1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED COMMISSION FILE NUMBER FEBRUARY 1, 1998 1-3822 [Campbell Soup Company Logo] NEW JERSEY 21-0419870 STATE OF INCORPORATION I.R.S. EMPLOYER IDENTIFICATION NO. CAMPBELL PLACE CAMDEN, NEW JERSEY 08103-1799 PRINCIPAL EXECUTIVE OFFICES TELEPHONE NUMBER: (609) 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 . THERE WERE 454,133,575 SHARES OF CAPITAL STOCK OUTSTANDING AS OF FEBRUARY 9, 1998. -1-
2 CAMPBELL SOUP COMPANY CONSOLIDATED STATEMENTS OF EARNINGS (unaudited) (millions, except per share amounts) <TABLE> <CAPTION> Three Months Ended Six Months Ended -------------------------- -------------------------- FEBRUARY January FEBRUARY January 1, 1998 26, 1997 1, 1998 26, 1997 ----------- ---------- ---------- ----------- <S> <C> <C> <C> <C> Net sales $ 2,342 $ 2,317 $ 4,462 $ 4,369 - -------------------------------------------------------------------------------------------------------------------- Costs and expenses Cost of products sold 1,177 1,227 2,281 2,339 Marketing and selling expenses 518 486 944 882 Administrative expenses 93 93 188 176 Research and development expenses 18 19 38 37 Other expense 18 29 42 67 Restructuring charge - - - 216 - ------------------------------------------------------------------------------------------------------------------- Total costs and expenses 1,824 1,854 3,493 3,717 - ------------------------------------------------------------------------------------------------------------------- Earnings before interest and taxes 518 463 969 652 Interest, net 44 45 87 74 - ------------------------------------------------------------------------------------------------------------------- Earnings before taxes 474 418 882 578 Taxes on earnings 163 142 304 214 - ------------------------------------------------------------------------------------------------------------------- Earnings before cumulative effect of change in accounting principle 311 276 578 364 Cumulative effect of change in accounting principle 11 - 11 - - ------------------------------------------------------------------------------------------------------------------- Net earnings $ 300 $ 276 $ 567 $ 364 =================================================================================================================== Per share - basic Earnings before cumulative effect of change in accounting principle $ .68 $ .59 $ 1.26 $ .76 Cumulative effect of change in accounting principle .02 - .02 - - ------------------------------------------------------------------------------------------------------------------- Net earnings $ .66 $ .59 $ 1.24 $ .76 =================================================================================================================== Dividends $ .210 $ .193 $ .403 $ .365 =================================================================================================================== Weighted average shares outstanding - basic 457 467 457 482 =================================================================================================================== Per share - assuming dilution Earnings before cumulative effect of change in accounting principle $ .67 $ .58 $ 1.25 $ .75 Cumulative effect of change in accounting principle .02 - .02 - - ------------------------------------------------------------------------------------------------------------------- Net earnings $ .65 $ .58 $ 1.23 $ .75 =================================================================================================================== Weighted average shares outstanding - assuming dilution 462 473 463 487 =================================================================================================================== </TABLE> See Notes to Financial Statements -2-
3 CAMPBELL SOUP COMPANY CONSOLIDATED BALANCE SHEETS (millions) <TABLE> <CAPTION> FEBRUARY August 1, 1998 3, 1997 --------- --------- (unaudited) <S> <C> <C> Current assets Cash and cash equivalents $ 99 $ 26 Accounts receivable 910 633 Inventories 722 762 Other current assets 174 162 - -------------------------------------------------------------------------------- Total current assets 1,905 1,583 - -------------------------------------------------------------------------------- Plant assets, net of depreciation 2,449 2,560 Intangible assets, net of amortization 2,124 1,793 Other assets 529 523 - -------------------------------------------------------------------------------- Total assets $ 7,007 $ 6,459 ================================================================================ Current liabilities Notes payable $ 2,112 $ 1,506 Payable to suppliers and others 522 608 Accrued liabilities 607 642 Dividend payable -- 88 Accrued income taxes 197 137 - -------------------------------------------------------------------------------- Total current liabilities 3,438 2,981 - -------------------------------------------------------------------------------- Long-term debt 1,263 1,153 Nonpension postretirement benefits 441 442 Other liabilities, including deferred income taxes of $254 and $251 381 463 - -------------------------------------------------------------------------------- Total liabilities 5,523 5,039 - -------------------------------------------------------------------------------- Shareowners' equity Preferred stock; authorized 40 shares; none issued -- -- Capital stock, $.0375 par value; authorized 560 shares; issued 542 shares 20 20 Capital surplus 370 338 Earnings retained in the business 3,955 3,571 Capital stock in treasury, at cost (2,749) (2,459) Cumulative translation adjustments (112) (50) - -------------------------------------------------------------------------------- Total shareowners' equity 1,484 1,420 - -------------------------------------------------------------------------------- Total liabilities and shareowners' equity $ 7,007 $ 6,459 ================================================================================ </TABLE> See Notes to Financial Statements -3-
