Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Description of the Company

Campbell Soup Company is a global manufacturer and marketer of high-quality, branded convenience food products. Commencing with the fourth quarter of fiscal 2011, the company reports the results of operations in the following reportable segments: U.S. Simple Meals; U.S. Beverages; Global Baking and Snacking; International Simple Meals and Beverages; and North America Foodservice. Segment results of prior periods were modified to conform to the current presentation. See Note 6 to the Consolidated Financial Statements for additional information on segments.

Key Strategies

In fiscal 2011, management and the Board of Directors conducted a comprehensive review of the company’s recent performance and business strategies. In July 2011, the company announced a new strategic framework focused on expansion of its brand and product platforms in its three core categories of simple meals, healthy beverages and baked snacks. The new framework is centered on three growth strategies:

	•	Stabilize and then profitably grow the company’s North America soup and simple meals business.

	•	Expand the company’s international presence.

	•	Continue to drive growth in the company’s healthy beverages and baked snacks businesses.

The new growth strategies are intended to accelerate profitable net sales growth and build the foundation for delivery of sustainable above-average total shareholder returns.

Implementation of the company’s new strategic framework will require substantial investment in 2012 to extend product platforms, re-invigorate consumer-focused marketing to expand the equities of its core brands, and drive global expansion. The company expects that these investments will negatively affect financial performance in 2012, but set the stage for profitable growth in 2013 and beyond.

The company is taking a number of steps to stabilize and then revitalize its soup and simple meals business in North America. In the first half of fiscal 2011, the company increased promotional support for its North America soup and simple meals business. This increased support did not deliver anticipated volume gains. Going forward, marketing investment in soup and simple meals will be rebalanced toward a greater emphasis on consumer brand building, with the recognition that this shift may have a short-term negative impact on volume. While it will continue to invest in advertising and innovation focused on maintaining the vitality of existing product lines, the company will devote a greater proportion of its research and development resources than in past years to innovation designed to expand its product platforms and packaging formats in the simple meals category and to reach new consumers and new usage occasions. In the area of health and wellness, the company will emphasize consumer choice. It will continue to offer a significant variety of products to meet the needs of consumers for whom lower sodium is a dietary priority. It will also offer other product propositions intended to appeal to consumers with a variety of health and wellness concerns.

The company plans to expand its presence in international markets by extending its product platforms in its existing categories in its current businesses in Europe and Asia Pacific, and by pursuing growth opportunities in fast-growing markets in Asia and Latin America. The company anticipates that its expansion into new markets will be anchored in external development, with transactions that may include both acquisitions and strategic alliances such as joint ventures and other strategic partnerships. In the People’s Republic of China, it will continue to focus on building a soup and simple meals business through the joint venture with Swire Pacific Limited announced in January 2011.

In its healthy beverages business, the company will leverage its differentiating capabilities in the area of fruit and vegetable nutrition to pursue innovation in fast-growing product segments, such as energy drinks and juices, and seek to expand the business in geographies outside of the United States. Growth in baked snacks will be fueled by continuing innovation in adjacent product segments and categories and expanded consumer support. On July 12, 2011, the company announced plans to enhance its innovation capabilities in baked snacks by building a new 34,000-square-foot innovation center at the headquarters of its Pepperidge Farm business in Norwalk, Connecticut.

Executive Summary

This Executive Summary provides significant highlights from the discussion and analysis that follows.

	•	Net sales increased 1% in 2011 to $7.719 billion.

	•	Gross profit, as a percent of sales, decreased to 40.2% from 41.0% a year ago.

	•	Net earnings per share were $2.42 in 2011 and 2010. The current year included $.12 per share of expense from items that impacted comparability. The prior year included $.05 per share of expense from items that impacted comparability, as discussed below.

	•	For 2011, cash from operations increased from $1.057 billion a year ago to $1.142 billion.

Net earnings attributable to Campbell Soup Company — 2011 Compared with 2010

The following items impacted the comparability of net earnings and net earnings per share:

	•	In the fourth quarter of fiscal 2011, the company announced a series of initiatives to improve supply chain efficiency and reduce overhead costs across the organization to help fund plans to drive the growth of the business. The company also announced its intent to exit the Russian market. In the fourth quarter of fiscal 2011, the company recorded a restructuring charge of $63 million ($41 million after tax or $.12 per share) related to these initiatives. See Note 7 to the Consolidated Financial Statements and “Restructuring Charges” for additional information;

	•	In the third quarter of fiscal 2010, the company recorded a restructuring charge of $12 million ($8 million after tax or $.02 per share) for pension benefit costs related to the 2008 initiatives to improve operational efficiency and long-term profitability. See Note 7 to the Consolidated Financial Statements and “Restructuring Charges” for additional information; and

• In the third quarter of fiscal 2010, the company recorded deferred tax expense of $10 million, or $.03 per share, to reduce deferred tax assets as a result of the U.S. health care legislation enacted in March 2010. The law changed the tax treatment of subsidies to companies that provide prescription drug benefits to retirees.

The items impacting comparability are summarized below:


	2011						2010
	Earnings			EPS			Earnings			EPS
	Impact			Impact			Impact			Impact
	(Millions, except per share amounts)

Net earnings	$	805		$	2.42		$	844		$	2.42

Restructuring charges	$	(41	)	$	(.12	)	$	(8	)	$	(.02	)
Deferred tax expense from U.S. health care legislation		—			—			(10	)		(.03	)

Impact of significant items on net earnings	$	(41	)	$	(.12	)	$	(18	)	$	(.05	)

Net earnings were $805 million ($2.42 per share) in 2011 and $844 million ($2.42 per share) in 2010. After adjusting for the items impacting comparability, net earnings decreased in 2011 primarily due to a decline in gross margin percentage and lower sales volume, partly offset by lower marketing expenses and the impact of currency. After adjusting for items impacting comparability, earnings per share increased in 2011 due to a reduction in the weighted average diluted shares outstanding, primarily due to share repurchases under the company’s strategic share repurchase program.

Net earnings (loss) attributable to noncontrolling interests

The company owns a 60% controlling interest in a joint venture formed with Swire Pacific Limited to support the development of the company’s business in China. The joint venture began operations on January 31, 2011, the beginning of the third fiscal quarter. The noncontrolling interest’s share in the net loss was included in Net earnings (loss) attributable to noncontrolling interests in the Consolidated Statements of Earnings.

The company also owns a 70% controlling interest in a Malaysian manufacturing company. Historically, the earnings attributable to the noncontrolling interest were less than $1 million annually and were previously included in Other expenses/(income) in the Consolidated Statements of Earnings. Beginning in the third quarter of fiscal 2011, the earnings attributable to the noncontrolling interest were included in Net earnings (loss) attributable to noncontrolling interests in the Consolidated Statements of Earnings. The earnings were not material in 2011.

Net earnings attributable to Campbell Soup Company — 2010 Compared with 2009

Net earnings were $844 million ($2.42 per share) in 2010 and $736 million ($2.05 per share) in 2009.

In addition to the 2010 items that impacted the comparability of net earnings and net earnings per share previously disclosed, the following items also impacted comparability:

Continuing Operations

	•	In fiscal 2009, the company recorded pre-tax restructuring-related costs of $22 million ($15 million after tax or $.04 per share) in Cost of products sold related to the previously announced initiatives to improve operational efficiency and long-term profitability. See Note 7 to the Consolidated Financial Statements and “Restructuring Charges” for additional information; and

	•	In the fourth quarter of fiscal 2009, as part of the company’s annual review of intangible assets, an impairment charge of $67 million ($47 million after tax or $.13 per share) was recorded in Other expense/(income) related to certain European trademarks, including Heisse Tasse, Blå Band and Royco, used in the International Simple Meals and Beverages segment. See Note 5 to the Consolidated Financial Statements for additional information.

