CAMPBELL'S Co — Interim / Quarterly Report 2005

Jun 7, 2005

10-Q 1 w09694e10vq.htm FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MAY 1, 2005 e10vq PAGEBREAK

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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 1, 2005	1-3822

New Jersey	21-0419870
State of Incorporation	I.R.S. Employer Identification No.

Campbell Place Camden, New Jersey 08103-1799 Principal Executive Offices

Telephone Number: (856) 342-4800

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o .

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b — 2 of the Securities Exchange Act of 1934).

Yes þ No o .

There were 411,005,099 shares of Capital Stock outstanding as of June 2, 2005.

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TABLE OF CONTENTS

PART I
ITEM 1. FINANCIAL INFORMATION
Statements of Earnings
Balance Sheets
Statements of Cash Flows
Statements of Shareowners’ Equity
Notes to Consolidated Financial Statements
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 6. EXHIBITS
SIGNATURES
INDEX TO EXHIBITS
Certification of Douglas R. Conant pursuant to Rule 13a-14(a)
Certification of Robert A. Schiffner pursuant to Rule 13a-14(a)
Certification of Douglas R. Conant pursuant to 18 U.S.C. Section 1350
Certification of Robert A. Schiffner pursuant to 18 U.S.C. Section 1350

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link1 " PART I"

PART I link2 " ITEM 1. FINANCIAL INFORMATION"

ITEM 1. FINANCIAL INFORMATION

CAMPBELL SOUP COMPANY CONSOLIDATED link2 "Statements of Earnings"

Statements of Earnings

(unaudited) (millions, except per share amounts)

	Three Months Ended — May 1,	May 2,		May 1,		May 2,
	2005	2004		2005		2004
Net sales	$ 1,736	$	1,667	$	6,050	$	5,676
Costs and expenses
Cost of products sold	1,035		995		3,601		3,315
Marketing and selling expenses	275		278		951		911
Administrative expenses	145		141		403		400
Research and development expenses	24		23		68		65
Other income	(2	)	(13	)	(2	)	(1	)
Total costs and expenses	1,477		1,424		5,021		4,690
Earnings before interest and taxes	259		243		1,029		986
Interest, net	45		40		134		125
Earnings before taxes	214		203		895		861
Taxes on earnings	68		61		284		273
Net earnings	$ 146	$	142	$	611	$	588
Per share - basic
Net earnings	$ .36	$	.35	$	1.49	$	1.43
Dividends	$ .17	$	.1575	$	.51	$	.4725
Weighted
average shares outstanding - basic	409		411		409		411
Per share - assuming dilution
Net earnings	$ .35	$	.34	$	1.48	$	1.43
Weighted
average shares outstanding - assuming dilution	414		413		414		412

See Notes to Consolidated Financial Statements.

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CAMPBELL SOUP COMPANY CONSOLIDATED link2 "Balance Sheets"

Balance Sheets

(unaudited) (millions, except per share amounts)

	May 1, — 2005	2004
Current assets
Cash and cash equivalents	$ 32	$	32
Accounts receivable	539		490
Inventories	706		795
Other current assets	142		164
Total current assets	1,419		1,481
Plant assets, net of depreciation	1,911		1,901
Goodwill	2,013		1,900
Other intangible assets, net of amortization	1,140		1,095
Other assets	330		298
Total assets	$ 6,813	$	6,675
Current liabilities
Notes payable	$ 447	$	810
Payable to suppliers and others	518		607
Accrued liabilities	557		607
Dividend payable	70		65
Accrued income taxes	308		250
Total current liabilities	1,900		2,339
Long-term debt	2,541		2,543
Nonpension postretirement benefits	290		298
Other liabilities, including deferred
income taxes of $339 and $332	714		621
Total liabilities	5,445		5,801
Shareowners’ equity
Preferred stock; authorized 40 shares;
none issued	—		—
Capital stock, $.0375 par value; authorized
560 shares; issued 542 shares	20		20
Additional paid-in capital	234		264
Earnings retained in the business	6,043		5,642
Capital stock in treasury, at cost	(4,823	)	(4,848	)
Accumulated other comprehensive loss	(106	)	(204	)
Total shareowners’ equity	1,368		874
Total liabilities and shareowners’ equity	$ 6,813	$	6,675

See Notes to Consolidated Financial Statements.

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CAMPBELL SOUP COMPANY CONSOLIDATED link2 "Statements of Cash Flows"

Statements of Cash Flows

(unaudited) (millions)

	Nine Months Ended — May 1,	May 2,
	2005	2004
Cash flows from operating activities:
Net earnings	$ 611	$	588
Non-cash charges to net earnings
Depreciation and amortization	207		195
Deferred income taxes	23		16
Other, net	80		67
Changes in working capital
Accounts receivable	(28	)	(51	)
Inventories	107		40
Prepaid assets	(1	)	(8	)
Accounts payable and accrued liabilities	(117	)	(125	)
Pension fund contributions	(53	)	(54	)
Other	(57	)	(92	)
Net cash provided by operating activities	772		576
Cash flows from investing activities:
Purchases of plant assets	(166	)	(142	)
Sales of plant assets	8		10
Businesses acquired	—		(9	)
Other, net	7		—
Net cash used in investing activities	(151	)	(141	)
Cash flows from financing activities:
Long-term borrowings	—		301
Net short-term repayments	(393	)	(534	)
Dividends paid	(205	)	(194	)
Treasury stock purchases	(66	)	(38	)
Treasury stock issuances	41		20
Net cash used in financing activities	(623	)	(445	)
Effect of exchange rate changes on cash	2		6
Net change in cash and cash equivalents	—		(4	)
Cash and
cash equivalents - beginning of period	32		32
Cash and
cash equivalents - end of period	$ 32	$	28

See Notes to Consolidated Financial Statements.

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CAMPBELL SOUP COMPANY CONSOLIDATED link2 "Statements of Shareowners’ Equity"

Statements of Shareowners’ Equity

(unaudited) (millions, except per share amounts)

Capital
Stock							Additional	Retained	Other		Total
Issued			In Treasury				Paid-in	in the	Comprehensive		Shareowners’
Shares		Amount	Shares		Amount		Capital	Business	Income (Loss)		Equity
Balance at August 3, 2003	542	$ 20	(132	)	$ (4,869	)	$ 298	$ 5,254	$ (316	)	$ 387
Comprehensive income (loss)
Net earnings								588			588
Foreign currency
translation adjustments									100		100
Cash-flow hedges,
net of tax									3		3
Minimum pension liability,
net of tax									(3	)	(3	)
Other comprehensive income									100		100
Total comprehensive income											688
Dividends ($.4725 per share)								(194	)		(194	)
Treasury stock purchased			(1	)	(38	)					(38	)
Treasury stock issued under
management incentive and
stock option plans			1		68		(35	)			33
Balance at May 2, 2004	542	$ 20	(132	)	$ (4,839	)	$ 263	$ 5,648	$ (216	)	$ 876
Balance at August 1, 2004	542	$ 20	(134	)	$ (4,848	)	$ 264	$ 5,642	$ (204	)	$ 874
Comprehensive income (loss)
Net earnings								611			611
Foreign currency
translation adjustments									114		114
Cash-flow hedges,
net of tax									(15	)	(15	)
Minimum pension liability,
net of tax									(1	)	(1	)
Other comprehensive income									98		98
Total comprehensive income											709
Dividends ($.51 per share)								(210	)		(210	)
Treasury stock purchased			(2	)	(66	)					(66	)
Treasury stock issued under
management incentive and
stock option plans			2		91		(30	)			61
Balance at May 1, 2005	542	$ 20	(134	)	$ (4,823	)	$ 234	$ 6,043	$ (106	)	$ 1,368

See Notes to Consolidated Financial Statements.

