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CPB > SEC Filings for CPB > Form 10-K on 26-Sep-2013All Recent SEC Filings

Show all filings for CAMPBELL SOUP CO

Form 10-K for CAMPBELL SOUP CO


26-Sep-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW
Description of the Company
Campbell Soup Company is a manufacturer and marketer of high-quality, branded convenience food products. The company reports the results of operations in the following reportable segments: U.S. Simple Meals; Global Baking and Snacking; International Simple Meals and Beverages; U.S. Beverages; and Bolthouse and Foodservice.
On August 6, 2012, the company completed the acquisition of Bolthouse Farms from a fund managed by Madison Dearborn Partners, LLC, a private equity firm, for $1.550 billion in cash, subject to customary purchase price adjustments. On August 6, 2012, the preliminary purchase price adjustments resulted in an increase in the purchase price of $20 million. In the third quarter, the purchase price adjustments were finalized and reduced to $11 million. The company funded the acquisition through a combination of short- and long-term borrowings. See Notes 3 and 13 to the Consolidated Financial Statements for more information on the acquisition.
On June 13, 2013, the company completed the acquisition of Plum for $249 million, subject to customary purchase price adjustments. Plum is a leading provider of premium, organic foods and snacks that serve the nutritional needs of babies, toddlers and children. See Note 3 to the Consolidated Financial Statements for more information on the acquisition.
On August 12, 2013, the company announced that it is in final and exclusive negotiations for the potential sale of its simple meals business in Europe. The company has reflected the results of the business as discontinued operations in the Consolidated Statements of Earnings for all years presented. The business was historically included in the International Simple Meals and Beverages segment. The assets and liabilities of the European business have been reflected in assets and liabilities held for sale in the Consolidated Balance Sheet as of July 28, 2013. See Note 4 to the Consolidated Financial Statements for additional information.
Key Strategies
Campbell's long-term goal is to create shareowner value by driving sustainable, profitable net sales growth. The company is seeking to achieve this goal by increasing the strength of its core business and by expanding into higher-growth spaces, including new consumer segments, categories, channels and geographies. Campbell is focused in three core categories: simple meals, healthy beverages and snacks. Its strategic priorities are to profitably grow its soup and simple meals business in North America, expand its international presence, and continue to drive growth in snacks and healthy beverages. In 2013, the company made meaningful progress in advancing these objectives.
In managing its core soup and simple meals business in North America, Campbell seeks to align investment in each business in the portfolio with the growth potential of the category and the brand. It grew net sales and operating earnings in U.S. Soup in 2013 by improving execution and optimizing key drivers of demand, including brand positioning, communication, merchandising and pricing, taste, distribution and innovation.
In 2014, Campbell will continue its efforts to strengthen its North American business through improved execution, brand building and innovation. It plans to introduce more than 30 new soup products, ranging from a new line of Campbell's Homestyle ready-to-eat soups to flavor-infused Swanson broths. It will expand its presence in the dinner sauce category with the launch of Campbell's Slow Cooker sauces. It will also focus on driving growth in its new Plum business, a line of premium, organic foods and snacks for babies, toddlers and young children, which the company acquired in 2013.
In 2013, Campbell also acquired Bolthouse Farms, a business that gives the company a strong platform for access to packaged fresh segments that are aligned with significant consumer trends. In combination, Bolthouse Farms' beverages business and the


company's line of V8 branded beverages provide Campbell with a healthy beverages portfolio that spans the range from shelf-stable value offerings to mainstream products to fresh, super-premium beverages. In 2014, Campbell expects to continue to drive growth in Bolthouse Farms by leveraging its robust innovation pipeline and by investing in brand building. It plans to improve the performance of its V8 beverages business through disciplined focus on the drivers of demand, continued expansion in energy drinks and other growth segments in the shelf-stable beverages category, and close attention to cost management. The introduction of V8 Harvest, a fresh tomato-based 100% vegetable juice, will represent the first entry of the V8 brand into the super-premium beverage segment.
In Campbell's baking and snacking portfolio, Pepperidge Farm expects continued growth in 2014, driven primarily by its cracker business. With the introduction of Goldfish Puffs, a puffed cheese snack product designed primarily for teens, Pepperidge Farm will begin to expand the Goldfish brand into adjacent categories. At Arnott's in Australia, the company will focus on growing the core biscuits business with innovative flavors and new pack sizes and on driving productivity and reducing costs.
Campbell is seeking to expand its presence in international markets by extending the product platforms of many of its current businesses and by pursuing business development opportunities in faster-growing developing markets. In 2014, the company intends to leverage new strategic alliances in Mexico with Grupo Jumex and Conservas La Costeρa to drive profitable growth in beverages, soups and simple meals through access to expanded manufacturing and distribution capabilities. In Indonesia, it plans to continue to drive growth in biscuits through increased penetration in the general trade. In Malaysia, it will focus on improved in-store execution behind its Prego and Kimball sauce brands. The company's acquisition of Kelsen during the first quarter of 2014 provides an immediate opportunity for growth in the large baked snacks category in China. Executive Summary
This Executive Summary provides significant highlights from the discussion and analysis that follows.
• Net sales increased 12% in 2013 to $8.052 billion. The acquisition of Bolthouse Farms and Plum contributed 11 points of the growth.

