Conagra Brands, Inc. — Form 10-Q Summary
Business context and reporting period
Fiscal 2017 third quarter (13 weeks) ended February 26, 2017; year-to-date figures cover 39 weeks. Conagra completed the tax-free spin-off of Lamb Weston on November 9, 2016, and sold its Spicetec and JM Swank businesses in the first quarter. Lamb Weston and the previously sold Private Brands business are presented as discontinued operations. These portfolio changes make reported revenue comparisons less like-for-like.
Continuing operations comprise Grocery & Snacks, Refrigerated & Frozen, International, Foodservice, and Commercial. Commercial had no sales after the Spicetec and JM Swank divestitures.
Key financial metrics
| Metric | Q3 FY2017 | Q3 FY2016 | 39 weeks FY2017 | 39 weeks FY2016 |
|---|---|---|---|---|
| Net sales | $1,981.2 million | $2,199.3 million | $5,965.2 million | $6,611.1 million |
| Gross profit margin | 31.3% | 28.2% | 30.4% | 28.0% |
| Income from continuing operations | $179.5 million | $71.4 million | $392.4 million | $245.1 million |
| Diluted EPS, continuing operations | $0.41 | $0.16 | $0.89 | $0.56 |
| Reported diluted EPS | $0.41 | $0.46 | $1.11 | $(1.83) |
- Quarterly net sales fell 10%; management cited lower volumes and the loss of divested-business sales. Sales declined in each continuing segment with year-over-year comparisons: Grocery & Snacks 5%, Refrigerated & Frozen 6%, International 3%, and Foodservice 3%.
- Quarterly segment operating profit rose 16% to $376.5 million. Management attributed stronger results principally to higher gross margins in Grocery & Snacks, Refrigerated & Frozen, and Foodservice, and lower SG&A and interest expense.
- Quarterly continuing-operations income increased despite lower sales. Reported diluted EPS was below the prior-year $0.46, which included $0.30 per share from discontinued operations; current-quarter discontinued operations contributed approximately $0.00 per diluted share.
- Year-to-date reported net income was $496.1 million, compared with a loss of $786.8 million in the prior-year period, which included a large Private Brands impairment charge. Current-year continuing-operations results included substantial impairment and divestiture items.
- Net interest expense was $45.7 million for the quarter and $158.0 million year to date, down from $76.4 million and $235.7 million. The company reported a 27.4% quarterly and 44.6% year-to-date effective tax rate on continuing operations.
- Continuing-operations operating cash flow was $803.5 million year to date, versus $274.3 million. Total operating cash flow, including discontinued operations, was $846.5 million versus $738.6 million. Capital expenditures were $158.5 million.
- Cash was $683.6 million at quarter end, compared with $798.1 million at May 29, 2016. Long-term debt including current installments was approximately $3.0 billion, down from $5.2 billion at fiscal year-end; total debt carrying value was approximately $3.0 billion versus $5.4 billion. The company repaid $1.06 billion of long-term debt year to date.
- Current assets were $2.54 billion and current liabilities $1.56 billion. A new $1.25 billion unsecured revolving credit facility, maturing in 2022, had no borrowings outstanding. The company said it was in compliance with its financial covenants.
Material changes, outlook, and unusual items
- Year-to-date results included $208.6 million of goodwill and intangible-asset impairment charges, primarily in International; $197.4 million of pre-tax gains on the Spicetec and JM Swank sales; $93.3 million of debt-extinguishment charges; and $47.6 million of SCAE restructuring charges. The International segment recorded a $157.8 million operating loss year to date, including $207.5 million of goodwill and brand impairment charges.
- Quarterly unusual items included $32.7 million of debt-retirement charges, $13.8 million of pension settlement expense, and $13.7 million of SCAE charges. A $6.7 million benefit arose from reversing a lease put-option accrual when a lease expired.
- The SCAE plan is ongoing over multiple years. The board had approved up to $880.5 million of plan expenses; the company estimated approximately $442.6 million in charges for actions identified to date, including cash and non-cash costs.
- Management expected a 33%–34% effective tax rate for the remainder of fiscal 2017, approximately $280 million of capital expenditures for the full fiscal year, and sufficient liquidity to meet obligations, planned capital spending, and dividends. No full-year EPS or revenue guidance is provided in the filing text.
- The company repurchased $594.6 million of shares during the first three quarters and paid $328.9 million in dividends. It had $787.3 million of remaining share-repurchase authorization at February 26, 2017. The $823.5 million cash payment received in connection with the Lamb Weston spin-off had been fully used for debt repayment and share repurchases.
- After quarter end, Conagra agreed to acquire Thanasi Foods and BIGS, subject to customary closing conditions and regulatory approvals; the transaction was expected to close in the following months. It had acquired Frontera Foods and Red Fork in September 2016 for $108.1 million.
- Key risks include commodity, foreign-exchange and interest-rate exposures; execution of restructuring and portfolio changes; consumer and competitive trends; and potential impairment of goodwill or intangibles. The company disclosed a $1.15 billion California lead-paint judgment that it is appealing and said the ultimate exposure could be material; it could not estimate exposure for that case or an Illinois case. Beatrice-related environmental accruals were $52.8 million, with possible additional liability at one site that could not be estimated. The company also disclosed a $108.9 million verdict against it in a Jacobs-related case and said it expected ultimate exposure to be limited to its insurance deductible.
- Management stated that disclosure controls were effective and that there was 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 divestitures versus organic volume, pricing, mix, and foreign exchange, and whether reduced promotions and product exits improve revenue quality sustainably.
- Whether improved segment margins and lower SG&A persist, particularly in Grocery & Snacks and Refrigerated & Frozen, and whether International results stabilize after the impairments.
- Progress, remaining cash costs, and realized savings from the SCAE plan; the filing does not provide a clear total completion timetable or a complete cost estimate for the entire plan.
- Debt maturity and refinancing needs, covenant headroom, cash deployment, and capacity to maintain dividends and share repurchases.
- Developments in the California lead-paint appeal, environmental matters, and other legal proceedings, including potential effects not presently estimable.
- Closing and integration of the Thanasi Foods and BIGS acquisitions, and future performance of the Frontera and Red Fork brands.