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 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 supply chain resources, including raw materials, packaging, and transportation, including any negative effects caused by changes in inflation rates, 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; risks related to a material failure in or breach of our or our vendors' information technology systems; 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 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 30, 2021 and subsequent filings with theSEC . Results for the second quarter of fiscal 2022 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.
Fiscal 2022 Second Quarter Results
In the second quarter of fiscal 2022, results reflected an increase in net sales, with organic (excludes the impacts of foreign exchange and divested businesses) increases in our Refrigerated & Frozen, International, and Foodservice segments partially offset by
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organic decreases in our Grocery & Snacks segment, in each case compared to the
second quarter of fiscal 2021. Overall gross profit decreased primarily as a
result of input cost inflation, higher transportation costs, and lost profits
from divested businesses, which were partially offset by higher organic net
sales, supply chain realized productivity, cost synergies associated with the
Pinnacle acquisition, and lower COVID-19 pandemic-related expenses. Overall
segment operating profit decreased in all of our operating segments. Corporate
expenses were lower primarily due to items impacting comparability, as discussed
below. There were lower selling, general and administrative ("SG&A") expenses
primarily due to lower stock-based and incentive compensation offset by higher
advertising and promotion expenses. We recognized higher equity method
investment earnings, lower interest expense, and higher income tax expense, in
each case compared to the second quarter of fiscal 2021. Excluding items
impacting comparability, our effective tax rate was slightly lower compared to
the second quarter of fiscal 2021.
Diluted earnings per share in the second quarter of fiscal 2022 were
In the second quarter of fiscal 2022, we continued to experience higher than expected input cost inflation, including higher transportation and supply chain costs, that negatively impacted gross margins. We expect input cost inflation to remain elevated throughout the rest of fiscal 2022. Supply chain realized productivity and pricing actions are expected to mitigate some of the inflationary pressures, but we do not expect such benefits to occur in time to fully offset the higher costs in fiscal 2022. As our estimates of inflation for fiscal 2022 continue to change, it is impractical to quantify the impact at this time.
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 second quarter of fiscal 2022 included the following:
• charges totaling
impairment of businesses held for sale,
• a gain of
settlement,
• charges totaling
our restructuring plans, and
• a gain of
received from the sale of a legacy investment.
Items of note impacting comparability for the second quarter of fiscal 2021 included the following:
• charges totaling
extinguishment of debt,
• charges totaling
with our restructuring plans,
• a gain of
divestiture of a business, and
• an income tax benefit of
allowance associated with the planned divestiture of the Peter Pan® peanut
butter business.
Items of note impacting comparability for the first half of fiscal 2022 included the following:
• charges totaling
impairment of businesses held for sale,
• charges totaling
with our restructuring plans,
• a gain of
settlement,
• an income tax benefit of
matter that was previously reserved, and
• a gain of
received from the sale of a legacy investment.
Items of note impacting comparability for the first half of fiscal 2021 included the following:
• charges totaling
with our restructuring plans,
• charges totaling
extinguishment of debt,
• a gain of $5.3 million ($3.5 million after-tax) associated with the
divestiture of a business,
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• an income tax benefit of $7.6 million related to certain final taxregulations on prior year federal tax matters, and
• an income tax benefit of
allowance associated with the planned divestiture of the Peter Pan® peanut
butter business.
Divestitures
During the fourth quarter of fiscal 2021, we completed the sale of our Egg
Beaters® business for net proceeds of $50.7 million , including working capital
adjustments. The results of operations of the divested Egg Beaters® business
were primarily included in our Refrigerated & Frozen 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 2021, we completed the sale of our Peter Pan®
peanut butter business for net proceeds of $101.5 million , including working
capital adjustments. 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.
