CONAGRA BRANDS, INC. 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: the risk that the cost savings and any other synergies from the acquisition ofPinnacle Foods Inc. (the Pinnacle acquisition) may not be fully realized or may take longer to realize than expected; the risk that the Pinnacle acquisition may not be accretive within the expected timeframe or to the extent anticipated; the risks that the Pinnacle acquisition and related integration will create disruption to the Company and its management and impede the achievement of business plans; risks related to our ability to achieve the intended benefits of other recent acquisitions and divestitures; risks associated with general economic and industry conditions; risks associated with our ability to successfully execute our long-term value creation strategies; 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 our ability to execute operating and restructuring plans and achieve targeted operating efficiencies from cost-saving initiatives and to benefit from trade optimization programs; risks related to the effectiveness of our hedging activities and ability to respond to volatility in commodities; risks related to the Company's competitive environment and related market conditions; risks related to our ability to respond to changing consumer preferences and the success of our innovation and marketing investments; risks related to the ultimate impact of any product recalls and litigation, including litigation related to the lead paint and pigment matters, as well as any securities litigation, including securities class action lawsuits; risk associated with actions of governments and regulatory bodies that affect our businesses, including the ultimate impact of new or revised regulations or interpretations; risks related to the impact of the coronavirus (COVID-19) pandemic on our business, suppliers, consumers, customers and employees; risks related to our forecasts of consumer eat-at-home habits as the impacts of the COVID-19 pandemic abate; risks related to the availability and prices of raw materials, including any negative effects caused by inflation, weather conditions, or health pandemics; disruptions or inefficiencies in our supply chain and/or operations, including from the COVID-19 pandemic; risks associated with actions by our customers, including changes in distribution and purchasing terms; risks and uncertainties associated with intangible assets, including any future goodwill or intangible assets impairment charges; and other risks described in our reports filed from time to time with theSecurities 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 endedMay 31, 2020 and subsequent filings with theSEC . Results for the third quarter of fiscal 2021 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 inChicago , is one ofNorth 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®,Marie Callender's ®, Banquet®, Healthy Choice®, Slim Jim®, Reddi-wip®, and Vlasic®, as well as emerging brands, including Angie's® BOOMCHICKAPOP®, Duke's®, Earth Balance®, Gardein®, and Frontera®, offer choices for every occasion.
The integration of
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--------------------------------------------------------------------------------Fiscal 2021 Third Quarter Results
In the third quarter of fiscal 2021, results reflected an increase in net sales,
with organic (excludes the impacts of foreign exchange and divested businesses)
increases in each of our operating segments with the exception of a decrease in
our Foodservice segment, in each case compared to the third quarter of fiscal
2020. Organic net sales for our retail segments (inclusive of Grocery & Snacks,
Refrigerated & Frozen, and International) were positively impacted by the
increase in at-home food consumption as a result of the COVID-19 pandemic, with
sales declines in our Foodservice segment due to lower traffic in away-from-home
food outlets.
Overall gross profit increased due to increased net sales, supply chain realized
productivity, favorable margin mix, cost synergies associated with the Pinnacle
acquisition, and fixed cost leverage, which were partially offset by input cost
inflation, higher transportation costs, COVID-19 related expenses, and lost
profits from divested businesses. Overall segment operating profit increased in
each operating segment with the exception of our Foodservice segment. Corporate
expenses were higher primarily due to items impacting comparability, as
discussed below. There were decreased selling, general and administrative
("SG&A") expenses due to the gain recognized in connection with the divestiture
of our Peter Pan® peanut butter business in addition to lower travel costs,
offset by increased advertising and promotion expenses and incentive
compensation expense. We recognized higher equity method investment earnings,
lower interest expense, and higher income tax expense, in each case compared to
the third quarter of fiscal 2020. Excluding items impacting comparability, our
effective tax rate was slightly lower compared to the third quarter of fiscal
2020.
Diluted earnings per share in the third quarter of fiscal 2021 were $0.58 .
Diluted earnings per share in the third quarter of fiscal 2020 were $0.42 .
Diluted earnings per share were affected by higher net income in the third
quarter of fiscal 2021 compared to the third quarter of fiscal 2020, slightly
lower weighted average shares outstanding due to recent share repurchases, as
well as several significant items affecting the comparability of year-over-year
results (see "Items Impacting Comparability" below).
At the end of the third quarter fiscal 2021, there were significant winter
storms across most of the United States . While we believe that these storms
resulted in slightly lower net sales and some incremental transportation costs
during the latter part of February 2021 , we do not believe that weather had a
material impact on our results of operations for the third quarter, nor do we
expect it to have a material impact to the full fiscal year.
Items Impacting Comparability
Segment presentation of gains and losses from derivatives used for economic hedging of anticipated commodity input costs and economic hedging of foreign currency exchange rate risks of anticipated transactions is discussed in the "Segment Review" below.
Items of note impacting comparability for the third quarter of fiscal 2021 included the following:
• a gain of
divestiture of a business,
• charges totaling
early extinguishment of debt,
• charges totaling
with our restructuring plans,
• consulting expenses of
associated with securing tax benefits for a new production facility (the
associated tax benefits will be recognized in future periods), and
• charges totaling $4.3 million ($3.2 million after-tax) related to a
previous legal matter.
