10-Q 1 0001.txt FORM 10-Q CAMPBELL SOUP COMPANY 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 April 30, 2000 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: (856) 342-4800 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . There were 421,115,848 shares of Capital Stock outstanding as of June 6, 2000. 2 PART I. FINANCIAL INFORMATION CAMPBELL SOUP COMPANY CONSOLIDATED Statements of Earnings (unaudited) (millions, except per share amounts)
Three Months Ended Nine Months Ended ------------------ ----------------- APRIL May APRIL May 30, 2000 2, 1999 30, 2000 2, 1999 -------- ------- -------- ------- Net sales $1,394 $1,492 $5,078 $5,128 ---------------------------------------------------------------------------------------------------------- Costs and expenses Cost of products sold 664 730 2,321 2,416 Marketing and selling expenses 389 370 1,281 1,301 Administrative expenses 68 69 238 221 Research and development expenses 14 15 45 48 Other expenses 15 24 65 40 ---------------------------------------------------------------------------------------------------------- Total costs and expenses 1,150 1,208 3,950 4,026 ---------------------------------------------------------------------------------------------------------- Earnings before interest and taxes 244 284 1,128 1,102 Interest, net 44 43 140 129 ---------------------------------------------------------------------------------------------------------- Earnings before taxes 200 241 988 973 Taxes on earnings 61 79 333 328 ---------------------------------------------------------------------------------------------------------- Net earnings $ 139 $ 162 $ 655 $ 645 ========================================================================================================== Per share - basic Net earnings $ .33 $ .37 $ 1.54 $ 1.46 ========================================================================================================== Dividends $ .225 $ .225 $ .675 $ .660 ========================================================================================================== Weighted average shares outstanding - basic 423 438 426 443 ========================================================================================================== Per share - assuming dilution Net earnings $ .32 $ .37 $ 1.52 $ 1.44 ========================================================================================================== Weighted average shares outstanding - assuming dilution 432 443 432 448 ========================================================================================================== See Notes to Financial Statements
2 3 CAMPBELL SOUP COMPANY CONSOLIDATED Balance Sheets (unaudited) (millions, except per share amounts)
APRIL August 30, 2000 1, 1999 -------- ------- Current assets Cash and cash equivalents $ 34 $ 6 Accounts receivable 470 541 Inventories 560 615 Other current assets 122 132 ----------------------------------------------------------------------------------------------------- Total current assets 1,186 1,294 ----------------------------------------------------------------------------------------------------- Plant assets, net of depreciation 1,622 1,726 Intangible assets, net of amortization 1,772 1,910 Other assets 615 592 ----------------------------------------------------------------------------------------------------- Total assets $ 5,195 $ 5,522 ===================================================================================================== Current liabilities Notes payable $ 1,887 $ 1,987 Payable to suppliers and others 351 511 Accrued liabilities 422 415 Dividend payable 95 97 Accrued income taxes 228 136 ----------------------------------------------------------------------------------------------------- Total current liabilities 2,983 3,146 ----------------------------------------------------------------------------------------------------- Long-term debt 1,270 1,330 Nonpension postretirement benefits 375 394 Other liabilities, including deferred income taxes of $249 and $263 404 417 ----------------------------------------------------------------------------------------------------- Total liabilities 5,032 5,287 ----------------------------------------------------------------------------------------------------- Shareowners' equity Preferred stock; authorized 40 shares; none issued - - Capital stock, $.0375 par value; authorized 560 shares; issued 542 shares 20 20 Capital surplus 318 382 Earnings retained in the business 4,409 4,041 Capital stock in treasury, at cost (4,348) (4,058) Accumulated other comprehensive income (236) (150) ----------------------------------------------------------------------------------------------------- Total shareowners' equity 163 235 ----------------------------------------------------------------------------------------------------- Total liabilities and shareowners' equity $ 5,195 $ 5,522 ===================================================================================================== See Notes to Financial Statements
