ConAgra Foods, Inc. (filing metadata identifies ConAgra Brands Inc.) — Q3 FY2011 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended February 27, 2011; comparisons are to periods ended February 28, 2010. The filing is for ConAgra Foods, Inc.
Financial performance
| Metric | Q3 FY2011 | Q3 FY2010 | 39 weeks FY2011 | 39 weeks FY2010 |
|---|---|---|---|---|
| Net sales | $3,154.7m | $3,030.5m | $9,133.4m | $9,016.9m |
| Operating profit, segments combined | $402.7m | $448.8m | $1,138.7m | $1,313.8m |
| Income from continuing operations | $215.1m | $221.0m | $560.0m | $621.8m |
| Net income attributable to ConAgra | $214.8m | $229.6m | $562.1m | $635.2m |
| Diluted EPS | $0.50 | $0.51 | $1.27 | $1.42 |
| Net interest expense | $51.6m | $39.7m | $122.6m | $121.6m |
- Quarterly sales increased 4%; year-to-date sales increased 1%. Combined segment operating profit fell 10% in Q3 and 13% year to date. Continuing-operations income declined 3% and 10%, respectively.
- Approximate gross margin was 25.3% in Q3 versus 25.7%; year-to-date it was 24.2% versus 25.8%. Approximate combined segment operating margin was 12.8% versus 14.8% in Q3 and 12.5% versus 14.6% year to date.
- Consumer Foods sales rose 2% in Q3, but operating profit declined 14%; Commercial Foods sales rose 7%, while operating profit declined 2%. Year-to-date segment operating profit declined 14% in Consumer Foods and 12% in Commercial Foods.
- Q3 sales growth reflected acquisitions and Commercial Foods wheat-price pass-throughs; Consumer Foods faced flat existing-business volumes, competitive categories, and increased promotional spending. Higher input costs and lower pricing/mix weighed on profitability.
Cash flow, balance sheet and liquidity
- For the first 39 weeks, operating cash flow was $939.9m, down from $1,106.5m. Investing activities provided $181.1m, compared with using $316.5m; this included $245.7m proceeds from the Gilroy divestiture and collection of the payment-in-kind notes. Financing activities used $1,198.9m, including $662.4m of share repurchases, $276.7m of dividends, and debt repayments.
- Cash was $882.9m at February 27, 2011, versus $953.2m at May 30, 2010. Inventory increased to $1,932.7m from $1,606.5m, a material use of working capital. Capital expenditures were $347.4m year to date; fiscal 2011 spending was estimated at approximately $475m.
- Total debt, including current installments and subordinated debt, was approximately $3.23bn; total debt and capital lease obligations were $3.3bn. Long-term debt carrying value was $3.2bn; estimated fair value was $3.6bn. Cash less reported debt was approximately $2.35bn.
- Current assets were $4.04bn and current liabilities $2.30bn (current ratio approximately 1.75). A $1.5bn revolving credit facility maturing December 2011 had no borrowings; the company expected to refinance it before maturity and was in compliance with its covenants. Management said available cash, operating cash flows, facilities, and capital-market access should cover needs for at least 12 months.
- Debt repayments included $248m of 7.875% senior notes and $35m of Lamb Weston BSW borrowings. The dividend was increased to $0.23 per share from $0.20. The company repurchased 30.2m shares for $686.9m year to date and reported $267m remaining under its authorization.
Material changes, outlook and notable items
- In July 2010, ConAgra sold substantially all Gilroy Foods & Flavors operations for $245.7m cash; results are presented as discontinued operations. It acquired American Pie for $131m cash plus assumed liabilities during Q1 FY2011.
- ConAgra collected $554.2m to settle the remaining payment-in-kind notes ahead of maturity and recognized a $25m pretax gain. The early collection also ended associated interest income; management expected Q4 net interest expense to be significantly higher than the prior-year quarter.
- After quarter-end, the company reached an insurance settlement in principle related to the 2009 Garner facility accident: additional payments of approximately $47.5m were expected, with an approximately $108m gain to be recognized in Q4 FY2011. The filing reports this as a subsequent event, not a Q3 result.
- A new 2011 restructuring plan is expected to cost $55.5m pretax over an approximately 18-month implementation period, including $20.7m of cash charges. The existing 2010 plan was estimated at $71.3m, with $59.5m recognized cumulatively by quarter-end. The Garner-to-Troy meat-snack production move was expected to finish in Q4 FY2011 and involve about 500 job eliminations in Garner and 200 positions in Troy.
- The company began operating its new Louisiana sweet-potato processing plant in Q2 FY2011 and had invested more than $130m by quarter-end. No specific earnings-per-share or revenue guidance is provided in the filing.
- Key risks identified include commodity and energy prices, ability to pass through input-cost increases, promotional and competitive pressures, execution of restructuring and cost-saving plans, the Garner insurance outcome, customer concentration, access to capital, and legal, regulatory, and recall-related matters. Wal-Mart and affiliates represented approximately 18% of sales in Q3 and year to date.
- Contingencies include Beatrice-related environmental reserves of $70.5m and various lawsuits and guarantees. Management stated that, after recorded liabilities, it did not expect the matters discussed to materially adversely affect financial condition, results, or liquidity. The company also disclosed post-quarter U.S. Attorney requests for records concerning its Sylvester, Georgia peanut-butter facility and said it was cooperating.
Most important facts for investors to verify
- Whether pricing, mix, and cost savings can offset rising commodity and processing costs, particularly in Consumer Foods and specialty potatoes.
- Q4 and full-year effects of the Garner insurance settlement, including the expected approximately $108m gain and additional cash proceeds.
- Restructuring cash costs, execution timing, and whether anticipated efficiencies compensate for the charges and operational disruption.
- Working-capital and operating-cash-flow trends, especially inventory growth, pension contributions, and lower interest income after note repayment.
- Debt refinancing and liquidity plans ahead of the December 2011 revolving-facility maturity, plus the pace of share repurchases and dividends.
- Developments in the peanut-butter-related government requests and other legal, environmental, and guarantee exposures.