Business context and reporting period
ConAgra Foods, Inc. (the registrant named in this filing; not “Conagra Brands Inc.”) filed this Form 10-K for the 52-week fiscal year ended May 30, 2010. The filing’s “2009 Q4” metadata does not match the annual reporting period. Fiscal 2009 comprised 53 weeks, which affects year-over-year comparisons. ConAgra operated Consumer Foods and Commercial Foods businesses, selling branded, private-label, foodservice, and ingredient products.
Financial performance and position
| Metric | Fiscal 2010 | Fiscal 2009 |
|---|---|---|
| Net sales | $12.079 billion | $12.426 billion |
| Gross profit / margin | $3.065 billion / 25.4% | $2.782 billion / 22.4% |
| Continuing-operations income | $744.8 million | $617.8 million |
| Net income attributable to ConAgra | $725.8 million | $978.4 million |
| Diluted EPS | $1.62 ($1.67 continuing; $(0.05) discontinued) | $2.15 ($1.36 continuing; $0.79 discontinued) |
| Net cash from operating activities | $1.473 billion | $124.0 million |
| Cash and cash equivalents at year-end | $953.2 million | $243.2 million |
| Total assets | $11.738 billion | $11.073 billion |
| Long-term debt, including current installments | $3.5 billion face value | $3.6 billion face value |
Segment operating profit was $1.652 billion, up from $1.492 billion: Consumer Foods increased 17% to $1.113 billion, while Commercial Foods edged down 1% to $539 million. Fiscal 2010 capital expenditures were $482.9 million; dividends declared were $0.79 per share. The company reported a $1.5 billion revolving credit facility with no borrowings outstanding and compliance with its financial covenants.
Material changes versus the prior comparable period
- Sales fell 3%, mainly because fiscal 2009 included an extra week and lower wheat costs reduced pass-through sales in flour milling. Consumer Foods sales were essentially flat; Commercial Foods sales declined 8%.
- Gross margin improved, reflecting lower commodity costs and supply-chain savings, particularly in Consumer Foods. Continuing-operations income and diluted continuing EPS increased, while total net income and EPS declined because fiscal 2009 included substantial discontinued-operations gains, notably the trading and merchandising sale.
- Operating cash flow rose substantially, supported by higher continuing income and working-capital improvements; fiscal 2009 discontinued operations used $862.6 million of operating cash.
- Year-end cash increased, while reported long-term debt declined modestly. The balance sheet showed $260.2 million of current debt installments versus $23.9 million in fiscal 2009.
Outlook, management commentary, risks, and unusual items
- Management expected fiscal 2011 capital expenditures of approximately $525 million, partly offset by anticipated Garner-accident insurance proceeds; it believed liquidity would cover needs for at least 12 months. The expected fiscal 2011 effective tax rate, excluding unusual items, was approximately 34%.
- Following the Garner, North Carolina explosion that disrupted Slim Jim production, management expected the brand’s profitability to return to pre-accident levels by fiscal 2012. The claim’s final insurance settlement was expected in fiscal 2011; approximately $85 million of insurance advances had been received through year-end.
- The 2010 restructuring plan moves meat-snack production from Garner to Troy, Ohio, and certain administrative functions from Edina, Minnesota, to Naperville, Illinois. Estimated total pre-tax charges were $67.5 million, including $39.2 million recognized in fiscal 2010; implementation was expected to finish by fiscal 2012.
- Unusual fiscal 2010 items included $40 million of restructuring charges, a $33 million facility impairment, a $15 million environmental-liability benefit, $14 million of tax-benefit transaction costs, a $14 million Luck’s brand-sale gain, and a lower-than-planned tax rate. Discontinued operations included a $59 million pre-tax write-down tied mainly to Gilroy Foods & Flavors, sold after year-end for $250 million cash, subject to working-capital adjustments.
- Other risks include volatile commodity and energy costs, competition and private-label pressure, customer concentration (Wal-Mart and affiliates were 18% of sales), changing consumer preferences, food safety and recalls, pension funding, and implementation of new information systems. Legal matters include legacy environmental and lead-paint claims, litigation over insurance coverage for the peanut-butter recall, diacetyl lawsuits, and a CFTC investigation related to a divested business. Management said it did not expect the matters, after recognized liabilities, to materially affect financial condition, results, or liquidity.
Most important facts for investors to verify
- Reconcile reported results to comparable underlying performance, including the extra week in fiscal 2009, discontinued operations, and the fiscal 2010 unusual items.
- Track the timing and sufficiency of Garner insurance recoveries, the final claim settlement, and the recovery of Slim Jim sales and profitability.
- Confirm delivery of restructuring savings against the remaining expected charges and planned facility transitions.
- Monitor working-capital cash generation, upcoming debt maturities, pension contributions, and the planned fiscal 2011 capital spending.
- Assess the impact of Gilroy’s sale and other portfolio changes, as well as continued dependence on Wal-Mart and exposure to commodity costs.