CAMPBELL'S Co 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW This Management's Discussion and Analysis of Financial Condition and Results of Operations is provided as a supplement to, and should be read in conjunction with, the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements in "Part I - Item 1. Financial Statements," and our Form 10-K for the year ended August 1, 2021, including but not limited to "Part I - Item 1A. Risk Factors" and "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Executive Summary Unless otherwise stated, the terms "we," "us," "our" and the "company" refer to Campbell Soup Company and its consolidated subsidiaries. We are a manufacturer and marketer of high-quality, branded food and beverage products. We operate in a highly competitive industry and experience competition in all of our categories. On May 3, 2021, we completed the sale of our Plum baby food and snacks business. The results of the business through the date of sale were reflected in continuing operations within the Meals & Beverages reportable segment. Beginning in 2022, the foodservice and Canadian business formerly in our Snacks segment is managed as part of the Meals & Beverages segment. Segment results have been adjusted retrospectively to reflect this change. Business Trends We have been actively monitoring the impact of the COVID-19 pandemic on all aspects of our business. During the first quarter of 2022, we continued to experience elevated demand for our retail products, but net sales were lower than in the first quarter of 2021 due to cycling the retailer inventory recovery in the prior-year quarter and the impact of supply constraints which held back our ability to meet persistent elevated demand. We anticipate that 2022 will continue to be a dynamic macroeconomic environment and we expect elevated levels of input cost inflation and a constrained labor market to persist throughout the remainder of 2022. We anticipate that these headwinds will be partially mitigated by pricing actions that have either taken effect or are expected to take effect in the remaining part of the fiscal year, supply chain productivity improvements and cost saving initiatives, but we do not expect such benefits will fully offset the incremental costs in 2022. Although we expect the impacts of the COVID-19 pandemic on our business to moderate in the second quarter and beyond there still remains uncertainty around the pandemic. The ultimate impact depends on the severity and duration of the pandemic, including the emergence and spread of COVID-19 variants, the continued availability and effectiveness of vaccines and actions taken by government authorities, including the recent U.S. vaccine mandate, and other third parties in response to the pandemic. We will continue to evaluate the extent to which the COVID-19 pandemic will impact our business, consolidated results of operations and financial condition. Summary of Results This Summary of Results provides significant highlights from the discussion and analysis that follows. • Net sales decreased 4% in 2022 to $2,236 million due to volume declines and increased promotional spending, partially offset by favorable price and sales allowances. Volumes declined as a result of cycling retailer inventory recovery in the prior-year quarter and supply pressures. Promotional spending increased due in part to moderated levels in the prior-year quarter. Net sales increased 2% in 2022 from $2,183 million in 2020, including a 2-point impact from divestitures. • Gross profit, as a percent of sales, decreased to 32.3% in 2022 from 34.7% in the prior-year quarter. The decrease was primarily due to higher cost inflation, higher levels of promotional spending and unfavorable product mix, partially offset by the benefits of recent pricing actions and supply chain productivity improvements. • Earnings per share from continuing operations were $.86 in 2022, compared to $1.02 a year ago. The current quarter and prior-year quarter included expenses of $.03 per share and gains of $.01 per share, respectively, from items impacting comparability as discussed below. 23 Net Earnings attributable to Campbell Soup Company The following items impacted the comparability of net earnings and net earnings per share: Continuing Operations • We implemented several cost savings initiatives in recent years. In the first quarter of 2022, we recorded implementation costs and other related costs of $2 million in Administrative expenses and $2 million in Cost of products sold (aggregate impact of $3 million after tax, or $.01 per share) related to these initiatives. In the first quarter of 2021, we recorded Restructuring charges of $1 million and implementation costs and other related costs of $4 million in Administrative expenses and $1 million in Cost of products sold (aggregate impact of $5 million after tax, or $.02 per share) related to these initiatives. See Note 6 to the Consolidated