Conagra Brands, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended May 27, 2018 (52 weeks). The filing also reports fourth-quarter results; this is not a fiscal 2017 annual report. Amounts are in U.S. dollars.
Business context and performance
Conagra is a branded food company operating in Grocery & Snacks, Refrigerated & Frozen, International, Foodservice, and Commercial. Commercial had no sales after the fiscal 2017 divestiture of Spicetec and JM Swank. The Lamb Weston business was spun off in November 2016 and is reported as discontinued operations.
- Net sales were $7.94 billion, up 1% from $7.83 billion. Management cited innovation and renovation, while pursuing a “value over volume” strategy.
- Gross profit was $2.35 billion, versus $2.34 billion; gross margin was approximately 29.6%, compared with 29.9%.
- Income from continuing operations was $797.5 million, up from $546.0 million. Diluted continuing-operations EPS was $1.95 versus $1.25. Net income attributable to Conagra was $808.4 million versus $639.3 million.
- Reported results included a $233.3 million income tax benefit from the Tax Act. Other significant items included $151.0 million in legal charges, $78.6 million in tax expense related to Wesson’s failed sale, and restructuring, lease, acquisition/divestiture, pension, and impairment charges.
- Net interest expense declined 19% to $158.7 million. The effective tax rate was approximately 18%, compared with 32%; fiscal 2018 included the Tax Act benefit and other unusual tax items.
Segments and comparable-period changes
| Segment | FY2018 sales | Change | FY2018 operating profit |
|---|---|---|---|
| Grocery & Snacks | $3.29 billion | +2% | $724.8 million, +11% |
| Refrigerated & Frozen | $2.75 billion | +4% | $479.4 million, +8% |
| International | $843.5 million | +3% | $86.5 million; prior year loss of $168.9 million |
| Foodservice | $1.05 billion | -2% | $121.8 million, +16% |
Grocery & Snacks volume declined about 2% excluding acquisitions; Refrigerated & Frozen volume rose 3%. International volume fell 3%, offset by pricing/mix and currency. Foodservice volume fell 11%, partly offset by 9% higher price/mix. The prior-year International loss included $235.9 million of goodwill and brand impairment charges.
Fourth-quarter net sales were $1.97 billion versus $1.86 billion. Continuing-operations income was $70.6 million versus $153.6 million, and diluted EPS was $0.18 versus $0.36.
Cash flow, debt, and liquidity
- Cash from operating activities was $954.2 million, including $919.7 million from continuing operations, down from $1.18 billion and $1.14 billion, respectively. The decline reflected $300 million of voluntary pension contributions, working-capital changes, and lease-exit payments.
- Capital expenditures were $251.6 million. Cash used in investing was $576.2 million, including $337.1 million for acquisitions. Cash used in financing was $506.9 million, including $967.3 million of share repurchases and $342.3 million of dividends.
- Cash and equivalents were $128.0 million, down from $251.4 million. Current assets were $1.94 billion and current liabilities $2.34 billion.
- Total debt was approximately $3.8 billion, including $277.0 million of commercial paper. The $1.25 billion revolving facility was undrawn at year-end; the company reported compliance with financial covenants and investment-grade senior debt ratings.
- Share repurchases totaled 27.4 million shares for $967.3 million. The quarterly dividend was $0.2125 per share, or $0.85 annualized.
Outlook, transactions, and risks
- Management expected a fiscal 2019 effective tax rate of approximately 23%–24%, excluding unusual items, and estimated capital expenditures of about $350 million, excluding Pinnacle-related amounts. It intended to maintain the $0.85 annual dividend while focusing on deleveraging.
- After year-end, Conagra agreed to acquire Pinnacle Foods in a cash-and-stock transaction valued at approximately $10.9 billion, including Pinnacle’s net debt. Closing was expected by the end of calendar 2018, subject to shareholder, regulatory, and other conditions. Conagra expected up to $8.3 billion of long-term debt and $215 million in cost synergies; neither completion nor expected benefits were assured.
- The Wesson sale agreement was terminated after an FTC challenge. The business remained held for sale and was being marketed. The Canadian Del Monte processed-fruit and vegetable business was sold after year-end for approximately C$43 million.
- The California lead-paint litigation was deemed probable and reasonably estimable: Conagra estimated its share at $60 million–$335 million and recorded a reserve, but the exact recorded amount is not stated here. A separate $108.9 million jury verdict in the Jacobs matter remained on appeal; the company expected exposure to be limited to its insurance deductible. Environmental reserves for Beatrice-related matters were $52.4 million.
- Key business risks include commodity and transportation inflation, competitive pricing and retailer bargaining power, changing consumer preferences, reliance on Walmart (24% of sales), product safety and recalls, supply-chain disruption, cybersecurity, pension costs, and debt obligations. The Pinnacle acquisition would substantially increase leverage.
Most important facts for investors to verify
- How much of the increase in continuing-operations earnings and EPS reflects recurring operations versus the Tax Act benefit and other unusual items.
- The final amount, timing, insurance recovery, and appeal status of the California lead-paint liability and other significant legal matters.
- Whether Pinnacle received required approvals, closed on expected terms, and achieved anticipated synergies without materially increasing financing costs or leverage.
- Progress on Wesson’s disposition, fiscal 2019 capital spending, and the company’s stated deleveraging and dividend plans.
- Whether sales and volumes improve in the segments where reported growth relied on acquisitions, pricing, or mix, and whether cost inflation is offset by productivity and pricing.