Discontinued Operations

• In the second quarter of fiscal 2009, the company recorded a $4 million tax benefit ($.01 per share) related to the sale of the Godiva Chocolatier business.

The items impacting comparability are summarized below:


	2010						2009
	Earnings			EPS			Earnings			EPS
	Impact			Impact			Impact			Impact
	(Millions, except per share amounts)

Earnings from continuing operations	$	844		$	2.42		$	732		$	2.03

Earnings from discontinued operations	$	—		$	—		$	4		$	.01

Net earnings(1)	$	844		$	2.42		$	736		$	2.05

Continuing operations:
Deferred tax expense from U.S. health care legislation	$	(10	)	$	(.03	)	$	—		$	—
Restructuring charges and related costs		(8	)		(.02	)		(15	)		(.04	)
Impairment charge		—			—			(47	)		(.13	)
Discontinued operations:
Tax benefit from the sale of Godiva Chocolatier business	$	—		$	—		$	4		$	.01

Impact of significant items on net earnings	$	(18	)	$	(.05	)	$	(58	)	$	(.16	)

(1) The sum of the individual per share amounts does not equal due to rounding.

Earnings from continuing operations were $844 million in 2010 ($2.42 per share) and $732 million ($2.03 per share) in 2009. After adjusting for the items impacting comparability, Earnings from continuing operations increased primarily due to improved gross margin performance and the impact of currency, partially offset by lower sales volume. Earnings per share from continuing operations benefited from a reduction in the weighted average diluted shares outstanding, which was primarily due to share repurchases under the company’s strategic share repurchase program.

Earnings from discontinued operations of $4 million in 2009 represented an adjustment to the tax liability associated with the sale of the Godiva Chocolatier business.

Discussion and Analysis

Sales

An analysis of net sales by reportable segment follows:


							% Change
	2011		2010		2009		2011/2010			2010/2009
	(Millions)

U.S. Simple Meals	$	2,751	$	2,938	$	3,049		(6	)		(4	)
U.S. Beverages		759		762		735		—			4
Global Baking and Snacking		2,156		1,975		1,846		9			7
International Simple Meals and Beverages		1,463		1,423		1,357		3			5
North America Foodservice		590		578		599		2			(4	)

	$	7,719	$	7,676	$	7,586		1			1

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


							Global			International
	U.S.						Baking			Simple			North
	Simple			U.S.			and			Meals and			America
	Meals			Beverages			Snacking			Beverages			Foodservice			Total

2011 versus 2010
Volume and Mix		(5	)%		2	%		3	%		—	%		(1	)%		(1	) %
Price and Sales Allowances		—			—			2			—			—			1
(Increased)/Decreased Promotional Spending(1)		(1	)		(2	)		(1	)		(1	)		2			(1	)
Currency		—			—			5			4			1			2

		(6	)%		—	%		9	%		3	%		2	%		1	%


							Global			International
	U.S.						Baking			Simple			North
	Simple			U.S.			and			Meals and			America
	Meals			Beverages			Snacking			Beverages			Foodservice			Total

2010 versus 2009
Volume and Mix		(3	)%		6	%		2	%		(1	)%		(5	)%		(1	)%
Price and Sales Allowances		1			1			1			2			1			1
Increased Promotional Spending(1)		(2	)		(3	)		(3	)		(2	)		(1	)		(2	)
Divestitures/Acquisitions		—			—			1			(1	)		—			—
Currency		—			—			6			7			1			3

		(4	)%		4	%		7	%		5	%		(4	)%		1	%

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

In 2011, U.S. Simple Meals sales decreased 6%. U.S. soup sales decreased 6% reflecting an overall weak economy; a challenging competitive environment in the U.S. food industry; changes in buying patterns among U.S. shoppers, particularly in “stock up” purchase behavior; and lower levels of product innovation. In this retail environment, the company’s high levels of promotional support during the first half of the year did not deliver anticipated volume gains.

	•	Sales of Campbell’s condensed soups declined 4% primarily due to declines in eating varieties. Sales of eating varieties were negatively impacted by promotional discounting in ready-to-serve soups.

	•	Sales of ready-to-serve soups decreased 9% with declines in both canned and microwavable varieties.

	•	Broth sales decreased 1%.

Sales of Prego pasta sauce and Pace Mexican sauce declined due to increased competitive activities.

In 2010, U.S. Simple Meals sales decreased 4%. U.S. soup sales decreased 4%, due to the following:

	•	Sales of Campbell’s condensed soups declined 2%, as declines in eating varieties were partially offset by gains in cooking varieties.

	•	Sales of ready-to-serve soups decreased 9% with declines in both canned and microwavable varieties.

	•	Broth sales increased 3% reflecting benefits from growth of in-home eating occasions and consumer demand for 100% natural product offerings.

Prego pasta sauce sales increased, reflecting growth of Prego Heart Smart varieties, while Pace Mexican sauce sales declined.

In 2011, U.S. Beverages sales were comparable to 2010 as increased volume was offset by higher promotional spending. Promotional spending was increased to be more competitive with other beverages. Sales of V8 Splash juice drinks and V8 V-Fusion juice increased, while sales of V8 vegetable juice declined.

In 2010, U.S. Beverages sales increased 4% primarily due to higher sales of V8 V-Fusion juice and gains in V8 Splash juice drinks, partly offset by lower sales of V8 vegetable juice. V8 V-Fusion juice sales increased double digits due to increased advertising and new item launches.

In 2011, Global Baking and Snacking sales increased 9% as both Pepperidge Farm and Arnott’s achieved volume gains and also benefited from higher selling prices. Pepperidge Farm sales increased primarily due to growth in Goldfish snack crackers and bakery products, including whole-grain bread. In Arnott’s, sales increased primarily due to currency, as well as gains in Shapes, Cruskits, and Vita-Weat savory crackers, and chocolate biscuits.

In 2010, Global Baking and Snacking sales increased 7% primarily due to currency. Pepperidge Farm sales were comparable to 2009, as the additional sales from the acquisition of Ecce Panis, Inc. and volume gains were offset by increased promotional spending. Arnott’s sales increased due to currency and growth in Tim Tam chocolate biscuits and Shapes savory crackers.

In 2011, International Simple Meals and Beverages sales increased 3%, primarily due to currency. In Europe, sales declined due to currency. In Asia Pacific, sales increased primarily due to currency and volume-driven gains in Australia. In Canada, sales increased due to currency and volume gains, partially offset by increased promotional spending on soup products to be more competitive with other simple meal products. Sales in Latin America declined.

In 2010, International Simple Meals and Beverages sales increased 5% primarily due to currency, partly offset by the divestiture of the company’s French sauce and mayonnaise business in September 2008. In Europe, sales declined, reflecting lower sales in Germany and the impact of the divestiture, partly offset by the impact of currency. In Asia Pacific, sales increased due to currency and volume-driven gains in Japan, Australia and Malaysia. In Canada, sales increased due to currency, partially offset by lower sales volume of ready-to-serve soups.

In 2011, North America Foodservice sales increased 2% primarily due to gains in refrigerated soup.

In 2010, North America Foodservice sales declined 4% primarily due to weakness in the food service sector.

