Conagra Brands, Inc. — Form 10-Q Summary
Business context and reporting period
Reports the 13 weeks ended August 30, 2020, Conagra’s first quarter of fiscal 2021, compared with the 13 weeks ended August 25, 2019. The company sells branded food products through Grocery & Snacks, Refrigerated & Frozen, International, and Foodservice segments. Management attributed stronger retail demand to increased at-home eating during COVID-19, while reduced restaurant traffic weighed on Foodservice.
Financial performance and liquidity
Amounts are in millions except per-share data. Percent changes are calculated from reported figures.
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $2,678.9 | $2,390.7 | +12% |
| Gross profit; margin | $810.2; 30.2% | $664.5; 27.8% | Margin +2.4 points |
| Net income | $329.8 | $174.3 | +89% |
| Net income attributable to Conagra | $329.0 | $173.8 | +89% |
| Diluted EPS | $0.67 | $0.36 | +$0.31 |
| Operating cash flow | $284.5 | $207.0 | +$77.5 |
| Capital expenditures | $145.5 | $106.6 | +$38.9 |
| Cash flow less capital expenditures | $139.0 | $100.4 | Derived measure |
| Net interest expense | $113.7 | $122.7 | -$9.0 |
Segment operating profit was $587.1 million versus $363.2 million. By segment, sales and operating profit were: Grocery & Snacks $1,134.2 million and $283.6 million; Refrigerated & Frozen $1,130.6 million and $240.1 million; International $219.0 million and $38.5 million; Foodservice $195.1 million and $24.9 million.
At quarter-end, cash and cash equivalents were $438.2 million, current assets $2,935.1 million, and current liabilities $3,101.9 million. Long-term debt, including current installments, was approximately $9.62 billion; $718.7 million was due within 12 months. The $1.6 billion revolving credit facility was undrawn, and the company reported no commercial paper or delayed-draw term-loan borrowings. It was in compliance with debt covenants. Cash and cash equivalents declined $115.1 million during the quarter; the company paid $103.5 million in dividends and repaid $133.4 million of long-term debt.
Material changes versus the prior-year quarter
- Sales rose 12%, with retail segment growth partly offset by Foodservice sales falling 22%. Retail volumes benefited from pandemic-related at-home demand and inventory replenishment; lower promotions and favorable trade-accrual estimate changes also supported price/mix.
- Gross margin expanded, reflecting productivity, Pinnacle acquisition synergies, favorable mix, lower promotional activity, and fixed-cost leverage. These benefits were partly offset by higher input costs, COVID-related expenses, foreign exchange, and divested-business profits no longer contributing.
- SG&A fell to $300.3 million from $400.8 million, including because the prior-year quarter included larger restructuring and impairment charges. Prior-year results also included significant discrete tax benefits; the effective tax rate was 20.8% this quarter versus a 7.0% benefit rate in the prior-year quarter.
- Net interest expense decreased following repayment or redemption of debt, including floating-rate notes and term-loan borrowings. Equity-method investment earnings declined to $6.5 million from $12.3 million; prior-year earnings included a $5.4 million Ardent Mills asset-sale gain.
Outlook, management commentary, risks and unusual items
- Management said Pinnacle integration remained on track and continued to expect $305 million of annual cost synergies when integration is complete. The filing provides no specific full-year earnings or revenue guidance.
- Management expected elevated retail demand and reduced Foodservice demand to continue for at least part of fiscal 2021, while cautioning that elevated consumer demand could reverse. COVID-related incremental costs were estimated at $34 million for the quarter; employee-safety and other related expenses were expected to continue through fiscal 2021. Facilities remained open, with minimal supply-chain disruption reported to date.
- Fiscal 2021 capital expenditures were estimated at approximately $505 million. The company said it expected sufficient liquidity to meet needs for at least 12 months and remained committed to deleveraging. A 29% increase in the quarterly dividend, to $0.275 per share, was approved after quarter-end.
- Q1 FY2021 comparability items included $25.9 million of restructuring charges and a $7.6 million tax benefit from final tax regulations. The company recognized $8.6 million under its Pinnacle integration plan and $17.3 million under its other restructuring plan; further charges are expected, with Pinnacle-related costs expected through fiscal 2022.
- After quarter-end, Conagra entered an agreement to sell H.K. Anderson for expected cash proceeds of $8.5 million, subject to working-capital adjustments and customary closing conditions.
- Contingencies include a $57.4 million accrual for Beatrice-related environmental matters and a California lead-paint settlement requiring total payments of $101.7 million through fiscal 2026; $75.0 million was accrued at quarter-end. The company also disclosed ongoing product-labeling, wage-and-hour, product-liability, and securities litigation. Management did not expect the other noted legal matters to have a material adverse effect, but stated that changes in estimates could materially affect results or liquidity.
- Other risks identified include pandemic effects on demand, suppliers and operations; commodity and foreign-exchange volatility; acquisition integration and synergy execution; debt refinancing and deleveraging; consumer preferences and competition; and possible goodwill or intangible-asset impairments. Walmart and its affiliates accounted for approximately 25% of quarterly sales.
Important facts for investors to verify
- Whether pandemic-driven retail sales and the quarter’s margin improvement persist as demand, promotions, input costs, and COVID-related costs change.
- Whether Foodservice demand recovers and how that affects segment sales and profit.
- Progress toward the $305 million annual Pinnacle synergy target, restructuring costs, and deleveraging objectives.
- How the company will address the $718.7 million of debt due within 12 months and fund capital expenditures and dividends.
- Developments in the lead-paint settlement, environmental matters, other litigation, and related estimates or insurance recoveries.