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CPB > SEC Filings for CPB > Form 10-Q on 5-Dec-2013All Recent SEC Filings

Show all filings for CAMPBELL SOUP CO

Form 10-Q for CAMPBELL SOUP CO


5-Dec-2013

Quarterly Report


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.
On August 8, 2013, the company completed the acquisition of Kelsen for $331 million. Kelsen is a producer of quality baked snacks that are sold in 85 countries around the world. Its primary brands include Kjeldsens and Royal Dansk. Kelsen has established distribution networks in markets in Asia, the U.S., Europe, the Middle East, South America and Africa.
On October 28, 2013, subsequent to the end of the first quarter, the company completed the sale of its European simple meals business to Soppa Investments
S.ΰ r.l., an affiliate of CVC Capital Partners. The transaction was completed pursuant to a sale and purchase agreement dated September 30, 2013, for approximately €400 million, or approximately $550 million, subject to certain post-closing adjustments. The company used the proceeds from the sale to pay down debt and for other general corporate purposes and expects the after-tax proceeds to be approximately $455 million. The company has reflected the results of the European simple meals business as discontinued operations in the Consolidated Statements of Earnings for all periods presented. The European simple meals business was historically included in the International Simple Meals and Beverages segment. The assets and liabilities of the European simple meals business have been reflected in assets and liabilities held for sale in the Consolidated Balance Sheets as of October 27, 2013 and July 28, 2013. See Note 4 to the Consolidated Financial Statements for additional information. 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. Executive Summary
This Executive Summary provides significant highlights from the discussion and analysis that follows.
• Net sales decreased 2% in the quarter ended October 27, 2013 to $2.165 billion. The Kelsen, Plum and Bolthouse Farms acquisitions contributed 4 points of growth. Volume and mix contributed 4 points of decline, primarily driven by performance in U.S. Simple Meals and U.S. Beverages. Movements in customer inventory levels contributed to the sales decline.

• On November 8, 2013, the company voluntarily recalled a range of Plum products after discovering a manufacturing defect that may cause spoilage in some pouches. In the quarter ended October 27, 2013, the company recognized costs of $16 million ($11 million after tax or $.03 per share) associated with the recall.

• Gross profit, as a percent of sales, decreased to 35.9% in the quarter ended October 27, 2013 from 37.2% in the year-ago quarter. The decline was primarily attributable to the impact of acquisitions, including the Plum product recall, and unfavorable mix, partly offset by lower restructuring-related costs in the current year.

• Marketing and selling expenses increased 11% in the quarter ended October 27, 2013 to $261 million, primarily driven by higher advertising to support new product launches and the Bolthouse Farms brand, and the impact of acquisitions.

• Earnings per share from continuing operations for the quarter ended October 27, 2013 were $.57, compared to $.73 in the year-ago quarter. The current and year-ago quarter included expenses of $.09 and $.11 per share, respectively, from items impacting comparability as discussed below.

Earnings from continuing operations attributable to Campbell Soup Company The following items impacted the comparability of earnings and earnings per share:
• In the quarter ended October 27, 2013, the company streamlined its salaried workforce in North America and in the Asia Pacific region. The company recorded a pre-tax restructuring charge of $20 million ($13 million after tax or $.04 per share) associated with the initiative;

• In the quarter ended October 27, 2013, the company recorded an unrealized loss of $9 million ($6 million after tax or $.02 per share) on foreign exchange forward contracts used to hedge the proceeds from the sale of the European simple meals business. In addition, the company recorded tax expense of $7 million ($.02 per share) associated with the sale of the business;

• In 2013, the company implemented several 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. In the quarter ended October 27, 2013, the company recorded a pre-tax restructuring charge of $1 million and restructuring-


related costs of $2 million in Cost of products sold (aggregate impact of $2 million after tax or $.01 per share) related to the initiatives. In the quarter ended October 28, 2012, the company recorded a pre-tax restructuring charge of $22 million and restructuring-related costs of $21 million in Cost of products sold (aggregate impact of $27 million after tax or $.09 per share); and
• In the quarter ended October 28, 2012, the company incurred transaction costs of $10 million ($7 million after tax or $.02 per share) associated with the acquisition of Bolthouse Farms.