4 CAMPBELL SOUP COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (millions) <TABLE> <CAPTION> Six Months Ended ---------------- FEBRUARY January 1, 1998 26, 1997 --------- -------- <S> <C> <C> Cash flows from operating activities: Net earnings $ 567 $ 364 Non-cash charges to net earnings Cumulative effect of accounting change 11 -- Restructuring charge -- 216 Depreciation and amortization 156 160 Deferred taxes 8 (64) Other, net 21 65 Changes in working capital Accounts receivable (273) (289) Inventories 39 74 Other current assets and liabilities (61) 51 - --------------------------------------------------------------------------------------------- Net cash provided by operating activities 468 577 - --------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of plant assets (113) (133) Sales of plant assets 14 21 Businesses acquired (478) (238) Sales of businesses 21 73 Other, net (5) (19) - --------------------------------------------------------------------------------------------- Net cash used in investing activities (561) (296) - --------------------------------------------------------------------------------------------- Cash flows from financing activities: Long-term borrowings 370 300 Repayments of long-term borrowings (16) (4) Short-term borrowings 1,066 1,019 Repayments of short-term borrowings (716) (196) Dividends paid (272) (175) Treasury stock purchased (304) (1,235) Treasury stock issued 49 20 - --------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities 177 (271) - --------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash (11) (13) - --------------------------------------------------------------------------------------------- Net change in cash and cash equivalents 73 (3) Cash and cash equivalents - beginning of period 26 34 - --------------------------------------------------------------------------------------------- Cash and cash equivalents - end of period $ 99 $ 31 ============================================================================================= </TABLE> See Notes to Financial Statements -4-
5 CAMPBELL SOUP COMPANY CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY (unaudited) (millions, except per share amounts) <TABLE> <CAPTION> Capital Stock ---------------------------------------- Earnings Issued In Treasury retained Cumulative Total ----------------- ------------------ Capital in the translation shareowners' Shares Amount Shares Amount surplus business adjustments equity - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance at July 28, 1996 542 $20 (48) $(779) $228 $3,211 $62 $2,742 Net earnings 364 364 Dividends ($.365 per share) (175) (175) Treasury stock purchased (31) (1,235) (1,235) Treasury stock issued under Management incentive and Stock option plans 1 (7) 39 32 Translation adjustments (40) (40) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at January 26, 1997 542 $20 (78) $(2,021) $267 $3,400 $22 $1,688 =================================================================================================================================== BALANCE AT AUGUST 3, 1997 542 $20 (84) $(2,459) $338 $3,571 $(50) $1,420 NET EARNINGS 567 567 DIVIDENDS ($.403 PER SHARE) (183) (183) TREASURY STOCK PURCHASED (6) (304) (304) TREASURY STOCK ISSUED UNDER MANAGEMENT INCENTIVE AND STOCK OPTION PLANS 2 14 32 46 TRANSLATION ADJUSTMENTS (62) (62) - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT FEBRUARY 1, 1998 542 $20 (88) $(2,749) $370 $3,955 $(112) $1,484 =================================================================================================================================== </TABLE> See Notes to Financial Statements -5-
6 CAMPBELL SOUP COMPANY CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (unaudited) (millions) (a) The financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the indicated periods. All such adjustments are of a normal recurring nature. (b) Cumulative Effect of Change In Accounting Principle In the second quarter of fiscal 1998, the company adopted the provisions of the Emerging Issues Task Force (EITF) consensus ruling on Issue 97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract that Combines Business Process Reengineering and Information Technology Transformation." The EITF, a sub-committee of the Financial Accounting Standards Board, reached a consensus that costs of business process reengineering activities that are part of a systems development project