3 4 CAMPBELL SOUP COMPANY CONSOLIDATED Statements of Cash Flows (unaudited) (millions)
Nine Months Ended ----------------- APRIL May 30, 2000 2, 1999 -------- ------- Cash flows from operating activities: Net earnings $655 $645 Non-cash charges to net earnings Depreciation and amortization 189 191 Deferred income taxes 1 (6) Other, net 21 19 Changes in working capital Accounts receivable 61 128 Inventories 35 (25) Other current assets and liabilities (28) (207) -------------------------------------------------------------------- Net cash provided by operating activities 934 745 -------------------------------------------------------------------- Cash flows from investing activities: Purchases of plant assets (120) (198) Sales of plant assets 4 8 Businesses acquired - (105) Sales of businesses 10 - Other, net (25) (27) -------------------------------------------------------------------- Net cash used in investing activities (131) (322) -------------------------------------------------------------------- Cash flows from financing activities: Long-term borrowings - 325 Repayments of long-term borrowings (7) (5) Short-term borrowings 686 1,315 Repayments of short-term borrowings (809) (1,036) Dividends paid (289) (288) Treasury stock purchases (374) (774) Treasury stock issuances 12 42 Other, net - (2) -------------------------------------------------------------------- Net cash used in financing activities (781) (423) -------------------------------------------------------------------- Effect of exchange rate changes on cash 6 8 -------------------------------------------------------------------- Net change in cash and cash equivalents 28 8 Cash and cash equivalents - beginning of period 6 16 -------------------------------------------------------------------- Cash and cash equivalents - end of period $ 34 $ 24 ==================================================================== See Notes to Financial Statements
4 5 CAMPBELL SOUP COMPANY CONSOLIDATED Statements of Shareowners' Equity (unaudited) (millions, except per share amounts)
Capital stock ------------- Earnings Accumulated Issued In treasury retained other Total ------ ----------- Capital in the comprehensive shareowners' Shares Amount Shares Amount surplus business income equity ------------------------------------------------------------------------------------------------------------------------------------ Balance at August 2,1998 542 $20 (94) $(3,083) $395 $3,706 $(164) $ 874 Comprehensive income Net earnings 645 645 Foreign currency translation adjustments 24 24 Dividends ($.660 per share) (291) (291) Treasury stock purchased (16) (774) (774) Treasury stock issued under management incentive and stock option plans 2 37 (16) 21 ------------------------------------------------------------------------------------------------------------------------------------ Balance at May 2, 1999 542 $20 (108) $(3,820) $379 $4,060 $(140) $ 499 ==================================================================================================================================== BALANCE AT AUGUST 1, 1999 542 $20 (113) $(4,058) $382 $4,041 $(150) $ 235 COMPREHENSIVE INCOME NET EARNINGS 655 655 FOREIGN CURRENCY TRANSLATION ADJUSTMENTS (86) (86) DIVIDENDS ($.675 PER SHARE) (287) (287) TREASURY STOCK PURCHASED (10) (373) (373) TREASURY STOCK ISSUED UNDER MANAGEMENT INCENTIVE AND STOCK OPTION PLANS 2 83 (64) 19 ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT APRIL 30, 2000 542 $20 (121) $(4,348) $319 $4,409 $(236) $ 163 ==================================================================================================================================== See Notes to Financial Statements
5 6 CAMPBELL SOUP COMPANY CONSOLIDATED Notes to Financial Statements (unaudited) (dollars in millions, except per share amounts) (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. Certain reclassifications were made to the prior year amounts to conform with current presentation. (b) Comprehensive Income In 1999, the company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," issued in June 1997. SFAS 130 establishes a standard for reporting comprehensive income, which is comprised of net income and "other" comprehensive income items, in the financial statements. "Other" comprehensive income includes items recorded in shareowners' equity that are not the result of transactions with shareowners, such as foreign