Annual Reports

 
Quarterly Reports

  • 10-Q (Oct 3, 2017)
  • 10-Q (Apr 4, 2017)
  • 10-Q (Jan 4, 2017)
  • 10-Q (Oct 4, 2016)
  • 10-Q (Apr 7, 2016)
  • 10-Q (Jan 6, 2016)

 
8-K

 
Other

CONAGRA BRANDS INC. 10-Q 2005

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.   20549

 

FORM 10-Q

 

(Mark One)

ý                                 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended August 28, 2005

OR

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                       to

 

Commission File Number 1-7275

 

CONAGRA FOODS, INC.

(Exact name of registrant, as specified in charter)

 

Delaware

 

47-0248710

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

One ConAgra Drive, Omaha, Nebraska

 

68102-5001

(Address of Principal Executive Offices)

 

(Zip Code)

 

(402) 595-4000

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report.)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   ý                  No   o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes   ý                  No   o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes   o                  No   ý

 

Number of shares outstanding of issuer’s common stock, as of September 23, 2005, was 518,914,830.

 

 



 

Part I – Financial Information

Item 1.  Condensed Consolidated Financial Statements

ConAgra Foods, Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings

(in millions except per share amounts)

(unaudited)

 

 

 

Thirteen weeks ended

 

 

 

August 28,
2005

 

August 29,
2004

 

Net sales

 

$

3,362.9

 

$

3,383.2

 

Costs and expenses:

 

 

 

 

 

Cost of goods sold

 

2,635.4

 

2,700.4

 

Selling, general and administrative expenses

 

434.0

 

410.1

 

Interest expense, net

 

68.1

 

73.4

 

Gain on sale of Pilgrim’s Pride Corporation common stock

 

329.4

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes and equity method investment earnings (loss)

 

554.8

 

199.3

 

Income tax expense

 

193.6

 

81.0

 

Equity method investment earnings (loss)

 

(13.9

)

14.1

 

 

 

 

 

 

 

Income from continuing operations

 

347.3

 

132.4

 

 

 

 

 

 

 

Income from discontinued operations, net of tax

 

4.8

 

2.3

 

 

 

 

 

 

 

Net income

 

$

352.1

 

$

134.7

 

 

 

 

 

 

 

Earnings per share – basic

 

 

 

 

 

Income from continuing operations

 

$

0.67

 

$

0.26

 

Income from discontinued operations

 

0.01

 

 

Net income

 

$

0.68

 

$

0.26

 

 

 

 

 

 

 

Earnings per share – diluted

 

 

 

 

 

Income from continuing operations

 

$

0.67

 

$

0.26

 

Income from discontinued operations

 

0.01

 

 

Net income

 

$

0.68

 

$

0.26

 

 

See notes to the condensed consolidated financial statements.

 

2



 

ConAgra Foods, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(in millions)

(unaudited)

 

 

 

Thirteen weeks ended

 

 

 

August 28,
2005

 

August 29,
2004

 

Net income

 

$

352.1

 

$

134.7

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

Net derivative adjustment, net of tax

 

28.7

 

(24.4

)

Unrealized gain (loss) on available-for-sale securities, net of tax:

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

(19.8

)

0.2

 

Less: reclassification adjustment for gains included in net income

 

(95.3

)

 

Currency translation adjustment

 

(0.1

)

9.4

 

 

 

 

 

 

 

Comprehensive income

 

$

265.6

 

$

119.9

 

 

See notes to the condensed consolidated financial statements.

 

3



 

ConAgra Foods, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(dollars in millions)

(unaudited)

 

 

 

August 28,
2005

 

May 29,
2005

 

August 29,
2004

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

501.4

 

$

207.6

 

$

369.8

 

Receivables, less allowance for doubtful accounts of $31.7, $30.7 and $28.2

 

1,286.8

 

1,292.0

 

1,322.9

 

Inventories

 

2,756.3

 

2,614.5

 

2,584.9

 

Prepaid expenses and other current assets

 

736.9

 

631.3

 

547.9

 

Current assets of discontinued operations

 

8.5

 

29.4

 

257.6

 

Total current assets

 

5,289.9

 

4,774.8

 

5,083.1

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

5,764.1

 

5,735.6

 

5,674.6

 

Less accumulated depreciation

 

(2,929.6

)

(2,887.3

)

(2,805.9

)

Property, plant and equipment, net

 

2,834.5

 

2,848.3

 

2,868.7

 

 

 

 

 

 

 

 

 

Goodwill

 

3,794.0

 

3,797.7

 

3,791.2

 

Brands, trademarks and other intangibles, net

 

819.3

 

819.7

 

826.4

 

Other assets

 

444.4

 

798.4

 

1,564.9

 

Noncurrent assets of discontinued operations

 

0.4

 

3.9

 

54.9

 

 

 

$

13,182.5

 

$

13,042.8

 

$

14,189.2

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Notes payable

 

$

10.8

 

$

8.5

 

$

22.4

 

Current installments of long-term debt

 

119.1

 

117.3

 

366.9

 

Accounts payable

 

926.9

 

818.4

 

863.4

 

Advances on sales

 

128.8

 

149.6

 

103.0

 

Accrued payroll

 

194.3

 

272.4

 

175.4

 

Other accrued liabilities

 

1,341.5

 

1,263.3

 

1,420.3

 

Current liabilities of discontinued operations

 

4.2

 

10.2

 

181.0

 

Total current liabilities

 

2,725.6

 

2,639.7

 

3,132.4

 

 

 

 

 

 

 

 

 

Senior long-term debt, excluding current installments

 

3,943.5

 

3,949.1

 

4,887.1

 

Subordinated debt

 

400.0

 

400.0

 

400.3

 

Other noncurrent liabilities

 

1,121.9

 

1,194.6

 

1,154.8

 

Total liabilities

 

8,191.0

 

8,183.4

 

9,574.6

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

Common stockholders’ equity

 

 

 

 

 

 

 

Common stock of $5 par value, authorized 1,200,000,000 shares; issued 566,063,997, 565,942,765 and 565,886,206

 

2,830.3

 

2,829.7

 

2,829.4

 

Additional paid-in capital

 

755.2

 

761.6

 

754.5

 

Retained earnings

 

2,649.0

 

2,438.1

 

2,351.6

 

Accumulated other comprehensive income (loss)

 

(42.5

)

44.0

 

5.1

 

Less treasury stock, at cost, 47,385,348, 47,841,291 and 51,599,271 common shares

 

(1,196.7

)

(1,209.3

)

(1,311.1

)

 

 

4,995.3

 

4,864.1

 

4,629.5

 

Less unearned restricted stock and common shares held in Employee Equity Fund (0, 0, and 373,601)

 

(3.8

)

(4.7

)

(14.9

)

Total common stockholders’ equity

 

4,991.5

 

4,859.4

 

4,614.6

 

 

 

$

13,182.5

 

$

13,042.8

 

$

14,189.2

 

 

See notes to the condensed consolidated financial statements.

 

4



 

ConAgra Foods, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in millions)

(unaudited)

 

 

 

Thirteen weeks ended

 

 

 

August 28,
2005

 

August 29,
2004

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

352.1

 

$

134.7

 

Income from discontinued operations

 

4.8

 

2.3

 

Income from continuing operations

 

347.3

 

132.4

 

Adjustments to reconcile income from continuing operations to net cash flows from operating activities:

 

 

 

 

 

Depreciation and amortization

 

88.5

 

87.7

 

Gain on sale of Pilgrim’s Pride Corporation common stock, pretax (see Note 2)

 

(329.4

)

 

Loss on sale of fixed assets

 

0.1

 

 

Undistributed earnings of affiliates

 

(3.4

)

(11.1

)

Non-cash impairments

 

19.4

 

 

Other items (includes pension and other postretirement benefits)

 

(2.8

)

1.6

 

Change in operating assets and liabilities before effects of business dispositions:

 

 

 

 

 

Accounts receivable

 

2.8

 

(22.1

)

Inventory

 

(141.9

)

(68.4

)

Prepaid expenses and other current assets

 

(76.9

)

(59.6

)

Accounts payable and advances on sales

 

87.8

 

(110.8

)

Other accrued liabilities

 

3.2

 

202.1

 

Net cash flows from operating activities – continuing operations

 

(5.3

)

151.8

 

Net cash flows from operating activities – discontinued operations

 

10.1

 

4.1

 

Net cash flows from operating activities

 

4.8

 

155.9

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Additions to property, plant and equipment

 

(70.6

)

(105.2

)

Sale of Pilgrim’s Pride Corporation common stock

 

482.4

 

 

Sale of plant and equipment

 

6.4

 

8.3

 

Notes receivable and other items

 

(1.7

)

1.7

 

Net cash flows from investing activities – continuing operations

 

416.5

 

(95.2

)

Net cash flows from investing activities – discontinued operations

 

13.1

 

29.8

 

Net cash flows from investing activities

 

429.6

 

(65.4

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net short-term borrowings

 

2.3

 

(8.2

)

Repayment of long-term debt

 

(8.9

)

(17.8

)

Repurchase of ConAgra Foods common shares

 

 

(181.4

)

Cash dividends paid

 

(141.0

)

(135.5

)

Proceeds from exercise of employee stock options

 

7.3

 

12.2

 

Other items

 

(0.3

)

(0.3

)

Net cash flows from financing activities – continuing operations

 

(140.6

)

(331.0

)

Net cash flows from financing activities – discontinued operations

 

 

1.7

 

Net cash flows from financing activities

 

(140.6

)

(329.3

)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

293.8

 

(238.8

)

Cash and cash equivalents at beginning of period

 

207.6

 

608.6

 

Cash and cash equivalents at end of period

 

$

501.4

 

$

369.8

 

 

See notes to the condensed consolidated financial statements.

