported a 1% decline in sales due to volume and mix declines. The volume decrease was driven by declines inPrego pasta bake sauce, V8 Splash, and Franco-American canned pasta, partially offset by volume gains in Pace Mexican sauces, Campbell’stomato juice and V8 vegetable juice.

Biscuits and Confectionery reported an 11% increase in sales due to a 6% increase from the Snack Foods acquisition, a 1% increase in volume/mix, a 3% increase from higher selling prices, a 2% increase from currency, offset by a 1% decrease due to increased trade and consumer coupon redemption expenses. Pepperidge Farm reported sales increases across its portfolio of cookies, crackers and bread. The primary driver of the growth was theGoldfish cracker line, which was driven by the introduction of Goldfish Colors crackers. Godiva Chocolatier reported sales growth, primarily in Europe and Asia. Arnotts in Australia contributed to the sales increase due primarily to price increases and the favorable impact of currency.

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The 10% increase in International Soup and Sauces sales was due to a 9% increase from currency and a 2% increase from the acquisition, offset by a 1% decline due to increased trade and consumer coupon redemption expenses. The dry soup business in Europe delivered a positive performance, offset by a decline in sales in wet soup and sauces in the United Kingdom and Germany.

Gross Margin

Gross margin, defined as net sales less cost of products sold, increased $32 million year-to-date. As a percent of sales, gross margin was 44.1% compared to 44.2% last year. The negative impact of lower soup sales and inflation on ingredients, packaging materials and manufacturing costs was substantially offset by productivity gains and comparison to a year ago which included higher costs related to the Australian manufacturing reconfiguration.

Marketing and Selling Expense

Marketing and selling expenses increased from $591 million in 2002 to $602 million in 2003. As a percent of sales, Marketing and selling expenses were approximately 17% in both 2003 and 2002. Excluding the acquisitions and currency, marketing expenses declined slightly compared to the prior year, while selling expenses increased due to shelving initiatives on the U.S. Soup business.

General and Administrative Expenses

Administrative expenses increased by approximately 11% primarily due to costs associated with investments in both systems and people, and integration costs associated with the acquisitions.

Other expenses declined from $66 million in 2002 to $13 million in 2003 due primarily to the elimination of $34 million of amortization upon adoption of SFAS No. 142 as of the beginning of this fiscal year. In 2003, Other expenses included the gain of approximately $8 million on the sale of the site of the recently closed facility in Australia. In addition, stock-based compensation costs declined as compared to the prior year as the company shifted elements of compensation programs from stock-based toward a higher cash component. Cash compensation costs are classified by function on the Statements of Earnings.

Operating Earnings

As previously noted, operating segment results for the period ended January 27, 2002 have been restated to reflect the pro forma impact of SFAS No. 142. Amortization expense of $34 million has been eliminated from prior period results. Segment operating earnings remained flat versus the prior year. An analysis of operating earnings by segment follows:

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The 8% decrease in earnings from North America Soup and Away From Home was due to lower sales, marketing costs associated with the launch of Soup at Hand, and costs associated with shelving and product development initiatives.

North America Sauces and Beverages reported a 20% increase in earnings due to favorable sales mix, a reduction in marketing expenses since the prior year included costs associated with the introduction of Prego pasta bake sauces, and manufacturing cost improvements.

Earnings from Biscuits and Confectionery increased 11% as reported, 3% excluding the impact of the Australian manufacturing reconfiguration and movements in currency exchange rates. The increase in earnings was attributed to an increase in sales, particularly at Pepperidge Farm, compared to a year-ago. In the current period, the gain on the sale of the recently closed site in Australia was completely offset by start-up costs related to the Australian manufacturing reconfiguration and costs related to the integration of the Snack Foods acquisition.

Earnings from International Soup and Sauces declined 6% as reported, 16% before the impact of currency. The acquisition did not impact the percentage comparison to the year-ago period. The decline in earnings was primarily due to weak sales performance, costs related to strategy development, investments in infrastructure, and costs associated with the closure of a dry soup plant in Ireland.

Corporate expenses decreased $15 million due principally to lower stock-based compensation costs.

Nonoperating Items

Net interest expense decreased to $91 million from $98 million in the prior year due to lower levels of debt and lower interest rates.

The effective tax rate was 32.2% for 2003 and 34.2% for 2002, as reported. The comparable tax rate for 2002 would be 33.6%, based on a pro forma adjustment for the adoption of SFAS No. 142. The reduction in the rate from the prior year reflects a number of factors which favorably impact foreign and U.S. tax rates.

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Restructuring Programs

As a result of the reconfiguration of the manufacturing network of Arnotts in Australia, costs of approximately $1 million in 2003 and $7 million ($5 million after tax) in 2002 were recorded as Cost of products sold, primarily representing accelerated depreciation on assets to be taken out of service. In addition, in the second quarter ended January 27, 2002, the company recorded a $1 million restructuring charge related to planned severance activities under this program. 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 (k) to the Consolidated Financial Statements.