Restructuring Plans
InDecember 2018 , our Board of Directors (the "Board") approved a restructuring and integration plan related to the ongoing integration of the operations ofPinnacle Foods, Inc. (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$346.5 million of charges ($278.0 million of cash charges and$68.5 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 second quarter and first half of fiscal 2022, we recognized charges of$5.8 million and$13.1 million , respectively, in connection with the Pinnacle Integration Restructuring Plan. In the second quarter and first half of fiscal 2021, we recognized charges of$10.2 million and$18.8 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 for costs incurred in connection with actions taken to improve SG&A expense effectiveness and efficiencies and to optimize our supply chain network (the "Conagra Restructuring Plan"). 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 second quarter of fiscal 2022, 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 ofNovember 28, 2021 , we have approved the incurrence of$172.6 million ($45.8 million of cash charges and$126.8 million of non-cash charges) for several projects associated with the Conagra Restructuring Plan. As ofNovember 28, 2021 , we have incurred or expect to incur$143.4 million of charges ($40.2 million of cash charges and$103.2 million of non-cash charges) for actions identified to date under the Conagra Restructuring Plan. In the second quarter and first half of fiscal 2022, we recognized charges of$6.6 million and$15.1 million , respectively, in connection with the Conagra Restructuring Plan. In the second quarter and first half of fiscal 2021, we recognized charges of$10.5 million and$27.8 million , respectively, in connection with theConagra Restructuring Plan. We expect to incur costs related to theConagra Restructuring Plan over a multi-year period.
COVID-19 Pandemic
We continue to monitor the impact of the COVID-19 pandemic on all aspects of our business. During the second quarter of fiscal 2022, we continued to experience elevated demand for our products in the retail segments, but volumes were lower compared to the second quarter of fiscal 2021 as we lap the surge in demand in at-home food consumption from the pandemic. We experienced higher demand for our foodservice products across all of our major markets during the second quarter of fiscal 2022 compared to the second quarter of fiscal 2021 as consumer traffic in away-from-home food outlets continue to recover from the impacts of the pandemic. During the second quarter of fiscal 2022, we incurred$21.0 million of supply chain costs associated with the COVID-19 pandemic, which was a decrease in comparison to the second quarter of fiscal 2021. As we progress through fiscal 2022, we generally expect retail demand levels to remain elevated versus pre-pandemic levels and we continue to expect foodservice demand levels to return to more historical norms. However, uncertainty still remains with the pandemic and such trends ultimately depend on the length and severity of the pandemic, inclusive of the introduction of new strains and variants of the virus; infection rates in the markets where we do business; the federal, state, and local government actions taken in response; vaccine effectiveness; and the macroeconomic environment. In the second half of fiscal 2022, we continue to expect to see inflationary headwinds but anticipate that they will be partially mitigated by supply chain realized productivity and sales price increases that have either taken effect or are expected to take effect in the remaining part of the fiscal year. We also continue to expect 27 -------------------------------------------------------------------------------- a decrease in costs related to the COVID-19 pandemic and a decrease in supply chain costs as we continue to recover our supply and service levels. However, we do not expect full realization of such benefits to occur in time to fully offset the higher costs overall in fiscal 2022. We will continue to evaluate the extent to which the COVID-19 pandemic will impact our business, consolidated results of operations, and financial condition. Beginning inFebruary 2020 and over the course of the COVID-19 pandemic, we created cross functional teams 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, these teams have recommended and implemented various measures, including the installation of physical barriers between employees, cleaning and sanitation protocols, execution of a phased return to office approach to enable in-person work for corporate personnel, implementation of work-from-home initiatives, and increased access to vaccines for employees. The implementation of such safety measures has not resulted in any meaningful change to our financial control environment. We have experienced some challenges in connection with the COVID-19 pandemic, including with respect to the supply of our ingredients, packaging, or other sourced materials. Despite these challenges, all of our production facilities remain open. We cannot predict the ultimate COVID-19 impact on our suppliers, distributors, and manufacturers.
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 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.