 

5



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Thirteen Weeks ended August 28, 2005

(columnar dollars in millions except per share amounts)

 

1.              Summary of Significant Accounting Policies

 

The unaudited financial information reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented.  The adjustments are of a normal recurring nature, except as otherwise noted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the ConAgra Foods, Inc. (the “company”) fiscal 2005 annual report on Form 10-K.

 

The results of operations for any quarter or a partial fiscal year period are not necessarily indicative of the results to be expected for other periods or the full fiscal year.

 

Basis of ConsolidationThe condensed consolidated financial statements include the accounts of ConAgra Foods, Inc. and all majority-owned subsidiaries.  In addition, the accounts of all variable interest entities of which the company is determined to be the primary beneficiary are included in the company’s condensed consolidated financial statements from the date such determination is made.  All significant intercompany investments, accounts and transactions have been eliminated.

 

Stock-Based Compensation – The company has stockholder approved stock option plans which provide for granting of options to employees for purchase of common stock at prices equal to the fair value at the time of grant.  The company accounts for its employee stock option plans in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.  Accordingly, no stock-based compensation expense is reflected in net income for stock options granted, as options granted under these plans have an exercise price equal to the market value of the underlying common stock on the date of grant.  The company issues stock under various stock-based compensation arrangements approved by stockholders, including restricted stock, phantom stock and stock issued in lieu of cash bonuses.  The value of restricted and phantom stock, equal to fair value at the time of grant, is amortized as compensation expense over the vesting period.  Stock issued in lieu of cash bonuses is recognized as compensation expense as earned.  In addition, the company grants restricted share equivalents.  The restricted share equivalents are credited with appreciation or depreciation in the company’s stock during the restriction period and will be settled in cash when the restriction period ends.  The company amortizes the expense associated with the restricted share equivalents over the period of restriction.

 

6



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Thirteen Weeks ended August 28, 2005

(columnar dollars in millions except per share amounts)

 

The following table illustrates the pro forma effect on net income and earnings per share assuming the company had followed the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, for all outstanding and unvested stock options and other stock-based compensation.

 

 

 

Thirteen weeks ended

 

 

 

August 28,
2005

 

August 29,
2004

 

Net income, as reported

 

$

352.1

 

$

134.7

 

Add: Stock-based employee compensation included in reported net income, net of related tax effects

 

2.6

 

3.6

 

Deduct: Total stock-based compensation expense determined under fair value based method, net of related tax effects

 

(5.3

)

(7.8

)

Pro forma net income

 

$

349.4

 

$

130.5

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic earnings per share – as reported

 

$

0.68

 

$

0.26

 

Basic earnings per share – pro forma

 

$

0.67

 

$

0.25

 

 

 

 

 

 

 

Diluted earnings per share – as reported

 

$

0.68

 

$

0.26

 

Diluted earnings per share – pro forma

 

$

0.67

 

$

0.25

 

 

Comprehensive Income – Comprehensive income includes net income, currency translation adjustments, certain derivative-related activity, changes in the value of available-for-sale investments and changes, if any, in the minimum pension liability.  The company generally deems its foreign investments to be permanent in nature and does not provide for taxes on currency translation adjustments arising from converting the investment in a foreign currency to U.S. dollars.  When the company determines that a foreign investment is no longer permanent in nature, estimated taxes are provided for the related deferred tax liability (asset), if any, resulting from currency translation adjustments.

 

The following details the income tax expense (benefit) on components of other comprehensive income (loss):

 

 

 

Thirteen weeks ended

 

 

 

August 28,
2005

 

August 29,
2004

 

Net derivative adjustment

 

$

16.5

 

$

(14.9

)

Unrealized gains (losses) on available-for-sale securities

 

(11.6

)

0.1

 

Less: reclassification adjustment for gains included in net income

 

(54.8

)

 

 

 

$

(49.9

)

$

(14.8

)

 

7



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Thirteen Weeks ended August 28, 2005

(columnar dollars in millions except per share amounts)

 

Reclassifications – Certain reclassifications have been made to prior year amounts to conform to current year classifications.  The company has reclassified the fair value of certain derivative contracts for which it does not have the legal right of offset, which had previously been presented on a net basis, to a gross presentation within prepaid expenses and other current assets and other accrued liabilities.  This change in presentation resulted in an increase to both prepaid expenses and other current assets and other accrued liabilities of $164.1 million, $251.1 million, and $175.3 million as of August 28, 2005, May 29, 2005, and August 29, 2004, respectively.

 

Recently Issued Accounting Pronouncements – In December 2004, the FASB issued Statement No. 123 (revised 2004) (“SFAS No. 123R”), Share-Based Payment. SFAS No. 123R will require the company to measure the cost of all employee stock-based compensation awards based on the grant date fair value of those awards and to record that cost as compensation expense over the period during which the employee is required to perform service in exchange for the award (generally over the vesting period of the award).  Accordingly, the adoption of SFAS No. 123R will have an impact on the company’s results of operations, although it will have no impact on the company’s overall financial position.  SFAS No. 123R is effective beginning in the company’s first quarter of fiscal 2007. Management is currently evaluating the impact that the adoption of this statement will have on the company’s consolidated results of operations and cash flows.

 

In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4.  SFAS No. 151 amends the guidance in ARB No. 43, Inventory Pricing, for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage), requiring that those items be recognized as current-period expenses.  This statement also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities.  The statement is effective for inventory costs incurred beginning in the company’s fiscal 2007.  Management is currently evaluating the impact that the adoption of this statement will have on the company’s consolidated financial position and results of operations.

 

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.  APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged.  SFAS No. 153 amends APB Opinion No. 29, eliminating the exception to fair value accounting for nonmonetary exchanges of similar productive assets, and replaces it with a general exception to fair value accounting for nonmonetary exchanges that do not have commercial substance.  A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange.  The statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005.  Management does not expect this statement to have a material impact on the company’s consolidated financial position or results of operations.

 

In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143 (“FIN 47”).  FIN 47 clarifies that the term “conditional asset retirement obligation”, as used in SFAS No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity.  The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement.  Thus, the timing and (or) method of settlement may be conditional on a future event.  Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated.  The statement must be applied by the end of fiscal 2006.  Management does not expect this

 

8



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Thirteen Weeks ended August 28, 2005

(columnar dollars in millions except per share amounts)

 

statement to have a material impact on the company’s consolidated financial position or results of operations.

 

Use of Estimates – Preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions.  These estimates and assumptions affect reported amounts of assets, liabilities, revenues and expenses as reflected in the financial statements.  Actual results could differ from these estimates.

 

2.              Discontinued Operations and Divestitures

 

Chicken Business Divestiture

 

In November 2003, the company completed the sale of its chicken business to Pilgrim’s Pride Corporation (the “chicken business divestiture”).  A portion of the proceeds from this divestiture was in the form of 25.4 million shares of Pilgrim’s Pride Corporation common stock initially valued at $246.1 million.  The fair value of the Pilgrim’s Pride common stock was based on an independent valuation as of the date of the transaction and was reflective of the common stock’s trading restrictions.

 

During the third quarter of fiscal 2005, the company sold ten million shares of the Pilgrim’s Pride Corporation common stock for $282.5 million, resulting in a pre-tax gain of $185.7 million and a net-of-tax reclassification from accumulated other comprehensive income of $115.2 million.

 

During the first quarter of fiscal 2006, the company sold the remaining 15.4 million shares of the Pilgrim’s Pride Corporation common stock for $482.4 million, resulting in a pre-tax gain of $329.4 million ($209.3 million after tax) and a net-of-tax reclassification from accumulated other comprehensive income of $95.3 million.  The following table provides details of the gain recognized in the first quarter of fiscal 2006:

 

Amounts included in accumulated other comprehensive income at May 29, 2005 for 6.96 million shares classified as available-for-sale

 

$

180.5

 

Reduction in value (including sales commission) associated with shares classified as available-for-sale from May 29, 2005 to August 3, 2005

 

(34.0

)

Gain realized on the additional 8.48 million shares not classified as available-for-sale

 

182.9

 

Total pre-tax gain

 

$

329.4

 

 

UAP North America and UAP International Divestitures

 

In the fourth quarter of fiscal 2005, the company completed the disposition of the remaining businesses of its Agricultural Products segment (“UAP International”).  The company reflects the results of the Agricultural Products segment as discontinued operations for all periods presented.

