1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED COMMISSION FILE NUMBER MAY 2, 1999 1-3822 [CAMPBELL SOUP COMPANY LOGO] NEW JERSEY 21-0419870 STATE OF INCORPORATION I.R.S. EMPLOYER IDENTIFICATION NO. CAMPBELL PLACE CAMDEN, NEW JERSEY 08103-1799 PRINCIPAL EXECUTIVE OFFICES TELEPHONE NUMBER: (609) 342-4800 INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]. THERE WERE 434,170,301 SHARES OF CAPITAL STOCK OUTSTANDING AS OF JUNE 10, 1999. -1- 2 PART I. FINANCIAL INFORMATION CAMPBELL SOUP COMPANY CONSOLIDATED STATEMENTS OF EARNINGS (unaudited) (millions, except per share amounts) Three Months Ended Nine Months Ended ------------------- -------------------- MAY May MAY May 2, 1999 3, 1998 2, 1999 3, 1998 ------- ------- ------- ------- Net sales $ 1,492 $ 1,572 $ 5,128 $ 5,397 - ------------------------------------------------------------------------------------------------------------------------------------ Costs and expenses Cost of products sold 730 775 2,416 2,623 Marketing and selling expenses 370 397 1,301 1,226 Administrative expenses 69 84 221 244 Research and development expenses 15 18 48 52 Other expenses 24 20 40 61 Restructuring charge -- 262 -- 262 - ------------------------------------------------------------------------------------------------------------------------------------ Total costs and expenses 1,208 1,556 4,026 4,468 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings before interest and taxes 284 16 1,102 929 Interest, net 43 45 129 131 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings (loss) before taxes 241 (29) 973 798 Taxes on earnings 79 7 328 291 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings (loss) from continuing operations 162 (36) 645 507 Loss from discontinued operations -- (54) -- (18) Cumulative effect of change in accounting principle -- -- -- (11) - ------------------------------------------------------------------------------------------------------------------------------------ Net earnings (loss) $ 162 $ (90) $ 645 $ 478 ==================================================================================================================================== Per share - basic Earnings (loss) from continuing operations $ .37 $ (.08) $ 1.46 $ 1.11 Loss from discontinued operations -- (.12) -- (.04) Cumulative effect of change in accounting principle -- -- -- (.02) - ------------------------------------------------------------------------------------------------------------------------------------ Net earnings (loss) $ .37 $ (.20) $ 1.46 $ 1.05 ==================================================================================================================================== Dividends $ .225 $ .210 $ .660 $ .613 ==================================================================================================================================== Weighted average shares outstanding - basic 438 453 443 456 ==================================================================================================================================== Per share - assuming dilution Earnings (loss) from continuing operations $ .37 $ (.08) $ 1.44 $ 1.10 Loss from discontinued operations -- (.12) -- (.04) Cumulative effect of change in accounting principle -- -- -- (.02) - ------------------------------------------------------------------------------------------------------------------------------------ Net earnings (loss) $ .37 $ (.20) $ 1.44 $ 1.04 ==================================================================================================================================== Weighted average shares outstanding - assuming dilution 443 453 448 462 ==================================================================================================================================== See Notes to Financial Statements -2- 3 CAMPBELL SOUP COMPANY CONSOLIDATED BALANCE SHEETS (unaudited) (millions) MAY August 2, 1999 2, 1998 ------- ------- Current assets Cash and cash equivalents $ 24 $ 16 Accounts receivable 530 656 Inventories 587 564 Other current assets 230 204 - -------------------------------------------------------------------------------- Total current assets 1,371 1,440 - -------------------------------------------------------------------------------- Plant assets, net of depreciation 1,743 1,723 Intangible assets, net of amortization 1,988 1,904 Other assets 601 566 - -------------------------------------------------------------------------------- Total assets $ 5,703 $ 5,633 ================================================================================ Current liabilities Notes payable $ 1,859 $ 1,401 Payable to suppliers and others 403 506 Accrued liabilities 440 638 Dividend payable 98 95 Accrued income taxes 234 163 - -------------------------------------------------------------------------------- Total current liabilities 3,034 2,803 - -------------------------------------------------------------------------------- Long-term debt 1,338 1,169 Nonpension postretirement benefits 398 405 Other liabilities, including deferred income taxes of $251 and $246 434 382 - -------------------------------------------------------------------------------- Total liabilities 5,204 4,759 - -------------------------------------------------------------------------------- Shareowners' equity Preferred stock; authorized 40 shares; none issued -- -- Capital stock, $.0375 par value; authorized 20 20 560 shares; issued 542 shares 379 395 Capital surplus 4,060 3,706 Earnings retained in the business (3,820) (3,083) Capital stock in treasury, at cost (140) (164) Accumulated other comprehensive income - -------------------------------------------------------------------------------- Total shareowners' equity 499 874 ================================================================================ Total liabilities and shareowners' equity $ 5,703 $ 5,633 ================================================================================ See Notes to Financial Statements -3- 4 CAMPBELL SOUP COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (millions) Nine Months Ended -------------------- MAY May 2, 1999 3, 1998 ------- ------- Cash flows from operating activities: Net earnings, excluding discontinued operations $ 645 $ 496 Non-cash charges to net earnings Cumulative effect of accounting change -- 11 Restructuring charge -- 262 Depreciation and amortization 191 201 Deferred income taxes (6) (61) Other, net 19 60 Changes in working capital Accounts receivable 128 (145) Inventories (25) 40 Other