SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE ACT OF 1934
Campbell PlaceCamden, New Jersey 08103-1799Principal Executive Offices
Telephone Number: (856) 342-4800
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 þ No o.
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 412,174,263 shares of Capital Stock outstanding as of March 2, 2005.
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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Balance Sheets
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Statements of Cash Flows
(unaudited)(millions)
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CAMPBELL SOUP COMPANY CONSOLIDATEDStatements of Shareowners’ Equity
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CAMPBELL SOUP COMPANY CONSOLIDATEDNotes to Consolidated Financial Statements
(unaudited)(dollars in millions, except per share amounts)
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Changes in the carrying amount for goodwill for the period ended January 30, 2005 are as follows:
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January 30, 2005
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February 1, 2004
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Historical information on the reporting segments is as follows:
Fiscal Year 2004
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Fiscal Year 2003
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maturity during the quarter. At January 30, 2005, the maximum maturity date of any cash-flow hedge was August 2013.
Other ContractsThe company is exposed to equity price changes related to certain employee compensation obligations. Swap contracts are utilized to hedge exposures relating to certain employee compensation obligations linked to the total return of the Standard & Poor’s 500 Index and the total return of the company’s capital stock. The company pays a variable interest rate and receives the equity returns under these instruments. The notional value of the equity swap contracts, which mature in 2005, was $37 at January 30, 2005. These instruments are not designated as accounting hedges. Gains and losses are recorded in the Statements of Earnings. The net gain recorded under these contracts at January 30, 2005 was approximately $1.
A restructuring charge of $32 ($22 after tax) was recorded in the fourth quarter 2004 for severance and employee benefit costs associated with a worldwide reduction in workforce and with the implementation of a distribution and logistics realignment in Australia. These programs are part of cost savings initiatives designed to improve the company’s operating margins and asset utilization. Approximately 400 positions were eliminated under the reduction in workforce program resulting in a restructuring charge of $23. The reductions represent the elimination of layers of management, elimination of redundant positions due to the realignment of operations in North America, and reorganization of the U.S. sales force. The majority of the terminations occurred in the fourth quarter 2004.
The distribution and logistics realignment in Australia represents converting a direct store delivery system to a central warehouse system. As a result of this program, over 200 positions will be eliminated due to the outsourcing of the infrastructure. A restructuring charge of $9 was recorded for this program. The majority of the terminations have occurred in 2005.
A summary of restructuring reserves at January 30, 2005 and related activity is as follows:
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The company sponsors certain U.S. and foreign defined benefit plans and U.S. postretirement medical benefit plans for employees. Components of benefit expense were as follows:
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act introduced a prescription drug benefit under Medicare Part D and a federal subsidy to sponsors of retirement health care plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In accordance with FASB Staff Position (FSP) FAS 106-1, the company elected in January 2004 to defer recognizing the effects of the Act on accounting for postretirement health care plans until the FASB guidance was finalized.
In May 2004, FASB issued FSP FAS 106-2, which provides accounting guidance to sponsors of postretirement health care plans that are impacted by the Act. The FSP is effective for interim or annual periods beginning after June 15, 2004. The company believes that certain drug benefits offered under postretirement health care plans will qualify for the subsidy under Medicare Part D. The effects of the subsidy were factored into the 2004 annual year-end valuation. The reduction in the benefit obligation attributable to past service cost was approximately $32 and has been reflected as an actuarial gain. The reduction in benefit cost for 2005 related to the Act is approximately $5.
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In the first quarter 2005, the company made a $35 voluntary contribution to a U.S. pension plan. Additional contributions to the U.S. pension plans are not expected this fiscal year. Contributions of $12 were made to the international plans as of January 30, 2005.
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), 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.
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 in taxes, accumulated interest as of December 23, 2002, 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.
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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 company guarantees approximately 1,350 bank loans made to Pepperidge Farm independent sales distributors by third party financial institutions for the purchase of distribution routes. The maximum potential amount of future payments the company could be required to make under the guarantees is approximately $100. The company’s guarantees are indirectly secured by the distribution routes. The company does not believe it is probable that it will be required to make guarantee payments as a result of defaults on the bank loans guaranteed. Prior to the adoption of FIN 45, no amounts were recognized on the Consolidated Balance Sheets related to these guarantees. The amounts recognized as of January 30, 2005 and February 1, 2004 were not material.
