UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.   20549

 

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended November 26, 2006
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                      to

 

Commission File Number 1-7275

 

CONAGRA FOODS, INC.

(Exact name of registrant, as specified in charter)

 

(402) 595-4000

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    x        No    o

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

 

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

Number of shares outstanding of issuer’s common stock, as of December 22, 2006, was 505,165,952.

Table of Contents

Part I.		FINANCIAL INFORMATION
		Item 1		Financial Statements
				Unaudited Condensed Consolidated Statements of Earnings for the Thirteen and Twenty-six Weeks ended November 26, 2006 and November 27, 2005
				Unaudited Condensed Consolidated Statements of Comprehensive Income for the Thirteen and Twenty-six Weeks ended November 26, 2006 and November 27, 2005
				Unaudited Condensed Consolidated Balance Sheets as of November 26, 2006, May 28, 2006 and November 27, 2005
				Unaudited Condensed Consolidated Statements of Cash Flows for the Twenty-six Weeks ended November 26, 2006 and November 27, 2005
				Notes to Unaudited Condensed Consolidated Financial Statements
		Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations
		Item 3		Quantitative and Qualitative Disclosures About Market Risk
		Item 4		Controls and Procedures
Part II.		OTHER INFORMATION
		Item 1		Legal Proceedings
		Item 2		Unregistered Sales of Equity Securities and Use of Proceeds
		Item 4		Submission of Matters to a Vote of Security Holders
		Item 6		Exhibits
		Signatures
		Exhibit Index
		Exhibit 10.23.1
		Exhibit 10.25
		Exhibit 10.26
		Exhibit 10.27
		Exhibit 12
		Exhibit 31.1
		Exhibit 31.2
		Exhibit 32.1

 

2

Part I — Financial Information
Item 1.  Condensed Consolidated Financial Statements
ConAgra Foods, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions except per share amounts)
(unaudited)

		Thirteen weeks ended						Twenty-six weeks ended
		November 26, 2006			November 27, 2005			November 26, 2006			November 27, 2005
Net sales		$	3,088.7		$	3,002.0		$	5,777.3		$	5,675.8
Costs and expenses:
Cost of goods sold		2,278.4			2,270.6			4,304.0			4,273.7
Selling, general and administrative expenses		450.4			450.4			887.6			867.4
Interest expense, net		52.1			68.6			110.1			141.0
Gain on sale of Pilgrim’s Pride Corporation common stock		—			—			—			329.4
Income from continuing operations before income taxes and equity method investment earnings (loss)		307.8			212.4			475.6			723.1
Income tax expense		119.1			79.5			180.6			257.1
Equity method investment earnings (loss)		12.6			(16.7		)	14.8			(30.6		)
Income from continuing operations		201.3			116.2			309.8			435.4
Income from discontinued operations, net of tax		12.0			36.3			70.2			64.4
Net income		$	213.3		$	152.5		$	380.0		$	499.8
Earnings per share — basic
Income from continuing operations		$	0.40		$	0.22		$	0.61		$	0.84
Income from discontinued operations		0.02			0.07			0.14			0.12
Net income		$	0.42		$	0.29		$	0.75		$	0.96
Earnings per share — diluted
Income from continuing operations		$	0.39		$	0.22		$	0.61		$	0.84
Income from discontinued operations		0.03			0.07			0.13			0.12
Net income		$	0.42		$	0.29		$	0.74		$	0.96

 

See notes to the condensed consolidated financial statements.

3

ConAgra Foods, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(in millions)
(unaudited)

		Thirteen weeks ended						Twenty-six weeks ended
		November 26, 2006			November 27, 2005			November 26, 2006			November 27, 2005
Net income		$	213.3		$	152.5		$	380.0		$	499.8
Other comprehensive income (loss):
Net derivative adjustment, net of tax		(4.7		)	1.1			(1.3		)	29.8
Unrealized gain (loss) on available-for-sale securities, net of tax:
Unrealized holding gains (losses) arising during the period		1.7			3.2			2.1			(16.6		)
Less: reclassification adjustment for gains included in net income		(0.8		)	—			(2.3		)	(95.3		)
Currency translation adjustment:
Unrealized holding gains (losses) arising during the period		(8.4		)	9.2			(6.4		)	9.1
Less: reclassification adjustment for losses included in net income		21.7			—			21.7			—
Minimum pension liability, net of tax		3.1			—			4.1			—
Comprehensive income		$	225.9		$	166.0		$	397.9		$	426.8

 

See notes to the condensed consolidated financial statements.

4

ConAgra Foods, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(dollars in millions except share data)
(unaudited)