current assets and liabilities (207) (107) - -------------------------------------------------------------------------------- Net cash provided by operating activities 745 757 - -------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of plant assets (198) (151) Sales of plant assets 8 20 Businesses acquired (105) (472) Sales of businesses -- 21 Other, net (27) (1) - -------------------------------------------------------------------------------- Net cash used in investing activities (322) (583) - -------------------------------------------------------------------------------- Cash flows from financing activities: Long-term borrowings 325 300 Repayments of long-term borrowings (5) (20) Short-term borrowings 1,315 1,179 Repayments of short-term borrowings (1,036) (1,283) Dividends paid (288) (272) Treasury stock purchases (774) (545) Treasury stock issuances 42 76 Other, net (2) -- - -------------------------------------------------------------------------------- Net cash used in financing activities (423) (565) - -------------------------------------------------------------------------------- Net cash provided by discontinued operations -- 436 - -------------------------------------------------------------------------------- Effect of exchange rate changes on cash 8 (16) - -------------------------------------------------------------------------------- Net change in cash and cash equivalents 8 29 Cash and cash equivalents - beginning of period 16 17 - -------------------------------------------------------------------------------- Cash and cash equivalents - end of period $ 24 $ 46 ================================================================================ See Notes to Financial Statements -4- 5 CAMPBELL SOUP COMPANY CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY (unaudited) (millions, except per share amounts) Capital stock ---------------------------------- Earnings Accumulated Issued In treasury retained other Total ---------------- ---------------- Capital in the comprehensive shareowners' Shares Amount Shares Amount surplus business income equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance at August 3, 1997 542 $20 (84) $(2,459) $338 $3,571 $ (50) $1,420 Comprehensive income Net earnings 478 478 Foreign currency translation adjustments (64) (64) Dividends ($.613 per share) (281) (281) Treasury stock purchased (10) (545) (545) Treasury stock issued under management incentive and stock option plans 2 33 45 78 Spinoff of Specialty Foods segment (150) (150) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at May 3, 1998 542 $20 (92) $(2,971) $383 $3,618 $(114) $ 936 ==================================================================================================================================== BALANCE AT AUGUST 2, 1998 542 $20 (94) $(3,083) $395 $3,706 $(164) $ 874 COMPREHENSIVE INCOME NET EARNINGS 645 645 FOREIGN CURRENCY TRANSLATION ADJUSTMENTS 24 24 DIVIDENDS ($.660 PER SHARE) (291) (291) TREASURY STOCK PURCHASED (16) (774) (774) TREASURY STOCK ISSUED UNDER MANAGEMENT INCENTIVE AND STOCK OPTION PLANS 2 37 (16) 21 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT MAY 2, 1999 542 $20 (108) $(3,820) $379 $4,060 $(140) $ 499 ==================================================================================================================================== See Notes to Financial Statements -5- 6 CAMPBELL SOUP COMPANY CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (unaudited) (millions) (a) The financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the indicated periods. All such adjustments are of a normal recurring nature. Certain reclassifications were made to the prior year amounts to conform with current presentation. (b) New Accounting Pronouncement As of August 3, 1998, the company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", issued in June 1997. SFAS 130 establishes a standard for reporting of comprehensive income, which is comprised of net income and "other" comprehensive income items, in the financial statements. "Other" comprehensive income includes items recorded in shareowners' equity that are not the result of transactions with shareowners, such as foreign currency translation adjustments. Prior year financial statements have been reclassified to conform to SFAS 130. The components of comprehensive income are as follows: Three Months Ended Nine Months Ended May May May May 2, 1999 3, 1998 2, 1999 3, 1998 ------- ------- ------- ------- Net earnings (loss) $ 162 $ (90) $ 645 $ 478 Foreign currency translation adjustments 30 (2) 24 (64) ------ ------ ------- ------- Comprehensive income $ 192 $ (92) $ 669 $ 414 ====== ====== ======= ======= As of May 2, 1999 and May 3, 1998, accumulated other comprehensive income is comprised entirely of the cumulative translation adjustment. (c) Discontinued Operations Effective March 30, 1998, the company spun off the Specialty Foods segment to its shareowners as an independent publicly-traded company. The spin-off qualified as a tax-free distribution to U.S. shareholders. Shareowners of record as of March 9, 1998 received one share of the common stock of the new company, Vlasic Foods International Inc. (Vlasic), for every ten shares of Campbell Soup Company capital stock. -6- 7 Results of discontinued operations were as follows: Three Months Ended Nine Months Ended May 3, 1998(1) May 3, 1998(1) Net sales $ 169 $ 809 ===== ===== Earnings (loss) before taxes $ (17) $ 41 Taxes on earnings (1) 21 ----- ----- Earnings (loss) from (16) 20 operations Spin-off costs (38) (38) ----- ----- Loss from discontinued operations, net $ (54) $ (18) ===== ===== (1) Results of Vlasic are included through March 29, 1998. (d) Restructuring Charge A restructuring charge included in earnings from continuing operations of $262 million ($193 million after-tax or $.42 share), was recorded in the third quarter fiscal 1998. This charge relates to the rationalization of certain U.S., European and Australian production and administrative facilities and anticipated losses on the divestitures of non-strategic businesses with annual sales of approximately $170 million. See also note (k) regarding the sale of Fresh Start Bakeries, Inc. The restructuring program includes the elimination of approximately 750 employee positions. The restructuring charge includes approximately $78 million in cash charges primarily related to severance, employee benefit costs and lease termination fees. The balance relates to non-cash charges for estimated losses on the