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Net Sales
Net Sales
($ in millions) Thirteen Weeks Ended Twenty-Six Weeks Ended
November 28, November 29, % Inc November 28, November 29, % Inc
Reporting Segment 2021 2020 (Dec) 2021 2020 (Dec)
Grocery & Snacks $ 1,264.5 $ 1,283.1 (1 )% $ 2,339.6 $ 2,414.1 -3 %
Refrigerated & Frozen 1,285.9 1,248.0 3 % 2,387.7 2,378.6 - %
International 262.2 249.8 5 % 498.8 468.8 6 %
Foodservice 246.3 214.3 15 % 486.1 412.6 18 %
Total $ 3,058.9 $ 2,995.2 2 % $ 5,712.2 $ 5,674.1 1 %
Net sales for the second quarter of fiscal 2022 in our Grocery & Snacks segment
included a decrease in volumes of 5%, excluding the impact of divestitures,
compared to the prior-year period. The decrease in volumes was primarily due to
lapping the prior year's surge in at-home food consumption from the COVID-19
pandemic. Price/mix increased 5% for the second quarter of fiscal 2022,
excluding the impact of divestitures, when compared to the prior-year period due
to favorability in net pricing and favorable brand mix. The second quarter of
fiscal 2021 included $9.1 million of net sales related to our Peter Pan® peanut
butter business, which was sold in the third quarter of fiscal 2021. The second
quarter of fiscal 2021 also included $1.7 million of net sales related to our
H.K. Anderson® business, which was sold in the second quarter of fiscal 2021.
Net sales for the first half of fiscal 2022 in our Grocery & Snacks segment
included a decrease in volumes of 4%, excluding the impact of divestitures,
compared to the prior-year period. The decrease in volumes was primarily due to
lapping the prior year's surge in at-home food consumption from the COVID-19
pandemic and replenishment of customer inventory levels in connection with the
COVID-19 pandemic. Price/mix increased 2% for the first half of fiscal 2022,
excluding the impact of divestitures, when compared to the prior-year period due
to favorability in net pricing and a benefit in the prior-year period of $7.4
million related to a change in estimate associated with our fiscal 2020 fourth
quarter trade accrual. The first half of fiscal 2021 included $25.9 million of
net sales related to our Peter Pan® peanut butter business, which was sold in
the third quarter of fiscal 2021. The first half of fiscal 2021 also included
$3.6 million of net sales related to our H.K. Anderson® business, which was sold
in the second quarter of fiscal 2021.
Net sales for the second quarter of fiscal 2022 in our Refrigerated & Frozen
segment reflected a decrease in volumes of 5%, excluding the impact of
divestitures, compared to the prior-year period primarily due to lapping the
prior year's surge in at-home food consumption from the COVID-19 pandemic.
Price/mix increased by 9% for the second quarter of fiscal 2022, excluding the
impact of divestitures, when compared to the prior-year period due to favorable
brand mix and favorability in net pricing. The second quarter of fiscal 2021
included $10.1 million of net sales related to our Egg Beaters® business, which
was sold in the fourth quarter of fiscal 2021.
Net sales for the first half of fiscal 2022 in our Refrigerated & Frozen segment
reflected a decrease in volumes of 4%, excluding the impact of divestitures,
compared to the prior-year period primarily due to lapping the prior year's
surge in at-home food consumption from the COVID-19 pandemic and replenishment
of inventory levels in connection with the COVID-19 pandemic. Price/mix
increased by 6% for the first half of fiscal 2022, excluding the impact of
divestitures, when compared to the prior-year period due to favorable brand mix
and favorability in net pricing partially offset by a benefit in the prior-year
period of $7.4 million related to a change in estimate associated with our
fiscal 2020 fourth quarter trade accrual. The first half of fiscal 2021 included
$19.3 million of net sales related to our Egg Beaters® business, which was sold
in the fourth quarter of fiscal 2021.
