SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
Campbell PlaceCamden, New Jersey 08103-1799Principal 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.
Yes [X] No [ ].
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b - 2 of the Securities Exchange Act of 1934).
There were 410,521,764 shares of Capital Stock outstanding as of June 4, 2003.
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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Balance Sheets
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Statements of Cash Flows(unaudited)(millions)
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Statements of Shareowners’ Equity (Deficit)
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CAMPBELL SOUP COMPANY CONSOLIDATEDNotes 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:
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Changes in the carrying amount for goodwill for the period ended April 27, 2003 are as follows:
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April 27, 2003
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April 28, 2002
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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 $129 million for the third quarter ended April 27, 2003 versus $96 million in the comparable quarter a year ago. Earnings per share were $.31, compared to $.23 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 third quarter ended April 28, 2002 would have been $109 million, or $.27 per share. Net earnings for the third quarter of the prior year were impacted by costs of approximately $4 million (slightly less than $.01 per share) related to the Australian manufacturing reconfiguration. The increase in earnings was also due to higher sales during the quarter and a lower effective tax rate compared to the prior year, partially offset by higher administrative expenses and higher pension expense in 2003.
For the nine months ended April 27, 2003, earnings before the cumulative effect of accounting change were $552 million compared to $470 million in the year-ago period. Excluding amortization of $39 million eliminated under SFAS No. 142, net earnings for the nine months ended April 28, 2002 were $509 million. Earnings per share before the cumulative effect of accounting change rose to $1.34 from $1.14 as reported in 2002. Earnings per share for the year-ago period included amortization expense of approximately $.10 per share eliminated under SFAS No. 142. The increase over the prior year in net earnings before the cumulative effect of the accounting change is due to higher sales during the period, a reduction in costs related to the Australian manufacturing reconfiguration which were approximately $10 million in 2002 and $1 million in 2003, lower interest expense, and a reduction in the tax rate, partially offset by higher administrative expense and 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 the International Soup and Sauces segment. 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.
THIRD QUARTER
Sales
Net sales in the quarter increased 17% to $1.60 billion from $1.37 billion last year. The change was attributed to a 6% increase in volume and mix, a 2% increase from higher selling prices, a 2% increase due to lower revenue reductions from trade promotion and consumer coupon redemption programs, a 3% increase from acquisitions and a 4% increase due to currency. Worldwide wet soup shipments increased 9% this quarter compared to last year. U.S. wet soup shipments increased 10%, while shipments outside the U.S. increased 8%.
An analysis of net sales by reportable segment follows:
The 16% increase in sales from North America Soup and Away From Home was due to an 8% increase in volume and mix, a 2% increase due to higher price realization, a 5% increase due to lower revenue reductions from trade promotion and consumer coupon redemption programs, and a 1% increase due to currency. The 10% increase in U.S. soup shipments was driven primarily by lower retailer inventory reductions in the quarter versus year ago and positive consumer takeaway as a result of new products, new shelving initiatives, and more productive trade promotion programs. Condensed soup
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shipments increased 2% as the continued advertising of the improved vegetable soups was supplemented by consumer support for the expanded line of Fun Favorites soups for kids. Ready-to-serve shipments increased 17%, driven by the launch this year of Soup at Hand, a new convenient portable sipping soup, and by strong consumer takeaway gains in Select. Swanson broth also contributed to the segment sales increase, with a shipment increase of 38% over the prior year, behind the Easter holiday promotional activity and continued success of the cooking with broth marketing campaign. Canada reported sales growth versus last year driven by increased soup shipments, while Away From Home experienced increased soup shipments, offset by declines in frozen entrees and other product lines.
