UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
| | | |
For the Fiscal Year Ended
July 31, 2005 | | Commission File Number |
August 1, 2004 | |
1-3822 |
CAMPBELL SOUP COMPANY
| | | |
New Jersey
State of Incorporation | | 21-0419870 |
State of Incorporation | |
I.R.S. Employer Identification No. |
1 Campbell Place
Camden, New Jersey 08103-1799
Principal Executive Offices
Telephone Number: (856) 342-4800
Securities registered pursuant to Section 12(b) of the Act:
| | | |
Title of Each Class
Capital Stock, par value $.0375 | | Name of Each Exchange on Which Registered |
Capital Stock, par value $.0375 | |
New York Stock Exchange |
| | Philadelphia Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
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. Yesþ Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.þ
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 13a-212b-2 of the Securities Exchange Act of 1934)Act). Yesþ Noo
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
As of September 21, 2004,January 28, 2005 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of capital stock held by nonaffiliatesnon-affiliates of the Registrantregistrant was $6,312,173,575.approximately $6,908,285,404. There were 410,241,976410,636,363 shares of capital stock outstanding as of September 21, 2004.2005.
Portions of the Registrant’s Proxy Statement for the Annual Meeting of Shareowners to be held on November 18, 2004,2005, are incorporated by reference into Part III.
Campbell Soup Company
Form 10-K
For Fiscal Year Ended August 1, 2004
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Part I
Item 1. Business
The CompanyCampbell Soup Company (“Campbell” or the “company”), together with its consolidated subsidiaries, is a global manufacturer and marketer of high quality,high-quality, branded convenience food products. Campbell was incorporated as a business corporation under the laws of New Jersey on November 23, 1922; however, through predecessor organizations, it traces its heritage in the food business back to 1869. The company’s principal executive offices are in Camden, New Jersey 08103-1799.
On June 24, 2004, the company announced a series of initiatives designed to improve the company’s sales growth and the quality and growth of its earnings. These includeBeginning with fiscal 2006, the following:company updated the strategies it is using to continue this effort. The five strategies include:
| • | | The elimination of approximately 400 positions worldwide, which resulted in a pre-tax charge of $23 million, or three cents per share, inExpanding the fourth quarter of fiscal 2004;company’s well-known brands within the simple meal and baked snack categories; |
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| • | | The implementationTrading consumers up to higher levels of a new salessatisfaction centering on convenience, wellness and distribution system for the company’s business in Australia, converting from a direct store delivery system to a central warehouse system. As a result of this new system, over 200 positions are expected to be eliminated, with most of the terminations occurring in fiscal 2005. The company recorded a pre-tax charge of $9 million, or two cents per share, in the fourth quarter of fiscal 2004 related to this new system;quality; |
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| • | | The implementation of aMaking the company’s products more broadly available in existing and new SAP enterprise-resource planning system in North America. The project is planned for the next three yearsmarkets; |
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| • | | Increasing margins by improving price realization and is expected to cost approximately $125 million;company-wide productivity; and |
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| • | | An expanded focus on convenienceImprove overall organizational diversity, engagement, excellence and availability as the primary sources of incremental future revenue growth, along with an increased emphasis on “wellness” initiatives.agility. |
See also “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and the Consolidated Financial Statements (and the Notes thereto).
Through fiscal 2004, the company’s operations were organized and reported in four segments: North America Soup and Away From Home,Home; North America Sauces and Beverages,Beverages; Biscuits and Confectionery,Confectionery; and International Soup and Sauces. Beginning with fiscal 2005, the company changed its organizational structure and as a result its operations are organized and reported in the following segments: U.S. Soup, Sauces and Beverages; Baking and Snacking; International Soup and Sauces; and Other. The new segments are discussed in greater detail below.
North AmericaU.S. Soup, and Away From HomeThe North America Soup and Away From Home segment comprises the retail soup and Away From Home business in the U.S. and Canada. The U.S. retail business includes theCampbell’sbrand condensed and ready-to-serve soups andSwansonbroths. The segment includes the company’s total business in Canada, which comprisesHabitantandCampbell’ssoups,Pregopasta sauce andV8juices. The Away From Home operations represent the distribution of products such asCampbell’ssoups,Campbell’s
specialty entrees, beverage products, other prepared foods andPepperidge Farmproducts through various food service channels in North America.
North America Sauces and BeveragesThe North AmericaU.S. Soup, Sauces and Beverages segment includes U.S.the following retail sales forbusinesses:Campbell’scondensed and ready-to-serve soups;Swansonbroth and canned poultry;Pregopasta sauces,sauce;PaceMexican sauces,sauce;Franco-AmericanCampbell’s Chunkychili;Campbell’scanned pastaspasta, gravies, and gravies,beans;Campbell’s Supper Bakesmeal kits;V8vegetable juices,juice;V8 Splashjuice beverages,beverages; andCampbell’stomato juice, as well as the total of all businesses in Mexicojuice.
Baking and other Latin AmericanSnackingThe Baking and Caribbean countries. The company operates this segment and the North America Soup and Away From Home operations under an integrated supply chain organization, in which these operations share substantially all manufacturing, warehouse, distribution and sales activities.
Biscuits and ConfectioneryThe Biscuits and ConfectionerySnacking segment includes all retail sales ofthe following businesses:Pepperidge Farmcookies, crackers, breadsbakery and frozen products in the United States,U.S. retail;Arnott’sbiscuits and crackers in Australia and Asia Pacific, Pacific; andArnott’s Snackfoods salty snacks in Australia, andGodiva chocolates worldwide.Australia.
International Soup and SaucesThe International Soup and Sauces segment comprises operationsincludes the soup, sauce and beverage businesses outside of Norththe United States, including Europe, Mexico,
Latin America, includingthe Asia Pacific region and the retail business in Canada. The segment’s operations includeErascoandHeisse Tassesoups in Germany,LiebigandRoycosoups andLesieursauces in France,Campbell’sandBatchelorssoups,OXOstock cubes andHomepridesauces in the United Kingdom,Devos Lemmensmayonnaise and cold sauces andCampbell’sandRoycosoups in Belgium,Blå Bandsoups and sauces in Sweden, andMcDonnellsandErinsoups in Ireland. In Asia Pacific, operations includeCampbell’ssoup and stock andSwansonbroths across the region. In Canada, operations includeHabitantandCampbell’ssoups,Pregopasta sauce andV8juices.
OtherThe 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.
IngredientsThe ingredients required for the manufacture of the company’s food products are purchased from various suppliers. While all such ingredients are available from numerous independent suppliers, raw materials are subject to fluctuations in price attributable to a number of factors, including changes in crop size, cattle cycles, government-sponsored agricultural programs, import and export requirements and weather conditions during the growing and harvesting seasons. To help reduce some of this volatility, the company uses commodity futures contracts for a number of its ingredients, such as corn, cocoa, soybean meal, soybean oil and wheat. Ingredient inventories are at a peak during the late fall and decline during the winter and spring. Since many ingredients of suitable quality are available in sufficient quantities only at certain seasons, the company makes commitments for the purchase of such ingredients during their respective seasons. At this time, the company does not anticipate any material restrictions on availability or shortages of ingredients that would have a significant impact on the company’s businesses. For additional information on the company’s ingredient management and for information relating to the impact of inflation on the company, see “Management’s Discussion and Analysis of Results of Operations and Financial Condition.”Condition” and Note 18 to the Consolidated Financial Statements.
CustomersIn most of the United States, Canada, Europe and the Asia Pacific region,company’s markets, sales solicitation activities are conducted by the company’s own sales force and through broker and distributor
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arrangements. In the United States, Canada and Canada,Latin America, the company’s products are generally resold to consumers in retail food chains, mass discounters, mass merchandisers, club stores, convenience stores, drug stores and other retail establishments. In Europe, the company’s products are generally resold to consumers in retail food chains, mass discounters and other retail establishments. In Mexico, the company’s products are generally resold to consumers in retail food chains, club stores, convenience stores, drug stores
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and other retail establishments. In the Asia Pacific region, the company’s products are generally resold to consumers through retail food chains, convenience stores vending machines and other retail establishments. Godiva’sGodiva Chocolatier’s products are sold generally through a network of company-owned retail boutiques in North America, Europe and Asia, franchised third-party retail boutique operators in Europe, third-party distributors in Europe and Asia, and major retailers, including finer department stores and duty-free shops, worldwide. Godiva’sGodiva Chocolatier’s products are also sold through catalogs and on the Internet, although these sales are primarily limited to North America.America and Japan. The company makes shipments promptly after receipt and acceptance of orders.
The company’s largest customer, Wal-Mart Stores, Inc. and its affiliates, accounted for approximately 13%14% of the company’s consolidated net sales during fiscal 20042005 and 12% during fiscal 2003.2004. All of the company’s segments sold products to Wal-Mart Stores, Inc. or its affiliates. No other customer accounted for 10% or more of the company’s consolidated net sales.
Trademarks and TechnologyThe company owns over 6,900 trademark registrations and applications in over 160 countries and believes that its trademarks are of material importance to its business. Although the laws vary by jurisdiction, trademarks generally are valid as long as they are in use and/or their registrations are properly maintained and have not been found to have become generic. Trademark registrations generally can be renewed indefinitely as long as the trademarks are in use. The company believes that its principal brands, includingCampbell’s, Erasco, Liebig, Pepperidge Farm, V8, Pace, Prego, Swanson, Batchelors, Arnott’s,andGodiva,are protected by trademark law in the company’s relevant major markets. In addition, some of the company’s products are sold under brands that have been licensed from third parties.
Although the company owns a number of valuable patents, it does not regard any segment of its business as being dependent upon any single patent or group of related patents. In addition, the company owns copyrights, both registered and unregistered, and proprietary trade secrets, technology, know-how processes, and other intellectual property rights that are not registered.
CompetitionThe company experiences worldwide competition in all of its principal products. This competition arises from numerous competitors of varying sizes, including producers of generic and private label products, as well as from manufacturers of other branded food products, which compete for trade merchandising support and consumer dollars. As such, the
number of competitors cannot be reliably estimated. The principal areas of competition are brand recognition, quality, price, advertising, promotion, convenience and service.
Working CapitalFor information relating to the company’s cash and other working capital items, see “Management’s Discussion and Analysis of Results of Operations and Financial Condition.”
Capital ExpendituresDuring fiscal 2005, the company’s aggregate capital expenditures were $332 million. The company expects to spend approximately $360 million for capital projects in fiscal 2006. The major fiscal 2006 capital projects include the ongoing implementation of the SAP enterprise-resource planning system in North America and the construction of a new facility in Everett, Washington, for the company’s Stockpot subsidiary.
Research and DevelopmentDuring the last three fiscal years, the company’s expenditures on research activities relating to new products and the improvement and maintenance of existing products were $95 million in 2005, $93 million in 2004 and $88 million in 2003 and $79 million in 2002.2003. The increase during the last two fiscal years in research and development spending in 2004 iswas primarily due to currency fluctuations. The increase from 2002 to 2003 was consistent with previously announced investment initiatives designed to drive top line growth and improve the company’s cost position. The company conducts this research primarily at its headquarters in Camden, New Jersey, although important research is also undertaken inat various other locations inside and outside the United States.
Environmental MattersThe company has programsrequirements for the operation and design of its facilities that meet or exceed applicable environmental rules and regulations. TheOf the company’s $332 million in capital expenditures made during fiscal 2004 were $288 million, of which2005, approximately $5$5.8 million was for compliance with environmental laws and regulations in the United States. The company further estimates that approximately $6$6.4 million of the capital expenditures anticipated during fiscal 20052006 will be for compliance with such environmental laws and regulations. The company believes that continued compliance with existing environmental laws and regulations will not have a material effect on capital expenditures, earnings or the competitive position of the company. Additional information regarding the company’s environmental matters is set forth in “Legal Proceedings.”
SeasonalityDemand for the company’s products is somewhat seasonal, with the fall and winter months usually accounting for the highest sales volume due primarily to demand for the company’s soup and sauce products. Godiva Chocolatier sales are also strongest during the fall and winter months. Demand for the company’s beverage, baking and snacking products, however, is generally evenly distributed throughout the year.
RegulationThe manufacture and marketing of food products is highly regulated. In the United States, the company is subject to regulation by various government agencies, including the Food and Drug Administration, the Department of Agriculture and the Federal Trade Commission, as well as various state and local agencies. The company is also regulated by similar agencies outside the United States and by voluntary organizations such as the National Advertising Division of the Better Business Bureau.
EmployeesAt August 1, 2004,On July 31, 2005, there were approximately 24,000 full-time employees of the company.
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Financial InformationFor information with respect to revenue, operating profitability and identifiable assets attributable to the company’s business segments and geographic areas, see Note 4 to the Consolidated Financial Statements.
Company WebsiteThe company’s primary corporate website can be found at www.campbellsoupcompany.com. The company
makes available free of charge at this website (under the “Investor Center –— Financial Reports –— SEC Financial Reports”Filings” caption) all of its reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, including its annual report on Form 10-K, its quarterly reports on Form10-Q and its Current Reportscurrent reports on Form 8-K. These reports are made available on the website as soon as reasonably practicable after their filing with, or furnishing to, the Securities and Exchange Commission.
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Item 2. Properties
The company’s principal executive offices and main research facilities are company-owned and located in Camden, New Jersey.
The following table sets forth the company’s principal manufacturing facilities and the business segment that primarily uses each of the facilities:
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| Principal Manufacturing Facilities |
| Inside the U.S. | | | | | Outside the U.S. | | |
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California
| | Ohio | | | Australia | | Germany |
• Dixon (NASA/NASB) | | • Napoleon (NASA/NASB) | | • Huntingwood (BC) | | • Luebeck (ISS) |
• Sacramento (NASA/NASB) | | • Wauseon (NASA) | | • Marleston (BC) | | • Gerwisch (ISS) |
• Stockton (NASA/NASB) | | • Willard (BC) | | • Shepparton (ISS) | | |
| | | | • Virginia (BC) | | Indonesia |
Connecticut
| | Pennsylvania | | • Miranda (BC) | | • Jawa Barat (BC) |
• Bloomfield (BC) | | • Denver (BC) | | • Smithfield (BC) | | |
| | • Downingtown (BC) | | • Scoresby (BC) | | Ireland |
Florida
| | • Reading (BC) | | | | • Thurles (ISS) |
• Lakeland (BC) | | | | Belgium | | |
| | South Carolina | | • Puurs (ISS) | | Malaysia |
Illinois
| | • Aiken (BC) | | • Brussels (BC) | | • Selangor Darul Ehsan (ISS) |
• Downers Grove (BC) | | | | | | |
| | Texas | | Canada | | Mexico |
Michigan
| | • Paris (NASA/NASB) | | • Listowel (NASA) | | • Villagran (NASA) |
• Marshall (NASA) | | | | • Toronto (NASA) | | • Guasave (NASA) |
| | Utah | | | | |
New Jersey
| | • Richmond (BC) | | United Kingdom | | Netherlands |
• South Plainfield | | | | • Ashford (ISS) | | • Utrecht (ISS) |
(NASA/NASB) | | Washington | | • King’s Lynn (ISS) | | |
| | • Woodinville (NASA) | | • Worksop (ISS) | | Papua New Guinea |
North Carolina
| | | | | | • Port Moresby (BC) |
• Maxton (NASA) | | Wisconsin | | France | | • Malahang Lae (BC) |
| | • Milwaukee (NASA/NASB) | | • LePontet (ISS) | | |
| | | | • Dunkirk (ISS) | | Sweden |
| | | | | | • Kristianstadt (ISS) |
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NASA – North America Soup and Away From Home
NASB – North America Sauces and Beverages
BC – Biscuits and Confectionery
ISS – International Soup and Sauces | | | | |
| | | | | | | | |
California | | Ohio | | | Australia | | Indonesia
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• Dixon (SSB)
• Sacramento (SSB/OT)
• Stockton (SSB)
Connecticut
• Bloomfield (BS)
Florida
• Lakeland (BS)
Illinois
• Downers Grove (BS)
Michigan
• Marshall (SSB)
New Jersey
• South Plainfield (SSB)
North Carolina
• Maxton (SSB/OT) | | • Napoleon (SSB/OT)
• Wauseon (SSB)
• Willard (BS)
Pennsylvania
• Denver (BS)
• Downingtown (BS)
• Reading (OT)
South Carolina
• Aiken (BS)
Texas
• Paris (SSB/OT)
Utah
• Richmond (BS)
Washington
• Woodinville (OT)
Wisconsin
• Milwaukee (SSB) | | | • Huntingwood (BS)
• Marleston (BS)
• Shepparton (ISS)
• Virginia (BS)
• Miranda (BS)
• Smithfield (BS)
• Scoresby (BS)
Belgium
• Puurs (ISS)
• Brussels (OT)
Canada
• Listowel (ISS/OT)
• Toronto (ISS/OT)
France
• Le Pontet (ISS)
• Dunkirk (ISS)
Germany
• Luebeck (ISS)
• Gerwisch (ISS) | | • Jawa Barat (BS)
Ireland
• Thurles (ISS)
Malaysia
• Selangor Darul Ehsan (ISS)
Mexico
• Villagran (ISS)
• Guasave (ISS)
Netherlands
• Utrecht (ISS)
Papua New Guinea
• Port Moresby (BS)
• Malahang Lae (BS)
Sweden
• Kristianstadt (ISS)
United Kingdom
• Ashford (ISS)
• King’s Lynn (ISS)
• Worksop (ISS)
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| SSB – U.S. Soup, Sauces and Beverages | | | | | |
| BS – Baking and Snacking | | | | | |
| ISS – International Soup and Sauces | | | | | |
| OT – Other | | | | | |
| | | |
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Each of the foregoing manufacturing facilities is company-owned, except that the Woodinville, Washington, facility,facility; the Scoresby, Australia, facilityfacility; the Selangor Darul Ehsan, Malaysia, facility; and portions of the Ashford, United Kingdom, facility are subject to leases.leased. The Utrecht, Netherlands, facility is subject to a ground lease. The company also operates retail confectionery shops in the United States, Canada, Europe and Asia; retail bakery thrift stores in the United States; and
other plants, facilities and offices at various locations in the United States and abroad, including additional
executive offices in Norwalk, Connecticut; Paris, France; and Homebush, Australia. On July 15, 2005, the company announced plans to build a new facility in Everett, Washington, to replace the existing Woodinville, Washington, facility for the manufacture of refrigerated soups by its Stockpot subsidiary.
Management believes that the company’s manufacturing and processing plants are well maintained and are generally adequate to support the current operations of the businesses.
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Item 3. 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
Following a trial on the ultimate dispositionmerits, on September 13, 2005, the District Court issued Post-Trial Findings of complex litigation is inherently difficult to assess,Fact and Conclusions of Law, ruling in favor of the company believesand against VFB on all claims. The Court ruled that VFB failed to prove that the action is without meritspinoff was a constructive or actual fraudulent transfer. The Court also rejected VFB’s claim of breach of fiduciary duty, VFB’s claim that VFI was an alter ego of the company, and is defendingVFB’s claim that the case vigorously.spinoff should be deemed an illegal dividend. VFB will have 30 days following the entry of the judgment of the District Court to appeal the decision.
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, theThe company believes that the ultimate outcomeexpects a final resolution of this matter will not have a material impact on the consolidated financial condition or results of operation of the company.
As previously reported, in July 2003, the company began discussions with the Wisconsin Department of Natural Resources (“WDNR”) regarding certain air emissions from the company’s Milwaukee, Wisconsin flavoring and spice mix plant. These emissions may have exceeded limits established pursuant to the
Wisconsin Clean Air Act Program. As a result of these discussions, the company has (i) installed air emission control equipment at a cost of approximately $700 thousand, and (ii) submitted a payment of approximately $50 thousand to the WDNR for additional emission fees. As of August 1, 2004, in addition to the amounts described above, the company incurred costs of approximately $275 thousand related to the evaluation of this issue. While the WDNR may require additional expenditures, the company believes that the WDNR is unlikely to do so and that, in the event that the WDNR does impose such additional expenditures, they would not have a material impact on the consolidated financial condition or results of operation of the company.
As previously reported, on April 22, 2004, the company entered into an Administrative Consent Order (“ACO”) with the New Jersey Department of Environmental Protection (“NJDEP”) to settle alleged violations of the New Jersey Air Pollution Control Act related to certain air emissions from the company’s South Plainfield, New Jersey flavoring and spice mix plant. Under the ACO, the company agreed to (i) modify existing process equipment and to install additional air emission control equipment at a cost of approximately $1.5 million, (ii) pay a $300 thousand penalty, (iii) pay $100 thousand for a supplemental environmental project, and (iv) pay approximately $185 thousand in outstanding air emission fees. The company has complied with its obligations under the ACO, and the company expects the ACO to be officially terminated following an inspection by the NJDEP. The ACO does not constitute an admission of liability by the company.fiscal 2006.
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 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 August 1, 2004,July 31, 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
Although the results of these matters cannot be predicted with certainty, in management’s opinion, the final outcome of these legal proceedings, tax issues and environmental matters will not expect that the cost of complying with the EPA Agreement will have a material impactadverse effect on the consolidated financial condition or results of operationoperations or financial condition of the company.
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Item 4. Submission of Matters to a Vote of Security Holders
NoneNone.
Executive Officers of the Company
The following list of executive officers as of October 1, 2004,2005, is included as an item in Part III of this Form 10-K:
| | | | | | | | | | | | | |
| | | | Year First Appointed | | Year First Appointed |
| Name | | Present Title | | Age | | Executive Officer | | Present Title | | Age | | Executive Officer |
| | | |
Douglas R. Conant | | President and Chief Executive Officer | | 53 | | 2001 | | President and Chief Executive Officer | | 54 | | 2001 |
Anthony P. DiSilvestro | | Vice President — Controller | | 45 | | 2004 | | Vice President — Controller | | 46 | | 2004 |
John A. Doumani | | Vice President | | 47 | | 2002 | |
M. Carl Johnson, III | | Senior Vice President | | 56 | | 2001 | | Senior Vice President | | 57 | | 2001 |
Ellen Oran Kaden | | Senior Vice President — Law and Government Affairs | | 53 | | 1998 | | Senior Vice President — Law and Government Affairs | | 54 | | 1998 |
Larry S. McWilliams | | Senior Vice President | | 48 | | 2001 | | Senior Vice President | | 49 | | 2001 |
Denise M. Morrison | | Senior Vice President | | 50 | | 2003 | | Senior Vice President | | 51 | | 2003 |
Nancy A. Reardon | | Senior Vice President | | 52 | | 2004 | | Senior Vice President | | 53 | | 2004 |
Mark A. Sarvary | | Executive Vice President | | 45 | | 2002 | | Executive Vice President | | 46 | | 2002 |
Robert A. Schiffner | | Senior Vice President and Chief Financial Officer | | 54 | | 2001 | | Senior Vice President and Chief Financial Officer | | 55 | | 2001 |
David R. White | | Senior Vice President | | 49 | | 2004 | | Senior Vice President | | 50 | | 2004 |
Doreen A. Wright | | Senior Vice President and Chief Information Officer | | 47 | | 2001 | | Senior Vice President and Chief Information Officer | | 48 | | 2001 |
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Douglas R. Conantserved as President of Nabisco Foods Company (1995–2001) prior to joining Campbell in 2001.
John A. Doumaniserved as a Managing Director of Goodman Fielder Limited (1997–1999) prior to joining Campbell in 1999.
M. Carl Johnson, III,served as Executive Vice President and President, New Meals Division, Kraft Foods, N.A. (1997–2001) and Member of Kraft Foods Operating Committee (1995–2001) prior to joining Campbell in 2001.
Larry S. McWilliamsserved as Senior Vice President and General Manager, U.S. Business (1998–2001) of the Minute Maid Company prior to joining Campbell in 2001.
Denise M. Morrisonserved as Executive Vice President and General Manager, Kraft Snacks divisionDivision (2001–2003) of Kraft Foods, Inc., Executive Vice President and General Manager, Kraft Confection divisionDivision (2001) of Kraft Foods, Inc., Senior Vice President, Nabisco DTS (2000) of Nabisco, Inc. and Senior Vice President, Nabisco Food and Sales & Integrated Logistics (1998–2000) of Nabisco, Inc. prior to joining Campbell in 2003.
Nancy A. Reardonserved as Executive Vice President of Human Resources, Comcast Cable Communications (2002–2004) and Executive Vice President — Human Resources/Corporate Affairs (1997–2002) of Borden Capital Management Partners prior to joining Campbell in 2004.
Mark A. Sarvaryserved as Chief Executive Officer of J. Crew Group (1999–2002) and President/General Manager, Frozen Foods (1997–1999) of Nestlé USA prior to joining Campbell in 2002.
Robert A. Schiffnerserved as Senior Vice President and Treasurer (1998–2001) of Nabisco Holdings Corporation prior to joining Campbell in 2001.
David R. Whiteserved as Vice President, Product Supply — Global Family Care Business (1999–2004) of The Procter & Gamble Company prior to joining Campbell in 2004.
Doreen A. Wrightserved as Executive Vice President and Chief Information Officer of Nabisco, Inc. (1999–2001) and Senior Vice President — Operations and Systems, of Prudential Investments (1995–1998) prior to joining Campbell in 2001.
The company has employed Ellen Oran Kaden and Anthony P. DiSilvestro in an executive or managerial capacity for at least five years.
There is no family relationship among any of the company’s executive officers or between any such officer and any director of Campbell. All of the executive officers were elected at the July 2004June 2005 meeting of the Board of Directors.
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Part II
Item 5. Market for Registrant’s Capital Stock, Related Shareowner Matters and Issuer Purchases of Equity Securities
Market for Registrant’s Capital Stock
The company’s capital stock is listed and principally traded on the New York Stock Exchange. The company’s capital stock is also
is also listed on the Philadelphia Stock Exchange and the SWX Swiss Exchange. On September 21, 2004,2005, there were 32,39931,186 holders of record of the company’s capital stock. The marketMarket price and dividend information with respect to the company’s capital stock are set forth in Note 22 to the Consolidated Financial Statements. In September 2004,2005, the company increased the quarterly dividend to be paid in the first quarter of fiscal 20052006 to $0.17$0.18 per share. Future dividends will be dependent upon future earnings, financial requirements and other factors.
Issuer Purchases of Equity Securities
| | | | | | | | | |
| | | | | | | Total Number | | Maximum Number |
| | | | | | | of Shares | | of Shares that |
| | | Total | | | | Purchased as | | May Yet Be |
| | | Number of | | Average | | Part of Publicly | | Purchased |
| | | Shares | | Price Paid | | Announced Plans | | Under the Plans |
| Period | | Purchased1 | | Per Share2 | | or Programs | | or Programs |
| |
| 5/2/05–5/31/05 | | 5293 | | $29.933 | | 0 | | 0 |
| 6/1/05–6/30/05 | | 588,000 | | $31.06 | | 0 | | 0 |
| 7/1/05–7/31/05 | | 841,2664 | | $30.644 | | 0 | | 0 |
| |
| Total | | 1,429,795 | | $30.81 | | 0 | | 0 |
| |
| | | | | | | | |
| | | | | | Total Number | | Maximum Number |
| | | | | | of Shares | | of Shares that |
| | Total | | | | Purchased as | | May Yet Be |
| | Number of | | Average | | Part of Publicly | | Purchased |
| | Shares | | Price Paid | | Announced Plans | | Under the Plans |
Period | | Purchased1 | | Per Share2 | | or Programs | | or Programs |
|
5/2/04–5/31/04
6/1/04–6/30/04
7/1/04–8/1/04 | | 257,4723
270,1654
151,0715 | | $26.783
$25.984
$26.565 | | 0
0
0 | | 0
0
0 |
|
| 1 | | The company repurchases shares of capital stock to offset the dilutive impact to existing shareowners of issuances under the company’s stock compensation plans. The company also repurchases shares of capital stock that are owned and tendered by employees to satisfy tax withholding obligations on the vesting of restricted shares. All share repurchases were made in open-market transactions, except for the shares owned and tendered by employees to satisfy tax withholding obligations (which, unless otherwise indicated, were purchased at the closing price of the company’s shares on the date of tender)vesting). None of these transactions were made pursuant to a publicly announced repurchase plan or program. |
| |
| 2 | | Average price paid per share is calculated on a settlement basis and excludes commission. |
| |
| 3 | | Includes 2,472Represents shares owned and tendered by employees at an average price per share of $27.57 to satisfy tax withholding requirements on the vesting of restricted shares. |
| |
| 4 | | Includes 1651,266 shares owned and tendered by employees at an average price per share of $27.63$30.97 to satisfy tax withholding requirements on the vesting of restricted shares. |
|
5 | | Includes 1,071 shares owned and tendered by employees at an average price per share of $26.32 to satisfy tax withholding requirements on the vesting of restricted shares. |
7
Item 6. Selected Financial Data
Five-Year Review — Consolidated
(millions, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year | | 20041 | | 20032 | | 20023 | | 20014 | | 2000 | | | 2005 | | 20041 | | 2003 | | 20022 | | 20013 | |
| Summary of Operations | | |
| Net sales | | $ | 7,109 | | $ | 6,678 | | $ | 6,133 | | $ | 5,771 | | $ | 5,626 | | | $ | 7,548 | | $ | 7,109 | | $ | 6,678 | | $ | 6,133 | | $ | 5,771 | |
| Earnings before interest and taxes | | 1,115 | | 1,105 | | 984 | | 1,194 | | 1,265 | | | 1,210 | | 1,115 | | 1,105 | | 984 | | 1,194 | |
| Earnings before taxes | | 947 | | 924 | | 798 | | 987 | | 1,077 | | | 1,030 | | 947 | | 924 | | 798 | | 987 | |
| Earnings before cumulative effect of accounting change | | 647 | | 626 | | 525 | | 649 | | 714 | | | 707 | | 647 | | 626 | | 525 | | 649 | |
| Cumulative effect of accounting change | | — | | | (31 | ) | | — | | — | | — | | | — | | — | | | (31 | ) | | — | | — | |
| Net earnings | | 647 | | 595 | | 525 | | 649 | | 714 | | | 707 | | 647 | | 595 | | 525 | | 649 | |
| Financial Position | | |
| Plant assets — net | | $ | 1,901 | | $ | 1,843 | | $ | 1,684 | | $ | 1,637 | | $ | 1,644 | | | $ | 1,987 | | $ | 1,901 | | $ | 1,843 | | $ | 1,684 | | $ | 1,637 | |
| Total assets | | 6,675 | | 6,205 | | 5,721 | | 5,927 | | 5,196 | | | 6,776 | | 6,662 | | 6,205 | | 5,721 | | 5,927 | |
| Total debt | | 3,353 | | 3,528 | | 3,645 | | 4,049 | | 3,091 | | | 2,993 | | 3,353 | | 3,528 | | 3,645 | | 4,049 | |
| Shareowners’ equity (deficit) | | 874 | | 387 | | | (114 | ) | | | (247 | ) | | 137 | | | 1,270 | | 874 | | 387 | | | (114 | ) | | | (247 | ) |
| Per Share Data | | |
| Earnings before cumulative effect of accounting change — basic | | $ | 1.58 | | $ | 1.52 | | $ | 1.28 | | $ | 1.57 | | $ | 1.68 | | | $ | 1.73 | | $ | 1.58 | | $ | 1.52 | | $ | 1.28 | | $ | 1.57 | |
| Earnings before cumulative effect of accounting change — assuming dilution | | 1.57 | | 1.52 | | 1.28 | | 1.55 | | 1.65 | | | 1.71 | | 1.57 | | 1.52 | | 1.28 | | 1.55 | |
| Net earnings — basic | | 1.58 | | 1.45 | | 1.28 | | 1.57 | | 1.68 | | | 1.73 | | 1.58 | | 1.45 | | 1.28 | | 1.57 | |
| Net earnings — assuming dilution | | 1.57 | | 1.45 | | 1.28 | | 1.55 | | 1.65 | | | 1.71 | | 1.57 | | 1.45 | | 1.28 | | 1.55 | |
| Dividends declared | | 0.63 | | 0.63 | | 0.63 | | 0.90 | | 0.90 | | | 0.68 | | 0.63 | | 0.63 | | 0.63 | | 0.90 | |
| Other Statistics | | |
| Capital expenditures | | $ | 288 | | $ | 283 | | $ | 269 | | $ | 200 | | $ | 200 | | | $ | 332 | | $ | 288 | | $ | 283 | | $ | 269 | | $ | 200 | |
| Number of shareowners (in thousands) | | 45 | | 46 | | 47 | | 48 | | 51 | | | 43 | | 45 | | 46 | | 47 | | 48 | |
| Weighted average shares outstanding | | 409 | | 411 | | 410 | | 414 | | 425 | | | 409 | | 409 | | 411 | | 410 | | 414 | |
| Weighted average shares outstanding — assuming dilution | | 412 | | 411 | | 411 | | 418 | | 432 | | | 413 | | 412 | | 411 | | 411 | | 418 | |
In 2003, the company adopted SFAS No. 142 resulting in the elimination of amortization of goodwill and other indefinite-lived intangible assets. Prior periods have not been restated. See Note 3 to the Consolidated Financial Statements for additional information.
