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.
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 411,005,099 shares of Capital Stock outstanding as of June 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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Statements of Shareowners’ Equity
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CAMPBELL SOUP COMPANY CONSOLIDATEDNotes to Consolidated Financial Statements
(unaudited)(dollars in millions, except per share amounts)
The financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations, financial position, and cash flows for the indicated periods. All such adjustments are of a normal recurring nature. The accounting policies used in preparing these financial statements are consistent with those applied in the Annual Report on Form 10-K for the year ended August 1, 2004. Certain reclassifications were made to the prior year amounts to conform with current presentation. The results for the period are not necessarily indicative of the results to be expected for other interim periods or the full year.
The company accounts for stock option grants and restricted stock awards in accordance with Accounting Principles Board Opinion (APB) 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 an exercise price equal to the market value of the underlying stock on the grant date. Restricted stock awards are expensed. The following table illustrates the effect on net earnings and earnings per share if the company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123 to stock-based employee compensation.
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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:
Changes in the carrying amount for goodwill for the period ended May 1, 2005 are as follows:
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Total comprehensive income comprises net earnings, net foreign currency translation adjustments, minimum pension liability adjustments, and net unrealized gains (losses) on cash-flow hedges.
Total comprehensive income for the three months ended May 1, 2005 and May 2, 2004, was $138 and $78, respectively. Total comprehensive income for the nine months ended May 1, 2005 and May 2, 2004 was $709 and $688, respectively.
The components of Accumulated other comprehensive loss, as reflected in the Statements of Shareowners’ Equity, consisted of the following:
For the periods presented in the Statements of Earnings, the calculations of basic EPS and EPS assuming dilution vary in that the weighted average shares outstanding assuming dilution include the incremental effect of stock options and restricted stock programs, except when such effect would be antidilutive. Stock options to purchase 11 million and 18 million shares of capital stock for the three-month periods ended May 1, 2005 and May 2, 2004, respectively, and 17 million and 26 million shares of capital stock for the nine-month periods ended May 1, 2005 and May 2, 2004, respectively, were not included in the calculation of diluted earnings per share because the exercise price of the stock options exceeded the average market price of the capital stock and therefore, the effect would be antidilutive.
Campbell Soup Company, together with its consolidated subsidiaries, is a global manufacturer and marketer of high quality, branded convenience food products. Through fiscal 2004, the company was organized and reported the results of operations in four segments: North America Soup and Away From Home, North America Sauces and Beverages, Biscuits and Confectionery, and International Soup and Sauces.
As of fiscal 2005, the company changed its organizational structure and as a result reports the following segments: U.S. Soup, Sauces and Beverages, Baking and Snacking, International Soup and Sauces, and Other. Comparative periods have
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been restated to conform to the current year presentation. The restatements also reflect a reallocation of certain expenses between corporate and the operating segments.
The U.S. Soup, Sauces and Beverages segment includes the following retail businesses: theCampbell’s condensed and ready-to-serve soups; Swanson broth and canned poultry; Pregopasta sauce; Pace Mexican sauce; Campbell’s Chunky chili; Campbell’s canned pasta, gravies, and beans; Campbell’s Supper Bakes meal kits; V8 vegetable juice; V8 Splash juice beverages; and Campbell’s tomato juice.
The Baking and Snacking segment includes the following businesses: Pepperidge Farmcookies, crackers, bakery and frozen products in U.S. retail; Arnott’s biscuits in Australia and Asia Pacific; and Arnott’s salty snacks in Australia.
The International Soup and Sauces segment includes the soup, sauce and beverage businesses outside of the United States, including Europe, Mexico, Latin America, the Asia Pacific region and the retail business in Canada.
The balance of the portfolio reported in Other includes Godiva Chocolatier worldwide and the company’s Away From Home operations, which represent the distribution of products such as soup, specialty entrees, beverage products, other prepared foods and Pepperidge Farm products through various food service channels in the United States and Canada.
Accounting policies for measuring segment assets and earnings before interest and taxes are substantially consistent with those described in the company’s 2004 Annual Report on Form 10-K. The company evaluates segment performance before interest and taxes. Away From Home products are principally produced by the tangible assets of the company’s other segments, except for Stockpot soups, which are produced in a separate facility, and certain other products, which are produced under contract manufacturing agreements. Accordingly, with the exception of the designated Stockpot facility, plant assets are not allocated to the Away From Home operations. Depreciation, however, is allocated to Away From Home based on production hours.