 

Portuguese Poultry Divestiture

 

The company completed the sale of the Portuguese poultry business for cash proceeds of $3.6 million in the first quarter of fiscal 2005.  The company removed the results of this business from the Food Ingredients reporting segment and reflects the results of this business as discontinued operations for all periods presented.

 

9



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Thirteen Weeks ended August 28, 2005

(columnar dollars in millions except per share amounts)

 

Specialty Meats Divestiture

 

In the fourth quarter of fiscal 2005, the company implemented a plan to exit the specialty meats foodservice business.  The company closed a manufacturing facility in Alabama, sold its operations in California and, in the first quarter of fiscal 2006, completed the sale of its operations in Illinois.  Upon the sale of the Illinois operations, the company has no remaining specialty meats foodservice operations.  Accordingly, the company removed the results of these businesses from the Foodservice Products reporting segment and reflects the results of these businesses as discontinued operations for all periods presented.

 

The company recorded charges in the third and fourth quarters of fiscal 2005, reducing the carrying values of the assets at the Alabama and Illinois facilities to their expected salvage values.  During the first quarter of fiscal 2006, the company sold these facilities and recognized pre-tax gains within results of discontinued operations totaling approximately $6 million.

 

Fresh Beef and Pork Divestitures

 

In September 2002, the company sold a controlling interest in its fresh beef and pork operations to a joint venture led by Hicks, Muse, Tate & Furst Incorporated (“Hicks Muse”).  The fresh beef operations sold to the joint venture included a beef processing business as well as a cattle feeding business.  The company reported its share of the earnings associated with its minority ownership of the joint venture as equity method investment earnings.  The company sold its remaining minority interest investment in the fresh beef and pork business (“Swift Foods”) to Hicks Muse in September 2004.  Due to the purchase price of the cattle feeding business being entirely financed by the company, the legal divestiture of the cattle feeding operation was not recognized as a divestiture for accounting purposes, and the assets, liabilities and results of operations of the cattle feeding business were reflected in the company’s financial statements prior to October 15, 2004.  Beginning September 24, 2004, following orderly liquidation of the cattle feeding business, the assets, liabilities and results of operations, including the gain on sale, of the cattle feeding business are classified as discontinued operations.

 

The company continues to hold subordinated notes in the original principal amount of $150 million plus accrued interest of $38.8 million from Swift Foods.  During the company’s fourth quarter of fiscal 2005, Swift Foods effected changes in its capital structure.  As a result of those changes, the company determined that the fair value of the subordinated notes was impaired.  The company believes this impairment of an available-for-sale security is temporary.  As such, the company has reduced the carrying value of the note by $40.0 million and recorded after-tax charges of $24.9 million in accumulated other comprehensive income.

 

10



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Thirteen Weeks ended August 28, 2005

(columnar dollars in millions except per share amounts)

 

Summary results of operations of the former Agricultural Products segment, the chicken business, the Portuguese poultry businesses, the cattle feeding business and the specialty meats foodservice business included within discontinued operations are as follows:

 

 

 

Thirteen weeks ended

 

 

 

August 28,
2005

 

August 29,
2004

 

Net sales

 

$

16.1

 

$

228.9

 

 

 

 

 

 

 

Long-lived asset impairment charge

 

$

 

$

1.2

 

Income (loss) from operations of discontinued operations before income taxes

 

(0.9

)

5.7

 

Net gain from disposal of businesses

 

6.0

 

 

Income before income taxes

 

5.1

 

4.5

 

Income tax expense

 

(0.3

)

(2.2

)

Income from discontinued operations, net of tax

 

$

4.8

 

$

2.3

 

 

The assets and liabilities of the former Agricultural Products segment and the specialty meats foodservice business as of August 28, 2005, May 29, 2005 and August 29, 2004 are as follows:

 

 

 

August 28,
2005

 

May 29,
2005

 

August 29,
2004

 

 

 

 

 

 

 

 

 

Receivables, less allowances for doubtful accounts

 

$

0.9

 

$

0.9

 

$

148.2

 

Inventories

 

7.6

 

28.5

 

103.8

 

Prepaid expenses and other current assets

 

 

 

5.6

 

Current assets of discontinued operations

 

$

8.5

 

$

29.4

 

$

257.6

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

$

0.4

 

$

3.9

 

$

46.1

 

Goodwill and other intangibles

 

 

 

8.0

 

Other assets

 

 

 

0.8

 

Noncurrent assets of discontinued operations

 

$

0.4

 

$

3.9

 

$

54.9

 

 

 

 

 

 

 

 

 

Notes payable

 

$

 

$

 

$

24.9

 

Accounts payable

 

3.1

 

6.1

 

123.5

 

Other accrued liabilities and advances on sales

 

1.1

 

4.1

 

32.6

 

Current liabilities of discontinued operations

 

$

4.2

 

$

10.2

 

$

181.0

 

 

11



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Thirteen Weeks ended August 28, 2005

(columnar dollars in millions except per share amounts)

 

3.              Goodwill and Other Identifiable Intangible Assets

 

Goodwill by reporting segment was as follows:

 

 

 

August 28,
2005

 

May 29,
2005

 

August 29,
2004

 

Retail Products

 

$

3,474.5

 

$

3,477.7

 

$

3,477.2

 

Foodservice Products

 

282.7

 

283.2

 

277.2

 

Food Ingredients

 

36.8

 

36.8

 

36.8

 

Total

 

$

3,794.0

 

$

3,797.7

 

$

3,791.2

 

 

Other identifiable intangible assets were as follows:

 

 

 

August 28, 2005

 

May 29, 2005

 

August 29, 2004

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Non-amortizing intangible assets

 

$

790.5

 

$

 

$

790.5

 

$

 

$

798.1

 

$

 

Amortizing intangible assets

 

42.5

 

13.7

 

42.1

 

12.9

 

39.0

 

10.7

 

 

 

$

833.0

 

$

13.7

 

$

832.6

 

$

12.9

 

$

837.1

 

$

10.7

 

 

Non-amortizing intangible assets are comprised of the following balances:

 

 

 

August 28,
2005

 

May 29,
2005

 

August 29,
2004

 

Brands/Trademarks

 

$

769.6

 

$

769.6

 

$

776.5

 

Pension Intangible Asset

 

19.5

 

19.5

 

20.2

 

Miscellaneous

 

1.4

 

1.4

 

1.4

 

Total non-amortizing intangible assets

 

$

790.5

 

$

790.5

 

$

798.1

 

 

Amortizing intangible assets, carrying a weighted average life of approximately 16 years, are principally composed of licensing arrangements and customer lists.  Based on amortizing assets recognized in the company’s balance sheet as of August 28, 2005, amortization expense is estimated to be approximately $2.7 million for each of the next five years.

 

4.              Derivative Financial Instruments

 

The fair value of derivative assets is recognized within prepaid expenses and other current assets, while the fair value of derivative liabilities is recognized within other accrued liabilities.  As of August 28, 2005, May 29, 2005 and August 29, 2004, the fair value of derivatives recognized within prepaid expenses and other current assets was $506.2 million, $300.2 million and $238.3 million, respectively, while the amount recognized within other accrued liabilities was $182.2 million, $266.9 million and $192.3 million, respectively.

 

12



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Thirteen Weeks ended August 28, 2005

(columnar dollars in millions except per share amounts)

 

For the quarters ending August 28, 2005 and August 29, 2004, the ineffectiveness associated with derivatives designated as cash flow and fair value hedges from continuing operations resulted in a gain of $5.6 million and a gain of $0.2 million, respectively.  Hedge ineffectiveness is recognized within net sales, cost of goods sold or interest expense, depending on the nature of the hedge.  The company does not exclude any component of the hedging instrument’s gain or loss when assessing effectiveness.

 

Generally, the company hedges a portion of its anticipated consumption of certain commodity inputs for periods ranging from 12 to 36 months.  The company may enter into longer-term hedges on particular commodities if deemed appropriate.  As of August 28, 2005, the company had hedged certain portions of its anticipated consumption of commodity inputs through March 2008.

 

As of August 28, 2005, May 29, 2005 and August 29, 2004, the net deferred gain or loss recognized in accumulated other comprehensive income was a $36.4 million gain, a $7.7 million gain and a $16.3 million loss, net of tax, respectively. The company anticipates a gain of $22.0 million, net of tax, will be transferred out of accumulated other comprehensive income and recognized within earnings over the next 12 months.  The company anticipates a gain of $14.4 million, net of tax, will be transferred out of accumulated other comprehensive income and recognized within earnings subsequent to the next 12 months.

 

In order to reduce exposures related to changes in interest rates, the company may use derivative instruments, including interest rate swaps.  During fiscal 2004, the company closed out all $2.5 billion of its interest rate swap agreements in order to lock-in existing favorable interest rates.  These interest rate swap agreements were previously put in place as a strategy to hedge interest costs associated with long-term debt.  For financial statement and tax purposes the proceeds received upon termination of the interest rate swap agreements is being recognized over the term of the debt instruments originally hedged.

