CONAGRA BRANDS INC. quarterly report, Q1 FY2018

Full document

Conagra Brands, Inc. — Q1 FY2018 Form 10-Q

Business context and period: The filing covers the 13 weeks ended August 27, 2017, compared with the 13 weeks ended August 28, 2016. Results exclude Lamb Weston, spun off in November 2016, from continuing operations. The company reported Grocery & Snacks, Refrigerated & Frozen, International, Foodservice, and Commercial segments; Commercial had no sales in the current quarter after the prior-year divestitures of Spicetec and JM Swank.

Key financial results

MetricQ1 FY2018Q1 FY2017
Net sales$1,804.2 million$1,895.6 million
Income from continuing operations$153.6 million$98.6 million
Net income attributable to Conagra$152.5 million$186.2 million
Diluted EPS$0.36$0.42
Cash dividends declared per share$0.2125$0.25
Cash from operating activities, continuing operations$141.5 million$208.3 million
  • Sales fell 4.8%. Cost of goods sold was $1,285.2 million versus $1,351.0 million; gross profit was approximately $519.0 million versus $544.6 million, with gross margin essentially flat at approximately 28.8%.
  • SG&A expense was $239.0 million, up from $231.7 million. Net interest expense declined to $36.4 million from $58.2 million.
  • Continuing-operations income improved despite lower sales, reflecting lower interest expense, higher equity-method earnings ($30.0 million versus $13.1 million), and stronger segment results in Refrigerated & Frozen and International. The effective tax rate was 43.9%, down from 63.2% but still elevated by foreign earnings and planned cash repatriation tax charges.
  • Prior-year diluted EPS included $0.20 from discontinued operations; current-quarter discontinued operations recorded a $0.3 million loss. Prior-year results also included divestiture gains and impairment charges, making net income and segment comparisons less directly comparable.
  • Balance-sheet cash was $251.4 million. Current assets were $2,125.0 million and current liabilities $2,053.6 million. Notes payable rose to $323.5 million from $28.2 million; the company reported $323.2 million outstanding under its commercial-paper program and no borrowings under its $1.25 billion revolving facility. Long-term debt, including current installments, had a carrying amount of approximately $2.97 billion.
  • Total cash from operating activities was $136.0 million, including $5.5 million used by discontinued operations. Capital expenditures were $42.6 million. Financing included $295.3 million of net short-term borrowings, $300.0 million of share repurchases, and $83.3 million of dividends paid.

Material changes and segment performance

  • Grocery & Snacks sales declined 2% to $745.8 million; volume excluding acquisitions fell 6%. Operating profit declined 2% to $176.2 million, with lower volume and input-cost inflation partly offset by productivity.
  • Refrigerated & Frozen sales rose 2% to $615.7 million and operating profit rose 11% to $101.9 million, aided by cost reductions and innovation-related pipeline fills.
  • International sales declined 2% to $190.9 million, while operating profit was $18.9 million versus a prior-year $149.2 million loss that included $163.6 million of goodwill and brand impairments.
  • Foodservice sales declined 6% to $251.8 million, principally due to exiting a non-core business; operating profit increased 7% to $23.2 million.
  • The company repurchased 8.7 million shares for $300.0 million during the quarter; $1.08 billion remained authorized. Retained earnings increased, while total stockholders’ equity fell to $3,882.6 million from $4,077.8 million.

Outlook, commentary, risks, and unusual items

  • Management expected a fiscal 2018 effective tax rate of approximately 32.5%–33.5% for the remainder of the year and estimated full-year capital expenditures of approximately $280 million. Management stated liquidity should be adequate for at least the next 12 months.
  • The company expected to repatriate approximately $154.8 million of foreign cash in Q2 FY2018. The decision and related foreign-earnings treatment generated $27.8 million of tax expense in Q1.
  • The SCAE restructuring plan remains ongoing. Charges identified to date for continuing operations were approximately $450.1 million, including $303.3 million of cash charges; Q1 charges were $11.4 million. Costs are expected to continue over multiple years.
  • After quarter-end, Conagra agreed to acquire Angie's BOOMCHICKAPOP for $250 million, subject to customary conditions and regulatory approvals; closing was expected by calendar year-end. The April 2017 acquisitions of Thanasi Foods and BIGS cost $217.6 million in cash, net of cash acquired.
  • The proposed Wesson oil sale was subject to FTC review; the parties received a second request for information on August 28, 2017. Conagra expected net proceeds of approximately $285 million, but either party could terminate if the transaction had not closed by March 31, 2018 because HSR approval was not received.
  • Notable contingencies include a California lead-paint judgment of $1.15 billion that the company was appealing and for which exposure could not be estimated; $53.1 million accrued for Beatrice environmental matters; and a $108.9 million jury verdict in the Jacobs/Garner matter, which the company appealed and expected to be limited by insurance to the applicable deductible. Management said the ultimate resolution of the matters discussed was not expected to materially adversely affect the company, while noting the lead-paint matter could result in a material judgment.
  • Principal stated risks include commodity and foreign-exchange volatility, consumer and competitive conditions, acquisition/divestiture approvals and execution, litigation, restructuring delivery, cybersecurity and third-party service-provider dependence, and protection of intellectual property. The company reported compliance with credit-facility covenants and effective disclosure controls.

Important facts for investors to verify

  1. Whether lower sales volumes in Grocery & Snacks and Foodservice stabilize, and whether margin improvements in Refrigerated & Frozen and International persist.
  2. Whether the stated tax-rate outlook is achieved after the Q1 repatriation-related charges and any further foreign-cash decisions.
  3. Progress, final costs, and realized savings from the SCAE plan, alongside planned capital expenditures and working-capital cash demands.
  4. Completion, timing, and proceeds of the Wesson sale and Angie's acquisition, including regulatory outcomes and financing effects.
  5. Commercial-paper reliance, debt maturities, and liquidity after share repurchases, dividends, acquisitions, and seasonal working-capital needs.
  6. Developments in the lead-paint appeal, environmental claims, and other litigation or guarantees, including the degree of insurance recovery.