Campbell Soup Company — Q1 FY2016 10-Q
Reporting period: Three months ended November 1, 2015; comparative quarter ended November 2, 2014. Amounts are in millions except per-share data. Campbell reorganized into three reportable segments beginning in fiscal 2016 and recast prior-period segment results.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $2,203 | $2,255 | Down 2% |
| Gross margin | 34.3% | 35.3% | Down 1.0 percentage point |
| Earnings before interest and taxes | $315 | $389 | Down 19% |
| Net earnings attributable to Campbell | $194 | $248 | Down 22% |
| Diluted earnings per share | $0.62 | $0.78 | Down $0.16 |
| Operating cash flow | $218 | $188 | Up $30 |
| Capital expenditures | $71 | $62 | Up $9 |
| Dividends paid | $100 | $101 | Down $1 |
Reported gross margin and earnings were materially affected by pension and postretirement plan mark-to-market losses of $128 pretax, or $80 after tax ($0.26 per share). Restructuring and related implementation costs reduced earnings by a further $23 after tax ($0.07 per share). The filing reports total current-quarter comparability items of $103 after tax ($0.33 per share); excluding those items, management said earnings increased, driven by improved gross profit and lower marketing and selling costs, partly offset by currency and a higher tax rate.
Gross margin excluding the pension mark-to-market effect improved, with productivity, higher selling prices, and lower promotional spending contributing. The effective tax rate was 32.4%, versus 31.9%. Interest expense rose to $29 from $26, reflecting higher average interest rates.
Segment results and material changes
| Segment | Sales | Sales change | Segment operating earnings |
|---|---|---|---|
| Americas Simple Meals and Beverages | $1,302 | Down 2% | $363, up 19% |
| Global Biscuits and Snacks | $652 | Down 6% | $114, up 16% |
| Campbell Fresh | $249 | Up 8% | $18, up from $9 |
Consolidated sales declined on currency headwinds and volume and mix declines, partly offset by higher prices, reduced promotional spending, and Garden Fresh Gourmet. Americas soup sales were pressured by lower volumes, including declines in ready-to-serve soup and broth. Global Biscuits and Snacks sales were particularly affected by foreign currency translation. Campbell Fresh sales included Garden Fresh Gourmet, acquired in June 2015; excluding the acquisition, segment sales declined. Segment operating earnings rose 20% overall, but corporate costs included the pension charge and $15 of costs related to organizational changes and savings initiatives.
Cash, debt, and liquidity
Cash and equivalents were $263 at November 1, 2015, compared with $253 at fiscal year-end. Operating cash flow was $218; investing used $68, principally including $71 of capital spending; financing used $136, including $100 of dividends and $32 of treasury-stock purchases.
Short-term borrowings were $1,545, including $1,524 of commercial paper, and long-term debt was $2,551. The $2,551 carrying value of long-term debt had a disclosed fair value of $2,611. The company had a $2.2 billion revolving credit facility, unused except for $3 of standby letters of credit, and reported compliance with debt covenants. Management said anticipated operating cash flow, borrowings, and cash were expected to meet foreseeable funding needs.
Outlook, unusual items, and risks
- Campbell forecast fiscal 2016 capital expenditures of approximately $350.
- For its 2015 cost-saving initiatives, the company estimated total pretax costs of $250–$325 through 2018. It expected pretax savings of approximately $165–$185 in fiscal 2016 and ongoing annual savings of approximately $250 beginning in 2018. These are estimates, not reported results.
- The filing does not provide a clear full-year sales or earnings guidance figure.
- The pension accounting policy changed: actuarial gains and losses are recognized immediately in earnings at measurement, and expected return uses fair value of plan assets. The change was applied retrospectively. A high volume of lump-sum pension payments prompted the current-quarter plan remeasurement.
- Principal disclosed risks include competition and consumer demand, acceptance of pricing and new products, realization of cost savings, customer and inventory practices, input-cost inflation and supply, currency and interest-rate movements, acquisitions and integration, litigation, and business disruptions.
- Management identified no significant change in market-risk exposures from fiscal year-end. Disclosure controls were concluded effective, and no material change in internal control over financial reporting was reported during the quarter.
Most important facts to verify
- How much of the earnings decline reflects the unusual pension remeasurement and restructuring-related charges versus underlying operating performance.
- Whether segment sales and margins stabilize, especially U.S. soup volumes and foreign-currency-affected international sales.
- Progress toward the stated cost savings and the remaining restructuring and implementation costs through 2018.
- Commercial-paper refinancing and liquidity capacity, given $1.545 billion of short-term borrowings and the revolving facility’s availability.
- Whether Garden Fresh Gourmet and other growth initiatives deliver durable sales and earnings contributions beyond the acquisition-related comparison.