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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
CONAGRA BRANDS, INC.
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
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| (Address of principal executive offices) | (Zip Code) |
(
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Number of shares outstanding of issuer's common stock as of August 27, 2023 was
PART I — FINANCIAL INFORMATION
Conagra Brands, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in millions except per share amounts)
(unaudited)
| Thirteen Weeks Ended | ||||||||
| August 27, 2023 | August 28, 2022 | |||||||
| Net sales | $ | $ | ||||||
| Costs and expenses: | ||||||||
| Cost of goods sold | ||||||||
| Selling, general and administrative expenses | ||||||||
| Pension and postretirement non-service expense (income) | ( | ) | ||||||
| Interest expense, net | ||||||||
| Income (loss) before income taxes and equity method investment earnings | ( | ) | ||||||
| Income tax expense | ||||||||
| Equity method investment earnings | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Less: Net income attributable to noncontrolling interests | ||||||||
| Net income (loss) attributable to Conagra Brands, Inc. | $ | $ | ( | ) | ||||
| Earnings (loss) per share — basic | ||||||||
| Net income (loss) attributable to Conagra Brands, Inc. common stockholders | $ | $ | ( | ) | ||||
| Earnings (loss) per share — diluted | ||||||||
| Net income (loss) attributable to Conagra Brands, Inc. common stockholders | $ | $ | ( | ) | ||||
See Notes to the Unaudited Condensed Consolidated Financial Statements.
Conagra Brands, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in millions)
(unaudited)
| Thirteen Weeks Ended | ||||||||||||||||||||||||
| August 27, 2023 | August 28, 2022 | |||||||||||||||||||||||
| Pre-Tax Amount | Tax (Expense) Benefit | After- Tax Amount | Pre-Tax Amount | Tax (Expense) Benefit | After- Tax Amount | |||||||||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||
| Derivative adjustments: | ||||||||||||||||||||||||
| Unrealized derivative adjustments | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Reclassification for derivative adjustments included in net income (loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Unrealized currency translation gains (losses) | ( | ) | ( | ) | ||||||||||||||||||||
| Pension and post-employment benefit obligations: | ||||||||||||||||||||||||
| Unrealized pension and post-employment benefit obligations | ( | ) | ( | ) | ||||||||||||||||||||
| Reclassification for pension and post-employment benefit obligations included in net income (loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Comprehensive income (loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Comprehensive income (loss) attributable to noncontrolling interests | ( | ) | ( | ) | ||||||||||||||||||||
| Comprehensive income (loss) attributable to Conagra Brands, Inc. | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||
See Notes to the Unaudited Condensed Consolidated Financial Statements.
Conagra Brands, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions except share data)
(unaudited)
| August 27, 2023 | May 28, 2023 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Receivables, less allowance for doubtful accounts of $ and $ | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Property, plant and equipment, net | ||||||||
| Goodwill | ||||||||
| Brands, trademarks and other intangibles, net | ||||||||
| Other assets | ||||||||
| $ | $ | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Notes payable | $ | $ | ||||||
| Current installments of long-term debt | ||||||||
| Accounts and other payables | ||||||||
| Accrued payroll | ||||||||
| Other accrued liabilities | ||||||||
| Total current liabilities | ||||||||
| Senior long-term debt, excluding current installments | ||||||||
| Other noncurrent liabilities | ||||||||
| Total liabilities | ||||||||
| Common stockholders' equity | ||||||||
| Common stock of $ par value, authorized shares; issued | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Less treasury stock, at cost, and common shares | ( | ) | ( | ) | ||||
| Total Conagra Brands, Inc. common stockholders' equity | ||||||||
| Noncontrolling interests | ||||||||
| Total stockholders' equity | ||||||||
| $ | $ | |||||||
See Notes to the Unaudited Condensed Consolidated Financial Statements.
Conagra Brands, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions)
(unaudited)
| Thirteen Weeks Ended | ||||||||
| August 27, 2023 | August 28, 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash flows from operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Asset impairment charges | ||||||||
| Equity method investment earnings in excess of distributions | ( | ) | ( | ) | ||||
| Stock-settled share-based payments expense (benefit) | ( | ) | ||||||
| Contributions to pension plans | ( | ) | ( | ) | ||||
| Pension expense (benefit) | ( | ) | ||||||
| Other items | ( | ) | ||||||
| Change in operating assets and liabilities: | ||||||||
| Receivables | ( | ) | ||||||
| Inventories | ( | ) | ( | ) | ||||
| Deferred income taxes and income taxes payable, net | ||||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Accounts and other payables | ||||||||
| Accrued payroll | ( | ) | ( | ) | ||||
| Other accrued liabilities | | |||||||
| Net cash flows from operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Additions to property, plant and equipment | ( | ) | ( | ) | ||||
| Sale of property, plant and equipment | ||||||||
| Purchase of marketable securities | ( | ) | ( | ) | ||||
| Sale of marketable securities | ||||||||
| Other items | ||||||||
| Net cash flows from investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Issuance of short-term borrowings, maturities greater than 90 days | ||||||||
| Repayment of short-term borrowings, maturities greater than 90 days | ( | ) | ||||||
| Net issuance (repayment) of other short-term borrowings, maturities less than or equal to 90 days | ( | ) | ||||||
| Issuance of long-term debt | ||||||||
| Repayment of long-term debt | ( | ) | ( | ) | ||||
| Debt issuance costs | ( | ) | ( | ) | ||||
| Repurchase of Conagra Brands, Inc. common shares | ( | ) | ||||||
| Cash dividends paid | ( | ) | ( | ) | ||||
| Exercise of stock options and issuance of other stock awards, including tax withholdings | ( | ) | ( | ) | ||||
| Other items | ( | ) | ( | ) | ||||
| Net cash flows from financing activities | ( | ) | ( | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ) | ||||||
| Net change in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
See Notes to the Unaudited Condensed Consolidated Financial Statements.
Conagra Brands, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(columnar dollars in millions except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying Condensed Consolidated Financial Statements of Conagra Brands, Inc. (the "Company", "Conagra Brands", "we", "us", or "our") have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not include certain information and disclosures required for comprehensive financial statements. The unaudited financial information reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of the results of operations, financial position, and cash flows for the periods presented. All adjustments are of a normal recurring nature. The results of operations for any quarter or a partial fiscal year period are not necessarily indicative of the results to be expected for other periods or the full fiscal year. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended May 28, 2023. There were no significant changes to our accounting policies from those disclosed in Note 1, "Summary of Significant Accounting Policies", to the Consolidated Financial Statements in that Form 10-K.
In September 2022, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2022-04, Supplier Finance Programs (Topic 405-50) - Disclosure of Supplier Finance Program Obligations, to add disclosure requirements related to supplier financing programs under Accounting Standards Codification 405, Liabilities. The guidance requires entities that maintain supplier financing programs to provide information in their financial statements about their use of supplier finance programs and their effect on the entity's working capital, liquidity, and cash flows. Specifically, the amendment requires entities to disclose the key terms of their programs, amounts outstanding, balance sheet presentation, and a roll-forward of amounts outstanding during the annual period. Only the amount outstanding at the end of the period is required to be disclosed in interim periods. We adopted this ASU when it became effective in the first quarter of fiscal 2024, except for the roll-forward requirement, which will be effective in fiscal 2025. The adoption of this ASU did not have a significant impact on our financial statements and related disclosures.
2. RESTRUCTURING ACTIVITIES
See our consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended May 28, 2023 for additional information on our restructuring activities.