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link2 "Notes to Consolidated Financial Statements"

CAMPBELL SOUP COMPANY CONSOLIDATED Notes to Consolidated Financial Statements

(unaudited) (dollars in millions, except per share amounts)

(a) Basis of Presentation / Accounting Policies

The financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations, financial position, and cash flows for the indicated periods. All such adjustments are of a normal recurring nature. The accounting policies used in preparing these financial statements are consistent with those applied in the Annual Report on Form 10-K for the year ended August 1, 2004. Certain reclassifications were made to the prior year amounts to conform with current presentation. The results for the period are not necessarily indicative of the results to be expected for other interim periods or the full year.

The company accounts for stock option grants and restricted stock awards in accordance with Accounting Principles Board Opinion (APB) No. 25 “Accounting for Stock Issued to Employees” and related Interpretations. Accordingly, no compensation expense has been recognized for stock options since all options granted had an exercise price equal to the market value of the underlying stock on the grant date. Restricted stock awards are expensed. The following table illustrates the effect on net earnings and earnings per share if the company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123 to stock-based employee compensation.

	Three Months Ended — May 1, 2005	May 2, 2004		May 1, 2005		May 2, 2004
Net earnings, as reported	$ 146	$	142	$	611	$	588
Add: Stock-based employee
compensation expense included
in reported net earnings, net of
related tax effects 1	4		4		11		9
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects	(12	)	(11	)	(33	)	(30	)
Pro forma net earnings	$ 138	$	135	$	589	$	567
Earnings per share:
Basic-as reported	$ .36	$	.35	$	1.49	$	1.43
Basic-pro forma	$ .34	$	.33	$	1.44	$	1.38
Diluted-as reported	$ .35	$	.34	$	1.48	$	1.43
Diluted-pro forma	$ .33	$	.33	$	1.42	$	1.38

1 Represents restricted stock expense.

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(b) Goodwill and Intangible Assets

The following table sets forth balance sheet information for intangible assets, excluding goodwill, subject to amortization and intangible assets not subject to amortization:

	May 1, 2005 — Carrying	Accumulated		August 1, 2004 — Carrying	Accumulated
	Amount	Amortization		Amount	Amortization
Intangible assets subject to amortization 1 :
Trademarks	$ 6	$ (4	)	$ 6	$ (3	)
Other	17	(7	)	17	(7	)
Total	$ 23	$ (11	)	$ 23	$ (10	)
Intangible assets not subject to amortization:
Trademarks	$ 1,098			$ 1,053
Pension	27			27
Other	3			2
Total	$ 1,128			$ 1,082

1 Amortization related to these assets was approximately $1 for the nine month periods ended May 1, 2005 and May 2, 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 ended May 1, 2005 are as follows:

	U.S. Soup, — Sauces and	Baking and	International
	Beverages	Snacking	Soup and Sauces	Other	Total
Balance at August 1, 2004 1	$ 428	$ 558	$ 763	$ 151	$ 1,900
Foreign currency
translation adjustment	—	63	49	1	113
Balance at May 1, 2005	$ 428	$ 621	$ 812	$ 152	$ 2,013

1 Information has been restated to conform with the current year presentation, which reflects a change in the company’s operating segments as described in Note (e).

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(c) Comprehensive Income

Total comprehensive income comprises net earnings, net foreign currency translation adjustments, minimum pension liability adjustments, and net unrealized gains (losses) on cash-flow hedges.

Total comprehensive income for the three months ended May 1, 2005 and May 2, 2004, was $138 and $78, respectively. Total comprehensive income for the nine months ended May 1, 2005 and May 2, 2004 was $709 and $688, respectively.

The components of Accumulated other comprehensive loss, as reflected in the Statements of Shareowners’ Equity, consisted of the following:

	May 1, — 2005		May 2, — 2004
Foreign currency translation adjustments	$ 107		$ (1	)
Cash-flow hedges, net of tax	(16	)	(2	)
Minimum pension liability, net of tax 1	(197	)	(213	)
Total Accumulated other comprehensive loss	$ (106	)	$ (216	)

1 Includes a tax benefit of $112 as of May 1, 2005 and $121 as of May 2, 2004.

(d) Earnings Per Share

For the periods presented in the Statements of Earnings, the calculations of basic EPS and EPS assuming dilution vary in that the weighted average shares outstanding assuming dilution include the incremental effect of stock options and restricted stock programs, except when such effect would be antidilutive. Stock options to purchase 11 million and 18 million shares of capital stock for the three-month periods ended May 1, 2005 and May 2, 2004, respectively, and 17 million and 26 million shares of capital stock for the nine-month periods ended May 1, 2005 and May 2, 2004, respectively, were not included in the calculation of diluted earnings per share because the exercise price of the stock options exceeded the average market price of the capital stock and therefore, the effect would be antidilutive.

(e) Segment Information

Campbell Soup Company, together with its consolidated subsidiaries, is a global manufacturer and marketer of high quality, branded convenience food products. Through fiscal 2004, the company was organized and reported the results of operations in four segments: North America Soup and Away From Home, North America Sauces and Beverages, Biscuits and Confectionery, and International Soup and Sauces.

As of fiscal 2005, the company changed its organizational structure and as a result reports the following segments: U.S. Soup, Sauces and Beverages, Baking and Snacking, International Soup and Sauces, and Other. Comparative periods have

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been restated to conform to the current year presentation. The restatements also reflect a reallocation of certain expenses between corporate and the operating segments.

The U.S. Soup, Sauces and Beverages segment includes the following retail businesses: the Campbell’s condensed and ready-to-serve soups; Swanson broth and canned poultry; Prego pasta sauce; Pace Mexican sauce; Campbell’s Chunky chili; Campbell’s canned pasta, gravies, and beans; Campbell’s Supper Bakes meal kits; V8 vegetable juice; V8 Splash juice beverages; and Campbell’s tomato juice.

The Baking and Snacking segment includes the following businesses: Pepperidge Farm cookies, crackers, bakery and frozen products in U.S. retail; Arnott’s biscuits in Australia and Asia Pacific; and Arnott’s salty snacks in Australia.

The International Soup and Sauces segment includes the soup, sauce and beverage businesses outside of the United States, including Europe, Mexico, Latin America, the Asia Pacific region and the retail business in Canada.