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May 1, 2005
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May 2, 2004
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Historical information on the reporting segments is as follows:
Fiscal Year 2004
Net Sales:
Earnings Before Interest and Taxes:
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Fiscal Year 2003
There were 53 weeks in fiscal 2003.
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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 $146 million for the third quarter ended May 1, 2005, versus $142 million in the comparable quarter a year ago. Earnings per share were $.35, compared to $.34 a year ago. (All earnings per share amounts included in Management’s Discussion and Analysis are presented on a diluted basis.) Net sales increased 4% to $1.7 billion. The prior year net earnings included a $10 million gain (net of $6 million in taxes) or $.02 per share from the settlement of a class action lawsuit. Current year earnings were favorably impacted by higher sales, lower Marketing and selling expenses as a percentage of sales, partially offset by higher net interest expense and a higher effective tax rate.
For the nine months ended May 1, 2005, net earnings were $611 million, compared to $588 million a year ago. Earnings per share were $1.48 compared to $1.43 a year ago. Net sales increased 7% to $6.1 billion. The prior year results include the gain from the litigation settlement previously noted. The increase in earnings over the prior year was 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 net interest expense.
THIRD 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 6% and broth sales increased 7%. Total U.S. soup sales were flat compared with a year ago. The condensed soup sales growth was primarily due to successful merchandising and kids promotional marketing programs and increased advertising. Condensed soup sales also benefited from the installation of additional gravity-feed shelving systems. Sales of ready-to-serve soups declined due to lower volumes, reflecting shifts in marketing programs to the first and second quarters and strong competitive activity, partially offset by reduced promotional spending and higher selling prices. The convenience platform within ready-to-serve soups, which includesCampbell’s Soup at Hand and microwaveable bowls of Campbell’s Chunky and Select soups, had strong sales results. Sales of Prego pasta sauces and Pace Mexican sauces declined due to lower marketing and an increase in competitive activity. V8 vegetable juice sales increased due to higher prices and increased volume, while sales of V8 Splash juice beverages declined due to continued competitive pressures. The sales performance benefited from the introduction of Campbell’s Chunkychili.
In Baking and Snacking, Pepperidge Farm reported sales increases across all its businesses: bakery, cookies and crackers, and frozen. Sales of fresh bread and bakery products increased by double digits due to the performance of Pepperidge Farm whole grain breads, Pepperidge Farm Carb Style breads and rolls and the expanded distribution of Pepperidge Farm bagels and English muffins.Pepperidge Farm Goldfish snack crackers, cookies, frozen premium pot pies, frozen breads and frozen pastries also
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contributed to the sales growth. Arnott’s reported a sales increase driven by strong customer programs and new product launches.
In International Soup and Sauces, sales in Europe increased primarily due to currency. Strong volume growth in France from Liebig wet soup and in Germany from Erasco wet soup was offset by lower volume in the United Kingdom. In Asia Pacific, sales increased due to volume gains in broth and beverages and the favorable impact of currency. Sales in Canada increased significantly due to volume gains in ready-to-serve soups and V8 beverages, and the favorable impact of currency.
In Other, Godiva Chocolatier sales increased, with double-digit growth in same-store sales in North America driven by new product introductions, increased merchandising activity, and increased advertising and promotions. Away From Home sales increased primarily due to the performance of refrigerated soups.
Gross Margin
Gross margin, defined as net sales less cost of products sold, increased $29 million. As a percent of sales, gross margin increased from 40.3% in 2004 to 40.4% in 2005. The percentage increase was due to productivity improvements (approximately 2.1 percentage points), higher selling prices (approximately 1.1 percentage points) and lower trade and consumer promotion (approximately 0.2 percentage points), partially offset by the impact of cost inflation and other factors (approximately 3.2 percentage points) and product mix (approximately 0.1 percentage points).
Marketing and Selling Expenses
Marketing and selling expenses decreased 1% in 2005 as a result of lower consumer promotions (approximately 4 percent), partially offset by higher selling expenses (approximately 2 percent) and the impact of currency translation (approximately 1 percent). As a percent of sales, Marketing and selling expenses were 16% in 2005 and 17% in 2004.
