Business context and reporting period
Conagra Brands, Inc. is a branded food company. This Form 10-Q covers the 13 and 26 weeks ended November 26, 2017, the second quarter and first half of fiscal 2018. Lamb Weston, spun off in November 2016, is presented as discontinued operations.
Financial performance and position
| Metric | Second quarter | First half |
|---|---|---|
| Net sales | $2,173.4 million, up 4% year over year | $3,977.6 million, essentially flat |
| Gross profit / gross margin | $658.3 million / 30.3%; prior-year margin 31.0% | $1,177.3 million / 29.6%; prior-year margin 29.9% |
| Income from continuing operations | $224.1 million; diluted EPS $0.54 | $377.7 million; diluted EPS $0.91 |
| Net income attributable to Conagra | $223.5 million, versus $122.1 million | $376.0 million, versus $308.3 million |
| Net interest expense | $38.0 million, down from $54.1 million | $74.4 million, down from $112.3 million |
| Operating cash flow | $420.7 million total; $404.7 million from continuing operations, versus $460.6 million in the prior-year first half |
At November 26, cash was $84.0 million, total current assets $2,056.3 million, and current liabilities $1,850.3 million. Long-term debt, including current installments, was approximately $3.46 billion, compared with $2.97 billion at May 28. The company had $67.0 million of commercial paper outstanding and no borrowings under its $1.25 billion revolving facility; it reported compliance with facility covenants. First-half capital expenditures were $123.4 million, share repurchases $580.0 million, and cash dividends paid $171.6 million.
Changes versus the prior comparable period
- Quarterly sales rose $85.0 million, reflecting increased volume, including hurricane-related customer and consumer inventory builds. Management expects those builds to weigh on third-quarter sales.
- Quarterly continuing-operations diluted EPS increased from $0.26 to $0.54. Comparisons are affected by prior-year debt-extinguishment and goodwill-impairment charges, as well as prior-year discontinued-operation earnings.
- First-half continuing income increased to $377.7 million from $212.9 million, while first-half net sales were nearly unchanged. Prior-year results included substantial International impairment charges and gains on divestitures.
- Segment operating profit in the quarter improved in Refrigerated & Frozen ($128.5 million, up 9%), Foodservice ($47.4 million, up 48%), and International ($20.2 million versus a loss). Grocery & Snacks declined 9% to $199.8 million. Foodservice’s first-half sales and volume were lower, partly reflecting an exited non-core business.
- Lower interest expense reflected earlier debt repayments and the Lamb Weston debt exchange, partly offset by $500 million of floating-rate notes issued in the quarter.
Outlook, commentary, risks and unusual items
- Management cited higher-than-anticipated inflation, hurricane-related costs, and increased distribution and consumer-trial investment as pressures on operating performance. Grocery & Snacks faced higher input, transportation, and warehousing costs; Foodservice benefited from hurricane-related demand, pricing, and mix.
- Management expects fiscal 2018 capital expenditures of approximately $300 million and $189.7 million of senior-note maturities in the second half. It stated liquidity should be adequate for at least the next 12 months, including debt service, investment, working capital, repurchases, and dividends.
- The October 2017 acquisition of Angie’s Artisan Treats cost $249.6 million. A subsequent agreement to acquire Sandwich Bros. for $87 million was expected to close in early 2018, subject to customary conditions. The proposed $285 million Wesson oil sale remained under FTC review after a second request for information; either party could terminate if approval had not been obtained by March 31, 2018.
- The continuing-operations SCAE restructuring plan generated $18.5 million of first-half charges. Management reported approximately $464.8 million incurred or expected for identified continuing-operations actions and said costs would continue over multiple years.
- The company amended salaried and non-qualified pension plans to freeze future benefit accruals for affected employees effective January 1, 2018. Remeasurement reduced the pension underfunded status by $43.5 million, with a benefit in other comprehensive income; related charges included $4.1 million for actuarial-loss write-off and curtailment.
- The Tax Cuts and Jobs Act was enacted December 22, 2017, after quarter-end. The company expected a material financial-statement impact, was evaluating it, and expected to record an initial estimate in the third quarter.
- Contingencies include the California lead-paint case: an earlier $1.15 billion abatement judgment was partly reversed on appeal and remanded for recalculation; further review was sought. No loss was accrued because loss was considered neither probable nor estimable. Environmental reserves for Beatrice-related matters were $52.8 million. A separate $108.9 million jury verdict in the Jacobs matter was on appeal; the company expected exposure to be limited to its insurance deductible.
- Subsequent to quarter-end, the company bought one building subject to a lease put option and expected to record an approximately $13 million loss. A possible second purchase could result in an estimated $30–$40 million loss if completed.
- Contractual obligations totaled $4.77 billion, including $3.32 billion long-term debt, $127.0 million capital-lease obligations, $216.5 million operating leases, and $1.04 billion purchase obligations. Operating leases and purchase obligations were not recognized as balance-sheet liabilities.
Important facts for investors to verify
- Whether hurricane-driven sales and inventory builds reverse as management anticipated, and how inflation and pricing affect gross margins.
- Progress and financial effects of the Wesson sale, Sandwich Bros acquisition, and integration of recent acquisitions.
- The company’s tax-reform estimate and resulting tax expense, cash-tax obligations, and repatriation effects.
- Debt and liquidity after the $500 million note issuance, substantial repurchases, and upcoming $189.7 million maturities.
- Developments in the lead-paint appeal, environmental matters, Jacobs appeal, and lease-put exposures.
- Execution, remaining costs, and realized savings from the multi-year restructuring plan.