Gross Profit

Gross profit, defined as Net sales less Cost of products sold, decreased by $47 million in 2011 from 2010 and increased by $122 million in 2010 from 2009. As a percent of sales, gross profit was 40.2% in 2011, 41.0% in 2010, and 39.9% in 2009.

The 0.8-percentage-point decrease in gross margin percentage in 2011 was due to the following factors:


	Margin Impact

Cost inflation and other factors, including higher plant costs		(2.2	)
Higher level of promotional spending		(0.7	)
Mix		(0.2	)
Productivity improvements		1.9
Higher selling prices		0.4

		(0.8	)

The 1.1-percentage-point increase in gross margin percentage in 2010 was due to the following factors:


	Margin Impact

Productivity improvements		2.1
Higher selling prices		0.8
Costs in 2009 related to the initiatives to improve operational efficiency and long-term profitability		0.3
Mix		0.1
Higher level of promotional spending		(1.2	)
Cost inflation and other factors		(1.0	)

		1.1

Marketing and Selling Expenses

Marketing and selling expenses as a percent of sales were 13.0% in 2011, 13.8% in 2010, and 14.2% in 2009. Marketing and selling expenses decreased 5% in 2011 from 2010. The decrease was primarily due to lower advertising expenses (approximately 3 percentage points); lower selling expenses (approximately 2 percentage points); and lower other marketing expenses (approximately 2 percentage points), partly offset by the impact of currency (approximately 2 percentage points). Marketing and selling expenses decreased 2% in 2010 from 2009. The decrease was primarily due to lower advertising and consumer promotion costs (approximately 3 percentage points) and lower marketing expenses (approximately 1 percentage point), partially offset by the impact of currency (approximately 2 percentage points). The lower advertising expenses in 2010 reflected a reduction in media rates and a shift to trade promotion in many of the businesses.

Administrative Expenses

Administrative expenses as a percent of sales were 7.9% in 2011 and in 2010, and 7.8% in 2009. Administrative expenses increased by 1% in 2011 from 2010 primarily due to an increase in pension and health care benefit costs (approximately 2 percentage points); the impact of currency (approximately 2 percentage points); and costs associated with the corporate headquarters facility (approximately 1 percentage point), partially offset by lower compensation costs (approximately 2 percentage points) and cost management efforts and other factors (approximately 2 percentage points). Administrative expenses increased by 2% in 2010 from 2009, primarily due to the impact of currency (approximately 2 percentage points); an increase in compensation and benefit costs, including pension expense (approximately 2 percentage points), partially offset by the company’s cost management efforts and other factors (approximately 2 percentage points).

Research and Development Expenses

Research and development expenses increased $6 million or 5% in 2011 from 2010. The increase was primarily due to costs associated with an ongoing initiative to simplify the soup-making process and product innovation in North America (approximately 2 percentage points); costs associated with a global baked snacks initiative (approximately 2 percentage points), and the impact of currency (approximately 2 percentage points), partly offset by costs savings initiatives (approximately 1 percentage point). Research and development expenses increased $9 million or 8% in 2010 from 2009. The increase was primarily due to an increase in compensation and benefit costs (approximately 4 percentage points); costs associated with an initiative to simplify the soup-making process in North America (approximately 2 percentage points); and the impact of currency (approximately 2 percentage points).

Other Expenses/(Income)

Other expense in 2011 included a $3 million impairment charge associated with the Heisse Tasse trademark used in the International Simple Meals and Beverages segment. The charge was recorded as a result of the company’s annual review of intangible assets. See Note 5 to the Consolidated Financial Statements.

Other expense in 2009 included a $67 million impairment charge associated with certain European trademarks, including Heisse Tasse, Blå Band and Royco. The charge was recorded as a result of the company’s annual review of intangible assets and was reflected in the International Simple Meals and Beverages segment. See Note 5 to the Consolidated Financial Statements.

Operating Earnings

Segment operating earnings decreased 1% in 2011 from 2010 and increased 13% in 2010 from 2009. The 2009 results included a $67 million impairment charge.

An analysis of operating earnings by reportable segment follows:


										% Change
	2011			2010			2009			2011/2010			2010/2009
				(Millions)

U.S. Simple Meals	$	657		$	737		$	749			(11	)		(2	)
U.S. Beverages		182			206			178			(12	)		16
Global Baking and Snacking		355			322			265			10			22
International Simple Meals and Beverages(1)		185			161			69			15			133
North America Foodservice		82			55			53			49			4

Segment operating earnings		1,461			1,481			1,314			(1	)		13
Unallocated corporate expenses		(119	)		(121	)		(107	)
Restructuring charges and related costs(2)		(63	)		(12	)		(22	)

Earnings before interest and taxes	$	1,279		$	1,348		$	1,185

(1)		The International Simple Meals and Beverages segment included a $67 million impairment charge in 2009 on certain European trademarks. See Note 5 to the Consolidated Financial Statements for additional information.

(2)		See Note 7 to the Consolidated Financial Statements for additional information on restructuring charges and related costs. Beginning in 2011, segment operating performance is evaluated excluding restructuring charges. Prior periods were modified to conform to the current presentation. See Note 6 to the Consolidated Financial Statements.

Earnings from U.S. Simple Meals decreased 11% in 2011 versus 2010. The decline was primarily due to lower sales and a reduced gross margin percentage, partially offset by lower marketing and selling expenses. In the first half of 2011, in response to the overall competitive environment, the company maintained higher levels of promotional support, which did not deliver anticipated volume gains.

Earnings from U.S. Simple Meals decreased 2% in 2010 versus 2009. The decrease was due to a decline in U.S. Soup, resulting from lower sales, partly offset by lower advertising costs. Earnings from U.S. Sauces increased primarily due to an improvement in gross margin percentage and lower advertising costs, partially offset by lower sales.

Earnings from U.S. Beverages decreased 12% in 2011 versus 2010 primarily due to increased promotional spending.

Earnings from U.S. Beverages increased 16% in 2010 versus 2009 primarily due to an improvement in gross margin percentage and higher sales.

Earnings from Global Baking and Snacking increased 10% in 2011 versus 2010. The increase was primarily due to the impact of currency and volume-driven growth in both Pepperidge Farm and Arnott’s.

Earnings from Global Baking and Snacking increased 22% in 2010 versus 2009. The increase in operating earnings was due to the impact of currency and earnings growth in Pepperidge Farm and Arnott’s.

Earnings from International Simple Meals and Beverages increased to $185 million in 2011 from $161 million in 2010. The increase was primarily due to growth in the Asia Pacific region, the impact of currency and reduced investment in Russia.

Earnings from International Simple Meals and Beverages increased to $161 million in 2010 from $69 million in 2009. Earnings in 2009 included a $67 million impairment charge on certain European trademarks, including Heisse Tasse, Blå Band and Royco. Excluding the impairment charge, the increase in operating earnings was primarily due to the impact of currency and growth in the businesses in Europe as well as Asia Pacific, partially offset by declines in Canada.

Earnings from North America Foodservice increased to $82 million in 2011 from $55 million in 2010 primarily due to reduced promotional spending, productivity improvements in excess of inflation, and lower administrative expense.

Earnings from North America Foodservice increased to $55 million in 2010 from $53 million in 2009 due primarily to cost reduction efforts.

Unallocated corporate expenses decreased $2 million from $121 million in 2010 to $119 million in 2011.

Unallocated corporate expenses increased from $107 million in 2009 to $121 million in 2010. The increase was primarily due to foreign exchange gains recorded in 2009 and higher equity-related benefit costs in 2010.

