Final

Assignment
Campbell Soup Co.

Ocampo, Ignacio
Contents
Introduction ..................................................................................................................... 2
Campbell Soup Co. ......................................................................................................... 2
Main product lines ........................................................................................................ 2
Global Biscuit and Snacks ........................................................................................ 2
Simple Meals and Beverages ................................................................................... 3
Campbell Fresh ........................................................................................................ 3
Main Competitors ......................................................................................................... 3
General Mills ............................................................................................................. 3
The Kraft Heinz Company ........................................................................................ 3
Mondelez International ............................................................................................. 3
Financial Statements ....................................................................................................... 4
Balance Sheet.............................................................................................................. 4
Income Statement ........................................................................................................ 5
Financial Analysis............................................................................................................ 6
Horizontal Analysis of main variables .......................................................................... 6
Revenue and Gross Profit ........................................................................................ 6
Costs ........................................................................................................................ 6
Profitability ................................................................................................................ 7
Balance Sheet Structure and Financing ................................................................... 8
Vertical Analysis ........................................................................................................... 9
Short-term liquidity ..................................................................................................... 10
Operating Cycle ...................................................................................................... 11
Long-Term Solvency .................................................................................................. 11
Conclusions................................................................................................................... 13
Bibliography .................................................................................................................. 14

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Introduction
The purpose of this report is to provide a detailed analysis of the financial situation of
Campbell Soup Co, by digging into their financial statements and extracting ratios and
comparable measures. Additionally, vertical and horizontal analyses are carried out to
produce meaningful information on the company’s performance and evolution over the
past few years.

Campbell Soup Co.

Campbell Soup Company, which is also referred to as just Campbell’s, is a producer of
canned soups and related products based out of the United States world. Originally
founded in 1869 by Joseph Campbell, a local fruit seller in New Jersey and Abraham
Anderson, they started off by producing canned tomatoes, vegetables and other products.
Almost 150 years later, its products are sold in over 100 countries all over the world and
it employs over 18,000 people.

Campbell’s portrays itself as a manufacturer and marketer of high-quality, branded food

and beverage products. It is 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 principal executive offices are in Camden,
New Jersey 08103-1799. In 2013, it acquired BF Bolthouse Holdco LLC (Bolthouse
Farms) and Plum, PBC (formerly Plum Inc.) (Plum). In 2014, it acquired Kelsen Group
A/S (Kelsen) and divested its European simple meals business. In 2015, it acquired the
assets of Garden Fresh Gourmet. On December 12, 2017, it acquired Pacific Foods of
Oregon, LLC (Pacific Foods) and, on March 26, 2018, it acquired Snyder's-Lance, Inc.
(Snyder's-Lance)1.

Main product lines

It’s core business divisions are: Global Biscuits and Snacks, Simple Meals and Beverages
and Campbell Fresh. A wide variety of brands are offered by the different business Units.

Global Biscuit and Snacks

This division includes Pepperidge Farm, Arnott’s and Kelsen businesses. Also Snyder’s-
lance brands including Snyder´s of Hanover, Lance, Kettle Brand, Kettle Chips, Cape
Cod, Snack Factory Pretzel Crisps, Pop Secret, Emerald and Late July. The division also
includes simple meals and beverages in Australia, Asia Pacific and as of this year, also
in Latin America.

1 Campbell Soup Co 10-k annual filing

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Simple Meals and Beverages
This business division includes Campbell’s retail and food services in the US and Canada.
The division include brands such as Mighty4, Swanson, the classic Campbell’s soup
brand, Plum, V8 juice and Pacific Foods, among others.

Campbell Fresh
It’s newest division, Campbell Fresh, tries to follow the trend towards healthier and more
Organic foods. They include Bolthouse Farms’ portfolio of fresh vegetables, including
carrots and peppers and also healthy and fresh beverages and salad dressing. Also as
part of this division, the Campbell Soup Co owns the brands Garden Fresh Gourmet salsa,
hummus, Dips and tortilla Chips.

