Business context and reporting period
Campbell Soup Company’s Form 10-Q covers the three and six months ended January 31, 2021. The company reports two continuing-operating segments: Meals & Beverages and Snacks. Prior-year results include divested businesses in discontinued operations, so reported net earnings are not directly comparable.
Financial performance
| Metric | Three months ended Jan. 31, 2021 | Prior-year quarter | Six months ended Jan. 31, 2021 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $2.279 billion | $2.162 billion | $4.619 billion | $4.345 billion |
| Earnings from continuing operations | $245 million | $171 million | $554 million | $340 million |
| Diluted continuing-operations EPS | $0.80 | $0.56 | $1.82 | $1.12 |
| Gross margin | 34.4% | 34.3% | 34.6% | 34.1% |
| EBIT | $401 million | $350 million | $862 million | $667 million |
Quarterly sales rose 5%: Meals & Beverages increased 6% to $1.300 billion and Snacks increased 4% to $979 million. Six-month sales rose 6%, with Meals & Beverages up 9% and Snacks up 3%. Higher at-home demand drove volume gains, partly offset by foodservice weakness and supply-constrained products. Segment operating earnings increased 7% in Meals & Beverages and 6% in Snacks for the quarter.
Quarterly net earnings were $245 million versus $1.208 billion a year earlier; six-month net earnings were $554 million versus $1.374 billion. The prior-year periods included substantial gains from the sale of Campbell International, classified as discontinued operations. Prior-year diluted EPS also included $3.41 from discontinued operations in both comparisons.
Cash flow, debt and liquidity
- Six-month operating cash flow was $611 million, down from $663 million. Capital expenditures were $132 million versus $167 million; operating cash flow less capital expenditures was $479 million versus $496 million.
- At January 31, 2021, cash was $946 million. Short-term borrowings were $1.025 billion and long-term debt was $4.996 billion, for total carrying-value debt of $6.021 billion. Debt fair value was $6.670 billion.
- Working capital was negative $266 million, compared with negative $690 million at August 2, 2020. Debt due within one year was $1.025 billion. A $1.850 billion revolving credit facility maturing in November 2023 was essentially unused; the company reported compliance with debt covenants.
- Dividends paid in the first half were $215 million. The quarterly dividend was increased from $0.35 to $0.37 per share.
Material changes and unusual items
- Quarterly interest expense fell to $55 million from $149 million; the prior-year quarter included a $75 million debt-extinguishment loss, and lower debt also reduced interest expense.
- Quarterly gross margin improved 0.1 percentage point. Productivity and lower promotional spending were offset substantially by inflation, supply-chain costs and other factors. For the first half, gross margin improved 0.5 percentage point.
- Quarterly results included $30 million of pension settlement gains, a $19 million deferred-tax charge related to a Snyder’s-Lance legal-entity reorganization, and $22 million of cost-savings and restructuring charges. Management’s comparability analysis reported a net $0.04-per-share negative impact from identified items, versus a $0.16-per-share negative impact in the prior-year quarter.
- Campbell had recognized $669 million of continuing-operations costs for multiyear savings and transformation initiatives. Estimated total costs are $695–$725 million through 2022, with $595–$625 million expected to be cash expenditures. Planned related capital investment is approximately $455 million through 2022; $367 million had been invested by January 31, 2021.
Outlook, management commentary and risks
Management said elevated retail demand associated with COVID-19 had continued, while foodservice remained weaker. It expected sales to decline year over year in the third quarter as the company compares against the initial COVID-related demand surge a year earlier. The company cautioned that retail demand could ease or reverse, and that supply constraints had limited its ability to fulfill some customer orders.
Management expected approximately $315 million of capital expenditures in fiscal 2021. Cost-savings initiatives were expected to generate approximately $800–$810 million of annual pretax savings in 2021 and approximately $850 million of ongoing annual savings by the end of 2022 once implemented; these are targets, not guarantees. February 2021 winter weather disrupted some plants and distribution centers, though the company did not then expect a material third-quarter impact.
Key risks cited include the uncertain course of COVID-19 and its effects on demand, suppliers and employees; input-cost inflation and supply-chain disruption; competitive and consumer responses; execution of cost savings and Snyder’s-Lance integration; customer concentration; litigation and regulatory matters; product safety; pension costs; and possible impairment of goodwill or intangible assets. A securities class action related to historical Campbell Fresh disclosures remained pending; the company said it was vigorously defending the matter and that potential losses could not be reasonably estimated.
Important facts for investors to verify
- Whether retail demand normalizes as COVID-related comparisons become more difficult, and whether foodservice recovers.
- Whether cost savings meet management’s targets and outweigh restructuring, integration, capital and inflation-related costs.
- Near-term liquidity and refinancing needs given negative working capital and $1.025 billion of debt due within one year.
- Actual effects of supply constraints, February weather disruptions and input-cost inflation on sales and margins.
- Developments in the securities litigation and any resulting financial exposure.