disposition of plant assets and divestitures of businesses. -7- 8 A summary of the original reserve and related activity through May 2, 1999 is as follows: Balance at Balance at Original August May Reserves Activity 2, 1998 Activity 2, 1999 -------- -------- ---------- -------- ---------- Loss on asset dispositions and divestitures $ 209 $ (58) $ 151 $(104) $ 47 Severance and benefits 41 (9) 32 (7) 25 Other 12 (2) 10 (9) 1 ----- ----- ----- ----- ----- TOTAL $ 262 $ (69) $ 193 $(120) $ 73 ===== ===== ===== ===== ===== (e) Earnings Per Share The company adopted the provisions of SFAS No. 128, "Earnings per Share" ("EPS") as of the second quarter fiscal 1998. For the periods presented in the Statements of Earnings, the calculations of basic EPS and EPS assuming dilution vary in that the weighted average shares outstanding assuming dilution includes the incremental effect of stock options, except when such effect would be antidilutive. For the nine month period ended May 2, 1999, the weighted average shares outstanding assuming dilution also includes the incremental effect of approximately one million shares under the forward stock purchase contract. See note (j) for a description of the contract. (f) Cumulative Effect of Change In Accounting Principle In the second quarter of fiscal 1998, the company adopted the provisions of the Emerging Issues Task Force (EITF) consensus ruling on Issue 97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract that Combines Business Process Reengineering and Information Technology Transformation". The unamortized balance of previously capitalized business process reengineering costs was written off as a cumulative effect of change in accounting principle of $11 million or $.02 per share, net of an income tax benefit of approximately $7 million. -8- 9 (g) Segment Information The company operates in three business segments: Soup and Sauces, Biscuits and Confectionery, and Away From Home. The segments are managed as strategic units due to their distinct manufacturing processes, marketing strategies and distribution channels. The Soup and Sauces segment includes the worldwide soup businesses, Prego spaghetti sauces, Pace Mexican sauces, Franco-American pastas and gravies, Swanson broths, and V8 beverages. The Biscuits and Confectionery segment includes the Godiva Chocolatier, Pepperidge Farm, Arnotts Limited and Delacre businesses. The Delacre business was sold in June 1998. Away From Home represents products, including Campbell's Soups and Campbell's Specialty Kitchen entrees, which are distributed to the food service and meal replacement markets. Accounting policies for measuring segment assets and earnings before interest and taxes are substantially consistent with those described in the summary of significant accounting policies included in the fiscal 1998 Annual Report. The company evaluates segment performance based on earnings before interest and taxes, excluding certain non-recurring charges. Away From Home products are principally produced by the tangible assets of the company's other segments. Accordingly, tangible assets have not been allocated to the Away From Home segment. Depreciation and amortization is allocated to Away From Home based on budgeted production hours. Transfers between segments are recorded at cost plus mark-up or at market. -9- 10 MAY 2, 1999 Away Corporate Soup and Biscuits and From And Sauces Confectionery Home Other(1) Eliminations(2) Total -------- ------------- ---- -------- --------------- ------- THREE MONTHS ENDED Net sales $1,010 340 122 34 (14) $1,492 Earnings before interest and taxes $ 249 44 13 (1) (21) $ 284 Depreciation and amortization $ 31 21 4 3 5 $ 64 Capital expenditures $ 47 17 4 1 3 $ 72 NINE MONTHS ENDED Net sales $3,578 1,109 382 110 (51) $5,128 Earnings before interest and taxes $ 929 173 46 6 (52) $1,102 Depreciation and $ 96 62 10 8 15 $ 191 amortization Capital expenditures $ 124 45 7 9 13 $ 198 Segment assets $2,994 1,494 314 159 742 $5,703 (1) Represents financial information of certain prepared convenience food businesses not categorized as reportable segments. (2) Represents elimination of intersegment sales, unallocated corporate expenses and unallocated assets, including corporate offices, deferred income taxes and prepaid pension assets. -10- 11 MAY 3, 1998 Away Corporate Soup and Biscuits and From And Sauces Confectionery Home Other(1) Eliminations(2) Total -------- ------------- ---- -------- --------------- ------- THREE MONTHS ENDED Net sales $1,007 361 115 94 (5) $1,572 Earnings before interest and taxes(3) $ 109 15 8 (95) (21) $ 16 Depreciation and amortization $ 34 23 2 5 4 $ 68 Capital expenditures $ 32 23 -- 2 4 $ 61 NINE MONTHS ENDED Net sales $3,605 1,197 340 302 (47) $5,397 Earnings before interest and taxes(3) $ 876 150 39 (89) (47) $ 929 Depreciation and $ 100 67 6 14 14 $ 201 amortization Capital expenditures $ 77 53 -- 10 11 $ 151 Segment assets $3,402 1,625 90 351 583 $6,051 (1) Represents financial information of certain prepared convenience food businesses not categorized as reportable segments. (2) Represents elimination of intersegment sales, unallocated corporate expenses and unallocated assets, including corporate offices, deferred income taxes and prepaid pension assets. (3) Contributions to earnings before interest and taxes by segment include the effects of a third quarter restructuring charge of $262 as follows: Soup and Sauces $135, Biscuits and Confectionery $25, Away From Home $4, and Other $98. -11- 12 (h) Inventories MAY August 2, 1999 2, 1998 ------- ------- Raw materials, containers and supplies $213 $205 Finished products 374 359 - -------------------------------------------------------------------------------- $587 $564 ================================================================================ Approximately 70% of inventory is accounted for on the last in, first out (LIFO) method of determining cost. If the first in, first out inventory valuation method had been used exclusively, inventories would not differ materially from the amounts reported at May 2, 1999 and August 2, 1998. (i) Notes Payable and Long-Term Debt In October 1998, the company issued $300 million of notes due October 2003 bearing interest at 4.75%. The issuance was the third draw down on the company's $1 billion shelf registration filed with the Securities and Exchange Commission in fiscal 1997. As of May 2, 1999, $100 million remains available for issuance under the shelf registration. (j) Forward Stock Purchase