ConAgra Foods, Inc. (10-Q) — Fiscal 2011 Second Quarter
Reporting period: Thirteen and twenty-six weeks ended November 28, 2010, compared with the periods ended November 29, 2009. The filing identifies the registrant as ConAgra Foods, Inc.; “ConAgra Brands Inc.” appears in the request metadata.
Financial performance
| Metric | Quarter | First half |
|---|---|---|
| Net sales | $3,161.1 million, up 2% | $5,978.7 million, essentially flat |
| Income from continuing operations | $201.2 million, down from $237.8 million | $344.9 million, down from $400.8 million |
| Net income attributable to ConAgra | $200.9 million, down from $239.7 million | $347.3 million, down from $405.6 million |
| Diluted EPS | $0.45, versus $0.54 | $0.78, versus $0.91 |
| Net interest expense | $33.7 million, versus $40.5 million | $71.0 million, versus $81.9 million |
| Operating cash flow | Not separately provided in the filing text | $319.1 million, versus $657.2 million |
Quarterly cost of goods sold rose to $2,401.0 million from $2,257.5 million. Gross profit was approximately $760 million, or 24.0% of sales, compared with approximately $843 million, or 27.2%, in the prior-year quarter. These gross profit and margin figures are calculated from reported sales and cost of goods sold. Segment operating profit fell 14% at Consumer Foods and 16% at Commercial Foods in both the quarter and first half.
At November 28, cash was $545.2 million, down from $953.2 million at May 30. Current assets were $4,193.8 million and current liabilities $2,280.0 million (current ratio approximately 1.84). Total debt, including current installments, subordinated debt and notes payable, was approximately $3.24 billion, down from approximately $3.49 billion at May 30. The company repaid $248 million of senior notes and $35.4 million of venture borrowings during the first half.
First-half cash flow included $211.2 million of capital expenditures. Continuing-operations operating cash flow less capital expenditures was approximately $104.7 million, versus $444.7 million in the prior-year period; this is a simple calculation, not a company-reported measure. Financing outflows were $644.4 million, including $200 million of share repurchases and $176.4 million of dividends. The quarterly dividend was increased to $0.23 per share from $0.20.
Material changes and business drivers
- Quarterly sales increased 2%, but first-half sales were essentially unchanged. Consumer Foods quarterly sales rose 1%; Commercial Foods sales rose 3%. Acquisitions, including American Pie, contributed to sales, while net pricing and mix were a headwind in Consumer Foods.
- Profitability weakened as higher input and production costs and lower selling prices reduced gross profit. Consumer Foods cited higher protein and fuel costs; Commercial Foods cited potato quality and related costs, as well as lower specialty-potato prices. Supply-chain savings and lower incentive compensation partly offset pressure.
- The filing reports $5 million of restructuring charges for the quarter and $13 million for the first half. The broader plan is expected to cost $70.2 million pretax, including $30.1 million of cash costs; $51.8 million had been recognized through November 28.
- Gilroy Foods & Flavors operations were sold in July 2010 for $245.7 million cash and reported as discontinued operations. American Pie was acquired for $131 million cash plus assumed liabilities. The filing also reports the prior-year sale of the Luck’s brand.
Outlook, risks and unusual items
- Management expected fiscal 2011 continuing-operations effective tax rate of approximately 34%, capital expenditures of approximately $500 million, and sufficient liquidity for at least twelve months. The $1.5 billion revolving credit facility had no borrowings and the company was in compliance with its covenants.
- Management expected Slim Jim profitability to return to pre-accident levels by fiscal 2012. Completion of the Garner-to-Troy meat-snack production transition was expected in fiscal 2012; the plan involves approximately 500 Garner job eliminations and 200 Troy positions.
- On December 6, 2010, after quarter-end, ConAgra received $554.2 million in payment of the remaining payment-in-kind notes and expected to recognize a $25 million gain in fiscal 2011’s third quarter. Management also expected materially higher net interest expense for the rest of fiscal 2011 as the notes no longer generated interest income. The board increased repurchase authorization by the payment amount; the company expected further repurchases, subject to market conditions.
- Key risks include commodity and energy prices, pricing and promotional effectiveness, competition, execution of operating plans, foreign exchange and interest-rate exposure, and uncertainty over insurance recoveries and costs tied to the Garner accident. The company reported $109 million of insurance advances received through November 28 and anticipated final settlement in fiscal 2011; it did not expect the accident to have a material adverse effect.
- Contingencies include Beatrice-related environmental reserves of $70.2 million, ongoing litigation and other guarantees. Management stated that resolution of disclosed matters was not expected to materially adversely affect financial condition, results or liquidity. The filing also disclosed a $58.7 million gross balance of unrecognized tax benefits.
Important facts for investors to verify
- Whether sales volumes, pricing and promotional response improve, and whether cost inflation continues to pressure margins.
- Progress and total cash/non-cash costs of the restructuring, including the Garner-to-Troy transition and Slim Jim recovery.
- Use of the $554.2 million note repayment proceeds, subsequent share repurchases, and the resulting effect on cash, debt and interest income.
- Actual capital spending, operating cash generation and working-capital needs, particularly inventory levels.
- Final Garner insurance settlement and developments in environmental, product-related, tax and other legal contingencies.