currency translation adjustments. As of April 30, 2000 and May 2, 1999, accumulated other comprehensive income, as reflected in the statements of shareowners' equity, represents the cumulative translation adjustment. (c) Restructuring Program A restructuring charge of $41 ($30 after tax or $.07 per share) was recorded in the fourth quarter fiscal 1999 to cover the costs of a restructuring and divestiture program approved in July 1999 by the company's Board of Directors. This charge relates to the streamlining of certain North American and European production and administrative facilities and the anticipated cost of a divestiture of a non-strategic business with annual sales of approximately $25. The divestiture was completed in April 2000. The restructuring charge includes approximately $20 in cash charges primarily related to severance and employee benefit costs. The balance of the restructuring charge includes non-cash charges related to the disposition of plant assets and the divestiture. The restructuring and divestiture program will be substantially completed by the end of fiscal 2000. The expected net cash outflows will not have a material impact on the company's liquidity. From this program, the company expects to realize annual pre-tax savings of approximately $21. 6 7 A summary of restructuring reserves at April 30, 2000, and related activity is as follows:
Losses on Asset Dispositions Severance and Other Exit and Divestitures Benefits Costs Total ---------------- ------------- ---------- ----- Balance at August 1, 1999 $ 19 38 3 $ 60 SPENDING $(19) (21) (2) $(42) ------ ------ ------ ------ BALANCE AT APRIL 30, 2000 $ 0 17 1 $ 18 ====== ====== ====== ======
The reserve balances as of August 1, 1999 also include amounts related to a fiscal 1998 program. The program was substantially completed by the second quarter fiscal 2000. (d) Earnings Per Share 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. For the three and nine month periods ended April 30, 2000, the weighted average shares outstanding assuming dilution also includes the incremental effect of approximately seven million and three million shares, respectively, under a forward stock purchase contract. See note (g) for a description of the contract. For the nine month period ended May 2, 1999, the weighted average shares outstanding assuming dilution also includes the incremental effect of approximately one million shares under the contract. (e) Segment Information The company operates in three business segments: Soup and Sauces, Biscuits and Confectionery, and Away From Home. 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 pastas and gravies, Swanson broths, and V8 and V8 Splash beverages. The Biscuits and Confectionery segment includes the Godiva Chocolatier, Pepperidge Farm, and Arnotts Limited businesses. Away From Home represents products, including Campbell's soups and Campbell's Specialty Kitchen entrees, which are distributed to the food service and meal replacement markets. 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 company's fiscal 1999 Annual Report on Form 10-K. The company evaluates segment performance based on earnings before interest 7 8 and taxes, excluding certain non-recurring charges. Away From Home products are principally produced by the tangible assets of the company's other segments, except for Stockpot premium refrigerated soups, which are produced in a separate facility, and for certain frozen products which are produced under contract manufacturing agreements. Accordingly, with the exception of the designated Stockpot facility, tangible assets have not been allocated to the Away From Home segment. For products produced by the assets of other segments, depreciation and amortization are allocated to Away From Home based on budgeted production hours. Transfers between segments are recorded at cost plus mark-up or at market. 8 9 The following tables present information about the company's reportable segments: APRIL 30, 2000
Away Soup and Biscuits and From Corporate and Sauces Confectionery Home Other(1) Eliminations(2) Total -------- ------------- ---- -------- ---------------- ----- THREE MONTHS ENDED Net sales $ 927 347 132 5 (17) $1,394 Earnings before interest and taxes $ 204 42 13 (1) (14) $ 244 Depreciation and amortization $ 31 24 6 - 5 $ 66 Capital expenditures $ 27 14 1 - 5 $ 47 NINE MONTHS ENDED Net sales $3,552 1,140 410 27 (51) $5,078 Earnings before interest and taxes $ 968 178 44 - (62) $1,128 Depreciation and amortization $ 94 65 14 - 16 $ 189 Capital expenditures $ 70 37 4 - 9 $ 120 Segment assets $2,769 1,344 362 7 713 $5,195 (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 income taxes and prepaid pension assets.