		November 26, 2006			May 28, 2006			November 27, 2005
ASSETS
Current assets
Cash and cash equivalents		$	803.5		$	331.6		$	687.4
Receivables, less allowance for doubtful accounts of $25.0, $27.8 and $31.2		1,115.5			1,178.1			1,301.4
Inventories		2,587.7			2,130.6			2,449.4
Prepaid expenses and other current assets		1,213.3			889.0			558.9
Current assets held for sale		—			261.0			460.2
Total current assets		5,720.0			4,790.3			5,457.3
Property, plant and equipment		4,814.1			4,829.5			4,802.5
Less accumulated depreciation		(2,659.4		)	(2,561.1		)	(2,468.6		)
Property, plant and equipment, net		2,154.7			2,268.4			2,333.9
Goodwill		3,442.4			3,445.6			3,446.1
Brands, trademarks and other intangibles, net		796.5			799.5			800.1
Other assets		242.9			233.5			428.4
Noncurrent assets held for sale		—			433.1			839.1
		$	12,356.5		$	11,970.4		$	13,304.9
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Notes payable		$	5.6		$	10.0		$	10.7
Current installments of long-term debt		20.8			421.1			920.4
Accounts payable		992.7			867.6			976.8
Advances on sales		149.4			103.2			211.4
Accrued payroll		291.7			310.8			227.1
Other accrued liabilities		1,497.0			1,247.5			1,296.1
Current liabilities held for sale		—			4.6			66.7
Total current liabilities		2,957.2			2,964.8			3,709.2
Senior long-term debt, excluding current installments		3,131.7			2,754.8			3,036.8
Subordinated debt		400.0			400.0			400.0
Other noncurrent liabilities		1,130.0			1,197.6			1,127.8
Noncurrent liabilities held for sale		—			3.2			5.0
Total liabilities		7,618.9			7,320.4			8,278.8
Commitments and contingencies (Note 11)
Common stockholders’ equity
Common stock of $5 par value, authorized 1,200,000,000 shares; issued 566,256,801, 566,214,311 and 566,186,464		2,831.3			2,831.1			2,830.9
Additional paid-in capital		788.6			764.0			757.4
Retained earnings		2,650.7			2,454.6			2,655.3
Accumulated other comprehensive income (loss)		(4.0		)	(21.8		)	(29.0		)
Less treasury stock, at cost, 61,570,244, 55,352,988 and 46,947,140 common shares		(1,529.0		)	(1,375.7		)	(1,185.6		)
		4,737.6			4,652.2			5,029.0
Less unearned restricted stock		—			(2.2		)	(2.9		)
Total common stockholders’ equity		4,737.6			4,650.0			5,026.1
		$	12,356.5		$	11,970.4		$	13,304.9

 

See notes to the condensed consolidated financial statements.

5

ConAgra Foods, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(dollars in millions except share data)
(unaudited)

		Twenty-six weeks ended
		November 26, 2006			November 27, 2005
Cash flows from operating activities:
Net income		$	380.0		$	499.8
Income from discontinued operations		70.2			64.4
Income from continuing operations		309.8			435.4
Adjustments to reconcile income from continuing operations to net cash flows from operating activities:
Depreciation and amortization		176.8			148.8
Gain on sale of Pilgrim’s Pride Corporation common stock, pretax (see Note 2)		—			(329.4		)
Gain (loss) on sale of fixed assets		(2.3		)	1.9
Gain (loss) on sale of businesses and equity method investments		(22.1		)	0.7
Undistributed earnings of affiliates		(8.1		)	(6.9		)
Non-cash impairments of investments		—			45.2
Other items (includes pension and other postretirement benefits)		(29.4		)	10.1
Change in operating assets and liabilities:
Accounts receivable		(49.1		)	(36.6		)
Inventory		(462.7		)	(315.6		)
Prepaid expenses and other current assets		(467.4		)	113.0
Accounts payable and advances on sales		230.0			288.4
Other accrued liabilities		267.3			(5.7		)
Net cash flows from operating activities — continuing operations		(57.2		)	349.3
Net cash flows from operating activities — discontinued operations		78.1			116.3
Net cash flows from operating activities		20.9			465.6
Cash flows from investing activities:
Purchases of marketable securities		(1,074.6		)	—
Sales of marketable securities		1,075.4			—
Additions to property, plant and equipment		(137.0		)	(120.4		)
Sale of Swift note receivable		117.4			—
Sale of Pilgrim’s Pride Corporation common stock		—			482.4
Sale of property, plant and equipment		101.9			3.9
Sale of businesses and equity method investments		72.3			30.5
Notes receivable and other items		0.6			(3.2		)
Net cash flows from investing activities — continuing operations		156.0			393.2
Net cash flows from investing activities — discontinued operations		664.5			0.5
Net cash flows from investing activities		820.5			393.7
Cash flows from financing activities:
Net short-term borrowings		(4.4		)	2.2
Repayment of long-term debt		(25.0		)	(113.3		)
Repurchase of ConAgra Foods common shares		(202.9		)	—
Cash dividends paid		(185.2		)	(282.3		)
Proceeds from exercise of employee stock options		45.3			14.2
Other items		2.7			(0.3		)
Net cash flows from financing activities — continuing operations		(369.5		)	(379.5		)
Net cash flows from financing activities — discontinued operations		—			—
Net cash flows from financing activities		(369.5		)	(379.5		)
Net change in cash and cash equivalents		471.9			479.8
Cash and cash equivalents at beginning of period		331.6			207.6
Cash and cash equivalents at end of period		$	803.5		$	687.4

 

See notes to the condensed consolidated financial statements.

6

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-Six Weeks ended November 26, 2006 and November 27, 2005

(columnar dollars in millions except per share amounts)

1.              Summary of Significant Accounting Policies

The unaudited financial information reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented.  The adjustments are of a normal recurring nature, except as otherwise noted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the ConAgra Foods, Inc. (the “Company”) fiscal 2006 annual report on Form 10-K, as updated via the Company’s Form 8-K as filed on November 20, 2006.

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

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

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 financial statements on the basis of the equity method of accounting or the cost method of accounting, depending on specific facts and circumstances.

The Company reviews its 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 might include 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 the Company’s 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 the Company’s investments in its 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 a maturity of three months or less at the date of acquisition, including short-term time deposits, government agency and corporate obligations, are classified as cash and cash equivalents.  Cash deposits in margin accounts of $232 million are included in prepaid and other current assets in the Company’s consolidated balance sheet at November 26, 2006.

Share-Based Compensation — The Company has stockholder-approved stock option plans which provide for granting of options to employees for purchase of common stock at prices equal to the fair value at the time of grant.  The Company issues stock under various stock-based compensation arrangements, including restricted stock, performance shares and other share-based awards and stock

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ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-Six Weeks ended November 26, 2006 and November 27, 2005

(columnar dollars in millions except per share amounts)

issued in lieu of cash bonuses.  In addition, the Company grants restricted share equivalents pursuant to plans approved by stockholders which are ultimately settled in cash based on the market price of the Company’s stock as of the date the award is fully vested.