Interest Expense/Income

Interest expense increased to $122 million in 2011 from $112 million in 2010 primarily due to an increase in fixed-rate debt and higher debt levels. Interest income increased to $11 million in 2011 from $6 million in 2010 primarily due to higher levels of cash and cash equivalents.

Interest expense increased to $112 million in 2010 from $110 million in 2009 primarily due to an increase in fixed-rate debt and higher average debt levels, partially offset by lower average short-term rates. Interest income increased to $6 million in 2010 from $4 million in 2009 primarily due to higher levels of cash and cash equivalents.

Taxes on Earnings

The effective tax rate was 31.3% in 2011, 32.0% in 2010, and 32.2% in 2009. The reduction in the effective tax rate in 2011 from 2010 was primarily due to $10 million of deferred tax expense recognized in 2010 as a result of the enactment of U.S. health care legislation. The law changed the tax treatment of subsidies to companies that provide prescription drug benefits to retirees. The company recorded the adjustment to reduce the value of the deferred tax asset associated with the subsidy.

In addition to the deferred tax expense recognized in 2010 related to the enactment of health care legislation, the change in the effective tax rate from 2009 to 2010 was impacted by additional tax expense in 2009 associated with the repatriation of foreign earnings.

Restructuring Charges

2011 Initiatives

On June 28, 2011, the company announced a series of initiatives to improve supply chain efficiency and reduce overhead costs across the organization to help fund plans to drive the growth of the business. The company also announced its intent to exit the Russian market. The company expects to eliminate approximately 750 positions in connection with these initiatives. Details of the plans include:

• In Australia, the company will invest in a new system to automate packing operations at its biscuit plant in Virginia. This investment will occur over an 18-month period and will result in the elimination of approximately 190 positions, subject to union and employee consultations. Further, the company will improve asset utilization in the U.S. by shifting production of ready-to-serve soups from Paris, Texas, to other facilities in 2012. In addition, the manufacturing facility in Marshall, Michigan, was closed in 2011,

and manufacturing of Campbell’s Soup at Hand microwavable products will be consolidated at the Maxton, North Carolina, plant in 2012.

	•	The company streamlined its salaried workforce by approximately 510 positions around the world, including approximately 130 positions at its world headquarters in Camden, New Jersey. These actions were substantially completed in 2011. As part of this initiative, the company outsourced a larger portion of its U.S. retail merchandising activities to its current retail sales agent, Acosta Sales and Marketing, and eliminated approximately 190 positions. The company expects that this action will enhance merchandising effectiveness and coverage for its U.S. customers.

	•	In connection with exiting the Russian market, the company will eliminate approximately 50 positions. The exit process commenced in 2011 and is expected to be completed in fiscal 2012.

In 2011, the company recorded a restructuring charge of $63 million ($41 million after tax or $.12 per share) related to these initiatives. A summary of the pre-tax charge and remaining costs associated with the initiatives is as follows:


						Remaining
	Total		Recognized			Costs to be
	Program		as of July 31, 2011			Recognized
	(Millions)

Severance pay and benefits	$	40	$	(37	)	$	3
Asset impairment/accelerated depreciation		25		(22	)		3
Other exit costs		10		(4	)		6

Total	$	75	$	(63	)	$	12

Of the aggregate $75 million of pre-tax costs, the company expects approximately $50 million will be cash expenditures, the majority of which will be spent in 2012. In addition, the company expects to invest approximately $40 million in capital expenditures in connection with the actions. The cash outflows related to these programs are not expected to have a material adverse impact on the company’s liquidity. The initiatives are expected to be completed by the end of fiscal 2013.

The initiatives included in this program are expected to generate annual pre-tax cash savings of approximately $60 million beginning in fiscal 2012 and increasing to approximately $70 million in fiscal 2014.

The total pre-tax costs of $75 million associated with each segment are expected to be as follows: U.S. Simple Meals — $33 million, U.S. Beverages — $3 million, Global Baking and Snacking — $15 million, International Simple Meals and Beverages — $18 million, North America Foodservice — $1 million, and Corporate — $5 million. Segment operating results do not include restructuring charges as segment performance is evaluated excluding such charges.

2008 Initiatives

On April 28, 2008, the company announced a series of initiatives to improve operational efficiency and long-term profitability, including selling certain salty snack food brands and assets in Australia, closing certain production facilities in Australia and Canada, and streamlining the company’s management structure.

As a result of these initiatives, in 2009, the company recorded approximately $22 million ($15 million after tax or $.04 per share) of costs in Cost of products sold. Approximately $17 million ($12 million after tax) of the costs represented accelerated depreciation on property, plant and equipment; approximately $4 million ($2 million after tax) related to other exit costs; and approximately $1 million related to employee severance and benefit costs, including other pension charges.

As a result of these initiatives, in 2010, the company recorded a restructuring charge of $12 million ($8 million after tax or $.02 per share) for pension benefit costs, which represented the final costs associated with the 2008 initiatives.

Details of the impact of the initiatives on fiscal 2010 and 2009 results are as follows:

	•	In April 2008, as part of the initiatives, the company announced plans to close the Listowel, Ontario, Canada food plant. The Listowel facility produced primarily frozen products, including soup, entrees, and Pepperidge Farm products, as well as ramen noodles. The facility employed approximately 500 people. The company closed the facility in April 2009. Production was transitioned to its network of North American contract manufacturers and to its Downingtown, Pennsylvania, plant. In connection with this action in 2009, the company recorded $1 million of employee severance and benefit costs, including other pension charges; $16 million ($11 million after tax) in accelerated depreciation of property, plant and equipment; and $2 million ($1 million after tax) of other exit costs. In 2010, the company recorded a restructuring charge of $12 million ($8 million after tax) for pension benefit costs, which represented the final costs associated with the initiatives.

	•	In April 2008, as part of the initiatives, the company also announced plans to discontinue the private label biscuit and industrial chocolate production at its Miranda, Australia, facility. The company closed the Miranda facility, which employed approximately 150 people, in the second quarter of 2009. In connection with this action in 2009, the company recorded $1 million in accelerated depreciation of property, plant and equipment and $2 million ($1 million after tax) of other exit costs.

In aggregate, the company incurred pre-tax costs of $216 million in 2008 through 2010 associated with the initiatives. Approximately $40 million of the costs were cash expenditures, the majority of which was spent in 2009.

In aggregate, the company incurred pre-tax costs of $216 million in 2008 through 2010 by segment as follows: Global Baking and Snacking — $147 million, International Simple Meals and Beverages — $9 million and North America Foodservice — $60 million.

See Note 7 to the Consolidated Financial Statements for additional information.

Discontinued Operations

On March 18, 2008, the company completed the sale of its Godiva Chocolatier business for $850 million, pursuant to a Stock Purchase Agreement dated December 20, 2007. The purchase price was subject to certain post-closing adjustments, which resulted in an additional $20 million of proceeds. In fiscal 2009, the company recognized a $4 million tax benefit as a result of an adjustment to the tax liability associated with the sale.

Liquidity and Capital Resources

The company expects that foreseeable liquidity and capital resource requirements, including cash outflows to repurchase shares, pay dividends and fund pension plan contributions, will be met through anticipated cash flows from operations; long-term borrowings under its shelf registration statement; short-term borrowings, including commercial paper; and cash and cash equivalents. Over the last three years, operating cash flows totaled approximately $3.4 billion. This cash-generating capability provides the company with substantial financial flexibility in meeting its operating and investing needs. The company expects that its sources of financing are adequate to meet its future liquidity and capital resource requirements. The cost and terms of any future financing arrangements may be negatively impacted by capital and credit market disruptions and will depend on the market conditions and the company’s financial position at the time.

