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.
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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, health pandemics or outbreaks of disease, or actual or threatened hostilities or war, or other geopolitical uncertainty; disruptions or inefficiencies in our supply chain and/or operations, including from the COVID-19 pandemic; risks related to disruptions in the global economy caused by the ongoing conflict betweenRussia andUkraine ; 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; risks related to the Company's ability to execute on its strategies or achieve expectations related to environmental, social, and governance matters, including as a result of evolving legal, regulatory, and other standards, processes, and assumptions, the pace of scientific and technological developments, increased costs, the availability of requisite financing, and changes in carbon markets; 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 29, 2022 and subsequent filings with theSEC . Results for the second quarter of fiscal 2023 are not necessarily indicative of results that may be attained in the future. 26
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Table of Contents EXECUTIVE OVERVIEWConagra 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 2023 Second Quarter Results
In the second quarter of fiscal 2023, results reflected an increase in net
sales, with organic (excludes the impact of foreign exchange) increases in all
of our segments, in each case compared to the second quarter of fiscal 2022.
Overall gross profit increased primarily as a result of higher net sales,
productivity, and lower transportation costs, which were offset by input cost
inflation, unfavorable operating leverage, and elevated supply chain operating
costs. Overall segment operating profit increased in our Refrigerated & Frozen,
Grocery & Snacks, and Foodservice segments, which was partially offset by
a slight decrease in our International segment. Corporate expenses were higher
primarily due to higher share-based payment expense. Selling, general and
administrative ("SG&A") expenses were also impacted by higher advertising and
promotion expenses offset by other items impacting comparability as discussed
below. We recognized higher equity method investment earnings, higher interest
expense, and higher income tax expense, in each case compared to the second
quarter of fiscal 2022. Excluding items impacting comparability, our effective
tax rate was slightly higher compared to the second quarter of fiscal 2022.
Diluted earnings per share in the second quarter of fiscal 2023 and 2022
was $0.79 and $0.57 , respectively. Diluted earnings per share was affected by
higher net income in the second quarter of fiscal 2023 compared to the second
quarter of fiscal 2022.
Trends Impacting Our Business
During fiscal 2022 and continuing into fiscal 2023, our industry has been
impacted by supply chain disruptions, labor issues, input cost inflation, and
other global macroeconomic challenges. In the second quarter of fiscal 2023,
while we continued to experience significant input cost inflation, our supply
chain productivity and pricing actions assisted in a 316-basis point improvement
to gross margin. We expect input cost inflation to remain elevated throughout
the rest of fiscal 2023, but anticipate continued supply chain productivity and
pricing actions to mitigate some of the inflationary pressures. As our estimates
of inflation for fiscal 2023 continue to change, it is impractical to quantify
the ultimate impact at this time. As we approach our annual goodwill and brand
impairment assessment in the fourth quarter of fiscal 2023, continued increases
to interest rates coupled with the uncertainty in the inflationary environment
creates a heightened risk for future impairments later in the fiscal year.
We continue to monitor the impact of the COVID-19 pandemic on financial markets,
supply chains, commodity costs, the labor environment and aspects of our
business. During the second quarter of fiscal 2023, we continued to experience
elevated demand for our products in the retail segments versus pre-pandemic
levels, but volumes were lower compared to the second quarter of fiscal 2022
primarily due to the elasticity impact from our inflation-driven pricing
actions. We experienced higher demand for our foodservice products across all of
our major markets during the second quarter of fiscal 2023 compared to the
second quarter of fiscal 2022 as consumer traffic in away-from-home food outlets
continues to be strong, approaching pre-pandemic levels. We expect these trends
to continue throughout the remainder of fiscal 2023.
We also continue to expect recovery from the higher costs we experienced in
fiscal 2021 and which continued to rise in fiscal 2022 during the COVID-19
pandemic and we expect a decrease in supply chain operating costs during the
second half of fiscal 2023 as we continue to recover our service levels. We will
continue to evaluate the evolving macroeconomic environment to take action to
mitigate the impact on our business, consolidated results of operations, and
financial condition.
