ConAgra Foods, Inc. (now Conagra Brands, Inc.) — Form 10-Q Summary
Reporting period: Fiscal 2012 third quarter, the 13 weeks ended February 26, 2012, and year to date, the 39 weeks ended February 26, 2012. Comparisons are with the corresponding fiscal 2011 periods. The filing is by ConAgra Foods, Inc.; its results are not necessarily indicative of the full fiscal year.
Financial performance
| Metric | Third quarter 2012 | Third quarter 2011 | 39 weeks 2012 | 39 weeks 2011 |
|---|---|---|---|---|
| Net sales | $3,373.1 million | $3,141.3 million | $9,849.0 million | $9,093.1 million |
| Income from continuing operations | $272.2 million | $225.7 million | $532.4 million | $570.2 million |
| Net income attributable to ConAgra | $271.6 million | $214.8 million | $528.7 million | $562.1 million |
| Diluted EPS | $0.65 | $0.50 | $1.26 | $1.27 |
| Operating cash flow | Not separately stated for the quarter | $779.4 million | $939.9 million |
- Sales increased 7% in the quarter and 8% year to date. Consumer Foods sales rose 4% in both periods; Commercial Foods sales increased 14% and 16%, respectively.
- Approximate gross margin, calculated from reported sales and cost of goods sold, was 23.4% for the quarter versus 25.4%; year to date it was 21.8% versus 24.3%. Higher input costs pressured gross profit.
- Approximate net margin was 8.1% for the quarter versus 6.8%, and 5.4% year to date versus 6.2%, based on reported net income.
- Segment operating profit was $481.3 million for the quarter, up 16%, and $1,192.1 million year to date, up 4%. Consumer Foods quarterly profit rose 20%; Commercial Foods profit rose 7% in both periods.
- Year-to-date capital expenditures were $239.1 million. Operating cash flow less capital expenditures was approximately $537 million, compared with approximately $584 million a year earlier.
- Cash and cash equivalents were $604.2 million at February 26, 2012, down from $972.4 million at May 29, 2011. Current assets were $3,825.4 million and current liabilities $2,175.4 million (current ratio approximately 1.76).
- Reported long-term debt, including current installments, was approximately $2.9 billion; total liabilities were $6.625 billion. The company repaid $342.7 million of 6.75% senior notes in September 2011. Net interest expense was $153.2 million year to date, up from $122.6 million.
- Dividends declared were $0.24 per share for the quarter and $0.71 year to date. The company repurchased approximately 4.3 million shares for $102 million in the first 39 weeks.
Changes, transactions, and unusual items
- Quarterly earnings included a $58.7 million gain from remeasuring ConAgra’s previously held stake in Agro Tech Foods Limited (ATFL) when it acquired control and began consolidating the business. The gain was described as nontaxable and materially reduced the effective tax rate.
- ConAgra acquired National Pretzel Company for approximately $301.9 million, net of cash acquired, and increased its ATFL interest to approximately 52%. It also acquired the Marie Callender’s brand trademarks for approximately $57.5 million earlier in fiscal 2012.
- After quarter-end, the company acquired Del Monte Canada for approximately $185 million in cash, plus assumed liabilities. The filing gives March 5 in the acquisition note and March 6 in MD&A as the completion date.
- Year-to-date continuing-operations income fell despite higher sales; diluted EPS was nearly flat. Results were affected by the ATFL gain, restructuring charges, peanut-butter-recall-related legal costs, an insurance-claim receivable write-off, higher incentive compensation and pension costs, and prior-year gains from payment-in-kind notes that were absent in 2012.
- The company’s effective tax rate was approximately 28% for the quarter and 31% year to date, versus 35% and 34% in the comparable periods.
Outlook, liquidity, and risks
- No specific earnings or sales guidance is provided. Management estimated fiscal 2012 capital expenditures of approximately $400 million and said cash, operating cash flows, credit facilities, and capital-market access should cover working capital, planned capital spending, and anticipated dividends for at least 12 months.
- A $1.5 billion revolving credit facility, maturing in September 2016, had no borrowings at quarter-end. The company reported compliance with its financial covenants.
- Management said restructuring is intended to improve efficiency and reduce costs. Estimated charges were approximately $18.5 million for the Administrative Efficiency Plan and $74.7 million for the Network Optimization Plan; the latter was expected to continue through fiscal 2013. Management may modify that plan, potentially causing additional charges.
- Key risks identified include commodity and energy cost inflation, effectiveness of pricing and promotions, volume and competitive conditions, execution of cost savings and acquisitions, product recalls, access to capital, and regulatory or economic changes. Wal-Mart and affiliates represented approximately 17% of quarterly sales and 18% of year-to-date sales.
- Contingencies include $70.4 million of reserves for Beatrice-related environmental matters, with expenditures potentially continuing for up to 18 years; unresolved lead-paint litigation for which exposure could not be estimated; and other legal matters. The company recorded an additional $7.5 million charge for peanut-butter-related matters in the quarter, while stating it did not expect these matters to materially affect its financial statements or results.
- After quarter-end, an onion supplier defaulted on a secured loan. ConAgra agreed to purchase the loan for approximately $41 million and said it expected to obtain first-priority collateral rights and not to be required to honor its $25 million guarantee.
- Commodity, currency, and interest-rate exposures are hedged in part with derivatives. The company reported a $121.3 million unrealized loss on interest-rate swaps for anticipated 2014 debt refinancing, deferred in accumulated other comprehensive loss.
Most important facts for investors to verify
- How much of reported quarterly earnings and EPS growth reflects the one-time ATFL remeasurement gain, and what underlying earnings trends show excluding unusual items.
- Whether pricing can continue to offset higher input costs without further weakening Consumer Foods volume or margins.
- Integration progress and returns from National Pretzel, ATFL, and the post-quarter Del Monte Canada acquisition, including the differing Del Monte completion dates stated in the filing.
- Cash generation, working-capital needs, capital spending, dividend commitments, and the effect of acquisitions and debt maturities on liquidity.
- Potential exposure and developments in environmental, lead-paint, peanut-butter, supplier-loan, and other guarantee-related matters.
- Progress, remaining costs, and realized savings from restructuring, alongside derivative exposure and the concentration of sales with Wal-Mart.