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.

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).

Yes  [X]   No  [  ].

There were 411,067,183 shares of Capital Stock outstanding as of December 8, 2003.

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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 Consolidated Financial Statements.

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CAMPBELL SOUP COMPANY CONSOLIDATED

Balance Sheets

(unaudited)
(millions, except per share amounts)

See Notes to Consolidated Financial Statements.

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CAMPBELL SOUP COMPANY CONSOLIDATED

Statements of Cash Flows
(unaudited)
(millions)

See Notes to Consolidated Financial Statements.

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CAMPBELL SOUP COMPANY CONSOLIDATED

Statements of Shareowners’ Equity (Deficit)

(unaudited)
(millions, except per share amounts)

See Notes to Consolidated 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:

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Changes in the carrying amount for goodwill for the period ended November 2, 2003 are as follows:

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Three Months Ended
November 2, 2003

Three Months Ended
October 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 $211 million for the first quarter ended November 2, 2003 versus $192 million before the cumulative effect of accounting change in the comparable quarter a year ago. Earnings per share were $.51, compared to $.47, before the cumulative effect of accounting change, a year ago. (All earnings per share amounts included in Management’s Discussion and Analysis are presented on a diluted basis.) The increase in earnings was primarily driven by sales increases.

In connection with the adoption of Statement of Financial Accounting Standards (SFAS) No. 142 in fiscal 2003, the company recognized a non-cash charge of $31 million (net of a $17 million tax benefit) or $.08 per share, as a cumulative effect of accounting change. This charge related to impaired goodwill associated with the Stockpot business, a food service business acquired in August 1998.

In the fourth quarter of fiscal 2003, certain stock-based incentive compensation expenses were reclassified from Other expenses to reflect the costs by function on various lines of the Statements of Earnings. The prior period has been reclassified to conform to the current presentation.

FIRST QUARTER

Sales

Net sales in the quarter increased 12% to $1.91 billion from $1.71 billion last year. The change was attributed to a 2% 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 2% increase from acquisitions and a 4% increase due to currency.

An analysis of net sales by reportable segment follows:

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The 8% increase in sales from North America Soup and Away From Home was due to a 2% increase from higher price realization, a 4% increase attributable to lower revenue reductions from trade promotion and consumer coupon redemption programs, and a 2% increase from currency. Volume and mix was flat compared to the year-ago quarter. In the U.S., ready-to-serve soup shipments rose 6 %, condensed soup declined 7% and broth rose 14%. The ready-to-serve increase was driven by the strong performance of the new M’m! M’m! Good! To Go convenience platform including Campbell’s Select and Chunky soups in microwavable bowls, which were introduced this year, and Campbell’s Soup at Hand. Additional varieties of Campbell’s Soup at Hand, a portable sipping soup introduced last year, were also launched during the quarter. Total sales of the Campbell’s Chunky and Select branded products and Campbell’s Soup at Hand rose significantly compared to the prior year. Consumer demand for the new microwavable bowl products has exceeded expectations and the company announced plans to increase production capacity. Aggressive competitive activities impacted the canned ready-to-serve and condensed soup businesses. Away From Home reported increased sales due to shipment growth in soup products. The Canadian business reported a sales volume decline as shipments were unfavorably impacted by start up issues with a new distribution partner.

North America Sauces and Beverages reported a 7% increase in sales due to a 3% increase in volume and mix and a 4% increase due to lower revenue reductions from trade promotion and consumer coupon redemption programs. The sales increase was primarily due to the performance of beverages. V8 vegetable juice reported sales gains due to a successful advertising campaign and the introduction of new varieties. V8 Splash Smoothies, introduced in the second-half of last year, and Campbell’s tomato juice also contributed to the sales growth. Prego pasta sauces experienced a decline in sales, attributable in part to weakness in the Italian sauce category. Pace sales were even with the year-ago quarter.

