ConAgra Foods, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first 39 weeks of fiscal 2013, ended February 24, 2013. The filing is by ConAgra Foods, Inc. (now identified in the request as Conagra Brands). Unless otherwise noted, amounts are in millions of dollars.
Business context
ConAgra completed its acquisition of Ralcorp on January 29, 2013, adding private-label food and frozen bakery businesses reported in two new segments. Ralcorp contributed 27 days of results: $291.8 million in sales, with no material effect on quarterly profit. The acquisition was funded with cash, debt and an issuance of common shares.
Financial performance
| Metric | 13 weeks ended Feb. 24, 2013 | 13 weeks ended Feb. 26, 2012 | 39 weeks ended Feb. 24, 2013 | 39 weeks ended Feb. 26, 2012 |
|---|---|---|---|---|
| Net sales | $3,850.5 | $3,396.0 | $10,897.9 | $9,933.0 |
| Income from continuing operations | $123.4 | $280.7 | $592.1 | $557.8 |
| Net income attributable to ConAgra | $120.0 | $280.1 | $581.7 | $554.1 |
| Diluted EPS | $0.29 | $0.67 | $1.40 | $1.32 |
| Net interest expense | $70.6 | $49.7 | $173.3 | $153.2 |
- Quarterly sales increased 13%; year-to-date sales rose 10%. Quarterly net income and diluted EPS fell sharply, while year-to-date net income and diluted EPS increased.
- Quarterly gross profit was $874.0 million, or about 22.7% of sales, compared with $786.6 million, or about 23.2%, a year earlier. SG&A rose to $614.0 million from $356.7 million; reported quarterly earnings included substantial acquisition and other costs.
- Year-to-date operating cash flow was $781.7 million, versus $776.5 million. Capital expenditures were $289.1 million, implying operating cash flow less capital expenditures of approximately $492.6 million. Acquisition-related investing drove total investing outflows to $5.30 billion.
- Cash and equivalents were $723.8 million at quarter-end, up from $103.0 million at May 27, 2012. Current assets were $5.15 billion and current liabilities $3.42 billion.
- Debt increased substantially with the Ralcorp transaction: balance-sheet debt, including current installments and subordinated debt, was approximately $10.6 billion, versus approximately $2.9 billion at May 27, 2012. The company also had a $1.5 billion revolving credit facility with no borrowings; it reported compliance with its financial covenants.
- Quarterly dividends declared were $0.25 per share, up from $0.24. Management estimated fiscal 2013 capital expenditures of approximately $500 million.
Segments and changes versus prior year
- Consumer Foods: Quarterly sales rose 7% to $2.30 billion, supported by acquisitions and pricing/mix, while base-business volumes fell 3%. Operating profit declined 14% to $284.4 million. Higher advertising, acquisition costs and the prior-year $58.6 million ATFL remeasurement gain affected the comparison.
- Commercial Foods: Quarterly sales increased 1% to $1.26 billion and operating profit rose 11% to $166.6 million. Improved Lamb Weston pricing/mix and flour-milling conditions supported profit; softer Asian-market demand reduced volumes. A $10.2 million onion-supplier asset impairment was recorded.
- Ralcorp Food Group and Ralcorp Frozen Bakery Products: Recorded post-acquisition quarterly sales of $212.5 million and $79.3 million, respectively, and operating profit of $3.6 million and $1.4 million. Results included $16.7 million of acquisition-accounting inventory costs across the two segments.
- Year-to-date segment operating profit was $1.29 billion, up from $1.19 billion. Consolidated quarterly sales growth should be viewed in light of the newly acquired Ralcorp results and other acquisitions.
Outlook, risks and unusual items
- Management said cash balances, operating cash flows, credit facilities and capital-market access should provide sufficient liquidity for working capital, planned capital expenditures and dividends for at least the next 12 months. No EPS or revenue guidance was provided in the filing.
- Management expects ongoing integration and restructuring costs. The Network Optimization Plan is expected to continue through fiscal 2014; management noted that further evaluation of the manufacturing footprint and Ralcorp integration could lead to significant additional restructuring expenses.
- ConAgra disclosed a planned flour-milling joint venture, Ardent Mills, with Cargill and CHS. The parties expected a late-2013 closing, subject to financing, regulatory approvals and other conditions; completion and anticipated benefits were uncertain.
- Key operating risks include commodity and energy prices, weather, pricing and promotional effectiveness, competitive conditions, integration and synergy realization, and customer concentration. Walmart accounted for 18% of consolidated sales in the quarter. A major foodservice customer did not renew a significant portion of Lamb Weston potato-product contracts; the company expected an effect in fiscal 2014 and planned to seek replacement business.
- Quarterly comparability was affected by $77.5 million of acquisition-related costs, $16.7 million of Ralcorp inventory fair-value costs, a $10.2 million onion-asset impairment, $8.4 million of integration costs, $4.5 million of Beatrice environmental charges and $13.3 million of incremental tax expense. The prior-year quarter included a $58.6 million ATFL remeasurement gain.
- Other matters include a $4 million reserve following an adverse Mexican tax ruling; $63.6 million in Beatrice-related environmental reserves; ongoing peanut-butter-recall-related matters; and an appeal of a verdict concerning a flour-mill accident. Management stated that, after recorded liabilities, the matters discussed were not expected to have a material adverse effect, though estimates may change.
Important facts for investors to verify
- Whether Ralcorp integration produces expected synergies and how acquisition-related costs, purchase accounting and acquired-business performance evolve.
- Post-acquisition leverage, debt maturities and interest costs, covenant headroom, and liquidity after the subsequent February 28, 2013 repayment of Ralcorp callable notes.
- Consumer Foods’ base-volume trends and whether pricing, marketing and product initiatives stabilize demand.
- The fiscal 2014 effect of the Lamb Weston contract nonrenewal and the success of replacement sales.
- Ardent Mills’ financing, regulatory approvals, closing timetable and expected distributions and benefits.
- Developments in disclosed legal, tax, environmental and supplier-related contingencies, including whether estimates or reserves change.