Campbell Soup Company — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2013, ended January 27, 2013; comparisons are with the periods ended January 29, 2012. Amounts are in millions except per-share data.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $2,333, up 10% | $4,669, up 9% |
| Gross margin | 35.1%, versus 38.4% | 36.1%, versus 39.0% |
| Earnings before interest and taxes | $301, versus $329 | $686, versus $745 |
| Net earnings attributable to Campbell | $190, versus $205 | $435, versus $470 |
| Diluted earnings per share | $0.60, versus $0.64 | $1.38, versus $1.45 |
| Operating cash flow | Not separately reported | $499, versus $478 |
Quarterly sales growth mainly reflected the Bolthouse Farms acquisition; excluding its contribution, reported sales growth was limited. Bolthouse contributed $195 of quarterly sales and $366 for the six-month period. Six-month diluted EPS included $0.20 per share of restructuring-related costs and acquisition transaction costs; reported figures should not be read as adjusted results.
Quarterly gross profit as a percentage of sales fell 3.3 percentage points. Management attributed the decline principally to restructuring-related costs (1.7 points), cost inflation and other factors (1.5), acquisition impact (1.4), and promotional spending (0.8), partly offset by productivity improvements (1.4) and higher selling prices (0.9). Marketing and selling expense was $297 for the quarter, flat year over year; administrative expense rose to $172 from $152.
Segments and material changes
- Quarterly sales: U.S. Simple Meals $833 (+1%); Global Baking and Snacking $561 (+7%); International Simple Meals and Beverages $405 (+1%); U.S. Beverages $182 (-3%); Bolthouse and Foodservice $352 (+103%, including Bolthouse).
- U.S. Simple Meals operating earnings rose to $191 from $174; Global Baking and Snacking to $74 from $71; International Simple Meals and Beverages fell to $54 from $58; U.S. Beverages increased to $37 from $34; Bolthouse and Foodservice rose to $30 from $28.
- Management cited weaker U.S. broth sales following earlier promotional shipments, declines in U.S. shelf-stable beverages amid competition, and North America Foodservice sales declines following the loss of a major restaurant customer. Pepperidge Farm and several soup and snack lines recorded growth.
- For the six months, sales rose 9%, while attributable net earnings declined about 7%. Higher corporate expenses, restructuring costs, acquisition-related expenses, interest expense and margin pressure weighed on reported results.
Cash, debt and liquidity
- At January 27, cash was $410; current assets were $2,264 and current liabilities $2,891. Short-term borrowings were $1,489 and long-term debt $2,940. The filing reports long-term debt fair value, including current portions, of $3,461 versus carrying value of $3,250.
- Six-month operating cash flow was $499; capital expenditures were $110. Investing cash outflow was $1,685, including $1,567 for the acquisition, net of cash acquired. Financing cash inflow was $1,257, including borrowings.
- Cash increased by $75 during the six months, to $410. The company had $2.0 billion in committed revolving credit facilities, unused at period-end apart from $3 of standby letters of credit; it reported compliance with debt covenants. It also had $47 of standby letters of credit issued on its behalf.
- Bolthouse was acquired for $1.55 billion in cash, with preliminary purchase-price adjustments increasing the price by $20. The acquisition was funded with short- and long-term borrowings. Campbell issued $1.25 billion of long-term notes, including $400 of floating-rate notes maturing in 2014.
Outlook, management commentary, risks and unusual items
- The filing does not provide a clear full-year sales or earnings forecast. Management expected 2013 capital expenditures of approximately $330.
- U.S. supply-chain initiatives were expected to cost $115 pre-tax in total, of which $85 had been recognized by January 27; approximately $30 remained. Management projected annual pre-tax cash savings of about $21 in 2014 and $30 beginning in 2016, and expected approximately $38 of program costs to be cash expenditures. The initiatives include closures affecting about 727 positions, including the Sacramento thermal plant.
- A Mexico commercial arrangement will result in closure of the Villagrán plant in 2014 and elimination of approximately 260 positions. Estimated total pre-tax costs are $9, with approximately $4 expected to be cash expenditures; ongoing annual cash savings were not expected to be material.
- Other stated risks include competition and consumer acceptance of pricing, promotions and new products; input-cost inflation and supply; customer inventory practices and concentration; integration of Bolthouse; foreign exchange, interest rates and economic conditions; litigation; and disruption from political events or natural disasters.
- Bolthouse agreed to pay an $800,000 penalty and install wastewater monitoring equipment expected to cost approximately $139,000 to settle a Bakersfield notice of violation. The agreement was reached February 13, 2013; the company also reported approximately $52,000 of related costs incurred by January 27.
- Management said disclosure controls were effective. The ongoing transition of certain finance, accounting and payroll services to a third party materially affected internal control over financial reporting; completion was expected by the end of 2013.
Investor verification points
- Separate organic performance from acquired Bolthouse sales and verify the final purchase-price allocation, which remained preliminary.
- Track whether margin recovery, cost savings and restructuring timelines meet management’s stated expectations, including the effects of plant closures and production transfers.
- Assess leverage and refinancing exposure, particularly short-term borrowings and the floating-rate 2014 notes, alongside cash generation and dividend requirements.
- Monitor U.S. beverage and broth trends, Foodservice customer losses, promotional spending, and cost inflation.
- Review the service-provider transition’s effect on internal controls and follow any further developments related to the Bakersfield settlement.