XNYS:CAG ConAgra Foods Inc Annual Report 10-K Filing - 5/27/2012

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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

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

For the fiscal year ended May 27, 2012

or

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

For the transition period from                   to

Commission File No. 1-7275

 

CONAGRA FOODS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware   47-0248710

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One ConAgra Drive

Omaha, Nebraska

  68102-5001
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (402) 240-4000

 

Securities registered pursuant to section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $5.00 par value   New York Stock Exchange

Securities registered pursuant to section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  þ

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  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  þ Accelerated filer  ¨

Non-accelerated filer    ¨  (Do not check if a smaller reporting company) Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨     No  þ

The aggregate market value of the voting common stock of ConAgra Foods, Inc. held by non-affiliates on November 25, 2011 (the last business day of the Registrant’s most recently completed second fiscal quarter) was approximately $9,865,276,377 based upon the closing sale price on the New York Stock Exchange on such date.

At June 24, 2012, 407,683,921 common shares were outstanding.

Documents incorporated by reference are listed on page 1.

Documents Incorporated by Reference

Portions of the Registrant’s definitive Proxy Statement for the Registrant’s 2012 Annual Meeting of Stockholders (the “2012 Proxy Statement”) are incorporated into Part III.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

            Page      

PART I

    3   

Item 1

  Business     3   
  Executive Officers of the Registrant     6   

Item 1A

  Risk Factors     9   

Item 1B

  Unresolved Staff Comments     13   

Item 2

  Properties     13   

Item 3

  Legal Proceedings     13   

Item 4

  Mine Safety Disclosures     15   

PART II

    15   

Item 5

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    15   

Item 6

  Selected Financial Data     16   

Item 7

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    17   

Item 7A

  Quantitative and Qualitative Disclosures About Market Risk     36   

Item 8

  Financial Statements and Supplementary Data     38   
 

Consolidated Statements of Earnings for the Fiscal Years Ended May 2012, 2011, and 2010

    38   
 

Consolidated Statements of Comprehensive Income for the Fiscal Years Ended May 2012, 2011, and 2010

    39   
  Consolidated Balance Sheets as of May 27, 2012 and May 29, 2011     40   
 

Consolidated Statements of Common Stockholders’ Equity for the Fiscal Years  Ended May 2012, 2011, and 2010

    41   
 

Consolidated Statements of Cash Flows for the Fiscal Years Ended May 2012, 2011, and 2010

    42   
  Notes to Consolidated Financial Statements     43   

Item 9

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    94   

Item 9A

  Controls and Procedures     94   

Item 9B

  Other Information     96   

PART III

    96   

Item 10

  Directors, Executive Officers and Corporate Governance     96   

Item 11

  Executive Compensation     96   

Item 12

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    96   

Item 13

  Certain Relationships and Related Transactions, and Director Independence     97   

Item 14

  Principal Accountant Fees and Services     97   

PART IV

    97   

Item 15

  Exhibits and Financial Statement Schedules     97   

Signatures

    99   

Schedule II

    101   

Exhibit Index

    103   

 

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PART I

 

ITEM 1.      BUSINESS

a)  General Development of Business

ConAgra Foods, Inc. (“ConAgra Foods”, “Company”, “we”, “us”, or “our”) is one of North America’s leading food companies, with consumer brands in 97% of America’s households sold in grocery, convenience, mass merchandise, and club stores. ConAgra Foods also has a strong business-to-business presence, supplying frozen potato and sweet potato products, as well as other vegetable, spice, and grain products to a variety of well-known restaurants, foodservice operators, and commercial customers.

The Company began as a flour-milling company and entered other commodity-based businesses. Over time, through various acquisitions and divestitures, we significantly changed our portfolio of businesses, focusing on adding branded, value-added opportunities, while strategically divesting commodity-based businesses to become one of North America’s leading food companies. Executing this strategy involved the acquisition over time of a number of brands such as Banquet®, Chef Boyardee®, PAM®, Marie Callender’s®, and Alexia®. More notable divestitures have included a dehydrated garlic, onion, capsicum, and fresh vegetable operation, a trading and merchandising business, packaged meat and cheese operations, a poultry business, beef and pork businesses, and various other businesses. For more information about our more recent acquisitions and divestitures, see “Acquisitions” and “Divestitures” below. Our development over time has also been aided by innovation and organic growth.

We are focused on growing our core operations, expanding into adjacent categories, and increasing our presence in private label and international operations. Our core operations include the strategic product groups of convenient meals, potatoes, snacks, meal enhancers, and specialty items. We are also focused on sustainable sales and profit growth with strong and improving returns on invested capital. As part of continually strengthening our operating foundation, our major profit-enhancing initiatives have centered on and continue to include:

 

   

Enhancing our portfolio by developing through innovation;

 

   

Acquiring products that resonate with consumers, establish or further develop our desired operating platforms, or which expand our presence in desired geographies or market segments;

 

   

Implementing high-impact, insights-based marketing programs;

 

   

Partnering strategically with customers to improve linkage, strengthen relationships, and capitalize on growth opportunities;

 

   

Improving trade spending effectiveness and pricing analytics;

 

   

Achieving cost savings throughout the supply chain with continuous efficiency improvement programs; and

 

   

Implementing efficiency initiatives throughout the selling, general, and administrative functions.

The Company’s growth, efficiency, and portfolio improvement initiatives continue to be implemented with high standards of customer service, product safety, and product quality.

We were initially incorporated as a Nebraska corporation in 1919 and were reincorporated as a Delaware corporation in December 1975.

b)  Financial Information about Reporting Segments

We report our operations in two reporting segments: Consumer Foods and Commercial Foods. The contributions of each reporting segment to net sales, operating profit, and identifiable assets are set forth in Note 22 “Business Segments and Related Information” to the consolidated financial statements.

 

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c)  Narrative Description of Business

We compete throughout the food industry and focus on adding value for customers who operate in the retail food, foodservice, and ingredients channels.

Our operations, including our reporting segments, are described below. Our locations, including distribution facilities, within each reporting segment, are described in Item 2, Properties.

Consumer Foods

The Consumer Foods reporting segment includes branded, private label, and customized food products, which are sold in various retail and foodservice channels, principally in North America. The products include a variety of categories (meals, entrées, condiments, sides, snacks, and desserts) across frozen, refrigerated, and shelf-stable temperature classes.

Major brands include: Alexia®, ACT II®, Banquet®, Blue Bonnet®, Chef Boyardee®, DAVID®, Egg Beaters®, Healthy Choice®, Hebrew National®, Hunt’s®, Marie Callender’s®, Odom’s Tennessee Pride ®, Orville Redenbacher’s®, PAM®, Peter Pan®, Reddi-wip®, Slim Jim®, Snack Pack®, Swiss Miss®, Van Camp’s®, and Wesson®.

Commercial Foods

The Commercial Foods reporting segment includes commercially branded foods and ingredients, which are sold principally to foodservice, food manufacturing, and industrial customers. The segment’s primary products include: specialty potato products, milled grain ingredients, a variety of vegetable products, seasonings, blends, and flavors which are sold under brands such as ConAgra Mills®, Lamb Weston®, and Spicetec Flavors & SeasoningsTM.

Unconsolidated Equity Investments

We have a number of unconsolidated equity investments. Significant affiliates produce and market potato products for retail and foodservice customers.

Acquisitions

In May 2012, we acquired Kangaroo Brands’ pita chip operations. The business, which manufactures private label and Kangaroo® brand pita chip snacks, is included in the Consumer Foods segment.

In May 2012, we acquired Odom’s Tennessee Pride. The business manufactures Odom’s Tennessee Pride® frozen breakfast products and other sausage products. This business is included in the Consumer Foods segment.

In March 2012, we acquired Del Monte Canada. The acquisition includes all Del Monte® branded packaged fruit, fruit snacks, and vegetable products in Canada, as well as Aylmer® brand tomato products. This business is included in the Consumer Foods segment.

In November 2011, we acquired National Pretzel Company. National Pretzel Company is a private label supplier and branded producer of pretzels and related products. This business is included in the Consumer Foods segment.

In November 2011, we acquired an additional equity interest in Agro Tech Foods Limited (“ATFL”). ATFL is a publicly traded company in India that markets food and food ingredients to consumers and institutional customers in India. As a result of this additional investment, we now have a majority interest (approximately 52%) in ATFL. Consolidated financial results of ATFL are included in the Consumer Foods segment.

In June 2011, we purchased the Marie Callender’s® brand trademark from Marie Callender Pie Shops, Inc.

During fiscal 2011, we acquired the assets of American Pie, LLC, a manufacturer of frozen fruit pies, thaw and serve pies, fruit cobblers, and pie crusts under the licensed Marie Callender’s® and Claim Jumper® trade names, as well as frozen dinners, pot pies, and appetizers under the Claim Jumper® trade name. This business is included in the Consumer Foods segment.

 

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Divestitures

In fiscal 2011, we completed the sale of substantially all of the assets of our frozen handhelds operations. We reflected the results of these operations as discontinued operations for all periods presented.

In fiscal 2011, we completed the sale of substantially all of the assets of Gilroy Foods & FlavorsTM dehydrated garlic, onion, capsicum and Controlled MoistureTM, GardenFrost®, Redi-MadeTM, and fresh vegetable operations. We reflected the results of these operations as discontinued operations for all periods presented.

General

The following comments pertain to both of our reporting segments.

ConAgra Foods is a food company that operates in many sectors of the food industry, with a significant focus on the sale of branded and value-added consumer products, as well as foodservice products and ingredients. We also manufacture and sell private label products. We use many different raw materials, the bulk of which are commodities. The prices paid for raw materials used in our products generally reflect factors such as weather, commodity market fluctuations, currency fluctuations, tariffs, and the effects of governmental agricultural programs. Although the prices of raw materials can be expected to fluctuate as a result of these factors, we believe such raw materials to be in adequate supply and generally available from numerous sources. We have faced increased costs for many of our significant raw materials, packaging, and energy inputs. We seek to mitigate the higher input costs through productivity and pricing initiatives, and through the use of derivative instruments used to economically hedge a portion of forecasted future consumption.

We experience intense competition for sales of our principal products in our major markets. Our products compete with widely advertised, well-known, branded products, as well as private label and customized products. Some of our competitors are larger and have greater resources than we have. We compete primarily on the basis of quality, value, customer service, brand recognition, and brand loyalty.

Demand for certain of our products may be influenced by holidays, changes in seasons, or other annual events.

We manufacture primarily for stock and fill customer orders from finished goods inventories. While at any given time there may be some backlog of orders, such backlog is not material in respect to annual net sales, and the changes of backlog orders from time to time are not significant.

Our trademarks are of material importance to our business and are protected by registration or other means in the United States and most other markets where the related products are sold. Some of our products are sold under brands that have been licensed from others. We also actively develop and maintain a portfolio of patents, although no single patent is considered material to the business as a whole. We have proprietary trade secrets, technology, know-how, processes, and other intellectual property rights that are not registered.

Many of our facilities and products are subject to various laws and regulations administered by the United States Department of Agriculture, the Federal Food and Drug Administration, the Occupational Safety and Health Administration, and other federal, state, local, and foreign governmental agencies relating to the quality and safety of products, sanitation, safety and health matters, and environmental control. We believe that we comply with such laws and regulations in all material respects, and that continued compliance with such regulations will not have a material effect upon capital expenditures, earnings, or our competitive position.

Our largest customer, Wal-Mart Stores, Inc. and its affiliates, accounted for approximately 17%, 18%, and 18% of consolidated net sales for fiscal 2012, 2011, and 2010, respectively.

At May 27, 2012, ConAgra Foods and its subsidiaries had approximately 26,100 employees, primarily in the United States. Approximately 42% of our employees are parties to collective bargaining agreements. Of the employees subject to collective bargaining agreements, approximately 43% are parties to collective bargaining agreements that are scheduled to expire during fiscal 2013. We believe that our relationships with employees and their representative organizations are good.

Research and Development

We employ processes at our principal manufacturing locations that emphasize applied research and technical services directed at product improvement and quality control. In addition, we conduct research

 

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activities related to the development of new products. Research and development expense was $86 million, $81 million, and $78 million in fiscal 2012, 2011, and 2010, respectively.

EXECUTIVE OFFICERS OF THE REGISTRANT AS OF JULY 20, 2012

 

Name

  

Title & Capacity

     Age        Year First
Appointed  an
Executive
Officer
 

Gary M. Rodkin

   President and Chief Executive Officer      60         2005   

John F. Gehring

   Executive Vice President, Chief Financial Officer      51         2004   

Colleen R. Batcheler

   Executive Vice President, General Counsel and Corporate Secretary      38         2008   

André J. Hawaux

   President, Consumer Foods      51         2006   

Brian L. Keck

   Executive Vice President and Chief Administrative Officer      59         2010   

Paul T. Maass

   President, Commercial Foods      46         2010   

Scott E. Messel

   Senior Vice President, Treasurer and Assistant Corporate Secretary      53         2001   

Andrew G. Ross

   Executive Vice President and Chief Strategy Officer      44         2011   

Robert G. Wise

   Vice President, Corporate Controller      44         2012   

Gary M. Rodkin joined ConAgra Foods as President and Chief Executive Officer in October 2005. Previously, he was Chairman and Chief Executive Officer of PepsiCo Beverages and Foods North America (consumer products and manufacturing) from February 2003 to June 2005. He also served as President and Chief Executive Officer of PepsiCo Beverages and Foods North America in 2002, and President and Chief Executive Officer of Pepsi-Cola North America from 1999 to 2002. Mr. Rodkin is a director of Avon Products, Inc., the Grocery Manufacturers of America, and Boys Town.

John F. Gehring has served ConAgra Foods as Executive Vice President, Chief Financial Officer since January 2009. Mr. Gehring joined ConAgra Foods as Vice President of Internal Audit in 2002, became Senior Vice President in 2003, and most recently served as Senior Vice President and Corporate Controller from July 2004 to January 2009. He served as the ConAgra Foods’ interim Chief Financial Officer from October 2006 to November 2006. Prior to joining ConAgra Foods, Mr. Gehring was a partner at Ernst & Young LLP (an accounting firm) from 1997 to 2001.

Colleen R. Batcheler joined ConAgra Foods in June 2006 as Vice President, Chief Securities Counsel and Assistant Corporate Secretary. In September 2006, she was appointed Corporate Secretary, in February 2008, she was named Senior Vice President, General Counsel and Corporate Secretary and in September 2009, she was named Executive Vice President, General Counsel and Corporate Secretary. From 2003 until joining ConAgra Foods, Ms. Batcheler was Vice President and Corporate Secretary of Albertson’s, Inc. (a retail food and drug chain).

André J. Hawaux has served ConAgra Foods as President, Consumer Foods since January 2009. Previously, he served ConAgra Foods as Executive Vice President, Chief Financial Officer from November 2006 to January 2009. Prior to joining ConAgra Foods, Mr. Hawaux served as Senior Vice President, Worldwide Strategy & Corporate Development, PepsiAmericas, Inc. (a manufacturer and distributor of a broad portfolio of beverage products) from May 2005. Previously, from 2000 until May 2005, Mr. Hawaux served as Vice President and Chief Financial Officer for Pepsi-Cola North America (a division of PepsiCo, Inc.). Mr. Hawaux currently serves as a member of the Board of Trustees for Southern New Hampshire University.

Brian L. Keck joined ConAgra Foods as Executive Vice President and Chief Administrative Officer in September 2010. In this role, he is responsible for Human Resources, Facilities and Real Estate, and Communication & External Relations. Prior to joining ConAgra Foods, Mr. Keck was president and chief

 

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operating officer of Macy’s Inc.’s Midwest Division (retail department stores) where he was responsible for sales, customer service, store operations, finance, distribution, human resources, IT, design and construction, and community affairs. Prior to that, Mr. Keck held multiple senior leadership responsibilities at the May Department Stores Company (acquired by Macy’s) in both operating divisions and corporate-wide roles. From 2000 to 2005, Brian led May’s HR function after having served as chairman of Meier & Frank Department Stores, a division of May.

Paul T. Maass was named President of the Commercial Foods business for ConAgra Foods in October 2010. Mr. Maass joined ConAgra Foods in 1988 as a commodity merchandiser in the trading business and quickly progressed in several roles at the company. In 2003, Mr. Maass was named President and General Manager of ConAgra Mills. He assumed responsibility for J.M. Swank in 2007 and for Spicetec Flavors & Seasonings in 2010.

Scott E. Messel has served ConAgra Foods as Senior Vice President, Treasurer and Assistant Corporate Secretary since July 2004. Mr. Messel joined ConAgra Foods in August 2001 as Vice President and Treasurer. Prior to joining ConAgra Foods, Mr. Messel served in various treasury leadership roles at Lennox International (a provider of climate control solutions), Flowserve Corporation (a manufacturer of flow management products and services) and Ralston Purina Company (a former manufacturer of cereals, packaged foods, pet food, and livestock feed).

Andrew G. Ross was named Executive Vice President and Chief Strategy Officer for ConAgra Foods in November 2011. Mr. Ross leads the company’s strategic planning process, with specific responsibility for developing strategies that align with the company’s growth ambitions. Prior to joining ConAgra Foods, he was a partner at McKinsey & Company, Inc. (consulting firm), where he led the firm’s global consumer, retail and marketing practices. Prior to that, he worked for William Grant & Sons, Ltd. in Glasgow, Scotland and McKinsey & Company in London.

Robert G. Wise has served ConAgra Foods as Vice President, Corporate Controller since January 2012. Mr. Wise joined ConAgra Foods in March 2003 and has held various positions of increasing responsibility with ConAgra Foods, including Director, Financial Reporting, and most recently served as Vice President, Assistant Corporate Controller since March 2006. Prior to joining ConAgra Foods, Mr. Wise served in various roles at KPMG LLP (an accounting firm).

OTHER SENIOR OFFICERS OF THE REGISTRANT AS OF JULY 20, 2012

 

Name

  

Title & Capacity

  

  Age  

Albert D. Bolles

   Executive Vice President, Research, Quality & Innovation    54

Douglas A. Knudsen

   President, ConAgra Foods Sales    57

Joan K. Chow

   Executive Vice President, Chief Marketing Officer    52

Allen J. Cooper

   Vice President, Internal Audit    48

Nicole B. Theophilus

   Senior Vice President, Human Resources    42

Albert D. Bolles joined ConAgra Foods in March 2006 as Executive Vice President, Research & Development, and Quality. He was named to his current position in June 2007. Prior to joining the Company, he was Senior Vice President, Worldwide Research and Development for PepsiCo Beverages and Foods from 2002 to 2006. From 1993 to 2002, he was Senior Vice President, Global Technology and Quality for Tropicana Products Incorporated.

Douglas A. Knudsen joined ConAgra Foods in 1977. He was named to his current position in May 2006. He previously served the Company as President, Retail Sales Development from 2003 to 2006, President, Retail Sales from 2001 to 2003, and President, Grocery Product Sales from 1995 to 2001.

Joan K. Chow joined ConAgra Foods in February 2007 as Executive Vice President, Chief Marketing Officer. Prior to joining ConAgra Foods, she served Sears Holding Corporation (retailing) as Senior Vice President and Chief Marketing Officer, Sears Retail from July 2005 until January 2007 and as Vice President, Marketing Services from April 2005 until July 2005. From 2002 until April 2005, Ms. Chow served Sears, Roebuck and Co. as Vice President, Home Services Marketing.

 

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Allen J. Cooper joined ConAgra Foods in March 2003 and has held various finance and internal audit leadership positions with the Company, including Director, Internal Audit from 2003 until 2005; Vice President, Supply Chain Finance from 2005 until 2007; Senior Director, Finance; and most recently as Senior Director, Internal Audit. He was named to his current position in February 2009. Prior to joining the Company, he was with Ernst & Young LLP (an accounting firm).

