Conagra Brands, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended May 26, 2019 (52 weeks), with comparison to fiscal 2018. Although the request identifies “2018 Q4,” this filing reports FY2019; it also provides unaudited fourth-quarter data. Amounts below are in U.S. dollars.
Business context and reporting period
Conagra is a branded packaged-food company with Grocery & Snacks, Refrigerated & Frozen, International, Foodservice, and Pinnacle Foods reporting segments. Pinnacle was acquired on October 26, 2018, so its FY2019 results include only 213 days of ownership. The company also sold its Canadian Del Monte processed-food business, Wesson oil business, and Italian Gelit frozen-pasta business during FY2019.
Key financial metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $9,538.4 million | $7,938.3 million |
| Gross profit | $2,653.0 million | $2,351.5 million |
| Gross margin, calculated | 27.8% | 29.6% |
| Income from continuing operations | $680.3 million | $797.5 million |
| Net income attributable to Conagra | $678.3 million | $808.4 million |
| Diluted EPS | $1.52 | $1.98 |
| Net interest expense | $391.4 million | $158.7 million |
| Operating cash flow, continuing operations | $1,114.3 million | $919.7 million |
| Capital expenditures | $353.1 million | $251.6 million |
| Cash and cash equivalents at year-end | $236.6 million | $128.0 million |
| Total assets | $22,213.8 million | $10,389.5 million |
| Total debt, face value | $10,722.0 million | $3,526.4 million |
FY2019 operating cash flow less capital expenditures was approximately $761 million. Current assets were $2,733.8 million versus current liabilities of $2,142.6 million, a current ratio of approximately 1.28. The company had no borrowings under its $1.6 billion revolving credit facility or commercial-paper program at year-end and reported compliance with debt covenants. Its senior long-term debt ratings remained investment grade.
FY2019 quarterly data show fourth-quarter sales of $2,613.2 million and income from continuing operations of $125.2 million, compared with $1,966.2 million and $70.6 million, respectively, in FY2018’s fourth quarter.
Material changes versus FY2018
- Sales increased 20%, principally reflecting the Pinnacle acquisition. Organic growth was reported in Refrigerated & Frozen and International; Grocery & Snacks sales were nearly flat, while Foodservice sales fell 11%.
- Gross profit dollars increased, but calculated gross margin declined to 27.8% from 29.6%. Management cited higher transportation costs, input-cost inflation, and increased retailer marketing investment, partly offset by productivity and pricing.
- Segment operating profit rose to $1,641.8 million from $1,412.5 million, primarily due to Pinnacle. Existing segments had mixed results: Refrigerated & Frozen and International improved, while Grocery & Snacks and Foodservice declined.
- Continuing-operations income and diluted EPS fell year over year. Higher interest expense following acquisition financing and higher income-tax expense contributed; results also included substantial restructuring, acquisition, impairment, and divestiture items.
- Operating cash flow from continuing operations improved, while investing cash outflow increased sharply due to the $5.12 billion net cash purchase of Pinnacle. Financing included new debt and equity issuance, debt repayments, and dividends; no common shares were repurchased in FY2019’s fourth quarter.
Outlook, management commentary, risks, and unusual items
- Management said Pinnacle integration was on track and expected annual cost synergies of $285 million when integration is complete. The company’s stated expectation is not a guarantee of realization.
- The Pinnacle integration plan could involve up to $360 million of operating expenditures ($285 million cash and $75 million non-cash) and $85 million of capital expenditures. Through FY2019, approximately $260.1 million of charges had been incurred or expected for identified actions.
- FY2020 outlook included an expected effective tax rate of approximately 24%–25%, capital expenditures of approximately $400 million, and an intended annual dividend rate of $0.85 per share, subject to conditions and Board approval. The filing does not provide a clear consolidated sales or EPS forecast.
- FY2019 comparability items included $180.8 million of restructuring charges, $118.1 million of acquisition and divestiture costs, $89.6 million of intangible impairment charges, $53.0 million of acquired-inventory fair-value costs, and $69.4 million of gains from divestitures. The company recorded impairments primarily for Chef Boyardee and Red Fork brands.
- Debt increased substantially to finance Pinnacle, and interest expense rose 147% to $391.4 million. Management identifies deleveraging and continued access to capital as risks; debt covenants include minimum interest coverage and maximum funded-debt-to-EBITDA requirements.
- Walmart and affiliates represented approximately 24% of consolidated sales in each of FY2017–FY2019. Other key risks include commodity and transportation cost volatility, competitive pricing, customer concentration, changing consumer preferences, supply disruptions, food safety and recalls, and successful integration of Pinnacle.
- For the California lead-paint litigation, the parties reached an agreement in principle after year-end for Conagra to pay $101.7 million in seven annual installments from FY2020 through FY2026 and provide a guarantee of up to $15 million if a co-defendant defaults. The agreement remained subject to trial-court approval; Conagra had accrued $99.4 million for the matter at year-end. Environmental liabilities included a $52.8 million accrual for Beatrice-related matters.
- Auditors gave an unqualified opinion on the financial statements and internal control over financial reporting. The FY2019 internal-control assessment excluded Pinnacle, which represented $12.06 billion of assets and $1.73 billion of sales included in the consolidated statements.
Important facts for investors to verify
- Whether Pinnacle integration delivers the targeted $285 million annual synergies, on schedule and after related restructuring and capital costs.
- Debt reduction, interest expense, covenant headroom, and progress toward management’s deleveraging objectives.
- Underlying sales, volume, pricing, and margins by segment, separating acquisition effects, divestitures, and unusual items.
- Final purchase-price allocation for Pinnacle and the sensitivity of goodwill and acquired brands to future impairment tests.
- Approval and payment schedule of the lead-paint settlement, along with potential exposure from other litigation and environmental matters.
- Integration of Pinnacle into internal controls and any resulting changes to financial reporting or control assessments.