 

Of the $2.5 billion interest rate swaps closed out in fiscal 2004, $2.0 billion of the interest rate swaps had been used to effectively convert certain of the company’s fixed rate debt into floating rate debt.  These interest rate swaps were accounted for as fair value hedges and resulted in no recognition of ineffectiveness in the statement of earnings as the interest rate swaps’ provisions matched the applicable provisions of the hedged debt.  The remaining $500 million portion of the company’s interest rate swaps was used to hedge certain of the company’s forecasted interest payments on floating rate debt for the period from 2005 through 2011.  These interest rate swaps were accounted for as cash flow hedges with gains and losses deferred in accumulated other comprehensive income.  During the second quarter of fiscal 2005, the company determined it was no longer probable that the related floating rate debt would be issued and therefore the company recognized approximately $13.6 million of additional interest expense associated with this interest rate swap.  The company’s net interest expense was reduced by $4.0 million due to the net impact of interest rate swap agreements in the first quarter of fiscal 2006 and by $14.3 million in the comparable period of fiscal 2005.

 

13



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Thirteen Weeks ended August 28, 2005

(columnar dollars in millions except per share amounts)

 

5.              Earnings Per Share

 

Basic earnings per share is calculated on the basis of weighted average outstanding common shares.  Diluted earnings per share is computed on the basis of basic weighted average outstanding common shares adjusted for the dilutive effect of stock options, restricted stock awards and other dilutive securities.

 

The following table reconciles the income and average share amounts used to compute both basic and diluted earnings per share:

 

 

 

Thirteen weeks ended

 

 

 

August 28,
2005

 

August 29,
2004

 

Net income:

 

 

 

 

 

Income from continuing operations

 

$

347.3

 

$

132.4

 

Income from discontinued operations, net of tax

 

4.8

 

2.3

 

Net income

 

$

352.1

 

$

134.7

 

 

 

 

 

 

 

Weighted Average Shares Outstanding:

 

 

 

 

 

Basic weighted average shares outstanding

 

518.1

 

517.0

 

Add: Dilutive effect of stock options, restricted stock awards and other dilutive securities

 

2.4

 

4.4

 

Diluted weighted average shares outstanding

 

520.5

 

521.4

 

 

For the first quarter of fiscal 2006 there were 13.8 million stock options outstanding that were excluded from the computation of shares contingently issuable upon exercise of the stock options because exercise prices exceeded the average market value of common stock during the period.  For the first quarter of fiscal 2005, 7.9 million stock options were excluded from the calculation.

 

6.              Inventories

 

The major classes of inventories are as follows:

 

 

 

August 28,
2005

 

May 29,
2005

 

August 29,
2004

 

Raw materials and packaging

 

$

1,110.6

 

$

1,013.0

 

$

974.8

 

Work in process

 

101.3

 

79.7

 

101.7

 

Finished goods

 

1,393.9

 

1,382.4

 

1,317.8

 

Supplies and other

 

150.5

 

139.4

 

190.6

 

 

 

$

2,756.3

 

$

2,614.5

 

$

2,584.9

 

 

14



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Thirteen Weeks ended August 28, 2005

(columnar dollars in millions except per share amounts)

 

7.              Cost Reduction Efforts

 

In fiscal 2004, the company identified specific operating efficiency initiatives as part of an effort to improve the company’s cost structure, margins and competitive position.  As a result of these specific initiatives, the company recognized certain expenses during fiscal 2004 and 2005, including employee termination costs, accelerated depreciation on fixed assets, equipment/employee relocation costs, asset impairments and other related costs.  The company recognized $13.6 million of expenses in the first quarter of fiscal 2005 for these initiatives.  These costs were primarily incurred in the Retail Products segment.

 

As part of the company’s ongoing efforts to reduce general and administrative expenses, including salaried headcount, during the fourth quarter of fiscal 2005 the company announced it was in the process of eliminating several hundred salaried jobs across the organization and recognized $42.7 million of severance expense primarily within its Retail Products segment and Corporate.  The headcount reductions were largely completed during the first quarter of fiscal 2006.  As of August 28, 2005, $24.8 million was included in other accrued liabilities in the company’s consolidated balance sheet for the settlement of severance costs.  These liabilities are expected to be paid over the next several months.

 

8.              Plant Closure Charges and Asset Impairments

 

As a result of a Retail Products plant closure in the first quarter of fiscal 2006, the company recognized pre-tax charges of $6.5 million, primarily for expenses related to severance and accelerated depreciation.

 

Also during the first quarter of fiscal 2006, the company determined that the carrying value of its investments in two unrelated joint ventures were other than temporarily impaired and therefore recognized pre-tax impairment charges totaling $19.4 million ($17.4 million after tax).  These charges are reflected in equity method investment earnings (loss) in the consolidated statement of earnings.  The extent of the impairments was determined based upon the company’s assessment of the recoverability of its investments based primarily upon the expected proceeds of planned dispositions of the investments.

 

9.            Income Taxes

 

In the first quarter of fiscal 2006 and 2005, the company’s income tax expense was $193.6 million and $81.0 million, respectively.  The effective tax rate (calculated as the ratio of income tax expense to pre-tax income from continuing operations, inclusive of equity method investment earnings) was approximately 36% for the first quarter of fiscal 2006 and 38% for the first quarter of fiscal 2005.  The company’s effective tax rate was lower in the first quarter of fiscal 2006 than in the first quarter of fiscal 2005 due to the impact of foreign taxes and related tax credits, increased research and development tax credits, the benefit from the new domestic manufacturing deduction, and a lower effective state income tax rate.

 

10.       Contingencies

 

In fiscal 1991, the company acquired Beatrice Company (“Beatrice”).  As a result of the acquisition and the significant pre-acquisition contingencies of the Beatrice businesses and its former subsidiaries, the consolidated post-acquisition financial statements of the company reflect significant liabilities associated with the estimated resolution of these contingencies.  These include various litigation and environmental proceedings related to businesses divested by Beatrice prior to its acquisition by the company.  The environmental proceedings include litigation and administrative proceedings involving Beatrice’s status as

 

15



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Thirteen Weeks ended August 28, 2005

(columnar dollars in millions except per share amounts)

 

a potentially responsible party at 31 Superfund, proposed Superfund or state-equivalent sites; these sites involve locations previously owned or operated by predecessors of Beatrice that used or produced petroleum, pesticides, fertilizers, dyes, inks, solvents, PCBs, acids, lead, sulfur, tannery wastes, and/or other contaminants.  Beatrice has paid or is in the process of paying its liability share at 30 of these sites.  Reserves for these matters have been established based on the company’s best estimate of its undiscounted remediation liabilities, which estimates include evaluation of investigatory studies, extent of required cleanup, the known volumetric contribution of Beatrice and other potentially responsible parties and its experience in remediating sites.  The reserves for Beatrice environmental matters totaled $109.6 million as of August 28, 2005, a majority of which relates to the Superfund and state equivalent sites referenced above.  Expenditures for these matters are expected to occur over a period of 5 to 20 years.

 

In certain limited situations, the company will guarantee an obligation of an unconsolidated entity.  Currently, the company guarantees certain obligations primarily associated with leases entered into by certain of its equity method investees and the divested fresh beef and pork business.  Under these arrangements, the company is obligated to perform under these leases (i.e., make the lease payments) should the primary obligor be unable to perform.  Most of these guarantees resulted from the company’s fresh beef and pork divestiture.  The leases have terms not exceeding 10 years and the maximum amount of future payments the company has guaranteed is approximately $44.2 million as of August 28, 2005.  The company has also assigned a hog purchase contract to the beef and pork business which has indemnified the company for all liabilities under the contract.  The company has, however, guaranteed the performance of the fresh beef and pork business with respect to the hog purchase contract.  The hog purchase contract requires the fresh beef and pork business to purchase a minimum of approximately 1.2 million hogs annually through 2014.  The contract stipulates minimum price commitments, based in part on market prices and, in certain circumstances, also includes price adjustments based on certain inputs.

 

On June 22, 2001, the company filed an amended annual report on Form 10-K for the fiscal year ended May 28, 2000.  The filing included restated financial information for fiscal years 1997, 1998, 1999 and 2000.  The restatement, due to accounting and conduct matters at its United Agri Products, Inc., (“UAP”) subsidiary, was based upon an investigation undertaken by the company and the Audit Committee of its Board of Directors.  The restatement was principally related to revenue recognition for deferred delivery sales and vendor rebates, advance vendor rebates and bad debt reserves.  The Securities and Exchange Commission (“SEC”) issued a formal order of nonpublic investigation dated September 28, 2001.  The company is cooperating with the SEC investigation, which relates to the UAP matters described above, as well as other aspects of the company’s financial statements, including the level and application of certain of the company’s reserves.

