Conagra(US:CAG)2024-07-11 20:30Business Overview Conagra Brands, a leading North American branded food company, operates across four segments, with Walmart as its largest customer, and manages a workforce of approximately 18,500 employees under a defined executive leadership team Company Profile and Segments Conagra Brands is a leading North American branded food company with a portfolio including well-known brands like Birds Eye®, Healthy Choice®, and Slim Jim®. The company operates through four main reporting segments: Grocery & Snacks, Refrigerated & Frozen, International, and Foodservice. Its largest customer, Walmart, Inc., accounted for approximately 28% of consolidated net sales in fiscal 2024 - Conagra Brands is one of North America's leading branded food companies, with a portfolio including brands such as Birds Eye®, Duncan Hines®, Healthy Choice®, Marie Callender's®, Reddi-wip®, and Slim Jim®11 - The company's operations are organized into four reporting segments: - Grocery & Snacks: Branded, shelf-stable food products sold in U.S. retail channels - Refrigerated & Frozen: Branded, temperature-controlled food products sold in U.S. retail channels - International: Branded food products sold in retail and foodservice channels outside the U.S - Foodservice: Branded and customized food products for restaurants and other foodservice establishments, primarily in the U.S141516 - Walmart, Inc. and its affiliates represent the company's largest customer, accounting for approximately 28% of consolidated net sales in fiscal 2024 and 2023, and 27% in fiscal 202227 Human Capital Management As of May 26, 2024, Conagra employed approximately 18,500 people, with 46% covered by collective bargaining agreements. The company prioritizes employee health and safety, achieving a lower OSHA incident rate of 1.40 in fiscal 2024, down from 1.58 in fiscal 2023, with no employee fatalities for three consecutive years. It fosters an inclusive culture through eight Employee Resource Groups (ERGs) and offers competitive compensation and benefits to attract and retain talent - As of May 26, 2024, the company had approximately 18,500 employees, with about 46% being parties to collective bargaining agreements28 - The Occupational Safety and Health Administration (OSHA) Incident Rate improved, decreasing from 1.67 in fiscal 2022 and 1.58 in fiscal 2023 to 1.40 in fiscal 2024. There were no employee fatalities in fiscal years 2022, 2023, or 202430 - The company supports eight employee-led Employee Resource Groups (ERGs) to foster an engaged and inclusive culture, including groups for Asian, Black, Disability, Latinx, LGBTQ+, Veterans, Women, and Young Professionals4345 Executive Officers The company's leadership team as of July 11, 2024, is led by President and CEO Sean M. Connolly. Key executives include David S. Marberger as EVP and CFO, and Thomas M. McGough as EVP and COO. In May 2024, Noelle O'Mara joined as EVP and President, New Platforms and Acquisitions | Name | Title & Capacity | Age | Year First Appointed an Executive Officer | | :--- | :--- | :--- | :--- | | Sean M. Connolly | President and Chief Executive Officer | 58 | 2015 | | David S. Marberger | Executive Vice President and Chief Financial Officer | 59 | 2016 | | Carey L. Bartell | Executive Vice President, General Counsel and Corporate Secretary | 50 | 2022 | | Charisse Brock | Executive Vice President, Chief Human Resources Officer | 62 | 2015 | | Alexandre O. Eboli | Executive Vice President, Chief Supply Chain Officer | 52 | 2021 | | Thomas M. McGough | Executive Vice President and Chief Operating Officer | 59 | 2013 | | Noelle O'Mara | Executive Vice President and President New Platforms and Acquisitions | 45 | 2024 | | William E. Johnson | Senior Vice President and Corporate Controller | 42 | 2023 | Risk Factors Conagra faces diverse risks including economic downturns, high debt, intense competition, commodity price volatility, supply chain disruptions, product liability, evolving consumer preferences, customer concentration, third-party reliance, cybersecurity threats, and potential impairment of significant goodwill and intangible assets Market, Credit, and Competition Risks The company faces significant market risks from economic downturns, inflation, and geopolitical conflicts that could reduce consumer spending and increase costs. Credit risks are heightened by its substantial debt of approximately $8.44 billion, which could limit cash flow and increase borrowing costs. The highly competitive food industry poses risks of reduced sales and profits due to pressure from large competitors, private brands, and the growth of e-commerce - The business is exposed to risks from general economic conditions, including inflation, rising interest rates, recessions, and geopolitical conflicts, which can lead to shifts in consumer spending to lower-margin products and decreased demand in the foodservice sector646567 - As of May 26, 2024, the company had total debt of approximately $8.44 billion. This high level of debt could make it difficult to service obligations, fund operations, and could increase vulnerability to adverse economic conditions68 - The food industry is intensely competitive, with pressure from large, well-resourced competitors, private label products, and e-commerce, which may reduce sales, market