Campbell Soup Company (CPB) — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2022, ended May 1, 2022. Comparisons are with the periods ended May 2, 2021; balance-sheet comparisons are with August 1, 2021. Amounts are in millions except per-share data.
Financial performance
| Metric | Third quarter | Nine months |
|---|---|---|
| Net sales | $2,130, up 7% from $1,984 | $6,575, down slightly from $6,603 |
| Gross margin | 31.2%, versus 31.7% | 31.3%, versus 33.7% |
| Earnings from continuing operations | $188, versus $166 | $661, versus $720 |
| Diluted EPS from continuing operations | $0.62, versus $0.54 | $2.18, versus $2.36 |
| EBIT | $294, versus $272 | $993, versus $1,134 |
| Operating cash flow | Not separately stated in the supplied filing text | $1,101, versus $881 |
| Capital expenditures | Not separately stated | $179, versus $190 |
Quarterly sales growth was driven mainly by pricing and sales allowances, partly offset by lower volume and the Plum business divestiture. The company attributed the lower gross margin to inflation and supply-chain costs and unfavorable volume/mix; pricing and productivity gains partly offset those pressures. Quarterly segment operating earnings rose 18% in Meals & Beverages to $220 and 25% in Snacks to $127. For the nine months, Meals & Beverages operating earnings fell 9% to $713, while Snacks was essentially unchanged at $376.
Balance sheet, cash flow and capital allocation
- Cash was $196 at May 1, 2022, compared with $69 at fiscal year-end.
- Short-term borrowings were $750, up from $48; long-term debt was $3,998, down from $5,010. Total carrying-value debt was $4,748, versus $5,058 at fiscal year-end.
- Current liabilities exceeded current assets by $847, compared with negative working capital of $119 at fiscal year-end. The company attributed negative working capital partly to debt maturities and its focus on reducing core working capital.
- Nine-month operating cash flow was $1,101; investing activities used $168 and financing activities used $805. Financing included $340 of dividends, $116 of share repurchases and $453 to redeem senior notes.
- The company redeemed $450 of 2.50% notes due August 2022 for $453, using cash and short-term debt, and recorded a $4 loss on extinguishment.
- Capital spending was $179 for the nine months; management expected approximately $275 for fiscal 2022. Dividends paid were $340. The quarterly dividend was $0.37 per share.
Material changes and unusual items
- Quarterly continuing-operations EPS included $0.08 per share of unfavorable comparability items, while the prior-year quarter included $0.03 per share of favorable items. Items included cost-savings implementation costs, pension actuarial losses, the debt-extinguishment loss and commodity hedge mark-to-market losses.
- For the nine months, continuing-operations EPS included $0.10 per share of unfavorable items, compared with $0.03 per share of net favorable items in the prior-year period. Prior-year items included pension and commodity hedge gains and a deferred tax charge.
- Management said pricing and productivity actions helped offset inflation, but volumes were affected by labor and materials constraints, price sensitivity and reduced operating leverage. Retailer inventory rebuild partly offset volume declines.
- Sales of the Plum baby food and snacks business were completed May 3, 2021. The filing also states that foodservice and Canadian operations previously reported in Snacks are now included in Meals & Beverages, with prior segment results adjusted retrospectively.
Outlook, risks and contingencies
The filing provides no specific full-year sales or EPS guidance. Management expected significantly elevated input-cost inflation to persist through the remainder of 2022, partly mitigated by pricing, supply-chain productivity and cost savings. The expanded cost-savings program was estimated to incur $725–$735 of pre-tax costs, substantially all through 2022, including $625–$635 of expected cash expenditures. The company also expected approximately $440 of related capital investment, with $433 invested by May 1, 2022. Management targeted approximately $1,000 of annual ongoing savings by the end of 2025; reported program-to-date pre-tax savings were $840.
Key risks include inflation and availability of labor, commodities, packaging and transportation; supply-chain disruption; consumer response to pricing; COVID-19 uncertainty; and potential economic or supply impacts from the Russia-Ukraine conflict. Campbell reported no direct operations in Russia or Ukraine and no material impact from the conflict to date, but cited related material shortages and higher transportation, energy and raw-material costs. The company is defending a securities class-action lawsuit concerning earlier statements about its former Campbell Fresh segment. It stated that potential litigation charges could be material in a particular period, but did not believe known matters were likely to materially adversely affect consolidated results or financial condition. The company reported compliance with its debt covenants and availability of an unused $1.85 billion revolving credit facility, subject to customary terms.
Important facts for investors to verify
- Whether pricing and productivity gains can continue to offset input-cost inflation without further weakening volumes or gross margin.
- Whether the stated $1 billion annual savings target by the end of 2025 is achieved, and whether remaining program costs and capital investment stay within estimates.
- How short-term borrowings and negative working capital evolve, including the company’s ability to fund operations, dividends, repurchases and planned investment.
- Whether supply constraints, consumer price sensitivity, COVID-19 developments or geopolitical disruptions materially affect sales and costs.
- Developments in the securities litigation and any other legal or regulatory matters that could require material expenditures.