Net sales for the second quarter of fiscal 2022 in our International segment
reflected a 6% decrease in volumes, a 3% increase due to favorable foreign
exchange rates, and an 8% increase in price/mix, excluding the impact of
divestitures, in each case compared to the prior-year period. The decrease in
volumes was driven by lapping the prior year's surge in at-home food demand from
the COVID-19 pandemic. The increase in price/mix was primarily due to
inflation-driven pricing and favorable product mix.
Net sales for the first half of fiscal 2022 in our International segment
reflected a 5% decrease in volumes, a 5% increase due to favorable foreign
exchange rates, and a 7% increase in price/mix, excluding the impact of
divestitures, in each case compared to the prior-year period. The decrease in
volumes was driven by lapping the prior year's surge in at-home food demand from
the COVID-19 pandemic. The increase in price/mix was primarily due to
inflation-driven pricing and favorable product mix offset by a benefit in the
prior-year period of $2.8 million related to a change in estimate associated
with our fiscal 2020 fourth quarter trade accrual.
Net sales for the second quarter of fiscal 2022 in our Foodservice segment reflected a 9% increase in volumes, excluding the impact of divestitures, compared to the prior-year period. The increase in volume reflected the continued recovery of away-from-home
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food outlets from the impacts of the COVID-19 pandemic. Price/mix, excluding the
impact of divestitures, increased by 6% in the second quarter of fiscal 2022
compared to the prior-year period, reflecting inflation-driven pricing and
favorable product mix.
Net sales for the first half of fiscal 2022 in our Foodservice segment reflected
a 14% increase in volumes, excluding the impact of divestitures, compared to the
prior-year period. The increase in volume reflected the continued recovery of
away-from-home food outlets from the impacts of the COVID-19 pandemic.
Price/mix, excluding the impact of divestitures, increased by 4% in the first
half of fiscal 2022 compared to the prior-year period, reflecting
inflation-driven pricing and favorable product mix.
SG&A Expenses (includes general corporate expenses)
SG&A expenses totaled$345.4 million for the second quarter of fiscal 2022, a decrease of$12.3 million , as compared to the second quarter of fiscal 2021. SG&A expenses for the second quarter of fiscal 2022 reflected the following:
Items impacting comparability of earnings
• expense of
sale,
• a net benefit of $14.6 related to a legal settlement,
• a benefit of $3.3 million related to the sale of a legacy investment,
• expenses of
• expenses of
matters.
Other changes in expenses compared to the second quarter of fiscal 2021
• an increase in salary, wage, and fringe benefit expense of
• a decrease in short-term incentive expense of
expectation of exceeding certain performance targets in the prior year,
• an increase in advertising and promotion expense of $7.8 million drivenprimarily by higher eCommerce investments,
• a decrease in share-based payment and deferred compensation expense of
declines, and
• an increase of
claim development in the prior year.
SG&A expenses for the second quarter of fiscal 2021 included the following items impacting the comparability of earnings:
• expenses of
• expenses of
• a gain of
SG&A expenses totaled
Items impacting comparability of earnings
• expense of
sale,
• a net benefit of $14.6 related to a legal settlement,
• expenses of $11.9 million in connection with our restructuring plans,
• a benefit of
• expenses of
matters.
Other changes in expenses compared to the first half of fiscal 2021
• an increase in advertising and promotion expense of
primarily by higher eCommerce investments,
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• a decrease in share-based payment and deferred compensation expense of
a reduction of estimated level of achievement of certain performance
targets,
• an increase in salary, wage, and fringe benefit expense of
• a decrease in short-term incentive expense of
expectation of exceeding certain performance targets in the prior year,
• an increase of $6.9 million in foreign currency transaction losses,primarily due to remeasuring certain intercompany notes payable,
• an increase of
claim development in the prior year,
• an increase in information technology-related expenses of
• an increase in professional fees of
SG&A expenses for the first half of fiscal 2021 included the following items impacting the comparability of earnings:
• expenses of
• expenses of$26.7 million in connection with our restructuring plans, • a gain of$5.3 million related to the divestiture of a business,
• expenses of
divestitures,
• a benefit of $2.0 million related to a previous legal matter, and
• expenses of
matters.