are to be expensed as incurred. Furthermore, the consensus ruling stipulates that the unamortized balance of such previously capitalized business process reengineering costs are to be written off as a cumulative effect of accounting change as of the beginning of the quarter which includes November 20, 1997. The company previously capitalized certain consulting costs related to the purchase and implementation of software for internal use. The cumulative effect of this change in accounting principle is $11 million or $.02 per share, net of an income tax benefit of approximately $7 million. (c) Earnings Per Share The company adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128") as of the second quarter fiscal 1998. FAS 128 revised the standards for computation and presentation of earnings per share ("EPS"), requiring the presentation of both basic EPS and EPS assuming dilution. Basic EPS is based on the weighted average shares outstanding during the applicable period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Prior periods have been restated to conform with the provisions of FAS 128. 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 includes the incremental effect of stock options. -6-
7 (d) Acquisitions In December 1997, the company acquired the Liebig soup business in France for approximately $180 million. Aggregate annual sales are approximately $75 million. Also in December, Arnotts Limited purchased the remaining outstanding ordinary shares held by its minority shareholders for an aggregate purchase price of approximately $290 million. Prior to the transaction, the company owned approximately 70% of Arnotts Limited. The acquisitions have been recorded using the purchase method of accounting, and accordingly, results of their operations have been included in the company's consolidated financial statements since the effective dates of the respective acquisitions. The aggregate excess of the purchase price over the fair value of the net identifiable assets of $360 million has been recorded as goodwill and will be amortized over 40 years. The allocations of the purchase price of the acquisitions is preliminary and may be modified as additional financial information is available. (e) Segment Information The company operates in four business segments: Soup and Sauces, Biscuits and Confectionery, Foodservice, and Specialty Foods. The segments are managed as strategic units due to their distinct manufacturing processes, marketing strategies and distribution channels. The Soup and Sauces segment includes the worldwide soup businesses, Prego spaghetti sauces, Pace Mexican sauces, Franco-American pasta, Swanson broths, and V8 beverages. The Biscuits and Confectionery segment includes the Godiva Chocolatier, Pepperidge Farm, Arnotts Limited and Delacre businesses. Foodservice represents the distribution of products, including Campbell's Soups and Campbell's Specialty Kitchen entrees to the food service and meal replacement markets. The Specialty Foods segment is comprised of Swanson frozen foods, Vlasic pickles and certain European and Argentine specialty foods businesses. On September 9, 1997, the company announced its intention to spin off the Specialty Foods segment. Accounting policies for measuring segment assets and earnings before interest and taxes are substantially consistent with those described in the summary of significant accounting policies included in the fiscal 1997 Annual Report. The company evaluates segment performance based on earnings before interest and taxes, excluding certain non-recurring charges. Foodservice products are principally produced by the tangible assets of the company's other segments. Accordingly, tangible assets have not been allocated to the Foodservice segment. Depreciation and amortization is allocated to Foodservice based on budgeted production hours. Transfers between segments are recorded at cost plus mark-up or at market. -7-
8 FEBRUARY 1, 1998 <TABLE> <CAPTION> Corporate Soup and Biscuits and Food- Specialty and Sauces Confectionery service Foods Other(1) Eliminations(2) Total -------- ------------- ------- ----- -------- --------------- ----- <S> <C> <C> <C> <C> <C> <C> <C> THREE MONTHS ENDED Net sales $1,386 428 119 344 98 (33) $2,342 Earnings before Interest and Taxes $ 396 76 16 34 4 (8) $ 518 Depreciation and Amortization $ 30 22 2 12 5 5 $ 76 Capital Expenditures $ 25 14 -- 12 3 4 $ 58 SIX MONTHS ENDED Net sales $2,601 837 225 665 201 (67) $4,462 Earnings before Interest and Taxes $ 766 135 31 60 6 (29) $ 969 Depreciation and Amortization $ 66 44 4 23 9 10 $ 156 Capital Expenditures $ 45 30 -- 23 8 7 $ 113 Segment Assets $3,294 1,725 100 930 382 576 $7,007 </TABLE> - ---------- (1)Represents financial information of certain prepared convenience food businesses not categorized as reportable segments. (2)Represents elimination of intersegment sales, unallocated corporate expenses and unallocated assets, including corporate offices, deferred taxes and pension accounts. -8-