Nicole B. Theophilus joined ConAgra Foods in April 2006 as Vice President, Chief Employment Counsel. In 2008, in addition to her legal duties, she assumed the role of Vice President, Human Resources for Commercial Foods. In November 2009, she was named to her current position. Prior to joining ConAgra Foods, she was an attorney and partner with Blackwell Sanders Peper Martin LLP (a law firm) from 1999 until 2006.

d)  Foreign Operations

Foreign operations information is set forth in Note 22 “Business Segments and Related Information” to the consolidated financial statements.

e)  Available Information

We make available, free of charge through the “Our Company—Investors—Financial Reports & Filings” link on our Internet website at http://www.conagrafoods.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. We use our Internet website, through the “Our Company—Investors” link, as a channel for routine distribution of important information, including news releases, analyst presentations, and financial information.

We have also posted on our website our (1) Corporate Governance Principles, (2) Code of Conduct, (3) Code of Ethics for Senior Corporate Officers, and (4) Charters for the Audit/Finance Committee, Nominating, Governance and Public Affairs Committee, and Human Resources Committee. Shareholders may also obtain copies of these items at no charge by writing to: Corporate Secretary, ConAgra Foods, Inc., One ConAgra Drive, Omaha, NE, 68102-5001.

 

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ITEM 1A.      RISK FACTORS

The following risks and uncertainties could affect our operating results and should be considered in evaluating us. While we believe we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our business, performance, or financial condition in the future.

Deterioration of general economic conditions could harm our business and results of operations.

Our business and results of operations may be adversely affected by changes in national or global economic conditions, including inflation, interest rates, availability of capital markets, consumer spending rates, energy availability and costs (including fuel surcharges), and the effects of governmental initiatives to manage economic conditions.

Volatility in financial markets and deterioration of national and global economic conditions could impact our business and operations in a variety of ways, including as follows:

 

   

consumers may shift purchases to lower-priced private label or other value offerings, or may forego certain purchases altogether during economic downturns, which may adversely affect the results of our Consumer Foods operations;

 

   

decreased demand in the restaurant business, particularly casual and fine dining, may adversely affect our Commercial Foods operations;

 

   

volatility in commodity and other input costs could substantially impact our result of operations;

 

   

volatility in the equity markets or interest rates could substantially impact our pension costs and required pension contributions; and

 

   

it may become more costly or difficult to obtain debt or equity financing to fund operations or investment opportunities, or to refinance our debt in the future, in each case on terms and within a time period acceptable to us.

Increases in commodity costs may have a negative impact on profits.

We use many different commodities such as wheat, corn, oats, soybeans, beef, pork, poultry, and energy. Commodities are subject to price volatility caused by commodity market fluctuations, supply and demand, currency fluctuations, and changes in governmental agricultural programs. Commodity price increases will result in increases in raw material costs and operating costs. We may not be able to increase our product prices and achieve cost savings that fully offset these increased costs; and increasing prices may result in reduced sales volume and profitability. We have experience in hedging against commodity price increases; however, these practices and experience reduce, but do not eliminate, the risk of negative profit impacts from commodity price increases.

Increased competition may result in reduced sales or profits.

The food industry is highly competitive, and increased competition can reduce our sales due to loss of market share or the need to reduce prices to respond to competitive and customer pressures. Competitive pressures also may restrict our ability to increase prices, including in response to commodity and other cost increases. In most product categories, we compete not only with other widely advertised branded products, but also with private label products that are generally sold at lower prices. A strong competitive response from one or more of our competitors to our marketplace efforts, or a consumer shift towards private label offerings, could result in us reducing pricing, increasing marketing or other expenditures, or losing market share. Our profits could decrease if a reduction in prices or increased costs are not counterbalanced with increased sales volume.

Changes in our relationships with significant customers or suppliers could adversely affect us.

During fiscal 2012, our largest customer Wal-Mart Stores, Inc. accounted for approximately 17% of our net revenues. There can be no assurance that Wal-Mart Stores, Inc. and other significant customers will continue to

 

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purchase our products in the same quantities or on the same terms as in the past, particularly as increasingly powerful retailers continue to demand lower pricing and develop their own brands. The loss of a significant customer or a material reduction in sales to a significant customer could materially and adversely affect our product sales, financial condition, and results of operations.

Disputes with significant suppliers, including pricing or performance, could adversely affect our ability to supply products to our customers and could materially and adversely affect our product sales, financial condition, and results of operations.

The sophistication and buying power of our customers could have a negative impact on profits.

Many of our customers, such as supermarkets, warehouse clubs, and food distributors, have consolidated in recent years and consolidation is expected to continue. These consolidations and the growth of supercenters have produced large, sophisticated customers with increased buying power and negotiating strength who are more capable of resisting price increases and operating with reduced inventories. These customers may also in the future use more of their shelf space, currently used for our products, for their private label products. We continue to implement initiatives to counteract these pressures. However, if the larger size of these customers results in additional negotiating strength and/or increased private label competition, our profitability could decline.

We must identify changing consumer preferences and develop and offer food products to meet their preferences.

Consumer preferences evolve over time and the success of our food products depends on our ability to identify the tastes and dietary habits of consumers and to offer products that appeal to their preferences, including concerns of consumers regarding health and wellness, obesity, product attributes, and ingredients. Introduction of new products and product extensions requires significant development and marketing investment. If our products fail to meet consumer preferences, or we fail to introduce new and improved products on a timely basis, then the return on that investment will be less than anticipated and our strategy to grow sales and profits with investments in marketing and innovation will be less successful. Similarly, demand for our products could be affected by consumer concerns regarding the health effects of ingredients such as sodium, trans fats, sugar, processed wheat, or other product ingredients or attributes.

If we do not achieve the appropriate cost structure in the highly competitive food industry, our profitability could decrease.

Our success depends in part on our ability to achieve the appropriate cost structure and operate efficiently in the highly competitive food industry, particularly in an environment of volatile input costs. We continue to implement profit-enhancing initiatives that impact our supply chain and general and administrative functions. These initiatives are focused on cost-saving opportunities in procurement, manufacturing, logistics, and customer service, as well as general and administrative overhead levels. If we do not continue to effectively manage costs and achieve additional efficiencies, our competitiveness and our profitability could decrease.

We may be subject to product liability claims and product recalls, which could negatively impact our profitability.

We sell food products for human consumption, which involves risks such as product contamination or spoilage, product tampering, and other adulteration of food products. We may be subject to liability if the consumption of any of our products causes injury, illness, or death. In addition, we will voluntarily recall products in the event of contamination or damage. We have issued recalls and have from time to time been and currently are involved in lawsuits relating to our food products. A significant product liability judgment or a widespread product recall may negatively impact our sales and profitability for a period of time depending on product availability, competitive reaction, and consumer attitudes. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential customers and our corporate and brand image.

 

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Any damage to our reputation could have a material adverse effect on our business, financial condition, and results of operations.

Maintaining a good reputation globally is critical to selling our products. Product contamination or tampering, the failure to maintain high standards for product quality, safety, and integrity, including with respect to raw materials and ingredients obtained from suppliers, or allegations of product quality issues, mislabeling or contamination, even if untrue, may reduce demand for our products or cause production and delivery disruptions. Our reputation could also be adversely impacted by any of the following, or by adverse publicity (whether or not valid) relating thereto: the failure to maintain high ethical, social, and environmental standards for all of our operations and activities; the failure to achieve our goals with respect to sodium or saturated fat; our research and development efforts; our environmental impact, including use of agricultural materials, packaging, energy use, and waste management; or our responses to any of the foregoing. Failure to comply with local laws and regulations, to maintain an effective system of internal controls or to provide accurate and timely financial information could also hurt our reputation. Damage to our reputation or loss of consumer confidence in our products for any of these or other reasons could result in decreased demand for our products and could have a material adverse effect on our business, financial condition, and results of operations, as well as require additional resources to rebuild our reputation.

If we are unable to complete proposed acquisitions or divestitures or integrate acquired businesses, our financial results could be materially and adversely affected.

From time to time, we evaluate acquisition candidates that may strategically fit our business objectives. If we are unable to complete acquisitions or to successfully integrate and develop acquired businesses, our financial results could be materially and adversely affected. In addition, we may divest businesses that do not meet our strategic objectives, or do not meet our growth or profitability targets. We may not be able to complete desired or proposed divestitures on terms favorable to us. Gains or losses on the sales of, or lost operating income from, those businesses may affect our profitability. Moreover, we may incur asset impairment charges related to acquisitions or divestitures that reduce our profitability.

Our acquisition or divestiture activities may present financial, managerial, and operational risks. Those risks include diversion of management attention from existing businesses, difficulties integrating or separating personnel and financial and other systems, effective and immediate implementation of control environment processes across our employee population, adverse effects on existing business relationships with suppliers and customers, inaccurate estimates of fair value made in the accounting for acquisitions and amortization of acquired intangible assets which would reduce future reported earnings, potential loss of customers or key employees of acquired businesses, and indemnities and potential disputes with the buyers or sellers. Any of these factors could affect our product sales, financial condition and results of operations.

Our results could be adversely impacted as a result of increased pension, labor, and people-related expenses.

Inflationary pressures and any shortages in the labor market could increase labor costs, which could have a material adverse effect on our consolidated operating results or financial condition. Our labor costs include the cost of providing employee benefits in the U.S. and foreign jurisdictions, including pension, health and welfare, and severance benefits. Any declines in market returns could adversely impact the funding of pension plans. Additionally, the annual costs of benefits vary with increased costs of health care and the outcome of collectively-bargained wage and benefit agreements.

If we fail to comply with the many laws applicable to our business, we may face lawsuits or incur significant fines and penalties.

Our facilities and products are subject to many laws and regulations administered by the United States Department of Agriculture, the Federal Food and Drug Administration, the Occupational Safety and Health Administration, and other federal, state, local, and foreign governmental agencies relating to the processing, packaging, storage, distribution, advertising, labeling, quality, and safety of food products, the health and safety of our employees, and the protection of the environment. Our failure to comply with applicable laws and regulations could subject us to lawsuits, administrative penalties and injunctive relief, civil remedies, including

 

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fines, injunctions, and recalls of our products. Our operations are also subject to extensive and increasingly stringent regulations administered by the Environmental Protection Agency, which pertain to the discharge of materials into the environment and the handling and disposition of wastes. Failure to comply with these regulations can have serious consequences, including civil and administrative penalties and negative publicity. Changes in applicable laws or regulations or evolving interpretations thereof, including increased government regulations to limit carbon dioxide and other greenhouse gas emissions as a result of concern over climate change, may result in increased compliance costs, capital expenditures, and other financial obligations for us, which could affect our profitability or impede the production or distribution of our products, which could affect our net operating revenues.

Climate change, or legal, regulatory or market measures to address climate change, may negatively affect our business and operations.

There is growing concern that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns, and the frequency and severity of extreme weather and natural disasters. In the event that such climate change has a negative effect on agricultural productivity, we may be subject to decreased availability or less favorable pricing for certain commodities that are necessary for our products, such as corn, wheat, and potatoes. We may also be subjected to decreased availability or less favorable pricing for water as a result of such change, which could impact our manufacturing and distribution operations. In addition, natural disasters and extreme weather conditions may disrupt the productivity of our facilities or the operation of our supply chain. The increasing concern over climate change also may result in more regional, federal, and/or global legal and regulatory requirements to reduce or mitigate the effects of greenhouse gases. In the event that such regulation is enacted and is more aggressive than the sustainability measures that we are currently undertaking to monitor our emissions and improve our energy efficiency, we may experience significant increases in our costs of operation and delivery. In particular, increasing regulation of fuel emissions could substantially increase the distribution and supply chain costs associated with our products. As a result, climate change could negatively affect our business and operations.

Our information technology resources must provide efficient connections between our business functions, or our results of operations will be negatively impacted.

Each year we engage in billions of dollars of transactions with our customers and vendors. Because the amount of dollars involved is so significant, our information technology resources must provide connections among our marketing, sales, manufacturing, logistics, customer service, and accounting functions. If we do not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure and to maintain the related automated and manual control processes, we could be subject to billing and collection errors, business disruptions, or damage resulting from security breaches. We began implementing new financial and operational information technology systems in fiscal 2008 and placed systems into production during fiscal 2008, 2009, 2010, 2011, and 2012. If future implementation problems are encountered, our results of operations could be negatively impacted.

We are increasingly dependent on information technology, and potential disruption, cyber attacks, security problems, and expanding social media vehicles present new risks.

We are increasingly dependent on information technology systems to manage and support a variety of business processes and activities, and any significant breakdown, invasion, destruction, or interruption of these systems could negatively impact operations. In addition, there is a risk of business interruption and reputational damage from leakage of confidential information.

The inappropriate use of certain media vehicles could cause brand damage or information leakage. Negative posts or comments about the Company on any social networking web site could seriously damage its reputation. In addition, the disclosure of non-public company sensitive information through external media channels could lead to information loss. Identifying new points of entry as social media continues to expand presents new challenges. Any business interruptions or damage to our reputation could negatively impact our financial condition, results of operation, and the market price of our common stock.

 

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ITEM 1B.      UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2.      PROPERTIES

Our headquarters are located in Omaha, Nebraska. In addition, certain shared service centers are located in Omaha, Nebraska, including a product development facility, enterprise business services center, and an information technology center. The general offices and location of principal operations are set forth in the following summary of our locations. We also lease many sales offices mainly in the United States.

We maintain a number of stand-alone distribution facilities. In addition, there is warehouse space available at substantially all of our manufacturing facilities.

Utilization of manufacturing capacity varies by manufacturing plant based upon the type of products assigned and the level of demand for those products. Management believes that our manufacturing and processing plants are well maintained and are generally adequate to support the current operations of the business.

We own most of the manufacturing facilities. However, a limited number of plants and parcels of land with the related manufacturing equipment are leased. Substantially all of our transportation equipment and forward-positioned distribution centers containing finished goods are leased or operated by third parties. Information about the properties supporting our two business segments follows.

CONSUMER FOODS REPORTING SEGMENT

General offices in Omaha, Nebraska, Naperville, Illinois, Miami, Florida, Lancaster, Pennsylvania, Madison, Tennessee, Toronto, Canada, Mexico City, Mexico, San Juan, Puerto Rico, Shanghai, China, Panama City, Panama, and Bogota, Colombia.

As of July 20, 2012, thirty-nine domestic manufacturing facilities in Arkansas, California, Georgia, Indiana, Iowa, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, Ohio, Pennsylvania, Tennessee, and Wisconsin. Two international manufacturing facilities in Canada; one manufacturing facility in Mexico; and one manufacturing facility in Argentina. Interests in ownership of manufacturing facilities in Mexico and India.

COMMERCIAL FOODS REPORTING SEGMENT

Domestic general, marketing, and administrative offices in Omaha, Nebraska, Eagle, Idaho, and Tri-Cities, Washington. International general and merchandising offices in Beijing, China, Shanghai, China, Tokyo, Japan, and Singapore.

As of July 20, 2012, forty-one domestic production facilities in Alabama, California, Colorado, Florida, Georgia, Idaho, Illinois, Louisiana, Minnesota, Nebraska, New Jersey, Ohio, Oregon, Pennsylvania, Texas, and Washington. One international production facility in Puerto Rico and one manufacturing facility in Canada. Interests in ownership of manufacturing facilities in Colorado, Minnesota, Washington, United Kingdom, Puerto Rico, Austria, and the Netherlands.

 

ITEM 3.      LEGAL PROCEEDINGS

In fiscal 1991, we acquired Beatrice Company (“Beatrice”). As a result of the acquisition and the significant pre-acquisition contingencies of the Beatrice businesses and its former subsidiaries, our consolidated post-acquisition financial statements reflect 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 us. The litigation includes suits against a number of lead paint and pigment manufacturers, including ConAgra Grocery Products and the Company as alleged successors to W. P. Fuller Co., a lead paint and pigment manufacturer owned and operated by Beatrice until 1967. Although decisions favorable to us have been rendered in Rhode Island, New Jersey, Wisconsin, and Ohio, we remain a defendant in active suits in

 

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Illinois and California. The Illinois suit seeks class-wide relief in the form of medical monitoring for elevated levels of lead in blood. In California, a number of cities and counties have joined in a consolidated action seeking abatement of the alleged public nuisance.

The environmental proceedings include litigation and administrative proceedings involving Beatrice’s status as a potentially responsible party at 36 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 32 of these sites. Reserves for these matters have been established based on our best estimate of the undiscounted remediation liabilities, which estimates include evaluation of investigatory studies, extent of required clean-up, the known volumetric contribution of Beatrice and other potentially responsible parties, and its experience in remediating sites. The reserves for Beatrice-related environmental matters totaled $70.0 million as of May 27, 2012, a majority of which relates to the Superfund and state-equivalent sites referenced above. We expect expenditures for Beatrice-related environmental matters to continue for up to 18 years.

We are a party to a number of lawsuits and claims arising out of the operation of our business. Among these, there are lawsuits, claims, and matters related to the February 2007 recall of our peanut butter products. Among the matters outstanding related to the peanut butter recall are litigation we initiated against an insurance carrier to recover our settlement expenditures and defense costs, and an ongoing investigation by the U.S. Attorney’s office in Georgia. During fiscal 2012, we recognized a charge of $17.5 million in connection with peanut butter matters. This amount is in addition to a charge of $24.8 million we recognized during the third quarter of fiscal 2009 in connection with the insurance coverage dispute. With respect to the coverage dispute matter, during the fourth quarter of fiscal 2012, we received a favorable opinion related to our defense costs, pursuant to which we have received $11.8 million which is recognized in income in fiscal 2012. During the fourth quarter of fiscal 2012, a jury verdict was rendered in our favor in the amount of approximately $25 million on the claim for disputed coverage, which is subject to appeal. This amount has not been recognized in income in fiscal 2012. With respect to the U.S. Attorney matter, in fiscal 2011, we received formal requests from the U.S. Attorney’s office in Georgia seeking a variety of records and information related to the operations of our peanut butter manufacturing facility in Sylvester, Georgia. These requests are related to the previously disclosed June 2007 execution of a search warrant at our facility following the February 2007 recall. We continue to engage in discussions with officials in regard to the investigation.

In June 2009, an accidental explosion occurred at our manufacturing facility in Garner, North Carolina. This facility was the primary production facility for our Slim Jim® branded meat snacks. On June 13, 2009, the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives announced its determination that the explosion was the result of an accidental natural gas release, and not a deliberate act. During the fourth quarter of fiscal 2011, we settled our property and business interruption claims related to the Garner accident with our insurance providers. During the fourth quarter of fiscal 2011, Jacobs Engineering Group Inc., our engineer and project manager at the site, filed a declaratory judgment action against us seeking indemnity for personal injury claims brought against it as a result of the accident. In the first quarter of fiscal 2012, we were granted our motion for summary judgment on the basis that the suit was filed prematurely. We will continue to defend this action vigorously.

In April 2010, an accidental explosion occurred at our flour milling facility in Chester, Illinois. Two employees of a subcontractor and one employee of the primary contractor, Westside Salvage (“Westside”), on the site at the time of the accident suffered injuries in the accident. Suit was initiated against Westside and the Company for personal injury claims. Subsequent to the end of the fourth quarter of fiscal 2012 (on May 31, 2012), a jury in federal court returned a verdict against the Company and Westside and in favor of the three employees. The verdict was in the amount of approximately $78 million in compensatory damages apportioned between the Company and Westside and $100 million in punitive damages against the Company. While we have insurance policies in place that we believe will cover the full amount of the compensatory and punitive damages apportioned to us (other than a $3 million deductible that we accrued in a prior period), the Company intends to appeal the verdict and the damages. Any exposure in this case is expected to be limited to the applicable insurance deductible.

 

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We are a party to several lawsuits concerning the use of diacetyl, a butter flavoring ingredient that was added to our microwave popcorn until late 2007. The cases are consumer personal injury suits claiming respiratory illness allegedly due to exposures to vapors from microwaving popcorn. We have received favorable outcomes in connection with these cases to date. We do not believe these cases possess merit and continue to vigorously defend them.