 

The company is currently conducting discussions with the SEC Staff regarding a possible settlement of these matters.  Based on discussions to date, the company estimates the amount of such settlement and related payments to be approximately $46.5 million.  The company recorded charges of $25 million and $21.5 million in fiscal 2004 and the third quarter of fiscal 2005, respectively, in connection with the expected settlement of these matters.  There can be no assurance that the negotiations with the SEC Staff will ultimately be successful or that the SEC will accept the terms of any settlement that is negotiated with the SEC Staff.  Accordingly, the terms of any settlement, if reached, could result in charges greater than the amount currently estimated and recognized in the company’s financial statements.

 

The company is party to a number of lawsuits and claims arising out of the operation of its business.  After taking into account liabilities recorded for all of the foregoing matters, management believes the ultimate resolution of such matters should not have a material adverse effect on the company’s financial condition, results of operations or liquidity.

 

16



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Thirteen Weeks ended August 28, 2005

(columnar dollars in millions except per share amounts)

 

11.       Pension and Postretirement Benefits

 

The company and its subsidiaries have defined benefit retirement plans (“plans”) for eligible salaried and hourly employees.  Benefits are based on years of credited service and average compensation or stated amounts for each year of service.  The company uses February 28 as its measurement date for its plans.  The company also sponsors postretirement plans which provide certain medical and dental benefits (“other benefits”) to qualifying U.S. employees.

 

Components of pension benefit and other postretirement benefit costs are:

 

 

 

Pension

 

Other Postretirement

 

 

 

Thirteen weeks ended

 

Thirteen weeks ended

 

 

 

August 28,
2005

 

August 29,
2004

 

August 28,
2005

 

August 29,
2004

 

Service cost

 

$

15.9

 

$

14.7

 

$

0.6

 

$

1.0

 

Interest cost

 

31.4

 

30.8

 

5.3

 

7.4

 

Expected return on plan assets

 

(32.4

)

(32.8

)

(0.1

)

(0.1

)

Amortization of prior service cost

 

0.7

 

0.6

 

(3.2

)

(0.2

)

Amortization of transition amount

 

 

(0.1

)

 

 

Recognized net actuarial loss

 

4.7

 

2.6

 

2.0

 

1.9

 

Benefit cost – company plans

 

20.3

 

15.8

 

4.6

 

10.0

 

Pension benefit cost – multi-employer plans

 

2.0

 

2.3

 

 

 

Total benefit cost

 

$

22.3

 

$

18.1

 

$

4.6

 

$

10.0

 

 

During the thirteen weeks ended August 28, 2005, the company contributed $24.0 million to the pension plans and contributed $14.0 million to the company’s other postretirement plans.  The company anticipates making further contributions of approximately $7 million to its pension plans for the remainder of fiscal 2006. The company anticipates making further contributions in a range of $31 million to $36 million to its other postretirement plans during the remainder of fiscal 2006.  These estimates are based on current tax laws, plan asset performance and liability assumptions, which are subject to change.

 

12.       Business Segments

 

The company’s operations are organized into three reporting segments:  Retail Products, Foodservice Products and Food Ingredients.  The Retail Products reporting segment includes branded foods which are sold in various retail channels and include frozen, refrigerated and shelf-stable temperature classes.  The Foodservice Products reporting segment includes branded and customized food products, including meals, entrees, prepared potatoes, meats, seafood, sauces and a variety of custom-manufactured culinary products packaged for sale to restaurants and other foodservice establishments. The Food Ingredients reporting segment includes both branded and commodity food ingredients, including milled grain ingredients, seasonings, blends and flavorings, which are sold to food processors, as well as certain commodity trading, sourcing and merchandising operations.

 

Intersegment sales have been recorded at amounts approximating market.  Operating profit for each segment is based on net sales less all identifiable operating expenses.  General corporate expense, gain on

 

17



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Thirteen Weeks ended August 28, 2005

(columnar dollars in millions except per share amounts)

 

sale of Pilgrim’s Pride Corporation common stock, net interest expense, equity method investment earnings (loss) and income taxes have been excluded from segment operations.

 

Operating profit for the first quarter of fiscal 2006 at the Retail Products segment includes a $6.5 million pre-tax charge related to a plant closure.

 

 

 

Thirteen weeks ended

 

 

 

August 28,
2005

 

August 29,
2004

 

Sales to unaffiliated customers

 

 

 

 

 

Retail Products

 

$

1,941.6

 

$

2,014.2

 

Foodservice Products

 

789.9

 

792.2

 

Food Ingredients

 

631.4

 

576.8

 

Total

 

$

3,362.9

 

$

3,383.2

 

 

 

 

 

 

 

Intersegment sales

 

 

 

 

 

Retail Products

 

$

5.2

 

$

5.5

 

Foodservice Products

 

14.0

 

17.4

 

Food Ingredients

 

47.3

 

51.1

 

 

 

66.5

 

74.0

 

Intersegment elimination

 

(66.5

)

(74.0

)

Total

 

$

 

$

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

Retail Products

 

$

1,946.8

 

$

2,019.7

 

Foodservice Products

 

803.9

 

809.6

 

Food Ingredients

 

678.7

 

627.9

 

Intersegment elimination

 

(66.5

)

(74.0

)

Total

 

$

3,362.9

 

$

3,383.2

 

 

 

 

 

 

 

Operating profit

 

 

 

 

 

Retail Products

 

$

210.7

 

$

209.8

 

Foodservice Products

 

79.5

 

66.4

 

Food Ingredients

 

76.3

 

60.1

 

Total operating profit

 

366.5

 

336.3

 

 

 

 

 

 

 

Gain on sale of Pilgrim’s Pride Corporation common stock

 

329.4

 

 

General corporate expenses

 

73.0

 

63.6

 

Interest expense, net

 

68.1

 

73.4

 

Income tax expense

 

193.6

 

81.0

 

Equity method investment earnings (loss)

 

(13.9

)

14.1

 

 

 

 

 

 

 

Income from continuing operations

 

$

347.3

 

$

132.4

 

 

The company’s largest customer, Wal-Mart Stores, Inc. and its affiliates, accounted for approximately 13% and 12% of consolidated net sales for the first quarter of fiscal 2006 and 2005, respectively, primarily in the Retail Products segment.

 

18



 

ConAgra Foods, Inc. and Subsidiaries

Part I – Financial Information

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

FORWARD-LOOKING STATEMENTS

 

This report, including Management’s Discussion & Analysis, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements are based on management’s current views and assumptions of future events and financial performance and are subject to uncertainty and changes in circumstances.  Readers of this report should understand that these statements are not guarantees of performance or results.  Many factors could affect the company’s actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements.  These factors include, among other things, future economic circumstances, industry conditions, company performance and financial results, availability and prices of raw materials, product pricing, competitive environment and related market conditions, operating efficiencies, access to capital, actions of governments and regulatory factors affecting the company’s businesses and other risks described in the company’s reports filed with the Securities and Exchange Commission.  The company cautions readers not to place undue reliance on any forward-looking statements included in this report which speak only as of the date of this report.

 

Following is management’s discussion and analysis of the company’s operating results as well as liquidity and capital resources which should be read together with the company’s financial statements and related notes contained in this report and with the financial statements and management’s discussion and analysis in the company’s annual report on Form 10-K for the fiscal year ended May 29, 2005.  Results for the thirteen week period ended August 28, 2005 are not necessarily indicative of results that may be attained in the future.

 

Fiscal 2006 First Quarter Executive Overview

 

ConAgra Foods is one of North America’s largest packaged food companies, serving consumer grocery retailers, as well as restaurants and other foodservice establishments.  Popular ConAgra Foods consumer brands include:  ACT II, Armour, Banquet, Blue Bonnet, Brown ‘N Serve, Butterball, Chef Boyardee, Cook’s, Crunch ‘n Munch, DAVID, Eckrich, Egg Beaters, Fleischmann’s, Gulden’s, Healthy Choice, Hebrew National, Hunt’s, Kid Cuisine, Knott’s Berry Farm, La Choy, Lamb Weston, Libby’s, Louis Kemp, Lunch Makers, MaMa Rosa’s, Manwich, Marie Callender’s, Orville Redenbacher’s, PAM, Parkay, Pemmican, Peter Pan, Reddi-wip, Rosarita, Ro*Tel, Slim Jim, Snack Pack, Swiss Miss, Van Camp’s, Wesson, Wolf and many others.

 

Over the past few years, the company has strategically repositioned its portfolio to focus on higher-margin, branded and value-added businesses because that business mix is expected to better serve consumers, customers and shareholders over the long term.  Executing that strategy has involved acquiring branded operations and divesting commodity-related businesses.  The company is also implementing initiatives to improve the operating performance of its core business segments through more effective and efficient sales, marketing and supply chain functions.