During the first quarter of fiscal 2007, the Company adopted the provisions of the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123—revised 2004, Share-Based Payment (“SFAS No. 123R”), which replaced SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period.  The Company elected the modified-prospective transition method, under which prior periods are not revised for comparative purposes. The valuation provisions of SFAS No. 123R apply to new grants and to grants that were outstanding prior to the effective date and are subsequently modified.  Estimated future compensation expense for grants that were outstanding as of the effective date will be recognized over the remaining service period using the compensation cost estimated for the SFAS No. 123 pro forma disclosures.  See Note 5 for further information regarding the Company’s stock-based compensation assumptions and expenses, including pro forma disclosures for prior periods as if the Company had followed the fair value recognition provisions of SFAS No. 123 for all outstanding and unvested stock options.

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

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

		Thirteen weeks ended						Twenty-six weeks ended
		November 26, 2006			November 27, 2005			November 26, 2006			November 27, 2005
Net derivative adjustment		$	(2.1	)	$	1.9		$	(0.2	)	$	18.4
Unrealized gains (losses) on available-for-sale securities		1.0			1.9			1.2			(9.7		)
Less: reclassification adjustment for gains included in net income		(0.5		)	—			(1.3		)	(54.8		)
Minimum pension liability		—			—			0.7			—
		$	(1.6	)	$	3.8		$	0.4		$	(46.1	)

 

Accounting Changes — In addition to the adoption of SFAS No. 123R, as discussed in the Share-Based Compensation section above, the Company changed two other accounting methods effective May 29, 2006:

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ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-Six Weeks ended November 26, 2006 and November 27, 2005

(columnar dollars in millions except per share amounts)

Inventory Costs:  In November 2004, the FASB issued SFAS No. 151, Inventory Costs — an Amendment of Accounting Research Bulletin No. 43, Chapter 4.  SFAS No. 151 amends ARB No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities.  The adoption of SFAS No. 151 did not have a material impact on the Company’s financial position, results of operations or cash flows.

Advertising and Promotion Expense:  Previously, the Company recognized advertising costs in expense in interim periods based on the sales volumes for the interim period as a proportion of estimated annual sales volumes.  During the first quarter of fiscal 2007, the Company changed its method of accounting for advertising expense for interim periods such that all advertising expense is recognized as incurred.

The Company adopted this change as a result of significant changes in its marketing strategies and management’s belief that the new method results in a more objective measure of quarterly expense that will better support planning and resource allocation decisions by management.  The new policy of expensing advertising as incurred eliminates the need to estimate overall expected sales, expenses, and the benefit period of the advertising on an interim basis, and conforms the Company’s interim accounting policy with that used to prepare the annual financial statements.  The change has been applied retrospectively to all prior interim periods and advertising expense for such interim periods has been restated.  The impact of the change in accounting methods was to increase advertising and promotion expense by approximately $24 million ($15 million after tax), or $0.03 per diluted share for both the second quarter and first half of fiscal 2007, respectively.  The impact on the second quarter and first half of fiscal 2006 was to increase advertising expense by approximately $17.2 million and $25.1 million ($10.6 million and $15.4 million after tax), or $0.02 and $0.03 per diluted share, respectively.  There will be no impact on any annual reporting periods.

Recently Issued Accounting Pronouncements — In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108), to address diversity in practice in quantifying financial statement misstatements. SAB 108 requires that the Company quantify misstatements based on their impact on each of the Company’s financial statements and related disclosures. SAB 108 is effective as of the end of the Company’s fiscal 2007, allowing a one-time transitional cumulative effect adjustment to retained earnings as of May 29, 2006 for errors that were not previously deemed material, but are material under the guidance in SAB 108. Management is currently evaluating the impact that the adoption of this statement will have on the Company’s consolidated financial position and results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective as of the beginning of the Company’s 2009 fiscal year.  Management is currently evaluating the impact of adopting SFAS No. 157 on the Company’s consolidated financial position and results of operations.

In September 2006, the FASB issued SFAS 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS No. 158 requires that the Company recognize the overfunded or underfunded status of its defined benefit and retiree medical plans (the “Plans”) as an asset or liability in the Company’s fiscal 2007 year-end balance sheet, with changes in the funded status recognized through comprehensive

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ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-Six Weeks ended November 26, 2006 and November 27, 2005

(columnar dollars in millions except per share amounts)

income in the year in which they occur.  SFAS No. 158 also requires the Company, no later than fiscal 2009, to measure the funded status of its Plans as of the Company’s year-end balance sheet date versus the current measurement date of February 28. Management is currently evaluating the impact of adopting SFAS No. 158 on the Company’s consolidated financial position and results of operations.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.  SFAS No. 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the entire instrument on a fair value basis. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. SFAS No. 155 is effective for all financial instruments acquired, issued or subject to a remeasurement event occurring in fiscal years beginning after September 15, 2006.  The Company plans to adopt SFAS No. 155 in the first quarter of fiscal 2008.  Management is currently evaluating the impact that the adoption of this statement will have on the Company’s consolidated financial position and results of operations.

In June 2006, the FASB issued FASB Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 describes a recognition threshold and measurement attribute for the recognition and measurement of tax positions taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company plans to adopt FIN 48 in the first quarter of fiscal 2008. Management is currently evaluating the impact that the adoption of this statement will have on the Company’s consolidated financial position and results of operations.