9 JANUARY 26, 1997 <TABLE> <CAPTION> Corporate Soup and Biscuits and Food- Specialty and Sauces Confectionery service Foods Other(1) Eliminations(2) Total -------- -------------- ------- --------- -------- --------------- ----- <S> <C> <C> <C> <C> <C> <C> <C> THREE MONTHS ENDED Net sales $1,301 425 118 353 143 (23) $2,317 Earnings before Interest and Taxes $ 359 69 18 32 2 (17) $ 463 Depreciation and Amortization $ 33 23 2 10 8 5 $ 81 Capital Expenditures $ 16 20 -- 19 4 5 $ 64 SIX MONTHS ENDED Net sales $2,407 826 223 684 279 (50) $4,369 Earnings before Interest and Taxes(3) $ 557 68 32 46 (12) (39) $ 652 Depreciation and Amortization $ 65 45 4 20 16 10 $ 160 Capital Expenditures $ 33 45 -- 35 7 13 $ 133 Segment Assets(4) $2,966 1,523 78 888 439 565 $6,459 </TABLE> - ---------- (1)Represents financial information of certain prepared convenience food businesses not categorized as reportable segments. (2)Represents elimination of intersegment sales, unallocated corporate expenses and unallocated assets, including corporate offices, deferred taxes and pension accounts. (3)Contributions to earnings before interest and taxes by segment include the effects of a first quarter fiscal 1997 restructuring charge of $216 as follows: Soup and Sauces - $134, Biscuits and Confectionery - $53, Specialty Foods - $13 and Other - $16. (4)Segment assets reported as of the fiscal year ended August 3, 1997. -9-
10 (f) Inventories <TABLE> <CAPTION> FEBRUARY August 1, 1998 3, 1997 ------- ------- <S> <C> <C> Raw materials, containers and supplies $273 $300 Finished products 455 471 - -------------------------------------------------------------------------------- 728 771 Less - Adjustment of certain inventories To LIFO basis 6 9 - -------------------------------------------------------------------------------- $722 $762 ================================================================================ </TABLE> (g) Notes Payable and Long-Term Debt In December 1997, the company partially financed the purchase of the remaining outstanding minority shares in Arnotts Limited with a one-year $260 million bank borrowing bearing interest at 5.1%. In December 1997, the company issued $300 million of notes due December 1, 2002 bearing interest at 6.15%. The issuance was the second draw down on the company's $1 billion Shelf Registration filed with the Securities and Exchange Commission in fiscal 1997. Four hundred million dollars remain available for issuance under the Shelf Registration. Also in December 1997, a wholly owned subsidiary of the company entered into a three-year borrowing arrangement with an investor group for approximately $100 million. Principal payments are made monthly under the terms of the arrangement. (h) Subsequent Events On February 18, 1998, the company announced that it received a favorable ruling from the Internal Revenue Service that the previously announced plan to spin off the Specialty Foods segment qualifies as a tax-free transaction to U.S. shareowners. Subject to approval of the company's Board of Directors and various regulatory agencies, the spinoff is expected to be completed in the third quarter of fiscal 1998. The new company, which includes Swanson frozen foods, Vlasic pickles, and certain European and Argentine specialty foods businesses, will be named Vlasic Foods International Inc. -10-
11 In February 1998, the company entered into a revolving credit facility which provides for aggregate funding of $750 million. The company expects to draw down $500 million under the terms of the facility in March 1998. In connection with the spinoff of the Specialty Foods segment, the revolving credit facility and the outstanding debt obligation will be assigned to the new company, Vlasic Foods International Inc. In February 1998, the company reached an agreement in principle to sell the assets of its can-making operations at four of its North American thermal manufacturing plants for approximately $125 million and enter into a long-term supply agreement with the buyer. The transaction is expected to be completed in fiscal 1998. On February 18, 1998, the company announced that it expects to record a special charge in the third quarter of fiscal 1998 to cover the costs associated with its strategic growth plan. The special charge is expected to include one-time costs related to the spinoff of Vlasic Foods International Inc. and other cost and productivity initiatives that are currently under review. -11-
12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION CAMPBELL SOUP COMPANY RESULTS OF OPERATIONS OVERVIEW Campbell achieved record sales and earnings for the second quarter ended February 1, 1998. Comparability in net earnings and earnings per share with the second quarter last year were impacted by the adoption of a one-time accounting change. On November 20, 1997, the Emerging Issues Task Force (EITF) released Issue 97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract that Combines Business Process Reengineering and Information Technology Transformation." The impact of this required accounting change was $11 million after-tax or $.02 per share. In addition, the company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share", which requires the computation and presentation of basic and diluted earnings per share. Excluding the accounting change, net earnings increased 12% and basic and diluted earnings per share