Campbell Soup Company — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2020, ended April 26, 2020. Dollar amounts are in millions, except per-share data. The company’s fiscal year ends August 2, 2020.
Business context and results
Campbell manufactures and markets branded food and beverage products. Its reportable segments are Meals & Beverages and Snacks. Results reflect significant portfolio changes: Campbell sold its U.S. refrigerated soup, Garden Fresh Gourmet and Bolthouse Farms businesses in 2019, and completed sales of Kelsen and Campbell International in 2019. These businesses’ results are presented as discontinued operations. The European chips business was also sold in October 2019; its results through sale remained in continuing operations.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $2,238 | $1,953 | $6,583 | $6,327 |
| Gross margin | 34.5% | 33.5% | 34.2% | 33.0% |
| Earnings before interest and taxes | $273 | $245 | $940 | $896 |
| Earnings from continuing operations | $166 | $123 | $506 | $479 |
| Net earnings | $168 | $84 | $1,542 | $219 |
| Diluted EPS from continuing operations | $0.55 | $0.41 | $1.66 | $1.59 |
| Diluted net EPS | $0.55 | $0.28 | $5.07 | $0.73 |
Q3 sales increased 15% year over year: Meals & Beverages rose 20% and Snacks rose 9% (including a 3-point drag from the European chips divestiture). For the nine months, sales rose 4%; Meals & Beverages increased 5% and Snacks 3% (including a 2-point divestiture drag). Gross margin improved in both periods, supported by productivity, favorable mix, operating leverage and savings, partly offset by inflation, supply-chain costs, COVID-related expenses and commodity hedge mark-to-market losses.
Q3 segment operating earnings were $275 for Meals & Beverages, up 35%, and $154 for Snacks, up 19%. Nine-month segment operating earnings were $799 and $415, up 7% and 8%, respectively. Higher volume and gross-profit performance were partly offset by increased marketing support and other costs.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $1,125, versus $1,148 a year earlier. Investing activities provided $2,318, chiefly reflecting $2,537 of proceeds from business sales; financing activities used $2,378.
- Capital expenditures were $220 for the nine months, compared with $274. Management expected approximately $300 for fiscal 2020.
- At April 26, 2020, cash was $1,242; short-term borrowings were $1,504 and long-term debt was $5,191. Total carrying value of short- and long-term debt was $6,695. Debt due within one year was $1,504.
- Working capital was negative $523, improved from negative $1,418 at July 28, 2019. The company cited current debt maturities and short-term borrowings, alongside its focus on lowering core working capital and extending supplier payment terms.
- Q3 interest expense declined to $55 from $89, mainly due to lower debt. Nine-month interest expense rose to $284 from $271, including a $75 loss on debt extinguishment.
- Campbell issued $1,000 of senior notes on April 24, 2020: $500 at 2.375% due 2030 and $500 at 3.125% due 2050. It reported $300 drawn on its $1,850 revolving credit facility at quarter-end; on May 1 it used $300 of note proceeds to repay that borrowing. Management said remaining proceeds were intended to repay commercial paper as it came due and for general corporate purposes.
- Nine-month dividends paid were $320. Share repurchases had been suspended since the second quarter of 2018.
Material changes, unusual items and outlook
- COVID-19 drove sharply higher retail demand in March and April, particularly for at-home consumption, more than offsetting declines in foodservice. Campbell increased production and adjusted schedules and product mix. Management cautioned that the demand increases could lessen or reverse and said it could not reliably predict the pandemic’s future sales or earnings impact.
- The company incurred higher front-line compensation, contractor, health-screening, cleaning and sanitation costs. Supply-chain strain, workforce or supplier disruptions, product availability, foodservice weakness, demand shifts and capital-market volatility were identified as pandemic risks.
- Q3 continuing-operations earnings included $54 of pension settlement charges and a $45 loss on Acre, as well as $14 of cost-savings implementation costs. Acre was sold May 8 for $30 after the quarter; the pending sale prompted the Q3 loss.
- Nine-month continuing-operations comparability items included $64 of loss on the European chips sale, $45 of Acre losses, $43 of pension settlement charges, $75 of debt-extinguishment loss and $50 of restructuring and implementation costs. The company also recorded $19 of tax benefit related to using the European chips capital loss against the Campbell International sale gain.
- Nine-month net earnings included $1,036 of earnings from discontinued operations, principally a $1,039 pre-tax gain associated with the Campbell International sale. Thus, reported net earnings and EPS substantially reflect divestiture-related gains and are not a direct measure of recurring continuing-operations performance.
- Cost-savings initiatives had incurred $622 of costs through April 26. Management estimated total identified continuing-operations costs of $665–$690 through 2021, of which $590–$615 was expected to be cash expenditures. It expected approximately $710 of pre-tax savings in 2020 and approximately $850 of annual ongoing savings by the end of 2022 once all phases were implemented; $120 of additional pre-tax savings was generated in the first nine months. Approximately $420 of related capital spending was expected through 2021, with $311 invested to date.
- No specific consolidated sales or earnings guidance for the remainder of fiscal 2020 is provided in the filing. Management said liquidity needs were expected to be met through operating cash flow, borrowing facilities, debt issuance and cash, while noting reduced availability and attractiveness of commercial paper amid COVID-19 uncertainty.
- A shareholder securities class action concerning past statements about Campbell Fresh was being defended. The filing says the potential loss could not be reasonably estimated; based on information then known, the company did not believe such charges were likely to materially adversely affect consolidated results or financial condition.
Most important facts for investors to verify
- Whether elevated pandemic-related retail demand persists or reverses, and how foodservice recovery affects sales and product mix.
- Whether operating cash flow, working capital and debt maturities remain manageable, including the company’s commercial-paper and refinancing needs.
- Progress against the stated cost-savings targets, implementation costs, capital spending and any delays to projects.
- Underlying continuing-operations performance apart from divestiture gains and other comparability items.
- Final sale-related and legal exposures, including the Acre transaction and the securities litigation, as subsequent developments become available.