 

During the first quarter of fiscal 2006, the company:

 

                  earned $0.68 per diluted share, which includes $0.40 per diluted share gain from the sale of Pilgrim’s Pride Corporation common stock and $0.01 per diluted share of earnings from discontinued operations, as compared to first quarter fiscal 2005 diluted earnings per share of $0.26,

 

19



 

ConAgra Foods, Inc. and Subsidiaries

Part I – Financial Information

 

                  achieved 7% improvement in gross profit despite 1% decline in net sales, largely due to a favorable environment for trading and merchandising operations within the Food Ingredients segment for which gross profit increased by 41% and improved performance from the Foodservice Products segment which more than offset a 1% decline in gross profit within the Retail Products segment,

 

                  recognized charges of $0.04 per diluted share reflecting impairments of certain equity method investments and costs associated with a plant closure,

 

                  sold the remaining investment in Pilgrim’s Pride Corporation common stock for $482 million, thereby completing the monetization of the company’s discontinued poultry operations,

 

                  announced the appointment of Gary Rodkin as the company’s new chief executive officer and the election of Steven F. Goldstone as the non-executive chairman, effective October 1, 2005.

 

Multi-Year Marketing, Operating and Business Process Improvement Initiatives

 

ConAgra Foods is focused on sales and marketing, operating, and business process improvement initiatives that are key to profitable future growth and stronger returns on capital.

 

Sales and Marketing Initiatives: Growing volumes and improving product mix is essential to long-term success, and requires the company to develop its brands, enhance customer service, find new customers, and go to market with new products that are responsive to consumer preference.

 

The company is implementing fact-based analytical methods for assessing the potential of its brands and products in a disciplined process.  This is designed to bring a consistency to the marketing function across retail, foodservice, and ingredients operations.  These methods address the fundamentals of the products the company sells - taste profile, packaging, product quality, and nutritional statistics - and also help design appropriate consumer communication through advertising and promotion campaigns, store merchandising programs, and appropriate price points.

 

Operating Initiatives:  The company is striving to achieve cost savings by integrating and upgrading the supply chain.  The primary areas of emphasis are purchasing, logistics, manufacturing, and the reduction of SKUs (stock keeping units, or individual products).

 

Purchasing:  The company is in the process of consolidating the purchasing activity for major inputs to more effectively and efficiently purchase inputs used across its segments.

 

Logistics:  The company is transitioning from a network of several hundred warehouses across the country to a network defined by 14 mixing centers that will support retail and foodservice operations in strategic locations.  This new structure is intended to better utilize truckload shipments and optimize warehouse investment, while also reducing working capital as excess inventory quantities are eliminated.

 

Manufacturing:  The company has been developing plans to consolidate manufacturing facilities, under which inefficient plants will most likely be closed and sold over time.  The company expects to increase capacity utilization through plant rationalization and implementation of best practices relating to overall efficiency throughout all plants, resulting in cost savings and improved margins.

 

20



 

ConAgra Foods, Inc. and Subsidiaries

Part I – Financial Information

 

SKU Rationalization:  The company has reduced low-volume, low-margin SKUs over the past few quarters, and plans to continue to do this aggressively over the next 2-3 years.  SKU reduction is expected to reduce complexity and save money throughout the entire supply chain, and also result in an increased focus on the SKUs that have higher profit potential.

 

General and Administrative Expense and Headcount Reduction:  The company is pursuing plans for reductions in its SG&A (selling, general and administrative) cost structure, and those plans include salaried headcount reduction.  The reduction of several hundred salaried personnel was completed in the first quarter of fiscal 2006; those headcount reductions, along with other SG&A expense reduction programs, are expected to reduce planned SG&A costs by more than $100 million annually once the programs are completed.

 

Business Process Improvement Initiatives:  The company is changing its business processes and implementing new information systems so that it has improved connections between the manufacturing, marketing, sales, logistics, customer service and accounting functions.  The new processes are intended to improve operating efficiency and relationships with customers and vendors.  This is being done through Project Nucleus, which integrates the new information technology platforms and allows the company to better manage important areas such as trade merchandising programs, order management, inventory management, customer payment and collections, and logistics.

 

Packaged Meats

 

Profit margin trends for the packaged meats operations within the Retail Products and Foodservice Products segments have improved from the trends experienced during the second half of fiscal 2005.  However, gross profits for these operations remain substantially below historic levels.  The company’s packaged meats operations posted weak results in fiscal 2005, resulting primarily from higher input costs and ineffective pricing actions that did not recover the increased costs.  Also, manufacturing challenges resulting from the installation of new equipment, consolidation of plant locations and transfer of production across plant locations resulted in the disruption of the company’s ability to fill customer orders for certain products, primarily in the third quarter of fiscal 2005.  The packaged meats operations are benefiting from new management and lower pork input costs, as well as better net pricing policies that are closely linked to SKU reduction efforts and product and customer mix improvement.

 

Sale of Pilgrim’s Pride Corporation Common Stock

 

During the first quarter of fiscal 2006, the company sold its remaining 15.4 million shares of Pilgrim’s Pride Corporation common stock for $482 million, resulting in a pre-tax gain of $329 million.  This investment had been acquired as a portion of the proceeds for the sale of the company’s discontinued poultry operations in November 2003.

 

Opportunities and Challenges

 

The company believes that its sales and marketing and operating initiatives will favorably influence future profits, profit margins and returns on capital.  Because of the scope of change underway, there is risk in successfully implementing these broad change initiatives.

 

As described above, the company has made several changes to its retail and foodservice packaged meats businesses.  The company has begun to benefit from these changes and expects to continue to improve the profitability of these operations over time.  However, competitive pressures, input costs and the execution of

 

21



 

ConAgra Foods, Inc. and Subsidiaries

Part I – Financial Information

 

the operational changes, among other factors, will affect the future profitability of these operations and the timing of any profit recovery.

 

The company has, over the past several quarters, experienced increased costs for many of its significant raw materials, packaging and energy inputs.  When appropriate, the company uses long-term purchase contracts, futures and options to reduce the volatility of these costs.  The company has also recently implemented sales price increases for certain products and will continue to evaluate further price increases based on raw material cost trends, expected impact on sales volumes and other factors.

 

Changing consumer preferences may impact sales of certain of the company’s products.  The company offers a variety of food products which appeal to a range of consumer preferences and utilizes innovation and marketing programs to develop products that fit with changing consumer trends.  As part of these programs, the company introduces new products and product extensions.

 

Consolidation of many of the company’s customers continues to result in increased buying power, negotiating strength and complex service requirements for those customers.  This trend, which is expected to continue, may negatively impact gross margins, particularly in the Retail Products segment.  In order to effectively respond to this customer consolidation, during fiscal 2004 the company consolidated its sales force to more efficiently service its customers.  In fiscal 2003, the company’s retail customer service centers were consolidated into one specialized facility to service all retail channel customers.  The company continues to streamline its distribution network in order to reduce costs and increase its responsiveness to customer needs.

 

Segment Review

 

The company’s operations are organized into three reporting segments:  Retail Products, Foodservice Products and Food Ingredients.  The Retail Products reporting segment includes branded foods which are sold in various retail channels and include frozen, refrigerated and shelf-stable temperature classes.  The Foodservice Products reporting segment includes branded and customized food products, including meals, entrees, prepared potatoes, meats, seafood, sauces and a variety of custom-manufactured culinary products packaged for sale to restaurants and other foodservice establishments. The Food Ingredients reporting segment includes both branded and commodity food ingredients, including milled grain ingredients, seasonings, blends and flavorings, which are sold to food processors, as well as certain commodity trading, sourcing and merchandising operations.

 

22



 

ConAgra Foods, Inc. and Subsidiaries

Part I – Financial Information

 

Net Sales

 

 

 

Net Sales

 

 

 

Thirteen weeks ended

 

($ in millions)
Reporting Segment

 

August 28,
2005

 

August 29,
2004

 

% Increase /
(Decrease)

 

Retail Products

 

$

1,942

 

$

2,014

 

(4)%

 

Foodservice Products

 

790

 

792

 

 

Food Ingredients

 

631

 

577

 

9%

 

 

 

$

3,363

 

$

3,383

 

(1)%

 

 

Net sales for the first quarter of fiscal 2006 were $3.4 billion, a decrease of $20 million, or 1%, from the same period in the prior fiscal year.  This decrease was driven primarily by the 4% decline in net sales in the Retail Products segment, partially offset by favorable results primarily in the trading and merchandising activities of the Food Ingredients segment.

 

Retail Products net sales for the first quarter were $1.9 billion, a decrease of $73 million, or 4%, compared to the same period in the prior year.  Sales volumes declined by 3%, reflecting the effect of price increases, customer and product mix changes, continued challenges for the packaged meats products, and to a lesser extent, the targeted reduction of SKUs.  Several major brands posted sales growth, including Butterball, Chef Boyardee, DAVID, Kid Cuisine, La Choy, Manwich, Marie Callender’s, Orville Redenbacher’s, Peter Pan, Slim Jim, Snack Pack, Van Camp’s and Wesson.  Sales declines occurred for certain large brands including ACT II, Armour, Banquet, Blue Bonnet, Cook’s, Eckrich, Egg Beaters, Healthy Choice, Hebrew National, Hunt’s, PAM, Parkay, Reddi-wip and Swiss Miss.

 

Foodservice Products net sales were $790 million in the first quarter of fiscal 2006 and $792 million in the same period of the prior year, reflecting improved sales volumes in specialty potato products and culinary products offset by decreased seafood sales due to the impact of tariffs and related competitive impacts.