share, and profitability767880 Commodity and Operating Risks Conagra is subject to commodity price volatility for key raw materials, which can negatively impact profits despite hedging strategies. Operational risks include supply chain disruptions, which have previously impacted profitability, and the potential for product recalls and liability claims. The company's reputation is critical and can be damaged by product quality issues, negative publicity, or failure to meet ethical and environmental standards - The company is exposed to price volatility in key commodities like wheat, corn, oils, and proteins. While it uses hedging, it may not fully offset cost increases, potentially impacting profits8386 - Supply chain disruptions, transportation issues, and labor challenges have impacted and could continue to impact operations and profitability8991 - The company faces risks of product recalls, liability claims, and changing regulations. A significant recall or judgment could negatively impact sales and profitability9295 Consumer, Customer, and Third-Party Risks The business is dependent on its ability to adapt to changing consumer preferences, including health trends and the impact of weight loss medications. A significant portion of revenue comes from its largest customer, Walmart (28% of FY24 sales), and the loss or reduction of this business could be material. The company also relies heavily on third-party suppliers, co-manufacturers, and service providers, whose failure to perform, including from cybersecurity incidents, could disrupt operations - Success depends on identifying and meeting evolving consumer preferences, which are influenced by factors like health and wellness trends, packaging sustainability, and the growing use of weight loss medication101 - The company has significant customer concentration risk, with its largest customer, Walmart, Inc., accounting for approximately 28% of consolidated net sales in fiscal 2024103 - The company is vulnerable to disruptions from third parties in its supply chain. A third-party vendor's cybersecurity incident in Q4 fiscal 2023 resulted in $4.4 million in charges due to operational disruptions115116 Cybersecurity, Legal, and Other Risks Conagra faces risks from potential cybersecurity incidents targeting its own or third-party IT systems, which are increasingly complex with remote work and new technologies like AI. The company is also subject to extensive government regulation, and changes related to climate change could increase costs. A significant risk lies in the potential impairment of its $10.58 billion in goodwill and $2.71 billion in other intangible assets, which could lead to material charges - The company relies on complex IT systems vulnerable to cyberattacks. The modernization of operations and adoption of AI may increase this exposure125129 - Growing concern over climate change may lead to new regulations, decreased availability of agricultural commodities, and increased operational costs121122 - As of May 26, 2024, the company had goodwill of $10.58 billion and other intangibles of $2.71 billion. Impairment of these assets, driven by factors like competitive pressure or lower growth, could result in significant charges and negatively impact net worth138 Cybersecurity Conagra's cybersecurity program, based on NIST framework, is integrated into ERM, focusing on continuous monitoring and training, with governance overseen by the Board and its Audit/Finance Committee Risk Management, Strategy, and Governance Conagra's cybersecurity program, informed by the NIST framework, is integrated into its enterprise risk management (ERM) process. The program focuses on assessing, identifying, and managing cyber risks through continuous monitoring, employee training, and third-party testing. Governance is managed by a dedicated internal team led by a Chief Information Security Officer (CISO), with direct oversight from the Board of Directors and its Audit/Finance Committee, which receives regular updates on cyber risks and mitigation strategies - The cybersecurity program is based on recognized frameworks like NIST and is integrated with the company's overall Enterprise Risk Management (ERM)152153 - The program includes ongoing monitoring, annual employee training, penetration testing, tabletop exercises, and engagement with law enforcement and intelligence-sharing organizations152154 - Oversight is provided by the Board of Directors and its Audit/Finance Committee, which receives regular updates from the Chief Information Officer (CIO) or Chief Information Security Officer (CISO) at each scheduled meeting167 Management's Discussion and Analysis (MD&A) Fiscal 2024 saw a net sales decrease for Conagra, significantly impacted by goodwill and intangible asset impairment charges, despite strong operating cash flow, with critical accounting estimates focusing on asset impairment Executive Overview In fiscal 2024, Conagra experienced a decrease in net sales, driven by lower volumes in its Grocery & Snacks and Refrigerated & Frozen segments as consumers adapted to higher prices. Despite lower sales, gross profit increased due to productivity gains and lower costs. However, significant non-cash impairment charges on goodwill and intangible assets heavily impacted net income, causing diluted EPS to