Campbell Soup Company — FY2016 Form 10-K
Business context and reporting period. Campbell manufactures and markets branded food and beverages across Americas Simple Meals and Beverages, Global Biscuits and Snacks, and Campbell Fresh. Fiscal 2016 ended July 31, 2016, and comprised 52 weeks; the comparable fiscal 2015 also comprised 52 weeks. This is an annual filing, with fourth-quarter results also reported.
Financial results and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $7.961 billion | $8.082 billion |
| Gross margin | 34.9% | 34.4% |
| Earnings before interest and taxes | $960 million | $1.054 billion |
| Net earnings attributable to Campbell | $563 million | $666 million |
| Diluted earnings per share | $1.81 | $2.13 |
| Cash flow from operations | $1.463 billion | $1.182 billion |
| Capital expenditures | $341 million | $380 million |
| Total debt | $3.533 billion | $4.082 billion |
Operating margin was approximately 12.1% and net margin approximately 7.1% in FY2016. Operating cash flow less capital expenditures was approximately $1.122 billion. Cash and cash equivalents were $296 million at year-end. Current liabilities exceeded current assets by $647 million; $1.219 billion of debt was due within one year, including $770 million of commercial paper. Campbell had an unused $2.2 billion U.S. revolving facility, apart from $3 million of letters of credit; it also borrowed $215 million under a Canadian facility.
Material changes and notable items
- Sales declined 1% year over year, mainly from currency translation and lower volume, partly offset by Garden Fresh Gourmet and higher selling prices. Americas Simple Meals and Beverages sales fell 2%, Global Biscuits and Snacks fell 3%, and Campbell Fresh rose 5% (largely reflecting the acquisition).
- Gross margin improved 0.5 percentage points, supported by productivity and pricing, despite inflation, supply-chain costs and pension-related mark-to-market losses. EBIT and reported net earnings declined.
- FY2016 included $200 million after tax of pension and postretirement mark-to-market losses, a $127 million after-tax Bolthouse Farms impairment, and $49 million after-tax of restructuring and implementation costs; a $25 million pre-tax Kelsen claim settlement gain partly offset these items.
- Fourth-quarter net sales were $1.687 billion and Campbell reported an $81 million net loss attributable to the company, or a diluted loss of $0.26 per share. The quarter included the impairment and substantial pension-related losses.
- Operating cash flow increased from $1.182 billion, primarily due to higher cash earnings and lower working-capital requirements. Total debt declined by $549 million.
Outlook, commentary and risks
- Management targets approximately $300 million in annual pre-tax savings from the 2015 restructuring and cost initiatives once fully implemented, beginning in FY2018; it expected approximately $265 million of pre-tax savings in FY2017 and planned to reinvest part of the savings. Estimated total pre-tax initiative costs were $250–$300 million through 2018.
- FY2017 capital expenditures were expected to be approximately $350 million, including Australian biscuit capacity expansion and Pepperidge Farm refrigeration replacements. No overall sales or EPS forecast is provided in the filing text.
- Management revised its 2017 outlook and longer-term expectations for the Bolthouse carrot and carrot-ingredients business after weather-related crop problems and execution issues led to customer dissatisfaction, lost business, and higher costs. It expected sales and margins to improve over time, but the reporting unit’s goodwill and trademark were impaired by $141 million pre-tax.
- Campbell announced after year-end that its quarterly dividend would rise from $0.312 to $0.35 per share. FY2016 dividends declared were $1.248 per share.
- Key risks include intense competition and private-label pressure; reliance on major retailers (Wal-Mart represented about 20% of sales); commodity, weather and supply-chain exposure; currency risk; pension volatility; execution of restructuring and acquisitions; food safety and recalls; and litigation challenging the independent-contractor status of some Pepperidge Farm distributors. Campbell disclosed a voluntary recall of Bolthouse Farms Protein PLUS drinks.
- The filing reports an out-of-period tax adjustment of $13 million, or $0.04 per share, recorded in the fourth quarter; management said it was not material to any period. Management and the auditor concluded internal control over financial reporting was effective at year-end. The auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether the planned cost savings are achieved on schedule and whether reported savings are reinvested or translate into sustained earnings growth.
- Whether the Bolthouse carrot business recovers as expected and whether further goodwill or intangible-asset impairments are required.
- How underlying sales and volumes perform in soup and beverages, and whether pricing and productivity can offset category weakness and input-cost pressure.
- Near-term refinancing and liquidity needs given negative working capital and substantial debt maturities, alongside the company’s debt-reduction progress.
- Potential financial impact of pension assumptions and mark-to-market volatility, distributor-classification litigation, and product-quality or recall matters.