UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
_____________________________________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended July 28, 2013 | Commission File Number 1-3822 |
CAMPBELL SOUP COMPANY
New Jersey | 21-0419870 |
State of Incorporation | I.R.S. Employer Identification No. |
1 Campbell Place
Camden, New Jersey 08103-1799
Principal Executive Offices
Telephone Number: (856) 342-4800
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Capital Stock, par value $.0375 | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. R Yes o No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. o Yes R No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. R Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). R Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. R
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes R No
As of January 27, 2013 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of capital stock held by non-affiliates of the registrant was approximately $6,774,117,501. There were 313,503,523 shares of capital stock outstanding as of September 13, 2013.
Portions of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on November 20, 2013, are incorporated by reference into Part III.
TABLE OF CONTENTS
PART I
Item 1. Business
The Company
Campbell Soup Company, together with its consolidated subsidiaries (Campbell or the company), is a manufacturer and marketer of high-quality, branded convenience food products. Campbell was organized as a business corporation under the laws of New Jersey on November 23, 1922; however, through predecessor organizations, it traces its heritage in the food business back to 1869. The company’s principal executive offices are in Camden, New Jersey 08103-1799.
Background
On August 6, 2012, the company completed the acquisition of BF Bolthouse Holdco LLC (Bolthouse Farms) for approximately $1.55 billion in cash. Based in Bakersfield, California, Bolthouse Farms is a vertically integrated food and beverage company focused on developing, manufacturing and marketing fresh carrots and proprietary, high value-added healthy products.
On June 13, 2013, the company completed the acquisition of Plum PBC (formerly Plum Inc.) (Plum) for approximately $249 million, subject to customary purchase price adjustments. Based in Emeryville, California, Plum is a leading provider of premium, organic foods and snacks that serve the nutritional needs of babies, toddlers and children. The Plum Organics brand is the No. 4 brand of baby food in the U.S. and the No. 2 brand of organic baby food in the U.S. The acquisition provides the company with an attractive platform to extend its core categories of simple meals, snacks and beverages and enhances the company's access to a new generation of consumers. Since the Plum acquisition occurred on June 13, 2013, only the results of operations of Plum from June 13, 2013 through July 28, 2013 are included in this 2013 Annual Report on Form 10-K (this Report).
On August 8, 2013, the company completed the acquisition of Kelsen Group A/S (Kelsen) for approximately $325 million, subject to customary purchase price adjustments. Based in Nørre Snede, Denmark, 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, and it is a market leader in the assortment segment of the sweet biscuits category in China and Hong Kong. The Kelsen acquisition provides the company with an immediate opportunity for growth in the large baked snacks category in China. Kelsen employs approximately 350 persons, and its two primary manufacturing facilities are company-owned and located in Nørre Snede and Ribe, Denmark. Since the Kelsen acquisition occurred subsequent to 2013, the results of Kelsen's operations are not included in this Report, and the discussion of the company's business and operations in this Report does not incorporate Kelsen's business and operations unless specifically stated otherwise.
On August 12, 2013, the company announced that it is in final and exclusive negotiations for the potential sale of its simple meal business in Europe to CVC Capital Partners, a leading global private equity firm. CVC has made a firm offer to purchase the business. The proposed transaction includes the company's simple meal national brands, including Liebig and Royco in France, Erasco in Germany, Blå Band in Sweden and Devos Lemmens and Royco in Belgium. The proposal also includes the sale of four plants in Puurs, Belgium; Le Pontet, France; Lubeck, Germany; and Kristianstadt, Sweden. The proposed transaction does not include the export of Pepperidge Farm products throughout Europe, Campbell’s products in the United Kingdom or Kelsen. The company has the option to cause the parties to execute a binding share purchase agreement. The proposed transaction is subject to clearance by the relevant European competition law authorities. The company has reflected the results of the business as discontinued operations in the Consolidated Statements of Earnings for all years presented. 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. The business was historically included in the International Simple Meals and Beverages segment.
Reportable Segments
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. The company has 13 operating segments based on product type and geographic location and has aggregated the operating segments into the appropriate reportable segment based on similar economic characteristics; products; production processes; types or classes of customers; distribution methods; and regulatory environment. See also Note 7 to the Consolidated Financial Statements. The segments are discussed in greater detail below.
U.S. Simple Meals
The U.S. Simple Meals segment aggregates the following operating segments: U.S. Soup and U.S. Sauces. The U.S. Soup retail business includes the following products: Campbell’s condensed and ready-to-serve soups; and Swanson broth and stocks. The U.S. Sauces retail business includes the following products: Prego pasta sauces; Pace Mexican sauces; Campbell’s canned gravies, pasta, and beans; Swanson canned poultry; and as of June 13, 2013, Plum Organics foods and snacks.
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Global Baking and Snacking
The Global Baking and Snacking segment aggregates the following operating segments: Pepperidge Farm cookies, crackers, bakery and frozen products in U.S. retail; and Arnott’s biscuits in Australia and Asia Pacific.
International Simple Meals and Beverages
The International Simple Meals and Beverages segment aggregates the simple meals and beverages operating segments outside of the U.S., including the retail business in Canada and the businesses in Asia Pacific, Latin America and China. In Canada, the segment’s operations include Habitant and Campbell’s soups, Prego pasta sauces, Pace Mexican sauces, V8 juices and beverages and certain Pepperidge Farm products. In Asia Pacific, the segment's operations include Campbell’s soup and stock, Kimball sauces, V8 juices and beverages, Prego pasta sauce and Swanson broths. As previously discussed, on August 12, 2013, the company announced that it is in final and exclusive negotiations for the potential sale of its simple meal brands in Europe. The European simple meal business was historically included in this segment. The results of operations for the European simple meal business are reflected as discontinued operations for the years presented in this Report, and the assets of the business have been reflected as assets held for sale as of July 28, 2013.
Bolthouse and Foodservice
Bolthouse and Foodservice comprises the Bolthouse Farms carrot products operating segment, including fresh carrots, juice concentrate and fiber; the Bolthouse Farms super-premium refrigerated beverages and refrigerated salad dressings operating segment; and the North America Foodservice operating segment. The North America Foodservice operating segment represents the distribution of products such as soup, specialty entrées, beverage products, other prepared foods and Pepperidge Farm products through various food service channels in the U.S. and Canada. None of these operating segments meets the criteria for aggregation nor the thresholds for separate disclosure.
Ingredients and Packaging
The ingredient and packaging materials required for the manufacture of the company’s food products are purchased from various suppliers. These items are subject to fluctuations in price attributable to a number of factors, including changes in crop size, cattle cycles, product scarcity, demand for raw materials, energy costs, government-sponsored agricultural programs, import and export requirements and regional drought and other weather conditions (including the potential effects of climate change) during the growing and harvesting seasons. To help reduce some of this price volatility, the company uses a combination of purchase orders, short- and long-term contracts and various commodity risk management tools for most of its ingredients and packaging. Ingredient inventories are at a peak during the late fall and decline during the winter and spring. Since many ingredients of suitable quality are available in sufficient quantities only at certain seasons, the company makes commitments for the purchase of such ingredients during their respective seasons. At this time, the company does not anticipate any material restrictions on availability or shortages of ingredients or packaging that would have a significant impact on the company’s businesses. For information on the impact of inflation on the company, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Customers
In most of the company’s markets, sales and merchandising activities are conducted through the company’s own sales force and its third-party broker and distributor partners. In the U.S., Canada and Latin America, the company’s products are generally resold to consumers in retail food chains, mass discounters, mass merchandisers, club stores, convenience stores, drug stores, dollar stores and other retail, commercial and non-commercial establishments. In the Asia Pacific region, the company’s products are generally resold to consumers through retail food chains, convenience stores and other retail, commercial and non-commercial establishments. The company makes shipments promptly after receipt and acceptance of orders.
The company's five largest customers accounted for approximately 36% of the company's consolidated net sales from continuing operations in 2013, and 37% in 2012 and 2011. The company’s largest customer, Wal-Mart Stores, Inc. and its affiliates, accounted for approximately 19% of the company’s consolidated net sales in 2013 and 2012 and 18% in 2011. All of the company’s segments sold products to Wal-Mart Stores, Inc. or its affiliates. No other customer accounted for 10% or more of the company’s consolidated net sales.
Trademarks and Technology
As of September 13, 2013, the company owned over 4,400 trademark registrations and applications in over 170 countries, including the registrations acquired in the Plum and Kelsen acquisitions and those associated with its European simple meal business. The company believes its trademarks are of material importance to its business. Although the laws vary by jurisdiction, trademarks generally are valid as long as they are in use and/or their registrations are properly maintained and have not been found to have become generic. Trademark registrations generally can be renewed indefinitely as long as the trademarks are in use. The company believes that its principal brands, including Campbell's, Pepperidge Farm, Goldfish, V8, Pace, Prego, Swanson, Arnott's and Bolthouse Farms, as well as the Plum brand acquired in the Plum acquisition and the Kjeldsens and Royal Dansk brands
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acquired in the Kelsen acquisition, are protected by trademark law in the major markets where they are used. In addition, some of the company's products are sold under brands that have been licensed from third parties.
Although the company owns a number of valuable patents, it does not regard any segment of its business as being dependent upon any single patent or group of related patents. In addition, the company owns copyrights, both registered and unregistered, and proprietary trade secrets, technology, know-how, processes, and other intellectual property rights that are not registered.
Competition
The company experiences worldwide competition in all of its principal products. This competition arises from numerous competitors of varying sizes across multiple food and beverage categories, and includes producers of generic and private label products, as well as other branded food and beverage manufacturers. All of these competitors vie for trade merchandising support and consumer dollars. The number of competitors cannot be reliably estimated. The principal areas of competition are brand recognition, taste, quality, price, advertising, promotion, convenience and service.
Working Capital
For information relating to the company’s cash and working capital items, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Capital Expenditures
During 2013, the company’s aggregate capital expenditures were $336 million. The company expects to spend approximately $350 million for capital projects in 2014. Major 2014 capital projects include a Pepperidge Farm cracker capacity expansion project, a U.S. beverage relocation and refurbishment project, the ongoing implementation of a series of related initiatives to simplify the soup-making process in North America (also known as the soup common platform initiative), and a flexible production line for Bolthouse Farms.
