CONAGRA BRANDS INC. annual report, FY2017

Conagra Brands, Inc. — FY2017 Form 10-K

Business context and reporting period. Conagra is a branded food company reporting for the 52 weeks ended May 28, 2017; fiscal 2016 was also 52 weeks. The company operated Grocery & Snacks, Refrigerated & Frozen, International, Foodservice, and Commercial segments. Lamb Weston was spun off on November 9, 2016, and is presented as discontinued operations in all periods. Fiscal 2017 also included the sale of Spicetec and JM Swank and acquisitions of Frontera/Red Fork and Thanasi/BIGS.

Financial performance and liquidity

Metric	FY2017	FY2016
Net sales	$7.827 billion	$8.664 billion
Gross profit / gross margin	$2.342 billion / 29.9%	$2.429 billion / 28.0%
Income from continuing operations	$546.0 million	$128.5 million
Net income (loss) attributable to Conagra	$639.3 million	$(677.0) million
Diluted EPS, continuing operations	$1.25	$0.29
Diluted EPS, total	$1.46	$(1.56)
Operating cash flow, continuing operations	$1.141 billion	$625.5 million
Cash and cash equivalents at year-end	$251.4 million	$798.1 million

Net sales declined 10% year over year. Segment sales fell in each continuing segment; the Commercial segment’s reported sales also dropped sharply following the first-quarter sale of its businesses.
Segment operating profit totaled $1.238 billion, up from $1.223 billion. Grocery & Snacks, Refrigerated & Frozen, and Foodservice improved; International recorded a $168.9 million operating loss, principally reflecting impairment charges.
Interest expense declined to $195.5 million from $295.8 million, reflecting substantial debt repayments and the Lamb Weston-related debt exchange. Income tax expense was $254.7 million; the effective tax rate was approximately 32%.
Capital expenditures were $242.1 million. Continuing-operations investing cash flow was a net use of $65.6 million, including $489.0 million of proceeds from the Spicetec and JM Swank sales and $325.7 million of acquisition spending.
Reported cash decreased by $583.1 million during the year. Continuing-operations financing used $2.408 billion, including $1.064 billion of long-term debt repayments, $1.0 billion of share repurchases, and $415.0 million of dividends paid.
At year-end, long-term debt carrying value was $2.769 billion, current long-term debt installments were $199.0 million, and notes payable were $28.2 million. The company had $26.2 million outstanding under commercial paper and no revolver borrowings. Its unsecured revolving facility provides $1.25 billion of capacity, with potential increases subject to lender consent; the company reported compliance with its covenants.
Total assets were $10.096 billion and total liabilities were $6.019 billion. The company reported $4.298 billion of goodwill and $1.233 billion of net brands and other intangibles.

Changes versus prior period and unusual items

Continuing-operations sales decreased $837.2 million. Management attributed pressure to lower volumes, reduced trade promotions, planned product exits, foreign exchange effects, and the loss of Commercial business sales after divestiture. Management said the promotion and pricing actions were intended to improve revenue quality.
Continuing-operations income improved substantially, but comparisons were affected by major unusual items in both years. FY2017 included $304.2 million of goodwill and intangible impairment charges, $197.4 million of divestiture gains, $93.3 million of debt-retirement charges, $63.6 million of SCAE restructuring charges, and $31.4 million of Wesson-related charges. FY2016 included a $348.5 million pension actuarial-loss charge, $281.8 million of SCAE charges, a $50.1 million Chef Boyardee impairment, and other items.
FY2017 total net income included $102.0 million of after-tax income from discontinued operations, including Lamb Weston activity through the spin-off. FY2016’s total loss included $794.4 million of discontinued-operations losses, including the large Private Brands divestiture impairment.
The company repurchased 25.1 million shares for approximately $1.0 billion during FY2017. The Board authorized additional repurchase capacity, leaving $1.382 billion available at year-end.

Outlook, management commentary, risks, and contingencies

Management forecast FY2018 capital expenditures of approximately $285 million and an effective tax rate of approximately 32.5%–33.5%, excluding unusual transactions or tax events. The filing does not provide clear consolidated revenue or EPS guidance.
Management said liquidity should be adequate for working capital, dividends, planned capital spending, share repurchases, and debt maturities or refinancing. It expected approximately $285 million of net proceeds from the pending Wesson oil sale, subject to customary closing conditions and regulatory approval.
The SCAE efficiency plan remained in progress. The Board had approved up to $880.5 million of plan expenses; the company estimated approximately $446.2 million of charges for identified continuing-operations actions, including cash and non-cash costs, with costs expected over multiple years.
Key business risks include commodity and energy cost volatility, competition and pricing pressure, evolving consumer preferences, dependence on major retailers, product safety and recalls, supply-chain disruption, foreign exchange exposure, pension costs, and execution of restructuring and portfolio changes. Walmart and affiliates represented approximately 24% of consolidated sales.
Material contingencies include the appealed California lead-paint judgment of $1.15 billion, for which the company said exposure could not be estimated and insurance coverage was uncertain; an Illinois lead-paint matter; and a $108.9 million jury verdict in the Jacobs matter that the company appealed and expected to be limited to its insurance deductible. Environmental accruals included $52.3 million for Beatrice-related matters; a potential Wells G&H site liability could be material, but no range could be estimated. Management generally did not expect the identified matters to materially affect results, while acknowledging the lead-paint risk.
The Lamb Weston spin-off was intended to qualify as tax-free, but an adverse IRS or court determination could create significant tax liabilities. Conagra also retained certain guarantees related to Lamb Weston, subject to indemnification provisions.
KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.

Important facts for investors to verify

How much of the FY2017 earnings and cash-flow improvement is sustainable after removing divestiture gains, impairments, pension effects, restructuring, and debt-retirement costs?
Whether reduced promotions and selective price increases can stabilize volumes and sales across the continuing segments.
Progress and remaining cash costs of the SCAE plan, and whether expected efficiencies are realized.
Completion terms and proceeds from the Wesson sale, and the tax treatment and ongoing effects of the Lamb Weston spin-off.
Developments in the California and Illinois lead-paint matters, Jacobs appeal, environmental proceedings, and retained spin-off guarantees.
Debt repayment and refinancing needs, cash availability, pension funding, and the use of remaining share-repurchase authorization.