Items of note impacting comparability for the third quarter of fiscal 2020
included charges totaling
Items of note impacting comparability for the first three quarters of fiscal 2021 included the following:
• charges totaling
extinguishment of debt,
• charges totaling
with our restructuring plans,
• a gain of
divestiture of certain businesses,
• consulting expenses of
associated with securing tax benefits for a new production facility (the
associated tax benefits will be recognized in future periods),
• an income tax benefit of
allowance associated with the divestiture of the Peter Pan® peanut butter
business, and
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• an income tax benefit of
regulations on prior year federal tax matters.
Items of note impacting comparability for the first three quarters of fiscal 2020 included the following:
• charges totaling
with our restructuring plans,
• charges totaling
impairment of businesses held for sale,
• charges totaling
impairment of certain brand intangible assets,
• a gain of
settlement,
• charges totaling
environmental matter, and
• an income tax benefit of
reorganization of various legacy Pinnacle legal entities and state tax
planning strategies.
Divestitures
During the third quarter of fiscal 2021, we completed the sale of our Peter Pan®
peanut butter business for net proceeds of $103.4 million , subject to final
adjustments for working capital and certain tax benefits. The results of
operations of the divested Peter Pan® peanut butter business are primarily
included in our Grocery & Snacks segment, and to a lesser extent within our
International and Foodservice segments, for the periods preceding the completion
of the transaction.
During the third quarter of fiscal 2020, we completed the sale of our Lender's®
bagel business for net proceeds of $33.3 million , including working capital
adjustments. The results of operations of the divested Lender's® bagel business
are primarily included in our Refrigerated & Frozen segment, and to a lesser
extent within our Foodservice segment, for the periods preceding the completion
of the transaction.
During the second quarter of fiscal 2020, we completed the sale of our Direct
Store Delivery Snacks ("DSD Snacks") business for net proceeds of $137.5
million , including working capital adjustments. The results of operations of the
divested DSD Snacks business are included in our Grocery & Snacks segment for
the periods preceding the completion of the transaction.
Restructuring Plans
InDecember 2018 , our Board of Directors (the "Board") approved a restructuring and integration plan related to the ongoing integration of the operations of Pinnacle, which we acquired inOctober 2018 (the "Pinnacle Integration Restructuring Plan"), for the purpose of achieving significant cost synergies between the companies, as a result of which we expect to incur material charges for exit and disposal activities underU.S. generally accepted accounting principles. We expect to incur approximately$362.3 million of charges ($284.3 million of cash charges and$78.0 million of non-cash charges) for actions identified to date under the Pinnacle Integration Restructuring Plan. The Board and/or our senior management have authorized incurrence of these charges. In the third quarter and first three quarters of fiscal 2021, we recognized charges of$5.4 million and$24.2 million , respectively, in connection with the Pinnacle Integration Restructuring Plan. In the third quarter and first three quarters of fiscal 2020, we recognized charges of$19.6 million and$63.5 million , respectively, in connection with the Pinnacle Integration Restructuring Plan. We expect to incur costs related to the Pinnacle Integration Restructuring Plan over a multi-year period. In fiscal 2019, senior management initiated a restructuring plan (the "Conagra Restructuring Plan") for costs incurred in connection with actions taken to improve SG&A expense effectiveness and efficiencies and to optimize our supply chain network. Although we remain unable to make good faith estimates relating to the entire Conagra Restructuring Plan, we are reporting on actions initiated through the end of the third quarter of fiscal 2021, including the estimated amounts or range of amounts for each major type of costs expected to be incurred, and the charges that have resulted or will result in cash outflows. As ofFebruary 28, 2021 , we have approved the incurrence of$171.0 million ($44.2 million of cash charges and$126.8 million of non-cash charges) for several projects associated with the Conagra Restructuring Plan. We have incurred or expect to incur$157.4 million of charges ($36.9 million of cash charges and$120.5 million of non-cash charges) for actions identified to date under the Conagra Restructuring Plan. In the third quarter and first three quarters of fiscal 2021, we recognized charges of$10.0 million and$37.8 million , respectively, in connection with the Conagra Restructuring Plan. In the third quarter and first three quarters of fiscal 2020, we recognized charges of$11.9 million and$52.6 million , respectively, in connection with theConagra Restructuring Plan. We expect to incur costs related to theConagra Restructuring Plan over a multi-year period. 29 --------------------------------------------------------------------------------
COVID-19 Pandemic
We continue to monitor the impact of the COVID-19 pandemic on all aspects of our business. During the third quarter of fiscal 2021, we continued to experience higher sales for our products in the retail segments as a result of increased customer demand for food at home due to the COVID-19 pandemic. We continued to experience reduced demand for our foodservice products across all of our major markets during the third quarter of fiscal 2021 as consumer traffic in away-from-home food outlets has decreased as a result of the COVID-19 pandemic. While levels of at-home eating have remained elevated during the pandemic, the distribution of vaccines, state re-opening plans, and increased outdoor dining as a result of warmer weather may impact consumer at-home eating trends. We will continue to evaluate these trends and the impact to our business. During the third quarter of fiscal 2021, our operating margins continued to benefit from fixed cost leverage, reduced travel expenses, and lower trade promotional activity on certain brands. That benefit was partially offset by several factors including higher transportation and warehousing costs, employee safety and sanitation costs, and employee compensation costs, which accounted for an estimated$45 million of additional incremental costs in the third quarter. InFebruary 2020 , we created an internal COVID-19 pandemic team in order to review and assess the evolving COVID-19 pandemic, and to recommend risk mitigation actions for the health and safety of our employees. In order to enhance the safety of our employees during the COVID-19 pandemic, we have implemented various measures, including the installation of physical barriers between employees in production facilities, extensive cleaning and sanitation of both production and office spaces, and implementation of broad work-from-home initiatives for office personnel. While all of these measures have been necessary and appropriate, they have resulted in additional costs, many of which we expect to continue to incur throughout fiscal 2021 as we continue to address employee safety. We have experienced some challenges in connection with the COVID-19 pandemic, including temporary closings of production facilities and reduced demand in our Foodservice segment. Despite these challenges, all of our production facilities remain open and there has been minimal disruption to our supply chain network to date, including the supply of our ingredients, packaging, or other sourced materials. However, we continue to closely monitor the potential impacts of the COVID-19 pandemic, as we cannot predict its ultimate impact on our suppliers, distributors, and manufacturers. At this time, we have not experienced a net negative impact on our liquidity or results of operations and we believe we have sufficient liquidity to satisfy our cash needs. We will continue to evaluate the nature and extent of the impact to our business, consolidated results of operations, financial condition, and liquidity.