Conagra Restructuring Plan
In fiscal 2019, senior management initiated a restructuring plan for costs incurred in connection with actions taken to improve selling, general and administrative ("SG&A") expense effectiveness and efficiencies and to optimize our supply chain network (the "Conagra Restructuring Plan"). As of August 27, 2023, we have approved the incurrence of $
During the first quarter of fiscal 2024, we recognized the following pre-tax expenses for the Conagra Restructuring Plan:
| Grocery & Snacks | Refrigerated & Frozen | International | Corporate | Total | ||||||||||||||||
| Accelerated depreciation | $ | $ | $ | $ | $ | |||||||||||||||
| Other cost of goods sold | ||||||||||||||||||||
| Total cost of goods sold | ||||||||||||||||||||
| Severance and related costs | ||||||||||||||||||||
| Asset impairment | ||||||||||||||||||||
| Consulting/professional fees | ||||||||||||||||||||
| Other SG&A | ||||||||||||||||||||
| Total SG&A | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
Included in the above results are $
Liabilities recorded for the Conagra Restructuring Plan and changes therein for the first quarter of fiscal 2024 were as follows:
| Balance at May 28, 2023 | Costs Incurred and Charged to Expense | Costs Paid or Otherwise Settled | Changes in Estimates | Balance at August 27, 2023 | ||||||||||||||||
| Severance and related costs | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
| Consulting/professional fees | ( | ) | ||||||||||||||||||
| Other costs | ( | ) | ||||||||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
3. DEBT AND REVOLVING CREDIT FACILITY
Senior Notes
During the first quarter of fiscal 2024, we repaid the entire outstanding $
During the third quarter of fiscal 2023, we repaid the remaining outstanding $
During the second quarter of fiscal 2023, we repaid the entire outstanding $
Term Loan
During the second quarter of fiscal 2023, we borrowed the full $
Revolving Credit Facility
At August 27, 2023, we had a revolving credit facility (the "Revolving Credit Facility") with a syndicate of financial institutions providing for a maximum aggregate principal amount outstanding at any one time of $
Debt Covenants
The Revolving Credit Facility generally requires our ratio of earnings before interest, taxes, depreciation and amortization ("EBITDA") to interest expense to be not less than
Commercial Paper
As of August 27, 2023 and May 28, 2023, we had $
Interest Expense
Net interest expense consists of:
| Thirteen Weeks Ended | ||||||||
| August 27, 2023 | August 28, 2022 | |||||||
| Long-term debt | $ | $ | ||||||
| Short-term debt | ||||||||
| Interest income | ( | ) | ( | ) | ||||
| Interest capitalized | ( | ) | ( | ) | ||||
| $ | $ | |||||||
4. FINANCING ARRANGEMENTS
Supplier Financing Arrangements
In order to manage our cash flow and related liquidity, we work with our suppliers to optimize our terms and conditions, which include the extension of payment terms. A number of factors may impact our future payment terms, including our relative creditworthiness, overall market liquidity, and changes in interest rates and other general economic conditions. Our current payment terms with our suppliers, which we deem to be commercially reasonable, range up to
We have also concluded that certain obligations to our suppliers, including amounts due and scheduled payment terms, are impacted by these third-party service programs and these arrangements are classified as notes payable within our Condensed Consolidated Balance Sheets. The proceeds and payments associated with short-term borrowings are reflected as financing activities within our Condensed Consolidated Statements of Cash Flows. As of August 27, 2023 and May 28, 2023, we had approximately $
Non-cash Lease Arrangements
In the first quarter of fiscal 2024, we took control of a third-party distribution facility that was assessed to be a finance lease. At lease commencement, the term of the lease was
5. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
The change in the carrying amount of goodwill for the first quarter of fiscal 2024 was as follows:
| Grocery & Snacks | Refrigerated & Frozen | International | Foodservice | Total | ||||||||||||||||
| Balance as of May 28, 2023 | $ | $ | $ | $ | $ | |||||||||||||||
| Currency translation | ||||||||||||||||||||
| Balance as of August 27, 2023 | $ | $ | $ | $ | $ | |||||||||||||||
Other identifiable intangible assets were as follows:
| August 27, 2023 | May 28, 2023 | |||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||
| Non-amortizing intangible assets | ||||||||||||||||
| Brands and trademarks | $ | $ | — | $ | $ | — | ||||||||||
| Amortizing intangible assets | ||||||||||||||||
| Customer relationships and intellectual property | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
During the first quarter of fiscal 2023, management reorganized its reporting structure for certain brands within two reporting units in our Refrigerated & Frozen segment. The change in management reporting required us to reassign assets and liabilities, including goodwill, between the reporting units, complete a goodwill impairment test both prior to and subsequent to the change, and evaluate other assets in the reporting units for impairment, including indefinite-lived intangibles (brand names and trademarks). The fair value of our indefinite-lived intangibles was determined using the "relief from royalty" methodology. As a result of our impairment tests, we recognized goodwill impairment charges within SG&A expenses of $
Amortizing intangible assets carry a remaining weighted average life of approximately
6. DERIVATIVE FINANCIAL INSTRUMENTS
See our consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended May 28, 2023, for additional information on our derivative activities.
Derivatives Designated as Cash Flow Hedges
During the first quarter of fiscal 2019, we entered into deal-contingent forward starting interest rate swap contracts to hedge a portion of the interest rate risk related to our issuance of long-term debt to help finance the acquisition of Pinnacle Foods, Inc. We settled these contracts during the second quarter of fiscal 2019 and deferred a $
Economic Hedges of Forecasted Cash Flows
Many of our derivatives do not qualify for, and we do not currently designate certain commodity or foreign currency derivatives to achieve, hedge accounting treatment. We reflect realized and unrealized gains and losses from derivatives used to economically hedge anticipated commodity consumption and to mitigate foreign currency cash flow risk in earnings immediately within general corporate expense (within cost of goods sold). The gains and losses are reclassified to segment operating results in the period in which the underlying item being economically hedged is recognized in cost of goods sold. In the event that management determines a particular derivative entered into as an economic hedge of a forecasted commodity purchase has ceased to function as an economic hedge, we cease recognizing further gains and losses on such derivatives in corporate expense and begin recognizing such gains and losses within segment operating results immediately.
The following table presents the net derivative gains (losses) from economic hedges of forecasted commodity consumption and the foreign currency risk of certain forecasted transactions, under this methodology:
| Thirteen Weeks Ended | ||||||||
| August 27, 2023 | August 28, 2022 | |||||||
| Gross derivative gains incurred | $ | $ | ||||||
| Less: Net derivative gains (losses) allocated to reporting segments | ( | ) | ||||||
| Net derivative gains recognized in general corporate expenses | $ | $ | ||||||
| Net derivative gains (losses) allocated to Grocery & Snacks | $ | ( | ) | $ | ||||
| Net derivative gains (losses) allocated to Refrigerated & Frozen | ( | ) | ||||||
| Net derivative gains (losses) allocated to International | ( | ) | ||||||
| Net derivative gains (losses) allocated to Foodservice | ( | ) | ||||||
| Net derivative gains (losses) included in segment operating profit | $ | ( | ) | $ | ||||
The fair values of our derivative positions were not material as of August 27, 2023 and were Level 1 or Level 2 assets or liabilities in the fair value hierarchy (see Note 14 for further information). We have not significantly changed our valuation techniques from prior periods.
