Conagra Brands, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, the thirteen weeks ended August 26, 2018. Comparatives are for the thirteen weeks ended August 27, 2017. Dollar amounts are in millions unless otherwise stated.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $1,834.4 | $1,804.2 | +2% |
| Segment operating profit | $339.0 | $320.2 | +6% |
| Income from continuing operations | $178.2 | $153.6 | +16% |
| Net income attributable to Conagra | $178.2 | $152.5 | +17% |
| Diluted EPS | $0.45 | $0.36 | +$0.09 |
| Operating cash flow | $94.7 | $141.5 | Down $46.8 |
| Capital expenditures | $86.1 | $42.6 | Up $43.5 |
- Gross margin declined slightly, with higher-than-anticipated input and transportation costs and increased brand and innovation investment. Segment operating profit benefited from the Del Monte Canada sale gain and Topic 606 adoption; higher corporate expense, interest expense, and lower equity-method earnings partly offset gains.
- Net interest expense rose to $49.0 from $36.4, including $5.6 of amortized bridge-financing costs. Equity-method investment earnings fell to $16.2 from $30.0.
- Income tax expense fell to $57.4 from $120.0; the effective tax rate was 24.4% versus 43.9%, reflecting the lower statutory rate under the Tax Act and other tax items.
- Cash and cash equivalents were $74.8 at quarter-end, down from $128.0 at fiscal year-end. Total liabilities were $6,670.0 and stockholders’ equity was $3,815.0.
- Debt, notes payable, and capital lease obligations totaled approximately $3.83 billion. Commercial paper outstanding was $304.1; the $1.6 billion revolving facility had no borrowings, and the company reported compliance with its financial covenants.
Material changes and business developments
- Sales increased in Grocery & Snacks (+3%), Refrigerated & Frozen (+3%), and International (+2%); Foodservice sales fell 7%, largely reflecting the Trenton facility sale and discontinuation of lower-performing businesses.
- International segment operating profit nearly doubled to $37.3, including a $13.3 gain on the Del Monte Canada divestiture. Refrigerated & Frozen operating profit declined 6% amid cost inflation; Foodservice operating profit rose 19% despite lower sales.
- Q1 results included $16.6 of acquisition and planned-divestiture costs, $4.3 of Pinnacle integration costs, a $13.3 Del Monte Canada sale gain, and a $4.8 Mexican tax-reserve benefit. Prior-year comparability included $11.4 of restructuring charges and a $27.8 tax charge related to foreign earnings.
- Adopting Topic 606 affected reported Q1 net sales by $9.3 and pre-tax continuing-operations income by $16.1 versus the amounts that would have been reported without adoption. Management said it identified no material differences in its revenue-contract accounting overall.
Outlook, financing, and risks
- The planned Pinnacle acquisition was valued at approximately $10.9 billion including Pinnacle net debt, with expected closing by the end of October 2018, subject to shareholder approval and other closing conditions. Conagra expected up to $8.3 billion of long-term debt and approximately $575 million of incremental cash proceeds from equity issuance and/or divestitures to support the transaction. The filing states the acquisition had no financing condition.
- Management estimated fiscal 2019 capital expenditures of approximately $350 million, excluding any incremental Pinnacle-related amounts. It expected sufficient liquidity for at least the next twelve months and intended to maintain the quarterly dividend at an annualized $0.85 per share, subject to market conditions and board approval; it also cited a focus on deleveraging.
- Wesson oil remained held for sale after the prior sale agreement was terminated following an FTC challenge; Conagra said it was actively marketing the business and expected a sale within twelve months.
- The California lead-paint case remained a significant contingency. A September 4, 2018 trial-court estimate set the remediation fund at $409.0, while Conagra had accrued $136.0. Allocation among defendants, participation, appeals, timing, and insurance recovery remained uncertain; the company warned a final judgment could materially affect financial condition, results, or liquidity.
- The Nebraska Supreme Court affirmed a $108.9 jury verdict against Conagra in the Jacobs matter on September 14, 2018; the company expected exposure to be limited to its insurance deductible, though insurers had reserved rights. Pinnacle shareholder lawsuits also sought, among other relief, to enjoin the acquisition.
- Key operating risks include commodity and transportation inflation, consumer and competitive conditions, execution of acquisition synergies and restructuring, financing and integration risks, and uncertainty in legal and tax matters. Management reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether the Pinnacle acquisition closed on the anticipated timeline and what final debt, equity, and divestiture financing was used.
- Underlying organic sales, volume, pricing, and margins by segment, especially Foodservice and the cost pressures in Grocery & Snacks and Refrigerated & Frozen.
- Cash conversion and working-capital trends, including the increase in inventories and the year-over-year decline in operating cash flow.
- Developments in the California lead-paint case, the adequacy of the $136.0 accrual, allocation of the potential fund, and any insurance recovery; also monitor the Jacobs and merger-related cases.
- Progress on Wesson divestiture, expected capital spending, restructuring costs, and post-acquisition deleveraging.