The items impacting comparability of earnings from continuing operations are summarized below:

                                                                Three Months Ended
                                                   October 27, 2013             October 28, 2012
                                                Earnings         EPS         Earnings         EPS
(Millions, except per share amounts)             Impact         Impact        Impact         Impact
Earnings from continuing operations
attributable to Campbell Soup Company         $     181       $    .57     $     232       $    .73

Restructuring charges and related costs       $     (15 )     $   (.05 )   $     (27 )     $   (.09 )
Unrealized loss on foreign exchange forward
contracts                                            (6 )         (.02 )           -              -
Tax expense associated with sale of business         (7 )         (.02 )           -              -
Acquisition transaction costs                         -              -            (7 )         (.02 )
Impact of items on earnings from continuing
operations                                    $     (28 )     $   (.09 )   $     (34 )     $   (.11 )

Earnings from continuing operations were $181 million in the quarter ended October 27, 2013, compared to $232 million in the year-ago quarter. After adjusting for items impacting comparability, earnings decreased primarily due to the decline in gross margin percentage, including the impact of the Plum recall, and an increase in advertising expense.
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 the current or year-ago quarter.

DISCUSSION AND ANALYSIS
Sales
An analysis of net sales by reportable segment follows:
                                                         Three Months Ended
(Millions)                                     October 27, 2013       October 28, 2012      % Change
U.S. Simple Meals                            $          860         $              896        (4)%
Global Baking and Snacking                              609                        574          6
International Simple Meals and Beverages                193                        223        (13)
U.S. Beverages                                          173                        189         (8)
Bolthouse and Foodservice                               330                        323          2
                                             $        2,165         $            2,205        (2)%


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
                         Meals     Snacking     Beverages     Beverages   Foodservice   Total(3)
Volume and Mix            (6)%        -%          (3)%          (9)%         (2)%         (4)%
Price and Sales
Allowances                 2          2            (2)           (1)           -           1
(Increased)/Decreased
Promotional Spending(1)   (2)        (2)           (2)            2            -          (1)
Currency                   -         (3)           (5)            -            -          (1)
Net Accounting(2)          -          -            (1)            -            -           -
Acquisitions               2          9             -             -            4           4
                          (4)%        6%          (13)%         (8)%          2%          (2)%


__________________________________________


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

(2) In 2014, revenue in Mexico is presented on a net accounting basis in connection with a new business model under which the cost of certain services provided by the company's suppliers is netted against revenue.

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

In U.S. Simple Meals, sales decreased 4%. U.S. Soup sales decreased 6% compared to the year-ago quarter. Across the U.S. Soup portfolio, sales were negatively impacted by movements in retailer inventory levels, which in aggregate reduced sales by approximately 4%. Sales were also negatively impacted by shifts in marketing and trade programs. Further details of U.S. Soup include:
• Sales of Campbell's condensed soups decreased 7%, with declines in both eating and cooking varieties.

• Sales of ready-to-serve soups decreased 11%, primarily due to declines in canned and microwaveable soup varieties.

• Broth sales increased 3%, primarily driven by double-digit volume gains in aseptic broth, partly offset by declines in canned broth.

