Campbell Soup Company — Q1 FY2011 Form 10-Q
Business context and period: Global branded convenience-food manufacturer reporting an unaudited first quarter ended October 31, 2010, compared with the quarter ended November 1, 2009. Financial amounts are in millions except per-share data.
Financial performance
| Metric | Q1 FY2011 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $2,172 | $2,203 | Down 1% as reported |
| Gross profit / margin | $894 / 41.2% | $923 / 41.9% | Margin down 0.7 percentage point |
| EBIT | $444 | $478 | Down 7% |
| Net earnings | $279 | $304 | Down 8% |
| Diluted EPS | $0.82 | $0.87 | Down 6% |
| Operating cash flow | $(29) | $(36) | Cash used in both periods |
Higher promotional spending weighed on sales and gross margin; cost inflation and other factors reduced gross margin, partly offset by productivity, favorable mix, and pricing. Interest expense increased to $32 from $28. The effective tax rate was 32.6% in both periods. Dividends per share rose to $0.275 from $0.25.
Segment results and material changes
- U.S. Soup, Sauces and Beverages: Sales fell 3% to $1,103; EBIT fell 11% to $295. U.S. soup sales declined 5%, including a 13% drop in ready-to-serve soups. U.S. beverage sales rose 10%, while Prego and Pace sales were pressured by promotions and competition.
- Baking and Snacking: Sales rose 3% to $544; EBIT was flat at $100. Pepperidge Farm sales were comparable; Arnott’s growth reflected currency.
- International Soup, Sauces and Beverages: Sales declined 1% to $372, while EBIT rose 16% to $51, driven by Europe.
- North America Foodservice: Sales fell 4% to $153 and EBIT fell 12% to $23 amid continued weakness in the foodservice sector.
Lower diluted share count, primarily from repurchases, supported EPS, but did not prevent the year-over-year decline. Administrative expense increased 5%, including higher pension and long-term compensation costs.
Cash, debt, liquidity, and capital allocation
- Cash was $291 at quarter-end, versus $254 at fiscal year-end. Current assets were $2,124 and current liabilities $2,479; the resulting current ratio was approximately 0.86.
- Reported short-term borrowings were $1,134, up from $835 at August 1, 2010; long-term debt was $1,946. Cash-flow financing included $294 of net short-term borrowing.
- Operating cash use was $29. Working-capital needs, including a $280 receivables outflow and $101 inventory outflow, largely offset lower pension contributions. Capital expenditures were $27, down from $44; management expected approximately $300 for FY2011.
- The company repurchased 4 million shares for $156 and paid $94 in dividends. Approximately $453 remained under the $1.2 billion repurchase authorization.
- Two committed revolving credit facilities totaled $1.95 billion and were substantially unused; they support the commercial-paper programs. The company reported compliance with debt covenants and expected financing sources to meet foreseeable needs, while noting future financing terms could be affected by credit-market conditions.
Outlook, risks, and other notable matters
The filing does not provide a clear full-year sales or earnings guidance figure. Management expected liquidity needs to be met through operating cash flows, borrowings, and cash, and expected approximately $300 million of FY2011 capital spending. No further U.S. pension contributions were expected in FY2011; approximately $11 million of non-U.S. contributions were expected for the remainder of the year.
Management cited risks from competition and consumer response to promotions, pricing and new products; commodity and packaging-cost inflation; customer concentration and inventory practices; currency, interest-rate and economic changes; cost-savings execution; business-system changes; and potential business disruptions. Promotional spending did not deliver anticipated volume gains in U.S. soup. Derivatives are used to manage currency, interest-rate, commodity and equity exposures, not for speculation; losses on derivatives not designated as hedges totaled $35 versus $26 in the prior-year quarter, including a $38 loss on cross-currency swaps.
The company adopted revised variable-interest-entity consolidation guidance without material impact. Disclosure controls were deemed effective. SAP implementation led to changes in certain financial-reporting controls; management reported no other material control changes.
Most important facts for investors to verify
- Whether promotional activity produces sufficient volume and improves U.S. soup sales and gross margin.
- Whether cost inflation continues to outpace productivity, mix, and pricing benefits.
- How short-term borrowings and commercial-paper funding are managed, particularly given the facilities’ maturities and seasonal working-capital demands.
- Whether planned capital spending, pension funding, dividends, and share repurchases remain consistent with cash generation.
- Whether SAP implementation and related control changes proceed without disruption; review the filing’s risk disclosures for factors that could affect future results.