The location and amount of gains from derivatives not designated as hedging instruments in our Condensed Consolidated Statements of Operations were as follows:
| Location in Condensed Consolidated | Gains (Losses) Recognized on Derivatives in Condensed Consolidated Statements of Operations for the Thirteen Weeks Ended | ||||||||
| Derivatives Not Designated as Hedging Instruments | Statements of Operations of Gains (Losses) Recognized on Derivatives | August 27, 2023 | August 28, 2022 | ||||||
| Commodity contracts | Cost of goods sold | $ | $ | ||||||
| Foreign exchange contracts | Cost of goods sold | ( | ) | ||||||
| Total gains from derivative instruments not designated as hedging instruments | $ | $ | |||||||
As of August 27, 2023, our open commodity contracts had a notional value (defined as notional quantity times market value per notional quantity unit) of $
7. SHARE-BASED PAYMENTS
For the first quarter of fiscal 2024 and 2023, we recognized total stock-based compensation income (including restricted stock units and performance shares) of $
Performance shares are granted to selected executives and other key employees with vesting contingent upon meeting various Company-wide performance goals. The performance goal for the -year performance period ending in fiscal 2024 (the "2024 performance period") is based on our diluted earnings per share ("EPS") compound annual growth rate ("CAGR"), subject to certain adjustments, measured over the defined performance period. The performance goals for the -year performance periods ending in fiscal 2025 (the "2025 performance period") and 2026 (the "2026 performance period") are based on our net sales and diluted EPS growth, subject to certain adjustments, measured over the defined performance period, with each year of the performance period weighted one-third. For each of the 2024 performance period, 2025 performance period, and 2026 performance period, the awards actually earned will range from to percent of the targeted number of performance shares for such performance period. Dividend equivalents are paid on the portion of performance shares actually earned at our regular dividend rate in additional shares of common stock.
Awards, if earned, will be paid in shares of our common stock. Subject to limited exceptions set forth in our performance share plan, any shares earned will be distributed after the end of the performance period, and generally only if the participant continues to be employed with the Company through the date of distribution. For awards where performance against the performance target has not been certified, the value of the performance shares is adjusted based upon the market price of our common stock and current forecasted performance against the performance targets at the end of each reporting period and amortized as compensation expense over the vesting period. Forfeitures are accounted for as they occur.
8. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is calculated on the basis of weighted average outstanding shares of common stock. Diluted earnings per share is computed on the basis of basic weighted average outstanding shares of common stock adjusted for the dilutive effect of stock options, restricted stock unit awards, and other dilutive securities. In periods when we recognize a net loss, we exclude the impact of outstanding stock awards from the diluted loss per share calculation, as their inclusion would have an antidilutive effect.
The following table reconciles the income (loss) and average share amounts used to compute both basic and diluted earnings (loss) per share:
| Thirteen Weeks Ended | ||||||||
| August 27, 2023 | August 28, 2022 | |||||||
| Net income (loss) attributable to Conagra Brands, Inc. common stockholders: | $ | $ | ( | ) | ||||
| Weighted average shares outstanding: | ||||||||
| Basic weighted average shares outstanding | ||||||||
| Add: Dilutive effect of stock options, restricted stock unit awards, and other dilutive securities | ||||||||
| Diluted weighted average shares outstanding | ||||||||
For the first quarter of fiscal 2024, there were
9. INVENTORIES
The major classes of inventories were as follows:
| August 27, 2023 | May 28, 2023 | |||||||
| Raw materials and packaging | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Supplies and other | ||||||||
| Total | $ | $ | ||||||
10. INCOME TAXES
In the first quarter of fiscal 2024 and 2023, we recognized income tax expense of $
The effective tax rate in the first quarter of fiscal 2024 was in line with our expected effective tax rate of approximately
The effective tax rate for the first quarter of fiscal 2023 reflected the impact of an impairment of goodwill that is largely non-deductible for tax purposes. During the first quarter of fiscal 2023, goodwill impairment charges totaling $
The amount of gross unrecognized tax benefits for uncertain tax positions was $
The net amount of unrecognized tax benefits at August 27, 2023 and May 28, 2023 that, if recognized, would favorably impact the Company's effective tax rate was $
We estimate that it is reasonably possible that the amount of gross unrecognized tax benefits will decrease by up to $
We have previously made the assessment that the current earnings of certain foreign subsidiaries were not indefinitely reinvested or that we could not remit to the U.S. parent in a tax-neutral transaction. Accordingly, we have recorded a deferred tax liability of $
On August 16, 2022, the Inflation Reduction Act of 2022 was signed into law. We have determined that we are not subject to the corporate alternative minimum tax at this time.
11. CONTINGENCIES
Litigation Matters
We are a party to certain litigation matters as a result of our acquisition of Beatrice Company ("Beatrice") in fiscal 1991, including litigation proceedings related to lead-based paint and pigment businesses divested by Beatrice prior to our acquisition. These lawsuits have generally sought damages for personal injury, property damage, economic loss, and governmental expenditures allegedly caused by the use of lead-based paint. We have denied liability, both on the merits of the claims and on the basis that we do not believe we are the successor to any such liability. In one such action in California, we agreed to pay $
We are party to a number of matters asserting product liability claims against the Company related to certain Pam® and other cooking spray products. These lawsuits generally seek damages for personal injuries allegedly caused by defects in the design, manufacture, or safety warnings of the cooking spray products. We have put the Company's insurance carriers on notice. While we cannot predict with certainty the results of these or any other legal proceedings, the Company believes adequate provision has been made in its condensed consolidated financial statements for all probable and reasonably estimable losses for the litigation related to the cooking spray products based on information available to us at the time of our evaluation.
Environmental Matters
Securities and Exchange Commission (the "SEC") regulations require us to disclose certain information about environmental proceedings if a governmental authority is a party to such proceedings and such proceedings involve potential monetary sanctions that we reasonably believe will exceed a stated threshold. Pursuant to the SEC regulations, the Company uses a threshold of $
In October 2019, the Minnesota Pollution Control Agency ("MPCA") initiated an odor complaint investigation at our Waseca, Minnesota vegetable processing facility. As a result of the investigation, the MPCA required implementation of a continuous monitoring system running from May 1 to October 31 in 2020 and 2021 and from April 1 to October 31 in 2022 to monitor hydrogen sulfide emissions at the wastewater treatment facility. As a result of the monitoring data findings, the MPCA alleged violations of Minnesota Ambient Air Quality Standards based on our hydrogen sulfide emissions during calendar years 2020, 2021, and 2022. On August 23, 2023, the parties settled the matter pursuant to a Stipulation Agreement in which Conagra agreed to take certain steps to manage and decrease hydrogen sulfide emissions and pay MPCA $
We are a party to certain environmental proceedings relating to businesses divested by Beatrice prior to our acquisition in fiscal 1991, including litigation and administrative proceedings involving Beatrice's possible status as a potentially responsible party at approximately 35 Superfund, proposed Superfund, or state-equivalent sites (the "Beatrice sites"). The Beatrice sites consist of locations previously owned or operated by predecessors of Beatrice that used or produced petroleum, pesticides, fertilizers, dyes, inks, solvents, polychlorinated biphenyls, acids, lead, sulfur, tannery wastes, and/or other contaminants. Reserves for these Beatrice environmental proceedings have been established based on our best estimate of the undiscounted remediation liabilities, which estimates include evaluation of investigatory studies, extent of required clean-up, the known volumetric contribution of Beatrice and other potentially responsible parties, and its experience in remediating sites. The accrual for Beatrice-related environmental matters totaled $
Guarantees and Other Contingencies
In certain limited situations, we will guarantee an obligation of an unconsolidated entity. As of August 27, 2023, we continued to guarantee an obligation of the Lamb Weston business pursuant to a guarantee arrangement that existed prior to the spinoff of the Lamb Weston business (the "Spinoff"), remained in place following completion of the Spinoff, and will remain in place until such guarantee obligation is substituted for guarantees issued by Lamb Weston. Pursuant to the separation and distribution agreement, dated as of November 8, 2016 (the "Separation Agreement"), between us and Lamb Weston, this guarantee arrangement is deemed a liability of Lamb Weston that was transferred to Lamb Weston as part of the Spinoff. Accordingly, under the Separation Agreement, in the event that we are required to make any payments as a result of this guarantee arrangement, Lamb Weston is obligated to indemnify us for any such liability, reduced by any insurance proceeds received by us. Lamb Weston is a party to an agricultural sublease agreement with a third party for certain farmland through 2025 (subject, at Lamb Weston's option, to extension for one additional -year period). Under the terms of the sublease agreement, Lamb Weston is required to make certain rental payments to the sublessor. We have guaranteed to the sublessor Lamb Weston's performance and the payment of all amounts (including indemnification obligations) owed by Lamb Weston under the sublease agreement, up to a maximum of $
We also guarantee a lease resulting from an exited facility. As of August 27, 2023, the remaining term of this arrangement did not exceed years and the maximum amount of guaranteed future payments was $
General
After taking into account liabilities recognized for all of the foregoing matters, management believes the ultimate resolution of such matters should not have a material adverse effect on our financial condition, results of operations, or liquidity; however, it is reasonably possible that a change of the estimates of any of the foregoing matters may occur in the future that could have a material adverse effect on our financial condition, results of operations, or liquidity.