The 2003 fiscal year consisted of fifty-three weeks compared to fifty-two weeks in all other periods. The additional week contributed 2 percentage points of the sales increase compared to 2002, and approximately $.02 per share to net earnings.
In 2002, financial results were restated to conform to the requirements of new accounting standards. Certain consumer and trade promotional expenses have been reclassified from Marketing and selling expenses and Cost of products sold to Net sales for years 2000 to 2001.
| | |
| 1 | | 2004 results include a pre-tax restructuring chargescharge of $32 ($22 after tax or $.05 per share basic and assuming dilution) related to a reduction in workforce and the implementation of a distribution and logistics realignment in Australia. |
| |
| 2 | | 2003 results include pre-tax costs of $1 ($1 after tax) related to an Australian manufacturing reconfiguration. These costs were recorded in Cost of products sold. |
|
3 | | 2002 results include pre-tax costs of $20 ($14 after tax or $.03 per share basic and assuming dilution) related to an Australian manufacturing reconfiguration. Of this amount, pre-tax costs of approximately $19 were recorded in Cost of products sold. |
| |
43 | | 2001 results include pre-tax costs of $15 ($11 after tax or $.03 per share basic and assuming dilution) related to an Australian manufacturing reconfiguration. Of this amount, pre-tax costs of approximately $5 were recorded in Cost of products sold. |
8
Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition
Results of Operations
Overview
20042005Net earnings were
$707 million ($1.71 per share) in 2005 compared to $647 million ($1.57 per share) in
2004 compared to $626 million before the cumulative effect of accounting change ($1.52 per share) in 2003.2004. (All earnings per share amounts included in Management’s Discussion and Analysis are presented on a diluted basis.)
Net earnings between 2005 and 2004 were impacted by an increase in sales, lower corporate expenses and the favorable impact of currency, partially offset by a decline in gross margin as a percentage of sales and an increase in interest expense. The 2004 results were
also impacted by the following:
A pre-tax restructuring charge of $32 million ($22 million after tax or $.05 per share) related to a reduction in workforce and the implementation of a distribution and logistics realignment in Australia. (See also the section entitled Restructuring Program and Note 5 to the Consolidated Financial Statements);
• | | A pre-tax restructuring charge of $32 million ($22 million after tax or $.05 per share) related to a reduction in workforce and the implementation of a distribution and logistics realignment in Australia. (See also the section entitled Restructuring Program and Note 5 to the Consolidated Financial Statements); |
|
• | | A pre-tax gain of $16 million ($10 million after tax or $.02 per share) from a settlement of a class action lawsuit involving ingredient suppliers; and |
|
• | | A pre-tax gain of $10 million ($6 million after tax or $.02 per share) from a sale of a manufacturing site in California. |
A pre-tax gain of $16 million ($10 million after tax or $.02 per share) from a settlement of a class action lawsuit involving ingredient suppliers; and
A pre-tax gain of $10 million ($6 million after tax or $.02 per share) from a sale of a manufacturing site in California.
The gains were recorded in Other expenses/(income).
Comparisons2004In 2004, net earnings increased 3% to $647 million from $626 million before the cumulative effect of accounting change and earnings per share increased 3% to $1.57 from $1.52 in 2003.
In addition to the 2004 restructuring charge and gains, earnings between 2004 and 2003 of earnings before the cumulative effect of accounting change were also impacted by an increase in sales, favorable currency translation, lower interest expense and a lower tax rate, partially offset by a decline in gross margin as a percentage of sales and higher administrative expenses. In addition, there were 52 weeks in 2004 and 53 weeks in 2003. The additional week contributed approximately $.02 per share to earnings.
In the first quarter 2004, the company acquired certain Australian chocolate biscuit brands for approximately $9 million. These brands are included in the Biscuits and Confectionery segment.
2003In 2003, earnings before the cumulative effect of accounting change increased 19% to $626 million from $525 million and earnings per share increased 19% to $1.52 from $1.28 in 2002. Comparisons to 2002 were impacted byconnection with the adoption of Statement of Financial Accounting Standards (SFAS) No.142 “Goodwill and Other Intangible Assets,” as of the beginning of 2003. In accordance with the provisions of this standard, the company discontinued amortization of goodwill and indefinite-lived intangible assets on a prospective basis
from the date of adoption. Had such amortization been eliminated as of the beginning of 2002, net earnings for 2002 would have been $579 million, or $1.41 per share. The 2002 results included a restructuring charge and related costs of approximately $20 million pre-tax ($.03 per share) associated with the Australian manufacturing reconfiguration. Pre-tax charges of $19 million were classified as Cost of products sold and $1 million were classified as a Restructuring charge. The increase in earnings before the cumulative effect of accounting change in 2003 was primarily related to higher sales during the year, lower interest expense, and a lower effective tax rate compared to 2002, partially offset by higher administrative expenses and higher pension expense. The additional week contributed approximately $.02 per share to earnings in 2003.
In connection with the adoption of SFAS No.142,No. 142, the company recognized a non-cash charge of $31 million (net of a $17 million tax benefit), or $.08 per share, in the first quarter of 2003 as a cumulative effect of accounting change. This charge related to impaired goodwill associated with the Stockpot business, a food service business acquired in August 1998. See also Note 3 to the Consolidated Financial Statements.
Although SFAS No.142 precludes restatement of prior period results,In the 2002 segment operating earnings have been adjusted to reflectfirst quarter 2004, the pro forma impact of amortization eliminated undercompany acquired certain Australian chocolate biscuit brands for approximately $9 million. These brands are included in the standard.Baking and Snacking segment.
During the first quarter ended October 27, 2002,of 2003, the company acquired two businesses for cash consideration of approximately $170 million and assumed debt of approximately $20 million. The company acquired Snack Foods Limited, a leader in the Australian salty snack category, and Erin Foods, the number two dry soup manufacturer in Ireland. Snack Foods Limited is included in the BiscuitsBaking and ConfectionerySnacking segment. Erin Foods is included in the International Soup and Sauces segment. The businesses have annual sales of approximately $160 million.
SalesSales increased 6% in 2004 to $7.1 billion from $6.7 billion. The current fiscal year included 52 weeks compared to 53 weeks in 2003. The increase in
An analysis of net sales was due to a 2% increase in volume and mix, a 2% increase due to higher selling prices, a 4% increase due to currency, offset by a 2% decrease due to one less week in the fiscal year.segment follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | % Change | |
| | | | | | | | | | | | | | | 2005/ | | | 2004/ | |
| (millions) | | 2005 | | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| |
U.S. Soup, Sauces and
Beverages | | $ | 3,098 | | | $ | 2,998 | | | $ | 2,944 | | | | 3 | | | | 2 | |
| Baking and Snacking | | | 1,742 | | | | 1,613 | | | | 1,428 | | | | 8 | | | | 13 | |
International Soup
and Sauces | | | 1,703 | | | | 1,595 | | | | 1,438 | | | | 7 | | | | 11 | |
| Other | | | 1,005 | | | | 903 | | | | 868 | | | | 11 | | | | 4 | |
| |
| | | $ | 7,548 | | | $ | 7,109 | | | $ | 6,678 | | | | 6 | | | | 6 | |
| |
Sales increased 9% in 2003 to $6.7 billion from $6.1 billion. The increase inAn analysis of percent change of net sales was due to a 1% increase in volume and mix, a 2% increase from the additional week in 2003, a 1% increase due to higher selling prices, a 3% increase from currency, and a 2% increase from the acquisitions of Erin Foods and Snack Foods Limited.by reportable segment follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | U.S. Soup, | | | Baking | | | International | | | | | | | |
| | | Sauces and | | | and | | | Soup and | | | | | | | |
| 2005/2004 | | Beverages | | | Snacking | | | Sauces | | | Other | | | Total | |
| |
| Volume and Mix | | | 2 | % | | | 4 | % | | | 2 | % | | | 7 | % | | | 3 | % |
| Price and Sales Allowances | | | 1 | | | | 3 | | | | — | | | | 3 | | | | 2 | |
Increased Promotional Spending1 | | | — | | | | (1 | ) | | | (1 | ) | | | — | | | | (1 | ) |
| Currency | | | — | | | | 2 | | | | 6 | | | | 1 | | | | 2 | |
| |
| | | | 3 | % | | | 8 | % | | | 7 | % | | | 11 | % | | | 6 | % |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | U.S. Soup, | | | Baking | | | International | | | | | | | |
| | | Sauces and | | | and | | | Soup and | | | | | | | |
| 2004/2003 | | Beverages | | | Snacking | | | Sauces | | | Other | | | Total | |
| |
| Volume and Mix | | | — | % | | | 4 | % | | | 2 | % | | | 1 | % | | | 2 | % |
| 53rd Week | | | (1 | ) | | | (2 | ) | | | (2 | ) | | | (1 | ) | | | (2 | ) |
| Price and Sales Allowances | | | 2 | | | | 2 | | | | — | | | | 2 | | | | 2 | |
Decreased/(Increased) Promotional Spending1 | | | 1 | | | | (1 | ) | | | — | | | | — | | | | — | |
| Acquisitions | | | — | | | | 2 | | | | — | | | | — | | | | — | |
| Currency | | | — | | | | 8 | | | | 11 | | | | 2 | | | | 4 | |
| |
| | | | 2 | % | | | 13 | % | | | 11 | % | | | 4 | % | | | 6 | % |
| |
| | |
| 1 | | Revenue reductions from trade promotion and consumer coupon redemption programs. |
9
An analysis of net sales by segment follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | % Change |
| | | | | | | | | | | | | | | 2004/ | | | 2003/ | |
| (millions) | | 2004 | | | 2003 | | | 2002 | | | 2003 | | | 2002 | |
| |
| North America Soup and Away From Home | | $ | 2,699 | | | $ | 2,606 | | | $ | 2,524 | | | | 4 | | | | 3 | |
| North America Sauces and Beverages | | | 1,246 | | | | 1,246 | | | | 1,182 | | | | — | | | | 5 | |
| Biscuits and Confectionery | | | 1,982 | | | | 1,774 | | | | 1,507 | | | | 12 | | | | 18 | |
| International Soup and Sauces | | | 1,182 | | | | 1,052 | | | | 920 | | | | 12 | | | | 14 | |
| |
| | | $ | 7,109 | | | $ | 6,678 | | | $ | 6,133 | | | | 6 | | | | 9 | |
| |
North AmericaIn 2005, U.S. Soup, Sauces and Away From HomeBeverages sales increased 4%3%. U.S. soup sales increased 5%, driven by an 8% gain in 2004 versus 2003. Thecondensed soup and a 12% increase in broth, partially offset by a 1% decline in ready-to-serve soup. The U.S. condensed soup increase was driven by a double-digit increase in eating soups, due in part to the combination of successful merchandising and kids promotional marketing programs, increased advertising and higher prices. Cooking varieties of condensed soup also achieved sales growth behind strong performance during the holiday season. Condensed soup sales also benefited from gravity-feed shelving systems installed in retail stores. Broth sales increased, driven by gains achieved through its expanded use in cooking and strong consumer response to two new organic varieties in aseptic containers introduced earlier in 2005. In ready-to-serve soup,Campbell’s Chunkysoup sales increased 7%. These gains were offset by declines in sales ofCampbell’s Select soups andCampbell’s Kitchen Classicssoups. TheCampbell’s Select soups decline of 15% was due to a 1% increasevolume losses resulting from volumecompetitive activity. Sales of microwaveable soups were flat for the year, as double-digit growth ofCampbell’s ChunkyandCampbell’s Selectsoups in microwaveable bowls was offset by declines inCampbell’s Soup at Handsippable soups. In other parts of the business, the launch ofCampbell’s Chunkychili in 2005 added to sales gains.Campbell’s SpaghettiOspasta sales rose as consumers responded to the transition from theFranco-Americanbrand to theCampbell’sbrand and mix, a 1% decrease due to one less week in 2004, a 3% increase from higher net price realization, a 1% decreasenew advertising. Sales ofPregopasta sauces declined slightly, while sales ofPaceMexican sauces were flat for the year.V8vegetable juice sales increased due to higher revenue reductions from trade promotionprices and consumer coupon redemption programs,improved volume, while sales ofV8 Splashjuice beverages and aCampbell’stomato juice declined.
In 2004, U.S. Soup, Sauces and Beverages sales increased 2% increase from currency. In the. U.S., ready-to-serve soup sales increased 2%, driven by an 8% as volume increased 6%.gain in ready-to-serve soup, partially offset by a 2% decline in condensed soup. The ready-to-serve sales performance was driven by the strong performance on the newM’m! M’m! Good! To Goconvenience platformfrom microwaveable soups, includingCampbell’s SelectandCampbell’s Chunkysoups, in microwavable bowls, which were introduced this year,in 2004, andCampbell’s Soup at Handsippable soups. Condensed soup sales were down 2% on volume declines of 4%. Broth sales increased 6% reflecting volume growth of 5%. Away From HomeBeverage sales grew slightly primarily due to strong sales of refrigerated soups. The Canadian business reported a sales increase versus prior year due to currency.
The 3% increase in sales from North America Soup and Away From Home in 2003 versus 2002 was due to a 1% increase due to the additional week in 2003, a 1% increase due to lower revenue reductions from trade promotion and consumer coupon redemption programs, and a 1% increase from currency. U.S. wet soup volume increased, 2% over the prior year. Ready-to-serve volume increased 8% behind volume gains inCampbell’s ChunkyandCampbell’s Selectsoups, and the launch ofSoup at Handsippable soups in convenient portable microwavable packaging.Swansonbroth reported a volume increase of 13% due to successful promotional campaigns for cooking with broth. Condensed soup volume declined 6%. Canada reported growth in soup volume, due in part to the regional introduction of the newCampbell’s Gardennaysoup in aseptic packages. Away From Home experienced increased soup volume, offset by declines in lower margin businesses.
North America Sauces and Beverages sales of $1.2 billion in 2004 were equal to 2003. Sales were impacted by a 1% increase from volume and mix, a 2% decrease due to one less week in 2004, and a 1% increase due to lower revenue reductions from trade promotion and consumer coupon redemption programs. Sales were favorably impacted by the growth of beverages, led by sales growth ofV8vegetable juice. Sales ofPaceMexican sauces were equal to 2003.2003, andPregopasta sauces experienced a decline in sales, attributable in part to weakness in the dry pasta category.
The 5%Baking and Snacking sales increased 8% in 2005 versus 2004. Pepperidge Farm contributed significantly to the sales increase inas a result of sales from North America Saucesgains across bakery, cookies and Beverages in 2003 versus 2002 wascrackers and frozen, primarily due to a 2% increase inhigher volume and mix, increased prices. The fresh bakery business experienced double-digit growth as
a 2% increase due to the additional week in 2003, a 1% increaseresult of expanded distribution and product improvements on bagels and English muffins along with strong results from higher net price realizationPepperidge Farm Farmhousebreads and a 1% increase due to lower revenue reductions from trade promotionPepperidge FarmCarb Style breads and consumer coupon redemption programs, offset by a 1% decline due to currency. Therolls. In cookies and crackers, sales increasegrowth was driven by strong gains inPacePepperidge FarmMexican sauces,Prego brand products,V8vegetable juices,Campbell’stomato juice, Latin America,Chocolate Chunk cookies, four new soft-baked varieties of cookies, and the introduction ofV8 SplashSmoothies. The introduction ofPregoHearty Meat sauces sugar-free cookies andPace Mexican CreationsWhimssauces contributed to thepoppable snacks. In addition,Pepperidge Farm Goldfishcrackers delivered sales growth. These gains were partially offset by declinesPepperidge Farm frozen product sales increased behind the strong performance of pot pies, breads and pastry. Arnott’s sales grew primarily due to currency and volume gains. Arnott’s achieved sales growth inFranco-American canned pasta each of its three businesses: sweet biscuits, savory biscuits and gravies.salty snacks.
BiscuitsBaking and Confectionery reported a 12% increase inSnacking sales increased 13% in 2004 due to a 4% increase from volume and mix, a 2% decrease due to one less week in 2004, a 2% increase from higher net price realization, a decrease of 1% due to higher revenue reductions from trade promotion and consumer coupon redemption programs, a 2% increase from the acquisition of Snack Foods Limited in Australia, and a 7% increase from currency.versus 2003. The favorable currency impact was attributabledue primarily to the strengthening of the Australian dollar. Pepperidge Farm contributed to the sales increase as a result of growth inGoldfishcrackers and fresh bread. Arnott’s reported aachieved an increase in sales increase driven by innovation on theTim Tam, ShapesandJatzproducts and new product offerings in theSnack RightandSaladabrands. Godiva Chocolatier’s worldwide sales increased due to improving same store sales trends in North America and increased sales in duty free stores.
Sales from Biscuits and Confectionery increased 18% in 2003 due to a 1% increase in volume and mix, a 2% increase due to the additional week in 2003, a 4% increase from higher net price realization, an 8% increase from the acquisition of Snack Foods Limited in Australia, and a 4% increase from currency, offset by a 1% increase in revenue reductions from trade promotion and consumer coupon redemption programs. The favorable currency impact principally reflected the strengthening of the Australian dollar. Pepperidge Farm reported sales increases in cookies,
10
crackers, and fresh bread. Arnott’s contributed to the sales increase with growth in the chocolate segment and new products introduced in the year, particularlySnack Rightfruit-based low fat biscuits. Godiva Chocolatier’s worldwide sales increased due to growth in Asia, partially offset by continued weakness in same store sales in North America.
International Soup and Sauces reported an increasesales increased 7% in 2005 versus 2004, driven primarily by currency. In Europe, strong sales gains of 12%wet and dry soups in 2004. ImprovementsFrance andCampbell’swet soups in Belgium also contributed to growth. In Asia Pacific, Australian beverages and broth delivered volume gains, while sales increased in Asia, in part, from the launch of a new dry soup product targeting breakfast consumption. Canada achieved volume growth due in part to its ready-to-serve soup business, which includes a new aseptic variety,Campbell’s Gardennay soup.
International Soup and mix added 2% growth offset by a decline of 2%Sauces sales increased 11% in 2004 versus 2003, primarily due to one less week in 2004. The favorable impact of currency accounted for a 12% increase.currency. The increase in volume and mix was driven primarily by sales gains in France, Australia, Belgium and Asia, partially offset by sales declines in the United Kingdom and Germany. In Australia, soup had strong sales and volume growth driven byCampbell’s Country LadleandChunkysoups.soup.
International SoupIn Other, sales increased 11% in 2005 versus 2004. Away From Home delivered strong sales growth, led by premium refrigerated soups. Godiva Chocolatier’s worldwide sales increased double-digits with North America, Europe and Sauces reported a 14% increaseAsia all contributing to growth. In North America, Godiva achieved double-digit same-store sales results driven by successful new products, including sugar-free chocolates and the relaunch of truffles.
In Other, sales increased 4% in 2004 versus 2003. Away From Home sales grew slightly, primarily due to strong sales of premium refrigerated soups. Godiva Chocolatier’s worldwide sales increased due to improving same-store sales trends in North America and increased sales in 2003 due to a 12% increase from currency and a 2% increase from the acquisition of Erin Foods in Ireland. Volume and mix declined 2% offset by a 2% increase due to the additional week in 2003. Strong performance of dry soups in Europe was offset by weakness in the wet soup and sauces businesses in the United Kingdom, France, and Germany. The United Kingdom performance reflected declines inHomepridesauces andCampbell’ssoups. Sales in France declined due primarily to aggressive competitive activity. In Germany, a significant portion of the private-label soup business is being discontinued. The Asia Pacific region reported sales growth.duty free stores.
10
Gross MarginGross margin, defined as Net sales less Cost of products sold, increased by $49$135 million in 2004.2005. As a percent of sales, gross margin was 40.5% in 2005, 41.1% in 2004 and 43.0% in 20032003. The percentage point decrease in 2005 was due to the impact of inflation and 43.9% in 2002.other factors (approximately 3.0 percentage points), a higher level of promotional spending (approximately 0.3 percentage points) and mix (approximately 0.1 percentage points), partially offset by productivity improvements (approximately 2.0 percentage points) and higher selling prices (approximately 0.8 percentage points). The percentage point decrease in 2004 was due to costs associated with quality and packaging improvements (approximately 11.0 percentage point), mix (approximately 0.7 percentage points), higher pension expense and the impact of acquisitions (approximately 0.3 percentage points), and the impact of inflation and other factors (approximately 2.7 percentage points), partially offset by higher selling prices (approximately 0.9 percentage points) and productivity improvements (approximately 1.9 percentage points). The percentage decrease in 2003 was due to the lower margin structure of acquisitions (approximately 0.5 percentage points), costs associated with transition and startup of the new Pepperidge Farm bakery and with the discontinuance of certain co-packing contracts (approximately 0.3 percentage points), the net impact of mix (approximately 0.3 percentage points) and inflation/quality improvements (approximately 2.7 percentage points), partially offset by the benefits of lower costs related to the Australian manufacturing reconfiguration (approximately 0.3 percentage
points), pricing (approximately 0.7 percentage points) and productivity gains (approximately 1.9 percentage points).
Marketing and Selling ExpensesMarketing and selling expenses as a percent of sales were 15.7% in 2005, 16.2% in 2004 and 17.1% in 20032003. Marketing and 17.5%selling expenses increased 3% in 2002.2005. The increase was driven by higher levels of advertising and currency. In 2004, Marketing and selling expenses increased 1% in 2004.from 2003. The increase was driven by currency, partially offset by reductions in marketing expenses related to consumer promotion activity and lower media production costs. In 2003, Marketing and selling expenses increased 7% from 2002. The increase was driven by currency and acquisitions (3 percentage points), increased advertising, primarily forV8 SplashSmoothies,V8juices, andPaceMexican sauces (3 percentage points) and incremental selling expense due to shelving initiatives and systems upgrades.
Administrative ExpensesAdministrative expenses as a percent of sales were 7.6% in 2005, 2004, and 2003. Administrative expenses increased by 5% in 2005 from 2004. Currency accounted for approximately 2 percentage points of the increase and costs associated with the implementation of the SAP enterprise-resource planning system in North America accounted for 2 percentage points of the increase. Administrative expenses increased by 7% in 2004 from 2003. Currency accounted for approximately 4 percentage points of the increase, with the balance due to general inflationary increases and costs associated with litigation. In 2003, Administrative expenses increased to 7.6% of Net sales from 7.4% in 2002. Administrative expenses increased by 12% from 2002 to 2003. Currency and acquisitions accounted for approximately 5 percentage points of the increase. The remaining increase was driven by a number of items, including costs associated with litigation, investments in information technology, and an increase in bad debt expense.
Research and Development ExpensesResearch and development expenses increased $2 million or 2% in 2005 from 2004, primarily due to currency. Research and development expenses increased $5 million or 6% in 2004 from 2003, primarily due to currency, which accounted for approximately 4 percentage points of the increase. Research and development expenses increased $9 million or 11% in 2003 from 2002 due to costs associated with quality improvement initiatives and new product development costs (approximately 8 percentage points) and the impact of currency and acquisitions (approximately 3 percentage points).
Other Expenses/(Income)Other income in 2005 of $4 million was primarily royalty income related to the company’s brands.
Other income in 2004 of $13 million included a $16 million gain from the company’s share of a class action settlement involving ingredient suppliers, a $10 million gain on a sale of a manufacturingmanu-
facturing site, other net income of $4 million, partially offset by a $10 million adjustment to the carrying value of long-term investments in affordable housing partnerships and $7 million in expenseexpenses from currency hedging related to the financing of international activities.
Other expenses of $28 million in 2003 included a $36 million adjustment to the carrying value of long-term investments in affordable housing partnerships, $15 million in expenses from currency hedging related to the financing of international
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activities, partially offset by $16 million of gains on the sales of land and buildings, a $5 million one-time payment for the transfer of the Godiva Chocolatier ice cream license, and other net income of $2 million. The sales of land and buildings relate to the closureclosures of a dry soup plant in Ireland ($8 million) and an Arnott’s plant in Melbourne, Australia ($8 million).
Other expenses of $99 million in 2002 included $78 million in amortization expense, $16 million in adjustments to the carrying value of long-term investments in affordable housing partnerships, $9 million in expenses from currency hedging related to the financing of international activities, partially offset by other net income of $4 million. Approximately $70 million of amortization was eliminated from 2002 results on a pro forma basis upon adoption of SFAS No. 142 in 2003. See also Note 6 to the Consolidated Financial Statements.
In 2003, costs related to stock-based incentive compensation and deferred compensation were reclassified from Other expenses to reflect the costs by function. The prior period was adjusted to conform to the current presentation.
Operating EarningsSegment operating earnings increased 6% in 2005 from 2004.
Segment operating earnings declined 3% in 2004 from 2003. The restructuring chargescharge accounted for 2%2 percentage points of the decline.
As previously noted, operating segment results for 2002 have been restated to reflect the pro forma impact of SFAS No. 142. Consequently, amortization expense of $70 million was eliminated from 2002 operating earnings. Segment operating earnings, on a comparable basis, increased 5% in 2003 from 2002.
An analysis of operating earnings by segment follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | % Change | | % Change | |
| | | 2004/ | | 2003/ | | | 2005/ | | 2004/ | |
| (millions) | | 20041 | | 2003 | | 2002 | | 2003 | | 2002 | | | 2005 | | 20041 | | 2003 | | 2004 | | 2003 | |
| | North America Soup and Away From Home | | $ | 602 | | $ | 632 | | $ | 634 | | | (5 | ) | | — | | |
| North America Sauces and Beverages | | 268 | | 289 | | 257 | | | (7 | ) | | 12 | | |
| Biscuits and Confectionery | | 216 | | 212 | | 186 | | 2 | | 14 | | |
| U.S. Soup, Sauces and Beverages | | | $ | 747 | | $ | 730 | | $ | 772 | | 2 | | | (5 | ) |
| Baking and Snacking | | | 198 | | 166 | | 161 | | 19 | | 3 | |
| International Soup and Sauces | | 135 | | 128 | | 120 | | 5 | | 7 | | | 221 | | 205 | | 201 | | 8 | | 2 | |
| Other | | | 110 | | 101 | | 100 | | 9 | | 1 | |
| | | | 1,221 | | 1,261 | | 1,197 | | | (3 | ) | | 5 | | | 1,276 | | 1,202 | | 1,234 | | 6 | | | (3 | ) |
| Corporate | | | (106 | ) | | | (156 | ) | | | (143 | ) | | | | (66 | ) | | | (87 | ) | | | (129 | ) | |
| | | | $ | 1,115 | | $ | 1,105 | | $ | 1,054 | | | $ | 1,210 | | $ | 1,115 | | $ | 1,105 | |
|
| | |
| 1 | | Contributions to earnings by segment include the effect of a pre-tax fourth quarter 2004 restructuring charge of $32 million as follows: North AmericaU.S. Soup, and Away From Home — $7 million, North America Sauces and Beverages — $3$8 million, BiscuitsBaking and ConfectionerySnacking — $12$10 million, International Soup and Sauces — $9$10 million, Other — $3 million and Corporate — $1 million. |
Earnings from North AmericaU.S. Soup, Sauces and Away From Home declinedBeverages increased 2% in 2005 versus 2004. The 2004 results included an $8 million restructuring charge. The remaining increase in 2005 was due to productivity improvements and higher sales volume and prices, partially offset by cost inflation and increased marketing.