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
Refrigerated & Frozen
The Refrigerated & Frozen reporting segment principally includes branded,
temperature-controlled food products sold in various retail channels in
International
The International reporting segment principally includes branded food products, in various temperature states, sold in various retail and foodservice channels outside ofthe 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 inthe United States .
Presentation of Derivative Gains (Losses) from Economic Hedges of Forecasted Cash Flows in Segment Results
Derivatives used to manage commodity price risk and foreign currency risk are not designated for hedge accounting treatment. We believe these derivatives provide economic hedges of certain forecasted transactions. As such, these derivatives are recognized at
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fair market value with realized and unrealized gains and losses recognized in
general corporate expenses. The gains and losses are subsequently recognized in
the operating results of the reporting segments in the period in which the
underlying transaction being economically hedged is included in earnings. 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. See Note 15 "Business Segments
and Related Information", to the Condensed Consolidated Financial Statements
contained in this report for further discussion.
Net Sales
Net Sales
($ in millions) Thirteen weeks ended Thirty-nine weeks ended
February 28, February 23, % Inc February 28, February 23, % Inc
Reporting Segment 2021 2020 (Dec) 2021 2020 (Dec)
Grocery & Snacks $ 1,133.1 $ 1,022.9 11 % $ 3,552.6 $ 3,143.0 13 %
Refrigerated & Frozen 1,203.1 1,076.8 12 % 3,581.7 3,204.2 12 %
International 240.9 220.9 9 % 709.7 659.6 8 %
Foodservice 194.0 234.4 (17 )% 601.2 759.7 (21 )%
Total $ 2,771.1 $ 2,555.0 9 % $ 8,445.2 $ 7,766.5 9 %
Net sales for the third quarter of fiscal 2021 in our Grocery & Snacks segment
included an increase in volumes of 9%, excluding the impact of divestitures,
compared to the prior-year period. The increase in volumes reflected an increase
across multiple categories due to increased at-home eating in connection with
the COVID-19 pandemic. Price/mix increased by 4% for the third quarter of fiscal
2021, excluding the impact of divestitures, when compared to the prior-year
period primarily due to favorable product mix and reduced promotional trade
activity. The third quarter of fiscal 2021 and 2020 included $8.8 million and
$23.1 million , respectively, of net sales related to our Peter Pan® peanut
butter business, which was sold in the third quarter of fiscal 2021. The third
quarter of fiscal 2020 included $1.6 million of net sales related to our H.K.
Anderson® business, which was sold in the second quarter of fiscal 2021. The
third quarter of fiscal 2020 also included $4.4 million of net sales related to
our private label peanut butter business, which we exited in the third quarter
of fiscal 2020.
Net sales for the first three quarters of fiscal 2021 in our Grocery & Snacks
segment included an increase in volumes of 14%, excluding the impact of
divestitures, compared to the prior-year period. The increase in volumes
reflected an increase across multiple categories due to increased at-home eating
and replenishment of customer inventory levels in connection with the COVID-19
pandemic. Price/mix increased by 3% for the first three quarters of fiscal 2021,
excluding the impact of divestitures, when compared to the prior-year period due
to favorable product mix, lower promotional trade activity, and the favorable
impact of a $7.4 million change in estimate associated with our fiscal 2020
fourth quarter trade accrual. The first three quarters of fiscal 2021 and 2020
included $34.7 million and $70.9 million , respectively, of net sales related to
our Peter Pan® peanut butter business. The first three quarters of fiscal 2021
and 2020 included $3.6 million and $5.9 million , respectively, of net sales
related to our H.K. Anderson® business. The first three quarters of fiscal 2020
included $46.1 million of net sales related to our DSD Snacks business, which
was sold in the second quarter of fiscal 2020. The first three quarters of
fiscal 2020 also included $22.8 million of net sales related to our private
label peanut butter business.