North America Sauces and Beverages reported a 7% increase in sales due to a 6% increase in volume and mix, a 1% increase from higher price realization, a 1% increase due to lower revenue reductions from trade promotion and consumer coupon redemption programs, offset by a 1% decline due to currency. Volume increases were reported across most product categories. Pace contributed to the volume growth behind strong base business growth. The successful launch ofV8 Splash Smoothies drove volume growth in beverages. Franco-American canned pasta and gravies also reported volume growth. Prego pasta sauce volume was negatively impacted by significantly lower shipments of Prego pasta bake sauce, which was heavily promoted a year ago during its initial launch year. Latin America and Mexico reported strong volume gains.
Biscuits and Confectionery reported a 22% increase in sales due to an 11% increase from the acquisition of Snack Foods Limited in Australia, a 4% increase from volume and mix, a 4% increase from higher price realization, a 5% increase from currency, offset by a 2% increase in revenue reductions from higher trade promotion and consumer coupon redemption programs. The favorable currency impact principally reflects the strengthening of the Australian dollar. Pepperidge Farm reported volume increases across its portfolio due to gains in cookies, crackers, fresh bread and frozen products. Volume growth led to increased sales at Arnotts. Godiva Chocolatier’s worldwide sales increased due to growth in Asia, partially offset by continued weakness in same store sales in North America.
International Soup and Sauces reported an increase in sales of 22%. The favorable impact of currency accounted for a 17% increase, the acquisition of Erin Foods in Ireland added 3%, volume and mix added 3%, offset by a 1% decline due to lower price realization. Wet soup shipments in the Asia Pacific region increased double-digit during the period.
Gross Margin
Gross margin, defined as net sales less cost of products sold, increased $91 million. As a percent of sales, gross margin decreased from 43.0% in 2002 to 42.5% in 2003. The percentage decrease was due to product mix (approximately 0.8 percentage points) and costs associated with quality upgrades (approximately 1.4 percentage points), partially offset by benefits from cost productivity programs (approximately 1.3 percentage points) and costs incurred in 2002 related to the Australian manufacturing reconfiguration (approximately 0.4 percentage points).
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Marketing and Selling Expenses
Marketing and selling expenses increased 7% in 2003 primarily as a result of the acquisitions and currency translation. As a percent of sales, Marketing and selling expenses were approximately 16% in 2003 and approximately 18% in 2002.
Administrative Expenses
Administrative expenses increased by approximately $43 million, or 46%. Currency and acquisitions accounted for 6 percentage points of the increase. The remaining increase was driven primarily by a number of items, including costs associated with ongoing litigation (approximately 10 percentage points), an increase in bad debt expense due to the bankruptcy of a major U.S. customer (approximately 4 percentage points), investments in information technology and supply chain to improve execution capabilities (approximately 6 percentage points), and an increase in employee benefit costs (approximately 7 percentage points).
Research and Development Expenses
Research and development expenses increased 35%, or $6 million, reflecting additional resources behind innovation initiatives and quality improvement programs.
Other Expenses
Other expenses declined $20 million from the prior year due primarily 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 in 2003 from stock-based toward a higher cash component. Cash compensation costs are classified by function on the Statements of Earnings. See also Note (l) of the Notes to Consolidated Financial Statements.
Operating Earnings
As previously noted, operating segment results for the period ended April 28, 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 17% 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 increased 32% primarily due to the increase in soup sales and lower marketing expenses.
Earnings from North America Sauces and Beverages decreased 3% due to increased marketing investments primarily behind the new product introduction of V8 Splash Smoothies.
Earnings from Biscuits and Confectionery decreased 10%, primarily due to increased advertising and promotional costs. Operating earnings in 2003 included $5 million of transitional expenses related to the planned closure of a Pepperidge Farm bakery in Norwalk, Connecticut and construction of a new bakery in Bloomfield, Connecticut. Operating earnings in 2002 included $6 million of costs related to the Australian manufacturing reconfiguration.
Earnings from International Soup and Sauces increased 42%. Currency translation contributed 19 percentage points of the increase. The remaining increase was driven by improved gross margin, reflecting volume growth in the higher margin dry soup business in Europe, and lower marketing spending.