Earnings from U.S. Soup, Sauces and Beverages decreased 5% in 2004 fromversus 2003. The 2004 results included an $8 million restructuring charges of $7 million,charge, which negatively impacted earnings byaccounted for 1 percentage point. Earnings were negatively impacted by costs associated withpoint of the earnings decline. The remainder of the earnings decline was due to quality improvements, higher inflation and trade promotion, and product mix. These factors weremix, partially offset by an increase in sales and productivity improvements.
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Earnings from North America SoupBaking and Away From HomeSnacking increased 19% in 2003 were even with 2002 earnings.2005 versus 2004. The 2004 results included a $10 million restructuring charge. Currency accounted for 3 percentage points of the earnings increase. The remaining increase in earnings was due to sales wasgrowth in Pepperidge Farm and improvement in the Snackfoods business in Australia, partially offset by expenses associated with the implementation of a declinenew sales and distribution system in gross margin due to quality improvements, packaging improvements and product mix. In addition, costs increased due to shelving initiatives and system upgrades.Australia.
Earnings from North America SaucesBaking and Beverages decreased 7% in 2004 from 2003. The results included restructuring charges of $3 million, which negatively impacted earnings by 1 percentage point. The earnings decline also reflected higher costs associated with new product introductions and inflation, partially offset by productivity improvements and lower marketing expenses.
Earnings from North America Sauces and BeveragesSnacking increased 12% in 2003 from 2002 primarily due to the increase in sales ofPace, V8 SplashandPrego brand products, and an improvement in gross margin.
Earnings from Biscuits and Confectionery increased 2%3% in 2004 versus 2003. The 2004 results included a $10 million restructuring charges of $12 million,charge, which negatively impactedreduced earnings by 6 percentage points. Currency added 8accounted for 9 percentage points of growth. Earnings growth at Pepperidge Farm, Arnott’s, and Godiva was offset by a decline in the Australian Snackfoods business.
Earnings from Biscuits and Confectionery increased 14% in 2003 compared to 2002. Favorable currency translation accounted for approximately 4 percentage points of the increase. Operating earnings in 2003 were impacted by approximately $10 million of transitional expenses related to the closure of the Pepperidge Farm bakery in Norwalk, Connecticut and startup of the new bakery in Bloomfield, Connecticut. Earnings in 2003 benefited from a $5 million payment to Godiva Chocolatier for the transfer of an ice cream license. Earnings from Arnott’s were impacted by an $8 million gain on sale of the closed facility in Melbourne. This gain was completely offset by start-up costs related to the Australian manufacturing reconfiguration and costs related to the integration of the Snack Foods acquisition. Operating earnings in 2002 included $20 million of costs associated with the Australian manufacturing reconfiguration compared to $1 million in 2003.
Earnings from International Soup and Sauces increased 5%8% in 2005 versus 2004. FavorableThe 2004 results included a $10 million restructuring charge. The remaining increase in earnings was due to the favorable impact of currency translation accounted for approximately 11(6 percentage points of the increase,points) and operating earnings growth in Canada, partially offset by restructuring charges of $9 million (approximately 7 percentage points).
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The 7% increase in 2003 earningsEarnings from International Soup and Sauces was primarily due to favorable currency translation,increased 2% in 2004 versus 2003. Currency accounted for 11 percentage points of growth, partially offset by $8a $10 million restructuring charge (approximately 5 percentage points) and declines in earnings in Canada and Europe.
Earnings from Other increased 9% in 2005 from 2004. The 2004 results included a $3 million restructuring charge. Currency accounted for 2 percentage points of the increase. The remainder of the increase was due to the strong sales growth in Godiva Chocolatier and Away From Home.
Earnings from Other increased 1% in 2004 from 2003. The 2004 results included a $3 million restructuring charge, which negatively impacted earnings by 3 percentage points. Currency accounted for 4 percentage points of growth.
Corporate expenses decreased in 2005 due to lower costs associated with ongoing litigation, lower adjustments related to the discontinuancecarrying value of long-term investments in affordable housing partnerships, and lower expenses from currency hedging related to the financing of international activities, partially offset by the gains in 2004 of certain co-packing contracts in Europe. Earnings during 2003 were impacted by costs associated withrelated to the closurecompany’s share of a dry soup plant in Ireland, offset by a gain onclass action lawsuit involving ingredient suppliers and the sale of the closed facility.a manufacturing site in California.
Corporate expenses decreased in 2004, primarily due to lower adjustments related to the carrying value of long-term investments in affordable housing partnerships, the gain from the company’s share of a class action lawsuit involving ingredient suppliers, the
gain on sale of a manufacturing site in California, lower expenses from currency hedging related to the financing of international investments,activities, partially offset by increases in costs associated with ongoing litigation.
Corporate expensesNonoperating ItemsInterest expense increased 6% in 20032005 from 2004, primarily due to adjustments recorded to the carrying value of long-term investments in affordable housing partnerships and legal expenses related to ongoing litigation,higher interest rates, partially offset by lower stock-related compensation costs.levels of debt.
Nonoperating ItemsInterest expense declined 6% in 2004 from 2003, primarily due to lower levels of debt.
Interest expense declined 2% in 2003 from 2002 due to lower levels of debt and lower interest rates.
The effective tax rate was 31.4% in 2005, 31.7% in 2004 and 32.2% in 2003 and 34.2%2003. The reduction in 2002, as reported.the rate in 2005 from 2004 was due to lower international taxes, which reflected a one-time benefit in Australia related to a change in tax law. The reduction in the rate from 2003 to 2004 reflectsreflected a lower U.S. tax liability which resulted from an increase in charitable contribution deductions and research and development credits, and the favorable resolution of certain income tax audits. The comparable tax rate for 2002 would be 33.3% based on a pro forma adjustment for the adoption of SFAS No. 142. The reduction from 2002 to 2003 reflects favorable resolution of certain state income tax audits and a reduction of foreign tax expense.
Restructuring ProgramA 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 representrepresented the elimination of layers of management, elimination of redundant positions due to the realignment of operations in North America, and reorganization of the U.S. sales force. The majority of the terminations occurred in the fourth quarter of 2004. Annual pre-tax savings from the reduction are expected to be approximately $40 million beginning in 2005.
The distribution and logistics realignment in Australia represents convertinginvolves 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 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.
A restructuring charge of $10 million ($7 million after tax) was recorded in the fourth quarter 2001 for severance costs associated with the reconfiguration of the manufacturing network of Arnott’s in Australia. In the second quarter of 2002, the company recorded an additional $1 million restructuring charge related to planned severance actions. Related costs of approximately $1 million and $19 million ($13 million after tax) were recorded in 2003 and 2002, respectively, as Cost of products sold, primarily representing accelerated depreciation on assets to be taken out of service. This program was designed to drive greater manufacturing efficiency resulting from the closure of the Melbourne plant. Approximately 550 jobs were eliminated due to the plant closure. In 2003, the company incurred start-up costs associated with the transition of production. These costs were substantially offset by a gain on the sale of the facility.
See Note 5 to the Consolidated Financial Statements for further discussion of these programs.
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Liquidity and Capital Resources
Net cash flows from operating activities provided $990 million in 2005, compared to $744 million in 2004. The increase was due primarily to a lower increase in working capital, an increase in earnings, and lower cash settlements related to foreign currency hedging transactions. Net cash flows from operating activities provided $744 million in 2004, compared to $873 million in 2003. The reduction was due to higher working capital requirements and an increase in pension fund contributions, partially offset by an increase in earnings. Net cash flows from operating activities provided $873 million in 2003, compared to $1.0 billion in 2002. The 2002 cash flow benefited from a significant reduction in working capital to a low level, which was maintained in 2003. Over the last three years, operating cash flows totaled approximately $3$2.6 billion. This cash generating capability provides the company with substantial financial flexibility in meeting its operating and investing needs.
Capital expenditures were $332 million in 2005, $288 million in 2004 and $283 million in 2003 and $269 million in 2002.2003. Capital expenditures are projected to be approximately $380$360 million in 2005.2006. The increase in 2005 was primarily driven by investments to increase manufacturing capacity for microwaveable products, implement the SAP enterprise-resource planning system in North America, increase manufacturing capacity for refrigerated soups, and implement a new sales and distribution system in Australia. The increase in 2004 was primarily driven by currency. Capital expenditures in 2004 included projects to increase manufacturing capacity for soup, beverages andGoldfish Sandwich Snackerscrackers, as well as investments in U.S. sales systems. The increase in 2003 was driven by the Pepperidge Farm bakery and soup quality projects, partially offset by reduced spending in Australia on the manufacturing reconfiguration that was substantially completed in 2002.
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Businesses acquired, as presented in the Statements of Cash Flows, primarily represents the acquisition of certain brands from George Weston Foods Limited in Australia in the first quarter of 2004 and the acquisitions of Snack Foods Limited and Erin Foods in the first quarter of 2003. The purchase price adjustment
There were no new long-term borrowings in 2002 related to2005. Long-term borrowings in 2004 included the European dry soup and sauces acquisition, completed in 2001.
In September 2003, the company issuedissuance of $300 million of ten-year 4.875% fixed-rate notes.notes due October 2013. The proceeds were used to repay commercial paper borrowings and for other general corporate purposes. While planning for the issuance of these notes, the company entered into treasury lock agreements with a notional value of $100 million that effectively fixed a portion of the interest rate on the debt prior to issuance of the notes. These agreements were settled at a minimal gain upon issuance of the notes, which will be amortized over the life of the notes. In connection with this issuance, the company entered into ten-year interest rate swaps that converted $200 million of the fixed-rate debt to variable.
In September 2003, the company also entered into $100 million five-year interest rate swaps that converted a portion of the 5.875% fixed-rate notes due October 2008 to variable.
In April 2004, the company entered into a $50 million interest rate swap that converted a portion of the 6.9% fixed-rate notes due October 2006 to variable.
In May 2004, the company entered into a $50 million interest rate swap that converted a portion of the 6.9% fixed-rate notes due October 2006 to variable.
Long-term borrowings in 2003 included the issuance of $400 million of ten-year 5% fixed-rate notes due December 2012. The proceeds were used to retire $300 million 6.15% notes and to repay commercial paper borrowings. In connection with this issuance, the company entered into ten-year interest rate swaps that converted $300 million of the fixed-rate debt to variable.
In November 2002, the company terminated interest rate swap contracts with a notional value of $250 million that converted fixed-rate debt (6.75% notes due 2011) to variable and received $37 million. Of this amount, $3 million represented accrued interest earned on the swap prior to the termination date. The remainder will be amortized over the remaining life of the notes as a reduction to interest expense.
Long-term borrowings in 2002 were the result of a series of debt issuances throughout the year. In September 2001, the company issued $300 million seven-year 5.875% fixed-rate notes. The proceeds were used to repay short-term borrowings. While planning for the issuance of these notes, the company entered into interest rate swaps with a notional value of approximately $138 million that effectively fixed a portion of the interest rate
on the debt prior to issuance. These contracts were settled at a loss of approximately $4 million upon issuance of the notes. This loss is being amortized over the life of the notes. In conjunction with the issuance of these notes, the company also entered into a $75 million seven-year interest rate swap that converted fixed-rate debt to variable.
In October 2001, the company issued $300 million two-year variable-rate notes. The proceeds were also used to repay short-term borrowings. In connection with this issuance, the company entered into a $300 million two-year interest rate swap that converted the variable-rate debt to fixed.
In November 2001, the company redeemed $100 million 5.625% fixed-rate notes due in September 2003. The notes were callable at par. This redemption was financed with lower rate commercial paper.
In December 2001, the company issued an additional $200 million of its existing 6.75% fixed-rate notes due February 2011, originally issued in February 2001. These additional notes were priced at a premium to reflect market conditions. The proceeds were used to repay short-term borrowings.
In January 2002, the company repaid $300 million of variable-rate notes due December 2003. The notes were repaid with lower cost short-term borrowings.
In March 2002, the company issued $300 million five-year 5.50% fixed-rate notes. The proceeds were used to repay $228 million variable-rate notes due in December 2003 and short-term borrowings. In connection with this issuance, the company entered into a five-year interest rate swap that converted $100 million of the fixed-rate debt to variable.
In June 2002, the company filed a $1 billion shelf registration statement with the Securities and Exchange Commission to use for future offerings of debt securities. Under the registration statement, the company may issue debt securities from time to time, depending on market conditions. The company intends to use the proceeds to repay short-term debt, to reduce or retire other indebtedness or for other general corporate purposes. As of August 1, 2004,July 31, 2005, the company had $300 million available for issuance under this registration statement.
Dividend payments were $275 million in 2005 and $259 million in 2004 and 2003. Annual dividends declared in 2005 were $.68 and $.63 per share in 2004 2003 and 2002 totaled $0.63 per share.2003. The 20042005 fourth quarter rate was $0.1575$.17 per share.
The company repurchased 4 million shares at a cost of $110 million during 2005, compared to 2 million shares at a cost of $56 million during 2004 compared toand 1 million shares at a cost of $24 million during 2003 and 200,000 shares at a cost of $5 million in 2002.2003. 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 “Market For
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Registrant’s Capital Stock, Related Shareowner Matters and Issuer Purchases of Equity Securities” for more information.
At August 1, 2004,July 31, 2005, the company had $810$451 million of notes payable due within one year and $34$35 million of standby letters of credit issued on behalf of the company. The company maintained $1.8 billion of committed revolving credit facilities totaling $1.5 billion, which were unused at August 1, 2004,July 31, 2005 except for $34$5 million of
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standby letters of credit. Another $30 million of standby letters of credit. Both of these facilities were replaced incredit was issued under a separate facility. In September 2004. As part of the replacement,2005, the company entered into a $500 million committed 364-day revolving credit facility, which replaced the existing $900$500 million 364-day facility that matured in September 2004.2005. The 364-day revolving credit facility contains a one-year term-out feature. The company also entered intohas a $1 billion revolving multi-year credit facility. In September 2005, the maturity of this facility that matures in Septemberwas extended from 2009 which replaced the existing $900 million revolving credit facility that was scheduled to mature in September 2006.2010. 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 believes that foreseeable liquidity, including the resolution of the contingencies described in Note 20 to the Consolidated Financial Statements, and capital resource requirements are expected to be met through anticipated cash flows from operations, management of working capital, long-term borrowings under its shelf registration, and short-term borrowings, including commercial paper. The company believes that its sources of financing are adequate to meet its future liquidity and capital resource requirements. The cost and terms of any future financing arrangements depend on the market conditions and the company’s financial position at that time.
Contractual Obligations and Other Commitments
Contractual ObligationsThe following table summarizes the company’s obligations and commitments to make future payments under certain contractual obligations. For additional information on debt, see Note 16 to the Consolidated Financial Statements. Operating leases are primarily entered into for warehouse and office facilities, retail store space, and certain equipment. Purchase commitments represent purchase orders and long-term purchase arrangements related to the procurement of ingredients, supplies, machinery, equipment and services. These commitments are not expected to have a material impact on liquidity. Other long-term liabilities primarily represent payments related to deferred compensation obligations and postemployment benefits. For additional information on other long-term liabilities, see Note 17 to the Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Contractual Payments Due by Fiscal Year | | Contractual Payments Due by Fiscal Year | |
| | | 2006 | - | | 2008 | - | | | | | 2007- | | 2009- | | | |
| (millions) | | Total | | 2005 | | 2007 | | 2009 | | Thereafter | | | Total | | 2006 | | 2008 | | 2010 | | Thereafter | |
| Debt obligations1 | | $ | 3,353 | | $ | 810 | | $ | 607 | | $ | 302 | | $ | 1,634 | | | $ | 2,993 | | $ | 451 | | $ | 614 | | | $304 | | | $1,624 | |
Interest payments2 | | 1,201 | | 153 | | 297 | | 312 | | 439 | | | 951 | | 161 | | 260 | | 212 | | 318 | |
| Purchase commitments | | 1,278 | | 754 | | 365 | | 153 | | 6 | | | 1,251 | | 1,008 | | 208 | | 22 | | 13 | |
| Operating leases | | 281 | | 65 | | 94 | | 65 | | 57 | | | 297 | | 68 | | 107 | | 71 | | 51 | |
| Derivative payments | | 162 | | 11 | | 90 | | 6 | | 55 | | | 183 | | 7 | | 98 | | 15 | | 63 | |
Other long-term liabilities3 | | 135 | | 15 | | 32 | | 20 | | 68 | | | 149 | | 24 | | 30 | | 23 | | 72 | |
| | Total long-term cash obligations | | $ | 6,410 | | $ | 1,808 | | $ | 1,485 | | $ | 858 | | $ | 2,259 | | | $ | 5,824 | | $ | 1,719 | | $ | 1,317 | | | $647 | | | $2,141 | |
|
| | |
| 1 | | Includes capital lease obligations totaling $9$13 million, unamortized net premium on debt issuances, unamortized gain on an interest rate swap and a gain on fair-value interest rate swaps. For additional information on debt obligations, see Note 16 to the Consolidated Financial Statements. |
| |
| 2 | | Interest payments for notes payable, long-term debt and derivative instruments are calculated as follows. For notes payable, interest is based on par values and coupon rates of contractually obligated issuances at fiscal year end. For long-term debt, interest is based on principal amounts and fixed coupon rates at fiscal year end. Interest on fixed-rate derivative instruments is based on notional amounts and fixed interest rates contractually obligated at fiscal year end. Interest on variable-rate derivative instruments is based on notional amounts contractually obligated at fiscal year end and weighted-average rates estimated over the instrument’s life using forward interest rates plus applicable spreads. |
| |
| 3 | | Represents other long-term liabilities, excluding deferred taxes and minority interest. This table does not include postretirement medical benefits or payments related to pension plans. The company made a $35 million voluntary contribution to a U.S. plan subsequent to August 1, 2004.July 31, 2005. |
Off-Balance Sheet Arrangements and Other CommitmentsThe company guarantees approximately 1,3001,400 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 $95$112 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 20 to the Consolidated Financial Statements for information on off-balance sheet arrangements.
Inflation
Inflation during recentDuring the past two years, inflation, on average, has been higher than previous years but has not had a significant effect on the company. The company mitigatesuses a number of strategies to mitigate the effects of inflation by pricing and aggressivelycost inflation. These strategies include increasing prices, pursuing cost productivity initiatives includingsuch as global procurement strategies, and making capital investments that improve the efficiency of operations.
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Market Risk Sensitivity
The principal market risks to which the company is exposed are changes in commodity prices, interest rates and foreign currency exchange rates. In addition, the company is exposed to equity price changes related to certain employee compensation
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obligations. The company manages its exposure to changes in interest rates by optimizing the use of variable-rate and fixed-rate debt and by utilizing interest rate swaps in order to maintain its variable-to-total debt ratio within targeted guidelines. International operations, which accounted for approximately 36%over 35% of 20042005 net sales, are concentrated principally in Australia, Canada, France, Germany and the United Kingdom. The company manages its foreign currency exposures by borrowing in various foreign currencies and utilizing cross-currency swaps and forward contracts. Swaps and forward contracts are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. The company does not enter into contracts for speculative purposes and does not use leveraged instruments.
The company principally uses a combination of purchase orders and various short- and long-term supply arrangements in connection with the purchase of raw materials, including certain
commodities and agricultural products. The company may also
enter into commodity futures contracts, as considered appropriate, to reduce the volatility of price fluctuations for commodities such as corn, cocoa, soybean meal, soybean oil and wheat. At July 31, 2005 and August 1, 2004, and August 3, 2003, the notional values and unrealized gains or losses on commodity futures contracts held by the company were not material.
The information below summarizes the company’s market risks associated with debt obligations and other significant financial instruments as of August 1, 2004.July 31, 2005. Fair values included herein have been determined based on quoted market prices. The information presented below should be read in conjunction with Notes 16 and 18 to the Consolidated Financial Statements.
The table below presents principal cash flows and related interest rates by fiscal year of maturity for debt obligations. Variable interest rates disclosed represent the weighted-average rates of the portfolio at the period end. Notional amounts and related interest rates of interest rate swaps are presented by fiscal year of maturity. For the swaps, variable rates are the weighted-average forward rates for the term of each contract.
Expected Fiscal Year of Maturity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (millions) | | 2005 | | 2006 | | 2007 | | 2008 | | 2009 | | Thereafter | | Total | | Fair Value | | | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | Thereafter | | Total | | Fair Value | |
| Debt | | |
| Fixed rate | | $ | 6 | | $ | 1 | | $ | 606 | | $ | 1 | | $ | 301 | | $ | 1,634 | | $ | 2,549 | | $ | 2,736 | | | $ | 5 | | $ | 610 | | $ | 4 | | $ | 302 | | $ | 2 | | $ | 1,624 | | $ | 2,547 | | $ | 2,727 | |
| Weighted-average interest rate | | | 2.87 | % | | | 6.19 | % | | | 6.20 | % | | | 6.35 | % | | | 5.88 | % | | | 6.23 | % | | | 6.17 | % | | | | 4.27 | % | | | 6.19 | % | | | 3.74 | % | | | 5.87 | % | | | 4.40 | % | | | 6.23 | % | | | 6.17 | % | |
| | Variable rate | | $ | 804 | | $ | 804 | | $ | 804 | | | $ | 446 | | $ | 446 | | $ | 446 | |
| Weighted-average interest rate | | | 3.30 | % | | | | 3.30 | % | | | | 5.44 | % | | | 5.44 | % | |
| Interest Rate Swaps | | |
| Fixed to variable | | $ | 200 | 2 | | $ | 175 | 3 | | $ | 500 | 4 | | $ | 875 | | $ | — | | | $ | 200 | 2 | | $ | 175 | 3 | | $ | 500 | 4 | | $ | 875 | | $ | (2 | ) |
Average pay rate1 | | | 5.11 | % | | | 5.50 | % | | | 5.15 | % | | | 5.21 | % | | | | 6.45 | % | | | 5.82 | % | | | 4.63 | % | | | 5.28 | % | |
| Average receive rate | | | 6.20 | % | | | 5.88 | % | | | 4.95 | % | | | 5.42 | % | | | | 6.20 | % | | | 5.88 | % | | | 4.95 | % | | | 5.42 | % | |
|
| | |
| 1 | | Weighted-average pay rates estimated over life of swap by using forward LIBOR interest rates plus applicable spread. |
| |
| 2 | | Hedges $100 million of 5.50% notes and $100 million of 6.90% notes due in 2007. |
| |
| 3 | | Hedges $175 million of 5.875% notes due in 2009. |
| |
| 4 | | Hedges $300 million of 5.00% notes and $200 million of 4.875% notes due in 2013 and 2014, respectively. |
As of August 3, 2003,1, 2004, fixed-rate debt of approximately $2.6$2.5 billion with an average interest rate of 6.17% and variable-rate debt of approximately $1 billion with an average interest rate of 2.07%3.30% were outstanding. As of August 3, 2003,1, 2004, the company had also swapped $475$875 million of fixed-rate debt to variable. The average rate received on these swaps was 5.24%5.42% and the average rate paid was estimated to be 4.89%5.21% over the remaining life of the swaps. Additionally, the company had swapped $300 million of floating-rate debt to fixed. The swap matured in 2004.
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The company is exposed to foreign exchange risk related to its international operations, including non-functional currency intercompany debt and net investments in subsidiaries.
The table below summarizes the cross-currency swaps outstanding as of August 1, 2004,July 31, 2005, which hedge such exposures. The notional amount of each currency and the related weighted-average forward interest rate are presented in the Cross-Currency Swaps table.
Cross-Currency Swaps
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Interest | | Notional | | Fair | | | Interest | | Notional | | Fair | |
| (millions) | | Expiration | | Rate | | Value | | Value | | | Expiration | | Rate | | Value | | Value | |
| | |
| Pay variable SEK | | 2005 | | | 4.01 | % | | $ | 18 | | $ | (1 | ) | |
| Receive variable USD | | | 3.95 | % | | |
| | |
| Pay fixed SEK | | 2005 | | | 5.78 | % | | $ | 47 | | $ | (15 | ) | |
| Receive fixed USD | | | 5.25 | % | | |
| | Pay variable EUR | | 2005 | | | 2.71 | % | | $ | 137 | | $ | 6 | | | 2006 | | | 2.68 | % | | $ | 20 | | $ | 1 | |
| Receive variable USD | | | 2.38 | % | | | | 4.41 | % | |
| | Pay variable EUR | | 2006 | | | 3.06 | % | | $ | 32 | | $ | 1 | | | 2006 | | | 2.68 | % | | $ | 69 | | $ | 4 | |
| Receive variable USD | | | 3.12 | % | | | | 3.95 | % | |
| | Pay variable GBP | | 2006 | | | 6.35 | % | | $ | 125 | | $ | (11 | ) | | 2006 | | | 5.57 | % | | $ | 125 | | $ | (7 | ) |
| Receive variable USD | | | 3.80 | % | | | | 5.01 | % | |
| | Pay variable CAD | | 2007 | | | 4.89 | % | | $ | 53 | | $ | (3 | ) | | 2007 | | | 4.69 | % | | $ | 53 | | $ | (8 | ) |
| Receive variable USD | | | 4.32 | % | | | | 5.48 | % | |
| | Pay fixed EUR | | 2007 | | | 5.46 | % | | $ | 200 | | $ | (77 | ) | | 2007 | | | 5.46 | % | | $ | 200 | | $ | (84 | ) |
| Receive fixed USD | | | 5.75 | % | | | | 5.75 | % | |
| | Pay fixed EUR | | | 2008 | | | 2.92 | % | | $ | 69 | | $ | 4 | |
| Receive fixed USD | | | | 4.47 | % | |
| | | |
| Pay variable SEK | | | 2008 | | | 2.72 | % | | $ | 32 | | $ | 1 | |
| Receive variable USD | | | | 4.62 | % | |
| | | |
| Pay fixed CAD | | 2009 | | | 5.13 | % | | $ | 61 | | $ | (5 | ) | | 2009 | | | 5.13 | % | | $ | 60 | | $ | (13 | ) |
| Receive fixed USD | | | | 4.22 | % | |
| | | |
| Pay fixed SEK | | | 2010 | | | 4.53 | % | | $ | 32 | | $ | (2 | ) |
| Receive fixed USD | | | 4.22 | % | | | | 4.29 | % | |
| | Pay fixed GBP | | 2011 | | | 5.97 | % | | $ | 200 | | $ | (44 | ) | | 2011 | | | 5.97 | % | | $ | 200 | | $ | (49 | ) |
| Receive fixed USD | | | 6.08 | % | | | | 6.08 | % | |
| | Pay fixed GBP | | 2011 | | | 5.97 | % | | $ | 30 | | $ | (1 | ) | | 2011 | | | 5.97 | % | | $ | 30 | | $ | (1 | ) |
| Receive fixed USD | | | 5.01 | % | | | | 5.01 | % | |
| | Pay fixed GBP | | 2011 | | | 5.97 | % | | $ | 40 | | $ | 1 | | | 2011 | | | 5.97 | % | | $ | 40 | | $ | 1 | |
| Receive fixed USD | | | 4.76 | % | | | | 4.76 | % | |
| | Pay fixed CAD | | 2014 | | | 6.24 | % | | $ | 61 | | $ | (5 | ) | | 2014 | | | 6.24 | % | | $ | 60 | | $ | (15 | ) |
| Receive fixed USD | | | 5.66 | % | | | | 5.66 | % | |
| | Total | | $ | 1,004 | | $ | (154 | ) | | $ | 990 | | $ | (168 | ) |
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The cross-currency swap contracts outstanding at August 3, 20031, 2004 represented one pay fixed SEK/receive fixed USD swap with a notional value of $47 million, a pay variable SEK/receive variable USD swap with a notional value of $18 million, a pay variable CAD/receive variable USD swap with a notional value of $53 million, two pay fixed SEK/CAD/receive fixed USD swaps with notional values of $31$122 million, and $47two pay variable EUR/receive variable USD swaps with notional values of $169 million, a pay fixed EUR/receive fixed USD swap with a notional value of $200 million, and a pay fixedvariable GBP/receive fixedvariable USD swap with a notional value of $200$125 million, and three pay fixed GBP/receive fixed USD swaps with notional values of $270 million. The notional value of these swap contracts was $1 billion as of August 1, 2004 and the aggregate fair value of these swap contracts was $(97)$(154) million as of August 3, 2003.1, 2004.
The company is also exposed to foreign exchange risk as a result of transactions in currencies other than the functional currency of certain subsidiaries, including subsidiary debt. The company utilizes foreign exchange forward purchase and sale contracts to hedge these exposures. The following table below summarizes the foreign exchange forward contracts outstanding and the related weighted-average contract exchange rates as of August 1, 2004.July 31, 2005.