Reclassifications — The Company previously classified the estimated cost of financing certain inventories in its Trading and Merchandising segment in cost of goods sold.  The Company has reclassified $6.4 million and $10.7 million from cost of goods sold to interest expense for the second quarter and first half of fiscal 2006, respectively.  Certain other reclassifications have been made to prior year amounts to conform to current year classifications.

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

2.      Discontinued Operations and Assets Held for Sale

Packaged Meats Operations

During the second quarter of fiscal 2007, the Company completed its divestiture of the packaged meats operations for proceeds of approximately $543 million, resulting in no significant gain or loss.  Based upon the Company’s estimate of proceeds from the sale of this business, the Company recognized impairment charges totaling $240.4 million ($209.3 million after tax) in the second half of fiscal 2006 to reflect the net assets of this business at its estimated fair value, less costs to sell, in accordance with SFAS No. 144, Accounting for the

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ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-Six Weeks ended November 26, 2006 and November 27, 2005

(columnar dollars in millions except per share amounts)

Impairment or Disposal of Long-Lived Assets.  Based on the final negotiations of this transaction, the Company recognized an additional impairment charge of approximately $19.7 million ($12.1 million after tax) in the first quarter of fiscal 2007.  The Company reflects the results of these operations as discontinued operations for all periods presented.  The assets and liabilities of the divested packaged meats business are classified as assets and liabilities held for sale within the Company’s consolidated balance sheets for all periods prior to divestiture.

During the first half of fiscal 2007, the Company decided to discontinue the production of certain branded deli meats products concurrent with the disposition of the packaged meats business, discussed above.  Accordingly, the Company has reclassified the results of operations associated with this branded deli meats business to discontinued operations for all periods presented.

Packaged Cheese Operations

During the first quarter of fiscal 2007, the Company completed its divestiture of the packaged cheese business for proceeds of approximately $97.6 million, resulting in a pre-tax gain of $57.8 million ($32.0 million after tax).  Accordingly, the Company reflects the results of these operations as discontinued operations for all periods presented.  The assets and liabilities of the divested packaged cheese business are classified as assets and liabilities held for sale within the Company’s consolidated balance sheets for all periods prior to divestiture.

Cook’s Ham Business

During the fourth quarter of fiscal 2006, the Company completed its divestiture of its Cook’s Ham business for proceeds of approximately $301.0 million, resulting in a pre-tax gain of $110.1 million ($38.0 million after tax).  Accordingly, the Company reflects the results of this business as discontinued operations for all periods presented.  The assets and liabilities divested are classified as assets and liabilities held for sale within the Company’s consolidated balance sheets for all periods prior to divestiture.

Seafood Business

During the fourth quarter of fiscal 2006, the Company completed its divestiture of its seafood  operations for proceeds of approximately $141.3 million, resulting in no significant gain or loss.  Accordingly, the Company reflects the results of this business as discontinued operations for all periods presented.  The assets and liabilities divested are classified as assets and liabilities held for sale within the Company’s consolidated balance sheets for all periods prior to divestiture.

Chicken Business Divestiture

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

11

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ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-Six Weeks ended November 26, 2006 and November 27, 2005

(columnar dollars in millions except per share amounts)

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

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

UAP International Divestitures

In the fourth quarter of fiscal 2005, the Company completed the disposition of the remaining businesses of its Agricultural Products segment (“UAP International”).  During the first quarter of fiscal 2007, final contingent consideration was received by the Company resulting in a gain of $1.6 million, which was not subject to taxation.  The Company reflects this gain within discontinued operations.

Specialty Meats Divestiture

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

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

Culturelle Business

During the first quarter of fiscal 2007, the Company completed its divestiture of its nutritional supplement business for proceeds of approximately $8.2 million, resulting in a pre-tax gain of approximately $6.2 million ($3.5 million after tax).  The Company reflects this gain within discontinued operations.

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

 

12

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-Six Weeks ended November 26, 2006 and November 27, 2005

(columnar dollars in millions except per share amounts)

		Thirteen weeks ended						Twenty-six weeks ended
		November 26, 2006			November 27, 2005			November 26, 2006			November 27, 2005
Net sales		$	210.1		$	809.6		$	712.6		$	1,514.8
Income from operations of discontinued operations before income taxes		21.4			56.5			55.5			91.8
Long-lived asset impairment charge		(1.4		)	—			(1.4		)	—
Net gain (loss) from disposal of businesses		(0.5		)	—			65.3			6.0
Income before income taxes		19.5			56.5			119.4			97.8
Income tax expense		(7.5		)	(20.2		)	(49.2		)	(33.4		)
Income from discontinued operations, net of tax		$	12.0		$	36.3		$	70.2		$	64.4

 

Other Assets Held for Sale

During the third quarter of fiscal 2006, the Company initiated a plan to dispose of a refrigerated pizza business with annual revenues of less than $70 million.  During the second quarter of fiscal 2007, the Company disposed of this business for proceeds of approximately $22.0 million, resulting in no significant gain or loss.  Due to the Company’s expected significant continuing cash flows associated with this business, the results of operations of this business are included in continuing operations for all periods presented.  The assets and liabilities of this business are classified as assets and liabilities held for sale in the consolidated balance sheets for all periods prior to the sale.

During the second quarter of fiscal 2007, the Company completed the disposal of an oat milling business for proceeds of approximately $34.5 million, subject to final working capital adjustments, resulting in a pre-tax gain of $17.6 million ($10.9 million after tax).  Due to the Company’s expected significant continuing cash flows associated with this business, the results of operations of this business are included in continuing operations for all periods presented.  The assets and liabilities of this business are classified as assets and liabilities held for sale in the consolidated balance sheets for all periods prior to the sale.