Corporate expenses increased to $46 million from $33 million primarily due to costs associated with ongoing litigation.
Nonoperating Items
Interest expense increased to $45 million from $44 million in the prior year.
The effective tax rate was 32.1% for 2003 and 34.2% for 2002, as reported. The comparable tax rate for 2002 would be 33.1%, 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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NINE MONTHS
Sales for the nine months increased 6% to $5.22 billion from $4.91 billion last year. The change in net sales was attributed to a 1% increase from volume and mix, a 1% increase from higher selling prices, a 2% increase from acquisitions, and a 2% increase due to currency. Wet soup shipments increased 1% in the U.S. and 1% worldwide.
North America Soup and Away From Home reported a 2% increase in sales compared to the prior year. Volume and mix increased 1% coupled with a 1% increase due to higher price realization. U.S. shipments of condensed products declined 6%, while shipments of ready-to-serve products increased 5%. The ready-to-serve performance was driven primarily by the launch of Soup at Hand, the new portable sipping soup, and sales gains from Campbell’s Chunky and Select.Swanson broth shipments increased 12% over the prior year driven by strong holiday performance and the continued success of the cooking with broth marketing campaign. Canada reported sales growth over last year, while Away From Home sales declined slightly.
North America Sauces and Beverages reported a 1% increase in sales due to a 1% increase in volume and mix and a 1% increase from higher price realization, offset by a 1% decline due to currency translation related to the Mexican peso.Pace delivered double-digit volume growth. V8 Splash Smoothies, introduced in January, drove beverage volume gains. Franco-American canned pasta and gravies volumes declined during the period, while significantly lower volumes of Pregopasta bake sauce were reported relative to last year’s launch period.
Biscuits and Confectionery reported a 14% increase in sales due to a 7% increase from the Snack Foods acquisition, a 2% increase in volume and mix, a 3% increase from higher price realization, a 3% increase from currency, offset by a 1% decrease due to an increase in revenue reductions from trade promotion and consumer coupon redemption programs. Pepperidge Farm reported sales increases driven by biscuits, crackers and fresh bakery products due to product innovation, increased promotional activity, and
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increased distribution. Godiva Chocolatier reported sales growth, primarily in Europe and Asia. Arnotts in Australia also contributed to the increase in sales.
The 14% increase in International Soup and Sauces sales was due to a 12% increase from currency, a 2% increase from the acquisition, and a 1% increase in volume and mix, offset by a 1% decline due to an increase in revenue reductions from trade promotion and consumer coupon redemption programs. The dry soup business in Europe delivered a positive sales performance, offset by declines in sales in wet soup and sauces in the United Kingdom and Germany.
Gross margin, defined as net sales less cost of products sold, increased $123 million year-to-date. As a percent of sales, gross margin was 43.6% compared to 43.8% last year. The negative impact of product mix (approximately 0.1 percentage point) and costs associated with quality improvements (approximately 1.4 percentage points) was substantially offset by the benefits of cost productivity programs (approximately 1.1 percentage points) and comparison to a year ago which included higher costs related to the Australian manufacturing reconfiguration (approximately 0.2 percentage points).
Marketing and Selling Expense
Marketing and selling expenses increased from $837 million in 2002 to $865 million in 2003. The increase was due to the impact of currency translation and the acquisitions in Australia and Ireland. As a percent of sales, Marketing and selling expenses were approximately 17% in both 2003 and 2002.
Administrative expenses increased by approximately 22%. Currency and acquisitions accounted for 6 percentage points of the increase. The remaining increase was driven primarily by a number of items, including increases in costs associated with ongoing litigation and bad debt expense (approximately 3 percentage points), investments in information technology and supply chain to improve execution capabilities (approximately 7 percentage points), and higher pension expense (approximately 2 percentage points).