Forward Exchange Contracts
| | | | | | | | | | | | | | | | | |
| | | Contract | | Average Contractual | | | Contract | | Average Contractual | |
| (millions) | | Amount | | Exchange Rate | | | Amount | | Exchange Rate | |
| | Receive USD / Pay CAD | | $ | 52 | | 1.34 | | |
| Receive EUR / Pay USD | | | $ | 97 | | 1.29 | |
| | | |
| Receive GBP / Pay USD | | | $ | 46 | | 1.74 | |
| | Receive EUR / Pay GBP | | $ | 36 | | 0.69 | | | $ | 39 | | 0.71 | |
| | Receive CAD / Pay EUR | | | $ | 37 | | 0.63 | |
| | | |
| Receive AUD / Pay NZD | | $ | 33 | | 1.13 | | | $ | 32 | | 1.08 | |
| | Receive GBP / Pay USD | | $ | 31 | | 1.81 | | |
| Receive USD / Pay CAD | | | $ | 28 | | 1.24 | |
| | Receive JPY / Pay USD | | $ | 16 | | 0.01 | | |
| Receive USD / Pay EUR | | | $ | 24 | | 0.82 | |
| | | |
| Receive USD / Pay MXN | | | $ | 17 | | 11.3 | |
| | | |
| Receive JPY / Pay EUR | | | $ | 15 | | 0.01 | |
| | | |
| Receive CAD / Pay USD | | | $ | 11 | | 0.81 | |
| | Receive USD / Pay AUD | | $ | 13 | | 1.35 | | | $ | 11 | | 1.34 | |
| | Receive EUR / Pay USD | | $ | 11 | | 1.23 | | |
| | |
| Receive EUR / Pay SEK | | $ | 10 | | 9.20 | | |
| | |
| Receive USD / Pay EUR | | $ | 9 | | 0.83 | | |
| | |
| Receive CAD / Pay USD | | $ | 9 | | 0.75 | | |
| | |
| Receive USD / Pay JPY | | $ | 7 | | 109.25 | | |
| Receive USD / Pay GBP | | | $ | 9 | | 0.53 | |
| | Receive EUR / Pay JPY | | $ | 7 | | 131.67 | | | $ | 8 | | 130.70 | |
| | Receive GBP / Pay AUD | | $ | 7 | | 2.40 | | | $ | 7 | | 2.41 | |
| | Receive AUD / Pay USD | | | $ | 5 | | 0.76 | |
| | | |
| Receive USD / Pay JPY | | | $ | 4 | | 104.8 | |
| | | |
| Receive SEK / Pay USD | | $ | 6 | | 0.13 | | | $ | 4 | | 0.13 | |
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The company had an additional $8 million in a number of smaller contracts to purchase or sell various other currencies, such as the Australian dollar, British pound, Canadian dollar, euro, New Zealand dollar, Japanese yen, Swedish krona and Swiss franc as of August 1, 2004.July 31, 2005. The aggregate fair value of all contracts was $2$3 million as of August 1, 2004.July 31, 2005. Total forward exchange contracts outstanding as of August 3, 20031, 2004 were $750$255 million with a fair value of $4$2 million.
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The company had swap contracts outstanding as of August 1, 2004,July 31, 2005, which hedge a portion of exposures relating to certain employee compensation liabilitiesobligations linked to the total return of the Standard & Poor’s 500 Index, or to the total return of the company’s capital stock.stock and beginning in February 2005, the total return of the Puritan Fund. Under these contracts, the company pays variable interest rates and receives from the counterparty either the Standard & Poor’s 500 Index total return, the Puritan Fund total return, or the total return on company capital stock. The notional value of the contracts that are linked to the return on the Standard & Poor’s 500 Index was $20 million at July 31, 2005 and $21 million at August 1, 2004 and $10 million at August 3, 2003.2004. The average forward interest rate applicable to the contract, which expires in 2005,2006, was 1.81%4.02% at August 1, 2004.July 31, 2005. The notional value of the contract that is linked to the return on the Puritan Fund was $9 million at July 31, 2005. The average forward interest rate applicable to the contract, which expires in 2006, was 4.38% at July 31, 2005. The notional value of the contract that is linked to the total return on company capital stock was $20 million at July 31, 2005 and $13 million at August 1, 2004 and $11 million at August 3, 2003.2004. The average forward interest rate applicable to this contract, which expires in 2005,2006, was 2.22%4.43% at August 1, 2004.July 31, 2005. The fair value of these contracts was a $1 million gain at both July 31, 2005 and August 1, 2004 and August 3, 2003.2004.
The company’s utilization of financial instruments in managing market risk exposures described above is consistent with the prior year. Changes in the portfolio of financial instruments are a function of the results of operations, debt repayment and debt issuances, market effects on debt and foreign currency, and the company’s acquisition and divestiture activities.
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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. See Note 1 to the Consolidated Financial Statements for a discussion of significant accounting policies. The following areas all require the use of subjective or complex judgments, estimates and assumptions:
Trade and consumer promotion programprogramsThe company offers various sales incentive programs to customers and consumers, such as cooperative advertising programs, feature price discounts, in-store display incentives and coupons. The recognition of the costs for these programs, which are classified as a reduction of revenue, involves use of judgment related to performance and
redemption estimates. Estimates are made based on historical experience and other factors. Actual expenses may differ if the level of redemption rates and performance vary from estimates.
Valuation of long-lived assetsLong-lived assets, including fixed assets and intangibles, are reviewed for impairment as events or changes in circumstances occur indicating that the carrying amount of the asset may not be recoverable. Discounted cash flow analyses are used to assess nonamortizable intangible asset impairment, while undiscounted cash flow analyses are used to assess other long-lived asset impairment. The estimates of future cash flows involve considerable management judgment and are based upon assumptions about expected future operating performance. Assumptions used in these forecasts are consistent with internal planning. The actual cash flows could differ from management’s estimates due to changes in business conditions, operating performance, and economic conditions.
Pension and postretirement medical benefitsThe company provides certain pension and postretirement benefits to employees and retirees. Determining the cost associated with such benefits is dependent on various actuarial assumptions, including discount rates, expected return on plan assets, compensation increases, turnover rates and health care trend rates. Independent actuaries, in accordance with accounting principles generally accepted in the United States, perform the required calculations to determine expense. Actual results that differ from the actuarial assumptions are generally accumulated and amortized over future periods.
The discount rate is established as of the company’s fiscal year-end measurement date based ondate. In establishing the discount rate, the company reviews published market indices of high-quality long-term debt securities.securities, adjusted as appropriate for duration. In addition, independent financial consultants apply high-quality bond yield curves to the expected benefit payments of the plans. The estimatedexpected return on plan assets is a long-term assumption based upon historical experience and expected future performance, considering the company’s current and projected
investment mix. This estimate is based on an estimate of future inflation, long-term projected real returns for each asset class, and a premium for active management. Within any given fiscal period, significant differences may arise between the actual return and the estimated long-termexpected return on plan assets. The value of plan assets, used in the calculation of pension expense, is determined on a calculated method that recognizes 20% of the difference between the actual fair value of assets and the expected calculated method. Gains and losses resulting from differences between actual experience and the assumptions are determined at each measurement date. If the net gain or loss exceeds 10% of the greater of plan assets or liabilities, a portion is amortized into earnings in the following year.
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When the fair value of pension plan assets is less than the accumulated benefit obligation, accounting principles generally accepted in the United States require a company to recognize an additional minimal liability. This adjustmentminimum liability is recorded in Other comprehensive income within Shareowners’ Equity. As of July 31, 2005 and August 1, 2004, and August 3, 2003, Shareowners’ Equity includes a minimum liability, net of tax, of $196$238 million and $210$196 million, respectively.
Net periodic pension and postretirement medical expense was $67 million in 2005, $65 million in 2004, and $43 million in 2003 and $8 million in 2002.2003. The increase in 2004 was primarily due to a lower discount rate and a reduction in the expected return on assets, partially offset by the expected returns associated with a $50 million voluntary contribution to a U.S. plan. Significant weighted-average assumptions as of the end of the year are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 | |
| Pension | | | 2005 | | 2004 | | 2003 | |
| | Discount rate for benefit obligations | | | 6.19 | % | | | 6.39 | % | | | 6.90 | % | | | 5.44 | % | | | 6.19 | % | | | 6.39 | % |
| Expected return on plan assets | | | 8.76 | % | | | 8.80 | % | | | 9.30 | % | | | 8.76 | % | | | 8.76 | % | | | 8.80 | % |
| Initial health care trend rate | | | 9.00 | % | | | 9.00 | % | | | 8.00 | % | |
| Ultimate health care trend rate | | | 4.50 | % | | | 4.50 | % | | | 4.50 | % | |
|
| | | | | | | | | | | | | |
| Postretirement | | 2005 | | | 2004 | | | 2003 | |
| |
| Discount rate for obligations | | | 5.50 | % | | | 6.25 | % | | | 6.50 | % |
| Initial health care trend rate | | | 9.00 | % | | | 9.00 | % | | | 9.00 | % |
| Ultimate health care trend rate | | | 4.50 | % | | | 4.50 | % | | | 4.50 | % |
| |
Estimated sensitivities to the net periodic pension cost are as follows: a 50 basis point reduction in the discount rate would increase expense by approximately $10$12 million; a 50 basis point reduction in the estimated return on assets assumption would increase expense by approximately $9$8 million. A one percentage point change in assumed health care costs would increase postretirement service and interest cost by approximately $2 million.
Although there were no mandatory funding requirements to the U.S. plans in 2005 and 2004, the company made a$35 million and $50 million contributioncontributions, respectively, to a U.S. plan based on expected future funding requirements. Contributions to international plans were $26 million in 2005 and $15 million.million in 2004. In 2003, there were no contributions to the U.S. plans and contributions to international plans were $19 million. Subsequent to August 1, 2004,July 31, 2005, the company made a $35 million voluntary contribution to a U.S. plan in anticipation of future funding requirements.
See also Note 9 to the Consolidated Financial Statements for additional information on pension and postretirement medical expenses.
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Income taxesThe effective tax rate reflects statutory tax rates, tax planning opportunities available in the various jurisdictions in which the company operates and management’s estimate of the ultimate outcome of various tax audits and issues. In addition, valuationSignificant judgment is required in determining the effective tax rate and in evaluating tax positions. Tax reserves are established when,
despite the company’s belief that tax return positions are fully supportable, certain positions are subject to challenge and the company may not successfully defend its position. These reserves, as well as the related interest, are adjusted in light of changing facts and circumstances, such as the progress of a tax audit. While it is difficult to predict the final outcome or timing of resolution of any particular tax matter, the company believes that the reserves reflect the probable outcome of known tax contingencies. Income taxes are recorded based on amounts refundable or payable in the current year and include the effect of deferred taxes. Deferred tax assets and liabilities are recognized for the future impact of differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled. Valuation allowances are established for deferred tax assets wherewhen it is more likely than not that a tax benefit will not be realized. See also the amount of expected future taxablesection entitled Recently Issued Accounting Pronouncements and Notes 1 and 10 to the Consolidated Financial Statements for further discussion on income from operations does not supporttaxes, including the realizationimpact of the asset.American Jobs Creation Act (the AJCA).
Recently Issued Accounting Pronouncements
The company adopted SFAS No.144 “Accounting for the Impairment or Disposal of Long-Lived Assets” on July 29, 2002. This standard was effective for the company on a prospective basis. This standard addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This standard supersedes SFAS No.121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” and the accounting and reporting provisions of Accounting Principles Board (APB) Opinion No.30 “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” for the disposal of a segment of a business. Long-lived assets are tested for impairment if certain triggers occur. The adoption of this standard did not have a material impact on the financial statements.
In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.146 “Accounting for Exit or Disposal Activities.” The provisions of this standard apply to disposal activities initiated after December 31, 2002. The adoption of this standard did not have a material impact on the financial statements.
In December 2002, the FASB issued SFAS No.148 “Accounting for Stock-Based Compensation — Transition and Disclosure.” This standard amends the transition and disclosure requirements of SFAS No.123 “Accounting for Stock-Based Compensation.” The required disclosures are included in Note 1 to the Consolidated Financial Statements. As permitted by SFAS No.148, the company accounts for stock option grants and restricted stock awards in accordance with APB Opinion 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.
In November 2002, FASB Interpretation No.45 (FIN 45) “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” was issued. FIN 45 clarifies the requirements relating to a guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. The initial recognition and measurement provisions are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure provisions are included in Note 20 to the Consolidated Financial Statements.
In January 2003, the FASB issued FIN 46 “Consolidation of Variable Interest Entities, an Interpretation of ARB 51.” This Interpretation addresses consolidation by business enterprises of certain variable interest entities (VIEs). The Interpretation as amended is effective immediately for all enterprises with interests in VIEs created after January 31, 2003. In December 2003, the FASB issued a revised version of FIN 46 (FIN 46R), which clarified the provisions of FIN 46 by addressing implementation issues. FIN 46R must be applied to all entities subject to the Interpretation as of the first interim quarter ending after March 15, 2004. The company has investments of approximately $150 million as of August 1, 2004 consisting of limited partnership interests in affordable housing partnership funds. The company’s ownership ranges from approximately 12% to 19%. The company evaluated the nature of these investments, which were in existence before January 31, 2003, against the provisions of the guidance and determined that such investments do not need to be consolidated in the financial statements.
In May 2003, the FASB issued SFAS No.150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No.150 changes the accounting for certain financial instruments that, under previous guidance, could be classified as equity or “mezzanine” equity, by now requiring those instruments to be classified as liabilities (or assets in some circumstances) in the statement of financial position. Further, SFAS No.150 requires disclosure regarding the terms of those instruments and settlement alternatives. The guidance in SFAS No.150 is generally effective for all financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this standard did not impact the financial statements.
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, the FASBFinancial Accounting Standards Board (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. Although detailed regulations necessary to implement the Act have not yet been finalized, theThe company believes that certain
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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 iswas approximately $5 million.
Recent Developments
As part
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In November 2004, SFAS No. 151 “Inventory Costs — an amendment of ARB No. 43, Chapter 4” was issued. SFAS No. 151 is the result of efforts to converge U.S. accounting standards for inventories with International Accounting Standards. SFAS No. 151 requires abnormal amounts of idle facility expense, freight, handling costs and spoilage to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the initiatives announcedproduction facilities. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The company does not expect the adoption to have a material impact on the financial statements.
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 accounting policy for stock options. See Note 1 to the Consolidated Financial Statements 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 will adopt the provisions of SFAS No. 123R on a prospective basis. The financial statement impact will be dependent on future stock-based awards and any unvested stock options outstanding at the date of adoption.
In October 2004, 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 company on June 24,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 will implementcomplete its evaluation in fiscal 2006. The company estimates the range of possible amounts considered for repatriation to be between $200 and $425 million and the related impact on income tax to be between $7 and $16 million. Based on the company’s plans related to the AJCA as of 2005, tax expense of $7 million has been recorded for amounts expected to be repatriated.
In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47) “Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143.” This Interpretation clarifies that a new SAP enterprise-resource planning systemconditional retirement obligation refers to a legal
obligation to perform an asset retirement activity in North America.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 projectobligation to perform the asset retirement activity is plannedunconditional even though uncertainty exists about the timing and (or) method of settlement. Accordingly, an entity is required to recognize a liability for the next threefair 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 andending after December 15, 2005. The company is expectedin the process of evaluating the impact of FIN 47 but does not expect the adoption to cost approximately $125 million.have a material impact on the financial statements.
Earnings Outlook
On September 13, 2004,12, 2005, the company issued a press release announcing results for 20042005 and commented on the outlook for earnings per share for 2005.2006.
Cautionary Factors That May Affect Future Results
This Report contains “forward-looking” statements that reflect the company’s current expectations regarding future results of operations, economic performance, financial condition and achievements of the company. The company tries, wherever possible, to identify these forward-looking statements by using words such as “anticipate,” “believe,” “estimate,” “expect,” “will” and similar expressions. One can also identify them by the fact that they do not relate strictly to historical or current facts. These statements reflect the company’s current plans and expectations and are based on information currently available to it. They rely on a number of assumptions regarding future events and estimates which could be inaccurate and which are inherently subject to risks and uncertainties.
The company wishes to caution the reader that the following important factors and those important factors described elsewhere in the commentary, or in the Securities and Exchange Commission filings of the company, 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, promotional programs and new advertising, and of changes in consumer demand for the company’s products;
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• | | the impact of strong competitive response to the company’s efforts to leverage its brand power with product innovation, promotional programs and new advertising, and of changes in consumer demand for the company’s products; |
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| • | | the risks in the marketplace associated with trade and consumer acceptance of product improvements, shelving initiatives, and new product introductions; |
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| • | | the company’s ability to achieve sales and earnings forecasts, which are based on assumptions about sales volume and product mix, and the impact of marketing plans;and pricing actions; |
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| • | | the company’s ability to realize projected cost savings and benefits, including those contemplated by restructuring programs and other cost-savings initiatives; |
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| • | | the company’s ability to successfully manage changes to its business processes, including selling, distribution, product capacity, information management systems and the integration of acquisitions; |
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| • | | the increased significance of certain of the company’s key trade customers; |
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| • | | the difficulty of predicting the pattern of inventory movements by the company’s trade customers and of predicting changes in the policies of its customers, such as changes in customer inventory levels pricing and access to shelf space; |
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| • | | the impact of fluctuations in the supply and cost of raw materials; |
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| • | | the uncertainties of litigation described from time to time in the company’s Securities and Exchange Commission filings; |
| |
| • | | the impact of unforeseen economic changes in currency exchange rates, tax rates, interest rates, equity markets, inflation rates, recession and other external factors over which the company has no control;factors; and |
| |
| • | | the impact of unforeseen business disruptions in one or more of the company’s markets due to political instability, civil disobedience, armed hostilities, natural disasters or other calamities. |
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 forward-looking statements made by the company in order to reflect new information, events or circumstances after the date they are made.
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk
The information presented in the section entitled “Management’s Discussion and Analysis of Results of Operations and Financial Condition — Market Risk Sensitivity” is incorporated herein by reference.
20
Item 8. Financial Statements and Supplementary Data
Consolidated Statements of Earnings
(millions, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | |
| | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | | 2003 | |
| | 52 weeks | | 53 weeks | | 52 weeks | | | 52 weeks | | 52 weeks | | 53 weeks | |
| Net Sales | | $ | 7,109 | | $ | 6,678 | | $ | 6,133 | | | $ | 7,548 | | $ | 7,109 | | $ | 6,678 | |
| | Costs and expenses | | |
| Cost of products sold | | 4,187 | | 3,805 | | 3,443 | | | 4,491 | | 4,187 | | 3,805 | |
| Marketing and selling expenses | | 1,153 | | 1,145 | | 1,073 | | | 1,185 | | 1,153 | | 1,145 | |
| Administrative expenses | | 542 | | 507 | | 454 | | | 571 | | 542 | | 507 | |
| Research and development expenses | | 93 | | 88 | | 79 | | | 95 | | 93 | | 88 | |
| Other expenses / (income) (Note 6) | | | (13 | ) | | 28 | | 99 | | | | (4 | ) | | | (13 | ) | | 28 | |
| Restructuring charges (Note 5) | | 32 | | — | | 1 | | |
| Restructuring charge (Note 5) | | | — | | 32 | | — | |
| | Total costs and expenses | | 5,994 | | 5,573 | | 5,149 | | | 6,338 | | 5,994 | | 5,573 | |
| Earnings Before Interest and Taxes | | 1,115 | | 1,105 | | 984 | | | 1,210 | | 1,115 | | 1,105 | |
| Interest expense (Note 7) | | 174 | | 186 | | 190 | | | 184 | | 174 | | 186 | |
| Interest income | | 6 | | 5 | | 4 | | | 4 | | 6 | | 5 | |
| | Earnings before taxes | | 947 | | 924 | | 798 | | | 1,030 | | 947 | | 924 | |
| Taxes on earnings (Note 10) | | 300 | | 298 | | 273 | | | 323 | | 300 | | 298 | |
| | Earnings before cumulative effect of accounting change | | 647 | | 626 | | 525 | | | 707 | | 647 | | 626 | |
| Cumulative effect of change in accounting principle | | — | | | (31 | ) | | — | | | — | | — | | | (31 | ) |
| Net Earnings | | $ | 647 | | $ | 595 | | $ | 525 | | | $ | 707 | | $ | 647 | | $ | 595 | |
| Per Share — Basic | | |
| Earnings before cumulative effect of accounting change | | $ | 1.58 | | $ | 1.52 | | $ | 1.28 | | | $ | 1.73 | | $ | 1.58 | | $ | 1.52 | |
| Cumulative effect of change in accounting principle | | — | | | (.08 | ) | | — | | | — | | — | | | (.08 | ) |
| Net Earnings | | $ | 1.58 | | $ | 1.45 | | $ | 1.28 | | | $ | 1.73 | | $ | 1.58 | | $ | 1.45 | |
| | Weighted average shares outstanding — basic | | 409 | | 411 | | 410 | | | 409 | | 409 | | 411 | |
| Per Share — Assuming Dilution | | |
| Earnings before cumulative effect of accounting change | | $ | 1.57 | | $ | 1.52 | | $ | 1.28 | | | $ | 1.71 | | $ | 1.57 | | $ | 1.52 | |
| Cumulative effect of change in accounting principle | | — | | | (.08 | ) | | — | | | — | | — | | | (.08 | ) |
| Net Earnings | | $ | 1.57 | | $ | 1.45 | | $ | 1.28 | | | $ | 1.71 | | $ | 1.57 | | $ | 1.45 | |
| | Weighted average shares outstanding — assuming dilution | | 412 | | 411 | | 411 | | | 413 | | 412 | | 411 | |
|
See accompanying Notes to Consolidated Financial Statements.
The sum of the individual per share amounts does not equal net earnings per share due to rounding.
21
Consolidated Balance Sheets
(millions, except per share amounts)
| | | | | | | | | | | | | | | | | |
| | August 1, 2004 | | August 3, 2003 | | | July 31, 2005 | | August 1, 2004 | |
| Current Assets | | |
| Cash and cash equivalents | | $ | 32 | | $ | 32 | | | $ | 40 | | $ | 32 | |
| Accounts receivable (Note 11) | | 490 | | 413 | | | 509 | | 490 | |
| Inventories (Note 12) | | 795 | | 709 | | | 782 | | 782 | |
| Other current assets (Note 13) | | 164 | | 136 | | | 181 | | 164 | |
| | Total current assets | | 1,481 | | 1,290 | | | 1,512 | | 1,468 | |
| Plant Assets, Net of Depreciation(Note 14) | | 1,901 | | 1,843 | | | 1,987 | | 1,901 | |
Goodwill(Note 3) | | 1,900 | | 1,803 | | | 1,950 | | 1,900 | |
Other Intangible Assets, Net of Amortization(Note 3) | | 1,095 | | 1,018 | | | 1,059 | | 1,095 | |
Other Assets(Note 15) | | 298 | | 251 | | | 268 | | 298 | |
| | Total assets | | $ | 6,675 | | $ | 6,205 | | | $ | 6,776 | | $ | 6,662 | |
| Current Liabilities | | |
| Notes payable (Note 16) | | $ | 810 | | $ | 1,279 | | | $ | 451 | | $ | 810 | |
| Payable to suppliers and others | | 607 | | 620 | | | 624 | | 607 | |
| Accrued liabilities | | 607 | | 602 | | | 606 | | 594 | |
| Dividend payable | | 65 | | 65 | | | 70 | | 65 | |
| Accrued income taxes | | 250 | | 217 | | | 251 | | 250 | |
| | Total current liabilities | | 2,339 | | 2,783 | | | 2,002 | | 2,326 | |
| Long-term Debt(Note 16) | | 2,543 | | 2,249 | | | 2,542 | | 2,543 | |
Nonpension Postretirement Benefits(Note 9) | | 298 | | 304 | | | 278 | | 298 | |
Other Liabilities(Note 17) | | 621 | | 482 | | | 684 | | 621 | |
| | Total liabilities | | 5,801 | | 5,818 | | | 5,506 | | 5,788 | |
| Shareowners’ Equity(Note 19) | | |
| Preferred stock; authorized 40 shares; none issued | | — | | — | | | — | | — | |
| Capital stock, $.0375 par value; authorized 560 shares; issued 542 shares | | 20 | | 20 | | | 20 | | 20 | |
| Additional paid-in capital | | 264 | | 298 | | | 236 | | 264 | |
| Earnings retained in the business | | 5,642 | | 5,254 | | | 6,069 | | 5,642 | |
| Capital stock in treasury, 134 shares in 2004 and 132 shares in 2003, at cost | | | (4,848 | ) | | | (4,869 | ) | |
| Capital stock in treasury, 134 shares in 2005 and 2004, at cost | | | | (4,832 | ) | | | (4,848 | ) |
| Accumulated other comprehensive loss | | | (204 | ) | | | (316 | ) | | | (223 | ) | | | (204 | ) |
| | Total shareowners’ equity | | 874 | | 387 | | | 1,270 | | 874 | |
| | Total liabilities and shareowners’ equity | | $ | 6,675 | | $ | 6,205 | | | $ | 6,776 | | $ | 6,662 | |
|
See accompanying Notes to Consolidated Financial Statements.
22
Consolidated Statements of Cash Flows
(millions)
| | | | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | | 2003 | |
| Cash Flows from Operating Activities: | | |
| Net earnings | | $ | 647 | | $ | 595 | | $ | 525 | | | $ | 707 | | $ | 647 | | $ | 595 | |
| Non-cash charges to net earnings | | |
| Restructuring charges | | | — | | 32 | | — | |
| Cumulative effect of accounting change | | — | | 31 | | — | | | — | | — | | 31 | |
| Restructuring charges | | 32 | | — | | — | | |
| Depreciation and amortization | | 260 | | 243 | | 319 | | | 279 | | 260 | | 243 | |
| Deferred taxes | | 51 | | 72 | | 5 | | | 47 | | 51 | | 72 | |
| Other, net | | 97 | | 93 | | 53 | | |
| Other, net (Note 21) | | | 122 | | 97 | | 93 | |
| Changes in working capital | | |
| Accounts receivable | | | (61 | ) | | 46 | | 40 | | | | (10 | ) | | | (61 | ) | | 46 | |
| Inventories | | | (67 | ) | | | (33 | ) | | | (30 | ) | | 6 | | | (54 | ) | | | (33 | ) |
| Prepaid assets | | 2 | | 1 | | 9 | | | | (17 | ) | | 2 | | 1 | |
| Accounts payable and accrued liabilities | | | (49 | ) | | | (38 | ) | | 195 | | | | (24 | ) | | | (62 | ) | | | (38 | ) |
| Pension fund contributions | | | (65 | ) | | | (19 | ) | | | (8 | ) | | | (61 | ) | | | (65 | ) | | | (19 | ) |
| Other | | | (103 | ) | | | (118 | ) | | | (91 | ) | |
| Other (Note 21) | | | | (59 | ) | | | (103 | ) | | | (118 | ) |
| Net Cash Provided by Operating Activities | | 744 | | 873 | | 1,017 | | | 990 | | 744 | | 873 | |
| Cash Flows from Investing Activities: | | |
| Purchases of plant assets | | | (288 | ) | | | (283 | ) | | | (269 | ) | | | (332 | ) | | | (288 | ) | | | (283 | ) |
| Sales of plant assets | | 22 | | 22 | | 5 | | | 11 | | 22 | | 22 | |
| Businesses acquired | | | (9 | ) | | | (177 | ) | | | (15 | ) | | — | | | (9 | ) | | | (177 | ) |
| Sales of businesses | | — | | 10 | | 3 | | | — | | — | | 10 | |
| Long-term investments | | — | | | (4 | ) | | | (12 | ) | |
| Other, net | | | 7 | | — | | | (4 | ) |
| Net Cash Used in Investing Activities | | | (275 | ) | | | (432 | ) | | | (288 | ) | | | (314 | ) | | | (275 | ) | | | (432 | ) |
| Cash Flows from Financing Activities: | | |
| Long-term borrowings | | 301 | | 400 | | 1,100 | | | — | | 301 | | 400 | |
| Repayments of long-term borrowings | | — | | — | | | (628 | ) | |
| Net repayments of short-term borrowings | | | (486 | ) | | | (566 | ) | | | (915 | ) | | | (354 | ) | | | (486 | ) | | | (566 | ) |
| Dividends paid | | | (259 | ) | | | (259 | ) | | | (286 | ) | | | (275 | ) | | | (259 | ) | | | (259 | ) |
| Treasury stock purchases | | | (56 | ) | | | (24 | ) | | | (5 | ) | | | (110 | ) | | | (56 | ) | | | (24 | ) |
| Treasury stock issuances | | 25 | | 17 | | 14 | | | 71 | | 25 | | 17 | |
| Other, net | | — | | — | | | (6 | ) | |
| Net Cash Used in Financing Activities | | | (475 | ) | | | (432 | ) | | | (726 | ) | | | (668 | ) | | | (475 | ) | | | (432 | ) |
| Effect of Exchange Rate Changes on Cash | | 6 | | 2 | | | (6 | ) | | — | | 6 | | 2 | |
| Net Change in Cash and Cash Equivalents | | — | | 11 | | | (3 | ) | | 8 | | — | | 11 | |
Cash and Cash Equivalents — Beginning of Year | | 32 | | 21 | | 24 | | | 32 | | 32 | | 21 | |
| Cash and Cash Equivalents — End of Year | | $ | 32 | | $ | 32 | | $ | 21 | | | $ | 40 | | $ | 32 | | $ | 32 | |
|
See accompanying Notes to Consolidated Financial Statements.