Net sales for the third quarter of fiscal 2021 in our Refrigerated & Frozen
segment reflected an increase in volumes of 8%, excluding the impact of
divestitures, compared to the prior-year period, due to increased at-home eating
in connection with the COVID-19 pandemic. Price/mix increased by 4% for the
third quarter of fiscal 2021, excluding the impact of divestitures, when
compared to the prior-year period, due in part to favorable mix and lower
promotional trade activity. The third quarter of fiscal 2020 included $3.8
million of net sales related to our Lender's® bagel business, which was sold in
the third quarter of fiscal 2020.
Net sales for the first three quarters of fiscal 2021 in our Refrigerated &
Frozen segment reflected an increase in volumes of 9%, excluding the impact of
divestitures, compared to the prior-year period, due to increased at-home eating
and replenishment of customer inventory levels in connection with the COVID-19
pandemic. Price/mix increased by 4% for the first three quarters of fiscal 2021,
excluding the impact of divestitures, when compared to the prior-year period,
due to the drivers discussed above, favorable pricing, and the favorable impact
of a $7.4 million change in estimate associated with our fiscal 2020 fourth
quarter trade accrual. The first three quarters of fiscal 2020 included $23.2
million of net sales related to our Lender's® bagel business.
Net sales for the third quarter of fiscal 2021 in our International segment reflected a 7% increase in volume and a 3% increase in price/mix, excluding the impact of divestitures, in each case compared to the prior-year period. The increase in volumes was driven by
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--------------------------------------------------------------------------------elevated demand related to the impacts of the COVID-19 pandemic and strong growth in all regions, excluding the impact of foreign exchange rates and divestitures.
Net sales for the first three quarters of fiscal 2021 in our International segment reflected an 8% increase in volume, a 3% decrease due to unfavorable foreign exchange rates, and a 3% increase in price/mix, excluding the impact of divestitures, in each case compared to the prior-year period. The increase in volumes was driven by elevated demand related to the impacts of the COVID-19 pandemic and strong growth across all regions, excluding the impact of foreign exchange rates and divestitures. The increase in price/mix was driven by lower promotional trade activity and the favorable impact of a$2.8 million change in estimate associated with our fiscal 2020 fourth quarter trade accrual. The first three quarters of fiscal 2021 and 2020 included$1.4 million and$3.6 million , respectively, of net sales related to our Peter Pan® peanut butter business. Net sales for the third quarter of fiscal 2021 in our Foodservice segment reflected a 20% decrease in volume, excluding the impact of divestitures, compared to the prior-year period. The decline in volume reflected lower traffic in away-from-home food outlets as a result of the COVID-19 pandemic. Price/mix, excluding the impact of divestitures, increased by 3% in the third quarter of fiscal 2021 compared to the prior-year period, reflecting inflation-related pricing and lower trade activity. Net sales for the first three quarters of fiscal 2021 in our Foodservice segment reflected a 23% decrease in volume, excluding the impact of divestitures, compared to the prior-year period. The decline in volume reflected lower traffic in away-from-home food outlets as a result of the COVID-19 pandemic. Price/mix, excluding the impact of divestitures, increased by 4% in the first three quarters of fiscal 2021 compared to the prior-year period, reflecting the drivers noted above. The first three quarters of fiscal 2020 included$6.6 million of net sales related to our Lender's® bagel business. The first three quarters of fiscal 2020 also included$4.6 million of net sales related to our private label peanut butter business, which we exited in the third quarter of fiscal 2020.
SG&A Expenses (includes general corporate expenses)
SG&A expenses totaled$309.7 million for the third quarter of fiscal 2021, a decrease of$10.2 million , as compared to the third quarter of fiscal 2020. SG&A expenses for the third quarter of fiscal 2021 reflected the following:
Items impacting comparability of earnings
• a gain of
• expenses of
• expenses of$6.2 million in connection with our restructuring plans,
• consulting expenses of
benefits for a new production facility (the associated tax benefits will
be recognized in future periods), and
• expense of $4.3 million related to a previous legal matter.
Other changes in expenses compared to the third quarter of fiscal 2020
• an increase in advertising and promotion expense of
higher eCommerce investments,
• an increase in incentive compensation expense of
expectation of exceeding certain performance targets,
• an increase in commission expense of
net sales noted above,
• a decrease of
in part due to reduced travel from the COVID-19 pandemic, and
• an increase in consulting fees primarily associated with information
technology-related projects of $3.0 million .
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SG&A expenses for the third quarter of fiscal 2020 included expenses of
SG&A expenses totaled$967.7 million for the first three quarters of fiscal 2021, a decrease of$122.8 million , as compared to the first three quarters of fiscal 2020. SG&A expenses for the first three quarters of fiscal 2021 reflected the following:
Items impacting comparability of earnings
• expenses of
• a gain of
• expenses of$32.9 million in connection with our restructuring plans,
• consulting expenses of
benefits for a new production facility (the associated tax benefits will
be recognized in future periods),
• expenses of
and planned divestitures, and
• a net expense of $2.3 million related to a previous legal matter.
