Campbell Soup Company (Campbell’s) — FY2019 Form 10-K
Business context and period. Fiscal 2019 ended July 28, 2019, and comprised 52 weeks. Campbell manufactures and markets branded foods and beverages. Following acquisitions of Pacific Foods and Snyder’s-Lance, it reported Meals & Beverages and Snacks as continuing segments. Results for Campbell Fresh and Campbell International were presented as discontinued operations; prior periods were reclassified accordingly.
Financial results and key metrics
Unless otherwise noted, figures are in millions of dollars. Continuing-operations results reflect the filing’s discontinued-operations presentation.
- Revenue: Net sales were $8,107, up 23% from $6,615. Acquisitions contributed 23 percentage points to the increase, principally Snyder’s-Lance; organic performance was more mixed.
- Profit and margins: Gross profit was $2,693, or 33.2% of sales, versus 35.9% in 2018. EBIT was $979, down from $1,010; earnings from continuing operations were $474, or diluted EPS of $1.57, versus $724 and $2.40. Net earnings were $211, or diluted EPS of $0.70, versus $261 and $0.86.
- Discontinued operations: The reported loss was $263 in 2019 versus $463 in 2018. The 2019 loss included $377 of non-cash impairment charges and divestiture-related costs; the 2018 loss included $694 of impairment charges, mainly for Campbell Fresh.
- Cash flow and investment: Cash from operations increased to $1,398 from $1,305. Capital expenditures were $384, making operating cash flow less capital expenditures approximately $1,014. Dividends paid were $423; the declared annual dividend was $1.40 per share.
- Debt and liquidity: Total debt was approximately $8,712 at year-end, including debt related to discontinued operations, down from $9,894. Cash was $31, and working capital was negative $1,418. Short-term borrowings of continuing operations were $1,371; the $1,850 revolving credit facility was essentially unused. Debt due within one year was $1,603 when discontinued-operation debt is included.
- Segments: Meals & Beverages sales were $4,322, broadly flat, while operating earnings declined 9% to $903. Snacks sales rose 64% to $3,784, largely reflecting Snyder’s-Lance; operating earnings increased 34% to $514.
Material changes versus prior year
- Reported sales increased substantially following the acquisitions, but gross margin declined 2.7 percentage points. Management cited cost inflation, higher supply-chain and distribution costs, acquisition mix, and promotions; productivity improvements partly offset these pressures.
- Interest expense rose to $356 from $183, primarily due to acquisition-related debt and higher average rates. The effective tax rate was 24.2% versus 12.8%; 2018 included a $126 net tax benefit from U.S. tax reform.
- Campbell sold its U.S. refrigerated soup business, Garden Fresh Gourmet, and Bolthouse Farms during 2019. It completed the Kelsen sale after year-end and signed agreements to sell Arnott’s and related international operations, and its European chips business.
- The company used proceeds from completed 2019 divestitures to reduce debt. The balance sheet also reflects large goodwill and intangible balances, including $4,017 of goodwill in continuing operations and $2,629 of indefinite-lived trademarks.
Outlook, management commentary, risks and unusual items
- Strategy and savings: Campbell aims to focus on core North American brands, support soup and grow snacks. It targets $850 of annualized cost savings from continuing operations by the end of 2022, including $295 of Snyder’s-Lance synergies and run-rate savings. Management cited a 2020 savings target of $710. Identified program costs were estimated at $615–$665, with approximately $540–$590 expected to be cash costs.
- Portfolio and investment plans: Management expected the Arnott’s and international operations sale to close in the first half of 2020 and the European chips sale in the first quarter of 2020, subject to closing conditions. Net proceeds were intended for debt reduction. Expected 2020 capital expenditures were approximately $350.
- Cost and operating outlook: Management expected distribution, transportation, ingredient and packaging cost pressures to continue in 2020. Competition, private-label growth, changing retail channels, customer bargaining power, and consumer preference shifts may pressure sales and margins.
- Unusual items: Continuing-operations results included $92 after-tax costs for restructuring and cost-saving initiatives, $93 after-tax pension and postretirement mark-to-market losses, a $22 after-tax pension settlement charge, and a $13 after-tax European chips impairment. The company expected approximately $65 of additional charges in 2020 related to the European chips disposal group.
- Other key risks: High indebtedness, refinancing and interest-rate exposure, the execution and benefits of divestitures and integration, impairment risk, supply-chain disruption, product safety and recalls, cybersecurity, litigation, pension assumptions, and activist-shareholder activity. Campbell disclosed a shareholder securities class action; it said it was defending the matter and could not reliably estimate potential loss. It also guarantees distributor route loans, with a maximum potential guarantee amount of $220 for Pepperidge Farm loans and $194 outstanding on Snyder’s-Lance distributor loans.
- Quarterly context: In the fourth quarter, net sales were $1,780, gross profit was $606, continuing-operations loss was $5, and net loss was $8. Diluted EPS was a loss of $0.02 from continuing operations and $0.03 overall. The quarter included a $93 pension and postretirement mark-to-market loss before tax.
Investor verification priorities
- Confirm final proceeds, closing conditions, tax effects, and debt reduction from pending divestitures, particularly the Arnott’s and international operations transaction.
- Track debt maturities, commercial-paper access, interest costs, and liquidity given negative working capital and substantial leverage.
- Assess whether cost savings are being realized on schedule and whether associated restructuring and capital costs remain within estimates.
- Separate organic sales, pricing, volume and mix from acquisition and discontinued-operations effects; monitor Meals & Beverages margins and Snacks growth.
- Review impairment assumptions and exposure, especially the Pace trademark, acquired Snyder’s-Lance and Pacific Foods brands, and the European chips sale.
- Follow the securities litigation and other contingencies, and assess the recoverability of deferred tax assets and any tax benefit associated with the planned sale.