ConAgra Foods, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, the thirteen weeks ended August 26, 2012; comparisons are with the thirteen weeks ended August 28, 2011. The filing is by ConAgra Foods, Inc. (identified in the request metadata as ConAgra Brands Inc.). Unless stated otherwise, amounts are in millions of dollars.
Financial performance
| Metric | Quarter ended Aug. 26, 2012 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $3,311.9 | $3,105.3 | +6.7% |
| Gross profit | $871.3 | $596.0 | +46.2% |
| Gross margin | 26.3% | 19.2% | +7.1 percentage points |
| Income from continuing operations | $252.2 | $94.0 | +168.3% |
| Net income attributable to ConAgra | $250.1 | $93.8 | +166.6% |
| Diluted EPS | $0.61 | $0.22 | +$0.39 |
| Operating cash flow | $323.9 | $312.0 | +3.8% |
Consumer Foods sales rose 8% to $2,042.6; segment operating profit increased 20% to $235.3. Commercial Foods sales rose 5% to $1,269.3; segment operating profit increased 43% to $139.6. Total segment operating profit was $374.9, up from $293.7. Net interest expense decreased to $49.3 from $52.9. The effective tax rate was approximately 33%, versus 34%.
Cash used in investing activities was $365.3, including $266.9 for the P.F. Chang’s and Bertolli frozen-meals acquisition and $98.6 of capital expenditures. Financing activities provided $53.2, including $232.0 of net short-term borrowings; the company also paid $97.9 of dividends and repurchased $75.0 of shares. Cash increased $13.5 to $116.5.
Financial position and liquidity
At August 26, 2012, cash was $116.5; current assets were $3,475.9 and current liabilities $2,594.3, giving a current ratio of approximately 1.34. At May 27, 2012, the ratio was approximately 1.45. Inventories increased to $2,065.7 from $1,869.6. Notes payable, principally commercial paper, were $272.0; senior long-term debt was $2,663.8 and subordinated debt $195.9. The filing reports long-term debt, including current installments, of approximately $2.9 billion. Management said liquidity was sufficient for at least the next twelve months, supported by cash, operating cash flow, credit facilities, and capital-market access.
The company had a $1.5 billion revolving credit facility with no borrowings outstanding and was in compliance with its covenants. On September 13, 2012, after quarter-end, it issued $750 million of senior unsecured notes in three tranches: three years at 1.35%, 5.5 years at 2.10%, and ten years at 3.25%. The proceeds were intended for general corporate purposes, including repayment of commercial paper. Capital expenditures for fiscal 2013 were estimated to exceed $450 million.
Material changes and drivers
- Reported sales growth included acquisition contributions. Consumer Foods benefited 8% from acquisitions and 5% from net pricing/mix, partly offset by a 4% decline in base-business volume and a 1% foreign-exchange impact.
- Commercial Foods benefited from 4% volume growth and 7% improved net pricing/mix in Lamb Weston specialty potatoes. Lower wheat prices reduced flour-milling sales by approximately $37.6.
- Consumer Foods gross profit benefited from higher sales and supply-chain savings, partly offset by higher commodity costs, notably proteins, peanuts, popcorn, vegetables, and packaging. Advertising and promotion spending increased.
- Reported earnings were affected by derivatives used as economic hedges: $130.2 of net gains remained in general corporate expenses during the quarter, versus $33.5 of net losses in the prior-year quarter. These timing-related gains had not yet been allocated to segment results; the filing expected $37.0 to be reclassified in fiscal 2013 and $34.3 in fiscal 2014 and thereafter.
- The company acquired the P.F. Chang’s and Bertolli frozen-meals business for $266.9 cash on August 21, 2012. It also cited recent acquisitions including Del Monte Canada, Odom’s Tennessee Pride, Kangaroo Brands pita chips, National Pretzel Company, and a majority interest in Agro Tech Foods.
Outlook, risks, contingencies, and unusual items
- Management expected a fiscal 2013 effective tax rate of approximately 34%; no full-year EPS guidance is stated in the provided filing text.
- Management estimated fiscal 2013 capital expenditures above $450 and expected liquidity to cover operating needs, planned investment, and dividends for at least twelve months. The quarterly dividend was raised after quarter-end from $0.24 to $0.25 per share.
- Restructuring plans were expected to generate approximately $9.9 of acquisition-related exit costs, $21.1 under the Administrative Efficiency Plan, and $82.0 under the Network Optimization Plan. Management said further manufacturing-footprint opportunities could lead to additional restructuring expense.
- Legal and environmental exposures include a $69.9 reserve for Beatrice-related environmental matters; the filing says some remaining lead-paint litigation exposure is reasonably possible but cannot be estimated. A first-quarter charge of $7.5 related to peanut-butter-recall matters was recorded, and a U.S. Attorney investigation remained ongoing.
- A jury verdict in a flour-mill explosion case awarded $77.5 in compensatory damages apportioned between ConAgra and another party and $100.0 in punitive damages against ConAgra. The company intended to appeal and believed insurance would cover its share except for a previously accrued $3 deductible.
- Other exposures include guarantees, including $73.2 of potato-supplier loans and $21.2 of tax credits, which management considered unlikely to require payment. The company also disclosed a contingent put option on its Lamb Weston BSW venture; the stated exercise price at quarter-end was $35.4.
- Key operating and market risks include commodity and energy prices, foreign exchange and interest rates, competition, acquisition integration, execution of restructuring and cost initiatives, customer concentration, and access to capital. Wal-Mart and affiliates represented approximately 17% of quarterly sales.
Most important facts for investors to verify
- How much of the earnings increase reflects recurring segment performance versus the $130.2 of derivative gains temporarily recorded in corporate expenses.
- Whether acquisition-driven sales growth and base-business volume trends improve, particularly the 4% decline in Consumer Foods base-business volume.
- Progress integrating acquisitions and delivering expected synergies, and whether restructuring costs exceed current estimates.
- Use of the post-quarter $750 million note proceeds, commercial-paper repayment, debt levels, and the effect of the dividend increase and share repurchases on liquidity.
- Outcomes and insurance coverage for the flour-mill verdict, peanut-butter matters, environmental proceedings, and other guarantees or contingencies.