23
Consolidated Statements of Shareowners’ Equity (Deficit)
(millions, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Earnings | | Accumulated | | | | | Earnings | | Accumulated | | | |
| | | Capital Stock | | Additional | | Retained | | Other | | Total | | | Capital Stock | | Additional | | Retained | | Other | | Total | |
| | | Issued | | In Treasury | | Paid-in | | in the | | Comprehensive | | Shareowners’ | | | Issued | | In Treasury | | Paid-in | | in the | | Comprehensive | | Shareowners’ | |
| | | Shares | | Amount | | Shares | | Amount | | Capital | | Business | | Income (Loss) | | Equity (Deficit) | | | Shares | | Amount | | Shares | | Amount | | Capital | | Business | | Income (Loss) | | Equity (Deficit) | |
| | |
| Balance at July 29, 2001 | | 542 | | $ | 20 | | | (133 | ) | | $ | (4,908 | ) | | $ | 314 | | $ | 4,651 | | $ | (324 | ) | | $ | (247 | ) | |
| | |
| Comprehensive income (loss) | | |
| Net earnings | | 525 | | 525 | | |
| Foreign currency translation adjustments | | 49 | | 49 | | |
| Cash-flow hedges, net of tax | | 2 | | 2 | | |
| Minimum pension liability, net of tax | | | (208 | ) | | | (208 | ) | |
| | |
| Other comprehensive loss | | | (157 | ) | | | (157 | ) | |
| | | | |
| Total Comprehensive income | | 368 | | |
| | |
| Dividends ($.63 per share) | | | (258 | ) | | | (258 | ) | |
| Treasury stock purchased | | — | | | (5 | ) | | | (5 | ) | |
| Treasury stock issued under management incentive and stock option plans | | 1 | | 22 | | 6 | | 28 | | |
| | Balance at July 28, 2002 | | 542 | | 20 | | | (132 | ) | | | (4,891 | ) | | 320 | | 4,918 | | | (481 | ) | | | (114 | ) | | 542 | | $ | 20 | | | (132 | ) | | $ | (4,891 | ) | | $ | 320 | | $ | 4,918 | | $ | (481 | ) | | $ | (114 | ) |
| | Comprehensive income (loss) | | |
| Net earnings | | 595 | | 595 | | | 595 | | 595 | |
| Foreign currency translation adjustments | | 174 | | 174 | | | 174 | | 174 | |
| Cash-flow hedges, net of tax | | | (7 | ) | | | (7 | ) | | | (7 | ) | | | (7 | ) |
| Minimum pension liability, net of tax | | | (2 | ) | | | (2 | ) | | | (2 | ) | | | (2 | ) |
| | Other comprehensive income | | 165 | | 165 | | | 165 | | 165 | |
| | | | | |
| Total Comprehensive income | | 760 | | | 760 | |
| | Dividends ($.63 per share) | | | (259 | ) | | | (259 | ) | | | (259 | ) | | | (259 | ) |
| Treasury stock purchased | | | (1 | ) | | | (24 | ) | | | (24 | ) | | | (1 | ) | | | (24 | ) | | | (24 | ) |
| Treasury stock issued under management incentive and stock option plans | | 1 | | 46 | | | (22 | ) | | 24 | | | 1 | | 46 | | | (22 | ) | | 24 | |
| | Balance at August 3, 2003 | | 542 | | 20 | | | (132 | ) | | | (4,869 | ) | | 298 | | 5,254 | | | (316 | ) | | 387 | | | 542 | | 20 | | | (132 | ) | | | (4,869 | ) | | 298 | | 5,254 | | | (316 | ) | | 387 | |
| Comprehensive income (loss) | | |
Net earnings | | 647 | | 647 | | | 647 | | 647 | |
Foreign currency translation adjustments | | 94 | | 94 | | | 94 | | 94 | |
Cash-flow hedges, net of tax | | 4 | | 4 | | | 4 | | 4 | |
Minimum pension liability, net of tax | | 14 | | 14 | | | 14 | | 14 | |
| Other comprehensive income | | 112 | | 112 | | | 112 | | 112 | |
| | | | | |
Total Comprehensive income | | 759 | | | 759 | |
| Dividends ($.63 per share) | | | (259 | ) | | | (259 | ) | | | (259 | ) | | | (259 | ) |
Treasury stock purchased | | | (2 | ) | | | (56 | ) | | | (56 | ) | | | (2 | ) | | | (56 | ) | | | (56 | ) |
Treasury stock issued under management incentive and stock option plans | | — | | 77 | | | (34 | ) | | 43 | | | — | | 77 | | | (34 | ) | | 43 | |
| Balance at August 1, 2004 | | 542 | | $ | 20 | | | (134 | ) | | $ | (4,848 | ) | | $ | 264 | | $ | 5,642 | | $ | (204 | ) | | $ | 874 | | | 542 | | 20 | | | (134 | ) | | | (4,848 | ) | | 264 | | 5,642 | | | (204 | ) | | 874 | |
| Comprehensive income (loss) | | |
Net earnings | | | 707 | | 707 | |
Foreign currency translation adjustments | | | 42 | | 42 | |
Cash-flow hedges, net of tax | | | | (19 | ) | | | (19 | ) |
Minimum pension liability, net of tax | | | | (42 | ) | | | (42 | ) |
| | | |
Other comprehensive loss | | | | (19 | ) | | | (19 | ) |
| | | | |
Total Comprehensive income | | | 688 | |
| | | |
Dividends ($.68 per share) | | | | (280 | ) | | | (280 | ) |
Treasury stock purchased | | | | (4 | ) | | | (110 | ) | | | (110 | ) |
Treasury stock issued under management incentive and stock option plans | | | 4 | | 126 | | | (28 | ) | | 98 | |
| | | |
Balance at July 31, 2005 | | | 542 | | $ | 20 | | | (134 | ) | | $ | (4,832 | ) | | $ | 236 | | $ | 6,069 | | $ | (223 | ) | | $ | 1,270 | |
| | | |
See accompanying Notes to Consolidated Financial Statements.
24
Notes to Consolidated Financial Statements
(dollars in millions, except per share amounts)
| | |
| |
| | | |
1 | | | Summary of Significant Accounting Policies |
| | | |
Basis of PresentationThe consolidated financial statements include the accounts of the company and its majority-owned subsidiaries. Significant intercompanyIntercompany transactions are eliminated in consolidation. Certain amounts in prior year financial statements were reclassified to conform to the current presentation.
The company’s fiscal year ends on the Sunday nearest July 31. There were 52 weeks in 2005 and 2004, and 53 weeks in 2003 and 52 weeks in 2002.2003.
Revenue RecognitionRevenues are recognized when the earnings process is complete. This occurs when products are shipped in accordance with terms of agreements, title and risk of loss transfer to customers, collection is probable and pricing is fixed or determinable.
Beginning in 2002, the company adopted the consensus reached by the Financial Accounting Standards Board’s (FASB) Emerging Issues Task Force (EITF) on Issue No. 01-09 “Accounting Revenues are recognized net of provisions for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products.” Under this consensus, the EITF concluded that certain consumerreturns, discounts and tradeallowances. Certain sales promotion expenses, such as coupon redemption costs, cooperative advertising programs, new product introduction fees, feature price discounts and in-store display incentives should beare classified as a reduction of sales rather than as marketing expenses.sales.
Cash and Cash EquivalentsAll highly liquid debt instruments purchased with a maturity of three months or less are classified as cash equivalents.
InventoriesSubstantially all U.S. inventories are priced at the lower of cost or market, with cost determined by the last in, first out (LIFO) method. Other inventories are priced at the lower of average cost or market.
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 does not expect the adoption to have a material impact on the financial statements.
Property, Plant Assets and Other Long-Lived AssetsEquipmentPlant assetsProperty, plant and equipment are statedrecorded at historical cost. Alterationscost and major overhauls, which extend theare depreciated over estimated useful lives or increase the capacity of plant assets, are capitalized. Ordinary repairs and maintenance are charged to operating costs. Depreciation provided in Costs and expenses is calculated using the straight-line method over the estimated useful lives of the assets.method. Buildings and machinery and equipment are depreciated over periods not exceeding 45 years and 15 years, respectively. Assets are evaluated for impairment when triggering events occur.
The company adopted Statement of Financial Accounting Standards (SFAS)Goodwill and Intangible AssetsGoodwill and indefinite-lived intangible assets are not amortized but rather are tested at least annually for impairment in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets.” Intangible assets with finite lives are amortized over the estimated useful life and reviewed for impairment in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” on July 29, 2002. This standard was effective forLong-lived Assets.” Goodwill impairment testing first requires a comparison of the company on a prospective basis. This standard addresses financial accounting andfair value of each reporting forunit to the carrying value. If the carrying value exceeds fair value, goodwill is considered impaired. The amount of impairment or disposalis the difference between the carrying value of long-lived assets such as property, plants, equipment and amortized intangibles. This standard supersedes SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”goodwill and the accounting“implied” fair value, which is calculated as if the reporting unit had just been acquired and reporting provisionsaccounted for as a business combination. Impairment testing for indefinite-lived intangible assets requires a comparison between the fair value and carrying value of Accounting Principles Board (APB) Opinion No. 30 “Reporting the Resultsasset. If carrying value exceeds the fair value, the asset is reduced to fair value. Fair values are primarily determined using discounted cash flow analyses. See Note 3 of Operations—Reporting the Effects of Disposal of a Segment of a Business,Notes to Consolidated Financial Statements for information on goodwill and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” for the disposal of a segment of a business. Long-lived assets are tested for impairment if certain triggers occur. The adoption of this standard did not have a material impact on the financial statements.other intangible assets.
Derivative Financial InstrumentsThe company uses derivative financial instruments primarily for purposes of hedging exposures to fluctuations in interest rates, foreign currency exchange rates, commodities and equity-linked employee benefit obligations. All derivatives are recognized 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. Gains or losses on derivative instruments reported in other comprehensive income are reclassified to earnings in the period in which earnings are affected by the underlying hedged item. The ineffective portion of all hedges is recognized in earnings in the current period. See Note 18 of the Notes to Consolidated Financial Statements for additional information.
25
Stock-Based CompensationIn December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation–Transition and Disclosure.” This standard amends the transition and disclosure requirements of SFAS No. 123 “Accounting for Stock-Based Compensation.” As permitted by SFAS No. 148, theThe company accounts for stock option grants and restricted stock awards in accordance with APBAccounting Principles Board (APB) Opinion 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. See also Note 19 of the Notes to Consolidated Financial Statements. The following table illustrates the effect on net earnings and earnings per share if the company had applied
25
the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | | 2003 | |
| | Net Earnings, as reported | | $ | 647 | | $ | 595 | | $ | 525 | | |
| Net earnings, as reported | | | $ | 707 | | $ | 647 | | $ | 595 | |
Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects1 | | 11 | | 13 | | 19 | | | 16 | | 11 | | 13 | |
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects1 | | | (40 | ) | | | (37 | ) | | | (34 | ) | |
| Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | | | (45 | ) | | | (40 | ) | | | (37 | ) |
| | Pro forma net earnings | | $ | 618 | | $ | 571 | | $ | 510 | | | $ | 678 | | $ | 618 | | $ | 571 | |
| | Earnings per share: | | |
| | | |
| Basic – as reported | | $ | 1.58 | | $ | 1.45 | | $ | 1.28 | | | $ | 1.73 | | $ | 1.58 | | $ | 1.45 | |
| | Basic – pro forma | | $ | 1.51 | | $ | 1.39 | | $ | 1.24 | | | $ | 1.66 | | $ | 1.51 | | $ | 1.39 | |
| | Diluted – as reported | | $ | 1.57 | | $ | 1.45 | | $ | 1.28 | | | $ | 1.71 | | $ | 1.57 | | $ | 1.45 | |
| | Diluted – pro forma | | $ | 1.50 | | $ | 1.39 | | $ | 1.24 | | | $ | 1.64 | | $ | 1.50 | | $ | 1.39 | |
|
| | |
| 1 | | Represents restricted stock expense. |
The weighted average fair value of options granted in 2005, 2004 2003 and 20022003 was estimated as $4.74, $5.73 $5.91 and $8.09,$5.91, respectively. The fair value of each option grant at grant date is estimated using the Black-Scholes option pricing model. The following weighted average assumptions were used for grants in 2005, 2004 2003 and 2002:2003:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | | 2003 | |
| | Risk-free interest rate | | | 4.1 | % | | | 4.0 | % | | | 5.0 | % | | | 3.2 | % | | | 4.1 | % | | | 4.0 | % |
| Expected life (in years) | | 6 | | 6 | | 6 | | | 6 | | 6 | | 6 | |
| Expected volatility | | | 24 | % | | | 26 | % | | | 31 | % | | | 21 | % | | | 24 | % | | | 26 | % |
| Expected dividend yield | | | 2.4 | % | | | 2.8 | % | | | 2.2 | % | | | 2.4 | % | | | 2.4 | % | | | 2.8 | % |
|
In December 2004, the Financial Accounting Standards Board (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 APB No. 25’s intrinsic value method of accounting for awards. SFAS No. 123R is effective for the beginning of fiscal 2006. The company will adopt the provisions of SFAS No. 123R on a prospective basis. The financial statement impact will be dependent on future stock-based awards and any unvested stock options outstanding at the date of adoption.
Use of EstimatesGenerally accepted accounting principles require management to make estimates and assumptions that affect assets and liabilities, contingent assets and liabilities, and revenues and expenses. Actual results could differ from those estimates.
Income TaxesIncome taxes are accounted for in accordance with SFAS No. 109 “Accounting for Income Taxes.” Deferred tax assets and liabilities are recognized for the future tax consequences attributable toimpact of differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.
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 FASB Staff Position (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 will complete its evaluation in fiscal 2006. The company estimates the range of possible amounts considered for repatriation to be between $200 and $425 and the related impact on income tax to be between $7 and $16. Based on the company’s plans related to the AJCA as of 2005, tax expense of $7 has been recorded for amounts expected to be repatriated.
26
Recently Issued Accounting PronouncementsIn July 2002, the FASB issued SFAS No. 146 “Accounting for Exit or Disposal Activities.” The provisions of this standard apply to disposal activities initiated after December 31, 2002. The adoption of this standard did not have a material impact on the financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46) “Consolidation of Variable Interest Entities, an Interpretation of ARB 51.” This Interpretation addresses consolidation by business enterprises of certain variable interest entities (VIEs). The Interpretation as amended is effective immediately for all enterprises with interests in VIEs created after January 31, 2003. In December 2003, the FASB issued a revised version of FIN 46 (FIN 46R), which clarified the provisions of FIN 46 by addressing implementation issues. FIN 46R must be applied to all entities subject to the Interpretation as of the first interim quarter ending after March 15, 2004. The company has investments of approximately $150 as of August 1, 2004 consisting of limited partnership interests in affordable housing partnership funds. The company’s ownership ranges from approximately 12% to 19%. The company evaluated the nature of these investments, which were in existence before January 31, 2003, against the provisions of the guidance and determined that such investments do not need to be consolidated in the financial statements.
In May 2003, the FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 changes the accounting for certain financial instruments that, under previous guidance, could be classified as equity or “mezzanine” equity, by now requiring those instruments to be classified as liabilities (or assets in some circumstances) in the statement of financial position. Further, SFAS No. 150 requires disclosure regarding the terms of those instruments and settlement alternatives. The guidance in SFAS No. 150 is generally effective for all financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this standard did not impact the financial statements.
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)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.
26
In May 2004, the 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. Although detailed regulations necessary to implement the Act have not yet been finalized, theThe company believes that certain drug benefits offered under postretirement health care plans will qualify for the subsidy under Medicare Part D. The effects of the subsidy were factored into the 2004 annual year-end valuation. The reduction in the benefit obligation attributable to past service cost was approximately $32 and has beenwas reflected as an actuarial gain. The reduction in benefit cost for 2005 related to the Act iswas approximately $5.
In March 2005, the FASB issued FASB Interpretation No. 47 (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 but does not expect the adoption to have a material impact on the financial statements.
Total comprehensive income is comprised of net earnings, net foreign currency translation adjustments, minimum pension liability adjustments (see Note 9), and net unrealized gains and losses on cash-flow hedges. Total comprehensive income for the twelve months ended July 31, 2005, August 1, 2004 and August 3, 2003 was $688, $759 and July 28, 2002 was $759, $760, and $368, respectively.
The components of Accumulated other comprehensive loss, as reflected in the Statements of Shareowners’ Equity (Deficit), consisted of the following:
| | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | | 2005 | | 2004 | |
| | Foreign currency translation adjustments | | $ | (7 | ) | | $ | (101 | ) | | $ | 35 | | $ | (7 | ) |
| Cash-flow hedges, net of tax | | | (1 | ) | | | (5 | ) | | | (20 | ) | | | (1 | ) |
Minimum pension liability, net of tax1 | | | (196 | ) | | | (210 | ) | | | (238 | ) | | | (196 | ) |
| | Total Accumulated other comprehensive loss | | $ | (204 | ) | | $ | (316 | ) | | $ | (223 | ) | | $ | (204 | ) |
|
| | |
| 1 | | Includes a tax benefit of $139 in 2005 and $111 in 2004 and $120 in 2003.2004. |
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| | | |
3 | | | Goodwill and Intangible Assets |
| | | | |
On July 29, 2002,In 2003, the company adopted SFAS No. 142 “Goodwill and Other Intangible Assets.” Under this standard, goodwill and intangible assets with indefinite useful lives are no longer amortized, but rather are to be tested at least annually for impairment. Intangible assets with finite lives should continue to be amortized over the estimated useful life and reviewed for impairment in accordance with SFAS No.144 “Accounting for the Impairment or Disposal of Long-lived Assets.” In connection with the adoption, of SFAS No. 142, the company was required to perform an impairment assessment on all goodwill and indefinite-lived intangible assets as of July 29, 2002. The assessment of the indefinite-lived intangible assets requires a comparison between the fair value and carrying value of the intangible asset. To the extent the carrying
value exceeds the fair value, an impairment loss is recognized. The assessment of goodwill is a two-step process in which the first step identifies impairment by requiring a comparison of the fair value of each reporting unit to the carrying value, including goodwill allocated to the unit. If the carrying value exceeds the fair value, goodwill is considered to be impaired. The amount of impairment is measured in a second step as the difference between the carrying value of goodwill and the “implied” fair value of goodwill, which is determined by calculating goodwill as if the reporting unit had just been acquired and accounted for as a business combination. Fair values were determined using discounted cash flow analyses. As a result of this evaluation, the company recorded a non-cash after-tax chargecumulative effect of accounting change of $31 (net of a $17 tax benefit), or $.08 per share in 2003, for impaired goodwill associated with the Stockpot business, a food service business acquired in August 1998. Stockpot is a reporting unit within Other in the North America Soup and Away From Home segment. This non-cash charge was recorded as a cumulative effect of a change in accounting principle.segment reporting. The impairment of Stockpot goodwill was the result of a reduction in actual sales attained and forecasted future sales growth relative to projections made at the time of the acquisition.
The provisions of SFAS No. 142 were adopted on a prospective basis and prior year results are not restated. The following tables present a reconciliation of earnings before cumulative effect of accounting change, adjusted to exclude amortization of goodwill and indefinite-lived intangible assets:
| | | | | | | | | | | | | | | |
| | | | | 2004 | | | 20031 | | | 2002 | |
| |
| Earnings before cumulative effect of accounting change, as reported | | | $647 | | | | $626 | | | | $525 | |
| Add back: | | Goodwill Amortization | | | — | | | | — | | | | 36 | |
| | | Trademark Amortization | | | — | | | | — | | | | 18 | |
| |
| Adjusted earnings before cumulative effect of accounting change | | | $647 | | | | $626 | | | | $579 | |
| |
| | | | | | | | | | | | | | | |
| | | | | 2004 | | | 20031 | | | 2002 | |
| |
| Basic earnings per share before cumulative effect of accounting change, as reported | | $ | 1.58 | | | $ | 1.52 | | | $ | 1.28 | |
| Add back: | | Goodwill Amortization | | | — | | | | — | | | | 0.09 | |
| | | Trademark Amortization | | | — | | | | — | | | | 0.04 | |
| |
| Adjusted basic earnings per share before cumulative effect of accounting change | | $ | 1.58 | | | $ | 1.52 | | | $ | 1.41 | |
| |
| | | | | | | | | | | | | | | |
| | | | | 2004 | | | 20031 | | | 2002 | |
| |
| Diluted earnings per share before cumulative effect of accounting change, as reported | | $ | 1.57 | | | $ | 1.52 | | | $ | 1.28 | |
| Add back: | | Goodwill Amortization | | | — | | | | — | | | | 0.09 | |
| | | Trademark Amortization | | | — | | | | — | | | | 0.04 | |
| |
| Adjusted diluted earnings per share before cumulative effect of accounting change | | $ | 1.57 | | | $ | 1.52 | | | $ | 1.41 | |
| |
1 | | In the first quarter of 2003, the company recognized a $31 (net of a $17 tax benefit), or $.08 per share, cumulative effect of accounting change related to the adoption of SFAS No. 142. |
27
The following table sets forth balance sheet information for intangible assets, excluding goodwill, subject to amortization and intangible assets not subject to amortization:
| | | | | | | | | | | | | | | | | | | | | |
| | | August 1, 2004 | | August 3, 2003 | | July 31, 2005 | | August 1, 2004 | |
| | | Carrying | | Accumulated | | Carrying | | Accumulated | | | Carrying | | Accumulated | | Carrying | | Accumulated | |
| | | Amount | | Amortization | | Amount | | Amortization | | | Amount | | Amortization | | Amount | | Amortization | |
| Intangible assets subject to amortization:1 | | |
Intangible assets subject to amortization1: | | |
| Trademarks | | | $ 6 | | $ | (3 | ) | | | $ 6 | | $ | (2 | ) | | $ | 6 | | $ | (4 | ) | | $ | 6 | | $ | (3 | ) |
| Other | | 17 | | | (7 | ) | | 16 | | | (7 | ) | | 17 | | | (7 | ) | | 17 | | | (7 | ) |
| | Total | | | $23 | | $ | (10 | ) | | | $22 | | $ | (9 | ) | | $ | 23 | | $ | (11 | ) | | $ | 23 | | $ | (10 | ) |
| | Intangible assets not subject to amortization: | | |
| Trademarks | | $ | 1,053 | | $ | 975 | | | $ | 1,042 | | $ | 1,053 | |
| Pension | | 27 | | 28 | | | 3 | | 27 | |
| Other | | 2 | | 2 | | | 2 | | 2 | |
| | Total | | $ | 1,082 | | $ | 1,005 | | | $ | 1,047 | | $ | 1,082 | |
|
| | |
| 1 | | Amortization related to these assets was approximately $2 for 20042005 and 2003.2004. The estimated aggregated amortization expense for each of the five succeeding fiscal years is less than $2 per year. Asset useful lives range from five to thirty-four years. |
Changes in the carrying amount for goodwill for the period are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | North America | | North America | | International | | | | | U.S. Soup, | | International | | | | | |
| | | Soup and | | Sauces and | | Biscuits and | | Soup and | | | | | Sauces | | Baking and | | Soup and | | | | | |
| | | Away From Home | | Beverages | | Confectionery | | Sauces | | Total | | | and Beverages | | Snacking | | Sauces | | Other | | Total | |
| | Balance at July 28, 2002 | | $ | 336 | | $ | 365 | | $ | 339 | | $ | 541 | | $ | 1,581 | | |
| Goodwill acquired | | — | | — | | 92 | | 11 | | 103 | | |
| Impairment losses | | | (48 | ) | | — | | — | | — | | | (48 | ) | |
| Foreign currency translation adjustment | | 10 | | — | | 93 | | 64 | | 167 | | |
| | |
| Balance at August 3, 2003 | | 298 | | 365 | | 524 | | 616 | | 1,803 | | | $ | 428 | | $ | 518 | | $ | 706 | | $ | 151 | | $ | 1,803 | |
| Foreign currency translation adjustment | | 5 | | — | | 40 | | 52 | | 97 | | | — | | 40 | | 57 | | — | | 97 | |
| Balance at August 1, 2004 | | $ | 303 | | $ | 365 | | $ | 564 | | $ | 668 | | $ | 1,900 | | | 428 | | 558 | | 763 | | 151 | | 1,900 | |
| Foreign currency translation adjustment | | | — | | 44 | | 6 | | — | | 50 | |
| Balance at July 31, 2005 | | | $ | 428 | | $ | 602 | | $ | 769 | | $ | 151 | | $ | 1,950 | |
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| |
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4 | | | Business and Geographic Segment Information |
| | | |
Campbell Soup Company, together with its consolidated subsidiaries, is a global manufacturer and marketer of high quality, branded convenience food products. TheThrough fiscal 2004, the company iswas organized and reportsreported 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.
The North AmericaAs 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 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:Campbell’scondensed and ready-to-serve soups;Swansonbroth and canned poultry;Pregopasta sauce;PaceMexican sauce;Campbell’s Chunky chili;Campbell’scanned pasta, gravies and beans;Campbell’s Supper Bakesmeal kits;V8vegetable juice;V8 Splashjuice beverages; andCampbell’stomato juice.
The Baking and Snacking segment includes the following businesses:Pepperidge Farmcookies, crackers, bakery and frozen products in U.S. retail;Arnott’sbiscuits in Australia and Asia Pacific; andArnott’ssalty 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 segment comprises the retail soup and Away From Home business in the U.S. and Canada. The U.S. retail business includes theCampbell’sbrand condensed and ready-to-serve soups andSwanson broths.
The segment includes the company’s total business in Canada,operations, which comprisesHabitantandCampbell’ssoups,Pregopasta sauce andV8juices. The Away From Home operations represent the distribution of products such asCampbell’ssoups,Campbell’s soup, specialty entrees, beverage products, other prepared foods andPepperidge Farmproducts through various food service channels in North America. The North America Sauces and Beverages segment includes U.S. retail sales forPregopasta sauces,PaceMexican sauces,Franco-Americancanned pastas and gravies,V8vegetable juices,V8 Splash juice beverages,Campbell’stomato juice, as well as the total of all businesses in Mexico and other Latin American and Caribbean countries. The Biscuits and Confectionery segment includes all retail sales ofPepperidge Farmcookies, crackers, breads and frozen products in the United StatesArnott’sbiscuits and crackers in Australia and Asia Pacific, Arnott’s Snackfoods salty snacks in Australia, andGodivachocolates worldwide. The International Soup and Sauces segment comprises operations outside of North America, includingErascoandHeisse Tassesoups in Germany,LiebigandRoycosoups andLesieursauces in France,Campbell’sandBatchelorssoups,OXOstock cubes andHomepridesauces in the United Kingdom,Devos Lemmensmayonnaise and cold sauces andCampbell’sandRoyco soups in Belgium,Blå Bandsoups and sauces in Sweden, andMcDonnellsandErinsoups in Ireland. In Asia Pacific, operations includeCampbell’ssoups and stock andSwansonbroths across the region.Canada.
Accounting policies for measuring segment assets and earnings before interest and taxes are substantially consistent with those described in Note 1. The company evaluates segment performance before interest and taxes. The North America Soup and 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 North America Sauces and Beverages segments operatecertain other products, which are produced under an integrated supply chain organization, sharing substantially allcontract manufacturing warehouse, distribution and sales activities.agreements. Accordingly, with the exception of the designated Stockpot facility, plant assets have beenare not allocated betweento the two segmentsAway From Home operations. Depreciation, however, is allocated to Away From Home based on various measures, for example, budgeted production hours for fixed assets and depreciation.hours.
The company’s largest customer, Wal-Mart Stores, Inc. and its affiliates, accounted for approximately 13%14% of consolidated net sales in 20042005 and 12% during 20032004 and 2002.2003. All of the company’s segments sold products to Wal-Mart Stores, Inc. or its affiliates.
Segment financial information for 2003 reflects the adoption of SFAS No. 142 as discussed in Note 3. Operating segment results for 2002 have been adjusted to reflect the pro forma impact of amortization eliminated under the standard. Amortization expense of $70 for 2002 has been eliminated from the prior period results.