Program In October 1998, the company entered into a forward stock purchase contract to partially hedge the company's equity exposure from its stock option program. The contract, which matures in fiscal 2004, allows the company to repurchase approximately 11 million shares at an average price of approximately $47 per share. The company may elect to settle the contract on a net share basis in lieu of physical settlement. The contract permits early settlement and may be extended for an additional five-year term. If the forward purchase contract had been settled on a net share basis as of May 2, 1999, the company would provide the counterparty with approximately 1.7 million shares of its capital stock. (k) Subsequent Event On May 28, 1999, the company completed the sale of Fresh Start Bakeries, Inc., a global provider of bakery products to the food service industry. -12- 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION CAMPBELL SOUP COMPANY RESULTS OF CONTINUING OPERATIONS OVERVIEW Net sales, as reported, in the third quarter ended May 2, 1999 declined 5% due to lower worldwide wet soup shipments. Worldwide wet soup shipments decreased 6% as a result of a 9% decline in the U.S. The decline in U.S. shipments was primarily attributable to the company's January 1999 decision to eliminate quarter-end promotions for U.S. retail customers. Outside the U.S., wet soup shipments increased 4%. Net sales excluding currency and divestitures increased 2% in the quarter. In the third quarter of fiscal 1998, the company recorded a restructuring charge of $262 million ($193 million after-tax or $.42 per share). Excluding the restructuring charge, earnings from continuing operations increased 3% to $162 million and diluted earnings per share increased 9% to $.37. For the nine months ended May 2, 1999 net sales, as reported, declined 5%; however, excluding currency and divestitures, sales from ongoing businesses increased 2%. Excluding the restructuring charge, earnings from continuing operations declined 8% to $645 million and diluted earnings per share decreased 5% to $1.46. THIRD QUARTER SALES Sales in the quarter declined 5% to $1.49 billion from $1.57 billion last year. The change in sales was due to flat volume and mix, a 7% decline due to divestitures and currency, offset by 1% from higher selling prices and 1% from acquisitions. -13- 14 An analysis of net sales by segment follows: (millions) 1999 1998 % CHANGE - ---------- ------- ------- -------- Soup and Sauces $ 1,010 $ 1,007 -- Biscuits and Confectionery 340 361 (6) Away From Home 122 115 6 - -------------------------------------------------------------------------------- Subtotal 1,472 1,483 (1) Other 34 94 (64) Intersegment (14) (5) - -------------------------------------------------------------------------------- $ 1,492 $ 1,572 (5) ================================================================================ Soup and Sauces sales were flat with lower U.S. wet soup shipments offset by growth in international wet soup and beverage sales. As previously discussed, the U.S. wet soup volume declined primarily as a result of the company's January 1999 decision to eliminate quarter-end promotions for U.S. retail customers, which primarily impacted shipments of condensed soup. This worldwide wet soup volume decline was in contrast to increased consumer demand for U.S. soups driven by ready-to-serve products including Chunky and Simply Home and Swanson broths. Outside the U.S., wet soup volume and sales increased 4% and 6%, respectively. Solid sales gains in Canada, Germany, France and Australia were partially offset by weak sales in the U.K. and Japan. Beyond soup, beverages led by V8 Splash delivered double-digit sales growth. Sales of U.S. sauces and prepared foods declined in the quarter. Biscuits and Confectionery reported a decline in sales compared to third quarter 1998. The decline was primarily due to the divestiture of Delacre, the company's European biscuit business, and adverse currency translation impact in Australia. Excluding the impact of the divestiture and currency, sales increased approximately 6%. This increase was led by sales of Pepperidge Farm Goldfish crackers and Chocolate Chunk classic cookies. Godiva Chocolatier contributed double-digit sales growth through expansion of its North American, European and Japanese retail outlets. Arnotts Limited (Arnotts) reported increased sales led by strong performance from its market leading TimTams biscuits and Kettle chips as well as the introduction of Goldfish crackers in Australia. -14- 15 Away From Home sales increased by 6% reflecting the acquisition of Stockpot, a premium refrigerated soup brand acquired in the first quarter of fiscal 1999. New Campbell soup kettles, which provide Campbell's branded soup in university cafeterias, convenience stores and other outlets, continued to build volume. GROSS MARGIN Gross margin, defined as net sales less cost of products sold, decreased $35 million in the quarter. As a percent of sales, gross margin was 51.0% compared to 50.7% last year. The improvement in margin percentage was principally due to higher selling prices, cost savings generated from global procurement initiatives and continued productivity gains in manufacturing facilities, which offset the adverse mix impact resulting from declines in U.S. wet soup volume. MARKETING AND SELLING EXPENSES Marketing and selling expenses as a percent of sales decreased to 24.8% from 25.3% last year. The decrease is primarily due to a shift in the timing of U.S. wet soup advertising versus the prior year. ADMINISTRATIVE EXPENSES Administrative expenses declined as a percent of sales to 4.6% from 5.3% last year. The decline is primarily attributable to lower annual incentive compensation costs. OTHER EXPENSES Other expenses increased slightly principally due to losses recorded on contracts that hedge long-term compensation liabilities. OPERATING EARNINGS Segment operating earnings, as reported, increased significantly versus the prior year due to the restructuring charge recorded in the third quarter of fiscal 1998. Excluding the restructuring charge, operating earnings increased 2% compared to last year. -15- 16 An analysis of operating earnings by segment follows: (millions) 1999 1998(1) - ---------- ----- ----- Soup and Sauces $ 249 $ 109 Biscuits and Confectionery 44 15 Away From Home 13 8 - -------------------------------------------------------------------------------- Subtotal 306 132 Other (1) (95) - -------------------------------------------------------------------------------- 305 37 Corporate (21) (21) - -------------------------------------------------------------------------------- $ 284 $ 16 ================================================================================ (1) Contributions to earnings by segment included the effect of a third quarter fiscal 1998 restructuring charge of $262 million as follows: Soup and Sauces $135 million, Biscuits and Confectionery $25 million, Away From Home $4 million and Other $98 million. Soup and Sauces earnings, excluding the restructuring charge, were up 2% despite lower U.S. condensed soup shipments. Strong earnings performance by U.S. ready-to-serve soups and several international wet soup businesses including Erasco in Germany, Campbell's in Australia and Cheong Chan in Malaysia were partially offset by the U.S. condensed soup and the U.K. businesses. Beverages reported double-digit earnings growth and U.S. sauces and prepared foods were flat versus a year ago. Biscuits and Confectionery earnings, excluding the restructuring charge, increased 13%. Earnings growth was driven by Pepperidge Farm bakery and frozen products and Arnotts biscuits in Australia, more than offsetting the impact of the Delacre divestiture. Godiva earnings were flat primarily due to new store openings. Away From Home earnings, excluding the restructuring charge, were flat versus last year. -16- 17 NON-OPERATING ITEMS Net interest expense declined due to favorable rates versus prior year. The effective tax rate of 32.8% was favorably impacted by a federal tax refund recorded in the quarter. Excluding the restructuring charge, the comparable fiscal 1998 tax rate was 32.7%. NINE MONTHS SALES Sales for the nine months declined 5% to $5.13 billion from $5.40 billion last year. The change in sales was due to a 1% decrease from volume and mix, a 7% decline due to divestitures and currency, offset by 2% from higher selling prices and 1% from acquisitions. An analysis of net sales by segment follows: (millions) 1999 1998 % CHANGE - ---------- ------- ------- ------- Soup and Sauces $ 3,578 $ 3,605 (1) Biscuits and Confectionery 1,109 1,197 (7) Away From Home 382 340 12 - -------------------------------------------------------------------------------- Subtotal 5,069 5,142 (1) Other 110 302 (64) Intersegment (51) (47) - -------------------------------------------------------------------------------- $ 5,128 $ 5,397 (5) ================================================================================ The Soup and Sauces decline was due to worldwide wet soup volume decline of 5%, including U.S. wet soup volume decrease of 9%. This worldwide wet soup volume decline was offset by continued strong consumer demand for U.S. ready-to-serve soups including Chunky and Simply Home and Swanson broths. Outside the U.S., wet soup volume and sales increased 9% and 13%, respectively. Sales gains in Canada, Germany, France and Australia were partially offset by weak sales in the U.K. and Japan. Beyond soup, beverages led by V8 Splash delivered double-digit sales growth. U.S. sauces and prepared food sales were down versus the prior year. -17- 18 Biscuits and Confectionery reported a decline in sales compared to 1998. The decline was primarily due to the divestiture of Delacre and adverse currency translation impact in Australia. Excluding the impact of the divestiture and currency, sales increased approximately 8%. This increase was led by sales of Pepperidge Farm Goldfish crackers and Chocolate Chunk classic cookies. Godiva Chocolatier contributed double-digit sales growth through expansion of its North American, European and Japanese retail outlets. Arnotts Limited reported increased sales, before the impact of currency, led by strong performance from its TimTams biscuits and Kettle chips and the introduction of Goldfish in Australia. Away From Home sales increased by 13% primarily due to Stockpot, a premium refrigerated soup brand acquired during the first quarter of fiscal 1999. In addition, U.S. foodservice sales increased due to growth in soup and V8 Splash. New Campbell soup kettles increased branded soup sales in university cafeterias, convenience stores and other outlets, and continued to expand the Campbell's brand presence in the away-from-home market. GROSS MARGIN Gross margin, defined as net sales less cost of products sold, decreased $62 million year-to-date. As a percent of sales, gross margin was 52.9% compared to 51.4% last year. The improvement in margin percentage was principally due to selling price increases, cost savings generated from global procurement initiatives and continued productivity gains in manufacturing facilities, which offset the adverse mix impact resulting from declines in U.S. wet soup volume. MARKETING AND SELLING EXPENSES Marketing and selling expenses as a percent of sales increased to 25.4% from 22.7% last year. The increase is attributable to a double-digit increase in trade marketing spending driven by increased investment in the U.S. retail wet soup business and competitive pressures on the Pepperidge Farm and Arnotts' businesses. ADMINISTRATIVE EXPENSES Administrative expenses as a percent of sales declined to 4.3% from 4.5% last year. The decline was due to lower annual incentive compensation costs and productivity initiatives. OTHER EXPENSES Other expenses declined as compared to last year primarily due to lower minority interest expense, reflecting the buy-out of Arnotts Limited in fiscal 1998, and lower long-term incentive plan costs. -18- 19 OPERATING EARNINGS Segment operating earnings, as reported, increased 18% versus the prior year due to the restructuring charge recorded in the third quarter of fiscal 1998. Excluding the restructuring charge, operating earnings decreased 7%. An analysis of operating earnings by segment follows: (millions) 1999 1998(1) - ---------- ------- ------- Soup and Sauces $ 929 $ 876 Biscuits and Confectionery 173 150 Away From Home 46 39 - -------------------------------------------------------------------------------- Subtotal 1,148 1,065 Other 6 (89) - -------------------------------------------------------------------------------- 1,154 976 Corporate (52) (47) - -------------------------------------------------------------------------------- $ 1,102 $ 929 ================================================================================ (1) Contributions to earnings by segment included the effect of a third quarter fiscal 1998 restructuring charge of $262 million as follows: Soup and Sauces $135 million, Biscuits and Confectionery $25 million, Away From Home $4 million and Other $98 million. Soup and Sauces earnings, excluding the restructuring charge, were down 8% due to lower U.S. condensed soup shipments and increased marketing spending. This earnings shortfall was slightly offset by strong earnings performance by U.S. ready-to-serve soups and several international wet soup businesses including Erasco in Germany, Liebig in France, Campbell's in Australia and Cheong Chan in Malaysia. Beverages reported double-digit earnings growth and U.S. sauces and prepared foods earnings were flat. Biscuits and Confectionery earnings, excluding the restructuring charge, declined slightly due to the divestiture of Delacre in June 1998 and adverse currency impact in Australia. Excluding the impact of the divestiture and currency, earnings increased 6%. Pepperidge Farm's fresh breads, Goldfish crackers and Chocolate Chunk classic cookies delivered solid earnings performance and Godiva posted double-digit earnings growth. This earnings growth was partially offset by competitive pressures on the Arnotts' business. Away From Home earnings, excluding the restructuring charge, increased to $46 million versus -19- 20 last year. Wet soup and V8 Splash in the U.S. foodservice channel were the primary contributors to the earnings growth. NON-OPERATING ITEMS Net interest expense declined slightly to $129 million due to favorable rates versus the prior year. The effective tax rate was 33.7% compared to 36.5% last year. Excluding the restructuring charge, the fiscal 1998 effective tax rate was 34.0%. DISCONTINUED OPERATIONS On September 9, 1997, the company announced its intention to spin off the Specialty Foods segment to its shareowners as an independent publicly-traded company. The spin-off, which qualified as a tax-free distribution to U.S. shareholders, was effective March 30, 1998. On this date, shareowners of record as of March 9, 1998 received one share of the common stock of the new company, Vlasic Foods International Inc. (Vlasic), for every ten shares of Campbell Soup Company capital stock. In March 1998, the company entered into a revolving credit facility and borrowed $500 million. In connection with the spin-off, the revolving credit facility and outstanding obligation of $500 million were assumed by Vlasic. In addition, the company received approximately $75 million from subsidiaries of Vlasic for repayment of certain advances. See note (c) of the Notes to Financial Statements for further discussion of the discontinued operations. RESTRUCTURING CHARGE A restructuring charge included in earnings from continuing operations of $262 million ($193 million after-tax or $.42 per share), was recorded in the third quarter fiscal 1998. This charge relates to the rationalization of certain U.S., European and Australian production and administrative facilities and anticipated losses on the divestitures of non-strategic businesses with annual sales of approximately $170 million. The restructuring program includes the elimination of approximately 750 positions. The restructuring charge includes $78 million in cash charges primarily related to severance, employee benefit costs and lease termination fees. The balance relates to non-cash charges for estimated losses on the disposition of plant assets and divestitures of businesses. The company expects to realize approximately $74 million of ongoing annual pre-tax savings from this plan. Expected annual savings are not necessarily indicative of future incremental earnings due to management's commitment to fund investments to grow brands and drive volume growth. See note (d) of the Notes to Financial Statements for further discussion of the program and the related activity analysis. LIQUIDITY AND CAPITAL RESOURCES The company generated cash from operations of $745 million compared to $757 million last -20- 21 year. This decline is primarily due to lower non-cash charges partially offset by higher earnings and improved working capital due to the elimination of quarter-end promotions for U.S. retail customers. Capital expenditures were $198 million, an increase from $151 million last year. The company continues to aggressively manage its capital outlays and expects total expenditures to approximate $310 million in fiscal 1999. In the first quarter, the company acquired Stockpot, a premium refrigerated soup brand, for approximately $105 million. In October 1998, the company issued $300 million of notes due October 2003 and bearing interest of 4.75%. In the first nine months, the company repurchased 16.1 million shares versus 10.2 million last year. By repurchasing shares, the company expects to utilize existing cash and debt capacity to lower its cost of capital and increase returns to shareowners. The company's long-term strategy is to repurchase approximately two percent of its outstanding shares annually. In October 1998, the company entered into a forward stock purchase contract to partially hedge the company's equity exposure from its stock option program. See note (j) of the Notes to Financial Statements for further discussion of the contract. YEAR 2000 Historically, certain computer programs were written using two digits rather than four to define the applicable year. Accordingly, the company's software may recognize a date using "00" as 1900 rather than the year 2000, which could result in computer systems failures or miscalculations, commonly referred to as the Year 2000 ("Y2K") issue. The Y2K issue can arise at any point in the company's supply, manufacturing, processing, distribution and financial chains. Incomplete or untimely resolution of the Y2K issue by the company, key suppliers, customers and other parties could have a material adverse effect on the company's results of operations, financial condition and cash flows. To address the Y2K issue, the company has established a Worldwide Year 2000 Business Action Council, led by an Executive Steering Committee of the company's senior management, including representatives of each of the company's business segments and corporate functions, to oversee and regularly review the status of the readiness plan discussed below. In addition, the company has established a Worldwide Project Office responsible for the day-to-day oversight and coordination of the Y2K remediation, replacement and testing of business systems. This project office reports to the company's Chief Information Officer. -21- 22 