After taking into account liabilities recognized for all of the foregoing matters, management believes the ultimate resolution of such matters should not have a material adverse effect on our financial condition, results of operations, or liquidity.

 

ITEM 4.    MINE SAFETY DISCLOSURES

Not applicable.

PART II

 

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER    MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed on the New York Stock Exchange where it trades under the ticker symbol: CAG. At June 24, 2012, there were approximately 22,600 shareholders of record.

Quarterly sales price and dividend information is set forth in Note 23 “Quarterly Financial Data (Unaudited)” to the consolidated financial statements and incorporated herein by reference.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table presents the total number of shares of common stock purchased during the fourth quarter of fiscal 2012, the average price paid per share, the number of shares that were purchased as part of a publicly announced repurchase program, and the approximate dollar value of the maximum number of shares that may yet be purchased under the share repurchase program:

 

Period

   Total Number
of Shares (or
Units)
Purchased
     Average
Price Paid
per Share
(or Unit)
     Total Number of  Shares
Purchased as Part of
Publicly Announced
Plans or Programs (1)
     Approximate Dollar
Value of Maximum
Number of Shares that
may yet be Purchased
under the Program (1)
 

February 27 through March 25, 2012

     1,229,964         26.23         1,229,964       $         744,670,000   

March 26 through April 22, 2012

     8,171,500         26.23         8,171,500       $ 530,347,000   

April 23 through May 27, 2012

     132,110         25.87         132,110       $ 526,930,000   
  

 

 

       

 

 

    

Total Fiscal 2012 Fourth Quarter

         9,533,574             26.22                         9,533,574       $ 526,930,000   
  

 

 

       

 

 

    

 

(1) Pursuant to publicly announced share repurchase programs from December 2003, we have repurchased approximately 160.5 million shares at a cost of $3.8 billion through May 27, 2012. During the third quarter of fiscal 2012, the Board of Directors approved a $750.0 million increase to the share repurchase program. The current program has no expiration date.

 

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ITEM 6. SELECTED FINANCIAL DATA

 

For the Fiscal Years Ended May

   2012      2011      2010      2009 (3)      2008 (4)  

Dollars in millions, except per share amounts

              

Net sales (1)

   $   13,262.6       $   12,303.1       $   12,014.9       $   12,348.6       $     11,173.1   

Income from continuing operations (1)(2)

   $ 474.3       $ 830.9       $ 630.3       $ 530.3       $ 581.9   

Net income attributable to ConAgra Foods, Inc. (2)

   $ 467.9       $ 817.6       $ 613.5       $ 893.5       $ 1,022.8   

Basic earnings per share:

              

Income from continuing operations attributable to ConAgra Foods, Inc. common stockholders (1)(2)

   $ 1.13       $ 1.92       $ 1.43       $ 1.17       $ 1.19   

Net income attributable to ConAgra Foods, Inc. common stockholders (2)

   $ 1.13       $ 1.90       $ 1.38       $ 1.97       $ 2.10   

Diluted earnings per share:

              

Income from continuing operations attributable to ConAgra Foods, Inc. common stockholders (1)(2)

   $ 1.12       $ 1.90       $ 1.41       $ 1.16       $ 1.18   

Net income attributable to ConAgra Foods, Inc. common stockholders (2)

   $ 1.12       $ 1.88       $ 1.37       $ 1.96       $ 2.08   

Cash dividends declared per share of common stock

   $ 0.95       $ 0.89       $ 0.79       $ 0.76       $ 0.75   

At Year-End

              

Total assets

   $ 11,441.9       $ 11,408.7       $ 11,738.0       $ 11,073.3       $ 13,682.5   

Senior long-term debt (noncurrent)

   $ 2,662.7       $ 2,674.4       $ 3,030.5       $ 3,259.5       $ 3,180.4   

Subordinated long-term debt (noncurrent)

   $ 195.9       $ 195.9       $ 195.9       $ 195.9       $ 200.0   

 

(1)

Amounts exclude the impact of discontinued operations of the packaged meats and cheese operations, the Knott’s Berry Farm® operations, the trading and merchandising operations, the Fernando’s® operations, the Gilroy Foods & FlavorsTM operations, and the frozen handhelds operations.

 

(2) Previously reported amounts have been revised to reflect the impact of a change in accounting method for pension, as discussed in Note 1 “Summary of Significant Accounting Policies” to the consolidated financial statements.

 

(3) For fiscal 2009, the retrospective change in accounting method for pension decreased net income by $84.9 million and earnings per share, basic and diluted by $0.19.

 

(4) For fiscal 2008, the retrospective change in accounting method for pension increased net income by $92.2 million and earnings per share, basic by $0.19 and diluted by $0.18.

 

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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND    RESULTS OF OPERATIONS

The following discussion and analysis is intended to provide a summary of significant factors relevant to our financial performance and condition. The discussion should be read together with our consolidated financial statements and related notes in Item 8, Financial Statements and Supplementary Data. Results for the fiscal year ended May 27, 2012 are not necessarily indicative of results that may be attained in the future.

Executive Overview

ConAgra Foods, Inc. (NYSE: CAG) is one of North America’s leading food companies, with brands in 97% of America’s households. Consumers find Banquet®, Chef Boyardee®, Egg Beaters®, Healthy Choice®, Hebrew National®, Hunt’s®, Marie Callender’s®, Odom’s Tennessee Pride®, Orville Redenbacher’s®, PAM®, Peter Pan®, Reddi-wip®, and many other ConAgra Foods brands in grocery, convenience, mass merchandise, and club stores. We also have a strong business-to-business presence, supplying frozen potato and sweet potato products, as well as other vegetable, spice, and grain products to a variety of well-known restaurants, foodservice operators, and commercial customers.

Fiscal 2012 diluted earnings per share were $1.12. Fiscal 2011 diluted earnings per share were $1.88, including income from continuing operations of $1.90 per diluted share and a loss of $0.02 per diluted share from discontinued operations. Several significant items affect the comparability of year-over-year results of continuing operations (see “Items Impacting Comparability” below).

Items Impacting Comparability

Items of note impacting comparability for fiscal 2012 included the following:

Reported within Continuing Operations

 

   

a charge of $397 million ($251 million after-tax) reflecting the immediate write-off of actuarial losses in excess of 10% of our pension liability, in accordance with our newly adopted change in accounting method,

 

   

charges totaling $61 million ($37 million after-tax) under our restructuring plans,

 

   

a gain of $59 million ($59 million after-tax), resulting from the remeasurement to fair value of our previously held noncontrolling equity interest in Agro Tech Foods Limited (“ATFL”), in connection with our acquisition of a majority interest in that company,

 

   

a charge of approximately $18 million ($18 million after-tax) in connection with legal matters associated with the 2007 peanut butter recall,

 

   

a benefit of $12 million ($7 million after-tax) resulting from insurance settlements for matters associated with peanut butter,

 

   

charges of $7 million ($4 million after-tax) of acquisition-related costs, including certain exit costs, and

 

   

a charge of $5 million ($3 million after-tax) in connection with the write-off of an insurance claim receivable.

Items of note impacting comparability for fiscal 2011 included the following:

Reported within Continuing Operations

 

   

a gain of $105 million ($66 million after-tax) from the settlement of an insurance claim related to the Garner accident,

 

   

charges totaling $56 million ($35 million after-tax) under our restructuring plans,

 

   

a gain of $25 million ($16 million after-tax) from the receipt, as payment in full of all principal and interest due on the remaining payment-in-kind notes received in connection with the divestiture of

 

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the trading and merchandising operations in fiscal 2009 (the “Notes”), in advance of the scheduled maturity dates, and

 

   

a charge of $10 million ($6 million after-tax) reflecting the immediate write-off of actuarial losses in excess of 10% of our pension liability, in accordance with our newly adopted change in accounting method in fiscal 2012.

Reported within Discontinued Operations

 

   

Losses totaling $22 million ($14 million after-tax) due to the write-down of the carrying value of the assets of a small business.

Restructuring Plans

We anticipate incurring costs in connection with actions we take to attain synergies when integrating recently acquired businesses. These costs, collectively referred to as “acquisition-related exit costs,” include severance and other costs associated with consolidating facilities and administrative functions. We expect to incur approximately $18 million of charges associated with fiscal year 2012 acquisitions ($10 million of which are cash charges). In fiscal 2012, we recognized charges of approximately $5 million in relation to acquisition-related exit costs.

In August 2011, we made a decision to reorganize our Consumer Foods sales function and certain other administrative functions within our Commercial Foods and Corporate reporting segments. These actions, collectively referred to as the “Administrative Efficiency Plan,” are intended to improve the efficiency and effectiveness of the affected sales and administrative functions. In connection with the Administrative Efficiency Plan, we expect to incur approximately $19 million of charges ($17 million of which are cash charges), primarily for severance and costs of employee relocation. In fiscal 2012, we recognized charges of approximately $17 million in relation to the Administrative Efficiency Plan.

In February 2011, our Board of Directors approved a plan recommended by executive management designed to optimize our manufacturing and distribution networks (the “Network Optimization Plan,” which we previously referred to as the “2011 plan”). The Network Optimization Plan consists of projects that involve, among other things, the exit of certain manufacturing facilities, the disposal of underutilized manufacturing assets, and actions designed to optimize our distribution network. Implementation of the plan is expected to continue through fiscal 2013 and is intended to improve the efficiency of our manufacturing operations and reduce costs. In connection with the Network Optimization Plan, we currently estimate we will incur aggregate pre-tax costs of approximately $83 million, including approximately $26 million of cash charges. In fiscal 2012 and 2011, we recognized charges of $42 million and $31 million, respectively in relation to the Network Optimization Plan.

In March 2010, we announced a plan, authorized by our Board of Directors, related to the long-term production of our meat snack products. The plan provides for the closure of our meat snacks production facility in Garner, North Carolina, and the movement of production to our existing facility in Troy, Ohio.

In May 2010, we made a decision to consolidate certain administrative functions from Edina, Minnesota to Naperville, Illinois. The transition of these functions was completed in fiscal 2011. This plan, together with the plan to move production of our meat snacks from Garner, North Carolina to Troy, Ohio, are collectively referred to as the 2010 restructuring plan (the “2010 plan”). We have incurred pre-tax charges of $68 million, including approximately $28 million in cash charges. In fiscal 2012 and 2011, we recognized charges of approximately $3 million and $26 million, respectively, in relation to these plans. We do not expect to incur significant additional charges in connection with the 2010 plan.

In the aggregate, we expect to incur approximately $188 million of charges ($81 million of which are cash charges) under all of our restructuring plans. In fiscal 2012 and 2011, we recognized charges of $67 million and $57 million, respectively, in related restructuring activities.

Management continues to evaluate our manufacturing footprint and potential opportunities to generate cost savings. If such opportunities are identified, the Network Optimization Plan will be amended accordingly, and this could lead to significant additional restructuring expenses.

 

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Acquisitions

In May 2012, we acquired Kangaroo Brands’ pita chip operations for $48 million in cash, plus assumed liabilities. The business, which manufactures private label and Kangaroo® brand pita chip snacks, is included in the Consumer Foods segment.

In May 2012, we acquired Odom’s Tennessee Pride for $95 million in cash, plus assumed liabilities. The business manufactures Odom’s Tennessee Pride® frozen breakfast products and other sausage products. This business is included in the Consumer Foods segment.

In March 2012, we acquired Del Monte Canada for $186 million in cash, plus assumed liabilities. The acquisition includes all Del Monte® branded packaged fruit, fruit snacks, and vegetable products in Canada, as well as Aylmer® brand tomato products. This business is included in the Consumer Foods segment.

In November 2011, we acquired National Pretzel Company for $302 million in cash, net of cash acquired, plus assumed liabilities. National Pretzel Company is a private label supplier and branded producer of pretzels and related products. This business is included in the Consumer Foods segment.

In November 2011, we acquired an additional equity interest in ATFL for $5 million in cash, net of cash acquired, plus assumed liabilities. ATFL is a publicly traded company in India that markets food and food ingredients to consumers and institutional customers in India. As a result of this investment, we now have a majority interest (approximately 52%) in ATFL. Consolidated financial results of ATFL are included in the Consumer Foods segment.

In June 2011, we purchased various Marie Callender’s® brand trademarks from Marie Callender Pie Shops, Inc., for approximately $58 million in cash.

In June 2010, we acquired the assets of American Pie, LLC, a manufacturer of frozen fruit pies, thaw and serve pies, fruit cobblers, and pie crusts under the licensed Marie Callender’s® and Claim Jumper® trade names, as well as frozen dinners, pot pies, and appetizers under the Claim Jumper® trade name. We paid $131 million in cash, plus assumed liabilities for this business. This business is included in the Consumer Foods segment.

Divestitures

In May 2011, we completed the sale of the assets of our frozen handhelds operations for approximately $9 million. We recognized charges totaling $22 million ($14 million after-tax) relating to the impairment of the long-lived assets of the business. We reflected the results of these operations as discontinued operations for all periods presented.

In July 2010, we completed the sale of substantially all of the assets of Gilroy Foods & FlavorsTM dehydrated garlic, onion, capsicum and Controlled MoistureTM, GardenFrost®, Redi-MadeTM, and fresh vegetable operations for $246 million in cash. Based on our estimate of proceeds from the sale of this business, we recognized impairment and related charges totaling $59 million ($40 million after-tax) in the fourth quarter of fiscal 2010. We reflected the results of these operations as discontinued operations for all periods presented.

Capital Allocation

During fiscal year 2012, we repurchased approximately 14 million shares of our common stock for $352 million, of which approximately $213 million was funded by employee stock option exercise proceeds. We also repaid the entire principal balance of $343 million of our 6.75% senior notes, which were due on September 15, 2011. During fiscal 2011, we repurchased approximately 36 million shares of our common stock for $825 million and we repaid the entire principal balance of $248 million of our 7.875% senior notes, which were due September 15, 2010.

During fiscal 2011, we received $554 million as payment in full of all principal and interest due on the remaining Notes received in connection with the divestiture of the trading and merchandising operations in fiscal 2009, in advance of the scheduled maturity dates.

During fiscal 2012 and 2011, we paid dividends of $389 million and $375 million, respectively.

 

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SEGMENT REVIEW

We report our operations in two reporting segments: Consumer Foods and Commercial Foods. In the first quarter of fiscal 2012, we changed the manner in which the expenses associated with certain administrative functions are recognized in segment sales. Accordingly, segment results of prior periods have been reclassified to reflect these changes.

Consumer Foods

The Consumer Foods reporting segment includes branded and private label food products that are sold in various retail and foodservice channels, principally in North America. The products include a variety of categories (meals, entrees, condiments, sides, snacks, and desserts) across frozen, refrigerated, and shelf-stable temperature classes.

Commercial Foods

The Commercial Foods reporting segment principally includes commercially branded foods and ingredients, which are sold primarily to foodservice, food manufacturing, and industrial customers. The segment’s primary products include: specialty potato products, milled grain ingredients, and a variety of vegetable products, seasonings, blends, and flavors, which are sold under brands such as ConAgra Mills®, Lamb Weston®, and Spicetec Flavors & SeasoningsTM.

Presentation of Derivative Gains (Losses) for Economic Hedges of Forecasted Cash Flows in Segment Results

Derivatives used to manage commodity price risk and foreign currency risk are not designated for hedge accounting treatment. We believe these derivatives provide economic hedges of certain forecasted transactions. As such, these derivatives (except those related to our milling operations, see Note 19 to the consolidated financial statements) are recognized at fair market value with realized and unrealized gains and losses recognized in general corporate expenses. The gains and losses are subsequently recognized in the operating results of the reporting segments in the period in which the underlying transaction being economically hedged is included in earnings.

The following table presents the net derivative gains (losses) from economic hedges of forecasted commodity consumption and the foreign currency risk of certain forecasted transactions, under this methodology (in millions):

 

             Fiscal Year Ended           
         May 27,    
2012
        May 29,    
2011
 

Net derivative gains (losses) incurred

   $           (67)      $             35   

Less: Net derivative gains allocated to reporting segments

     24        1   
  

 

 

   

 

 

 

Net derivative gains (losses) recognized in general corporate expenses

   $ (91   $ 34   
  

 

 

   

 

 

 

Net derivative gains allocated to Consumer Foods

   $ 25      $ 4   

Net derivative losses allocated to Commercial Foods

     (1     (3
  

 

 

   

 

 

 

Net derivative gains included in segment operating profit

   $ 24      $ 1   
  

 

 

   

 

 

 

Based on our forecasts of the timing of recognition of the underlying hedged items, we expect to reclassify losses of $47 million and $12 million to segment operating results in fiscal 2013 and 2014 and thereafter, respectively. Amounts allocated, or to be allocated, to segment operating results during fiscal 2012 and thereafter include $32 million of net gains recognized within corporate expense prior to fiscal 2012.

 

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2012 vs. 2011

Net Sales

($ in millions)

 

Reporting Segment

   Fiscal 2012
Net Sales
     Fiscal 2011
Net Sales
     % Increase/
(Decrease)

Consumer Foods

     $ 8,377           $ 8,002         5%

Commercial Foods

     4,886           4,301         14%
  

 

 

    

 

 

    

 

Total

     $   13,263           $   12,303                 8%      
  

 

 

    

 

 

    

 

Overall, our net sales increased $960 million to $13.3 billion in fiscal 2012, reflecting a 5% increase in our Consumer Foods segment and a 14% increase in our Commercial Foods segment relative to results in fiscal 2011.

Consumer Foods net sales for fiscal 2012 were $8.4 billion, an increase of 5% as compared to fiscal 2011. Results reflected a 3% benefit from acquisitions, a 5% benefit from favorable pricing and mix, and a 3% decrease in volume from our base businesses (those businesses existing at the beginning of fiscal 2012). The decrease in volume from existing businesses reflected difficult economic conditions that are impacting consumer purchasing behavior, as well as price increases taken earlier in fiscal 2012 for some products. Increased pricing was necessitated by increased commodity input costs.

Sales of products associated with some of our most significant brands, including ACT II®, Blue Bonnet®, Chef Boyardee®, Healthy Choice®, Manwich®, Marie Callender’s®, Peter Pan®, Slim Jim®, Van Camp’s ®, and Wesson®, grew in fiscal 2012. Significant brands that experienced sales declines in fiscal 2012 included Banquet®, Crunch ‘n Munch®, Egg Beaters®, Hebrew National®, Hunt’s®, Kid Cuisine®, Orville Redenbacher’s®, PAM®, Reddi-wip®, Snack Pack®, and Swiss Miss®.

Commercial Foods net sales were $4.9 billion in fiscal 2012, an increase of $585 million, or 14% compared to fiscal 2011. Net sales in our flour milling business were approximately $284 million higher in fiscal 2012 than in fiscal 2011, principally reflecting the pass-through of higher wheat prices. Net sales also reflected a $256 million increase in results in our Lamb Weston® specialty potato products business, reflecting improved net pricing of approximately 9% and higher volume of approximately 4%.

Selling, General and Administrative Expenses (includes General Corporate Expense) (“SG&A”)

SG&A expenses totaled $2.0 billion for fiscal 2012, an increase of $488 million, or 32%, compared to fiscal 2011.

SG&A expenses for fiscal 2012 reflected the following:

 

   

an increase in pension and retirement expense of $336 million, reflecting the immediate write-off of actuarial losses in excess of 10% of our pension liability, in accordance with our newly adopted change in accounting method,

 

   

a gain of $59 million, resulting from the remeasurement to fair value of our previously held noncontrolling equity interest in ATFL, in connection with our acquisition of a majority interest in that company,

 

   

an increase in incentive compensation expense of $45 million,

 

   

charges totaling $43 million in connection with our restructuring plans,

 

   

a decrease in self-insured medical expense of $21 million,

 

   

a decrease in advertising and promotion expense of $7 million,

 

   

a charge of approximately $18 million in connection with legal matters associated with the 2007 peanut butter recall,

 

   

a benefit of $12 million resulting from insurance settlements for matters associated with peanut butter, and

 

   

a charge of $5 million in connection with the write-off of an insurance claim receivable.

