Conagra Brands, Inc. — Form 10-Q Summary
Business context and reporting period. Conagra is a branded food company with Grocery & Snacks, Refrigerated & Frozen, International, and Foodservice segments. This filing covers the 13 and 39 weeks ended February 26, 2023 (fiscal 2023 third quarter and first three quarters), compared with the corresponding fiscal 2022 periods. Financial statements are unaudited.
Key financial metrics
| Metric | 13 weeks ended Feb. 26, 2023 | Prior-year quarter | 39 weeks ended Feb. 26, 2023 | Prior-year period |
|---|---|---|---|---|
| Net sales | $3,086.5 million | $2,913.7 million | $9,303.7 million | $8,625.9 million |
| Gross profit | $838.8 million | $697.2 million | $2,481.4 million | $2,125.4 million |
| Gross margin | 27.2% | 23.9% | 26.7% | 24.6% |
| Net income attributable to Conagra | $341.7 million | $218.4 million | $646.1 million | $729.3 million |
| Diluted EPS | $0.71 | $0.45 | $1.34 | $1.51 |
| Net interest expense | $104.2 million | $94.6 million | $301.6 million | $283.7 million |
| Operating cash flow | Not presented separately for the quarter | Not presented separately for the quarter | $703.4 million | $752.6 million |
- Third-quarter sales increased about 6%; nine-month sales increased about 8%. Management attributed growth principally to inflation-driven pricing, while volumes declined across segments.
- Third-quarter segment operating profit was $580.9 million versus $424.1 million. Nine-month segment operating profit was $1,299.2 million versus $1,320.4 million.
- Cash used in investing activities was $260.2 million for the first three quarters, including $267.4 million of capital expenditures. Operating cash flow less capital expenditures was approximately $436 million, versus approximately $388 million in the prior-year period.
- At February 26, 2023, cash was $71.2 million; current assets were $3.45 billion and current liabilities were $3.56 billion. Inventories were $2.31 billion, up from $1.97 billion at May 29, 2022.
- Long-term debt, including current installments, had a carrying amount of $8.60 billion; notes payable were $658.0 million. Commercial paper outstanding was $569.0 million. The company had no borrowings under its $2.0 billion revolving credit facility and reported compliance with its covenants.
Material changes versus comparable periods
- Third-quarter diluted EPS rose to $0.71 from $0.45, reflecting higher net income; the prior-year quarter included $30.9 million of impairment charges on businesses previously held for sale.
- Nine-month diluted EPS fell to $1.34 from $1.51. Results included $385.7 million of goodwill and Birds Eye brand impairment charges in fiscal 2023, largely reflecting higher discount rates and reduced sales forecasts.
- Fiscal 2023 nine-month net income also reflected $26.7 million of impairments of businesses previously held for sale and $14.5 million of charges associated with fires at a manufacturing facility.
- Quarterly gross margin improved by about 325 basis points year over year. Management cited pricing, productivity, and lower transportation costs, partly offset by input inflation, unfavorable operating leverage, and elevated supply-chain costs.
- Nine-month operating cash flow declined by $49.2 million, primarily due to higher inventory, payment timing for accounts payable, and increased tax and interest payments.
- Net interest expense increased, which management attributed to a higher weighted-average interest rate on debt. The company repaid $437 million of 3.20% senior notes in January 2023, primarily using commercial paper; a $500 million term loan was drawn earlier in fiscal 2023.
Outlook, commentary, risks, and unusual items
- Management expects input-cost inflation to remain elevated through the rest of fiscal 2023, with pricing actions and supply-chain productivity expected to mitigate some pressure. The filing does not provide a clear full-year EPS or sales guidance figure.
- Management flagged heightened risk of additional goodwill or brand impairments as interest rates and economic uncertainty persist; the annual impairment assessment was planned for fiscal fourth quarter.
- Pricing supported sales, but volume declines reflected consumer elasticity and supply constraints. In Grocery & Snacks, volumes fell 10% in the quarter; Refrigerated & Frozen volumes also fell 10%. Foodservice volume declined 1%.
- An Armour Star-related recall reduced quarterly sales by $7.8 million for estimated returns and fees; management also estimated approximately $16 million of lost sales for the quarter.
- Liquidity: management believes cash, operating cash flow, credit facilities, commercial paper, and capital-market access will cover obligations, working capital, capital spending, and anticipated dividends for at least the next 12 months. Fiscal 2023 capital expenditures were estimated at approximately $370 million.
- Material contingencies include a proposed $6.8 million Minnesota environmental penalty, still under negotiation; approximately $38.7 million accrued for legacy Beatrice environmental matters; and $40.6 million accrued for the California lead-paint settlement. The company also guarantees up to $75 million of a Lamb Weston farmland sublease obligation, subject to an indemnity from Lamb Weston.
- Other risks cited include commodity, interest-rate, and foreign-exchange exposure; supply-chain and inflation pressures; customer and consumer changes; litigation; and execution of restructuring and integration plans. Walmart and affiliates accounted for approximately 28% of consolidated sales in the quarter and 32% of receivables at period-end.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported sales growth is price-driven, and whether volume declines persist as pricing and consumer elasticity evolve.
- Whether the company can sustain gross-margin recovery while input inflation and supply-chain costs remain elevated.
- The assumptions and sensitivity behind the $385.7 million goodwill and Birds Eye impairment, and the risk of further impairment.
- Inventory levels, working-capital needs, and cash conversion, given the increase in inventories and lower year-to-date operating cash flow.
- Debt costs and refinancing needs, including commercial-paper exposure, upcoming maturities, and covenant headroom.
- Developments in the Armour Star recall, Minnesota environmental negotiations, legacy litigation, and other contingencies.
- Whether the company’s stated liquidity sources remain available on acceptable terms and support planned capital expenditures and dividends.