Costs of legal services associated with the foregoing matters are recognized within SG&A expenses as services are provided.
12. PENSION AND POSTRETIREMENT BENEFITS
We have defined benefit retirement plans ("pension plans") for eligible salaried and hourly employees. Benefits are based on years of credited service and average compensation or stated amounts for each year of service. We also sponsor postretirement plans which provide certain medical and dental benefits to qualifying U.S. employees.
Components of pension and postretirement plan costs (benefits) are:
| Pension Plans | ||||||||
| Thirteen Weeks Ended | ||||||||
| August 27, 2023 | August 28, 2022 | |||||||
| Service cost | $ | $ | ||||||
| Interest cost | ||||||||
| Expected return on plan assets | ( | ) | ( | ) | ||||
| Amortization of prior service cost | ||||||||
| Pension cost (benefit) — Company plans | ( | ) | ||||||
| Pension cost (benefit) — multi-employer plans | ||||||||
| Total pension cost (benefit) | $ | $ | ( | ) | ||||
| Postretirement Plans | ||||||||
| Thirteen Weeks Ended | ||||||||
| August 27, 2023 | August 28, 2022 | |||||||
| Interest cost | ||||||||
| Amortization of prior service cost (benefit) | ( | ) | ( | ) | ||||
| Recognized net actuarial gain | ( | ) | ( | ) | ||||
| Total postretirement cost (benefit) | $ | ( | ) | $ | ( | ) | ||
The Company uses a split discount rate (spot-rate approach) for the U.S. plans and certain foreign plans. The spot-rate approach applies separate discount rates for each projected benefit payment in the calculation of pension service and interest cost.
The weighted-average discount rates for service and interest costs under the spot-rate approach used for pension cost in fiscal 2024 were
During the first quarter of fiscal 2024, we contributed $
13. STOCKHOLDERS' EQUITY
The following table presents a reconciliation of our stockholders' equity accounts for the thirteen weeks ended August 27, 2023:
| Conagra Brands, Inc. Stockholders' Equity | ||||||||||||||||||||||||||||||||
| Common Shares | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||
| Balance at May 28, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
| Stock option and incentive plans | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Currency translation adjustments | ( | ) | ||||||||||||||||||||||||||||||
| Derivative adjustments | ||||||||||||||||||||||||||||||||
| Activities of noncontrolling interests | ||||||||||||||||||||||||||||||||
| Pension and postretirement healthcare benefits | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Dividends declared on common stock; $ per share | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net income attributable to Conagra Brands, Inc. | ||||||||||||||||||||||||||||||||
| Balance at August 27, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
The following table presents a reconciliation of our stockholders' equity accounts for the thirteen weeks ended August 28, 2022:
| Conagra Brands, Inc. Stockholders' Equity | ||||||||||||||||||||||||||||||||
| Common Shares | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||
| Balance at May 29, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
| Stock option and incentive plans | ( | ) | ||||||||||||||||||||||||||||||
| Currency translation adjustments | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Repurchase of common shares | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Derivative adjustments | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Pension and postretirement healthcare benefits | ||||||||||||||||||||||||||||||||
| Dividends declared on common stock; $ per share | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net loss attributable to Conagra Brands, Inc. | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance at August 28, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
The following table details the accumulated balances for each component of other comprehensive loss, net of tax:
| August 27, 2023 | May 28, 2023 | |||||||
| Currency translation losses, net of reclassification adjustments | $ | ( | ) | $ | ( | ) | ||
| Derivative adjustments, net of reclassification adjustments | ||||||||
| Pension and postretirement benefit obligations, net of reclassification adjustments | ||||||||
| Accumulated other comprehensive loss | $ | ( | ) | $ | ( | ) | ||
The following tables summarize the reclassifications from accumulated other comprehensive income (loss) into income:
| Thirteen Weeks Ended | Affected Line Item in the Condensed Consolidated Statement of Operations1 | ||||||||
| August 27, 2023 | August 28, 2022 | ||||||||
| Net derivative adjustments: | |||||||||
| Cash flow hedges | $ | ( | ) | $ | ( | ) | Interest expense, net | ||
| Cash flow hedges | ( | ) | Equity method investment earnings | ||||||
| ( | ) | ( | ) | Total before tax | |||||
| Income tax expense | |||||||||
| $ | ( | ) | $ | ( | ) | Net of tax | |||
| Pension and postretirement liabilities: | |||||||||
| Net actuarial gain | $ | ( | ) | $ | ( | ) | Pension and postretirement non-service income | ||
| ( | ) | ( | ) | Total before tax | |||||
| Income tax expense | |||||||||
| $ | ( | ) | $ | ( | ) | Net of tax | |||
14. FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board guidance establishes a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The three levels of inputs used to measure fair value are as follows:
Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities,
Level 2 — Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets, and
Level 3 — Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing the asset or liability.
The fair values of our Level 2 derivative instruments were determined using valuation models that use market observable inputs including both forward and spot prices for currencies and commodities. Derivative assets and liabilities included in Level 2 primarily represent commodity and foreign currency option and forward contracts.
The following table presents our financial assets and liabilities measured at fair value on a recurring basis, based upon the level within the fair value hierarchy in which the fair value measurements fall, as of August 27, 2023:
| Level 1 | Level 2 | Level 3 | Net Value | |||||||||||||
| Assets: | ||||||||||||||||
| Derivative assets | $ | $ | $ | $ | ||||||||||||
| Deferred compensation assets | ||||||||||||||||
| Available-for-sale debt securities | ||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Derivative liabilities | $ | $ | $ | $ | ||||||||||||
| Deferred compensation liabilities | ||||||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||
The following table presents our financial assets and liabilities measured at fair value on a recurring basis, based upon the level within the fair value hierarchy in which the fair value measurements fall, as of May 28, 2023:
| Level 1 | Level 2 | Level 3 | Net Value | |||||||||||||
| Assets: | ||||||||||||||||
| Derivative assets | $ | $ | $ | $ | ||||||||||||
| Deferred compensation assets | ||||||||||||||||
| Available-for-sale debt securities | ||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Derivative liabilities | $ | $ | $ | $ | ||||||||||||
| Deferred compensation liabilities | ||||||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||
Certain assets and liabilities, including long-lived assets, goodwill, asset retirement obligations, and equity investments are measured at fair value on a nonrecurring basis using Level 3 inputs.
In the first quarter of fiscal 2024, we recognized charges for the impairment of certain long-lived assets based upon a discounted cash flow valuation model and included in restructuring activities (see Note 2). Impairments totaled $
In the first quarter of fiscal 2023, we recognized a charge for the impairment of an indefinite-lived brand of $
During the first quarter of fiscal 2023, goodwill impairment charges totaling $
In the first quarter of fiscal 2023, we recognized impairment charges totaling $
The carrying amount of long-term debt (including current installments) was $
15. BUSINESS SEGMENTS AND RELATED INFORMATION
We reflect our results of operations in
The Grocery & Snacks reporting segment principally includes branded, shelf-stable food products sold in various retail channels in the United States.
The Refrigerated & Frozen reporting segment principally includes branded, temperature-controlled food products sold in various retail channels in the United States.
