Item 1. Business

The Company Campbell Soup Company (“Campbell” or the “company”), together with its consolidated subsidiaries, is a global manufacturer and marketer of high-quality, branded convenience food products. Campbell was incorporated as a business corporation under the laws of New Jersey on November 23, 1922; however, through predecessor organizations, it traces its heritage in the food business back to 1869. The company’s principal executive offices are in Camden, New Jersey 08103-1799.

Throughout fiscal 2006, the company continued its focus on the five previously announced strategies designed to improve the company’s sales growth and the quality and growth of its earnings. The five strategies include:

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Expanding the company’s well-known brands within the simple meal and baked snack categories;

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Trading consumers up to higher levels of satisfaction centering on convenience, wellness and quality;

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Making the company’s products more broadly available in existing and new markets;

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Increasing margins by improving price realization and company-wide productivity; and

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Improving overall organizational diversity, engagement, excellence and agility.

Consistent with these strategies, on July 12, 2006, the company announced the sale of its United Kingdom and Irish businesses to Premier Foods plc. The sale, which was completed on August 15, 2006, better enables Campbell to focus on building its businesses within the simple meals and baked snacks categories in markets with the greatest potential for growth.

The company’s operations are organized and reported in the following segments: U.S. Soup, Sauces and Beverages; Baking and Snacking; International Soup and Sauces; and Other. The segments are discussed in greater detail below.

U.S. Soup, Sauces and Beverages The U.S. Soup, Sauces and Beverages segment includes the following retail businesses: 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 juice and juice drinks; and Campbell’s tomato juice.

Baking and Snacking 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.

International Soup and Sauces 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 segment’s operations include Erasco and Heisse Tasse soups in Germany, Liebig and Royco soups and Lesieur sauces in France, Devos Lemmens mayonnaise and cold sauces and Campbell’s and Royco soups in Belgium, and Blå Band soups and sauces in Sweden. In Asia Pacific, operations include Campbell’s soup and stock, Swanson broths and V8 beverages. In Canada, operations include Habitant and Campbell’s soups, Prego pasta sauce and V8 beverages. As previously discussed, on August 15, 2006, the company completed the sale of its United Kingdom and Irish businesses, which included Homepride sauces, OXO stock cubes, and Batchelors, McDonnells and Erin soups. The results of these divested businesses have been reflected as discontinued operations in the consolidated statements of earnings.

Other 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.

Ingredients The ingredients required for the manufacture of the company’s food products are purchased from various suppliers. While all such ingredients are available from numerous independent suppliers, raw materials are subject to fluctuations in price attributable to a number of factors, including changes in crop size, cattle cycles, government-sponsored agricultural programs, import and export requirements and weather conditions during the growing and harvesting seasons. To help reduce some of this volatility, the company uses commodity futures contracts for a number of its ingredients, such as corn, cocoa, soybean meal, soybean oil, wheat and dairy. Ingredient inventories are at a peak during the late fall and decline during the winter and spring. Since many ingredients of suitable quality are available in sufficient quantities only at certain seasons, the company makes commitments for the purchase of such ingredients during their respective seasons. At this time, the company does not anticipate any material restrictions on availability or shortages of ingredients that would have a significant impact on the company’s businesses. For additional information on the company’s ingredient management and for information relating to the impact of inflation on the company, see “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and Note 20 to the Consolidated Financial Statements.

Customers In most of the company’s markets, sales activities are conducted by the company’s own sales force and through broker and distributor arrangements. In the United States, Canada and Latin America, the company’s products are generally resold to consumers in retail food chains, mass discounters, mass merchandisers, club stores, convenience stores, drug stores and other retail establishments. In Europe, the company’s products are generally

resold to consumers in retail food chains, mass discounters and other retail establishments. In Mexico, the company’s products are generally resold to consumers in retail food chains, club stores, convenience stores and other retail establishments. In the Asia Pacific region, the company’s products are generally resold to consumers through retail food chains, convenience stores and other retail establishments. Godiva Chocolatier’s products are sold generally through a network of company-owned retail boutiques in North America, Europe, and Asia, franchised third-party retail boutique operators primarily in Europe, third-party distributors in Europe and Asia, and major retailers, including department stores and duty-free shops, worldwide. Godiva Chocolatier’s products are also sold through catalogs and on the Internet, although these sales are primarily limited to North America and Japan. The company makes shipments promptly after receipt and acceptance of orders.

The company’s largest customer, Wal-Mart Stores, Inc. and its affiliates, accounted for approximately 14% of the company’s consolidated net sales during fiscal 2006 and 2005. All of the company’s segments sold products to Wal-Mart Stores, Inc. or its affiliates. No other customer accounted for 10% or more of the company’s consolidated net sales.

Trademarks and Technology As of October 1, 2006, the company owns over 7,100 trademark registrations and applications in over 160 countries and believes that its trademarks are of material importance to its business. Although the laws vary by jurisdiction, trademarks generally are valid as long as they are in use and/or their registrations are properly maintained and have not been found to have become generic. Trademark registrations generally can be renewed indefinitely as long as the trademarks are in use. The company believes that its principal brands, including Campbell’s, Erasco, Liebig, Pepperidge Farm, V8, Pace, Prego, Swanson, Arnott’s, and Godiva, are protected by trademark law in the company’s relevant major markets. In addition, some of the company’s products are sold under brands that have been licensed from third parties.

Although the company owns a number of valuable patents, it does not regard any segment of its business as being dependent upon any single patent or group of related patents. In addition, the company owns copyrights, both registered and unregistered, and proprietary trade secrets, technology, know-how processes, and other intellectual property rights that are not registered.

Competition The company experiences worldwide competition in all of its principal products. This competition arises from numerous competitors of varying sizes, including producers of generic and private label products, as well as from manufacturers of other branded food products, which compete for trade merchandising support and consumer dollars. As such, the number of competitors cannot be reliably estimated. The principal areas of competition are brand recognition, quality, price, advertising, promotion, convenience and service.

Working Capital For information relating to the company’s cash and working capital items, see “Management’s Discussion and Analysis of Results of Operations and Financial Condition.”

Capital Expenditures During fiscal 2006, the company’s aggregate capital expenditures were $309 million. The company expects to spend approximately $325 to $350 million for capital projects in fiscal 2007. The single largest planned fiscal 2007 capital project is the ongoing implementation of the SAP enterprise-resource planning system in North America.

Research and Development During the last three fiscal years, the company’s expenditures on research activities relating to new products and the improvement and maintenance of existing products for continuing operations were $99 million in 2006, $90 million in 2005 and $88 million in 2004. The increase from 2005 to 2006 was primarily due to higher stock-based compensation expense recognized under SFAS No. 123R and expenses related to new product development. The increase from 2004 to 2005 was primarily due to currency fluctuations. The company conducts this research primarily at its headquarters in Camden, New Jersey, although important research is undertaken at various other locations inside and outside the United States.

Environmental Matters The company has requirements for the operation and design of its facilities that meet or exceed applicable environmental rules and regulations. Of the company’s $309 million in capital expenditures made during fiscal 2006, approximately $8 million was for compliance with environmental laws and regulations in the United States. The company further estimates that approximately $9 million of the capital expenditures anticipated during fiscal 2007 will be for compliance with such environmental laws and regulations. The company believes that continued compliance with existing environmental laws and regulations will not have a material effect on capital expenditures, earnings or the competitive position of the company.

Seasonality Demand for the company’s products is somewhat seasonal, with the fall and winter months usually accounting for the highest sales volume due primarily to demand for the company’s soup and sauce products. Godiva Chocolatier sales are also strongest during the fall and winter months. Demand for the company’s beverage, baking and snacking products, however, is generally evenly distributed throughout the year.

Regulation The manufacture and marketing of food products is highly regulated. In the United States, the company is subject to regulation by various government agencies, including the Food and Drug Administration, the U.S. Department of Agriculture and the Federal Trade Commission, as well as various state and local agencies. The company is also regulated by similar agencies outside the United States and by voluntary organizations such as the National Advertising Division of the Council of Better Business Bureaus.