During the third quarter of fiscal 2006, the Company initiated a plan to dispose of two aircraft.  During the first quarter of fiscal 2007, these two aircraft were sold for proceeds of approximately $31.4 million, resulting in pre-tax gains totaling approximately $4.3 million.  These long-lived assets are classified as assets held for sale in the consolidated balance sheets for all periods prior to the sale.

13

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ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-Six Weeks ended November 26, 2006 and November 27, 2005

(columnar dollars in millions except per share amounts)

The assets and liabilities classified as held for sale as of November 26, 2006, May 28, 2006 and November 27, 2005 are as follows:

		November 26, 2006			May 28, 2006			November 27, 2005
Receivables, less allowances for doubtful accounts		$	—		$	7.1		$	63.0
Inventories		—			253.9			397.2
Current assets held for sale		$	—		$	261.0		$	460.2
Property, plant and equipment, net		$	—		$	419.1		$	473.8
Goodwill and other intangibles		—			14.0			365.3
Noncurrent assets held for sale		$	—		$	433.1		$	839.1
Accounts payable		$	—		$	1.7		$	36.2
Other accrued liabilities and advances on sales		—			2.9			30.5
Current liabilities held for sale		$	—		$	4.6		$	66.7
Other noncurrent liabilities		$	—		$	3.2		$	5.0
Noncurrent liabilities held for sale		$	—		$	3.2		$	5.0

 

3.              Goodwill and Other Identifiable Intangible Assets

Goodwill by reporting segment was as follows:

		November 26, 2006			May 28, 2006			November 27, 2005
Consumer Foods		$	3,252.1		$	3,253.0		$	3,258.2
International Foods		87.3			89.4			85.0
Food and Ingredients		87.1			87.3			87.0
Trading and Merchandising		15.9			15.9			15.9
Total		$	3,442.4		$	3,445.6		$	3,446.1

 

14

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ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-Six Weeks ended November 26, 2006 and November 27, 2005

(columnar dollars in millions except per share amounts)

Other identifiable intangible assets were as follows:

		November 26, 2006						May 28, 2006						November 27, 2005
		Gross Carrying Amount			Accumulated Amortization			Gross Carrying Amount			Accumulated Amortization			Gross Carrying Amount			Accumulated Amortization
Non-amortizing intangible assets		$	771.8		$	—		$	773.1		$	—		$	773.5		$	—
Amortizing intangible assets		41.6			16.9			41.9			15.5			41.9			15.2
		$	813.4		$	16.9		$	815.0		$	15.5		$	815.4		$	15.2

 

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

		November 26, 2006			May 28, 2006			November 27, 2005
Brands/Trademarks		$	752.6		$	752.6		$	752.6
Pension Intangible Asset		19.2			19.1			19.5
Miscellaneous		—			1.4			1.4
Total non-amortizing intangible assets		$	771.8		$	773.1		$	773.5

 

Amortizing intangible assets, carrying a weighted average life of approximately 16 years, are principally composed of licensing arrangements and customer lists.  Based on amortizing assets recognized in the Company’s balance sheet as of November 26, 2006, amortization expense is estimated to be approximately $2.9 million for each of the next five years.

4.              Derivative Financial Instruments

The fair value of derivative assets is recognized within prepaid expenses and other current assets, while the fair value of derivative liabilities is recognized within other accrued liabilities.  As of November 26, 2006, May 28, 2006 and November 27, 2005, the fair value of derivatives recognized within prepaid expenses and other current assets was $636.8 million, $401.1 million and $357.5 million, respectively, while the amount recognized within other accrued liabilities was $396.6 million, $283.8 million and $209.3 million, respectively.

For the quarters ending November 26, 2006 and November 27, 2005, the ineffectiveness associated with derivatives designated as cash flow and fair value hedges from continuing operations resulted in a loss of $4.0 million and a gain of $9.4 million, respectively.  Hedge ineffectiveness is recognized within net sales, cost of goods sold or interest expense, depending on the nature of the hedge.  The Company does not exclude any component of the hedging instrument’s gain or loss when assessing effectiveness.

Generally, the Company hedges a portion of its anticipated consumption of certain commodity inputs for periods ranging from 12 to 36 months.  The Company may enter into longer-term hedges on particular commodities if deemed appropriate.  As of November 26, 2006, the Company had hedged certain portions of its anticipated consumption of commodity inputs through March 2008.

15

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ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-Six Weeks ended November 26, 2006 and November 27, 2005

(columnar dollars in millions except per share amounts)

As of November 26, 2006, May 28, 2006 and November 27, 2005, the net deferred gain recognized in accumulated other comprehensive income was $13.0 million, $14.3 million, and $37.4 million, net of tax, respectively. The Company anticipates a gain of $8.8 million, net of tax, will be transferred out of accumulated other comprehensive income and recognized within earnings over the next 12 months ending November 25, 2007.  The Company anticipates a gain of $4.2 million, net of tax, will be transferred out of accumulated other comprehensive income and recognized within earnings subsequent to November 25, 2007.

In order to reduce exposures related to changes in interest rates, the Company may use derivative instruments, including interest rate swaps.  During fiscal 2004, the Company closed out all $2.5 billion of its interest rate swap agreements in order to lock-in favorable interest rates.  These interest rate swap agreements were previously put in place as a strategy to hedge interest costs associated with long-term debt.  For financial statement and tax purposes, the proceeds received upon termination of the interest rate swap agreements are being recognized over the term of the debt instruments originally hedged (through 2011).