Although we are a North American focused company with no operations in or direct
exposure to Russia and Ukraine , starting in the second half of fiscal 2022, we
have experienced shortages in materials and increased costs for transportation,
energy, and raw material due in part to the negative impact of the
Russia -Ukraine military conflict on the global economy. To date, however, the
conflict between Russia and Ukraine has not had a material impact on our
business, financial condition, or result of operations.
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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 2023 included the following:
? charges totaling
occurring at one of our manufacturing facilities and
? net charges totaling
our restructuring plans.
Items of note impacting comparability for the second quarter of fiscal 2022 included the following:
? charges totaling$39.2 million ($32.2 million after-tax) related to the impairment of businesses previously held for sale, ? a gain of$14.6 million ($11.0 million after-tax) related to a legal settlement,
? net charges totaling
our restructuring plans, and
? a gain of
from the sale of a legacy investment.
Items of note impacting the comparability for the first half of fiscal 2023 included the following:
? charges totaling
goodwill and Birds Eye® brand impairments in connection with certain reporting
unit changes within our Refrigerated & Frozen segment,
? charges totaling
impairment of businesses previously held for sale,
? charges totaling
occurring at one of our manufacturing facilities, and
? net charges totaling
our restructuring plans.
Items of note impacting the comparability for the first half of fiscal 2022 included the following:
? charges totaling$39.2 million ($32.2 million after-tax) related to the impairment of businesses previously held for sale,
? net charges totaling
with our restructuring plans,
? a gain of $14.6 million ($11.0 million after-tax) related to a legal
settlement,
? an income tax benefit of
matter that was previously reserved, and
? a gain of
from the sale of a legacy investment.
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Table of Contents Restructuring Plans 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 2023, 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 27, 2022 , we had approved the incurrence of$184.0 million ($57.2 million of cash charges and$126.8 million of non-cash charges) for several projects associated with the Conagra Restructuring Plan. As ofNovember 27, 2022 , we had incurred or expected to incur$152.6 million of charges ($50.7 million of cash charges and$101.9 million of non-cash charges) for actions identified to date under the Conagra Restructuring Plan. In the second quarter of fiscal 2023 and 2022, we recognized charges of$1.8 million and$6.6 million , respectively, in connection with the Conagra Restructuring Plan. In the first half of fiscal 2023 and 2022, we recognized charges of$5.9 million and$15.1 million , respectively, in connection with this plan. We expect to incur costs related to the Conagra Restructuring Plan over a multi-year period. As of the end of the first quarter of fiscal 2023, we had substantially completed our Pinnacle Integration Restructuring Plan related to our acquisition of Pinnacle in 2018 for the purpose of achieving significant cost synergies (the "Pinnacle Integration Restructuring Plan"). In the second quarter of fiscal 2022, we recognized charges of$5.8 million in connection with the Pinnacle Integration Restructuring Plan. In the first half of fiscal 2023 and 2022, we recognized charges of$0.8 million and$13.1 million , respectively, in connection with this plan. Our total pre-tax expenses for this plan related to our continuing operations are expected to be$344.8 million ($283.6 million of cash charges and$61.2 million of non-cash charges). 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
14 "Business Segments and Related Information", to the Condensed Consolidated
Financial Statements contained in this report for further discussion.
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Table of ContentsNet Sales Net Sales ($ in millions) Thirteen Weeks Ended
Twenty-Six Weeks Ended
November November November November
Reporting Segment 27, 2022 28, 2021 % Inc (Dec) 27, 2022 28, 2021 % Inc (Dec)
Grocery & Snacks $ 1,349.9 $ 1,264.5 7 % $ 2,538.2 $ 2,339.6 8 %
Refrigerated & Frozen 1,421.5 1,285.9 11 % 2,629.1 2,387.7 10 %
International 258.7 262.2 (1 )% 492.2 498.8 (1 )%
Foodservice 282.8 246.3 15 % 557.7 486.1 15 %
Total $ 3,312.9 $ 3,058.9 8 % $ 6,217.2 $ 5,712.2 9 %
Net sales for the second quarter and first half of fiscal 2023 in our Grocery &
Snacks segment included an increase in price/mix of 19% and 18%, respectively,
when compared to the prior-year period due to favorability in inflation-driven
pricing and favorable brand mix. Volumes decreased by 12% and 9% for the second
quarter and first half of fiscal 2023, respectively, when compared to the
prior-year period. The decrease in volumes was primarily due to the elasticity
impact from inflation-driven pricing actions.
