Conagra Brands, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2020, the 13 weeks ended August 25, 2019; comparable period ended August 26, 2018. Dollar amounts are in millions except per-share data. The results include Pinnacle Foods, acquired October 26, 2018, so year-over-year comparisons reflect a materially expanded business.
Financial performance and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales | $2,390.7 | $1,834.4 |
| Gross profit | $664.5 | $515.5 |
| Segment operating profit | $363.2 | $339.0 |
| Net income attributable to Conagra | $173.8 | $178.2 |
| Diluted EPS | $0.36 | $0.45 |
| Operating cash flow | $207.0 | $94.7 |
- Sales rose 30%, primarily from Pinnacle. Reported gross margin was approximately 27.8%, versus 28.1%; net margin was approximately 7.3%, versus 9.7%. Segment operating profit increased, but corporate costs, interest and other items contributed to lower net income and EPS.
- Segment sales and operating profit: Grocery & Snacks $977.6 and $151.7; Refrigerated & Frozen $959.1 and $155.6; International $204.4 and $24.8; Foodservice $249.6 and $31.1. Segment results reflect the revised reporting structure incorporating Pinnacle.
- Interest expense, net, increased to $122.7 from $49.0, principally due to debt issued to finance Pinnacle. The filing reports long-term debt, including current installments, of approximately $10.47 billion; the revolving credit facility had no borrowings. The company was in compliance with debt covenants.
- At August 25, cash was $64.7, total current assets $2,728.0 and current liabilities $2,449.9. Cash and restricted cash decreased $171.9 during the quarter. Operating cash flow less capital expenditures was approximately $100.4.
- Capital expenditures were $106.6. Financing used $270.8, including $205.8 of long-term debt repayment and $103.3 of dividends, partly offset by short-term borrowing. Inventory increased to $1,755.7 from $1,563.3.
Material changes and unusual items
- Pinnacle contributed materially to sales and segment profit. Management said integration was on track and targeted $285 million of annual cost synergies when complete.
- Reported earnings included $50.1 of restructuring charges, $31.4 of impairment on a business held for sale, $19.3 of brand impairments, a $5.4 gain on an Ardent Mills asset sale, and a $51.0 income tax benefit. The tax benefit reflected, among other items, Pinnacle-related legal-entity reorganization and state tax planning.
- Management cited supply-chain productivity, pricing and Pinnacle synergies as offsets to divestitures, weaker organic sales in some businesses, higher transportation and input costs, and increased retailer marketing. Grocery & Snacks operating profit fell 15% and International fell 34%; Refrigerated & Frozen rose 63% and Foodservice rose 13%.
- On September 11, 2019, after quarter-end, Conagra agreed to sell its DSD snacks business for expected cash proceeds of $140.0, subject to working-capital adjustments and closing conditions. The filing records a $31.4 impairment charge related to the business.
- Conagra adopted lease accounting Topic 842 in the quarter, recognizing operating-lease assets of $238.4 and liabilities of $267.0 at adoption; management said adoption did not affect earnings or cash flows.
Outlook, risks and contingencies
- Management estimated fiscal 2020 capital expenditures of approximately $400 and said expected cash, operating cash flow, credit facilities and capital-market access should provide liquidity for at least the next 12 months. It intended, subject to conditions and Board approval, to maintain the annual dividend at $0.85 per share during fiscal 2020.
- The company expects up to $360.0 of operational expenditures under the Pinnacle integration restructuring plan, including $285.0 cash and $75.0 non-cash charges; approximately $260.9 had been incurred or was expected for actions identified to date. The separate Conagra restructuring plan had $98.4 of identified charges incurred or expected. The company said it could not yet estimate the full costs of either plan.
- Key risks include realizing Pinnacle synergies and integration benefits, deleveraging on the anticipated timeline, commodity and foreign-exchange volatility, changing consumer demand, competition, and potential goodwill or intangible-asset impairments.
- A California lead-paint matter was settled for $101.7 payable in seven annual installments from fiscal 2020 through fiscal 2026, plus a guarantee of up to $15.0 if a co-defendant defaults. Conagra accrued $99.1 for the matter. Other disclosed matters include securities class actions and derivative litigation related to Pinnacle; management did not expect those matters to have a material adverse effect.
- Unconditional purchase obligations totaled $1.40 billion and were not recorded as balance-sheet liabilities. The filing also discloses pension and postretirement funding expectations and other guarantees and commitments.
Important facts for investors to verify
- How much Pinnacle-driven growth is translating into sustainable organic sales, margins and the stated $285 million annual synergies.
- Debt reduction, interest burden, covenant headroom and progress toward management’s deleveraging objectives.
- The cash and earnings effects of restructuring, impairments, divestitures and other comparability items, including completion and proceeds from the DSD snacks sale.
- Whether weaker volumes in selected Grocery & Snacks and International businesses persist, and how input costs, transportation and promotional spending affect margins.
- Developments in the lead-paint settlement, securities litigation, and goodwill and brand impairment assumptions.