Financial Statements and "Restructuring Charges and Cost Savings Initiatives" for additional information; • In the first quarter of 2022, we recognized actuarial losses in Other expenses / (income) of $6 million ($5 million after tax, or $.02 per share). In the first quarter of 2021, we recognized actuarial gains in Other expenses / (income) of $4 million ($3 million after tax, or $.01 per share). The actuarial gains and losses related to the remeasurements of a U.S. and a Canadian pension plan. These interim remeasurements were each due to lump sum distributions that exceeded or are expected to exceed service and interest costs resulting in settlement accounting for the plans; and • In the first quarter of 2022, we recognized losses in Cost of products sold of $3 million ($2 million after tax, or $.01 per share) associated with unrealized mark-to-market adjustments on outstanding undesignated commodity hedges. In the first quarter of 2021, we recognized gains in Cost of products sold of $6 million ($5 million after tax, or $.02 per share) associated with unrealized mark-to-market adjustments on outstanding undesignated commodity hedges. The items impacting comparability are summarized below: Three Months Ended October 31, 2021 November 1, 2020 (Millions, except per share amounts) Earnings Impact EPS Impact Earnings Impact EPS Impact Earnings from continuing operations attributable to Campbell Soup Company $ 261 $ .86 $ 309 $ 1.02 Earnings (loss) from discontinued operations $ — $ — $ — $ — Net earnings attributable to Campbell Soup Company $ 261 $ .86 $ 309 $ 1.02 Continuing operations: Restructuring charges, implementation costs and other related costs $ (3) $ (.01) $ (5) $ (.02) Pension actuarial gains (losses) (5) (.02) 3 .01 Commodity mark-to-market gains (losses) (2) (.01) 5 .02 Impact of items on Earnings from continuing operations (1) $ (10) $ (.03) $ 3 $ .01 __________________________________________ (1) Sum of the individual amounts may not add due to rounding. Earnings from continuing operations were $261 million ($ .86 per share) in the current quarter, compared to $309 million ($ 1.02 per share) in the year-ago quarter. After adjusting for items impacting comparability, earnings from continuing operations decreased reflecting a lower gross profit performance, sales volume declines and higher administrative expenses, partially offset by lower marketing and selling expenses and a lower effective tax rate. FIRST-QUARTER DISCUSSION AND ANALYSIS Sales An analysis of net sales by reportable segment follows: Three Months Ended (Millions) October 31, 2021 November 1, 2020 % Change Meals & Beverages $ 1,266 $ 1,363 (7) Snacks 970 977 (1) $ 2,236 $ 2,340 (4) 24 An analysis of percent change of net sales by reportable segment follows: Meals & Beverages (2) Snacks Total (2) Volume and mix (7)% (4)% (6)% Price and sales allowances 4 4 4 Decreased / (increased) promotional spending (1) (3) (1) (2) Divestiture (2) — (1) (7)% (1)% (4)% __________________________________________ (1) Represents revenue reductions from trade promotion and consumer coupon redemption programs. (2) Sum of the individual amounts does not add due to rounding. In Meals & Beverages, sales decreased 7%. Excluding the impact from the divestiture of the Plum baby food and snacks business, sales decreased primarily due to declines across U.S. retail products, including V8 beverages, Prego pasta sauces and U.S. soup, as well as in Canada. Volume decreased primarily due to cycling the retailer inventory recovery in the prior-year quarter and due to supply pressures. Promotional spending increased relative to moderated levels in the prior-year quarter, partly offsetting the impact of recent price increases. Sales of U.S. soup decreased 2%, cycling a 21% increase in the first quarter of the prior year, due to volume declines in ready-to-serve soups and condensed soups, partially offset by gains in broth. In Snacks, sales decreased 1% as volume declines and increased promotional spending relative to moderated levels in the prior-year quarter were partly offset by favorable price and sales allowances. Declines in partner brands, in Pop Secret popcorn due to elevated demand in the prior-year quarter and in Late July snacks due to supply pressures were partially offset by gains in Goldfish crackers and Pepperidge Farm cookies. Partner brands consist of third-party branded products that we sell. Sales of our power brands increased 3%. Gross Profit Gross profit, defined as Net sales less Cost of products sold, decreased by $91 million in 2022 from 2021. As a percent of sales, gross profit was 32.3% in 2022 and 34.7% in 2021. The 240 basis-point decrease in gross profit margin was due to the following factors: Margin Impact Cost inflation, supply chain costs and other factors (1) (480) Higher level of promotional spending (130) Mix (70) Productivity improvements 120 Price and sales allowances 320 (240) __________________________________________ (1) Includes an estimated positive margin impact of 30 basis points from the benefit of cost savings initiatives, which was more than offset by cost inflation and other factors, including a 40 basis-point impact from the change in unrealized mark-to-market adjustments on outstanding undesignated commodity hedges. Marketing and Selling Expenses Marketing and selling expenses as a percent of sales were 7.6% in 2022 compared to 8.9% in 2021. Marketing and selling expenses decreased 18% in 2022 from 2021. The decrease was primarily due to lower advertising and consumer promotion expense (approximately 15 points) and lower selling expenses (approximately 3 points). The decrease in advertising and consumer promotion expense was due in part to supply constraints. Administrative Expenses Administrative expenses as a percent of sales were 7.0% in 2022 compared to 6.0% in 2021. Administrative expenses increased 11% in 2022 from 2021. The increase was primarily due to expenses related to the settlement of certain legal claims (approximately 11 points) and higher general administrative costs (approximately 4 points), partially offset by increased benefits from cost savings initiatives (approximately 4 points). 25 Other Expenses / (Income) Other income was $1 million in 2022 compared to other income of $18 million in 2021. Other income in 2022 included pension actuarial losses of $6 million. Other income in 2021 included pension actuarial gains of $4 million. Excluding these amounts, the remaining decrease in other income was primarily due to income from transition services fees in the prior year. Operating Earnings Segment operating earnings decreased 14% in 2022 from 2021. An analysis of operating earnings by segment follows: Three Months Ended (Millions) October 31, 2021 November 1, 2020 % Change Meals & Beverages $ 280 $ 337 (17) Snacks 128 135 (5) 408 472 (14) Corporate income (expense) (32) (10) Restructuring charges (1) — (1) Earnings before interest and taxes $ 376 $ 461 __________________________________________ (1) See Note 6 to the Consolidated Financial Statements for additional information on restructuring charges. Operating earnings from Meals & Beverages decreased 17%. The decrease was primarily due to lower gross profit performance and sales volume declines, partially offset by lower marketing and selling expenses. Gross profit performance was impacted by higher cost inflation, higher levels of promotional spending, higher other supply chain costs and unfavorable product mix, partially offset by the benefits of recent pricing actions and supply chain productivity improvements. Operating earnings from Snacks decreased 5%. The decrease was driven by higher administrative expenses due to the settlement of certain legal claims and a slightly lower gross profit performance, partially offset by lower marketing and selling expenses. Gross profit performance was impacted by higher cost inflation, unfavorable product mix and higher levels of promotional spending, largely offset by the benefits of recent pricing actions, supply chain productivity improvements and cost savings initiatives as well as lower other supply chain costs. Corporate expense in 2022 included pension actuarial losses of $6 million, costs of $4 million related to costs savings initiatives and unrealized mark-to-market losses on outstanding undesignated commodity hedges of $3 million. Corporate expense in 2021 included costs of $5 million related to cost savings initiatives, pension actuarial gains of $4 million and unrealized mark-to-market gains on outstanding undesignated commodity hedges of $6 million. Interest Expense Interest expense decreased to $47 million in 2022 from $55 million in 2021, primarily due to lower levels of debt. Taxes on Earnings The effective tax rate was 20.7% in 2022 and 23.9% in 2021. The decrease in the effective tax rate was primarily due to the favorable resolution of several tax matters in 2022. Restructuring Charges and Cost Savings Initiatives Multi-year Cost Savings Initiatives and Snyder's-Lance Cost Transformation Program and Integration Beginning in fiscal 2015, we implemented initiatives to reduce costs and to streamline our organizational structure. Over the years, we expanded these initiatives by further optimizing our supply chain and manufacturing networks, including closing our manufacturing facility in Toronto, Ontario, as well as our information technology infrastructure. On March 26, 2018, we completed the acquisition of Snyder's-Lance, Inc. (Snyder's-Lance). Prior to the acquisition, Snyder's-Lance launched a cost transformation program following a comprehensive review of its operations with the goal of significantly improving its financial performance. We continued to implement this program and identified opportunities for additional cost synergies as we integrated Snyder's-Lance. 