9 10 May 2, 1999
Away Soup and Biscuits and From Corporate and Sauces Confectionery Home Other(1) Eliminations(2) Total -------- -------------- ---- -------- ---------------- ----- THREE MONTHS ENDED Net sales $1,010 340 122 34 (14) $1,492 Earnings before interest and taxes $ 249 44 13 (1) (21) $ 284 Depreciation and amortization $ 31 21 4 3 5 $ 64 Capital expenditures $ 47 17 4 1 3 $ 72 NINE MONTHS ENDED Net sales $3,578 1,109 382 110 (51) $5,128 Earnings before interest and taxes $ 929 173 46 6 (52) $1,102 Depreciation and amortization $ 96 62 10 8 15 $ 191 Capital expenditures $ 124 45 7 9 13 $ 198 Segment assets $2,994 1,494 314 159 742 $5,703 (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 income taxes and prepaid pension assets.
10 11 (f) Inventories
APRIL August 30, 2000 1, 1999 -------- ------- Raw materials, containers and supplies $204 $207 Finished products 356 408 -------- ------- $560 $615
Approximately 65% of inventory in fiscal 2000 is accounted for on the last in, first out (LIFO) method of determining cost. If the first in, first out inventory valuation method had been used exclusively, inventories would not differ materially from the amounts reported at April 30, 2000 and August 1, 1999. (g) Forward Stock Purchase Program In October 1998, the company entered into a forward stock purchase contract in connection with the company's equity exposure from its stock option program. The contract, which matures in fiscal 2004, provides for the company to repurchase approximately 11 million shares at an average price of approximately $47 per share. The company may elect to settle the contract on a net share basis in lieu of physical settlement. The contract permits early settlement and may be extended for an additional five-year term. If the forward purchase contract had been settled on a net share basis as of April 30, 2000, the company would have provided the counterparty with approximately nine million shares of its capital stock. In March 2000, the Emerging Issues Task Force (EITF) released Issue Number 00-07, "Application of EITF Issue No. 96-13, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock," to Equity Derivative Transactions That Contain Certain Provisions That Require Cash Settlement if Certain Events Outside the Control of the Issuer Occur." The EITF reached a consensus that equity derivative contracts that include any provision that could require net cash settlement can no longer be accounted for as equity. Such contracts are initially recorded at fair value and must be accounted for as an asset or liability with subsequent changes in the fair value of the derivative included in earnings. Similarly the EITF reached a consensus that equity derivative contracts with any provisions that could require physical settlement by a cash payment to the counterparty in exchange for the issuer's shares can no longer be accounted for as permanent equity. Instead, the contracts should be classified as temporary or mezzanine equity. Both of these conclusions do not allow for an evaluation of the likelihood that otherwise unlikely or remote events would trigger cash settlement. 11 12 For contracts that existed before March 16, 2000, the provisions of the consensus are to be applied on December 31, 2000 to those contracts that remain outstanding at that date, based on the contract terms then in place. The effect of the application that requires asset/liability treatment for contracts with net cash settlement provisions should be calculated as of December 31, 2000, and presented on that date as a cumulative effect of change in accounting principle. Any reclassification of amounts from permanent equity to temporary equity as a result of settlement provisions that require physical cash settlement should be made for balance sheets as of and subsequent to December 31, 2000. The company's forward stock contract is currently accounted for as permanent equity. The company is evaluating the impact of the consensus and possible amendments to contract provisions with the counterparty. Further discussions related to the accounting for such contracts continue by the EITF and other accounting and regulatory bodies. The company expects to adopt the provisions of the consensus in the second quarter fiscal 2001. However, the ultimate resolution and impact of the accounting for the contract will be dependent upon the results of the review of contract provisions with the counterparty, possible future changes in authoritative guidance and fluctuations in the company's share price. 12 13 CAMPBELL SOUP COMPANY CONSOLIDATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS OVERVIEW Net sales in the third quarter ended April 30, 2000 declined 7% primarily due to lower worldwide wet soup shipments. Worldwide wet soup shipments decreased 5% as a result of an 8% decline in the U.S. Outside the U.S., wet soup shipments increased 1%. Net sales excluding currency and divestitures decreased 4% in the quarter. For the nine months ended April 30, 2000, net sales declined 1%. Net earnings increased 2% to $655 million and diluted earnings per share increased 6% to $1.52. THIRD QUARTER SALES Sales in the quarter declined 7% to $1.39 billion from $1.49 billion last year. The change in sales was due to a 5% decline in volume and mix, a 3% decline due to divestitures and currency, offset by 1% from higher selling prices. An analysis of net sales by segment follows:
(millions) 2000 1999 % CHANGE ---------- ---- ---- -------- Soup and Sauces $ 927 $ 1,010 (8)% Biscuits and Confectionery 347 340 2 Away From Home 132 122 8 -------------------------------------------------------------------------- Subtotal 1,406 1,472 (4) Other 5 34 Intersegment (17) (14) -------------------------------------------------------------------------- Total $ 1,394 $ 1,492 (7)%
13 14 The sales decline in Soup and Sauces was due primarily to a 5% decrease in worldwide wet soup volume, driven by an 8% decline in U.S. soup volume. Outside the U.S., wet soup volume increased 1%. Volume gains in France, Germany and Asia/Pacific were partially offset by declines in the United Kingdom, Canada and Japan. Beverage sales were lower than the prior year due to competitive pressure in the category. Sales of U.S. sauces and prepared foods also declined in the quarter in response to aggressive competitive activity in their respective categories. Biscuits and Confectionery reported an increase in sales compared to third quarter 1999. The increase was primarily driven by the performance of Godiva Chocolatier and the Arnotts biscuit business. Godiva Chocolatier contributed double-digit sales growth due to record Valentine's Day results and strong Easter sales. Pepperidge Farm reported lower sales as a result of continued competitive activity in the cheese cracker category although sales of frozen products increased over the prior year behind new product initiatives. Away From Home sales increased by 8% over the prior year due primarily to the expansion of the Campbell's branded soup in university cafeterias, convenience stores and other outlets. The decline on Other is due to the divestiture of Fresh Start Bakeries, Inc. in May 1999. GROSS MARGIN Gross margin, defined as net sales less cost of products sold, decreased $32 million in the quarter due to lower sales volumes. As a percent of sales, gross margin was 52.4% compared to 51.0% last year. The improvement in margin percentage was principally due to higher selling prices, cost savings generated from global procurement initiatives and continued productivity gains in manufacturing facilities, which offset the adverse mix impact resulting from declines in U.S. wet soup volume. MARKETING AND SELLING EXPENSES Marketing and selling expenses as a percent of sales increased to 27.9% from 24.8% last year. The increase was primarily due to an increase in selling costs associated with new stores in Godiva Chocolatier, an increase in marketing costs in the Pepperidge Farm business, and a shift in the timing of certain U.S. soup programs and reductions in programs to match marketplace performance. ADMINISTRATIVE EXPENSES Administrative expenses were relatively flat at approximately 5% of sales. 14 15 OTHER EXPENSES Other expenses decreased principally due to lower expenses in recognition of long-term compensation liabilities and related contracts that hedge the programs. OPERATING EARNINGS Segment operating earnings, defined as earnings before interest and taxes, decreased 15% versus the prior year due primarily to the decline in U.S. soup sales. An analysis of operating earnings by segment follows:
(millions) 2000 1999 % CHANGE ---------- ---- ---- -------- Soup and Sauces $ 204 $ 249 (18)% Biscuits and Confectionery 42 44 (5) Away From Home 13 13 - ------------------------------------------------------------------------------ Subtotal 259 306 (15) Other (1) (1) ------------------------------------------------------------------------------ 258 305 (15) Corporate (14) (21) ------------------------------------------------------------------------------ Total $ 244 $ 284 (14)%
Earnings from Soup and Sauces declined 18% due primarily to lower sales of U.S. soup. Beverages reported a decline in earnings primarily due to a decline in V8 Splash versus record sales a year ago. U.S. sauces and prepared foods reported a decline in earnings due to competition against pasta and gravy. Earnings from Biscuits and Confectionery declined by $2 million due in part to marketing investments in Pepperidge Farm products. Godiva Chocolatier reported double-digit growth in earnings due to record Valentine's Day results and strong Easter sales. Away From Home earnings were flat versus last year. 15 16 NON-OPERATING ITEMS Interest expense was consistent with the prior year. The effective tax rate was 30.5% compared to 32.7% in fiscal 1999. The decrease was due to a lower effective rate on foreign earnings primarily driven by a reduction in the Australian statutory rate. NINE MONTHS SALES Sales for the nine months declined 1% to $5.08 billion from $5.13 billion last year. The change in sales was due to a 1% decrease from volume and mix, a 2% decline due to divestitures, offset by 2% from higher selling prices. An analysis of net sales by segment follows:
(millions) 2000 1999 % CHANGE ---------- ---- ---- -------- Soup and Sauces $ 3,552 $ 3,578 (1)% Biscuits and Confectionery 1,140 1,109 3 Away From Home 410 382 7 -------------------------------------------------------------------------- Subtotal 5,102 5,069 1 Other 27 110 Intersegment (51) (51) -------------------------------------------------------------------------- Total $ 5,078 $ 5,128 (1)%
The decline in Soup and Sauces was due to declines in U.S. sauces, prepared foods and beverages and the United Kingdom business. U.S. soup sales were relatively flat versus the prior year. Germany, France and Asia/Pacific reported sales gains. Biscuits and Confectionery reported an increase in sales compared to 1999 due primarily to a double-digit increase in Godiva Chocolatier and an increase in the Australian biscuit business. The increase in Godiva Chocolatier sales was due to new retail store openings, improved comparable store sales and product innovation. Pepperidge Farm reported lower sales due to a decline in Goldfish volume. 16 17 Away From Home reported a 7% increase in sales primarily due to an increase in soup volume and improved performance in the Canadian and Pepperidge Farm businesses. GROSS MARGIN Gross margin, defined as net sales less cost of products sold, increased $45 million year-to-date. As a percent of sales, gross margin was 54.3% compared to 52.9% last year. The improvement in margin percentage was principally due to selling price increases, cost savings generated from global procurement initiatives and continued productivity gains in the manufacturing facilities. MARKETING AND SELLING EXPENSES Marketing and selling expenses as a percent of sales were relatively flat at 25.2% versus 25.4% last year. The slight decline is due to reductions in certain programs to match marketplace performance, offset by increased selling costs in Godiva Chocolatier. ADMINISTRATIVE EXPENSES Administrative expenses as a percent of sales increased to 4.6% from 4.3% last year. The increase is due to higher costs associated with the Away From Home infrastructure and higher compensation costs. OTHER EXPENSES Other expenses increased as compared to last year primarily due to increases in incentive compensation costs. 17 18 OPERATING EARNINGS Segment operating earnings, defined as earnings before interest and taxes, increased 4% versus the prior year. An analysis of operating earnings by segment follows:
(millions) 2000 1999 % CHANGE ---------- ---- ---- -------- Soup and Sauces $ 968 $ 929 4% Biscuits and Confectionery 178 173 3 Away From Home 44 46 (4) ------------------------------------------------------------------------------- Subtotal 1,190 1,148 4 Other - 6 ------------------------------------------------------------------------------- 1,190 1,154 3 Corporate (62) (52) ------------------------------------------------------------------------------- Total $ 1,128 $ 1,102 2%
The increase in earnings from Soup and Sauces is due primarily to lower marketing expenses and improvements in gross margin from cost productivity programs. Several international wet soup businesses including Erasco in Germany, Liebig in France, and Asia/Pacific contributed to the earnings performance. Beverages and U.S. sauces and prepared foods reported improved earnings due to lower marketing. Biscuits and Confectionery reported an increase in earnings driven by the performance of Godiva Chocolatier and Arnotts. Pepperidge Farm reported a decline in earnings. Earnings from Away From Home declined $2 million to $44 million due to increased investment behind growth initiatives and higher costs associated with the new Stockpot manufacturing facility. The decline in Other is due to the sale of Fresh Start Bakeries, Inc. in May 1999. 18 19 NON-OPERATING ITEMS Net interest expense increased to $140 million from $129 million in 1999 due to higher debt levels and interest rates. The effective tax rate was flat at 33.7%. RESTRUCTURING CHARGE A restructuring charge of $41 million ($30 million after tax or $.07 per share) was recorded in the fourth quarter fiscal 1999 to cover the costs of a restructuring and divestiture program approved in July 1999 by the company's Board of Directors. This charge relates to the streamlining of certain North American and European production and administrative facilities and the anticipated cost of a divestiture of a non-strategic business with annual sales of approximately $25 million. The divestiture was completed in April 2000. The restructuring charge includes approximately $20 million in cash charges primarily related to