Employees On July 30, 2006, there were approximately 24,000 full-time employees of the company. Following the sale of the company’s United Kingdom and Irish businesses on August 15, 2006, the company had approximately 23,000 full-time employees.

Financial Information For information with respect to revenue, operating profitability and identifiable assets attributable to the company’s business segments and geographic areas, see Note 5 to the Consolidated Financial Statements.

Company Website The company’s primary corporate website can be found at www.campbellsoupcompany.com. The company makes available free of charge at this website (under the “Investor Center – Financial Reports – SEC Filings” caption) all of its reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, including its annual report on Form 10-K, its quarterly reports on Form 10-Q and its Current Reports on Form 8-K. These reports are made available on the website as soon as reasonably practicable after their filing with, or furnishing to, the Securities and Exchange Commission.

Item 1A. Risk Factors

In addition to the factors discussed elsewhere in this Report, the following risks and uncertainties could materially adversely affect the company’s business, financial condition and results of operations. Additional risks and uncertainties not presently known to the company or that the company currently deems immaterial also may impair the company’s business operations and financial condition.

The company operates in a highly competitive industry The company operates in the highly competitive food industry and experiences worldwide competition in all of its principal products. A number of the company’s primary competitors have substantial financial, marketing and other resources. A strong competitive response from one or more of these competitors to the company’s marketplace efforts could result in the company reducing pricing, increasing capital, marketing or other expenditures, or losing market share. These changes may have a material adverse effect on the business and financial results of the company.

The company’s long-term results are dependent on successful marketplace initiatives The company’s long-term results are dependent on successful marketplace initiatives. The company’s product introductions and product improvements, along with its other marketplace initiatives, are designed to capitalize on new customer or consumer trends. In order to remain successful, the company must anticipate and react to these new trends and develop new products or processes to address them. While the company devotes significant resources to meeting this goal, the company may not be successful in developing new products or processes, or its new products or processes may not be accepted by customers or consumers. These results could have a material adverse effect on the business and financial results of the company.

The company may not properly execute, or realize anticipated cost savings or benefits from, its ongoing supply chain, information technology or other initiatives The company’s success is partly dependent upon properly executing, and realizing cost savings or other benefits from, its ongoing supply chain, information technology and other initiatives. These initiatives are primarily designed to make the company more efficient in the manufacture and distribution of its products, which is necessary in the company’s highly competitive industry. These initiatives are often complex, and a failure to implement them properly may, in addition to not meeting projected cost savings or benefits, result in an interruption to the company’s sales, manufacturing, logistics, customer service or accounting functions. Furthermore, the company has invested a significant amount of capital into a number of these initiatives, which may have been more efficiently used if the full cost savings or benefits are not realized. Finally, the company may not meet expected cost savings from publicly-announced restructuring programs. Any of these results could have a material adverse effect on the business and financial results of the company.

The company may be adversely impacted by the increased significance of some of its customers The loss of any of the company’s large customers, such as Wal-Mart Stores, Inc., for an extended period of time could adversely affect the company’s business or financial results. In addition, the retail grocery trade continues to consolidate and mass market retailers continue to become larger. In such an environment, a large retail customer may attempt to increase its profitability by improving efficiency, lowering its costs or increasing promotional programs. If the company is unable to use its scale, marketing expertise, product innovation and category leadership positions to respond to these customer demands, the company’s business or financial results could be negatively impacted.

The company’s long-term results may be adversely impacted by increases in the price of raw materials The raw materials used in the company’s business include tomato paste, beef, poultry, vegetables, metal containers, glass, paper, resin and energy. Many of these materials are subject to price fluctuations from a number of factors, including product scarcity, commodity market speculation, currency fluctuations, weather conditions, import and export requirements and changes in government-sponsored agricultural programs. To the extent any of these factors result in an unforeseen increase in raw material prices, the company may not be able to offset such increases through productivity or price increases. In such case, the company’s business or financial results could be negatively impacted.

The company may be adversely impacted by the failure to successfully identify and execute acquisitions and divestitures From time to time, the company undertakes acquisitions or divestitures. The success of any such acquisition or divestiture depends, in part, upon the company’s ability to identify suitable buyers or sellers,

negotiate favorable contractual terms and, in many cases, obtain governmental approval. For acquisitions, success is also dependent upon efficiently integrating the acquired business into the company’s existing operations. In cases where acquisitions or divestitures are not successfully implemented or completed, the company’s business or financial results could be negatively impacted.

The company’s long-term results may be impacted negatively by political and/or economic conditions in the United States or other nations The company is a global manufacturer and marketer of high-quality, branded convenience food products. Because of its global reach, the company’s performance may be impacted negatively by political and/or economic conditions in the United States as well as other nations. A change in any one or more of the following factors in the United States, or in other nations, could impact the company: currency exchange rates, tax rates, interest rates, legal or regulatory requirements, tariffs, export and import restrictions or equity markets. The company may also be impacted by recession, political instability, civil disobedience, armed hostilities, natural disasters and terrorist acts in the United States or throughout the world. Any one of the foregoing could have a material adverse effect on the business and financial results of the company.

If the company’s food products become adulterated or are mislabeled, the company might need to recall those items and may experience product liability claims if consumers are injured The company may need to recall some of its products if they become adulterated or if they are mislabeled. The company may also be liable if the consumption of any of its products causes injury. A widespread product recall could result in significant losses due to the costs of a recall, the destruction of product inventory and lost sales due to the unavailability of product for a period of time. The company could also suffer losses from a significant product liability judgment against it. A significant product recall or product liability case could also result in adverse publicity, damage to the company’s reputation and a loss of consumer confidence in the company’s food products, which could have a material adverse effect on the business and financial results of the company.

Item 1B. Unresolved Staff Comments

None.

Each of the foregoing manufacturing facilities is company-owned, except that the Woodinville, Washington facility, the Scoresby, Australia facility, and the Selangor Darul Ehsan, Malaysia, facility are leased. The Utrecht, Netherlands, facility is subject to a ground lease. The company also operates retail confectionery shops in the United States, Canada, Europe and Asia; retail bakery thrift stores in the United States; and other plants, facilities and offices at various locations in the United States and abroad, including additional executive offices in Norwalk, Connecticut, New York, New York, and Homebush, Australia. The company is constructing a new facility in Everett, Washington, to replace the existing Woodinville, Washington, facility. This new facility will manufacture refrigerated soups and sauces. On August 15, 2006, as part of the divestiture of the United Kingdom and Irish businesses, the following facilities were sold: Ashford, King’s Lynn and Worksop in the United Kingdom and Thurles in Ireland.

Management believes that the company’s manufacturing and processing plants are well maintained and are generally adequate to support the current operations of the businesses.

Item 3. Legal Proceedings

As previously reported, on March 30, 1998, the company effected a spinoff of several of its non-core businesses to Vlasic Foods International Inc. (“VFI”). VFI and several of its affiliates (collectively, “Vlasic”) commenced cases under Chapter 11 of the Bankruptcy Code on January 29, 2001 in the United States Bankruptcy Court for the District of Delaware. Vlasic’s Second Amended Joint Plan of Distribution under Chapter 11 (the “Plan”) was confirmed by an order of the Bankruptcy Court dated November 16, 2001, and became effective on or about November 29, 2001. The Plan provides for the assignment of various causes of action allegedly belonging to

the Vlasic estates, including claims against the company allegedly arising from the spinoff, to VFB L.L.C., a limited liability company (“VFB”) whose membership interests are to be distributed under the Plan to Vlasic’s general unsecured creditors.

On February 19, 2002, VFB commenced a lawsuit against the company and several of its subsidiaries in the United States District Court for the District of Delaware alleging, among other things, fraudulent conveyance, illegal dividends and breaches of fiduciary duty by Vlasic directors alleged to be under the company’s control. The lawsuit seeks to hold the company liable in an amount necessary to satisfy all unpaid claims against Vlasic (which VFB estimates in the amended complaint to be $200 million), plus unspecified exemplary and punitive damages.