Net sales for the second quarter and first half of fiscal 2023 in our
Refrigerated & Frozen segment reflected an increase in price/mix of 16% and 14%,
respectively, when compared to the prior-year period due to favorability in
inflation-driven pricing. Volumes decreased by 5% and 4% for the second quarter
and first half of fiscal 2023, respectively, when compared to the prior-year
period primarily due to the elasticity impact from inflation-driven pricing
actions.
Net sales for the second quarter of fiscal 2023 in our International segment
reflected a 13% increase in price/mix, an 11% decrease in volumes, and a 3%
decrease due to unfavorable foreign exchange rates, in each case compared to the
prior-year period. Net sales for the first half of fiscal 2023 in our
International segment reflected an 11% increase in price/mix, a 9% decrease in
volumes, and a 3% decrease due to unfavorable foreign exchange rates, in each
case compared to the prior-year period. The decrease in volumes was driven by
the elasticity impact from inflation-driven pricing actions. The increase in
price/mix was primarily due to favorability in inflation-driven pricing.
Net sales for the second quarter and first half of fiscal 2023 in our
Foodservice segment reflected an increase in price/mix of 18% and 19%,
respectively, compared to the prior-year period, reflecting inflation-driven
pricing. Volumes decreased by 3% and 4% in the second quarter and first half of
fiscal 2023, respectively, when compared to the prior-year period. The decrease
in volumes was driven by the elasticity impact from inflation-driven pricing
actions.
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SG&A Expenses (includes general corporate expenses)
SG&A expenses totaled$372.7 million for the second quarter of fiscal 2023, an increase of$27.3 million , as compared to the second quarter of fiscal 2022. SG&A expenses for the second quarter of fiscal 2023 reflected the following:
Items impacting comparability of earnings
? net charges of$1.7 million in connection with our restructuring plans.
Other changes in expenses compared to the second quarter of fiscal 2022
? an increase in share-based payment expense of
an increase to the estimated level of achievement of certain performance
targets and an increase in our share price,
? an increase in advertising and promotion expense of
increased investment in modern marketing, including social and digital
platforms,
? an increase in consulting and professional fees of $5.5 million ,
? an increase in salary, wage, and fringe benefit expense of
? an increase in charitable donations of$3.8 million , ? an increase in short-term incentive expense of$2.9 million , and ? an increase in travel and entertainment expense of$2.5 million .
SG&A expenses for the second quarter of fiscal 2022 included the following items impacting the comparability of earnings:
? expense of
held for 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.
SG&A expenses totaled
Items impacting comparability of earnings
? charges totaling
impairments in connection with certain reporting unit changes within our
Refrigerated & Frozen segment,
? charges totaling $26.7 million related to the impairment of businesses
previously held for sale, and
? net charges of $6.4 million in connection with our restructuring plans.
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Other changes in expenses compared to the first half of fiscal 2022
? an increase in share-based payment expense of
an increase to the estimated level of achievement of certain performance
targets, more significant award vesting in the current period, and volatility
between periods in our share price,
? an increase consulting and professional fees of
information technology implementation services,
? an increase in advertising and promotion expenses of
increased investment in modern marketing, including social and digital
platforms,
? an increase in salary, wage, and fringe benefit expense of
? an increase in charitable donations of$5.0 million , ? an increase in travel and entertainment expense of$4.6 million ,
? a decrease in deferred compensation expense of
market gains in the prior-year period,
? an increase in short-term incentive expense of $3.9 million , and
? a decrease in depreciation expense of $3.0 million .
SG&A expenses for the first half of fiscal 2022 included the following items impacting the comparability of earnings:
? expense of
held for sale,
? a net benefit of $14.6 related to a legal settlement,
? expenses of $11.9 million in connection with our restructuring plans,
? a benefit of
? expenses of
matters.