U.S. Sauces sales increased 4% driven by the acquisition of Plum. Excluding the acquisition, sales declined 4%. Declines in gravy products, Pace Mexican sauces and Campbell's canned pasta were partially offset by the introduction in 2014 of Campbell's Slow Cooker Sauces and gains in Prego pasta sauces, which benefited from the launch of Alfredo sauces.
In Global Baking and Snacking, sales increased 6%. The acquisition of Kelsen contributed $52 million in sales, or 9%. Pepperidge Farm sales increased due to growth in fresh bakery products and crackers. In fresh bakery, sales increased due to volume gains in bread and rolls, which benefited from increased shelf space at retail outlets resulting from the temporary withdrawal of a competitor's products, partly offset by a decline in stuffing. Sales of Pepperidge Farm crackers increased due to strong gains in Goldfish snack crackers, partly offset by declines in adult varieties. In Arnott's, sales decreased primarily due to the negative impact of currency and sales declines in Australia, partially offset by strong gains in Indonesia. The company also increased trade spending to remain competitive in Australia.
In International Simple Meals and Beverages, sales decreased 13%. Sales in Canada decreased due to declines in soup and beverages, and the negative impact of currency. Sales in Canada were negatively impacted by increased promotional spending related to the launch of new soup products. In Latin America, sales declined due to lower selling prices, and the impact of presenting revenue on a net basis. In the Asia Pacific region, sales decreased primarily due to the negative impact of currency and declines in Australia, primarily in soup. In U.S. Beverages, sales decreased 8% primarily due to declines in V8 V-Fusion beverages. Sales of V8 vegetable juice and V8 Splash beverages also declined. U.S. Beverages continues to be under pressure from category weakness in shelf-stable juices, as well as from competition from specialty beverages and packaged fresh juices.
In Bolthouse and Foodservice, sales increased 2%. Bolthouse was acquired one week into the quarter a year ago. The additional week of Bolthouse sales added 4%. North America Foodservice sales declined, primarily due to volume declines in frozen soup, reflecting the loss of a major restaurant customer. Excluding the additional week in 2014, Bolthouse sales were comparable to year ago, as sales growth in premium refrigerated beverages and salad dressings was offset by declines in juice concentrates.


Gross Profit
Gross profit, defined as Net sales less Cost of products sold, decreased by $44
million in the quarter ended October 27, 2013. As a percent of sales, gross
profit decreased from 37.2% in the year-ago quarter to 35.9% in the current
quarter. The 1.3-percentage-point decrease in gross margin percentage in the
quarter ended October 27, 2013 was due to the following factors:
                                               Margin
                                               Impact
Cost inflation and other factors               (1.8)%
Impact of acquisitions (including Plum recall) (1.5)
Higher level of promotional spending           (1.0)
Mix                                            (0.6)
Productivity improvements                       1.8
Restructuring-related costs                     0.9
Higher selling prices                           0.9
                                               (1.3)%

Marketing and Selling Expenses
Marketing and selling expenses as a percent of sales were 12.1% in the quarter ended October 27, 2013 and 10.7% in the year-ago quarter. Marketing and selling expenses were $261 million in the current quarter, compared to $236 million in the year-ago quarter, an increase of 11%. The increase was primarily driven by higher advertising (approximately 7 percentage points) to support new product launches primarily in U.S. Simple Meals and to support the Bolthouse Farms brand; the impact of the acquisitions (approximately 3 percentage points); and higher selling expenses (approximately 2 percentage points), partially offset by the impact of currency (approximately 1 percentage point). Administrative Expenses
Administrative expenses as a percent of sales were 6.8% in the quarter ended October 27, 2013 and 7.0% in the year-ago quarter. Administrative expenses decreased by 5% in the current quarter from the year-ago quarter, primarily due to lower compensation and benefit costs, including pension expense (approximately 6 percentage points); the impact of currency (approximately 1 percentage point); and lower general administrative costs and inflation (approximately 1 percentage point), partially offset by the impact of acquisitions (approximately 3 percentage points). Operating Earnings
Segment operating earnings decreased 21% in the quarter ended October 27, 2013 from the year-ago quarter.
An analysis of operating earnings by segment follows:

                                                                  Three Months Ended
(Millions)                                              October 27, 2013       October 28, 2012    % Change
U.S. Simple Meals                                      $          211         $           274       (23)%
Global Baking and Snacking                                         78                      85        (8)
International Simple Meals and Beverages                           20                      33        (39)
U.S. Beverages                                                     24                      30        (20)
Bolthouse and Foodservice                                          29                      34        (15)
                                                                  362                     456       (21)%
Unallocated corporate expenses                                    (36 )                   (66 )
Restructuring charges(1)                                          (21 )                   (22 )
Earnings before interest and taxes                     $          305         $           368


__________________________________________


(1) See Note 8 to the Consolidated Financial Statements for additional information on restructuring charges.