 

Food Ingredients net sales were $631 million in the first quarter of fiscal 2006, an increase of $55 million, or 9%, from the same period in the prior year.  Increased net sales reflect a favorable environment for trading and merchandising of commodities including petroleum products, natural gas, grain and fertilizer.  The company also achieved increased net sales of its specialty ingredients products due to improved performance from its flour mills, but this was partially offset by continued weakness from its dehydrated product lines.

 

23



 

ConAgra Foods, Inc. and Subsidiaries

Part I – Financial Information

 

Gross Profit

(Net sales less cost of goods sold)

 

 

 

Gross Profit

 

 

 

Thirteen weeks ended

 

($ in millions)
Reporting Segment

 

August 28,
2005

 

August 29,
2004

 

% Increase /
(Decrease)

 

Retail Products

 

$

472

 

$

476

 

(1)%

 

Foodservice Products

 

135

 

121

 

12%

 

Food Ingredients

 

121

 

86

 

41%

 

 

 

$

728

 

$

683

 

7%

 

 

The company’s gross profit for the first quarter of fiscal 2006 was $728 million, an increase of 7% from the same period in the prior year.  The improved gross profits were largely driven by the unusually strong results in the Food Ingredients segment, reflecting favorable market conditions in its commodity trading and merchandising operations.  Gross profits continue to be negatively impacted by increased input costs, primarily in the Retail Products and Foodservice Products segments.  Costs of implementing the company’s operational efficiency initiatives reduced gross profit for the first quarter of fiscal 2005 by $9 million.

 

Retail Products gross profit for the first quarter of fiscal 2006 was $472 million, a decrease of $4 million, or 1%, from the same period in the prior year.  The profit margin trends for packaged meats operations have improved from the trends experienced during the second half of fiscal 2005, but gross profit for branded processed meats was below prior year results for the first quarter of fiscal 2006.  Gross profits throughout the Retail Products segment were negatively impacted by inflation of raw materials and packaging and higher transportation costs, largely offset by increased pricing.  Costs of implementing the company’s operational efficiency initiatives reduced gross profit for the first quarter of fiscal 2005 by $7 million.

 

Foodservice Products gross profit was $135 million for the first quarter of fiscal 2006 and $121 million in the same period of the prior year, an increase of 12%.  Gross profit was negatively impacted in the first quarter of fiscal 2005 by $11 million of unfavorable production costs associated with a planned plant consolidation and $2 million of costs of implementing the company’s operational efficiency initiatives.

 

Food Ingredients gross profit for the first quarter of fiscal 2006 increased $35 million, or 41%, to $121 million.  Improvements in gross profit are due to favorable market conditions in the company’s commodity trading and merchandising operations, reflective of very favorable market conditions, primarily in crude oil and natural gas markets, and to a lesser extent to improved performance from the company’s flour milling operations.  The company does not expect to consistently achieve this level of gross profits in its trading and merchandising operations in future periods.

 

24



 

ConAgra Foods, Inc. and Subsidiaries

Part I – Financial Information

 

 

 

Gross Margin Percent

 

 

 

Thirteen weeks ended

 

Reporting Segment

 

August 28,
2005

 

August 29,
2004

 

Retail Products

 

24

%

24

%

Foodservice Products

 

17

%

15

%

Food Ingredients

 

19

%

15

%

Total

 

22

%

20

%

 

The company’s gross margin (gross profit as a percentage of net sales) for the first quarter of fiscal 2006 was 22%, as compared to 20% for the same period in the prior year, primarily reflecting the impact of the high margins realized in the Food Ingredients segment resulting from strong performance in the trading and merchandising operations.

 

Selling, General and Administrative Expenses (includes general corporate expense)

 

Selling, general and administrative expenses totaled $434 million for the first quarter of fiscal 2006, an increase of $24 million, or 6%, as compared to the same period in the prior year. The increase is primarily attributable to increased incentive costs due to favorable performance in the Food Ingredients segment, increased income tax-related professional fees, and certain costs related to the closure of a Retail Products segment production facility.

 

Operating Profit (Earnings before general corporate expense, interest expense, net, gain on the sale of Pilgrim’s Pride Corporation common stock, income taxes and equity method investment earnings)

 

 

 

Operating Profit

 

 

 

Thirteen weeks ended

 

($ in millions)
Reporting Segment

 

August 28,
2005

 

August 29,
2004

 

% Increase /
(Decrease)

 

Retail Products

 

$

211

 

$

210

 

—%

 

Foodservice Products

 

80

 

66

 

20%

 

Food Ingredients

 

76

 

60

 

27%

 

 

Retail Products operating profit for the first quarter of fiscal 2006 was $211 million, essentially unchanged from the same period in the prior year, reflective of the slightly reduced gross profit for the reasons cited in the Gross Profit discussion, above.

 

For the first quarter of fiscal 2006, Foodservice Products operating profit was $80 million, compared with $66 million for the first quarter of the prior fiscal year.  Operating profit is reflective of increased gross profits, largely due to fiscal 2005 costs, including the $11 million of unfavorable production costs associated with a planned plant consolidation and $5 million of costs of implementing the company’s operational efficiency initiatives, which were not incurred in the first quarter of fiscal 2006.

 

Food Ingredients operating profit for the first quarter of fiscal 2006 was $76 million, an increase of $16 million, or 27%, over the same period in the prior year.  Improved results are due to a favorable environment in the company’s commodity trading and merchandising operations, the operating profit of

 

25



 

ConAgra Foods, Inc. and Subsidiaries

Part I – Financial Information

 

which increased $19 million to $47 million for the first quarter of fiscal 2006 over the same period in the prior year.

 

Interest Expense, Net

 

Net interest expense for the first quarter of fiscal 2006 decreased $5 million, or 7%, as compared to the same period in fiscal 2005.  Decreased interest expense reflects the company’s reduction of $1.2 billion of long-term debt over the last twelve months, partially offset by a reduced benefit from the interest rate swap agreements terminated in the second quarter of fiscal 2004.  During fiscal 2004, the company closed out all of its interest rate swap agreements in order to lock-in existing favorable interest rates.  These interest rate swap agreements were previously put in place as a strategy to hedge interest costs associated with long-term debt.  For financial statement purposes the benefit associated with the termination of the interest rate swap agreements continues to be recognized over the term of the debt instruments originally hedged.  The company’s net interest expense was reduced by $4 million due to the interest rate swap agreements in the first quarter of fiscal 2006 and by $14 million in the comparable period of fiscal 2005.

 

Gain on Sale of Pilgrim’s Pride Corporation Common Stock

 

During the first quarter of fiscal 2006, the company sold its remaining 15.4 million shares of Pilgrim’s Pride Corporation common stock for $482 million, resulting in a pre-tax gain of $329 million.

 

Income Taxes

 

In the first quarter of fiscal 2006 and 2005, the company’s income tax expense was $193.6 million and $81.0 million, respectively.  The effective tax rate (calculated as the ratio of income tax expense to pre-tax income from continuing operations, inclusive of equity method investment earnings) was approximately 36% for the first quarter of fiscal 2006 and 38% for the first quarter of fiscal 2005.  The company’s effective tax rate was lower in the first quarter of fiscal 2006 than in the first quarter of fiscal 2005 due to the impact of foreign taxes and related tax credits, increased research and development tax credits, the benefit from the new domestic manufacturing deduction, and a lower effective state income tax rate.

 

Equity Method Investment Earnings (Loss)

 

Equity method investment losses for the first quarter of fiscal 2006 were $14 million.  During the first quarter of fiscal 2006, the company determined that the carrying value of its investments in two unrelated joint ventures were other than temporarily impaired and therefore recognized pre-tax impairment charges totaling $19 million ($17 million after tax).  The extent of the impairments was determined based upon the company’s assessment of the recoverability of its investments based primarily upon the expected proceeds of planned dispositions of the investments.  Equity method investment earnings were $14 million in the first quarter of fiscal 2005, which included $7 million of earnings from the company’s equity interest in Swift Foods, an investment which was divested in the second quarter of fiscal 2005.

 

Discontinued Operations

 

The first quarter of fiscal 2006 includes after tax income of $5 million from discontinued operations as compared to income of $2 million in the same period of the prior year.

 

26



 

ConAgra Foods, Inc. and Subsidiaries

Part I – Financial Information

 

Earnings Per Share

 

The company’s fiscal 2006 first quarter diluted earnings per share were $0.68, which includes $0.40 per diluted share gain from the sale of Pilgrim’s Pride Corporation common stock and $0.01 per diluted share of earnings from discontinued operations, as compared to first quarter fiscal 2005 diluted earnings per share of $0.26.

 

Liquidity and Capital Resources

 

Sources of Liquidity and Capital

 

The company’s primary financing objective is to maintain a prudent capital structure that provides the flexibility to pursue its growth objectives.  The company currently uses short-term debt to finance increases in its trade working capital (accounts receivable plus inventory, less accounts payable, accrued expenses and advances on sales) needs and a combination of equity and long-term debt to finance both its base trade working capital needs and its noncurrent assets.

