ConAgra Foods, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended May 26, 2013 (52 weeks); the filing also reports fourth-quarter results. The company’s fiscal year differs from calendar 2013. ConAgra was a branded, private-label, commercial and foodservice packaged-food producer. Its January 29, 2013 acquisition of Ralcorp materially expanded the private-label business. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Key financial metrics
| Metric | FY2013 | FY2012 | Change / context |
|---|---|---|---|
| Net sales | $15,491.4 | $13,367.9 | Up 16%; includes about four months of Ralcorp results |
| Gross profit | $3,560.0 | $2,812.8 | Gross margin approximately 23.0% vs. 21.0% |
| Net income attributable to ConAgra | $773.9 | $467.9 | Diluted EPS $1.85 vs. $1.12 |
| Cash from continuing operations | $1,412.2 | $1,049.7 | Capital expenditures were $458.7 vs. $336.7; operating cash less capex was approximately $953.5 vs. $713.0 |
| Net interest expense | $275.6 | $204.0 | Up 35%, largely reflecting acquisition financing |
| Cash and cash equivalents | $183.9 | $103.0 | At fiscal year-end |
| Debt and notes payable | Approximately $9.59 billion | Approximately $2.94 billion | FY2013 includes current debt, long-term debt, subordinated debt and commercial paper |
| Total assets | $20,405.3 | $11,441.9 | Increase largely reflects Ralcorp acquisition and acquired goodwill/intangibles |
| Dividends declared per share | $0.99 | $0.95 | Quarterly dividend raised to $0.25 during FY2013 |
Current assets were $4,379.8 and current liabilities were $3,401.3 at year-end, a current ratio of approximately 1.29. The filing states the company was compliant with debt covenants and had no borrowings under its $1.5 billion revolving facility; commercial paper outstanding was $185 million. Segment operating profit was $1,840.7, but this measure excludes general corporate expenses, interest, taxes and equity-method earnings and should not be read as consolidated operating income.
Fourth-quarter results
FY2013 Q4 net sales were $4,593.5, compared with $3,434.9 in FY2012 Q4. Net income attributable to ConAgra was $192.2, versus a loss of $86.2; diluted EPS was $0.45 versus a loss of $0.21. The FY2013 Q4 result included a $25.0 million pre-tax benefit from settlement of an insurance dispute related to the 2007 peanut-butter recall.
Material changes and business developments
- Ralcorp was acquired for approximately $5.07 billion of consideration (about $4.75 billion net of cash acquired), plus assumed liabilities. It contributed $1.25 billion in net sales and $112.8 million in segment operating profit during the period of ownership; results include acquisition-accounting inventory costs.
- Consumer Foods sales rose 8% to $9.07 billion, reflecting acquisitions and pricing/mix gains, partly offset by a 2% base-business volume decline. Consumer Foods operating profit increased 4% to $1.10 billion.
- Commercial Foods sales rose 4% to $5.17 billion; operating profit increased 16% to $631.4 million, supported by potato-product pricing/mix and productivity, partly offset by input costs.
- Ralcorp Food Group and Ralcorp Frozen Bakery Products reported $924.2 million and $329.9 million in sales, respectively, for approximately four months of ownership. Management noted competitive conditions and lower volumes than in periods before ConAgra’s ownership.
- Goodwill increased to $8.45 billion and net brands, trademarks and other intangibles to $3.42 billion. The annual impairment tests reported no impairment.
Outlook, risks and unusual items
- Management expected FY2014 effective tax rate of approximately 34%, excluding unusual transactions or tax events, and capital expenditures of approximately $650 million. It intended to refinance $500 million of senior debt due in April 2014 and said available cash, operating cash flows, credit facilities and capital-market access were expected to cover liquidity needs for at least 12 months.
- The Ralcorp-related restructuring plan was expected to extend over multiple years and could involve material charges. Management could not estimate total costs, their timing or the portion requiring future cash expenditures. FY2013 included $28.4 million of plan charges.
- A significant foodservice customer did not renew a material portion of Lamb Weston potato-product contracts; management expected an unfavorable FY2014 effect and anticipated replacement contracts would only partly offset the impact.
- The planned Ardent Mills joint venture with Cargill and CHS was expected to close late in calendar 2013, subject to approvals and other conditions. ConAgra and Cargill were each to own 44%, with CHS owning 12%.
- Key exposures include commodity and energy prices, pricing and volume elasticity, competition and private-label bidding, customer concentration, acquisition integration and leverage, supply-chain disruption, food safety/product liability, pension costs, regulation and climate-related effects. Wal-Mart and affiliates represented approximately 17% of FY2013 sales.
- Contingencies include an ongoing government investigation related to the 2007 peanut-butter recall and an appealed Illinois explosion verdict. The company said insurance was expected to cover the Illinois damages other than a previously accrued $3 million deductible. Beatrice-related environmental reserves were $63.3 million, with expenditures potentially continuing for up to 18 years. Management did not expect the matters discussed to materially adversely affect financial condition, results or liquidity.
- FY2013 comparability included acquisition-related costs of $114.2 million, restructuring charges of $45.5 million, Ralcorp integration expense of $21.6 million, and the $25.0 million insurance-settlement benefit, among other items. FY2012 included a $396.9 million pension actuarial-loss charge and a $58.6 million ATFL remeasurement gain; reported year-over-year earnings therefore include significant nonrecurring and accounting effects.
Investor verification priorities
- Separate acquired Ralcorp revenue and profit from organic growth, and assess whether its integration costs, synergies and volume trends meet management’s expectations.
- Review debt maturities, refinancing progress, covenant headroom, interest costs and the sustainability of dividends and repurchases after the acquisition-driven increase in leverage.
- Track Consumer Foods base-business volumes and the FY2014 effect of lost Lamb Weston customer contracts, including whether replacement sales offset lost margins.
- Reconcile reported earnings and cash flow for acquisition, restructuring, pension, derivative and insurance-settlement items; review cash requirements for the multiyear restructuring.
- Monitor Ardent Mills closing conditions and economics, and developments in the peanut-butter investigation, Illinois appeal and environmental matters.
- Note that management and the auditor excluded Ralcorp from the FY2013 internal-control assessment; the auditor gave unqualified opinions on the financial statements and on controls within the assessed scope.