Following a trial on the merits, on September 13, 2005, the District Court issued Post-Trial Findings of Fact and Conclusions of Law, ruling in favor of the company and against VFB on all claims. The Court ruled that VFB failed to prove that the spinoff was a constructive or actual fraudulent transfer. The Court also rejected VFB’s claim of breach of fiduciary duty, VFB’s claim that VFI was an alter ego of the company, and VFB’s claim that the spinoff should be deemed an illegal dividend. On November 1, 2005, VFB appealed the decision to the United States Court of Appeals for the Third Circuit.

The company continues to believe this action is without merit and is defending the case vigorously. In addition, although the results of this matter cannot be predicted with certainty, in management’s opinion, the final outcome of this proceeding will not have a material adverse effect on the consolidated results of operations or financial condition of the company.

Denise M. Morrison served as Executive Vice President and General Manager, Kraft Snacks division (2001 – 2003) of Kraft Foods, Inc., and Executive Vice President and General Manager, Kraft Confection division (2001) of Kraft Foods, Inc. prior to joining Campbell in 2003. Nancy A. Reardon served as Executive Vice President of Human Resources, Comcast Cable Communications (2002 – 2004) and Executive Vice President – Human Resources/Corporate Affairs (1997 – 2002) of Borden Capital Management Partners prior to joining Campbell in 2004. Mark A. Sarvary served as Chief Executive Officer, J. Crew Group (1999 – 2002) prior to joining Campbell in 2002. David R. White served as Vice President, Product Supply – Global Family Care

Business (1999 – 2004) of The Procter & Gamble Company prior to joining Campbell in 2004. The company has employed Douglas R. Conant, Anthony P. DiSilvestro, M. Carl Johnson, III, Ellen Oran Kaden, Larry S. McWilliams, Robert A. Schiffner and Doreen A. Wright in an executive or managerial capacity for at least five years.

There is no family relationship among any of the company’s executive officers or between any such officer and any director of Campbell. All of the executive officers were elected at the November 2005 meeting of the Board of Directors.

Item 5. Market for Registrant’s Capital Stock, Related Shareowner Matters and Issuer Purchases of Equity Securities

Market for Registrant’s Capital Stock

The company’s capital stock is listed and principally traded on the New York Stock Exchange. The company’s capital stock is also listed on the SWX Swiss Exchange. On September 19,

2006, there were 29,889 holders of record of the company’s capital stock. Market price and dividend information with respect to the company’s capital stock are set forth in Note 24 to the Consolidated Financial Statements. In September 2006, the company increased the quarterly dividend to be paid in the first quarter of fiscal 2007 to $0.20 per share. Future dividends will be dependent upon future earnings, financial requirements and other factors.

 

 

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

Overview

Campbell Soup Company is a global manufacturer and marketer of high-quality, branded convenience food products. The company is organized and reports operating results as follows: U.S. Soup, Sauces and Beverages, Baking and Snacking and International Soup and Sauces, with the balance of the portfolio, which includes Godiva Chocolatier worldwide and the Away From Home operations, reported as Other. See also Note 5 to the Consolidated Financial Statements for additional information on segments.

On August 15, 2006, the company completed the sale of its businesses in the United Kingdom and Ireland for £460 million, or approximately $870 million, pursuant to a Sale and Purchase Agreement dated July 12, 2006. The United Kingdom and Irish businesses include Homepride sauces, OXO stock cubes, Batchelors soups and McDonnells and Erin soups. The purchase price is subject to certain post-closing adjustments. The company has reflected the results of these businesses as discontinued operations in the consolidated statements of earnings for all years presented. The assets and liabilities of these businesses were reflected as assets and liabilities of discontinued operations held for sale in the consolidated balance sheet as of July 30, 2006. The company will use approximately $620 million of the net proceeds to purchase company stock. These purchases are expected to be completed in 2007. See Note 2 to the Consolidated Financial Statements for additional information.

Results of Operations

2006 Net earnings were $766 million ($1.85 per share) in 2006 compared to $707 million ($1.71 per share) in 2005. Earnings from continuing operations were $755 million ($1.82 per share) in 2006 and $644 million ($1.56 per share) in 2005. (All earnings per share amounts included in Management’s Discussion and Analysis are presented on a diluted basis.)

There were several items that impacted the comparability of earnings:

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As of August 1, 2005, the company adopted Statement of Financial Accounting Standards No. 123 (revised 2004) “Share-Based Payment” (SFAS No. 123R). Under SFAS No. 123R,

compensation expense is to be recognized for all stock-based awards, including stock options. Had all stock-based compensation been expensed in 2005, Earnings from continuing operations would have been $616 million and earnings per share would have been $1.49. Net earnings would have been $678 million and earnings per share would have been $1.64 (See Notes 1 and 21 to the Consolidated Financial Statements);

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In the first quarter of 2006, the company recorded a non-cash tax benefit of $47 million resulting from the favorable resolution of a U.S. tax contingency related to transactions in government securities in a prior period. In addition, the company reduced interest expense and accrued interest payable by $21 million and adjusted deferred tax expense by $8 million ($13 million after tax). The aggregate non-cash impact of the settlement on Earnings from continuing operations was $60 million, or $.14 per share. (See Note 11 to the Consolidated Financial Statements);

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In the first quarter of 2006, a $13 million pre-tax gain was recognized due to a change in the method of accounting for certain U.S. inventories from the LIFO method to the average cost method. The impact on Earnings from continuing operations was $8 million, or $.02 per share. Prior periods were not restated since the impact of the change on previously issued financial statements was not considered material. (See Note 13 to the Consolidated Financial Statements);

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In 2006, incremental tax expense of $13 million, or $.03 per share, was recognized associated with incremental dividends of $294 million as the company finalized its plan to repatriate earnings from non-U.S. subsidiaries under the provisions of the American Jobs Creation Act (the AJCA);

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In the fourth quarter of 2006, the company recorded a non-cash tax benefit of $14 million, or $.03 per share, from the anticipated use of higher levels of foreign tax credits, which can be utilized as a result of the sale of the company’s United Kingdom and Irish businesses in August 2006; and

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The 2006 results of discontinued operations included $56 million of deferred tax expense due to book/tax basis differences and $7 million pre-tax costs ($5 million after tax) associated with the sale of the businesses. The aggregate impact of these items was $.15 per share.

The items impacting comparability are summarized below:

		2006								2005
(millions, except per share amounts)		Earnings Impact				EPS Impact				Earnings Impact				EPS Impact
Earnings from continuing operations		$	755			$	1.82			$	644			$	1.56
Net earnings		$	766			$	1.85			$	707			$	1.71
Pro forma impact of SFAS No. 123R		$	—			$	—			$	(28	)		$	(0.07	)
Impact of change in inventory accounting method			(8	)			(0.02	)			—				—
Favorable resolution of a U.S. tax contingency			(60	)			(0.14	)			—				—
Tax expense on repatriation of earnings under the AJCA			13				0.03				—				—
Tax benefit related to the use of foreign tax credits			(14	)			(0.03	)			—				—
Impact of significant items on continuing operations1		$	(69	)		$	(0.17	)		$	(28	)		$	(0.07	)
Deferred taxes and after-tax costs associated with the sale of discontinued operations			61				0.15				—				—
Pro forma impact of SFAS No. 123R			—				—				(1	)			—
Impact of significant items on net earnings		$	(8	)		$	(0.02	)		$	(29	)		$	(0.07	)

The remaining improvement in 2006 earnings from 2005 was due to an increase in sales, an improvement in gross margin as a percentage of sales, a lower effective tax rate, and higher interest income, partially offset by higher administrative and marketing and selling costs.

2005 Earnings from continuing operations were $644 million ($1.56 per share) in 2005 compared to $582 million ($1.41 per share) in 2004. Earnings from continuing operations between 2005 and 2004 were impacted by an increase in sales, lower corporate expenses and the favorable impact of currency, partially offset by a decline in gross margin as a percentage of sales and an increase in interest expense. The 2004 results were also impacted by the following:

•

A pre-tax restructuring charge of $26 million ($18 million after tax or $.04 per share) related to a reduction in workforce and the implementation of a distribution and logistics realignment in Australia. (See also the section entitled Restructuring Program and Note 6 to the Consolidated Financial Statements);

•

A pre-tax gain of $16 million ($10 million after tax or $.02 per share) from a settlement of a class action lawsuit involving ingredient suppliers; and

•

A pre-tax gain of $10 million ($6 million after tax or $.02 per share) from a sale of a manufacturing site in California.