Research and Development
During the last three fiscal years, the company’s expenditures on research and development activities relating to new products and the improvement and maintenance of existing products were $128 million in 2013, $116 million in 2012, and $120 million in 2011. The increase from 2012 to 2013 was primarily due to higher incentive compensation and benefit costs, the addition of Bolthouse Farms expenses and higher costs associated with product innovation in North America. The decrease from 2011 to 2012 was primarily due to cost savings initiatives and other factors, partially offset by higher costs associated with product innovation in North America and the Asia Pacific region and inflation.
Environmental Matters
The company has requirements for the operation and design of its facilities that meet or exceed applicable environmental rules and regulations. Of the company’s $336 million in capital expenditures made during 2013, approximately $15 million was for compliance with environmental laws and regulations in the U.S. The company further estimates that approximately $14 million of the capital expenditures anticipated during 2014 will be for compliance with U.S. environmental laws and regulations. The company believes that continued compliance with existing environmental laws and regulations (both within the U.S. and elsewhere) will not have a material effect on capital expenditures, earnings or the competitive position of the company. In addition, the company continues to monitor pending environmental laws and regulations within the U.S. and elsewhere, including laws and regulations relating to climate change and greenhouse gas emissions. While the impact of these pending laws and regulations cannot be predicted with certainty, the company does not believe that compliance with these pending laws and regulations will have a material effect on capital expenditures, earnings or the competitive position of the company.
Seasonality
Demand for the company’s products is somewhat seasonal, with the fall and winter months usually accounting for the highest sales volume due primarily to demand for the company’s soup products. Demand for the company’s sauce, beverage, baking and snacking products, however, is generally evenly distributed throughout the year.
Employees
On July 28, 2013, there were approximately 20,000 employees of the company. In addition, as of July 28, 2013, Campbell Swire, the company's joint venture in China, employed approximately 170 persons.
Financial Information
Financial information for the company’s reportable segments and geographic areas is found in Note 7 to the Consolidated Financial Statements. For risks attendant to the company’s foreign operations, see “Risk Factors.”
Company Website
The company’s primary corporate website can be found at www.campbellsoupcompany.com. The company makes available free of charge at this website (under the “Investor Center — Financial Information — SEC Filings” caption) all of its reports
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(including amendments) filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, including its annual report on Form 10-K, its quarterly reports on Form 10-Q and its current reports on Form 8-K. These reports are made available on the website as soon as reasonably practicable after their filing with, or furnishing to, the Securities and Exchange Commission.
Item 1A. Risk Factors
In addition to the factors discussed elsewhere in this Report, the following risks and uncertainties could materially adversely affect the company’s business, financial condition and results of operations. Additional risks and uncertainties not presently known to the company or that the company currently deems immaterial also may impair the company’s business operations and financial condition.
The company operates in a highly competitive industry
The company operates in the highly competitive food industry and experiences international competition in all of its principal products. The principal areas of competition are brand recognition, taste, quality, price, advertising, promotion, convenience and service. A number of the company's primary competitors have substantial financial, marketing and other resources. A strong competitive response from one or more of these competitors to the company's marketplace efforts, or a consumer shift towards private label offerings, could result in the company reducing pricing, increasing marketing or other expenditures, and/or losing market share.
The company's results are dependent on successful marketplace initiatives and acceptance by consumers of the company's products, including new or improved product and packaging introductions
The company's results are dependent on successful marketplace initiatives and acceptance by consumers of the company's products. The company's new or improved product and packaging introductions, along with its other marketplace initiatives, are designed to capitalize on customer or consumer trends. In order to remain successful, the company must anticipate and react to these trends and develop new or improved products or packaging to address them. While the company devotes significant resources to meeting this goal, the company may not be successful in developing new or improved products or packaging, or its new or improved products or packaging may not be accepted by customers or consumers.
The company's results may be adversely affected by the failure to execute acquisitions and divestitures successfully
The company's ability to meet its objectives with respect to the acquisition of new businesses or the divestiture of existing businesses may depend in part on its ability to identify suitable buyers and sellers, negotiate favorable financial terms and other contractual terms, and obtain all necessary regulatory approvals. Potential risks of acquisitions also include the inability to integrate acquired businesses efficiently into the company's existing operations, diversion of management's attention from other business concerns, potential loss of key employees and/or customers of acquired businesses, potential assumption of unknown liabilities, potential disputes with the sellers, potential impairment charges if purchase assumptions are not achieved or market conditions decline, and the risks inherent in entering markets or lines of business with which the company has limited or no prior experience. Acquisitions outside the U.S. may present unique challenges and increase the company's exposure to risks associated with foreign operations, including foreign currency risks and risks associated with local regulatory regimes. For divestitures, potential risks may also include the inability to separate divested businesses or business units from the company effectively and efficiently and to reduce or eliminate associated overhead costs. The company's business or financial results may be negatively affected if acquisitions or divestitures are not successfully implemented or completed.
Disruption to the company's supply chain could adversely affect its business
The company's ability to manufacture and/or sell its products may be impaired by damage or disruption to its manufacturing or distribution capabilities, or to the capabilities of its suppliers or contract manufacturers, as a result of adverse weather conditions (such as drought, temperature extremes or floods), natural disasters, fire, terrorism, pandemics, strikes or other events. Production of carrots by the company's Bolthouse Farms business may be also be adversely affected by water scarcity, crop disease and crop pests. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, may adversely affect the company's business or financial results, particularly in circumstances where a product is sourced from a single supplier or location. Disputes with significant suppliers or contract manufacturers, including disputes regarding pricing or performance, may also adversely affect the company's ability to manufacture and/or sell its products, as well as its business or financial results.
The company's non-U.S. operations pose additional risks to the company's business
In 2013, approximately 23% of the company's consolidated net sales from continuing operations were generated outside of the U.S. Sales outside the U.S. are expected to continue to represent a significant portion of consolidated net sales. The company's business or financial performance may be adversely affected due to the risks of doing business in markets outside of the U.S., including but not limited to the following:
• | political instability; |
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• | unfavorable changes in tariffs or export and import restrictions; |
• | nationalization of operations; |
• | failure to comply with anti-corruption laws and regulations, such as the U.S. Foreign Corrupt Practices Act; |
• | the adverse impact of foreign tax treaties and policies; |
• | civil disobedience, armed hostilities and terrorist acts; and |
• | restrictions on the transfer of funds to and from countries outside of the United States, including potentially negative tax consequences. |
In addition, the company holds assets and incurs liabilities, generates revenue, and pays expenses in a variety of currencies other than the U.S. dollar, primarily the Australian dollar and the Canadian dollar. The company's consolidated financial statements are presented in U.S. dollars, and the company must translate its assets, liabilities, sales and expenses into U.S. dollars for external reporting purposes. As a result, changes in the value of the U.S. dollar due to fluctuations in currency exchange rates or currency exchange controls may materially and negatively affect the value of these items in the company's consolidated financial statements, even if their value has not changed in their local currency.
The company faces risks related to recession, financial and credit market disruptions and other economic conditions
Customer and consumer demand for the company's products may be impacted by weak economic conditions, recession, equity market volatility or other negative economic factors in the U.S. or other nations. Similarly, disruptions in financial and/or credit markets may impact the company's ability to manage normal commercial relationships with its customers, suppliers and creditors. In addition, changes in tax or interest rates in the U.S. or other nations, whether due to recession, financial and credit market disruptions or other reasons, could impact the company.
Increased regulation could adversely affect the company's business or financial results
The manufacture and marketing of food products is extensively regulated. The primary areas of regulation include the processing, packaging, storage, distribution, advertising, labeling, quality and safety of the company's food products, as well as the health and safety of the company's employees and the protection of the environment. In the U.S., the company is subject to regulation by various government agencies, including the Food and Drug Administration, the U.S. Department of Agriculture, the Federal Trade Commission, the Occupational Safety and Health Administration and the Environmental Protection Agency, as well as various state and local agencies. The company is also regulated by similar agencies outside the U.S. and by voluntary organizations, such as the National Advertising Division and the Children's Food and Beverage Advertising Initiative of the Council of Better Business Bureaus. Changes in regulatory requirements, or evolving interpretations of existing regulatory requirements, may result in increased compliance cost, capital expenditures and other financial obligations that could adversely affect the company's business or financial results.
The company's results may be adversely impacted by increases in the price of raw and packaging materials
The raw and packaging materials used in the company's business include tomato paste, grains, beef, poultry, vegetables, steel, glass, paper and resin. Many of these materials are subject to price fluctuations from a number of factors, including product scarcity, demand for raw materials, commodity market speculation, energy costs, currency fluctuations, weather conditions (including the potential effects of climate change), import and export requirements and changes in government-sponsored agricultural programs. To the extent any of these factors result in an increase in raw and packaging material prices, the company may not be able to offset such increases through productivity or price increases or through its commodity hedging activity.
Price increases may not be sufficient to cover increased costs, or may result in declines in sales volume due to pricing elasticity in the marketplace
The company intends to pass along to customers some or all cost increases in raw and packaging materials and other inputs through increases in the selling prices of some of its products. Higher product prices may result in reductions in sales volume. To the extent the price increases are not sufficient to offset increased raw and packaging materials and other input costs, and/or if they result in significant decreases in sales volume, the company's business results and financial condition may be adversely affected.
The company may be adversely impacted by a changing customer landscape and the increased significance of some of its customers
In recent years, alternative retail grocery channels, such as dollar stores, drug stores and club stores, have increased their market share. This trend towards alternative channels is expected to continue in the future. In addition, consolidations in the traditional retail grocery trade have produced large, sophisticated customers with increased buying power and negotiating strength who may seek lower prices or increased promotional programs funded by their suppliers. These customers may use more of their
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shelf space for their private label products. If the company is unable to use its scale, marketing expertise, product innovation and category leadership positions to respond to these customer dynamics, the company's business or financial results could be negatively impacted. Also, during 2013, the company's five largest customers accounted for approximately 36% of the company's consolidated net sales, with the largest customer, Wal-Mart Stores, Inc. and its affiliates, accounting for approximately 19% of the company's consolidated net sales. The disruption of sales to any of these customers, or to any of the company's other large customers, for an extended period of time could adversely affect the company's business or financial results.
The company may be adversely impacted by increased liabilities and costs related to its defined benefit pension plans
The company sponsors a number of defined benefit pension plans for employees in the U.S. and various non-U.S. locations. The major defined benefit pension plans are funded with trust assets invested in a globally diversified portfolio of securities and other investments. Changes in regulatory requirements or the market value of plan assets, investment returns, interest rates and mortality rates may affect the funded status of the company's defined benefit pension plans and cause volatility in the net periodic benefit cost, future funding requirements of the plans and the funded status as recorded on the balance sheet. A significant increase in the company's obligations or future funding requirements could have a material adverse effect on the financial results of the company.