• Gross profit, as a percent of sales, decreased to 36.2% from 39.2% a year ago. The decline was primarily attributable to the acquisition of Bolthouse Farms and the impact of restructuring-related costs recognized in the current year.

• Earnings from continuing operations per share were $2.17 in 2013, compared to $2.29 in 2012. The current year included $.31 per share of expense from items that impacted comparability, as discussed below. The prior year included $.02 per share of expense from items that impacted comparability, as discussed below.

• In 2013, the company reported a loss from discontinued operations of $.73 per share, compared to earnings of $.12 per share in 2012. The current year included $.89 per share of expense from items that impacted comparability. The prior year included $.01 per share of expense from items that impacted comparability, as discussed below.

Net earnings attributable to Campbell Soup Company - 2013 Compared with 2012 The following items impacted the comparability of net earnings and net earnings per share:
Continuing Operations
• In 2013, the company incurred transaction costs of $10 million ($7 million after tax or $.02 per share) associated with the acquisition of Bolthouse Farms. In 2012, the company recorded pre-tax transaction costs of $5 million ($3 million after tax or $.01 per share) related to the acquisition;

• In 2013, the company recorded pre-tax restructuring charges of $51 million and restructuring-related costs of $91 million in Cost of products sold (aggregate impact of $90 million after tax or $.28 per share) associated with initiatives to improve its U.S. supply chain cost structure and increase asset utilization across its U.S. thermal plant network; expand access to manufacturing and distribution capabilities in Mexico; improve its Pepperidge Farm bakery supply chain cost structure; and reduce overhead costs in North America. See Note 8 to the Consolidated Financial Statements and "Restructuring Charges" for additional information; and

• In 2011, the company announced a series of initiatives to improve supply chain efficiency and reduce overhead costs across the organization to help fund plans to drive growth of the business. The company also announced its exit from the Russian market. In 2012, the company recorded pre-tax restructuring charges of $7 million ($4 million after tax or $.01 per share) related to the initiatives. See Note 8 to the Consolidated Financial Statements and "Restructuring Charges" for additional information.

Discontinued Operations
• In the fourth quarter of 2013, the company recorded an impairment charge on the intangible assets of the simple meals business in Europe of $396 million ($263 million after tax or $.83 per share). In addition, the company recorded $18 million in tax expense ($.06 per share) representing taxes on the difference between the book value and tax basis of the business. See Note 4 to the Consolidated Financial Statements for additional information.


• In 2012, the company recorded restructuring charges of $3 million ($2 million after tax or $.01 per share) associated with reducing overhead.

The items impacting comparability are summarized below:

                                                          2013                         2012
                                                 Earnings          EPS        Earnings        EPS
                                                  Impact          Impact       Impact        Impact
                                                       (Millions, except per share amounts)
Earnings from continuing operations
attributable to Campbell Soup Company         $       689       $   2.17     $     734     $   2.29
Earnings (loss) from discontinued operations  $      (231 )     $   (.73 )   $      40     $   0.12
Net earnings attributable to Campbell Soup
Company                                       $       458       $   1.44     $     774     $   2.41

Continuing operations:
Restructuring charges and related costs       $       (90 )     $   (.28 )   $      (4 )   $   (.01 )
Acquisition transaction costs                          (7 )         (.02 )          (3 )       (.01 )
Impact of items on earnings from continuing
operations(1)                                 $       (97 )     $   (.31 )   $      (7 )   $   (.02 )

Discontinued operations:
Restructuring charges and related costs       $         -       $      -     $      (2 )   $   (.01 )
Impairment charge                                    (263 )         (.83 )           -            -
Tax expense on book and tax differences               (18 )         (.06 )           -            -
Impact of items on earnings (loss) from
discontinued operations                       $      (281 )     $   (.89 )   $      (2 )   $   (.01 )


_______________________________________


(1) The sum of the individual per share amounts may not add due to rounding.