Of the $2.5 billion interest rate swaps closed out in fiscal 2004, $2.0 billion of the interest rate swaps had been used to effectively convert certain of the Company’s fixed rate debt into floating rate debt.  These interest rate swaps were accounted for as fair value hedges and resulted in no recognition of ineffectiveness in the statement of earnings as the interest rate swaps’ provisions matched the applicable provisions of the hedged debt.  The Company’s net interest expense was reduced by $1.0 million and $2.2 million due to the net impact of previously closed interest rate swap agreements in the second quarter and first half of fiscal 2007, respectively, and was reduced by $3.0 million and $7.0 million, respectively, in the comparable period of fiscal 2006.

5.                          Share-based Payments

In accordance with stockholder-approved plans, the Company issues share-based payments under various stock-based compensation arrangements, including stock options, restricted stock, performance shares, and other share-based awards.

On September 28, 2006, the stockholders approved the ConAgra Foods 2006 Stock Plan, which authorizes the issuance of up to 30 million shares of ConAgra Foods common stock.  The Company will not issue any new stock awards under the 1990, 1995 or 2000 Stock Plans.  At November 26, 2006, approximately 29.9 million shares were reserved for granting additional options, restricted stock, bonus stock awards, or other share-based awards. 

Stock Option Plan

The Company has stockholder-approved stock option plans which provide for granting of options to employees for purchase of common stock at prices equal to the fair value at the date of grant.  Options become exercisable under various vesting schedules (typically three to five years) and generally expire seven to ten years after the date of grant.

16

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ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-Six Weeks ended November 26, 2006 and November 27, 2005

(columnar dollars in millions except per share amounts)

The fair value of each option is estimated on the date of grant using a Black-Scholes option-pricing model with the following weighted average assumptions for stock options granted during the first half of fiscal 2007:

Expected volatility (%)		19.50
Dividend yield (%)		3.27
Risk-free interest rates (%)		5.04
Expected life of stock option (years)		4.63

 

The expected volatility is based on the historical market volatility of the Company’s stock over the expected life of the stock options granted.  The expected life represents the period of time that the awards are expected to be outstanding and is based on the contractual term of each instrument, taking into account employees’ historical exercise and termination behavior.

A summary of the option activity as of November 26, 2006, and changes during the twenty-six weeks then ended is presented below:

		2007
Options		Number of Options (in Millions)		Weighted Average Exercise Price ($)			Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value ($ in Millions)
Outstanding at May 29, 2006		27.5		$	24.24
Granted		6.3		$	22.14
Exercised		(2.1	)	$	21.89				$	4.5
Forfeited		(1.0	)	$	23.56
Expired		(2.5	)	$	25.31
Outstanding at November 26, 2006		28.2		$	23.88		6.13		$	55.1
Options exercisable at November 26, 2006		16.8		$	24.67		5.10		$	27.3

 

The Company recognizes compensation expense using the straight-line method over the requisite service period.  During the first half of fiscal 2007 and fiscal 2006, the Company granted 6.3 million options and 6.4 million options, respectively, with a weighted average grant date value of $3.89 and $4.55, respectively.  The total intrinsic value of options exercised during the twenty-six weeks ended November 26, 2006 was $4.5 million.  The intrinsic value is calculated as the difference between the market value of the Company’s common stock as of November 24, 2006 (the last trading day of the fiscal quarter) and the exercise price of the options.  The market value of the Company’s common stock was $25.02 per share on November 24, 2006.

Compensation expense and the related tax benefit for stock option awards totaled $5.3 million and $1.9 million, respectively, for the thirteen weeks ended November 26, 2006, while the compensation expense and related tax benefit totaled $9.9 million and $3.6 million, respectively, for the first half of fiscal 2007.  No compensation expense was recognized in the prior year related to options as past awards (pre-SFAS No. 123R adoption) were accounted for under APB No. 25.

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ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-Six Weeks ended November 26, 2006 and November 27, 2005

(columnar dollars in millions except per share amounts)

At November 26, 2006, the Company had $33.9 million of total unrecognized compensation expense, net of estimated forfeitures, related to stock options that will be recognized over a weighted average period of 1.4 years.

Cash received from option exercises for the thirteen weeks ended November 26, 2006 and November 27, 2005 was $29.1 million and $8.3 million, respectively, while the cash received from options exercised for the first half of 2007 and 2006 was $46.8 million and $16.2 million, respectively.  The actual tax benefit realized for the tax deductions from option exercises totaled $1.3 million and $0.4 million for the thirteen weeks ended November 26, 2006 and November 27, 2005, respectively, and $1.6 million and $0.8 million for the first half of 2007 and 2006, respectively.

Share Unit Plans

In accordance with stockholder-approved plans, the Company issues stock under various stock-based compensation arrangements, including restricted stock and other share-based plans.  These share unit plans generally have requisite service periods of three to five years.  Under each arrangement, stock is issued without direct cost to the employee.  The Company estimates the fair value of the share units based upon the market price of the Company’s stock at the date of grant.  Certain share unit grants do not provide for the payment of dividend equivalents to the participant during the requisite service period (vesting period).  For those grants, the value of the grants is reduced by the net present value of the foregone dividend equivalent payment.  The Company recognizes compensation expense for share unit awards on a straight-line basis over the requisite service period.  The compensation expense for the Company’s restricted stock-based awards totaled $2.8 million and $9.4 million for the thirteen weeks ended November 26, 2006 and November 27, 2005, respectively, and $4.8 million and $13.5 million for the twenty-six weeks ended November 26, 2006 and November 27, 2005, respectively.  The tax benefit related to the compensation expense for the thirteen weeks ended November 26, 2006 and November 27, 2005 was $1.0 million and $3.4 million, respectively, while the tax benefit related to the compensation expense for the twenty-six weeks ended November 26, 2006 and November 27, 2005 was $1.8 million and $4.9 million, respectively.