Other expenses declined from $108 million in 2002 to $35 million in 2003 due primarily to the elimination of $51 million of amortization upon adoption of SFAS No. 142 as of the beginning of this fiscal year. In 2003, Other expenses included a 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 in 2003 from stock-based toward a higher cash component. Cash compensation costs are classified by function on the Statements of Earnings. See also Note (l) of the Notes to Consolidated Financial Statements.
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As previously noted, operating segment results for the period ended April 28, 2002 have been restated to reflect the pro forma impact of SFAS No. 142. Amortization expense of $51 million has been eliminated from prior period results. Segment operating earnings increased 4% versus the prior year. An analysis of operating earnings by segment follows:
Earnings from North America Soup and Away From Home were even with year ago as the benefits of sales growth and lower marketing expenditures were offset by increased costs associated with shelving and product development initiatives.
North America Sauces and Beverages reported a 13% increase in earnings due to favorable sales mix and manufacturing cost improvements.
Earnings from Biscuits and Confectionery increased 6%. Currency contributed approximately 3 percentage points of the increase. Operating earnings in 2002 included $14 million of costs associated with the Australian manufacturing reconfiguration. Operating earnings in 2003 were impacted by approximately $5 million of transitional expenses related to the closure of the Pepperidge Farm bakery in Norwalk, Connecticut and construction of a new bakery in Bloomfield, Connecticut, and $1 million of Australian reconfiguration costs.
Earnings from International Soup and Sauces increased 8% versus the year ago period. The increase was driven by favorable currency translation rates, partially offset by severance costs related to the closure of a dry soup plant in Ireland and costs related to a strategic procurement initiative in Europe.
Net interest expense decreased to $136 million from $142 million in the prior year due to lower levels of debt and lower interest rates.
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The effective tax rate was 32.2% for 2003 and 34.2% for 2002, as reported. The comparable tax rate for 2002 would be 33.5%, 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.
Restructuring Programs
As a result of the reconfiguration of the manufacturing network of Arnotts in Australia, costs of approximately $1 million in 2003 and $13 million ($9 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, most of which will be realized in 2004. See also Note (k) to the Consolidated Financial Statements.
Liquidity and Capital Resources
The company generated cash from operations of $706 million compared to $829 million last year. The decrease was primarily attributed to an increase in working capital during the period as compared to a decrease in working capital in the year ago period. The increase this year was a result of the very low level of working capital in place at the July 2002 fiscal year end.
Capital expenditures were $158 million compared to $112 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 compared to $269 million in fiscal 2002. This increase was driven by the Pepperidge Farm bakery and soup quality projects partially offset by reduced spending in Australia on the manufacturing reconfiguration which was substantially completed in 2002.
Businesses acquired, as presented in the Statements of Cash Flows, primarily 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 432,000 shares in the quarter ended April 27, 2003 for approximately $9 million. In the first nine months, the company purchased 552,000 shares for approximately $13 million. The company did not repurchase shares in the nine 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.
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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 entered into ten-year interest rate swaps that converted $300 million of the fixed-rate debt to variable.
The company believes that foreseeable liquidity, including the resolution of the contingencies described in Note (m) 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 April 27, 2003, the company had approximately $1.3 billion of notes payable due within one year and $38 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 April 27, 2003, except for the $38 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 programs – 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 the costs for these programs, which are classified as a reduction of revenue, involves use of judgment related to performance and redemption estimates. Estimates are made based on
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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, employee 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.
The discount rate is established as of the company’s fiscal year-end measurement date based on high-quality, long-term debt securities. The estimated return on plan assets is a long-term assumption based upon historical experience and expected future performance, considering the company’s current and projected investment mix. Within any given fiscal period, significant differences may arise between the actual return and the estimated long-term return on plan assets. The value of plan assets, used in the calculation of pension expense, is determined on a calculated method that recognizes 20% of the difference between the actual fair value of assets and the expected calculated method.
