Campbell Soup Company 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended January 28, 2007 (Second Quarter of Fiscal 2007) and the six months ended on that date. Campbell Soup Company is a global manufacturer and marketer of branded convenience food products. A significant event during this period was the completion of the sale of its United Kingdom and Ireland businesses in August 2006, which are now reported as discontinued operations.
Key Financial Metrics
| Metric | Three Months Ended Jan 28, 2007 | Six Months Ended Jan 28, 2007 |
|---|---|---|
| Net Sales | $2,252 million | $4,405 million |
| Gross Margin | 42.9% of sales | 42.7% of sales |
| Earnings Before Interest and Taxes (EBIT) | $445 million | $883 million |
| Net Earnings (Continuing Ops) | $284 million | $553 million |
| Diluted EPS (Continuing Ops) | $0.72 | $1.38 |
| Cash and Equivalents | $483 million (as of Jan 28, 2007) | N/A |
| Operating Cash Flow | N/A | $328 million |
| Total Debt (Notes Payable + Long-term) | $2,856 million | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 4% in the quarter and 6% for the six-month period compared to the prior year. Growth was driven by price increases, favorable currency impacts (particularly in International Soup and Sauces), and volume gains in Baking and Snacking.
- Profitability: Earnings from continuing operations rose 19% in the quarter and 5% for the six months. Gross margin improved due to productivity gains and higher selling prices, partially offset by cost inflation.
- Discontinued Operations: The UK and Ireland businesses were sold in August 2006. The current period reflects minimal earnings from these operations ($1 million for the quarter, $23 million for six months) compared to the prior year, as the businesses are no longer consolidated.
- Share Repurchases: The company utilized approximately $620 million of proceeds from the UK/Ireland sale to repurchase shares. In the six months ended Jan 28, 2007, the company repurchased 22 million shares for $842 million.
Outlook, Risks, and Unusual Items
- Unusual Items:
- Facility Sale: Included a pre-tax gain of $23 million ($14 million after-tax) from the sale of an idle manufacturing facility in the current quarter.
- Accounting Change: The prior year (2006) included a $13 million pre-tax benefit from changing inventory accounting from LIFO to average cost.
- Tax Contingency: The prior year included a $47 million non-cash tax benefit from the resolution of a U.S. tax contingency.
- Capital Allocation: The company expects capital expenditures to be between $325 million and $350 million for fiscal 2007. It maintains $1.5 billion in committed revolving credit facilities.
- Risks and Contingencies:
- Legal: The company is defending a lawsuit by VFB L.L.C. (related to the 1998 Vlasic spinoff) seeking up to $200 million plus damages. Management believes the action is without merit.
- Accounting Standards: The company is evaluating the impact of new standards including SFAS No. 158 (pension accounting), which may reduce shareowners' equity by approximately $350 million upon adoption in fiscal 2007.
- Market Risks: Exposure to fluctuations in raw material costs, energy prices, and foreign currency exchange rates.
Investor Verification Checklist
- Adjusted EPS: Verify the impact of the $23 million facility sale gain on current earnings versus the one-time tax benefits and accounting changes in the prior year to assess organic growth.
- Share Count: Confirm the reduction in weighted average shares outstanding due to the aggressive $842 million share repurchase program and its effect on EPS.
- Discontinued Ops: Ensure comparisons exclude the UK/Ireland businesses, which were sold in August 2006, to avoid misleading year-over-year revenue declines.
- Pension Liability: Monitor the upcoming adoption of SFAS No. 158, which will require recognizing the funded status of pension plans on the balance sheet, potentially impacting equity.
- Working Capital: Review the significant decrease in operating cash flow ($328M vs $649M prior year) driven by working capital increases and hedge settlements related to the divestiture.