severance and employee benefit costs. The balance of the restructuring charge includes non-cash charges related to the disposition of plant assets and the divestiture. The program will be substantially completed by the end of fiscal 2000. The expected net cash outflows will not have a material impact on the company's liquidity. From this program, the company expects to realize annual pre-tax savings of approximately $21 million. See note (c) of the Notes to Financial Statements for further discussion of the program and the related activity analysis. LIQUIDITY AND CAPITAL RESOURCES The company generated cash from operations of $934 million compared to $745 million last year. This increase is primarily due to higher earnings and improved working capital. Capital expenditures were $120 million, a decrease from $198 million last year. The company continues to aggressively manage its capital outlays and expects total expenditures to approximate $215 million in fiscal 2000. In the first nine months, the company repurchased approximately 10 million shares versus approximately 16 million last year. By repurchasing shares, the company expects to utilize existing cash and debt capacity to lower its cost of capital and increase returns to shareowners. The company's long-term strategy is to repurchase approximately two percent of its outstanding shares annually. 19 20 YEAR 2000 The company recognized the material nature of the business issues related to the computer processing of dates into and beyond the Year 2000 and effected a readiness plan that was divided into three major phases: Business Systems Inventory and Assessment, Remediation and Replacement, and Testing. Management believes the company has completed all of the activities within its control to ensure that the company's systems are Year 2000 compliant. The company has not experienced any disruption or material adverse impacts in its operations, business systems or supply chain as a result of the Year 2000 date transition. The company is not aware that any of its major business partners have experienced significant Year 2000 issues. However, the company has developed contingency plans to mitigate any remaining Year 2000-related risks. RECENT DEVELOPMENTS In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. This standard, effective for fiscal years beginning after June 15, 2000, requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded in earnings or other comprehensive income, based on whether the instrument is designated as part of a hedge transaction and, if so, the type of hedge transaction. The company is currently assessing the impact of the adoption on the company's financial statements. Based on the company's current portfolio, it is not expected that adoption of this statement will have a material effect on the company's results of operations, financial condition or cash flows. In March 2000, the Emerging Issues Task Force (EITF) released Issue Number 00-07, "Application of EITF Issue No. 96-13, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock," to Equity Derivative Transactions That Contain Certain Provisions That Require Cash Settlement If Certain Events Outside the Control of the Issuer Occur." The EITF reached a consensus that equity derivative contracts that include any provision that could require net cash settlement can no longer be accounted for as equity. Such contracts are initially recorded at fair value and must be accounted for as an asset or liability with subsequent changes in the fair value of the derivative included in earnings. Similarly the EITF reached a consensus that equity derivative contracts with any provisions that could require physical settlement by a cash payment to the counterparty in exchange for the issuer's shares can no longer be accounted for as permanent equity. Instead, the contracts should be classified as temporary or mezzanine equity. Both of these conclusions do not allow for an evaluation of the likelihood that otherwise unlikely or remote events would trigger cash settlement. 20 21 For contracts that existed before March 16, 2000, the provisions of the consensus are to be applied on December 31, 2000 to those contracts that remain outstanding at that date, based on the contract terms then in place. The company has a forward stock purchase contract outstanding that is accounted for as permanent equity. See note (g) of the Notes to Financial Statements. The company is evaluating the impact of the consensus and possible amendments to contract provisions with the counterparty. Further discussions related to the accounting for such contracts continue by the EITF and other accounting and regulatory bodies. The company expects to adopt the provisions of the consensus in the second quarter fiscal 2001. However, the ultimate resolution and impact of the accounting for the contract will be dependent upon the results of the review of contract provisions with the counterparty, possible