Campbell Soup Company — Form 10-Q Summary
Business context and reporting period
Reports the second quarter and first six months of fiscal 2015, ended February 1, 2015, compared with periods ended January 26, 2014. Campbell sells branded convenience foods across five reportable segments: U.S. Simple Meals; Global Baking and Snacking; International Simple Meals and Beverages; U.S. Beverages; and Bolthouse and Foodservice. Fiscal 2015 has 52 weeks.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $2.234 billion, down 2% from $2.281 billion | $4.489 billion, up 1% from $4.446 billion |
| Gross margin | 32.6%, versus 35.7% | 33.7%, versus 35.8% |
| Earnings before interest and taxes | $312 million, versus $361 million | $680 million, versus $666 million |
| Continuing earnings attributable to Campbell | $207 million, versus $235 million | $441 million, versus $416 million |
| Diluted EPS from continuing operations | $0.66, versus $0.74 | $1.40, versus $1.32 |
| Operating cash flow | Not separately reported in the provided statement | $584 million, versus $363 million |
| Capital expenditures | Not separately reported | $143 million, versus $127 million |
- Quarterly sales weakness was primarily attributed to currency. Gross margin fell as inflation, supply-chain costs and other factors reduced margin by 3.6 percentage points; higher promotional spending reduced it by another 1.0 point. Productivity improvements contributed 1.3 points.
- Quarterly segment sales: U.S. Simple Meals $867 million (down 3%); Global Baking and Snacking $640 million (flat); International Simple Meals and Beverages $194 million (down 9%); U.S. Beverages $169 million (down 4%); Bolthouse and Foodservice $364 million (up 1%).
- Cash and cash equivalents were $201 million at February 1, 2015, versus $232 million at fiscal year-end. Short-term borrowings were $1.640 billion and long-term debt $2.253 billion, or $3.893 billion total reported borrowings. Current assets were $2.090 billion against current liabilities of $2.850 billion.
- The $584 million six-month operating cash flow increase chiefly reflected divestiture-related taxes paid in the prior-year period, lower working-capital requirements and lower pension contributions. Financing used $448 million, including $199 million in dividends, $133 million in treasury-stock purchases and $300 million in note repayments.
Changes versus prior comparable periods
- Quarterly continuing EPS declined to $0.66 from $0.74, with weaker gross margin and currency effects partly offset by lower marketing expense and a lower effective tax rate. The prior-year quarter included $0.02 per share of restructuring charges.
- Six-month continuing EPS rose to $1.40 from $1.32. Prior-year results included restructuring and related costs, a foreign-exchange hedge loss tied to the European business sale, and associated tax expense. Prior-year net earnings also included discontinued-operation earnings from the European simple meals business sale; therefore total net earnings are not directly comparable.
- Quarterly segment operating earnings declined 14%. Global Baking and Snacking increased 22%, while U.S. Simple Meals fell 21%, International Simple Meals and Beverages fell 32%, U.S. Beverages fell 35%, and Bolthouse and Foodservice fell 28%. For the six months, segment operating earnings declined 3% overall.
Outlook, commentary, risks and unusual items
- No specific sales or EPS guidance is stated in the provided filing text. Management forecast fiscal 2015 capital expenditures of approximately $400 million.
- Management expected 2014 restructuring initiatives to generate about $56 million of pretax savings in fiscal 2015 and approximately $65 million of annual ongoing savings from fiscal 2016; 2013 initiatives were expected to generate about $40 million in annual ongoing pretax savings beginning in 2015. Some actions extend through 2016, and management said it did not expect significant savings from the newly announced cost and organizational initiatives in 2015.
- On January 29, 2015, Campbell announced a new product-category-focused organization with three divisions: Americas Simple Meals and Beverages, Global Biscuits and Snacks, and Packaged Fresh. Specific plans were still being developed.
- Key pressures included ingredient and packaging inflation, higher manufacturing and transportation costs, increased use of co-manufacturers, promotional spending, currency effects and adverse weather-related carrot costs. Risks cited include competition and consumer demand, customer inventory practices and concentration, commodity and currency volatility, execution of restructuring and organizational changes, and litigation and other external disruptions.
- Campbell had $1.64 billion in short-term borrowings, including approximately $1.6 billion of commercial paper. Its $2.2 billion revolving credit facility, maturing in December 2018, was substantially unused and supported its commercial-paper programs; the company reported compliance with debt covenants.
- Derivative-related earnings were volatile: undesignated cross-currency swaps generated gains of $38 million in the quarter and $52 million for six months, while commodity derivatives generated losses of $13 million and $18 million, respectively. Six-month other comprehensive loss was $226 million, primarily reflecting foreign-currency translation.
- The company completed the sale of its European simple meals business in October 2013; the prior-year results included discontinued operations and a sale gain. The filing also notes a voluntary Plum pouch-product recall in 2013, with $16 million of costs recognized then; it was not a current-quarter charge.
- Management judged disclosure controls effective. The ongoing transition of certain North American plant and distribution-center accounting services to a third party materially affected internal control over financial reporting; full transition was expected by year-end 2015.
Most important facts for investors to verify
- Whether gross-margin pressure from inflation, supply-chain costs and promotions persists, and whether productivity offsets it.
- Whether segment trends improve, particularly in U.S. Simple Meals and the international, beverage and Bolthouse businesses.
- Commercial-paper refinancing and liquidity against $1.64 billion of short-term borrowings, while monitoring cash, the unused revolving facility and capital spending.
- Delivery and timing of management’s projected restructuring savings and the costs of the new organizational design.
- The underlying earnings effect of currency and derivative movements, including the large cross-currency swap gains and commodity-hedge losses.