Segment Operating Profit (Earnings before general corporate expenses, pension
and postretirement non-service income, interest expense, net, income taxes, and
equity method investment earnings)
Operating Profit
($ in millions) Thirteen Weeks Ended Twenty-Six Weeks Ended
November 28, November 29, % Inc November 28, November 29, % Inc
Reporting Segment 2021 2020 (Dec) 2021 2020 (Dec)
Grocery & Snacks $ 249.2 $ 316.1 (21 )% $ 465.1 $ 599.2 (22 )%
Refrigerated & Frozen 168.3 264.3 (36 )% 325.9 504.4 (35 )%
International 37.1 39.5 (6 )% 71.2 78.0 (9 )%
Foodservice 13.8 22.6 (39 )% 34.1 48.0 (29 )%
Operating profit in our Grocery & Snacks segment for the second quarter of
fiscal 2022 reflected a decrease in gross profits of $50.8 million compared to
the second quarter of fiscal 2021. The lower gross profit was driven by the net
sales decline discussed above, the impacts of input cost inflation, higher
inventory write-offs, unfavorable fixed cost leverage, and a reduction in profit
associated with the divestitures of our H.K. Anderson® and Peter Pan® peanut
butter businesses, partially offset by the benefits of supply chain realized
productivity, cost synergies associated with the Pinnacle acquisition, and a
decrease in COVID-19 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 $2.0 million
and $7.8 million related to our restructuring plans in the second quarter of
fiscal 2022 and 2021, respectively. The second quarter of fiscal 2022 included
expense of $22.4 million related to the impairment of businesses held for sale.
The second quarter of fiscal 2021 included a gain of $5.3 million related to the
divestiture of a business.
Operating profit in our Grocery & Snacks segment for the first half of fiscal
2022 reflected a decrease in gross profits of $118.2 million compared to the
first half of fiscal 2021. The lower gross profit was driven by the net sales
decline discussed above, the impacts of input cost inflation, higher inventory
write-offs, unfavorable fixed cost leverage, and a reduction in profit
associated with the divestitures of our H.K. Anderson® and Peter Pan® peanut
butter businesses, partially offset by the benefits of supply chain realized
productivity, cost synergies associated with the Pinnacle acquisition, and a
decrease in COVID-19 pandemic-related costs. Operating profit of the Grocery &
Snacks segment was impacted by expense of $6.1 million and $21.7 million related
to our restructuring plans in the first half of fiscal 2022 and 2021,
respectively. The first half of fiscal 2022 included expense of $22.4 million
related to the impairment of businesses held for sale. The first half of fiscal
2021 included a gain of $5.3 million related to the divestiture of a business.
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Operating profit in our Refrigerated & Frozen segment for the second quarter of
fiscal 2022 reflected a decrease in gross profits of $76.1 million compared to
the second quarter of fiscal 2021. The decrease was driven by the impacts of
input cost inflation, unfavorable fixed cost leverage, higher inventory
write-offs, and a reduction in profit associated with the divestiture of our Egg
Beaters® business, partially offset by the benefits of supply chain realized
productivity, cost synergies associated with the Pinnacle acquisition, and a
decrease in COVID-19 pandemic-related costs. Operating profit of the
Refrigerated & Frozen segment was impacted by expense of $6.8 million and $7.2
million related to our restructuring plans in the second quarter of fiscal 2022
and 2021, respectively. The second quarter of fiscal 2022 included expense of
$12.0 million related to the impairment of businesses held for sale. Advertising
and promotion expenses for the second quarter of fiscal 2022 increased by $7.2
million compared to the second quarter of fiscal 2021.