 

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SG&A expenses for fiscal 2011 included the following:

 

   

a net benefit of $105 million in connection with the settlement of insurance claims, net of expenses incurred, related to the Garner accident,

 

   

charges totaling $35 million in connection with our restructuring plans,

 

   

a gain of $25 million from the receipt, as payment in full of all principal and interest due on the Notes received in connection with the divestiture of the trading and merchandising operations in fiscal 2009, in advance of the scheduled maturity dates, and

 

   

a charge of $10 million reflecting the immediate write-off of actuarial losses in excess of 10% of our pension liability, in accordance with our newly adopted change in accounting method in fiscal 2012.

Operating Profit

(Earnings before general corporate expense, interest expense (net), income taxes, and equity method investment earnings)

($ in millions)

 

Reporting Segment

       Fiscal 2012    
Operating
Profit
         Fiscal 2011    
Operating
Profit
         % Increase/        
(Decrease)
 

Consumer Foods

   $           1,053       $           1,126                   (6)

Commercial Foods

     547         510         7

Consumer Foods operating profit decreased $73 million in fiscal 2012 versus the prior year to $1.05 billion. Gross profits in the Consumer Foods segment were $11 million higher in fiscal 2012 than in fiscal 2011 driven by the benefit of price increases and supply chain cost savings initiatives, offset by the impact of higher commodity input costs (particularly for proteins, vegetable oil, and packaging). Businesses acquired in fiscal 2012 contributed $13 million of operating profit to fiscal 2012. Other items that significantly impacted Consumer Foods operating profit in fiscal 2012 included:

 

   

a gain of $59 million, resulting from the remeasurement to fair value of our previously held noncontrolling equity interest in ATFL, in connection with our acquisition of a majority interest in that company,

 

   

charges totaling $56 million in connection with our restructuring plans,

 

   

an increase in incentive compensation expense of $11 million, and

 

   

a decrease in advertising and promotion expense of $9 million.

Items that significantly impacted Consumer Foods operating profit in fiscal 2011 included:

 

   

a net benefit of $105 million in connection with the settlement of insurance claims, net of expenses incurred, related to the Garner accident, and

 

   

charges totaling $45 million in connection with our restructuring plans.

Commercial Foods operating profit increased $37 million in fiscal 2012 versus the prior year to $547 million. Gross profits in the Commercial Foods segment were $56 million higher in fiscal 2012 than fiscal 2011, driven by higher sales volume and improved pricing in the Lamb Weston® specialty potato business, largely offset by lower profits in our flour milling business. The decline in margins in the flour milling business was due to less favorable market conditions in the current year. SG&A expenses were higher in the Commercial Foods segment in fiscal 2012 as compared to fiscal 2011, largely due to a $14 million increase in incentive compensation expense. The Commercial Foods segment also recognized charges of $6 million in fiscal 2012 related to the execution of our restructuring plans.

Interest Expense, Net

In fiscal 2012, net interest expense was $204 million, an increase of $27 million, or 15%, from fiscal 2011. Included in net interest expense was $4 million and $42 million of interest income in fiscal 2012 and 2011,

 

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respectively. In 2011, the income was principally from interest on the Notes received in connection with the divestiture of the trading and merchandising business in fiscal 2009. Interest expense in fiscal 2012 and 2011 also reflected a net benefit of $9 million and $13 million, respectively, primarily resulting from interest rate swaps used to effectively convert the interest rates of certain outstanding debt instruments from fixed to variable (these hedges were terminated in fiscal 2011) and the benefit of the repayment of $343 million of our 6.75% senior notes in September 2011.

Income Taxes

Our income tax expense was $196 million and $422 million in fiscal 2012 and 2011, 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 29% for fiscal 2012 and 34% in fiscal 2011. The lower effective tax rate in fiscal 2012 was reflective of the benefit of normal, recurring, income tax credits and deductions combined with a lower pre-tax level of earnings (due in large part to the impact of the write-off of $397 million of actuarial losses under the newly adopted method of pension accounting), as well as the non-taxable nature of the $59 million gain on the remeasurement to fair value of our previously held noncontrolling equity interest in ATFL, in connection with our acquisition of a majority interest in that company.

We expect our effective tax rate in fiscal 2013, exclusive of any unusual transactions or tax events, to be approximately 34%.

Equity Method Investment Earnings

We include our share of the earnings of certain affiliates based on our economic ownership interest in the affiliates. Significant affiliates produce and market potato products for retail and foodservice customers. Our share of earnings from our equity method investments was $45 million ($5 million in the Consumer Foods segment and $40 million in the Commercial Foods segment) and $26 million ($6 million in the Consumer Foods segment and $20 million in the Commercial Foods segment) in fiscal 2012 and 2011, respectively. Equity method investment earnings in the Commercial Foods segment were a result of more profitable operations of a foreign potato processing venture.

Results of Discontinued Operations

Our discontinued operations were immaterial in fiscal 2012 and generated after-tax losses of $12 million in fiscal 2011. In fiscal 2011, we completed the sale of the assets of a small frozen foods business for approximately $9 million. We recognized after-tax impairment charges totaling $14 million in connection with this sale. Operating results of discontinued operations in fiscal 2011 included the favorable resolution of a foreign tax matter relating to a divested business.

Earnings Per Share

Our diluted earnings per share in fiscal 2012 were $1.12. Our diluted earnings per share in fiscal 2011 were $1.88 (including earnings of $1.90 per diluted share from continuing operations and losses of $0.02 per diluted share from discontinued operations). See “Items Impacting Comparability” above as several significant items affected the comparability of year-over-year results of operations.

2011 vs. 2010

Net Sales

($ in millions)

 

Reporting Segment

   Fiscal 2011
Net Sales
     Fiscal 2010
Net Sales
     % Increase/
(Decrease)

Consumer Foods

     $ 8,002           $ 7,940               1%      

Commercial Foods

     4,301           4,075         6%
  

 

 

    

 

 

    

 

Total

     $   12,303           $   12,015         2%
  

 

 

    

 

 

    

 

 

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Overall, our net sales increased $288 million to $12.3 billion in fiscal 2011, reflecting a 1% increase in our Consumer Foods segment and a 6% increase in our Commercial Foods segment relative to results in fiscal 2010.

Consumer Foods net sales for fiscal 2011 were $8.0 billion, an increase of 1% as compared to fiscal 2010. Results reflected a 2% benefit from acquisitions, net of divestitures, a 1% decrease in volume from existing businesses, and essentially unchanged net pricing and mix. The decrease in volume from existing businesses reflected highly competitive pricing for some products, as well as lower consumption in certain product categories. The net pricing impacts for fiscal 2011 were not significant, reflecting the fact that price increases in the second half of the year were offset by pricing reductions earlier in the year related to competitive pressures.

Sales of products associated with some of our most significant brands, including Blue Bonnet®, Marie Callender’s®, Peter Pan®, Reddi-wip®, Ro*Tel®, Slim Jim®, Snack Pack®, and Wesson®, grew in fiscal 2011. Significant brands that experienced sales declines in fiscal 2011 included ACT II®, Banquet®, Chef Boyardee®, Egg Beaters®, Healthy Choice®, Hunt’s®, Libby’s®, Orville Redenbacher’s®, PAM®, Swiss Miss®, and Van Camp’s ®.

Commercial Foods net sales were $4.3 billion in fiscal 2011, an increase of $226 million, or 6% compared to fiscal 2010. Net sales in our flour milling business were approximately $107 million higher in fiscal 2011 than in fiscal 2010, principally reflecting the pass-through of higher wheat prices. Results also reflected a $98 million increase in results in our Lamb Weston® specialty potato products business, reflecting higher volume of approximately 4% and flat net pricing and mix. The increase in sales volume included significant growth in sales of sweet potato products.

Selling, General and Administrative Expenses (includes General Corporate Expense) (“SG&A”)

SG&A expenses totaled $1.51 billion for fiscal 2011, a decrease of $478 million, or 24%, compared to fiscal 2010.

SG&A expenses for fiscal 2011 reflected the following:

 

   

a decrease in incentive compensation expense of $130 million,

 

   

a net benefit of $105 million in connection with the settlement of insurance claims, net of expenses incurred, related to the Garner accident,

 

   

charges totaling $35 million in connection with our restructuring plans,

 

   

a decrease in advertising and promotion expense of $37 million,

 

   

an increase in salaries and labor expense of $26 million,

 

   

a gain of $25 million from the receipt, as payment in full of all principal and interest due on the remaining Notes received in connection with the divestiture of the trading and merchandising operations in fiscal 2009, in advance of the scheduled maturity dates,

 

   

a decrease in charitable donations of $13 million,

 

   

a decrease in stock-based compensation expense of $11 million,

 

   

a charge of $10 million reflecting the immediate write-off of actuarial losses in excess of 10% of our pension liability, in accordance with our newly adopted change in accounting method in fiscal 2012,

 

   

an increase in self-insured medical expense of $10 million, and

 

   

a decrease in property, sales, and use taxes of $10 million.

SG&A expenses for fiscal 2010 included the following:

 

   

a charge of $168 million reflecting the immediate write-off of actuarial losses in excess of 10% of our pension liability, in accordance with our newly adopted change in accounting method in fiscal 2012,

 

   

charges totaling $36 million in connection with the 2010 plan, consisting of charges related to our decision to move manufacturing activities in Garner, North Carolina to Troy, Ohio, and our decision to move administrative functions in Edina, Minnesota to Naperville, Illinois,

 

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a charge of $33 million in connection with the impairment of a partially completed production facility,

 

   

a benefit of $15 million associated with a favorable adjustment to an environmental-related liability,

 

   

transaction-related costs of $14 million associated with securing federal tax benefits related to the Delhi, Louisiana sweet potato production facility (the associated income tax benefits will be recognized in future periods),

 

   

a $14 million gain on the sale of the Luck’s® brand, and

 

   

a net benefit of $8 million, representing SG&A expenses associated with the Garner accident that were more than offset by insurance recoveries (related charges of $12 million were recognized in cost of goods sold).

Operating Profit

(Earnings before general corporate expense, interest expense (net), income taxes, and equity method investment earnings)

($ in millions)

 

Reporting Segment

   Fiscal  2011
Operating
Profit
     Fiscal  2010
Operating
Profit
    

 

   %  Increase/
(Decrease)
 

Consumer Foods

   $         1,126       $         1,062            6%    

Commercial Foods

     510         543            (6)%   

Consumer Foods operating profit increased $64 million in fiscal 2011 versus the prior year to $1.13 billion. Gross profits were $156 million lower in fiscal 2011 than in fiscal 2010 driven by the impact of higher commodity input costs that were not fully offset by the benefit of price increases and supply chain cost savings initiatives. Other items that significantly impacted Consumer Foods operating profit in fiscal 2011 included:

 

   

a net benefit of $105 million in connection with the settlement of insurance claims, net of expenses incurred, related to the Garner accident,

 

   

a decrease in incentive compensation expense of $48 million,

 

   

a decrease in advertising and promotion expense of $42 million,

 

   

charges totaling $45 million in connection with the Company’s restructuring plans, and

 

   

the impact of foreign currencies, including related economic hedges, resulted in an increase of operating profit of approximately $27 million in fiscal 2011, as compared to fiscal 2010.

Items that significantly impacted Consumer Foods operating profit in fiscal 2010 included:

 

   

charges totaling $36 million in connection with our restructuring plans,

 

   

a charge of $33 million in connection with the impairment of a partially completed production facility, and

 

   

a $14 million gain on the sale of the Luck’s® brand.

Commercial Foods operating profit decreased $33 million in fiscal 2011 versus the prior year to $510 million. Gross profits in our Lamb Weston® specialty potato business were negatively impacted in fiscal 2011 by significant increases in input costs which more than offset the benefit of increased sales volumes and a higher quality potato crop than that which was processed in fiscal 2010 and the first half of fiscal 2011. Gross profits in our flour milling business improved in fiscal 2011 due to effective management of margins in a volatile wheat market, which more than offset the decrease in sales volumes. SG&A expenses were lower in the Commercial Foods segment in fiscal 2011 as compared to fiscal 2010, largely due to a $13 million decrease in incentive compensation expense. The Commercial Foods segment also recognized charges of $11 million in fiscal 2011 in connection with our restructuring plans.

 

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Interest Expense, Net

In fiscal 2011, net interest expense was $178 million, an increase of $17 million, or 11%, from fiscal 2010. Included in net interest expense was $42 million and $85 million of interest income in fiscal 2011 and 2010, respectively, principally from the Notes received in connection with the divestiture of the trading and merchandising business in fiscal 2009. Interest expense in fiscal 2011 also reflected a net benefit of $13 million primarily resulting from interest rate swaps used to effectively convert the interest rates of certain outstanding debt instruments from fixed to variable (these hedges were terminated in fiscal 2011) and the benefit of the repayment of $248 million of debt in September 2010.

During fiscal 2010, we received $115 million as payment in full of all principal and interest due on a portion of the Notes, in advance of the scheduled maturity date. In December 2010, we received $554 million as payment in full of all principal and interest due on the remaining Notes, in advance of the scheduled maturity dates.

Income Taxes

Our income tax expense was $422 million and $292 million in fiscal 2011 and 2010, 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 34% for fiscal 2011 and 32% in fiscal 2010. The lower effective tax rate in fiscal 2010 was reflective of favorable changes in estimates and audit settlements, as well as certain income tax credits and deductions identified in fiscal 2010 that related to prior periods. These benefits were offset, in part, by unfavorable tax consequences of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010.

Equity Method Investment Earnings

We include our share of the earnings of certain affiliates based on our economic ownership interest in the affiliates. Significant affiliates produce and market potato products for retail and foodservice customers. Our share of earnings from our equity method investments was $26 million ($6 million in the Consumer Foods segment and $20 million in the Commercial Foods segment) and $22 million ($5 million in the Consumer Foods segment and $17 million in the Commercial Foods segment) in fiscal 2011 and 2010, respectively. Equity method investment earnings in the Commercial Foods segment reflected improving market conditions in a foreign potato processing venture and continued difficult market conditions for our domestic potato ventures.

Results of Discontinued Operations

Our discontinued operations generated after-tax losses of $12 million and $19 million in fiscal 2011 and 2010, respectively. In fiscal 2011, we completed the sale of the assets of a small frozen foods business for approximately $9 million. We recognized after-tax impairment charges totaling $14 million in connection with this sale. In fiscal 2010, we decided to divest our dehydrated vegetable operations. As a result of this decision, we recognized an after-tax impairment charge of $40 million in fiscal 2010, representing a write-down of the carrying value of the related long-lived assets to fair value, based on the anticipated sales proceeds. The sale of this business for $246 million in cash was completed in July 2010. Operating results of discontinued operations in fiscal 2011 include the favorable resolution of a foreign tax matter relating to a divested business. Operating results of discontinued operations in fiscal 2010 include charges related to certain legal and environmental matters of divested businesses.

Earnings Per Share

Our diluted earnings per share in fiscal 2011 were $1.88 (including earnings of $1.90 per diluted share from continuing operations and a loss of $0.02 per diluted share from discontinued operations). Our diluted earnings per share in fiscal 2010 were $1.37 (including earnings of $1.41 per diluted share from continuing operations and losses of $0.04 per diluted share from discontinued operations). See “Items Impacting Comparability” above as several significant items affected the comparability of year-over-year results of operations.

 

 

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LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity and Capital

Our primary financing objective is to maintain a prudent capital structure, including our goal of maintaining an investment grade credit rating, that provides us flexibility to pursue our growth objectives. If necessary, we use short-term debt principally to finance ongoing operations, including our seasonal requirements for working capital (accounts receivable, prepaid expenses and other current assets, and inventories, less accounts payable, accrued payroll, and other accrued liabilities) and a combination of equity and long-term debt to finance both our base working capital needs and our noncurrent assets.

In September 2011, we entered into a $1.5 billion revolving credit facility. The facility is scheduled to mature in September 2016. Borrowings under this facility will bear interest at 1.1% over LIBOR and may be prepaid without penalty. The facility, like its predecessor facility, has historically been used principally as a back-up facility for our commercial paper program. As of May 27, 2012, there were no outstanding borrowings under the facility. The facility requires that our consolidated funded debt not exceed 65% of our consolidated capital base, and that our fixed charges coverage ratio be greater than 1.75 to 1.0 on a four-quarter rolling basis. As of May 27, 2012, we were in compliance with these financial covenants.

As of May 27, 2012, we had borrowings of $40 million outstanding under our commercial paper program, which was representative of the highest borrowings during the fiscal year.

As of the end of fiscal 2012, our senior long-term debt ratings were all investment grade. A significant downgrade in our credit ratings would not affect our ability to borrow amounts under the revolving credit facility, although borrowing costs would increase. A downgrade of our short-term credit ratings would impact our ability to borrow under our commercial paper program by negatively impacting borrowing costs and causing shorter durations, as well as making access to commercial paper more difficult.

In connection with the divestiture of the trading and merchandising operations in fiscal 2009, we received $550 million (face value) of the Notes issued by the purchaser of the divested business. During fiscal 2010, we received $115 million as payment in full of all principal and interest due on a portion of the Notes, in advance of the scheduled maturity date. During fiscal 2011, we received $554 million as payment in full of all principal and interest due on the remaining Notes, in advance of the scheduled maturity dates.

We repurchase our shares of common stock from time to time after considering market conditions and in accordance with repurchase limits authorized by our Board of Directors. We repurchased approximately 13.8 million shares of our common stock for an aggregate of $352 million under this program in fiscal 2012, of which approximately $213 million was funded by employee stock option exercise proceeds. In December 2011, the Company’s Board of Directors approved a $750 million increase to our share repurchase authorization. The Company’s total remaining share repurchase authorization as of May 2012 was $527 million. Under the share repurchase authorization, we may repurchase our shares periodically over several years, depending on market conditions and other factors, and may do so in open market purchases or privately negotiated transactions. The authorization has no time limit and may be suspended or discontinued at any time.

In July 2010, we completed the sale of substantially all of the assets of Gilroy Foods & FlavorsTM dehydrated garlic, onion, capsicum and Controlled MoistureTM, GardenFrost®, Redi-MadeTM, and fresh vegetable operations for $246 million in cash.

On September 15, 2011, we repaid the entire principal balance of $343 million of our 6.75% senior notes, due on that date.

On September 15, 2010, we repaid the entire principal balance of $248 million of our 7.875% senior notes, due on that date.

During fiscal 2012, we acquired National Pretzel Company, Del Monte Canada, Odom’s Tennessee Pride, and Kangaroo Brand’s pita chip operations, as well as an additional equity interest in ATFL for a total of $635 million in cash, net of cash acquired. In fiscal 2012, we also acquired the Marie Callender’s® brand trademarks for approximately $58 million in cash.

 

 

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We also contributed $326 million to our pension plans in fiscal 2012, the majority of which was discretionary.

Cash Flows

In fiscal 2012, we utilized $869 million of cash, which was the net result of $1.05 billion generated from operating activities, $1.06 billion used in investing activities, $850 million used in financing activities, and a decrease of $7 million in cash and cash equivalents due to the effect of changes in foreign currency exchange rates.

