Business Context and Reporting Period
Company: Campbell Soup Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 29, 2007 (Third Quarter of Fiscal Year 2007)
Business Overview: Global manufacturer and marketer of branded convenience food products, including soups, sauces, beverages, baking, and snacking products. The company operates in four reportable segments: U.S. Soup, Sauces and Beverages; Baking and Snacking; International Soup and Sauces; and Other (including Godiva Chocolatier and Away From Home operations).
Key Financial Metrics
| Metric (in millions, except per share) | Three Months Ended Apr 29, 2007 |
Three Months Ended Apr 30, 2006 |
Nine Months Ended Apr 29, 2007 |
Nine Months Ended Apr 30, 2006 |
|---|---|---|---|---|
| Net Sales | $1,868 | $1,728 | $6,273 | $5,889 |
| Gross Margin % | 41.4% | 40.9% | 42.4% | 41.8% |
| Earnings Before Interest & Taxes (EBIT) | $281 | $248 | $1,164 | $1,012 |
| Net Earnings (Continuing Ops) | $217 | $146 | $770 | $671 |
| Diluted EPS (Continuing Ops) | $0.55 | $0.35 | $1.93 | $1.62 |
| Cash from Operating Activities | N/A | N/A | $623 | $977 |
| Cash and Cash Equivalents | $274 | $657 | $274 | $530 |
| Total Debt (Notes Payable + Long-term) | $2,616 | $3,213 | $2,616 | $3,213 |
Note: Debt figures derived from Balance Sheet (Notes Payable + Long-term debt). Cash flow data provided for nine-month periods only.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 8% in the quarter and 7% year-to-date, driven by volume/mix improvements, price increases, and favorable currency impacts in international segments.
- Profitability: Earnings from continuing operations rose 49% in the quarter ($217M vs $146M) and 15% year-to-date ($770M vs $671M). Gross margin expanded due to productivity gains and price increases, partially offset by cost inflation.
- Segment Performance:
- U.S. Soup, Sauces & Beverages: Sales up 13% (quarter) driven by ready-to-serve soups and V8 beverages.
- Baking & Snacking: Sales up 5% (quarter); earnings up 31% due to Pepperidge Farm growth.
- International: Sales up 6% (quarter), aided by currency translation.
- Discontinued Operations: The company sold its UK and Ireland businesses in August 2006. Results are reported as discontinued operations. A pre-tax gain of $39M was recognized in the nine-month period 2007 related to the sale.
- Share Repurchases: The company utilized proceeds from the UK/Ireland sale to repurchase approximately 26 million shares for $974 million in the nine-month period, significantly reducing shares outstanding.
Guidance, Outlook, and Risks
- Capital Expenditures: Expected to be approximately $325 million to $350 million for fiscal 2007.
- Liquidity: Management believes cash flows from operations, existing cash balances, and credit facilities are sufficient to meet future requirements. The company maintains $1.5 billion in committed revolving credit facilities.
- Unusual Items Impacting Comparability:
- Legal Reserves: $20M pre-tax benefit ($13M after-tax) from reversal of legal reserves due to favorable litigation results.
- Tax Matters: $22M tax benefit from settlement of Advance Pricing Agreements (APA) and $27M benefit from finalization of 2000-2004 U.S. federal tax audits.
- Asset Sale: $23M pre-tax gain from the sale of an idle manufacturing facility.
- Risks and Contingencies:
- Legal: The company successfully defended against a lawsuit by VFB L.L.C. regarding the 1998 Vlasic spinoff; the appeal was affirmed in March 2007.
- Accounting Changes: Adoption of SFAS No. 158 (pension accounting) is expected at the end of fiscal 2007, which may reduce shareowners' equity by approximately $350 million due to the recognition of unfunded pension obligations.
- Market Risks: Exposure to fluctuations in raw material costs, energy prices, and foreign currency exchange rates.
Investor Verification Checklist
- Quality of Earnings: Verify the sustainability of earnings growth after excluding one-time benefits from legal reserve reversals ($20M), tax settlements ($49M total benefit), and asset sales ($23M).
- Share Count Impact: Confirm the dilutive impact of stock-based compensation versus the accretive impact of the aggressive $974M share repurchase program.
- Working Capital: Investigate the $186M cash outflow for hedging activities and the $120M decrease in accounts payable/accrued liabilities which reduced operating cash flow.
- Pension Obligations: Monitor the upcoming adoption of SFAS No. 158 and its potential impact on the balance sheet and equity.
- Segment Mix: Assess the reliance on the U.S. Soup segment (approx. 43% of sales) and the performance of the Godiva Chocolatier business within the "Other" segment.