Campbell Soup Company — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2022, ended January 30, 2022; comparisons are with periods ended January 31, 2021 unless noted. Campbell is a branded food and beverage manufacturer with Meals & Beverages and Snacks segments. The Plum baby food and snacks business was sold in May 2021.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $2.209 billion, down 3% | $4.445 billion, down 4% |
| Gross margin | 30.3%, versus 34.4% | 31.3%, versus 34.6% |
| Earnings before interest and taxes | $323 million, versus $401 million | $699 million, versus $862 million |
| Net earnings | $212 million, versus $245 million | $473 million, versus $554 million |
| Diluted EPS | $0.70, versus $0.80 | $1.56, versus $1.82 |
| Operating cash flow | Six-month: $766 million, versus $611 million | |
| Capital expenditures | Six-month: $129 million, versus $132 million |
Quarterly sales fell in both segments: Meals & Beverages was $1.275 billion (down 3%) and Snacks was $934 million (down 3%). Segment operating earnings declined 19% to $213 million in Meals & Beverages and 14% to $121 million in Snacks. Lower volumes, largely from labor and supply constraints, weighed on results. Pricing and sales allowances helped offset inflation, but were insufficient to prevent significant gross-margin compression.
Six-month operating cash flow increased mainly because of working-capital movements, particularly accounts payable and receivables, despite lower net earnings. Cash and equivalents were $357 million at quarter-end, compared with $69 million at August 1, 2021. Total debt carrying value was $5.029 billion, compared with $5.058 billion; this included $464 million of short-term borrowings, up from $48 million. Current assets of $1.980 billion were below current liabilities of $2.322 billion, resulting in negative working capital of $342 million, versus $119 million negative at fiscal year-end.
Material changes, outlook and risks
- Management attributed the sales decline primarily to volume and mix pressure from labor and materials constraints, plus the Plum divestiture. Price increases and lower promotional spending provided partial offsets.
- Quarterly gross margin fell 410 basis points. The filing attributes the decline mainly to cost inflation, supply-chain costs and unfavorable volume/mix; pricing and productivity improvements partly offset these pressures.
- Management expected elevated input-cost inflation to persist through 2022, with improvement in labor conditions, pricing actions, supply-chain productivity and cost savings expected to mitigate the impact. Pricing was expected to be fully reflected in the third quarter. The filing provides no specific full-year sales or EPS guidance.
- Cost-saving initiatives had incurred $703 million of cumulative pre-tax costs. Estimated identified costs were $715 million to $725 million, mostly expected through 2022; approximately $615 million to $625 million were expected to be cash expenditures. The company expected approximately $1 billion of annual ongoing savings by the end of 2025 and reported $835 million of program-to-date pre-tax savings. It also expected approximately $445 million of related capital spending through 2022.
- On February 2, 2022, Campbell announced redemption of all $450 million of its 2.50% notes due August 2022. The March 4 redemption cost $453 million plus accrued interest and was funded with cash on hand and short-term debt.
- Management cited continuing uncertainty related to COVID-19, labor availability, inflation and supply-chain disruptions, and potential broader commodity effects from the Russia-Ukraine crisis. Other disclosed risks include commodity and currency exposure, customer concentration, litigation, product quality, IT security, and execution of cost-saving plans.
Unusual and contingent items: The quarter included $10 million of pension actuarial gains and $5 million of cost-savings implementation costs; the prior-year quarter included $30 million of pension gains and a $19 million deferred-tax charge. Campbell disclosed a shareholder securities class action seeking unspecified damages and said some legal matters could require expenditures that cannot presently be estimated; it did not expect known matters to likely have a material adverse effect on consolidated results or financial condition. The company reported compliance with debt covenants and effective disclosure controls.
Important facts for investors to verify
- Whether labor and supply constraints ease enough to restore volumes and operating leverage, and whether pricing keeps pace with inflation.
- Progress on the cost-savings program, remaining restructuring and implementation costs, expected cash outlays, and delivery of the stated 2025 savings target.
- Liquidity and refinancing needs following the note redemption, given negative working capital and higher short-term borrowings.
- Developments in the securities litigation and other legal matters, including any changes to potential exposure.
- Customer concentration and commodity-cost exposure: the filing reports that in 2021 the largest customer represented approximately 21% and the five largest approximately 46% of continuing-operations sales.