Campbell Soup Company — Q3 2013 Form 10-Q
Reporting period: Third quarter and nine months ended April 28, 2013; comparisons are with the periods ended April 29, 2012. Amounts are in millions of dollars except per-share data.
Business context and key financial metrics
Campbell manufactures and markets branded convenience foods. Its five reportable segments are U.S. Simple Meals, Global Baking and Snacking, International Simple Meals and Beverages, U.S. Beverages, and Bolthouse and Foodservice. Results include Bolthouse Farms, acquired August 6, 2012.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $2,094 | $1,821 | $6,763 | $6,094 |
| Gross margin | 35.7% | 38.8% | 36.0% | 38.9% |
| EBIT | $272 | $264 | $958 | $1,009 |
| Net earnings attributable to Campbell | $181 | $177 | $616 | $647 |
| Diluted EPS | $0.57 | $0.55 | $1.94 | $2.01 |
| Operating cash flow | Not presented for quarter | $864 | $838 |
Q3 sales rose 15%, including 11 percentage points from Bolthouse; U.S. Simple Meals sales increased 11%. Q3 net earnings attributable to Campbell increased about 2%, while diluted EPS rose 4%. For nine months, sales increased 11%, but attributable net earnings fell about 5% and diluted EPS fell about 3%.
Q3 segment operating earnings rose 12% to $329 before corporate costs and restructuring. U.S. Simple Meals earnings increased 30%; U.S. Beverages declined 27%. Nine-month segment operating earnings rose 7% to $1,185, while higher corporate costs and restructuring contributed to lower consolidated EBIT.
Liquidity, debt and cash flows
- At April 28, 2013, cash was $453; current assets were $2,177 and current liabilities were $2,604.
- Short-term borrowings were $1,309 and long-term debt was $2,944, totaling $4,253, compared with $2,790 at July 29, 2012. The increase primarily financed the Bolthouse acquisition. Fair value of debt was $3,453 versus carrying value of $3,250 for long-term debt, including its current portion.
- Nine-month operating cash flow was $864; capital expenditures were $205. Investing cash outflow was $1,774, including $1,558 for the acquisition. Financing cash inflow was $1,031. Ending cash increased $118 from the fiscal-year start.
- The company had $2.0 billion of committed revolving credit facilities, unused except for $3 million of standby letters of credit; it reported compliance with debt covenants. Management said expected operating cash flows, borrowing capacity and cash were adequate for foreseeable requirements.
Material changes, outlook and risks
- Bolthouse Farms: The $1.55 billion acquisition added $205 of Q3 sales and $571 for the nine-month period. It contributed $6 to Q3 net earnings and $8 since acquisition, after related financing, amortization, depreciation and transaction costs. Purchase-price adjustments were finalized at an $11 increase. The purchase-price allocation remained preliminary pending tax-balance finalization.
- Margins and costs: Gross margin fell 3.1 percentage points in Q3 and 2.9 points year to date. Management cited cost inflation, acquisition mix, restructuring-related costs and increased promotion, partly offset by productivity, pricing and mix. Q3 restructuring charges and related costs reduced earnings by $14 after tax, or $0.04 per share; nine-month charges and related costs plus acquisition transaction costs reduced earnings by $78 after tax, or $0.25 per share.
- Restructuring: U.S. supply-chain initiatives were estimated at $120 in total pretax costs, with $15 remaining, and expected to generate approximately $30 in annual pretax cash savings beginning in 2016, with about $21 of savings in 2014. Plans include closing the Sacramento plant and South Plainfield spice plant. The company also planned to close its Villagrán, Mexico, plant in 2014, eliminating about 260 positions; expected total pretax costs were $9.
- Capital allocation and transactions: 2013 capital expenditures were expected to total about $330. The company announced an agreement to acquire Plum Inc., expected to close in 2013 subject to approvals and customary conditions; it planned to fund the transaction with commercial paper. The filing gives no purchase price.
- Management commentary and risks: Management cited improved U.S. soup performance, but also discussed competitive pricing and promotion, customer inventory effects, cost inflation, acquisition integration, foreign exchange, interest rates, and the ability to deliver planned savings. No formal company-wide earnings or sales guidance is provided in the filing text.
- Controls: Management concluded disclosure controls were effective. The ongoing transition of certain finance and accounting services to a third party materially affected internal control over financial reporting; substantial completion was expected by year-end 2013.
Important facts for investors to verify
- Whether Bolthouse Farms integration, growth and margin contribution meet expectations, and how final purchase accounting affects reported results.
- Whether cost inflation, promotional spending and restructuring costs continue to pressure gross margins and earnings.
- Progress, final costs, timing and realized savings from the U.S. and Mexico restructuring plans.
- Debt levels, commercial-paper funding, interest expense and liquidity needs, particularly following the Plum agreement.
- Whether declining U.S. beverage sales and Foodservice customer losses stabilize, and whether strong recent U.S. soup sales persist.