fall to $0.72 from $1.42 in fiscal 2023. The company expects moderate input cost inflation and improving volumes to continue into fiscal 2025 - Fiscal 2024 net sales decreased due to lower consumption and consumer shifts, while gross profit increased from higher productivity and lower transportation costs. Segment operating profit was mixed186 - Diluted earnings per share fell to $0.72 in fiscal 2024 from $1.42 in fiscal 2023, primarily due to significant items impacting comparability, including large impairment charges187 - Key items impacting comparability in fiscal 2024 included $956.7 million in goodwill and brand impairment charges and $66.6 million in restructuring charges190 Results of Operations (FY2024 vs. FY2023) For fiscal 2024, consolidated net sales decreased 1.8% to $12.05 billion, with declines in Refrigerated & Frozen (-5.6%) and Grocery & Snacks (-0.5%) offsetting growth in International (+7.6%) and Foodservice (+1.0%). Operating profit was severely impacted by a $347.5 million loss in the Refrigerated & Frozen segment, driven by $879.1 million in goodwill and intangible asset impairments. Consequently, diluted EPS fell to $0.72 from $1.42 in the prior year | Reporting Segment | Net Sales FY2024 ($M) | Net Sales FY2023 ($M) | % Change | | :--- | :--- | :--- | :--- | | Grocery & Snacks | $4,958.7 | $4,981.9 | (0.5)% | | Refrigerated & Frozen | $4,865.5 | $5,156.2 | (5.6)% | | International | $1,078.3 | $1,002.5 | 7.6% | | Foodservice | $1,148.4 | $1,136.4 | 1.0% | | Total | $12,050.9 | $12,277.0 | (1.8)% | | Reporting Segment | Operating Profit (Loss) FY2024 ($M) | Operating Profit FY2023 ($M) | % Change | | :--- | :--- | :--- | :--- | | Grocery & Snacks | $1,012.4 | $1,002.8 | 1.0% | | Refrigerated & Frozen | ($92.5) | $255.0 | N/A | | International | $97.9 | $121.4 | (19.4)% | | Foodservice | $157.2 | $85.0 | 84.8% | - The Refrigerated & Frozen segment's operating loss was primarily due to $879.1 million in impairment charges for goodwill and certain brand intangible assets during fiscal 2024208 - Diluted EPS decreased to $0.72 in FY2024 from $1.42 in FY2023, reflecting lower net income primarily due to significant impairment charges215 Liquidity and Capital Resources The company generated strong operating cash flow of $2.02 billion in fiscal 2024, a significant increase from $995.4 million in the prior year, mainly due to inventory reductions. Key financing activities included repaying $1.77 billion of long-term debt and issuing $500.0 million in new notes. The company ended the year with $77.7 million in cash and cash equivalents and maintains a $2.0 billion revolving credit facility for liquidity. Capital expenditures for fiscal 2025 are estimated to be approximately $500 million | Cash Flow Activity ($ in billions) | Fiscal 2024 | Fiscal 2023 | | :--- | :--- | :--- | | Net cash from operating activities | $2.02 | $0.995 | | Net cash used in investing activities | ($0.375) | ($0.355) | | Net cash used in financing activities | ($1.66) | ($0.632) | - The increase in operating cash flow was primarily driven by a reduction in inventory balances and higher dividends received from an equity method investment239 - The company did not repurchase any common stock in fiscal 2024. The remaining share repurchase authorization is $916.6 million228 - The preliminary estimate for capital expenditures in fiscal 2025 is approximately $500 million237 Critical Accounting Estimates Management identifies the impairment of goodwill and other intangible assets as a critical accounting estimate due to the significant judgment required. In fiscal 2024, the company recorded goodwill impairments of $526.5 million and indefinite-lived intangible impairments of $430.2 million. These charges were primarily driven by higher discount rates and revised sales forecasts. The carrying value of goodwill was $10.58 billion and indefinite-lived intangibles was $2.03 billion at year-end, with certain assets remaining susceptible to future impairment if economic conditions or performance decline - The company holds significant goodwill ($10.58 billion) and indefinite-lived intangible assets ($2.03 billion) as of May 26, 2024263 - In fiscal 2024, the company recorded goodwill impairment charges of $526.5 million in its Sides, Components, Enhancers reporting unit and $430.2 million in impairments for indefinite-lived brand intangibles263360 - The impairments were largely due to increased discount rates reflecting current economic conditions (higher interest rates), declines in market capitalization and multiples, and downward revisions to sales forecasts for specific units and brands358360 | Sensitivity Analysis on Assets with <10% Fair Value Cushion | Impact of 50-Basis-Point Discount Rate Change | Impact of 25-Basis-Point Growth Rate Change | Impact of 100-Basis-Point Royalty Rate Change | | :--- | :--- | :--- | :--- | | Reporting unit (Goodwill) | +$93.9M / -$82.0M | +$49.7M / -$28.9M | N/A | | Brands (Intangibles) | +$81.2M / -$68.3M | +$32.5M / -$22.9M | +$309.7M / -$298.9M | Financial Statements and Supplementary Data Conagra's fiscal 2024 financial statements reflect decreased net sales and net income due to substantial impairment charges, alongside strong operating cash flow, with notes detailing restructuring, impairments, and ongoing litigation Consolidated