Other cash used in operating activities for the six month periods is comprised of the following:
In November 2004, SFAS No. 151 “Inventory Costs – an amendment of ARB No. 43, Chapter 4” was issued. SFAS No. 151 is the result of efforts to converge U.S. accounting standards for inventories with International Accounting Standards. SFAS No. 151 requires abnormal amounts of idle facility expense, freight, handling costs and spoilage to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The company is in the process of evaluating the impact of SFAS No. 151, but does not expect the adoption to have a material impact on the financial statements.
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In December 2004, the FASB issued SFAS No. 123 (revised 2004) “Share-Based Payment.” SFAS 123R requires employee stock-based compensation to be measured based on the grant-date fair value of the awards and the cost to be recognized over the period during which an employee is required to provide service in exchange for the award. The Statement eliminates the alternative use of APB No. 25’s intrinsic value method of accounting for awards that was provided in SFAS 123 as originally issued. Excess tax benefits, as defined by this Statement, will be recognized as an addition to paid-in capital. SFAS 123R is effective for the beginning of the first interim or annual reporting period that begins after June 15, 2005. The company is in the process of evaluating the impact of this standard on the financial statements. See Note (a) for the pro forma impact of stock options on net earnings and earnings per share.
In October 2004, the American Jobs Creation Act (the AJCA) was signed into law. The AJCA provides for a deduction of 85% of certain foreign earnings that are repatriated, as defined by the AJCA, and a phased-in tax deduction related to profits from domestic manufacturing activities. In December 2004, the FASB issued FSP FAS 109-1 and 109-2 to address the accounting and disclosure requirements related to the AJCA. The company is currently evaluating the impact of the AJCA. The company anticipates it will complete its evaluation by fiscal 2006. The company estimates the range of possible amounts considered for repatriation to be between zero and $570 and the related impact on income tax to be between zero and $30.
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ITEM 2.
CAMPBELL SOUP COMPANY CONSOLIDATEDMANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Overview
The company reported net earnings of $235 million for the second quarter ended January 30, 2005 even with the comparable quarter a year ago. Earnings per share were $.57, even with a year ago. (All earnings per share amounts included in Management’s Discussion and Analysis are presented on a diluted basis.) Net sales increased 6% to $2.2 billion. The impact of higher sales on earnings was offset by a decrease in gross margin as a percentage of sales and an increase in Marketing and selling expenses.
For the six months ended January 30, 2005, net earnings were $465 million, compared to $446 million a year ago. Earnings per share were $1.13 compared to $1.08 a year ago. Net sales increased 8% to $4.3 billion. The increase in earnings over the prior year is due to the increase in sales, the favorable impact of currency and lower corporate expenses, partially offset by a decline in gross margin as a percentage of sales and an increase in Marketing and selling expenses.
SECOND QUARTER
Sales
An analysis of net sales by reportable segment follows:
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An analysis of percent change of net sales by reportable segment follows:
In U.S. Soup, Sauces and Beverages, condensed soup sales increased 4%, ready-to-serve soup sales declined 9% and broth sales increased 15%. The condensed soup sales growth was primarily due to successful merchandising and kids promotional marketing programs, a strong holiday promotion performance and the introduction of three new Southwestern-style cooking soups. Condensed soup also benefited from the installation of additional gravity-feed shelving. Sales of ready-to-serve soups were adversely impacted in part by a shift between first and second quarter promotional spending and marketing programs, as well as the comparison to a very strong sales quarter a year ago. Performance of the convenience platform was flat with a year earlier, with sales gains in ready-to-serve microwavable bowls offset by a decline in Campbell’s Soup at Hand sippable soup sales. Prego pour-over pasta sauces continued to achieve increased volume as category trends improved, although overall pasta sauce sales declined due to lower sales of Prego pasta bake products. Sales of Pace Mexican sauces increased. V8 vegetable juice and Campbell’s tomato juice sales increased, while sales of V8 Splash juice beverage declined. The sales performance benefited from the introduction of Campbell’s Chunky chili in the first quarter 2005. Campbell’s SpaghettiOspasta sales increased significantly due to benefits from the conversion to the Campbell’s brand supported by increased advertising.