Other changes in expenses compared to the first three quarters of fiscal 2020
• a decrease in salary, wage, and fringe benefit expense of
largely due to achieved synergies from the Pinnacle acquisition and lower
employer-related 401(k) costs,
• an increase in share-based payment and deferred compensation expense of
• an increase in incentive compensation expense of
expectation of exceeding certain performance targets,
• a decrease of
in part due to reduced travel from the COVID-19 pandemic,
• an increase in advertising and promotion expense of
by higher eCommerce investments,
• a decrease in depreciation expense of $5.1 million ,
• a decrease in royalty expense of $4.2 million , in part due to the
expiration of a royalty agreement,
• a decrease in lease and rent expense of $4.2 million , and
• a decrease of
SG&A expenses for the first three quarters of fiscal 2020 included the following items impacting the comparability of earnings:
• expenses of
• expense of
sale,
• charges totaling
intangible assets,
• a benefit of $11.9 million related to a contract settlement gain,
• charges totaling
• expenses of
and planned divestitures,
• a net loss of $1.7 million related to divestitures of businesses, and
• a benefit of $1.5 million related to a previous legal matter.
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Operating Profit (Earnings before general corporate expenses, pension and postretirement non-service income, interest expense, net, income taxes, and equity method investment earnings)
Operating Profit
($ in millions) Thirteen weeks ended Thirty-nine weeks ended
February 28, February 23, % Inc February 28, February 23, % Inc
Reporting Segment 2021 2020 (Dec) 2021 2020 (Dec)
Grocery & Snacks $ 290.2 $ 199.4 46 % $ 890.2 $ 614.8 45 %
Refrigerated & Frozen 214.6 190.7 13 % 719.0 533.7 35 %
International 27.8 22.3 25 % 105.8 73.5 44 %
Foodservice 12.8 27.2 (53 )% 60.0 96.6 (38 )%
Operating profit in our Grocery & Snacks segment for the third quarter of fiscal
2021 reflected an increase in gross profits of $48.8 million compared to the
third quarter of fiscal 2020. The higher gross profit was driven by the net
sales growth discussed above, the benefits of supply chain realized
productivity, favorable margin mix, cost synergies associated with the Pinnacle
acquisition, and fixed cost leverage partially offset by the impacts of input
cost inflation, higher transportation costs, a reduction in profit associated
with the divestitures of our H.K. Anderson® and Peter Pan® peanut butter
businesses and the exit of our private label peanut butter business, and
pandemic-related costs. Pandemic-related costs included investments in employee
safety protocols, bonuses paid to supply chain employees, and costs necessary to
meet elevated levels of demand. Operating profit of the Grocery & Snacks segment
was impacted by expense of $4.2 million and $10.9 million related to our
restructuring plans in the third quarter of fiscal 2021 and 2020, respectively.
The third quarter of fiscal 2021 included a gain on the divestiture of our Peter
Pan® peanut butter business of $49.7 million .
Operating profit in our Grocery & Snacks segment for the first three quarters of
fiscal 2021 reflected an increase in gross profits of $176.1 million compared to
the first three quarters of fiscal 2020. The higher gross profit was a result of
the same drivers noted above. Operating profit of the Grocery & Snacks segment
was impacted by expense of $25.9 million and $49.2 million related to our
restructuring plans in the first three quarters of fiscal 2021 and 2020,
respectively. In addition, the first three quarters of fiscal 2021 included
gains of $55.0 million on the divestiture of our H.K. Anderson® and Peter Pan®
peanut butter businesses. The first three quarters of fiscal 2020 included
charges of $31.4 million related to the impairment of a business held for sale,
a benefit of $11.9 million related to a contract settlement, charges of $3.5
million related to the impairment of certain brand intangible assets, and costs
of $3.0 million related to planned divestitures.
Operating profit in our Refrigerated & Frozen segment for the third quarter of
fiscal 2021 reflected an increase in gross profits of $23.6 million compared to
the third quarter of fiscal 2020. The increase was driven by the net sales
growth discussed above, the benefits of supply chain realized productivity,
favorable margin mix, cost synergies associated with the Pinnacle acquisition,
and fixed cost leverage, partially offset by the impacts of input cost
inflation, higher transportation costs, a reduction in profit associated with
the divestiture of our Lender's® bagel business, and pandemic-related costs.
Operating profit of the Refrigerated & Frozen segment was impacted by expense of
$7.0 million and $10.5 million related to our restructuring plans in the third
quarter of fiscal 2021 and 2020, respectively. Advertising and promotion
expenses for the third quarter of fiscal 2021 increased by $8.1 million compared
to the third quarter of fiscal 2020.
Operating profit in our Refrigerated & Frozen segment for the first three
quarters of fiscal 2021 reflected an increase in gross profits of $137.7 million
compared to the first three quarters of fiscal 2020. The increase in gross
profits was a result of the drivers discussed above. Operating profit of the
Refrigerated & Frozen segment was impacted by expense of $19.9 million and $12.3
million related to our restructuring plans in the first three quarters of fiscal
2021 and 2020, respectively. Operating profit in the first three quarters of
fiscal 2020 was also impacted by charges of $27.6 million related to the
impairment of a business held for sale and charges of $15.8 million related to
the impairment of certain brand intangible assets. Advertising and promotion
expenses for the first three quarters of fiscal 2021 increased by $13.4 million
compared to the first three quarters of fiscal 2020.