Segment Operating Profit (Earnings before general corporate expenses, pension
and postretirement non-service income, interest expense, net, income taxes, and
equity method investment earnings)
Operating Profit
($ in millions) Thirteen Weeks Ended Twenty-Six Weeks Ended
November November November 27, November
Reporting Segment 27, 2022 28, 2021 % Inc (Dec) 2022 28, 2021 % Inc (Dec)
Grocery & Snacks $ 340.4 $ 249.2 37 % $ 590.8 $ 465.1 27 %
Refrigerated & Frozen 250.3 168.3 49 % 34.0 325.9 (90 )%
International 36.9 37.1 (1 )% 63.8 71.2 (10 )%
Foodservice 28.5 13.8 106 % 29.7 34.1 (13 )%
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Operating profit in our Grocery & Snacks segment for the second quarter of fiscal 2023 reflected an increase in gross profits of$78.8 million compared to the second quarter of fiscal 2022. The higher gross profit was driven by the net sales growth discussed above, partially offset by the impacts of input cost inflation, unfavorable fixed cost leverage, and elevated supply chain operating costs. The increase in gross profits was partially offset by higher SG&A expenses, excluding items impacting comparability, as discussed above. Operating profit in the second quarter of fiscal 2022 included$2.0 million of net charges related to our restructuring plans and expense of$22.4 million related to the impairment of businesses previously held for sale. Operating profit in our Grocery & Snacks segment for the first half of fiscal 2023 reflected an increase in gross profits of$113.6 million compared to the first half of fiscal 2022. The higher gross profit was driven by the net sales growth discussed above, partially offset by the impacts of input cost inflation, unfavorable fixed cost leverage, and elevated supply chain operating costs. The increase in gross profits was partially offset by higher SG&A expenses, excluding items impacting comparability, as discussed above. Operating profit of the Grocery & Snacks segment was impacted by net expense of$0.2 million and$6.1 million related to our restructuring plans in the first half of fiscal 2023 and 2022, respectively. The first half of fiscal 2023 included expenses of$3.2 million related to a municipal water break that impacted one of our production facilities. The first half of fiscal 2022 included expense of$22.4 million related to the impairment of businesses previously held for sale. Operating profit in our Refrigerated & Frozen segment for the second quarter of fiscal 2023 reflected an increase in gross profits of$78.6 million compared to the second quarter of fiscal 2022. The increase was driven by the net sales growth discussed above, partially offset by the impacts of input cost inflation, unfavorable fixed cost leverage, and elevated supply chain operating costs. The increase in gross profits was partially offset by higher SG&A expenses, excluding items impacting comparability, as discussed above, including increased advertising and promotion expenses. Operating profit of our Refrigerated & Frozen segment included charges of$7.9 million in the second quarter of fiscal 2023 associated with a fire occurring at one of our manufacturing facilities. Operating profit in the second quarter of fiscal 2022 included charges of$12.0 million related to the impairment of businesses previously held for sale. Operating profit of the Refrigerated & Frozen segment was impacted by net expense of$0.8 million and$6.8 million related to our restructuring plans in the second quarter of fiscal 2023 and 2022, respectively. Operating profit in our Refrigerated & Frozen segment for the first half of fiscal 2023 reflected an increase in gross profits of$100.4 million compared to the first half of fiscal 2022. The increase was driven by the net sales growth discussed above, partially offset by the impacts of input cost inflation, unfavorable fixed cost leverage, and elevated supply chain operating costs. The increase in gross profits was partially offset by higher SG&A expenses, excluding items impacting comparability, as discussed above, including increased advertising and promotion expenses. Operating profit in the first half of fiscal 2023 included charges of$385.7 million related to the goodwill and Birds Eye® brand impairments in connection with certain reporting unit changes within our Refrigerated & Frozen segment and charges of$7.9 million associated with a fire occurring at one of our manufacturing facilities. Operating profit in the first half of fiscal 2023 and 2022 included charges of$5.7 million and$12.0 million , respectively, related to the impairment of businesses previously held for sale. Operating profit of the Refrigerated & Frozen segment was impacted by net expense of$1.4 million and$11.8 million related to our restructuring plans in the first half of fiscal 2023 and 2022, respectively. Operating profit in our International segment for the second quarter of fiscal 2023 reflected flat gross profits when compared to the prior-year period. Operating profit in our International segment for the first half of fiscal 2023 reflected a decrease in gross profits of$6.5 million when compared to the prior-year period due to the impacts of input cost inflation and unfavorable fixed cost leverage. 33
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Operating profit in our Foodservice segment for the second quarter of fiscal 2023 reflected an increase in gross profits of$10.8 million compared to the second quarter of fiscal 2022. The increase in gross profit was driven by the net sales growth discussed above, partially offset by the impacts of input cost inflation and unfavorable fixed cost leverage. Operating profit in the second quarter of fiscal 2022 included expense of$4.8 million related to the impairment of businesses previously held for sale. Operating profit in our Foodservice segment for the first half of fiscal 2023 reflected an increase in gross profits of$12.2 million compared to the first half of fiscal 2022. The increase in gross profit was driven by the net sales growth discussed above, partially offset by the impacts of input cost inflation, unfavorable fixed cost leverage, and elevated supply chain operating costs. Operating profit in the first half of fiscal 2023 and 2022 included expense of$20.5 million and$4.8 million , respectively, related to the impairment of businesses previously held for sale.
