Conagra Brands, Inc. — Form 10-Q Summary
Reporting period: Fiscal 2019 third quarter, the 13 weeks ended February 24, 2019; year-to-date figures cover 39 weeks. Comparisons are with periods ended February 25, 2018. Amounts are in U.S. dollars.
Key financial results
| Metric | Third quarter 2019 | Third quarter 2018 | 39 weeks 2019 | 39 weeks 2018 |
|---|---|---|---|---|
| Net sales | $2,707.1 million | $1,994.5 million | $6,925.2 million | $5,972.1 million |
| Income from continuing operations | $242.6 million | $349.2 million | $555.1 million | $726.9 million |
| Net income attributable to Conagra | $242.0 million | $362.8 million | $551.8 million | $738.8 million |
| Diluted EPS | $0.50 | $0.90 | $1.27 | $1.80 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $756.3 million | $842.3 million |
- Third-quarter cost of goods sold was $1,954.8 million, or about 72.2% of sales; the comparable ratio was about 70.0%. The 2019 quarter included $26.9 million of acquisition-related inventory fair-value expense.
- Reported segment operating profit totaled $480.8 million for the quarter and $1,253.1 million year to date. These totals include Pinnacle only from its October 26, 2018 acquisition date and are not directly comparable with prior-year totals.
- Net interest expense rose to $130.9 million for the quarter from $39.8 million, and to $260.5 million year to date from $114.2 million, mainly reflecting acquisition financing.
- Year-to-date capital expenditures were $236.1 million. Operating cash flow less capital expenditures was approximately $520.2 million, versus $666.4 million in the prior-year period.
- At February 24, cash was $282.2 million; current assets were $2,946.1 million and current liabilities $2,241.7 million. Long-term debt, including current installments, was approximately $11.13 billion; debt less cash was approximately $10.85 billion.
Business changes and comparison with prior periods
- Sales increased 36% in the quarter and 16% year to date, principally due to the acquisition of Pinnacle Foods. Pinnacle contributed $712.3 million of third-quarter sales and $971.1 million year to date.
- Excluding acquisitions, foreign exchange, and divested businesses as applicable, management reported organic third-quarter growth in Grocery & Snacks and Refrigerated & Frozen. Grocery & Snacks and Refrigerated & Frozen quarterly sales each rose 3%; International fell 11% and Foodservice fell 9%.
- Management cited supply-chain productivity and improved pricing as offsets to higher transportation costs and inflation. Foodservice sales declines reflected lower volumes, the value-over-volume strategy, and the sale of the Trenton facility.
- Quarterly diluted EPS declined to $0.50 from $0.90. Results were affected by higher interest and tax expense, more shares outstanding after the acquisition-related share issuance, and significant comparability items. The prior-year quarter included a $236.7 million Tax Act-related benefit; the filing cautions that periods are not directly comparable.
Financing, outlook, risks, and unusual items
- Conagra acquired Pinnacle for approximately $8.03 billion, financed in part with $7.025 billion of senior notes and a $1.30 billion term loan. It repaid $450 million of the term loan during the quarter and another $250 million after quarter-end. No revolving-credit or commercial-paper borrowings were outstanding at quarter-end; the company reported compliance with debt covenants and investment-grade ratings.
- Management said Pinnacle integration was on track and expects annual cost synergies exceeding $215 million when integration is complete. The company expects up to $360 million of Pinnacle integration restructuring charges, including $285 million cash charges; approximately $255.6 million had been incurred or was expected for actions identified to date. A separate restructuring plan was initiated, but its full scope was not yet quantifiable.
- Management estimated fiscal 2019 capital expenditures of approximately $400 million. It intended to maintain the quarterly dividend at $0.2125 per share through fiscal 2019 and 2020, subject to Board approval, while prioritizing deleveraging. The Wesson oil business sale closed after quarter-end for net proceeds of $167.1 million, which were used to prepay term debt. Conagra expected to sell its Gelit frozen pasta business within 12 months.
- A California lead-paint case has a recalculated trial-court abatement estimate of $409 million. Conagra accrued $136 million, but allocation, participation, appeals, and insurance recovery remain uncertain; the filing warns the matter could materially affect financial condition, results, or liquidity.
- Other notable items include a $27.3 million benefit from release of a Lamb Weston warehouse guarantee and a $13.2 million gain on the sale of the Canadian Del Monte business. New securities class actions alleging misstatements concerning the Pinnacle acquisition were disclosed; management did not expect a material adverse effect. Commodity, foreign-exchange, and interest-rate exposures are managed partly through derivatives.
- Conagra identified lease accounting changes expected to materially increase reported assets and liabilities upon fiscal 2020 adoption; it could not yet estimate the amount. Pinnacle, which represented $12.10 billion of assets at quarter-end, was excluded from the company’s internal-control assessment for the acquisition year; management stated disclosure controls were effective.
Important facts for investors to verify
- Whether Pinnacle delivers the expected synergies and integration benefits, and whether restructuring cash costs and timing remain within disclosed expectations.
- Debt reduction progress, interest costs, covenant headroom, and the company’s ability to deleverage while funding capital expenditures and dividends.
- Underlying organic sales, volume, pricing, and segment profitability apart from acquisition effects, inventory fair-value charges, restructuring, and divestitures.
- Developments in the lead-paint litigation, including the ultimate liability, allocation among defendants, timing of payments, and potential insurance recoveries.
- Final Pinnacle purchase-price allocation, goodwill and intangible-asset assumptions, and the balance-sheet effect of adopting lease accounting.