Earnings from continuing operations were $689 million ($2.17 per share) in 2013, compared to $734 million ($2.29 per share) in 2012. After adjusting for restructuring charges and related costs and acquisition transaction costs, earnings increased in 2013 from 2012. The increase was primarily due to sales growth, lower marketing expenses, the impact of the acquisition of Bolthouse Farms and a lower effective tax rate, partially offset by higher administrative expenses and higher selling expenses. Earnings per share benefited from a reduction in the weighted average diluted shares outstanding, reflecting the impact of the company's strategic share repurchase program in 2012. Net earnings attributable to Campbell Soup Company - 2012 Compared with 2011 In addition to the 2012 item that impacted comparability of net earnings and net earnings per share previously disclosed, the following items impacted the comparability of net earnings and earnings per share:
Continuing Operations
• In 2011, the company announced a series of initiatives to improve supply chain efficiency and reduce overhead costs across the organization to help fund plans to drive the growth of the business. The company also announced its exit from the Russian market. In 2012, the company recorded pre-tax restructuring charges of $7 million ($4 million after tax or $.01 per share) related to the initiatives. In the fourth quarter of 2011, the company recorded a restructuring charge of $60 million ($39 million after tax or $.12 per share) related to the initiatives. See Note 8 to the Consolidated Financial Statements and "Restructuring Charges" for additional information.

Discontinued Operations
• In 2011, the company recorded $3 million ($2 million after tax) associated with the initiatives.


The items impacting comparability are summarized below:

                                                          2012                         2011
                                                Earnings           EPS        Earnings        EPS
                                                 Impact          Impact        Impact        Impact
                                                       (Millions, except per share amounts)
Earnings from continuing operations
attributable to Campbell Soup Company         $      734       $    2.29     $     752     $   2.26
Earnings (loss) from discontinued operations  $       40       $    0.12     $      53     $   0.16
Net earnings attributable to Campbell Soup
Company                                       $      774       $    2.41     $     805     $   2.42

Continuing operations:
Restructuring charges                         $       (4 )     $    (.01 )   $     (39 )   $   (.12 )
Acquisition transaction costs                         (3 )          (.01 )           -            -
Impact of items on earnings from continuing
operations                                    $       (7 )     $    (.02 )   $     (39 )   $   (.12 )

Discontinued operations:
Restructuring charges and related costs       $       (2 )     $    (.01 )   $      (2 )   $      -
Impact of items on earnings from discontinued
operations                                    $       (2 )     $    (.01 )   $      (2 )   $      -

Earnings from continuing operations were $734 million ($2.29 per share) in 2012, compared to $752 million ($2.26 per share) in 2011. After adjusting for items impacting comparability, earnings decreased in 2012 from 2011. The decrease was primarily due to a decline in gross margin percentage partially offset by a lower effective tax rate. The decline in gross margin was due to cost inflation, increased promotional spending and unfavorable mix, partly offset by higher selling prices and productivity improvements. Earnings per share benefited from a reduction in the weighted average diluted shares outstanding, which was primarily due to share repurchases under the company's strategic share repurchase programs.
Net earnings (loss) attributable to noncontrolling interests The company owns a 60% controlling interest in a joint venture formed with Swire Pacific Limited to support the development of the company's business in China. The joint venture began operations on January 31, 2011. The noncontrolling interest's share in the net loss was included in Net earnings (loss) attributable to noncontrolling interests in the Consolidated Statements of Earnings.
The company also owns a 70% controlling interest in a Malaysian food products manufacturing company. The noncontrolling interest's share in the net earnings was included in Net earnings (loss) attributable to noncontrolling interests in the Consolidated Statements of Earnings and was not material in 2013, 2012, or 2011.