Pension and Postretirement Non-service Income
In the second quarter of fiscal 2023, pension and postretirement non-service income was$6.1 million , a decrease of$10.0 million compared to the second quarter of fiscal 2022. In the first half fiscal 2023, pension and postretirement non-service income was$12.2 million , a decrease of$20.0 compared to the first half of fiscal 2022. The second quarter and first half of fiscal 2023 reflected higher interest costs. Interest Expense, Net Net interest expense was$100.3 million and$94.9 million for the second quarter of fiscal 2023 and 2022, respectively. Net interest expense was$197.4 million and$189.1 million for the first half of fiscal 2023 and 2022, respectively. The increase was driven by a higher weighted average interest rate on outstanding debt. See Note 3, "Debt and Revolving Credit Facility", to the Condensed Consolidated Financial Statements contained in this report for further discussion. Income Taxes In the second quarter of fiscal 2023 and 2022, we recognized income tax expense of$122.5 million and$84.2 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 24.3% and 23.4% for the second quarter of fiscal 2023 and 2022, respectively. In the first half of fiscal 2023 and 2022, we recognized income tax expense of$136.9 million and$153.9 million , respectively. The effective tax rate was approximately 31.0% and 23.1% for the first half of fiscal 2023 and 2022, respectively. The effective tax rate for the first half of fiscal 2023 was principally impacted by the non-deductible goodwill impairments noted above. See Note 9, "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$49.3 million and$29.5 million for the second quarter of fiscal 2023 and 2022, respectively. Equity method investment earnings were$98.5 million and$49.7 million for the first half of fiscal 2023 and 2022, respectively. Ardent Mills earnings for the second quarter and first half of fiscal 2023 reflected favorable market conditions, including the joint venture's effective management through the recent volatility in the wheat markets. Earnings Per Share Diluted earnings per share in the second quarter of fiscal 2023 and 2022 was$0.79 and$0.57 , respectively. Diluted earnings per share in the first half of fiscal 2023 and 2022 was$0.63 and$1.06 , respectively. The increase in diluted earnings per share for the second quarter of fiscal 2023 reflected higher net income. The decrease in diluted earnings per share for the first half of fiscal 2023 reflected lower net income and was largely impacted by the goodwill and brand impairment charges in the first quarter of fiscal 2023. 34
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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, other contractual obligations, and payment of anticipated quarterly dividends for at least the next twelve months and the foreseeable future thereafter.