The company may be adversely impacted by inadequacies in, or security breaches of, its information technology systems
Each year the company engages in several billion dollars of transactions with its customers and vendors. Because the amount of dollars involved is so significant, the company's information technology resources (some of which are managed by third parties) must provide connections among its marketing, sales, manufacturing, logistics, customer service, and accounting functions. If the company does not allocate and effectively manage the resources necessary to build and sustain an appropriate technology infrastructure and to maintain the related computerized and manual control processes, the company's business or financial results could be negatively impacted. Furthermore, the company's information technology systems may be vulnerable to security breaches (including the theft of customer, consumer or other confidential data), cyber-based attacks or other system failures. If the company is unable to prevent such failures, the company's business or financial results could be negatively impacted.
The company may not properly execute, or realize anticipated cost savings or benefits from, its ongoing supply chain, information technology or other initiatives
The company's success is partly dependent upon properly executing, and realizing cost savings or other benefits from, its ongoing supply chain, information technology and other initiatives. These initiatives are primarily designed to make the company more efficient, which is necessary in the company's highly competitive industry. These initiatives are often complex, and a failure to implement them properly may, in addition to not meeting projected cost savings or benefits, result in an interruption to the company's sales, manufacturing, logistics, customer service or accounting functions.
If the company's food products become adulterated or are mislabeled, the company might need to recall those items, and may experience product liability claims if consumers are injured
The company may need to recall some of its products if they become adulterated or if they are mislabeled. The company may also be liable if the consumption of any of its products causes injury. A widespread product recall could result in significant losses due to the costs of a recall, the destruction of product inventory and lost sales due to the unavailability of product for a period of time. The company could also suffer losses from a significant product liability judgment against it. A significant product recall or product liability case could also result in adverse publicity, damage to the company's reputation and a loss of consumer confidence in the company's products. In addition, the company's results could be adversely affected if consumers lose confidence in the safety and quality of the company's products, ingredients or packaging, even in the absence of a recall or a product liability case.
The company's results may be negatively impacted if consumers do not maintain their favorable perception of its brands
The company has a number of iconic brands with significant value. Maintaining and continually enhancing the value of these brands is critical to the success of the company's business. Brand value is based in large part on consumer perceptions. Success in promoting and enhancing brand value depends in large part on the company's ability to provide high-quality products. Brand value could diminish significantly due to a number of factors, including consumer perception that the company has acted in an irresponsible manner, adverse publicity about the company's products and/or ingredients (whether or not valid), the company's failure to maintain the quality of its products, the failure of the company's products to deliver consistently positive consumer experiences, or the products becoming unavailable to consumers. The growing use of social and digital media by consumers increases the speed and extent that information and opinions can be shared. Negative posts or comments about the company, its brands or products on social or digital media could seriously damage the company's brands and reputation. If the company does not maintain the favorable perception of its brands, the company's results could be negatively impacted.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
The company's principal executive offices are company-owned and located in Camden, New Jersey. The following table sets forth the company's principal manufacturing facilities and the business segment that primarily uses each of the facilities:
Principal Manufacturing Facilities
Inside the U.S. | ||||
California | New Jersey | South Carolina | ||
Bakersfield (BFS) | East Brunswick (GBS) | Aiken (GBS) | ||
Dixon (USSM/USB) | North Carolina | Texas | ||
Stockton (USSM/USB) | Maxton (USSM/ISMB) | Paris (USSM/USB/ISMB/BFS) | ||
Connecticut | Ohio | Utah | ||
Bloomfield (GBS) | Napoleon (USSM/USB/BFS/ISMB) | Richmond (GBS) | ||
Florida | Willard (GBS) | Washington | ||
Lakeland (GBS) | Pennsylvania | Everett (BFS) | ||
Illinois | Denver (GBS) | Prosser (BFS) | ||
Downers Grove (GBS) | Downingtown (GBS/BFS) | Wisconsin | ||
Milwaukee (USSM) | ||||
Outside the U.S. | ||||
Australia | China | Indonesia | ||
Huntingwood (GBS) | Xiamen (ISMB) | Jawa Barat (GBS) | ||
Marleston (GBS) | Canada | Malaysia | ||
Shepparton (ISMB) | Toronto (USSM/ISMB/BFS) | Selangor Darul Ehsan (ISMB) | ||
Virginia (GBS) | France | Mexico | ||
Belgium | Le Pontet (ISMB) | Villagran (ISMB) | ||
Puurs (ISMB) | Germany | Sweden | ||
Lubeck (ISMB) | Kristianstadt (ISMB) | |||
____________________________________
USSM - U.S. Simple Meals
GBS - Global Baking and Snacking
ISMB - International Simple Meals and Beverages
USB - U.S. Beverages
BFS - Bolthouse and Foodservice
Each of the foregoing manufacturing facilities is company-owned, except the (i) Selangor Darul Ehsan, Malaysia, and the East Brunswick, New Jersey, facilities are leased, and (ii) Xiamen, China, facility is owned by Swire Pacific Limited, the company's joint venture partner in China. The company also maintains executive offices in Norwalk, Connecticut; Puurs, Belgium; Bakersfield, California; Toronto, Canada; and North Strathfield, Australia.
The company expects to close the Aiken, South Carolina, and the Villagran, Mexico, facilities in 2014. On August 12, 2013, the company announced that it is in final and exclusive negotiations for the potential sale of its simple meal business in Europe. The potential transaction includes the sale of the facilities and executive offices in Puurs, Belgium; Le Pontet, France; Lubeck, Germany; and Kristianstadt, Sweden. The former Sacramento, California, and South Plainfield, New Jersey, facilities were closed prior to the filing of this Report.
Management believes that the company's manufacturing and processing plants are well maintained and are generally adequate to support the current operations of the businesses.
Item 3. Legal Proceedings
None.
Item 4. Mine Safety Disclosures
Not applicable.
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Executive Officers of the Company
The following list of executive officers as of September 13, 2013, is included as an item in Part III of this Form 10-K:
Name | Present Title | Age | Year First Appointed Executive Officer |
Mark R. Alexander | Senior Vice President | 49 | 2009 |
Carlos Barroso | Senior Vice President | 54 | 2013 |
Irene Chang Britt | Senior Vice President | 50 | 2010 |
Anthony P. DiSilvestro | Senior Vice President - Finance | 54 | 2004 |
Ellen Oran Kaden | Senior Vice President - Chief Legal and Public Affairs Officer | 61 | 1998 |
Luca Mignini | Senior Vice President | 51 | 2013 |
Denise M. Morrison | President and Chief Executive Officer | 59 | 2003 |
Robert W. Morrissey | Senior Vice President and Chief Human Resources Officer | 55 | 2012 |
B. Craig Owens | Senior Vice President - Chief Financial Officer and Chief Administrative Officer | 59 | 2008 |
Michael P. Senackerib | Senior Vice President - Chief Marketing Officer | 48 | 2012 |
David R. White | Senior Vice President | 58 | 2004 |
Carlos Barroso served as President and Founder of CJB and Associates, LLC, an R&D consulting firm (2009 - 2013), and Senior Vice President of R&D, Pepsico Global Foods (2008 - 2009), of PepsiCo, Inc. prior to joining the company in 2013. Luca Mignini served as Chief Executive Officer of the Findus Italy division of IGLO Group (2010 - 2012) and Senior Vice President, Europe, Japan and Australia and New Zealand (2007 - 2010), of SC Johnson & Son, Inc. prior to joining the company in 2013. B. Craig Owens served as Executive Vice President and Chief Financial Officer of the Delhaize Group prior to joining the company in 2008. Michael P. Senackerib served as Senior Vice President and Chief Marking Officer of Hertz Global Holdings, Inc. and The Hertz Corporation (2008 - 2011) prior to joining the company in 2012. The company has employed Mark R. Alexander, Irene Chang Britt, Anthony P. DiSilvestro, Ellen Oran Kaden, Denise M. Morrison, Robert W. Morrissey, and David R. White in an executive or managerial capacity for at least five years.
There is no family relationship among any of the company’s executive officers or between any such officer and any director that is first cousin or closer. All of the executive officers were elected at the November 2012 meeting of the Board of Directors, except Carlos Barroso was elected at the June 2013 meeting with his appointment effective as of July 31, 2013. Luca Mignini's appointment was effective as of January 21, 2013.
PART II
Item 5. | Market for Registrant’s Capital Stock, Related Shareowner Matters and Issuer Purchases of Equity Securities |
Market for Registrant’s Capital Stock
The company’s capital stock is listed and principally traded on the New York Stock Exchange. On September 13, 2013, there were 23,123 holders of record of the company’s capital stock. Market price and dividend information with respect to the company’s capital stock are set forth in Note 20 to the Consolidated Financial Statements. Future dividends will be dependent upon future earnings, financial requirements and other factors.
Return to Shareowners* Performance Graph
The following graph compares the cumulative total shareowner return (TSR) on the company’s stock with the cumulative total return of the Standard & Poor’s 500 Stock Index (the S&P 500) and the Standard & Poor’s Packaged Foods Index (the S&P Packaged Foods Group). The graph assumes that $100 was invested on August 1, 2008, in each of company stock, the S&P 500 and the S&P Packaged Foods Group, and that all dividends were reinvested. The total cumulative dollar returns shown on the graph represent the value that such investments would have had on July 26, 2013.