Liquidity and Capital Resources

The company generated cash from operations of $473 million compared to $491 million last year as the seasonal increase in working capital during the period was larger than a year ago due to the very low level in place at the July 2002 fiscal year end.

Capital expenditures were $93 million compared to $61 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 in the first quarter of 2003 and a purchase price adjustment in 2002 related to the European dry soup and sauces acquisition.

The company purchased 120,000 shares in the quarter ended January 26, 2003. The company did not repurchase shares in the six month period last year. The company expects to repurchase sufficient shares over time to offset the impact of dilution from shares issued under incentive stock compensation plans.

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 amount, $3 million represented accrued interest earned on the swap prior to the termination date. 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 ten-year 5% 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

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entered into ten-year interest rate swaps that convert $300 million of the fixed-rate debt to variable.

The company believes that foreseeable liquidity, including the resolution of the contingencies described in Note (l) to the Consolidated Financial Statements, and capital resource requirements can 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.

At January 26, 2003, the company had approximately $1.4 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 January 26, 2003, except for the $48 million of standby letters of credit issued on behalf of the company. The credit facilities support the company’s commercial paper program. 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

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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. 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.

In December 2002, FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” This standard amends the transition and disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation.” The increased disclosure requirements are applicable to the company’s interim and annual financial statements beginning in the third quarter of the current fiscal year. However, the required disclosures are included in Note (b) to the Consolidated Financial Statements. The company currently does not intend to transition to the use of a fair value method for accounting for stock-based compensation. As permitted by SFAS No. 148,

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the company accounts for stock option grants and restricted stock awards in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Accordingly, no compensation expense has been recognized for stock options since all options granted had a exercise price equal to the market value of the underlying stock on the grant date.

In November 2002, FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” was issued. FIN 45 clarifies the requirements relating to a guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. The initial recognition and measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure provisions became effective in this quarter and are included in Note (m) to the Consolidated Financial Statements.

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB 51.” This Interpretation addressed consolidation by business enterprises of certain variable interest entities (“VIEs”). The Interpretation is effective immediately for all enterprises with variable interests in VIEs created after January 31, 2003. For variable interests in VIEs created before February 1, 2003, the provisions of this Interpretation will be applicable no later than the beginning of the first interim or annual period beginning after June 15, 2003. Further, the disclosure requirements of the Interpretation are applicable for all financial statements initially issued after January 31, 2003, regardless of the date on which the VIE was created. The company is in the process of completing its evaluation of this Interpretation, but does not expect the adoption to have a material impact on the financial statements.

The Emerging Issue Task Force (EITF) reached a consensus on Issue No. 02-17, “Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination” which clarifies certain recognition requirements in SFAS No. 141, “Business Combinations.” The guidance in this Issue is to be applied to business combinations consummated and goodwill impairments tests performed after October 25, 2002. The company does not expect its application to have a material impact on the financial statements.

Recent Developments

On February 13, 2003, the company issued a press release announcing results for the second quarter 2003 and commented on the outlook for earnings per share for the third quarter of 2003 and for the full year. In that release, the company maintained its previous full year earnings estimate of approximately $1.47 per share, before the cumulative effect of the accounting change. This compares to $1.28 per share as reported in 2002, or $1.44 when adjusted for amortization expense of $.13 per share and costs of $.03 per share related to the Australian reconfiguration. For the third quarter of 2003, the company expects earnings per share to be in the range of $.25 to $.27.

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Subsequent Event

Early in 2000, ten purported class action lawsuits were commenced against the company and two of its former executives 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 the former executives 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. On February 6, 2003, the company announced it had reached an agreement in principle to settle this case. If the court approves the settlement, all claims will be dismissed and the litigation will be terminated in exchange for a payment of $35 million, all of which will be covered by insurance. The company recorded a $35 million liability for the amount due under the agreement and a $35 million receivable from the anticipated insurance recovery as of January 26, 2003. In addition, the settlement agreement recognizes that entry into the settlement does not constitute an admission of fault or liability by the company or any other defendant.

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 in November 2002 to variable. See the Liquidity and Capital Resources section of Management’s Discussion and Analysis of Results of Operations and Financial Condition for an additional discussion of these interest rate swap contracts.

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 two of its former executives 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 the former executives 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. On February 6, 2003, the company announced it had reached an agreement in principle to settle this case. If the court approves the settlement, all claims will be dismissed and the litigation will be terminated in exchange for a payment of $35,000,000, all of which will be covered by insurance. In addition, the settlement agreement recognizes that entry into the settlement does not constitute an admission of fault or liability by the company or any other defendant.

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.

Following receipt of a Notice of Proposed Adjustment on November 20, 2002, the company received an Examination Report from the Internal Revenue Service on December 23, 2002, which included a challenge to the treatment of gains and interest deductions claimed in the company’s fiscal 1995 federal income tax return, relating to

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transactions involving government securities. If the proposed adjustment were upheld, it would require the company to pay a net amount of approximately $100,000,000 in taxes, accumulated interest to date, and penalties. Interest will continue to accrue until the matter is resolved. 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 is challenging these 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.

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ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        Election of Directors