Business context and reporting period
ConAgra Foods, Inc. (the registrant named in the filing) reported its fiscal 2014 second quarter, the 13 weeks ended November 24, 2013, and first half, the 26 weeks ended November 24, 2013. The quarter’s comparison with 2012 is substantially affected by the January 2013 Ralcorp acquisition. The company reorganized reporting into Consumer Foods, Commercial Foods and Private Brands; prior segment figures were reclassified.
Financial results and key metrics
| Metric | Q2 FY2014 | Q2 FY2013 | First half FY2014 | First half FY2013 |
|---|---|---|---|---|
| Net sales | $4,713.9 million | $3,727.2 million | $8,911.4 million | $7,029.5 million |
| Income from continuing operations | $234.0 million | $217.5 million | $380.1 million | $470.1 million |
| Net income attributable to ConAgra | $248.7 million | $211.6 million | $393.0 million | $461.7 million |
| Diluted EPS | $0.58 | $0.51 | $0.92 | $1.12 |
| Operating cash flow | Not separately presented for the quarter | Not separately presented for the quarter | $555.7 million | $478.6 million |
- Q2 sales increased 27%; continuing-operations income rose about 8%, while diluted EPS from continuing operations increased to $0.54 from $0.52. First-half continuing income and diluted EPS declined despite 27% sales growth.
- Q2 cost of goods sold was $3,699.2 million, implying gross profit of $1,014.7 million and a gross margin of approximately 21.5%, compared with approximately 23.1% a year earlier. These margins are calculated from reported sales and cost of goods sold.
- Segment operating profit in Q2 was $288.9 million for Consumer Foods, $169.2 million for Commercial Foods and $89.4 million for Private Brands. Commercial Foods profit fell 13% year over year; Private Brands’ large increase primarily reflects Ralcorp being included in the current period.
- First-half investing cash outflow was $305.0 million, including $332.2 million of capital expenditures; financing cash outflow was $241.3 million. Cash increased $8.8 million to $192.7 million. Operating cash flow less capital expenditures was $223.5 million, a simple calculated measure, versus $299.5 million in the prior first half.
- At November 24, current assets were $4,755.6 million and current liabilities $3,729.5 million (current ratio approximately 1.28). Total debt and notes payable were approximately $9.6 billion, including $584.9 million of current long-term debt installments, $8,575.2 million of senior long-term debt, $195.9 million of subordinated debt and $233.7 million of notes payable. The company reported compliance with its credit-facility covenants.
- Dividends declared were $0.25 per share for Q2 and $0.50 per share for the first half. Wal-Mart and affiliates represented 18% of Q2 sales and approximately 15% of receivables at period end.
Material changes versus prior comparable periods
- Most of the consolidated sales increase reflects Ralcorp, especially in Private Brands. Excluding that acquisition effect, Consumer Foods sales were essentially flat for Q2 and down 1% for the first half; Commercial Foods sales rose 3% and 4%, respectively.
- Higher acquisition-related debt drove net interest expense up to $95.4 million for Q2 from $53.4 million and to $191.0 million for the first half from $102.7 million.
- Q2 discontinued-operations income included a $32.1 million pre-tax ($19.8 million after-tax) gain from selling Lightlife. The business was sold for $54.7 million cash.
- The first-half effective tax rate fell to approximately 29% from 33%, principally due to tax-method and state-tax estimate changes and settlement of a Mexican tax issue. This benefited reported first-half earnings.
- First-half capital expenditures increased from $179.1 million to $332.2 million. First-half share repurchases declined to $100.0 million from $238.6 million.
Outlook, management commentary, risks and unusual items
- Management expected fiscal 2014 volume to be slightly lower than fiscal 2013 and the full-year effective tax rate to be approximately 32%. Fiscal 2014 capital expenditures were estimated at approximately $650 million.
- Management said Private Brands results had been softer than expected, citing pre-acquisition issues, and was working on sales-force coverage, pricing, customer service and plant efficiency. It expected improvement over time. Lower potato quality was expected to pressure Lamb Weston manufacturing costs and margins over the next few quarters; the segment also faced moderate input-cost inflation and the loss of a sizeable foodservice customer.
- The initial phase of the Supply Chain and Administrative Efficiency Plan was expected to incur approximately $200 million of charges, including $155 million cash and $45 million non-cash charges. The company could not make a good-faith estimate for the full plan. It reported $14.6 million of plan charges in the first half.
- The company had repaid more than $600 million toward its stated goal of repaying $1.5 billion of debt by fiscal year-end 2015, excluding potential proceeds from the proposed Ardent Mills transaction. It planned to refinance $500 million of senior debt due in April 2014. Management believed available cash, operating cash flow, credit facilities and capital-market access would meet needs for at least 12 months.
- Closing of the proposed Ardent Mills flour-milling joint venture was expected in the first quarter of calendar 2014, subject to closing conditions; timing had shifted from the previously expected late 2013.
- A California lead-paint case produced a proposed December 16, 2013 decision ordering a $1.1 billion abatement fund with joint-and-several proposed liability. ConAgra disputed liability and planned to appeal; it said the appeal could take several years and that the ultimate exposure could not be estimated. The filing cautioned that the final outcome could materially affect financial condition, results or liquidity.
- Other disclosed matters include a continuing federal investigation related to the 2007 peanut-butter recall, environmental reserves of $62.6 million, and guarantees and purchase commitments. The company also disclosed $38.9 million of unallocated derivative losses expected to be reclassified to segment results over fiscal 2014 and later periods.
Important facts for investors to verify
- How much of sales, earnings and cash-flow changes reflects Ralcorp, and whether Private Brands improves operationally.
- Debt repayment progress, refinancing of the $500 million maturity, interest expense and liquidity under seasonal working-capital needs.
- Whether Lamb Weston’s potato-quality and customer-volume pressures affect margins as management anticipated.
- Costs, timing and realized benefits of the restructuring plan, including cash versus non-cash charges and the still-unestimated full-plan cost.
- Developments in the California lead-paint appeal, the peanut-butter investigation and other legal or environmental exposures.
- Ardent Mills closing status and proceeds, and the effect of the Lightlife divestiture and tax benefits on comparisons with recurring results.