Business context and reporting period
ConAgra Foods, Inc. filed this unaudited Form 10-Q for the 13 and 39 weeks ended February 28, 2010, compared with the periods ended February 22, 2009. The company reported Consumer Foods and Commercial Foods segments. Results exclude the divested trading and merchandising business, which is presented as discontinued operations.
Financial performance and condition
| Metric | 13 weeks ended Feb. 28, 2010 | 13 weeks ended Feb. 22, 2009 | 39 weeks ended Feb. 28, 2010 | 39 weeks ended Feb. 22, 2009 |
|---|---|---|---|---|
| Net sales | $3,096.8 million | $3,125.0 million | $9,230.8 million | $9,433.2 million |
| Income from continuing operations | $224.6 million | $191.8 million | $634.3 million | $471.5 million |
| Net income attributable to ConAgra | $229.6 million | $193.2 million | $635.2 million | $803.7 million |
| Diluted EPS | $0.51 | $0.43 | $1.42 | $1.76 |
| Operating cash flow, continuing operations | Not separately presented for the quarter | Not separately presented for the quarter | $1,103.6 million | $432.2 million |
- Quarterly diluted EPS from continuing operations was $0.50, versus $0.43 a year earlier; the remaining $0.01 was from discontinued operations.
- Quarterly segment operating profit was $455.2 million, up from $385.7 million. Consumer Foods generated $306.3 million, up 25%; Commercial Foods generated $148.9 million, up 6%.
- For the 39-week period, total segment operating profit was $1,335.6 million, compared with $1,114.8 million. Continuing-operations income improved, while year-ago net income and EPS benefited substantially from discontinued-operations gains.
- Cash and cash equivalents were $785.6 million at February 28, 2010, versus $243.2 million at May 31, 2009. Total current assets were $3,995.3 million and current liabilities were $1,996.7 million.
- Balance-sheet debt included $261.0 million of current long-term debt, $3,029.3 million of senior long-term debt, and $195.9 million of subordinated debt. The filing also reports $3,531.9 million of long-term debt in its contractual-obligations table and $3.6 billion of debt and capital lease obligations.
- Net interest expense was $39.9 million for the quarter and $122.0 million for the 39 weeks, down from $42.0 million and $134.8 million, respectively. The filing does not state a consolidated operating-margin figure.
Material changes versus comparable periods
- Sales fell 1% in the quarter and 2% year to date. Consumer Foods sales rose 2% in both periods; Commercial Foods sales fell 6% in the quarter and 9% year to date, principally because lower wheat prices were passed through to flour customers.
- Consumer Foods profit growth reflected lower commodity costs, higher sales, and supply-chain savings. Commercial Foods profit increased despite lower sales, with improved flour-milling and specialty-potato margins.
- Year-to-date SG&A rose $125.9 million to $1,308.3 million, largely reflecting higher incentive compensation, advertising and promotion, and self-insured medical costs. Favorable environmental-liability adjustments and the Luck’s brand sale partly offset the increases.
- Continuing-operations operating cash flow increased to $1,103.6 million from $432.2 million, which management attributed to higher continuing income and working-capital improvements. Total cash flow from operations was $1,106.5 million versus a use of $376.3 million; prior-year cash use included discontinued trading operations.
- The 2009 comparison included $332.6 million of after-tax discontinued-operations income for the 39 weeks, principally associated with the trading and merchandising divestiture. Fiscal 2010 discontinued operations recorded a $1.2 million loss for the 39 weeks.
Outlook, commentary, risks and unusual items
- No earnings or sales guidance is provided. Management estimated fiscal 2010 capital expenditures of approximately $550 million, including about $85 million for a sweet-potato processing plant in Louisiana and approximately $35 million for Slim Jim recovery-related investment. The filing elsewhere describes $29 million of such capital spending through the first three quarters.
- After the June 2009 accidental explosion at the Garner, North Carolina Slim Jim facility, management received approximately $55 million in insurer advances through February 28, 2010 and more than $75 million by April 2, 2010. It expected final claim settlement in fiscal 2011 and said the accident was not expected to materially adversely affect results, financial condition, or liquidity.
- A March 3, 2010 plan announced closure of the Garner meat-snacks facility and transfer of production to Troy, Ohio over 15–18 months. Estimated pre-tax charges are $52–$72 million, including $14–$18 million in cash charges; approximately 500 Garner positions would end and 200 Troy positions would be created. Potential impairment of equipment with a $12 million book value remained unresolved.
- Quarterly unusual items included a $15 million pre-tax environmental-liability benefit, a $14 million pre-tax gain on the Luck’s sale, and an estimated $11 million benefit from a lower-than-planned tax rate. The effective tax rate was approximately 32% for the quarter and 33% year to date.
- The $1.5 billion revolving credit facility had no borrowings at quarter-end; the company reported compliance with its financial covenants. A $500 million share-repurchase authorization was approved during the quarter, with no purchases made by February 28, 2010.
- Risks include commodity and energy prices, foreign exchange, the Garner disruption and insurance recoveries, customer concentration, and legal and regulatory matters. Walmart and affiliates represented about 19% of quarterly and 18% of year-to-date continuing-operations sales. Matters disclosed include Beatrice-related environmental and litigation exposures, the peanut-butter recall insurance dispute, and a CFTC investigation concerning former trading operations. Management stated it did not expect the disclosed contingencies to materially adversely affect the company.
Important facts for investors to verify
- How much of the reported profit improvement was recurring after adjusting for the environmental benefit, Luck’s gain, tax benefits, and Garner-related insurance recoveries and costs.
- Whether insurance proceeds ultimately cover the Garner accident’s property, business-interruption, and relocation costs, and the final charges from the production transfer.
- Whether sales and margins in Commercial Foods recover as wheat-cost pass-through effects ease, and whether Consumer Foods growth is sustained.
- The timing and funding of the $550 million capital-spending plan, upcoming debt maturities, and any use of the share-repurchase authorization.
- Developments in the CFTC investigation, environmental reserves, recall-related insurance litigation, and other disclosed contingencies.