CONAGRA BRANDS INC. quarterly report, Q3 FY2021

Conagra Brands, Inc. — Form 10-Q Summary

Reporting period: Fiscal 2021 third quarter, the 13 weeks ended February 28, 2021; year-to-date figures cover 39 weeks. Comparisons are with the periods ended February 23, 2020. Amounts are in U.S. dollars.

Financial performance

Metric	Q3 FY2021	Q3 FY2020	39 weeks FY2021	39 weeks FY2020
Net sales	$2,771.1 million	$2,555.0 million	$8,445.2 million	$7,766.5 million
Net income attributable to Conagra	$281.4 million	$204.4 million	$989.3 million	$638.7 million
Diluted EPS	$0.58	$0.42	$2.02	$1.31
Operating cash flow	Not reported for quarter	Not reported for quarter	$1,070.0 million	$906.5 million

Q3 sales increased 9%; year-to-date sales increased 9%. Q3 net income attributable to Conagra rose about 38%, and diluted EPS rose about 38%.
Gross profit, calculated as sales less cost of goods sold, was $758.4 million in Q3 (27.4% of sales), versus $684.4 million (26.8%) a year earlier. Year-to-date gross profit was $2,457.5 million (29.1%), versus $2,146.8 million (27.6%).
Segment operating profit was $545.4 million in Q3, up 24%, and $1,775.0 million year to date, up 35%. This segment measure excludes corporate expense, interest, taxes, pension non-service income and equity-method earnings; results include specified divestiture gains.
Net interest expense declined to $100.6 million in Q3 from $117.7 million, and to $322.0 million year to date from $361.8 million, primarily reflecting lower debt balances. The year-to-date effective tax rate was 21.3%, versus 18.1%; Q3 rates were 26.5% and 25.2%, respectively.
Year-to-date investing cash outflow was $281.9 million, including $396.7 million of capital expenditures and $112.2 million of divestiture proceeds. Operating cash flow less capital expenditures was approximately $673.3 million, calculated from reported figures.

Liquidity, debt and capital allocation

At February 28, 2021, cash was $80.7 million, current assets were $2,627.9 million and current liabilities were $3,291.1 million, a working-capital deficit of $663.2 million. The company had $728.6 million outstanding under commercial paper and no borrowings under its $1.6 billion revolving credit facility.
Long-term debt, including current installments, had a carrying amount of approximately $8.50 billion; notes payable were $728.7 million. Total liabilities were $13.78 billion. The filing reports covenant compliance at quarter end.
Year-to-date financing cash outflow was $1.26 billion. The company repaid $2.31 billion of long-term debt, issued $988.2 million of long-term debt, paid $341.7 million in dividends and repurchased $298.1 million of shares.
Conagra repurchased approximately 8.8 million shares during Q3; $1.12 billion remained under its authorization. The quarterly dividend was $0.275 per share.

Changes versus the prior comparable period

Retail demand benefited from higher at-home food consumption during the COVID-19 pandemic. Q3 sales increased in Grocery & Snacks, Refrigerated & Frozen and International, while Foodservice sales fell 17%. Year-to-date Foodservice sales declined 21%.
Q3 sales increased 11% in Grocery & Snacks, 12% in Refrigerated & Frozen and 9% in International. Management cited volume growth and favorable price/mix in retail segments; Foodservice weakness reflected reduced away-from-home traffic.
Management attributed gross-profit growth to higher sales, supply-chain productivity, favorable mix, Pinnacle synergies and fixed-cost leverage, partly offset by input-cost inflation, transportation costs, pandemic-related costs and divested-business profits.
Year-to-date operating cash flow increased from $906.5 million to $1.07 billion. Cash and cash equivalents fell from $553.3 million at May 31, 2020, to $80.7 million at February 28, 2021.

Outlook, commentary, risks and unusual items

Management continued to expect $305 million of annual cost synergies when Pinnacle integration is complete. It estimated fiscal 2021 capital expenditures of approximately $510 million and stated that available liquidity should cover anticipated needs for at least 12 months.
Management reported approximately $45 million of incremental Q3 costs for transportation and warehousing, employee safety and sanitation, and employee compensation. It said winter storms had a slight effect on sales and transportation costs, but no material effect on quarterly results or expected full-year results.
Management cautioned that the evolution of the pandemic, reopening activity and consumer shifts away from eating at home could affect retail and Foodservice demand. Other cited risks include commodity inflation, supply-chain disruption, competition, execution of cost savings and deleveraging, hedging effectiveness, and potential goodwill or intangible-asset impairment.
Q3 comparability items included a $49.7 million gain on the Peter Pan peanut butter sale, $24.4 million of debt-extinguishment charges, $15.4 million of restructuring charges, $5.3 million of consulting costs and $4.3 million related to a prior legal matter. The gain and charges affected reported earnings in different directions.
During the quarter, Conagra sold Peter Pan for net proceeds of $103.4 million and recognized the $49.7 million gain. It also completed the sale of H.K. Anderson earlier in the fiscal year. The company redeemed $400 million of 3.20% notes before maturity; on March 1, 2021, it repaid $195.9 million of 9.75% subordinated notes at maturity.
Contingencies include accrued liabilities of $64.4 million for the California lead-paint settlement and Beatrice-related environmental matters. Management did not expect the disclosed legal and environmental matters, after recorded accruals, to materially affect financial condition, results or liquidity, but noted estimates could change. A $55.8 million environmental accrual was reported at quarter end.
The filing identifies customer concentration: Walmart and affiliates represented approximately 27% of Q3 sales and 34% of receivables at February 28, 2021. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

How much of retail sales and profit growth reflects recurring demand, pricing and productivity versus pandemic-related at-home consumption, mix and lower promotion levels.
Whether Foodservice demand recovers as away-from-home outlets reopen, and how quickly retail demand may normalize.
Progress against the $305 million annual Pinnacle synergy target, remaining restructuring costs and the timing of expected savings.
Debt repayment and refinancing plans, commercial-paper reliance, liquidity, leverage-covenant headroom and the effect of continued share repurchases and dividends.
Potential impacts of input-cost inflation and transportation costs on margins, and the results of the upcoming annual goodwill and intangible-asset impairment review.
Developments in the lead-paint, environmental, product-labeling and other legal matters, including whether recorded reserves remain adequate.