26 A summary of charges recorded in Earnings from continuing operations related to these initiatives is as follows: Three Months Ended (Millions, except per share amounts) October 31, 2021 November 1, 2020 Recognized as of October 31, 2021 Restructuring charges $ — $ 1 $ 259 Administrative expenses 2 4 341 Cost of products sold 2 1 81 Marketing and selling expenses — — 13 Research and development expenses — — 4 Total pre-tax charges $ 4 $ 6 $ 698 Aggregate after-tax impact $ 3 $ 5 Per share impact $ .01 $ .02 A summary of the pre-tax costs in Earnings from continuing operations associated with these initiatives is as follows: (Millions) Recognized as of October 31, 2021 Severance pay and benefits $ 222 Asset impairment/accelerated depreciation 82 Implementation costs and other related costs 394 Total $ 698 The total estimated pre-tax costs for actions associated with continuing operations are approximately $ 715 million to $ 730 million. The majority of the remaining costs will be incurred in 2022. We expect the costs for actions associated with continuing operations to consist of the following: approximately $ 225 million in severance pay and benefits; approximately $ 85 million in asset impairment and accelerated depreciation; and approximately $ 405 million to $ 420 million in implementation costs and other related costs. We expect these pre-tax costs to be associated with our segments as follows: Meals & Beverages - approximately 31 %; Snacks - approximately 45 %; and Corporate - approximately 24 %. Of the aggregate $ 715 million to $ 730 million of pre-tax costs associated with continuing operations, we expect approximately $ 615 million to $ 630 million will be cash expenditures. In addition, we expect to invest approximately $ 450 million in capital expenditures through 2022, of which we invested $ 415 million as of October 31, 2021. The capital expenditures primarily relate to improvement of quality, safety and cost structure across the Snyder’s-Lance manufacturing network, a U.S. warehouse optimization project, implementation of our existing SAP enterprise-resource planning system for Snyder's-Lance, transition of production of the Toronto manufacturing facility to our U.S. thermal plants, optimization of information technology infrastructure and applications, and optimization of the Snyder’s-Lance warehouse and distribution network. We expect to fund the costs through cash flows from operations and short-term borrowings. We expect the initiatives for actions associated with continuing operations, once all phases are implemented, to generate annual ongoing savings of approximately $850 million by the end of 2022. In the three-month period ended October 31, 2021, we generated an additional $15 million of pre-tax savings. The annual pre-tax savings associated with continuing operations generated were as follows: Year Ended (Millions) August 1, 2021 August 2, 2020 July 28, 2019 July 29, 2018 July 30, 2017 July 31, 2016 August 2, 2015 Total pre-tax savings $ 805 $ 725 $ 560 $ 395 $ 325 $ 215 $ 85 27 Segment operating results do not include restructuring charges, implementation costs and other related costs because we evaluate segment performance excluding such charges. A summary of the pre-tax costs in Earnings from continuing operations associated with segments is as follows: October 31, 2021 (Millions) Three Months Ended Costs Incurred to Date Meals & Beverages $ 1 $ 224 Snacks 3 302 Corporate — 172 Total $ 4 $ 698 Through April 28, 2019, we incurred pre-tax charges of $ 23 million in Earnings from discontinued operations consisting of $ 19 million of severance pay and benefits and $ 4 million of implementation costs and other related costs. All of the costs were cash expenditures. Expanded Initiatives in 2022 We continue to pursue cost savings initiatives by further optimizing our supply chain and manufacturing network and through effective cost management. We are pursuing additional initiatives that will generate incremental annual ongoing savings of approximately $150 million by the end of 2025. With these expanded initiatives, we expect to generate cumulative annual pre-tax savings of approximately $1 billion by the end of 2025. Cost estimates will be updated as the expanded initiatives are developed. LIQUIDITY AND CAPITAL RESOURCES We expect foreseeable liquidity and capital resource requirements to be met through anticipated cash flows from operations; long-term borrowings; short-term borrowings, which may include commercial paper; credit facilities; and cash and cash equivalents. We believe that our sources of financing will be adequate to meet our future requirements. We generated cash flows from operations of $288 million in 2022, compared to $180 million in 2021. The increase in 2022 was primarily due to changes in working capital, principally accounts payable and accrued liabilities, partially offset by lower cash earnings. Current assets are less than current liabilities as a result of our level of current maturities of long-term debt and short-term borrowings