Campbell Soup Company — Q1 FY2017 Form 10-Q
Business context and reporting period. Campbell Soup manufactures and markets branded food and beverages. This unaudited quarter ended October 30, 2016, and is compared with the three months ended November 1, 2015. Dollar amounts are in millions unless noted.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net sales | $2,202 | $2,203 |
| Gross margin | 38.2% | 34.3% |
| Earnings before interest and taxes | $457 | $315 |
| Net earnings attributable to Campbell | $292 | $194 |
| Diluted EPS | $0.94 | $0.62 |
| Operating cash flow | $221 | $244 |
| Capital expenditures | $48 | $71 |
Gross profit was $841, up $86 year over year. Net earnings increased despite essentially flat sales. Management attributed the improvement primarily to higher gross profit and a lower effective tax rate, partly offset by higher marketing and selling expense. Reported diluted EPS also benefited from fewer weighted-average shares, primarily due to repurchases.
Segment sales were $1,297 for Americas Simple Meals and Beverages (flat), $671 for Global Biscuits and Snacks (up 3%, including favorable currency), and $234 for Campbell Fresh (down 6%). Segment operating earnings were $383, $112, and $1, respectively, compared with $363, $114, and $18.
Balance sheet and liquidity
- At October 30, 2016, cash was $290; current assets were $2,146 and current liabilities were $2,760, resulting in negative working capital of $614.
- Short-term borrowings were $1,290 and long-term debt was $2,298. The filing reports debt maturing within one year of $1,290. The company said it complied with debt covenants.
- Operating cash flow was $221, down from $244, primarily due to lower cash earnings and higher working-capital requirements. Investing cash outflow was $52; financing cash outflow was $173. Cash declined $6 during the quarter.
- Dividends paid were $100. The company repurchased approximately 2 million shares for $112, including $100 under its publicly announced program; approximately $350 remained authorized.
- The company had a $2.2 billion U.S. revolving facility, largely unused, and a Canadian facility with $183 outstanding. It expected to replace the U.S. facility with a $1.85 billion facility in Q2 FY2017.
Material changes, outlook, and risks
- Margin and earnings drivers: Gross margin rose 3.9 percentage points. Management cited lower pension and postretirement mark-to-market losses and productivity improvements, partly offset by inflation, supply-chain costs, and higher Campbell Fresh carrot and beverage costs. Total pension and postretirement mark-to-market losses were $20 versus $128 a year earlier; restructuring and related costs were $9 versus $36.
- Cost savings: The 2015 initiatives had incurred $215 of estimated pre-tax costs through the quarter, with total costs expected to be $250–$300 through 2018. Management projected approximately $265 of pre-tax savings in FY2017 and ongoing annual savings of approximately $300 beginning in 2018; it reported an additional $35 of savings in this quarter. These are projections, not guarantees.
- Spending: FY2017 capital expenditures were expected to total approximately $350. The filing provides no specific full-year earnings or sales guidance.
- Business pressures: Campbell Fresh sales were affected by Bolthouse Farms Protein PLUS recall-related supply constraints, carrot quality and execution issues, and lower beverage operating efficiencies. The company also cited competition, changing consumer demand, input-cost and supply disruptions, customer concentration, foreign-exchange and interest-rate exposures, product quality and safety, pension costs, litigation, and technology risks.
- Contingencies and unusual items: Management said pending legal and regulatory matters could require material charges in a particular period, but based on information then known did not expect them to materially adversely affect consolidated results or financial condition. Campbell had funded $41 of a $125 capital commitment to Acre Venture Partners, leaving $84 unfunded.
Important facts for investors to verify
- Whether sales and Campbell Fresh performance recover from the reported volume, supply, and quality pressures.
- Whether projected cost savings are achieved and restructuring costs remain within the estimated $250–$300 range.
- Cash conversion, working-capital trends, and the company’s ability to manage $1,290 of short-term borrowings and negative working capital.
- Progress on the U.S. revolving-credit facility replacement and planned FY2017 capital expenditures.
- Actual effects of pension-related items, litigation or regulatory developments, and the remaining Acre commitment.