DISCUSSION AND ANALYSIS
Sales
An analysis of net sales by reportable segment follows:
                                                                                 % Change
                                    2013          2012          2011       2013/2012   2012/2011
                                               (Millions)
U.S. Simple Meals                $   2,849     $   2,726     $   2,751         5          (1)
Global Baking and Snacking           2,273         2,193         2,156         4           2
International Simple Meals and
Beverages                              869           872           887         -          (2)
U.S. Beverages                         742           774           759        (4)          2
Bolthouse and Foodservice            1,319           610           590        116          3
                                 $   8,052     $   7,175     $   7,143        12           -


An analysis of percent change of net sales by reportable segment follows:

                                    Global    International
                          U.S.      Baking    Simple Meals                 Bolthouse
                         Simple      and           and          U.S.          and
2013 versus 2012         Meals     Snacking     Beverages     Beverages   Foodservice   Total (2)
Volume and Mix             3%         4%           -%           (3)%         (6)%          1%
Price and Sales
Allowances                 2          2             2             -            -            2
Increased Promotional
Spending (1)              (1)        (2)           (2)           (1)          (2)          (1)
Currency                   -          -             -             -            -            -
Acquisitions               1          -             -             -           124          11
                           5%         4%           -%           (4)%         116%          12%



                                    Global    International
                          U.S.      Baking    Simple Meals                 Bolthouse
                         Simple      and           and          U.S.          and
2012 versus 2011         Meals     Snacking     Beverages     Beverages   Foodservice    Total
Volume and Mix            (4)%       (1)%         (1)%           3%           2%          (2)%
Price and Sales
Allowances                 3          5             3             -            2           3
Increased Promotional
Spending (1)               -         (3)           (3)           (1)          (1)         (1)
Currency                   -          1            (1)            -            -           -
                          (1)%        2%          (2)%           2%           3%           -%


__________________________________________


(1) Represents revenue reductions from trade promotion and consumer coupon redemption programs.

(2) Sum of the individual amounts does not add due to rounding.

In 2013, U.S. Simple Meals sales increased 5%, reflecting increases in U.S. Soup and U.S. Sauces. U.S. Soup sales increased 5%, benefiting from improved execution and the favorable impact of weather. Further details of U.S. Soup include:
• Sales of Campbell's condensed soups increased 2% with gains in both cooking and eating varieties.

• Sales of ready-to-serve soups increased 9% due to volume-driven gains in Campbell's Chunky canned soups, which benefited from new varieties, increased promotional spending and a return to NFL-themed advertising.

• Broth sales increased 4%, primarily driven by double-digit gains in aseptically packaged broth, partially offset by lower sales of canned products and lower sales of Swanson Flavor Boost concentrated broth, which was introduced in 2012.

U.S. Sauces sales increased 5% primarily due to the acquisition of Plum in June 2013, growth in Prego pasta sauces, the 2013 launch of Campbell's Skillet Sauces, and growth in Pace Mexican sauces, partially offset by lower sales in other simple meals products.
In 2012, U.S. Simple Meals sales decreased 1%. U.S. Soup declined 2% as lower volumes were partially offset by higher selling prices, reflecting a continued cautious consumer environment. Further details of U.S. Soup include:
• Sales of Campbell's condensed soups increased 1% due to gains in eating varieties as cooking varieties were comparable to a year ago.

• Sales of ready-to-serve soups decreased 7%. Ready-to-serve soup volumes were impacted by the company's shift to improve price realization through higher selling prices and reduced promotional spending. The introduction of Campbell's Slow Kettle soups in July 2011 positively impacted sales performance.

• Broth sales increased 3% primarily due to volume gains and the introduction of Swanson Flavor Boost concentrated broth, which launched in July 2011.

U.S. Sauces sales increased slightly as gains in Prego pasta sauces were mostly offset by declines in sales of Pace Mexican sauces and other simple meal products. Sales of Pace Mexican sauces were negatively impacted by increased private label competitive activity. In U.S. Sauces, promotional spending was increased to improve marketplace performance.
In 2013, Global Baking and Snacking sales increased 4% with gains in both Pepperidge Farm and Arnott's. Pepperidge Farm sales increased primarily due to growth in fresh bakery products, Goldfish snack crackers, and cookies. Sales of fresh bakery products benefited from improved marketplace performance and increased shelf space at retail outlets resulting from the bankruptcy of a competitor. Arnott's sales increased primarily due to gains in Indonesia, partially offset by the impact of currency. Promotional


