Campbell Soup Company (CPB) — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2019, ended April 28, 2019. Dollar amounts are in millions unless stated otherwise. Fiscal year ends July 28, 2019.
Business context and results
Campbell manufactures and markets branded food and beverage products. The period reflects the Snyder’s-Lance acquisition, completed in March 2018, and the company’s continuing portfolio review. Beginning this quarter, the U.S. refrigerated soup, Garden Fresh Gourmet, and Bolthouse Farms businesses are presented as discontinued operations for all periods shown.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $2,178 | $1,878 | $7,129 | $5,743 |
| Earnings from continuing operations | $131 | $73 | $550 | $690 |
| Net earnings (loss) | $84 | $(393) | $219 | $167 |
| Diluted EPS from continuing operations | $0.43 | $0.24 | $1.82 | $2.28 |
| Diluted EPS, total | $0.28 | $(1.31) | $0.73 | $0.55 |
Quarterly sales rose 16%, with a 17-point contribution from Snyder’s-Lance; excluding that acquisition, sales declined, reflecting lower volume and currency effects, partly offset by lower promotional spending. Global Biscuits and Snacks sales increased 37% in the quarter, largely from Snyder’s-Lance; Meals and Beverages sales decreased 1%. For the first nine months, sales increased 24%, while sales in Meals and Beverages were essentially flat.
Profitability, cash flow and liquidity
- Margins: Q3 gross margin was 33.2%, versus 32.7% a year earlier, benefiting from productivity, lower promotion spending and lower restructuring costs; inflation, supply-chain costs and other factors offset much of the improvement. Nine-month gross margin fell to 32.9% from 36.9%, mainly due to inflation and supply-chain costs, acquisition dilution and higher promotional spending.
- Operating performance: Q3 EBIT was $266 versus $158. Segment operating earnings increased 2%; Meals and Beverages declined 5%, while Global Biscuits and Snacks increased 15%. Nine-month EBIT was $1,010 versus $900, with segment operating earnings up 2%.
- Interest and taxes: Interest expense increased to $92 from $44 in Q3 and to $279 from $107 year to date, mainly due to acquisition-related debt, higher average rates and a prior-year treasury-rate-lock gain. The Q3 effective tax rate was 25.1% versus 37.1%; the nine-month rate was 25.1% versus 13.3%, with the prior-year period benefiting from tax-reform items.
- Cash flow: Operating cash flow for nine months was $1,148, up from $1,024, primarily from improved working-capital management, partly offset by lower cash earnings. Capital expenditures were $274 versus $223; full-year 2019 capex was expected to be approximately $400.
- Debt and liquidity: At April 28, cash was $202; short-term borrowings were $1,773 and long-term debt was $7,507. Debt due within one year was $1,773, including $934 of commercial paper. Negative working capital was $1,350. The $1,850 U.S. revolving facility was largely unused; the company said available financing sources and operating cash flow were expected to meet requirements. It reported compliance with debt covenants.
- Shareholder returns: Nine-month dividends paid were $318. Share repurchases remained suspended; approximately $1,296 remained available under the existing authorization.
Material changes, outlook and notable items
- Campbell sold its U.S. refrigerated soup and Garden Fresh Gourmet businesses for combined proceeds of approximately $55, subject to adjustments. It agreed to sell Bolthouse Farms for $510 and expected the transaction to close in Q4 2019. Management said divestiture proceeds would be used to reduce debt.
- Discontinued operations generated a Q3 loss of $47 and a nine-month loss of $331. The nine-month figure included $360 of noncash impairment charges. Q3 included $24 of sale-process expenses and a $29 tax expense related to deferred tax assets associated with the pending Bolthouse Farms sale.
- Continuing-operations restructuring and cost-transformation charges were $89 year to date. Management estimated total program costs of $610–$655, substantially all through 2020, and expected $530–$575 of those costs to be cash expenditures. It forecast more than $565 of 2019 pretax savings and approximately $850 of annual ongoing savings by the end of 2022 once all phases were implemented; $120 of additional continuing-operations savings had been generated in the first nine months.
- Management expected approximately $340 of capital investment through 2021 for efficiency and network projects; approximately $226 had been invested by April 28. It also expected more than $70 of 2019 pretax savings from initiatives associated with discontinued operations.
- Other unusual continuing-operations items included a $28 pretax pension settlement charge in Q3. Revenue-recognition guidance adopted in Q1 increased Q3 sales by $6 and continuing-operations EPS by approximately $0.01; management said the annual impact was not expected to be material, though quarterly results could be affected.
- Risks and contingencies: The company cited competition, cost inflation and supply-chain disruption, execution of divestitures and acquisition synergies, high indebtedness, consumer demand, customer concentration, impairment risk, and litigation. A consolidated shareholder securities lawsuit alleges misleading statements concerning Campbell Fresh; defendants moved to dismiss, and Campbell said it was defending the action. Management said the outcome and potential loss for litigation matters could be difficult to estimate.
Most important facts for investors to verify
- Whether Bolthouse Farms closed on the expected timetable and at the stated price, and how proceeds were applied to debt.
- Debt maturities, commercial-paper dependence, covenant headroom and progress in reducing leverage.
- Underlying sales and margins excluding Snyder’s-Lance and discontinued businesses, especially Meals and Beverages performance.
- Whether cost savings, restructuring costs and planned capital spending track management’s estimates.
- Potential further asset impairments, divestiture-related tax effects and developments in the shareholder litigation.