future changes in authoritative guidance and fluctuations in the company's share price. FORWARD-LOOKING STATEMENTS This quarterly report contains certain statements which reflect the company's current expectations regarding future results of operations, economic performance, financial condition and achievements of the company. The company has tried, wherever possible, to identify these forward looking statements by using words such as "anticipate," "believe," "estimate," "expect" and similar expressions. These statements reflect the company's current plans and expectations and are based on information currently available to it. They rely on a number of assumptions and estimates which could be inaccurate and which are subject to risks and uncertainties. The company wishes to caution the reader that the following important factors and those important factors described elsewhere in the commentary, or in other Securities and Exchange Commission filings, 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: - the impact of strong competitive response to the company's efforts to leverage its brand power with product innovation and new advertising; - the inherent risks in the marketplace associated with new product introductions, including uncertainties about trade and consumer acceptance; - the company's ability to achieve sales and earnings forecasts, which are based on assumptions about sales volume and product mix; 21 22 - the continuation of the company's successful record of integrating acquisitions into its existing operations and the availability of new acquisition and alliance opportunities that build shareowner wealth; - the company's ability to achieve its cost savings objectives, including the projected outcome of supply chain management programs; - the difficulty of predicting the pattern of inventory movements by the company's trade customers; and - the impact of unforeseen economic and political changes in international markets where the company competes such as currency exchange rates, inflation rates, recession, foreign ownership restrictions and other external factors over which the company has no control. This discussion of uncertainties is by no means exhaustive but is designed to highlight important factors that may impact the company's outlook. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For information regarding the company's exposure to certain market risks, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Annual Report on Form 10-K for fiscal 1999. There have been no significant changes in the company's portfolio of financial instruments or market risk exposures which have occurred since year-end. 22 23 PART II ITEM 1. LEGAL PROCEEDINGS In management's opinion, there are no pending claims or litigation, the outcome of which would have a material effect on the consolidated results of operations, financial position or cash flows of the company. As previously reported, ten lawsuits have been commenced against Campbell Soup Company and certain of its officers in the United States District Court for the District of New Jersey, on behalf of persons who allegedly purchased the company's stock between November 18, 1997 and January 8, 1999. Specifically, the actions allege, among other things, that during this period, Campbell and certain of its officers misrepresented the company's financial condition by failing to disclose alleged shipping and revenue recognition practices in connection with the sale of certain company products at the end of the company's fiscal quarters in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The actions seek compensatory and other damages, and costs and expenses associated with the litigation. Campbell believes the complaints are without merit and intends to defend the actions vigorously. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits -------- Exhibit 3 (ii) Campbell's By-laws, effective March 23, 2000. Exhibit 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. Exhibit 10 (i) Agreement between the company and Dale F. Morrison dated April 20, 2000. 10 (j) Agreement between the company and David W. Johnson dated May 23, 2000. 23 24 Exhibit 27 Financial Data Schedule. b. Reports on Form 8-K ------------------- No reports on Form 8-K were filed by the company during the quarter ended April 30, 2000. 24 25 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: June 13, 2000 By: /s/ Basil L. Anderson ---------------------------- Basil L. Anderson Executive Vice President and Chief Financial Officer By: /s/ Ellen Oran Kaden ---------------------------- Ellen Oran Kaden Senior Vice President - Law and Government Affairs 25 26 INDEX TO EXHIBITS Exhibit Number -------------- 3 (ii) Campbell's By-laws, effective March 23, 2000. 10 (i) Agreement between the company and Dale F. Morrison dated April 20, 2000. 10 (j) Agreement between the company and David W. Johnson dated May 23, 2000. 27 Financial Data Schedule. 26