ConAgra Foods, Inc. Form 10-Q Summary
Reporting period: First quarter of fiscal 2016, the thirteen weeks ended August 30, 2015. The filing compares results with the thirteen weeks ended August 24, 2014. The company reported two continuing segments: Consumer Foods and Commercial Foods; Private Brands and certain related operations were presented as discontinued operations and held for sale.
Financial performance and position
| Metric | Quarter ended Aug. 30, 2015 | Comparable 2014 quarter |
|---|---|---|
| Net sales from continuing operations | $2,793.8 million | $2,763.0 million |
| Operating profit, before corporate expense and other items | $380.3 million | $312.0 million |
| Income from continuing operations | $167.2 million | $96.2 million |
| Net income (loss) attributable to ConAgra | $(1,154.1) million | $482.3 million |
| Diluted EPS, continuing operations | $0.38 | $0.22 |
| Diluted EPS, discontinued operations | $(3.03) | $0.90 |
| Diluted EPS, total | $(2.65) | $1.12 |
- Sales increased 1%. Cost of goods sold fell to $2,093.0 million from $2,172.2 million; gross profit was $700.8 million versus $590.8 million. Gross margin was approximately 25.1%, compared with 21.4%.
- Consumer Foods sales were $1,697.2 million, essentially flat, while operating profit rose 25% to $241.5 million. Commercial Foods sales increased 4% to $1,096.6 million and operating profit rose 17% to $138.8 million.
- Net interest expense declined to $80.3 million from $83.3 million. Income tax expense from continuing operations rose to $84.9 million from $43.1 million; the effective tax rates were approximately 34% and 31%, respectively.
- Cash from operating activities was $66.8 million, including $40.8 million from continuing operations, versus $233.6 million and $160.3 million, respectively, in the prior-year quarter. Capital expenditures were $108.0 million; cash used in investing activities was $125.5 million. Cash declined $46.2 million to $114.3 million.
- Cash dividends paid were $107.1 million; the declared dividend remained $0.25 per share.
- At August 30, cash was $114.3 million. The company had approximately $7.9 billion of long-term debt, including current installments, and $13.1 million of notes payable. Its $1.5 billion revolving facility had no borrowings; it had $1.0 million outstanding under commercial paper. The company reported covenant compliance.
- Total assets were $15.8 billion and stockholders’ equity was $3.4 billion, down from $17.5 billion and $4.6 billion, respectively, at May 31, 2015. Current liabilities exceeded current assets at quarter-end.
Material changes and unusual items
- The principal driver of the consolidated loss was a $1.812 billion pre-tax impairment of Private Brands assets held for sale, or $1.34 billion after tax. The impairment reflected estimated sale proceeds less costs to sell; final sale terms could require further adjustment.
- Private Brands sales were classified as discontinued operations for both periods. Discontinued operations produced a $1,319.6 million after-tax loss in the current quarter, compared with $388.3 million of income in the prior-year quarter, which included a substantial gain related to the formation of Ardent Mills.
- Continuing segment operating profit improved: management cited better plant productivity in Consumer Foods and stronger domestic volume, crop quality and operating efficiencies in Commercial Foods. Consumer Foods sales were flat, with volume flat, price/mix up 2%, and foreign exchange down 2%; Commercial Foods volume increased 5%, partly offset by 1% lower price/mix.
- Operating cash flow from continuing operations fell year over year. Management cited higher incentive compensation and income tax payments, settlement of share-based awards, and larger working-capital increases, including receivables and inventory.
- The SCAE restructuring plan had incurred or was expected to incur approximately $144 million of charges for identified actions; $17.4 million was recognized in the quarter. Separately, an October 1, 2015 post-quarter restructuring announcement estimated approximately $345 million of charges over two to three years, substantially all expected to be cash costs.
- Wal-Mart and affiliates accounted for 21% of quarterly consolidated sales, compared with 20% a year earlier, creating significant customer concentration.
Outlook, risks and contingencies
- Management expected fiscal 2016 effective tax rate of approximately 33%–34% and capital expenditures of approximately $575 million.
- The company planned to sell substantially all Private Brands operations and said sale proceeds would be allocated among debt reduction, share repurchases, growth investment and dividends. The timing and completion of a sale were uncertain.
- Management stated it expected sufficient liquidity for at least the next twelve months from cash, operating cash flow, credit facilities and capital-market access. It had repaid $250 million of senior debt that matured in September 2015, principally using commercial paper.
- Key disclosed risks include the Private Brands sale and valuation, commodity and foreign-exchange volatility, execution of cost-saving and operating plans, customer and competitive pressures, access to capital, and litigation outcomes.
- Lead-paint litigation remained a significant uncertainty: a California judgment ordered a $1.15 billion abatement fund, and the company had appealed. Management said exposure could not be estimated and that insurance coverage was uncertain. Environmental reserves for Beatrice-related matters were $54.0 million.
- Other disclosed exposures included $58.5 million of supplier-loan guarantees and lease-property put options whose estimated excess of put prices over fair values was $103 million, of which $5.7 million had been accrued. Management did not expect material losses from these exposures.
Most important facts for investors to verify
- Whether and on what terms the Private Brands business is sold, and whether the estimated proceeds support the recorded held-for-sale values or lead to additional impairment.
- Underlying continuing-segment earnings and cash generation, separating operating performance from restructuring, corporate costs, discontinued operations and derivative timing.
- Debt maturities, refinancing costs, covenant headroom and liquidity after the September 2015 repayment and planned divestiture.
- Execution, timing and cash costs of the SCAE and subsequent restructuring plans, and whether projected savings materialize.
- Developments in the California lead-paint appeal and other litigation, including potential insurance recovery and any resulting financial exposure.
- Customer concentration, especially Wal-Mart’s share of sales, and the sustainability of segment volume, pricing and margin trends.