Business context and reporting period
ConAgra Foods, Inc. (NYSE: CAG), a branded food and ingredients company, filed this Form 10-K for the 52-week fiscal year ended May 29, 2011. The filing covers fiscal 2011, not fiscal 2010 Q4; the requested company name, Conagra Brands Inc., differs from the registrant name shown in the filing.
Operations are reported in Consumer Foods and Commercial Foods. Consumer Foods sells branded, private-label and customized products; Commercial Foods supplies foodservice, manufacturing and industrial customers. Wal-Mart and affiliates represented approximately 18% of fiscal 2011 net sales.
Key financial metrics
| Metric | Fiscal 2011 | Fiscal 2010 |
|---|---|---|
| Net sales | $12.303 billion | $12.015 billion |
| Gross profit | $2.914 billion | $3.061 billion |
| Gross margin | 23.7% | 25.5% |
| Income from continuing operations | $830.3 million | $742.6 million |
| Net income attributable to ConAgra | $817.0 million | $725.8 million |
| Diluted EPS | $1.88 | $1.62 |
| Operating cash flow, continuing operations | $1.340 billion | $1.430 billion |
| Capital expenditures | $466.2 million | $482.3 million |
| Cash and cash equivalents at year-end | $972.4 million | $953.2 million |
| Total assets | $11.409 billion | $11.738 billion |
| Total debt, face value | $3.275 billion | $3.559 billion |
| Dividends declared per share | $0.89 | $0.79 |
Current assets were $3.899 billion and current liabilities $2.126 billion at year-end, for a current ratio of approximately 1.83. The company reported $2.674 billion of noncurrent senior long-term debt and $195.9 million of subordinated debt; current debt installments were $363.5 million. The $1.5 billion revolving credit facility had no borrowings, and the company was in compliance with its covenants.
Material changes versus the prior comparable period
- Sales rose 2% year over year. Consumer Foods sales increased 1% to $8.002 billion; Commercial Foods sales increased 6% to $4.301 billion.
- Continuing-operations income increased to $830.3 million from $742.6 million, and diluted EPS rose to $1.88 from $1.62. The comparison includes significant one-time items, including a $105 million pre-tax Garner insurance settlement gain in 2011.
- Gross profit declined by approximately $148 million and gross margin contracted about 1.8 percentage points, reflecting higher commodity input costs not fully offset by pricing and supply-chain savings.
- Consumer Foods operating profit increased 3% to $1.144 billion; Commercial Foods operating profit fell 6% to $505 million, with higher input costs affecting specialty potatoes.
- Operating cash flow from continuing operations decreased by $90 million. Cash used in financing increased substantially, principally due to $825 million of share repurchases, $375 million of dividends paid and $294 million of debt reduction.
- Year-end debt face value declined approximately $284 million. The company repaid $248 million of 7.875% senior notes and received $554 million on the remaining payment-in-kind notes before scheduled maturities.
Outlook, management commentary, risks and unusual items
- Management expected fiscal 2012 capital expenditures of approximately $475 million, an effective tax rate near 34% absent unusual events, and significantly higher net interest expense, mainly because interest income on payment-in-kind notes had ended.
- Management stated that cash, operating cash flows, credit facilities and capital-market access were expected to cover working capital, planned capital spending and anticipated dividends for at least the next twelve months. The revolving credit facility was due to mature in December 2011, and management expected to refinance it before maturity.
- The Network Optimization Plan was expected to continue through fiscal 2013, with estimated total pre-tax costs of approximately $55 million, including about $22 million of cash charges. The 2010 restructuring plan, including shifting meat-snack production from Garner to Troy, had estimated total pre-tax costs of $68 million.
- Fiscal 2011 unusual items included the $105 million pre-tax Garner insurance gain, $56 million of restructuring charges, and a $25 million gain on early collection of payment-in-kind notes. Discontinued operations recorded an after-tax loss of $11.5 million, including impairment charges associated with the frozen handhelds divestiture.
- Principal risks include volatile commodity, energy and packaging costs; competitive and private-label pricing pressure; customer concentration and bargaining power; changing consumer preferences; product recalls and liability; execution of restructuring and acquisitions; regulation and environmental obligations; and access to financing.
- Contingencies include Beatrice-related environmental reserves of $68.5 million and ongoing lead-paint litigation, peanut-butter recall-related matters and diacetyl claims. The company also disclosed an indemnity action related to the Garner accident and formal information requests from the U.S. Attorney’s office concerning the peanut-butter facility. Management believed the matters, after recorded liabilities, would not materially adversely affect financial condition, results or liquidity.
- KPMG gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.
Important facts for investors to verify
- Separate recurring operating performance from the $105 million Garner insurance gain, restructuring charges, note-collection gain and other comparability items.
- Track whether pricing and productivity can offset elevated commodity costs, particularly given the fiscal 2011 gross-margin decline and Commercial Foods profit reduction.
- Confirm refinancing of the December 2011 revolving facility and repayment of the $343 million senior notes due September 2011, which management expected to fund with cash.
- Assess progress, remaining cash costs and expected savings from the network optimization and meat-snack restructuring programs.
- Monitor customer concentration, working-capital needs, pension funding and the outcome or cost evolution of disclosed litigation, environmental and recall-related matters.