Business context and reporting period
Conagra Brands, Inc. is a branded food company. This Form 10-Q reports the 13 weeks ended February 25, 2018 (fiscal Q3 2018) and the 39 weeks ended that date, compared with the corresponding fiscal 2017 periods. Lamb Weston is presented as discontinued operations; the 2017 comparison also includes results from businesses divested in fiscal 2017.
Financial performance
| Metric | Fiscal Q3 2018 | Fiscal Q3 2017 | 39 weeks 2018 | 39 weeks 2017 |
|---|---|---|---|---|
| Net sales | $1,994.5 million | $1,981.2 million | $5,972.1 million | $5,965.2 million |
| Income from continuing operations | $349.2 million | $179.5 million | $726.9 million | $392.4 million |
| Net income attributable to Conagra | $362.8 million | $179.7 million | $738.8 million | $488.0 million |
| Diluted EPS | $0.90 | $0.41 | $1.80 | $1.11 |
| Net interest expense | $39.8 million | $45.7 million | $114.2 million | $158.0 million |
- Q3 sales increased 1%; sales were essentially flat for the 39-week period. Approximate gross margin declined to 30.0% from 31.3% in Q3 and to 29.7% from 30.4% year to date, based on reported net sales and cost of goods sold.
- Q3 reported continuing-operations income included a $91.4 million income tax benefit; the company attributed a $236.7 million estimated benefit to the Tax Act. Reported earnings therefore include substantial tax-related effects and are not directly indicative of underlying operating trends.
- Cash from operating activities was $842.3 million for 39 weeks ($808.1 million from continuing operations), versus $846.5 million ($803.5 million continuing) a year earlier. Capital expenditures were $175.9 million. Cash fell by $118.5 million to $132.9 million.
- At February 25, 2018, current assets were $2,058.1 million and current liabilities $1,990.7 million. Notes payable were $352.3 million; long-term debt, including current installments, was $3,310.2 million, plus $195.9 million of subordinated debt. The company had no borrowings under its $1.25 billion revolving facility and reported compliance with financial covenants.
- Cash dividends declared were $0.2125 per share in Q3. The company repurchased $860.0 million of shares during the 39 weeks, with $522.0 million of authorization remaining at quarter end.
Material changes versus the prior comparable period
- Q3 segment sales rose in Refrigerated & Frozen (3%) and International (9%), but declined in Grocery & Snacks (1%) and Foodservice (6%). Grocery & Snacks operating profit fell 13% to $175.6 million; Foodservice fell 13% to $24.0 million. Refrigerated & Frozen operating profit declined 2% to $126.1 million, while International rose 63% to $29.5 million.
- For the 39 weeks, segment operating profit was $1,071.3 million versus $1,067.9 million. The prior-year figure included $202.6 million from Commercial, including divestiture gains, and a $157.8 million International operating loss that included impairment charges. These items make the overall comparison less representative of ongoing performance.
- Management cited higher-than-anticipated input and transportation inflation, retailer investment and lower-than-expected supply-chain productivity as pressures on gross margin. Grocery & Snacks volumes fell, including retailer inventory reductions; Refrigerated & Frozen volumes improved. Foodservice volumes weakened, partly reflecting planned exits from lower-performing and non-core business.
- Interest expense declined year over year, primarily reflecting debt repayments and the Lamb Weston spin-off debt exchange, partly offset by $500 million of floating-rate notes issued in fiscal 2018.
Outlook, management commentary, risks and unusual items
- The Tax Act lowered the U.S. federal corporate rate to 21% beginning January 1, 2018; Conagra expects a blended 29.3% statutory rate for fiscal 2018 and 21% for fiscal years beginning after May 27, 2018. Tax accounting remains provisional in some respects.
- Fiscal 2018 capital expenditures are estimated at approximately $275 million. Management said available cash, operating cash flow, credit facilities and capital-market access should cover planned needs and obligations for at least the next 12 months.
- After quarter end, Conagra borrowed $300 million under a term loan due February 2019 at three-month LIBOR plus 0.75%; proceeds funded a $300 million voluntary pension contribution. Management expects pension expense to increase in fiscal 2019 and thereafter following a change in pension investment strategy. The company also expects approximately $3.2 million of additional pension-plan contributions and $9.0 million of other postretirement contributions for the rest of fiscal 2018.
- The proposed Wesson oil sale was terminated after the FTC challenged it; Conagra said it continues to market the business and expects a sale within 12 months. The announced sale of its Canadian Del Monte processed fruit and vegetable business, valued at approximately US$34 million at the announcement-date exchange rate, remains subject to customary closing conditions.
- Q3 unusual items included $34.9 million of charges related to early termination of unfavorable leases, $14.7 million of restructuring charges, and a $4.3 million gain from substantial liquidation of an international joint venture. The company’s multi-year Supply Chain and Administrative Efficiency Plan has incurred or is expected to incur approximately $463.1 million of charges for identified actions related to continuing operations.
- Material legal exposure includes the California lead-paint case: the appellate court affirmed liability for pre-1951 homes and remanded for recalculation of the abatement fund. Conagra said liability is likely but the amount or range is not reasonably estimable; insurance coverage is uncertain, and a material adverse effect cannot be ruled out. The company also reported $52.2 million of Beatrice-related environmental accruals and a $108.9 million jury verdict in the Jacobs matter, which is on appeal; Conagra expects ultimate exposure there to be limited to its insurance deductible.
- Other disclosed risks include commodity, currency and interest-rate fluctuations, retailer and consumer trends, execution of restructuring and portfolio changes, and uncertainty around acquisitions and divestitures. Walmart and affiliates represented approximately 24% of sales in both comparative periods.
Most important facts for investors to verify
- Separate ongoing operating performance from the significant Tax Act benefit, other unusual items, discontinued operations and prior-year divestiture and impairment effects.
- Track whether inflation, transportation costs and retailer investments continue to pressure gross margin, and whether volume trends and productivity improve across segments.
- Monitor the Wesson sale process, the Canadian Del Monte transaction, and the expected benefits and integration of recent acquisitions.
- Review debt maturities, commercial-paper reliance, the post-quarter $300 million borrowing and pension contribution, and future pension funding and expense.
- Follow developments in the California lead-paint litigation and other contingencies, for which potential outcomes or exposures remain uncertain.