In Baking and Snacking, Pepperidge Farm reported sales increases across all its businesses: bakery, cookies, crackers, and frozen. Sales of fresh bread and bakery products increased by double digits due to the performance of Pepperidge Farm wheat and grain breads, Pepperidge Farm Carb Style breads and rolls, introduced in the fourth quarter of 2004, and the expanded distribution of Pepperidge Farm bagels and English muffins. Pepperidge Farm Goldfish snack crackers, cookies, and frozen premium pot pies also contributed to the sales growth. Arnott’s reported a sales increase driven by currency, as well as volume and pricing gains in biscuits and salty snacks.
In International Soup and Sauces, sales were up in Europe primarily due to currency. In addition, the United Kingdom, France and Belgium delivered growth from improved volume and mix. Sales in Asia Pacific increased, driven by significant volume growth in the region. In Canada, sales increased due to the favorable impact of currency.
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In Other, Godiva Chocolatier sales increased, with double-digit growth in same store sales in North America driven by new product introductions, stronger merchandising, and increased advertising and promotional activity. Away From Home sales increased primarily due to the strong performance of refrigerated soups.
Gross Margin
Gross margin, defined as net sales less cost of products sold, increased $14 million. As a percent of sales, gross margin decreased from 42.3% in 2004 to 40.6% in 2005. The percentage decrease was due to increased trade promotion (approximately 0.7 percentage points), the impact of cost inflation and other factors (approximately 2.9 percentage points) and product mix (approximately 0.2 percentage points), partially offset by productivity improvements (approximately 1.5 percentage points) and higher selling prices (approximately 0.6 percentage points).
Marketing and Selling Expenses
Marketing and selling expenses increased 6% in 2005 as a result of higher advertising (approximately 4 percentage points) and currency translation (approximately 2 percentage points). As a percent of sales, Marketing and selling expenses were 16% in both 2005 and 2004.
Administrative Expenses
Administrative expenses decreased by $7 million, or 5%, due in part to the cost savings initiatives announced in the fourth quarter of 2004.
Other Expenses
In 2005, Other income was $2 million compared to Other expense of $2 million in 2004. The change was due to lower adjustments related to the carrying value of investments in affordable housing partnerships and lower expenses from currency hedging related to the financing of international activities, partially offset by a $4 million insurance settlement payment in the prior year related to losses incurred by Godiva in connection with the events of September 11, 2001.
Operating Earnings
Segment operating earnings decreased 3% from the prior year.
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An analysis of operating earnings by reportable segment follows:
Earnings from U.S. Soup, Sauces and Beverages decreased 12% primarily due to increased trade promotion and advertising and higher materials costs, partially offset by productivity savings and lower administrative expenses.
Earnings from Baking and Snacking increased 12% due to higher sales, partially offset by increased marketing and commodity cost inflation.
Earnings from International Soup and Sauces increased 8% due primarily to the favorable impact of currency.
Earnings from Other increased 14% due primarily to the strong sales growth. Prior year earnings included a $4 million insurance settlement payment related to the losses incurred by Godiva in connection with the events of September 11, 2001.
Corporate expenses decreased to $16 million from $27 million primarily due to lower adjustments related to the carrying value of investments in affordable housing partnerships and lower expenses from currency hedging related to the financing of international activities.
Nonoperating Items
Interest expense increased to $45 million from $42 million in the prior year, primarily due to higher interest rates partially offset by lower debt balances.
The effective tax rate for the quarter was 31.7% for 2005, which is consistent with the full year expected rate and the full year 2004 rate of 31.7%. The effective rate for the year-ago quarter was 32.3%.