Operating profit in our International segment for the third quarter of fiscal
2021 reflected an increase in gross profits of $7.7 million when compared to the
prior-year period, due to the net sales growth discussed above, the benefits of
supply chain realized productivity, fixed cost leverage, and favorable product
mix, partially offset by the impacts of input cost inflation, higher
transportation costs, and unfavorable foreign exchange rates.
Operating profit in our International segment for the first three quarters of
fiscal 2021 reflected an increase in gross profits of $23.0 million when
compared to the prior-year period, due to the drivers noted above and a
reduction in profit associated with the divestiture of our Peter Pan® peanut
butter business. Operating profit of the International segment was impacted by
income of $0.1 million and expense of $1.4 million related to our restructuring
plans in the first three quarters of fiscal 2021 and 2020, respectively.
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Operating profit in our Foodservice segment for the third quarter of fiscal 2021
reflected a decrease in gross profits of $16.3 million compared to the third
quarter of fiscal 2020. The lower gross profit primarily reflected lower traffic
in away-from-home food outlets due to the COVID-19 pandemic, input cost
inflation, and pandemic-related costs, partially offset by supply chain realized
productivity and cost synergies associated with the Pinnacle acquisition.
Operating profit in our Foodservice segment for the first three quarters of
fiscal 2021 reflected a decrease in gross profits of $42.5 million compared to
the first three quarters of fiscal 2020. The lower gross profit primarily
reflected the items discussed above and a reduction in profit associated with
the divestitures of our Lender's® bagel, H.K. Anderson®, and Peter Pan® peanut
butter businesses and the exit of our private label peanut butter business.
Pension and Postretirement Non-service Income
In the third quarter of fiscal 2021, pension and postretirement non-service income was$13.7 million , a decrease of$2.7 million compared to the third quarter of fiscal 2020. In the first three quarters of fiscal 2021, pension and postretirement non-service income was$41.2 million , an increase of$4.0 million compared to the first three quarters of fiscal 2020. The third quarter and first three quarters of fiscal 2020 included a settlement gain of$2.1 million related to the remeasurement of our salaried pension plan. The third quarter and first three quarters of fiscal 2021 reflected lower interest costs as a result of declining interest rates and lower expected returns on plan assets.
Interest Expense, Net
Net interest expense was$100.6 million and$117.7 million for the third quarter of fiscal 2021 and 2020, respectively. Net interest expense was$322.0 million and$361.8 million for the first three quarters of fiscal 2021 and 2020, respectively. The decrease was driven by an overall reduction of our debt balances. See Note 4 "Long-Term Debt and Revolving Credit Facility", to the Condensed Consolidated Financial Statements contained in this report for further discussion. Income Taxes In the third quarter and first three quarters of fiscal 2021, we recognized income tax expense of$101.6 million and$269.0 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 26.5% and 21.3% for the third quarter and first three quarters of fiscal 2021, respectively. In the third quarter and first three quarters of fiscal 2020, we recognized income tax expense of$68.9 million and$141.5 million , respectively. The effective tax rate was approximately 25.2% and 18.1% for the third quarter and first three quarters of fiscal 2020, 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$21.5 million and$10.4 million for the third quarter of fiscal 2021 and 2020, respectively. Equity method investment earnings were$51.0 million and$50.3 million for the first three quarters of fiscal 2021 and 2020, respectively. Results for the third quarter and first three quarters of fiscal 2020 included an expense of$0.6 million and a gain of$4.2 million , respectively, related to the sale of an asset by the Ardent Mills joint venture. Ardent Mills earnings for the third quarter of fiscal 2021 reflected favorable market conditions.
Earnings Per Share
Diluted earnings per share in the third quarter of fiscal 2021 and 2020 were$0.58 and$0.42 , respectively. Diluted earnings per share in the first three quarters of fiscal 2021 and 2020 were$2.02 and$1.31 , respectively. See "Items Impacting Comparability" above as several significant items affected the comparability of year-over-year results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity and Capital
Our primary financing objective is to maintain a prudent capital structure that provides us flexibility to pursue our growth objectives. If necessary, 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 payable, accrued payroll, and other accrued liabilities), and a combination of equity and long-term debt to finance both our base working capital needs and our non-current assets. We are committed to maintaining solid investment grade credit ratings. As ofFebruary 28, 2021 , 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$1.6 billion (subject to increase to a 35
-------------------------------------------------------------------------------- maximum aggregate principal amount of$2.1 billion with the consent of the lenders). The Revolving Credit Facility matures onJuly 11, 2024 and is unsecured. The term of the Revolving Credit Facility may 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 ofFebruary 28, 2021 , there were no outstanding borrowings under the Revolving Credit Facility. As ofFebruary 28, 2021 , we had$728.6 million outstanding under our commercial paper program. The highest level of borrowings during the first three quarters of fiscal 2021 was$820.5 million . We had no amounts outstanding under our commercial paper program as ofMay 31, 2020 . During the third quarter of fiscal 2021, we redeemed$400.0 million aggregate principal amount of our 3.20% senior notes dueJanuary 25, 2023 , prior to maturity, resulting in a net loss of$24.4 million as a cost of early extinguishment of debt. The repayment was primarily funded by the issuance of commercial paper. OnMarch 1, 2021 , subsequent to the end of the third quarter of fiscal 2021, we repaid the remaining outstanding$195.9 million aggregate principal amount of our 9.75% subordinated notes on their maturity date. The repayment was primarily funded by the issuance of commercial paper. We expect to maintain or have access to sufficient liquidity to retire or refinance long-term debt upon maturity, 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 third quarter of fiscal 2021, 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 be not less than 3.0 to 1.0 and our ratio of funded debt to EBITDA not to exceed certain decreasing specified levels, ranging from 4.75 through the first quarter of fiscal 2022 to 3.75 from the second quarter of fiscal 2023 and thereafter, with each ratio to be calculated on a rolling four-quarter basis. As ofFebruary 28, 2021 , we were in compliance with these financial covenants. 