Campbell Soup Company — Form 10-Q Summary
Reporting period: Second quarter and six months ended January 29, 2012; comparisons are to the periods ended January 30, 2011. Amounts are in millions except per-share data.
Business context and results
Campbell makes and markets branded convenience foods across five segments: U.S. Simple Meals, Global Baking and Snacking, International Simple Meals and Beverages, U.S. Beverages, and North America Foodservice.
- Quarter: Net sales were $2,112, down 1%. Net earnings attributable to Campbell were $205, versus $239; diluted EPS was $0.64 versus $0.71. Management cited inflation, lower sales volumes, and a higher tax rate as key earnings pressures, partly offset by pricing and productivity.
- Six months: Net sales were $4,273, down 1%. Net earnings attributable to Campbell were $470, versus $518; diluted EPS was $1.45 versus $1.53.
- Gross margin: 38.4% for the quarter, down from 39.4%; 39.0% year to date, down from 40.3%. Inflation and other factors were the largest adverse drivers; pricing and productivity partly offset them.
Financial position and cash flow
- Six-month operating cash flow was $478, compared with $483. Capital expenditures were $97 versus $74; management expected approximately $325 of capital spending for fiscal 2012.
- Cash and cash equivalents were $322 at January 29, 2012, versus $484 at July 31, 2011. Current assets were $1,918 and current liabilities $2,152.
- Balance-sheet short-term borrowings were $870 and long-term debt was $2,008. The company had $2.0 billion of committed revolving credit facilities, unused except for $3 of standby letters of credit; it also reported $45 of standby letters of credit issued on its behalf. Management said available financing sources were expected to meet foreseeable needs and the company was in compliance with debt covenants.
- Dividends paid were $188 in the first six months. The company repurchased 5 million shares for $173; approximately $885 remained under its June 2011 repurchase authorization.
Segment performance and material changes
- Quarter sales: U.S. Simple Meals $824 (down 2%); Global Baking and Snacking $526 (flat); International Simple Meals and Beverages $402 (down 5%); U.S. Beverages $187 (up 4%); North America Foodservice $173 (up 9%). Foodservice gains were driven largely by fresh chilled soup; international results were weaker in Europe and Canada.
- Quarter segment operating earnings: U.S. Simple Meals $174 (down 2%); Global Baking and Snacking $71 (down 12%); International Simple Meals and Beverages $58 (down 16%); U.S. Beverages $34 (down 21%); North America Foodservice $28 (up 33%). Total segment operating earnings fell 7% to $365.
- For the six months, segment operating earnings fell 5% to $813. U.S. Simple Meals rose 4% and Foodservice rose 25%; Global Baking and Snacking fell 12%, International fell 16%, and U.S. Beverages fell 35%. Corporate costs increased to $63 from $57, including losses on open commodity hedges and higher incentive compensation.
- Interest expense declined to $28 from $34 for the quarter and to $58 from $66 year to date. The effective tax rate rose to 33.7% from 27.1% for the quarter and to 32.9% from 30.2% year to date.
Outlook, management commentary, and risks
- The filing provides no overall sales or EPS guidance. Management expected advertising and consumer promotion expenses to increase in the remainder of fiscal 2012.
- Restructuring and market-exit initiatives, including exiting Russia, are expected to eliminate approximately 750 positions and be completed by the end of 2013. The program totals $75 of pretax costs, of which $68 had been recognized and $7 remained; approximately $50 is expected to be cash expenditures, mostly in 2012, alongside about $40 of related capital investment. Management estimated annual pretax cash savings of approximately $60 beginning in 2012, increasing to approximately $70 in 2014, and said cash outflows were not expected to materially adversely affect liquidity.
- Management identified risks including competitive responses and consumer acceptance of new products, pricing and promotions; customer inventory practices; raw-material, packaging and energy inflation; execution of projected savings and business-process changes; currency, interest-rate and tax changes; litigation; and business disruptions. The company uses derivatives to manage currency, interest-rate, commodity and equity exposures and states it does not use them for speculation.
- Disclosure controls were judged effective as of January 29, 2012; the company reported no materially significant change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether pricing and productivity can continue to offset cost inflation without further weakening volumes.
- Whether segment trends improve, particularly in ready-to-serve soup, Australia/Arnott’s, international markets, and U.S. Beverages.
- Whether restructuring costs, capital spending, timing, and projected savings track management’s estimates.
- How short-term borrowing needs, cash generation, dividends, and repurchases affect liquidity and financing requirements.
- Whether the higher effective tax rate and corporate commodity-hedge volatility persist.