The company's plan for addressing the Y2K issue is divided into three major phases: Business Systems Inventory and Assessment, Remediation and Replacement and Testing. - - Business Systems Inventory and Assessment - The internal inventory portion of this phase, which commenced in 1997, was designed to identify internal business systems that were susceptible to system failure or processing errors as a result of the Y2K issue. This phase is complete. Approximately 700 worldwide information technology business systems (IT) were inventoried and approximately 200 were Y2K compliant and 500 were identified as non-compliant. It was determined that approximately 400 of the non-compliant systems require remediation and the remaining 100 systems will be retired or replaced. In addition, the company has completed the inventory and assessment of its non-information technology systems (Non-IT). The remediation and replacement of these systems, which include manufacturing production lines and equipment, elevators, heating, ventilation and air conditioning systems and water treatment systems, is included in the remediation and replacement plan discussed below. As part of this phase, significant service providers, vendors, suppliers, customers and governmental entities that are believed to be critical to business operations after January 1, 2000, were identified and steps were undertaken to ascertain their stage of Y2K readiness through questionnaires, interviews, on-site visits and other available means. - - Remediation and Replacement - The Company has developed and is in the process of implementing its remediation and replacement plan for all affected systems, including IT and Non-IT systems. This phase, which commenced in 1998, is approximately 85% complete. The company's plan established priorities for remediation or replacement. The business systems considered most critical to ongoing operations are being given the highest priority. The company has prioritized its business systems into "Mission Critical" and "All Other". "Mission Critical" systems are defined as business systems such as Business Planning and Control Process manufacturing, Sales Order Billing and Warehouse Management systems, that, if shut down or interrupted, could have a material adverse effect on the company's results of operations, financial condition and cash flows. "All Other" systems are defined as business systems such as Data Warehouse and Job Bidding systems that, if shut down or interrupted, may have an adverse impact on the company. The company is utilizing internal and external resources to execute the plan and substantially completed all remediation and replacement of "Mission Critical" systems by third quarter fiscal 1999. "All Other" systems are expected to be substantially completed by fourth quarter fiscal 1999. - - Testing - This phase is ongoing as systems are remediated and replaced. The company's efforts in this phase include testing by users and confirmation by appropriate local and Y2K project management that the remediated or replaced systems are Y2K compliant. The company substantially completed testing of "Mission Critical" systems by third quarter fiscal 1999. "All Other" systems are expected to be substantially complete by first quarter fiscal 2000. -22- 23 Because the company's Y2K compliance is dependent upon key third parties also being Y2K compliant on a timely basis, there can be no guarantee that the company's efforts will prevent a material adverse impact on its results of operations, financial condition and cash flows. The possible consequences to the company or its business partners not being fully Y2K compliant include temporary plant closings, delays in the delivery of finished products, delays in the receipt of key ingredients, containers and packaging supplies, invoice and collection errors and inventory and supply obsolescence. These consequences could have a material adverse effect on the company's results of operations, financial condition and cash flows if the company is unable to conduct its business in the ordinary course as a result of the Y2K issue. The company believes that its readiness program, including the contingency plans discussed below, should significantly reduce the adverse effect any such disruptions may have on the company. The company is developing contingency plans to mitigate the potential disruptions that may result from the Y2K issue. These plans may include identifying and securing alternate suppliers of ingredients, containers, packaging materials and utilities, adjusting manufacturing facility production, shutdown and start-up schedules, stockpiling of finished product inventories and other measures considered appropriate by management. Once developed and approved, contingency plans, and the related cost estimates, will be continually refined, as additional information becomes available. -23- 24 The company estimates that the aggregate cost of its Y2K efforts will be approximately $50 million, of which $29 million has been incurred to date. These costs, except for capital costs of approximately $4 million, are being expensed as incurred and are being funded through operating cash flows. The company expects to incur Y2K costs of approximately $30-$35 million in fiscal 1999. (millions) Original Costs Estimated Costs Components Estimates Incurred to Complete - ---------- --------- -------- --------------- External Consulting $ 27 (16) $ 11 Hardware/Software Upgrades 17 (11) 6 Other 6 (2) 4 ---- ---- ---- $ 50 (29) $ 21 ==== ==== ==== The company believes that such costs will not have a material impact on the company's results of operations, financial condition or cash flows. RECENT DEVELOPMENTS In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued and is expected to be effective for fiscal years beginning after June 15, 2000. The standard requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded in earnings or other comprehensive income, based on whether the instrument is designated as part of a hedge transaction and, if so, the type of hedge transaction. The company is currently assessing the impact of the adoption on the company's financial statements. Based on the company's current portfolio, it is not expected that adoption of this statement will have a material effect on the company's results of operations, financial condition or cash flows. The existing currencies of certain member countries of the European Union are being phased out and have been effectively replaced with the