Main Competitors
As Campbell’s has presence in several different lines of products across the food and
beverage vertical, the number of competitors is considerably high. Ranging from local
producers to colossal multinationals, Campbell’s myriad of competitors extends to
thousands and thousands of businesses. However, there are three that we can point out
as main competitors due to their sheer size, market presence, international reach and
product variety.

General Mills
With an annual revenue of 16B and 33,000 employees, General Mills is approximately
double the size of Campbell’s soup co. It competes on several lines of business like baked
products, snacks and ready-made meals. They are also a heavy competitor on the
healthy foods market.

The Kraft Heinz Company

It is the result of the merger between Kraft Foods and Heinz. With a revenue over 26B,
35,000 employees and a worldwide presence, Kraft Heinz Foods is definitely one of the
big boys in the Food and Beverage industry. Their business and product lines are so wide
that compete with Campbell at practically every level and in all geographical locations.

Mondelez International
American multinational conglomerate of food processing, which was a result of a spin off
from Kraft Foods that was completed in October 2012. It currently produces and markets
all of Kraft Foods former brands. With more than 80,000 employees worldwide, and
approximately 26B in revenue, Mondelez is one of the world leaders in the Food and
Beverages Industry, competing with almost all of Campbell’ brands.

3
Financial Statements
Balance Sheet
Consolidated Balance Sheets - USD ($) shares in Millions, $ in Jul. 29, Jul. 30, Jul. 31,
Millions 2018 2017 2016
Current assets
Cash and cash equivalents $226 $319 $296
Accounts receivable, net $785 $605 $626
Inventories $1,199 $902 $940
Other current assets $86 $74 $46
Total current assets $2,296 $1,900 $1,908
Plant assets, net of depreciation $3,233 $2,454 $2,407
Goodwill $4,580 $2,115 $2,263
Other intangible assets, net of amortization $4,196 $1,118 $1,152
Other assets ($77 as of 2018 and $51 as of 2017 attributable to $224 $139 $107
variable interest entity)
Total assets $14,529 $7,726 $7,837
Current liabilities
Short-term borrowings $1,896 $1,037 $1,219
Payable to suppliers and others $893 $666 $610
Accrued liabilities $676 $561 $604
Dividends payable $107 $111 $100
Accrued income taxes $22 $20 $22
Total current liabilities $3,594 $2,395 $2,555
Long-term debt $7,998 $2,499 $2,314
Deferred taxes $995 $490 $396
Other liabilities $569 $697 $1,039
Total liabilities $13,156 $6,081 $6,304
Commitments and contingencies
Campbell Soup Company shareholders' equity
Preferred stock; authorized 40 shares; none issued $0 $0 $0
Capital stock, $.0375 par value; authorized 560 shares; issued 323 $12 $12 $12
shares
Additional paid-in capital $349 $359 $354
Earnings retained in the business $2,224 $2,385 $1,927
Capital stock in treasury, at cost ($1,103) ($1,066) ($664)
Accumulated other comprehensive loss ($118) ($53) ($104)
Total Campbell Soup Company shareholders' equity $1,364 $1,637 $1,525
Noncontrolling interests $9 $8 $8
Total equity $1,373 $1,645 $1,533
Total liabilities and equity $14,529 $7,726 $7,837
Table 1: Campbell Soup Co Consolidated Balance sheet. Source: Campbell Soup Co 2017 and 2018 10-K document

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Income Statement

Consolidated Statements of Earnings - USD ($) shares in Millions, 12 Months Ended