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 the 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. During the third quarter of fiscal 2021, we repurchased approximately 8.8 million shares of our common stock under this authorization for an aggregate of$298.1 million . We plan to repurchase shares under our authorized program only at times and in amounts as are consistent with the prioritization of achieving our long-term leverage target. The Company's total remaining share repurchase authorization as ofFebruary 28, 2021 , was$1.12 billion . OnDecember 11, 2020 , our Board announced a quarterly dividend payment of$0.275 per share which was paid onMarch 3, 2021 to stockholders of record as of close of business onJanuary 29, 2021 . In fiscal 2017, we began a program to offer certain suppliers access to a third-party service that allows them to view our scheduled payments online. The third-party service also allows suppliers to finance advances on our scheduled payments at the sole discretion of the supplier and the third party. We have no economic interest in these financing arrangements and no direct relationship with the suppliers, the third party, or any financial institutions concerning this service. All balances remain as obligations to our suppliers as stated in our supplier agreements and are reflected in accounts payable within our Condensed Consolidated Balance Sheets. The associated payments are included in net cash flows from operating activities within our Condensed Consolidated Statements of Cash Flows. As ofFebruary 28, 2021 andMay 31, 2020 ,$251.9 million and$258.7 million , respectively, of our total accounts payable was payable to suppliers who utilize this third-party service. The program commenced at about the same time that we began an initiative to negotiate extended payment terms with our suppliers. Although difficult to predict, we generally expect the incremental cash flow benefits associated with these extended payment terms to increase at a slower rate in the future. 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. 36 --------------------------------------------------------------------------------
Cash Flows
During the first three quarters of fiscal 2021, we used$472.6 million of cash, which was the net result of$1.07 billion generated from operating activities,$281.9 million used in investing activities,$1.26 billion used in financing activities, and an increase of$2.9 million due to the effects of changes in foreign currency exchange rates. Cash generated from operating activities totaled$1.07 billion in the first three quarters of fiscal 2021, as compared to$906.5 million generated in the first three quarters of fiscal 2020. The increase in operating cash flows for the first three quarters of fiscal 2021 compared to the first three quarters of fiscal 2020 was largely due to the impact of increased net sales in our retail segments from COVID-19 pandemic-related demand as well as decreased interest payments. This was partially offset by increased tax payments for the first three quarters of fiscal 2021 compared to fiscal 2020. Tax payments for the first three quarters of fiscal 2021 included approximately$47.0 million of fourth quarter fiscal 2020 tax payments, which were deferred due to the extension of the deadline for certain federal cash tax payments. Comparative changes in working capital balances were impacted by some inventory rebuilding in the third quarter of fiscal 2021 and the timing of accounts payable payments. Operating cash flows also benefited from the continued deferral of employer payroll taxes under the Coronavirus Aid, Relief, and Economic Security Act, which totaled$33.9 million for the first three quarters of fiscal 2021. Payment of such amounts will occur in fiscal 2022 and 2023. Cash used in investing activities totaled$281.9 million and$59.9 million in the first three quarters of fiscal 2021 and 2020, respectively. Net cash outflows from investing activities in the first three quarters of fiscal 2021 consisted primarily of capital expenditures totaling$396.7 million partially offset by proceeds totaling$112.2 million from the sale of our Peter Pan® peanut butter and H.K. Anderson® businesses. Investing activities in the first three quarters of fiscal 2020 consisted mainly of capital expenditures of$265.3 million partially offset by proceeds from divestitures totaling$191.4 million , including the sales of our DSD Snacks and Lender's® bagel businesses. Cash used in financing activities totaled$1.26 billion and$984.6 million in the first three quarters of fiscal 2021 and 2020, respectively. Financing activities in the first three quarters of fiscal 2021 principally reflect repayments of long-term debt of$2.31 billion , the issuance of long-term debt totaling$988.2 million , net short-term borrowings of$727.6 million , cash dividends paid of$341.7 million , and common stock repurchases of$298.1 million . Financing activities in the first three quarters of fiscal 2020 consisted primarily of the repayment of long-term debt totaling$665.9 million and cash dividends paid of$310.1 million . The Company had cash and cash equivalents of$80.7 million atFebruary 28, 2021 and$553.3 million atMay 31, 2020 , of which$70.7 million atFebruary 28, 2021 and$80.5 million atMay 31, 2020 was held in foreign countries. We believe that our foreign subsidiaries have invested or will invest any undistributed earnings indefinitely, or that any undistributed earnings will be remitted in a tax-neutral transaction, and, therefore, do not provide deferred taxes on the cumulative undistributed earnings of our foreign subsidiaries.