Biscuits and Confectionery reported a 20% increase in sales due to a 6% increase from acquisitions, a 5% increase from volume and mix, a 3% increase from higher price realization and a 6% increase from currency. The favorable currency impact principally reflects the strengthening of the Australian dollar. Pepperidge Farm contributed to the sales increase primarily as a result of growth in cookies and fresh bread. Arnott’s reported a sales increase from volume gains in biscuit products. Godiva Chocolatier’s worldwide sales increased due to growth in the Asia Pacific region, duty free businesses, and catalog and internet sales. Same store sales in the U.S. were below last year.

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International Soup and Sauces reported an increase in sales of 18%. The favorable impact of currency accounted for a 12% increase, the acquisition of Erin Foods in Ireland in 2003 added 1%, volume and mix added 8%, offset by a 1% decrease due to lower price realization and a 2% decrease due to higher revenue reductions from trade promotion and consumer coupon redemption programs. In Europe, sales increased compared to the year-ago quarter due to the improved performance of dry soup products across the region, partially offset by continued declines in wet soup and sauces in the U.K. In Asia Pacific, soup sales rose significantly across the region. Sales gains in Australia were driven by new product introductions and increases in broth shipments.

Gross Margin

Gross margin, defined as net sales less cost of products sold, increased $67 million. As a percent of sales, gross margin decreased from 43.1% in 2003 to 42.0% in 2004. The percentage decrease was primarily due to product mix (approximately 1.2 percentage points), costs associated with quality and packaging improvements (approximately 1.0 percentage points) and the acquisition of businesses with lower margins (approximately 0.3 percentage points), partially offset by higher selling prices (approximately 1.1 percentage points) and lower promotional spending (approximately 0.7 percentage points).

Marketing and Selling Expenses

Marketing and selling expenses increased 7% in 2004 primarily as a result of the impact of currency translation (approximately 3 percentage points) and acquisitions (approximately 2 percentage points). As a percent of sales, Marketing and selling expenses were approximately 15% in 2004 and approximately 16% in 2003.

Administrative Expenses

Administrative expenses increased by approximately $15 million, or 14% primarily due to the impact of currency translation (approximately 5 percentage points) and expenses related to litigation (approximately 5 percentage points).

Research and Development Expenses

Research and development expenses increased 11%, or $2 million, due primarily to the impact of acquisitions and currency translation (approximately 5 percentage points) and the continued investment in new product development (approximately 5 percentage points).

Operating Earnings

Segment operating earnings increased 9% from the prior year.

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An analysis of operating earnings by reportable segment follows:

Earnings from North America Soup and Away From Home increased 8% due to the increase in sales.

Earnings from North America Sauces and Beverages increased 1% due to the increase in sales, partially offset by declines in gross margin due to product mix and an increase in marketing and selling expenses.

Earnings from Biscuits and Confectionery increased 10% due to the increase in sales, partially offset by product mix and start up expenses at the new Pepperidge Farm bakery in Bloomfield, Connecticut.

Earnings from International Soup and Sauces increased 35% primarily due to the sales gains and improved gross margins, reflecting product mix and productivity improvements.

Corporate expenses increased to $26 million from $20 million primarily due to increases in legal expenses related to ongoing litigation.

Nonoperating Items

Interest expense decreased to $43 million from $45 million in the prior year, primarily due to lower levels of short-term debt.

The effective tax rate for the quarter was 32.2% for 2004 and 32.6% for 2003. The effective tax rate for the 2003 year was 32.2%.

Liquidity and Capital Resources

The company used cash from operations of $66 million compared to $70 million generated from operations last year. This reduction in cash flow reflects a $50 million voluntary contribution to a U.S. pension plan and a larger seasonal increase in working capital than the year ago period.

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Capital expenditures were $23 million compared to $37 million a year ago. As previously announced, capital expenditures are expected to be approximately $285 million in fiscal 2004 compared to $283 million in fiscal 2003.

