CONAGRA BRANDS INC. quarterly report, Q2 FY2016

Business context and reporting period

ConAgra Foods, Inc. filed this Form 10-Q for the 13 and 26 weeks ended November 29, 2015 (fiscal 2016 second quarter and first half). The company reported Consumer Foods and Commercial Foods as continuing segments; Private Brands was classified as discontinued operations and held for sale.

Key financial metrics

Q2 sales declined 1%; continuing income attributable to ConAgra fell to $161.4 million from $212.8 million. First-half diluted EPS was $(2.29), including a $3.04 loss per share from discontinued operations. Q2 discontinued operations reported a $6.5 million after-tax loss, versus a $202.8 million loss a year earlier.

Q2 segment operating profit increased 10% in Consumer Foods to $330.9 million and 11% in Commercial Foods to $162.2 million. Segment operating margins, calculated as operating profit divided by segment sales, were approximately 16.7% and 14.6%, respectively. Q2 gross profit from continuing operations was $828.0 million, or approximately 26.8% of sales; SG&A was $524.7 million, up $132.7 million year over year, substantially reflecting restructuring and other higher costs.

At November 29, 2015, cash was $95.9 million; current assets were $3.91 billion and current liabilities $3.95 billion. Long-term debt, including current installments, was approximately $7.5 billion; notes payable were $195.0 million. Total cash from operations in the first half was $318.0 million, capital expenditures for continuing operations were $176.7 million, and cash dividends paid were $215.0 million.

Material changes versus comparable periods

• Consumer Foods Q2 sales declined 3%, reflecting a 3% volume decrease, partly offset by 2% favorable price/mix; foreign exchange reduced sales by 2%. Commercial Foods sales grew 1%, with 4% higher volume partly offset by 3% lower price/mix.
• Continuing segment operating profit improved in both segments, supported by productivity and lower commodity costs in Consumer Foods and higher Lamb Weston volumes in Commercial Foods. Consumer Foods also faced lower sales volumes and unfavorable foreign exchange.
• Q2 SCAE restructuring charges were $133.0 million ($82.2 million after tax), compared with $10.3 million a year earlier. First-half charges were $150.4 million. The company said it had incurred or expected approximately $472.9 million of charges for identified plan actions, including $376.5 million cash and $96.4 million non-cash charges; plan costs are expected to continue over multiple years.
• Private Brands impairment charges were $86.3 million pre-tax in Q2 and $1.90 billion pre-tax in the first half. These drove the first-half discontinued-operations loss and the consolidated net loss.
• First-half operating cash flow declined from $417.7 million to $318.0 million. Management attributed the continuing-operations decline mainly to timing of income-tax and incentive-compensation payments.

Outlook, commentary, risks and unusual items

• TreeHouse Foods agreed to acquire Private Brands for $2.7 billion cash, cash-free and debt-free, subject to adjustments and closing conditions. ConAgra expected completion in the first quarter of calendar 2016. Proceeds were expected to be used primarily for debt repayment; further impairment adjustments at closing remained possible.
• ConAgra announced plans to spin off Lamb Weston as a separate public company, expected tax-free in fall 2016. Completion depended on approvals, a tax opinion, SEC filings and other conditions; timing or completion was not assured.
• Management expected a fiscal 2016 effective tax rate of approximately 33%–34%, continuing-operations capital expenditures of approximately $440 million, and adequate liquidity for at least the next 12 months. It expected to refinance $750 million of 1.3% senior debt due in January 2016 using short-term debt and commercial paper.
• The company was in compliance with revolving-credit covenants and had no borrowings under its $1.5 billion revolving facility; commercial paper outstanding was $167.0 million. A $250 million 1.35% senior-note maturity was repaid in September 2015.
• Significant contingencies include an appealed California lead-paint judgment ordering a $1.15 billion abatement fund; the company said exposure could not be estimated and insurance coverage was uncertain. Beatrice-related environmental accruals were $53.5 million. Management said resolution of the matters discussed generally was not expected to materially adversely affect the company, but noted the lead-paint matter could do so.
• Other risks include commodity, currency and interest-rate exposure; customer concentration (Walmart and affiliates represented 19% of sales); execution of restructuring and divestiture plans; and potential further Private Brands impairment. The filing states disclosure controls were effective and there was no material change in internal control over financial reporting during the quarter.

Most important facts for investors to verify

• Closing conditions, final proceeds and any further impairment or tax effects from the Private Brands sale.
• Timing, costs, tax-free status and expected benefits of the Lamb Weston separation.
• Underlying continuing-operations earnings and cash generation apart from restructuring, impairment and other unusual items.
• Debt refinancing, liquidity and cash use after the planned divestiture; also monitor working-capital needs and dividend capacity.
• Progress on SCAE savings relative to the approved spending and estimated remaining charges.
• Developments in the lead-paint appeal, environmental matters and other contingent exposures.