Campbell Soup Company — FY2014 Form 10-K
Business context and reporting period. Campbell manufactures and markets branded convenience foods across five reporting segments. This 10-K covers the fiscal year ended August 3, 2014, which contained 53 weeks; FY2013 contained 52 weeks. The company acquired Kelsen and Plum and completed the sale of its European simple meals business during the relevant period. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and position
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $8.268 billion | $8.052 billion |
| Gross profit margin | 35.1% | 36.2% |
| Earnings before interest and taxes | $1.192 billion | $1.080 billion |
| Earnings from continuing operations attributable to Campbell | $737 million; diluted EPS $2.33 | $689 million; diluted EPS $2.17 |
| Net earnings attributable to Campbell | $818 million; diluted EPS $2.59 | $458 million; diluted EPS $1.44 |
| Cash from operations | $899 million | $1.019 billion |
| Capital expenditures | $347 million | $336 million |
| Total debt at year-end | $4.015 billion | $4.453 billion |
| Cash and cash equivalents at year-end | $232 million | $333 million |
Sales grew 3%; acquisitions contributed approximately 3 percentage points and the extra week approximately 2 points, while underlying sales were pressured in several businesses. Operating cash flow less capital expenditures was approximately $552 million, versus $683 million in FY2013. The current ratio was approximately 0.70, based on current assets of $2.100 billion and current liabilities of $2.989 billion. Short-term borrowings were $1.771 billion, including $1.406 billion of commercial paper.
FY2014 fourth-quarter net sales were $1.852 billion, gross profit was $631 million, continuing-operations earnings attributable to Campbell were $137 million, and diluted continuing-operations EPS was $0.43. Comparable FY2013 fourth-quarter figures were $1.723 billion, $623 million, $117 million, and $0.37, respectively.
Material changes versus the prior period
- Sales rose 3%, but gross margin fell 1.1 percentage points, principally from cost inflation and supply-chain costs, higher promotional spending, acquisition impacts, and mix. Productivity, higher selling prices, and lower restructuring-related costs partly offset these pressures.
- Administrative expense fell 15% to $573 million, largely reflecting lower incentive compensation, restructuring savings, and lower pension expense.
- Continuing-operations diluted EPS increased to $2.33 from $2.17. The additional week contributed approximately $0.08 per share. Management reported that comparable earnings also benefited from lower administrative and marketing expenses, partly offset by weaker margins, lower underlying sales, and a higher effective tax rate.
- Operating cash flow declined $120 million, primarily due to lower cash earnings and taxes paid on the European business sale, partly offset by lower working-capital requirements.
- Net earnings included $81 million from discontinued operations, including a $141 million pretax gain on the European business sale. FY2013 net earnings were reduced by a $396 million impairment charge and related tax expense for that business.
Outlook, management commentary, risks, and unusual items
- Management’s strategy is to strengthen established meals, snacks, and beverage businesses while expanding into higher-growth areas, including packaged fresh foods, developing markets, innovation, and alternative retail channels. The filing does not provide a clear numerical FY2015 sales or EPS forecast.
- FY2015 capital expenditures were expected to be approximately $400 million. The company expected FY2014 restructuring initiatives to produce about $56 million of pretax savings in FY2015 and approximately $65 million of annual ongoing savings beginning in FY2016.
- The 2014 restructuring program recorded $54 million of charges, with approximately $2 million of further costs expected. Initiatives included workforce reductions, China soup and broth restructuring, and relocation of Australian biscuit production. Management said remaining restructuring cash outflows were not expected to materially affect liquidity.
- A voluntary recall of certain Plum pouch products, announced in November 2013 due to a manufacturing defect that could cause spoilage, generated $16 million of costs ($11 million after tax) in FY2014.
- Competition, private-label products, raw-material and packaging inflation, weather and supply disruptions, customer concentration, foreign currency exposure, regulatory and food-safety matters, and acquisition integration are among the disclosed risks. Wal-Mart and affiliates represented approximately 19% of sales; the five largest customers represented approximately 35%.
- The company had a $2.2 billion revolving credit facility maturing in December 2018, unused at year-end except for $3 million of letters of credit, and reported compliance with debt covenants. The filing also describes pension, tax, goodwill and trademark valuation sensitivities. Management and the auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion.
Investor facts to verify
- How much of reported sales growth reflects sustainable volume and mix, rather than acquisitions, currency, pricing, or the 53rd week?
- Whether gross-margin pressures ease and soup, U.S. beverages, Arnott’s, and foodservice stabilize or improve.
- Whether restructuring savings are achieved on schedule and offset the costs of execution and capacity investment.
- The continuing effects of the Plum recall and the performance of the acquired Plum, Kelsen, and Bolthouse businesses.
- How commercial-paper maturities and other short-term borrowing needs will be refinanced or repaid, and the resulting impact on liquidity and interest expense.
- Whether acquisition-related goodwill and trademark valuations remain supportable if growth, margin, or discount-rate assumptions weaken.