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* | Stock appreciation plus dividend reinvestment. |
2008 | 2009 | 2010 | 2011 | 2012 | 2013 | |||||||
Campbell | 100 | 89 | 107 | 102 | 105 | 154 | ||||||
S&P 500 | 100 | 80 | 92 | 110 | 120 | 150 | ||||||
S&P Packaged Foods Group | 100 | 92 | 107 | 128 | 140 | 190 | ||||||
Issuer Purchases of Equity Securities
Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share (2) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (3) | Approximate Dollar Value of Shares that may yet be Purchased Under the Plans or Programs ($ in Millions) (3) | ||||||
4/29/2013 - 5/31/2013 | 228,500 | $46.39 | — | $750 | ||||||
6/1/2013 - 6/30/2013 | 88,973 | $43.60 | — | $750 | ||||||
7/1/2013 - 7/28/2013 | — | — | — | $750 | ||||||
Total | 317,473 | $45.61 | — | $750 | ||||||
____________________________________
(1) | Represents shares repurchased in open-market transactions to offset the dilutive impact to existing shareowners of issuances under the company's stock compensation plans. |
(2) | Average price paid per share is calculated on a settlement basis and excludes commission. |
(3) | During the fourth quarter of 2013, the company had a publicly announced share repurchase program. Under this program, which was announced on June 23, 2011, the company's Board of Directors authorized the purchase of up to $1 billion of company stock. The program has no expiration date, although the company suspended purchases under the program in July 2012. The company expects to continue its longstanding practice, under separate authorization, of purchasing shares sufficient to offset shares issued under incentive compensation plans. |
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Item 6. Selected Financial Data
FIVE-YEAR REVIEW — CONSOLIDATED
Fiscal Year | 2013(1) | 2012(2) | 2011(3) | 2010(4) | 2009(5) | ||||||||||||||
(Millions, except per share amounts) | |||||||||||||||||||
Summary of Operations | |||||||||||||||||||
Net sales | $ | 8,052 | $ | 7,175 | $ | 7,143 | $ | 7,085 | $ | 6,988 | |||||||||
Earnings before interest and taxes | 1,080 | 1,155 | 1,212 | 1,272 | 1,187 | ||||||||||||||
Earnings before taxes | 955 | 1,049 | 1,100 | 1,166 | 1,080 | ||||||||||||||
Earnings from continuing operations | 680 | 724 | 749 | 791 | 736 | ||||||||||||||
Earnings (loss) from discontinued operations | (231 | ) | 40 | 53 | 53 | — | |||||||||||||
Net earnings | 449 | 764 | 802 | 844 | 736 | ||||||||||||||
Net earnings attributable to Campbell Soup Company | 458 | 774 | 805 | 844 | 736 | ||||||||||||||
Financial Position | |||||||||||||||||||
Plant assets - net | $ | 2,260 | $ | 2,127 | $ | 2,103 | $ | 2,051 | $ | 1,977 | |||||||||
Total assets | 8,323 | 6,530 | 6,862 | 6,276 | 6,056 | ||||||||||||||
Total debt | 4,453 | 2,790 | 3,084 | 2,780 | 2,624 | ||||||||||||||
Total equity | 1,210 | 898 | 1,096 | 929 | 731 | ||||||||||||||
Per Share Data | |||||||||||||||||||
Earnings from continuing operations attributable to Campbell Soup Company - basic | $ | 2.19 | $ | 2.30 | $ | 2.28 | $ | 2.29 | $ | 2.06 | |||||||||
Earnings from continuing operations attributable to Campbell Soup Company - assuming dilution | 2.17 | 2.29 | 2.26 | 2.27 | 2.05 | ||||||||||||||
Net earnings attributable to Campbell Soup Company - basic | 1.46 | 2.43 | 2.44 | 2.44 | 2.06 | ||||||||||||||
Net earnings attributable to Campbell Soup Company - assuming dilution | 1.44 | 2.41 | 2.42 | 2.42 | 2.05 | ||||||||||||||
Dividends declared | 1.16 | 1.16 | 1.145 | 1.075 | 1.00 | ||||||||||||||
Other Statistics | |||||||||||||||||||
Capital expenditures | $ | 336 | $ | 323 | $ | 272 | $ | 315 | $ | 345 | |||||||||
Weighted average shares outstanding - basic | 314 | 317 | 326 | 340 | 352 | ||||||||||||||
Weighted average shares outstanding - assuming dilution | 317 | 319 | 329 | 343 | 354 | ||||||||||||||
____________________________________
(All per share amounts below are on a diluted basis)
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 results of the business were reflected as discontinued operations in the Consolidated Statements of Earnings for all years presented. 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.
(1) | The 2013 earnings from continuing operations were impacted by restructuring charges and related costs of $90 million ($.28 per share) associated with restructuring initiatives in 2013. Earnings from continuing operations were also impacted by Bolthouse Farms acquisition-related costs of $7 million ($.02 per share). Earnings from discontinued operations were impacted by an impairment charge on the intangible assets of the simple meals business in Europe of $263 million ($.83 per share) and tax expense of $18 million ($.06 per share) representing taxes on the difference between the book value and tax basis of the business. |
(2) | The 2012 earnings from continuing operations were impacted by a restructuring charge of $4 million ($.01 per share) associated with the 2011 initiatives to improve supply chain efficiency, reduce overhead costs across the organization and exit the Russian market. Earnings from discontinued operations included a restructuring charge of $2 million ($.01 per share) associated with the initiatives. Earnings from continuing operations were also impacted by Bolthouse Farms acquisition-related costs of $3 million ($.01 per share). |
(3) | The 2011 earnings from continuing operations were impacted by a restructuring charge of $39 million ($.12 per share) associated with initiatives announced in June 2011 to improve supply chain efficiency, reduce overhead costs across the |
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organization and exit the Russian market. Earnings from discontinued operations included a restructuring charge of $2 million associated with the initiatives.
(4) | The 2010 earnings from continuing operations were impacted by the following: a restructuring charge of $8 million ($.02 per share) for pension benefit costs associated with the 2008 initiatives to improve operational efficiency and long-term profitability and $10 million ($.03 per share) to reduce deferred tax assets as a result of the U.S. health care legislation enacted in March 2010. |
(5) | The 2009 earnings from continuing operations were impacted by the following: $15 million ($.04 per share) of restructuring-related costs associated with the 2008 initiatives to improve operational efficiency and long-term profitability. The 2009 earnings from discontinued operations were impacted by an impairment charge of $47 million ($.13 per share) related to certain European trademarks and a $4 million ($.01 per share) tax benefit related to the sale of the Godiva Chocolatier business. |
Five-Year Review should be read in conjunction with the Notes to Consolidated Financial Statements.
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
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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 Costeña 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. |
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• | 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 Impact | EPS Impact | Earnings Impact | EPS 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. |
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The items impacting comparability are summarized below:
2012 | 2011 | ||||||||||||||
Earnings Impact | EPS Impact | Earnings Impact | EPS 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 | — | ||||||||
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An analysis of percent change of net sales by reportable segment follows:
2013 versus 2012 | U.S. Simple Meals | Global Baking and Snacking | International Simple Meals and Beverages | U.S. Beverages | Bolthouse and 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% | ||||||
2012 versus 2011 | U.S. Simple Meals | Global Baking and Snacking | International Simple Meals and Beverages | U.S. Beverages | Bolthouse and 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
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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.
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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 associated with product innovation in North America and the Asia Pacific region (approximately 2 percentage points), and inflation (approximately 1 percentage point).
Other Expenses/(Income)
Other expenses in 2013 included $10 million of transaction costs and $14 million of amortization of intangible assets associated with the acquisition of Bolthouse Farms.
Other expenses in 2012 included $5 million of transaction costs associated with the acquisition of Bolthouse Farms.
Operating Earnings
Segment operating earnings increased 7% in 2013 from 2012 and decreased 8% in 2012 from 2011.
An analysis of operating earnings by segment follows:
% Change | |||||||||||||||
2013 | 2012 | 2011 | 2013/2012 | 2012/2011 | |||||||||||
(Millions) | |||||||||||||||
U.S. Simple Meals | $ | 731 | $ | 658 | $ | 657 | 11% | —% | |||||||
Global Baking and Snacking | 316 | 315 | 355 | — | (11) | ||||||||||
International Simple Meals and Beverages | 108 | 106 | 128 | 2 | (17) | ||||||||||
U.S. Beverages | 120 | 134 | 182 | (10) | (26) | ||||||||||
Bolthouse and Foodservice | 116 | 85 | 82 | 36 | 4 | ||||||||||
1,391 | 1,298 | 1,404 | 7% | (8)% | |||||||||||
Unallocated corporate expenses | (260 | ) | (136 | ) | (132 | ) | |||||||||
Restructuring charges(1) | (51 | ) | (7 | ) | (60 | ) | |||||||||
Earnings before interest and taxes | $ | 1,080 | $ | 1,155 | $ | 1,212 | |||||||||
__________________________________________
(1) | See Note 8 to the Consolidated Financial Statements for additional information on restructuring charges. |
Earnings from U.S. Simple Meals increased 11% in 2013 versus 2012. The improvement in operating earnings was due to solid gains in U.S. Soup, partially offset by a decline in U.S. Sauces mostly due to increased marketing spending in support of new items. For the segment, higher selling prices and productivity savings were partially offset by cost inflation.
Earnings from U.S. Simple Meals in 2012 and 2011 were comparable, as earnings gains in U.S. Soup were mostly offset by declines in U.S. Sauces. For the segment, higher selling prices, productivity improvements and lower promotional spending were mostly offset by lower volumes and cost inflation.
Earnings from Global Baking and Snacking increased $1 million in 2013, reflecting growth in Pepperidge Farm mostly offset by lower earnings in Arnott's.
Earnings from Global Baking and Snacking decreased 11% in 2012 versus 2011 primarily due to cost inflation, increased promotional spending and higher advertising expense, partly offset by higher selling prices and productivity improvements. Promotional spending was increased to support the businesses.
Earnings from International Simple Meals and Beverages increased 2% in 2013 versus 2012. The increase was primarily due to lower losses in China, reflecting lower marketing expenses partially offset by a lower gross margin percentage.
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Earnings from International Simple Meals and Beverages decreased 17% in 2012 versus 2011. The decrease in operating earnings was primarily due to lower earnings in the Asia Pacific region and Canada, and increased costs associated with the company's market expansion in China, partially offset by the benefit of exiting the Russian market.
Earnings from U.S. Beverages decreased 10% in 2013 versus 2012, primarily due to lower sales and a lower gross margin percentage, partially offset by reduced advertising expenses.
Earnings from U.S. Beverages decreased 26% in 2012 versus 2011 primarily due to cost inflation, increased promotional spending and advertising expense, partly offset by productivity improvements.
Earnings from Bolthouse and Foodservice increased $31 million in 2013 from 2012 due to the acquisition of Bolthouse Farms, which contributed $63 million, partially offset by lower earnings in North America Foodservice resulting from the decline in sales.
Earnings from Bolthouse and Foodservice increased 4% in 2012 versus 2011 due to higher selling prices and productivity improvements, partially offset by cost inflation. In 2012 and 2011, all of the segment earnings were from North America Foodservice as Bolthouse was acquired in 2013.
Unallocated corporate expenses in 2013 included restructuring-related costs of $91 million and transaction costs of $10 million associated with the acquisition of Bolthouse Farms. Unallocated corporate expenses in 2012 included $5 million associated with the acquisition of Bolthouse Farms. The remaining increase in 2013 was primarily due to higher incentive compensation costs.