increased 15% and 16%, respectively, versus last year. Also in the quarter, the following transactions were completed: - The company acquired the Liebig soup business in France from Danone S.A. for approximately $180 million; - Arnotts Limited repurchased the outstanding ordinary shares held by minority shareholders for approximately $290 million. As a result of the repurchase, Campbell's ownership of Arnotts increased to 100%; and - The company issued $300 million 6.15% notes due December 1, 2002. Comparability of net earnings and earnings per share for the six months ended February 1, 1998 were impacted by the cumulative effect of adopting EITF 97-13 in the second quarter of fiscal 1998 and the first quarter fiscal 1997 special charge of $216 million ($160 million after-tax or $.32 per share) to cover the costs of a restructuring program. Excluding these charges, net earnings increased 10% and basic and diluted earnings per share increased 16% versus the prior year. -12-
13 SECOND QUARTER SALES Sales in the quarter increased 1% to $2.34 billion from $2.32 billion last year. The growth was due to a 2% increase from volume and product mix, 2% from higher selling prices, 1% from acquisitions, offset by a 4% decline due to currency and divestitures. An analysis of net sales by segment follows: <TABLE> <CAPTION> (millions) 1998 1997 % CHANGE - ---------- -------- -------- -------- <S> <C> <C> <C> Soup and Sauces $ 1,386 $ 1,301 7% Biscuits and Confectionery 428 425 1 Foodservice 119 118 1 - ---------------------------------------------------------------------------- Subtotal 1,933 1,844 5 Specialty Foods 344 353 (3) Other 98 143 (31) Interdivision (33) (23) -- - ---------------------------------------------------------------------------- $ 2,342 $ 2,317 1% ============================================================================ </TABLE> Soup and Sauces sales were up significantly due to worldwide wet soup volume growth of 7%. Strong volume gains were achieved in Canada, Germany and Japan. France, due to the acquisition of Liebig, also contributed to the volume gains. U.S. soup unit volume increase was led by Campbell's ready-to-serve soups, including Home Cookin', Joseph A. Campbell premium soups in glass jars and Chunky soups. In beverages, V8 Splash continues to deliver outstanding results. Biscuits and Confectionery posted a moderate increase in sales compared to second quarter fiscal 1997. This performance was adversely impacted by currency movement, particularly the weakness of the Australian dollar against the U.S. dollar. Excluding the impact of currency, sales increased 8%. The increase was led by Pepperidge Farm Goldfish crackers, Milano and Chocolate Chunk cookies and Swirl breads. Godiva Chocolatier, boosted by excellent holiday season and Valentine's Day sales, delivered double-digit sales growth. -13-
14 The increase in Foodservice sales was principally driven by wet soup volume gains offset by volume declines in the club store channel. Specialty Foods reported increases in sales of Swanson frozen foods which were more than offset by declines in Vlasic pickle sales and competitive difficulties in the German specialty foods distribution business. GROSS MARGIN Gross margin, defined as net sales less cost of products sold, increased $75 million in the quarter. As a percent of sales, gross margin was 49.7% compared to 47.1% last year. The improvement was primarily due to continued productivity gains in manufacturing facilities. MARKETING AND SELLING EXPENSES Marketing and selling expenses as a percent of sales increased to 22% from 21% last year. The increase is attributable to a 7% increase in worldwide advertising spending including double-digit increases in U.S. wet soup, Pace Mexican Sauces, Erasco and Arnotts Limited. ADMINISTRATIVE EXPENSES Administrative expenses as a percent of sales remained flat with the prior year at 4%. Research and development expenses as a percent of sales were consistent with last year at 1%. Other expenses declined as compared to last year due primarily to reduced minority interest expense and lower expenses associated with the company's long-term incentive plan obligations. OPERATING EARNINGS Segment operating earnings increased 10% for the second quarter versus the prior year. Excluding the impact of currency, operating earnings in core segments increased 10% compared to last year. An analysis of operating earnings by segment follows: -14-