28
Information about operations by business segment, reflecting the reclassifications described in Note 1, is as follows:
Business Segments
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Earnings | | | | | | | | | | |
| | | | | | | Before | | | Depreciation | | | Capital | | | | |
| | | | | | | Interest | | | and | | | Expen- | | | Segment | |
| 2004 | | Net Sales | | | and Taxes2 | | | Amortization | | | ditures | | | Assets | |
| |
North America Soup and Away From Home | | $ | 2,699 | | | $ | 602 | | | $ | 64 | | | $ | 97 | | | $ | 1,357 | |
North America Sauces and Beverages | | | 1,246 | | | | 268 | | | | 35 | | | | 53 | | | | 1,249 | |
Biscuits and Confectionery | | | 1,982 | | | | 216 | | | | 91 | | | | 83 | | | | 1,764 | |
International Soup and Sauces | | | 1,182 | | | | 135 | | | | 41 | | | | 40 | | | | 1,959 | |
Corporate and Eliminations1 | | | — | | | | (106 | ) | | | 29 | | | | 15 | | | | 346 | |
| |
Total | | $ | 7,109 | | | $ | 1,115 | | | $ | 260 | | | $ | 288 | | | $ | 6,675 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Earnings | | | | | | | | | | |
| | | | | | | Before | | | Depreciation | | | Capital | | | | |
| | | | | | | Interest | | | and | | | Expen- | | | Segment | |
| 2005 | | Net Sales | | | and Taxes | | | Amortization | | | ditures | | | Assets | |
| |
U.S. Soup, Sauces and Beverages | | $ | 3,098 | | | $ | 747 | | | $ | 89 | | | $ | 124 | | | $ | 2,070 | |
Baking and Snacking | | | 1,742 | | | | 198 | | | | 84 | | | | 80 | | | | 1,687 | |
International Soup and Sauces | | | 1,703 | | | | 221 | | | | 52 | | | | 63 | | | | 2,309 | |
Other | | | 1,005 | | | | 110 | | | | 26 | | | | 33 | | | | 380 | |
Corporate1 | | | — | | | | (66 | ) | | | 28 | | | | 32 | | | | 330 | |
| |
Total | | $ | 7,548 | | | $ | 1,210 | | | $ | 279 | | | $ | 332 | | | $ | 6,776 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Earnings | | | | | | | | | | |
| | | | | | | Before | | | Depreciation | | | Capital | | | | |
| | | | | | | Interest | | | and | | | Expen- | | | Segment | |
| 2003 | | Net Sales | | | and Taxes3 | | | Amortization | | | ditures | | | Assets | |
| |
| North America Soup and Away From Home | | $ | 2,606 | | | $ | 632 | | | $ | 62 | | | $ | 71 | | | $ | 1,237 | |
| North America Sauces and Beverages | | | 1,246 | | | | 289 | | | | 34 | | | | 42 | | | | 1,213 | |
| Biscuits and Confectionery | | | 1,774 | | | | 212 | | | | 85 | | | | 115 | | | | 1,680 | |
| International Soup and Sauces | | | 1,052 | | | | 128 | | | | 30 | | | | 34 | | | | 1,775 | |
Corporate and Eliminations1 | | | — | | | | (156 | ) | | | 32 | | | | 21 | | | | 300 | |
| |
| Total | | $ | 6,678 | | | $ | 1,105 | | | $ | 243 | | | $ | 283 | | | $ | 6,205 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Earnings | | | | | | | | | | |
| | | | | | | Before | | | Depreciation | | | Capital | | | | |
| | | | | | | Interest | | | and | | | Expen- | | | Segment | |
| 2004 | | Net Sales | | | and Taxes2 | | | Amortization | | | ditures | | | Assets | |
| |
| U.S. Soup, Sauces and Beverages | | $ | 2,998 | | | $ | 730 | | | $ | 80 | | | $ | 123 | | | $ | 2,051 | |
| Baking and Snacking | | | 1,613 | | | | 166 | | | | 74 | | | | 73 | | | | 1,613 | |
| International Soup and Sauces | | | 1,595 | | | | 205 | | | | 52 | | | | 63 | | | | 2,311 | |
| Other | | | 903 | | | | 101 | | | | 24 | | | | 14 | | | | 341 | |
Corporate1 | | | — | | | | (87 | ) | | | 30 | | | | 15 | | | | 346 | |
| |
| Total | | $ | 7,109 | | | $ | 1,115 | | | $ | 260 | | | $ | 288 | | | $ | 6,662 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Earnings | | | | | | | | | | |
| | | | | | | Before | | | Depreciation | | | Capital | | | | |
| | | | | | | Interest | | | and | | | Expen- | | | Segment | |
| 2002 | | Net Sales | | | and Taxes3 | | | Amortization | | | ditures | | | Assets | |
| |
| North America Soup and Away From Home | | $ | 2,524 | | | $ | 634 | | | $ | 58 | | | $ | 75 | | | $ | 1,263 | |
| North America Sauces and Beverages | | | 1,182 | | | | 257 | | | | 32 | | | | 47 | | | | 1,228 | |
| Biscuits and Confectionery | | | 1,507 | | | | 186 | | | | 90 | | | | 100 | | | | 1,276 | |
| International Soup and Sauces | | | 920 | | | | 120 | | | | 27 | | | | 28 | | | | 1,632 | |
Corporate and Eliminations1 | | | — | | | | (143 | ) | | | 42 | | | | 19 | | | | 322 | |
| |
| Total | | $ | 6,133 | | | $ | 1,054 | | | $ | 249 | | | $ | 269 | | | $ | 5,721 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Earnings | | | | | | | | | | |
| | | | | | | Before | | | Depreciation | | | Capital | | | | |
| | | | | | | Interest | | | and | | | Expen- | | | Segment | |
| 2003 | | Net Sales | | | and Taxes | | | Amortization | | | ditures | | | Assets | |
| |
| U.S. Soup, Sauces and Beverages | | $ | 2,944 | | | $ | 772 | | | $ | 78 | | | $ | 96 | | | $ | 1,971 | |
| Baking and Snacking | | | 1,428 | | | | 161 | | | | 68 | | | | 102 | | | | 1,513 | |
| International Soup and Sauces | | | 1,438 | | | | 201 | | | | 41 | | | | 49 | | | | 2,089 | |
| Other | | | 868 | | | | 100 | | | | 25 | | | | 16 | | | | 339 | |
Corporate1 | | | — | | | | (129 | ) | | | 31 | | | | 20 | | | | 293 | |
| |
| Total | | $ | 6,678 | | | $ | 1,105 | | | $ | 243 | | | $ | 283 | | | $ | 6,205 | |
| |
| | |
| 1 | | Represents unallocated corporate expenses and unallocated assets, including corporate offices, deferred income taxes and investments. |
| |
| 2 | | Contributions to earnings before interest and taxes by segment include the effect of a fourth quarter 2004 restructuring charge of $32 as follows: North AmericaU.S. Soup, and Away From Home — $7, North America Sauces and Beverages — $3, Biscuits$8, Baking and ConfectionerySnacking — $12,$10, International Soup and Sauces — $9,$10, Other — $3 and Corporate — $1. |
|
3 | | Contributions to earnings before interest and taxes by the Biscuits and Confectionery segment include the effect of costs of $1 in 2003 and $20 in 2002 associated with the Australian manufacturing reconfiguration. |
Geographic Area Information
Information about operations in different geographic areas is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net sales | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | | 2003 | |
| | United States | | $ | 4,581 | | $ | 4,549 | | $ | 4,339 | | | $ | 4,832 | | $ | 4,581 | | $ | 4,549 | |
| Europe | | 1,090 | | 969 | | 843 | | | 1,164 | | 1,090 | | 969 | |
| Australia/Asia Pacific | | 965 | | 779 | | 554 | | | 1,038 | | 965 | | 779 | |
| Other countries | | 570 | | 492 | | 502 | | | 637 | | 570 | | 492 | |
| Adjustments and eliminations | | | (97 | ) | | | (111 | ) | | | (105 | ) | | | (123 | ) | | | (97 | ) | | | (111 | ) |
| | Consolidated | | $ | 7,109 | | $ | 6,678 | | $ | 6,133 | | | $ | 7,548 | | $ | 7,109 | | $ | 6,678 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Earnings before interest and taxes | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | | 2003 | |
| | United States | | $ | 909 | | $ | 965 | | $ | 913 | | | $ | 931 | | $ | 890 | | $ | 942 | |
| Europe | | 132 | | 126 | | 92 | | | 142 | | 133 | | 126 | |
| Australia/Asia Pacific | | 96 | | 93 | | 41 | | | 112 | | 99 | | 88 | |
| Other countries | | 84 | | 77 | | 81 | | | 91 | | 80 | | 78 | |
| | Segment earnings before interest and taxes | | 1,221 | | 1,261 | | 1,127 | | | 1,276 | | 1,202 | | 1,234 | |
| Unallocated corporate expenses | | | (106 | ) | | | (156 | ) | | | (143 | ) | |
| Corporate | | | | (66 | ) | | | (87 | ) | | | (129 | ) |
| | Consolidated | | $ | 1,115 | | $ | 1,105 | | $ | 984 | | | $ | 1,210 | | $ | 1,115 | | $ | 1,105 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Identifiable assets | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | | 2003 | |
| | United States | | $ | 2,898 | | $ | 2,774 | | $ | 2,797 | | | $ | 2,939 | | $ | 2,885 | | $ | 2,774 | |
| Europe | | 1,890 | | 1,718 | | 1,586 | | | 1,883 | | 1,890 | | 1,718 | |
| Australia/Asia Pacific | | 1,184 | | 1,100 | | 725 | | | 1,274 | | 1,184 | | 1,100 | |
| Other countries | | 357 | | 313 | | 288 | | | 350 | | 357 | | 313 | |
| Corporate | | 346 | | 300 | | 325 | | | 330 | | 346 | | 300 | |
| | Consolidated | | $ | 6,675 | | $ | 6,205 | | $ | 5,721 | | | $ | 6,776 | | $ | 6,662 | | $ | 6,205 | |
|
Transfers between geographic areas are recorded at cost plus markup or at market. Identifiable assets are those assets, including goodwill, which are identified with the operations in each geographic region. The restructuring charge of $32 in 2004 was allocated to the geographic regions as follows: United States — $12, Europe — $9, Australia/Asia Pacific — $10, and Other countries — $1. The restructuring charge in 2002 was allocated to Australia/Asia Pacific.
29
A restructuring charge of $32 ($22 after tax) was recorded in the fourth quarter 2004 for severance and employee benefit costs associated with a worldwide reduction in workforce and with the implementation of a distribution and logistics realignment in Australia. These programs are part of cost savings initiatives designed to improve the company’s operating margins and asset utilization. Approximately 400 positions were eliminated under the reduction in workforce program, resulting in a restructuring charge of $23. The reductions representrepresented the elimination of layers of management, elimination of redundant positions due to the
29
realignment of operations in North America, and reorganization of the U.S. sales force. The majority of the terminations occurred in the fourth quarter.quarter of 2004.
The distribution and logistics realignment in Australia represents convertinginvolves the conversion of a direct store delivery system to a central warehouse system. As a result of this program, over 200 positions will be eliminated due to the outsourcing of the infrastructure. A restructuring charge of $9 was recorded for this program. The majority of the terminations will occuroccurred in 2005.
A restructuring charge of $10 ($7 after tax) was recorded in the fourth quarter 2001 for severance costs associated with the reconfiguration of the manufacturing network of Arnott’s in Australia. In the second quarter 2002, the company recorded an additional $1 restructuring charge related to planned severance actions. Related costs of approximately $1 in 2003 and $19 ($13 after tax) in 2002 were recorded as Cost of products sold, primarily representing accelerated depreciation on assets to be taken out of service. This program was designed to drive greater manufacturing efficiency resulting from the closure of the Melbourne plant. Approximately 550 jobs were eliminated due to the plant closure.
A summary of restructuring reserves at August 1, 2004July 31, 2005 and related activity is as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | Accrued | | | | | | | | | | | Accrued | | | | |
| | | Balance at | | | | | | | | | | | Pension | | | Balance at | |
| | | August 3, | | | 2004 | | | Cash | | | Termination | | | August 1, | |
| | | 2003 | | | Charge | | | Payments | | | Benefits)1 | | | 2004 | |
| |
| Severance pay and benefits | | $ | — | | | | 32 | | | | (1 | ) | | | (3 | ) | | $ | 28 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Accrued | | | | | | | | | | | | | | | Accrued | | | | | | | Accrued | |
| | | Balance at | | | | | | | | | | | Pension | | | Balance at | | | | | | | Balance at | |
| | | August 3, | | | 2004 | | | Cash | | | Termination | | | August 1, | | | Cash | | | July 31, | |
| | | 2003 | | | Charge | | | Payments | | | Benefits1 | | | 2004 | | | Payments | | | 2005 | |
| |
| Severance pay and benefits | | $ | — | | | | 32 | | | | (1 | ) | | | (3 | ) | | | $28 | | | | (24 | ) | | | $4 | |
| | |
| 1 | | Pension termination benefits are recognized as a reduction of the prepaid pension asset. See Note 9 to the Consolidated Financial Statements. |
| | |
| |
| | | |
6 | | | Other Expenses/(Income) |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | | 2003 | |
| | Foreign exchange losses | | $ | 7 | | $ | 15 | | $ | 9 | | | $ | — | | $ | 7 | | $ | 15 | |
| Amortization of intangible and other assets | | 2 | | 2 | | 78 | | | 2 | | 2 | | 2 | |
| Gain on asset sales | | | (10 | ) | | | (16 | ) | | — | | | — | | | (10 | ) | | | (16 | ) |
| Adjustments to long-term investments | | 10 | | 36 | | 16 | | | — | | 10 | | 36 | |
| Gain from settlement of a lawsuit | | | (16 | ) | | — | | — | | | — | | | (16 | ) | | — | |
| Other | | | (6 | ) | | | (9 | ) | | | (4 | ) | | | (6 | ) | | | (6 | ) | | | (9 | ) |
| | | | $ | (13 | ) | | $ | 28 | | $ | 99 | | | $ | (4 | ) | | $ | (13 | ) | | $ | 28 | |
|
Adjustments to long-term investments represent a non-cash write-down to estimated fair market value of investments in affordable housing partnerships.
In 2003, certain stock-based incentive compensation expenses were reclassified from Other expenses/(income) to reflect the costs by function on various lines of the Statements of Earnings. Prior periods have been reclassified to conform to the current presentation.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | | 2003 | |
| | Interest expense | | $ | 177 | | $ | 188 | | $ | 191 | | | $ | 188 | | $ | 177 | | $ | 188 | |
| Less: Interest capitalized | | 3 | | 2 | | 1 | | | 4 | | 3 | | �� | | 2 | |
| | | | $ | 174 | | $ | 186 | | $ | 190 | | | $ | 184 | | $ | 174 | | $ | 186 | |
|
In the first quarter 2004, the company acquired certain Australian chocolate biscuit brands for approximately $9. These brands are included in the BiscuitsBaking and ConfectionerySnacking segment.
In the first quarter 2003, the company acquired two businesses for cash consideration of approximately $170 and assumed debt of approximately $20. The company acquired Snack Foods Limited, a leader in the Australian salty snack category, and Erin Foods, the number two dry soup manufacturer in Ireland. Snack Foods Limited is included in the BiscuitsBaking and ConfectionerySnacking segment. Erin Foods is included in the International Soup and Sauces segment. The businesses have annual sales of approximately $160. The pro forma impact on net earnings or earnings per share for the prior periods would not have been material.
| | |
| |
| | | |
9 | | | Pension and Postretirement Benefits |
| | | |
Pension BenefitsSubstantially all of the company’s U.S. and certain non-U.S. employees are covered by noncontributory defined benefit pension plans. In 1999, the company implemented significant amendments to certain U.S. plans. Under a new formula, retirement benefits are determined based on percentages of annual pay and age. To minimize the impact of converting to the new formula, service and earnings credit will continuecontinues to accrue for active employees participating in the plans under the formula prior to the amendments through the year 2014. Employees will receive the benefit from either the new or old formula, whichever is higher. Benefits become vested upon the completion of five years of service. Benefits are paid from funds previously provided to trustees and insurance companies or are paid directly by the
30
company from general funds. Plan assets consist primarily of investments in equities, fixed income securities and real estate.
Postretirement BenefitsThe company provides postretirement benefits including health care and life insurance to substantially all retired U.S. employees and their dependents. In 1999, changes were made to the postretirement benefits offered to certain U.S. employees. Participants who were not receiving postretirement benefits as of May 1, 1999 will no longer be eligible to receive such benefits in the future, but the company will provide
30
access to health care coverage for non-eligible future retirees on a group basis. Costs will be paid by the participants. To preserve the economic benefits for employees near retirement, participants who were at least age 55 and had at least 10 years of continuous service remain eligible for postretirement benefits.
In 2005, the company established retiree medical account benefits for eligible U.S. retirees, intended to provide reimbursement for eligible health care expenses.
The company uses the fiscal year end as the measurement date for the benefit plans.
Components of net periodic benefit cost:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | | 2003 | |
| | Service cost | | $ | 50 | | $ | 46 | | $ | 36 | | | $ | 56 | | $ | 50 | | $ | 46 | |
| Interest cost | | 111 | | 112 | | 109 | | | 113 | | 111 | | 112 | |
| Expected return on plan assets | | | (150 | ) | | | (153 | ) | | | (159 | ) | | | (155 | ) | | | (150 | ) | | | (153 | ) |
| Amortization of prior service cost | | 6 | | 6 | | 6 | | | 6 | | 6 | | 6 | |
| Recognized net actuarial loss | | 23 | | 14 | | 4 | | | 30 | | 23 | | 14 | |
| Curtailment/special termination benefits | | 3 | | 4 | | — | | |
| Special termination benefits | | | 2 | | 3 | | 4 | |
| | Net periodic pension (income) expense | | $ | 43 | | $ | 29 | | $ | (4 | ) | |
| Net periodic pension expense | | | $ | 52 | | $ | 43 | | $ | 29 | |
|
The special termination benefits recognized in 2004 primarily relate to a reductionreductions in workforce in the United Kingdom. ThisEurope. The 2004 amount was recognized as a component of the restructuring charges described in Note 5 to the Consolidated Financial Statements. The special termination benefits recognized in 2003 relate to European reductions in workforce.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Postretirement | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | | 2003 | |
| | Service cost | | $ | 4 | | $ | 4 | | $ | 5 | | | $ | 1 | | $ | 4 | | $ | 4 | |
| Interest cost | | 23 | | 21 | | 21 | | | 20 | | 23 | | 21 | |
| Amortization of prior service cost | | | (10 | ) | | | (11 | ) | | | (14 | ) | | | (7 | ) | | | (10 | ) | | | (11 | ) |
| Amortization of net loss | | 5 | | — | | — | | |
| Recognized net actuarial loss | | | 1 | | 5 | | — | |
| | Net periodic postretirement expense | | $ | 22 | | $ | 14 | | $ | 12 | | | $ | 15 | | $ | 22 | | $ | 14 | |
|
Change in benefit obligation:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension | | Postretirement | | Pension | | Postretirement | |
| | | 2004 | | 2003 | | 2004 | | 2003 | | | 2005 | | 2004 | | 2005 | | 2004 | |
| | Obligation at beginning of year | | $ | 1,798 | | $ | 1,669 | | $ | 373 | | $ | 340 | | | $ | 1,893 | | $ | 1,798 | | $ | 333 | | $ | 373 | |
| Acquisition adjustment | | — | | 13 | | — | | — | | |
| Service cost | | 50 | | 46 | | 4 | | 4 | | | 56 | | 50 | | 1 | | 4 | |
| Interest cost | | 111 | | 112 | | 23 | | 21 | | | 113 | | 111 | | 20 | | 23 | |
| Plan amendments | | | (3 | ) | | — | | | (21 | ) | | — | | | | (37 | ) | | | (3 | ) | | 33 | | | (21 | ) |
| Actuarial loss | | 23 | | 62 | | | (19 | ) | | 37 | | |
| Actuarial loss (gain) | | | 230 | | 23 | | 37 | | | (19 | ) |
| Participant contributions | | 3 | | 2 | | — | | — | | | 2 | | 3 | | — | | — | |
Curtailment/
special termination benefits | | 3 | | 4 | | — | | — | | |
| Special termination benefits | | | 2 | | 3 | | — | | — | |
| Benefits paid | | | (119 | ) | | | (132 | ) | | | (27 | ) | | | (29 | ) | | | (128 | ) | | | (119 | ) | | | (27 | ) | | | (27 | ) |
| Foreign currency adjustment | | 27 | | 22 | | — | | — | | | 5 | | 27 | | — | | — | |
| | Benefit obligation at end of year | | $ | 1,893 | | $ | 1,798 | | $ | 333 | | $ | 373 | | | $ | 2,136 | | $ | 1,893 | | $ | 397 | | $ | 333 | |
|
Change in the fair value of pension plan assets:
| | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | | 2005 | | 2004 | |
| | Fair value at beginning of year | | $ | 1,472 | | $ | 1,377 | | | $ | 1,627 | | $ | 1,472 | |
| Acquisition adjustment | | — | | 12 | | |
| Actual return on plan assets | | 184 | | 172 | | | 273 | | 184 | |
| Employer contributions | | 65 | | 19 | | | 61 | | 65 | |
| Participants contributions | | 3 | | 2 | | | 2 | | 3 | |
| Benefits paid | | | (115 | ) | | | (127 | ) | | | (123 | ) | | | (115 | ) |
| Foreign currency adjustment | | 18 | | 17 | | | 7 | | 18 | |
| | Fair value at end of year | | $ | 1,627 | | $ | 1,472 | | | $ | 1,847 | | $ | 1,627 | |
|
Funded status as recognized in the
Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension | | Postretirement | | Pension | | Postretirement | |
| | | 2004 | | 2003 | | 2004 | | 2003 | | | 2005 | | 2004 | | 2005 | | 2004 | |
| | Funded status at end of year | | $ | (266 | ) | | $ | (326 | ) | | $ | (333 | ) | | $ | (373 | ) | | $ | (289 | ) | | $ | (266 | ) | | $ | (397 | ) | | $ | (333 | ) |
| Unrecognized prior service cost | | 42 | | 51 | | | (33 | ) | | | (22 | ) | | | (1 | ) | | 42 | | 7 | | | (33 | ) |
| Unrecognized loss | | 661 | | 682 | | 49 | | 72 | | | 745 | | 661 | | 85 | | 49 | |
| | Net amount recognized | | $ | 437 | | $ | 407 | | $ | (317 | ) | | $ | (323 | ) | | $ | 455 | | $ | 437 | | $ | (305 | ) | | $ | (317 | ) |
|
Amounts recognized in the Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | |
| Pension | | 2004 | | 2003 | | | 2005 | | 2004 | |
| | Prepaid benefit cost | | $ | 103 | | $ | 49 | | | $ | 75 | | $ | 103 | |
| Intangible asset | | 27 | | 28 | | | 3 | | 27 | |
| Accumulated other comprehensive loss | | 307 | | 330 | | | 377 | | 307 | |
| | Net amount recognized | | $ | 437 | | $ | 407 | | | $ | 455 | | $ | 437 | |
|
31
The accumulated benefit obligation for all pension plans was $1,945 at July 31, 2005 and $1,336 at August 1, 2004 and $1,249 at August 3, 2003.2004. The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $1,598, $1,444 and $1,292, respectively, as of July 31, 2005 and $1,340, $1,204, and $1,046, respectively, as of August 1, 2004 and $1,256, $1,131, and $929, respectively, as of August 3, 2003.2004.
The current portion of nonpension postretirement benefits included in Accrued liabilities was $27 at July 31, 2005 and $19 at August 1, 2004 and August 3, 2003.2004.
Increase (decrease) in minimum pension minimum liability included in other comprehensive income:
Weighted-average assumptions used to determine benefit obligations at the end of the year:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension | | Postretirement | | Pension | | Postretirement | |
| | | 2004 | | 2003 | | 2004 | | 2003 | | | 2005 | | 2004 | | 2005 | | 2004 | |
| | Discount rate | | | 6.19 | % | | | 6.39 | % | | | 6.25 | % | | | 6.50 | % | | | 5.44 | % | | | 6.19 | % | | | 5.50 | % | | | 6.25 | % |
| Rate of compensation increases | | | 4.21 | % | | | 4.43 | % | | — | | — | | | | 3.93 | % | | | 4.21 | % | | — | | — | |
|
31
Weighted-average assumptions used to determine net periodic benefit cost for the years ended:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | | 2003 | |
| | Discount rate | | | 6.39 | % | | | 6.90 | % | | | 7.25 | % | | | 6.19 | % | | | 6.39 | % | | | 6.90 | % |
| Expected return on plan assets | | | 8.78 | % | | | 9.30 | % | | | 10.00 | % | | | 8.76 | % | | | 8.78 | % | | | 9.30 | % |
| Rate of compensation increase | | | 4.43 | % | | | 4.50 | % | | | 4.50 | % | | | 4.21 | % | | | 4.43 | % | | | 4.50 | % |
|
The discount rate used to determine net periodic postretirement medical benefit costexpense was 6.25% in 2005, 6.5% in 2004 and 7.00% in 2003, and 7.25% in 2002.2003.
The long-termexpected rate of return on assets for the company’s global plans is a weighted average of the long-termexpected rates of return selected for the various countries where the company has funded pension plans. These rates of return are set annually and are based upon the long-term historical investment performance of the plans and an estimate of future long-term investment returns for the current asset allocation.
Assumed health care cost trend rates at the end of the year:
| | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | | 2005 | | 2004 | |
| | Health care cost trend rate assumed for next year | | | 9.00 | % | | | 9.00 | % | | | 9.00 | % | | | 9.00 | % |
| Rate to which the cost trend rate is assumed to decline (ultimate trend rate) | | | 4.50 | % | | | 4.50 | % | | | 4.50 | % | | | 4.50 | % |
| Year that the rate reaches the ultimate trend rate | | 2009 | | 2008 | | | 2010 | | 2009 | |
|
A one percentage pointone-percentage-point change in assumed health care costs would have the following effects on 20042005 reported amounts:
| | | | | | | | | |
| | | Increase | | | Decrease | |
| |
| Effect of service and interest cost | | | $ 2 | | | | $ (2) | |
| Effect on the 2004 accumulated benefit obligation | | | $32 | | | | $(27) | |
| |
| | | | | | | | | |
| | | Increase | | | Decrease | |
| |
| Effect on service and interest cost | | $ | 2 | | | $ | (2 | ) |
| Effect on the 2005 accumulated benefit obligation | | $ | 29 | | | $ | (25 | ) |
| |
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. The effects of the Act were reflected in the 2004 valuation. See also Note 1 to Consolidated Financial Statements for additional information.
Obligations related to non-U.S. postretirement benefit plans are not significant, since these benefits are generally provided through government-sponsored plans.
Plan Assets
The company’s year-end pension plan weighted-average asset allocations by category were:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Strategic | | | | | | | Strategic | | | | | |
| | | Target | | 2004 | | 2003 | | | Target | | 2005 | | 2004 | |
| | Equity securities | | | 68 | % | | | 68 | % | | | 73 | % | | | 68 | % | | | 68 | % | | | 68 | % |
| Debt securities | | | 22 | % | | | 21 | % | | | 21 | % | | | 22 | % | | | 21 | % | | | 21 | % |
| Real estate and other | | | 10 | % | | | 11 | % | | | 6 | % | | | 10 | % | | | 11 | % | | | 11 | % |
| | Total | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
|
The fundamental goal underlying the pension plans’ investment policy is to ensure that the assets of the plans are invested in a prudent manner to meet the obligations of the plans as these obligations come due. Investment practices must comply with applicable laws and regulations.
32
The company’s investment strategy is based on an expectation that equity securities will outperform debt securities over the long term. Accordingly, in order to maximize the return on assets, a majority of assets are invested in equities. Additional asset classes with dissimilar expected rates of return, return volatility, and correlations of returns are utilized to reduce risk by providing diversification relative to equities. Investments within each asset class are also diversified to further reduce the impact of losses in single investments. The use of derivative instruments is permitted where appropriate and necessary to achieve overall investment policy objectives and asset class targets.
The company establishes strategic asset allocation percentage targets and appropriate benchmarks for each significant asset class to obtain a prudent balance between return and risk. The interaction between plan assets and benefit obligations is periodically studied to assist in the establishment of strategic asset allocation targets.
Estimated future benefit payments are as follows:
| | | | | | | | | | | | | | | | | |
| | | Pension | | Postretirement | | | Pension | | Postretirement | |
| | 2005 | | | $144 | | | $ 30 | | |
| 2006 | | | $138 | | | $ 30 | | | | $146 | | | $ 31 | |
| 2007 | | | $139 | | | $ 29 | | | | $142 | | | $ 31 | |
| 2008 | | | $140 | | | $ 28 | | | | $146 | | | $ 30 | |
| 2009 | | | $147 | | | $ 27 | | | | $150 | | | $ 29 | |
| 2010-2014 | | | $790 | | | $123 | | |
| 2010 | | | | $155 | | | $ 29 | |
| 2011-2015 | | | | $831 | | | $144 | |
|
The benefit payments include payments from funded and unfunded plans.
Estimated future Medicare subsidy receipts are $1-$2 annually from 2006 through 2010, and $14 for the period 2011 through 2015.
The company made a voluntary contribution of $35 to a U.S. pension plan subsequent to August 1, 2004.July 31, 2005. The company is not required to make additional contributions to the U.S. plans in 2005.2006. Contributions to non-U.S. plans are expected to be $20approximately $17 in 2005.2006.
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Savings PlanThe company sponsors employee savings plans which cover substantially all U.S. employees. After one year of continuous service, the company historically matched 50% of employee contributions up to 5% of compensation. Effective January 1, 2004, the company increased the amount of matching contribution from 50% to 60% of the employee’semployee contributions. Amounts charged to Costs and expenses were $14 in 2005 and 2004 and $11 in 2003 and $13 in 2002.2003.
The provision for income taxes on earnings consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | | 2003 | |
| | Income taxes: | | |
| Currently payable | | |
| Federal | | $ | 184 | | $ | 178 | | $ | 201 | | | $ | 214 | | $ | 184 | | $ | 178 | |
| State | | 13 | | 13 | | 19 | | | 6 | | 13 | | 13 | |
| Non-U.S. | | 52 | | 35 | | 48 | | | 56 | | 52 | | 35 | |
| | | | 249 | | 226 | | 268 | | | 276 | | 249 | | 226 | |
| | Deferred | | |
| Federal | | 47 | | 62 | | 7 | | | 38 | | 47 | | 62 | |
| State | | 2 | | 1 | | — | | | 3 | | 2 | | 1 | |
| Non-U.S. | | 2 | | 9 | | | (2 | ) | | 6 | | 2 | | 9 | |
| | | | 51 | | 72 | | 5 | | | 47 | | 51 | | 72 | |
| | | | $ | 300 | | $ | 298 | | $ | 273 | | | $ | 323 | | $ | 300 | | $ | 298 | |
| | Earnings before income taxes: | | |
| United States | | $ | 691 | | $ | 686 | | $ | 642 | | | $ | 753 | | $ | 691 | | $ | 686 | |
| Non-U.S. | | 256 | | 238 | | 156 | | | 277 | | 256 | | 238 | |
| | | | $ | 947 | | $ | 924 | | $ | 798 | | | $ | 1,030 | | $ | 947 | | $ | 924 | |
|
The following is a reconciliation of the effective income tax rate on continuing operations with the U.S. federal statutory income tax rate:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | | 2003 | |
| | Federal statutory income tax rate | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % |
| State income taxes (net of federal tax benefit) | | 1.0 | | 1.0 | | 1.6 | | | 0.6 | | 1.0 | | 1.0 | |
| Tax effect of international items | | | (2.9 | ) | | | (2.3 | ) | | | (0.8 | ) | | | (3.5 | ) | | | (2.9 | ) | | | (2.3 | ) |
| Tax loss carryforwards | | | (0.2 | ) | | | (0.1 | ) | | | (0.4 | ) | | — | | | (0.2 | ) | | | (0.1 | ) |
| Other | | | (1.2 | ) | | | (1.4 | ) | | | (1.2 | ) | | | (0.7 | ) | | | (1.2 | ) | | | (1.4 | ) |
| | Effective income tax rate | | | 31.7 | % | | | 32.2 | % | | | 34.2 | % | | | 31.4 | % | | | 31.7 | % | | | 32.2 | % |
|
Deferred tax liabilities and assets are comprised of the following:
| | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | | 2005 | | 2004 | |
| | Depreciation | | $ | 186 | | $ | 170 | | | $ | 198 | | $ | 177 | |
| Pensions | | 37 | | 24 | | | 30 | | 47 | |
| Amortization | | 169 | | 138 | | | 252 | | 210 | |
| Other | | 125 | | 109 | | | 80 | | 102 | |
| | Deferred tax liabilities | | 517 | | 441 | | | 560 | | 536 | |
| | Benefits and compensation | | 202 | | 184 | | | 195 | | 189 | |
| Tax loss carry forwards | | 26 | | 22 | | |
| Tax loss carryforwards | | | 23 | | 26 | |
| Other | | 96 | | 100 | | | 125 | | 112 | |
| | Gross deferred tax assets | | 324 | | 306 | | | 343 | | 327 | |
| Deferred tax asset valuation allowance | | | (22 | ) | | | (20 | ) | | | (5 | ) | | | (6 | ) |
| | Net deferred tax assets | | 302 | | 286 | | | 338 | | 321 | |
| | Net deferred tax liability | | $ | 215 | | $ | 155 | | | $ | 222 | | $ | 215 | |
|
33
At August 1, 2004,July 31, 2005, non-U.S. subsidiaries of the company have tax loss carryforwards of approximately $78.$75. Of these carryforwards, $3 expire through 20092010 and $75$72 may be carried forward indefinitely. The current statutory tax rates in these countries range from 13% to 46%39%.
