Campbell Soup Company — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2011, ended May 1, 2011. Comparisons are with the periods ended May 2, 2010, except balance-sheet comparisons, which are with August 1, 2010. Amounts are in millions, except per-share data.
Financial performance
- Third-quarter sales: $1,813, up 1% from $1,802. Net earnings attributable to Campbell were $187 versus $168; diluted EPS was $0.57 versus $0.49. The prior-year quarter included $18 of charges, or $0.05 per share, for restructuring and a deferred-tax adjustment. Excluding those items, management said earnings increased slightly.
- Nine-month sales and earnings: Sales were $6,112, down 1%. Net earnings attributable to Campbell were $705 versus $731, and diluted EPS was $2.11 versus $2.09. The prior-year period included the same $18 of charges; adjusted EPS declined year over year.
- Gross margin: 40.4% in the quarter versus 41.2%; 40.3% for nine months versus 41.2%. Cost inflation and higher plant costs were the main pressures, partly offset by productivity, pricing and favorable mix. Nine-month gross profit declined $73.
- Operating results: Quarterly earnings before interest and taxes were $307 versus $292. Nine-month EBIT was $1,110 versus $1,161. Nine-month segment operating earnings fell 4% to $1,198, with U.S. Soup, Sauces and Beverages down 12% to $708.
- Cash flow: Nine-month operating cash flow was $858, essentially unchanged from $859. Capital expenditures were $133 versus $177; net cash used in investing was $123. Cash at May 1 was $449, up from $254 at fiscal year-end.
- Debt and liquidity: Short-term borrowings were $674 and long-term debt was $2,431, totaling $3,105, versus $2,780 at August 1, 2010. Current assets of $1,842 and current liabilities of $1,837 were approximately level. The company had $1.95 billion of committed revolving facilities, largely unused, and reported compliance with debt covenants.
- Shareholder returns: The company paid $284 in dividends and spent $696 repurchasing 20 million shares during the nine months. The nine-month dividend was $0.855 per share; approximately $7 remained under the June 2008 repurchase authorization.
Segment and period changes
- Third quarter: U.S. Soup, Sauces and Beverages sales fell 8%, including a 15% decline in ready-to-serve soup. Baking and Snacking rose 10%; International Soup, Sauces and Beverages rose 7%; North America Foodservice rose 5%.
- Nine months: U.S. Soup, Sauces and Beverages sales fell 5%; Baking and Snacking rose 7%; International and Foodservice sales were essentially flat. Simple Meals sales declined to $3,657 from $3,814, while Baked Snacks increased to $1,723 from $1,617.
- Management attributed U.S. soup weakness to competition, customer inventory fluctuations, and promotional activity that did not deliver anticipated volume. In the quarter, higher promoted price points and reduced promotion weighed on soup volume. Baking and Snacking benefited from Pepperidge Farm growth and currency; international results also benefited from currency.
- Nine-month interest expense rose to $93 from $84, primarily due to higher debt levels. The effective tax rate was 31.3% versus 32.4%; the prior-year rate included the $10 deferred-tax charge relating to U.S. health-care legislation.
Outlook, risks and unusual items
- Management expected foreseeable liquidity needs—including dividends, share repurchases and pension contributions—to be met through operating cash flow, borrowings and cash on hand, and considered financing sources adequate. Planned fiscal 2011 capital expenditures were approximately $275. The filing gives no clear numerical full-year sales or earnings guidance.
- Campbell issued $500 of 4.25% notes due April 2021. Proceeds were intended to repay part of commercial-paper borrowings and for general corporate purposes; the company had also repaid $700 of maturing notes in February using commercial paper.
- Cost inflation, especially raw and packaging materials and energy, remains a risk. The filing cautions that price increases may not cover cost increases and may reduce volume. Other cited risks include competition, customer inventory practices, promotional effectiveness, currency and interest-rate changes, execution of cost-saving and business-process initiatives, and litigation or business disruptions.
- Derivative activity included a $94 nine-month loss on undesignated cross-currency swaps recorded in other expenses/income ($55 in the quarter). Total derivative liabilities were $150 at May 1, versus $43 at fiscal year-end; the filing describes exposures and hedging practices but does not attribute the entire change to one cause.
- The China joint venture with Swire Pacific began operations in the quarter; Campbell owns 60%. The quarter also included noncontrolling-interest accounting for its Malaysian subsidiary. The filing reports no material impact from adoption of revised variable-interest-entity guidance and no significant change in market-risk exposures from fiscal year-end.
Key facts for investors to verify
- Whether U.S. soup and beverage volumes stabilize, and whether changes in pricing and promotion improve sales without further margin pressure.
- Whether productivity and selling-price benefits can offset continuing input inflation and higher plant costs.
- How debt, commercial-paper usage and cash generation evolve after substantial repurchases, dividends and the 2021 note issuance.
- The drivers and potential earnings effects of the cross-currency swap losses and higher reported derivative liabilities.
- Whether the $275 fiscal-year capital-spending estimate and management’s liquidity expectations remain on track; the filing provides no clear numerical full-year earnings forecast.