15 <TABLE> <CAPTION> (millions) 1998 1997 % CHANGE -------------------------- ----- ----- -------- <S> <C> <C> <C> Soup and Sauces $ 396 $ 359 10% Biscuits and Confectionery 76 69 10 Foodservice 16 18 (11) - ---------------------------------------------------------------------------- Subtotal 488 446 9 Specialty Foods 34 32 6 Other 4 2 100 - ---------------------------------------------------------------------------- $ 526 $ 480 10 Corporate (8) (17) - ---------------------------------------------------------------------------- $ 518 $ 463 ============================================================================ </TABLE> Soup and Sauces earnings increased due to sales and volume growth in Campbell's ready-to-serve soups including Home Cookin', Joseph A. Campbell and Chunky soups. In addition, strong earnings were delivered by our core business in Mexico and newly acquired business in France. In addition, V8 Splash and Franco-American pastas posted strong earnings results. Biscuits and Confectionery earnings increase was primarily led by Godiva Chocolatier's outstanding holiday season and Valentine's Day sales growth and cost productivity gains in the Delacre biscuit business in Europe. Foodservice earnings decline was attributable to volume declines in non-soup products. Specialty Foods earnings increase was due to increased sales of Swanson frozen foods and manufacturing productivity gains in the U.S. plants offset by cattle supply issues in Argentina. NON-OPERATING ITEMS Interest expense was flat versus prior year. The effective tax rate was 34.5% compared to 33.9% in fiscal 1997. SIX MONTHS -15-
16 SALES Sales for the six months increased 2% to $4.46 billion from $4.37 billion last year. The growth was due to a 3% increase in volume and product mix, 2% from higher selling prices, 1% from acquisitions offset by a 4% decline due to currency and divestitures. An analysis of net sales by segment follows: <TABLE> <CAPTION> (millions) 1998 1997 % CHANGE ---------------- ------- ------- -------- <S> <C> <C> <C> Soup and Sauces $ 2,601 $ 2,407 8% Biscuits and Confectionery 837 826 1 Foodservice 225 223 1 ---------------------------------------------------------------------------- Subtotal 3,663 3,456 6 Specialty Foods 665 684 (3) Other 201 279 (28) Interdivision (67) (50) -- ---------------------------------------------------------------------------- $ 4,462 $ 4,369 2% ============================================================================ </TABLE> Soup and Sauces sales were led by worldwide wet soup volume growth of 7%. Volume gains were achieved in Canada, Germany, Mexico, Japan and France. U.S. soup volume gains were led by Campbell's ready-to-serve soups including Home Cookin', Joseph A. Campbell and Chunky soups. In addition, Swanson broths and V8 Splash continued their momentum. Biscuits and Confectionery reported a moderate sales increase compared to the prior year. The performance was adversely impacted by currency movement, particularly the weakness of the Australian dollar against the U.S. dollar. Excluding the impact of currency, sales increased 7% year-to-date. The increase was driven by Pepperidge Farm Goldfish crackers, Milano cookies and Swirl breads. In addition, Godiva reported double-digit growth due to their excellent holiday season and Valentine's Day sales. Foodservice sales were relatively flat due to the volume increases in wet soup offset by declines in the club store channel. -16-
17 Specialty Foods reported increases in Swanson frozen foods' sales which were more than offset by declines in Vlasic pickle sales and competitive difficulties in the German specialty foods distribution business. GROSS MARGIN Gross margin increased $151 million year-to-date. As a percent of sales, gross margin was 48.9% compared to 46.5% last year. The improvement was primarily due to continued productivity gains in manufacturing facilities. MARKETING AND SELLING EXPENSES Marketing and selling expenses as a percent of sales increased to 21% from 20% last year. The increase is attributable to a 12% increase in worldwide advertising spending including double-digit increases in U.S. wet soup, Prego spaghetti sauces, V8 beverages, Pepperidge Farm Goldfish crackers and Milano cookies and Erasco. ADMINISTRATIVE EXPENSES Administrative expenses as a percent of sales remained flat with the prior year at 4%. Research and development expenses as a percent of sales were consistent with the prior year at 1%. Other expenses declined compared to last year primarily due to reduced minority interest expense and lower expenses associated with the company's long-term incentive plans. OPERATING EARNINGS The increase in segment operating earnings from the prior year is due in part to the first quarter fiscal 1997 special charge of $216 million. Excluding the special charge, operating earnings increased 10% versus the prior year. An analysis of operating earnings by segment follows: -17-
18 <TABLE> <CAPTION> (millions) 1998 1997 -------------- ----- ----- <S> <C> <C> Soup and Sauces $ 766 $ 557 Biscuits and Confectionery 135 68 Foodservice 31 32 - ----------------------------------------------------------------- Subtotal 932 657 Specialty Foods 60 46 Other 6 (12) - ----------------------------------------------------------------- 998 691 Corporate (29) (39) - ----------------------------------------------------------------- $ 969 $ 652 ================================================================= </TABLE> Contributions to earnings by segment included the effect of a first quarter fiscal 1997 restructuring charge as follows: Soup and Sauces $134 million, Biscuits and Confectionery $53 million, Specialty Foods $13 million and Other $16 million. Soup and Sauces earnings, excluding the special charge, were up 11% due to sales growth in Campbell's ready-to-serve soups including Home Cookin', Joseph A. Campbell and Chunky soups. In addition, Swanson broths and our core businesses in the United