The company has undistributed earnings of non-U.S. subsidiaries of approximately $590. Of this amount, the company intends to repatriate approximately $200 in 2006 under the AJCA and has provided tax expense of $7. See also Note 1 to the Consolidated Financial Statements for additional information on the AJCA. U.S. income taxes have not been provided on the remaining $390 of undistributed earnings, of non-U.S. subsidiaries of approximately $514, which are deemed to be permanently invested.reinvested. If remitted, tax credits or planning strategies should substantially offset any resulting tax liability.
| | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | | 2005 | | 2004 | |
| | Customers | | $ | 503 | | $ | 425 | | | $ | 509 | | $ | 503 | |
| Allowances | | | (39 | ) | | | (40 | ) | | | (36 | ) | | | (39 | ) |
| | | | 464 | | 385 | | | 473 | | 464 | |
| Other | | 26 | | 28 | | | 36 | | 26 | |
| | | | $ | 490 | | $ | 413 | | | $ | 509 | | $ | 490 | |
|
| | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | | 2005 | | 2004 | |
| | Raw materials, containers and supplies | | $ | 294 | | $ | 264 | | | $ | 297 | | $ | 292 | |
| Finished products | | 501 | | 445 | | | 498 | | 497 | |
| Less: Adjustment to LIFO valuation method | | | | (13 | ) | | | (7 | ) |
| | | | $ | 795 | | $ | 709 | | | $ | 782 | | $ | 782 | |
|
Approximately 54% of inventory in 2005 and 55% of inventory in 2004 and 57% of inventory in 2003 is accounted for on the last in, first out method of determining cost. If the first in, first out inventory valuation
33
method had been used exclusively, inventories would not differ materially from the amounts reported at August 1, 2004 and August 3, 2003.
| | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | | 2005 | | 2004 | |
| | Deferred taxes | | $ | 117 | | $ | 90 | | | $ | 114 | | $ | 117 | |
| Other | | 47 | | 46 | | | 67 | | 47 | |
| | | | $ | 164 | | $ | 136 | | | $ | 181 | | $ | 164 | |
|
| | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | | 2005 | | 2004 | |
| | Land | | $ | 70 | | $ | 66 | | | $ | 69 | | $ | 70 | |
| Buildings | | 1,009 | | 974 | | | 1,062 | | 1,009 | |
| Machinery and equipment | | 2,977 | | 2,827 | | | 3,172 | | 2,977 | |
| Projects in progress | | 192 | | 145 | | | 208 | | 192 | |
| | | | 4,248 | | 4,012 | | | 4,511 | | 4,248 | |
| Accumulated depreciation | | | (2,347 | ) | | | (2,169 | ) | | | (2,524 | ) | | | (2,347 | ) |
| | | | $ | 1,901 | | $ | 1,843 | | | $ | 1,987 | | $ | 1,901 | |
|
Depreciation expense provided in Costs and expenses was $277 in 2005, $258 in 2004 and $241 in 20032003. Buildings are depreciated over periods ranging from 10 to 45 years. Machinery and in 2002.equipment are depreciated over periods generally ranging from 2 to 15 years. Approximately $129$212 of capital expenditures areis required to complete projects in progress at August 1, 2004.July 31, 2005.
| | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | | 2005 | | 2004 | |
| | Prepaid pension benefit cost | | $ | 103 | | $ | 49 | | | $ | 75 | | $ | 103 | |
| Investments | | 150 | | 160 | | | 150 | | 150 | |
| Deferred taxes | | | 6 | | — | |
| Other | | 45 | | 42 | | | 37 | | 45 | |
| | | | $ | 298 | | $ | 251 | | | $ | 268 | | $ | 298 | |
|
Investments consist primarily of several limited partnership interests in affordable housing partnership funds. These investments generate significant tax credits. The company’s ownership primarily ranges from approximately 12% to 19%. The decrease in the carrying value of these investments represents a write-down to estimated fair market value.
34
| | |
| |
| | | |
16 | | | Notes Payable and Long-term Debt |
| | | | |
Notes payable consists of the following:
| | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | | 2005 | | 2004 | |
| | Commercial paper | | $ | 790 | | $ | 668 | | | $ | 428 | | $ | 790 | |
| Current portion of Long-term Debt | | — | | 600 | | |
| Variable-rate bank borrowings | | 14 | | 11 | | | 18 | | 14 | |
| Fixed-rate borrowings | | 6 | | — | | |
| Fixed-rate bank borrowings | | | 5 | | 6 | |
| | | | $ | 810 | | $ | 1,279 | | | $ | 451 | | $ | 810 | |
|
Commercial paper had a weighted averageweighted-average interest rate of 5.34% and 3.23% at July 31, 2005 and 2.33% at August 1, 2004, and August 3, 2003, respectively.
The current portion of Long-term Debt had a weighted average interest rate of 3.15% at August 3, 2003.
The company has two committed lines of credit totaling $1,800$1,500 that support commercial paper borrowings and remain unused at August 1, 2004,July 31, 2005, except for $34$5 of standby letters of credit. Another $30 of standby letters of credit issued on behalf of the company.remain unused under a separate facility.
Long-term Debt consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Type | | Fiscal Year of Maturity | | Rate | | 2004 | | 2003 | | | Fiscal Year of Maturity | | Rate | | 2005 | | 2004 | |
| | Notes | | 2007 | | | 6.90 | % | | $ | 300 | | $ | 300 | | | 2007 | | | 6.90 | % | | $ | 300 | | $ | 300 | |
| Notes | | 2007 | | | 5.50 | % | | 300 | | 300 | | | 2007 | | | 5.50 | % | | 300 | | 300 | |
| Notes | | 2009 | | | 5.88 | % | | 300 | | 300 | | | 2009 | | | 5.88 | % | | 300 | | 300 | |
| Notes | | 2011 | | | 6.75 | % | | 700 | | 700 | | | 2011 | | | 6.75 | % | | 700 | | 700 | |
| Notes | | 2013 | | | 5.00 | % | | 400 | | 400 | | | 2013 | | | 5.00 | % | | 400 | | 400 | |
| Notes | | 2014 | | | 4.88 | % | | 300 | | — | | | 2014 | | | 4.88 | % | | 300 | | 300 | |
| Debentures | | 2021 | | | 8.88 | % | | 200 | | 200 | | | 2021 | | | 8.88 | % | | 200 | | 200 | |
| Other | | 43 | | 49 | | | 42 | | 43 | |
| | | | $ | 2,543 | | $ | 2,249 | | | $ | 2,542 | | $ | 2,543 | |
|
The fair value of the company’s long-term debt including the current portion of long-term debt in Notes payable was $2,727 at July 31, 2005 and $2,736 at August 1, 2004, and $3,080 at August 3, 2003.2004.
The company has $300 of long-term debt available to issue as of August 1, 2004July 31, 2005 under a shelf registration statement filed with the Securities and Exchange Commission.
Principal amounts of debt mature as follows: 20052006 – $810$451 (in current liabilities); 2006 – $1; 2007 – $606;$610; 2008 – $1;$4; 2009 - $302; 2010 – $301$2 and beyond – $1,634.$1,624.
34
| | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | | 2005 | | 2004 | |
| | Deferred taxes | | $ | 332 | | $ | 245 | | | $ | 342 | | $ | 332 | |
| Deferred compensation | | 108 | | 102 | | | 116 | | 108 | |
| Postemployment benefits | | 15 | | 19 | | | 22 | | 15 | |
| Fair value of derivatives | | 151 | | 97 | | | 174 | | 151 | |
| Other | | 15 | | 19 | | | 30 | | 15 | |
| | | | $ | 621 | | $ | 482 | | | $ | 684 | | $ | 621 | |
|
The deferred compensation plan is an unfunded plan maintained for the purpose of providing the company’s directors and certain of its executives the opportunity to defer a portion of their compensation. All forms of compensation contributed to the deferred compensation plan are accounted for in accordance with the underlying program. Contributions are credited to an investment account in the participant’s name, although no funds are actually contributed to the investment account and no investment choices are actually purchased. Four investment choices are available, including: (1) a book account which tracks the total return on company stock; (2) a book account that tracks performance of Fidelity’s Spartan U.S. Equity Index Fund; (3) a book account which tracks the performance of Fidelity’s Puritan Fund and;Fund; and (4) a book account that credits interest based on the Wall Street Journal indexed prime rate. Participants can reallocate investments daily and are entitled to the gains and losses on investment funds. The company recognizes an amount in the Statements of Earnings for the market appreciation/depreciation of each fund, as appropriate.
The carrying values of cash and cash equivalents, accounts and notes receivable, accounts payable and short-term debt approximate fair value. The fair values of long-term debt, as indicated in Note 16, and derivative financial instruments are based on quoted market prices.
In 2001, the company adopted SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” as amended by SFAS No. 138 and SFAS No. 149. The standard requires that all
35
derivative instruments be recorded on the balance sheet at fair value and establishes criteria for designation and effectiveness of the hedging relationships.
The company utilizes certain derivative financial instruments to enhance its ability to manage risk, including interest rate, foreign currency, commodity and certain equity-linked employee compensation exposures that exist as part of ongoing business
operations. Derivative instruments are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. The company does not enter into contracts for speculative purposes, nor is it a party to any leveraged derivative instrument.
The company is exposed to credit loss in the event of nonperformance by the counterparties on derivative contracts. The company minimizes its credit risk on these transactions by dealing only with leading, credit-worthy financial institutions having long-term credit ratings of “A” or better and, therefore, does not anticipate nonperformance. In addition, the contracts are distributed among several financial institutions, thus minimizing credit risk concentration.
All derivatives are recognized on the balance sheet at fair value. On the date the derivative contract is entered into, the company designates the derivative as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair-value hedge), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash-flow hedge), (3) a foreign-currency fair-value or cash-flow hedge (foreign-currency hedge), or (4) a hedge of a net investment in a foreign operation. Some derivatives may also be considered natural hedging instruments (changes in fair value are recognized to act as economic offsets to changes in fair value of the underlying hedged item and do not qualify for hedge accounting under SFAS No. 133).
Changes in the fair value of a fair-value hedge, along with the loss or gain on the hedged asset or liability that is attributable to the hedged risk (including losses or gains on firm commitments), are recorded in current period earnings. Changes in the fair value of a cash-flow hedge are recorded in other comprehensive income, until earnings are affected by the variability of cash flows. Changes in the fair value of a foreign-currency hedge are recorded in either current period earnings or other comprehensive income, depending on whether the hedge transaction is a fair-value hedge (e.g., a hedge of a firm commitment that is to be
settled in foreign currency) or a cash-flow hedge (e.g., a hedge of a foreign-currency-denominated forecasted transaction). If, however, a derivative is used as a hedge of a net investment in a foreign operation, its changes in fair value, to the extent effective as a hedge, are recorded in the cumulative translation adjustments account within Shareowners’ equity (deficit).
The company finances a portion of its operations through debt instruments primarily consisting of commercial paper, notes, debentures and bank loans. The company utilizes interest rate swap agreements to minimize worldwide financing costs and to achieve a targeted ratio of variable-rate versus fixed-rate debt.
There were no changes made to the company’s interest rate swap portfolio in 2005.
35
In September 2003, the company entered into ten-year interest rate swaps that converted $200 of the 4.875% fixed-rate notes issued during that month to variable. The company also entered into $100 of five-year interest rate swaps that converted a portion of the 5.875% fixed-rate notes due October 2008 to variable.
In April 2004, the company entered into a $50 interest rate swap that converted a portion of the 6.9% fixed-rate notes due October 2006 to variable.
In May 2004, the company entered into a $50 interest rate swap that converted a portion of the 6.9% fixed-rate notes due October 2006 to variable.
In November 2002, the company terminated interest rate swap contracts with a notional value of $250 that converted fixed-rate debt (6.75% notes due 2011) to variable and received $37. Of this amount, $3 represented accrued interest earned on the swap prior to the termination date. The remainder of $34 is being amortized over the remaining life of the notes as a reduction to interest expense. The company also entered into ten-year interest rate swaps that converted $300 of ten-year 5% fixed-rate notes issued in November 2002 to variable.
In 2002, the company entered into interest rate swaps that converted fixed-rate debt (5.50% notes due in 2007 and 5.875% notes due in 2009) to variable. Fixed-to-variable interest rate swaps are accounted for as fair-value hedges. Gains and losses on these instruments are recorded in earnings as adjustments to interest expense, offsetting gains and losses on the hedged item. The notional amount of fair-value interest rate swaps was $875 at both July 31, 2005 and $475 at August 1, 2004 and August 3, 2003, respectively.2004. The swaps had a fair value of $(2) at July 31, 2005 and a minimal fair value at August 1, 2004 and a fair value of $2 at August 3, 2003.2004.
In 2002, the company also entered into interest rate swaps with a notional value of $300 that converted variable-rate debt to fixed. The swaps matured in 2004.
In anticipation of the $300 seven-year notes issued in September 2001, the company entered into forward-starting interest rate swap contracts with a notional value of $138. Upon issuance of the notes, the contracts were settled at a loss of approximately $4. This loss was recorded in other comprehensive income (loss) and is being amortized to interest expense over the life of the notes.
36
The company is exposed to foreign currency exchange risk as a result of transactions in currencies other than the functional currency of certain subsidiaries, including subsidiary financing transactions. The company utilizes foreign currency forward purchase and sale contracts, options and cross-currency swaps in order to manage the volatility associated with foreign currency purchases and sales and certain intercompany transactions in the normal course of business.
Qualifying foreign exchange forward and cross-currency swap contracts are accounted for as cash-flow hedges when the hedged item is a forecasted transaction, or when future cash flows related to a recognized asset or liability are expected to be received or paid. The effective portion of the changes in fair value on these instruments is recorded in Accumulated other comprehensive income (loss) and is reclassified into the Statements of Earnings on the same line item and in the same period or periods in which the hedged transaction affects earnings. The assessment of effectiveness for contracts is based on changes in spot rates. The fair value of these instruments was $(147)$(157) at August 1, 2004.July 31, 2005.
Qualifying foreign exchange forward contracts are accounted for as fair-value hedges when the hedged item is a recognized asset, liability or firm commitment. The fair-valuefair value of such contracts was not material at August 1, 2004.July 31, 2005.
The company also enters into certain foreign exchange forward contracts and variable-to-variable cross-currency swap contracts that are not designated as accounting hedges. These instruments are primarily intended to reduce volatility of certain intercompany financing transactions. Gains and losses on derivatives not designated as accounting hedges are typically recorded in Other expenses/(income), as an offset to gains (losses) on the underlying transactions. The fair value of these instruments was $(8) at August 1, 2004.July 31, 2005.
Foreign exchange forward contracts typically have maturities of less than eighteen months. Principal currencies include the Australian dollar, British pound, Canadian dollar, euro, Japanese yen, Mexican peso and Swedish krona.
As of August 1, 2004,July 31, 2005, the accumulated derivative net loss in other comprehensive income for cash-flow hedges, including the foreign exchange forward and cross-currency contracts, forward-starting swap contracts and treasury lock agreements, was $1,$20, net of tax. As of August 3, 20031, 2004, the accumulated derivative net loss in other comprehensive income for cash-flow hedges including the cross-currency swaps, variable-to-fixed interest rate swaps and forward-starting swap contracts was $5,$1, net of tax. Reclassifications from Accumulated other comprehensive income (loss) into the Statements of Earnings during the period ended August 1, 2004July 31, 2005 were not material. There were no discontinued cash-flow hedges during the year. At August 1, 2004,July 31, 2005, the maximum maturity date of any cash-flow hedge was approximately nineeight years.
Other disclosures related to hedge ineffectiveness, gains (losses) excluded from the assessment of hedge effectiveness, gains (losses) arising from effective hedges of net investments, gains (losses) resulting from the discontinuance of hedge accounting and reclassifications from other comprehensive income to earnings have been omitted due to the insignificance of these amounts.
36
The company principally uses a combination of purchase orders and various short- and long-term supply arrangements in connection with the purchase of raw materials, including certain commodities and agricultural products. The company may also enter into commodity futures contracts, as considered appropriate, to reduce the volatility of price fluctuations for commodities such as corn, cocoa, soybean meal, soybean oil and wheat. As of August 1, 2004July 31, 2005, the notional values and the fair valuevalues of open contracts related to commodity hedging activity was $(4).were not material.
The company is exposed to equity price changes related to certain employee compensation obligations. Swap contracts are utilized to hedge exposures relating to certain employee compensation obligations linked to the total return of the Standard & Poor’s 500 Index, and the total return of the company’s capital stock.stock and the total return of the Puritan Fund. The company pays a variable interest rate and receives the equity returns under these instruments. The notional value of the equity swap contracts, which mature in 2005,2006, was $34$49 at August 1, 2004.July 31, 2005. These instruments are not designated as accounting hedges. Gains and losses are recorded in the Statements of Earnings. The net asset recorded under these contracts at August 1, 2004July 31, 2005 was approximately $1.
37
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| 19 | | | |
19
| | | Shareowners'Shareowners’ Equity (Deficit) |
| | | | |
The company has authorized 560 million shares of Capital stock with $.0375 par value and 40 million shares of Preferred stock, issuable in one or more classes, with or without par as may be authorized by the Board of Directors. No Preferred stock has been issued.
The company sponsors a long-term incentive compensation plan. Under the plan, restricted stock and options may be granted to certain officers and key employees of the company. The plan provides for future awards of approximately 3220 million shares of Capital stock, although this amount may increase upon the lapse, expiration or termination of previously issued awards. Options are granted at a price not less than the fair value of the shares on the date of grant and expire not later than ten years after the date of grant. Options vest over a three-year period. See also Note 1 to the Consolidated Financial Statements for additional information on accounting for stock-based compensation, including the pro forma impact if the company applied the fair value recognition provisions of SFAS No.123.No. 123.
In 2001, the Board of Directors authorized the conversion of certain stock options to shares of restricted stock based on specified conversion ratios. The exchange, which was voluntary,
replaced approximately 4.7 million options with approximately one million restricted shares. Depending on the original grant date of the options, the restricted shares vested in 2002, 2003 or 2004. The company recognized compensation expense throughout the vesting period of the restricted stock. Compensation expense related to this award was $3 in 2004 and $6 in 2003 and $11 in 2002.2003.
Restricted shares granted are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (shares in thousands) | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | | 2003 | |
| Restricted Shares | | |
| Granted | | 1,324 | | 900 | | 94 | | | 1,399 | | 1,324 | | 900 | |
|
Information about stock options and related activity is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Weighted | | Weighted | | Weighted | | | Weighted | | Weighted | | Weighted | |
| | | Average | | Average | | Average | | | Average | | Average | | Average | |
| | | Exercise | | Exercise | | Exercise | | | Exercise | | Exercise | | Exercise | |
| (options in thousands) | | 2004 | | Price | | 2003 | | Price | | 2002 | | Price | | | 2005 | | Price | | 2004 | | Price | | 2003 | | Price | |
| | Beginning of year | | 28,862 | | $ | 28.29 | | 30,006 | | $ | 28.21 | | 17,370 | | $ | 30.30 | | | 35,775 | | $ | 28.18 | | 28,862 | | $ | 28.29 | | 30,006 | | $ | 28.21 | |
| Granted | | 10,471 | | $ | 26.85 | | 577 | | $ | 22.89 | | 15,176 | | $ | 25.53 | | | 8,624 | | $ | 26.44 | | 10,471 | | $ | 26.85 | | 577 | | $ | 22.89 | |
| Exercised | | | (1,325 | ) | | $ | 19.08 | | | (847 | ) | | $ | 19.66 | | | (827 | ) | | $ | 17.52 | | | | (2,916 | ) | | $ | 24.52 | | | (1,325 | ) | | $ | 19.08 | | | (847 | ) | | $ | 19.66 | |
| Terminated | | | (2,233 | ) | | $ | 28.69 | | | (874 | ) | | $ | 28.67 | | | (1,713 | ) | | $ | 31.16 | | | | (1,935 | ) | | $ | 32.72 | | | (2,233 | ) | | $ | 28.69 | | | (874 | ) | | $ | 28.67 | |
| | End of year | | 35,775 | | $ | 28.18 | | 28,862 | | $ | 28.29 | | 30,006 | | $ | 28.21 | | | 39,548 | | $ | 27.85 | | 35,775 | | $ | 28.18 | | 28,862 | | $ | 28.29 | |
| | Exercisable at end of year | | 21,234 | | 17,665 | | 12,595 | | | 25,147 | | 21,234 | | 17,665 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (options in thousands) | | Stock Options Outstanding | | Exercisable Options | | Stock Options Outstanding | | Exercisable Options | |
| | | Weighted | | | | | | | Weighted | | | | | |
| | | Average | | Weighted | | Weighted | | | Average | | Weighted | | Weighted | |
| Range of | | Remaining | | Average | | Average | | | Remaining | | Average | | Average | |
| Exercise | | Contractual | | Exercise | | Exercise | | | Contractual | | Exercise | | Exercise | |
| Prices | | Shares | | Life | | Price | | Shares | | Price | | | Shares | | Life | | Price | | Shares | | Price | |
| | $16.81-$22.60 | | 1,156 | | 2.1 | | $ | 22.49 | | 1,022 | | $ | 22.56 | | | 185 | | 7.3 | | $ | 21.88 | | 122 | | $ | 21.93 | |
| $22.61-$31.91 | | 31,544 | | 7.0 | | $ | 27.16 | | 17,137 | | $ | 27.93 | | | 36,831 | | 6.7 | | $ | 27.08 | | 22,493 | | $ | 27.40 | |
| $31.92-$44.41 | | 2,611 | | 4.5 | | $ | 38.52 | | 2,611 | | $ | 38.52 | | | 2,271 | | 4.1 | | $ | 37.74 | | 2,271 | | $ | 37.74 | |
| $44.42-$56.50 | | 464 | | 2.5 | | $ | 54.10 | | 464 | | $ | 54.10 | | | 261 | | 2.9 | | $ | 53.99 | | 261 | | $ | 53.99 | |
| | | | 35,775 | | 21,234 | | | 39,548 | | 25,147 | |
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For the periods presented in the Consolidated Statements of Earnings, the calculations of basic earnings per share and earnings per share assuming dilution vary in that the weighted average shares outstanding assuming dilution includes the incremental effect of stock options and restricted stock programs, except when such effect would be antidilutive. Stock options to purchase 10 million shares of capital stock for 2005 and 26 million shares of capital stock for 2004 and 2003 and 18 million shares of capital stock for 2002 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, would be antidilutive.
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20 | | | Commitments and Contingencies |
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On March 30, 1998, the company effected a spinoff of several of its non-core businesses to Vlasic Foods International Inc. (VFI). VFI and several of its affiliates (collectively, Vlasic) commenced cases under Chapter 11 of the Bankruptcy Code on January 29, 2001 in the United States Bankruptcy Court for the District of Delaware. Vlasic’s Second Amended Joint Plan of Distribution under Chapter 11 (the Plan) was confirmed by an order of the Bankruptcy Court dated November 16, 2001, and became effective on or about November 29, 2001. The Plan provides for the assignment of various causes of action allegedly belonging to the Vlasic estates, including claims against the company allegedly arising from the spinoff, to VFB L.L.C., a limited liability company (VFB) whose membership interests are to be distributed under the Plan to Vlasic’s general unsecured creditors.
On February 19, 2002, VFB commenced a lawsuit against the company and several of its subsidiaries in the United States District Court for the District of Delaware alleging, among other things, fraudulent conveyance, illegal dividends and breaches of fiduciary duty by Vlasic directors alleged to be under the company’s control. The lawsuit seeks to hold the company liable in an amount necessary to satisfy all unpaid claims against Vlasic (which VFB estimates in the amended complaint to be $200), plus unspecified exemplary and punitive damages. While
Following a trial on the ultimate dispositionmerits, on September 13, 2005, the District Court issued Post-Trial Findings of complex litigation is inherently difficult to assess,Fact and Conclusions of Law, ruling in favor of the company believesand against VFB on all claims. The Court ruled that VFB failed to prove that the action is without meritspinoff was a constructive or actual fraudulent transfer. The Court also rejected VFB’s claim of breach of fiduciary duty, VFB’s claim that VFI was an alter ego of the company, and is defendingVFB’s claim that the case vigorously.spinoff should be deemed an illegal dividend. VFB will have 30 days following the entry of the judgment of the District Court to appeal the decision.
The company received an Examination Report from the Internal Revenue Service on December 23, 2002, which included a challenge to the treatment of gains and interest deductions claimed in the company’s fiscal 1995 federal income tax return, relating to transactions involving government securities. If the proposed adjustment were upheld, it would require the company to pay a
net amount of approximately $100 in taxes, accumulated interest as of December 23, 2002, and penalties. Interest will continue to accrue until the matter is resolved. The company believes these transactions were properly reported on its federal income tax return in accordance with applicable tax laws and regulations in effect during the period involved and is challenging these adjustments vigorously. While the outcome of proceedings of this type cannot be predicted with certainty, theThe company believes that the ultimate outcomeexpects a final resolution of this matter will not have a material impact on the consolidated financial condition or results of operation of the company.in 2006.
The company is a party to other legal proceedings and claims, tax issues and environmental matters and tax issues arising out of the normal course of business.
Management assesses the probability of loss for all legal proceedings and claims, tax issues and environmental matters and has recognized liabilities for such contingencies, as appropriate. Although the results of the pending claims and litigationthese matters cannot be predicted with certainty, in management’s opinion, the final outcome of these other legal proceedings and claims, tax issues and environmental matters and tax issues will not have a material adverse effect on the consolidated results of operations or financial position or cash flowscondition of the company.
The company has certain operating lease commitments, primarily related to warehouse and office facilities, retail store space and certain equipment. Rent expense under operating lease commitments was $84 in 2005, $79 in 2004 and $66 in 2003. Future minimum annual rental payments under these operating leases are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | | 2006 | | | 2007 | | | 2008 | | | 2009 | | | Thereafter | |
| |
| | | $ | 65 | | | $ | 53 | | | $ | 41 | | | $ | 35 | | | $ | 30 | | | $ | 57 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | Thereafter | |
| |
| | | | $68 | | | | $59 | | | | $48 | | | | $37 | | | | $34 | | | | $51 | |
| |
In November 2002, FIN 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” was issued. FIN 45 clarifies the requirements relating to a guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. The initial recognition and measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002.
The company guarantees almost 1,300approximately 1,400 bank loans made to Pepperidge Farm independent sales distributors by third party financial institutions for the purchase of distribution routes. The maximum potential amount of future payments the company could be required to make under the guarantees is approximately $95.$112. The company’s guarantees are indirectly secured by the distribution routes. The company does not believe it is probable that it will be required to make guarantee payments as a result of defaults on the bank loans guaranteed. Prior to the adoption of FIN 45, no amounts were recognized on the Consolidated Balance Sheets related to these guarantees. The amounts recognized as of July 31, 2005 and August 1, 2004 and August 3, 2003 arewere not material.
The company has provided certain standard indemnifications in connection with divestitures, contracts and other transactions. Certain indemnifications have finite expiration dates. Liabilities recognized based on known exposures related to such matters arewere not material at August 1, 2004.July 31, 2005.
