Conagra Brands, Inc. — Fiscal 2023 Second-Quarter Form 10-Q
Reporting period: Thirteen weeks ended November 27, 2022; first-half comparisons cover the twenty-six weeks ended that date. Dollar amounts are in millions unless otherwise noted. The filing’s “second quarter” is fiscal 2023 Q2.
Business context and financial performance
- Conagra is a branded food company reporting Grocery & Snacks, Refrigerated & Frozen, International, and Foodservice segments.
- Q2 net sales were $3,312.9, up 8% from $3,058.9. First-half sales were $6,217.2, up 9% from $5,712.2.
- Q2 gross profit was $922.3, versus $754.8 a year earlier; gross margin rose to approximately 27.8% from 24.7%, a 316-basis-point improvement cited by management. First-half gross profit was $1,642.6 versus $1,428.2.
- Q2 net income attributable to Conagra was $381.9, or $0.79 diluted EPS, versus $275.5, or $0.57. First-half attributable net income was $304.4, or $0.63 diluted EPS, versus $510.9, or $1.06.
- Q2 segment sales increased in Grocery & Snacks (7%), Refrigerated & Frozen (11%), and Foodservice (15%); International declined 1%. Price/mix gains were offset in part by lower volumes, primarily attributed to consumers’ response to inflation-driven pricing. International also faced unfavorable foreign exchange.
- Q2 segment operating profit rose in Grocery & Snacks ($340.4 versus $249.2), Refrigerated & Frozen ($250.3 versus $168.3), and Foodservice ($28.5 versus $13.8); International was nearly flat at $36.9 versus $37.1. First-half total segment operating profit fell to $718.3 from $896.3, largely reflecting impairment charges in Refrigerated & Frozen.
- Q2 net interest expense was $100.3, up from $94.9; first-half expense was $197.4 versus $189.1. The company attributed the increase to a higher weighted-average interest rate on debt. First-half effective tax rate was 31.0%, versus 23.1%, principally affected by largely non-deductible goodwill impairment.
Cash flow, liquidity, and debt
- For the first half, operating cash flow was $297.8, compared with $262.1. Investing activities used $181.9, including $188.4 of capital expenditures; financing activities used $157.4. Cash and cash equivalents declined by $43.6 to $39.7.
- Management said accelerated customer receipts increased first-half operating cash flow by approximately $152, in exchange for slightly higher prompt-pay discounts. Higher inventories and payment timing partly offset the benefit.
- At November 27, 2022, current assets were $3,416.4 and current liabilities were $3,722.7; cash was $39.7 and inventories were $2,347.7. The resulting current ratio was approximately 0.92.
- Long-term debt, including current installments, had a carrying amount of approximately $9.04 billion. The company borrowed $500.0 under a term loan maturing August 2025, using proceeds to repay $250.0 of 3.25% notes at maturity and commercial paper borrowings. Commercial paper outstanding was $254.0; the $2.0 billion revolving facility, maturing August 2027, had no borrowings.
- The company reported compliance with its revolving-facility covenants. It stated that cash, operating cash flow, credit facilities, commercial paper, and capital-market access should provide sufficient liquidity for at least the next twelve months.
- First-half cash dividends paid were $308.6 and share repurchases were $150.0. Management estimated fiscal 2023 capital expenditures of approximately $425.
Material changes, outlook, and notable items
- First-half results included $385.7 of goodwill and Birds Eye brand impairment charges: $141.7 for goodwill and $244.0 for the Birds Eye brand. Management cited higher discount rates and revised sales forecasts. It warned that further rate increases and inflation uncertainty heightened impairment risk ahead of the fiscal fourth-quarter annual assessment.
- Q2 included $7.9 of charges associated with a manufacturing-facility fire and $1.8 of net restructuring charges. First-half results also included $26.7 of impairment charges for businesses no longer meeting held-for-sale criteria.
- Management expected input-cost inflation to remain elevated through the rest of fiscal 2023, with pricing and productivity actions mitigating some pressure. It anticipated lower supply-chain operating costs in the second half as service levels recover. No specific full-year revenue or EPS guidance is provided in the supplied filing text.
- Management described retail demand as elevated versus pre-pandemic levels but said volumes were lower year over year, primarily due to pricing elasticity. Foodservice demand was higher year over year and approaching pre-pandemic levels; management expected these trends to continue for the rest of fiscal 2023.
- Notable contingencies include the Waseca facility environmental matter, where Minnesota’s pollution-control agency proposed penalties of $1.8 for 2020 and $4.3 for 2021, subject to settlement discussions; and California lead-paint settlement payments, with $40.7 remaining as of the filing date. The company also guaranteed up to $75.0 of a Lamb Weston farmland sublease obligation, with indemnification rights.
- Management said the disclosed legal and environmental matters were not expected to have a material adverse effect, while acknowledging estimates could change. It also identified commodity and energy prices, interest rates, foreign exchange, supply-chain availability and costs, consumer response to pricing, and intangible-asset impairments as risks.
Important facts for investors to verify
- Whether price increases can continue to offset inflation without further material volume declines, and whether the anticipated second-half supply-chain cost reduction occurs.
- The assumptions behind the Birds Eye and reporting-unit impairment tests, and the potential for additional impairments if discount rates rise or forecasts weaken.
- The sustainability of cash generation: first-half operating cash flow benefited by approximately $152 from accelerated customer receipts, while inventories rose to $2,347.7.
- Debt refinancing needs, interest-rate exposure, covenant headroom, and liquidity under the company’s stated leverage and interest-coverage requirements.
- Developments in the Waseca environmental penalty discussions, lead-paint settlement payments, product-labeling and product-liability matters, and related recorded reserves.
- Customer concentration: Walmart and affiliates represented approximately 28% of Q2 and first-half sales.