Cash generated from operating activities of continuing operations totaled $1.05 billion for fiscal 2012, as compared to $1.34 billion generated in fiscal 2011. We contributed $326 million and $129 million to our Company-sponsored pension plans in fiscal 2012 and 2011, respectively. Cash flows from operations benefited in fiscal 2012, relative to fiscal 2011, due to increasing accounts payable balances, despite slightly lower inventory balances (excluding impacts of acquisitions), and lower incentive compensation payments paid in fiscal 2012 (earned in fiscal 2011) than in fiscal 2011 (earned in fiscal 2010). In fiscal 2011, improvement in our accounts payable balance largely offset increases in the inventory balances, reflecting the impact of higher commodity costs in our flour milling business. Cash payments of income taxes were $191 million and $172 million in fiscal 2012 and 2011, respectively. Tax payments in fiscal 2011 reflected the benefit of changes in certain federal income tax laws that allowed us to defer the payment of a significant amount of income taxes recognized in fiscal 2011 until future years. Fiscal 2011 operating cash flows also reflect the receipt of $142 million of interest due on the remaining Notes received in connection with the divestiture of the trading and merchandising operations in fiscal 2009, and insurance advances of $65 million for reimbursement of out-of-pocket expenses and foregone profits associated with the Garner accident. Cash generated from operating activities of discontinued operations was $2 million and $12 million in fiscal 2012 and 2011, respectively, primarily reflecting income from operations of the discontinued frozen handheld operations.

Cash used in investing activities of continuing operations totaled $1.06 billion in fiscal 2012 and $166 million in fiscal 2011. Investing activities of continuing operations in fiscal 2012 consisted primarily of acquisitions of businesses and intangibles totaling $698 million, capital expenditures of $337 million, and a $40 million purchase of a secured loan. Investing activities of continuing operations in fiscal 2011 consisted primarily of capital expenditures of $466 million and acquisitions of businesses and intangibles totaling $149 million, partially offset by the receipt of $413 million, as payment in full of all amounts due on the remaining Notes received in connection with the divestiture of the trading and merchandising operations in fiscal 2009 (receipt of interest due is reflected in operating cash flows), and sales of property, plant and equipment of $19 million. In fiscal 2011, we generated $255 million of cash from investing activities of discontinued operations from the disposition of the Gilroy Foods & FlavorsTM dehydrated vegetable business.

Cash used in financing activities totaled $850 million in fiscal 2012, as compared to cash used in financing activities of $1.43 billion in fiscal 2011. During fiscal 2012, we repurchased approximately 14 million shares of our common stock for $352 million, we paid dividends of $389 million, and we decreased our debt by $324 million, including the repayment of the entire principal balance of $343 million of our 6.75% senior notes on September 15, 2011, due on that date, partially offset by borrowings of $40 million in our commercial paper program. During fiscal 2012, we also received net proceeds of $213 million from employee stock option exercises. During fiscal 2011, we repurchased approximately 36 million shares of our common stock for $825 million, we paid dividends of $375 million, and we decreased our debt by $294 million, including the repayment of the entire principal balance of $248 million of our 7.875% senior notes on September 15, 2010, due on that date, as well as the repayment of $35 million of bank borrowings by our Lamb Weston BSW potato processing venture. During fiscal 2011, we also received net proceeds of $60 million from employee stock option exercises.

We estimate our capital expenditures in fiscal 2013 will be approximately $450 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 our working capital needs, planned capital expenditures, and payment of anticipated quarterly dividends for at least the next twelve months.

 

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OFF-BALANCE SHEET ARRANGEMENTS

We use off-balance sheet arrangements (e.g., leases accounted for as operating leases) where sound business principles warrant their use. We also periodically enter 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.

Variable Interest Entities Not Consolidated

We have variable interests in certain entities that we have determined to be variable interest entities, but for which we are not the primary beneficiary. We do not consolidate the financial statements of these entities.

We hold a 50% interest in Lamb Weston RDO, a potato processing venture. We provide all sales and marketing services to Lamb Weston RDO. We receive a fee for these services based on a percentage of the net sales of the venture. We reflect the value of our ownership interest in this venture in other assets in our consolidated balance sheets, based upon the equity method of accounting. The balance of our investment was $15 million and $14 million at May 27, 2012 and May 29, 2011, respectively, representing our maximum exposure to loss as a result of our involvement with this venture. The capital structure of Lamb Weston RDO includes owners’ equity of $30 million and term borrowings from banks of $43 million as of May 27, 2012. We have determined that we do not have the power to direct the activities that most significantly impact the economic performance of this venture.

We lease certain office buildings from entities that we have determined to be variable interest entities. The lease agreements with these entities include fixed-price purchase options for the assets being leased, representing our only variable interest in these lessor entities. These leases are accounted for as operating leases, and accordingly, there are no material assets or liabilities associated with these entities included in our balance sheets. We have no material exposure to loss from our variable interests in these entities. We have determined that we do not have the power to direct the activities that most significantly impact the economic performance of these entities. In making this determination, we have considered, among other items, the terms of the lease agreements, the expected remaining useful lives of the assets leased, and the capital structure of the lessor entities.

OBLIGATIONS AND COMMITMENTS

As part of our ongoing operations, we enter into arrangements that obligate us to make future payments under contracts such as debt agreements, lease agreements, and unconditional purchase 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 in the normal course of business in order to ensure adequate levels of sourced product are available. Of these items, debt and capital lease obligations, which totaled $3.0 billion as of May 27, 2012, were recognized as liabilities in our consolidated balance sheet. Operating lease obligations and unconditional purchase obligations, which totaled approximately $881 million as of May 27, 2012, were not recognized as liabilities in our consolidated balance sheet, in accordance with generally accepted accounting principles.

A summary of our contractual obligations at the end of fiscal 2012 was as follows:

 

($ in millions)   Payments Due by Period  

Contractual Obligations

  Total    

 

   Less than
1 Year
   

 

   1-3 Years    

 

   3-5 Years    

 

   After 5
Years
 

Long-term debt

  $   2,879.6         $ 30.6         $ 578.4         $ 10.8         $ 2,259.8   

Capital lease obligations

    76.1           7.5           12.6           9.3           46.7   

Operating lease obligations

    444.4           82.8           135.1           91.1           135.4   

Purchase obligations

    436.6           361.5           46.2           6.0           22.9   
 

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total

  $ 3,836.7         $   482.4         $   772.3         $   117.2         $   2,464.8   
 

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

 

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The purchase obligations noted in the table above do not reflect $638 million of open purchase orders or $437 million of agreements for goods and services, some of which are not legally binding. These purchase orders and agreements are generally settleable in the ordinary course of business in less than one year.

The operating lease obligations noted in the table above have not been reduced by non-cancellable sublease rentals of approximately $38 million.

We are also contractually obligated to pay interest on our long-term debt and capital lease obligations. The weighted average interest rate of the long-term debt obligations outstanding as of May 27, 2012 was approximately 7.0%.

We own a 49.99% interest in Lamb Weston BSW, LLC (“Lamb Weston BSW”), a potato processing venture with Ochoa Ag Unlimited Foods, Inc. (“Ochoa”). We provide all sales and marketing services to Lamb Weston BSW. Under certain circumstances, we could be required to compensate Ochoa for lost profits resulting from significant production shortfalls (“production shortfalls”). Commencing on June 1, 2018, or on an earlier date under certain circumstances, we have a contractual right to purchase the remaining equity interest in Lamb Weston BSW from Ochoa (the “call option”). We are currently subject to a contractual obligation to purchase all of Ochoa’s equity investment in Lamb Weston BSW at the option of Ochoa (the “put option”). The purchase prices under the call option and the put option (the “options”) are based on the book value of Ochoa’s equity interest at the date of exercise, as modified by an agreed-upon rate of return for the holding period of the investment balance. The agreed-upon rate of return varies depending on the circumstances under which any of the options are exercised. As of May 27, 2012, the price at which Ochoa had the right to put its equity interest to us was $34.3 million. This amount, which is presented within other liabilities in our condensed consolidated balance sheet, is not included in the “Contractual Obligations” table above, as the payment is contingent upon the exercise of the put option by Ochoa, and the eventual occurrence and timing of such exercise is uncertain.

As part of our ongoing operations, we also enter into arrangements that obligate us 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). In accordance with generally accepted accounting principles, the following commercial commitments are not recognized as liabilities in our consolidated balance sheet. A summary of our commitments, including commitments associated with equity method investments, as of the end of fiscal 2012, is as follows:

 

($ in millions)    Amount of Commitment Expiration per Period  

Other Commercial Commitments

   Total      Less than
1 Year
     1-3 Years      3-5 Years      After 5
Years
 

Guarantees

   $     75.7       $     49.0       $     10.9       $     9.3       $     6.5   

Other commitments

     0.5         0.5         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 76.2       $ 49.5       $ 10.9       $ 9.3       $ 6.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In certain limited situations, we will guarantee an obligation of an unconsolidated entity. We guarantee certain leases and other commercial obligations resulting from the 2002 divestiture of our fresh beef and pork operations. The remaining terms of these arrangements do not exceed four years and the maximum amount of future payments we have guaranteed was approximately $11 million, included in the table above, as of May 27, 2012.

We have also guaranteed the performance of the divested business with respect to a 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 June 1, 2013. The contract stipulates minimum price commitments, based in part on market prices, and in certain circumstances also includes price adjustments based on certain inputs. We have not established a liability for these guarantees, as we have determined that the likelihood of our required performance under the guarantees is remote.

We are a party to various potato supply agreements. Under the terms of certain such potato supply agreements, we have guaranteed repayment of short-term bank loans of the potato suppliers, under certain conditions. At May 27, 2012, the amount of supplier loans effectively guaranteed by us was approximately

 

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$44 million, included in the table above. We have not established a liability for these guarantees, as we have determined that the likelihood of our required performance under the guarantees is remote.

We were a party to a supply agreement with an onion processing company where we had guaranteed, under certain conditions, repayment of a secured loan (the “Secured Loan”) of this onion supplier to the onion supplier’s lender. The Secured Loan was in the amount of approximately $40 million (classified as other assets in fiscal 2012) with a remaining term of approximately 11 years. The amount of our guarantee was $25 million. We had the option to purchase the Secured Loan, and thereby assume first-priority secured rights to the underlying collateral for the amount of the Secured Loan. During the fourth quarter of fiscal 2012, we received notice from the lender that the onion supplier had defaulted on the Secured Loan and we purchased the Secured Loan from the lender for approximately $41 million, and cancelled our guarantee. The onion supplier subsequently filed for bankruptcy on April 12, 2012. Based on our estimate of the value of the collateral and our first-priority secured rights, we expect to recover the carrying value of the Secured Loan.

Federal income tax credits were generated related to the construction of our sweet potato production facility in Delhi, Louisiana. Third parties invested in certain of these income tax credits. We have guaranteed these third parties the face value of these income tax credits over their statutory lives, through fiscal 2017, in the event that the income tax credits are recaptured or reduced. The face value of the income tax credits was $21 million, included in the table above, as of May 27, 2012. We believe the likelihood of the recapture or reduction of the income tax credits is remote, and therefore we have not established a liability in connection with this guarantee.

The obligations and commitments tables above do not include any reserves for income taxes, as we are unable to reasonably estimate the ultimate amount or timing of settlement of our reserves for income taxes. The liability for gross unrecognized tax benefits at May 27, 2012 was approximately $49 million. The net amount of unrecognized tax benefits at May 27, 2012, that, if recognized, would impact our effective tax rate was approximately $30 million. Recognition of this tax benefit would have a favorable impact on our effective tax rate.

CRITICAL ACCOUNTING ESTIMATES

The process of preparing financial statements requires the use of estimates on the part of management. The estimates used by management are based on our historical experiences combined with management’s understanding of current facts and circumstances. Certain of our accounting estimates are considered critical as they are both important to the portrayal of our financial condition and results and require significant or complex judgment on the part of management. The following is a summary of certain accounting estimates considered critical by management.

Our Audit/Finance Committee has reviewed management’s development, selection, and disclosure of the critical accounting estimates.

Marketing Costs—We incur certain costs to promote our products through marketing programs, which include advertising, customer incentives, and consumer incentives. We recognize the cost of each of these types of marketing activities as incurred in accordance with generally accepted accounting principles. The judgment required in determining when marketing costs are incurred can be significant. For volume-based incentives provided to customers, management must continually assess the likelihood of the customer achieving the specified targets. Similarly, for consumer coupons, management must estimate the level at which coupons will be redeemed by consumers in the future. Estimates made by management in accounting for marketing costs are based primarily on our historical experience with marketing programs with consideration given to current circumstances and industry trends. As these factors change, management’s estimates could change and we could recognize different amounts of marketing costs over different periods of time.

We have recognized reserves of approximately $165 million for these marketing costs as of May 27, 2012. Changes in the assumptions used in estimating the cost of any individual customer marketing program would not result in a material change in our results of operations or cash flows.

Advertising and promotion expenses of continuing operations totaled $365 million, $372 million, and $409 million in fiscal 2012, 2011, and 2010, respectively.

 

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Income Taxes—Our income tax expense is based on our income, statutory tax rates, and tax planning opportunities available in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining our income tax expense and in evaluating our tax positions, including evaluating uncertainties. Management reviews tax positions at least quarterly and adjusts the balances as new information becomes available. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. Management evaluates the recoverability of these future tax deductions by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings, and available tax planning strategies. These estimates of future taxable income inherently require significant judgment. Management uses historical experience and short and long-range business forecasts to develop such estimates. Further, we employ various prudent and feasible tax planning strategies to facilitate the recoverability of future deductions. To the extent management does not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established.

Further information on income taxes is provided in Note 16 “Pre-tax Income and Income Taxes” to the consolidated financial statements.

Environmental Liabilities—Environmental liabilities are accrued when it is probable that obligations have been incurred and the associated amounts can be reasonably estimated. Management works with independent third-party specialists in order to effectively assess our environmental liabilities. Management estimates our environmental liabilities based on evaluation of investigatory studies, extent of required clean-up, our known volumetric contribution, other potentially responsible parties, and our experience in remediating sites. Environmental liability estimates may be affected by changing governmental or other external determinations of what constitutes an environmental liability or an acceptable level of clean-up. Management’s estimate as to our potential liability is independent of any potential recovery of insurance proceeds or indemnification arrangements. Insurance companies and other indemnitors are notified of any potential claims and periodically updated as to the general status of known claims. We do not discount our environmental liabilities as the timing of the anticipated cash payments is not fixed or readily determinable. To the extent that there are changes in the evaluation factors identified above, management’s estimate of environmental liabilities may also change.

We have recognized a reserve of approximately $71 million for environmental liabilities as of May 27, 2012. The reserve for each site is determined based on an assessment of the most likely required remedy and a related estimate of the costs required to effect such remedy. Historically, the underlying assumptions utilized in estimating this reserve have been appropriate as actual payments have neither differed materially from the previously estimated reserve balances, nor have significant adjustments to this reserve balance been necessary.

Employment-Related Benefits—We incur certain employment-related expenses associated with pensions, postretirement health care benefits, and workers’ compensation. In order to measure the annual expense associated with these employment-related benefits, management must make a variety of estimates including, but not limited to, discount rates used to measure the present value of certain liabilities, assumed rates of return on assets set aside to fund these expenses, compensation increases, employee turnover rates, anticipated mortality rates, anticipated health care costs, and employee accidents incurred but not yet reported to us. The estimates used by management are based on our historical experience as well as current facts and circumstances. We use third-party specialists to assist management in appropriately measuring the expense associated with these employment-related benefits. Different estimates used by management could result in us recognizing different amounts of expense over different periods of time. We had recognized a pension liability of $566 million and $352 million, a postretirement liability of $283 million and $322 million, and a workers’ compensation liability of $76 million and $74 million, as of the end of fiscal 2012 and 2011, respectively. We also had recognized a pension asset of $4 million and $15 million as of the end of fiscal 2012 and 2011, respectively, as certain individual plans of the Company had a positive funded status.

In May 2012, we elected to change our method of accounting for pension benefits. Historically, we have recognized actuarial gains and losses in accumulated other comprehensive loss in the consolidated balance sheets

 

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upon each plan remeasurement, amortizing them into operating results over the average future service period of active employees in these plans, to the extent such gains and losses were in excess of 10% of the greater of the market-related value of plan assets or the plan’s projected benefit obligation (the “corridor”). We have elected to immediately recognize actuarial gains and losses in our operating results in the year in which they occur, to the extent they exceed the corridor; therefore, eliminating the amortization. Actuarial gains and losses outside the corridor, to the extent they occur, will be recognized annually as of our measurement date, which is our fiscal year-end, or when measurement is required otherwise under generally accepted accounting principles. Additionally, for purposes of calculating the expected return on plan assets, we will no longer use the market-related value of plan assets, an averaging technique permitted under generally accepted accounting principles, but instead will use the fair value of plan assets. These changes are intended to improve the transparency of our operating results by more quickly recognizing the effects of changes in plan asset values and the impact of current interest rates on plan obligations.

We recognized pension expense from Company plans of $422 million, $54 million, and $227 million in fiscal years 2012, 2011, and 2010, respectively. Such amounts reflect an increase in pension expense, reflecting the immediate write-off of actuarial losses in excess of 10% of our pension liability, in accordance with our newly adopted change in accounting method. This also reflected expected returns on plan assets of $196 million, $168 million, and $142 million in fiscal years 2012, 2011, and 2010, respectively. We contributed $326 million, $129 million, and $123 million to our pension plans in fiscal years 2012, 2011, and 2010, respectively. We anticipate contributing approximately $20 million to our pension plans in fiscal 2013.

One significant assumption for pension plan accounting is the discount rate. We select a discount rate each year (as of our fiscal year-end measurement date) for our plans based upon a hypothetical bond portfolio for which the cash flows from coupons and maturities match the year-by-year projected benefit cash flows for our pension plans. The hypothetical bond portfolio is comprised of high-quality fixed income debt instruments (usually Moody’s Aa) available at the measurement date. Based on this information, the discount rate selected by us for determination of pension expense was 5.3% for fiscal year 2012, 5.8% for fiscal 2011, and 6.9% for fiscal 2010. We selected a discount rate of 4.5% for determination of pension expense for fiscal 2013. A 25 basis point increase in our discount rate assumption as of the end of fiscal 2012 would have resulted in a decrease of approximately $97 million in our pension expense for fiscal 2012. A 25 basis point decrease in our discount rate assumption as of the end of fiscal 2012 would have resulted in an increase of approximately $101 million in our pension expense for fiscal 2012. For our year-end pension obligation determination, we selected discount rates of 4.5% and 5.3% for fiscal years 2012 and 2011, respectively.

Another significant assumption used to account for our pension plans is the expected long-term rate of return on plan assets. In developing the assumed long-term rate of return on plan assets for determining pension expense, we consider long-term historical returns (arithmetic average) of the plan’s investments, the asset allocation among types of investments, estimated long-term returns by investment type from external sources, and the current economic environment. Based on this information, we selected 7.75% for the long-term rate of return on plan assets for determining our fiscal 2012 pension expense. A 25 basis point increase/decrease in our expected long-term rate of return assumption as of the beginning of fiscal 2012 would decrease/increase annual pension expense for our pension plans by approximately $6 million. We selected an expected rate of return on plan assets of 7.75% to be used to determine our pension expense for fiscal 2013. A 25 basis point increase/decrease in our expected long-term rate of return assumption as of the beginning of fiscal 2013 would decrease/increase annual pension expense for our pension plans by approximately $7 million.

The rate of compensation increase is another significant assumption used in the development of accounting information for pension plans. We determine this assumption based on our long-term plans for compensation increases and current economic conditions. Based on this information, we selected 4.25% for fiscal years 2012 and 2011 as the rate of compensation increase for determining our year-end pension obligation. We selected 4.25% for the rate of compensation increase for determination of pension expense for each of fiscal years 2012, 2011, and 2010. A 25 basis point increase in our rate of compensation increase assumption as of the beginning of fiscal 2012 would increase pension expense for our pension plans by approximately $1 million for the year. A 25 basis point decrease in our rate of compensation increase assumption as of the beginning of fiscal 2012 would decrease pension expense for our pension plans by approximately $1 million for the year. We selected a rate of

 

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4.25% for the rate of compensation increase to be used to determine our pension expense for fiscal 2013. A 25 basis point increase/decrease in our rate of compensation increase assumption as of the beginning of fiscal 2013 would increase/decrease pension expense for our pension plans by approximately $1 million for the year.

