Campbell Soup Company — Q3 Fiscal 2010 Form 10-Q
Reporting period: The quarter and nine months ended May 2, 2010, compared with the periods ended May 3, 2009. Dollar figures are in millions unless otherwise stated.
Business context and results
Campbell manufactures and markets branded convenience foods through four segments: U.S. Soup, Sauces and Beverages; Baking and Snacking; International Soup, Sauces and Beverages; and North America Foodservice.
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $1,802, up 7% | $6,158, up 2% |
| Gross margin | 41.2%, versus 40.6% | 41.2%, versus 39.5% |
| Earnings before interest and taxes | $292, versus $286 | $1,161, versus $1,040 |
| Net earnings | $168, versus $174 | $731, versus $667 |
| Diluted EPS from continuing operations | $0.49, unchanged | $2.09, versus $1.82 |
| Operating cash flow | Not presented separately | $859, versus $806 |
Financial position, cash flow and capital allocation
- At May 2, cash was $80; current assets were $1,431 and current liabilities were $2,114.
- Short-term borrowings were $945 and long-term debt was $1,542. At August 2, 2009, these were $378 and $2,246, respectively. The company reported compliance with debt covenants.
- Nine-month investing cash outflow was $169, including $177 of capital expenditures. Financing cash outflow was $665, including $270 of dividends, $315 of treasury-stock purchases and net short-term repayments of $161.
- Cash from operations rose to $859, reflecting higher earnings and improved working capital, partly offset by $281 of pension contributions, including a $260 U.S. plan contribution.
- Capital expenditures were expected to total approximately $350 for fiscal 2010. The quarterly dividend was $0.275 per share, compared with $0.25 a year earlier.
- The company repurchased 9 million shares for $315 during the nine months; approximately $618 remained available under its $1.2 billion repurchase authorization.
Material changes and management commentary
- Quarterly sales growth included a 5-percentage-point contribution from currency. U.S. Soup, Sauces and Beverages sales rose 5%, Baking and Snacking rose 11%, International rose 11%, and North America Foodservice fell 3%.
- Management attributed higher gross margin chiefly to productivity improvements, partly offset by increased promotional spending and cost inflation. Quarterly marketing and selling expenses rose 2%; administrative expenses rose 21%, including higher employee benefit and pension costs.
- Nine-month sales rose 2% despite lower U.S. Soup and Foodservice sales. Baking and Snacking benefited in part from the Ecce Panis acquisition; international sales growth was primarily currency-driven.
- Quarterly net earnings declined despite higher sales and gross margin. Management said comparable earnings improved after excluding significant items; lower diluted share count from repurchases supported EPS, and currency added approximately $0.03 to quarterly EPS.
Outlook, unusual items and risks
- Management expected foreseeable liquidity needs to be met through operating cash flows, borrowing capacity and cash, and stated financing sources were adequate. The $1.5 billion committed revolving credit facility, maturing in 2011, was unused except for $25 of standby letters of credit.
- The company forecast approximately $350 of fiscal 2010 capital expenditures. The filing provides no specific full-year sales or earnings guidance in the supplied text.
- Quarter results included a $12 restructuring charge ($8 after tax; $0.02 per share), the final pension-related costs of initiatives announced in 2008, and a $10 deferred tax expense ($0.03 per share) related to U.S. health care legislation. Together, significant items reduced quarterly EPS by $0.05.
- Key stated risks include competitive and consumer responses to pricing, promotion and new products; achieving cost savings; raw-material and energy cost inflation; customer concentration and inventory practices; currency, interest-rate and market volatility; execution of system changes and acquisitions; litigation; and business disruptions.
- Market exposures include foreign exchange, interest rates, commodities and equity prices. The company uses derivatives for risk management, not speculation. It had entered into $200 of forward-starting interest-rate swaps to hedge a planned debt offering; their fair value was a $5 loss.
Important facts for investors to verify
- Whether sales and margin momentum can persist after separating currency effects, promotions and acquisitions.
- Whether Foodservice weakness and lower year-to-date U.S. Soup sales improve, and the extent to which volume trends underpin growth.
- How recurring administrative, pension and employee-benefit costs affect future profitability after the disclosed unusual items.
- How the higher short-term borrowing balance, planned debt offering, dividends and share repurchases affect liquidity and leverage.
- Whether planned capital spending and productivity initiatives deliver the expected capacity and cost benefits.