Kingdom, Germany and Mexico reported strong earnings. Franco-American pastas and gravies also delivered strong financial performance. Biscuits and Confectionery earnings, excluding the special charge, increased 12% led by excellent earnings growth at Pepperidge Farm and Godiva. Pepperidge Farm's Swirl and frozen breads delivered strong earnings performance and Godiva posted record earnings as a result of outstanding holiday season and Valentine's Day sales volume growth. Foodservice earnings, excluding the special charge, were down 4% due to lower sales of non-soup products. Specialty Foods earnings, excluding the special charge, were up 2% due to increased sales of Swanson frozen foods and manufacturing efficiencies in the U.S. plants offset by cattle supply issues in Argentina and the competitive difficulties in the German specialty foods distribution business. -18-
19 NON-OPERATING ITEMS Comparability in interest expense is primarily impacted by the financing costs associated with the company's $2.5 billion share repurchase program that commenced in October 1996 with the "Dutch Auction" tender offer. The effective tax rate was 34.5% compared to 37% last year. Excluding the special charge, the effective tax rate was 34% for the six months ended January 26, 1997. SPECIAL CHARGE A special charge of $216 million ($160 million after-tax or $.32 per share) was recorded in the first quarter of fiscal 1997 to cover the costs of a restructuring program. The restructuring program was designed to improve operational efficiency by reconfiguring or closing various plants, reducing administrative and operational staff functions and divesting non-strategic, under-performing businesses. The program was substantially completed in the first quarter of fiscal 1998. LIQUIDITY AND CAPITAL RESOURCES The company generated cash from operations of $468 million compared to $577 million last year. This decrease is principally due to changes in working capital, including spending on the restructuring program and a reduction in accrued liabilities due to timing of trade marketing and consumer promotions versus the prior year. Capital expenditures were $113 million, a decline from $133 million last year. The company continues to aggressively manage its capital outlays and expects total expenditures to approximate $375 million in fiscal 1998. During the year, the company acquired the Liebig soup business in France for approximately $180 million and the outstanding ordinary shares held by Arnotts Limited's minority shareholders for approximately $290 million. In the first six months, the company repurchased approximately 5.7 million shares versus 30.9 million shares last year. In December 1997, the company issued $300 million 6.15% notes due December 1, 2002. This issuance was the second draw down on the company's $1 billion shelf registration. Four hundred million dollars remain available under the Shelf Registration. In addition, the company entered into a three-year debt borrowing arrangement for approximately $100 million. Principal payments are remitted monthly in accordance with the terms of the arrangement. -19-
20 In February 1998, the company entered into a revolving credit facility which provides for aggregate funding of $750 million. The company expects to draw down $500 million under the terms of the facility in March 1998. In connection with the spinoff of the Specialty Foods segment, as discussed in Footnote (h) to the consolidated financial statements, the revolving credit facility and the outstanding debt obligation will be assigned to the new company, Vlasic Foods International Inc. The company intends to use the net proceeds to repay short-term debt. OTHER MATTERS Historically, certain computer programs were written using two digits rather than four to define the applicable year. Accordingly, the company's software may recognize a date using "00" as 1900 rather than the year 2000, which could result in major systems failures or miscalculations, commonly referred to as the Year 2000 issue. The company has performed an assessment of major information technology systems and expects that all necessary modifications and/or replacements will be completed in a timely manner to ensure that systems are Year 2000 compliant. Based on current estimates, the costs of addressing this issue are not expected to have a material adverse effect on the company's financial position, results of operations or cash flows. The potential impact of the Year 2000 issue on significant customers, vendors and suppliers cannot be reasonably estimated at this time. RECENT DEVELOPMENTS On February 18, 1998, the company announced that it received a favorable ruling from the Internal Revenue Service that the previously announced plan to spin off the Specialty Foods segment qualifies as a tax-free transaction to U.S. shareowners. Subject to approvals of the company's Board of Directors and various regulatory agencies, the spinoff is expected to be completed in the third quarter of fiscal 1998. The new company, which includes Swanson frozen foods, Vlasic pickles, and certain European and Argentine specialty foods businesses, will be named Vlasic Foods International Inc. In February 1998, the company reached an agreement in principle to sell the assets of its can-making operations at four of its North American thermal manufacturing plants for approximately $125 million and enter into a long-term supply agreement with the buyer. The transaction is expected to be completed in fiscal 1998. On February 18, 1998, the company announced that it expects to record a special charge in the third quarter of fiscal 1998 to cover the costs associated with its strategic growth plan. The special charge is expected to include one-time costs related to the spinoff of Vlasic Foods International Inc. and other cost and productivity initiatives that are currently under review. -20-