Operating profit in our Refrigerated & Frozen segment for the first half of
fiscal 2022 reflected a decrease in gross profits of $151.0 million compared to
the first half of fiscal 2021. The decrease was driven by the impacts of input
cost inflation, unfavorable fixed cost leverage, higher inventory write-offs,
and a reduction in profit associated with the divestiture of our Egg Beaters®
business, partially offset by the benefits of supply chain realized
productivity, cost synergies associated with the Pinnacle acquisition, and a
decrease in COVID-19 pandemic-related costs. Operating profit of the
Refrigerated & Frozen segment was impacted by expense of $11.8 million and $12.9
million related to our restructuring plans in the first half of fiscal 2022 and
2021, respectively. The first half of fiscal 2022 included expense of $12.0
million related to the impairment of businesses held for sale. Advertising and
promotion expenses for the first half of fiscal 2022 increased by $18.4 million
compared to the first half of fiscal 2021.
Operating profit in our International segment for the second quarter of fiscal
2022 reflected an increase in gross profits of $3.3 million when compared to the
prior-year period due to the net sales growth discussed above and the benefits
of supply chain realized productivity, partially offset by the impacts of input
cost inflation. The increase in gross profit was more than offset by an increase
in SG&A expenses of $5.7 million driven by higher foreign currency transaction
losses, advertising and promotion expenses, and salary, wage, and fringe
benefits.
Operating profit in our International segment for the first half of fiscal 2022
reflected an increase in gross profits of $5.6 million when compared to the
prior-year period due to the net sales growth discussed above and the benefits
of supply chain realized productivity, partially offset by the impacts of input
cost inflation. The increase in gross profit was more than offset by an increase
in SG&A expenses of $12.4 million driven by higher foreign currency transaction
losses, advertising and promotion expenses, salary, wage, and fringe benefits,
and commission expenses.
Operating profit in our Foodservice segment for the second quarter of fiscal
2022 reflected a decrease in gross profits of $5.4 million compared to the
second quarter of fiscal 2021. The lower gross profit was driven by input cost
inflation, which more than offset the net sales growth discussed above and the
benefits of supply chain realized productivity. The second quarter of fiscal
2022 included expense of $4.8 million related to the impairment of businesses
held for sale.
Operating profit in our Foodservice segment for the first half of fiscal 2022
reflected a decrease in gross profits of $9.9 million compared to the first half
of fiscal 2021. The lower gross profit was driven by input cost inflation and
higher inventory write-offs, which more than offset the net sales growth
discussed above and the benefits of supply chain realized productivity. The
first half of fiscal 2022 included expense of $4.8 million related to the
impairment of businesses held for sale.
Pension and Postretirement Non-service Income
In the second quarter of fiscal 2022, pension and postretirement non-service income was$16.1 million , an increase of$2.4 million compared to the second quarter of fiscal 2021. In the first half of fiscal 2022, pension and postretirement non-service income was$32.2 million , an increase of$4.7 million compared to the first half of fiscal 2021. The second quarter and first half of fiscal 2022 reflected lower interest costs and an increase in expected returns on plan assets. Interest Expense,Net Net interest expense was$94.9 million and$107.7 million for the second quarter of fiscal 2022 and 2021, respectively. Net interest expense was$189.1 million and$221.4 million for the first half of fiscal 2022 and 2021, respectively. The decrease was driven by a lower weighted average interest rate on outstanding debt. See Note 4, "Long-Term Debt and Revolving Credit Facility", to the Condensed Consolidated Financial Statements contained in this report for further discussion. 32
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Income Taxes
In the second quarter and first half of fiscal 2022, we recognized income tax expense of$84.2 million and$153.9 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 23.4% and 23.1% for the second quarter and first half of fiscal 2022, respectively. In the second quarter and first half of fiscal 2021, we recognized income tax expense of$80.7 million and$167.4 million , respectively. The effective tax rate was approximately 17.6% and 19.1% for the second quarter and first half of fiscal 2021, 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. In fiscal 2021, we completed a restructuring of our ownership interest in the Ardent Mills joint venture, a milling business ("Ardent Mills"), that utilized a portion of our capital loss carryforward prior to its expiration. Also in fiscal 2021, we completed several other transactions related to retained assets in conjunction with the divestitures of the Peter Pan® peanut butter and Egg Beaters® businesses that we believe will utilize a portion of the remaining capital loss carryforward. These transactions are subject to certain elections and are currently under review by the Internal Revenue Service. We believe they may result in increases to the tax basis in those assets and if successful would result in tax benefits being realized in future periods.
