Conagra Brands, Inc. — Form 10-Q Summary
Business context and period: The filing covers the 13 weeks ended August 28, 2022, Conagra’s first quarter of fiscal 2023. The company reports four segments: Grocery & Snacks, Refrigerated & Frozen, International, and Foodservice. Amounts below are in millions of dollars unless otherwise noted.
Financial performance and liquidity
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales | $2,904.3 | $2,653.3 |
| Operating profit | $62.2 | $427.9 |
| Net income (loss) | ($77.5) | $235.7 |
| Diluted EPS | ($0.16) | $0.49 |
| Operating cash flow | $263.7 | $139.8 |
| Capital expenditures | $125.4 | $154.9 |
- Sales increased 9%; growth was primarily price/mix, while volumes declined in every segment. Cost of goods sold was $2,184.0, implying gross profit of $720.3 and a gross margin of approximately 24.8%, versus approximately 25.4% a year earlier.
- Quarterly earnings included $385.7 of goodwill and Birds Eye brand impairments, plus $26.7 of impairments on businesses held for sale. These charges were the principal reason for the reported loss; the effective tax rate was also affected by largely nondeductible goodwill impairment.
- Segment sales and operating profit (loss): Grocery & Snacks $1,188.3 and $250.4; Refrigerated & Frozen $1,207.6 and ($216.3); International $233.5 and $26.9; Foodservice $274.9 and $1.2. Refrigerated & Frozen results reflect the major impairments.
- Net interest expense was $97.1, up from $94.2. Equity-method investment earnings rose to $49.2 from $20.2, with management citing favorable Ardent Mills conditions.
- Operating cash flow improved year over year, partly due to approximately $164 of cash received earlier through customer payment-term offerings, in exchange for prompt-pay discounts. Higher inventories, up to $2,229.4 from $1,939.7 at fiscal year-end, partly offset the benefit. Cash used in operations less capital expenditures was approximately $138.3.
- Cash was $67.4 at quarter-end. Current assets were $3,233.8 versus current liabilities of $4,160.3. Long-term debt, including current installments, had a carrying value of $8.79 billion; commercial paper outstanding was $248.0. The company reported compliance with debt covenants and said available cash, operating cash flows, credit facilities, commercial paper, and capital-market access should provide liquidity for at least 12 months.
Changes versus the prior comparable period
- Sales rose 9%, but higher pricing was accompanied by volume declines: Grocery & Snacks 6%, Refrigerated & Frozen 2%, International 7%, and Foodservice 4%. Price/mix increased 17%, 12%, 8%, and 19%, respectively; International sales also faced a 2% foreign-exchange headwind.
- Segment operating profit improved in Grocery & Snacks, but declined in International and Foodservice; Refrigerated & Frozen swung to an operating loss, primarily due to impairment charges.
- Operating cash flow increased from $139.8 to $263.7, though the company identifies accelerated receivable collection as a substantial, potentially timing-related contributor.
- Goodwill and brand impairment charges totaled $385.7, compared with no comparable impairment charge highlighted for the prior-year quarter. Share-based payment expense also increased by $20.3.
Outlook, commentary, and risks
- Management expects input-cost inflation, including elevated supply-chain costs, to remain high through the rest of fiscal 2023. Pricing and supply-chain productivity are expected to offset some pressure, but management said the inflation impact was impractical to quantify.
- Higher interest rates and inflation-related uncertainty raise the risk of additional goodwill or brand impairments at the fiscal-year assessment. The current impairment testing used a 7.75% discount rate and approximately 1% terminal growth rate for the specified reporting unit; management notes that different assumptions could materially change valuations.
- Management expects fiscal 2023 capital expenditures of approximately $500. It generally expects retail demand to remain above pre-pandemic levels and foodservice demand to return toward historical norms, while noting continuing uncertainty.
- After quarter-end, Conagra borrowed the full $500 under its term loan agreement, using proceeds to repay $250 of 3.25% notes maturing September 15, 2022, and commercial-paper borrowings. The new loan matures in August 2025; its interest rate is floating-rate based.
- Key risks include commodity, energy, packaging, transport and labor costs; supply-chain disruption; consumer response to price increases; interest rates and access to refinancing; and further impairment charges. The Russia-Ukraine conflict had not materially affected results to date, but contributed to global cost and supply pressures.
- Contingencies include the California lead-paint settlement, with $52.3 accrued at quarter-end and $49.0 paid through that date; environmental matters, including proposed Minnesota penalties of $1.8 for 2020 and $4.3 for 2021 under negotiation; and other litigation and guarantees. Management does not expect the matters, as accrued, to materially harm results or liquidity, but says future estimate changes could do so.
- The filing reports no material change to previously disclosed risk factors. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether price increases can offset inflation without further material volume declines, and whether margins recover.
- The assumptions behind the $385.7 impairment and the potential for additional goodwill or brand impairments.
- The sustainability of operating cash flow, given the approximately $164 benefit from accelerated receivable collection and the continued inventory build.
- Debt maturities, floating-rate borrowing costs, covenant headroom, and the company’s ability to refinance on acceptable terms.
- Progress and final costs of the held-for-sale business dispositions, restructuring plans, environmental negotiations, and lead-settlement payments.
- Customer concentration: Walmart and affiliates represented approximately 27% of quarterly sales.