Borrowing Facilities and Long-Term Debt
AtNovember 27, 2022 , we had a revolving credit facility (the "Revolving Credit Facility") with a syndicate of financial institutions providing for a maximum aggregate principal amount outstanding at any one time of$2.0 billion (subject to increase to a maximum aggregate principal amount of$2.5 billion with the consent of the lenders). The Revolving Credit Facility matures onAugust 26, 2027 and is unsecured. The Company may request the term of the Revolving Credit Facility be extended for additional one-year or two-year periods from the then-applicable maturity date on an annual basis. We have historically used a credit facility principally as a back-up for our commercial paper program. As ofNovember 27, 2022 , there were no outstanding borrowings under the Revolving Credit Facility. As ofNovember 27, 2022 , we had$254.0 million outstanding under our commercial paper program. The highest level of borrowings during the first half of fiscal 2023 was$452.0 million . We had$180.0 million outstanding under our commercial paper program as ofMay 29, 2022 . During the first quarter of fiscal 2023, we entered into an unsecured Term Loan Agreement (the "Term Loan Agreement") with a syndicate of financial institutions. The Term Loan Agreement provided for delayed draw term loans to the Company in an aggregate principal amount of up to$500.0 million . The Term Loan Agreement matures onAugust 26, 2025 . During the second quarter of fiscal 2023, we borrowed the full$500.0 million aggregate principal amount available under the Term Loan Agreement. The proceeds were used to repay the full outstanding$250.0 million aggregate principal amount of our 3.25% senior notes on their maturity date ofSeptember 15, 2022 as well as to repay outstanding borrowings under our commercial paper program. For additional information about our long-term debt balances, refer to Note 3, "Debt and Revolving Credit Facility", to the Condensed Consolidated Financial Statements contained in this report and Note 3, "Long-Term Debt", to the Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the fiscal year endedMay 29, 2022 . The weighted average coupon interest rate of long-term debt obligations outstanding as ofNovember 27, 2022 , 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. 35
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As of the end of the second quarter of fiscal 2023, our senior long-term debt
ratings were all investment grade. A significant downgrade in our credit ratings
would not affect our ability to borrow amounts under the Revolving Credit
Facility, although borrowing costs would increase. A downgrade of our short-term
credit ratings would impact our ability to borrow under our commercial paper
program by negatively impacting borrowing costs and causing shorter durations,
as well as making access to commercial paper more difficult, or impossible.
Our most restrictive debt agreement (the Revolving Credit Facility) generally
requires our ratio of earnings before interest, taxes, depreciation and
amortization ("EBITDA") to interest expense not be less than 3.0 to 1.0 and our
ratio of funded net debt to EBITDA not to exceed 4.75 to 1.0 through the third
quarter of fiscal 2023 and 4.5 to 1.0 for each quarter thereafter. Each ratio is
to be calculated on a rolling four-quarter basis. As of November 27, 2022 , 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 half of fiscal 2023, we repurchased 4.2 million shares of our common
stock under this authorization for an aggregate of $150.0 million . The Company's
total remaining share repurchase authorization as of November 27, 2022 was
$916.6 million .
On December 1, 2022 , the Company paid a quarterly cash dividend on shares of its
common stock of $0.33 per share to stockholders of record as of close of
business on November 3, 2022 . On December 21, 2022 , our Board announced a
quarterly dividend payment of $0.33 per share to be paid on March 2, 2023 , to
stockholders of record as of close of business on January 30, 2023 .
Contractual Obligations
As part of our ongoing operations, we enter into contractual arrangements that
obligate us to make future cash payments. These obligations impact our liquidity
and capital resource needs. In addition to principal and interest payments on
our outstanding long-term debt and notes payable balances, discussed above, our
contractual obligations primarily consist of lease payments, income taxes,
pension and postretirement benefits, and unconditional purchase obligations.
As of November 27, 2022 , our finance and operating lease liabilities reported in
our Condensed Consolidated Balance Sheet totaled $118.8 million and
$248.7 million , respectively. We have entered into contracts that are or contain
a lease that have not yet commenced with aggregate payments totaling
$269.6 million , as of November 27, 2022 . For additional information, refer to
Note 14, "Leases", to the Consolidated Financial Statements contained in the
Company's Annual Report on Form 10-K for the fiscal year ended May 29, 2022 .