$ in Millions Jul. 29, Jul. 30, Jul. 31,
2018 2017 2016
Net sales $ 8,685 $ 7,890 $ 7,961
Costs and expenses
Cost of products sold 5,869 4,965 5,033
Marketing and selling expenses 902 855 852
Administrative expenses 654 550 575
Research and development expenses 110 111 105
Other expenses / (income) 619 (9) 405
Restructuring charges 62 18 31
Total costs and expenses 8,216 6,490 7,001
Earnings before interest and taxes 469 1,400 960
Interest expense 201 112 115
Interest income 4 5 4
Earnings before taxes 272 1,293 849
Taxes on earnings 11 406 286
Net earnings 261 887 563
Less: Net earnings (loss) attributable to noncontrolling interests 0 0 0
Net earnings attributable to Campbell Soup Company $ 261 $ 887 $ 563
Per Share – Basic
Net earnings attributable to Campbell Soup Company $ 0.87 $ 2.91 $ 1.82
Weighted average shares outstanding - basic 301 305 309
Per Share - Assuming Dilution
Net earnings attributable to Campbell Soup Company $ 0.86 $ 2.89 $ 1.81
Weighted average shares outstanding - assuming dilution 302 307 311
Table 2: Campbell Soup Co Consolidated Earnings Statement. Source: Campbell Soup Co 2017 and 2018 10-K
document

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Financial Analysis
Horizontal Analysis of main variables
The purpose of this analysis is to portray the evolution of the most relevant financial
figures, by comparing current figures to previous periods. This will shed some light on
how the company has evolved in the past three years and infer future situations by
identifying existing trends and their underlying causes.

Revenue and Gross Profit

As we can see in Figure 1, annual
Revenue shows an increasing trend in Revenue and Margin
the three years under analysis. While it $ 10,000 38%
$ 9,000 36%
remains fairly constant between 2016
$ 8,000 34%
and 2017 (-0.89%), we can see that $ 7,000 32%
there is a significant (10.08%) increase $ 6,000
30%
from 2017 to 2018, primarily fueled by $ 5,000
28%
$ 4,000
the acquisitions of Snyder’s Lance and 26%
$ 3,000
Pacific Foods2. $ 2,000 24%
$ 1,000 22%
Even though that seems to be good $0 20%
news, we can see that the company has 2016 2017 2018
failed to maintain operating margins Net sales Gross Margin Gross Margin %
(close to 37% in previous years) in 2018
and therefore, even if it had a better Figure 1: Sales and Margins evolution. Source: Campbell Soup
Co 2018 10-K document
performance on top-line revenue, the
higher increase in Cost of Goods Sold
has caused the Gross Profit to decrease slightly in comparative terms (3.73%) but more
significantly as a percentage of revenue; from 37% in previous years to 32% in 2018.

According to the company’s SEC filing, this was due to “cost inflation and higher supply
chain costs” which appear to have affected COGS disproportionately as compared to
selling prices.

Costs
As mentioned in the preceding section, there has been a quite substantial increase in
COGS that eroded the firm’s margins. However, not only have the variable costs
increased, but also fixed costs and other costs of business, ultimately having a negative
impact in the bottom line. The figure below shows the evolution of costs throughout the
three last periods.

2 Cambpell Soup Co 10-K, Summary of Results.

6
 It is important to
COGS and Other costs notice the
$9,000 important increase
$8,000 in Other Costs in
$7,000 $2,347.00
2018, that has
$6,000 $1,968.00 $1,525.00 greatly affected
$5,000
the company’s
$4,000
$3,000
profitability in 2018.
$5,869
$5,033 $4,965 This happened
$2,000
$1,000 mainly due to an
$- increase in the
2016 2017 2018 sub-category
Cost of products sold Other Costs Other expenses /
(Income), which
Figure 2: Cost of Goods Sold and Other costs. Source: Campbell Soup Co 2018 10-K increased from an
document.
income of $9 in
2017 to an expense of $619 in 2018. According to Campbell’s report, this was primarily
caused by “non-cash impairment charges of $737 million on the intangible assets of
Campbell Fresh and the Plum trademark”. This indicates that at least it these costs did
not affect Cash Flow but did in fact decrease the company’s declared profits.

