Conagra Brands, Inc. — Q2 Fiscal 2022 Form 10-Q
Reporting period: The 13 weeks ended November 28, 2021, and the first 26 weeks of fiscal 2022; comparisons are with the corresponding periods ended November 29, 2020. Amounts are in millions unless otherwise noted.
Business context and results
Conagra is a branded food company operating through Grocery & Snacks, Refrigerated & Frozen, International, and Foodservice segments. Management said second-quarter sales increased, but input-cost inflation, higher transportation costs, and lower volumes in retail businesses pressured profitability. Retail volumes were compared with the prior year’s pandemic-related surge; Foodservice continued to recover.
| Metric | Q2 FY2022 | Q2 FY2021 | First half FY2022 | First half FY2021 |
|---|---|---|---|---|
| Net sales | $3,058.9 | $2,995.2 | $5,712.2 | $5,674.1 |
| Gross profit | $754.8 | $888.9 | $1,428.2 | $1,699.1 |
| Gross margin | 24.7% | 29.7% | 25.0% | 29.9% |
| Net income attributable to Conagra | $275.5 | $378.9 | $510.9 | $707.9 |
| Diluted EPS | $0.57 | $0.77 | $1.06 | $1.44 |
| Net interest expense | $94.9 | $107.7 | $189.1 | $221.4 |
Gross profit and margins are calculated from reported net sales less cost of goods sold. The filing attributes lower gross profit primarily to inflation and transportation costs, with partial offsets from pricing, productivity, Pinnacle-related cost synergies, and lower pandemic-related costs. Segment operating profit fell across all four segments in Q2: Grocery & Snacks $249.2 (down 21%), Refrigerated & Frozen $168.3 (down 36%), International $37.1 (down 6%), and Foodservice $13.8 (down 39%).
Cash flow, debt, and liquidity
- First-half operating cash flow was $262.1, down from $541.4. The company cited lower gross profit and unfavorable timing of accounts-payable payments, partly offset by lower tax, interest, and pension contributions.
- Capital expenditures were $257.5, producing approximately $4.6 of operating cash flow less capital expenditures. Investing cash outflow was $244.2; financing cash outflow was $23.7. Cash and cash equivalents were $68.7 at November 28, 2021.
- Long-term debt, including current installments, was approximately $8.80 billion; notes payable were $585.8. The filing reports total current liabilities of $3,277.0 and current assets of $3,039.3. No borrowings were outstanding under the $1.6 billion revolving credit facility.
- Commercial paper outstanding was $580.3. The company issued $500 million of 0.500% senior notes due August 2023. It was in compliance with its credit-facility covenants and reported investment-grade senior debt ratings.
- Cash dividends paid in the first half were $282.0. The quarterly dividend was $0.3125 per share. Management said available cash, operating cash flows, credit facilities, commercial paper, and capital-market access should provide sufficient liquidity for at least the next 12 months.
Material changes and unusual items
- Q2 sales rose about 2%, while first-half sales rose about 1%; net income attributable to Conagra fell about 27% in Q2 and 28% in the first half. Management cited lower retail volumes versus pandemic-driven comparisons and significant cost inflation.
- In Q2, Conagra recorded a $39.2 impairment charge for businesses planned for sale, with the assets and liabilities classified as held for sale and expected to be sold within 12 months. The impairment was allocated across Grocery & Snacks, Refrigerated & Frozen, and Foodservice.
- Other Q2 comparability items included a $14.6 legal-settlement gain, a $3.3 gain from proceeds on a legacy investment, and $12.4 of restructuring charges. First-half restructuring charges were $28.2.
- The company continued its Pinnacle integration and broader restructuring plans. It estimated approximately $346.5 of total charges for identified actions under the Pinnacle plan and reported $143.4 of charges incurred or expected for identified actions under the Conagra plan; both plans are expected to continue over multiple years.
- Q2 effective tax rate was 23.4%, versus 17.6% a year earlier; first-half rates were 23.1% and 19.1%. The prior-year comparison included a $25.3 tax benefit related to the planned Peter Pan divestiture.
Outlook, commentary, and risks
Management expected input-cost inflation to remain elevated through the rest of fiscal 2022. Pricing and supply-chain productivity were expected to offset some, but not all, of the cost pressure during the year; the company said it could not practically quantify the inflation impact because estimates continued to change. It also expected pandemic-related and supply-chain costs to decline, while noting uncertainty around COVID-19, demand patterns, and supply availability. The filing provides a fiscal 2022 capital-expenditure estimate of approximately $500 million, but no specific full-year earnings or sales guidance.
Key risks described include commodity, packaging, and transportation costs; supply-chain disruption; changing consumer demand as pandemic effects evolve; execution of pricing, productivity, restructuring, and Pinnacle integration plans; access to capital and deleveraging; customer concentration; and litigation and regulatory matters. Walmart and affiliates accounted for approximately 27% of Q2 sales and 31% of receivables at period-end.
Contingencies include a $54.5 accrual for Beatrice-related environmental matters and a $2.2 million proposed Minnesota pollution-control penalty for 2020, with settlement discussions ongoing and a further 2021 penalty pending. The company also disclosed lead-paint, product-labeling, wage-and-hour, cooking-spray product-liability, and securities-related litigation. Management did not expect the disclosed matters, after recorded accruals, to materially affect the company, while acknowledging estimates could change materially.
Important facts for investors to verify
- Whether pricing and productivity can catch up with persistent inflation and transportation costs, and how those pressures affect gross margins.
- Whether working-capital needs and operating cash generation improve after the first-half decline, particularly as inventories and receivables increased.
- Progress, expected proceeds, and any further impairment charges related to the businesses classified as held for sale.
- Debt refinancing and deleveraging capacity, covenant headroom, and the company’s ability to sustain dividends and planned capital spending.
- Developments in environmental and other litigation contingencies, including the Minnesota penalty and the status of the recorded reserves.