Equity Method Investment Earnings
Equity method investment earnings were$29.5 million and$23.0 million for the second quarter of fiscal 2022 and 2021, respectively. Equity method investment earnings were$49.7 million and$29.5 million for the first half of fiscal 2022 and 2021, respectively. Ardent Mills earnings for the second quarter and first half of fiscal 2022 reflected favorable market conditions.
Earnings Per Share
Diluted earnings per share in the second quarter of fiscal 2022 and 2021 were$0.57 and$0.77 , respectively. Diluted earnings per share in the first half of fiscal 2022 and 2021 were$1.06 and$1.44 , respectively. The decrease in diluted earnings per share reflected lower 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 payable, 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, and payment of anticipated quarterly dividends for at least the next twelve months.
Borrowing Facilities and Long-Term Debt
AtNovember 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 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. In the first quarter of fiscal 2022, we entered into an amendment to the Revolving Credit Facility, which modified the ratio of funded debt to earnings before interest, taxes, depreciation, and amortization ("EBITDA") financial covenant to require a ratio of not greater than 4.5 to 1.0 on a rolling four-quarter basis. We have historically used a credit facility principally as a back-up for our commercial paper program. As ofNovember 28, 2021 , there were no outstanding borrowings under the Revolving Credit Facility. As ofNovember 28, 2021 , we had$580.3 million outstanding under our commercial paper program. The highest level of borrowings during the first half of fiscal 2022 was$989.0 million . We had$705.7 million outstanding under our commercial paper program as ofMay 30, 2021 .
During the first quarter of fiscal 2022, we issued
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For additional information about our long-term debt balances, refer to Note 4, "
Long-Term Debt and Revolving Credit Facility", to the Condensed Consolidated
Financial Statements contained in this report and Note 4, "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 30, 2021 . The weighted average coupon
interest rate of long-term debt obligations outstanding as of November 28, 2021 ,
was approximately 4.4%.
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 second quarter of fiscal 2022, 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 EBITDA to interest expense be not less than 3.0 to 1.0 and
our ratio of funded debt to EBITDA not to exceed 4.5 to 1.0, with each ratio to
be calculated on a rolling four-quarter basis. As of November 28, 2021 , 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 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 first quarter of fiscal 2022, we repurchased 1.5 million shares of our common stock under this authorization for an aggregate of$50.0 million . We did not repurchase any shares of common stock during the second quarter of fiscal 2022. The Company's total remaining share repurchase authorization as ofNovember 28, 2021 , was$1.07 billion . OnDecember 1, 2021 , the Company paid a quarterly cash dividend on shares of its common stock of$0.3125 per share to stockholders of record as of the close of business onNovember 1, 2021 . OnDecember 8, 2021 , our Board announced a quarterly dividend payment of$0.3125 per share to be paid onMarch 2, 2022 , to stockholders of record as of close of business onJanuary 31, 2022 .
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 leases payments, income taxes, pension and postretirement benefits, and unconditional purchase obligations. As ofNovember 28, 2021 , our finance and operating lease liabilities reported in our Condensed Consolidated Balance Sheet totaled$138.5 million and$255.5 million , respectively. We have entered into contracts that are or contain a lease that have not yet commenced with aggregate payments totaling$279.4 million , as ofNovember 28, 2021 . For additional information, refer to Note 15, "Leases", to the Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the fiscal year endedMay 30, 2021 .