The gains were recorded in Other expenses/(income).

Had all stock-based compensation been expensed, Net earnings would have been $678 million and earnings per share would have been $1.64 in 2005; Net earnings would have been $618 million and earnings per share would have been $1.50 in 2004. Earnings from continuing operations would have been $616 million ($1.49 per share) in 2005 and $554 million ($1.34 per share) in 2004.

Sales

An analysis of net sales by reportable segment follows:

														% Change
														2006/				2005/
(millions)		2006				2005				2004				2005				2004
U.S. Soup, Sauces and Beverages		$	3,257			$	3,098			$	2,998				5				3
Baking and Snacking			1,747				1,742				1,613				—				8
International Soup and Sauces			1,255				1,227				1,146				2				7
Other			1,084				1,005				903				8				11
		$	7,343			$	7,072			$	6,660				4				6

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

		U.S. Soup,				Baking				International
		Sauces and				and				Soup and
2006/2005		Beverages				Snacking				Sauces				Other				Total
Volume and Mix			(1	)%			—	%			3	%			6	%			1	%
Price and Sales Allowances			6				3				—				3				3
Increased Promotional Spending1			—				(2	)			—				(1	)			—
Currency			—				(1	)			(1	)			—				—
			5	%			—	%			2	%			8	%			4	%

		U.S. Soup,				Baking				International
		Sauces and				and				Soup and
2005/2004		Beverages				Snacking				Sauces				Other				Total
Volume and Mix			2	%			4	%			2	%			7	%			3	%
Price and Sales Allowances			1				3				1				3				2
Increased Promotional Spending1			—				(1	)			(2	)			—				(1	)
Currency			—				2				6				1				2
			3	%			8	%			7	%			11	%			6	%

In 2006, U.S. Soup, Sauces and Beverages sales increased 5%. U.S. soup sales increased 4% as condensed soup sales increased 5%, ready-to-serve soup sales increased 1% and broth sales increased 11%. The U.S. Soup sales growth was primarily driven by higher prices across the portfolio. Condensed soup

also benefited from the additional installation of gravity-feed shelving systems and increased advertising. The ready-to-serve sales performance was positively impacted by the introductions of Campbell’s Select Gold Label soups in aseptic packaging and Campbell’s Chicken Noodle, Tomato and Vegetable soups in microwavable bowls, which were partially offset by the discontinuance of Campbell’s Kitchen Classics soups and a decline in Campbell’s Chunky soups. The introduction of Campbell’s Chicken Noodle, Tomato and Vegetable soups in microwavable bowls, combined with sales gains from Campbell’s Chunky and Campbell’s Select soups in microwavable bowls and Campbell’s Soup at Hand sippable soups, drove significant growth in the convenience platform. Swanson broth sales growth was primarily due to volume gains of aseptically-packaged products and successful holiday merchandising. In other parts of the business, Prego pasta sauces and Pace Mexican sauces delivered solid sales growth. Beverage sales increased double digits driven by V8 vegetable juices, which had strong volume growth. The introduction of V8 V-Fusion juice beverages also contributed to sales growth, while sales of V8 Splash juice beverages declined.

In 2005, U.S. Soup, Sauces and Beverages sales increased 3%. U.S. soup sales increased 5%, driven by an 8% gain in condensed soup and a 12% increase in broth, partially offset by a 1% decline in ready-to-serve soup. The U.S. condensed soup increase was driven by a double-digit increase in eating soups, due in part to the combination of successful merchandising and kids promotional marketing programs, increased advertising and higher prices. Cooking varieties of condensed soup also achieved sales growth behind strong performance during the holiday season. Condensed soup sales also benefited from gravity-feed shelving systems installed in retail stores. Broth sales increased, driven by gains achieved through its expanded use in cooking and strong consumer response to two new organic varieties in aseptic containers introduced earlier in 2005. In ready-to-serve soup, Campbell’s Chunky soup sales increased 7%. These gains were offset by declines in sales of Campbell’s Select soups and Campbell’s Kitchen Classics soups. The Campbell’s Select soups decline of 15% was due to volume losses resulting from competitive activity. Sales of microwavable soups were flat for the year, as double-digit growth of Campbell’s Chunky and Campbell’s Select soups in microwavable bowls was offset by declines in Campbell’s Soup at Hand sippable soups. In other parts of the business, the launch of Campbell’s Chunky chili in 2005 added to sales gains. Campbell’s SpaghettiOs pasta sales rose as consumers responded to the transition from the Franco-American brand to the Campbell’s brand and to new advertising. Sales of Prego pasta sauces declined slightly, while sales of Pace Mexican sauces were flat for the year. V8 vegetable juice sales increased due to higher prices and improved volume, while sales of V8 Splash juice beverages and Campbell’s tomato juice declined.

In 2006, Baking and Snacking sales were flat versus 2005 as growth at Pepperidge Farm was offset by declines in the Arnott’s business. Pepperidge Farm reported sales increases in its bakery and cookies and crackers businesses. Sales of bakery products increased due to the strong performance of Pepperidge Farm whole grain breads. Sales gains in cookies and crackers were primarily due to double-digit growth of Pepperidge Farm Goldfish snack crackers. Arnott’s sales declined, primarily due to a decline in the Australian snack foods business and the unfavorable impact of currency.

Baking and Snacking sales increased 8% in 2005 versus 2004. Pepperidge Farm contributed significantly to the sales increase as a result of sales gains across bakery, cookies and crackers and frozen, primarily due to higher volume and increased prices. The fresh bakery business experienced double-digit growth as a result of expanded distribution and product improvements on bagels and English muffins along with strong results from Pepperidge Farm Farmhouse breads and Pepperidge Farm Carb Style breads and rolls. In cookies and crackers, sales growth was driven by Pepperidge Farm Chocolate Chunk cookies, four new soft-baked varieties of cookies, and the introduction of sugar-free cookies and Whims poppable snacks. In addition, Pepperidge Farm Goldfish snack crackers delivered sales growth. Pepperidge Farm frozen product sales increased behind the strong performance of pot pies, breads and pastry. Arnott’s sales grew primarily due to currency and volume gains. Arnott’s achieved sales growth in each of its three businesses: sweet biscuits, savory biscuits and salty snacks.

International Soup and Sauces sales increased 2% in 2006 versus 2005. In Canada, sales increased due to the favorable impact of currency and a strong performance in ready-to-serve soup, which grew double digits, aided by the introduction of Campbell’s Soup at Hand sippable soups. Sales from the Australian soup business increased double digits, primarily due to the performance of ready-to-serve soup and broth. In Europe, sales declined primarily due to currency. Excluding the impact of currency, sales grew slightly driven by the business in Belgium and higher sales of V8 vegetable juice.

International Soup and Sauces sales increased 7% in 2005 versus 2004, driven primarily by currency. In Europe, strong sales gains of wet and dry soups in France and Campbell’s wet soups in Belgium also contributed to growth. In Asia Pacific, Australian beverages and broth delivered volume gains, while sales increased in Asia, in part, from the launch of a new dry soup product targeting breakfast consumption. Canada achieved volume growth due in part to its ready-to-serve soup business which includes a new aseptic variety, Campbell’s Gardennay soup.

In Other, sales increased 8% in 2006 versus 2005. Godiva Chocolatier sales increased primarily due to same-store sales growth in all regions, new product introductions in the U.S., an

increase in duty-free sales in Europe and new stores in Asia. Away From Home sales increased primarily due to sales growth in soup, including refrigerated soups, and beverages.

In Other, sales increased 11% in 2005 versus 2004. Away From Home delivered strong sales growth, led by premium refrigerated soups. Godiva Chocolatier’s worldwide sales increased double digits with North America, Europe and Asia all contributing to growth. In North America, Godiva achieved double-digit same-store sales results driven by successful new products, including sugar-free chocolates and the relaunch of truffles.

