Campbell Soup Company — Q2 FY2020 Form 10-Q
Reporting period: Three and six months ended January 26, 2020. Amounts are in millions except per-share data. The company’s fiscal year ends August 2, 2020; fiscal 2020 has 53 weeks.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $2,162 | $2,172 | $4,345 | $4,374 |
| Gross profit margin | 34.3% | 32.5% | 34.1% | 32.7% |
| Earnings before interest and taxes | $350 | $325 | $667 | $651 |
| Continuing-operations earnings | $171 | $176 | $340 | $356 |
| Diluted continuing-operations EPS | $0.56 | $0.58 | $1.12 | $1.18 |
| Net earnings (loss) | $1,208 | $(59) | $1,374 | $135 |
| Diluted net EPS | $3.97 | $(0.20) | $4.53 | $0.45 |
| Operating cash flow | Not separately stated | Not separately stated | $663 | $846 |
Quarterly sales were essentially flat; six-month sales declined about 1%. Quarterly gross profit rose $36, and margin improved 1.8 percentage points, primarily on productivity, pricing and mix, partly offset by inflation, supply-chain costs and promotions. Reported net earnings and EPS were heavily affected by divestiture gains; continuing-operations earnings and EPS were lower year over year. Management said adjusted continuing earnings improved, citing gross-profit performance and lower interest expense, partly offset by higher marketing investment.
Quarterly net sales by segment were $1,224 for Meals & Beverages (flat) and $938 for Snacks (down 1%). Snacks’ reported sales included a 3-point negative impact from the European chips divestiture; excluding that sale, segment sales increased. For the six months, Meals & Beverages sales declined 1% and Snacks sales were comparable.
Liquidity, debt and capital allocation
- At January 26, 2020, cash was $58; short-term borrowings were $902 and long-term debt was $4,919, for total debt of $5,821. Total debt was $8,474 at July 28, 2019.
- Working capital was negative $980, versus negative $1,418 at fiscal year-end. Debt due within one year was $902. The company cited current maturities and its working-capital approach as reasons current liabilities exceeded current assets.
- Six-month operating cash flow was $663, down from $846, primarily due to changes in accrued liabilities, principally incentive compensation and interest. Capital expenditures were $167; the company expected approximately $350 for FY2020. Dividends paid were $213.
- Proceeds from divestitures funded debt reduction. The company redeemed $500 of 4.25% notes and tendered for $1,200 of other debt, paying $1,765 in total and recording a $75 debt-extinguishment loss. It said remaining net proceeds were used to reduce commercial-paper borrowings.
- A $1.85 billion revolving credit facility, maturing December 2021, was unused except for $1 of standby letters of credit. The company reported compliance with debt covenants and stated financing sources should meet foreseeable needs. Share repurchases remained suspended.
Material changes, outlook and notable items
- The company completed the sale of Kelsen for $322 in September 2019 and Arnott’s and certain other international operations for $2,286 in December 2019. It also sold its European chips business for $77 in October 2019. Results of Kelsen, Arnott’s and the previously sold Campbell Fresh businesses are presented as discontinued operations.
- Discontinued operations included a $1,087 quarterly pre-tax gain on the Arnott’s and other international sale; the six-month net gain on Campbell International sales was $1,036 pre-tax. These gains drove most of the sharp increase in reported net earnings.
- Interest expense was $149 in Q2 versus $91 a year earlier, including the $75 debt-extinguishment loss. Excluding that loss, management said interest expense declined, principally due to lower debt.
- Ongoing cost-saving and Snyder’s-Lance integration initiatives: estimated total pre-tax costs of $660–$685 through 2021, of which $608 had been recognized; expected cash expenditures of $585–$610. The company expected approximately $395 of related capital expenditures through 2021 and stated expected pre-tax savings of $710 in 2020 and approximately $850 of annual ongoing savings by the end of 2022. These are management estimates, not guaranteed results.
- Management identified growth in snacks and maintaining soup market share as strategic priorities. It cited increased marketing support for U.S. soup and Snyder’s-Lance brands. No formal full-year sales or EPS guidance is provided in the filing text.
- The filing added supply-chain disruption as a risk and discussed the emerging coronavirus outbreak. The company said it was monitoring potential effects and did not then expect a material adverse impact, while noting that the impact was uncertain.
- A securities class action alleges misleading statements concerning Campbell Fresh; the company said it was vigorously defending the case. It stated that potential losses could not be reasonably estimated in some matters, but did not believe known matters were likely to materially adversely affect results or financial condition.
Important facts for investors to verify
- Underlying continuing-business earnings and sales trends apart from divestiture gains, debt-extinguishment costs and other comparability items.
- Whether projected cost savings, integration benefits and related restructuring costs are achieved on schedule and within estimates.
- Progress in reducing debt and managing negative working capital, near-term maturities and commercial-paper reliance.
- Whether marketing investment and productivity gains support segment sales and margins amid inflation, promotions and competition.
- Actual financial or operating effects of supply-chain disruption, including the coronavirus risk noted in the filing, and developments in litigation.