Campbell Soup Company — Form 10-Q Summary
Reporting period: Second quarter and six months ended January 26, 2014; comparisons are to the periods ended January 27, 2013. Amounts are in millions of dollars except per-share data.
Business context
Campbell manufactures and markets branded convenience foods across five reportable segments. During the period, it acquired Kelsen, a global baked-snacks business, and completed the sale of its European simple meals business. The European business is presented as discontinued operations.
Financial results
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $2,281, up 6% | $4,446, up 2% |
| Gross margin | 35.7%, versus 35.2% | 35.8%, versus 36.2% |
| Earnings before interest and taxes | $361, versus $277 | $666, versus $645 |
| Earnings from continuing operations attributable to Campbell | $235; diluted EPS $0.74 | $416; diluted EPS $1.32 |
| Net earnings attributable to Campbell | $325; diluted EPS $1.03 | $497; diluted EPS $1.57 |
| Operating cash flow | $363 for six months, versus $499 | |
| Capital expenditures | $127 for six months, versus $110 |
Second-quarter sales growth reflected acquisition contributions of five percentage points, with Kelsen contributing $92 and Plum $17. Quarterly gross margin improved, chiefly from lower restructuring-related costs, productivity gains, and pricing, partly offset by inflation and supply-chain costs, unfavorable mix, and promotions. For the six months, margin declined as inflation, acquisition effects including the Plum recall, and promotions outweighed productivity, pricing, and lower restructuring costs.
Six-month cash from operations fell by $136, primarily because of taxes paid on the European divestiture and lower cash earnings. Investing cash flow was positive $97, including $534 proceeds from the business sale and $329 spent on acquisitions. Financing cash flow was negative $553, including $300 of note repayments and $195 of dividends paid.
At January 26, cash was $293; short-term borrowings were $1,958 and long-term debt was $2,247. Total current assets were $2,174 and current liabilities were $3,189. The company reported a $2.2 billion revolving credit facility, unused apart from $3 of standby letters of credit, and stated that it was in compliance with debt covenants. Management said available financing sources should meet foreseeable liquidity needs.
Changes versus prior period
- Second-quarter sales increased 6%; U.S. Simple Meals rose 7% and Global Baking and Snacking rose 14%, while International Simple Meals and Beverages fell 9% and U.S. Beverages fell 3%.
- Six-month reported continuing-operations EPS increased to $1.32 from $1.28, while management’s comparison excluding specified items showed a decline to $1.32 from $1.48. Items affecting comparability included restructuring, the divestiture-related currency hedge loss and tax expense, and prior-year acquisition costs.
- Administrative expenses declined 13% in the quarter and 9% for six months, mainly due to lower incentive compensation, benefits costs, and restructuring savings. Marketing and selling expense fell in the quarter but increased for the six-month period.
- Segment operating earnings increased 12% in the quarter but decreased 6% for six months. Six-month declines in U.S. Simple Meals, International Simple Meals and Beverages, and U.S. Beverages outweighed gains in Global Baking and Snacking and Bolthouse and Foodservice.
Outlook, commentary, and notable items
- The filing provides no specific full-year sales or EPS guidance. Management expected 2014 capital expenditures of approximately $350 and stated that financing sources were adequate for foreseeable requirements.
- Management expected approximately $6 of annual pretax savings from the China restructuring; approximately $40 of annual savings beginning in 2015 from the North America/Asia Pacific workforce action; and approximately $40 of annual savings beginning in 2015 from 2013 initiatives. Cash outflows for the cited restructuring programs were not expected to materially harm liquidity.
- The European business sale closed for approximately $548, subject to post-closing adjustments. Campbell recorded a pretax gain of $147 in the quarter and $141 for six months; the final gain remained subject to those adjustments. Proceeds were used for sale taxes, debt reduction, and general corporate purposes.
- The Plum product recall, initiated after a packaging defect was found, resulted in $16 of pretax costs ($11 after tax) in the first quarter. Plum contributed a six-month net loss of $12, including the recall costs.
- China soup and broth restructuring included an $11 asset impairment and the elimination of approximately 110 positions. The company also described workforce reductions and plant/network changes in North America, Mexico, and Australia.
- Key risks cited include competitive and consumer-demand pressures, acceptance of new products and pricing, customer inventory practices and concentration, commodity and supply-chain inflation, acquisition/divestiture integration, currency and interest-rate movements, litigation, and business disruptions.
Important facts for investors to verify
- Underlying sales and earnings trends excluding Kelsen and Plum, divestiture effects, and other comparability items.
- Whether restructuring savings are achieved as projected and whether remaining costs and capital investments stay within estimates.
- The final European sale proceeds and gain after post-closing adjustments, and the effect of related taxes and foreign-exchange hedges.
- Plum recall costs, any further product-quality developments, and the acquired business’s path to profitability.
- Short-term borrowing levels, cash generation, and the company’s ability to fund debt service, dividends, and planned capital expenditures.
- Exposure to cost inflation, weak U.S. shelf-stable beverage demand, international currency pressures, and customer inventory movements that affected soup sales.