Campbell Soup Company — Q3 FY2015 Form 10-Q
Reporting period: Three and nine months ended May 3, 2015, compared with periods ended April 27, 2014. Unless otherwise stated, amounts are in millions of dollars. Campbell manufactures and markets branded convenience foods.
Financial performance
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Net sales | $1,900 | $1,970 | $6,389 | $6,416 |
| Gross margin | 35.9% | 34.3% | 34.3% | 35.3% |
| Earnings before interest and taxes | $287 | $292 | $967 | $958 |
| Continuing-operations earnings attributable to Campbell | $182 | $184 | $623 | $600 |
| Diluted EPS from continuing operations | $0.58 | $0.58 | $1.98 | $1.90 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $971 | $763 |
| Capital expenditures | Not provided by quarter | Not provided by quarter | $242 | $198 |
Third-quarter sales fell 4%, mainly from currency effects and lower U.S. soup sales. Gross margin rose 1.6 percentage points, reflecting productivity, reduced promotions, higher prices and the prior-year pension settlement charge, partly offset by inflation and supply-chain costs. Quarterly diluted EPS was unchanged; currency translation reduced current-quarter EPS by $0.02. Nine-month continuing-operations EPS improved, although management said adjusted earnings were pressured by weaker gross margin and currency.
Segment sales, Q3: U.S. Simple Meals $630 (down 6%); Global Baking and Snacking $555 (down 2%); International Simple Meals and Beverages $175 (down 6%); U.S. Beverages $187 (down 2%); Bolthouse and Foodservice $353 (down 1%). U.S. Simple Meals operating earnings declined 16%, chiefly on soup volume declines, inflation and unfavorable mix. Global Baking and Snacking earnings rose 18%; U.S. Beverages rose 17%; Bolthouse and Foodservice rose 35%.
Financial position, cash flow and capital
At May 3, 2015, cash was $230; current assets were $1,902 and current liabilities $2,323. Short-term borrowings were $1,232 and long-term debt $2,553, for total reported borrowings of $3,785. At August 3, 2014, those amounts were $232, $2,100, $2,989, $1,771 and $2,244, respectively. The company issued $300 of 3.30% notes due 2025 during the period.
Nine-month operating cash flow increased to $971 from $763, primarily due to lower working-capital requirements, taxes paid in 2014 on the European business sale, and lower pension contributions. Investing cash outflow was $240; financing cash outflow was $711, including $297 of dividends and $192 of share repurchases. The company reported a $2 net decrease in cash. A $2.2 billion revolving credit facility, maturing in December 2018, was unused except for $3 of standby letters of credit; commercial paper borrowings were $1,212. The company said it was in compliance with debt covenants and believed available financing would meet foreseeable needs.
Dividends were $0.312 per share in the quarter and $0.936 per share year to date. Approximately $600 remained under the $1 billion share-repurchase authorization as of May 3.
Material changes, outlook and risks
- Restructuring and organization: A new product-category-based design is planned for 2016, with divisions for Americas Simple Meals and Beverages, Global Biscuits and Snacks, and Campbell Fresh. The voluntary separation program recorded $9 of restructuring charges for 471 employees; implementation costs added $9. Total estimated pre-tax program costs are $131, of which $18 had been recognized by May 3; the majority of remaining costs were expected in Q4 FY2015. Management could not yet estimate the timing or amount of savings from these new initiatives.
- Other savings programs: Management expected 2014 initiatives to generate about $56 of pre-tax savings in FY2015 and about $65 annually from 2016; the 2013 initiatives were expected to generate about $40 of annual pre-tax savings beginning in 2015. These are expectations, not assured outcomes.
- Capital spending: FY2015 capital expenditures were expected to total approximately $400.
- Acquisition announced after quarter-end: On June 9, 2015, Campbell agreed to acquire Garden Fresh Gourmet assets for approximately $230, expected to be funded with commercial paper. Closing was subject to regulatory approvals and customary conditions, with completion expected in 2015.
- Key operating pressures: U.S. soup sales fell 10% in the quarter, including declines in ready-to-serve soup and broth; management attributed much of the volume weakness to lower retailer inventories and reduced promotional activity. Year-to-date margin faced ingredient and packaging inflation, transportation and manufacturing costs, higher use of co-manufacturers, and currency effects on international input costs.
- Principal disclosed risks: Competition and changing consumer demand; retailer inventory practices and customer concentration; commodity and packaging inflation; currency, interest-rate and tax movements; execution of restructuring and cost-savings plans; and integration of acquisitions. One customer accounted for approximately 19% of consolidated sales in 2014. Management cautioned that actual results may differ materially from forward-looking statements.
- Unusual comparability items: Current-quarter restructuring and implementation costs reduced earnings by $11 after tax, or $0.04 per share. The prior-year quarter included an $18 pension settlement charge, with an $11 after-tax impact, or $0.03 per share. Prior-year nine-month results also included discontinued European simple meals earnings of $81, including a $141 pre-tax sale gain; that business was sold in October 2013.
Important facts for investors to verify
- Whether U.S. soup volumes and retailer inventories stabilize, and whether lower promotions support lasting sales and pricing.
- Whether productivity and pricing can offset continuing input, manufacturing and supply-chain inflation.
- Actual restructuring costs, timing, execution and realized savings versus management’s estimates.
- Cash generation and liquidity after planned capital spending, dividends, repurchases and the proposed Garden Fresh acquisition funded with commercial paper.
- Exposure to currency movements, customer concentration, and the effect of continued international weakness on earnings and asset values.