Campbell Soup Company — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2014, ended April 27, 2014. The company’s fiscal 2014 has 53 weeks. Unless noted, amounts are in millions of dollars.
Business context and reporting period
Campbell manufactures and markets branded convenience foods. The filing reports five segments: U.S. Simple Meals; Global Baking and Snacking; International Simple Meals and Beverages; U.S. Beverages; and Bolthouse and Foodservice. Results reflect the Kelsen and Plum acquisitions; the European simple meals business, sold in October 2013, is reported as discontinued operations.
Financial performance
| Metric | Three months ended April 27, 2014 | Nine months ended April 27, 2014 |
|---|---|---|
| Net sales | $1,970; up 0% from $1,962 | $6,416; up 1% from $6,329 |
| Earnings before interest and taxes | $292, versus $257 | $958, versus $902 |
| Earnings from continuing operations attributable to Campbell | $184, versus $169 | $600, versus $572 |
| Diluted EPS from continuing operations attributable to Campbell | $0.58, versus $0.53 | $1.90, versus $1.80 |
| Net earnings attributable to Campbell | $184, versus $181 | $681, versus $616 |
| Gross margin | 34.3%, versus 36.0% | 35.3%, versus 36.2% |
Reported nine-month net earnings include $81 of earnings from discontinued operations, including a $141 pre-tax gain on the European business sale ($72 after tax). The quarter had no discontinued-operations earnings. The statement of earnings reports total continuing-operations earnings of $183 for the quarter and $591 for nine months; attributable earnings differ because of noncontrolling interests.
Quarterly segment sales ranged from U.S. Simple Meals +7% and Bolthouse and Foodservice +4% to International Simple Meals and Beverages -17%. Nine-month segment sales were U.S. Simple Meals +3%, Global Baking and Snacking +6%, International Simple Meals and Beverages -13%, U.S. Beverages -5%, and Bolthouse and Foodservice +3%. Acquisitions contributed to sales growth, including $17 of quarterly and $161 of nine-month Kelsen sales, and $24 of quarterly and $56 of nine-month Plum sales.
Gross margin pressure reflected inflation, supply-chain costs, promotions, acquisitions and the pension settlement charge; productivity, lower restructuring-related costs and higher selling prices partly offset these factors. Quarterly marketing and selling expense fell 11% to $217, and administrative expense fell 18% to $134. For nine months, those expenses were $746 (down 1%) and $424 (down 12%), respectively. The nine-month effective tax rate was 32.0%, versus 30.0%; quarterly rates were 30.2% and 26.1%.
Cash flow, debt and liquidity
- Operating cash flow was $763 for the first nine months, down from $864. The company attributed the decline mainly to lower cash earnings and taxes paid on the European divestiture, partly offset by lower working-capital requirements.
- Capital expenditures were $198; management expected approximately $350 for fiscal 2014. Investing cash flow was positive $11, including $520 proceeds from the business sale and $329 of net acquisition spending.
- Cash and cash equivalents were $222 at April 27, versus $333 at July 28, 2013. Short-term borrowings were $1,662 and long-term debt was $2,247, compared with $1,909 and $2,544, respectively, at fiscal year-end.
- Cash dividends paid were $293. The quarterly dividend was $0.312 per share. Share repurchases were $76 for nine months; approximately $750 remained under the suspended $1 billion authorization.
- The company said operating cash flows, borrowing facilities and cash were expected to meet foreseeable requirements. Its $2.2 billion revolving credit facility, maturing in December 2018, was substantially unused; the company reported compliance with debt covenants.
Material changes, outlook and risks
The European simple meals sale generated approximately $548 of proceeds before a $14 post-closing adjustment; proceeds were used for sale-related taxes, debt reduction and general corporate purposes. The $141 pre-tax gain is a material non-recurring contributor to nine-month reported results.
Management expected approximately $40 of annual pre-tax savings beginning in 2015 from 2014 workforce actions, with approximately $26 of savings in 2014. The China restructuring was expected to generate approximately $6 of annual pre-tax savings; the company did not expect further charges for that initiative. The 2013 restructuring program was expected to generate approximately $40 of annual pre-tax savings beginning in 2015 and approximately $30 in 2014. No specific full-year sales or EPS guidance is stated in the provided filing text.
Risks highlighted include competition and consumer acceptance of products, pricing and promotions; commodity, packaging and energy cost inflation; customer and inventory-management practices; foreign exchange, interest rates and economic conditions; execution and integration of acquisitions and divestitures; realization of cost savings; litigation; and business disruptions. The company also disclosed a Plum product recall: $16 of costs was recognized in the quarter ended October 27, 2013, including estimates for returns, rebates and inventory disposal. A $18 pension settlement charge affected the current quarter and nine-month results.
Restructuring included China manufacturing changes and workforce reductions, as well as plant closures and supply-chain changes. Approximately $3 of additional costs remained under the 2013 initiatives; management said related remaining cash outflows were not expected to materially adversely affect liquidity. The filing reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much underlying earnings growth remains after excluding the European divestiture gain, pension settlement, restructuring, currency effects and recall costs?
- Whether promotional spending, inflation and supply-chain costs continue to pressure gross margins, and whether projected productivity and restructuring savings are achieved.
- Whether sales trends improve in International Simple Meals and Beverages and U.S. Beverages, and whether acquisition-related growth translates into profitable performance.
- Debt, commercial-paper exposure, cash generation and capital spending relative to dividends and other funding needs.
- The effect of the Plum recall on consumer demand, future costs or liabilities; the filing gives recognized costs but does not provide a clear value for any remaining exposure.
- Fiscal 2014 results may be affected by the 53rd week; the filing text does not provide a clear quantified estimate of its impact.