The balance of the portfolio reported in Other includes Godiva Chocolatier worldwide and the company’s Away From Home operations, which represent the distribution of products such as soup, specialty entrees, beverage products, other prepared foods and Pepperidge Farm products through various food service channels in the United States and Canada.

Accounting policies for measuring segment assets and earnings before interest and taxes are substantially consistent with those described in the company’s 2004 Annual Report on Form 10-K. The company evaluates segment performance before interest and taxes. Away From Home products are principally produced by the tangible assets of the company’s other segments, except for Stockpot soups, which are produced in a separate facility, and certain other products, which are produced under contract manufacturing agreements. Accordingly, with the exception of the designated Stockpot facility, plant assets are not allocated to the Away From Home operations. Depreciation, however, is allocated to Away From Home based on production hours.

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May 1, 2005

		Earnings — Before Interest	and		Capital
Three Months Ended	Net Sales	and Taxes	Amortization		Expenditures
U.S. Soup, Sauces and
Beverages	$ 627	$ 152	$	22	$ 20
Baking and Snacking	421	36		23	22
International Soup and
Sauces	435	59		13	11
Other	253	27		6	4
Corporate 1	—	(15	)	7	5
Total	$ 1,736	$ 259	$	71	$ 62

		Earnings — Before Interest	and		Capital	Segment
Nine Months Ended	Net Sales	and Taxes	Amortization		Expenditures	Assets
U.S. Soup, Sauces and
Beverages	$ 2,577	$ 643	$	64	$ 58	$ 1,957
Baking and Snacking	1,303	129		65	47	1,622
International Soup and
Sauces	1,353	184		38	29	2,441
Other	817	121		20	11	352
Corporate 1	—	(48	)	20	21	441
Total	$ 6,050	$ 1,029	$	207	$ 166	$ 6,813

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May 2, 2004

		Earnings — Before Interest	and		Capital
Three Months Ended	Net Sales	and Taxes	Amortization		Expenditures
U.S. Soup, Sauces and
Beverages	$ 637	$ 141	$	20	$ 25
Baking and Snacking	389	27		20	19
International Soup and
Sauces	412	57		14	16
Other	229	24		6	2
Corporate 1	—	(6	)	8	4
Total	$ 1,667	$ 243	$	68	$ 66

		Earnings — Before Interest	and		Capital	Segment
Nine Months Ended	Net Sales	and Taxes	Amortization		Expenditures	Assets
U.S. Soup, Sauces and
Beverages	$ 2,487	$ 652	$	59	$ 50	$ 1,910
Baking and Snacking	1,202	111		57	44	1,551
International Soup and
Sauces	1,255	175		39	33	2,244
Other	732	109		18	6	336
Corporate 1	—	(61	)	22	9	402
Total	$ 5,676	$ 986	$	195	$ 142	$ 6,443

1 Represents unallocated corporate expenses and unallocated assets, including corporate offices, deferred income taxes and investments.

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Historical information on the reporting segments is as follows:

Fiscal Year 2004

Net Sales:

	Quarter Ended	Year Ended
	August 1,	August 1,
	2004	2004
U.S. Soup, Sauces
and Beverages	$ 511	$ 2,998
Baking and Snacking	411	1,613
International Soup
and Sauces	340	1,595
Other	171	903
Total	$ 1,433	$ 7,109

Earnings Before Interest and Taxes:

	Quarter Ended — August 1,	August 1,
	2004	2004
U.S. Soup, Sauces
and Beverages	$ 78	$	730
Baking and Snacking	55		166
International Soup
and Sauces	30		205
Other	(8	)	101
Unallocated Corporate
Expenses	(26	)	(87	)
Total	$ 129	$	1,115

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Fiscal Year 2003

Net Sales:

	Quarter Ended — October 27,	January 26,	April 27,	August 3,	Year to Date — January 26,	April 27,	August 3,
	2002	2003	2003	2003	2003	2003	2003
U.S. Soup, Sauces
and Beverages	$ 835	$ 896	$ 662	$ 551	$ 1,731	$ 2,393	$ 2,944
Baking and Snacking	341	341	348	398	682	1,030	1,428
International Soup
and Sauces	333	394	373	338	727	1,100	1,438
Other	196	287	217	168	483	700	868
Total	$ 1,705	$ 1,918	$ 1,600	$ 1,455	$ 3,623	$ 5,223	$ 6,678

Earnings Before Interest and Taxes:

	Quarter Ended — October 27,	January 26,		April 27,		August 3,		January 26,		April 27,		August 3,
	2002	2003		2003		2003		2003		2003		2003
U.S. Soup, Sauces
and Beverages	$ 244	$	253	$	168	$	107	$	497	$	665	$	772
Baking and Snacking	37		45		24		55		82		106		161
International Soup
and Sauces	42		56		59		44		98		157		201
Other	22		60		25		(7	)	82		107		100
Unallocated Corporate
Expenses	(15	)	(29	)	(41	)	(44	)	(44	)	(85	)	(129	)
Total	$ 330	$	385	$	235	$	155	$	715	$	950	$	1,105

There were 53 weeks in fiscal 2003.

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(f) Inventories

	May 1, 2005	August 1, 2004
Raw materials, containers and supplies	$ 244	$ 294
Finished products	462	501
	$ 706	$ 795

| | Approximately 52% of inventory in 2005 and 55% in 2004 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 1, 2005 and August 1, 2004. |
| --- | --- |
| (g) | Accounting for Derivative Instruments |
| | 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. |
| | 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). |
| | Interest Rate Swaps |
| | 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. |
| | 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 amounts of all outstanding
fair-value interest rate swaps at May 1, 2005 totaled $875 with a maximum maturity date of
October 2013. The fair value of such instruments was a gain of $4 as of May 1, 2005. |

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| Foreign Currency Contracts |
| --- |
| 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 the spot rates. The fair value of these instruments was $(199) at May 1, 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. There were no such
fair-value contracts at May 1, 2005. |
| The company also enters into certain foreign exchange forward 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, as an offset to gains (losses) on the underlying
transactions. The fair value of these instruments was $(26) at May 1, 2005. |
| Foreign exchange forward contracts typically have maturities of less than eighteen months.
Cross-currency swap contracts mature in 2005 through 2014. Principal currencies include
the Australian dollar, British pound, Canadian dollar, euro, Japanese yen and Swedish
krona. |
| As of May 1, 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 $16, net of tax. At May
2, 2004, the accumulated derivative net loss in other comprehensive income was $2, net of
tax. Reclassifications from Accumulated other comprehensive income (loss) into the
Statements of Earnings during the quarter ended May 1, 2005 were not material.
Reclassifications during the remainder of fiscal year 2005 are not expected to be material.
There were no cash-flow hedges discontinued before maturity during the quarter. At May 1,
2005, the maximum maturity date of any cash-flow hedge was August 2013. |