21 In June 1997, the FASB issued Statement of Financial Accounting Standards No.130, "Reporting Comprehensive Income." This statement establishes standards for the reporting and display of comprehensive income. The provisions of the statement are effective for fiscal years beginning after December 15, 1997. FORWARD LOOKING INFORMATION From time to time, in written reports, including the fiscal 1997 Annual Report, and oral statements, we discuss our expectations regarding future performance of the company. These "forward-looking statements" are based on currently available competitive, financial and economic data and our operating plans. They are inherently uncertain, and investors must recognize that actual results could differ materially from those expressed or implied in the forward-looking statements. In addition, as discussed in the Management's Discussion and Analysis: - The completion of the company's divestiture program in fiscal 1998 depends on our ability to find buyers to purchase these businesses at prices we consider appropriate. - The agreement in principle to sell the can-making assets is contingent upon negotiation and completion of definitive agreements. - The recording of a special charge in the third quarter of fiscal 1998 is subject to approval by the company's Board of Directors. -21-
22 PART II ITEM 1. LEGAL PROCEEDINGS There have been no material developments in the legal proceedings as reported in Campbell's Form 10-Q for the quarter ended November 2, 1997. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a. Campbell's Annual Meeting of Shareowners was held on November 20, 1997. c. The matters voted upon and the results of the vote are as follows: Election of Directors <TABLE> <CAPTION> Number of Shares ---------------- Name For Withheld <S> <C> <C> Alva A. App 412,414,173 1,065,716 Edmund M. Carpenter 412,456,950 1,022,939 Bennett Dorrance 412,447,459 1,032,430 Thomas W. Field, Jr. 412,455,731 1,024,158 Kent B. Foster 412,379,052 1,100,837 Harvey Golub 412,427,620 1,052,269 David W. Johnson 412,406,340 1,073,549 David K. P. Li 412,421,894 1,057,995 Philip E. Lippincott 412,418,854 1,061,035 Mary Alice Malone 412,427,168 1,052,721 Dale F. Morrison 412,453,660 1,026,229 Charles H. Mott 412,438,855 1,041,034 George M. Sherman 412,445,066 1,034,823 Donald M. Stewart 409,735,732 3,744,157 George Strawbridge, Jr. 412,435,942 1,043,947 Charlotte C. Weber 412,425,852 1,054,037 </TABLE> -22-
23 Ratification of Appointment of Accountants <TABLE> <CAPTION> Broker For Against Abstentions Non-Votes ---------- ------- ----------- --------- <S> <C> <C> <C> <C> Ratification of Appointment of Accountants 411,899,171 346,954 1,233,764 -0- </TABLE> Shareowner Proposal Concerning Proxy Format <TABLE> <CAPTION> Broker For Against Abstentions Non-Votes ----------- ---------- ----------- --------- <S> <C> <C> <C> <C> Shareowner Proposal Concerning Proxy Format 22,707,464 356,449,245 11,392,994 22,930,186 </TABLE> ITEM 5. CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements which are based on management's current views and assumptions regarding future events and financial performance. These statements are qualified by reference to the section "Cautionary Statement on Forward-Looking Statements" in Item 1 of the registrant's Annual Report on Form 10-K for the fiscal year ended August 3, 1997. See Item 1 for a description of important factors that could impact the company's strategic growth plan goals and cause actual results to differ materially from those expressed or implied in the forward-looking statements. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits No. 4 There is no instrument with respect to long-term debt of the company that involves indebtedness or securities authorized thereunder exceeding 10 percent of the total assets of the company and its subsidiaries on a consolidated basis. The company agrees to file a copy of any instrument or agreement defining the rights of holders of long-term debt of the company upon request of the Securities and Exchange Commission. 27 Financial Data Schedule. -23-
24 b. Reports on Form 8-K There were no reports on Form 8-K filed by Campbell during the quarter for which this report is filed. 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. CAMPBELL SOUP COMPANY Date: February 25, 1998 By: /s/ BASIL ANDERSON ------------------------------- Basil Anderson Executive Vice President and Chief Financial Officer -24-
25 INDEX TO EXHIBITS Exhibit Number 27 Financial Data Schedule. -25-