Campbell Soup Company — Form 10-Q Summary
Business context and period: First quarter of fiscal 2013, the three months ended October 28, 2012, compared with the three months ended October 30, 2011. Campbell markets branded convenience foods across five reportable segments. On August 6, 2012, it acquired Bolthouse Farms for $1.55 billion in cash, subject to purchase-price adjustments; the preliminary adjustment increased the price by $20 million.
Key financial results
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Net sales | $2.336 billion | $2.161 billion |
| Gross profit margin | 37.0% | 39.5% |
| Earnings before interest and taxes | $385 million | $416 million |
| Net earnings attributable to Campbell | $245 million | $265 million |
| Diluted earnings per share | $0.78 | $0.82 |
| Operating cash flow | $81 million | $73 million |
- Sales rose 8%, primarily reflecting Bolthouse Farms, which contributed $171 million in sales. Excluding acquisition effects, the filing reports mixed segment performance rather than a single comparable organic-growth figure.
- Gross margin fell 2.5 percentage points. Management attributed the decline to cost inflation and other factors (2.1 points), acquisition impact (1.3), restructuring-related costs (0.9), and increased promotional spending (0.8), partly offset by productivity improvements (1.6) and higher selling prices (1.0).
- Reported net earnings included $27 million after tax ($0.09 per share) of restructuring charges and related costs, and $7 million after tax ($0.02 per share) of Bolthouse transaction costs. Management said earnings excluding comparability items increased, mainly due to Bolthouse and lower advertising and consumer promotion expenses, partly offset by higher administrative expenses.
- Interest expense rose to $36 million from $30 million, reflecting higher acquisition-related debt, partly offset by lower rates. The effective tax rate was 31.0%, versus 32.2%, primarily due to a favorable settlement of a U.S. state tax matter.
- By segment, sales were $896 million for U.S. Simple Meals, $574 million for Global Baking and Snacking, $354 million for International Simple Meals and Beverages, $189 million for U.S. Beverages, and $323 million for Bolthouse and Foodservice. U.S. Beverages sales declined 5%; International Simple Meals and Beverages declined 1%. Segment operating earnings increased 5% overall, while unallocated corporate expenses increased to $63 million from $30 million.
Cash, debt, and liquidity
- Cash and cash equivalents were $361 million at quarter-end, compared with $335 million at fiscal year-end. Operating cash flow was $81 million; capital expenditures were $41 million.
- Investing cash outflow was $1.614 billion, primarily reflecting $1.567 billion for the acquisition, net of cash acquired. Financing cash inflow was $1.558 billion, including $1.250 billion of long-term borrowings and increased short-term borrowing.
- Short-term borrowings were $1.507 billion and long-term debt was $2.940 billion, totaling $4.447 billion, compared with $2.790 billion at July 29, 2012. The company issued $400 million of floating-rate notes due 2014, $450 million of 2.50% notes due 2022, and $400 million of 3.80% notes due 2042.
- Current assets were $2.401 billion and current liabilities were $3.092 billion. Campbell reported $2.0 billion in committed revolving credit facilities, unused at quarter-end except for $3 million of standby letters of credit; it was in compliance with debt covenants. Management believed available financing and expected operating cash flows would meet foreseeable requirements.
- Dividends paid were $92 million. The company repurchased about 480,000 shares for $17 million, primarily to offset stock-compensation dilution; purchases under its separate $1 billion strategic repurchase authorization had been suspended in July 2012.
Changes, outlook, and notable matters
- Bolthouse Farms: The acquisition added a new growth platform in fresh carrots and premium refrigerated beverages. It contributed $171 million in sales and reduced earnings by $3 million from acquisition close through quarter-end, including transaction costs, financing, and purchase-accounting effects. Purchase-price allocation remained preliminary.
- Restructuring: Announced U.S. supply-chain initiatives include closing the Sacramento thermal plant, with operations expected to cease in July 2013, and closing the South Plainfield spice plant. The program is expected to eliminate about 727 positions and incur $115 million in pretax costs, of which $43 million had been recognized by quarter-end. Campbell expected approximately $30 million of annual pretax cash savings beginning in 2016, with about $21 million in 2014; related capital spending is estimated at $27 million.
- Other outlook: Fiscal 2013 capital expenditures were expected to total approximately $330 million. The filing provides no clear full-year sales or earnings guidance.
- Risks and contingencies: The filing cites competition, consumer acceptance of products and pricing or promotional actions, commodity and packaging-cost inflation, customer concentration and inventory practices, currency and interest-rate changes, acquisition integration, litigation, and disruption risks. One customer accounted for approximately 17% of consolidated sales in 2012.
- Legal matter: Bakersfield, California, issued Bolthouse Farms a notice alleging unpermitted industrial-waste discharges and requesting corrective actions and an approximately $985,000 fee. Campbell did not expect a material financial impact.
- Controls: Management concluded disclosure controls were effective. The transition of certain finance and accounting services to a third party and integration of Bolthouse Farms materially affected internal control over financial reporting during the quarter.
Important facts for investors to verify
- Bolthouse Farms’ eventual contribution to organic growth, margins, cash generation, and debt reduction, and the final purchase-price allocation.
- Whether gross-margin pressures, promotional spending, and commodity inflation persist, and whether restructuring savings meet stated targets.
- Debt maturities, short-term funding needs, interest-rate exposure, and liquidity as acquisition integration and planned capital spending continue.
- Progress on the Sacramento and South Plainfield closures, including remaining costs, timing, and operational effects.
- Developments in the Bakersfield matter and the ongoing effects of third-party service transition and acquisition integration on financial controls.