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	Other Contracts
	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, the
total return of the company’s capital stock and beginning in February 2005 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 2006, was $47 at May 1, 2005. These instruments are not designated as accounting
hedges. Gains and losses are recorded in the Statements of Earnings. The net gain
recorded under these contracts at May 1, 2005 was approximately $1.
(h)	Restructuring
	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
represent the elimination of layers of management, elimination of redundant positions due
to the realignment of operations in North America, and reorganization of the U.S. sales
force. The majority of the terminations occurred in the fourth quarter 2004.
	The distribution and logistics realignment in Australia involves 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 have occurred
in 2005.
	A summary of restructuring reserves at May 1, 2005 and related activity is as follows:

	Accrued — Balance at	Cash	Translation		Accrued — Balance at
	August 1, 2004	Payments	Adjustment		May 1, 2005
Severance pay and benefits	$ 28	(22	)	1	$ 7

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(i)
The company sponsors certain U.S. and foreign defined benefit plans and U.S. postretirement
medical benefit plans for employees. Components of benefit expense were as follows:

Three Months Ended	Pension — May 1, 2005	May 2, 2004		May 1, 2005		May 2, 2004
Service cost	$ 13	$	13	$	—	$	1
Interest cost	28		28		5		5
Expected return on plan assets	(39	)	(38	)	—		—
Amortization of prior service
cost	2		2		(2	)	(2	)
Recognized net actuarial loss	7		5		1		1
Net periodic benefit expense	$ 11	$	10	$	4	$	5

Nine Months Ended	Pension — May 1, 2005	May 2, 2004		May 1, 2005		May 2, 2004
Service cost	$ 41	$	37	$	1	$	3
Interest cost	85		84		15		17
Expected return on plan assets	(117	)	(113	)	—		—
Amortization of prior service
cost	6		6		(5	)	(7	)
Recognized net actuarial loss	19		16		1		3
Net periodic benefit expense	$ 34	$	30	$	12	$	16

| In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the Act) was signed into law. The Act introduced a prescription drug benefit under
Medicare Part D and a federal subsidy to sponsors of retirement health care plans that
provide a benefit that is at least actuarially equivalent to Medicare Part D. In accordance
with FASB Staff Position (FSP) FAS 106-1, the company elected in January 2004 to defer
recognizing the effects of the Act on accounting for postretirement health care plans until
the FASB guidance was finalized. |
| --- |
| In May 2004, FASB issued FSP FAS 106-2, which provides accounting guidance to sponsors of
postretirement health care plans that are impacted by the Act. The FSP is effective for
interim or annual periods beginning after June 15, 2004. The company believes that
certain drug benefits offered under postretirement health care plans will qualify for the
subsidy under Medicare Part D. The effects of the subsidy were factored into the 2004
annual year-end valuation. The reduction in
the benefit obligation attributable to past service cost was approximately $32 and has been
reflected as an actuarial gain. The reduction in benefit cost for 2005 related to the Act
is approximately $5. |

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| | In the first quarter 2005, the company made a $35 voluntary contribution to a U.S. pension
plan. Additional contributions to the U.S. pension plans are not expected this fiscal
year. Contributions of $18 were made to the international plans as of May 1, 2005. |
| --- | --- |
| (j) | Contingencies |
| | 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 the ultimate disposition of complex litigation is inherently
difficult to assess, the company believes the action is without merit and is defending the
case vigorously. |
| | 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, the company believes that the
ultimate outcome of this matter will not have a material impact on the consolidated
financial condition or results of operation of the company. |

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(k)	Guarantees
	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 company guarantees approximately 1,350 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 $110. 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 May
1, 2005 and May 2, 2004 were not material.
(l)	Supplemental Cash Flow Information
	Other cash used in operating activities for the nine month periods is comprised of the
following:

Payments for hedging activities	May 1, 2005 — $ (22	)	May 2, 2004 — $ (56	)
Benefit related payments	(38	)	(38	)
Other	3		2
	$ (57	)	$ (92	)

| (m) |
| --- |
| 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 production facilities. SFAS
No. 151 will be effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. The company is in the process of evaluating the impact of SFAS No. 151, but
does not expect the adoption to have a material impact on the financial statements. |

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| In December 2004, the FASB issued SFAS No. 123R (revised 2004) “Share-Based Payment.” SFAS
No. 123R requires employee stock-based compensation to be measured based on the grant-date
fair value of the awards and the cost to be recognized over the period during which an
employee is required to provide service in exchange for the award. The Statement
eliminates the alternative use of APB No. 25’s intrinsic value method of accounting for
awards which is the company’s current accounting policy for stock options. See Note (a)
for the pro forma impact of compensation expense from stock options on net earnings and
earnings per share. SFAS No. 123R is effective for the beginning of fiscal 2006. The
company is in the process of evaluating the impact of this standard on the financial
statements, which will depend on the timing and structure of future equity-based awards. |
| --- |
| In October 2004, the American Jobs Creation Act (the AJCA) was signed into law. The AJCA
provides for a deduction of 85% of certain foreign earnings that are repatriated, as
defined by the AJCA, and a phased-in tax deduction related to profits from domestic
manufacturing activities. In December 2004, the FASB issued FSP FAS 109-1 and 109-2 to
address the accounting and disclosure requirements related to the AJCA. The company is
currently evaluating the impact of the AJCA along with the additional technical guidance
issued by the U.S. Treasury Department. The company anticipates it will complete its
evaluation by fiscal 2006. The company estimates the range of possible amounts considered
for repatriation to be between zero and $570 and the related impact on income tax to be
between zero and $30. |
| In March 2005, the FASB issued FIN 47 “Accounting for Conditional Asset Retirement
Obligations, an Interpretation of FASB Statement No. 143.” This Interpretation clarifies
that a conditional retirement obligation refers to a legal obligation to perform an asset
retirement activity in which the timing and (or) method of settlement are conditional on a
future event that may or may not be within the control of the entity. The obligation to
perform the asset retirement activity is unconditional even though uncertainty exists about
the timing and (or) method of settlement. Accordingly, an entity is required to recognize
a liability for the fair value of a conditional asset retirement obligation if the fair
value of the liability can be reasonably estimated. The liability should be recognized
when incurred, generally upon acquisition, construction or development of the asset. FIN
47 is effective no later than the end of the fiscal years ending after December 15, 2005.
The company is in the process of evaluating the impact of FIN 47. |

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link2 "ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION"

ITEM 2.

CAMPBELL SOUP COMPANY CONSOLIDATED MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Results of Operations

Overview

The company reported net earnings of $146 million for the third quarter ended May 1, 2005, versus $142 million in the comparable quarter a year ago. Earnings per share were $.35, compared to $.34 a year ago. (All earnings per share amounts included in Management’s Discussion and Analysis are presented on a diluted basis.) Net sales increased 4% to $1.7 billion. The prior year net earnings included a $10 million gain (net of $6 million in taxes) or $.02 per share from the settlement of a class action lawsuit. Current year earnings were favorably impacted by higher sales, lower Marketing and selling expenses as a percentage of sales, partially offset by higher net interest expense and a higher effective tax rate.