Gross Profit Gross profit, defined as Net sales less Cost of products sold, increased by $178 million in 2006. As a percent of sales, gross profit was 41.9% in 2006, 41.0% in 2005 and 41.4% in 2004. The percentage point increase in 2006 was due to higher selling prices (approximately 2.0 percentage points), productivity improvements (approximately 1.8 percentage points), and a change in the method of accounting for inventory (approximately 0.2 percentage points), partially offset by a higher level of promotional spending (approximately 0.1 percentage points), mix (approximately 0.2 percentage points) and inflation and other factors (approximately 2.8 percentage points). The percentage point decrease in 2005 was due to the impact of inflation and other factors (approximately 3.1 percentage points) and a higher level of promotional spending (approximately 0.3 percentage points), partially offset by mix (approximately 0.2 percentage points), productivity improvements (approximately 1.9 percentage points) and higher selling prices (approximately 0.9 percentage points).

Gross profit would have been $4 million lower in 2005 and 2004 had all stock-based compensation been expensed.

Marketing and Selling Expenses Marketing and selling expenses as a percent of sales were 16.4% in 2006, 16.0% in 2005 and 16.5% in 2004. Marketing and selling expenses increased 6% in 2006. The increase was driven primarily by higher advertising (approximately 3 percentage points), higher selling expenses (approximately 2 percentage points) and increased stock-based compensation recognized under SFAS No. 123R (approximately 1 percentage point). In 2005, Marketing and selling expenses increased 3% from 2004. The increase was driven by higher levels of advertising and currency.

Marketing and selling expenses would have been $12 million higher in 2005 and $11 million higher in 2004 had all stock-based compensation been expensed.

Administrative Expenses Administrative expenses as a percent of sales were 8.4% in 2006 and 7.8% in 2005 and 2004. Administrative expenses increased 12% in 2006 from 2005. The increase was due to higher stock-based compensation recognized under SFAS No. 123R (approximately 5 percentage points), higher compensation and benefit expenses (approximately 5 percentage

points), and an increase in costs associated with the ongoing implementation of the SAP enterprise-resource planning system in North America (approximately 2 percentage points). Administrative expenses increased by 5% in 2005 from 2004. Currency accounted for approximately 1 percentage point of the increase and costs associated with the implementation of the SAP enterprise-resource planning system in North America and higher general administrative expenses each accounted for 2 percentage points of the increase.

Administrative expenses would have been $25 million higher in 2005 and $26 million higher in 2004 had all stock-based compensation been expensed.

Research and Development Expenses Research and development expenses increased $9 million or 10% in 2006 from 2005 primarily due to higher stock-based compensation recognized under SFAS No. 123R and expenses related to new product development. Research and development expenses increased $2 million or 2% in 2005 from 2004 primarily due to currency.

Research and development expenses would have been $4 million higher in 2005 and 2004 had all stock-based compensation been expensed.

Other Expenses / (Income) Other expense of $5 million in 2006 included the cost of acquiring the rights to the Pepperidge Farm Goldfish trademark in certain non-U.S. countries and a write-down of a trademark used in the Australian snack foods market.

Other income in 2005 of $5 million was primarily royalty income related to the company’s brands.

Other income in 2004 of $13 million included a $16 million gain from the company’s share of a class action settlement involving ingredient suppliers, a $10 million gain on a sale of a manufacturing site, other net income of $4 million, partially offset by a $10 million adjustment to the carrying value of long-term investments in affordable housing partnerships and $7 million in expenses from currency hedging related to the financing of international activities.

Operating Earnings Segment operating earnings increased 5% in 2006 from 2005. Segment operating earnings increased 6% in 2005 from 2004. Operating earnings would have been $45 million lower in 2005 and 2004 had all stock-based compensation been expensed.

An analysis of operating earnings by reportable segment follows:

														% Change
														2006/				2005/
(millions)		2006				2005				2004		1		2005				2004
U.S. Soup, Sauces and Beverages		$	815			$	747			$	730				9				2
Baking and Snacking			187				198				166				(6	)			19
International Soup and Sauces			144				143				128				1				12
Other			110				110				101				—				9
			1,256				1,198				1,125				5				6
Corporate			(105	)			(66	)			(87	)
		$	1,151			$	1,132			$	1,038

1		Contributions to earnings by segment included the effect of a pre-tax fourth quarter 2004 restructuring charge of $26 million as follows: U.S. Soup, Sauces and Beverages —$8 million, Baking and Snacking — $10 million, International Soup and Sauces — $4 million, Other — $3 million and Corporate — $1 million.

Earnings from U.S. Soup, Sauces and Beverages increased 9% in 2006 from 2005. The 2005 earnings would have been $4 million lower had all stock-based compensation been expensed. The 2006 results included an $8 million benefit from the change in the method of accounting for inventories. The remaining increase in earnings was primarily due to higher selling prices and productivity gains, which were partially offset by cost inflation and higher advertising.

Earnings from U.S. Soup, Sauces and Beverages increased 2% in 2005 versus 2004. The 2004 results included an $8 million restructuring charge. The remaining increase in 2005 was due to productivity improvements and higher sales volume and prices, partially offset by cost inflation and increased marketing. Earnings in 2005 and 2004 would have been $4 million and $6 million lower, respectively, had all stock-based compensation been expensed.

Earnings from Baking and Snacking decreased 6% in 2006 from 2005. The 2005 earnings would have been $8 million lower had all stock-based compensation been expensed. The 2006 results included a $5 million benefit from the change in the method of accounting for inventories. The earnings results were driven by declines in the Indonesian biscuit business and the Australian snack foods business, and the unfavorable impact of currency, partially offset by higher earnings at Pepperidge Farm.

Earnings from Baking and Snacking increased 19% in 2005 versus 2004. The 2004 results included a $10 million restructuring charge. Currency accounted for 3 percentage points of the earnings increase. The remaining increase in earnings was due to sales growth in Pepperidge Farm and improvement in the snack foods business in Australia, partially offset by expenses associated with the implementation of a new sales and distribution system in Australia. Earnings in 2005 and 2004 would have been $8 million lower had all stock-based awards been expensed.

Earnings from International Soup and Sauces increased 1% in 2006 from 2005. The 2005 earnings would have been $3 million lower had all stock-based compensation been expensed. The increase in earnings was primarily due to strong market performance in Canada, partially offset by expenses associated with improving the cost structure of the supply chain in Europe and an organizational realignment in Europe due to the sale of the United Kingdom and Irish businesses.

Earnings from International Soup and Sauces increased 12% in 2005 versus 2004. The 2004 results included a $4 million restructuring charge. The remaining increase in earnings was due to the favorable impact of currency (8 percentage points) and operating earnings growth in Canada, partially offset by a decline in Latin America. Earnings in 2005 and 2004 would have been $3 million lower had all stock-based compensation been expensed.

Earnings from Other were $110 million in both 2006 and 2005. Prior year earnings would have been $6 million lower had all stock-based awards been expensed. The increase was primarily due to earnings growth in Godiva Chocolatier.

Earnings from Other increased 9% in 2005 versus 2004. The 2004 results included a $3 million restructuring charge. Currency accounted for 2 percentage points of the increase. The remainder of the increase was due to the strong sales growth in Godiva Chocolatier and Away From Home. Earnings in 2005 and 2004 would have been $6 million lower had all stock-based compensation been expensed.

Corporate expenses increased $39 million from $66 million in 2005 to $105 million in 2006. The 2005 expenses would have been $24 million higher had all stock-based compensation been expensed. The remaining increase was primarily due to costs associated with the ongoing implementation of the SAP enterprise-resource planning system in North America.

Corporate expenses decreased $21 million from $87 million in 2004 to $66 million in 2005 due to lower costs associated with ongoing litigation, lower adjustments related to the carrying value of long-term investments in affordable housing partnerships, and lower expenses from currency hedging related to the financing of international activities, partially offset by the gains in 2004 related to the company’s share of a class action lawsuit involving ingredient suppliers and the sale of a manufacturing site in California. Corporate expenses would have been $24 million higher in 2005 and $22 million higher in 2004 had all stock-based compensation been expensed.