Administrative Expenses
Administrative expenses increased by $4 million, or 3%, due primarily to the impact of currency translation.
Other Expenses
In 2005, Other income was $2 million compared to Other income of $13 million in 2004. The change was due to a $16 million gain from the company’s share of a class action settlement involving ingredient suppliers in 2004, partially offset by lower expenses from currency hedging related to the financing of international activities.
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Operating Earnings
Segment operating earnings increased 10% from the prior year.
An analysis of operating earnings by reportable segment follows:
Earnings from U.S. Soup, Sauces and Beverages increased 8% primarily due to higher selling prices, lower marketing spending and productivity savings, partially offset by volume declines and higher energy related costs.
Earnings from Baking and Snacking increased 33% due to higher sales, productivity savings and lower expenses in the Australian Snackfoods business, partially offset by commodity cost inflation.
Earnings from International Soup and Sauces increased 4% due to the favorable impact of currency.
Earnings from Other increased 13% due primarily to the strong sales growth.
Corporate expenses increased to $15 million from $6 million primarily due to the $16 million gain from the company’s share of a class action lawsuit in 2004. The comparison to the prior year is also impacted by expenses in 2005 associated with the ongoing implementation in North America of a new SAP enterprise-resource planning system, lower expenses from currency hedging related to the financing of international activities, lower legal expenses and lower corporate administrative expense.
Nonoperating Items
Interest expense increased to $45 million from $40 million in the prior year, primarily due to higher interest rates and lower interest income.
The effective tax rate for the quarter was 31.8% 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 30.0%.
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NINE MONTHS
In U.S. Soup, Sauces and Beverages, condensed soup sales increased 6%, ready-to-serve soup sales increased 2% and broth sales increased 10%. Total U.S. soup sales increased 5%. In condensed soup, eating varieties experienced double-digit growth driven in part by the combination of successful merchandising and kids promotional programs, as well as by increased advertising. Sales of cooking varieties were even with year ago, which was an improvement over historical trends, resulting from an increase in marketing support and a shift in spending to the higher consumption Thanksgiving and Christmas holiday season. Both eating and cooking condensed soup sales continued to benefit from gravity-feed shelving systems. The convenience platform within ready-to-serve soups experienced strong sales performance driven by double-digit growth of microwaveable bowls, partially offset by declines in Campbell’s Soup at Hand. Swanson broth continued to perform well, benefiting from a strong holiday season and the introduction of new organic varieties. Sales of Prego pasta sauces and Pace Mexican sauces declined due to increasing competitive pressures in their respective categories. V8 vegetable juice sales increased slightly, while sales of V8 Splash juice beverages declined. Campbell’s
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SpaghettiOs experienced significant growth as this business benefited from rebranding supported with increased advertising. Campbell’s Chunky chili, introduced in the first quarter of this year, also contributed to the sales increase.
In Baking and Snacking, Pepperidge Farm sales increased as a result of gains in all businesses: fresh bakery, cookies and crackers, and frozen. In particular, the fresh bakery business experienced double-digit growth as a result of expanded distribution and new product introductions such as Pepperidge Farm Carb Style breads and rolls. 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, with continued momentum in the core product line supplemented with the new Goldfish Sandwich Snackers product introduction. Arnott’s reported a sales increase due to volume gains in salty snacks and biscuits and the favorable impact of currency. Strong customer programs, new product introductions including Arnott’s Dessert cookies, and continued momentum in Kettle snacks drove volume growth.
In International Soup and Sauces, sales were up in Europe primarily due to currency as volume growth was mostly offset by increased sales allowances and higher promotional spending. Sales in Asia Pacific increased, driven by volume growth in the Australian business and by the favorable impact of currency. In Canada, sales increased due to the favorable impact of currency and volume growth, particularly in ready-to-serve soups and beverages, partially offset by higher promotional spending.
In Other, Godiva Chocolatier delivered double-digit sales growth driven by continued momentum of same-store sales growth. The primary drivers of this performance were increased in-store merchandising activity, increased advertising and successful new product introductions. Away From Home also achieved double-digit sales growth driven by volume growth of refrigerated soups and higher pricing in the U.S. food service business.