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SIX MONTHS
In U.S. Soup, Sauces and Beverages, condensed soup sales increased 7%, ready-to-serve soup sales increased 3% and broth sales increased 11%. The condensed performance was driven by a strong holiday promotional period and improved merchandising and marketing activities. Condensed soup also benefited from the installation of additional gravity-feed shelving systems. In ready-to-serve, sales gains in Campbell’s Chunky soup were partially offset by declines inCampbell’s Select and Campbell’s Soup at Hand. Sales of convenience platform products declined slightly as double-digit growth in microwavable bowls mostly offset the Campbell’s Soup at Handperformance. Swanson broth continued to perform well benefiting from a strong holiday season and the introduction of new organic varieties. Prego pasta sauces experienced sales growth as the category trends improved. Pace Mexican sauces declined primarily due to class of trade mix. Flat sales of V8 vegetable juices combined with declines of V8 Splash juices led to an overall decline in sales for the beverage business. Campbell’s SpaghettiOs experienced significant growth as this business benefited from rebranding supported with
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increased advertising. The sales performance benefited from the introduction of new Campbell’s Chunky chili in the first quarter of this year.
In Baking and Snacking, Pepperidge Farm sales increased as a result of gains in all businesses: fresh bakery, cookies, crackers and frozen. The fresh bakery business experienced double-digit growth as a result of expanded distribution and new product introductions. Cookie sales rose on the strength of a successful holiday campaign and the introduction of a new line of sugar free cookies and four new varieties of Soft Baked cookies. Pepperidge Farm Goldfish snack crackers also experienced sales growth. Arnott’s reported a sales increase due to volume gains in biscuits and salty snacks and the favorable impact of currency.
In International Soup and Sauces, sales were up in Europe primarily due to currency. The United Kingdom delivered volume growth as a result of new instant dry products, Batchelors Super Noodles to Go and Batchelors dry soup in a cup. Sales in Asia Pacific increased driven by volume increases in the region. In Canada, sales increased due to the favorable impact of currency and improved volume and mix, particularly in ready-to-serve soups.
In Other, Godiva Chocolatier delivered double-digit sales growth due primarily to successful new product introductions and strong same-store sales performance in North America. Away From Home sales increased primarily due to the strong performance of refrigerated soups.
Gross margin, defined as net sales less cost of products sold, increased $59 million. As a percent of sales, gross margin decreased from 42.1% in 2004 to 40.5% in 2005. The percentage decrease was due to product mix (approximately 0.1 percentage points), the impact of cost inflation and other factors (approximately 2.6 percentage points) and increased trade promotion (approximately 0.7 percentage points), partially offset by higher selling prices (approximately 0.3 percentage points) and productivity improvements (approximately 1.5 percentage points).
Marketing and selling expenses increased 7% in 2005 primarily as a result of higher advertising (approximately 4 percentage points) and the impact of currency translation (approximately 2 percentage points). As a percent of sales, Marketing and selling expenses were 16% in both 2005 and 2004.
Administrative expenses decreased by $1 million due in part to the impact of cost savings initiatives announced in the fourth quarter of 2004 and lower expenses associated with ongoing litigation, partially offset by the impact of currency translation.
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Other expenses decreased by $12 million in 2005 due to lower adjustments related to the carrying value of investments in affordable housing partnerships and lower expenses from currency hedging related to the financing of international activities, partially offset by a $4 million insurance settlement payment in the prior year related to losses incurred by Godiva in connection with the events of September 11, 2001.
Segment operating earnings increased 1% from the prior year.
Earnings from U.S. Soup, Sauces and Beverages decreased 4% as the benefit of higher sales volume and mix and productivity gains were more than offset by increased trade promotion and advertising, and higher materials costs.
Earnings from Baking and Snacking increased 11% driven by the increase in sales, partially offset by higher materials costs and increased marketing.
Earnings from International Soup and Sauces increased 6% primarily due to the impact of currency.
Earnings from Other increased by 11% due to the strong sales growth. Prior year earnings included a $4 million insurance settlement payment related to the losses incurred by Godiva in connection with the events of September 11, 2001.
Corporate expenses decreased to $33 million from $55 million primarily due to lower adjustments related to the carrying value of investments in affordable housing partnerships, lower expenses from currency hedging related to the financing of international activities, and lower costs associated with ongoing litigation.
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Interest expense increased to $89 million from $85 million in the prior year, primarily due to higher interest rates partially offset by lower debt balances.