Interest Expense/Income
Interest expense increased to $135 million in 2013 from $114 million in 2012, reflecting a higher debt level due to the Bolthouse Farms acquisition, partially offset by lower interest rates. Interest income increased to $10 million from $8 million in 2012 primarily due to higher levels of cash and cash equivalents.
Interest expense decreased to $114 million in 2012 from $122 million in 2011, primarily due to lower interest rates on fixed-rate debt. Interest income decreased to $8 million in 2012 from $10 million in 2011 primarily due to lower levels of cash and cash equivalents.
Taxes on Earnings
The effective tax rate was 28.8% in 2013, 31.0% in 2012, and 31.9% in 2011. The current year included a tax benefit of $55 million on $152 million of restructuring charges and related costs and acquisition transaction costs. The decline in the effective tax rate in 2013 from 2012 was primarily due to lower state taxes, including the favorable resolution of certain matters, and an increase in the U.S. manufacturing deduction.
The reduction in the effective tax rate in 2012 from 2011 was primarily due to lower tax expense associated with the repatriation of foreign earnings in 2012.
Restructuring 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 will close its plant in Villagrán, Mexico, in 2014 and eliminate approximately 260 positions. |
• | 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. |
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The company recorded a restructuring charge of $51 million related to these initiatives in 2013. In addition, approximately $91 million of costs related to these initiatives were recorded in Cost of products sold, representing accelerated depreciation and other exit costs. The aggregate after-tax impact of restructuring charges and related costs was $90 million, or $.28 per share. A summary of the pre-tax costs and remaining costs associated with the initiatives is as follows:
(Millions) | Total Program | Recognized as of July 28, 2013 | Remaining Costs to be Recognized | ||||||||
Severance pay and benefits | $ | 37 | $ | (35 | ) | $ | 2 | ||||
Accelerated depreciation/asset impairment | 99 | (99 | ) | — | |||||||
Other exit costs | 14 | (8 | ) | 6 | |||||||
Total | $ | 150 | $ | (142 | ) | $ | 8 | ||||
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 $12 million has been invested as of July 28, 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 - $91 million; Global Baking and Snacking - $16 million; International Simple Meals and Beverages - $10 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 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 2013 and will result in the elimination of approximately 190 positions. This initiative is now expected to be substantially completed by December 2013. 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 initiative, the company outsourced a larger portion of its U.S. retail merchandising activities to its retail sales agent, Acosta Sales and Marketing, and eliminated approximately 190 positions. |
• | In connection with exiting the Russian market, the company eliminated approximately 50 positions. The exit process commenced in 2011 and was substantially completed in 2012. |
In 2012, the company recorded a restructuring charge of $10 million ($6 million after tax or $.02 per share). Of the amount recorded in 2012, $3 million relates to discontinued operations. In the fourth quarter of 2011, the company recorded a restructuring charge of $63 million ($41 million after tax or $.12 per share). Of the amount recorded in 2011, $3 million related to discontinued operations. A summary of the pre-tax charges and remaining costs associated with the initiatives is as follows:
(Millions) | Total Program | Recognized as of July 28, 2013 | Remaining Costs to be Recognized | ||||||||
Severance pay and benefits | $ | 41 | $ | (41 | ) | $ | — | ||||
Accelerated depreciation/asset impairment | 23 | (23 | ) | — | |||||||
Other exit costs | 10 | (9 | ) | 1 | |||||||
Total | $ | 74 | $ | (73 | ) | $ | 1 | ||||
Of the aggregate $74 million of pre-tax costs, approximately $50 million represents cash expenditures, the majority of which was spent in 2012. In addition, the company expects to invest approximately $40 million in capital expenditures in connection
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with the actions, of which approximately $33 million has been invested as of July 28, 2013. 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 are expected to generate annual pre-tax cash savings of approximately $60 million beginning in 2012 and increasing to approximately $70 million in 2014.
The total pre-tax costs of $74 million associated with each segment are as follows: U.S. Simple Meals - $33 million; Global Baking and Snacking - $14 million; International Simple Meals and Beverages - $17 million; U.S. Beverages - $3 million; Bolthouse and Foodservice - $1 million; and Corporate - $6 million. Segment operating results do not include restructuring charges as segment performance is evaluated excluding such charges.
See Note 8 to the Consolidated Financial Statements for additional information.
Potential Future Initiatives
The company continues to evaluate initiatives to improve operational efficiency and long-term profitability and may take additional actions in the future as a result.
Discontinued Operations
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 European business includes Erasco and Heisse Tasse soups in Germany; Liebig and Royco soups in France; Devos Lemmens mayonnaise and cold sauces; and Royco soups in Belgium; and Blå Band and Isomitta soups and sauces in Sweden.
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.
Results of the European business are summarized below.
(Millions) | 2013 | 2012 | 2011 | ||||||||
Net sales | $ | 532 | $ | 532 | $ | 576 | |||||
Earnings (loss) before taxes | $ | (331 | ) | $ | 57 | $ | 68 | ||||
Taxes on earnings | 100 | (17 | ) | (15 | ) | ||||||
Earnings (loss) from discontinued operations | $ | (231 | ) | $ | 40 | $ | 53 | ||||
In the fourth quarter of 2013, the company recorded an impairment charge on the intangible assets of this business 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 also Notes 4 and 6 to the Consolidated Financial Statements for additional information.
In 2013, sales were comparable to 2012 as gains in France, Belgium and the Nordic region were offset by declines in Germany and export sales. Excluding the impairment charge and the tax charge, earnings increased in 2013 due primarily to lower marketing spending and administrative costs.
In 2012, sales declined primarily due to currency and declines in Germany. In 2012, earnings declined primarily due to lower sales, a lower gross margin percentage and restructuring charges, partially offset by lower marketing spending.
LIQUIDITY AND CAPITAL RESOURCES
The company expects that foreseeable liquidity and capital resource requirements, including cash outflows to repay debt, pay dividends and fund pension plan contributions, will be met through anticipated cash flows from operations; long-term borrowings under its shelf registration statement; short-term borrowings, including commercial paper; and cash and cash equivalents. The company believes that its sources of financing will be adequate to meet its future liquidity and capital resource requirements.
The company generated cash from operations of $1.019 billion in 2013, compared to $1.120 billion in 2012. The decrease was primarily due to higher working capital requirements, partly offset by higher cash earnings.
The company generated cash from operations of $1.120 billion in 2012, compared to $1.142 billion in 2011. The decline was primarily due to lower cash earnings, partially offset by lower pension contributions in 2012.
Capital expenditures were $336 million in 2013 compared to $323 million a year ago. Capital expenditures are expected to total approximately $350 million in 2014. Capital expenditures in 2013 included the soup capacity expansion project for the North America Foodservice business (approximately $42 million), capacity expansion at Pepperidge Farm (approximately $38 million), the packing automation and capacity expansion projects at one of the company’s Australian biscuit plants (approximately $19
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million), the ongoing initiative to simplify the soup-making process in North America (also known as the soup common platform initiative) (approximately $20 million), and an advanced planning system in North America (approximately $11 million). Capital expenditures in 2012 included the packing automation and capacity expansion projects at one of the company’s Australian biscuit plants (approximately $32 million), an advanced planning system in North America (approximately $14 million), capacity expansion at Pepperidge Farm (approximately $18 million), the ongoing initiative to simplify the soup-making process in North America (approximately $17 million), continued enhancement of the company’s corporate headquarters (approximately $11 million), and Pepperidge Farm's 34,000-square-foot innovation center (approximately $20 million). Capital expenditures in 2011 included the expansion of beverage capacity (approximately $6 million); the ongoing implementation of SAP (approximately $13 million); expenditures at the company’s corporate headquarters (approximately $6 million); Pepperidge Farm’s new 34,000-square-foot innovation center (approximately $5 million); expansion of Pepperidge Farm’s production capacity (approximately $5 million) and a number of infrastructure projects in the U.S. supply chain (approximately $31 million).
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 acquisition was funded through a combination of short- and long-term borrowings. The terms of long-term borrowings, which were issued on August 2, 2012, were as follows:
• | $400 million floating rate notes that mature on August 1, 2014. Interest on the notes is based on 3-month U.S. dollar LIBOR plus 0.30%. Interest is payable quarterly and commenced on November 1, 2012; |
• | $450 million of 2.50% notes that mature on August 2, 2022. Interest is payable semi-annually and commenced on February 2, 2013. The company may redeem the notes in whole or in part at any time at a redemption price of 100% of the principal amount plus accrued interest or an amount designed to ensure that the note holders are not penalized by the early redemption; and |
• | $400 million of 3.80% notes that mature on August 2, 2042. Interest is payable semi-annually and commenced on February 2, 2013. The company may redeem the notes in whole or in part at any time at a redemption price of 100% of the principal amount plus accrued interest or an amount designed to ensure that the note holders are not penalized by the early redemption. |
The remaining balance was funded through the issuance of commercial paper.
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. The acquisition provides the company with a new growth platform in the high-growth premium organic segment. The acquisition was funded through the issuance of commercial paper.
On August 8, 2013, the company completed the acquisition of Kelsen for approximately $325 million, subject to customary purchase price adjustments. Kelsen is a producer of quality baked snacks that are sold in 85 countries around the world. The acquisition was funded through the issuance of commercial paper.
Long-term borrowings in 2011 included the issuance in April of $500 million of 4.25% notes that mature in April 2021. The net proceeds from this issuance were used for the repayment of commercial paper borrowings and for other general corporate purposes.
Dividend payments were $367 million in 2013, $373 million in 2012, and $378 million in 2011. Annual dividends declared were $1.16 per share in 2013 and 2012, and $1.145 per share in 2011. The 2013 fourth quarter rate was $.29 per share.
Excluding shares owned and tendered by employees to satisfy tax withholding requirements on the vesting of restricted shares and for stock option exercises, the company repurchased approximately 4 million shares at a cost of $153 million during 2013. In June 2011, the company’s Board of Directors authorized the purchase of up to $1 billion of company stock. Approximately $750 million remained available to repurchase shares under the company's June 2011 repurchase program as of July 28, 2013. This program has no expiration date. The company suspended purchases under this program in July 2012. In addition to the June 2011 publicly announced share repurchase program, the company also purchased shares to offset the impact of dilution from shares issued under the company’s stock compensation plans. The company expects to continue this practice in the future. See “Unregistered Sales of Equity Securities and Use of Proceeds” for more information.