We continue to make investments in our business and operating facilities. Our
estimate of capital expenditures for fiscal 2021 is approximately
Management believes that existing cash balances, cash flows from operations, existing credit facilities, and access to capital markets will provide sufficient liquidity to meet our repayment of debt, including any repayment of debt or refinancing of debt, working capital needs, planned capital expenditures, and payment of anticipated quarterly dividends for at least the next twelve months. OBLIGATIONS AND COMMITMENTS As part of our ongoing operations, we enter into arrangements that obligate us to make future payments under contracts such as lease agreements, debt agreements, and unconditional purchase obligations (i.e., obligations to transfer funds in the future for fixed or minimum quantities of goods or services at fixed or minimum prices, such as "take-or-pay" contracts). The unconditional purchase obligation arrangements are entered into in our normal course of business in order to ensure adequate levels of sourced product are available. Of these items, debt, notes payable, finance lease obligations, and operating lease obligations were recognized as liabilities in the Condensed Consolidated Balance Sheets contained in this report as ofFebruary 28, 2021 . 37 -------------------------------------------------------------------------------- A summary of our contractual obligations as ofFebruary 28, 2021 was as follows: Payments Due by Period (in millions) More than 5 Contractual Obligations Total Less than 1 Year 1-3 Years 3-5 Years Years Long-term debt$ 8,404.9 $ 195.9$ 687.0 $ 2,000.1 $ 5,521.9 Finance lease obligations 145.4 24.7 37.0 28.4 55.3 Operating lease obligations 278.8 46.9 76.8 47.1 108.0 Purchase obligations1 and other contracts 2,191.5 1,418.3 167.2 138.6 467.4 Notes payable 728.7 728.7 - - - Total$ 11,749.3 $ 2,414.5$ 968.0 $ 2,214.2 $ 6,152.6 1Amounts include open purchase orders and agreements, some of which are not legally binding and/or may be cancellable. Such agreements are generally settleable in the ordinary course of business in less than one year. Purchase obligations and other contracts, which totaled$2.18 billion as ofFebruary 28, 2021 , were not recognized as liabilities in the Condensed Consolidated Balance Sheets contained in this report, in accordance with generally accepted accounting principles.
We are also contractually obligated to pay interest on our long-term debt and
finance lease obligations. The weighted average coupon interest rate of the
long-term debt obligations outstanding as of
The operating lease obligations noted in the table above have not been reduced
by non-cancellable sublease rentals of
As ofMay 31, 2020 , we had aggregate unfunded pension and postretirement benefit obligations totaling$52.1 million and$86.4 million , respectively. These amounts are not included in the table above as the unfunded obligations are remeasured each fiscal year, thereby resulting in our inability to accurately predict the ultimate amount and timing of any future required contributions to such plans. Based on current statutory requirements, we are not obligated to fund any amount to our qualified pension plans during the next twelve months. We estimate that we will make payments of approximately$32.2 million and$10.0 million over the next twelve months to fund our pension and postretirement plans, respectively. See Note 12 "Pension and Postretirement Benefits", to the Condensed Consolidated Financial Statements contained in this report and Note 18 "Pension and Postretirement Benefits", to the Consolidated Financial Statements and "Critical Accounting Estimates - Employment-Related Benefits" contained in the Company's Annual Report on Form 10-K for the year endedMay 31, 2020 for further discussion of our pension obligations and factors that could affect estimates of this liability. As part of our ongoing operations, we also enter into arrangements that obligate us to make future cash payments only upon the occurrence of a future event. As ofFebruary 28, 2021 , we had$55.8 million of standby letters of credit issued on our behalf. These standby letters of credit are primarily related to our self-insured workers compensation programs and are not reflected in the Condensed Consolidated Balance Sheets contained in this report. In certain limited situations, we will guarantee obligations of unconsolidated entities. For further discussion on these guarantees, see "Guarantees and Other Contingencies" within Note 11 "Contingencies", to the Condensed Consolidated Financial Statements contained in this report. The obligations and commitments disclosed above do not include any reserves for uncertainties in income taxes, as we are unable to reasonably estimate the ultimate amount or timing of settlement of our reserves for income taxes. The liability for gross unrecognized tax benefits atFebruary 28, 2021 was$34.4 million . The net amount of unrecognized tax benefits atFebruary 28, 2021 , that, if recognized, would impact our effective tax rate was$29.2 million . Recognition of these tax benefits would have a favorable impact on our effective tax rate. CRITICAL ACCOUNTING ESTIMATES Consistent with previous years, we will perform our annual impairment test on our indefinite-lived intangible assets and goodwill in the fourth quarter of fiscal 2021. We recognized impairment charges on several brands, primarily from the Pinnacle acquisition, in the fourth quarter of fiscal 2020. These assets were written down to their respective fair values resulting in zero excess fair value over carrying amount. While most of these brands have had elevated sales demand as a result of the COVID-19 pandemic, some brands have also experienced deterioration in margins due to several factors, including recent input cost inflation. If expectations of future long-term growth rates and margins are not met or if management's future strategy changes on certain brands, there is a heightened risk of future impairment. No events occurred during the third quarter of fiscal 2021 that indicated it was more likely than not that our indefinite-lived intangible assets were impaired. 38
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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 endedMay 31, 2020 .
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