The effective tax rate for the six months was 31.7% for 2005, which is consistent with the full year expected rate and the full year 2004 rate of 31.7%. The effective tax rate for the six months in 2004 was 32.2%.
Restructuring Program
A restructuring charge of $32 million ($22 million after tax) was recorded in the fourth quarter 2004 for severance and employee benefit costs associated with a worldwide reduction in workforce and with the implementation of a distribution and logistics realignment in Australia. These programs are part of cost savings initiatives designed to improve the company’s operating margins and asset utilization. Approximately 400 positions were eliminated under the reduction in workforce program resulting in a restructuring charge of $23 million. The reductions represent the elimination of layers of management, elimination of redundant positions due to the realignment of operations in North America, and reorganization of the U.S. sales force. The majority of the terminations occurred in the fourth quarter of 2004. Annual pre-tax savings from the reduction are expected to be approximately $40 million beginning in 2005.
The distribution and logistics realignment in Australia represents converting a direct store delivery system to a central warehouse system. A restructuring charge of $9 million was recorded for this program. As a result of this program, over 200 positions will be eliminated due to the outsourcing of the infrastructure. The majority of the terminations have occurred in 2005. Annual pre-tax benefits are expected to be approximately $10 - $15 million beginning in 2008.
The cash outflows related to these programs are not expected to have a material adverse effect on the company’s liquidity. See Note (h) to the Consolidated Financial Statements for further discussion of these programs.
Liquidity and Capital Resources
The company generated cash from operations of $500 million compared to $332 million last year. The increase in cash flow reflects a lower seasonal increase in working capital, lower cash settlements related to foreign currency hedging transactions which are reflected in Other, and an increase in earnings.
Capital expenditures were $104 million compared to $76 million a year ago. Capital expenditures are expected to be approximately $380 million in 2005.
The company repurchased 165,000 shares in the six month period ended January 30, 2005 at a cost of $4 million. The company repurchased 710,000 shares in the six month period last year at a cost of $19 million. The company expects to repurchase sufficient shares over time to offset the impact of dilution from shares issued under the company’s
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stock compensation plans. See “Unregistered Sales of Equity Securities and Use of Proceeds” for more information.
At January 30, 2005, the company had approximately $576 million of notes payable due within one year and $32 million of standby letters of credit issued on behalf of the company. The company maintains $1.5 billion of committed revolving credit facilities, which remain unused at January 30, 2005, except for $7 million of standby letters of credit issued on behalf of the company. These facilities are described below. Another $25 million of standby letters of credit were issued on behalf of the company under a separate facility.
In September 2004, the company entered into a $500 million committed 364-day revolving credit facility, which replaced an existing $900 million 364-day facility that matured in September 2004. The 364-day revolving credit facility contains a one-year term-out feature. The company also entered into a $1 billion revolving credit facility that matures in September 2009, which replaced the existing $900 million revolving credit facility that was scheduled to mature in September 2006. These agreements support the company’s commercial paper program. The company is in compliance with the covenants contained in its revolving credit facilities and debt securities.
The company guarantees approximately 1,350 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 $100 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 (k) to the Consolidated Financial Statements for information on guarantees.
The company believes that foreseeable liquidity, including the resolution of the contingencies described in Note (j) 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
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included in the 2004 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 policies 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 May 2004, FASB issued FSP FAS 106-2, which provides accounting guidance to sponsors of postretirement health care plans that are impacted by the Act. The FSP is effective for interim or annual periods beginning after June 15, 2004. The company believes that certain drug benefits offered under postretirement health care plans will qualify for the subsidy under Medicare Part D. The effects of the subsidy were factored into the 2004 annual year-end valuation. The reduction in the benefit obligation attributable to past service cost was approximately $32 million and has been reflected as an actuarial gain. The reduction in benefit cost for 2005 related to the Act is approximately $5 million.