The International reporting segment principally includes branded food products, in various temperature states, sold in various retail and foodservice channels outside of the United States.
The Foodservice reporting segment includes branded and customized food products, including meals, entrees, sauces and a variety of custom-manufactured culinary products packaged for sale to restaurants and other foodservice establishments primarily in the United States.
We do not aggregate operating segments when determining our reporting segments.
Operating profit (loss) for each of the segments is based on net sales less all identifiable operating expenses. General corporate expense; pension and postretirement non-service expense (income); interest expense, net; income taxes; and equity method investment earnings have been excluded from segment operations.
| Thirteen Weeks Ended | ||||||||
| August 27, 2023 | August 28, 2022 | |||||||
| Net sales | ||||||||
| Grocery & Snacks | $ | $ | ||||||
| Refrigerated & Frozen | ||||||||
| International | ||||||||
| Foodservice | ||||||||
| Total net sales | $ | $ | ||||||
| Operating profit (loss) | ||||||||
| Grocery & Snacks | $ | $ | ||||||
| Refrigerated & Frozen | ( | ) | ||||||
| International | ||||||||
| Foodservice | ||||||||
| Total operating profit | $ | $ | ||||||
| Equity method investment earnings | ||||||||
| General corporate expense | ||||||||
| Pension and postretirement non-service expense (income) | ( | ) | ||||||
| Interest expense, net | ||||||||
| Income tax expense | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Less: Net income attributable to noncontrolling interests | ||||||||
| Net income (loss) attributable to Conagra Brands, Inc. | $ | $ | ( | ) | ||||
The following table presents further disaggregation of our net sales:
| Thirteen Weeks Ended | ||||||||
| August 27, 2023 | August 28, 2022 | |||||||
| Frozen | $ | $ | ||||||
| Staples | ||||||||
| Other shelf-stable | ||||||||
| Refrigerated | ||||||||
| Snacks | ||||||||
| Foodservice | ||||||||
| International | ||||||||
| Total net sales | $ | $ | ||||||
To be consistent with the manner in which we present certain disaggregated net sales information to investors, we have categorized certain net sales of our segments as "Staples", which includes all of our U.S. domestic retail refrigerated products and other shelf-stable grocery products. Management continues to regularly review financial results and make decisions about allocating resources based upon the
Assets by Segment
The majority of our manufacturing assets are shared across multiple reporting segments. Output from these facilities used by each reporting segment can change over time. Also, working capital balances are not tracked by reporting segment. Therefore, it is impracticable to allocate those assets to the reporting segments, as well as disclose total assets by segment. Total depreciation expense was $
Other Information
Our operations are principally in the United States. With respect to operations outside of the United States, no single foreign country or geographic region was significant with respect to consolidated operations for the first quarter of fiscal 2024 and 2023. Foreign net sales, including sales by domestic segments to customers located outside of the United States, were approximately $
Our largest customer, Walmart, Inc. and its affiliates, accounted for approximately
Walmart, Inc. and its affiliates accounted for approximately
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The information contained in this report includes forward-looking statements within the meaning of the federal securities laws. Examples of forward-looking statements include statements regarding our expected future financial performance or position, results of operations, business strategy, plans and objectives of management for future operations, and other statements that are not historical facts. You can identify forward-looking statements by their use of forward-looking words, such as "may", "will", "anticipate", "expect", "believe", "estimate", "intend", "plan", "should", "seek", or comparable terms.
Readers of this report should understand that these forward-looking statements are not guarantees of performance or results. Forward-looking statements provide our current expectations and beliefs concerning future events and are subject to risks, uncertainties, and factors relating to our business and operations, all of which are difficult to predict and could cause our actual results to differ materially from the expectations expressed in or implied by such forward-looking statements. These risks, uncertainties, and factors include, among other things: risks associated with general economic and industry conditions, including inflation, rising interest rates, decreased availability of capital, volatility in financial markets, declining consumer spending rates, recessions, decreased energy availability, increased energy costs (including fuel surcharges), supply chain challenges, labor shortages, and geopolitical conflicts (including the ongoing conflict between Russia and Ukraine); negative impacts caused by public health crises; risks related to our ability to deleverage on currently anticipated timelines, and to continue to access capital on acceptable terms or at all; risks related to the Company's competitive environment, cost structure, and related market conditions; risks related to our ability to execute operating and value creation plans and achieve returns on our investments and targeted operating efficiencies from cost-saving initiatives, and to benefit from trade optimization programs; risks related to the availability and prices of commodities and other supply chain resources, including raw materials, packaging, energy, and transportation, including any negative effects caused by changes in levels of inflation and interest rates, weather conditions, health pandemics or outbreaks of disease, actual or threatened hostilities or war, or other geopolitical uncertainty; risks related to the effectiveness of our hedging activities and ability to respond to volatility in commodities; disruptions or inefficiencies in our supply chain and/or operations; risks related to the ultimate impact of, including reputational harm caused by, any product recalls and product liability or labeling litigation, including litigation related to lead-based paint and pigment and cooking spray; risks related to our ability to respond to changing consumer preferences and the success of our innovation and marketing investments; risks associated with actions by our customers, including changes in distribution and purchasing terms; risks related to the seasonality of our business; risks associated with our co-manufacturing arrangements and other third-party service provider dependencies; risks associated with actions of governments and regulatory bodies that affect our businesses, including the ultimate impact of new or revised regulations or interpretations including to address climate change or implement changes to taxes and tariffs; risks related to the Company's ability to execute on its strategies or achieve expectations related to environmental, social, and governance matters, including as a result of evolving legal, regulatory, and other standards, processes, and assumptions, the pace of scientific and technological developments, increased costs, the availability of requisite financing, and changes in carbon pricing or carbon taxes; risks related to a material failure in or breach of our or our vendors' information technology systems and other cybersecurity incidents; risks related to our ability to identify, attract, hire, train, retain and develop qualified personnel; risk of increased pension, labor or people-related expenses; risks and uncertainties associated with intangible assets, including any future goodwill or intangible assets impairment charges; risk relating to our ability to protect our intellectual property rights; risks relating to acquisition, divestiture, joint venture or investment activities; the amount and timing of future dividends, which remain subject to Board approval and depend on market and other conditions; and other risks described in our reports filed from time to time with the Securities and Exchange Commission (the "SEC"). We caution readers not to place undue reliance on any forward-looking statements included in this report, which speak only as of the date of this report. We undertake no responsibility to update these statements, except as required by law.
The discussion that follows should be read together with the unaudited Condensed Consolidated Financial Statements and related notes contained in this report and with the financial statements, related notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended May 28, 2023 and subsequent filings with the SEC. Results for the first quarter of fiscal 2024 are not necessarily indicative of results that may be attained in the future.
EXECUTIVE OVERVIEW
Conagra Brands, Inc. (the "Company", "Conagra Brands", "we", "us", or "our"), headquartered in Chicago, is one of North America's leading branded food companies. Guided by an entrepreneurial spirit, the Company combines a rich heritage of making great food with a sharpened focus on innovation. The Company's portfolio is evolving to satisfy people's changing food preferences. Its iconic brands such as Birds Eye®, Duncan Hines®, Healthy Choice®, Marie Callender's®, Reddi-wip®, and Slim Jim®, as well as emerging brands, including Angie's® BOOMCHICKAPOP®, Duke's®, Earth Balance®, Gardein®, and Frontera®, offer choices for every occasion.
