Business context and reporting period
ConAgra Foods, Inc. (the issuer named in this filing) reported its fiscal 2010 second quarter, the 13 weeks ended November 29, 2009, and first half, the 26 weeks ended that date. Its reporting segments are Consumer Foods and Commercial Foods. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Key financial results
| Metric | Q2 FY2010 | Q2 FY2009 | First half FY2010 | First half FY2009 |
|---|---|---|---|---|
| Net sales | $3,172.6 | $3,251.7 | $6,134.0 | $6,308.2 |
| Income from continuing operations | $243.2 | $172.1 | $409.7 | $279.7 |
| Net income attributable to ConAgra | $239.7 | $168.1 | $405.6 | $610.5 |
| Diluted EPS, continuing operations | $0.55 | $0.38 | $0.92 | $0.61 |
| Diluted EPS, total | $0.54 | $0.37 | $0.91 | $1.32 |
- Q2 sales declined about 2%; first-half sales declined about 3%. Lower wheat costs passed through to customers were the main reason, particularly in flour milling.
- Q2 gross profit was $855.3 million, versus $686.5 million a year earlier; the approximate gross margin increased to 27.0% from 21.1%. Lower commodity input costs, especially vegetable oils, and supply-chain savings supported profitability.
- Q2 segment operating profit was $489.7 million, up from $408.9 million. Consumer Foods operating profit rose 31% to $330.0 million; Commercial Foods increased 1% to $159.7 million.
- Q2 SG&A increased 18% to $460.0 million, including higher incentive compensation, advertising and promotion, and stock compensation. Net interest expense fell to $40.6 million from $42.7 million. The effective tax rate was approximately 33%.
- First-half operating cash flow was $657.2 million, including $653.5 million from continuing operations, compared with total operating cash outflow of $615.7 million in the prior-year period. The comparison is substantially affected by the trading business sold in 2008 and its working-capital cash flows.
- First-half capital expenditures were $241.9 million. Cash increased $247.0 million during the period, to $490.2 million at November 29, 2009. Dividends paid were $169.2 million.
- Long-term debt, including current installments, was approximately $3.5 billion; total liabilities were $6.6 billion. The company reported no borrowings under its $1.5 billion revolving credit facility and compliance with its financial covenants.
Material changes and comparability
- Consumer Foods sales grew 3% in Q2, with volume up 2% and pricing/mix up 1%. Commercial Foods sales fell 11%, largely reflecting lower wheat prices passed through to customers; foodservice weakness also affected some products.
- First-half total net income fell from $610.5 million to $405.6 million despite higher continuing-operations income. Prior-year results included a substantial gain from the sale of the trading and merchandising business; the filing reports $331.2 million of prior-year discontinued-operations income for the first half.
- The June 2009 Garner, North Carolina plant explosion disrupted Slim Jim production. Slim Jim sales declined 12% in Q2, and management attributed about a one-percentage-point reduction in Consumer Foods volume to limited product supply.
- Segment reporting was realigned in fiscal 2010, including moving Alexia frozen-food operations to Commercial Foods; prior periods were recast.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided in the supplied filing text. Management estimated fiscal 2010 capital expenditures of approximately $600 million, including about $90 million for a sweet-potato processing plant scheduled to open in fall 2010.
- Management expected insurance recoveries related to Garner and said the accident was not expected to materially adversely affect results, financial condition or liquidity. The company had received more than $53 million in insurance advances by the report date; final claim settlement was expected in fiscal 2011. Equipment with a book value of about $12 million remained inaccessible and could require further impairment.
- Garner-related first-half costs included $34.1 million of SG&A charges and $10.6 million of inventory and other costs, partly offset by $41.0 million of recognized insurance recoveries. These figures exclude lost profits from the interruption.
- Other exposures include legal and environmental matters from divested businesses, $86.4 million of Beatrice-related environmental reserves, peanut-butter recall insurance litigation (with an adverse trial-court decision on certain coverage issues and an intended appeal), and a CFTC investigation concerning a former subsidiary’s trading activity. Management stated that it did not expect the matters, taken together, to have a material adverse effect.
- Other risks identified include commodity and energy prices, foreign exchange, customer and foodservice demand, execution of cost-saving and innovation plans, recalls, regulation, and access to capital. Wal-Mart and affiliates accounted for approximately 18% of consolidated sales in Q2 and the first half.
- Contractual obligations totaled $4.484 billion, including $3.534 billion of long-term debt, $337.7 million of operating leases and $548.9 million of purchase obligations. Some guarantees and purchase commitments are not recorded as balance-sheet liabilities.
Important facts for investors to verify
- Separate underlying continuing-operations growth from the prior-year divestiture gain when assessing earnings and EPS trends.
- Track Garner production recovery, insurance receipts and settlement timing, and whether the potentially impaired equipment requires a further charge.
- Assess whether Consumer Foods’ margin improvement and Commercial Foods’ profitability persist as commodity costs, pricing pass-throughs and foodservice conditions change.
- Monitor cash conversion, working capital, planned capital spending, debt maturities and continued compliance with credit-facility covenants.
- Review developments in the insurance-coverage appeal, CFTC inquiry, environmental matters and other contingencies.