ConAgra Foods, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2010, the 13 weeks ended August 30, 2009; comparable period ended August 24, 2008. The filing is for ConAgra Foods, Inc. (now associated with the Conagra Brands name in the request).
Financial performance
| Metric | Q1 FY2010 | Q1 FY2009 | Change |
|---|---|---|---|
| Net sales | $2,961.4 million | $3,056.5 million | Down 3% |
| Income from continuing operations | $166.5 million | $107.6 million | Up 55% |
| Net income attributable to ConAgra | $165.9 million | $442.4 million | Prior period included large divestiture gain |
| Diluted EPS | $0.37 | $0.94 | Prior period included $0.71 from discontinued operations |
| Operating cash flow | $262.6 million | $(437.5) million | Continuing-operations cash flow was $264.2 million versus $198.2 million |
| Capital expenditures | $118.9 million | $106.3 million | Continuing operations |
Cost of goods sold declined to $2,244.9 million from $2,465.0 million. Implied gross profit was $716.5 million, or approximately 24.2% of sales, versus $591.5 million, or approximately 19.4%. The improvement reflected lower input costs and operating efficiencies. SG&A increased 16% to $426.4 million, including higher incentive compensation, health costs, and advertising. Net interest expense declined to $41.5 million from $50.1 million; equity-method earnings increased to $8.9 million from $0.9 million. The effective tax rate was approximately 35%, compared with 38%.
Segments and material period comparisons
- Consumer Foods: Sales rose 1% to $1,860.1 million; operating profit increased 34% to $249.9 million. Pricing and mix improved 3%, while volume declined about 1%. Slim Jim sales fell 58% following the Garner plant accident; Healthy Choice and Marie Callender’s frozen-meal sales rose 26% and 15%, respectively.
- Commercial Foods: Sales fell 9% to $1,101.3 million, primarily because lower wheat costs were passed through by flour milling, reducing sales by $115 million. Operating profit rose 5% to $140.8 million, with improved milling and specialty-potato margins partly offset by weaker foodservice-related volumes.
- Prior-year continuing results included an approximately $19 million pre-tax gain on the Pemmican sale and approximately $9 million of restructuring charges. Prior-year discontinued results included the trading and merchandising divestiture gain of approximately $488 million before tax ($299 million after tax), plus operating earnings. These items explain much of the year-over-year difference in total net income and EPS.
Balance sheet, liquidity and debt
- At August 30, 2009, cash was $289.7 million, current assets were $3,562.7 million, and current liabilities were $1,651.0 million; the current ratio was approximately 2.2.
- Total liabilities were $6,430.6 million and stockholders’ equity was $4,799.8 million. Long-term debt, including current installments, was reported at approximately $3.5 billion; contractual debt and capital-lease obligations totaled $3.6 billion.
- The company had a $1.5 billion revolving credit facility, with no borrowings outstanding, and reported compliance with its financial covenants. Management said available cash, operating cash flows, credit facilities, and capital-market access should cover working capital, planned capital spending, and dividends for at least 12 months.
- Fiscal 2010 capital expenditures were estimated at approximately $600 million, including about $90 million for a planned sweet-potato processing facility and about $35 million related to Slim Jim recovery. The board approved a quarterly dividend increase to $0.20 per share from $0.19 after quarter-end.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- The June 9, 2009 accidental explosion at the Garner, North Carolina facility disrupted the primary Slim Jim production site; its packaging area was expected to remain out of service for the foreseeable future. The quarter recorded $37 million of related charges, offset by $34 million of insurance recoveries, for a net loss of about $3 million. Approximately $34 million of expected recoveries was recorded as a receivable, and the company subsequently received $39 million in insurance advances. Equipment with a book value of approximately $12 million remained inaccessible and could require further impairment. Management did not expect a material adverse effect, subject to production, insurance, and brand-related uncertainties.
- The company planned a new sweet-potato processing plant near Delhi, Louisiana, scheduled to open in November 2010; approximately $34 million of state and local incentives had been secured, with additional federal incentives being pursued.
- Key risks cited include raw-material and energy prices, pricing and demand, economic and foodservice conditions, execution of cost-saving and innovation plans, currency movements, access to capital, regulation, recalls, and the Garner accident and related insurance recoveries.
- Contingencies include $87.6 million of reserves for Beatrice environmental matters, with spending potentially continuing for up to 20 years; active lead-paint litigation; and a CFTC investigation concerning trading activity of a former subsidiary. Management believed the identified matters would not materially adversely affect the company, while acknowledging estimates could change.
- Gross unrecognized tax benefits were $79.0 million, plus $15.9 million of related interest and penalties. The filing estimated these tax benefits could decrease by $8 million to $12 million over the following 12 months.
- Wal-Mart and affiliates represented approximately 18% of quarterly sales, creating customer concentration exposure. The company also disclosed $110.6 million of guarantees and other commercial commitments; certain supplier and divested-business guarantees were considered unlikely to require payment.
Important facts for investors to verify
- How quickly Slim Jim production and sales recover, and whether further Garner-related costs or insurance adjustments arise.
- Whether lower commodity costs, pricing, and supply-chain savings can sustain improved margins as input prices and demand change.
- Progress and total cost of the Louisiana sweet-potato plant and the availability of additional incentives.
- Debt maturities, borrowing costs, covenant headroom, and the company’s ability to fund planned investment and dividends.
- Developments in environmental, lead-paint, CFTC, and tax matters, including any changes to recorded reserves or management’s assessments.