Fiscal 2024 First Quarter Results
In the first quarter of fiscal 2024, results reflected flat net sales, with organic (excludes the impact of foreign exchange) increases in our Grocery & Snacks, Foodservice, and International segments offset by a decrease in our Refrigerated & Frozen segment, in each case compared to the first quarter of fiscal 2023. Overall gross profit increased primarily as a result of inflation-driven pricing that was implemented in fiscal 2023, higher productivity, and lower transportation costs, which were partially offset by input cost inflation and unfavorable operating leverage. Overall segment operating profit increased in our Grocery & Snacks, Refrigerated & Frozen, and Foodservice segments, partially offset by a decrease in our International segment. Corporate expenses were lower primarily due to items impacting comparability and lower incentive compensation compared to the first quarter of fiscal 2023. Selling, general and administrative ("SG&A") expenses were lower due primarily to our goodwill and brand impairment charges in the first quarter of fiscal 2023 in addition to other items impacting comparability as discussed below. We recognized lower equity method investment earnings, higher interest expense, and higher income tax expense, in each case compared to the first quarter of fiscal 2023. Excluding items impacting comparability, our effective tax rate was higher compared to the first quarter of fiscal 2023.
Diluted earnings per share in the first quarter of fiscal 2024 was $0.67 and diluted loss per share in the first quarter of fiscal 2023 was $0.16. Diluted earnings per share was affected by higher net income in the first quarter of fiscal 2024 compared to the first quarter of fiscal 2023.
Trends Impacting Our Business
Our industry continues to be impacted by supply chain disruptions, commodity cost fluctuations, labor market issues, input cost inflation, and other global macroeconomic challenges. We experienced a moderate amount of input cost inflation during the first quarter of fiscal 2024, which we expect to continue throughout the remainder of the fiscal year. However, we expect supply chain productivity to mitigate some of the inflationary pressures. We also have experienced a reduction to our volumes due to lower consumption trends seen throughout the industry and recent consumer behavior shifts. We expect consumer trends to evolve and our volumes to improve over time, however, economic pressures on consumers may continue to negatively impact our volumes throughout fiscal 2024. We will continue to evaluate the evolving macroeconomic environment to take action to mitigate the impact on our business, consolidated results of operations, and financial condition.
Items Impacting Comparability
Segment presentation of gains and losses from derivatives used for economic hedging of anticipated commodity input costs and foreign currency exchange rate risks of anticipated transactions is discussed in further detail in Note 6, “Derivative Financial Instruments”, to the Condensed Consolidated Financial Statements contained in this report. We had $27.6 million and $0.5 million of derivative gains in the first quarter of fiscal 2024 and 2023, respectively, which were included in general corporate expenses and reflected as items impacting comparability.
Other items of note impacting comparability for the first quarter of fiscal 2024 included the following:
| ● |
charges totaling $24.4 million ($18.1 million after-tax) in connection with our restructuring plans. |
Items of note impacting comparability for the first quarter of fiscal 2023 included the following:
| ● |
charges totaling $385.7 million ($326.8 million after-tax) related to the goodwill and Birds Eye® brand impairments in connection with certain reporting unit changes within our Refrigerated & Frozen segment, |
| ● |
charges totaling $26.7 million ($20.1 million after-tax) related to the impairment of businesses previously held for sale, and |
| ● |
net charges totaling $4.9 million ($3.7 million after-tax) in connection with our restructuring plans. |
SEGMENT REVIEW
We reflect our results of operations in four reporting segments: Grocery & Snacks, Refrigerated & Frozen, International, and Foodservice.
Grocery & Snacks
The Grocery & Snacks reporting segment principally includes branded, shelf-stable food products sold in various retail channels in the United States.
Refrigerated & Frozen
The Refrigerated & Frozen reporting segment principally includes branded, temperature-controlled food products sold in various retail channels in the United States.
International
The International reporting segment principally includes branded food products, in various temperature states, sold in various retail and foodservice channels outside of the United States.
Foodservice
The Foodservice reporting segment includes branded and customized food products, including meals, entrees, sauces, and a variety of custom-manufactured culinary products that are packaged for sale to restaurants and other foodservice establishments primarily in the United States.
Net Sales
| Net Sales |
||||||||||||
| ($ in millions) |
Thirteen Weeks Ended |
|||||||||||
| Reporting Segment |
August 27, 2023 |
August 28, 2022 |
% Inc (Dec) |
|||||||||
| Grocery & Snacks |
$ | 1,202.9 | $ | 1,188.3 | 1.2 | % | ||||||
| Refrigerated & Frozen |
1,151.6 | 1,207.6 | (4.6 | )% | ||||||||
| International |
260.2 | 233.5 | 11.4 | % | ||||||||
| Foodservice |
289.3 | 274.9 | 5.2 | % | ||||||||
| Total |
$ | 2,904.0 | $ | 2,904.3 | 0.0 | % | ||||||
Net sales for the first quarter of fiscal 2024 in our Grocery & Snacks segment included an increase in price/mix of 5.6% when compared to the first quarter of fiscal 2023 due to favorability in inflation-driven pricing that was implemented in the prior year. Volumes decreased by 4.4% for the first quarter of fiscal 2024, when compared to the first quarter of fiscal 2023. The decrease in volumes was primarily due to lower consumption trends seen throughout the industry.
Net sales for the first quarter of fiscal 2024 in our Refrigerated & Frozen segment reflected a decrease in volumes of 10.5% when compared to the first quarter of fiscal 2023. The decrease was primarily due to lower consumption trends seen throughout the industry and recent consumer behavior shifts. Price/mix increased by 5.9% when compared to the first quarter of fiscal 2023 due to favorability in inflation-driven pricing that was implemented in the prior year.
Net sales for the first quarter of fiscal 2024 in our International segment reflected a 7.9% increase in price/mix and a 3.2% increase due to favorable foreign exchange rates, in each case compared to the first quarter of fiscal 2023. Volumes were nearly flat compared to the first quarter of fiscal 2023. The increase in price/mix was primarily due to favorability in inflation-driven pricing that was implemented in the prior year.
Net sales for the first quarter of fiscal 2024 in our Foodservice segment reflected an increase in price/mix of 10.3%, compared to the first quarter of fiscal 2023, reflecting inflation-driven pricing that was implemented in the prior year. Volumes decreased by 5.1% in the first quarter of fiscal 2024, when compared to the first quarter of fiscal 2023. The decrease in volumes was driven by the elasticity impact from inflation-driven pricing actions and shortages from supply chain disruptions.
SG&A Expenses (includes general corporate expenses)
SG&A expenses totaled $334.1 million for the first quarter of fiscal 2024, a decrease of $407.5 million, as compared to the first quarter of fiscal 2023. SG&A expenses for the first quarter of fiscal 2024 reflected the following:
Items impacting comparability of earnings
| ● |
net charges of $20.1 million in connection with our restructuring plans and |
| ● |
a net gain of $3.3 million primarily associated with insurance proceeds expected from the previous fire that occurred at one of our manufacturing facilities. |
Other changes in expenses compared to the first quarter of fiscal 2023
| ● |
a decrease in share-based payment expense of $25.6 million primarily due to volatility between periods in our share price and a decrease in the estimated level of achievement of certain performance targets, |
|
|
● |
an increase in salary, wage, and fringe benefit expense of $11.1 million, |
| ● |
an increase in consulting and professional fees of $4.4 million, in part due to information technology implementation services, |
| ● |
an increase in short-term incentive expense of $4.2 million, |
| ● |
a decrease in advertising and promotion expense of $3.2 million, and |
| ● |
an increase in deferred compensation expense of $2.5 million primarily due to market volatility between periods. |
SG&A expenses for the first quarter of fiscal 2023 included the following items impacting the comparability of earnings:
| ● |
charges totaling $385.7 million related to the goodwill and Birds Eye® brand impairments in connection with certain reporting unit changes within our Refrigerated & Frozen segment, |
| ● |
charges totaling $26.7 million related to the impairment of businesses previously held for sale, and |
| ● |
net charges of $4.7 million in connection with our restructuring plans. |
Segment Operating Profit (Loss) (Earnings (loss) before general corporate expenses, pension and postretirement non-service expense (income), interest expense, net, income taxes, and equity method investment earnings)
| Operating Profit (Loss) |
||||||||||||
| ($ in millions) |
Thirteen Weeks Ended |
|||||||||||
| Reporting Segment |
August 27, 2023 |
August 28, 2022 |
% Inc (Dec) |
|||||||||
| Grocery & Snacks |
$ | 258.7 | $ | 250.4 | 3.3 | % | ||||||
| Refrigerated & Frozen |
199.2 | (216.3 | ) | N/A | ||||||||
| International |
23.7 | 26.9 | (12.1 | )% | ||||||||
| Foodservice |
44.1 | 1.2 | 3,588.2 | % | ||||||||
Operating profit in our Grocery & Snacks segment for the first quarter of fiscal 2024 reflected an increase in gross profits of $19.1 million compared to the first quarter of fiscal 2023. The higher gross profit was driven by the net sales growth discussed above, productivity, lower transportation costs, and lower inventory write-offs, partially offset by the impacts of input cost inflation and unfavorable fixed cost leverage. Advertising and promotion expenses increased $4.8 million compared to the first quarter of fiscal 2023. Operating profit in the first quarter of fiscal 2024 and 2023 included $4.8 million and $0.3 million of net charges, respectively, related to our restructuring plans. The first quarter of fiscal 2023 also included expenses of $2.6 million related to a municipal water break.
