Conagra Brands, Inc. — Form 10-Q Summary
Reporting period: Second quarter of fiscal 2021, the 13 weeks ended November 29, 2020; comparisons are with the 13 weeks ended November 24, 2019. The filing also reports first-half results for the 26 weeks ended on those dates. Amounts are in millions except per-share data.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | First half FY2021 | First half FY2020 |
|---|---|---|---|---|
| Net sales | $2,995.2 | $2,820.8 | $5,674.1 | $5,211.5 |
| Net income attributable to Conagra | $378.9 | $260.5 | $707.9 | $434.3 |
| Diluted EPS | $0.77 | $0.53 | $1.44 | $0.89 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $541.4 | $427.5 |
| Capital expenditures | Not separately provided for quarter | Not separately provided for quarter | $282.0 | $183.7 |
- Quarterly sales rose about 6%; first-half sales rose about 9%. Gross profit was $888.9 million in Q2 versus $797.9 million, with gross margin of approximately 29.7% versus 28.3%.
- Q2 operating profit by segment: Grocery & Snacks $316.4 million (up 20%); Refrigerated & Frozen $264.3 million (up 41%); International $39.5 million (up 49%); Foodservice $22.3 million (down 42%).
- Cash and cash equivalents were $68.0 million at November 29, down from $553.3 million at May 31, 2020. Current assets were $2,797.7 million and current liabilities $3,351.4 million.
- Long-term debt, including current installments, was $8,898.1 million; notes payable were $368.6 million. No revolving-credit-facility borrowings were outstanding. The company reported covenant compliance.
- Net interest expense declined to $107.7 million in Q2 from $121.4 million. The effective tax rate was 17.6% in Q2 and 19.1% for the first half, versus 24.3% and 14.3%, respectively, in the prior-year periods.
Material changes and drivers
- At-home food demand during the COVID-19 pandemic supported sales growth in the retail segments. Foodservice sales fell 23% in Q2 and in the first half, reflecting lower traffic at away-from-home food outlets.
- Management attributed stronger gross profit to sales growth, supply-chain productivity, favorable mix, Pinnacle acquisition synergies, and fixed-cost leverage. These benefits were partly offset by higher input, transportation, and pandemic-related costs, foreign exchange effects, and divested-business profit losses.
- Q2 net income and EPS include significant comparability items: a $44.3 million debt-extinguishment charge, $20.7 million of restructuring charges, a $5.3 million divestiture gain, and a $25.3 million tax benefit related to the planned Peter Pan sale. The prior-year quarter included restructuring and Lender’s impairment charges, among other items.
- First-half operating cash flow increased year over year, partly reflecting retail demand. It also benefited by $29.2 million from deferred employer payroll taxes; those taxes are payable in fiscal 2022 and 2023. Investing cash outflow rose with higher capital spending, while financing outflow included substantial debt repayments and dividends.
Outlook, risks and unusual items
- Management expected elevated at-home demand and depressed Foodservice demand to continue through Q3 FY2021. It estimated approximately $510 million of capital expenditures for FY2021 and said existing liquidity sources should cover anticipated needs for at least 12 months.
- The company continued to expect $305 million of annual cost synergies when Pinnacle integration is complete. The integration restructuring plan is expected to incur about $360 million of charges in total, with costs expected through FY2022. A separate Conagra restructuring plan is expected to incur $156.2 million of charges for actions identified to date.
- After quarter-end, Conagra entered a definitive agreement to sell Peter Pan peanut butter for expected net proceeds of $102 million, subject to adjustments and closing conditions; completion was expected in Q3 FY2021. The Q2 tax benefit includes a valuation-allowance release associated with this planned sale.
- After quarter-end, the company redeemed $400 million of 3.2% notes due 2023, funded primarily with commercial paper, and expected an approximately $24.4 million early-extinguishment charge in Q3.
- Key risks include COVID-19 effects on demand, employees and supply chains; commodity and transportation costs; integration and restructuring execution; leverage and refinancing access; customer concentration; litigation and environmental matters; and completion of the Peter Pan divestiture. Walmart accounted for about 25% of sales and 33% of receivables at quarter-end.
- Recorded contingencies include $63.2 million accrued for the California lead-paint settlement and $56.0 million for Beatrice-related environmental matters. Management said ultimate resolution of disclosed contingencies was not expected to materially affect the company, but changes in estimates could have a material effect.
Most important facts for investors to verify
- How much of reported sales and earnings growth reflects sustained underlying demand versus pandemic-related pantry loading, mix, tax benefits, and other comparability items.
- Whether Foodservice demand recovers and retail demand remains resilient as pandemic conditions and consumer behavior change.
- Progress toward Pinnacle synergies and restructuring targets, including remaining cash costs and delivery timing.
- Debt repayment, commercial-paper use, refinancing terms, liquidity, and progress toward management’s deleveraging objectives.
- Closing, proceeds, and final tax and working-capital adjustments for the Peter Pan sale, plus the effect of subsequent debt redemption.
- Developments in lead-paint, environmental, product-labeling, wage-and-hour, and product-liability matters, and any changes to related reserves.