The company generated cash from operations of $1.142 billion in 2011, compared to $1.057 billion in 2010. The increase was primarily due to lower pension contributions and higher cash earnings, partially offset by higher working capital requirements.

The company generated cash from operations of $1.057 billion in 2010, compared to $1.166 billion in 2009. The decline was primarily due to a $260 million contribution to a U.S. pension plan in 2010, partially offset by improvements in working capital requirements.

Capital expenditures were $272 million in 2011, $315 million in 2010, and $345 million in 2009. Capital expenditures are expected to total approximately $325 million in 2012. Capital expenditures in 2011 included the expansion of beverage capacity (approximately $6 million); the ongoing implementation of SAP (approximately

$13 million); expenditures at the company’s corporate headquarters (approximately $6 million); Pepperidge Farm’s new 34,000-square-foot innovation center (approximately $5 million); expansion of Pepperidge Farm’s production capacity (approximately $5 million) and a number of infrastructure projects in the U.S. supply chain (approximately $31 million). Capital expenditures in 2010 included expansion and enhancements of the company’s corporate headquarters (approximately $36 million); expansion of Arnott’s production capacity (approximately $21 million); the ongoing implementation of SAP in Australia and New Zealand (approximately $15 million) and expansion of Pepperidge Farm’s production capacity (approximately $14 million). Capital expenditures in 2009 included expansion of the U.S. beverage production capacity (approximately $54 million) and expansion and enhancements of the company’s corporate headquarters (approximately $20 million).

Business acquired, as presented in the Statements of Cash Flows, represented the acquisition of the Ecce Panis, Inc. business in the fourth quarter of 2009.

Net cash used in investing activities in 2009 included $38 million of proceeds from the sale of the sauce and mayonnaise business in France, net of cash divested.

Long-term borrowings in 2011 included the issuance in April of $500 million of 4.25% notes which mature on April 15, 2021. Long-term borrowings in 2010 included the issuance in July of $400 million of 3.05% notes that mature in July 2017. Long-term borrowings in 2009 included the issuance in January of $300 million of 4.5% notes that mature in February 2019 and the issuance in July of $300 million of 3.375% notes that mature in August 2014. The net proceeds from these issuances were used for the repayment of commercial paper borrowings and for other general corporate purposes.

Dividend payments were $378 million in 2011, $365 million in 2010, and $350 million in 2009. Annual dividends declared in 2011 were $1.145 per share, $1.075 per share in 2010, and $1.00 per share in 2009. The 2011 fourth quarter rate was $0.29 per share.

Excluding shares owned and tendered by employees to satisfy tax withholding requirements on the vesting of restricted shares and for stock option exercises, the company repurchased 21 million shares at a cost of $728 million during 2011. Approximately 16 million of the shares repurchased in 2011 were repurchased pursuant to the company’s June 2008 publicly announced share repurchase program. Under this program, the company’s Board of Directors authorized the purchase of up to $1.2 billion of company stock through the end of fiscal 2011. This program was completed in fiscal 2011. In June 2011, the company’s Board of Directors authorized the purchase of up to $1 billion of company stock. This program has no expiration date. In addition to these publicly announced share repurchase programs, the company also purchased shares to offset the impact of dilution from shares issued under the company’s stock compensation plans. The company expects to continue this practice in the future. See “Market for Registrant’s Capital Stock, Related Shareowner Matters and Issuer Purchases of Equity Securities” for more information.

Excluding shares owned and tendered by employees to satisfy tax withholding requirements on the vesting of restricted shares and for stock option exercises, the company repurchased 14 million shares at a cost of $472 million during 2010. Approximately 7 million of the shares repurchased in 2010 were repurchased pursuant to the company’s June 2008 publicly announced share repurchase program. In addition to the June 2008 publicly announced share repurchase program, the company also purchased shares to offset the impact of dilution from shares issued under the company’s stock compensation plans.

Excluding shares owned and tendered by employees to satisfy tax withholding requirements on the vesting of restricted shares, the company repurchased 17 million shares at a cost of $527 million during 2009. Approximately 13 million of the shares repurchased in 2009 were repurchased pursuant to the company’s June 2008 publicly announced share repurchase program. In addition to the June 2008 publicly announced share repurchase program, the company also purchased shares to offset the impact of dilution from shares issued under the company’s stock compensation plans.

At July 31, 2011, the company had $657 million of short-term borrowings due within one year and $45 million of standby letters of credit issued on behalf of the company. The company had a $975 million committed revolving credit facility that matured in September 2011, and a $975 million revolving credit facility that was due to mature in September 2013. The facilities were unused at July 31, 2011, except for $3 million of standby letters of credit issued

on behalf of the company. In September 2011, the company entered into committed revolving credit facilities totaling $2.0 billion. The facilities are comprised of a $1.5 billion facility that matures in September 2016, and a $500 million, 364-day facility that contains a one-year term-out feature. These facilities replaced the two $975 million revolving credit facilities. These revolving credit agreements support the company’s commercial paper programs and other general corporate purposes.

In November 2008, the company filed a registration statement with the Securities and Exchange Commission that registered an indeterminate amount of debt securities. Under the registration statement, the company may issue debt securities, depending on market conditions.

The company is in compliance with the covenants contained in its revolving credit facilities and debt securities.

Contractual Obligations and Other Commitments

Contractual Obligations

The following table summarizes the company’s obligations and commitments to make future payments under certain contractual obligations. For additional information on debt, see Note 13 to the Consolidated Financial Statements. Operating leases are primarily entered into for warehouse and office facilities and certain equipment. Purchase commitments represent purchase orders and long-term purchase arrangements related to the procurement of ingredients, supplies, machinery, equipment and services. These commitments are not expected to have a material impact on liquidity. Other long-term liabilities primarily represent payments related to deferred compensation obligations. For additional information on other long-term liabilities, see Note 19 to the Consolidated Financial Statements.


	Contractual Payments Due by Fiscal Year
					2013 -		2015 -
	Total		2012		2014		2016		Thereafter
	(Millions)

Debt obligations(1)	$	3,057	$	657	$	700	$	300	$	1,400
Interest payments(2)		645		110		174		130		231
Purchase commitments		1,043		695		146		73		129
Operating leases		206		45		63		46		52
Derivative payments(3)		149		60		75		14		—
Other long-term liabilities(4)		168		48		29		23		68

Total long-term cash obligations	$	5,268	$	1,615	$	1,187	$	586	$	1,880

(1)		Excludes unamortized net discount/premium on debt issuances and amounts related to interest rate swaps designated as fair-value hedges. For additional information on debt obligations, see Note 13 to the Consolidated Financial Statements.

(2)		Interest payments for short-term borrowings are calculated based on par values and rates of contractually obligated issuances at fiscal year end. Interest payments on long-term debt are based on principal amounts and fixed coupon rates at fiscal year end.

(3)		Represents payments of cross-currency swaps, forward exchange contracts, commodity contracts, and deferred compensation hedges. Contractual payments for cross-currency swaps represent future undiscounted cash payments based on forward interest and foreign exchange rates.

(4)		Represents other long-term liabilities, excluding unrecognized tax benefits, postretirement benefits and payments related to pension plans. For additional information on pension and postretirement benefits, see Note 11 to the Consolidated Financial Statements.