Operating profit in our Refrigerated & Frozen segment for the first quarter of fiscal 2024 reflected an increase in gross profits of $21.4 million compared to the first quarter of fiscal 2023. The increase was driven by inflation driven pricing that was implemented in the prior year, productivity, lower transportation costs, and lower inventory write-offs, partially offset by the net sales decline discussed above, impacts of input cost inflation, and unfavorable fixed cost leverage. Advertising and promotion expenses decreased $7.7 million compared to the first quarter of fiscal 2023. Operating loss in the first quarter of fiscal 2023 included charges of $385.7 million related to the goodwill and Birds Eye® brand impairments in connection with certain reporting unit changes within our Refrigerated & Frozen segment. Operating profit in the first quarter of fiscal 2023 included charges of $5.7 million related to the impairment of businesses previously held for sale.
Operating profit in our International segment for the first quarter of fiscal 2024 reflected an increase in gross profits of $16.8 million when compared to the first quarter of fiscal 2023. The increase was driven by the net sales growth discussed above, productivity, and lower inventory write-offs, partially offset by the impacts of input cost inflation and unfavorable fixed cost leverage. Operating profit in the first quarter of fiscal 2024 included $18.6 million of net charges related to our restructuring plans.
Operating profit in our Foodservice segment for the first quarter of fiscal 2024 reflected an increase in gross profits of $18.4 million compared to the first quarter of fiscal 2023. The increase in gross profit was driven by the net sales growth discussed above, productivity, and lower inventory write-offs, partially offset by the impacts of input cost inflation and unfavorable fixed cost leverage. Operating profit in the first quarter of fiscal 2023 included expense of $20.5 million related to the impairment of businesses previously held for sale.
Pension and Postretirement Non-service Expense (Income)
In the first quarter of fiscal 2024, pension and postretirement non-service expense was $0.3 million compared to income of $6.1 million in the first quarter of fiscal 2023. The first quarter of fiscal 2024 reflected higher interest costs.
Interest Expense, Net
Net interest expense was $106.0 million and $97.1 million for the first quarter of fiscal 2024 and 2023, respectively. The increase was driven by a higher weighted average interest rate on outstanding debt. See Note 3, "Debt and Revolving Credit Facility", to the Condensed Consolidated Financial Statements contained in this report for further discussion.
Income Taxes
In the first quarter of fiscal 2024 and 2023, we recognized income tax expense of $98.3 million and $14.4 million, respectively. The effective tax rate (calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings) was approximately 23.5% and (22.8)% for the first quarter of fiscal 2024 and 2023, respectively. See Note 10, "Income Taxes", to the Condensed Consolidated Financial Statements contained in this report for a discussion on the change in effective tax rates.
Equity Method Investment Earnings
Equity method investment earnings were $35.5 million and $49.2 million for the first quarter of fiscal 2024 and 2023, respectively. Ardent Mills earnings for the first quarter of fiscal 2024 reflected slightly lower volume trends in the milling industry.
Earnings (Loss) Per Share
Diluted earnings per share in the first quarter of fiscal 2024 was $0.67. Diluted loss per share in the first quarter of fiscal 2023 was $0.16. The increase in diluted earnings per share for the first quarter of fiscal 2024 reflected higher net income.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity and Capital
The primary objective of our financing strategy is to maintain a prudent capital structure that provides us flexibility to pursue our growth objectives. We use a combination of equity and short- and long-term debt. We use short-term debt principally to finance ongoing operations, including our seasonal requirements for working capital (accounts receivable, prepaid expenses and other current assets, and inventories, less accounts and other payables, accrued payroll, and other accrued liabilities). We are committed to maintaining solid investment grade credit ratings.
Management believes that existing cash balances, cash flows from operations, existing credit facilities, our commercial paper program, and access to capital markets will provide sufficient liquidity to meet our debt obligations, including any repayment of debt or refinancing of debt, working capital needs, planned capital expenditures, other contractual obligations, and payment of anticipated quarterly dividends for at least the next twelve months and the foreseeable future thereafter.
Borrowing Facilities and Long-Term Debt
At August 27, 2023, we had a revolving credit facility (the "Revolving Credit Facility") with a syndicate of financial institutions providing for a maximum aggregate principal amount outstanding at any one time of $2.0 billion (subject to increase to a maximum aggregate principal amount of $2.5 billion with the consent of the lenders). The Revolving Credit Facility matures on August 26, 2027 and is unsecured. The Company may request the term of the Revolving Credit Facility be extended for additional one-year or two-year periods from the then-applicable maturity date on an annual basis. We have historically used a credit facility principally as a back-up for our commercial paper program. As of August 27, 2023, there were no outstanding borrowings under the Revolving Credit Facility.
As of August 27, 2023, we had $458.7 million outstanding under our commercial paper program. The highest level of borrowings outstanding during the first quarter of fiscal 2024 was $697.0 million. We had $576.0 million outstanding under our commercial paper program as of May 28, 2023.
During the first quarter of fiscal 2024, we issued $500.0 million aggregate principal amount of 5.30% senior notes due October 1, 2026. The net proceeds were used to repay the outstanding $500.0 million aggregate principal amount of our 0.50% senior notes on their maturity date of August 11, 2023.
For additional information about our long-term debt balances, refer to Note 3, "Debt and Revolving Credit Facility", to the Condensed Consolidated Financial Statements contained in this report and Note 3, "Long-Term Debt", to the Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended May 28, 2023. The weighted average coupon interest rate of long-term debt obligations outstanding as of August 27, 2023 was approximately 4.9%.
We expect to maintain or have access to sufficient liquidity to retire or refinance long-term debt at maturity or otherwise, from operating cash flows, our commercial paper program, access to the capital markets, and our Revolving Credit Facility. We continuously evaluate opportunities to refinance our debt; however, any refinancing is subject to market conditions and other factors, including financing options that may be available to us from time to time, and there can be no assurance that we will be able to successfully refinance any debt on commercially acceptable terms at all.
As of the end of the first quarter of fiscal 2024, our senior long-term debt ratings were all investment grade. A significant downgrade in our credit ratings would not affect our ability to borrow amounts under the Revolving Credit Facility, although borrowing costs would increase. A downgrade of our short-term credit ratings would impact our ability to borrow under our commercial paper program by negatively impacting borrowing costs and causing shorter durations, as well as making access to commercial paper more difficult, or impossible.
Our most restrictive debt agreement (the Revolving Credit Facility) generally requires our ratio of earnings before interest, taxes, depreciation and amortization ("EBITDA") to interest expense not be less than 3.0 to 1.0 and our ratio of funded net debt to EBITDA not to exceed 4.5 to 1.0. Each ratio is to be calculated on a rolling four-quarter basis. As of August 27, 2023, we were in compliance with these financial covenants.