Financial Statements Summary The consolidated financial statements for fiscal year 2024 show a 1.8% decline in net sales to $12.05 billion. Net income attributable to Conagra Brands fell sharply to $347.2 million from $683.6 million in fiscal 2023, resulting in diluted EPS of $0.72. Total assets decreased to $20.86 billion from $22.05 billion, while total liabilities also decreased to $12.35 billion. Cash flow from operations was strong at $2.02 billion, a significant increase from the prior year | Key Financial Metrics (in millions, except EPS) | Fiscal 2024 | Fiscal 2023 | Fiscal 2022 | | :--- | :--- | :--- | :--- | | Net Sales | $12,050.9 | $12,277.0 | $11,535.9 | | Net Income Attributable to Conagra | $347.2 | $683.6 | $888.2 | | Diluted EPS | $0.72 | $1.42 | $1.84 | | Key Balance Sheet Items (in millions) | May 26, 2024 | May 28, 2023 | | :--- | :--- | :--- | | Total Current Assets | $3,149.5 | $3,385.0 | | Total Assets | $20,862.3 | $22,052.6 | | Total Current Liabilities | $3,241.8 | $4,440.7 | | Total Liabilities | $12,351.0 | $13,245.3 | | Total Stockholders' Equity | $8,511.3 | $8,807.3 | | Key Cash Flow Items (in millions) | Fiscal 2024 | Fiscal 2023 | Fiscal 2022 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $2,015.6 | $995.4 | $1,177.3 | | Net cash from investing activities | ($375.0) | ($354.9) | ($434.9) | | Net cash from financing activities | ($1,656.7) | ($631.6) | ($738.0) | Selected Notes to Financial Statements Key notes to the financial statements detail significant events in fiscal 2024. The company recorded $66.6 million in charges under its ongoing restructuring plan. Goodwill and intangible asset impairments were substantial, totaling $526.5 million for goodwill and $430.2 million for brands, primarily impacting the Refrigerated & Frozen segment. The company is also managing contingencies from legacy litigation related to lead-based paint and ongoing lawsuits concerning its cooking spray products. In a subsequent event, Conagra acquired the manufacturing operations of a co-manufacturer for $46 million - Restructuring: In fiscal 2024, the company recognized $66.6 million in pre-tax expenses related to the Conagra Restructuring Plan, including $19.1 million in cost of goods sold and $47.5 million in SG&A325327 - Goodwill & Intangible Impairments: In FY2024, recognized a $526.5 million goodwill impairment in the Sides, Components, Enhancers reporting unit and $430.2 million in brand impairments, with Birds Eye® ($255.4M) and Earth Balance® ($72.1M) being the largest358360 - Contingencies: The company has accrued $76.3 million for litigation matters as of May 26, 2024, including ongoing cases related to lead-based paint from the Beatrice acquisition and Pam® cooking spray products406409411 - Subsequent Event: After fiscal year-end, Conagra acquired the manufacturing operations of an existing co-manufacturer of its cooking spray products for initial cash consideration of $46 million478 Controls and Procedures Management, with CEO and CFO participation, concluded that Conagra's disclosure controls and internal control over financial reporting were effective as of May 26, 2024, a conclusion affirmed by KPMG LLP Management's Report on Internal Controls Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of May 26, 2024. Management also assessed the effectiveness of internal control over financial reporting using the COSO framework and concluded that it was effective as of the same date. The independent registered public accounting firm, KPMG LLP, has audited and concurred with management's assessment - Management, with the participation of the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of May 26, 2024496 - Based on an assessment using the criteria in the COSO framework, management concluded that the company's internal control over financial reporting was effective as of May 26, 2024499 - KPMG LLP, the independent registered public accounting firm, audited the effectiveness of the company's internal control over financial reporting and issued an unqualified opinion500481 Corporate Governance and Executive Compensation Information on Conagra's directors, executive officers, corporate governance, and compensation is incorporated by reference from its 2024 Proxy Statement, with details on equity compensation plans Director, Officer, and Compensation Disclosures Information regarding directors, executive officers, corporate governance, executive compensation, security ownership, and principal accountant fees and services is incorporated by reference from the company's definitive 2024 Proxy Statement. The company has adopted a code of ethics for senior financial officers, available on its website. As of May 26, 2024, there were 14.9 million securities available for future issuance under equity compensation plans approved by security holders - Detailed information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the Registrant's 2024 Annual Meeting of Stockholders Proxy Statement505510511518519 | Equity Compensation Plan Information (as of May 26, 2024) | Number of Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Number of Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by security holders | 7,846,847 | $31.38 | 14,873,523 | | Not approved by security holders | — | — | — | | Total | 7,846,847 | $31.38 | 14,873,523 |