European Union's common currency, the euro, as of January 1, 1999. On this date, a fixed conversion rate was established between the existing currencies and the euro. National currencies will be eliminated over a period ending January 1, 2002. The company does not believe that the conversion to the euro will have a material impact on its results of operations, financial condition or cash flows. On May 28, 1999, the company completed the sale of Fresh Start Bakeries, Inc. See note (k), in the Notes to Financial Statements. -24- 25 FORWARD-LOOKING STATEMENTS This quarterly report contains certain statements which reflect the company's current expectations regarding future results of operations, economic performance, financial condition and achievements of the company. The company has tried, wherever possible, to identify these forward looking statements by using words such as "anticipate," "believe," "estimate," "expect" and similar expressions. These statements reflect the company's current plans and expectations and are based on information currently available to it. They rely on a number of assumptions and estimates which could be inaccurate and which are subject to risks and uncertainties. The company wishes to caution the reader that the following important factors and those important factors described elsewhere in the commentary, or in other Securities and Exchange Commission filings, could affect the company's actual results and could cause such results to vary materially from those expressed in any forward looking statements made by, or on behalf of, the company: - - the impact of strong competitive response to the company's efforts to leverage its brand power with product innovation and new advertising; - - the inherent risks in the marketplace associated with new product introductions, including uncertainties about trade and consumer acceptance; - - the company's ability to achieve sales and earnings forecasts, which are based on assumptions about sales volume; - - the continuation of the company's successful record of integrating acquisitions into its existing operations and the availability of new acquisition and alliance opportunities that build shareowner wealth; - - the company's ability to achieve its cost savings and capacity utilization objectives; - - the impact of unforeseen economic and political changes in international markets where the company competes such as currency exchange rates, inflation rates, recession, foreign ownership restrictions and other external factors over which the company has no control; and -25- 26 - - the ability of the company and its key service providers, vendors, suppliers, customers and governmental entities to replace, modify or upgrade computer systems in ways that adequately address the Y2K issue. Specific factors that might cause actual results to vary materially from the results anticipated include the ability to identify and correct all relevant computer codes and embedded chips, unanticipated difficulties or delays in the implementation of the company's remediation plans and the ability of third parties to adequately address their own Y2K issues. This discussion of uncertainties is by no means exhaustive but is designed to highlight important factors that may impact the company's outlook. -26- 27 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. For information regarding the company's exposure to certain market risks, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Annual Report on Form 10-K for fiscal 1998. Except as described in note (j) of the Notes to Financial Statements, there have been no significant changes in the company's portfolio of financial instruments or market risk exposures, which have occurred since year end. -27- 28 PART II ITEM 1. LEGAL PROCEEDINGS In management's opinion, there are no pending claims or litigation, the outcome of which would have a material effect on the consolidated results of operations, financial position or cash flows of the company. As previously reported, Communities for a Better Environment (CBE) sent a Clean Air Act Notice of Intent to Sue letter dated April 6, 1998 to the company. The company and CBE have agreed to settle CBE's claim under the terms of a consent decree, which was approved by the District Court for the Eastern District of California on February 16, 1999. Under the consent decree, in which the company admits no liability, certain equipment which used solvents that were the subject of CBE's claim will be shut down at the Sacramento, California facility by August 1, 2000. Other significant provisions of the consent decree are that the company will donate certain emission reduction credits to the Air District and has donated the total amount of $85,000 to two non-profit organizations, in lieu of paying any civil penalty or CBE attorney's fees. The terms of the consent decree are not expected to have a material effect on the consolidated results of operations, financial position or cash flows of the company. The company has also been named as a potentially responsible party in a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund. Although the impact on these proceedings cannot be predicted at this time due to the large number of other potentially responsible parties and the speculative nature of clean-up cost estimates, the ultimate disposition is not expected to have a material effect on the consolidated results of operations, financial position, or cash flows of the company. -28- 29 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits No. 4 There is no instrument with respect to long-term debt of the company that involves indebtedness or securities authorized thereunder exceeding 10 percent of the total assets of the company and its subsidiaries on a consolidated basis. The company agrees to file a copy of any instrument or agreement defining the rights of holders of long-term debt of the company upon request of the Securities and Exchange Commission. 27 Financial Data Schedule. b. Reports on Form 8-K There were no reports on Form 8-K filed by the company during the third quarter of fiscal 1999. -29- 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAMPBELL SOUP COMPANY Date: June 16, 1999 By: /s/ Basil Anderson ------------------------ Basil Anderson Executive Vice President and Chief Financial Officer By: /s/ Ellen Oran Kaden ------------------------ Ellen Oran Kaden Senior Vice President Law and Government Affairs -30- 31 INDEX TO EXHIBITS Exhibit Number 27 Financial Data Schedule. -31-