Campbell Soup Company — Form 10-Q summary
Business context and period: Campbell manufactures and markets branded food and beverage products. This fiscal first-quarter report covers the three months ended October 30, 2022, compared with the three months ended October 31, 2021. Amounts are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Quarter ended Oct. 30, 2022 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $2,575 | $2,236 | +15% |
| Gross profit | $834 | $722 | +$112 |
| Gross margin | 32.4% | 32.3% | +0.1 percentage point |
| Earnings before interest and taxes | $436 | $376 | +16% |
| Net earnings attributable to Campbell | $297 | $261 | +14% |
| Diluted EPS | $0.99 | $0.86 | +$0.13 |
| Operating cash flow | $227 | $288 | -$61 |
| Capital expenditures | $77 | $69 | +$8 |
Sales growth was primarily driven by inflation-related pricing and sales allowances; volume and mix declined. Both Meals & Beverages and Snacks sales rose 15%. Segment operating earnings increased 18% to $331 million for Meals & Beverages and 20% to $153 million for Snacks. Reported EBIT margin was approximately 16.9%, versus 16.8%.
Gross-margin improvement reflected pricing, productivity, and lower promotional spending, partly offset by higher input and supply-chain costs and unfavorable volume/mix. Marketing and selling expense rose 18%; the effective tax rate increased to 23.8% from 20.7%, partly because of favorable tax resolutions in the prior-year quarter. Interest expense was $47 million in both periods.
Financial position and liquidity
- At October 30, 2022, cash was $130 million; current assets were $2.304 billion and current liabilities were $3.033 billion, resulting in negative working capital of $729 million. The company attributes negative working capital in part to short-term borrowings and its working-capital approach.
- Short-term borrowings were $858 million and long-term debt was $3.994 billion, for total carrying debt of $4.852 billion, compared with $4.810 billion at July 31, 2022. Debt due within one year was $858 million. The filing reports debt fair value of $4.352 billion.
- Operating cash flow declined to $227 million from $288 million, primarily due to working-capital changes, partly offset by higher cash earnings. Cash flow less capital expenditures was $150 million, compared with $219 million in the prior-year quarter.
- The $1.85 billion revolving credit facility was substantially unused. Campbell reported compliance with its debt covenants and said it expects operating cash flows, borrowings, credit facilities, and cash to meet foreseeable funding needs.
- Dividends paid were $115 million; the quarterly dividend was $0.37 per share. The company repurchased $41 million of shares during the quarter.
Material changes, outlook, and risks
- Cost environment: Management expected elevated input-cost inflation to persist through fiscal 2023 and said mitigation actions would not fully offset incremental costs. It cited higher transportation, energy, and raw-material costs; the Russia-Ukraine conflict had not had a material direct impact on Campbell to date. COVID-19 effects remained uncertain.
- Cost-saving program: Identified program costs were estimated at $735–$740 million through 2023, of which approximately $635–$640 million were expected to be cash expenditures. Campbell had recognized $728 million of costs and invested $440 million of approximately $450 million in related capital expenditures by October 30, 2022. Management targeted approximately $1 billion in annual ongoing savings by the end of 2025 and reported $860 million of cumulative pre-tax savings to date.
- Capital spending: Fiscal 2023 capital expenditures were expected to be approximately $325 million, apart from the separately described cost-program investment. Management expected program costs to be funded through operating cash flow and short-term borrowings.
- Debt refinancing: On November 15, 2022, Campbell entered into a delayed-draw term loan agreement for up to $500 million, maturing in 2025, and anticipated using proceeds to refinance $566 million of notes due March 15, 2023. The agreement includes a minimum interest-coverage covenant of 3.25:1.00.
- Unusual earnings items: The quarter included $15 million of pension actuarial losses and $5 million of unrealized commodity-hedge gains. The prior-year quarter included $6 million of pension actuarial losses and $3 million of hedge losses. Each period also included approximately $3 million after tax of identified cost-program items. Management said comparable EPS effects from the listed items were $0.03 per share in each period.
- Contingencies: A securities class action was dismissed with prejudice on October 11, 2022; the plaintiff did not appeal, concluding the matter. Campbell said other litigation or regulatory matters could result in charges that cannot currently be reasonably estimated, but did not expect known matters to have a material adverse effect on consolidated results or financial condition.
- Principal risks: Input-cost inflation and supply-chain disruption; competition and consumer response to pricing and promotions; execution and realization of cost savings; commodity and currency volatility; product quality and safety; customer concentration and changing retail practices; pension costs; litigation; cyber and technology risks; and impairment of goodwill or intangible assets.
Important facts for investors to verify
- Whether pricing can continue to offset inflation without further material volume declines, and how margins develop across both segments.
- Whether working-capital outflows moderate and cash generation supports debt maturities, dividends, share repurchases, and planned investment.
- Progress against the cost program’s spending, capital-investment, timing, and savings targets.
- Completion and terms of the planned refinancing of the March 2023 notes, including covenant headroom.
- Potential effects of pension remeasurements, commodity hedges, tax-rate changes, and other nonrecurring items on reported earnings.