spending was increased by Pepperidge Farm for competitive reasons and to capitalize on the opportunity to increase shelf space in the U.S. bread category and in Arnott's to remain competitive in the Australian marketplace. In 2012, Global Baking and Snacking sales increased 2% as sales growth in Pepperidge Farm was partially offset by a decline in Arnott's. Sales at Pepperidge Farm reflected higher selling prices across the product portfolio, partly offset by increased promotional spending. Sales increased at double-digit rates in Goldfish snack crackers, and declined in cookies and frozen products. Sales at Arnott's declined reflecting an increase in promotional spending as the business was impacted by a difficult customer and consumer environment. In 2013, International Simple Meals and Beverages sales were comparable to 2012. Sales declines in the Asia Pacific region, primarily due to currency and declines in exports, were partially offset by gains in China, Canada and Latin America. Promotional spending was increased, primarily to support the soup business in Canada, in response to more intense price competition in the marketplace.
In 2012, International Simple Meals and Beverages sales decreased 2% due to declines in Canada partly offset by growth in export sales. In Canada, sales declined primarily due to lower soup sales and the impact of currency. Promotional spending was increased within the segment to improve marketplace performance.
In 2013, U.S. Beverages sales decreased 4% due to declines in sales of V8 vegetable juice and V8 V-Fusion beverages, partially offset by an increase in V8 Splash beverages. Promotional spending was increased, primarily on V8 Splash, in response to more price-based competition in the value segment.
In 2012, U.S. Beverages sales increased 2%. Sales of V8 Splash beverages and V8 V-Fusion beverages increased, while sales of V8 vegetable juice declined. Sales of V8 V-Fusion beverages benefited from a range of new products, including V8 V-Fusion Smoothies, Energy, Sparkling and juice boxes, as well as increased promotional support.
In 2013, Bolthouse and Foodservice sales increased due to the acquisition of Bolthouse Farms in 2013, which contributed $756 million to sales. North America Foodservice sales declined 8% primarily due to declines in frozen soup products, reflecting the loss of a major restaurant customer, and higher levels of trade spending to remain competitive.
In 2012, North America Foodservice sales increased 3% primarily due to gains in refrigerated soup.
Gross Profit
Gross profit, defined as Net sales less Cost of products sold, increased by $102 million in 2013 and decreased by $78 million in 2012 from 2011. As a percent of sales, gross profit was 36.2% in 2013, 39.2% in 2012, and 40.4% in 2011. The 3.0 and 1.2 percentage-point decreases in gross margin percentage in 2013 and 2012 were due to the following factors:

                                       % Change
                                     2013    2012
Cost inflation and other factors     (1.9)   (3.6)
Impact of acquisitions               (1.7)     -
Restructuring-related costs          (1.1)     -
Higher level of promotional spending (0.7)   (0.8)
Productivity improvements             1.6     1.8
Higher selling prices                 0.8     2.1
Mix                                    -     (0.7)
                                     (3.0)   (1.2)

Marketing and Selling Expenses
Marketing and selling expenses as a percent of sales were 11.8% in 2013, 13.1% in 2012, and 12.7% in 2011. Marketing and selling expenses increased 1% in 2013 from 2012. The increase was primarily due to the impact of the Bolthouse Farms acquisition (approximately 3 percentage points); higher selling expenses (approximately 2 percentage points); and higher marketing expenses to support innovation efforts (approximately 2 percentage points), partially offset by lower advertising and consumer promotion expenses, primarily in the U.S. Soup business (approximately 6 percentage points). Marketing and selling expenses increased 4% in 2012 from 2011 primarily due to higher advertising and consumer promotion expenses (approximately 3 percentage points) and higher other marketing expenses (approximately 1 percentage point). Advertising and consumer promotion expenses increased 6% in 2012 from 2011, reflecting brand-building investments across many key brands.


Administrative Expenses
Administrative expenses as a percent of sales were 8.4% in 2013, 8.1% in 2012 and 2011. Administrative expenses increased by 17% in 2013 from 2012, primarily due to the impact of the Bolthouse Farms acquisition (approximately 10 percentage points) and higher incentive compensation costs (approximately 7 percentage points). Administrative expenses increased 1% in 2012 from 2011, primarily due to higher compensation and benefit costs (approximately 2 percentage points); and higher general administrative costs and inflation (approximately 3 percentage points), partially offset by cost savings from restructuring initiatives and other factors (approximately 4 percentage points). Research and Development Expenses
Research and development expenses increased $12 million or 10% in 2013 from 2012. The increase was primarily due to higher incentive compensation and benefit costs (approximately 7 percentage points); the impact of the Bolthouse Farms acquisition (approximately 2 percentage points); and higher costs associated with product innovation in North America (approximately 1 percentage point). Research and development expenses decreased $4 million or 3% in 2012 from 2011. The decrease was primarily due to cost savings initiatives and other factors (approximately 6 percentage points), partially offset by higher costs . . .

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