Campbell Soup Company — Form 10-Q Summary
Reporting period: Second quarter and six months ended January 31, 2016; comparison periods ended February 1, 2015. Dollar amounts are in millions unless otherwise noted. Campbell reorganized into three reportable segments in fiscal 2016 and retrospectively recast prior-period segment results.
Financial performance
| Metric | Three months 2016 | Three months 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $2,201 | $2,234 | $4,404 | $4,489 |
| Gross margin | 37.2% | 33.3% | 35.7% | 34.3% |
| Earnings before interest and taxes | $414 | $337 | $729 | $726 |
| Net earnings | $265 | $222 | $459 | $470 |
| Diluted EPS | $0.85 | $0.71 | $1.47 | $1.50 |
- Quarterly sales fell 1%; lower volume and unfavorable currency effects outweighed higher pricing, reduced promotional spending and Garden Fresh Gourmet sales. Six-month sales declined 2%.
- Quarterly gross margin improved 3.9 percentage points, primarily from productivity, pricing, lower promotional spending and supply-chain improvements. Six-month margin improved 1.4 points, partly offset by pension mark-to-market losses.
- Quarterly net earnings rose 19% and diluted EPS rose from $0.71 to $0.85. Six-month net earnings fell from $470 to $459 and diluted EPS from $1.50 to $1.47. The six-month comparison includes substantial pension remeasurement and restructuring-related costs.
- Quarterly interest expense was $28 versus $26; six-month interest expense was $57 versus $52. Effective tax rates were 31.5% versus 28.8% for the quarter and 31.9% versus 30.5% year to date.
Segments
- Americas Simple Meals and Beverages: Quarterly sales decreased 3% to $1,237; operating earnings rose 22% to $290. U.S. soup sales declined 4% for the quarter, including a 20% decline in ready-to-serve soups; pricing, lower promotions, warmer weather and a Chunky promotion execution issue were cited.
- Global Biscuits and Snacks: Quarterly sales decreased 3% to $682, primarily due to currency; operating earnings increased 23% to $141. Pepperidge Farm products grew, while higher marketing costs partly offset profit gains.
- Campbell Fresh: Quarterly sales increased 10% to $282, including Garden Fresh Gourmet; operating earnings rose to $21 from $13. Excluding the acquisition, quarterly sales were comparable to the prior year.
Cash flow, debt and liquidity
- Six-month operating cash flow was $727, up from $584, primarily reflecting higher cash earnings and lower working-capital requirements. Capital expenditures were $153 versus $143; management expected approximately $350 for fiscal 2016.
- Cash and cash equivalents were $306 at January 31, 2016, versus $253 at August 2, 2015. Investing activities used $139; financing activities used $526, including $197 of dividends, $86 of share repurchases and $252 of net short-term debt repayments.
- Short-term borrowings were $1,293 and long-term debt was $2,551, for total reported debt of $3,844. Current liabilities of $2,566 exceeded current assets of $2,132. The $2.2 billion revolving credit facility, maturing December 2018, was substantially unused; the company reported compliance with debt covenants.
- Dividends were $0.624 per share for the six-month period. Approximately $500 remained available under the share-repurchase authorization at January 31.
Outlook, management commentary and notable items
- The filing does not provide a clear full-year sales or EPS forecast. Management expected the 2015 restructuring and cost-saving initiatives to generate $205–$225 of pretax savings in fiscal 2016 and approximately $300 of annual ongoing savings beginning in 2018.
- Estimated pretax costs for those initiatives were $250–$325 through 2018; $179 had been recognized by January 31. Management expected costs to be mostly cash expenditures, funded through cash and short-term borrowings.
- Campbell adopted a pension accounting policy that recognizes actuarial gains and losses immediately in earnings and uses fair value of plan assets to calculate expected returns; prior periods were retrospectively revised. Year-to-date pension mark-to-market losses were $121 pretax ($76 after tax, or $0.24 per share); the second quarter recorded a $7 pretax gain. Remeasurements followed elevated lump-sum pension payments.
- Garden Fresh Gourmet, acquired for $232 in June 2015, contributed $51 of six-month sales; its contribution to earnings was not material. In February 2016, Campbell agreed to commit $125 to Acre Venture Partners, a food-sector venture capital fund.
- Key stated risks include consumer demand and acceptance of pricing or new products, competition, commodity and packaging costs, currency and interest-rate changes, customer practices, execution of cost savings and organizational changes, acquisition integration, and litigation or business disruptions. The largest customer represented approximately 20% of consolidated sales in 2015.
Important facts for investors to verify
- Whether sales and volume trends—especially ready-to-serve soup and Campbell Fresh excluding Garden Fresh—stabilize, and whether pricing affects demand.
- How much reported earnings reflect underlying operating improvement versus pension remeasurement, restructuring charges and related implementation costs.
- Progress and cash costs against the restructuring savings targets, including whether the anticipated $300 of ongoing annual savings is achieved.
- Short-term borrowing levels, refinancing needs and liquidity, given current liabilities exceed current assets.
- Execution and returns from the Garden Fresh acquisition, planned capital spending and the $125 Acre commitment.