Gross margin, defined as net sales less cost of products sold, increased $88 million. As a percent of sales, gross margin decreased from 41.6% in 2004 to 40.5% in 2005. The percentage decrease was due to the impact of cost inflation and other factors (approximately 2.6 percentage points), increased trade and consumer promotion (approximately 0.5 percentage points) and product mix (approximately 0.1 percentage points), partially offset by productivity improvements (approximately 1.6 percentage points) and higher selling prices (approximately 0.5 percentage points).
Marketing and selling expenses increased 4% in 2005 primarily as a result of higher advertising (approximately 3 percent) and the impact of currency translation (approximately 1 percent). As a percent of sales, Marketing and selling expenses were 16% in both 2005 and 2004.
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Administrative expenses increased by $3 million (1 percent) due in part to the impact of currency translation (approximately 2 percent) which more than offset reductions in corporate administrative expenses.
Other income increased by $1 million in 2005 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, 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 and the gain from the company’s share of a class action settlement involving ingredient suppliers in 2004.
Segment operating earnings increased 3% from the prior year.
Earnings from U.S. Soup, Sauces and Beverages decreased 1%, as the benefit of productivity gains and higher sales volume were more than offset by higher energy related costs and increased trade promotion and advertising.
Earnings from Baking and Snacking increased 16% driven by higher selling prices, increased sales volume and productivity gains, partially offset by higher material costs and increased marketing investments.
Earnings from International Soup and Sauces increased 5% due to the impact of currency.
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Earnings from Other increased by 11% due to 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 $48 million from $61 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, partially offset by the gain from the company’s share of a class action settlement involving ingredient suppliers in 2004.
Interest expense increased to $134 million from $125 million in the prior year, primarily due to higher interest rates partially offset by lower debt balances.
The effective tax rate for the nine months was 31.7% for 2005 and 2004, which is consistent with the full year expected rate and the full year 2004 rate of 31.7%.
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 involves the conversion of 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 $772 million compared to $576 million last year. The increase in cash flow reflects improved working capital performance,
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lower cash settlements related to foreign currency hedging transactions that are reflected in Other, and an increase in earnings.
Capital expenditures were $166 million compared to $142 million a year ago. Capital expenditures are expected to be approximately $350 million in 2005.
The company repurchased 2,185,000 shares in the quarter ended May 1, 2005 at a cost of $62 million. The company repurchased 2,350,000 shares in the nine month period ended May 1, 2005 at a cost of $66 million. The company repurchased 700,000 shares in the quarter ended May 2, 2004 at a cost of $19 million. The company repurchased 1,410,000 shares in the nine month period ended May 2, 2004 at a cost of $38 million. The company expects to repurchase sufficient shares over time to offset the impact of dilution from shares issued under the company’s stock compensation plans. See “Unregistered Sales of Equity Securities and Use of Proceeds” for more information.
At May 1, 2005, the company had approximately $447 million of notes payable due within one year and $33 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 May 1, 2005, except for $4 million of standby letters of credit issued on behalf of the company. These facilities are described below. Another $29 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 $110 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
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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 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 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 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, Statement of Financial Accounting Standards (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.
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In December 2004, the FASB issued SFAS No. 123R (revised 2004) “Share-Based Payment.” SFAS No. 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 Accounting Principles Board (APB) No. 25’s intrinsic value method of accounting for awards which is the company’s current accounting policy for stock options. See Note (a) for the pro forma impact of compensation expense from stock options on net earnings and earnings per share. SFAS No. 123R is effective for the beginning of fiscal 2006. The company is in the process of evaluating the impact of this standard on the financial statements, which will depend on the timing and structure of future equity-based awards.
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 along with the additional technical guidance issued by the U.S. Treasury Department. 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.
In March 2005, the FASB issued FIN 47 “Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143.” This Interpretation clarifies that a conditional retirement obligation refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The liability should be recognized when incurred, generally upon acquisition, construction or development of the asset. FIN 47 is effective no later than the end of the fiscal years ending after December 15, 2005. The company is in the process of evaluating the impact of FIN 47.
Recent Developments
On May 23, 2005, the company announced results for the third 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,”
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“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.
In April 2005, a pay variable EUR/receive variable USD swap with a notional value of $137 million matured. The company entered into a pay variable EUR/receive variable USD swap with a notional value of $69 million which matures in 2006. The company also entered into a pay fixed EUR/receive fixed USD swap with a notional value of $69 million which matures in 2008.
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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 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 May 1, 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.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
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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.
INDEX TO EXHIBITS
Exhibits