Business context and reporting period
Campbell Soup Company’s unaudited Form 10-Q covers the three months ended November 2, 2014 (fiscal 2015 first quarter), compared with the three months ended October 27, 2013. Campbell makes and markets branded convenience foods across five reportable segments. Comparability is affected by the prior-year Kelsen acquisition, the subsequent sale of the European simple meals business, and prior-year recall and restructuring costs. Unless noted, financial amounts are in millions.
Financial performance
| Metric | Q1 FY2015 | Comparable period |
|---|---|---|
| Net sales | $2,255 | $2,165 |
| Gross profit | $783; 34.7% of sales | $777; 35.9% |
| Earnings before interest and taxes | $368 | $305 |
| Earnings from continuing operations attributable to Campbell; diluted EPS | $234; $0.74 | $181; $0.57 |
| Net earnings attributable to Campbell | $234 | $172 |
| Operating cash flow | $188 | $38 |
| Capital expenditures | $62 | $52 |
Sales rose 4%, driven by volume and mix, partly offset by increased promotional spending and currency effects. Management said sales also benefited from retailer inventory movements, strong seasonal sell-in, and the later quarter-end relative to Thanksgiving. Gross margin fell 1.2 percentage points: inflation, supply-chain costs and other factors reduced margin by 3.4 points, and higher promotions by 0.7 points; productivity added 1.4 points, while mix and other factors partly offset the decline.
Net earnings and EPS improved year over year, but the comparison includes prior-year restructuring and related costs, a foreign-exchange hedge loss, and tax expense associated with the European business sale. Those items reduced prior-year continuing-operations earnings by $28 million, or $0.09 per share. The current quarter had no restructuring charge in the income statement. Operating cash flow increased primarily because of lower working-capital requirements, pension contributions and hedge-related payments.
Segments
| Segment | Sales change | Operating earnings change |
|---|---|---|
| U.S. Simple Meals | +8% | +15% |
| Global Baking and Snacking | +3% | +15% |
| International Simple Meals and Beverages | -2% | -20% |
| U.S. Beverages | -3% | +8% |
| Bolthouse and Foodservice | +4% | -24% |
U.S. soup, broth and other simple meals supported growth; Global Baking and Snacking benefited partly from Kelsen and lapping prior-year purchase-accounting costs. International results faced currency pressure, while U.S. Beverages sales declined amid a distribution-network transition. Bolthouse and Foodservice earnings were pressured by lower gross margin.
Balance sheet, debt and liquidity
At November 2, 2014, cash was $239, current assets $2,358, and current liabilities $3,168; the current ratio was approximately 0.74. Short-term borrowings were $1,828, including $1,790 of commercial paper, and long-term debt was $2,244. Total borrowings were therefore approximately $4,072. The filing reports total liabilities of $6,691 and shareholders’ equity of $1,618. Cash and short-term borrowings increased from $232 and $1,771, respectively, at fiscal year-end.
Campbell had a $2.2 billion committed revolving credit facility, unused except for $3 million of standby letters of credit, maturing in December 2018. Management said expected operating cash flows, borrowings and cash were adequate for foreseeable requirements and that the company was in compliance with debt covenants. Fiscal 2015 capital expenditures were expected to total approximately $400 million. Dividends paid were $101 million; Campbell repurchased about 2 million shares for $73 million, with approximately $700 million remaining under its authorized repurchase program.
Outlook, management commentary and risks
No specific consolidated sales or earnings guidance is stated in the supplied filing text. Campbell expected approximately $56 million of pretax savings in fiscal 2015 from its 2014 restructuring initiatives and approximately $65 million of annual ongoing savings from 2016 once fully implemented. The 2013 initiatives were expected to generate approximately $40 million of annual pretax savings beginning in 2015. Management expected remaining restructuring cash outflows not to materially adversely affect liquidity.
Current initiatives include workforce reductions, China soup and broth restructuring, and relocating Australian biscuit production through the second quarter of 2016. Risks highlighted include competitive responses, changing consumer demand, acceptance of product and pricing initiatives, customer inventory practices and concentration, inflation and availability of ingredients, packaging and energy, currency and interest-rate movements, execution of restructuring and cost savings, acquisitions and divestitures, litigation, and business disruptions. One customer accounted for approximately 19% of consolidated sales in fiscal 2014.
Campbell reported an ongoing transition of certain North American plant and distribution-center accounting services to a third party; the transition materially affected internal control over financial reporting, with full completion expected by year-end 2015. Management concluded disclosure controls were effective as of November 2, 2014.
Important facts for investors to verify
- How much of sales growth reflects sustainable consumer demand versus seasonal sell-in and retailer inventory timing.
- Whether gross margins recover as input, freight and supply-chain costs evolve and promotional activity changes.
- Progress against restructuring savings, implementation costs and planned completion dates.
- Commercial-paper funding, debt levels, revolving-credit availability and the capacity to fund planned capital spending and shareholder returns.
- Trends in weaker International Simple Meals and Beverages and Bolthouse and Foodservice earnings, including currency and margin effects.