In November 2004, SFAS No. 151 “Inventory Costs – an amendment of ARB No. 43, Chapter 4” was issued. SFAS No. 151 is the result of efforts to converge U.S. accounting standards for inventories with International Accounting Standards. SFAS No. 151 requires abnormal amounts of idle facility expense, freight, handling costs and spoilage to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The company is in the process of evaluating SFAS No. 151, but does not expect the adoption to have a material impact on the financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004) “Share-Based Payment.” SFAS 123R requires employee stock-based compensation to be measured based on the grant-date fair value of the awards and the cost to be recognized over the period during which an employee is required to provide service in exchange for the award. The Statement eliminates the alternative use of APB No. 25’s intrinsic value method of accounting for awards that was provided in SFAS 123 as originally issued. Excess tax benefits, as defined by this Statement, will be recognized as an addition to paid-in capital. SFAS 123R is effective for the beginning of the first interim or annual reporting period that begins after June 15, 2005. The company is in the process of evaluating the impact of this standard on the financial statements. See also Note (a) to the Consolidated Financial Statements for the pro forma impact of stock options on net earnings and earnings per share.
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In October 2004, the American Jobs Creation Act (the AJCA) was signed into law. The AJCA provides for a deduction of 85% of certain foreign earnings that are repatriated, as defined by the AJCA, and a phased-in tax deduction related to profits from domestic manufacturing activities. In December 2004, the FASB issued FSP FAS 109-1 and 109-2 to address the accounting and disclosure requirements related to the AJCA. The company is currently evaluating the impact of the AJCA. The company anticipates it will complete its evaluation by fiscal 2006. The company estimates the range of possible amounts considered for repatriation to be between zero and $570 million and the related impact on income tax to be between zero and $30 million.
Recent Developments
On February 18, 2005, the company announced results for the second quarter 2005 and commented on the outlook for earnings per share for the full year.
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.
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 2004 Annual Report on Form 10-K, 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 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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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the company’s exposure to certain market risk, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the 2004 Annual Report on Form 10-K. There have been no significant changes in the company’s portfolio of financial instruments or market risk exposures from the fiscal 2004 year-end except as follows:
In August 2004, a pay fixed SEK/receive fixed USD swap with a notional value of $47 million matured. In addition, a pay variable SEK/receive variable USD swap with a notional value of $18 million matured. The company entered into a pay variable SEK/receive variable USD swap with a notional value of $32 million which matures in 2008. The company also entered into a pay fixed SEK/receive fixed USD swap with a notional value of $32 million which matures in 2010.
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ITEM 4. CONTROLS AND PROCEDURES
The company, under the supervision and with the participation of its management, including the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, has evaluated the effectiveness of the company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of January 30, 2005 (the “Evaluation Date”). Based on such evaluation, the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer have concluded that, as of the Evaluation Date, the company’s disclosure controls and procedures are effective, and are reasonably designed to ensure that all material information relating to the company (including its consolidated subsidiaries) required to be included in the company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
During the quarter ended January 30, 2005, there were no changes in the company’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, such internal control over financial reporting.
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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 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 December 23, 2002, 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 previously reported, 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
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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 January 30, 2005, Pepperidge Farm has incurred costs of approximately $4.75 million relating to the evaluation and replacement of certain of its refrigerant appliances. Of this amount, $4 million was incurred in fiscal 2003; the remainder was incurred in fiscal 2004. If the submission is approved by the EPA, in addition to the expenditures previously made, Pepperidge Farm will be required to pay a penalty in the amount of approximately $370 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.
As previously reported, on August 12, 2004, the company received a Finding and Notice of Violation from the EPA alleging air emissions from the company’s Stockton, California tomato processing plant violated federal Clean Air Act provisions. On September 27, 2004, the company received a Complaint and Notice of Opportunity for Hearing from the EPA alleging that nitrogen oxide emissions from the Stockton plant exceeded allowable levels over a five (5) day period in 2002. In February 2005, the company and the EPA entered into a Consent Agreement and Final Order pursuant to which the company agreed to pay $72.5 thousand to settle these alleged violations. The company also incurred approximately $25 thousand in evaluation and defense cost.
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Issuer Purchases of Equity Securities
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a. The company’s Annual Meeting of Shareowners was held on November 18, 2004.
b. The matters voted upon and the results of the vote are as follows:
Election of Directors
Ratification of Appointment of PricewaterhouseCoopers LLP as Independent Accountants
Re-Approval of the Company’s Annual Incentive Plan
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ITEM 6. EXHIBITS
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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