Campbell Soup Company — Q1 FY2010 10-Q
Reporting period: Three months ended November 1, 2009; comparable period ended November 2, 2008. Campbell manufactures and markets branded convenience foods across four reportable segments.
Financial performance and liquidity
| Metric | Q1 FY2010 | Prior-year quarter |
|---|---|---|
| Net sales | $2.203 billion | $2.250 billion |
| Gross profit margin | 41.9% | 38.7% |
| Earnings before interest and taxes | $478 million | $399 million |
| Net earnings | $304 million | $260 million |
| Diluted earnings per share | $0.87 | $0.70 |
| Operating cash flow | $(36) million | $(15) million |
| Capital expenditures | $44 million | $35 million |
- Net earnings rose 17%; diluted EPS rose 24%, also benefiting from lower weighted-average diluted shares (346 million versus 362 million), primarily due to repurchases.
- Gross profit increased $52 million. Management attributed the higher margin primarily to productivity improvements, pricing and the absence of prior-year commodity hedge losses and restructuring-related costs; higher promotional spending and inflation partly offset gains.
- Cash and cash equivalents were $76 million at November 1, 2009, versus $51 million at August 2, 2009. Current assets were $1.852 billion and current liabilities $1.984 billion.
- Short-term borrowings were $656 million and long-term debt was $2.249 billion at quarter-end. The $1.5 billion revolving credit facility, maturing in 2011, was unused except for $27 million of standby letters of credit. The company reported compliance with debt covenants.
- Operating cash use reflected a $268 million pension contribution (including $260 million to a U.S. plan). Management said no additional U.S. pension contributions were expected for the fiscal year; about $10 million of non-U.S. contributions were expected during the remainder.
- Dividends were $0.25 per share. The company repurchased 3 million shares for $94 million; approximately $751 million remained under the announced repurchase authorization.
Changes versus the prior-year quarter
- Sales declined 2%, with U.S. Soup, Sauces and Beverages down 5%; Baking and Snacking up 4%; International Soup, Sauces and Beverages down 2%; and North America Foodservice down 2%.
- Segment EBIT increased across all four segments. Corporate expense fell to $23 million from $47 million, principally because the prior-year quarter included $26 million of unrealized commodity hedge losses.
- Interest expense decreased to $28 million from $33 million, mainly due to lower average interest rates, partly offset by higher debt. The effective tax rate rose to 32.6% from 29.2%; the prior-year rate benefited from a $12 million tax-audit resolution benefit.
- Prior-year results included $7 million of restructuring-related costs and $26 million of unrealized commodity hedge losses. Management identified their combined after-tax impact as $21 million, or $0.06 per share.
Outlook, commentary and risks
- No specific sales or earnings guidance is stated in the provided filing text. Fiscal 2010 capital expenditures were expected to be approximately $350 million.
- The company expected about $12 million of additional pre-tax restructuring-related pension costs, in addition to costs already recorded under its operational-efficiency program.
- Management expected liquidity needs—including operations, dividends, share repurchases and pension contributions—to be met through operating cash flow, borrowings and cash on hand, while noting future financing terms could be affected by credit-market conditions.
- Management cited competitive responses, consumer acceptance of product changes and new products, customer inventory practices, raw-material and energy cost volatility, currency and interest-rate movements, execution of cost savings and acquisitions, and potential business disruptions as risks to results.
- U.S. soup sales were lower following strong prior-year growth; foodservice remained weak. Increased competition affected Prego and Pace, while Baking and Snacking benefited from currency and the Ecce Panis acquisition.
- The company said disclosure controls were effective as of November 1, 2009, and there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales trends improve in U.S. soup and foodservice, and whether promotional spending affects margins.
- Whether gross-margin gains from productivity and pricing can offset inflation and other cost pressures.
- How pension funding and working-capital needs affect operating cash flow after the large quarterly contribution.
- How the $656 million of short-term borrowings will be funded or refinanced and whether liquidity remains adequate.
- Actual capital spending versus the approximately $350 million fiscal-year expectation, and remaining restructuring costs.
- How much EPS growth reflects operating improvement versus share repurchases and prior-year unusual items.