Profitability
As a result of the two previous sections, we can already infer that there has been a
decrease in profitability in the last period, caused by the increase in costs over the
increase observed in Revenue. In the figure below shows different measures of
profitability that illustrate this situation.

Profitability
$1,600.00 60.00%
$1,400.00
50.00%
$1,200.00
40.00%
$1,000.00
$800.00 30.00%
$600.00
20.00%
$400.00
10.00%
$200.00
$- 0.00%
2016 2017 2018

EBIT Net Earnings Earnings % ROA ROE ROI

Figure 3: Profitability. Source: Campbell Soup Co 2018 10-K document.

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Even if we can see a sharp decline in all profitability measures by 2018, it would not be
accurate to state that this is a trend that will be continued, since as it was pointed out
above, there is a very stark effect on profits caused by a one-time amortization of
intangible goods that will not affect future periods.

Return on Investment is very modest, even compared to other players in the industry, and
even if it has declined as a consequence of the amortization effect explained before, it
has been quite low for the past few periods.

However, it is interesting to notice the high levels of Return on Equity, which have been
between 20 – 55% in the past three periods. This is primarily due to the company’s
elevated financial leverage as we will see in the following sections.

Balance Sheet Structure and Financing

The company structure has experienced a drastic change in the last period, increasing
its total size almost twofold. This significant increase in assets was entirely funded by
third-party debt, as the equity has remained fairly constant over the past few periods; it
has even decreased in the last year due to a recent share buyback.

This has increased Campbell’s already high financial leverage, dramatically increasing
the debt to equity ratio from 3.7 to 9.58. This significant increase in debt has been
primarily due to the company resorting to third-party loans to finance recent costly
acquisitions.

Balance Sheet structure

16,000
14,000
12,000
10,000
91%
8,000
6,000
80%
4,000 79%
2,000
0 20% 21% 9%
2016 2017 2018

Total assets Total equity Total liabilities

Figure 4:Balance Sheet Structure. Source: Campbell Soup Co 2018 10-K document.

This highly leveraged position provides benefits but it also entails some risks that should
not be ignored. On the benefits side, as mentioned before, the leveraged structure
increases return on equity, as usually the cost of debt is lower than the cost of capital.

8
Higher profits generated by the increase in assets will go to shareholders that now
represent a lower percentage of the company’s funding.

However, such a high level of debt will undoubtedly increase interest expenses in the
following periods, which will have an important negative effect on net earnings, which will
have to be offset by higher margins.

Also, this could negatively affect the firm’s credit rating, as banks and credit agency could
start doubting about their capacity to generate enough cashflow to repay long-term debt.
This could lead to an increase in the interest rates which would in turn further harm the
firm’s profits.

Campbell’s must be very careful in its debt management and liquidity in the upcoming
years, since there is not much margin for maneuver in terms of financing if the company
were to face unexpected cash outflows.

Vertical Analysis
The purpose of this analysis is to compare the magnitude of certain indicators as a
percentage of another one. In this case, we will focus on the Statement of Earning and
different measures as a percentage of sales, like Gross Profit, EBIT and Net Income.
The analysis is more meaningful if we can benchmark these numbers against other
players in the market. The table below shows Campbell’s numbers compared to its main
competitors described in the first section of this document.

Campbell’s Mondelez General Mills The Kraft Heinz

International Company
Net sales 100% 100% 100% 100%
Gross Profit 32.42% 38.87% 34.48% 36.99%
EBIT 5.40% 13.54% 15.94% 25.82%
Net Earnings 3.01% 11.34% 13.54% 41.90%
Table 3: Comparison of Campbell´s performance to industry competitors. Source: www.sec.gov

It can be easily noticed in the above table, how Campbell’s is currently underperforming
in the market, or at least compared to its main competitors in every variable analyzed.
Gross Profit is a very good indicator of the company’s competitiveness in the market and
its efficiency to add value to raw materials. We can see that this indicator is fairly similar
in all the companies analyzed above, as we are talking about the most efficient players in
the market. It is also to be noticed that Campbell’s Gross Profit was higher (37%) in the
past two periods, as shown in our Horizontal Analysis.