For the nine months ended May 1, 2005, net earnings were $611 million, compared to $588 million a year ago. Earnings per share were $1.48 compared to $1.43 a year ago. Net sales increased 7% to $6.1 billion. The prior year results include the gain from the litigation settlement previously noted. The increase in earnings over the prior year was due to the increase in sales, the favorable impact of currency and lower corporate expenses, partially offset by a decline in gross margin as a percentage of sales and an increase in net interest expense.

THIRD QUARTER

Sales

An analysis of net sales by reportable segment follows:

	(millions) — 2005	2004	% Change
U.S. Soup, Sauces and
Beverages	$ 627	$ 637	(2	)%
Baking and Snacking	421	389	8
International Soup and Sauces	435	412	6
Other	253	229	10
	$ 1,736	$ 1,667	4	%

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An analysis of percent change of net sales by reportable segment follows:

Sauces and		and		Soup and
Beverages		Snacking		Sauces		Other	Total
Volume and Mix	(6	)%	4	%	2	%	5 %	— %
Price and Sales Allowances	2		4		—		4	2
Decreased / (Increased)
Promotional Spending 1	2		(1	)	(1	)	—	—
Currency	—		1		5		1	2
	(2	)%	8	%	6	%	10 %	4 %

1 Represents revenue reductions from trade promotion and consumer coupon redemption programs.

In U.S. Soup, Sauces and Beverages, condensed soup sales increased 4%, ready-to-serve soup sales declined 6% and broth sales increased 7%. Total U.S. soup sales were flat compared with a year ago. The condensed soup sales growth was primarily due to successful merchandising and kids promotional marketing programs and increased advertising. Condensed soup sales also benefited from the installation of additional gravity-feed shelving systems. Sales of ready-to-serve soups declined due to lower volumes, reflecting shifts in marketing programs to the first and second quarters and strong competitive activity, partially offset by reduced promotional spending and higher selling prices. The convenience platform within ready-to-serve soups, which includes Campbell’s Soup at Hand and microwaveable bowls of Campbell’s Chunky and Select soups, had strong sales results. Sales of Prego pasta sauces and Pace Mexican sauces declined due to lower marketing and an increase in competitive activity. V8 vegetable juice sales increased due to higher prices and increased volume, while sales of V8 Splash juice beverages declined due to continued competitive pressures. The sales performance benefited from the introduction of Campbell’s Chunky chili.

In Baking and Snacking, Pepperidge Farm reported sales increases across all its businesses: bakery, cookies and crackers, and frozen. Sales of fresh bread and bakery products increased by double digits due to the performance of Pepperidge Farm whole grain breads, Pepperidge Farm Carb Style breads and rolls and the expanded distribution of Pepperidge Farm bagels and English muffins. Pepperidge Farm Goldfish snack crackers, cookies, frozen premium pot pies, frozen breads and frozen pastries also

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contributed to the sales growth. Arnott’s reported a sales increase driven by strong customer programs and new product launches.

In International Soup and Sauces, sales in Europe increased primarily due to currency. Strong volume growth in France from Liebig wet soup and in Germany from Erasco wet soup was offset by lower volume in the United Kingdom. In Asia Pacific, sales increased due to volume gains in broth and beverages and the favorable impact of currency. Sales in Canada increased significantly due to volume gains in ready-to-serve soups and V8 beverages, and the favorable impact of currency.

In Other, Godiva Chocolatier sales increased, with double-digit growth in same-store sales in North America driven by new product introductions, increased merchandising activity, and increased advertising and promotions. Away From Home sales increased primarily due to the performance of refrigerated soups.

Gross Margin

Gross margin, defined as net sales less cost of products sold, increased $29 million. As a percent of sales, gross margin increased from 40.3% in 2004 to 40.4% in 2005. The percentage increase was due to productivity improvements (approximately 2.1 percentage points), higher selling prices (approximately 1.1 percentage points) and lower trade and consumer promotion (approximately 0.2 percentage points), partially offset by the impact of cost inflation and other factors (approximately 3.2 percentage points) and product mix (approximately 0.1 percentage points).

Marketing and Selling Expenses

Marketing and selling expenses decreased 1% in 2005 as a result of lower consumer promotions (approximately 4 percent), partially offset by higher selling expenses (approximately 2 percent) and the impact of currency translation (approximately 1 percent). As a percent of sales, Marketing and selling expenses were 16% in 2005 and 17% in 2004.

Administrative Expenses

Administrative expenses increased by $4 million, or 3%, due primarily to the impact of currency translation.

Other Expenses

In 2005, Other income was $2 million compared to Other income of $13 million in 2004. The change was due to a $16 million gain from the company’s share of a class action settlement involving ingredient suppliers in 2004, partially offset by lower expenses from currency hedging related to the financing of international activities.

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Operating Earnings

Segment operating earnings increased 10% from the prior year.

An analysis of operating earnings by reportable segment follows:

	(millions) — 2005	2004		% Change
U.S. Soup, Sauces and
Beverages	$ 152	$	141	8 %
Baking and Snacking	36		27	33
International Soup and Sauces	59		57	4
Other	27		24	13
Subtotal	274		249	10
Corporate	(15	)	(6	)
	$ 259	$	243	7 %

Earnings from U.S. Soup, Sauces and Beverages increased 8% primarily due to higher selling prices, lower marketing spending and productivity savings, partially offset by volume declines and higher energy related costs.

Earnings from Baking and Snacking increased 33% due to higher sales, productivity savings and lower expenses in the Australian Snackfoods business, partially offset by commodity cost inflation.

Earnings from International Soup and Sauces increased 4% due to the favorable impact of currency.

Earnings from Other increased 13% due primarily to the strong sales growth.

Corporate expenses increased to $15 million from $6 million primarily due to the $16 million gain from the company’s share of a class action lawsuit in 2004. The comparison to the prior year is also impacted by expenses in 2005 associated with the ongoing implementation in North America of a new SAP enterprise-resource planning system, lower expenses from currency hedging related to the financing of international activities, lower legal expenses and lower corporate administrative expense.

Nonoperating Items

Interest expense increased to $45 million from $40 million in the prior year, primarily due to higher interest rates and lower interest income.

The effective tax rate for the quarter was 31.8% for 2005, which is consistent with the full year expected rate and the full year 2004 rate of 31.7%. The effective rate for the year-ago quarter was 30.0%.