Interest Expense/Income Interest expense decreased 10% in 2006 from 2005, primarily due to a non-cash reduction of $21 million associated with the favorable settlement of a U.S. tax contingency and lower levels of debt, partially offset by higher interest rates. Interest income increased to $15 million in 2006 from $4 million in 2005 due to higher levels of cash and cash equivalents.

Interest expense increased 6% in 2005 from 2004 primarily due to higher interest rates, partially offset by lower levels of debt.

Taxes on Earnings The effective tax rate was 24.6% in 2006, 32.4% in 2005, and 33.1% in 2004. The reduction in rate from 2005 to 2006 was attributable primarily to the favorable resolution of federal income tax audits of $68 million, including $47 million related to transactions involving government securities, an increased deduction related to U.S. manufacturing activities under the AJCA of $10 million, and higher levels of foreign tax credits of $14 million, partially offset by incremental tax expense associated with the repatriation of non-U.S. earnings under the AJCA of $13 million. The reduction in the rate in 2005 from 2004 was due to lower international taxes, which reflected a one-time benefit in Australia related to a change in tax law.

Discontinued Operations The results of the company’s businesses in the United Kingdom and Ireland are classified as discontinued operations. Results of the businesses are summarized below:

(millions)		2006				2005				2004
Net sales		$	435			$	476			$	449
Earnings before taxes		$	83			$	78			$	77
Taxes on earnings			72				15				12
Earnings from discontinued operations		$	11			$	63			$	65

The 2006 results included $56 million of deferred tax expense, which was recognized in accordance with Emerging Issues Task Force Issue No. 93-17 “Recognition of Deferred Tax Assets for a Parent Company’s Excess Tax Basis in the Stock of a Subsidiary That is Accounted for as a Discontinued Operation.” Results also included $7 million pre-tax ($5 million after tax) of costs associated with the sale of the businesses. The remaining increase in earnings was primarily due to lower marketing and administrative expenses, partially offset by the decline in sales, the unfavorable impact of currency, and a higher tax rate.

The decline in earnings from $65 million in 2004 to $63 million in 2005 was primarily due to lower gross margins and a higher effective tax rate. The 2004 results included a $6 million pre-tax restructuring charge ($4 million after tax).

Restructuring Program A restructuring charge included in Earnings from continuing operations of $26 million ($18 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 sales 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 $17 million in Earnings from continuing operations. The reductions represented 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 $37 million. The sales and logistics realignment in Australia involves the conversion of a direct store delivery system to a central warehouse system, outsourcing of warehouse operations, and the consolidation of the field sales organization. A restructuring charge of $9 million was recorded for this program. As a result of this program, over 200 positions will be eliminated. The majority of the terminations occurred in 2005. Annual pre-tax benefits are expected to be approximately $12 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 6 to the Consolidated Financial Statements for further discussion of these programs.

A restructuring charge of $6 million ($4 million after tax) was recorded by the United Kingdom and Irish businesses associated with a reduction in workforce and is included in Earnings from discontinued operations. See also Note 2 to the Consolidated Financial Statements.

Liquidity and Capital Resources

Net cash flows from operating activities provided $1,226 million in 2006, compared to $990 million in 2005. The increase was due primarily to a reduction in working capital and an increase in earnings. Net cash flows from operating activities provided $990 million in 2005, compared to $744 million in 2004. The increase was due primarily to a lower increase in working capital, an increase in earnings, and lower cash settlements related to foreign currency hedging transactions. Over the last three years, operating cash flows totaled approximately $3 billion. This cash generating capability provides the company with substantial financial flexibility in meeting its operating and investing needs.

Capital expenditures were $309 million in 2006, $332 million in 2005 and $288 million in 2004. Capital expenditures are projected to be approximately $325 to $350 million in 2007. Capital expenditures in 2006 included investments to increase the manufacturing capacity for refrigerated soups, implement the SAP enterprise-resource planning system in North America, and implement certain quality and productivity projects in U.S. manufacturing facilities. The increase in 2005 was primarily driven by investments to increase manufacturing capacity for microwavable products, implement the SAP enterprise-resource planning system in North America, increase manufacturing capacity for refrigerated soups, and implement a new sales and distribution system in Australia.

Businesses acquired, as presented in the Statements of Cash Flows, represents the acquisition of certain brands from George Weston Foods Limited in Australia in the first quarter of 2004.

Long-term borrowings in 2006 included the issuance of $202 million of five-year variable-rate debt in Australia due July 2011. The proceeds were used to repatriate earnings pursuant to the AJCA. While planning for the issuance of the debt, the company entered into interest rate swap agreements to effectively fix the interest rate on $149 million of the debt prior to its issuance.

As of July 30, 2006, the company had $300 million available for issuance under a $1 billion shelf registration statement filed with the Securities and Exchange Commission in June 2002. Under the registration statement, the company may issue debt securities, depending on market conditions.

There were no new long-term borrowings in 2005. Long-term borrowings in 2004 included the issuance of $300 million of ten-year 4.875% fixed-rate notes due October 2013. The proceeds were used to repay commercial paper borrowings and for other general corporate purposes. While planning for the issuance of these notes, the company entered into treasury lock agreements with a notional value of $100 million that effectively fixed a portion of the interest rate on the debt prior to issuance of the notes. These agreements were settled at a minimal gain upon issuance of the notes, which will be amortized over the life of the notes. In connection with this issuance, the company entered into ten-year interest rate swaps that converted $200 million of the fixed-rate debt to variable.

In September 2003, the company also entered into $100 million five-year interest rate swaps that converted a portion of the 5.875% fixed-rate notes due October 2008 to variable.

In April 2004, the company entered into a $50 million interest rate swap that converted a portion of the 6.9% fixed-rate notes due October 2006 to variable.

In May 2004, the company entered into a $50 million interest rate swap that converted a portion of the 6.9% fixed-rate notes due October 2006 to variable.

Dividend payments were $292 million in 2006, $275 million in 2005 and $259 million in 2004. Annual dividends declared in 2006 were $.72 per share, $.68 per share in 2005 and $.63 per share in 2004. The 2006 fourth quarter rate was $.18 per share.

Excluding shares owned and tendered by employees to satisfy tax withholding requirements on vesting of restricted shares, the company repurchased 15 million shares at a cost of $506 million during 2006, compared to 4 million shares at a cost of $110 million during 2005 and 2 million shares at a cost of $56 million during 2004. Of the 2006 repurchases, 6 million shares at a cost of $200 million were under the Board of Directors authorization announced on November 21, 2005 to purchase up to $600 million

of company stock through fiscal 2008. The remaining shares were repurchased to offset the impact of dilution from shares issued under the company’s stock compensation plans. See “Market for Registrant’s Capital Stock, Related Shareowner Matters and Issuer Purchases of Equity Securities” for more information.

At July 30, 2006, the company had $1,097 million of notes payable due within one year and $33 million of standby letters of credit issued on behalf of the company. The company maintained committed revolving credit facilities totaling $1.5 billion, which were unused at July 30, 2006 except for $1 million of standby letters of credit. Another $32 million of standby letters of credit was issued under a separate facility. In September 2006, the company entered into a $1.5 billion, 5-year revolving credit facility that will mature in September 2011. This facility replaced the existing $500 million 364-day revolving credit facility that matured in September 2006 and the $1 billion revolving multi-year credit facility that would have matured in September 2010. These agreements support the company’s commercial paper programs.

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

Cash and cash equivalents were $657 million at July 30, 2006 and $40 million at July 31, 2005. The company expects to maintain higher cash balances until $600 million of notes payable that matures in 2007 are repaid.

The company believes that foreseeable liquidity and capital resource requirements, including notes payable due within one year and cash outflows to repurchase shares and pay dividends, are expected to be met through cash and cash equivalents, anticipated cash flows from operations, long-term borrowings under its shelf registration and short-term borrowings, including commercial paper. The company believes that its sources of financing are adequate to meet its future liquidity and capital resource requirements. The cost and terms of any future financing arrangements depend on the market conditions and the company’s financial position at that time.