 

Commercial paper borrowings (usually less than 30 days maturity) are reflected in the company’s consolidated balance sheets within notes payable.  The company maintains a $1.05 billion revolving credit line as a backup to the company’s commercial paper program.  The company has never used the revolving credit facility.  The company is in compliance with the credit agreements’ financial covenants.  Management believes the company will maintain its current commercial paper credit rating for the foreseeable future, thus allowing the company’s continued issuance of commercial paper.  If the company were unable to access the short-term commercial paper market, the company could use its bank revolving credit facility to provide liquidity.

 

The company’s $1.05 billion revolving credit facility (expiring in May 2007) is with major domestic and international banks.  The interest rate for the revolving credit facilities are generally .30 to .35 percentage points higher than the interest rates for commercial paper.

 

The company’s overall level of interest-bearing debt as of the end of the first quarter of fiscal year 2006 totaled $4.5 billion, compared to $5.7 billion as of the end of the first quarter of fiscal 2005.  As of the end of the first quarter of fiscal 2006, the company’s senior long-term debt ratings were BBB+ (Fitch), Baa1 (Moody’s) and BBB+ (Standard & Poor’s), all investment grade ratings.

 

In the first quarter of fiscal 2006, the company sold its remaining 15.4 million shares of Pilgrim’s Pride Corporation common stock to that company for $482 million.  The company recognized a pre-tax gain of approximately $329 million.

 

The company continues to evaluate opportunities to sell its $150 million subordinated notes receivable plus accrued interest of $39 million from the fresh beef and pork divestiture (which are reflected at a combined current fair value of $149 million in the company’s balance sheet at August 28, 2005).

 

Cash Flows

 

During the first quarter of fiscal 2006, the company generated $294 million of cash, which was the net impact of $5 million generated by operating activities, $430 million generated by investing activities, and $141 million used in financing activities.

 

27



 

ConAgra Foods, Inc. and Subsidiaries

Part I – Financial Information

 

Cash used in operating activities of continuing operations totaled $5 million in the first quarter of fiscal 2006, as compared to $152 million generated in the same period of the prior year.  The decreased cash flow was largely the result of an increase in inventory balances due to higher commodity input prices and increased production of certain products and an increase in derivative assets included in prepaid expenses and other current assets.  Cash generated from operating activities of discontinued operations was approximately $10 million in the first quarter of fiscal 2006, as compared to $4 million in the first quarter of fiscal 2005.  Cash flow from operating activities is one of the company’s primary sources of liquidity.

 

Cash provided by investing activities totaled $430 million in the first quarter of fiscal 2006, versus cash used in investing activities of $65 million in the same period of fiscal 2005.  Investing activities for the first quarter of fiscal 2006 consisted primarily of proceeds of $482 million from the sale of 15.4 million shares of Pilgrim’s Pride Corporation common stock, and proceeds from the sale of the company’s discontinued specialty meats foodservice business in Illinois of $14 million, offset by capital expenditures of $71 million.  Investing activities for the first quarter of fiscal 2005 consisted primarily of capital additions, partially offset by proceeds collected from the sale of the discontinued UAP North America operations.

 

Cash used in financing activities totaled $141 million in the first quarter of fiscal 2006, and $329 million in the first quarter of fiscal 2005.  During the first quarter of fiscal 2006 and 2005, the company paid dividends of $141 million and $135 million, respectively.  Additionally, in the first quarter of fiscal 2005, the company repurchased $181 million of its common stock as part of its share repurchase program.

 

The company estimates its capital expenditures in fiscal 2006 will be approximately $400 million.  Management believes that existing cash balances, cash flows from operations, existing credit facilities and access to capital markets will provide sufficient liquidity to meet its working capital needs, planned capital expenditures, amortizing debt payments and payment of quarterly dividends.

 

Off-Balance Sheet Arrangements

 

The company uses off-balance sheet arrangements (e.g., operating leases) where the economics and sound business principles warrant their use. The company periodically enters into guarantees and other similar arrangements as part of transactions in the ordinary course of business. These are described further in “Obligations and Commitments,” below.

 

As a result of adopting FIN 46R, the company has consolidated the assets and liabilities of several entities from which it leases property, plant and equipment.  The company also deconsolidated ConAgra Capital, L.C., an indirectly controlled subsidiary of the company, resulting in the removal of the preferred securities of subsidiary company of $175 million and addition of $221 million of long-term debt and $46 million in other assets in the company’s balance sheets as of August 29, 2004.  The company redeemed the preferred securities of ConAgra Capital, L.C. in December 2004.  Due to the adoption of FIN 46R, the company reflects in its balance sheet as of August 28, 2005:  property, plant and equipment of $211 million, long-term debt of $221 million (including current maturities of $8 million), other assets of $12 million, and other noncurrent liabilities of $6 million.  The company has no other material obligations arising out of variable interests with unconsolidated entities.

 

Obligations and Commitments

 

As part of its ongoing operations, the company enters into arrangements that obligate the company to make future payments under contracts such as lease agreements, debt agreements and unconditional purchase

 

28



 

ConAgra Foods, Inc. and Subsidiaries

Part I – Financial Information

 

obligations (i.e., obligations to transfer funds in the future for fixed or minimum quantities of goods or services at fixed or minimum prices, such as “take-or-pay” contracts).  The unconditional purchase obligation arrangements are entered into by the company in its normal course of business in order to ensure adequate levels of sourced product are available to the company.  Of these items, capital lease and debt obligations, which total $4.5 billion, are currently recognized as liabilities in the company’s consolidated balance sheet.  Operating lease obligations and unconditional purchase obligations, which total $994 million, are not recognized as liabilities in the company’s consolidated balance sheet in accordance with generally accepted accounting principles.

 

A summary of the company’s contractual obligations as of August 28, 2005 is as follows (including obligations of discontinued operations):

 

 

 

Payments Due by Period

 

(in millions)
Contractual Obligations

 

Total

 

Less than
1 Year

 

2-3 Years

 

4-5 Years

 

After 5
Years

 

Long-term debt

 

$

4,511.1

 

$

119.1

 

$

542.2

 

$

56.1

 

$

3,793.7

 

Lease obligations

 

729.9

 

101.9

 

196.7

 

128.1

 

303.2

 

Purchase obligations

 

264.1

 

74.2

 

125.0

 

36.4

 

28.5

 

Total

 

$

5,505.1

 

$

295.2

 

$

863.9

 

$

220.6

 

$

4,125.4

 

 

The company is also contractually obligated to pay interest on its long-term debt obligations.  The weighted average interest rate of the long-term debt obligations outstanding as of August 28, 2005 was approximately 7.4%.  As part of its ongoing operations, the company also enters into arrangements that obligate the company to make future cash payments only upon the occurrence of a future event (e.g., guarantees of debt or lease payments of a third party should the third party be unable to perform).  The following commercial commitments are not recognized as liabilities in the company’s consolidated balance sheet.  A summary of the company’s commitments, including commitments associated with the divested fresh beef and pork operations, as of August 28, 2005, is as follows:

 

(in millions)

 

Amount of Commitment Expiration Per Period

 

Other Commercial
Commitments

 

Total

 

Less than
1 Year

 

2-3 Years

 

4-5 Years

 

After 5
Years

 

Guarantees

 

$

56.2

 

$

8.0

 

$

21.2

 

$

9.3

 

$

17.7

 

Other commitments

 

7.9

 

7.6

 

0.3

 

 

 

Total

 

$

64.1

 

$

15.6

 

$

21.5

 

$

9.3

 

$

17.7

 

 

The company’s total commitments of $64 million include approximately $37 million in guarantees and other commitments the company has made on behalf of the divested fresh beef and pork business.

 

The company has assigned a hog purchase contract to the divested fresh beef and pork business which has indemnified the company for all liabilities under the contract.  The company has, however, guaranteed the performance of the divested fresh beef and pork business with respect to the hog purchase contract.  The hog purchase contract requires the divested fresh beef and pork business to purchase a minimum of approximately 1.2 million hogs annually through 2014.  The contract stipulates minimum price commitments, based in part on market prices and in certain circumstances also includes price adjustments based on certain inputs.

 

29



 

ConAgra Foods, Inc. and Subsidiaries

Part I – Financial Information

 

Trading Activities

 

The company accounts for certain contracts (e.g., “physical” commodity purchase/sale contracts and derivative contracts) at fair value.  The company considers a portion of these contracts to be its “trading” activities; specifically, those contracts that do not qualify for hedge accounting under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related amendment, SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities (collectively “SFAS No. 133”).

The following table represents the fair value and scheduled maturity dates of such contracts outstanding as of August 28, 2005:

 

 

 

Fair Value of Contracts as of
August 28, 2005
net asset / (liability)

 

Source of Fair Value

 

Maturity less
than 1 year

 

Maturity
1-3 years

 

Total Fair
Value

 

Prices actively quoted

 

$

211.2

 

$

18.2

 

$

229.4

 

Prices provided by other external sources

 

3.9