3839
| | |
| |
| | | |
21 | | | Statements of Cash Flows |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | | 2003 | |
| | Cash Flows from Operating Activities: | | |
| Other non-cash charges to net earnings: | | |
| Non-cash compensation/benefit related expense | | $ | 91 | | $ | 60 | | $ | 41 | | | $ | 109 | | $ | 91 | | $ | 60 | |
| Net loss on fixed assets, long-term investments, minority interest | | 11 | | 33 | | 16 | | |
| Adjustments to long-term investments, other assets, minority interest | | | 9 | | 11 | | 33 | |
| Other | | | (5 | ) | | — | | | (4 | ) | | 4 | | | (5 | ) | | — | |
| | Total | | $ | 97 | | $ | 93 | | $ | 53 | | | $ | 122 | | $ | 97 | | $ | 93 | |
| | Other: | | |
| Benefit related payments | | $ | (46 | ) | | $ | (44 | ) | | $ | (46 | ) | | $ | (47 | ) | | $ | (46 | ) | | $ | (44 | ) |
| Payments for hedging activities | | | (59 | ) | | | (67 | ) | | | (48 | ) | | | (19 | ) | | | (59 | ) | | | (67 | ) |
| Other | | 2 | | | (7 | ) | | 3 | | | 7 | | 2 | | | (7 | ) |
| | Total | | $ | (103 | ) | | $ | (118 | ) | | $ | (91 | ) | | $ | (59 | ) | | $ | (103 | ) | | $ | (118 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | | 2003 | |
| | Interest paid, net of amounts capitalized | | $ | 168 | | $ | 173 | | $ | 173 | | |
| Interest paid | | | $ | 176 | | $ | 168 | | $ | 173 | |
| Interest received | | $ | 6 | | $ | 5 | | $ | 4 | | | $ | 4 | | $ | 6 | | $ | 5 | |
| Income taxes paid | | $ | 249 | | $ | 225 | | $ | 222 | | | $ | 258 | | $ | 249 | | $ | 225 | |
|
| | |
| |
| | | |
22 | | | Quarterly Data (unaudited) |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2004 | | First | | Second | | Third | | Fourth | | |
| 2005 | | | First | | Second | | Third | | Fourth | |
| Net sales | | $ | 1,909 | | $ | 2,100 | | $ | 1,667 | | $ | 1,433 | | | $ | 2,091 | | $ | 2,223 | | $ | 1,736 | | $ | 1,498 | |
Cost of products sold | | 1,108 | | 1,212 | | 995 | | 872 | | | 1,245 | | 1,321 | | 1,035 | | 890 | |
Net earnings1 | | 211 | | 235 | | 142 | | 59 | | |
Per share – basic | | |
Net earnings1 | | 0.51 | | 0.57 | | 0.35 | | 0.14 | | |
Net earnings | | | 230 | | 235 | | 146 | | 96 | |
Per share — basic | | |
Net earnings | | | 0.56 | | 0.57 | | 0.36 | | 0.23 | |
Dividends | | 0.1575 | | 0.1575 | | 0.1575 | | 0.1575 | | | 0.17 | | 0.17 | | 0.17 | | 0.17 | |
Per share – assuming dilution | | |
Net earnings1 | | 0.51 | | 0.57 | | 0.34 | | 0.14 | | |
Per share — assuming dilution | | |
Net earnings | | | 0.56 | | 0.57 | | 0.35 | | 0.23 | |
Market price | | |
High | | $ | 27.90 | | $ | 27.39 | | $ | 28.70 | | $ | 28.13 | | | $ | 27.13 | | $ | 30.52 | | $ | 29.74 | | $ | 31.60 | |
Low | | $ | 23.26 | | $ | 24.92 | | $ | 26.15 | | $ | 25.03 | | | $ | 25.21 | | $ | 26.68 | | $ | 27.35 | | $ | 29.53 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2003 | | First | | Second | | Third | | Fourth | | |
| 2004 | | | First | | Second | | Third | | Fourth | |
| | Net sales | | $ | 1,705 | | $ | 1,918 | | $ | 1,600 | | $ | 1,455 | | | $ | 1,909 | | $ | 2,100 | | $ | 1,667 | | $ | 1,433 | |
| Cost of products sold | | 971 | | 1,056 | | 920 | | 858 | | | 1,108 | | 1,212 | | 995 | | 872 | |
Net earnings2 | | 161 | | 231 | | 129 | | 74 | | |
| Per share – basic | | |
Net earnings2 | | 0.39 | | 0.56 | | 0.31 | | 0.18 | | |
Net earnings1 | | | 211 | | 235 | | 142 | | 59 | |
| Per share — basic | | |
Net earnings1 | | | 0.51 | | 0.57 | | 0.35 | | 0.14 | |
| Dividends | | 0.1575 | | 0.1575 | | 0.1575 | | 0.1575 | | | 0.1575 | | 0.1575 | | 0.1575 | | 0.1575 | |
| Per share – assuming dilution | | |
Net earnings2 | | 0.39 | | 0.56 | | 0.31 | | 0.18 | | |
| Per share — assuming dilution | | |
Net earnings1 | | | 0.51 | | 0.57 | | 0.34 | | 0.14 | |
| Market price | | |
| High | | $ | 23.90 | | $ | 24.99 | | $ | 24.30 | | $ | 26.43 | | | $ | 27.90 | | $ | 27.39 | | $ | 28.70 | | $ | 28.13 | |
| Low | | $ | 21.00 | | $ | 19.65 | | $ | 19.95 | | $ | 21.35 | | | $ | 23.26 | | $ | 24.92 | | $ | 26.15 | | $ | 25.03 | |
|
| | |
| 1 | | Net earnings in the fourth quarter include a restructuring charge of $22 or $.05 per share. (See Note 5 to the Consolidated Financial Statements.) |
|
2 | | Net earnings in the first quarter include the cumulative effect of a change in accounting principle of $31 or $.08 per share. (See Note 3 to the Consolidated Financial Statements.) |
In 2003, the company adopted SFAS No. 142 “Goodwill and Other Intangible Assets” and discontinued the amortization of goodwill and indefinite-lived intangible assets. See Note 3 to the Consolidated Financial Statements.
3940
ReportReports of Management
Management’s Report on Financial Statements
The accompanying financial statements have been prepared by the company’s management of the company in conformity with generally accepted accounting principles to reflect the financial position of the company and its operating results. FinancialThe financial information appearing throughout this Annual Report is consistent with that in the financial statements. Management is responsible for the information and representations in such financial statements, including the estimates and judgments required for their preparation.
In order to meet its responsibility, management maintains a system of internal controls designed to assure that assets are safeguarded and that The financial records properly reflect all transactions. The company also maintains a worldwide auditing function to periodically evaluate the adequacy and effectiveness of such internal controls, as well as the company’s administrative procedures and reporting practices. The company believes that its long-standing emphasis on the highest standards of conduct and business ethics, set forth in extensive written policy statements serves to reinforce its system of internal accounting controls.
The report ofhave been audited by PricewaterhouseCoopers LLP, the company’san independent auditors, coveringregistered public accounting firm, as stated in their audit of the financial statements, is included in this Annual Report. Their independent audit of the company’s financial statements includes a review of the system of internal accounting controls to the extent they consider necessary to evaluate the system as required by generally accepted auditing standards.report, which appears herein.
The company’s internal auditors report directly to the Audit Committee of the Board of Directors, which is composed entirely of Directors who are not officers or employees of the company. The Audit Committeecompany, meets regularly with the company’s worldwide internal auditors,auditing department, other management personnel, and the independent auditors. The independent auditors and the internal auditorsauditing department have had, and continue to have, direct access to the Audit Committee without the presence of other management personnel, and have been directed to discuss the results of their audit work and any matters they believe should be brought to the Committee’s attention. The internal auditing department and the independent auditors report directly to the Audit Committee.
Financial Reporting
The company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America.
The company’s internal control over financial reporting includes those policies and procedures that:
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and Directors of the company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The company’s management assessed the effectiveness of the company’s internal control over financial reporting as of July 31, 2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control — Integrated Framework. Based on this assessment using those criteria, management concluded that the company’s internal control over financial reporting was effective as of July 31, 2005.
Management’s assessment of the effectiveness of the company’s internal control over financial reporting as of July 31, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which appears herein.
Douglas R. Conant
President and Chief Executive Officer
Robert A. Schiffner
Senior Vice President and Chief Financial Officer
Anthony P. DiSilvestro
Vice President — Controller
September 13, 200421, 2005
4041
Report of Independent Registered Public
Accounting Firm
To the Shareowners and
Directors of Campbell Soup Company
We have completed an integrated audit of Campbell Soup Company’s 2005 consolidated financial statements and of its internal control over financial reporting as of July 31, 2005 and audits of its 2004 and 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, of shareowners’ equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Campbell Soup Company and its subsidiaries at July 31, 2005 and August 1, 2004, and August 3, 2003, and the results of their operations and their cash flows for each of the three years in the period ended August 1, 2004July 31, 2005 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
As discussed in Note 3 to the consolidated financial statements, effective July 29, 2002, the Company adopted Statement of Financial Accounting Standard No.142,No. 142, “Goodwill and Other Intangible Assets.”
Also, in our opinion, management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that the Company maintained effective internal control over financial reporting as of July 31, 2005 based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 31, 2005, based on criteria established inInternal Control — Integrated
Frameworkissued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Philadelphia, Pennsylvania
September 23, 200421, 2005
4142
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The company, under the supervision and with the participation of its management, including the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, has evaluated the effectiveness of the company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of August 1, 2004July 31, 2005 (the “Evaluation Date”). Based on such evaluation, the President and Chief Executive Officer and the Senior Vice President and Chief
Financial Officer have concluded that, as of the Evaluation Date, the company’s disclosure controls and procedures are effective, and are reasonably designed to ensure that all material information relating to the company (including its consolidated
subsidiaries) required to be included in the company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
Changes in Internal Control Over Financial ReportingThe annual report of management on the company’s internal control over financial reporting is provided under “Financial Statements and Supplementary Data” on page 40. The attestation report of PricewaterhouseCoopers LLP, the company’s independent registered public accounting firm, regarding the company’s internal control over financial reporting is provided under “Financial Statements and Supplementary Data” on page 41.
During the quarter ended August 1, 2004,July 31, 2005, there were no changes in the company’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, such internal control over financial reporting.
Item 9B. Other Information
None.
PART III
43
PART III
Item 10. Directors and Executive Officers of
of the Registrant
The sections entitled “Election of Directors” and “Directors and Executive Officers Stock Ownership Reports” in the company’s Proxy Statement for the Annual Meeting of Shareowners to be held on November 18, 20042005 (the “2004 Proxy”“2005 Proxy Statement”) are incorporated herein by reference. The information presented in the section entitled “Board Committees” in the 20042005 Proxy Statement relating to the members of the company’s Audit Committee is incorporated herein by reference. The information presented in the section entitled “Audit Committee Report” in the 20042005 Proxy Statement relating to the Audit Committee’s financial experts is incorporated herein by reference.
Certain of the information required by this Item relating to the executive officers of Campbell is set forth in the heading “Executive Officers of the Company.”
The company has adopted a Code of Ethics for the Chief Executive Officer and Senior Financial Officers that applies to the company’s Chief Executive Officer, Chief Financial Officer, Controller and members of the Chief Financial Officer’s financial leadership team. The Code of Ethics for the Chief Executive Officer and Senior Financial Officers is posted on the company’s website, www.campbellsoupcompany.com (under the “Governance” caption). The company intends to satisfy the disclosure requirement regarding any amendment to, or a waiver of, a provision of the Code of Ethics for the Chief Executive Officer and Senior Financial Officers by posting such information on its website.
The company has also adopted a separate Code of Business Conduct and Ethics applicable to the Board of Directors, the company’s officers and all of the company’s employees. The Code of Business Conduct and Ethics is posted on the company’s website, www.campbellsoupcompany.com (under the “Governance” caption). The company’s Corporate Governance Standards and the
42
charters of the company’s four standing committees of the Board of Directors can also be found at this website. Printed copies of the foregoing are available to any shareowner requesting a copy by writing to: Corporate Secretary, Campbell Soup Company, 1 Campbell Place, Camden, NJ 08103. On November 23, 2004, the New York Stock Exchange Annual CEO Certification was submitted without any qualification.
Item 11. Executive Compensation
The information presented in the sections entitled “Summary Compensation,” “Option Grants in Last Fiscal Year,” “Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values,” “Pension Plans,” “Director Compensation,” “Employment Agreements and Termination Arrangements” and “Compensation and Organization Committee Interlocks and Insider Participation” in the 20042005 Proxy is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners
and ManagementRelated Shareowner Matters
The information presented in the sections entitled “Security Ownership of Directors and Executive Officers” andOfficers,” “Security Ownership of Certain Beneficial Owners” in the 2004 Proxy is incorporated herein by reference.
SecuritiesOwners,” “Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information about the company’s capital stock that may be issued under the company’s equity compensation plans as of August 1, 2004:
| | | | | | | | | | | | | |
| | | | | | | | | | | Number of Securities Remaining | |
| | | Number of Securities to | | | Weighted-Average | | | Available For Future Issuance | |
| | | be Issued Upon Exercise | | | Exercise Price of | | | Under Equity Compensation | |
| | | of Outstanding Options, | | | Outstanding Options, | | | Plans (Excluding Securities | |
| Plan Category | | Warrants and Rights (a) | | | Warrants and Rights (b) | | | Reflected in the First Column) (c) | |
| |
| Equity Compensation Plans Approved by Security Holders (1) | | | 35,774,544 | | | | $28.18 | | | | 32,097,311 | |
| Equity Compensation Plans Not Approved by Security Holders (2) | | | 1,174,909 | | | | N/A | | | | N/A | |
| |
| Total | | | 36,949,453 | | | | N/A | | | | 32,097,311 | |
(1) | | Column (a) represents stock options granted under the 2003 Long-Term Incentive Plan, 1994 Long-Term Incentive Plan and the 1984 Long-Term Incentive Plan. No additional awards can be made under the 1994 Long-Term Incentive Plan or the 1984 Long-Term Incentive Plan. Column (c) represents the maximum amount of future equity awards that can be made under the 2003 Long-Term Incentive Plan as of August 1, 2004, which may take the form of stock options, stock appreciation rights, performance unit awards, restricted stock, restricted performance stock or stock awards. In the event any award (or portion thereof) under the 1994 Long-Term Incentive Plan lapses, expires or is otherwise terminated without the issuance of any company capital stock or is settled by delivery of consideration other than company capital stock, the maximum number of future equity awards that can be made under the 2003 Long-Term Incentive Plan automatically increases by the number of such shares. |
(2) | | The company’s Deferred Compensation Plan (the “Plan”) allows participants the opportunity to invest in various book accounts, including a book account that tracks the performance of the company’s capital stock (the “Stock Account”). Upon distribution, participants may receive the amounts invested in the Stock Account in the form of shares of capital stock. Column (a) represents the maximum number of shares that could be issued upon a complete distribution of all amounts in the Stock Account. This calculation is based upon the amount of funds in the Stock Account as of August 1, 2004 and a $25.59 share price, which was the closing price of a share of company stock on July 30, 2004 (the last business day before August 1, 2004). 767,096 of the total number of shares that could be issued upon a complete distribution of the Plan are fully vested, and 407,813 of the shares are subject to restrictions. |
43
DeferredPlans” and “Deferred Compensation PlanThe Compensation and Organization Committee of the Board of Directors approved the Plan. The Plan is an unfunded plan maintained for the purpose of providing the company’s directors and U.S.-based executives and key managers the opportunity to defer a portion of their earned compensation. Plan participants may defer a portion of their base salaries and all or a portion of their annual incentive compensation, long-term incentive awards, certain stock option gains (eliminated following fiscal 2004) and director retainers and fees. The Plan was not submitted for security holder approval because it does not provide additional compensation to participants. It is a vehicle for participants to defer earned compensation, and phantom stock units are credited to each participant’s account based upon the full current market value of the company’s capital stock.
Each participant’s contributions to the Plan are credited to an investment accountPlans” in the participant’s name. Gains and losses in the participant’s account are based on the performance of the investment choices the participant has selected. Four investment choices are available, including the Stock Account. In addition to the Stock Account, participants also generally have the opportunity to invest in (i) a book account that tracks the performance of Fidelity’s Spartan U.S. Equity Index Fund, (ii) a book account that tracks the performance of Fidelity’s Puritan Fund, and (iii) a book account that credits interest at the Wall Street Journal indexed prime rate (determined on November 1 for the subsequent calendar year).
A participant may reallocate his or her investment account at any time among the four investment choices, except that (i) stock option gains must be invested in the Stock Account, (ii) restricted stock awards must be invested in the Stock Account during the restriction period and (iii) reallocations of the Stock Account must be made in compliance with the company’s policies on trading company stock. Dividends on amounts invested in the Stock Account may be reallocated among the four investment accounts. The company credits a participant’s account with an amount equal to the matching contribution that the company would have made to the participant’s 401(k) Plan account if the participant had not deferred compensation under the Plan. In addition, for those individuals whose base salary and annual incentive compensation exceed the Internal Revenue Service indexed compensation limit for the 401(k) Plan, the company credits such individual’s
account with an amount equal to the contribution the company would have made to the 401(k) Plan but for the compensation limit. These company contributions vest in 20% increments over the participant’s first five (5) years of credited service; after the participant’s first five (5) years of service, the company contributions vest automatically. Except as described above, there2005 Proxy is no company match on deferred compensation.
For terminations and retirements, a participant’s account is generally paid out in accordance with the last valid distribution election madeincorporated herein by the participant. The applicable elections include: (i) a lump sum, (ii) 5 annual installments, (iii) 10 annual installments, (iv) 15 annual installments (not available to participants terminated prior to their 55th birthday), and (v) 20 annual installments (not available to participants terminated prior to their 55th birthday). For distributions upon death, if a participant’s beneficiary is his or her spouse, the account is generally paid out in accordance with the last valid death distribution election (or, if there is no death distribution election, the regular distribution election). If a participant’s beneficiary is not his or her spouse, then the account is generally paid out in a lump sum. The Plan administrator has also established procedures for hardship withdrawals and unplanned withdrawals (with a penalty). The current penalty for unplanned withdrawals is 10%. In the event of a change in control of the company, the Stock Account is automatically converted into cash based upon a formula provided in the Plan.reference.
Item 13. Certain Relationships and Related Transactions
The information presented in the section entitled “Certain Relationships and Related Transactions” in the 20042005 Proxy is incorporated herein by reference.
Item 14. Principal Accounting Fees
and Services
The information presented in the section entitled “Independent AuditorsRegistered Public Accounting Firm Fees and Services” in the 20042005 Proxy is incorporated herein by reference.
44
PartPART IV
Item 15. Exhibits and Financial Statement Schedules and Reports on Form 8-K
| (a) | | The following documents are filed as part of this report: |
| | • | | Consolidated Statements of Earnings for 2005, 2004 2003 and 20022003 |
| |
| | • | | Consolidated Balance Sheets as of July 31, 2005 and August 1, 2004 and August 3, 2003 |
| |
| | • | | Consolidated Statements of Cash Flows for 2005, 2004 2003 and 20022003 |
| |
| | • | | Consolidated Statements of Shareowners’ Equity (Deficit) for 2005, 2004 2003 and 20022003 |
| |
| | • | | Notes to Consolidated Financial Statements |
|
| • | | Management’s Report on Internal Control Over Financial Reporting |
| |
| | • | | Report of Independent Registered Public Accounting Firm |
| | 2. | | Financial Statement Schedules |
| |
| | | | None. |
| |
| | 3. | | Exhibits |
| | 3(i) | | Campbell’s Restated Certificate of Incorporation as amended through February 24, 1997 was filed with the Securities and Exchange Commission (“SEC”) with Campbell’s Form 10-K for the fiscal year ended July 28, 2002, and is incorporated herein by reference. |
| |
| | 3(ii) | | Campbell’s By-Laws effective as ofamended through July 22, 2004.2004 were filed with the SEC with Campbell’s Form 10-K for the fiscal year ended August 1, 2004, and is incorporated herein by reference. |
| |
| | 4(i) | | With respect to Campbell’s 6.75% notes due 2011, the form of Indenture between Campbell and Bankers Trust Company, as Trustee, and the associated form of security were filed with Campbell’s Registration Statement No. 333-11497, and are incorporated herein by reference. |
| |
| | 4(ii) | | Except as described in 4(i) above, 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 SEC. |
| |
| | 9 | | Major Stockholders’ Voting Trust Agreement dated June 2, 1990, as amended, was filed with the SEC by (i) Campbell as Exhibit 99.C to Campbell’s Schedule 13E-4 filed on September 12, 1996, and (ii) with respect to certain subsequent amendments, the Trustees of the Major Stockholders’ Voting Trust as Exhibit 99.G to Amendment No. 7 to their Schedule 13D dated March 3, 2000, and as Exhibit 99.M to Amendment No. 8 to their Schedule 13D dated January 26, 2001, and as Exhibit 99.P to Amendment No. 9 to their Schedule 13D dated September 30, 2002, and is incorporated herein by reference. |
| |
| | 10(a) | | Campbell Soup Company 1984 Long-Term Incentive Plan, as amended on March 30, 1998, was filed with the SEC with Campbell’s Form 10-K for the fiscal year ended August 2, 1998, and is incorporated herein by reference. |
45
| 10(b) | | Campbell Soup Company 1994 Long-Term Incentive Plan, as amended on November 17, 2000, was filed with the SEC with Campbell’s 2000 Proxy Statement, and is incorporated herein by reference. |
| |
| | 10(c) 10(b) | | Campbell Soup Company 2003 Long-Term Incentive Plan was filed with the SEC with Campbell’s 2003 Proxy Statement, and is incorporated herein by reference. |
|
45
| | 10(d) 10(c) | | Campbell Soup Company Management WorldwideAnnual Incentive Plan, as amended on November 17, 2000,18, 2004, was filed with the SEC with Campbell’s 20002004 Proxy Statement, and is incorporated herein by reference. |
| |
| | 10(e) 10(d) | | Campbell Soup Company Mid-Career Hire Pension Program, amended effective as of January 25, 2001, was filed with the SEC with Campbell’s Form 10-K for the fiscal year ended July 29, 2001, and is incorporated herein by reference. |
| |
| | 10(f) 10(e) | | Deferred Compensation Plan, effective November 18, 1999, was filed with the SEC with Campbell’s Form 10-K for the fiscal year ended July 30, 2000, and is incorporated herein by reference. |
| |
| | 10(g) 10(f) | | Severance Protection Agreement dated January 8, 2001, with Douglas R. Conant, President and Chief Executive Officer, was filed with the SEC with Campbell’s Form 10-Q for the fiscal quarter ended January 28, 2001, and is incorporated herein by reference. Agreements with the other executive officers listed under the heading “Executive Officers of the Company” are in all material respects the same as Mr. Conant’s agreement. |
| |
| | 10(h) 10(g) | | Employment agreement between the company and Douglas R. Conant dated January 8, 2001, was filed with the SEC with Campbell’s Form 10-Q for the fiscal quarter ended January 28, 2001, and is incorporated herein by reference. |
| |
| | 10(i) 10(h) | | Letter Agreement between the company and Mark A. Sarvary, effective as of February 9, 2004, regarding severance arrangements was filed with the SEC with Campbell’s Form 10-Q for the fiscal quarter ended May 2, 2004, and is incorporated herein by reference. |
| |
| | 10(i) | | Performance goals for the fiscal 2005 awards under the Campbell Soup Company Annual Incentive Plan were described in a Campbell Form 8-K filed on November 5, 2004, and such description is incorporated herein by reference. |
|
| 10(j) | | Form of Stock Option Award Statement was filed with the SEC on a Campbell Form 8-K filed on September 28, 2004, and is incorporated herein by reference. |
|
| 10(k) | | Form of Restricted Stock Award Statement was filed with the SEC on a Campbell Form 8-K filed on September 28, 2004, and is incorporated herein by reference. |
|
| 10(l) | | Board of Director compensation for calendar year 2005 was described in a Campbell Form 8-K filed on January 7, 2005, and such description is incorporated herein by reference. |
|
| 10(m) | | Long-term incentive compensation programs adopted pursuant to the Campbell Soup Company 2003 Long-Term Incentive Plan were described in Campbell Form 8-K filed on July 12, 2005, and such description is incorporated herein by reference. |
|
| 10(n) | | Deed of Release, dated May 27, 2005, between John Doumani, Arnott’s Biscuits Ltd and the company. |
|
| 21 | | Subsidiaries (Direct and Indirect) of the company. |
| |
| | 23 | | Consent of Independent Registered Public Accounting Firm. |
| |
| | 24 | | Power of Attorney. |
| |
| | 31(i) | | Certification of Douglas R. Conant pursuant to Rule 13a-14(a). |
| |
| | 31(ii) | | Certification of Robert A. Schiffner pursuant to Rule 13a-14(a). |
| |
| | 32(i) | | Certification of Douglas R. Conant pursuant to 18 U.S.C. Section 1350. |
| |
| | 32(ii) | | Certification of Robert A. Schiffner pursuant to 18 U.S.C. Section 1350. |
46
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Campbell has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | |
Date: October 12, 2004 | | | | |
| 11, 2005 | | CAMPBELL SOUP COMPANY |
| | | | | |
| | By: | | /s/ Robert A. Schiffner |
| | | | |
| | | | Robert A. Schiffner
|
| | | | Senior Vice President
|
| | | | and Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Campbell and in the capacity and on the date indicated.
| | | |
Date: October 12, 200411, 2005 | | |
| | | |
| /s/ Robert A. Schiffner | | /s/ Anthony P. DiSilvestro |
| | | |
Robert A. Schiffner
| | Anthony P. DiSilvestro |
Senior Vice President
| | Vice President – Controller |
| and Chief Financial Officer | | Anthony P. DiSilvestro
Vice President – Controller |
| | | | | | | | | |
George M. ShermanHarvey Golub | | Chairman and Director | | } | | | | |
| Douglas R. Conant | | President, Chief Executive
| | } | | | | |
| | Officer and Director | | }
| | | | |
| John F. Brock | | Director | | } | | | | |
| Edmund M. Carpenter | | Director | | } | | | | |
| Paul R. Charron | | Director | | } | | | | |
| Bennett Dorrance | | Director | | } | | | | |
| Kent B. Foster | | Director | | } | | | | |
Harvey Golub | | Director | | } | | | | |
| Randall W. Larrimore | | Director | | } | | By: | | /s/ Ellen Oran Kaden |
| | | | | | | | |
| Philip E. Lippincott | | Director | | } | | | | Ellen Oran Kaden |
| Mary Alice D. Malone | | Director | | } | | | | Senior Vice President – |
| David C. Patterson | | Director | | } | | | | Law and Government Affairs |
| Charles R. Perrin | | Director | | } | | | | |
| Donald M. Stewart | | Director | | } | | | | |
| George Strawbridge, Jr. | | Director | | } | | | | |
| Les C. Vinney | | Director | | } | | | | |
| Charlotte C. Weber | | Director | | } | | | | |
INDEX OF EXHIBITSDocument
| | | |
| Document | | |
| | 3 | |
| 3 (i) | | Campbell’s Restated Certificate of Incorporation as amended through February 24, 1997 was filed with the SEC with Campbell’s Form 10-K for the fiscal year ended July 28, 2002, and is incorporated herein by reference. |
| | | | | |
| 3 | (ii) | | Campbell’s By-Laws effective as ofamended through July 22, 2004.2004 were filed with the SEC with Campbell’s Form 10-K for the fiscal year ended August 1, 2004, and is incorporated herein by reference. |
| | | | | |
| 4 | (i)4(i) | | With respect to Campbell’s 6.75% notes due 2011, the form of Indenture between Campbell and Bankers Trust Company, as Trustee, and the associated form of security were filed with Campbell’s Registration Statement No. 333-11497, and are incorporated herein by reference. |
| | | | | |
| 4 | (ii)4(ii) | | Except as described in 4(i) above, 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 SEC. |
| | | | | |
| 9 | | | Major Stockholders’ Voting Trust Agreement dated June 2, 1990, as amended, was filed with the SEC by (i) Campbell as Exhibit 99.C to Campbell’s Schedule 13E-4 filed on September 12, 1996, and (ii) with respect to certain subsequent amendments, the Trustees of the Major Stockholders’ Voting Trust as Exhibit 99.G to Amendment No. 7 to their Schedule 13D dated March 3, 2000, and as Exhibit 99.M to Amendment No. 8 to their Schedule 13D dated January 26, 2001, and as Exhibit 99.P to Amendment No. 9 to their Schedule 13D dated September 30, 2002, and is incorporated herein by reference. |
| | | | | |
| 10 | (a) | | Campbell Soup Company 1984 Long-Term Incentive Plan, as amended on March 30, 1998, was filed with the SEC with Campbell’s Form 10-K for the fiscal year ended August 2, 1998, and is incorporated herein by reference. |
| | | | |
| 10 | (b) | | Campbell Soup Company 1994 Long-Term Incentive Plan, as amended on November 17, 2000, was filed with the SEC with Campbell’s 2000 Proxy Statement, and is incorporated herein by reference. |
| | | | | |
| 10 | (c) (b) | | Campbell Soup Company 2003 Long-Term Incentive Plan was filed with the SEC with Campbell’s 2003 Proxy Statement, and is incorporated herein by reference. |
| | | | | |
| 10 | (d) (c) | | Campbell Soup Company Management WorldwideAnnual Incentive Plan, as amended on November 17, 2000,18, 2004, was filed with the SEC with Campbell’s 20002004 Proxy Statement, and is incorporated herein by reference. |
| | | | | |
| 10 | (e) (d) | | Campbell Soup Company Mid-Career Hire Pension Program, as amended effective as of January 25, 2001, was filed with the SEC with Campbell’s Form 10-K for the fiscal year ended July 29, 2001, and is incorporated herein by reference. |
| | | |
| Document | | |
| | | | | |
| 10 | (f) (e) | | Deferred Compensation Plan, effective November 18, 1999, was filed with the SEC with Campbell’s Form 10-K for the fiscal year ended July 30, 2000, and is incorporated herein by reference. |
| | | | | |
| 10 | (g) (f) | | Severance Protection Agreement dated January 8, 2001, with Douglas R. Conant, President and Chief Executive Officer, was filed with the SEC with Campbell’s Form 10-Q for the fiscal quarter ended January 28, 2001, and is incorporated herein by reference. Agreements with the other executive officers listed under the heading “Executive Officers of the Company” are in all material respects the same as Mr. Conant’s agreement. |
| | | | | |
| 10 | (h) (g) | | Employment agreement between the company and Douglas R. Conant dated January 8, 2001, was filed with the SEC with Campbell’s Form 10-Q for the fiscal quarter ended January 28, 2001, and is incorporated herein by reference. |
| | | | | |
| 10 | (i) (h) | | Letter Agreement between the company and Mark A. Sarvary, effective as of February 9, 2004, regarding severance arrangements was filed with the SEC with Campbell’s Form 10-Q for the fiscal quarter ended May 2, 2004, and is incorporated herein by reference. |
| | | |
| 10 (i) | | Performance goals for the fiscal 2005 awards under the Campbell Soup Company Annual Incentive Plan were described in a Campbell Form 8-K filed on November 5, 2004, and such description is incorporated herein by reference. |
| | |
| 2110 (j) | | Form of Stock Option Award Statement was filed with the SEC on a Campbell Form 8-K filed on September 28, 2004, and is incorporated herein by reference. |
| | |
| 10 (k) | | Form of Restricted Stock Award Statement was filed with the SEC on a Campbell Form 8-K filed on September 28, 2004, and is incorporated herein by reference. |
| | |
| 10 (l) | | Board of Director compensation for calendar year 2005 was described in a Campbell Form 8-K filed on January 7, 2005, and such description is incorporated herein by reference. |
| | |
| 10 (m) | | Long-term incentive compensation program adopted pursuant to the Campbell Soup Company 2003 Long-Term Incentive Plan were described in Campbell Form 8-K filed on July 12, 2005, and such description is incorporated herein by reference. |
| | |
| 10 (n) | | Deed of Release, dated May 27, 2005, between John Doumani, Arnott’s Biscuits Ltd and the company. |
| | |
| 21 | | Subsidiaries (Direct and Indirect) of the company. |
| | | | | |
| 23 | | | Consent of Independent Registered Public Accounting Firm. |
| | | | | |
| 24 | | | Power of Attorney. |
| | | |
| Document | | |
| | 31 | (i) |
| 31(i) | | Certification of Douglas R. Conant pursuant to Rule 13a-14(a). |
| | | | |
| 31(ii) | | Certification of Robert A. Schiffner pursuant to Rule 13a-14(a). |
| | | | | |
| 32 | (i)32(i) | | Certification of Douglas R. Conant pursuant to 18 U.S.C. Section 1350. |
| | | | |
| 32(ii) | | Certification of Robert A. Schiffner pursuant to 18 U.S.C. Section 1350. |