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It is in the other indicators (EBIT and Net earnings) that Campbell Soup Co is doing
considerably worse than its competitors. The champion in the industry seems to be The
Kraft Heinz Company, with over 25.82% Ebit/Sales and 41% net income/sales3, but also
the other two competitors are in a substantially better position.

Short-term liquidity
Short term liquidity is assessed by comparing the current assets and the current liability
and determining whether the company is in a healthy financial condition to comply with
its short-term obligations.

We can see a very particular case in Campbell Soup Co, where current assets are not
only lower than current liability, but they have also been lower for a long period of time.
This results in a negative Working Capital, and a Current Ratio below 1.
The company explains in its 10-K report that this is due to current maturities of long-term
debt and to their ongoing efforts to reduce working capital by shrinking inventories and
receivables while at the same time extending payables. However, such a low and
sustained level of liquidity could be an indication that the company may face temporary
challenges to pay suppliers on time or to repay short term debt or maturities of long-term
debt.

Short Term Liquidity ratios Working capital

1 0
2016 2017 2018
0.8 -200
0.6 -400
0.4 -600
0.2 -800
0 -1000
2016 2017 2018
-1200
Current ratio Acid-test ratio Cash ratio -1400

Figure 5:Working capital. Source: Campbell Soup Co 2018

Figure 6: Short term liquidity Ratios. Source: Campbell Soup 10-K
Co 2018 10-K

Keeping working capital and liquidity has an obvious cost, which is the cost of opportunity
of idle cash or cash dedicated to operations. However, there needs to be a certain balance
to avoid the risk of temporary default. Cash and cash equivalent levels should be raised
at least to have a current to prevent the risk of failing to comply with payment obligations.

3This is primarily due to income tax provisions from previous years, which have overinflated Net Earnings
numbers. If we do not consider this effect though, the Net Earnings to Sales ratio is still very high, close to
20%

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Operating Cycle
This ratio enables us to determine the time it takes Campbell’s soup to realize cash from
its inventory. In the table below, we can see the Inventory Turnover in Days as well as
the Accounts receivable turnover in days.
2018 2017 2018
Inventory turnover in days 74.57 66.31 68.17
Accounts receivable turnover in days 32.99 27.99 28.70
Operating Cycle 107.56 94.30 96.87
Table 4: Operating Cycle. Source: Campbell Soup Co. 2018 10-K

The information shows that in the last year, the operating cycle has been increased
significantly, both by an increase in the inventory turnover and an increase in the AR
turnover. Consequently, the company takes about 12 more days in average to realize
cash after it has a good in inventory. This increase in the operating Cycle harms the ability
of the company to realize cash from operations, therefore reducing the working capital
and the overall short-term liquidity of the company.

Campbell could definitely take action on this front to improve its short-term liquidity
situation, either by shortening accounts receivable times by negotiating contracts more
aggressively or by developing a leaner supply chain to reduce the inventory lifecycle.

Long-Term Solvency
As pointed out before, the company is highly leveraged from a financial perspective,
which means that the proportion of debt funding against total funding is very high. In this
case, it is over 90%. If liabilities continued to increase to a point where they surpass the
amount of assets, the firm would be in bankruptcy situation. This could happen if the
company faces severe losses in upcoming periods.
The Solvency Solvency Ratio
Ratio gives us an
1.3
insight into the
company’s long 1.2
term solvency, as 1.1
it compares the
1
assets to the
amount of 0.9
liabilities. In
0.8
normal situations, 2016 2017 2018
this ratio should be
Figure 7: Solvency Ratio. Source: Campbell Soup Co 2018 10-K document.
more than 1, since if it is equal to 1 or lower, it means equity is either 0 or less than 0.