Earnings from U.S. Simple Meals decreased 23%. The decrease was primarily due to lower volumes, higher advertising expenses and expenses related to the Plum product recall, partially offset by productivity improvements and net price realization in soup.


Earnings from Global Baking and Snacking decreased 8%. Operating earnings decreased primarily due to cost inflation, partly offset by net price realization. The operating earnings decline reflects lower earnings in Arnott's and the unfavorable impact of currency, partly offset by gains in Pepperidge Farm.
Earnings from International Simple Meals and Beverages decreased 39%. The decrease in operating earnings was primarily due to lower volumes, lower selling prices and increased promotional spending.
Earnings from U.S. Beverages decreased 20%, primarily due to lower volumes. Earnings from Bolthouse and Foodservice decreased 15%. The decrease was primarily due to cost inflation and increased advertising for the Bolthouse Farms brand, partially offset by earnings associated with the additional week of Bolthouse sales in the quarter ended October 27, 2013.
Unallocated corporate expenses included restructuring-related costs of $2 million in the quarter ended October 27, 2013 and $21 million in the year-ago quarter. The current quarter included a $9 million unrealized loss on foreign exchange forward contracts related to the sale of the European simple meals business. The prior-year quarter included $10 million of transaction costs associated with the Bolthouse Farms acquisition. The remaining decline in the current quarter was primarily due to gains on foreign exchange transactions and open commodity hedges.
Interest Expense
Interest expense decreased to $31 million in the quarter ended October 27, 2013 from $36 million in the year-ago quarter, reflecting lower interest rates, partially offset by interest costs associated with the Kelsen and Plum acquisitions.
Taxes on Earnings
The effective tax rate was 34.5% in the quarter ended October 27, 2013, compared to 31.3% in the year-ago quarter. In 2014, the company recognized tax expense of $7 million associated with the anticipated sale of the European simple meals business. The remaining increase in the effective rate in 2014 was primarily due to the favorable settlement of a U.S. state tax matter in 2013. Restructuring Charges
2014 Initiative
In the first quarter of 2014, the company streamlined its salaried workforce in North America and in the Asia Pacific region. Approximately 200 positions were eliminated. The actions were substantially completed in October 2013. The company recorded a restructuring charge of $20 million ($13 million after tax or $.04 per share) associated with the 2014 initiative for severance and benefit costs. The company does not expect any additional charges.
The company expects the total pre-tax costs of the 2014 initiative to represent cash expenditures, the majority of which will be spent in 2014. The cash outflows related to this initiative are not expected to have a material adverse impact on the company's liquidity.
The initiative is expected to generate annual ongoing pre-tax savings of approximately $40 million beginning in 2015, with 2014 savings of approximately $26 million.
The total pre-tax costs of $20 million associated with each segment are as follows: U.S. Simple Meals - $5 million; Global Baking and Snacking - $9 million; International Simple Meals and Beverages - $3 million; U.S. Beverages - $1 million; Bolthouse and Foodservice - $1 million; and Corporate - $1 million. Segment operating results do not include restructuring charges as segment performance is evaluated excluding such charges. 2013 Initiatives
In 2013, the company implemented the following initiatives to improve supply chain efficiency, expand access to manufacturing and distribution capabilities, and reduce costs:
• The company implemented initiatives to improve its U.S. supply chain cost structure and increase asset utilization across its U.S. thermal plant network, including closing its thermal plant in Sacramento, California, which produced soups, sauces and beverages. The closure resulted in the elimination of approximately 700 full-time positions and was completed in phases. Most of the positions were eliminated in 2013 and operations ceased in August 2013. The company shifted the majority of Sacramento's soup, sauce and beverage production to its thermal plants in Maxton, North Carolina; Napoleon, Ohio; and Paris, Texas. The company also closed its spice plant in South Plainfield, New Jersey, which resulted in the elimination of 27 positions. The company consolidated spice production at its Milwaukee, Wisconsin, plant in 2013.

