Conagra Brands, Inc. — Form 10-Q Summary
Reporting period: Fiscal 2020 third quarter (13 weeks ended February 23, 2020), with year-to-date results for the 39 weeks ended that date. The filing’s comparable periods ended February 24, 2019. This is fiscal 2020 Q3, notwithstanding the request metadata’s “2019 Q3.” Amounts are in U.S. dollars.
Business context and results
Conagra is a branded food company. Its reporting segments are Grocery & Snacks, Refrigerated & Frozen, International, and Foodservice. The company completed its Pinnacle Foods acquisition in October 2018 and reorganized segment reporting in fiscal 2020 to reflect how the combined business is managed.
| Metric | Q3 FY2020 | Q3 FY2019 | 39 weeks FY2020 | 39 weeks FY2019 |
|---|---|---|---|---|
| Net sales | $2.555 billion | $2.707 billion | $7.767 billion | $6.925 billion |
| Gross profit | $684.4 million | $752.3 million | $2.147 billion | $1.945 billion |
| Gross margin | 26.8% | 27.8% | 27.6% | 28.1% |
| Operating profit, by segment | $439.6 million | $480.8 million | $1.319 billion | $1.253 billion |
| Net income attributable to Conagra | $204.4 million | $242.0 million | $638.7 million | $551.8 million |
| Diluted EPS | $0.42 | $0.50 | $1.31 | $1.27 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $906.5 million | $745.1 million |
| Capital expenditures | Not presented for quarter | Not presented for quarter | $265.3 million | $236.1 million |
Financial position and liquidity
- At February 23, 2020, cash and cash equivalents were $99.0 million. Total debt, including current installments and subordinated debt, was approximately $10.02 billion, down from approximately $10.68 billion at May 26, 2019.
- Current assets were $2.71 billion versus current liabilities of $3.13 billion, a current-liability excess of about $418 million. The current debt installment was $923.8 million.
- Cash declined by $137.6 million during the first 39 weeks. Operating cash flow of $906.5 million and investing outflows of $59.9 million were more than offset by financing outflows of $984.6 million, principally debt repayments and dividends.
- There were no borrowings under the $1.6 billion revolving credit facility or commercial paper program at quarter-end; the company reported covenant compliance. The term loan was fully repaid and terminated during the period.
- About $900 million of debt was expected to mature within 12 months. Management expected to use operating cash flow and, as appropriate, refinancing, capital markets, divestitures, commercial paper, or the revolver. The filing notes commercial paper access could be more difficult or costly amid COVID-19-related market disruption.
- Management estimated fiscal 2020 capital expenditures of approximately $370 million and said available cash, operating cash flow, credit facilities, and capital-market access should cover expected needs for at least 12 months. It intended to maintain the fiscal 2020 annual dividend rate of $0.85 per share, subject to conditions and Board approval.
Changes versus comparable periods
- Quarterly sales fell 6% and diluted EPS fell from $0.50 to $0.42. Management cited divestitures, lower volumes, higher input costs, retailer brand-building investment, inventory write-offs, and warmer-than-normal winter weather; supply-chain productivity and synergies partly offset these pressures.
- Year-to-date sales rose 12%, principally because the prior-year comparison included Pinnacle only from its October 2018 acquisition date. The acquisition contributed $406.3 million of Grocery & Snacks sales, $567.6 million of Refrigerated & Frozen sales, $46.0 million of International sales, and $57.7 million of Foodservice sales during the year-to-date period through its anniversary.
- Quarterly segment sales declined in all four segments. Year-to-date Refrigerated & Frozen sales and operating profit increased substantially, including the acquisition effect. Quarterly operating profit declined in Grocery & Snacks, International, and Foodservice, while Refrigerated & Frozen increased slightly.
- Year-to-date net income and EPS increased despite higher year-to-date interest expense ($361.8 million versus $260.5 million). Comparisons include acquisition timing and multiple unusual items, including restructuring, asset impairments, tax benefits, and prior-year acquisition-related accounting effects.
- Working capital included seasonal inventory growth; management said increased accounts payable, including extended supplier payment terms, and collection timing more than offset the cash impact of inventory builds.
Outlook, commentary, risks, and unusual items
- Pinnacle integration: Management said integration remained on track and expected annual cost synergies of $305 million when complete. The Pinnacle restructuring plan is expected to continue through fiscal 2022; identified actions were estimated to involve approximately $363.8 million of charges. A separate Conagra restructuring plan is expected to continue over multiple years.
- COVID-19: Management expected reduced away-from-home consumer traffic to hurt Foodservice sales at least through the remainder of fiscal 2020. It also reported increased North American retail orders after quarter-end as consumers purchased more food for home, while warning that demand could reverse. The ultimate effects on operations, supply chain, results, and liquidity were uncertain.
- Restructuring and impairments: First-three-quarter charges included $117.1 million for restructuring, $59.0 million for businesses held for sale, and $19.3 million for brand impairments. The filing also reports a $6.6 million increase in an environmental reserve and an $11.9 million contract-settlement gain.
- Portfolio actions: Conagra sold its Lender’s bagel business for net proceeds of $33.2 million and its DSD Snacks business for $139.0 million; it also sold a peanut butter manufacturing facility and exited private-label peanut butter. Prior-period sales comparisons were affected by these and earlier divestitures.
- Litigation and contingencies: A California lead-paint matter was settled for $101.7 million payable in seven annual installments from fiscal 2020 through fiscal 2026; $74.4 million was accrued at quarter-end. Conagra also guaranteed up to $15.0 million if a co-defendant defaults. Beatrice-related environmental reserves were $58.2 million. The company reported securities and shareholder litigation related to Pinnacle but did not expect those matters to have a material adverse effect; it cautioned that estimates for contingencies could change materially.
- Other risk factors: Risks include Pinnacle synergy and integration execution, deleveraging, commodity and foreign-exchange volatility, consumer preferences, supply-chain disruption, customer concentration, and possible goodwill or intangible-asset impairments. Walmart accounted for about 27% of quarterly sales and 33% of receivables at quarter-end.
- Accounting and pension items: Adoption of lease accounting added operating lease right-of-use assets and liabilities; management said adoption did not materially affect earnings or cash flows. A pension settlement involving $154.6 million of lump-sum payments generated a $2.1 million settlement gain and a $79.8 million benefit in other comprehensive income.
Important facts for investors to verify
- How much of reported year-to-date growth and segment performance reflects Pinnacle acquisition timing rather than organic growth, and whether the stated $305 million synergy target is being achieved.
- The ability to refinance or repay approximately $900 million of near-term maturities while managing substantial debt, limited cash, and potential disruption to commercial-paper markets.
- Whether quarterly sales, gross margin, and segment profit trends improve after divestitures, input-cost pressure, retailer investment, and lower volumes.
- The duration and financial effects of COVID-19 on Foodservice demand, retail order patterns, employees, suppliers, and operations.
- Remaining restructuring costs, impairment assumptions, and the resolution and potential range of legal and environmental exposures.
- Whether operating cash flow supports planned capital expenditures, dividends, debt reduction, and other liquidity needs.