Campbell Soup Company — Q2 FY2010 Form 10-Q
Reporting period: Three and six months ended January 31, 2010, compared with periods ended February 1, 2009. Campbell manufactures and markets branded convenience foods across four segments. Amounts are in millions, except per-share data.
Financial performance
| Metric | Q2 FY2010 | Q2 FY2009 | Six months FY2010 | Six months FY2009 |
|---|---|---|---|---|
| Net sales | $2,153 | $2,122 | $4,356 | $4,372 |
| Earnings before interest and taxes | $391 | $355 | $869 | $754 |
| Net earnings | $259 | $233 | $563 | $493 |
| Diluted net EPS | $0.74 | $0.64 | $1.61 | $1.34 |
| Gross margin | 40.5% | 39.4% | 41.2% | 39.1% |
| Operating cash flow | Not separately stated for quarter | $496 | $418 |
- Quarterly sales rose 1%; currency translation contributed four percentage points. Six-month sales were essentially flat.
- Quarterly segment sales: U.S. Soup, Sauces and Beverages $1,068 (down 5%); Baking and Snacking $489 (up 11%); International Soup, Sauces and Beverages $437 (up 12%); North America Foodservice $159 (down 2%).
- Quarterly U.S. soup sales fell 8%, including an 18% decline in ready-to-serve soups. Management cited lower promotional spending and intense competition. Foodservice sales remained weak.
- Gross-margin improvement reflected productivity, pricing and favorable mix, partly offset by higher promotional spending and inflation. Marketing and selling expense declined; administrative expense increased, principally due to pension and other benefit costs.
- Quarterly effective tax rate was 29.0%, down from 30.6%; the six-month rate was 31.0%, up from 29.8%.
Financial position, liquidity and capital allocation
- At January 31, 2010, cash was $113; current assets were $1,632 and current liabilities $1,633.
- Short-term borrowings were $400 and long-term debt $2,250, for total reported debt of $2,650. Long-term debt fair value was $2,387. The $1.5 billion revolving credit facility was substantially unused, except for $27 of standby letters of credit; the company reported compliance with debt covenants.
- Six-month operating cash flow of $496 included a $260 U.S. pension contribution. Capital expenditures were $103; the company expected FY2010 capital expenditures of approximately $350.
- Cash used for dividends was $175 and treasury-stock purchases were $213 in the first half. The quarterly dividend was $0.275 per share. Approximately $682 remained under the $1.2 billion repurchase authorization.
Changes, outlook and risks
- Quarterly net earnings increased 11% and diluted EPS increased 16%. Management attributed continuing-operations improvement mainly to stronger gross margin, lower marketing expense, currency and a lower quarterly tax rate; lower sales volume was a partial offset. Repurchases also reduced diluted shares.
- First-half operating cash flow increased from $418 to $496, despite the pension contribution. First-half earnings growth also reflected improved margins and lower marketing expense, partly offset by lower sales volume.
- Management expected to fund foreseeable needs, including dividends, repurchases and pension contributions, from operations, cash and borrowing capacity, while cautioning that credit-market disruption could worsen financing costs or terms. No specific sales or earnings guidance is provided in the supplied filing text.
- The company expected approximately $12 of additional pretax pension-related restructuring costs in FY2010. It expected approximately $14 of non-U.S. pension contributions during the remainder of the fiscal year and no further U.S. pension contribution that year.
- Key disclosed risks include competitive responses and changing consumer demand; acceptance of new products, pricing and promotions; commodity, energy and packaging cost inflation; currency, interest-rate and tax movements; customer concentration and inventory practices; execution of cost savings and acquisitions; litigation; and business disruptions. Derivatives are used to manage currency, interest-rate, commodity and equity-price exposures, not for speculation.
- Prior-year comparisons included restructuring-related costs, $26 of unrealized commodity-hedge losses in the first half, and a $4 tax benefit related to the Godiva sale. The current period had no discontinued-operations earnings. EPS comparisons were retrospectively adjusted for adoption of the two-class EPS method.
Most important facts for investors to verify
- Whether U.S. soup declines and foodservice weakness persist, and whether growth in Baking and Snacking and International offsets them.
- How much margin improvement came from sustainable productivity and pricing versus prior-year unusual items, currency and spending changes.
- Whether projected FY2010 capital spending and remaining pension contributions are met while preserving cash generation and liquidity.
- Debt maturities, refinancing plans and financing terms, particularly given $400 of short-term borrowings and the anticipated debt offering referenced in the filing.
- Execution and remaining costs of restructuring, share repurchases and the expected $12 of additional pension-related costs.