Businesses acquired, as presented in the Statements of Cash Flows, primarily represent the acquisitions of Snack Foods Limited and Erin Foods in the first quarter of 2003 and the acquisition of certain brands from George Weston Foods Limited in the first quarter of 2004.

The company purchased 178,000 shares in the quarter ended November 2, 2003 at a cost of approximately $4 million. The company did not repurchase shares in the three 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 September 2003, the company issued $300 million ten-year 4.875% fixed-rate notes. The proceeds were used to repay commercial paper borrowings and for other general corporate purposes. While planning for the issuance of these notes, the company entered into treasury lock agreements with a notional value of $100 million that effectively fixed a portion of the interest rate on the debt prior to issuance. These agreements were settled at a minimal gain upon issuance of the notes, which will be amortized over the life of the notes. In connection with this issuance, the company entered into ten-year interest rate swaps that convert $200 million of the fixed-rate debt to variable.

In September 2003, the company also entered into $100 million five-year interest rate swaps that convert a portion of the 5.875% fixed-rate notes due October 2008 to variable.

At November 2, 2003, the company had approximately $1.2 billion of notes payable due within one year and $32 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 November 2, 2003, except for the $32 million of standby letters of credit issued on behalf of the company. In September 2003, the company entered into a $900 million committed 364-day revolving credit facility, which replaced an existing $900 million 364-day facility that matured in September 2003. The company also has a $900 million revolving credit facility that matures in September 2006. 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.

Shareowners’ equity includes a minimum liability, net of tax, of $212 million in 2004 and $208 million in 2003, principally related to a U.S. pension plan. Following stock market declines in July 2002, and continuing through 2003, the fair value of assets included in certain pension funds fell below the accumulated benefit obligation. As required under accounting principles generally accepted in the United States, the company recognized the additional minimum liability and reclassified an existing pension asset to equity. This non-cash adjustment did not impact 2002 operating results. However, pension expense is expected to increase in 2004 primarily due to a lower discount rate and a reduction in the

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estimated return on plan assets. As previously noted, the company made a $50 million voluntary contribution to a U.S. pension plan in 2004.

The company guarantees approximately 1,250 bank loans to Pepperidge Farm independent sales distributors by third party financial institutions used to purchase distribution routes. The maximum potential amount of the future payments the company could be required to make under the guarantees is approximately $85 million. The company’s guarantees are indirectly secured by the distribution routes. The company does not believe that it is probable that it will be required to make guarantee payments as a result of defaults on the bank loans guaranteed. See also Note (l) to the Consolidated Financial Statements for information on guarantees.

The company believes that foreseeable liquidity, including the resolution of the contingencies described in Note (k) to the Consolidated Financial Statements 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 future 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.

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 significant accounting policies of the company are described in Note 1 to the Consolidated Financial Statements and the significant accounting estimates are described in Management’s Discussion and Analysis included in the 2003 Annual Report on Form 10-K. The impact of new accounting standards is discussed in the following section. There have been no other changes in the company’s accounting policy in the current period that had a material impact on the company’s consolidated financial condition or results of operation.

Recently Issued Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities, an Interpretation of ARB 51.” This Interpretation addresses consolidation by business enterprises of certain variable interest entities (VIEs). The Interpretation as amended is effective immediately for all enterprises with interests in VIEs created after January 31, 2003.

In October 2003, the FASB deferred the effective date for applying the provisions of FIN 46 to interests held in VIEs created before February 1, 2003 to the end of the first interim

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or annual period ending after December 15, 2003. In addition, the FASB issued an Exposure Draft of a proposed Interpretation of FIN 46 in October 2003 to address implementation issues. The company has investments consisting of limited partnership interests in affordable housing partnership funds. These investments, which were all in existence prior to January 31, 2003, appear to be variable interest entities. Based on current guidance, the company does not expect the adoption of FIN 46 to have a material impact on the financial statements. The company will continue to monitor modifications to FIN 46.

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 adoption of this standard did not impact the financial statements.