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Another important ratio to analyze long-term solvency is the Asset turnover ratio, which
gives us an indication of the revenue-generating capacity of the company’s assets.

Asset turnover Asset turnover

decreased significantly
3.500
towards to the last
3.000
period since the firm has
2.500 acquired other
2.000 companies throughout
1.500 the fiscal year and thus
increasing substantially
1.000
the assets but such an
0.500
increase did not have a
0.000 corresponding increase
2016 2017 2018
on the sales side. That
Asset Turnover Ratio Fixed Assets turnover ratio imbalance is what
causes the ratio to drop
Figure 8: Asset Turnover. Source: Campbell Soup Co 10-K document. in 2018. However,
the company
shows an important capacity to generate sales as a proportion of assets, especially when
we compare to other companies in the industry. For example, The Kraft Heinz Co’s Asset
turnover ratio in 2018 was 0.22, which is approximately a fifth of Campbell’s. This means
Kraft Heinz needs approximately five times more assets than Campbell’s to generate the
same amount of revenue.
Debt Ratio

Another indication of the company’s

long term solvency is its debt ratio Debt Ratio
which can be calculated in many 12

different ways. In this case, we will 10

calculate it by comparing assets to
Equity (Assets/Equity). 8

6
We can see the ratio is over 10 in
2018, which means that for each 4
Equity dollar, there are more than 10
2
dollars in assets. The difference is
provided by debt, which in this 0
2016 2017 2018
company is very high as we can see.
Figure 9: Debt Ratio. Source: Campbell Soup Co 10-K report

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Conclusions
As a result of the analysis made here, we can conclude that the company is facing liquidity
issues both in the short and long run. This is evidenced by the weakness of the short-
term liquidity ratios, including persistent negative Working Capital. In the long-run, the
company shows a very high indebtedness, which could pose a significant risks on the
interest expense side, especially considering the current scenario where interest rates in
the US are growing at a steady pace.

From a profitability standpoint, the company has to work on strategic cost-savings

initiatives as it would seem that they have not been able to contain both Costs of Good
Solds and Other costs within an acceptable level. This is evidenced by Campbell´s weak
profitability numbers when benchmarked against other competing companies. One
highlight though on the profitability side is its high Return on Equity, mainly caused by the
highly leveraged position. This is attractive to investors because it boosts Earnings per
Share above market standards but it also poses a solvency risk.
An important highlight of our analysis and benchmarking is Campbell’s ability to generate
Revenue out of its assets, as pointed out in our Asset Turnover Ratio analysis. Based on
this, we can expect that revenue in the next period will be considerably increased as a
result of the incorporation of large quantities of assets during the last period.

Recommendations

The main recommendation is to reduce solvency risk. Even if this can prove costly,
reducing the risk would add shareholder value by creating more certainty around the
viability of the company. This can be achieved by increasing the level of current assets
compared to current liabilities, and to reduce the extremely high financial leverage.
Carry out cost saving initiative to offset the cost of the previous recommendation and to
improve bottom-line results. Cut down on admin costs or other costs not directly related
to the production and distribution, like corporate travel, office spending or by offshoring
certain business processes to low cost locations, such as finance, procurement, legal,
Accounts Payable, Payroll and others.

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Bibliography
Campbell Soup Co. (2018). Form 10-K. New Jersey: Campbell Soup Co.
General Mills, Inc. (2018). 10-K Report. General Mills, Inc.

Investopedia. (2018, 12 4). Debt Ratio. Retrieved from Investopedia:

https://www.investopedia.com/university/ratios/debt/
Mondelez International. (2018). 10-K Report. Washington D.C.: Security Exchange
Commision.
Security Exchange Commision. (2018, 12 4). Edgar Reporting . Retrieved from Security
Exchange Commision: www.sec.gov
The Kraft Heinz Company. (2018). 10-K Report. Security Exchange Commision.

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