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NINE MONTHS

Sales

An analysis of net sales by reportable segment follows:

	(millions) — 2005	2004	% Change
U.S. Soup, Sauces and
Beverages	$ 2,577	$ 2,487	4 %
Baking and Snacking	1,303	1,202	8
International Soup and Sauces	1,353	1,255	8
Other	817	732	12
	$ 6,050	$ 5,676	7 %

An analysis of percent change of net sales by reportable segment follows:

Sauces and		and		Soup and
Beverages		Snacking		Sauces		Other	Total
Volume and Mix	5	%	5	%	3	%	7 %	5	%
Price and Sales Allowances	—		3		—		4	1
Increased Promotional
Spending 1	(1	)	(2	)	(1	)	—	(1	)
Currency	—		2		6		1	2
	4	%	8	%	8	%	12 %	7	%

1 Represents revenue reductions from trade promotion and consumer coupon redemption programs.

In U.S. Soup, Sauces and Beverages, condensed soup sales increased 6%, ready-to-serve soup sales increased 2% and broth sales increased 10%. Total U.S. soup sales increased 5%. In condensed soup, eating varieties experienced double-digit growth driven in part by the combination of successful merchandising and kids promotional programs, as well as by increased advertising. Sales of cooking varieties were even with year ago, which was an improvement over historical trends, resulting from an increase in marketing support and a shift in spending to the higher consumption Thanksgiving and Christmas holiday season. Both eating and cooking condensed soup sales continued to benefit from gravity-feed shelving systems. The convenience platform within ready-to-serve soups experienced strong sales performance driven by double-digit growth of microwaveable bowls, partially offset by declines in Campbell’s Soup at Hand. Swanson broth continued to perform well, benefiting from a strong holiday season and the introduction of new organic varieties. Sales of Prego pasta sauces and Pace Mexican sauces declined due to increasing competitive pressures in their respective categories. V8 vegetable juice sales increased slightly, while sales of V8 Splash juice beverages declined. Campbell’s

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SpaghettiOs experienced significant growth as this business benefited from rebranding supported with increased advertising. Campbell’s Chunky chili, introduced in the first quarter of this year, also contributed to the sales increase.

In Baking and Snacking, Pepperidge Farm sales increased as a result of gains in all businesses: fresh bakery, cookies and crackers, and frozen. In particular, the fresh bakery business experienced double-digit growth as a result of expanded distribution and new product introductions such as Pepperidge Farm Carb Style breads and rolls. Cookie sales rose on the strength of a successful holiday campaign, and the introduction of a new line of sugar-free cookies and four new varieties of soft-baked cookies. Pepperidge Farm Goldfish snack crackers also experienced sales growth, with continued momentum in the core product line supplemented with the new Goldfish Sandwich Snackers product introduction. Arnott’s reported a sales increase due to volume gains in salty snacks and biscuits and the favorable impact of currency. Strong customer programs, new product introductions including Arnott’s Dessert cookies, and continued momentum in Kettle snacks drove volume growth.

In International Soup and Sauces, sales were up in Europe primarily due to currency as volume growth was mostly offset by increased sales allowances and higher promotional spending. Sales in Asia Pacific increased, driven by volume growth in the Australian business and by the favorable impact of currency. In Canada, sales increased due to the favorable impact of currency and volume growth, particularly in ready-to-serve soups and beverages, partially offset by higher promotional spending.

In Other, Godiva Chocolatier delivered double-digit sales growth driven by continued momentum of same-store sales growth. The primary drivers of this performance were increased in-store merchandising activity, increased advertising and successful new product introductions. Away From Home also achieved double-digit sales growth driven by volume growth of refrigerated soups and higher pricing in the U.S. food service business.

Gross Margin

Gross margin, defined as net sales less cost of products sold, increased $88 million. As a percent of sales, gross margin decreased from 41.6% in 2004 to 40.5% in 2005. The percentage decrease was due to the impact of cost inflation and other factors (approximately 2.6 percentage points), increased trade and consumer promotion (approximately 0.5 percentage points) and product mix (approximately 0.1 percentage points), partially offset by productivity improvements (approximately 1.6 percentage points) and higher selling prices (approximately 0.5 percentage points).

Marketing and Selling Expenses

Marketing and selling expenses increased 4% in 2005 primarily as a result of higher advertising (approximately 3 percent) and the impact of currency translation (approximately 1 percent). As a percent of sales, Marketing and selling expenses were 16% in both 2005 and 2004.

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Administrative Expenses

Administrative expenses increased by $3 million (1 percent) due in part to the impact of currency translation (approximately 2 percent) which more than offset reductions in corporate administrative expenses.

Other Expenses

Other income increased by $1 million in 2005 primarily due to lower adjustments related to the carrying value of investments in affordable housing partnerships and lower expenses from currency hedging related to the financing of international activities, partially offset by a $4 million insurance settlement payment in the prior year related to losses incurred by Godiva in connection with the events of September 11, 2001 and the gain from the company’s share of a class action settlement involving ingredient suppliers in 2004.

Operating Earnings

Segment operating earnings increased 3% from the prior year.

An analysis of operating earnings by reportable segment follows:

	(millions) — 2005	2004		% Change
U.S. Soup, Sauces and
Beverages	$ 643	$	652	(1	)%
Baking and Snacking	129		111	16
International Soup and Sauces	184		175	5
Other	121		109	11
Subtotal	1,077		1,047	3
Corporate	(48	)	(61	)
	$ 1,029	$	986	4	%

Earnings from U.S. Soup, Sauces and Beverages decreased 1%, as the benefit of productivity gains and higher sales volume were more than offset by higher energy related costs and increased trade promotion and advertising.

Earnings from Baking and Snacking increased 16% driven by higher selling prices, increased sales volume and productivity gains, partially offset by higher material costs and increased marketing investments.

Earnings from International Soup and Sauces increased 5% due to the impact of currency.

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Earnings from Other increased by 11% due to strong sales growth. Prior year earnings included a $4 million insurance settlement payment related to the losses incurred by Godiva in connection with the events of September 11, 2001.

Corporate expenses decreased to $48 million from $61 million primarily due to lower adjustments related to the carrying value of investments in affordable housing partnerships, lower expenses from currency hedging related to the financing of international activities and lower costs associated with ongoing litigation, partially offset by the gain from the company’s share of a class action settlement involving ingredient suppliers in 2004.

Nonoperating Items

Interest expense increased to $134 million from $125 million in the prior year, primarily due to higher interest rates partially offset by lower debt balances.

The effective tax rate for the nine months was 31.7% for 2005 and 2004, which is consistent with the full year expected rate and the full year 2004 rate of 31.7%.

Restructuring Program

A restructuring charge of $32 million ($22 million after tax) was recorded in the fourth quarter 2004 for severance and employee benefit costs associated with a worldwide reduction in workforce and with the implementation of a distribution and logistics realignment in Australia. These programs are part of cost savings initiatives designed to improve the company’s operating margins and asset utilization. Approximately 400 positions were eliminated under the reduction in workforce program resulting in a restructuring charge of $23 million. The reductions represent the elimination of layers of management, elimination of redundant positions due to the realignment of operations in North America, and reorganization of the U.S. sales force. The majority of the terminations occurred in the fourth quarter of 2004. Annual pre-tax savings from the reduction are expected to be approximately $40 million beginning in 2005.

The distribution and logistics realignment in Australia involves the conversion of a direct store delivery system to a central warehouse system. A restructuring charge of $9 million was recorded for this program. As a result of this program, over 200 positions will be eliminated due to the outsourcing of the infrastructure. The majority of the terminations have occurred in 2005. Annual pre-tax benefits are expected to be approximately $10 — $15 million beginning in 2008.

The cash outflows related to these programs are not expected to have a material adverse effect on the company’s liquidity. See Note (h) to the Consolidated Financial Statements for further discussion of these programs.