Excluding shares owned and tendered by employees to satisfy tax withholding requirements on the vesting of restricted shares and for stock option exercises, the company repurchased approximately 13 million shares at a cost of $412 million during 2012. Approximately $250 million was used to repurchase shares pursuant to the company’s June 2011 publicly announced share repurchase program. In addition to the June 2011 publicly announced share repurchase program, the company also purchased shares to offset the impact of dilution from shares issued under the company’s stock compensation plans.
Excluding shares owned and tendered by employees to satisfy tax withholding requirements on the vesting of restricted shares and for stock option exercises, the company repurchased 21 million shares at a cost of $728 million during 2011. Approximately
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$550 million was used to repurchase shares pursuant to the company’s June 2008 publicly announced share repurchase program. Under this program, the company’s Board of Directors authorized the purchase of up to $1.2 billion of company stock through the end of 2011. This program was completed in 2011. In addition to the June 2008 publicly announced share repurchase program, the company also purchased shares to offset the impact of dilution from shares issued under the company’s stock compensation plans.
At July 28, 2013, the company had $1.909 billion of short-term borrowings due within one year and $40 million of standby letters of credit issued on behalf of the company. The company has committed revolving credit facilities totaling $2.0 billion, comprised of a $500 million facility and a $1.5 billion facility, both maturing in September 2016. These facilities remained unused at July 28, 2013, except for $3 million of standby letters of credit issued on behalf of the company. These revolving credit agreements support the company’s commercial paper programs and other general corporate purposes. The company may also increase the commitments under the credit facilities up to an additional $1 billion, upon the agreement of either existing lenders or of additional banks not currently parties to the existing credit agreements.
In November 2011, the company filed a registration statement with the Securities and Exchange Commission that registered an indeterminate amount of debt securities. Under the registration statement, the company may issue debt securities, depending on market conditions.
The company is in compliance with the covenants contained in its revolving credit facilities and debt securities.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
Contractual Obligations
The following table summarizes the company’s obligations and commitments to make future payments under certain contractual obligations as of July 28, 2013. For additional information on debt, see Note 13 to the Consolidated Financial Statements. Operating leases are primarily entered into for warehouse and office facilities and certain equipment. Purchase commitments represent purchase orders and long-term purchase arrangements related to the procurement of ingredients, supplies, machinery, equipment and services. These commitments are not expected to have a material impact on liquidity. Other long-term liabilities primarily represent payments related to deferred compensation obligations. For additional information on other long-term liabilities, see Note 18 to the Consolidated Financial Statements.
Contractual Payments Due by Fiscal Year | |||||||||||||||||||
(Millions) | Total | 2014 | 2015 - 2016 | 2017 - 2018 | Thereafter | ||||||||||||||
Debt obligations(1) | $ | 4,462 | 1,908 | 302 | 402 | 1,850 | |||||||||||||
Interest payments(2) | 958 | 108 | 183 | 170 | 497 | ||||||||||||||
Derivative payments(3) | 36 | 35 | 1 | — | — | ||||||||||||||
Purchase commitments(4) | 1,110 | 687 | 202 | 88 | 133 | ||||||||||||||
Operating leases(4) | 204 | 45 | 68 | 44 | 47 | ||||||||||||||
Other long-term payments(5) | 177 | — | 50 | 41 | 86 | ||||||||||||||
Total long-term cash obligations | $ | 6,947 | $ | 2,783 | $ | 806 | $ | 745 | $ | 2,613 | |||||||||
_______________________________________
(1) | Excludes unamortized net discount/premium on debt issuances and amounts related to interest rate swaps designated as fair-value hedges. For additional information on debt obligations, see Note 13 to the Consolidated Financial Statements. |
(2) | Interest payments for short-term borrowings are calculated based on par values and rates of contractually obligated issuances at fiscal year end. Interest payments on long-term debt are based on principal amounts and fixed coupon rates at fiscal year end. |
(3) | Represents payments of cross-currency swaps, forward exchange contracts, commodity contracts, and deferred compensation hedges. Contractual payments for cross-currency swaps represent future discounted cash payments based on forward interest and spot foreign exchange rates. |
(4) | Includes purchase commitments of $44 million and operating leases of $27 million related to discontinued operations. |
(5) | Represents other long-term liabilities, excluding unrecognized tax benefits, postretirement benefits and payments related to pension plans. For additional information on pension and postretirement benefits, see Note 11 to the Consolidated Financial Statements. |
Off-Balance Sheet Arrangements and Other Commitments
The company guarantees approximately 2,000 bank loans to Pepperidge Farm independent sales distributors by third-party financial institutions used to purchase distribution routes. The maximum potential amount of the future payments the company could be required to make under the guarantees is $165 million. The company’s guarantees are indirectly secured by the distribution
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routes. The company does not believe that it is probable that it will be required to make guarantee payments as a result of defaults on the bank loans guaranteed. See also Note 18 to the Consolidated Financial Statements for information on off-balance sheet arrangements.
INFLATION
In fiscal 2013, inflation in cost of goods sold was lower than fiscal 2012 and 2011. The company continues to use a number of strategies to mitigate the effects of cost inflation including increasing prices, commodity hedging and pursuing cost productivity initiatives such as global procurement strategies and capital investments that improve the efficiency of operations.
MARKET RISK SENSITIVITY
The principal market risks to which the company is exposed are changes in foreign currency exchange rates, interest rates and commodity prices. In addition, the company is exposed to equity price changes related to certain deferred compensation obligations. The company manages its exposure to changes in interest rates by optimizing the use of variable-rate and fixed-rate debt and by utilizing interest rate swaps in order to maintain its variable-to-total debt ratio within targeted guidelines. International operations, which accounted for 23% of 2013 net sales from continuing operations, are concentrated principally in Australia and Canada. The company manages its foreign currency exposures by borrowing in various foreign currencies and utilizing cross-currency swaps and forward contracts. Cross-currency swaps and forward contracts are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. The company does not enter into contracts for speculative purposes and does not use leveraged instruments.
The company principally uses a combination of purchase orders and various short- and long-term supply arrangements in connection with the purchase of raw materials, including certain commodities and agricultural products. The company also enters into commodity futures, options and swap contracts to reduce the volatility of price fluctuations of diesel fuel, soybean oil, wheat, aluminum, natural gas, cocoa and corn, which impact the cost of raw materials.
The information below summarizes the company’s market risks associated with debt obligations and other significant financial instruments as of July 28, 2013. Fair values included herein have been determined based on quoted market prices or pricing models using current market rates. The information presented below should be read in conjunction with Notes 13 through 15 to the Consolidated Financial Statements.
The table below presents principal cash flows and related interest rates by fiscal year of maturity for debt obligations. Interest rates disclosed on variable-rate debt represent the weighted-average rates at July 28, 2013. Notional amounts and related interest rates of interest rate swaps are presented by fiscal year of maturity. For the swaps, variable rates are the weighted-average forward rates for the term of each contract.
Expected Fiscal Year of Maturity | |||||||||||||||||||||||||||||||
(Millions) | 2014 | 2015 | 2016 | 2017 | 2018 | Thereafter | Total | Fair Value | |||||||||||||||||||||||
Debt(1) | |||||||||||||||||||||||||||||||
Fixed rate | $ | 302 | $ | 301 | $ | 1 | $ | 401 | $ | 1 | $ | 1,850 | $ | 2,856 | $ | 2,900 | |||||||||||||||
Weighted-average interest rate | 4.87 | % | 3.37 | % | 1.06 | % | 3.05 | % | 1.51 | % | 4.27 | % | 4.07 | % | |||||||||||||||||
Variable rate(2) | $ | 1,606 | $ | 1,606 | $ | 1,607 | |||||||||||||||||||||||||
Weighted-average interest rate | 0.45 | % | 0.45 | % | |||||||||||||||||||||||||||
Interest Rate Swaps | |||||||||||||||||||||||||||||||
Fair-value swaps | |||||||||||||||||||||||||||||||
Fixed to variable | $ | 200 | $ | 200 | $ | 1 | |||||||||||||||||||||||||
Average pay rate | 0.67 | % | 0.67 | % | |||||||||||||||||||||||||||
Average receive rate | 4.88 | % | 4.88 | % | |||||||||||||||||||||||||||
Cash-flow swaps | |||||||||||||||||||||||||||||||
Variable to fixed | $ | 250 | $ | 250 | $ | 23 | |||||||||||||||||||||||||
Average pay rate | 2.18 | % | 2.18 | % | |||||||||||||||||||||||||||
Average receive rate | 3.33 | % | 3.33 | % | |||||||||||||||||||||||||||
_______________________________________
(1) | Excludes unamortized net premium/discount on debt issuances and amounts related to interest rate swaps designated as fair-value hedges. |
(2) | Represents $1.562 billion of USD borrowings and $44 million equivalent of borrowings in other currencies. |
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As of July 29, 2012, fixed-rate debt of approximately $2.4 billion with an average interest rate of 4.56% and variable-rate debt of approximately $382 million with an average interest rate of 0.72% were outstanding. As of July 29, 2012, the company had swapped $500 million of fixed-rate debt to variable. The average rate to be received on these swaps was 4.95%, and the average rate to be paid was estimated to be 1.05% over the remaining life of the swaps.
The company is exposed to foreign exchange risk related to its international operations, including non-functional currency intercompany debt and net investments in subsidiaries. The following table summarizes the cross-currency swaps outstanding as of July 28, 2013, which hedge such exposures. The notional amount of each currency and the related weighted-average forward interest rate are presented in the Cross-Currency Swaps table.
Cross-Currency Swaps
Fiscal Year of Expiration | Interest Rate | Notional Value | Fair Value | |||||||||
(Millions) | ||||||||||||
Pay fixed CAD | 2014 | 6.24% | $ | 60 | $ | (22 | ) | |||||
Receive fixed USD | 5.66% | |||||||||||
Pay variable AUD | 2014 | 1.45% | $ | 37 | $ | — | ||||||
Receive variable USD | 0.24% | |||||||||||
Pay variable CAD | 2014 | 0.69% | $ | 34 | $ | (1 | ) | |||||
Receive variable USD | 0.23% | |||||||||||
Pay variable CAD | 2014 | 0.77% | $ | 83 | $ | — | ||||||
Receive variable USD | 0.24% | |||||||||||
Pay variable AUD | 2015 | 2.19% | $ | 55 | $ | — | ||||||
Receive variable USD | 0.52% | |||||||||||
Pay variable CAD | 2015 | 1.21% | $ | 42 | $ | — | ||||||
Receive variable USD | 0.46% | |||||||||||
Pay variable AUD | 2016 | 2.85% | $ | 72 | $ | (1 | ) | |||||
Receive variable USD | 0.95% | |||||||||||
Total | $ | 383 | $ | (24 | ) | |||||||
The cross-currency swap contracts outstanding at July 29, 2012, represented four pay variable EUR/receive variable USD swaps with notional values totaling $241 million, four pay variable CAD/receive variable USD swaps with notional values totaling $210 million, four pay variable AUD/receive variable USD swaps with notional values totaling $325 million, and one pay fixed CAD/receive fixed USD swaps with a notional value totaling $60 million. The aggregate notional value of these swap contracts was $836 million as of July 29, 2012, and the aggregate fair value of these swap contracts was a loss of $60 million as of July 29, 2012.