The liability for gross unrecognized tax benefits related to uncertain tax
positions was
As ofMay 30, 2021 , we had an aggregate funded pension asset of$109.6 million and an aggregate unfunded postretirement benefit obligation totaling$78.2 million . We expect to make payments totaling approximately$12.3 million and$9.0 million in fiscal 2022 to fund our pension and postretirement plans, respectively. See Note 12 "Pension and Postretirement Benefits", to the 34 -------------------------------------------------------------------------------- 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 fiscal year endedMay 30, 2021 , for further discussion of our pension obligation and factors that could affect estimates of these obligations. As ofNovember 28, 2021 , our 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) totaled approximately$1.83 billion . Approximately$1.38 billion of this balance is due in less than one year. Included in this amount are open purchase orders and other supply agreements totaling approximately$1.20 billion , which are generally settleable in the ordinary course of business. Some are not legally binding and/or may be cancellable. Warehousing service agreements totaling approximately$390 million make up a majority of our remaining unconditional purchase obligations, with various terms of up to 20 years.
Capital Expenditures
We continue to make investments in our business and operating facilities. Our
estimate of capital expenditures for fiscal 2022 is approximately
Supplier Arrangements We 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 ofNovember 28, 2021 andMay 31, 2020 ,$271.6 million and$279.3 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.
Cash Flows
During the first half of fiscal 2022, we used$11.5 million of cash, which was the net result of$262.1 million generated from operating activities,$244.2 million used in investing activities,$23.7 million used in financing activities, and a decrease of$5.7 million due to the effects of changes in foreign currency exchange rates. Cash generated from operating activities totaled$262.1 million and$541.4 million in the first half of fiscal 2022 and 2021, respectively. The decrease in operating cash flows for the first half of fiscal 2022 compared to the first half of fiscal 2021 was primarily driven by lower gross profits, which reflect the impact of realized input cost inflation and higher transportation costs. Comparative changes in working capital balances were also negatively impacted by the timing of accounts payable payments. This was partially offset by decreased tax, interest, and pension contribution payments for the first half of fiscal 2022 compared to fiscal 2021. Tax payments for the first quarter 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. Operating cash flows in the first half of fiscal 2021 benefited from the deferral of$29.2 million of employer payroll taxes under the Coronavirus Aid, Relief, and Economic Security Act. Payments totaling 50% of such amounts will occur in the third quarter of both fiscal 2022 and 2023. Cash used in investing activities totaled$244.2 million and$270.5 million in the first half of fiscal 2022 and 2021, respectively. Net cash outflows from investing activities in the first half of fiscal 2022 and 2021 consisted primarily of capital expenditures totaling$257.5 million and$282.0 million , respectively. Investing cash flows for the first half of fiscal 2021 also included proceeds from divestitures totaling$8.6 million , mainly from the sale of our H.K. Anderson® business. Cash used in financing activities totaled$23.7 million and$760.0 million in the first half of fiscal 2022 and 2021, respectively. Financing activities in the first half of fiscal 2022 principally reflect net proceeds of$499.1 million from the issuance of$500.0 million aggregate principal amount of long-term debt, net short-term borrowing repayments of$121.6 million , cash dividends paid of$282.0 million , and common stock repurchases of$50.0 million . Financing activities in the first half of fiscal 2021 reflect repayments 35 --------------------------------------------------------------------------------
of long-term debt of
Cash Held by International Subsidiaries
The Company had cash and cash equivalents of$68.7 million atNovember 28, 2021 and$79.2 million atMay 30, 2021 , of which$59.4 million atNovember 28, 2021 , and$72.4 million atMay 30, 2021 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.
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 endedMay 30, 2021 .
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