Campbell Soup Company — Q1 FY2020 Form 10-Q
Reporting period: Three months ended October 27, 2019; comparison is the three months ended October 28, 2018. Amounts are in millions of dollars except per-share data. Campbell reports Meals & Beverages and Snacks as its continuing operating segments; several businesses are reported as discontinued operations following divestitures.
Financial results and liquidity
| Metric | Q1 FY2020 | Prior-year quarter | Change / context |
|---|---|---|---|
| Net sales | $2,183 | $2,202 | Down 1% |
| Gross profit margin | 33.8% | 33.0% | Up 0.8 percentage points |
| Earnings before interest and taxes | $317 | $326 | Down 3%; current quarter includes a $64 loss on the European chips sale |
| Earnings from continuing operations | $169; $0.56/share | $180; $0.60/share | Reported decline; management says results increased after comparability adjustments |
| Net earnings | $166; $0.55/share | $194; $0.64/share | Includes discontinued operations losses of $3 versus earnings of $14 |
| Operating cash flow | $182 | $231 | Down $49, primarily from working-capital changes |
| Capital expenditures | $98 | $111 | Simple operating-cash-flow less capex measure: $84 |
| Interest expense | $80 | $91 | Lower debt following divestiture proceeds |
| Debt of continuing operations | $8,337 | $8,474 at July 28, 2019 | $1,631 short-term borrowings and $6,706 long-term debt at quarter-end |
| Cash and cash equivalents | $61 | $31 at July 28, 2019 | Continuing operations balance-sheet figure |
| Working capital | $(1,382) | $(1,418) at July 28, 2019 | Current assets of $2,053; current liabilities of $3,435 |
| Effective tax rate | 28.7% | 23.7% | Current rate reflects a $4 tax benefit on the European chips sale loss |
Material changes and notable items
- Meals & Beverages sales declined 3% to $1,194, primarily from U.S. soup and foodservice declines; Snacks sales rose 2% to $989, with gains in several Pepperidge Farm and branded snack products.
- Gross margin improved 0.8 percentage points, supported by productivity, price and lower restructuring-related costs; inflation, other supply-chain costs and higher promotions partly offset those gains.
- Campbell sold its European chips business for £63 (about $77) and recorded a $64 pre-tax loss. The loss was included in continuing operations.
- The completed Kelsen sale and planned Arnott’s and other international operations divestiture generated $51 of pre-tax charges in discontinued operations. Campbell expected the $2.2 billion Arnott’s and related sale to close in Q2 FY2020 and intended to use proceeds to reduce debt.
- Lease-accounting adoption added $259 of operating lease right-of-use assets and $254 of operating lease liabilities; the company reported no material effect on net earnings or cash flows.
Outlook, risks, and contingencies
- Campbell expected FY2020 capital expenditures of approximately $350. It also expected approximately $390 of initiative-related capital investment through 2021, of which $265 had been invested by quarter-end.
- Identified continuing-operations cost initiatives were expected to incur $635–$670 of pre-tax costs through 2021, including $560–$595 expected cash expenditures. Management expected $700–$710 of pre-tax savings in 2020 and approximately $850 of annual ongoing savings by the end of 2022; $45 of additional pre-tax savings were generated in the quarter.
- Management said anticipated operating cash flows, borrowings, credit facilities and cash were expected to meet foreseeable liquidity needs. The $1.85 billion revolving facility, maturing in December 2021, was substantially unused; Campbell reported compliance with debt covenants.
- Risks cited include competition and consumer acceptance, divestiture execution, indebtedness, realization of cost savings, commodity and supply-chain pressures, customer concentration and inventory practices, product safety, litigation, and operational or information-technology disruptions.
- A securities class action relating to statements about the former Campbell Fresh segment was being defended. The company stated that potential losses in certain matters could not be reasonably estimated, while it did not believe known matters were likely to materially adversely affect results or financial condition.
Important facts for investors to verify
- Whether the Arnott’s and related international divestiture closed as expected, and the net proceeds and resulting debt reduction.
- Whether sales and margins in Meals & Beverages and Snacks improve, including the effects of promotions, inflation and retailer inventory movements.
- Progress toward stated cost-savings targets, associated cash charges, and the planned capital investment.
- Debt maturities, short-term borrowing needs, working-capital trends and the sustainability of operating cash flow and dividends.
- Developments in the securities litigation and any other contingencies that could result in material charges.