Off-Balance Sheet Arrangements and Other Commitments

The company guarantees approximately 2,000 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 $162 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. In connection with the sale of certain Australian salty snack food brands and assets, the company agreed to provide a loan facility to the buyer of AUD $10 million, or approximately USD $10 million. The facility was drawn down in AUD $5 million increments in 2009. Borrowings under the facility are to be repaid in 2013. See also Note 18 to the Consolidated Financial Statements for information on off-balance sheet arrangements.

Inflation

In fiscal 2011, inflation was higher than fiscal 2010 and primarily impacted Cost of products sold, although it did not increase at percentages similar to fiscal 2009. Inflation, on average, was higher in fiscal 2009 and primarily impacted Cost of products sold. In fiscal 2010, inflation was not as significant. The company uses a number of strategies to mitigate the effects of cost inflation. These strategies include increasing prices, commodity hedging and pursuing cost productivity initiatives such as global procurement strategies and making capital investments that improve the efficiency of operations.

Market Risk Sensitivity

The principal market risks to which the company is exposed are changes in foreign currency exchange rates, interest rates and commodity prices. In addition, the company is exposed to equity price changes related to certain deferred compensation obligations. The company manages its exposure to changes in interest rates by optimizing the use of variable-rate and fixed-rate debt and by utilizing interest rate swaps in order to maintain its variable-to-total debt ratio within targeted guidelines. International operations, which accounted for approximately 31% of 2011 net sales, are concentrated principally in Australia, Canada, France, Germany and Belgium. The company manages its foreign currency exposures by borrowing in various foreign currencies and utilizing cross-currency swaps and forward contracts. Cross-currency swaps and forward contracts are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. The company does not enter into contracts for speculative purposes and does not use leveraged instruments.

The company principally uses a combination of purchase orders and various short- and long-term supply arrangements in connection with the purchase of raw materials, including certain commodities and agricultural products. The company also enters into commodity futures and option contracts to reduce the volatility of price fluctuations of diesel fuel, wheat, natural gas, soybean oil, aluminum, sugar, cocoa, and corn, which impact the cost of raw materials.

The information below summarizes the company’s market risks associated with debt obligations and other significant financial instruments as of July 31, 2011. Fair values included herein have been determined based on quoted market prices or pricing models using current market rates. The information presented below should be read in conjunction with Notes 13 through 15 to the Consolidated Financial Statements.

The table below presents principal cash flows and related interest rates by fiscal year of maturity for debt obligations. Interest rates disclosed on variable-rate debt maturing in 2011 represent the weighted-average rates at the period end. Notional amounts and related interest rates of interest rate swaps are presented by fiscal year of maturity. For the swaps, variable rates are the weighted-average forward rates for the term of each contract.


	Expected Fiscal Year of Maturity
	2012			2013			2014			2015			2016		Thereafter			Total			Fair Value
	(Millions)
Debt(1)
Fixed rate	$	2		$	400		$	300		$	300		$	—	$	1,400		$	2,402		$	2,603
Weighted-average interest rate		3.29	%		5.00	%		4.88	%		3.38	%		—		4.62	%		4.56	%

Variable rate	$	655	(2)															$	655		$	655
Weighted-average interest rate		1.19	%																1.19	%

Interest Rate Swaps
Fixed to variable				$	300	(3)	$	200	(4)									$	500		$	33
Average pay rate					1.00	%		0.94	%										0.97	%
Average receive rate					5.00	%		4.88	%										4.95	%

(1)		Excludes unamortized net premium/discount on debt issuances and amounts related to interest rate swaps designated as fair-value hedges.

(2)		Represents $563 million of USD borrowings and $92 million equivalent of borrowings in other currencies.

(3)		Swaps $300 million of 5.00% notes due in 2013.

(4)		Swaps $200 million of 4.875% notes due in 2014.

As of August 1, 2010, fixed-rate debt of approximately $2.6 billion with an average interest rate of 5.21% and variable-rate debt of approximately $130 million with an average interest rate of 1.47% were outstanding. As of August 1, 2010, the company had swapped $500 million of fixed-rate debt to variable. The average rate to be received on these swaps was 4.95% and the average rate paid was estimated to be 1.38% over the remaining life of the swaps.

The company is exposed to foreign exchange risk related to its international operations, including non-functional currency intercompany debt and net investments in subsidiaries. The following table summarizes the cross-currency swaps outstanding as of July 31, 2011, which hedge such exposures. The notional amount of each currency and the related weighted-average forward interest rate are presented in the Cross-Currency Swaps table.

Cross-Currency Swaps


	Fiscal Year of		Interest			Notional		Fair
	Expiration		Rate			Value		Value
						(Millions)

Pay variable EUR		2012		1.46	%	$	69	$	(1	)
Receive variable USD				0.37	%


Pay variable EUR		2012		1.48	%	$	61	$	(1	)
Receive variable USD				0.37	%


Pay fixed EUR		2012		4.33	%	$	102	$	(8	)
Receive fixed USD				5.11	%


Pay variable CAD		2012		1.71	%	$	82	$	(7	)
Receive variable USD				0.62	%


Pay variable CAD		2012		1.75	%	$	37	$	(8	)
Receive variable USD				0.52	%


Pay variable EUR		2013		2.24	%	$	21	$	(1	)
Receive variable USD				1.24	%


Pay variable AUD		2013		5.68	%	$	133	$	(33	)
Receive variable USD				1.11	%


Pay variable EUR		2013		2.17	%	$	41	$	(5	)
Receive variable USD				1.26	%


Pay fixed CAD		2013		0.82	%	$	158	$	1
Receive fixed USD				0.33	%


Pay fixed CAD		2014		6.24	%	$	60	$	(30	)
Receive fixed USD				5.66	%


Pay variable AUD		2015		6.13	%	$	133	$	(35	)
Receive variable USD				1.94	%


Total						$	897	$	(128	)

The cross-currency swap contracts outstanding at August 1, 2010 represented four pay variable EUR/receive variable USD swaps with notional values totaling $200 million, one pay fixed EUR/receive fixed USD swap with a notional value of $102 million, two pay variable CAD/receive variable USD swaps with notional values totaling $119 million, two pay variable AUD/receive variable USD swaps with notional values totaling $266 million, and one pay fixed CAD/receive fixed USD swap with a notional value of $60 million. The aggregate notional value of these swap contracts was $747 million as of August 1, 2010, and the aggregate fair value of these swap contracts was a loss of $21 million as of August 1, 2010.

The company is also exposed to foreign exchange risk as a result of transactions in currencies other than the functional currency of certain subsidiaries, including subsidiary debt. The company utilizes foreign exchange forward purchase and sale contracts to hedge these exposures. The following table summarizes the foreign exchange forward contracts outstanding and the related weighted-average contract exchange rates as of July 31, 2011.

Forward Exchange Contracts


			Average Contractual
			Exchange Rate
	Contract		(currency paid/
	Amount		currency received)
	(Millions)

Receive USD/Pay CAD	$	139		0.98
Receive AUD/Pay NZD	$	44		1.30
Receive USD/Pay AUD	$	30		1.02
Receive EUR/Pay SEK	$	16		9.12

The company had an additional $22 million in a number of smaller contracts to purchase or sell various other currencies, such as the Australian dollar, British Pound, euro, and Japanese yen, as of July 31, 2011. The aggregate fair value of all contracts was a loss of $9 million as of July 31, 2011. The total forward exchange contracts outstanding were $271 million and the aggregate fair value was not material as of August 1, 2010.