We also provide certain postretirement health care benefits. We recognized postretirement benefit expense of $8 million, $12 million, and $9 million in fiscal 2012, 2011, and 2010, respectively. We reflected liabilities of $283 million and $322 million in our balance sheets as of May 27, 2012 and May 29, 2011, respectively. We anticipate contributing approximately $31 million to our postretirement health care plans in fiscal 2013.

The postretirement benefit expense and obligation are also dependent on our assumptions used for the actuarially determined amounts. These assumptions include discount rates (discussed above), health care cost trend rates, inflation rates, retirement rates, mortality rates, and other factors. The health care cost trend assumptions are developed based on historical cost data, the near-term outlook, and an assessment of likely long-term trends. Assumed inflation rates are based on an evaluation of external market indicators. Retirement and mortality rates are based primarily on actual plan experience. The discount rate we selected for determination of postretirement expense was 4.3% for fiscal 2012, 5.4% for fiscal 2011, and 6.6% for fiscal 2010. We have selected a discount rate of 3.9% for determination of postretirement expense for fiscal 2013. A 25 basis point increase/decrease in our discount rate assumption as of the beginning of fiscal 2012 would not have resulted in a material change to postretirement expense for our plans. We have assumed the initial year increase in cost of health care to be 7.5%, with the trend rate decreasing to 5.0% by 2016. A one percentage point change in the assumed health care cost trend rate would have the following effects:

 

($ in millions)    One  Percent
Increase
     One  Percent
Decrease
 

Effect on total service and interest cost

   $               1       $ (1)   

Effect on postretirement benefit obligation

     14                   (13)   

We provide workers’ compensation benefits to our employees. The measurement of the liability for our cost of providing these benefits is largely based upon actuarial analysis of costs. One significant assumption we make is the discount rate used to calculate the present value of our obligation. The discount rate used at May 27, 2012 was 3.0%. A 25 basis point increase/decrease in the discount rate assumption would not have a material impact on workers’ compensation expense.

Impairment of Long-Lived Assets (including property, plant and equipment) and Identifiable Intangible Assets—We reduce the carrying amounts of long-lived assets and identifiable intangible assets to their fair values when the fair value of such assets is determined to be less than their carrying amounts (i.e., assets are deemed to be impaired). Fair value is typically estimated using a discounted cash flow analysis, which requires us to estimate the future cash flows anticipated to be generated by the particular asset being tested for impairment as well as to select a discount rate to measure the present value of the anticipated cash flows. When determining future cash flow estimates, we consider historical results adjusted to reflect current and anticipated operating conditions. Estimating future cash flows requires significant judgment by management in such areas as future economic conditions, industry-specific conditions, product pricing, and necessary capital expenditures. The use of different assumptions or estimates for future cash flows could produce different impairment amounts (or none at all) for long-lived assets and identifiable intangible assets.

We utilize a “relief from royalty” methodology in evaluating impairment of our indefinite lived brands/trademarks. The methodology determines the fair value of each brand through use of a discounted cash flow model that incorporates an estimated “royalty rate” we would be able to charge a third party for the use of the particular brand. When determining the future cash flow estimates, we must estimate future net sales and a fair market royalty rate for each applicable brand and an appropriate discount rate to measure the present value of the anticipated cash flows. Estimating future net sales requires significant judgment by management in such areas as future economic conditions, product pricing, and consumer trends. In determining an appropriate discount rate to apply to the estimated future cash flows, we consider the current interest rate environment and our estimated cost of capital. As the calculated fair value of our other identifiable intangible assets generally significantly exceeds the carrying amount of these assets, a one percentage point increase in the discount rate assumptions used to estimate the fair values of our other identifiable intangible assets would not result in a material impairment charge.

 

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Goodwill—Goodwill is tested annually for impairment of value and whenever events or changes in circumstances indicate the carrying amount of the asset may be impaired. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include deterioration in general economic conditions, adverse changes in the markets in which an entity operates, increases in input costs that have negative effects on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods, among others. The fair value that could be realized in an actual transaction may differ from that used to evaluate the impairment of goodwill.

In the third quarter of fiscal 2012, in conjunction with management’s annual review of goodwill, we adopted new guidance for testing goodwill for impairment (see Note 1 “Summary of Significant Accounting Policies” to the consolidated financial statements). Under the qualitative assessment, various events and circumstances that would affect the estimated fair value of a reporting unit are identified (similar to impairment indicators above). Furthermore, management considers the results of the most recent two-step quantitative impairment test completed for a reporting unit (this would be fiscal 2011 in which the estimated fair values of all reporting units were substantially in excess of their carrying values) and compares the weighted average cost of capital (WACC) between the current and prior years for each reporting unit.

Under the two-step quantitative impairment test, the evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. Fair value is typically estimated using a discounted cash flow analysis, which requires us to estimate the future cash flows anticipated to be generated by the particular asset being tested for impairment as well as to select a discount rate to measure the present value of the anticipated cash flows. When determining future cash flow estimates, we consider historical results adjusted to reflect current and anticipated operating conditions. Estimating future cash flows requires significant judgment by management in such areas as future economic conditions, industry-specific conditions, product pricing, and necessary capital expenditures. The use of different assumptions or estimates for future cash flows could produce different impairment amounts (or none at all) for goodwill.

During the fiscal 2012 annual review of goodwill, management performed the qualitative assessment for all reporting units and concluded that it was more likely than not that their estimated fair values exceeded their carrying values. As such, no further analysis was required.

FORWARD-LOOKING STATEMENTS

This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, 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. We undertake no responsibility for updating these statements. Readers of this report should understand that these statements are not guarantees of performance or results. Many factors could affect our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements, including those set forth in this report. These factors include, among other things: availability and prices of raw materials, including any negative effects caused by inflation; the effectiveness of our product pricing, including any pricing actions and promotional changes; future economic circumstances; industry conditions; our ability to execute our operating and restructuring plans; the success of our innovation, marketing, and cost-savings initiatives; the competitive environment and related market conditions; operating efficiencies; the ultimate impact of any product recalls; the Company’s success in efficiently and effectively integrating the Company’s acquisitions; access to capital; actions of governments and regulatory factors affecting our businesses, including the Patient Protection and Affordable Care Act; the amount and timing of repurchases of our common stock, if any; and other risks described in our reports filed with the Securities and Exchange Commission. We caution 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.

 

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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The principal market risks affecting us during fiscal 2012 and 2011 were exposures to price fluctuations of commodity and energy inputs, interest rates, and foreign currencies. These fluctuations impacted all reporting segments.

Commodity Market Risk—We purchase commodity inputs such as wheat, corn, oats, soybean meal, soybean oil, meat, dairy products, sugar, natural gas, electricity, and packaging materials to be used in our operations. These commodities are subject to price fluctuations that may create price risk. We enter into commodity hedges to manage this price risk using physical forward contracts or derivative instruments. We have policies governing the hedging instruments our businesses may use. These policies include limiting the dollar risk exposure for each of our businesses. We also monitor the amount of associated counter-party credit risk for all non-exchange-traded transactions.

Interest Rate Risk—From time to time, we use interest rate swaps to manage the effect of interest rate changes on the fair value of our existing debt as well as the forecasted interest payments for the anticipated issuance of debt. During fiscal 2010, we entered into interest rate swap contracts used to effectively convert the interest rates of certain outstanding debt instruments from fixed to variable. During fiscal 2011, we terminated these interest rate swap contracts. As a result of this termination, we received proceeds of $32 million. The cumulative adjustment to the fair value of the debt instruments being hedged, $35 million, was included in long-term debt and is being amortized as a reduction of interest expense over the remaining lives of the debt instruments (through fiscal 2014). At May 27, 2012, the unamortized amount was $18 million.

During fiscal 2011, we entered into interest rate swap contracts to hedge the interest rate risk related to our forecasted issuance of long-term debt in 2014 (based on the anticipated refinancing of the senior long-term debt maturing at that time). The net notional amount of these interest rate derivatives at May 27, 2012 was $500 million. The maximum potential loss associated with these interest rate swap contracts from a hypothetical change of 1% in interest rates as of May 27, 2012 is approximately $151 million. Any such loss (or gain) would be deferred in accumulated other comprehensive income and recognized in earnings over the life of the forecasted interest payments associated with the anticipated debt refinancing. At May 27, 2012, we had recognized an unrealized loss of $154 million in accumulated other comprehensive income for these derivative instruments.

As of May 27, 2012 and May 29, 2011, the fair value of our fixed rate debt was estimated at $3.5 billion and $3.6 billion, respectively, based on current market rates primarily provided by outside investment advisors. As of May 27, 2012 and May 29, 2011, a one percentage point increase in interest rates would decrease the fair value of our fixed rate debt by approximately $211 million and $208 million, respectively, while a one percentage point decrease in interest rates would increase the fair value of our fixed rate debt by approximately $235 million and $232 million, respectively.

Foreign Currency Risk—In order to reduce exposures for our processing activities related to changes in foreign currency exchange rates, we may enter into forward exchange or option contracts for transactions denominated in a currency other than the functional currency for certain of our operations. This activity primarily relates to economically hedging against foreign currency risk in purchasing inventory and capital equipment, sales of finished goods, and future settlement of foreign denominated assets and liabilities.

Value-at-Risk (VaR)—We employ various tools to monitor our derivative risk, including value-at-risk (“VaR”) models. We perform simulations using historical data to estimate potential losses in the fair value of current derivative positions. We use price and volatility information for the prior 90 days in the calculation of VaR that is used to monitor our daily risk. The purpose of this measurement is to provide a single view of the potential risk of loss associated with derivative positions at a given point in time based on recent changes in market prices. Our model uses a 95% confidence level. Accordingly, in any given one day time period, losses greater than the amounts included in the table below are expected to occur only 5% of the time. We include commodity swaps, futures, and options and foreign exchange forwards, swaps, and options in this calculation. The following table provides an overview of our average daily VaR for our energy, agriculture, and other

 

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commodities as well as the average daily foreign exchange VaR. Other commodities may include items such as packaging, livestock, and/or metals.

 

     Fair Value Impact (in millions)  
     Average
During Fifty-two  Weeks

Ended May 27, 2012
     Average
During Fifty-two  Weeks
Ended May 29, 2011
 

Energy commodities

   $             2.3       $             1.8   

Agriculture commodities

   $ 3.7       $ 3.2   

Other commodities

   $ 2.2       $   

Foreign exchange

   $ 1.4       $ 1.3   

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED STATEMENTS OF EARNINGS

CONAGRA FOODS, INC. AND SUBSIDIARIES

Dollars in millions except per share amounts

 

     For the Fiscal Years Ended May  
     2012      2011     2010  

Net sales

   $     13,262.6       $     12,303.1      $     12,014.9   

Costs and expenses:

       

Cost of goods sold

     10,435.7         9,389.6        8,966.3   

Selling, general and administrative expenses

     1,997.7         1,509.9        1,987.7   

Interest expense, net

     204.0         177.5        160.4   
  

 

 

    

 

 

   

 

 

 

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

     625.2         1,226.1        900.5   

Income tax expense

     195.8         421.6        292.3   

Equity method investment earnings

     44.9         26.4        22.1   
  

 

 

    

 

 

   

 

 

 

Income from continuing operations

     474.3         830.9        630.3   

Income (loss) from discontinued operations, net of tax

     0.1         (11.5     (19.3
  

 

 

    

 

 

   

 

 

 

Net income

   $ 474.4       $ 819.4      $ 611.0   
  

 

 

    

 

 

   

 

 

 

Less: Net income (loss) attributable to noncontrolling interests

     6.5         1.8        (2.5
  

 

 

    

 

 

   

 

 

 

Net income attributable to ConAgra Foods, Inc.

   $ 467.9       $ 817.6      $ 613.5   
  

 

 

    

 

 

   

 

 

 

Earnings per share—basic

       

Income from continuing operations attributable to ConAgra Foods, Inc. common stockholders

   $ 1.13       $ 1.92      $ 1.43   

Loss from discontinued operations attributable to ConAgra Foods, Inc. common stockholders

             (0.02     (0.05
  

 

 

    

 

 

   

 

 

 

Net income attributable to ConAgra Foods, Inc. common stockholders

   $ 1.13       $ 1.90      $ 1.38   
  

 

 

    

 

 

   

 

 

 

Earnings per share—diluted

       

Income from continuing operations attributable to ConAgra Foods, Inc. common stockholders

   $ 1.12       $ 1.90      $ 1.41   

Loss from discontinued operations attributable to ConAgra Foods, Inc. common stockholders

             (0.02     (0.04
  

 

 

    

 

 

   

 

 

 

Net income attributable to ConAgra Foods, Inc. common stockholders

   $ 1.12       $ 1.88      $
1.37
  
  

 

 

    

 

 

   

 

 

 

The accompanying Notes are an integral part of the consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

CONAGRA FOODS, INC. AND SUBSIDIARIES

Dollars in millions

 

     For the Fiscal Years Ended May  
     2012    

 

   2011    

 

   2010  

Net income

   $         474.4         $         819.4         $         611.0   

Other comprehensive income (loss):

            

Derivative adjustments, net of tax

     (89.1        (7.2        0.2   

Unrealized losses on available-for-sale securities, net of tax

     (0.1        (0.1          

Currency translation adjustment:

            

Unrealized translation gains (losses)

     (62.4        47.3           (3.7

Reclassification adjustment for losses (gains) included in net income

     6.0           (1.6          

Pension and postretirement healthcare liabilities, net of tax

     (66.7        23.6           (65.8
  

 

 

   

 

  

 

 

   

 

  

 

 

 

Comprehensive income

     262.1           881.4           541.7   

Comprehensive income (loss) attributable to noncontrolling interests

     2.1           1.8           (2.5
  

 

 

   

 

  

 

 

   

 

  

 

 

 

Comprehensive income attributable to ConAgra Foods, Inc.

   $ 260.0         $ 879.6         $
544.2
  
  

 

 

   

 

  

 

 

   

 

  

 

 

 

The accompanying Notes are an integral part of the consolidated financial statements.

 

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Table of Contents

CONSOLIDATED BALANCE SHEETS

CONAGRA FOODS, INC. AND SUBSIDIARIES

Dollars in millions except share data

 

    May 27, 2012         May 29, 2011  

ASSETS

     

Current assets

     

Cash and cash equivalents

  $ 103.0        $ 972.4   

Receivables, less allowance for doubtful accounts of $5.9 and $7.8

    924.8          849.4   

Inventories

    1,869.6          1,803.4   

Prepaid expenses and other current assets

    321.4          274.1   
 

 

 

     

 

 

 

Total current assets

    3,218.8          3,899.3   
 

 

 

     

 

 

 

Property, plant and equipment

     

Land and land improvements

    202.1          201.3   

Buildings, machinery and equipment

    4,729.2          4,440.1   

Furniture, fixtures, office equipment and other

    905.2          871.9   

Construction in progress

    159.2          184.8   
 

 

 

     

 

 

 
    5,995.7          5,698.1   

Less accumulated depreciation

    (3,253.8       (3,028.0
 

 

 

     

 

 

 

Property, plant and equipment, net

    2,741.9          2,670.1   
 

 

 

     

 

 

 

Goodwill

    4,015.4          3,609.4   

Brands, trademarks and other intangibles, net

    1,191.5          936.3   

Other assets

    274.3          293.6   
 

 

 

     

 

 

 
  $ 11,441.9        $ 11,408.7   
 

 

 

     

 

 

 

LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY

     

Current liabilities

     

Notes payable

  $ 40.0        $   

Current installments of long-term debt

    38.1          363.5   

Accounts payable

    1,190.3          1,083.7   

Accrued payroll

    177.2          124.1   

Other accrued liabilities

    779.6          554.3   
 

 

 

     

 

 

 

Total current liabilities

    2,225.2          2,125.6   
 

 

 

     

 

 

 

Senior long-term debt, excluding current installments

    2,662.7          2,674.4   

Subordinated debt

    195.9          195.9   

Other noncurrent liabilities

    1,822.1          1,736.1   
 

 

 

     

 

 

 

Total liabilities

    6,905.9          6,732.0   
 

 

 

     

 

 

 

Commitments and contingencies (Notes 17 and 18)

     

Common stockholders’ equity

     

Common stock of $5 par value, authorized 1,200,000,000 shares; issued 567,907,172

    2,839.7          2,839.7   

Additional paid-in capital

    901.5          899.1   

Retained earnings

    4,765.1          4,690.3   

Accumulated other comprehensive loss

    (299.1       (91.2

Less treasury stock, at cost, common shares 160,294,748 and 157,412,899

    (3,767.7       (3,668.2
 

 

 

     

 

 

 

Total ConAgra Foods common stockholders’ equity

    4,439.5          4,669.7   

Noncontrolling interests

    96.5          7.0   
 

 

 

     

 

 

 

Total common stockholders’ equity

    4,536.0          4,676.7   
 

 

 

     

 

 

 
  $     11,441.9        $
    11,408.7
  
 

 

 

     

 

 

 

The accompanying Notes are an integral part of the consolidated financial statements.

 

40


Table of Contents

CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS’ EQUITY

CONAGRA FOODS, INC. AND SUBSIDIARIES

FOR THE FISCAL YEARS ENDED MAY

Dollars in millions except per share amounts

 

    ConAgra Foods, Inc. Stockholders’ Equity                
    Common
Shares
        Common
Stock
        Additional
Paid-in
Capital
        Retained
Earnings
        Accumulated
Other
Comprehensive
Income (Loss)
        Treasury
Stock
        Noncontrolling
Interests
        Total
Equity
     

Balance at May 31, 2009

    567.2        $ 2,835.9        $ 884.4        $ 3,990.9            $ (83.9     $ (2,938.2         $ —          $ 4,689.1     
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Stock option and incentive plans

    0.7          3.8          15.1          (1.3           93.1              110.7     

Currency translation adjustment

                    (3.7               (3.7  

Repurchase of common shares

                        (100.0           (100.0  

Derivative adjustment, net of reclassification adjustment

                    0.2                  0.2     

Activities of noncontrolling interests

            (2.0                   5.0          3.0     

Pension and postretirement healthcare benefits

                    (65.8               (65.8  

Dividends declared on common stock; $0.79 per share

                (349.9                   (349.9  

Net income attributable to ConAgra Foods, Inc.

                613.5                      613.5     
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Balance at May 30, 2010

    567.9          2,839.7          897.5          4,253.2          (153.2       (2,945.1       5.0          4,897.1     
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Stock option and incentive plans

            3.5          (0.4           101.9              105.0     

Currency translation adjustment, net of reclassification adjustment

                    45.7                  45.7     

Repurchase of common shares

                        (825.0           (825.0  

Unrealized loss on securities

                    (0.1               (0.1  

Derivative adjustment, net of reclassification adjustment

                    (7.2               (7.2  

Activities of noncontrolling interests

            (1.9                   2.0          0.1     

Pension and postretirement healthcare benefits

                    23.6                  23.6     

Dividends declared on common stock; $0.89 per share

                (380.1                   (380.1  

Net income attributable to ConAgra Foods, Inc.

                817.6                      817.6     
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Balance at May 29, 2011

    567.9          2,839.7          899.1          4,690.3          (91.2       (3,668.2       7.0          4,676.7     
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Stock option and incentive plans

            3.9          (1.3           252.9              255.5     

Currency translation adjustment, net of reclassification adjustment

                    (52.0           (4.4       (56.4  

Repurchase of common shares

                        (352.4           (352.4  

Unrealized loss on securities

                    (0.1               (0.1  

Derivative adjustment, net of reclassification adjustment

                    (89.1               (89.1  

Acquisition of majority interest in ATFL

                            92.6          92.6     

Activities of noncontrolling interests

            (1.5                   1.3          (0.2  

Pension and postretirement healthcare benefits

                    (66.7               (66.7  

Dividends declared on common stock; $0.95 per share

                (391.8                   (391.8  

Net income attributable to ConAgra Foods, Inc.