The weighted-average discount rate as of July 28, 2002 was 6.90% and the weighted-average expected return on plan assets was 9.30%. Based on current economic conditions, both assumptions may be reduced as of the 2003 valuation date. This would result in an increase in pension expense and postretirement medical expense in fiscal 2004. In connection with the upcoming year-end valuation, the company may also recognize an additional minimum liability charge and resultant non-cash charge to equity if the declines in plan asset performance and discount rate continue. Contributions to the U.S. plans are not required in 2003. However, the likelihood of future pension contributions has increased as a result of the economic conditions previously noted.
The assumptions used in the year-end valuation will be finalized at the fiscal year end. Estimated sensitivities related to the U.S. pension plans are as follows: a 50 basis point reduction in the discount rate would increase expense by approximately $8 million; a 50 basis point reduction in the estimated return on assets would increase expense by approximately $7 million. Based on the plan asset performance fiscal year to date, it is very likely that pension expense will increase significantly next year as a result of
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increased amortization of unrecognized losses, reduced return on asset assumptions and a reduced discount rate.
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, the 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. 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, 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
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measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure provisions are included in Note (o) 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 Issues 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.
In April 2003, the FASB issued SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This standard amends and clarifies financial accounting and reporting for derivative instruments and hedging activities, primarily as a result of decisions made by the FASB Derivatives Implementation Group subsequent to the original issuance of SFAS No. 133 and in connection with other FASB projects. This standard is generally effective prospectively for contracts and hedging relationships entered into or modified after June 30, 2003. The company is currently evaluating the impact of this standard.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 changes the accounting for certain financial instruments that, under previous guidance, could be classified as equity or “mezzanine” equity, by now requiring those instruments to be classified as liabilities (or assets in some circumstances) in the statement of financial position. Further, SFAS No. 150 requires disclosure regarding the terms of those instruments and settlement alternatives. The guidance in SFAS No. 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The company is in the process of evaluating this standard, but does not expect the adoption to have a material impact on the financial statements.
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Recent Developments
On May 19, 2003, the company announced results for the third quarter 2003 and commented on the outlook for earnings per share for the year. In that announcement, the company provided a full year earnings estimate of approximately $1.49 to $1.51 per share, before the cumulative effect of the accounting change. This compares to $1.28 per share as reported in 2002, which included amortization expense of $.13 per share and costs of $.03 per share related to the Australian reconfiguration. For the fourth quarter of 2003, the company expects earnings per share to be in the range of $.15 to $.17. In addition, on May 19, 2003, the company announced several new soup initiatives and updates for 2004.
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 converted $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. The district court’s order approving the settlement was issued on May 22, 2003; that order is subject to appeal until June 23, 2003. Pursuant to the court’s order, all claims have been dismissed and the litigation has been terminated in exchange for a payment of $35 million, which is expected to be made on June 23, 2003. The full amount of the payment will be covered by insurance. 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 million), plus unspecified exemplary and punitive damages. While this case is still in the discovery stage and the ultimate disposition of complex litigation is inherently difficult to assess, the company believes the action is without merit and is defending the case vigorously.
As also previously reported, 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 transactions involving government securities. If the proposed adjustment were upheld, it would require the company to pay a net amount of
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approximately $100 million 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 of the company.
In April 2003, the company began discussions with the New Jersey Department of Environmental Protection (“NJDEP”) regarding certain air emissions from the company’s South Plainfield, New Jersey flavoring and spice mix plant. These emissions may exceed limits established pursuant to the New Jersey Air Pollution Control Act. The discussions are likely to result in the company installing air emission control equipment on an agreed upon schedule. The NJDEP may require additional expenditures, which can not be determined at this time. As of May 30, 2003, the company incurred costs of approximately $83 thousand related to the evaluation of this issue, and the company expects to spend up to $1 million (exclusive of any other amounts) on the installation of required air emissions control equipment. The company does not expect the cost of installing the emission control equipment or any other expenditures required by the NJDEP will have a material impact on the consolidated financial condition or results of operation of the company.
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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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I, Robert A. Schiffner, certify that:
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INDEX TO EXHIBITS
Exhibits
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