Business context and reporting period
Campbell Soup Company filed this Form 10-K for the 52-week fiscal year ended July 29, 2012. The company manufactures and markets branded convenience foods across five reportable segments: U.S. Simple Meals, Global Baking and Snacking, International Simple Meals and Beverages, U.S. Beverages, and North America Foodservice. Bolthouse Farms was acquired on August 6, 2012, after year-end; its results are not included in fiscal 2012.
Financial results and key metrics
Amounts in millions, except per-share data and percentages.
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $7,707 | $7,719 |
| Gross profit margin | 38.8% | 40.2% |
| Earnings before interest and taxes | $1,212 | $1,279 |
| Net earnings attributable to Campbell | $774 | $805 |
| Diluted EPS | $2.41 | $2.42 |
| Cash from operations | $1,120 | $1,142 |
| Capital expenditures | $323 | $272 |
| Total debt | $2,790 | $3,084 |
| Cash and cash equivalents at year-end | $335 | $484 |
| Total equity | $898 | $1,096 |
| Dividends declared per share | $1.16 | $1.145 |
Operating cash flow less capital expenditures was approximately $797 million in 2012. Current assets were $1,771 million and current liabilities were $2,070 million at year-end. Cash from operations remained strong but declined year over year; cash also fell, while total debt declined.
Fiscal fourth quarter
Unaudited fourth-quarter net sales were $1,613 million, compared with $1,607 million in 2011. Net earnings attributable to Campbell were $127 million ($0.40 diluted EPS), versus $100 million ($0.31 diluted EPS). The 2012 quarter included $3 million of restructuring charges and $3 million of Bolthouse acquisition costs.
Material changes versus the prior comparable period
- Full-year sales were essentially flat. Volume and mix reduced sales by 2 percentage points, largely offset by a 3-point contribution from price and sales allowances.
- Gross margin fell 1.4 percentage points. Cost inflation and other factors reduced margin by 3.7 points, and higher promotional spending and mix were additional drags; price increases and productivity improvements partly offset them.
- Segment sales were mixed: U.S. Simple Meals declined 1%, Global Baking and Snacking rose 2%, International Simple Meals and Beverages declined 4%, U.S. Beverages rose 2%, and North America Foodservice rose 3%.
- Segment operating earnings fell 8% overall. U.S. Beverages declined 26%, International Simple Meals and Beverages 17%, and Global Baking and Snacking 11%; North America Foodservice rose 4%, while U.S. Simple Meals was approximately flat.
- Reported attributable net earnings declined to $774 million from $805 million. Comparability included $9 million after tax of 2012 restructuring and acquisition costs versus $41 million of after-tax restructuring charges in 2011. After adjusting for the disclosed items, management attributed the decline primarily to lower gross margin, partly offset by a lower effective tax rate.
Outlook, management commentary, risks and unusual items
- Management’s strategy is to stabilize and profitably grow North American soup and simple meals, expand internationally, and grow healthy beverages and baked snacks. Campbell planned more than 50 new products for fiscal 2013 and continued investment in brand building and product innovation. The filing does not provide a clear numerical fiscal 2013 sales or EPS forecast.
- Fiscal 2013 capital expenditures were expected to be approximately $330 million, including Bolthouse projects. The company expected annual pre-tax savings of approximately $60 million from its 2011 restructuring initiatives beginning in 2012, rising to approximately $70 million in 2014.
- The August 2012 Bolthouse Farms acquisition cost $1.55 billion in cash and was funded with short- and long-term borrowings, including approximately $300 million of commercial paper and $1.25 billion of notes. The company expected an additional $11 million of transaction costs in 2013; purchase-price allocation was ongoing.
- On September 27, 2012, the company announced plans to close its Sacramento thermal plant and South Plainfield spice plant, eliminating approximately 727 positions. It expected about $115 million of pre-tax costs, mostly in 2013, and approximately $27 million of related capital expenditures.
- Key risks include commodity and packaging inflation, competitive and private-label pressure, consumer acceptance of products and pricing, reliance on major retail customers, supply-chain disruption, foreign exchange and economic conditions, pension costs, and execution and integration risks related to acquisitions and efficiency programs. The five largest customers represented about 34% of sales; Walmart represented about 17%.
- Defined-benefit pension and postretirement expense was $102 million in 2012, and management expected approximately $128 million in 2013, primarily from amortization of unrecognized losses. The company reported no material adverse effect expected from ordinary-course legal claims; Item 3 listed no legal proceedings.
- Unusual 2012 items included a $3 million impairment of the Blå Band trademark and $5 million of Bolthouse transaction costs. Certain European trademarks, with a carrying value of about $40 million, were near fair value; a 100-basis-point increase in the assumed discount rate would reduce trademark fair values and could produce an estimated $6 million impairment.
Important facts for investors to verify
- Whether the planned product launches, pricing, promotions, and innovation can stabilize soup volumes and restore gross margins after substantial cost inflation.
- The actual post-acquisition financing, integration performance, purchase-price allocation, and contribution from Bolthouse Farms, which is excluded from fiscal 2012 results.
- Whether restructuring and plant closures deliver projected savings, and whether costs, timing, production transfers, or service disruptions exceed expectations.
- Cash conversion, capital spending, dividend sustainability, and leverage after the Bolthouse acquisition; fiscal year-end cash and debt were $335 million and $2.79 billion before acquisition financing.
- Exposure to Walmart and other large customers, pension funding and expense assumptions, and impairment sensitivity for European trademarks.