The company enters into commodity futures and options contracts to reduce the volatility of price fluctuations for commodities. The notional value of these contracts was $87 million and the aggregate fair value of these contracts was a gain of $1 million as of July 31, 2011. The notional value of these contracts was $50 million and the aggregate fair value of these contracts was a gain of $3 million as of August 1, 2010.

The company enters into swap contracts which hedge a portion of exposures relating to certain deferred compensation obligations linked to the total return of the Standard & Poor’s 500 Index, the total return of the company’s capital stock and the total return of the Puritan Fund, or beginning in January 2011, the total return of the Vanguard International Stock Index. Under these contracts, the company pays variable interest rates and receives from the counterparty either the total return of the Standard & Poor’s 500 Index, the total return on company capital stock, the total return of the Puritan Fund, or the total return of the iShares MSCI EAFE Index, which is expected to approximate the total return of the Vanguard International Stock Index. The notional value of the contract that is linked to the return on the Standard & Poor’s 500 Index was $16 million at July 31, 2011 and $12 million at August 1, 2010. The average forward interest rate applicable to the contract, which expires in 2012, was 0.59% at July 31, 2011. The notional value of the contract that is linked to the total return on company capital stock was $51 million at July 31, 2011 and $54 million at August 1, 2010. The average forward interest rate applicable to this contract, which expires in 2012, was 0.99% at July 31, 2011. The notional value of the contract that was linked to the return on the Puritan Fund was $9 million at August 1, 2010. The contract related to the Puritan Fund matured in January 2011. The notional value of the contract that is linked to the total return of the iShares MSCI EAFE Index was $4 million at July 31, 2011. The average forward interest rate applicable to this contract, which expires in 2012, was 0.74% at July 31, 2011. The fair value of these contracts was a $3 million loss at July 31, 2011 and a $2 million loss at August 1, 2010.

The company’s utilization of financial instruments in managing market risk exposures described above is consistent with the prior year. Changes in the portfolio of financial instruments are a function of the results of operations, debt repayment and debt issuances, market effects on debt and foreign currency, and the company’s acquisition and divestiture activities.

Significant Accounting Estimates

The consolidated financial statements of the company are prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates and assumptions. See Note 1 to the Consolidated Financial Statements for a discussion of significant accounting policies. The following areas all require the use of subjective or complex judgments, estimates and assumptions:

Trade and consumer promotion programs — The company offers various sales incentive programs to customers and consumers, such as feature price discounts, in-store display incentives, cooperative advertising programs, new product introduction fees, and coupons. The mix between promotion programs, which are classified as reductions in revenue, and advertising or other marketing activities, which are classified as marketing and selling expenses, fluctuates between periods based on the company’s overall marketing plans, and such fluctuations have an impact on revenues. The measurement and recognition of the costs for trade and consumer promotion programs involves the use of judgment related to performance and redemption estimates. Estimates are made based on historical experience and other factors. Typically, programs that are offered have a very short duration. Historically, the difference between actual experience compared to estimated redemptions and performance has not been significant to the quarterly or annual financial statements. However, actual expenses may differ if the level of redemption rates and performance were to vary from estimates.

Valuation of long-lived assets — Fixed assets and amortizable intangible assets are reviewed for impairment as events or changes in circumstances occur indicating that the carrying value of the asset may not be recoverable. Undiscounted cash flow analyses are used to determine if an impairment exists. If an impairment is determined to exist, the loss is calculated based on estimated fair value.

Goodwill and indefinite-lived intangible assets are tested at least annually for impairment, or as events or changes in circumstances occur indicating that the carrying amount of the asset may not be recoverable.

Goodwill impairment testing first requires a comparison of the fair value of each reporting unit to the carrying value. A reporting unit represents an operating segment or a component of an operating segment. Fair value is determined based on discounted cash flow analyses. The discounted estimates of future cash flows include significant management assumptions such as revenue growth rates, operating margins, weighted average cost of capital, and future economic and market conditions. If the carrying value of the reporting unit exceeds fair value, goodwill is considered impaired. The amount of the impairment is the difference between the carrying value of the goodwill and the “implied” fair value, which is calculated as if the reporting unit had just been acquired and accounted for as a business combination. As of July 31, 2011, the carrying value of goodwill was $2.133 billion. The company has not recognized any impairment of goodwill as a result of annual testing, which began in 2003. As of the 2011 measurement, the fair value of each reporting unit exceeded the carrying value by at least 80%. Holding all other assumptions used in the 2011 measurement constant, a 100-basis-point increase in the weighted average cost of capital would not result in the carrying value of any reporting unit to be in excess of the fair value.

Indefinite-lived intangible assets are tested for impairment by comparing the fair value of the asset to the carrying value. Fair value is determined based on discounted cash flow analyses that include significant management assumptions such as revenue growth rates, weighted average cost of capital, and assumed royalty rates. If the fair value is less than the carrying value, the asset is reduced to fair value. As of July 31, 2011, the carrying value of trademarks was $515 million. In 2011, as part of the company’s annual review of intangible assets, an impairment charge of $3 million was recognized related to the Heisse Tasse trademark used in the International Simple Meals and Beverages segment. The trademark was determined to be impaired as a result of a decrease in the fair value of the brand, resulting from reduced expectations for future sales and discounted cash flows in comparison to the prior year. As of July 31, 2011, certain European trademarks have a carrying value of approximately $100 million, which approximates fair value. Holding all other assumptions used in the 2011 measurement constant, a 100-basis-point increase in the weighted average cost of capital would reduce the fair value of all trademarks and result in an impairment charge of approximately $21 million. In 2009, as part of the company’s annual review of intangible assets, an impairment charge of $67 million was recognized related to certain European trademarks used in the International Simple Meals and Beverages segment, including Heisse Tasse, Blå Band and Royco. The trademarks were determined to be impaired as a result of a decrease in the fair value of the brands, resulting from reduced expectations for discounted cash flows in comparison to prior year. The reduction was due in part to a deterioration in market conditions and an increase in the weighted average cost of capital. See Note 5 to the Consolidated Financial Statements for additional information on goodwill and intangible assets.

The estimates of future cash flows involve considerable management judgment and are based upon assumptions about expected future operating performance, economic conditions, market conditions, and cost of capital. Inherent in estimating the future cash flows are uncertainties beyond the company’s control, such as capital markets. The actual cash flows could differ from management’s estimates due to changes in business conditions, operating performance, and economic conditions.

Pension and postretirement benefits — The company provides certain pension and postretirement benefits to employees and retirees. Determining the cost associated with such benefits is dependent on various actuarial assumptions, including discount rates, expected return on plan assets, compensation increases, turnover rates and health care trend rates. Independent actuaries, in accordance with accounting principles generally accepted in the United States, perform the required calculations to determine expense. Actual results that differ from the actuarial assumptions are generally accumulated and amortized over future periods.

The discount rate is established as of the company’s fiscal year-end measurement date. In establishing the discount rate, the company reviews published market indices of high-quality debt securities, adjusted as appropriate for duration. In addition, independent actuaries apply high-quality bond yield curves to the expected benefit

payments of the plans. The expected return on plan assets is a long-term assumption based upon historical experience and expected future performance, considering the company’s current and projected investment mix. This estimate is based on an estimate of future inflation, long-term projected real returns for each asset class, and a premium for active management. Within any given fiscal period, significant differences may arise between the actual return and the expected return on plan assets. The value of plan assets, used in the calculation of pension expense, is determined on a calculated method that recognizes 20% of the difference between the actual fair value of assets and the expected calculated method. Gains and losses resulting from differences between actual experience and the assumptions are determined at each measurement date. If the net gain or loss exceeds 10% of the greater of plan assets or liabilities, a portion is amortized into earnings in the following year.