Equity and Dividends
We repurchase shares of our common stock from time to time after considering market conditions and in accordance with repurchase limits authorized by our Board. Under our current share repurchase authorization, we may repurchase our shares periodically over several years, depending on market conditions and other factors, and may do so in open market purchases or privately negotiated transactions. The share repurchase authorization has no expiration date. We did not repurchase any shares of common stock during the first quarter of fiscal 2024. The Company's total remaining share repurchase authorization as of August 27, 2023 was $916.6 million.
On August 31, 2023, the Company paid a quarterly cash dividend on shares of its common stock of $0.35 per share to stockholders of record as of close of business on July 31, 2023. On October 4, 2023, we announced that our Board approved a quarterly dividend payment of $0.35 per share to be paid on November 30, 2023, to stockholders of record as of close of business on November 2, 2023.
Contractual Obligations
As part of our ongoing operations, we enter into contractual arrangements that obligate us to make future cash payments. These obligations impact our liquidity and capital resource needs. In addition to principal and interest payments on our outstanding long-term debt and notes payable balances, discussed above, our contractual obligations primarily consist of lease payments, income taxes, pension and postretirement benefits, and unconditional purchase obligations. There were no material changes to our contractual obligations from those disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended May 28, 2023.
Capital Expenditures
We continue to make investments in our business and operating facilities. Our estimate of capital expenditures for fiscal 2024 is approximately $500 million.
Cash Flows
During the first quarter of fiscal 2024, we used $0.6 million of cash, which was the net result of $443.5 million generated from operating activities, $138.4 million used in investing activities, $307.1 million used in financing activities, and an increase of $1.4 million due to the effects of changes in foreign currency exchange rates.
Cash generated from operating activities totaled $443.5 million and $263.7 million in the first quarter of fiscal 2024 and 2023, respectively. The increase in operating cash flows for the first quarter of fiscal 2024 compared to the first quarter of fiscal 2023 was primarily driven by higher gross profits and lower inventory balances, which were impacted by lower inventory volumes due to recent consumption trends in addition to an inventory rebuild from previous supply chain constraints in fiscal 2023. This was partially offset by the impact of the accelerated receipt of certain outstanding receivables in the first quarter of fiscal 2023.
Cash used in investing activities totaled $138.4 million and $123.4 million in the first quarter of fiscal 2024 and 2023, respectively. Net cash outflows from investing activities in the first quarter of fiscal 2024 and 2023 consisted primarily of capital expenditures totaling $143.6 million and $125.4 million, respectively.
Cash used in financing activities totaled $307.1 million and $154.4 million in the first quarter of fiscal 2024 and 2023, respectively. Financing activities in the first quarter of fiscal 2024 principally reflected repayments of long-term debt of $504.3 million, the issuance of long-term debt totaling $500.0 million, net short-term borrowing repayments of $128.3 million, and cash dividends paid of $157.4 million. Financing activities in the first quarter of fiscal 2023 principally reflected net short-term borrowing issuances of $69.1 million, cash dividends paid of $150.0 million, and common stock repurchases of $50.0 million.
Cash Held by International Subsidiaries
The Company had cash and cash equivalents of $93.3 million at August 27, 2023 and $93.9 million at May 28, 2023, of which $82.5 million at August 27, 2023 and $85.5 million at May 28, 2023 was held in foreign countries. A deferred tax liability is provided for certain undistributed foreign earnings that are not considered to be indefinitely reinvested or cannot be remitted in a tax-neutral transaction. Other undistributed foreign earnings are invested indefinitely and therefore we have not provided deferred taxes on those earnings.
CRITICAL ACCOUNTING ESTIMATES
For further discussion of our critical accounting estimates, please refer to the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended May 28, 2023.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks affecting us are exposures to price fluctuations of commodity and energy inputs, interest rates, and foreign currencies.
Other than the changes noted below, there have been no material changes in our market risk during the thirteen weeks ended August 27, 2023. For additional information, refer to the "Quantitative and Qualitative Disclosures About Market Risk" section in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended May 28, 2023.
Commodity Market Risk
We purchase commodity inputs such as wheat, corn, vegetable oils, pork, dairy products, and energy to be used in our operations. These commodities are subject to price fluctuations that may create price risk. We enter into commodity hedges to manage this price risk using physical forward contracts or derivative instruments. We have policies governing the hedging instruments our businesses may use. These policies include limiting the dollar risk exposure for each of our businesses. We also monitor the amount of associated counter-party credit risk for all non-exchange-traded transactions.
Interest Rate Risk
We may use interest rate swaps to manage the effect of interest rate changes on the fair value of our existing debt as well as the forecasted interest payments for the anticipated issuance of debt.
The carrying amount of long-term debt (including current installments) was $8.76 billion as of August 27, 2023. Based on current market rates, the fair value of this debt at August 27, 2023 was estimated at $8.37 billion. As of August 27, 2023, a 1% increase in the interest rates would decrease the fair value of our fixed rate debt by approximately $382.2 million, while a 1% decrease in interest rates would increase the fair value of our fixed rate debt by approximately $428.0 million.
Foreign Currency Risk
In order to reduce exposures for our processing activities related to changes in foreign currency exchange rates, we may enter into forward exchange or option contracts for transactions denominated in a currency other than the functional currency for certain of our operations. This activity primarily relates to economically hedging against foreign currency risk in purchasing inventory and capital equipment, sales of finished goods, and future settlement of foreign denominated assets and liabilities.
Effect of Hypothetical 10% Fluctuation
The potential gain or loss on the fair value of our outstanding commodity and foreign exchange contracts, assuming a hypothetical 10% fluctuation in commodity prices and foreign currency exchange rates, would have been (in millions):
| Fair Value Impact |
||||||||
| In Millions |
August 27, 2023 |
August 28, 2022 |
||||||
| Energy commodities |
$ | 2.7 | $ | 2.0 | ||||
| Agriculture commodities |
6.7 | 7.2 | ||||||
| Foreign exchange |
9.5 | 9.8 | ||||||
It should be noted that any change in the fair value of our derivative contracts, real or hypothetical, would be significantly offset by an inverse change in the value of the underlying hedged items. In relation to foreign currency contracts, this hypothetical calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company's management carried out an evaluation, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, as of August 27, 2023. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective.
Internal Control Over Financial Reporting
The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, evaluated any change in the Company's internal control over financial reporting that occurred during the quarter covered by this report and determined that there was no change in our internal control over financial reporting during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
For additional information on legal proceedings, please refer to Note 15, "Contingencies", to the financial statements contained in our Annual Report on Form 10-K for the fiscal year ended May 28, 2023 and Note 11, "Contingencies", to the Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.
A discussion of our risk factors can be found in Item 1A, "Risk Factors", in our Annual Report on Form 10-K for the fiscal year ended May 28, 2023 and in our other filings with the SEC. During the first quarter of fiscal 2024, there were no material changes to our previously disclosed risk factors.
Trading Arrangements
None of the Company's directors or "officers" (as defined in Rule 16a-1(f) promulgated under the Securities Exchange Act of 1934, as amended) adopted, modified, or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K, during the Company's fiscal quarter ended August 27, 2023.
All documents referenced below were filed pursuant to the Securities Exchange Act of 1934, as amended, by Conagra Brands, Inc. (file number 001-07275), unless otherwise noted.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CONAGRA BRANDS, INC. |
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| By: |
/s/ DAVID S. MARBERGER |
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| David S. Marberger |
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| Executive Vice President and Chief Financial Officer |
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| By: |
/s/ WILLIAM E. JOHNSON |
|
| William E. Johnson |
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| Senior Vice President and Corporate Controller |
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Dated this 5th day of October, 2023.
