Conagra Brands, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first half of fiscal 2019, ended November 25, 2018; comparative periods ended November 26, 2017. The quarter covers 13 weeks and the half-year 26 weeks. The filing is unaudited.
Business context and reporting period
Conagra is a branded food company. On October 26, 2018, it completed its approximately $8.03 billion acquisition of Pinnacle Foods, which contributed 31 days of results to the quarter. The company reported five segments, including the newly added Pinnacle Foods segment. Accordingly, reported sales growth includes acquired business and is not a like-for-like comparison.
Key financial metrics
| Metric | Q2 FY2019 | Q2 FY2018 | First half FY2019 | First half FY2018 |
|---|---|---|---|---|
| Net sales | $2,383.7 million | $2,173.4 million | $4,218.1 million | $3,977.6 million |
| Income from continuing operations | $134.3 million | $224.1 million | $312.5 million | $377.7 million |
| Net income attributable to Conagra | $131.6 million | $223.5 million | $309.8 million | $376.0 million |
| Diluted EPS | $0.31 | $0.54 | $0.76 | $0.91 |
| Operating cash flow | Not presented by quarter in the filing summary | $261.9 million | $420.7 million |
Quarterly gross profit was $677.2 million, or approximately 28.4% of sales, versus $658.3 million, or approximately 30.3%, a year earlier. Segment operating profit increased to $433.3 million from $395.9 million; this measure excludes general corporate expense, interest, taxes, pension non-service income and equity-method earnings. General corporate expense rose to $243.4 million from $62.4 million, while net interest expense increased to $80.6 million from $38.0 million. The effective tax rate was 14.3% versus 32.8%, reflecting the Tax Act and other tax adjustments.
First-half cash from continuing operations was $250.7 million, down from $404.7 million. Capital expenditures were $133.3 million. Cash and cash equivalents were $442.3 million at quarter-end, compared with $128.0 million at May 27, 2018. Long-term debt, including current installments, was approximately $11.56 billion, versus $3.54 billion at fiscal year-end; the company reported compliance with debt covenants and no revolver borrowings. Current assets were $3.28 billion and current liabilities $2.23 billion. The quarterly dividend remained $0.2125 per share.
Material changes versus the prior comparable period
- Quarterly sales rose 10% and first-half sales rose 6%, principally reflecting Pinnacle’s inclusion; Conagra said overall organic quarterly sales declined, partly because prior-year hurricane-related activity affected comparisons.
- Quarterly attributable net income fell 41% and diluted EPS declined from $0.54 to $0.31. Higher corporate costs and interest expense, plus acquisition-related and restructuring charges, more than offset higher segment operating profit and lower income taxes.
- Foodservice sales declined 17% in the quarter and 12% in the first half, with lower volume reflecting hurricane-related prior-year comparisons and the sale of the Trenton, Missouri facility. International quarterly sales fell 5%, including foreign-exchange effects; Refrigerated & Frozen quarterly sales increased 2%.
- First-half operating cash flow declined, which management attributed mainly to Pinnacle-related costs, working-capital timing (including receivables collections) and higher interest payments.
- Debt and balance-sheet assets rose substantially following the Pinnacle acquisition and related financing. The acquisition was funded with new debt, an equity offering and cash; 77.5 million treasury shares were issued to Pinnacle shareholders.
Outlook, commentary, risks and unusual items
- Management expects annual Pinnacle cost synergies in excess of $215 million when integration is complete. The filing provides no specific full-year revenue or EPS guidance.
- The board approved up to $290 million of Pinnacle integration restructuring charges. The company had incurred or expected to incur approximately $190.6 million for identified actions, including $188.7 million in cash charges, over an expected three-year period.
- Quarterly comparability was affected by $110.9 million of restructuring charges, $96.8 million of acquisition and planned-divestiture costs, $24.4 million of acquisition-related inventory fair-value expense and other items. A $15.1 million Ardent Mills asset-sale gain and a $24.3 million tax benefit related to the planned Wesson divestiture also affected results.
- After quarter-end, Conagra agreed to sell its Wesson oil business and expected approximately $180 million in net proceeds, subject to customary closing conditions and regulatory approval. It also prepaid $250 million of term loans after quarter-end.
- The company accrued $136 million for California lead-paint litigation. The trial court estimated a $409 million remediation fund for pre-1951 homes, but Conagra cited significant uncertainty over allocation, participation, spending and appeals; any insurance recovery was not included in its accrual. The filing warns the matter could materially affect financial condition, results or liquidity.
- Other key risks include integration and synergy execution, elevated leverage and debt-service capacity, commodity and transportation inflation, consumer and competitive conditions, product recalls, and potential impairment of acquired goodwill and intangibles. Management reported effective disclosure controls; Pinnacle was excluded from the internal-control assessment scope for the acquisition year.
Important facts for investors to verify
- How much of reported sales growth and segment profit reflects Pinnacle, and whether organic growth and margins improve after integration.
- Actual timing and cash cost of Pinnacle restructuring, and progress toward the stated annual synergy target.
- Debt reduction, interest expense, covenant headroom and the company’s ability to generate cash while funding capital expenditure and dividends.
- Developments in the California lead-paint case, including any revised judgment, allocation of liability and insurance coverage.
- Completion and proceeds of the Wesson sale, and the effects of its tax and accounting treatment.
- Whether Foodservice volume trends, acquisition-related charges and working-capital timing normalize in subsequent periods.