Liquidity and Capital Resources

The company generated cash from operations of $772 million compared to $576 million last year. The increase in cash flow reflects improved working capital performance,

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lower cash settlements related to foreign currency hedging transactions that are reflected in Other, and an increase in earnings.

Capital expenditures were $166 million compared to $142 million a year ago. Capital expenditures are expected to be approximately $350 million in 2005.

The company repurchased 2,185,000 shares in the quarter ended May 1, 2005 at a cost of $62 million. The company repurchased 2,350,000 shares in the nine month period ended May 1, 2005 at a cost of $66 million. The company repurchased 700,000 shares in the quarter ended May 2, 2004 at a cost of $19 million. The company repurchased 1,410,000 shares in the nine month period ended May 2, 2004 at a cost of $38 million. The company expects to repurchase sufficient shares over time to offset the impact of dilution from shares issued under the company’s stock compensation plans. See “Unregistered Sales of Equity Securities and Use of Proceeds” for more information.

At May 1, 2005, the company had approximately $447 million of notes payable due within one year and $33 million of standby letters of credit issued on behalf of the company. The company maintains $1.5 billion of committed revolving credit facilities, which remain unused at May 1, 2005, except for $4 million of standby letters of credit issued on behalf of the company. These facilities are described below. Another $29 million of standby letters of credit were issued on behalf of the company under a separate facility.

In September 2004, the company entered into a $500 million committed 364-day revolving credit facility, which replaced an existing $900 million 364-day facility that matured in September 2004. The 364-day revolving credit facility contains a one-year term-out feature. The company also entered into a $1 billion revolving credit facility that matures in September 2009, which replaced the existing $900 million revolving credit facility that was scheduled to mature in September 2006. These agreements support the company’s commercial paper program. The company is in compliance with the covenants contained in its revolving credit facilities and debt securities.

The company guarantees approximately 1,350 bank loans to Pepperidge Farm independent sales distributors by third party financial institutions used to purchase distribution routes. The maximum potential amount of the future payments the company could be required to make under the guarantees is approximately $110 million. The company’s guarantees are indirectly secured by the distribution routes. The company does not believe that it is probable that it will be required to make guarantee payments as a result of defaults on the bank loans guaranteed. See also Note (k) to the Consolidated Financial Statements for information on guarantees.

The company believes that foreseeable liquidity, including the resolution of the contingencies described in Note (j) to the Consolidated Financial Statements, and capital resource requirements are expected to be met through anticipated cash flows from operations, management of working capital, long-term borrowings under its shelf registration, and short-term borrowings, including commercial paper. The company believes that its sources of financing are adequate to meet its future liquidity and capital

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resource requirements. The cost and terms of any future financing arrangements depend on the market conditions and the company’s financial position at that time.

Significant Accounting Estimates

The consolidated financial statements of the company are prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates and assumptions. The significant accounting policies of the company are described in Note 1 to the Consolidated Financial Statements and the significant accounting estimates are described in Management’s Discussion and Analysis included in the 2004 Annual Report on Form 10-K. The impact of new accounting standards is discussed in the following section. There have been no other changes in the company’s accounting policies in the current period that had a material impact on the company’s consolidated financial condition or results of operation.

Recently Issued Accounting Pronouncements

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act introduced a prescription drug benefit under Medicare Part D and a federal subsidy to sponsors of retirement health care plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In accordance with FASB Staff Position (FSP) FAS 106-1, the company elected in January 2004 to defer recognizing the effects of the Act on accounting for postretirement health care plans until the FASB guidance was finalized.

In May 2004, FASB issued FSP FAS 106-2, which provides accounting guidance to sponsors of postretirement health care plans that are impacted by the Act. The FSP is effective for interim or annual periods beginning after June 15, 2004. The company believes that certain drug benefits offered under postretirement health care plans will qualify for the subsidy under Medicare Part D. The effects of the subsidy were factored into the 2004 annual year-end valuation. The reduction in the benefit obligation attributable to past service cost was approximately $32 million and has been reflected as an actuarial gain. The reduction in benefit cost for 2005 related to the Act is approximately $5 million.

In November 2004, Statement of Financial Accounting Standards (SFAS) No. 151 “Inventory Costs – an amendment of ARB No. 43, Chapter 4” was issued. SFAS No. 151 is the result of efforts to converge U.S. accounting standards for inventories with International Accounting Standards. SFAS No. 151 requires abnormal amounts of idle facility expense, freight, handling costs and spoilage to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The company is in the process of evaluating SFAS No. 151, but does not expect the adoption to have a material impact on the financial statements.

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In December 2004, the FASB issued SFAS No. 123R (revised 2004) “Share-Based Payment.” SFAS No. 123R requires employee stock-based compensation to be measured based on the grant-date fair value of the awards and the cost to be recognized over the period during which an employee is required to provide service in exchange for the award. The Statement eliminates the alternative use of Accounting Principles Board (APB) No. 25’s intrinsic value method of accounting for awards which is the company’s current accounting policy for stock options. See Note (a) for the pro forma impact of compensation expense from stock options on net earnings and earnings per share. SFAS No. 123R is effective for the beginning of fiscal 2006. The company is in the process of evaluating the impact of this standard on the financial statements, which will depend on the timing and structure of future equity-based awards.

In October 2004, the American Jobs Creation Act (the AJCA) was signed into law. The AJCA provides for a deduction of 85% of certain foreign earnings that are repatriated, as defined by the AJCA, and a phased-in tax deduction related to profits from domestic manufacturing activities. In December 2004, the FASB issued FSP FAS 109-1 and 109-2 to address the accounting and disclosure requirements related to the AJCA. The company is currently evaluating the impact of the AJCA along with the additional technical guidance issued by the U.S. Treasury Department. The company anticipates it will complete its evaluation by fiscal 2006. The company estimates the range of possible amounts considered for repatriation to be between zero and $570 million and the related impact on income tax to be between zero and $30 million.

In March 2005, the FASB issued FIN 47 “Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143.” This Interpretation clarifies that a conditional retirement obligation refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The liability should be recognized when incurred, generally upon acquisition, construction or development of the asset. FIN 47 is effective no later than the end of the fiscal years ending after December 15, 2005. The company is in the process of evaluating the impact of FIN 47.

Recent Developments

On May 23, 2005, the company announced results for the third quarter 2005 and commented on the outlook for earnings per share for the full year.

Forward-Looking Statements

This quarterly report contains certain statements that reflect the company’s current expectations regarding future results of operations, economic performance, financial condition and achievements of the company. The company tries, wherever possible, to identify these forward-looking statements by using words such as “anticipate,” “believe,”

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“estimate,” “expect,” “will” and similar expressions. One can also identify them by the fact that they do not relate strictly to historical or current facts. These statements reflect the company’s current plans and expectations and are based on information currently available to it. They rely on a number of assumptions regarding future events and estimates which could be inaccurate and which are inherently subject to risks and uncertainties.