The liability for gross unrecognized tax benefits related to uncertain tax
positions was
As ofMay 29, 2022 , we had an aggregate funded pension asset of$162.1 million and an aggregate unfunded postretirement benefit obligation totaling$61.4 million . We expect to make payments totaling approximately$12.4 million and$8.1 million in fiscal 2023 to fund our pension and postretirement plans, respectively. See Note 11 "Pension and Postretirement Benefits", to the Condensed Consolidated Financial Statements contained in this report and Note 17, "Pension and Postretirement Benefits", to the Consolidated Financial Statements and "Critical Accounting Estimates - Employee-Related Benefits" contained in the Company's Annual Report on Form 10-K for the fiscal year endedMay 29, 2022 , for further discussion of our pension obligation and factors that could affect estimates of these obligations. As ofNovember 27, 2022 , 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$2.84 billion . Approximately$1.93 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$1.73 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$626 millionmake up a majority of our remaining unconditional purchase obligations with various terms of up to 10 years.
We expect to have sufficient cash flows from the above cited sources to meet the material cash requirements of these contractual obligations as they become settleable in the ordinary course of business.
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Table of Contents Capital Expenditures
We continue to make investments in our business and operating facilities. Our
estimate of capital expenditures for fiscal 2023 is approximately
Supplier Arrangements Certain suppliers have access to third-party services that allow them to view our scheduled payments online. These third-party services also allow suppliers to finance advances on our scheduled payments at the sole discretion of the supplier and the third party. Balances remain as obligations to our suppliers as stated in our supplier agreements and are either reflected in accounts payable or in notes payable within our Condensed Consolidated Balance Sheets depending on the nature of the arrangement. The associated payments are included in net cash flows from operating activities for those balances reflected in accounts payable, whereas the proceeds and payments associated with short-term borrowings are reflected as financing activities within our Condensed Consolidated Statements of Cash Flows. As ofNovember 27, 2022 andMay 29, 2022 ,$386.8 million and$378.3 million , respectively, of our total accounts payable was payable to suppliers who utilize these third-party services. As ofNovember 27, 2022 , we also had approximately$109.2 million of short-term borrowings related to these arrangements.
The program commenced at about the same time that we began an initiative to negotiate extended payment terms with our suppliers. 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 2023, we used$43.6 million of cash, which was the net result of$297.8 million generated from operating activities,$181.9 million used in investing activities,$157.4 million used in financing activities, and a decrease of$2.1 million due to the effects of changes in foreign currency exchange rates. Cash generated from operating activities totaled$297.8 million and$262.1 million in the first half of fiscal 2023 and 2022, respectively. The increase in operating cash flows for the first half of fiscal 2023 compared to the first half of fiscal 2022 was primarily driven by higher gross profits and the accelerated receipt of our outstanding receivables. In the first half of fiscal 2023, we utilized certain customer payment term offerings to accelerate receipt on our outstanding receivables in exchange for a slightly higher prompt pay discount, which increased our cash flow from operations by approximately$152 million . This was partially offset by higher inventory balances, largely due to input cost inflation and some inventory rebuild from previous supply chain constraints, and timing of payments of accounts payable. Cash used in investing activities totaled$181.9 million and$244.2 million in the first half of fiscal 2023 and 2022, respectively. Net cash outflows from investing activities in the first half of fiscal 2023 and 2022 consisted primarily of capital expenditures totaling$188.4 million and$257.5 million , respectively. Cash used in financing activities totaled$157.4 million and$23.7 million in the first half of fiscal 2023 and 2022, respectively. Financing activities in the first half of fiscal 2023 principally reflected repayments of long-term debt of$265.8 million , the issuance of long-term debt totaling$500.0 million , net short-term borrowing issuances of$75.4 million , cash dividends paid of$308.6 million , and common stock repurchases of$150.0 million . Financing activities in the first half of fiscal 2022 principally reflected 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 .
Cash Held by International Subsidiaries
The Company had cash and cash equivalents of$39.7 million atNovember 27, 2022 and$83.3 million atMay 29, 2022 , of which$32.8 million atNovember 27, 2022 , and$74.7 million atMay 29, 2022 was held in foreign countries. A deferred tax liability is provided for certain undistributed foreign earnings in fiscal 2023 that are not considered to be indefinitely reinvested or cannot be remitted in a tax-neutral transaction. Other undistributed foreign earnings are invested indefinitely and therefore we have not provided deferred taxes on those earnings. 37
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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 29, 2022 .
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