Campbell Soup Company — FY2011 Form 10-K
Reporting period: Fiscal year ended July 31, 2011 (52 weeks); comparisons are with fiscal 2010 unless noted. The filing also reports fourth-quarter results. Campbell manufactures and markets branded convenience foods across five reportable segments: U.S. Simple Meals, U.S. Beverages, Global Baking and Snacking, International Simple Meals and Beverages, and North America Foodservice.
Financial performance and position
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $7.719 billion | $7.676 billion |
| Gross profit margin | 40.2% | 41.0% |
| EBIT | $1.279 billion | $1.348 billion |
| Net earnings attributable to Campbell | $805 million | $844 million |
| Diluted EPS | $2.42 | $2.42 |
| Cash from operations | $1.142 billion | $1.057 billion |
| Capital expenditures | $272 million | $315 million |
| Total debt at year-end | $3.084 billion | $2.780 billion |
| Cash and cash equivalents | $484 million | $254 million |
| Total equity | $1.096 billion | $929 million |
Revenue increased 1%. Gross profit fell $47 million; margin contracted 0.8 percentage points, chiefly from cost inflation and higher plant costs (negative 2.2 points) and increased promotions (negative 0.7), partly offset by productivity improvements (positive 1.9) and higher prices (positive 0.4). Interest expense rose to $122 million from $112 million, primarily due to higher debt levels and fixed-rate debt. The effective tax rate declined to 31.3% from 32.0%.
Operating cash flow rose $85 million, mainly because of lower pension contributions and higher cash earnings, partly offset by greater working-capital needs. Cash from investing activities was a net outflow of $261 million; financing activities used $700 million. The company paid $378 million in dividends and repurchased $728 million of stock. The declared annual dividend was $1.145 per share, up from $1.075.
At year-end, current assets were $1.963 billion and current liabilities were $1.989 billion. Short-term borrowings were $657 million and long-term debt was $2.427 billion. In September 2011, Campbell replaced two revolving facilities with new committed facilities totaling $2.0 billion; the company said these support commercial paper and general corporate purposes. It reported compliance with debt covenants.
Changes versus the prior period
- Segment sales were mixed: U.S. Simple Meals fell 6% to $2.751 billion; U.S. Beverages was essentially flat at $759 million; Global Baking and Snacking rose 9% to $2.156 billion; International Simple Meals and Beverages rose 3% to $1.463 billion; and North America Foodservice rose 2% to $590 million.
- U.S. Simple Meals operating earnings fell 11% and U.S. Beverages earnings fell 12%; Global Baking and Snacking earnings grew 10%, International earnings grew 15%, and Foodservice earnings grew 49% from a lower base.
- Net earnings attributable to Campbell declined 5%, while diluted EPS was unchanged, supported by fewer weighted-average diluted shares following repurchases. Reported 2011 earnings included a $41 million after-tax restructuring charge ($0.12 per share); 2010 included $8 million after tax of restructuring costs and $10 million of deferred tax expense ($0.05 per share combined).
- Debt increased by $304 million, while cash increased by $230 million. Capital expenditures declined from $315 million to $272 million.
Outlook, management commentary and risks
Management’s July 2011 strategy prioritizes stabilizing and profitably growing North American soup and simple meals, expanding internationally, and growing healthy beverages and baked snacks. Campbell expects substantial fiscal 2012 investment in product platforms, consumer-focused marketing, and global expansion, which it expects to weigh on 2012 financial performance; management said the investments are intended to support profitable growth in 2013 and beyond. No specific consolidated sales or EPS guidance is provided in the filing text.
The June 2011 restructuring is expected to eliminate approximately 750 positions and includes supply-chain changes, workforce reductions, and exiting Russia. The program’s estimated total pre-tax cost is $75 million, including $12 million remaining after year-end; approximately $50 million is expected to be cash expenditure, mostly in 2012, plus about $40 million of related capital investment. Management estimates annual pre-tax cash savings of approximately $60 million beginning in fiscal 2012, increasing to approximately $70 million in fiscal 2014. Completion is expected by the end of fiscal 2013. Fiscal 2012 capital expenditures are forecast at approximately $325 million.
Key risks include intense branded and private-label competition; raw-material, packaging and energy inflation; difficulty passing cost increases through without losing volume; changing consumer preferences and product-launch execution; customer concentration and negotiating power (Wal-Mart represented about 17% of fiscal 2011 sales); foreign-exchange exposure; pension funding and cost assumptions; supply-chain disruption; regulatory and food-safety matters; and execution of restructuring, technology and other initiatives. Campbell cited no material expected ingredient or packaging shortages. Item 3 lists no legal proceedings; the notes discuss ordinary-course claims and state management does not expect their outcome to materially harm results or financial condition. The company guarantees distributor loans with a maximum potential exposure of $162 million, but says payment is not considered probable.
FY2011 included a $3 million impairment charge on the Heisse Tasse trademark. Certain European trademarks, with approximately $100 million carrying value, were near fair value; a 100-basis-point increase in the discount rate, holding other assumptions constant, could result in approximately $21 million of impairment. The annual audit opinion was unqualified, and management and the auditor concluded internal control over financial reporting was effective as of July 31, 2011.
Important facts for investors to verify
- Whether North American soup and simple-meals sales stabilize after the 6% segment sales decline, and whether marketing rebalancing affects volume as management anticipates.
- Whether gross margin recovers as productivity, pricing and cost savings offset inflation, plant costs and promotional spending.
- Whether the restructuring delivers the stated $60 million to $70 million annual pre-tax cash savings, and whether its total costs and timing remain within estimates.
- How fiscal 2012 strategic spending and approximately $325 million of capital expenditures affect earnings, cash generation and the stated 2013-and-beyond growth plan.
- Debt, commercial-paper funding, pension funding needs and liquidity after the new $2.0 billion revolving facilities were arranged.
- Exposure to large retailers, foreign currencies, commodity prices and potential impairment of European trademarks.