• In Mexico, the company entered into commercial arrangements with third-party providers to expand access to manufacturing and distribution capabilities. The third-party providers will produce and distribute the company's beverages, soups, broths and sauces throughout the Mexican market. As a result of these agreements, the company


announced that it would close its plant in Villagrαn, Mexico and eliminate approximately 260 positions. In the first quarter of 2014, operations at the plant ceased and the positions were eliminated.
• The company will improve its Pepperidge Farm bakery supply chain cost structure by closing its plant in Aiken, South Carolina, in 2014. The company will shift the majority of Aiken's bread production to its bakery plant in Lakeland, Florida. Approximately 110 positions will be eliminated as a result of the plant closure.

• The company streamlined its salaried workforce in U.S. Simple Meals, North America Foodservice and U.S. Beverages by approximately 70 positions. This action was substantially completed in August 2013.

In the three-month period ended October 27, 2013, the company recorded a restructuring charge of $1 million related to the 2013 initiatives. In addition, approximately $2 million of costs related to the 2013 initiatives were recorded this quarter in Cost of products sold, representing other exit costs. The aggregate after-tax impact of restructuring charges and related costs recorded in this quarter was $2 million, or $.01 per share. In 2013, the company recorded a restructuring charge of $51 million. In addition, approximately $91 million of costs related to these initiatives were recorded in 2013 in Cost of products sold, representing accelerated depreciation and other exit costs. The aggregate after-tax impact of restructuring charges and related costs recorded in 2013 was $90 million, or $.28 per share. Of the amounts recorded in 2013, $22 million of restructuring charges were recorded in the first quarter, and approximately $21 million of costs related to these initiatives were recorded in the first quarter in Cost of products sold, representing accelerated depreciation and other exit costs. The aggregate after-tax impact of restructuring charges and related costs recorded in the first quarter of 2013 was $27 million, or $.09 per share. A summary of the pre-tax costs and remaining costs associated with the initiatives is as follows:

                                                                  Recognized            Remaining
                                                 Total               as of             Costs to be
(Millions)                                      Program        October 27, 2013         Recognized
Severance pay and benefits                   $         36     $           (36 )     $              -
Accelerated depreciation/asset impairment              99                 (99 )                    -
Other exit costs                                       15                 (10 )                    5
Total                                        $        150     $          (145 )     $              5

Of the aggregate $150 million of pre-tax costs, the company expects approximately $47 million will be cash expenditures. In addition, the company expects to invest approximately $31 million in capital expenditures, primarily to relocate and refurbish a beverage filling and packaging line, and relocate bread production, of which approximately $20 million has been invested as of October 27, 2013. The outstanding aspects of these restructuring initiatives are expected to be completed in 2014. The remaining cash outflows related to these restructuring initiatives are not expected to have a material adverse impact on the company's liquidity.
The initiatives included in this program, once fully implemented, are expected to generate annual ongoing pre-tax savings of approximately $40 million beginning in 2015, with 2014 savings of approximately $30 million.
The total pre-tax costs of $150 million associated with segments are expected to be as follows: U.S. Simple Meals - $92 million; Global Baking and Snacking - $16 million; International Simple Meals and Beverages - $9 million; U.S. Beverages - $31 million; and Bolthouse and Foodservice - $2 million. Segment operating results do not include restructuring charges as segment performance is evaluated excluding such charges.
2011 Initiatives
In the fourth quarter of 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. Details of the 2011 initiatives include:
• In Australia, the company is investing in a new system to automate packing operations at its biscuit plant in Virginia. This investment continued through the first quarter of 2014 and will result in the elimination of approximately 190 positions, which is expected to occur by December 2013. The company expects to continue investing in the new system through the third quarter of 2014. Further, the company improved asset utilization in the U.S. by shifting production of ready-to-serve soups from Paris, Texas, to other facilities in 2012. In addition, the manufacturing facility in Marshall, Michigan, was closed in 2011, and manufacturing of Campbell's Soup at Hand microwavable products was consolidated at the Maxton, North Carolina, plant in 2012.

• The company streamlined its salaried workforce by approximately 510 positions around the world, including approximately 130 positions at its world headquarters in Camden, New Jersey. These actions were substantially completed in 2011. As part of this action, the company outsourced a larger . . .

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