On August 15, 2006, the company completed the sale of its United Kingdom and Irish businesses for £460 million or approximately $870 million. The company also announced that its Board of Directors authorized using approximately $620 million of the net proceeds of the sales to purchase company stock. These purchases are expected to be completed in 2007. On September 28, 2006, the company entered into accelerated share repurchase agreements with a financial institution to repurchase approximately $600 million of stock. This share repurchase authority is in addition to the three-year $600 million share repurchase plan announced in November 2005 and the company’s ongoing practice of buying back shares sufficient to offset shares issued under incentive

compensation plans. The remaining net proceeds will be used to pay taxes and expenses associated with the sale, to settle foreign currency hedging contracts associated with intercompany financing transactions of the businesses, and to repay debt.

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 18 to the Consolidated Financial Statements. Operating leases are primarily entered into for warehouse and office facilities, retail store space, and certain equipment. Purchase commitments represent purchase orders and long-term purchase arrangements related to the procurement of ingredients, supplies, machinery, equipment and services. These commitments are not expected to have a material impact on liquidity. Other long-term liabilities primarily represent payments related to deferred compensation obligations and postemployment benefits. For additional information on other long-term liabilities, see Note 19 to the Consolidated Financial Statements.

		Contractual Payments Due by Fiscal Year
										2008-				2010-
(millions)		Total				2007				2009				2011				Thereafter
Debt obligations1		$	3,213			$	1,097			$	308			$	912			$	896
Interest payments2			884				175				263				216				230
Purchase commitments			1,484				997				441				31				15
Operating leases			335				77				114				80				64
Derivative payments3			197				167				14				1				15
Other long-term liabilities4			152				14				29				24				85
Total long-term cash obligations		$	6,265			$	2,527			$	1,169			$	1,264			$	1,305

1		Includes capital lease obligations totaling $18 million, unamortized net premium on debt issuances, unamortized gain on a terminated interest rate swap and a loss on fair-value interest rate swaps. For additional information on debt obligations, see Note 18 to the Consolidated Financial Statements.
2		Interest payments for notes payable, long-term debt and derivative instruments are calculated as follows. For notes payable, interest is based on par values and rates of contractually obligated issuances at fiscal year end. For fixed-rate long-term debt, interest is based on principal amounts and fixed coupon rates at fiscal year end. For variable-rate long-term debt, interest is based on principal amounts and rates estimated over the life of the instrument using forward interest rates and applicable spreads. Interest on fixed-rate derivative instruments is based on notional amounts and fixed interest rates contractually obligated at fiscal year end. Interest on variable-rate derivative instruments is based on notional amounts contractually obligated at fiscal year end and rates estimated over the instrument’s life using forward interest rates plus applicable spreads.
3		Represents payments of cross-currency swaps and forward exchange contracts. Includes payments of derivatives settled in 2007 associated with the sale of the businesses in the United Kingdom and Ireland.
4		Represents other long-term liabilities, excluding deferred taxes and minority interest. This table does not include postretirement medical benefits, payments related to pension plans or unvested stock-based compensation. The company made a $22 million voluntary contribution to a U.S. plan subsequent to July 30, 2006.

Off-Balance Sheet Arrangements and Other Commitments

The company guarantees approximately 1,500 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 $122 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 22 to the Consolidated Financial Statements for information on off-balance sheet arrangements.

Inflation

During the past three years, inflation, on average, has been higher than previous years but has not had a significant effect on the company. The company uses a number of strategies to mitigate the effects of cost inflation. These strategies include increasing prices, 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 commodity prices, interest rates and foreign currency exchange rates. In addition, the company is exposed to equity price changes related to certain employee 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 30% of 2006 net sales, are concentrated principally in Australia, Canada, France and Germany. The company sold its operations in the United Kingdom and Ireland on August 15, 2006 as discussed in Note 2 to the Consolidated Financial Statements. The company manages its foreign currency exposures by borrowing in various foreign currencies and utilizing cross-currency swaps and forward contracts. Swaps and forward contracts are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. The company does not enter into contracts for speculative purposes and does not use leveraged instruments.

The company principally uses a combination of purchase orders and various short- and long-term supply arrangements in connection with the purchase of raw materials, including certain commodities and agricultural products. The company may also enter into commodity futures contracts, as considered appropriate, to reduce the volatility of price fluctuations for commodities such as corn, cocoa, soybean meal, soybean oil, wheat and dairy. At

July 30, 2006 and July 31, 2005, the notional values and unrealized gains or losses on commodity futures contracts held by the company were not material.

The information below summarizes the company’s market risks associated with debt obligations and other significant financial instruments as of July 30, 2006. Fair values included herein have been determined based on quoted market prices. The information presented below should be read in conjunction with Notes 18 and 20 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 2007 represent the weighted-average rates at the period end. Interest rates disclosed on variable-rate debt maturing in 2011 represent the weighted-average forward rates for the term. 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.

As of July 31, 2005, fixed-rate debt of approximately $2.5 billion with an average interest rate of 6.17% and variable-rate debt of approximately $446 million with an average interest rate of 5.44% were outstanding. As of July 31, 2005, the company had also swapped $875 million of fixed-rate debt to variable. The average rate received on these swaps was 5.42% and the average rate paid was estimated to be 5.28% over the remaining life of the swaps.

The company is exposed to foreign exchange risk related to its international operations, including non-functional currency inter-company debt and net investments in subsidiaries.

The table below summarizes the cross-currency swaps outstanding as of July 30, 2006, which hedge such exposures, excluding contracts related to the divested United Kingdom and Irish businesses. The notional amount of each currency and the related weighted-average forward interest rate are presented in the Cross-Currency Swaps table.

Cross-Currency Swaps

						Interest				Notional				Fair
(millions)		Expiration				Rate				Value				Value
Pay variable EUR			2007				3.44	%		$	11			$	—
Receive variable USD							5.43	%
Pay variable EUR			2007				3.48	%		$	69			$	(4	)
Receive variable USD							5.46	%
Pay fixed EUR			2007				5.46	%		$	200			$	(92	)
Receive fixed USD							5.75	%
Pay variable CAD			2007				5.92	%		$	31			$	(7	)
Receive variable USD							6.78	%
Pay variable SEK			2008				3.74	%		$	16			$	(1	)
Receive variable USD							5.97	%
Pay fixed EUR			2008				2.92	%		$	69			$	1
Receive fixed USD							4.47	%
Pay fixed CAD			2009				5.13	%		$	60			$	(17	)
Receive fixed USD							4.22	%
Pay fixed SEK			2010				4.53	%		$	32			$	(3	)
Receive fixed USD							4.29	%
Pay fixed CAD			2014				6.24	%		$	60			$	(21	)
Receive fixed USD							5.66	%
Total										$	548			$	(144	)

The cross-currency swap contracts outstanding at July 31, 2005 represented one pay fixed SEK/receive fixed USD swap with a notional value of $32 million, a pay variable SEK/receive variable USD swap with a notional value of $32 million, a pay variable CAD/receive variable USD swap with a notional value of $53 million, two pay fixed CAD/receive fixed USD swaps with notional values of $120 million, two pay variable EUR/receive variable USD swaps with notional values of $89 million, two pay fixed EUR/receive fixed USD swaps with notional values of $269 million, a pay variable GBP/receive variable USD swap with a notional value of $125 million, and three pay fixed GBP/receive fixed USD swaps with notional values

of $270 million. The notional value of these swap contracts was $990 million as of July 31, 2005 and the aggregate fair value of these swap contracts was $(168) million as of July 31, 2005.

The following contracts were outstanding at July 30, 2006 related to intercompany financing of the divested United Kingdom and Irish businesses. These instruments were settled in August 2006 in connection with the sale of the business.

Cross-Currency Swaps

		Interest				Notional				Fair
(millions)		Rate				Value				Value
Pay variable GBP			5.67	%		$	138			$	(2	)
Receive variable USD			6.37	%
Pay fixed GBP			5.97	%		$	200			$	(66	)
Receive fixed USD			6.08	%
Pay fixed GBP			5.97	%		$	30			$	(3	)
Receive fixed USD			5.01	%
Pay fixed GBP			5.97	%		$	40			$	(2	)
Receive fixed USD			4.76	%
Total						$	408			$	(73	)

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 table below summarizes the foreign exchange forward contracts outstanding and the related weighted-average contract exchange rates as of July 30, 2006. The table excludes forward contracts used to hedge the investment in and intercompany transactions associated with the United Kingdom and Irish businesses sold in August 2006.