The following table summarizes the nonvested shares as of November 26, 2006, and changes during the twenty-six weeks then ended:

Share Units		Shares (in Millions)		Weighted Average Grant-Date Fair Value ($)
Nonvested share units at May 29, 2006		2.29		$	25.04
Granted		0.69		$	22.20
Vested/Issued		(0.11	)	$	24.81
Forfeited		(0.36	)	$	25.04
Nonvested share units at November 26, 2006		2.51		$	23.98

 

The total fair value of shares vested during the twenty-six weeks ended November 26, 2006 and November 27, 2005 was $2.6 million and $18.8 million, respectively.

At November 26, 2006, the Company had $21.2 million of total unrecognized compensation expense, net of estimated forfeitures, related to share unit plans that will be recognized over a weighted average period of 2.5 years.

 

18

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-Six Weeks ended November 26, 2006 and November 27, 2005

(columnar dollars in millions except per share amounts)

Performance Based Share Plan

Under its 2007 Performance Share Plan, adopted pursuant to shareholder approved incentive plans, the Company grants selected executives and other key employees performance share awards with vesting contingent upon the Company meeting various Company-wide performance goals.  The performance goals are based upon Company earnings before interest and taxes (EBIT) and Company return on average invested capital (ROAIC) measured over a defined performance period.  The awards actually earned will range from zero to three hundred percent of the targeted number of performance shares.  Generally, for the three-year performance period beginning with fiscal year 2007, up to one-third of the targeted performance shares may be earned in fiscal year 2007 based upon Company performance for fiscal year 2007; up to one-third of the targeted performance shares may be earned in fiscal year 2008 based upon Company performance for the entire performance period, representing cumulative performance in 2007 and 2008; and the balance of the targeted performance shares, and any above target payout, may be earned based upon cumulative performance for the entire performance period which concludes at the end of fiscal year 2009.  In no event will the amount paid in each of fiscal 2007 and fiscal 2008 exceed one-third of the three-year target.

The fair value of each grant was estimated based upon the Company’s stock price on the date of grant.  Management must evaluate, on a quarterly basis, the probability that the target performance goals will be met and the anticipated level of attainment in order to determine the amount of compensation cost to recognize in the financial statements.  If such defined performance goals are not met, no compensation cost will be recognized and any previously recognized compensation cost will be reversed.  As these awards contain both a service condition and performance conditions in order to vest and a certain portion of the award (tranche) may vest each fiscal year within the performance period, the Company recognizes compensation expense for these awards over the requisite service period for each separately vesting tranche.

A summary of the activity for performance based stock as of November 26, 2006, and changes during the twenty-six weeks then ended is presented below:

Performance Shares		Shares (in Millions)		Weighted  Average  Grant-Date  Fair Value ($)
Nonvested share units at May 29, 2006		—		—
Granted		1.8		$	22.20
Vested/Issued		—		—
Forfeited		—		—
Nonvested share units at November 26, 2006		1.8		$	22.20

 

The compensation expense for the Company’s performance based stock awards totaled $9.2 million and $14.0 million, respectively, for the thirteen and twenty-six weeks ended November 26, 2006.  The tax benefit related to the compensation expense for the thirteen and twenty-six weeks ended November 26, 2006 was $3.4 million and $5.1 million, respectively.

At November 26, 2006, the Company had $45.2 million of total unrecognized compensation expense, net of estimated forfeitures, related to performance shares that will be recognized over a weighted average period of 2.5 years.

19

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ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-Six Weeks ended November 26, 2006 and November 27, 2005

(columnar dollars in millions except per share amounts)

Restricted Cash Plan

The Company has granted restricted share equivalents pursuant to plans approved by stockholders which are ultimately settled in cash based on the market price of the Company’s stock as of the date the award is fully vested.  The value of the restricted share equivalents is adjusted, based upon the market price of the Company’s stock at the end of each reporting period and amortized as compensation expense over the vesting period (generally five years).

Restricted Cash		Share Equivalents  (in Millions)		Intrinsic Value
Outstanding share units at May 29, 2006		1.51		$	22.72
Granted		0.03		$	25.02
Vested/Issued		(0.05	)	$	22.19
Forfeited		(0.27	)	$	22.19
Outstanding share units at November 26, 2006		1.22		$	25.02

 

The compensation expense for the Company’s restricted cash awards totaled $2.8 million and $6.8 million for the thirteen weeks ended November 26, 2006 and November 27, 2005, respectively, while the tax benefit related to the compensation expense for the same periods was a benefit of $1.0 million and $2.5 million, respectively.  The compensation expense totaled $4.6 million and $6.6 million for the twenty-six weeks ended November 26, 2006 and November 27, 2005, respectively, while the tax benefit related to the compensation expense for the same period totaled $1.7 million and $2.4 million, respectively.  The total share-based liabilities paid during the twenty-six weeks ended November 26, 2006 and November 27, 2005 was $1.0 million and $8.1 million, respectively.

20

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ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-Six Weeks ended November 26, 2006 and November 27, 2005

(columnar dollars in millions except per share amounts)

The following table illustrates the pro forma effect on net income and earnings per share assuming the Company had followed the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, for all outstanding and unvested stock options and other stock-based compensation for the thirteen and twenty-six weeks ended November 27, 2005.

		Thirteen weeks ended			Twenty-six weeks ended
		November 27, 2005			November 27, 2005
Net income, as reported		$	152.5		$	499.8
Add: Stock-based employee compensation included in reported net income, net of related tax effects		1.6			4.2
Deduct: Total stock-based compensation expense determined under fair value based method, net of related tax effects		(4.3		)	(9.5		)
Pro forma net income		$	149.8		$	494.5
Earnings per share:
Basic earnings per share — as reported		$	0.29		$	0.96
Basic earnings per share — pro forma		$	0.29		$	0.95
Diluted earnings per share — as reported		$	0.29		$	0.96
Diluted earnings per share — pro forma		$	0.29		$	0.95

 

Prior to the adoption of SFAS No. 123R, the Company presented all tax benefits for deductions resulting from the exercise of stock options as operating cash flows in the consolidated statement of cash flows. SFAS No. 123R requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow. This requirement has reduced net operating cash flows and increased net financing cash flows in periods since adoption.

