Conagra Brands, Inc. — Form 10-Q Summary
Reporting period: Fiscal 2017 second quarter, the 13 weeks ended November 27, 2016; first-half comparisons cover the 26 weeks ended that date. Dollar amounts are in millions unless stated otherwise.
Business context
Conagra is a branded food company. On November 9, 2016, it completed the tax-intended spinoff of Lamb Weston; Lamb Weston is presented as discontinued operations for all periods. Conagra also sold Spicetec and JM Swank in the first quarter and acquired Frontera Foods and Red Fork in September. Segment comparisons reflect the company’s reorganized reporting structure.
Key financial results
| Metric | Q2 FY2017 | Q2 FY2016 | First half FY2017 | First half FY2016 |
|---|---|---|---|---|
| Net sales, continuing operations | $2,088.4 | $2,358.8 | $3,984.0 | $4,411.8 |
| Income from continuing operations | $114.3 | $80.1 | $212.9 | $173.7 |
| Net income (loss) attributable to Conagra | $122.1 | $154.9 | $308.3 | $(999.2) |
| Diluted EPS | $0.28 | $0.35 | $0.70 | $(2.29) |
| Operating cash flow, continuing operations | Not separately stated | Not separately stated | $460.6 | $16.6 |
- Q2 gross profit was approximately $647.5, or 31.0% of sales, compared with $668.0, or 28.3%, a year earlier. The filing attributes improved gross margins to lower commodity costs, reduced promotions, and productivity gains, partly offset by lower volumes.
- Q2 net interest expense declined to $54.1 from $79.2. First-half net interest expense was $112.3 versus $159.3.
- Cash and equivalents were $1,442.5 at November 27, up from $798.1 at fiscal year-end. Total first-half cash increased $608.0 to $1,442.5.
- Long-term debt, including current installments, was approximately $3.4 billion; notes payable were $6.7. No commercial paper or revolving-credit borrowings were outstanding. The $1.5 billion revolver was undrawn and covenants were met.
- First-half investing cash flow was $150.2, including $489.1 of divestiture proceeds, offset in part by $118.3 of capital expenditures and the $108.2 Frontera/Red Fork acquisition. Financing cash flow used $80.9, including $555.8 of debt repayments, $219.4 of dividends paid, and $170.1 of share repurchases.
Changes versus prior comparable periods
- Q2 sales fell 11%; first-half sales fell 10%. Lower volume and divestitures were important factors. Sales declined across Grocery & Snacks, Refrigerated & Frozen, International, and Foodservice; Commercial had no Q2 sales after the businesses were sold.
- Q2 continuing-operations income and diluted EPS improved year over year, while total diluted EPS declined because discontinued-operations income was lower. First-half total earnings improved from the prior-year loss, which included a large Private Brands impairment charge.
- Grocery & Snacks operating profit rose 19% in Q2 and 23% in the first half; Foodservice rose 56% and 15%, respectively. Refrigerated & Frozen Q2 operating profit declined 5%, while first-half profit rose 3%.
- International reported operating losses of $26.7 in Q2 and $175.9 in the first half, versus profits in the comparable prior periods, primarily reflecting goodwill and brand impairment charges and foreign-exchange pressure.
- First-half operating cash flow from continuing operations increased substantially from $16.6 to $460.6. Management cited improved margins and lower SG&A, timing of tax payments, lower inventory build, and reduced interest payments; higher incentive-compensation payments partly offset these benefits.
Outlook, management commentary, and risks
- Management estimated a 33%–34% effective tax rate for the remainder of fiscal 2017 and approximately $303.8 of fiscal-year capital expenditures. It stated that liquidity should be sufficient for at least the next 12 months. No full-year earnings guidance is provided in the filing text.
- The company expects to continue its multi-year Supply Chain and Administrative Efficiency Plan. The board approved up to $739.0 of plan expenses; approximately $432.8 of charges had been incurred or were expected for identified actions, including cash and non-cash costs.
- The Lamb Weston spinoff generated an $823.5 cash payment. Approximately $753.4 remained at quarter-end and must, to preserve intended tax-free treatment, be used within 12 months for specified debt repayment, dividends, or share repurchases. The company had $1.21 billion of remaining share-repurchase authorization.
- Q2 unusual items included $60.6 of debt-extinguishment charges, $43.9 of International goodwill impairment, $19.8 of restructuring charges, and a tax expense associated with a change in the estimated tax basis of Spicetec. First-half items also included $207.5 of International goodwill and intangible impairment and $197.7 of divestiture gains.
- Key risks include execution and potential costs of the Lamb Weston separation, possible tax challenges to the spinoff, commodity and foreign-exchange volatility, consumer and competitive pressures, future impairment risk, and restructuring execution. Walmart and affiliates represented 24% of Q2 sales.
- Contingencies include an appealed California lead-paint judgment of $1.15 billion against a subsidiary and other defendants; the company says its liability theory is disputed and exposure cannot be estimated. A separate $108.9 Jacobs Engineering verdict is on appeal; management expects any ultimate exposure to be limited to the insurance deductible. Lamb Weston-related guarantees also remain in place, with indemnification rights against Lamb Weston.
- Management reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the sales decline reflects lower volumes, divestitures, foreign exchange, and portfolio changes, and whether pricing actions can support a recovery.
- Whether operating-margin gains and continuing-operations cash generation persist after the Lamb Weston separation and completion of asset sales.
- The remaining costs, timing, and realized savings from the restructuring plan, and the effects of International impairment and tax items.
- Use of the restricted-purpose $823.5 spinoff cash payment, future debt repayments, and planned share repurchases.
- Developments in the California lead-paint appeal, Jacobs appeal and insurance coverage, and potential spinoff-related tax or guarantee liabilities.