Recent Developments

On November 24, 2003, the company announced results for the first quarter 2004 and commented on the outlook for earnings per share for the second quarter of 2004 and for the full year. In that announcement, the company maintained its previous earnings estimate of approximately $1.58 per share for 2004 and announced that it expects diluted earnings to be in the range of $.52 to $.54 per share for the second quarter of 2004.

Forward-Looking Statements

This quarterly report contains certain statements that 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. One can also identify them by the fact that they do not relate strictly to historical or current facts. 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 regarding future events and estimates which could be inaccurate and which are inherently subject to risks and uncertainties.

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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 2003 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:

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 any 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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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 2003. There have been no significant changes in the company’s portfolio of financial instruments or market risk exposures from the fiscal 2003 year-end except as follows:

In August 2003, the company entered into a pay floating CAD/receive floating USD swap with a notional value of $53 million. The company also entered into two pay fixed CAD/receive fixed USD swaps with notional values of $61 million each.

In August 2003, a pay fixed SEK/receive fixed USD swap with a notional value of $31 million matured. The company entered into a pay floating SEK/receive floating USD swap with a notional value of $18 million which matures in 2005.

In October 2003, the company entered into a pay floating GBP/receive floating USD swap with a notional value of $125 million to replace a portion of a forward exchange contract that matured.

In addition, see the Liquidity and Capital Resources discussion in Item 2 for information on the interest rate swap activity in 2004.

ITEM 4. CONTROLS AND PROCEDURES

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PART II

ITEM 1. LEGAL PROCEEDINGS

As 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 L.L.C., 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 amended complaint to be $200 million), plus unspecified exemplary and punitive damages. While 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 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.

As also previously reported, the company began discussions in April 2003 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 expected to result in the company installing air emission control equipment on an agreed upon schedule, which the company anticipates

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will cost up to $1 million. In addition, the NJDEP will likely require other expenditures, which the company anticipates will not exceed $500 thousand. As of November 2, 2003, the company incurred costs of approximately $150 thousand related to the evaluation of this issue. The company does not expect that the cost of installing the emission control equipment or any other expenditure required by the NJDEP will have a material impact on the consolidated financial condition or results of operation of the company.

In July 2003, the company began discussions with the Wisconsin Department of Natural Resources (WDNR) regarding certain air emissions from the company’s Milwaukee, Wisconsin flavoring and spice mix plant. These emissions may exceed limits established pursuant to the Wisconsin Clean Air Act Program. The discussions are likely to result in the company installing air emission control equipment on an agreed upon schedule. The WDNR may require additional expenditures, which can not be determined at this time. As of November 2, 2003, the company incurred costs of approximately $110 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 that the cost of installing the emission control equipment or any other expenditures required by the WDNR will have a material impact on the consolidated financial condition or results of operation of the company.

On July 15, 2003, Pepperidge Farm, Incorporated, an indirect wholly-owned subsidiary of the company, made a submission to the United States Environmental Protection Agency (EPA) relating to its use and replacement of certain appliances containing ozone-depleting refrigerants. The submission was made pursuant to the terms of the Ozone-Depleting Substance Emission Reduction Bakery Partnership Agreement (the EPA Agreement) entered into by and between Pepperidge Farm and the EPA. Pepperidge Farm executed the EPA Agreement in April 2002 as part of a voluntary EPA-sponsored program relating to the reduction of ozone-depleting refrigerants used in the bakery industry. As a result of the EPA Agreement, as of November 2, 2003, Pepperidge Farm has incurred costs of approximately $4 million relating to the evaluation and replacement of certain of its refrigerant appliances. If the submission is approved by the EPA, in addition to the expenditures previously made, Pepperidge Farm will be required to (i) pay a penalty in the amount of approximately $370 thousand, and (ii) replace certain additional refrigerant appliances, which Pepperidge Farm expects to cost approximately $750 thousand. The company does not expect that the cost of complying with the EPA Agreement 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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INDEX TO EXHIBITS

Exhibits