ConAgra Foods, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the 13 weeks ended August 28, 2016. Comparisons are with the 13 weeks ended August 30, 2015. The filing is by ConAgra Foods, Inc.; the planned Lamb Weston separation was still pending.
Financial performance
| Metric | Quarter ended Aug. 28, 2016 | Comparable prior quarter |
|---|---|---|
| Net sales | $2,667.5 million | $2,794.9 million |
| Income from continuing operations | $188.5 million | $167.4 million |
| Continuing-operations diluted EPS | $0.42 | $0.38 |
| Net income (loss) attributable to ConAgra | $186.2 million | $(1,154.1) million |
| Cash from operating activities | $325.9 million | $93.1 million |
| Cash and cash equivalents at period end | $794.6 million | $834.5 million at May 29, 2016 |
- Sales declined 5%. Gross profit, calculated as sales less cost of goods sold, was $724.1 million versus $701.1 million; the corresponding gross margins were approximately 27.1% and 25.1%.
- Reported operating profit was $491.6 million versus $375.0 million. Comparability is significantly affected by $198.2 million of divestiture gains and $163.6 million of goodwill and intangible-asset impairment charges in the current quarter.
- Net interest expense fell to $59.0 million from $80.3 million. Income tax expense rose to $218.7 million from $85.0 million; the effective tax rate was 54% versus 34%.
- Operating cash flow from continuing operations was $336.9 million, up from $63.9 million. Investing activities provided $371.9 million, primarily from divestitures, while financing activities used $737.7 million, including $554.2 million of long-term debt repayment, $85.6 million of share repurchases and $109.5 million of dividends paid.
- At August 28, current assets were $3.407 billion and current liabilities were $2.365 billion. Long-term debt, including current installments, had a carrying value of approximately $4.9 billion. The company reported no commercial paper or revolving-credit borrowings; its $1.5 billion revolver was undrawn, and it was in compliance with covenants.
Material changes and business developments
- Net sales fell across all five reporting segments. Grocery & Snacks and Refrigerated & Frozen sales declined 5% and 8%, respectively; International declined 6%, Foodservice 1%, and Commercial 2%.
- Grocery & Snacks operating profit rose to $180.5 million from $139.5 million, and Refrigerated & Frozen rose to $92.2 million from $81.1 million. Commercial operating profit increased to $346.4 million from $111.8 million, including $198.2 million of gains on business sales. International recorded a $149.2 million operating loss, including the $163.6 million impairment charges.
- Spicetec and JM Swank were sold for combined cash proceeds of $486.3 million, with gains of $145.0 million and $53.2 million, respectively. Private Brands had been sold in February 2016; its prior-year discontinued-operations loss included a $1.81 billion pre-tax write-down.
- The company repaid $550 million of floating-rate notes at maturity. Senior long-term debt ratings remained investment grade.
- The company expected to spin off Lamb Weston in fall 2016, subject to completion and other uncertainties. On September 26, 2016, after quarter-end, it acquired Frontera Foods and Red Fork assets for $108.9 million in cash, net of assumed liabilities and subject to working-capital adjustments.
Outlook, risks and unusual items
- Management expected an effective tax rate of approximately 33%–34% for the remainder of fiscal 2017. It estimated fiscal 2017 capital expenditures of approximately $585 million, including $297 million attributable to Lamb Weston, and stated that available liquidity should cover expected needs for at least the next 12 months. No full-year earnings guidance was provided in the supplied filing text.
- The Supply Chain and Administrative Efficiency Plan is expected to continue over multiple years. The company reported approximately $431.4 million of charges incurred or expected for identified continuing-operations actions; the Board had approved up to $739.0 million in plan expenses, including Private Brands-related expenses.
- A California lead-paint judgment ordered a $1.15 billion abatement fund, with joint and several liability; the company appealed and said exposure could not be estimated. Insurance coverage was uncertain. Separately, a jury verdict against the company in the Jacobs matter was $108.9 million plus interest; the company appealed and expected any ultimate exposure to be limited to its insurance deductible.
- Other disclosed exposures include $54.3 million accrued for environmental matters, supplier-loan guarantees of $67.9 million, and an estimated $58.5 million excess of building lease put prices over fair values, of which $11.1 million was accrued. Management did not expect material losses from these exposures, but outcomes remain subject to uncertainty.
- Management identified risks involving the Lamb Weston separation, restructuring execution, commodity prices and hedging, consumer demand, foreign exchange, impairment of goodwill and intangibles, litigation, and other factors. A Canadian reporting-unit goodwill impairment and brand impairment totaled $163.6 million; the Mexican reporting unit had only a modest estimated fair-value cushion over carrying value.
Investor verification priorities
- Assess underlying operating performance excluding divestiture gains, impairment charges, restructuring costs, and Lamb Weston separation expenses.
- Track sales volumes, pricing and mix, segment margins, and whether cost reductions offset continued sales declines.
- Verify completion, timing, tax treatment, and financial effects of the Lamb Weston spinoff and the treatment of its results as discontinued operations.
- Monitor debt repayment, cash generation, capital spending, dividends, and liquidity after the divestitures and planned separation.
- Follow the California lead-paint appeal and Jacobs appeal, including insurance coverage and any changes in estimated exposure.
- Check whether the Canadian impairment or the Mexican reporting unit’s limited valuation cushion signals further impairment risk.