The company is also exposed to foreign exchange risk as a result of transactions in currencies other than the functional currency of certain subsidiaries, including subsidiary debt. The company utilizes foreign exchange forward purchase and sale contracts to hedge these exposures. The following table summarizes the foreign exchange forward contracts outstanding and the related weighted-average contract exchange rates as of July 28, 2013.
Forward Exchange Contracts
Contract Amount | Average Contractual Exchange Rate (currency paid/ currency received) | ||||
(Millions) | |||||
Receive USD/Pay AUD | $ | 231 | 1.08 | ||
Receive USD/Pay EUR | $ | 225 | 0.76 | ||
Receive USD/Pay CAD | $ | 151 | 1.02 | ||
Receive AUD/Pay NZD | $ | 29 | 1.22 | ||
The company had an additional $5 million in a number of smaller contracts to purchase or sell various other currencies, such as the Swedish krona, British pound, and Australian dollar, as of July 28, 2013. The aggregate fair value of all contracts was a loss
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of $2 million as of July 28, 2013. The total forward exchange contracts outstanding were $228 million, and the aggregate fair value was a gain of $2 million as of July 29, 2012.
The company enters into commodity futures and options contracts to reduce the volatility of price fluctuations for commodities. The notional value of these contracts was $105 million and the aggregate fair value of these contracts was a loss of $4 million as of July 28, 2013. The notional value of these contracts was $95 million, and the aggregate fair value of these contracts was a gain of $4 million as of July 29, 2012.
The company enters into swap contracts which hedge a portion of exposures relating to certain deferred compensation obligations linked to the total return of the company’s capital stock, the total return of the Vanguard Institutional Index, the total return of the Vanguard Total International Stock Index, and during 2012, the total return of the Vanguard Short-Term Bond Index. Under these contracts, the company pays variable interest rates and receives from the counterparty either the total return on company capital stock; the total return of the Standard & Poor's 500 Index, which is expected to approximate the total return of the Vanguard Institutional Index; the total return of the iShares MSCI EAFE Index, which is expected to approximate the total return of the Vanguard Total International Stock Index; or the total return of the Vanguard Short-Term Bond Index. The notional value of the contract that is linked to the total return on company capital stock was $26 million at July 28, 2013 and July 29, 2012. The average forward interest rate applicable to this contract, which expires in 2014, was 0.60% at July 28, 2013. The notional value of the contract that is linked to the return on the Standard & Poor's 500 Index was $19 million at July 28, 2013 and $15 million at July 29, 2012. The average forward interest rate applicable to this contract, which expires in 2013, was 0.67% at July 28, 2013. The notional value of the contract that is linked to the total return of the iShares MSCI EAFE Index was $5 million at July 28, 2013 and $4 million at July 29, 2012. The average forward interest rate applicable to this contract, which expires in 2014, was 0.55% at July 28, 2013. The notional value of the contract that was linked to the return on the Vanguard Short-Term Bond Index was $30 million at July 29, 2012. The fair value of these contracts was a $2 million gain at July 28, 2013 and a $1 million gain at July 29, 2012.
The company’s utilization of financial instruments in managing market risk exposures described above is consistent with the prior year. Changes in the portfolio of financial instruments are a function of the results of operations, debt repayment and debt issuances, market effects on debt and foreign currency, and the company’s acquisition and divestiture activities.
SIGNIFICANT ACCOUNTING ESTIMATES
The consolidated financial statements of the company are prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates and assumptions. See Note 1 to the Consolidated Financial Statements for a discussion of significant accounting policies. The following areas all require the use of subjective or complex judgments, estimates and assumptions:
Trade and consumer promotion programs — The company offers various sales incentive programs to customers and consumers, such as feature price discounts, in-store display incentives, cooperative advertising programs, new product introduction fees, and coupons. The mix between promotion programs, which are classified as reductions in revenue, and advertising or other marketing activities, which are classified as marketing and selling expenses, fluctuates between periods based on the company’s overall marketing plans, and such fluctuations have an impact on revenues. The measurement and recognition of the costs for trade and consumer promotion programs involves the use of judgment related to performance and redemption estimates. Estimates are made based on historical experience and other factors. Typically, programs that are offered have a very short duration. Historically, the difference between actual experience compared to estimated redemptions and performance has not been significant to the quarterly or annual financial statements. However, actual expenses may differ if the level of redemption rates and performance were to vary from estimates.
Valuation of long-lived assets — Fixed assets and amortizable intangible assets are reviewed for impairment as events or changes in circumstances occur indicating that the carrying value of the asset may not be recoverable. Undiscounted cash flow analyses are used to determine if an impairment exists. If an impairment is determined to exist, the loss is calculated based on estimated fair value.
Goodwill and intangible assets deemed to have indefinite lives are not amortized but rather are tested at least annually for impairment, or more often if events or changes in circumstances indicate that more likely than not the carrying amount of the asset may not be recoverable. Goodwill is tested for impairment at the reporting unit level. A reporting unit represents an operating segment or a component of an operating segment. Goodwill is tested for impairment by either performing a qualitative evaluation or a two-step quantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. The company may elect not to perform the qualitative assessment for some or all reporting units and perform a two-step quantitative impairment test. Fair value is determined based on discounted cash flow analyses. The discounted estimates of future cash flows include significant management assumptions such as revenue growth rates, operating margins, weighted average cost of capital, and future economic and market conditions. If the carrying value of the reporting unit exceeds fair value, goodwill is considered impaired. The amount of the
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impairment is the difference between the carrying value of the goodwill and the “implied” fair value, which is calculated as if the reporting unit had just been acquired and accounted for as a business combination.
Indefinite-lived intangible assets are tested for impairment by comparing the fair value of the asset to the carrying value. Fair value is determined based on discounted cash flow analyses that include significant management assumptions such as revenue growth rates, weighted average cost of capital, and assumed royalty rates. If the fair value is less than the carrying value, the asset is reduced to fair value.
In the fourth quarter of 2013, as part of the company's annual review of intangible assets, an impairment charge of $360 million was recorded on goodwill and $36 million on trademarks for the simple meals business in Europe. The impairment was attributable to a combination of factors, including the existence of a firm offer to purchase the business; a revised future outlook for the business, with reduced expectations for future sales and discounted cash flows, given the economic uncertainty in the region; future investments required to maintain performance; and management's assumptions on the weighted average cost of capital.
On August 12, 2013, the company announced that it was in final and exclusive negotiations for the potential sale of this business. 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 have been reflected in assets and liabilities held for sale in the Consolidated Balance Sheet as of July 28, 2013.
As of July 28, 2013, the carrying value of goodwill was $2.407 billion, of which $110 million relates to the European simple meals business and has been included in assets held for sale. Prior to the impairment charge in 2013, the company had not recognized any impairment of goodwill as a result of annual testing, which began in 2003. As of the 2013 measurement, the estimated fair value of each reporting unit of continuing operations exceeded the carrying value by at least 40%, excluding the 2013 acquisitions. Holding all other assumptions used in the 2013 fair value measurement constant, a 100-basis-point increase in the weighted average cost of capital would not result in the carrying value of any reporting unit to be in excess of the fair value. As of July 28, 2013, goodwill related to the acquisition of Bolthouse Farms and Plum was $692 million and $128 million, respectively. Within Bolthouse, the fair value exceeded the carrying value by at least 15%. Because the Plum acquisition closed on June 13, 2013, the carrying value represents fair value.
As of July 28, 2013, the carrying value of trademarks was $960 million, of which $150 million relates to the European simple meals business and has been included in assets held for sale. Holding all other assumptions used in the 2013 measurement constant, a 100-basis-point increase in the weighted average cost of capital would reduce the fair value of trademarks of continuing operations, excluding the 2013 acquisitions, but would not result in an impairment charge. As of July 28, 2013, trademarks related to the acquisition of Bolthouse Farms and Plum were $383 million and $115 million, respectively.
In 2012, as part of the company’s annual review of intangible assets, an impairment charge of $3 million was recognized related to a trademark used in the European simple meals business, formerly included in the International Simple Meals and Beverages segment. The trademark was determined to be impaired as a result of a decrease in the fair value of the brand, resulting from reduced expectations for future sales and discounted cash flows in comparison to the prior year.
The estimates of future cash flows involve considerable management judgment and are based upon assumptions about expected future operating performance, economic conditions, market conditions, and cost of capital. Inherent in estimating the future cash flows are uncertainties beyond the company’s control, such as capital markets. The actual cash flows could differ materially from management’s estimates due to changes in business conditions, operating performance, and economic conditions.
See also Note 6 to the Consolidated Financial Statements for additional information on goodwill and intangible assets.
Pension and postretirement benefits — The company provides certain pension and postretirement benefits to employees and retirees. Determining the cost associated with such benefits is dependent on various actuarial assumptions, including discount rates, expected return on plan assets, compensation increases, turnover rates and health care trend rates. Independent actuaries, in accordance with accounting principles generally accepted in the United States, perform the required calculations to determine expense. Actual results that differ from the actuarial assumptions are generally accumulated and amortized over future periods.
The discount rate is established as of the company’s fiscal year-end measurement date. In establishing the discount rate, the company reviews published market indices of high-quality debt securities, adjusted as appropriate for duration. In addition, independent actuaries apply high-quality bond yield curves to the expected benefit payments of the plans. The expected return on plan assets is a long-term assumption based upon historical experience and expected future performance, considering the company’s current and projected investment mix. This estimate is based on an estimate of future inflation, long-term projected real returns for each asset class, and a premium for active management. Within any given fiscal period, significant differences may arise between the actual return and the expected return on plan assets. The value of plan assets, used in the calculation of pension expense, is determined on a calculated method that recognizes 20% of the difference between the actual fair value of assets and the expected calculated method. Gains and losses resulting from differences between actual experience and the assumptions are
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determined at each measurement date. If the net gain or loss exceeds 10% of the greater of plan assets or liabilities, a portion is amortized into earnings in the following year.