                467.9                      467.9     
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Balance at May 27, 2012

      567.9        $   2,839.7        $   901.5        $   4,765.1            $ (299.1       $ (3,767.7         $   96.5        $
  4,536.0
  
 
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

The accompanying Notes are an integral part of the consolidated financial statements.

 

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Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS

CONAGRA FOODS, INC. AND SUBSIDIARIES

FOR THE FISCAL YEARS ENDED MAY

Dollars in millions

 

    2012         2011          2010       

Cash flows from operating activities:

             

Net income

  $ 474.4        $ 819.4         $ 611.0      

Income (loss) from discontinued operations

    0.1          (11.5        (19.3   
 

 

 

     

 

 

      

 

 

    

Income from continuing operations

    474.3          830.9           630.3      

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

             

Depreciation and amortization

    371.8          360.9           324.1      

Gain on sale of businesses

                       (14.3   

Gain on acquisition of controlling interest in Agro Tech Foods, Ltd.

    (58.7                      

Asset impairment charges

    8.6          19.8           64.4      

Impairment charges related to Garner accident

                       31.5      

Insurance recoveries recognized related to Garner accident

             (109.4        (58.1   

Receipts from insurance carriers related to Garner accident

             64.5           50.2      

Earnings of affiliates less than (in excess of) distributions

    (17.6       (13.1        8.5      

Share-based payments expense

    41.8          44.8           55.8      

Proceeds from settlement of interest rate swaps

             31.5                

Pension expense

    421.8          54.0           227.4      

Contributions to Company pension plans

    (326.4       (129.4        (122.6   

Non-cash interest income on payment-in-kind notes

                       (67.9   

Receipt of interest on payment-in-kind notes earned in prior years

             102.8           6.2      

Gain on collection of payment-in-kind notes

             (25.0             

Other items (including noncurrent deferred income taxes)

    (11.3       212.9           (25.4   

Change in operating assets and liabilities excluding effects of business acquisitions and dispositions:

             

Accounts receivable

    (4.3       2.8           (90.1   

Inventories

    14.9          (190.7        199.6      

Prepaid expenses and other current assets

    7.5          31.6           (20.0   

Accounts payable

    82.1          185.0           73.9      

Accrued payroll

    48.4          (139.2        96.9      

Other accrued liabilities

    (3.2       5.3           59.6      
 

 

 

     

 

 

      

 

 

    

Net cash flows from operating activities—continuing operations

    1,049.7          1,340.0           1,430.0      

Net cash flows from operating activities—discontinued operations

    2.3          12.3           42.7      
 

 

 

     

 

 

      

 

 

    

Net cash flows from operating activities

    1,052.0          1,352.3           1,472.7      
 

 

 

     

 

 

      

 

 

    

Cash flows from investing activities:

             

Additions to property, plant and equipment

    (336.7       (466.2        (482.3   

Purchase of businesses, net of cash acquired

    (635.2       (131.1        (103.5   

Receipts from insurance carriers related to Garner accident

             18.0           34.8      

Purchase of secured loan

    (39.6                      

Sale of property, plant and equipment

    9.7          18.9           88.4      

Purchase of intangible assets

    (62.5       (18.0        (3.0   

Proceeds from collection of payment-in-kind notes

             412.5           91.9      

Sale of businesses

                       21.7      
 

 

 

     

 

 

      

 

 

    

Net cash flows from investing activities—continuing operations

    (1,064.3       (165.9        (352.0   

Net cash flows from investing activities—discontinued operations

             254.8           (3.3   
 

 

 

     

 

 

      

 

 

    

Net cash flows from investing activities

    (1,064.3       88.9           (355.3   
 

 

 

     

 

 

      

 

 

    

Cash flows from financing activities:

             

Net short-term borrowings

    40.0                         

Repayment of long-term debt

    (363.6       (294.3        (15.8   

Repurchase of ConAgra Foods common shares

    (352.4       (825.0        (100.0   

Cash dividends paid

    (388.6       (374.5        (346.7   

Exercise of stock options and issuance of other stock awards

    213.2          59.7           54.7      

Other items

    1.8          2.1           3.9      
 

 

 

     

 

 

      

 

 

    

Net cash flows from financing activities—continuing operations

    (849.6       (1,432.0        (403.9   

Net cash flows from financing activities—discontinued operations

             (0.1        (0.6   
 

 

 

     

 

 

      

 

 

    

Net cash flows from financing activities

    (849.6       (1,432.1        (404.5   
 

 

 

     

 

 

      

 

 

    

Effect of exchange rate changes on cash and cash equivalents

    (7.5       10.1           (2.9   

Net change in cash and cash equivalents

    (869.4       19.2           710.0      

Cash and cash equivalents at beginning of year

    972.4          953.2           243.2      
 

 

 

     

 

 

      

 

 

    

Cash and cash equivalents at end of year

  $         103.0        $         972.4         $         953.2      
 

 

 

     

 

 

      

 

 

    

The accompanying Notes are an integral part of the consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal years ended May 27, 2012, May 29, 2011, and May 30, 2010

Columnar Amounts in Millions Except Per Share Amounts

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fiscal Year—The fiscal year of ConAgra Foods, Inc. (“ConAgra Foods”, “Company”, “we”, “us”, or “our”) ends the last Sunday in May. The fiscal years for the consolidated financial statements presented consist of 52-week periods for fiscal years 2012, 2011, and 2010.

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

Investments in Unconsolidated Affiliates—The investments in, and the operating results of, 50%-or-less-owned entities not required to be consolidated are included in the consolidated financial statements on the basis of the equity method of accounting or the cost method of accounting, depending on specific facts and circumstances.

We review our investments in unconsolidated affiliates for impairment whenever events or changes in business circumstances indicate that the carrying amount of the investments may not be fully recoverable. Evidence of a loss in value that is other than temporary include, but are not limited to, the absence of an ability to recover the carrying amount of the investment, the inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment, or, where applicable, estimated sales proceeds which are insufficient to recover the carrying amount of the investment. Management’s assessment as to whether any decline in value is other than temporary is based on our ability and intent to hold the investment and whether evidence indicating the carrying value of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. Management generally considers our investments in equity method investees to be strategic long-term investments. Therefore, management completes its assessments with a long-term viewpoint. If the fair value of the investment is determined to be less than the carrying value and the decline in value is considered to be other than temporary, an appropriate write-down is recorded based on the excess of the carrying value over the best estimate of fair value of the investment.

Cash and Cash Equivalents—Cash and all highly liquid investments with an original maturity of three months or less at the date of acquisition, including short-term time deposits and government agency and corporate obligations, are classified as cash and cash equivalents.

Inventories—We principally use the lower of cost (determined using the first-in, first-out method) or market for valuing inventories other than merchandisable agricultural commodities. Grain and flour inventories are principally stated at market value.

Property, Plant and Equipment—Property, plant and equipment are carried at cost. Depreciation has been calculated using the straight-line method over the estimated useful lives of the respective classes of assets as follows:

 

Land improvements

   1 - 40 years 

Buildings

   15 - 40 years

Machinery and equipment

   3 - 20 years 

Furniture, fixtures, office equipment and other

   5 - 15 years 

We review property, plant and equipment for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Recoverability of an asset considered “held-and-used” is determined by comparing the carrying amount of the asset to the undiscounted net cash flows expected to be generated from the use of the asset. If the carrying amount is greater than the undiscounted net cash flows expected to be generated by the asset, the asset’s carrying amount is reduced to its estimated fair value. An asset considered “held-for-sale” is reported at the lower of the asset’s carrying amount or fair value.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal years ended May 27, 2012, May 29, 2011, and May 30, 2010

Columnar Amounts in Millions Except Per Share Amounts

 

Goodwill and Other Identifiable Intangible Assets—Goodwill and other identifiable intangible assets with indefinite lives (e.g., brands or trademarks) are not amortized and are tested annually for impairment of value and whenever events or changes in circumstances indicate the carrying amount of the asset may be impaired. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include deterioration in general economic conditions, adverse changes in the markets in which an entity operates, increases in input costs that have negative effects on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods, among others. The fair value that could be realized in an actual transaction may differ from that used to evaluate the impairment of goodwill and other intangible assets.

In September 2011, new accounting guidance was issued for testing goodwill for impairment. The guidance provides an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform the existing two-step quantitative impairment test, otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test.

In the third quarter of fiscal 2012, in conjunction with management’s annual review of goodwill, we early adopted the new guidance. Under the qualitative assessment, various events and circumstances that would affect the estimated fair value of a reporting unit are identified (similar to impairment indicators above). Furthermore, management considers the results of the most recent two-step quantitative impairment test completed for a reporting unit (this would be fiscal 2011 in which the estimated fair values of all reporting units were substantially in excess of their carrying values) and compares the weighted average cost of capital (WACC) between the current and prior years for each reporting unit.

Under the two-step quantitative impairment test, the evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. The first step of the test compares the carrying value of a reporting unit, including goodwill, with its fair value. We estimate the fair value using level 3 inputs as defined by the fair value hierarchy. Refer to Note 21 for the definition of the levels in the fair value hierarchy. The inputs used to calculate the fair value include a number of subjective factors, such as estimates of future cash flows, estimates of our future cost structure, discount rates for our estimated cash flows, required level of working capital, assumed terminal value, and time horizon of cash flow forecasts. If the carrying value of a reporting unit exceeds its fair value, we complete the second step of the test to determine the amount of goodwill impairment loss to be recognized. In the second step, we estimate an implied fair value of the reporting unit’s goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill (including any unrecognized intangible assets). The impairment loss is equal to the excess of the carrying value of the goodwill over the implied fair value of that goodwill.

During the fiscal 2012 annual review of goodwill, management performed the qualitative assessment for all reporting units and concluded that it was more likely than not that their estimated fair values exceeded their carrying values. As such, no further analysis was required.

Identifiable intangible assets with definite lives (e.g., licensing arrangements with contractual lives or customer relationships) are amortized over their estimated useful lives and tested for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may be impaired. Identifiable intangible assets with definite lives are evaluated for impairment using a process similar to that used in evaluating elements of property, plant and equipment. If impaired, the asset is written down to its fair value.

Fair Values of Financial Instruments—Unless otherwise specified, we believe the carrying value of financial instruments approximates their fair value.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal years ended May 27, 2012, May 29, 2011, and May 30, 2010

Columnar Amounts in Millions Except Per Share Amounts

 

Environmental Liabilities—Environmental liabilities are accrued when it is probable that obligations have been incurred and the associated amounts can be reasonably estimated. We use third-party specialists to assist management in appropriately measuring the obligations associated with environmental liabilities. Such liabilities are adjusted as new information develops or circumstances change. We do not discount our environmental liabilities as the timing of the anticipated cash payments is not fixed or readily determinable. Management’s estimate of our potential liability is independent of any potential recovery of insurance proceeds or indemnification arrangements. We do not reduce our environmental liabilities for potential insurance recoveries.

Employment-Related Benefits—Employment-related benefits associated with pensions, postretirement health care benefits, and workers’ compensation are expensed as such obligations are incurred. The recognition of expense is impacted by estimates made by management, such as discount rates used to value these liabilities, future health care costs, and employee accidents incurred but not yet reported. We use third-party specialists to assist management in appropriately measuring the obligations associated with employment-related benefits.

In May 2012, we elected to change our method of accounting for pension benefits. Historically, we have recognized actuarial gains and losses in accumulated other comprehensive income (loss) in the consolidated balance sheets upon each plan remeasurement, amortizing them into operating results over the average future service period of active employees in these plans, to the extent such gains and losses were in excess of 10% of the greater of the market-related value of plan assets or the plan’s projected benefit obligation (“the corridor”). We have elected to immediately recognize actuarial gains and losses in our operating results in the year in which they occur, to the extent they exceed the corridor, eliminating the amortization. Actuarial gains and losses outside the corridor, to the extent they occur, will be recognized annually as of our measurement date, which is our fiscal year-end, or when measurement is required otherwise under generally accepted accounting principles. Additionally, for purposes of calculating the expected return on plan assets, we will no longer use the market-related value of plan assets, an averaging technique permitted under generally accepted accounting principles, but instead will use the fair value of plan assets. These changes are intended to improve the transparency of our operating results by more quickly recognizing the effects of changes in plan asset values and the impact of current interest rates on plan obligations.

These changes have been reported through retrospective application of the new policies to all periods presented, by recalculating all actuarial gains and losses under the new method back to a reasonable period of time when actuarial gains and losses recognized were immaterial. The Company also considered the impact of

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal years ended May 27, 2012, May 29, 2011, and May 30, 2010

Columnar Amounts in Millions Except Per Share Amounts

 

the revised pension expense on cost of goods sold in its assessment of the impact of all adjustments in application of the new policy. The impacts of all adjustments made to the financial statements are summarized below:

Consolidated Statement of Operations

 

    Fiscal Year Ended May 29, 2011     Fiscal Year Ended May 30, 2010  
    Previously
Reported
    Revised     Effect of
Change
    Previously
Reported
    Revised     Effect of
Change
 

Selling, general and administrative expenses

  $     1,511.1      $     1,509.9      $     (1.2   $     1,819.4      $     1,987.7      $     168.3   

Cost of goods sold

    9,389.6        9,389.6               8,953.7        8,966.3        12.6   

Income tax expense

    421.0        421.6        0.6        360.9        292.3        (68.6

Income from continuing operations

    830.3        830.9        0.6        742.6        630.3        (112.3

Net income

    818.8        819.4        0.6        723.3        611.0        (112.3

Net income attributable to ConAgra Foods, Inc.

    817.0        817.6        0.6        725.8        613.5        (112.3

Earnings per share from continuing operations-basic

  $ 1.92      $ 1.92      $      $ 1.68      $ 1.43      $ (0.25

Earnings per share attributable to ConAgra Foods-basic

  $ 1.90      $ 1.90      $      $ 1.63      $ 1.38      $ (0.25

Earnings per share from continuing operations-diluted

  $ 1.90      $ 1.90      $      $ 1.66      $ 1.41      $ (0.25

Earnings per share attributable to ConAgra Foods-diluted

  $ 1.88      $ 1.88      $      $ 1.62      $ 1.37      $ (0.25

Consolidated Balance Sheet

 

     May 29, 2011  
     Previously
Reported*
    Revised     Effect of
Change
 

Retained earnings

   $     4,821.8      $     4,690.3      $     (131.5

Accumulated other comprehensive loss

     (222.7     (91.2     131.5   

Consolidated Statement of Cash Flows

 

     Fiscal Year Ended May 29, 2011     Fiscal Year Ended May 30, 2010  
     Previously
Reported
     Revised      Effect of
Change
    Previously
Reported
     Revised     Effect of
Change
 

Cash flows from operating activities:

               

Net income

   $ 818.8       $ 819.4       $ 0.6      $ 723.3       $ 611.0      $     (112.3

Income from continuing operations

     830.3         830.9         0.6        742.6         630.3        (112.3

Pension expense

             54.0         54.0                227.4        227.4   

Other items

     267.5         212.9             (54.6     89.7         (25.4     (115.1

Net cash flows from operating activities

         1,352.3             1,352.3                    1,472.7             1,472.7          

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal years ended May 27, 2012, May 29, 2011, and May 30, 2010

Columnar Amounts in Millions Except Per Share Amounts

 

Consolidated Statement of Common Stockholders’ Equity

 

     Fiscal Year Ended May 29, 2011     Fiscal Year Ended May 30, 2010  
     Previously
Reported*
    Revised     Effect of
Change
    Previously
Reported*
    Revised     Effect of
Change
 

Retained earnings:

            

Beginning balance

   $     4,385.3      $     4,253.2      $     (132.1   $     4,010.7      $     3,990.9      $ (19.8

Net income

     817.0        817.6        0.6        725.8        613.5            (112.3

Ending balance

     4,821.8        4,690.3        (131.5     4,385.3        4,253.2        (132.1

Accumulated other comprehensive loss:

            

Beginning balance

     (285.3     (153.2     132.1        (103.7     (83.9     19.8   

Pensions and postretirement healthcare benefits

     24.2        23.6        (0.6     (178.1     (65.8     112.3   

Ending balance

     (222.7     (91.2     131.5        (285.3     (153.2     132.1   

Total equity

     4,676.7        4,676.7               4,897.1        4,897.1          

Consolidated Statement of Comprehensive Income

 

     Fiscal Year Ended May 29, 2011     Fiscal Year Ended May 30, 2010  
     Previously
Reported
     Revised      Effect of
Change
    Previously
Reported
    Revised     Effect of
Change
 

Net income

   $     818.8       $     819.4       $     0.6      $     723.3      $     611.0      $     (112.3

Pension and postretirement healthcare liabilities, net of tax

     24.2         23.6         (0.6     (178.1     (65.8     112.3   

 

* Retained earnings also reflects the impact of the change related to income taxes as discussed in Note 16.

Revenue Recognition—Revenue is recognized when title and risk of loss are transferred to customers upon delivery based on terms of sale and collectability is reasonably assured. Revenue is recognized as the net amount to be received after deducting estimated amounts for discounts, trade allowances, and returns of damaged and out-of-date products. Changes in the market value of inventories of merchandisable agricultural commodities, and the fair values of forward cash purchase and sales contracts, and exchange-traded futures and options contracts are recognized in earnings immediately.

Shipping and Handling—Amounts billed to customers related to shipping and handling are included in net sales. Shipping and handling costs are included in cost of goods sold.

Marketing Costs—We promote our products with advertising, consumer incentives, and trade promotions. Such programs include, but are not limited to, discounts, coupons, rebates, and volume-based incentives. Advertising costs are expensed as incurred. Consumer incentives and trade promotion activities are recorded as a reduction of revenue or as a component of cost of goods sold based on amounts estimated as being due to customers and consumers at the end of the period, based principally on historical utilization and redemption rates. Advertising and promotion expenses totaled $364.5 million, $371.9 million, and $409.1 million in fiscal 2012, 2011, and 2010, respectively, and are included in selling, general and administrative expenses.

Research and Development—We incurred expenses of $86.0 million, $81.4 million, and $77.9 million for research and development activities in fiscal 2012, 2011, and 2010, respectively.

Comprehensive IncomeComprehensive income includes net income, currency translation adjustments, certain derivative-related activity, changes in the value of available-for-sale investments, and changes in prior

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal years ended May 27, 2012, May 29, 2011, and May 30, 2010

Columnar Amounts in Millions Except Per Share Amounts

 

service cost and net actuarial gains/losses from pension (only amounts within the corridor) and postretirement health care plans. We generally deem our foreign investments to be essentially permanent in nature and, as such, we do not provide for taxes on currency translation adjustments arising from converting the investment in a foreign currency to U.S. dollars. When we determine that a foreign investment, as well as undistributed earnings, are no longer permanent in nature, estimated taxes are provided for the related deferred taxes, if any, resulting from currency translation adjustments. We reclassified $6.0 million of foreign currency translation net losses to net income in fiscal 2012 due to our acquisition of a majority interest in Agro Tech Foods Limited in India (“ATFL”) and the related remeasurement of our previously held noncontrolling equity interest in ATFL to fair value (see Note 3). We reclassified $1.6 million of foreign currency translation net gains to net income due to the disposal or substantial liquidation of foreign subsidiaries in fiscal 2011.