Forward Exchange Contracts

		Contract				Average Contractual
(millions)		Amount				Exchange Rate
Receive USD / Pay CAD		$	33				1.15
Receive AUD / Pay NZD		$	18				1.13
Receive GBP / Pay USD		$	9				1.85
Receive EUR / Pay GBP		$	8				0.70
Receive EUR / Pay USD		$	8				1.24
Receive USD / Pay EUR		$	7				0.79
Receive EUR / Pay JPY		$	5				137.00
Receive GBP / Pay EUR		$	5				1.46
Receive JPY / Pay EUR		$	4				0.01

The company had an additional $13 million in a number of smaller contracts to purchase or sell various other currencies, such as the Australian dollar, Mexican peso, Japanese yen, and Canadian dollar as of July 30, 2006. The aggregate fair value of all contracts was $2 million as of July 30, 2006. Total forward exchange contracts outstanding as of July 31, 2005 were $402 million with a fair value of $3 million.

The following forward contracts, which hedge exposures related to the United Kingdom and Irish businesses, were outstanding as of July 30, 2006 and settled in August 2006 in connection with the sale. The fair value of these contracts was $(5) million at July 30, 2006.

GBP Forward Exchange Contracts

		Contract				Average Contractual
(millions)		Amount				Exchange Rate
Receive USD / Pay GBP		$	347				0.54
Receive GBP / Pay EUR		$	54				1.46
Receive EUR / Pay GBP		$	12				0.71

The company had swap contracts outstanding as of July 30, 2006, which hedge a portion of 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 the total return of the Puritan Fund. Under these contracts, the company pays variable interest rates and receives from the counterparty either the Standard & Poor’s 500 Index total return, the Puritan Fund total return, or the total return on company capital stock. The notional value of the contract that is linked to the return on the Standard & Poor’s 500 Index was $18 million at July 30, 2006 and $20 million at July 31, 2005. The average forward interest rate applicable to the contract, which expires in 2007, was 5.00% at July 30, 2006. The notional value of the contract that is linked to the return on the Puritan Fund was $10 million at July 30, 2006 and $9 million at July 31, 2005. The average forward interest rate applicable to the contract, which expires in 2007, was 5.24% at July 30, 2006. The notional value of the contract that is linked to the total return on company capital stock was $27 million at July 30, 2006 and $20 million at July 31, 2005. The average forward interest rate applicable to this contract, which expires in 2007, was 5.13% at July 30, 2006. The fair value of these contracts was a $2 million gain at July 30, 2006 and a $1 million gain at July 31, 2005.

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 cooperative advertising programs, feature price discounts, in-store display incentives and coupons. The recognition of the costs for these programs, which are classified as a reduction of revenue, involves use of judgment related to performance and redemption estimates. Estimates are made based on historical experience and other factors. Actual expenses may differ if the level of redemption rates and performance vary from estimates.

Valuation of long-lived assets Long-lived assets, including fixed assets and intangibles, are reviewed for impairment as events or changes in circumstances occur indicating that the carrying amount of the asset may not be recoverable. Discounted cash flow analyses are used to assess nonamortizable intangible asset impairment, while undiscounted cash flow analyses are used to assess other long-lived asset impairment. The estimates of future cash flows involve considerable management judgment and are based upon assumptions about expected future operating performance. Assumptions used in these forecasts are consistent with internal planning. The actual cash flows could differ from management’s estimates due to changes in business conditions, operating performance, and economic conditions.

Pension and postretirement medical 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 financial consultants 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.

When the fair value of pension plan assets is less than the accumulated benefit obligation, an additional minimum liability is recorded in Other comprehensive income within Shareowners’ Equity. As of July 30, 2006 and July 31, 2005, Shareowners’ Equity includes a minimum liability, net of tax, of $67 million and $238 million, respectively.

Net periodic pension and postretirement medical expense was $77 million in 2006, $67 million in 2005 and $65 million in 2004. Significant weighted-average assumptions as of the end of the year are as follows:

Pension		2006				2005				2004
Discount rate for benefit obligations			6.05	%			5.44	%			6.19	%
Expected return on plan assets			8.71	%			8.76	%			8.76	%

Postretirement
Discount rate for obligations			6.25	%			5.50	%			6.25	%
Initial health care trend rate			9.00	%			9.00	%			9.00	%
Ultimate health care trend rate			4.50	%			4.50	%			4.50	%

Estimated sensitivities to annual net periodic pension cost are as follows: a 50 basis point reduction in the discount rate would increase expense by approximately $12 million; a 50 basis point reduction in the estimated return on assets assumption would increase expense by approximately $10 million. A one percentage point increase in assumed health care costs would increase postretirement service and interest cost by approximately $2 million.

Although there were no mandatory funding requirements to the U.S. plans in 2006, 2005 and 2004, the company made a $35 million contribution in 2006 and 2005 and a $50 million contribution in 2004 to a U.S. plan based on expected future funding requirements. Contributions to international plans were $17 million in 2006, $26 million in 2005 and $15 million in 2004. Subsequent to July 30, 2006, the company made a $22 million voluntary contribution to a U.S. plan in anticipation of future funding requirements. Contributions to non-U.S. plans are expected to be approximately $10 million in 2007.

See also Note 10 to the Consolidated Financial Statements for additional information on pension and postretirement medical 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. Tax reserves are established when,

despite the company’s belief that tax return positions are fully supportable, certain positions are subject to challenge and the company may not successfully defend its position. These reserves, as well as the related interest, are adjusted in light of changing facts and circumstances, such as the progress of a tax audit. While it is difficult to predict the final outcome or timing of resolution of any particular tax matter, the company believes that the reserves reflect the probable outcome of known tax contingencies. Income taxes are recorded based on amounts refundable or payable in the current year and include the effect of deferred taxes. Deferred tax assets and liabilities are recognized for the future impact of differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, 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 the section entitled Recently Issued Accounting Pronouncements and Notes 1 and 11 to the Consolidated Financial Statements for further discussion on income taxes, including the impact of the AJCA, and FASB Interpretation No. (FIN) 48 “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.”

Recently Issued Accounting Pronouncements

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 was effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 in 2006 did not have a material impact on the financial statements.

In October 2004, the AJCA was signed into law. The AJCA provides for a deduction of 85% of certain non-U.S. 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 Financial Accounting Standards Board (FASB) issued FASB Staff Position FAS 109-1 and 109-2 to address the accounting and disclosure requirements related to the AJCA. The total amount repatriated in 2006 under the AJCA was $494 million and the related tax cost was $20 million. In 2005, the company recorded $7 million in tax expense for $200 million of anticipated earnings to be repatriated. In 2006, the company finalized its plan under the AJCA and recorded tax expense of $13 million for $294 million of earnings repatriated.

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. The company adopted FIN 47 in 2006. The adoption did not have a material impact on the financial statements.

In July 2006, the FASB issued FIN 48 “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” FIN 48 clarifies the criteria that must be met for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. This Interpretation also addresses derecognition, recognition of related penalties and interest, classification of liabilities and disclosures of unrecognized tax benefits. FIN 48 is effective for fiscal years beginning after December 15, 2006. The company is in the process of evaluating the impact of FIN 48.

Earnings Outlook

On September 11, 2006, the company issued a press release announcing results for 2006 and commented on the outlook for earnings per share for 2007.

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 1, Item 1A and elsewhere in the commentary, or in the Securities and Exchange Commission filings of the company, could affect the company’s actual results and could cause such results to vary

materially from those expressed in any forward-looking statements made by, or on behalf of, the company:

•

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

•

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 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, product capacity, information management systems and the integration of acquisitions;

•

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

•

the impact of fluctuations in the supply and cost of energy and raw materials;

•

the risks 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, equity markets, inflation rates, recession 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.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information presented in the section entitled “Management’s Discussion and Analysis of Results of Operations and Financial Condition — Market Risk Sensitivity” is incorporated herein by reference.