Conagra Brands, Inc. — Q1 FY2022 Form 10-Q
Reporting period: Thirteen weeks ended August 29, 2021; comparisons are with the thirteen weeks ended August 30, 2020. Amounts are in U.S. dollars. The quarter’s results are not necessarily indicative of full-year results.
Business context and results
Conagra is a branded food company reporting four segments: Grocery & Snacks, Refrigerated & Frozen, International, and Foodservice. Results reflected lower retail sales as the prior-year pandemic demand surge was lapped, partial recovery in foodservice, and significant input-cost and transportation inflation.
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $2,653.3 million | $2,678.9 million | Down 1% |
| Gross profit | $673.4 million | $810.2 million | Down $136.8 million |
| Gross margin | 25.4% | 30.2% | Down 4.8 percentage points |
| Segment operating profit | $427.9 million | $587.1 million | Down 27% |
| Net income attributable to Conagra | $235.4 million | $329.0 million | Down 28% |
| Diluted EPS | $0.49 | $0.67 | Down $0.18 |
| Net cash from operations | $139.8 million | $284.5 million | Down $144.7 million |
| Capital expenditures | $154.9 million | $145.5 million | Up $9.4 million |
Gross profit and gross margins are calculated from reported net sales and cost of goods sold. Lower sales, inflation, higher transportation costs, fixed-cost deleverage, inventory write-offs, and lost earnings from divested businesses weighed on results. Supply-chain productivity, Pinnacle acquisition synergies, and lower pandemic-related costs provided partial offsets. Interest expense fell to $94.2 million from $113.7 million, while equity-method investment earnings rose to $20.2 million from $6.5 million.
Segments and material changes
| Segment | Sales | Sales change | Operating profit | Operating profit change |
|---|---|---|---|---|
| Grocery & Snacks | $1,075.1 million | Down 5% | $215.9 million | Down 24% |
| Refrigerated & Frozen | $1,101.8 million | Down 3% | $157.6 million | Down 34% |
| International | $236.6 million | Up 8% | $34.1 million | Down 11% |
| Foodservice | $239.8 million | Up 21% | $20.3 million | Down 20% |
Retail segment volume declines reflected comparison with pandemic-era demand and customer inventory replenishment. Foodservice sales benefited from a 20% volume increase as away-from-home outlets recovered. Prior-year sales included the subsequently divested Peter Pan, H.K. Anderson, and Egg Beaters businesses.
Cash, debt, and liquidity
Operating cash flow declined year over year, with management citing realized input inflation and the timing of receivable collections; lower tax and interest payments partly offset the decline. Inventory used $220.7 million of operating cash during the quarter and rose to $1,954.6 million from $1,734.0 million at May 30, 2021. Cash and cash equivalents were $67.0 million, compared with $79.2 million at fiscal year-end. The quarter’s net change in cash and restricted cash was a use of $12.2 million.
At August 29, 2021, notes payable were $458.6 million, current installments of long-term debt were $21.9 million, and senior long-term debt was $8,779.6 million. The company issued $500 million of 0.500% senior notes due August 2023, primarily to refinance commercial paper. Commercial paper outstanding was $457.0 million; there were no borrowings under the $1.6 billion revolving credit facility. The company was in compliance with its financial covenants. Management said available cash, operating cash flows, credit facilities, commercial paper, and capital-market access should provide liquidity for at least twelve months. The reported current-asset and current-liability balances were $2,972.2 million and $3,090.3 million, respectively.
Quarterly cash dividends paid were $132.1 million. The company repurchased 1.46 million shares for $50.0 million, with approximately $1.07 billion remaining under its authorization. Fiscal 2022 capital expenditures were estimated at approximately $500 million.
Outlook, risks, and unusual items
- Management expected input-cost inflation, including transportation and supply-chain costs, to remain elevated through the rest of fiscal 2022. Pricing actions and productivity were expected to mitigate some, but not fully offset, the pressure during the fiscal year; management said the inflation impact could not then be quantified.
- Management expected retail demand to remain above pre-pandemic levels and foodservice demand to move toward historical norms, subject to pandemic conditions and consumer behavior. It also expected pandemic-related costs and supply-chain costs to decrease as service levels recovered.
- First-quarter items affecting comparability included $15.8 million of restructuring charges ($11.9 million after tax) and a $3.6 million tax benefit from a tax settlement. The prior-year quarter included $25.9 million of restructuring charges and a $7.6 million tax benefit from tax regulations.
- Environmental matter: Minnesota regulators proposed a $2.2 million penalty for alleged 2020 hydrogen-sulfide emissions at a facility; settlement discussions were underway, and a further proposed penalty for 2021 was pending.
- Other disclosed contingencies include lead-paint litigation settlement payments, accrued at $63.8 million at quarter-end, and a proposed $9.0 million wage-and-hour settlement, which was accrued subject to final approval. Management did not expect the disclosed matters, after recorded liabilities, to materially affect financial condition, results, or liquidity, but said estimates could change materially.
- Key risks cited include continued commodity, packaging, and transportation inflation; supply-chain disruption; COVID-19 effects; consumer demand changes; execution of Pinnacle integration and restructuring plans; leverage and refinancing access; litigation; and potential impairment of goodwill or intangible assets.
Important facts for investors to verify
- Whether pricing and productivity offset inflation and transportation costs, and how segment margins develop in subsequent quarters.
- Whether retail volumes stabilize as pandemic comparisons ease and foodservice recovery continues.
- Inventory growth, working-capital cash use, and the ability to convert earnings into operating cash flow.
- Debt maturities, refinancing access, covenant headroom, and progress toward management’s deleveraging objectives.
- Updates on the Minnesota environmental matter, the wage-and-hour settlement, and other significant litigation or tax contingencies.
- Progress and remaining costs for the Pinnacle integration and Conagra restructuring plans, and whether expected synergies are realized.