Net periodic pension and postretirement expense was $98 million in 2011, $92 million in 2010, and $53 million in 2009. The 2010 expense included $12 million of pension settlement costs related to the closure of a plant in Canada. Significant weighted-average assumptions as of the end of the year are as follows:


	2011			2010			2009

Pension
Discount rate for benefit obligations		5.41	%		5.46	%		6.00	%
Expected return on plan assets		7.90	%		8.15	%		8.13	%
Postretirement
Discount rate for obligations		5.00	%		5.25	%		6.00	%
Initial health care trend rate		8.25	%		8.25	%		8.25	%
Ultimate health care trend rate		4.50	%		4.50	%		4.50	%

Estimated sensitivities to annual net periodic pension cost are as follows: a 50-basis-point reduction in the discount rate would increase expense by approximately $14 million; a 50-basis-point reduction in the estimated return on assets assumption would increase expense by approximately $12 million. A one-percentage-point increase in assumed health care costs would increase postretirement service and interest cost by approximately $1 million.

Net periodic pension and postretirement expense is expected to increase to approximately $103 million in 2012 primarily due to increased amortization of unrecognized losses.

The company contributed $100 million to U.S. pension plans in 2011. Given the adverse impact of declining financial markets on the funding levels of the plans, the company contributed $260 million to a U.S. plan in 2010. Contributions to non-U.S. plans were $44 million in 2011, $24 million in 2010, and $13 million in 2009. The company contributed $55 million to U.S. plans in the first quarter of 2012. Additional contributions to U.S. plans are not expected in 2012. Contributions to non-U.S. plans are expected to be approximately $10 million in 2012.

See also Note 11 to the Consolidated Financial Statements for additional information on pension and postretirement expenses.

Income taxes — The effective tax rate reflects statutory tax rates, tax planning opportunities available in the various jurisdictions in which the company operates and management’s estimate of the ultimate outcome of various tax audits and issues. Significant judgment is required in determining the effective tax rate and in evaluating tax positions. Income taxes are recorded based on amounts refundable or payable in the current year and include the effect of deferred taxes. Deferred tax assets and liabilities are recognized for the future impact of differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled. Valuation allowances are established for deferred tax assets when it is more likely than not that a tax benefit will not be realized.

See also Notes 1 and 12 to the Consolidated Financial Statements for further discussion on income taxes.

Recent Accounting Pronouncements

In addition to the guidance related to the calculation of earnings per share described in Note 9 to the Consolidated Financial Statements, recent accounting pronouncements are as follows:

In December 2007, the Financial Accounting Standards Board (FASB) issued authoritative guidance which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It requires a noncontrolling interest in a subsidiary, which was formerly known as minority interest, to be classified as a separate component of total equity in the consolidated financial statements. The company retrospectively adopted the new noncontrolling interest guidance in the first quarter of fiscal 2010. The adoption did not have a material impact on the financial statements. See Note 10 to the Consolidated Financial Statements for additional information.

In June 2009, the FASB issued authoritative guidance that changed the consolidation model for variable interest entities. The provisions were effective for the first quarter of fiscal 2011. The adoption did not have a material impact on the company’s consolidated financial statements.

In January 2010, the FASB issued additional authoritative guidance related to fair value measurements and disclosures. The guidance requires disclosure of details of significant transfers in and out of Level 1 and Level 2 fair value measurements. Level 1 fair value measurements are based on unadjusted quoted market prices. Level 2 fair value measurements are based on significant inputs, other than Level 1, that are observable for the asset/liability through corroboration with observable market data. The guidance also clarifies the existing disclosure requirements for the level of disaggregation of fair value measurements and the disclosures on inputs and valuation techniques. The company adopted these provisions in the third quarter of fiscal 2010. The adoption did not have a material impact on the consolidated financial statements. In addition, the guidance requires a gross presentation of the activity within the Level 3 roll forward, separately presenting information about purchases, sales, issuances and settlements. The roll forward information must be provided by the company for the first quarter of fiscal 2012, as the provision is effective for annual reporting periods beginning after December 15, 2010 and for interim reporting periods within those years.

In November 2010, the FASB issued additional authoritative guidance clarifying the required disclosures of supplementary pro forma information for business combinations. The guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.

In December 2010, the FASB issued additional authoritative guidance on accounting for goodwill. The guidance clarifies the impairment test for reporting units with zero or negative carrying amounts. The guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2011. The company does not expect the adoption to have a material impact on the consolidated financial statements.

In May 2011, the FASB issued further additional authoritative guidance related to fair value measurements and disclosures. The new guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between accounting principles generally accepted in the United States (U.S. GAAP) and International Financial Reporting Standards (IFRS). The guidance is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2011. The company is assessing the impact of the guidance.

In June 2011, the FASB issued authoritative guidance requiring entities to present net income and other comprehensive income (OCI) in one continuous statement or two separate, but consecutive, statements of net income and comprehensive income. The option to present items of OCI in the statement of changes in equity has been eliminated. The new requirements are effective for annual reporting periods beginning after December 15, 2011 and for interim reporting periods within those years.

See also Note 2 to the Consolidated Financial Statements for further discussion on new accounting standards.

Cautionary Factors That May Affect Future Results

This Report contains “forward-looking” statements that reflect the company’s current expectations regarding future results of operations, economic performance, financial condition and achievements of the company. The company tries, wherever possible, to identify these forward-looking statements by using words such as “anticipate,” “believe,” “estimate,” “expect,” “will,” and similar expressions. One can also identify them by the fact that they do not relate strictly to historical or current facts. These statements reflect the company’s current plans and expectations and are based on information currently available to it. They rely on a number of assumptions regarding future events and estimates which could be inaccurate and which are inherently subject to risks and uncertainties.

The company wishes to caution the reader that the following important factors and those important factors described in Part I, Item 1A and elsewhere in the commentary, or in other Securities and Exchange Commission filings of the company, could affect the company’s actual results and could cause such results to vary materially from those expressed in any forward-looking statements made by, or on behalf of, the company:

	•	the impact of strong competitive response to the company’s efforts to leverage its brand power with product innovation, promotional programs and new advertising, and of changes in consumer demand for the company’s products;

	•	the risks in the marketplace associated with trade and consumer acceptance of product improvements, shelving initiatives, new product introductions, and pricing and promotional strategies;

	•	the company’s ability to achieve sales and earnings guidance, which is based on assumptions about sales volume, product mix, the development and success of new products, the impact of marketing, promotional and pricing actions, product costs and currency;

	•	the company’s ability to realize projected cost savings and benefits;

	•	the company’s ability to successfully manage changes to its business processes, including selling, distribution, manufacturing, information management systems and the integration of acquisitions;

	•	the increased significance of certain of the company’s key trade customers;

	•	the impact of inventory management practices by the company’s trade customers;

	•	the impact of fluctuations in the supply and inflation in energy, raw and packaging materials cost;

	•	the impact associated with portfolio changes and completion of acquisitions and divestitures;

	•	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, debt and equity markets, inflation rates, economic conditions and other external factors; and

	•	the impact of unforeseen business disruptions in one or more of the company’s markets due to political instability, civil disobedience, armed hostilities, natural disasters or other calamities.

This discussion of uncertainties is by no means exhaustive but is designed to highlight important factors that may impact the company’s outlook. The company disclaims any obligation or intent to update forward-looking statements made by the company in order to reflect new information, events or circumstances after the date they are made.

CPB - Campbell Soup Company