and our focus to lower core working capital requirements. We had negative working capital of $462 million as of October 31, 2021, and $119 million as of August 1, 2021. Total debt maturing within one year was $480 million as of October - 31, 2021, and $48 million as of August 1, 2021. Capital expenditures were $69 million in 2022 and $74 million in 2021. Capital expenditures are expected to total approximately $300 million in 2022. Pepperidge Farm and Snyder’s-Lance have a direct-store-delivery distribution model that uses independent contractor distributors. In order to maintain and expand this model, we routinely purchase and sell routes. The purchase and sale proceeds of the routes are reflected in investing activities. Dividend payments were $116 million in 2022 and $108 million in 2021. The regular quarterly dividend paid on our capital stock was $.37 per share in the first quarter of 2022 and $.35 per share in the first quarter of 2021. On December 1, 2021, the Board of Directors declared a regular quarterly dividend of $.37 per share payable on January 31, 2022 to shareholders of record at the close of business on January 6, 2022. In June 2021, the Board authorized an anti-dilutive share repurchase program of up to $250 million (June 2021 program) to offset the impact of dilution from shares issued under our stock compensation programs. The June 2021 program has no expiration date, but it may be suspended or discontinued at any time. Repurchases under the anti-dilutive program may be made in open-market or privately negotiated transactions. In September 2021, the Board approved a new strategic share repurchase program of up to $500 million (September 2021 program). The September 2021 program has no expiration date, but it may be suspended or discontinued at any time. Repurchases under the September 2021 program may be made in open-market or privately negotiated transactions. The September 2021 program replaced the prior $1,500 million program, which our Board approved in March 2017 and has been cancelled. We repurchased approximately 1.5 million shares at a cost of $63 million in 2022. Of this amount, $38 million was used to repurchase shares pursuant to our June 2021 program and $25 million was used to repurchase shares pursuant to our September 2021 program. As of October 31, 2021, approximately $176 million remained available under the June 2021 program and approximately $475 million remained available under the September 2021 program. See Note 12 to the Consolidated Financial Statements and “Unregistered Sales of Equity Securities and Use of Proceeds” for additional information. 28 As of October 31, 2021, we had $480 million of short-term borrowings due within one year, $15 million of which was comprised of commercial paper borrowings. As of October 31, 2021, we issued $32 million of standby letters of credit. On November 2, 2020, we entered into a committed revolving credit facility totaling $1,850 million scheduled to mature on November 2, 2023. On September 27, 2021, we replaced the current facility with a new $1,850 million committed revolving facility that matures on September 27, 2026. The facility remained unused at October 31, 2021, except for $1 million of standby letters of credit that we issued under it. The facility contains customary covenants, including a financial covenant with respect to a minimum consolidated interest coverage ratio of consolidated adjusted EBITDA to consolidated interest expense (as each is defined in the credit facility) of not less than 3.25:1.00, measured quarterly, and customary events of default for credit facilities of this type. Loans under this facility will bear interest at the rates specified in the facility, which vary based on the type of loan and certain other customary conditions. The facility supports our commercial paper program and other general corporate purposes. We expect to continue to access the commercial paper markets, bank credit lines and utilize cash flows from operations to support our short-term liquidity requirements. We are in compliance with the covenants contained in our credit facilities and debt securities. In September 2020, we filed a registration statement with the Securities and Exchange Commission that registered an indeterminate amount of debt securities. Under the registration statement, we may issue debt securities from time to time, depending on market conditions. SIGNIFICANT ACCOUNTING ESTIMATES We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates and assumptions. Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended August 1, 2021 (2021 Annual Report on Form 10-K). The accounting policies we used in preparing these financial statements are substantially consistent with those we applied in our 2021 Annual Report on Form 10-K. Our significant accounting estimates are described in Management’s Discussion and Analysis included in the 2021 Annual Report on Form 10‑K. RECENT ACCOUNTING PRONOUNCEMENTS See Note 2 to the Consolidated Financial Statements for information on recent accounting pronouncements. FORWARD LOOKING STATEMENTS This Report contains "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current expectations regarding our future results of operations, economic performance, financial condition and achievements. These forward-looking statements can be identified by words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "pursue," "strategy," "target," "will" and similar expressions. One can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts, and may reflect anticipated cost savings or implementation of our strategic plan. These statements reflect our current plans and expectations and are based on information currently available to us. They rely on several assumptions regarding future events and estimates which could be inaccurate and which are inherently subject to risks and uncertainties. We wish to caution the reader that the following important factors and those important factors described in our other Securities and Exchange Commission filings, or in our 2021 Annual Report on Form 10-K, could affect our actual results and could cause such results to vary materially from those expressed in any forward-looking statements made by, or on behalf of, us: • impacts of, and associated responses to the COVID-19 pandemic on our business, suppliers, customers, consumers and employees; • our ability to execute on and realize the expected benefits from our strategy, including growing sales in snacks and growing/maintaining our market share position in soup; • the impact of strong competitive responses to our efforts to leverage brand power with product innovation, promotional programs and new advertising; • the risks associated with trade and consumer acceptance of product improvements, shelving initiatives, new products and pricing and promotional strategies; • our ability to realize projected cost savings and benefits from cost savings initiatives and the integration of recent acquisitions; 29 • disruptions in or inefficiencies to our supply chain and/or operations including the impacts of the COVID-19 pandemic; • the risks related to the availability of, and cost inflation in, supply chain inputs, including labor, raw materials, commodities, packaging and transportation; • risks related to the effectiveness of our hedging activities and our ability to respond to volatility in commodity prices; • our ability to manage changes to our organizational structure and/or business processes, including selling, distribution, manufacturing and information management systems or processes; • changes in consumer demand for our products and favorable perception of our brands; • changing inventory management practices by certain of our key customers; • a changing customer landscape, with value and e-commerce retailers expanding their market presence, while certain of our key customers maintain significance to our business; • product quality and safety issues, including recalls and product liabilities; • the possible disruption to the independent contractor distribution models used by certain of our businesses, including as a result of litigation or regulatory actions affecting their independent contractor classification; • the uncertainties of litigation and regulatory actions against us; • the costs, disruption and diversion of management's attention associated with activist investors; • a material failure in or breach of our or our vendors' information technology systems; • impairment to goodwill or other intangible assets; • our ability to protect our intellectual property rights; • increased liabilities and costs related to our defined benefit pension plans; • our ability to attract and retain key talent; • goals and initiatives related to, and the impacts of, climate change, including from weather-related events; • negative changes and volatility in financial and credit markets, deteriorating economic conditions and other external factors, including changes in laws and regulations; and • unforeseen business disruptions in one or more of our markets due to political instability, civil disobedience, terrorism, armed hostilities, extreme weather conditions, natural disasters, other pandemics or other calamities. This discussion of uncertainties is by no means exhaustive but is designed to highlight important factors that may impact our outlook. We disclaim any obligation or intent to update forward-looking statements made by us in order to reflect new information, events or circumstances after the date they are made. Item 3. Quantitative and Qualitative Disclosure About Market Risk For information regarding our exposure to certain market risk, see Item 7A, Quantitative and Qualitative Disclosure About Market Risk, in the 2021 Annual Report on Form 10-K. There have been no significant changes in our portfolio of financial instruments or market risk exposures from the 2021 year-end.