The following is a rollforward of the balances in accumulated other comprehensive income (loss), net of tax (except for currency translation adjustment):

 

    Currency
Translation
Adjustment,
Net of
Reclassification
Adjustments
         Net
Derivative
Adjustment, Net
of  Reclassification
Adjustments
         Unrealized
Loss on
Available-
For-Sale
Securities, Net
of
Reclassification
Adjustments
        Pension and
Postretirement
Adjustments
        Accumulated
Other
Comprehensive
Income (Loss)
 

Balance at May 31, 2009

  $ 52.6         $ (1.2      $ (1.2     $ (134.1     $ (83.9

Current-period change

    (3.7        0.2                    (65.8       (69.3
 

 

 

      

 

 

      

 

 

     

 

 

     

 

 

 

Balance at May 30, 2010

    48.9           (1.0        (1.2       (199.9       (153.2

Current-period change

    45.7           (7.2        (0.1       23.6          62.0   
 

 

 

      

 

 

      

 

 

     

 

 

     

 

 

 

Balance at May 29, 2011

    94.6           (8.2        (1.3       (176.3       (91.2

Current-period change

    (52.0        (89.1        (0.1       (66.7       (207.9
 

 

 

      

 

 

      

 

 

     

 

 

     

 

 

 

Balance at May 27, 2012

  $             42.6         $             (97.3      $             (1.4     $         (243.0     $         (299.1
 

 

 

      

 

 

      

 

 

     

 

 

     

 

 

 

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

 

     2012     2011     2010  

Net derivative adjustment

   $         (52.7   $         (4.2   $         0.1   

Unrealized losses on available-for-sale securities

     (0.1     (0.1       

Pension and postretirement healthcare liabilities

     (35.4     15.8        (40.0

Foreign Currency Transaction Gains and Losses—We recognized net foreign currency transaction gains (losses) from continuing operations of $(3.9) million, $3.9 million, and $(6.2) million in fiscal 2012, 2011, and 2010, respectively, in selling, general and administrative expenses.

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 consolidated financial statements. Actual results could differ from these estimates.

Reclassifications—Certain prior year amounts have been reclassified to conform with current year presentation.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal years ended May 27, 2012, May 29, 2011, and May 30, 2010

Columnar Amounts in Millions Except Per Share Amounts

 

2. DISCONTINUED OPERATIONS AND DIVESTITURES

Frozen Handhelds Operations

During fiscal 2011, we completed the sale of substantially all of the assets of our frozen handhelds operations for $8.8 million in cash. We recognized impairment and related charges totaling $21.7 million ($14.2 million after-tax) in fiscal 2011. We reflected the results of these operations as discontinued operations for all periods presented.

Gilroy Foods & FlavorsTM Operations

During fiscal 2011, we completed the sale of substantially all of the assets of Gilroy Foods & FlavorsTM dehydrated garlic, onion, capsicum and Controlled MoistureTM, GardenFrost®, Redi-MadeTM, and fresh vegetable operations for $245.7 million in cash. Based on our estimate of proceeds from the sale of this business, we recognized impairment and related charges totaling $59.2 million ($39.9 million after-tax) in fiscal 2010. We reflected the results of these operations as discontinued operations for all periods presented.

In connection with the sale of this business, we entered into agreements to purchase certain ingredients, at prices approximating market rates, from the divested business for a period of five years. The continuing cash flows related to these agreements are not significant, and, accordingly, are not deemed to be direct cash flows of the divested business.

The results of the aforementioned businesses which have been divested are included within discontinued operations. The summary comparative financial results of discontinued operations were as follows:

 

    2012          2011         2010  

Net sales

  $         0.5         $         92.4        $         355.2   
 

 

 

      

 

 

     

 

 

 

Long-lived asset impairment charge

              (21.7       (58.3

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

    0.1           (18.6       (38.9
 

 

 

      

 

 

     

 

 

 

Income (loss) before income taxes

    0.1           (18.6       (38.9

Income tax benefit

              7.1          19.6   
 

 

 

      

 

 

     

 

 

 

Income (loss) from discontinued operations, net of tax

  $ 0.1         $ (11.5     $ (19.3
 

 

 

      

 

 

     

 

 

 

The effective tax rate for discontinued operations varies significantly from the statutory rate in certain years due to the non-deductibility of a portion of the goodwill of divested businesses and changes in estimates of income taxes.

Other Divestitures

In February 2010, we completed the sale of our Luck’s® brand for proceeds of approximately $22.0 million, resulting in a pre-tax gain of approximately $14.3 million ($9.0 million after-tax), reflected in selling, general and administrative expenses.

3. ACQUISITIONS

In May 2012, we acquired Kangaroo Brands’ pita chip operations for $47.9 million in cash, plus assumed liabilities. Approximately $41.2 million of the purchase price was allocated to goodwill pending determination of the fair values of assets and liabilities acquired. The amount allocated to goodwill is deductible for income tax purposes. This business is included in the Consumer Foods segment.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal years ended May 27, 2012, May 29, 2011, and May 30, 2010

Columnar Amounts in Millions Except Per Share Amounts

 

In May 2012, we acquired Odom’s Tennessee Pride for $94.9 million in cash, plus assumed liabilities. The business manufactures Odom’s Tennessee Pride® frozen breakfast products and other sausage products. Approximately $30.5 million of the purchase price was allocated to goodwill and $24.5 million was allocated to brands, trademarks and other intangibles. The amount allocated to goodwill is not deductible for income tax purposes. This business is included in the Consumer Foods segment.

In March 2012, we acquired Del Monte Canada for $185.6 million in cash, plus assumed liabilities. The acquisition includes all Del Monte® branded packaged fruit, fruit snacks, and vegetable products in Canada, as well as Aylmer® brand tomato products. Approximately $36.1 million of the purchase price was allocated to goodwill and $86.9 million was allocated to brands, trademarks and other intangibles. The amount allocated to goodwill is not deductible for income tax purposes. This business is included in the Consumer Foods segment.

In November 2011, we acquired National Pretzel Company for $301.9 million in cash, net of cash acquired, plus assumed liabilities. National Pretzel Company is a private label supplier and branded producer of pretzels and related products. All products are produced at its manufacturing facilities in California and Pennsylvania. Approximately $178.5 million of the purchase price was allocated to goodwill and $68.2 million was allocated to brands, trademarks and other intangibles. The amount allocated to goodwill is deductible for income tax purposes. This business is included in the Consumer Foods segment.

In November 2011, we acquired an additional equity interest in ATFL for $4.9 million in cash, net of cash acquired, plus assumed liabilities. ATFL is a publicly traded company in India that markets food and food ingredients to consumers and institutional customers in India. Approximately $132.5 million of the acquisition value was allocated to goodwill and $40.0 million was allocated to trade names. The amount allocated to goodwill is not deductible for income tax purposes. As a result of this additional investment, we now have a majority interest (approximately 52%) in ATFL, and we have consolidated the financial statements of ATFL beginning in the third quarter of fiscal 2012. Prior to our acquisition of a majority interest in ATFL, we accounted for our noncontrolling interest (approximately 48% of the outstanding common shares) under the equity method. In accordance with the acquisition method of accounting, in the third quarter of fiscal 2012, we remeasured our previously held noncontrolling equity interest in ATFL at fair value and recorded a gain of approximately $58.7 million in selling, general and administrative expenses, which represents the excess of the fair value over the carrying value of our noncontrolling equity interest in ATFL. The fair value of ATFL was determined based upon the closing price of ATFL common shares as the date of the acquisition of this additional investment. Consolidated financial results of ATFL are included in the Consumer Foods segment.

In June 2010, we acquired the assets of American Pie, LLC (“American Pie”) for $131.0 million in cash plus assumed liabilities. American Pie is a manufacturer of frozen fruit pies, thaw and serve pies, fruit cobblers, and pie crusts under the licensed Marie Callender’s® and Claim Jumper® trade names, as well as frozen dinners, pot pies, and appetizers under the Claim Jumper® trade name. Approximately $51.5 million of the purchase price was allocated to goodwill and $61.3 million was allocated to brands, trademarks and other intangibles. The amount allocated to goodwill is deductible for income tax purposes. This business is included in the Consumer Foods segment.

In April 2010, we acquired Elan Nutrition, Inc., a privately held formulator and manufacturer of private label snack and nutrition bars, for $103.5 million in cash, plus assumed liabilities. Approximately $66.4 million of the purchase price was allocated to goodwill and $33.6 million was allocated to brands, trademarks and other intangibles. The amount allocated to goodwill is not deductible for income tax purposes. This business is included in the Consumer Foods segment.

For each of these acquisitions, the amounts allocated to goodwill were primarily attributable to anticipated synergies, product portfolios, and other intangibles that do not qualify for separate recognition.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal years ended May 27, 2012, May 29, 2011, and May 30, 2010

Columnar Amounts in Millions Except Per Share Amounts

 

Under the acquisition method of accounting, the assets acquired and liabilities assumed in these acquisitions were recorded at their respective estimated fair values at the date of acquisition. The fair values of the assets and liabilities related to the ATFL, Del Monte Canada, Odom’s Tennessee Pride, and Kangaroo Brands’ pita chip operations are subject to refinement as we complete our analyses relative to the fair values at the respective acquisition dates.

The following unaudited pro forma financial information presents the combined results of operations as if the acquisitions of National Pretzel Company, the majority interest in ATFL, Del Monte Canada, Odoms Tennessee Pride, and the Kangaroo Brands’ pita chip operations (the acquirees) had occurred at the beginning of each period presented. The acquirees’ pre-acquisition results have been added to ConAgra Foods’ historical results. The pro forma results contained in the table below include adjustments for amortization of acquired intangibles and depreciation expense, as well as related income taxes. These pro forma results may not necessarily reflect the actual results of operations that would have been achieved, nor are they necessarily indicative of future results of operations.

 

     For the Fiscal Years Ended May  
     2012      2011      2010  

Pro forma net sales

   $     13,749.7       $     12,979.1       $     12,653.5   

Pro forma net income

   $ 497.7       $ 873.6       $ 667.3   

Pro forma net income from continuing operations per share-basic

   $ 1.21       $ 2.03       $ 1.50   

Pro forma net income from continuing operations per share-diluted

   $ 1.19       $ 2.01       $ 1.49   

4. PAYMENT-IN-KIND NOTES RECEIVABLE

In connection with the divestiture of the trading and merchandising operations in fiscal 2009, we received $550.0 million (face value) of payment-in-kind debt securities (the “Notes”) issued by the purchaser of the divested business. The Notes were recorded at an initial estimated fair value of $479.4 million.

The Notes were issued in three tranches: $99,990,000 original principal amount of 10.5% notes due June 19, 2010; $200,035,000 original principal amount of 10.75% notes due June 19, 2011; and $249,975,000 original principal amount of 11.0% notes due June 19, 2012. The Notes permitted payment of interest in cash or additional notes.

During fiscal 2010, we received $115.4 million as payment in full of all principal and interest due on the first tranche of the Notes, in advance of the scheduled maturity date. During fiscal 2011, we received $554.2 million as payment in full of all principal and interest due on the second and third tranches of the Notes, in advance of the scheduled maturity dates. As a result, we recognized a gain of $25.0 million in fiscal 2011.

5. GARNER, NORTH CAROLINA ACCIDENT

On June 9, 2009, an accidental explosion occurred at our manufacturing facility in Garner, North Carolina (the “Garner accident”). This facility was the primary production facility for our Slim Jim® branded meat snacks.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal years ended May 27, 2012, May 29, 2011, and May 30, 2010

Columnar Amounts in Millions Except Per Share Amounts

 

The costs incurred and insurance recoveries recognized, for fiscal 2011 and 2010, were reflected in our consolidated financial statements as follows:

 

        Fiscal Year Ended May 29, 2011         Fiscal Year Ended May 30, 2010  
        Consumer
Foods
        Corporate          Total         Consumer
Foods
        Corporate          Total  

Cost of goods sold:

                         

Inventory write-downs and other costs

    $ 0.9        $         $ 0.9        $     11.9        $         $     11.9   

Selling, general and administrative expenses:

                         

Fixed asset impairments, clean-up costs, etc.

      2.6          0.6           3.2          47.5          2.6           50.1   

Insurance recoveries recognized

      (109.4                 (109.4       (58.1                 (58.1
   

 

 

     

 

 

      

 

 

     

 

 

     

 

 

      

 

 

 

Total selling, general and administrative expenses

      (106.8       0.6           (106.2       (10.6       2.6           (8.0
   

 

 

     

 

 

      

 

 

     

 

 

     

 

 

      

 

 

 

Net loss (gain)

    $     (105.9     $     0.6         $     (105.3     $ 1.3        $     2.6         $ 3.9   
   

 

 

     

 

 

      

 

 

     

 

 

     

 

 

      

 

 

 

The amounts in the table above exclude actual lost profits due to the interruption of the meat snacks business in the periods presented, but do reflect the recovery of the related business interruption insurance claim in fiscal 2011.

During fiscal 2011, the Company settled its property and business interruption claims related to the Garner accident with our insurance providers. The total payments received from the insurers in fiscal 2010 and 2011 were $167.5 million and all previously deferred balances were immediately recognized upon settlement of the insurance claim in fiscal 2011. The insurance recoveries recognized in fiscal 2011, included in selling, general and administrative expenses, totaled $109.4 million, representing $84.0 million of reimbursement for business interruption, a $21.3 million gain on involuntary conversion of property, plant and equipment, and recovery of other expenses incurred of $4.1 million.

6.  RESTRUCTURING ACTIVITIES

Acquisition-related restructuring

We anticipate incurring costs in connection with actions we take to attain synergies when integrating recently acquired businesses. These costs, collectively referred to as “acquisition-related exit costs”, include severance and other costs associated with consolidating facilities and administrative functions. In connection with the acquisition-related exit costs, we expect to incur pre-tax cash and non-cash charges for asset impairments, accelerated depreciation, severance, relocation, and site closure costs of $18.4 million. We anticipate that we will recognize the

 

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal years ended May 27, 2012, May 29, 2011, and May 30, 2010

Columnar Amounts in Millions Except Per Share Amounts

 

following pre-tax cash and non-cash acquisition-related exit costs, all within our Consumer Foods reporting segment, during fiscal 2012 to 2014 (amounts include charges recognized in fiscal 2012):

 

    Total  

Accelerated depreciation

  $ 8.5   
 

 

 

 

Total cost of goods sold

    8.5   
 

 

 

 

Severance and related costs

    9.9   
 

 

 

 

Total selling, general and administrative expenses

    9.9   
 

 

 

 

Consolidated total

  $     18.4   
 

 

 

 

Included in the above estimates are $9.9 million of charges which have resulted or will result in cash outflows and $8.5 million of non-cash charges.

During fiscal 2012, we recognized the following pre-tax charges in our consolidated statement of earnings, all within our Consumer Foods reporting segment, for acquisition-related exit costs:

 

    Total  

Accelerated depreciation

  $     0.2   
 

 

 

 

Total cost of goods sold

    0.2   
 

 

 

 

Severance and related costs

    4.3   
 

 

 

 

Total selling, general and administrative expenses

    4.3   
 

 

 

 

Consolidated total

  $ 4.5   
 

 

 

 

Liabilities recorded for acquisition-related exit costs and changes therein for fiscal 2012 were as follows:

 

    Balance at
May  29,
2011
        Costs Incurred
and Charged
to Expense
        Balance at
May  27,
2012
 

Severance and related costs

  $         —        $         4.3        $         4.3   
 

 

 

     

 

 

     

 

 

 

Total

  $        $ 4.3        $ 4.3   
 

 

 

     

 

 

     

 

 

 

Administrative Efficiency Restructuring Plan

In August 2011, we made a decision to reorganize our Consumer Foods sales function and certain other administrative functions within our Commercial Foods and Corporate reporting segments. These actions, collectively referred to as the “Administrative Efficiency Plan,” are intended to improve the efficiency and effectiveness of the affected sales and administrative functions. In connection with the Administrative Efficiency Plan, we expect to incur approximately $18.8 million of charges, primarily for severance and costs of employee relocation. We anticipate that we will recognize the following pre-tax expenses associated with the

 

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal years ended May 27, 2012, May 29, 2011, and May 30, 2010

Columnar Amounts in Millions Except Per Share Amounts

 

Administrative Efficiency Plan in the fiscal 2012 to 2013 timeframe (amounts include charges recognized in fiscal 2012):

 

    Consumer
Foods
        Commercial
Foods
        Corporate         Total  

Accelerated depreciation

  $         —        $         —        $         1.5        $         1.5   

Severance and related costs

    6.5                   2.3          8.8   

Other, net

    7.0          1.3          0.2         8.5   
 

 

 

     

 

 

     

 

 

     

 

 

 

Total selling, general and administrative expenses

    13.5          1.3          4.0          18.8   
 

 

 

     

 

 

     

 

 

     

 

 

 

Consolidated total

  $ 13.5        $ 1.3        $ 4.0        $ 18.8   
 

 

 

     

 

 

     

 

 

     

 

 

 

\

Included in the above estimates are $17.3 million of charges that have resulted or will result in cash outflows and $1.5 million of non-cash charges.

During fiscal 2012, we recognized the following pre-tax charges in our consolidated statement of earnings for the Administrative Efficiency Plan:

 

    Consumer
Foods
        Commercial
Foods
        Corporate         Total  

Accelerated depreciation

  $         —        $         —        $         1.1        $         1.1   

Severance and related costs

    6.2                  2.2          8.4   

Other, net

    6.0          1.0          0.2          7.2   
 

 

 

     

 

 

     

 

 

     

 

 

 

Total selling, general and administrative expenses

    12.2          1.0          3.5          16.7   
 

 

 

     

 

 

     

 

 

     

 

 

 

Consolidated total

  $ 12.2        $ 1.0        $ 3.5        $ 16.7   
 

 

 

     

 

 

     

 

 

     

 

 

 

Liabilities recorded for the various initiatives and changes therein for fiscal 2012 under the Administrative Efficiency Plan were as follows:

 

    Balance at
May  29,
2011
        Costs Incurred
and Charged
to Expense
        Costs Paid
or  Otherwise
Settled
        Changes  in
Estimates
        Balance at
May  27,
2012
 

Severance and related costs

  $         —        $         9.2        $         (6.3     $         (0.8     $         2.1   

Plan implementation costs

             7.1          (6.8                0.3   
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total

  $        $ 16.3        $ (13.1     $ (0.8     $ 2.4   
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Network Optimization Plan

During the third quarter of fiscal 2011, our Board of Directors approved a plan recommended by executive management designed to optimize our manufacturing and distribution networks. The plan consists of projects that involve, among other things, the exit of certain manufacturing facilities, the disposal of underutilized manufacturing assets, and actions designed to optimize our distribution network. The plan is expected to be implemented by the end of fiscal 2014 and is intended to improve the efficiency of our manufacturing operations and reduce costs. This plan is referred to as the Network Optimization Plan, which we previously referred to as the 2011 plan.

In connection with the Network Optimization Plan, we expect to incur pre-tax cash and non-cash charges of $83.2 million. We have recognized, and/or expect to recognize, expenses associated with the Network Optimization Plan, including but not limited to, impairments of property, plant and equipment, accelerated depreciation, severance and related costs, and plan implementation costs (e.g., consulting, employee relocation, etc.). We

 

54


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal years ended May 27, 2012, May 29, 2011, and May 30, 2010

Columnar Amounts in Millions Except Per Share Amounts

 

anticipate that we will recognize the following pre-tax expenses associated with the Network Optimization Plan in the fiscal 2011 to 2014 timeframe (amounts include charges recognized in fiscal 2011 and 2012):

 

    Consumer
Foods
        Commercial
Foods
        Total  

Accelerated depreciation

  $         22.4        $         —        $         22.4   

Inventory write-offs and related costs

    11.2          0.4          11.6   
 

 

 

     

 

 

     

 

 

 

Total cost of goods sold

    33.6          0.4          34.0   
 

 

 

     

 

 

     

 

 

 

Asset impairment

    13.3          14.0          27.3   

Severance and related costs

    9.7          0.1          9.8   

Other, net

    10.6          1.5          12.1   
 

 

 

     

 

 

     

 

 

 

Total selling, general and administrative expenses

    33.6          15.6          49.2   
 

 

 

     

 

 

     

 

 

 

Consolidated total

  $ 67.2        $ 16.0        $ 83.2   
 

 

 

     

 

 

     

 

 

 

Included in the above estimates are $26.0 million of charges which have resulted or will result in cash outflows and $57.2 million of non-cash charges.

During fiscal 2012, we recognized the following pre-tax charges in our consolidated statement of earnings for the Network Optimization Plan:

 

    Consumer
Foods
         Commercial
Foods
         Total  

Accelerated depreciation

  $         15.5         $         —         $         15.5