Net periodic pension and postretirement expense was $130 million in 2013, $102 million in 2012, and $98 million in 2011.
Significant weighted-average assumptions as of the end of the year were as follows:
2013 | 2012 | 2011 | |||
Pension | |||||
Discount rate for benefit obligations | 4.82% | 4.05% | 5.41% | ||
Expected return on plan assets | 7.65% | 7.65% | 7.90% | ||
Postretirement | |||||
Discount rate for obligations | 4.50% | 3.75% | 5.00% | ||
Initial health care trend rate | 8.25% | 8.25% | 8.25% | ||
Ultimate health care trend rate | 4.50% | 4.50% | 4.50% | ||
Estimated sensitivities to annual net periodic pension cost are as follows: a 50-basis-point reduction in the discount rate would increase expense by approximately $14 million; a 50-basis-point reduction in the estimated return on assets assumption would increase expense by approximately $12 million. A one-percentage-point increase in assumed health care costs would increase postretirement service and interest cost by approximately $1 million.
Net periodic pension and postretirement expense is expected to decrease to approximately $90 million in 2014 primarily due to decreased amortization of unrecognized losses as a result of an increase in the discount rate.
The company contributed $75 million, $55 million, and $100 million, respectively, to U.S. pension plans in 2013, 2012, and 2011. Contributions to non-U.S. plans were $12 million in 2013, $16 million in 2012, and $44 million in 2011. The company contributed $35 million to U.S. plans in the first quarter of 2014. Additional contributions to U.S. plans are not expected in 2014. Contributions to non-U.S. plans are expected to be approximately $18 million in 2014.
See also Note 11 to the Consolidated Financial Statements for additional information on pension and postretirement expenses.
Income taxes — The effective tax rate reflects statutory tax rates, tax planning opportunities available in the various jurisdictions in which the company operates and management’s estimate of the ultimate outcome of various tax audits and issues. Significant judgment is required in determining the effective tax rate and in evaluating tax positions. Income taxes are recorded based on amounts refundable or payable in the current year and include the effect of deferred taxes. Deferred tax assets and liabilities are recognized for the future impact of differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled. Valuation allowances are established for deferred tax assets when it is more likely than not that a tax benefit will not be realized.
See also Notes 1 and 12 to the Consolidated Financial Statements for further discussion on income taxes.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2 to the Consolidated Financial Statements for information on recent accounting pronouncements.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
This Report contains “forward-looking” statements that reflect the company’s current expectations regarding future results of operations, economic performance, financial condition and achievements of the company. The company tries, wherever possible, to identify these forward-looking statements by using words such as “anticipate,” “believe,” “estimate,” “expect,” “will” and similar expressions. One can also identify them by the fact that they do not relate strictly to historical or current facts. These statements reflect the company’s current plans and expectations and are based on information currently available to it. They rely on a number of assumptions regarding future events and estimates which could be inaccurate and which are inherently subject to risks and uncertainties.
The company wishes to caution the reader that the following important factors and those important factors described in Part 1, Item 1A and elsewhere in this Report, or in other Securities and Exchange Commission filings of the company, could affect the company’s actual results and could cause such results to vary materially from those expressed in any forward-looking statements made by, or on behalf of, the company:
• | the impact of strong competitive response to the company’s efforts to leverage its brand power with product innovation, promotional programs and new advertising, and of changes in consumer demand for the company’s products; |
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• | the risks in the marketplace associated with trade and consumer acceptance of product improvements, shelving initiatives, new products, and pricing and promotional strategies; |
• | the company’s ability to achieve sales and earnings guidance, which is based on assumptions about sales volume, product mix, the development and success of new products, the impact of marketing, promotional and pricing actions, product costs and currency; |
• | the company’s ability to realize projected cost savings and benefits, including restructuring initiatives; |
• | the company’s ability to successfully manage changes to its business processes, including selling, distribution, manufacturing and information management systems; |
• | the practices and increased significance of certain of the company’s key customers; |
• | the impact of inventory management practices by the company’s customers; |
• | the impact of fluctuations in the supply of and inflation in energy, raw and packaging materials cost; |
• | the impact associated with completing and integrating acquisitions, divestitures and other portfolio changes; |
• | the uncertainties of litigation described from time to time in the company’s Securities and Exchange Commission filings; |
• | the impact of changes in currency exchange rates, tax rates, interest rates, debt and equity markets, inflation rates, economic conditions and other external factors; and |
• | the impact of unforeseen business disruptions in one or more of the company’s markets due to political instability, civil disobedience, armed hostilities, natural disasters or other calamities. |
This discussion of uncertainties is by no means exhaustive but is designed to highlight important factors that may impact the company’s outlook. The company disclaims any obligation or intent to update forward-looking statements made by the company in order to reflect new information, events or circumstances after the date they are made.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The information presented in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk Sensitivity” is incorporated herein by reference.
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Item 8. Financial Statements and Supplementary Data
CAMPBELL SOUP COMPANY
Consolidated Statements of Earnings
(millions, except per share amounts)
2013 | 2012 | 2011 | |||||||||
Net sales | $ | 8,052 | $ | 7,175 | $ | 7,143 | |||||
Costs and expenses | |||||||||||
Cost of products sold | 5,140 | 4,365 | 4,255 | ||||||||
Marketing and selling expenses | 947 | 941 | 909 | ||||||||
Administrative expenses | 677 | 580 | 577 | ||||||||
Research and development expenses | 128 | 116 | 120 | ||||||||
Other expenses / (income) | 29 | 11 | 10 | ||||||||
Restructuring charges | 51 | 7 | 60 | ||||||||
Total costs and expenses | 6,972 | 6,020 | 5,931 | ||||||||
Earnings before interest and taxes | 1,080 | 1,155 | 1,212 | ||||||||
Interest expense | 135 | 114 | 122 | ||||||||
Interest income | 10 | 8 | 10 | ||||||||
Earnings before taxes | 955 | 1,049 | 1,100 | ||||||||
Taxes on earnings | 275 | 325 | 351 | ||||||||
Earnings from continuing operations | 680 | 724 | 749 | ||||||||
Earnings (loss) from discontinued operations | (231 | ) | 40 | 53 | |||||||
Net earnings | 449 | 764 | 802 | ||||||||
Less: Net earnings (loss) attributable to noncontrolling interests | (9 | ) | (10 | ) | (3 | ) | |||||
Net earnings attributable to Campbell Soup Company | $ | 458 | $ | 774 | $ | 805 | |||||
Per Share — Basic | |||||||||||
Earnings from continuing operations | $ | 2.19 | $ | 2.30 | $ | 2.28 | |||||
Earnings (loss) from discontinued operations | (0.74 | ) | 0.12 | 0.16 | |||||||
Net earnings attributable to Campbell Soup Company | $ | 1.46 | $ | 2.43 | $ | 2.44 | |||||
Weighted average shares outstanding — basic | 314 | 317 | 326 | ||||||||
Per Share — Assuming Dilution | |||||||||||
Earnings from continuing operations | $ | 2.17 | $ | 2.29 | $ | 2.26 | |||||
Earnings (loss) from discontinued operations | (0.73 | ) | 0.12 | 0.16 | |||||||
Net earnings attributable to Campbell Soup Company | $ | 1.44 | $ | 2.41 | $ | 2.42 | |||||
Weighted average shares outstanding — assuming dilution | 317 | 319 | 329 | ||||||||
The sum of the individual per share amounts may not add due to rounding.
See accompanying Notes to Consolidated Financial Statements.
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CAMPBELL SOUP COMPANY
Consolidated Statements of Comprehensive Income
(millions)
2013 | 2012 | 2011 | |||||||||||||||||||||||||||||||||
Pre-tax amount | Tax (expense) benefit | After-tax amount | Pre-tax amount | Tax (expense) benefit | After-tax amount | Pre-tax amount | Tax (expense) benefit | After-tax amount | |||||||||||||||||||||||||||
Net earnings | $ | 449 | $ | 764 | $ | 802 | |||||||||||||||||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | $ | (95 | ) | $ | 3 | (92 | ) | $ | (127 | ) | $ | (8 | ) | (135 | ) | $ | 269 | $ | (5 | ) | 264 | ||||||||||||||
Cash-flow hedges: | |||||||||||||||||||||||||||||||||||
Unrealized gains (losses) arising during the period | 20 | (8 | ) | 12 | 15 | (5 | ) | 10 | (12 | ) | 4 | (8 | ) | ||||||||||||||||||||||
Reclassification adjustment for (gains) losses included in net earnings | 4 | (1 | ) | 3 | — | — | — | 9 | (3 | ) | 6 | ||||||||||||||||||||||||
Pension and other postretirement benefits: | |||||||||||||||||||||||||||||||||||
Net actuarial gain (loss) arising during the period | 322 | (103 | ) | 219 | (428 | ) | 151 | (277 | ) | — | — | — | |||||||||||||||||||||||
Reclassification of prior service credit included in net earnings | (2 | ) | — | (2 | ) | (1 | ) | — | (1 | ) | — | — | — | ||||||||||||||||||||||
Reclassification of net actuarial loss included in net earnings | 124 | (54 | ) | 70 | 83 | (29 | ) | 54 | 77 | (30 | ) | 47 | |||||||||||||||||||||||
Other comprehensive income (loss) | $ | 373 | $ | (163 | ) | $ | 210 | $ | (458 | ) | $ | 109 | $ | (349 | ) | $ | 343 | $ | (34 | ) | $ | 309 | |||||||||||||
Total comprehensive income (loss) | 659 | 415 | 1,111 | ||||||||||||||||||||||||||||||||
Total comprehensive income (loss) attributable to noncontrolling interests | (10 | ) | (10 | ) | (3 | ) | |||||||||||||||||||||||||||||
Total comprehensive income (loss) attributable to Campbell Soup Company | $ | 669 | $ | 425 | $ | 1,114 | |||||||||||||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
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CAMPBELL SOUP COMPANY
Consolidated Balance Sheets
(millions, except per share amounts)
July 28, 2013 | July 29, 2012 | ||||||
Current assets | |||||||
Cash and cash equivalents | $ | 333 | $ | 335 | |||
Accounts receivable, net | 635 | 553 | |||||
Inventories | 925 | ||||||