The company wishes to caution the reader that the following important factors and those important factors described in other Securities and Exchange Commission filings of the company, or in the company’s 2004 Annual Report on Form 10-K, could affect the company’s actual results and could cause such results to vary materially from those expressed in any forward-looking statements made by, or on behalf of, the company:

| • | 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; |
| --- | --- |
| • | the risks in the marketplace associated with trade and consumer acceptance of product
improvements, shelving initiatives and new product introductions; |
| • | 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 increased marketing and
pricing actions; |
| • | the company’s ability to realize projected cost savings and benefits, including those
contemplated by restructuring programs and other cost-savings initiatives; |
| • | the company’s ability to successfully manage changes to its business processes,
including selling, distribution, production capacity, information management systems and
the integration of acquisitions; |
| • | the increased significance of certain of the company’s key trade customers; |
| • | 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 and access to shelf space; |
| • | the impact of fluctuations in the supply and cost of raw materials; |
| • | the uncertainties of litigation described from time to time in the company’s Securities
and Exchange Commission filings; |
| • | the impact of changes in currency exchange rates, tax rates, interest rates, equity
markets, inflation rates, recession and other external factors; and |

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• the impact of unforeseen business disruptions in one or more of the company’s markets due to political instability, civil disobedience, armed hostilities 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 any forward-looking statements made by the company in order to reflect new information, events or circumstances after the date they are made.

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link2 "ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK"

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For information regarding the company’s exposure to certain market risk, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the 2004 Annual Report on Form 10-K. There have been no significant changes in the company’s portfolio of financial instruments or market risk exposures from the fiscal 2004 year-end except as follows:

In August 2004, a pay fixed SEK/receive fixed USD swap with a notional value of $47 million matured. In addition, a pay variable SEK/receive variable USD swap with a notional value of $18 million matured. The company entered into a pay variable SEK/ receive variable USD swap with a notional value of $32 million which matures in 2008. The company also entered into a pay fixed SEK/receive fixed USD swap with a notional value of $32 million which matures in 2010.

In April 2005, a pay variable EUR/receive variable USD swap with a notional value of $137 million matured. The company entered into a pay variable EUR/receive variable USD swap with a notional value of $69 million which matures in 2006. The company also entered into a pay fixed EUR/receive fixed USD swap with a notional value of $69 million which matures in 2008.

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link2 "ITEM 4. CONTROLS AND PROCEDURES"

ITEM 4. CONTROLS AND PROCEDURES

a.	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 May 1, 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.
b.	Changes in Internal Controls
	During the quarter ended May 1, 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.

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link1 " PART II"

PART II link2 "ITEM 1. LEGAL PROCEEDINGS"

ITEM 1. LEGAL PROCEEDINGS

As previously reported, on March 30, 1998, the company effected a spinoff of several of its non-core businesses to Vlasic Foods International Inc. (“VFI”). VFI and several of its affiliates (collectively, “Vlasic”) commenced cases under Chapter 11 of the Bankruptcy Code on January 29, 2001 in the United States Bankruptcy Court for the District of Delaware. Vlasic’s Second Amended Joint Plan of Distribution under Chapter 11 (the “Plan”) was confirmed by an order of the Bankruptcy Court dated November 16, 2001, and became effective on or about November 29, 2001. The Plan provides for the assignment of various causes of action allegedly belonging to the Vlasic estates, including claims against the company allegedly arising from the spinoff, to VFB L.L.C., a limited liability company (“VFB”) whose membership interests are to be distributed under the Plan to Vlasic’s general unsecured creditors.

On February 19, 2002, VFB commenced a lawsuit against the company and several of its subsidiaries in the United States District Court for the District of Delaware alleging, among other things, fraudulent conveyance, illegal dividends and breaches of fiduciary duty by Vlasic directors alleged to be under the company’s control. The lawsuit seeks to hold the company liable in an amount necessary to satisfy all unpaid claims against Vlasic (which VFB estimates in the amended complaint to be $200 million), plus unspecified exemplary and punitive damages. While the ultimate disposition of complex litigation is inherently difficult to assess, the company believes the action is without merit and is defending the case vigorously.

As previously reported, the company received an Examination Report from the Internal Revenue Service on December 23, 2002, which included a challenge to the treatment of gains and interest deductions claimed in the company’s fiscal 1995 federal income tax return, relating to transactions involving government securities. If the proposed adjustment were upheld, it would require the company to pay a net amount of approximately $100 million in taxes, accumulated interest to December 23, 2002, and penalties. Interest will continue to accrue until the matter is resolved. The company believes these transactions were properly reported on its federal income tax return in accordance with applicable tax laws and regulations in effect during the period involved and is challenging these adjustments vigorously. While the outcome of proceedings of this type cannot be predicted with certainty, the company believes that the ultimate outcome of this matter will not have a material impact on the consolidated financial condition or results of operation of the company.

As previously reported, on July 15, 2003, Pepperidge Farm, Incorporated, an indirect wholly-owned subsidiary of the company, made a submission to the United States Environmental Protection Agency (“EPA”) relating to its use and replacement of certain appliances containing ozone-depleting refrigerants. The submission was made pursuant to the terms of the Ozone-Depleting Substance Emission Reduction Bakery Partnership Agreement (the “EPA Agreement”) entered into by and between Pepperidge Farm and the EPA. Pepperidge Farm executed the EPA Agreement in April 2002 as part of a

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voluntary EPA-sponsored program relating to the reduction of ozone-depleting refrigerants used in the bakery industry. As a result of the EPA Agreement, as of May 1, 2005, Pepperidge Farm has incurred costs of approximately $4.75 million relating to the evaluation and replacement of certain of its refrigerant appliances. Of this amount, $4 million was incurred in fiscal 2003; the remainder was incurred in fiscal 2004. If the submission is approved by the EPA, in addition to the expenditures previously made, Pepperidge Farm will be required to pay a penalty in the amount of approximately $370 thousand. The company does not expect that the cost of complying with the EPA Agreement will have a material impact on the consolidated financial condition or results of operation of the company.

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link2 "ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS"

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

				Shares Purchased	of Shares that May
	Total Number		Average	as Part of Publicly	Yet Be Purchased
	of Shares		Price Paid	Announced Plans	Under the Plans
Period	Purchased (1)		Per Share (2)	or Programs	or Programs
1/31/05 - 2/28/05	50	(3)	$ 29.66	(3)	0	0
3/1/05 - 3/31/05	2,187,263	(4)	$ 28.26	(4)	0	0
4/1/05 - 5/1/05	7,558	(3)	$ 28.48	(3)	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
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) | Represents shares owned and tendered by employees to satisfy tax
withholding requirements on the vesting of restricted shares. |
| (4) | Includes 2,263 shares owned and tendered by employees at an average price per
share of $26.21 to satisfy tax withholding requirements on the vesting of restricted
shares. |

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link2 " ITEM 6. EXHIBITS "

ITEM 6. EXHIBITS

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.

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link1 "SIGNATURES"

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.

/s/ Robert A. Schiffner
Robert A. Schiffner Senior Vice President and Chief Financial Officer

By:
Ellen Oran Kaden
Senior Vice President – Law and Government Affairs

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link1 "INDEX TO EXHIBITS"

INDEX TO EXHIBITS

Exhibits

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.