Campbell Soup Company — Q2 FY2011 Form 10-Q
Reporting period: Three and six months ended January 30, 2011; comparisons are to the periods ended January 31, 2010. Dollar amounts are in millions, except per-share data.
Business context and performance
Campbell manufactures and markets branded convenience foods through U.S. Soup, Sauces and Beverages; Baking and Snacking; International Soup, Sauces and Beverages; and North America Foodservice.
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $2,127; down 1% | $4,299; down 1% |
| EBIT | $359 vs. $391; down 8% | $803 vs. $869; down 8% |
| Net earnings | $239 vs. $259; down 8% | $518 vs. $563; down 8% |
| Diluted EPS | $0.71 vs. $0.74; down 4% | $1.53 vs. $1.61; down 5% |
| Gross margin | 39.4% vs. 40.5% | 40.3% vs. 41.2% |
| Dividend per share | $0.29 vs. $0.275 | $0.565 vs. $0.525 |
Segment sales for the quarter: U.S. Soup, Sauces and Beverages $1,022 (down 4%); Baking and Snacking $526 (up 8%); International Soup, Sauces and Beverages $421 (down 4%); and North America Foodservice $158 (down 1%). U.S. Soup segment earnings fell 15% to $220; Baking and Snacking earnings rose 11% to $81; International earnings fell 7% to $69; Foodservice earnings rose 24% to $21.
Cash flow, debt and liquidity
- Six-month operating cash flow was $483 vs. $496. Plant-asset purchases were $74 vs. $103; operating cash flow less plant-asset purchases was approximately $409 vs. $393.
- Cash and equivalents were $325 at January 30, 2011, compared with $254 at August 1, 2010. Current assets were $1,914 and current liabilities $2,415, a $501 working-capital deficit.
- Short-term borrowings were $1,184 and long-term debt $1,937, totaling $3,121, versus $2,780 at fiscal year-end. The filing reports long-term debt fair value of $2,775 at January 30, 2011.
- Financing cash outflows included $573 of treasury-share purchases and $188 of dividends paid. The company repurchased 16 million shares during the six months; $94 remained under the 2008 repurchase authorization.
- In February 2011, Campbell repaid $700 of maturing fixed-rate notes with commercial-paper borrowings. It reported unused committed revolving facilities of $975 maturing September 2011 and $975 maturing September 2013, except for $24 of standby letters of credit. The company said it was in compliance with debt covenants and expected available funding sources to meet foreseeable needs.
Changes, outlook and risks
- Management attributed weaker earnings primarily to increased promotional spending, especially in U.S. Soup, and cost inflation; productivity improvements partly offset these pressures. Quarter gross margin also reflected higher plant costs and depreciation. Promotional spending did not produce anticipated volume gains.
- Management said it planned to reduce promotional spending in the second half of the fiscal year and rely more on advertising and brand-building. Capital expenditures were expected to total approximately $275 for FY2011. Additional non-U.S. pension contributions of approximately $9 were expected during the rest of the year; no further U.S. pension contributions were expected.
- Management identified competition, consumer and trade acceptance of products and pricing, promotional effectiveness, customer inventory practices, commodity and packaging inflation, currency, interest rates, execution of cost savings and business-process changes, and disruption events as risks. It cautioned that forward-looking statements depend on assumptions and disclaimed an obligation to update them.
- The company uses derivatives to manage currency, interest-rate, commodity and equity-price exposures, not for speculation; it noted counterparty risk. It reported no significant change in market-risk exposures since fiscal 2010 year-end. No specific material litigation contingency or quantified loss contingency is clearly provided in the supplied filing text.
- Six-month pension contributions totaled $135 ($100 U.S. and $35 non-U.S.). The company also disclosed amendments to pension and retiree medical eligibility. Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported for the quarter.
Key facts for investors to verify
- Whether the planned reduction in promotions and increased brand-building improve U.S. Soup volume and gross margin.
- How commodity, plant and depreciation costs develop, and whether productivity gains continue to offset inflation.
- Short-term borrowing and commercial-paper refinancing needs, including the February $700 repayment and revolving-facility maturities.
- Share-repurchase pace and its effect on leverage and EPS, given $573 of purchases during the six-month period.
- Whether the FY2011 capital-spending and pension-contribution expectations remain current; the filing provides no clear full-year earnings or EPS guidance value.