21

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ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-Six Weeks ended November 26, 2006 and November 27, 2005

(columnar dollars in millions except per share amounts)

6.   Earnings Per Share

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

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

		Thirteen weeks ended						Twenty-six weeks ended
		November 26, 2006			November 27, 2005			November 26, 2006			November 27, 2005
Net income:
Income from continuing operations		$	201.3		$	116.2		$	309.8		$	435.4
Income from discontinued operations, net of tax		12.0			36.3			70.2			64.4
Net income		$	213.3		$	152.5		$	380.0		$	499.8
Weighted Average Shares Outstanding:
Basic weighted average shares outstanding		508.3			518.7			509.2			518.4
Add: Dilutive effect of stock options, restricted stock awards and other dilutive securities		3.0			2.3			2.6			2.4
Diluted weighted average shares outstanding		511.3			521.0			511.8			520.8

 

For the second quarter and first half of fiscal 2007, there were 16.4 million and 20.0 million stock options outstanding that were excluded from the computation of shares contingently issuable upon exercise of the stock options because exercise prices exceeded the average market value of common stock during the period.  For the second quarter and first half of fiscal 2006, 13.0 million and 13.4 million stock options were excluded from the calculation.

7.              Inventories

The major classes of inventories are as follows:

		November 26, 2006			May 28,  2006			November 27, 2005
Raw materials and packaging		$	1,340.0		$	985.0		$	1,206.8
Work in process		140.4			97.4			98.8
Finished goods		1,020.5			923.6			1,048.7
Supplies and other		86.8			124.6			95.1
		$	2,587.7		$	2,130.6		$	2,449.4

 

22

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ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-Six Weeks ended November 26, 2006 and November 27, 2005

(columnar dollars in millions except per share amounts)

8.              Restructuring and Other Cost Reduction Efforts

In February 2006, the Company’s board of directors approved plans recommended by executive management to simplify the Company’s operating structure and reduce its manufacturing and selling, general, and administrative costs.  These plans include supply chain rationalization initiatives, the relocation of the Grocery Foods headquarters from Irvine, California to Naperville, Illinois, the centralization of shared services, salaried headcount reductions and other cost-reduction initiatives.  These plans are expected to be substantially completed by fiscal 2008.  The forecasted costs of all plans, as updated through November 26, 2006, are $266.4 million, of which $43.6 million and $82.5 million were recorded in the second quarter and first half of fiscal 2007, respectively, and $129.8 million was recorded in the second half of fiscal 2006.  The Company will record expenses associated with its restructuring plans, including but not limited to, asset impairment charges, accelerated depreciation (i.e., incremental depreciation due to an asset’s reduced estimated useful life), inventory write-downs, severance and related costs, and plan implementation costs (e.g., consulting, employee relocation, etc.).  The Company anticipates it will recognize the following pre-tax expenses associated with the projects identified to date in the fiscal 2006 to 2008 timeframe (amounts include charges recognized in the first and second quarters of fiscal 2007 and in the third and fourth quarters of fiscal 2006):

		Consumer Foods			Food and Ingredients			Trading and Merchandising			International Foods			Corporate			Total
Accelerated depreciation		$	56.0		$	—		$	—		$	—		$	—		$	56.0
Inventory write-downs		4.0			0.2			—			—			—			4.2
Pension/Postretirement		5.0			—			—			—			—			5.0
Severance		—			1.1			—			—			—			1.1
Other (including plant shutdown costs)		(1.5		)	—			—			—			—			(1.5		)
Total cost of goods sold		63.5			1.3			—			—			—			64.8
Accelerated depreciation		11.1			—			—			—			0.5			11.6
Asset impairments		24.4			1.6			—			—			—			26.0
Severance (and related costs)		35.5			3.3			0.3			0.7			25.2			65.0
Contract termination		20.4			6.6			—			—			1.1			28.1
Pension/Postretirement		—			0.1			—			—			4.1			4.2
Plan implementation costs		34.9			0.4			—			—			32.6			67.9
Goodwill/Brand impairment		—			0.4			—			—			—			0.4
Other		(1.7		)	—			—			—			0.9			(0.8		)
Total selling, general and administrative expenses		124.6			12.4			0.3			0.7			64.4			202.4
Other Expense/(Income)		0.1			(0.9		)	—			—			—			(0.8		)
Consolidated total		$	188.2		$	12.8		$	0.3		$	0.7		$	64.4		$	266.4

 

Included in the above estimates are $168.5 million of charges anticipated to result in cash outflows and $97.9 million of anticipated non-cash charges.  The charges above do not reflect impairment

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ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-Six Weeks ended November 26, 2006 and November 27, 2005

(columnar dollars in millions except per share amounts)

charges related to the recently completed divestiture program which are classified within the results of discontinued operations.  Severance payments are expected to be paid from a Voluntary Employee’s Beneficiary Trust (“VEBA”) which was funded by the Company in the fourth quarter of fiscal 2006.

During the second quarter of fiscal 2007, the Company recognized the following pre-tax charges in its consolidated statements of earnings:

		Consumer Foods			Food and Ingredients			Trading and Merchandising			International Foods			Corporate			Total
Accelerated depreciation		$	16.5		$	—		$	—		$	—		$	—		$	16.5
Inventory write-downs		0.5			—			—			—			—			0.5
Pension/Postretirement		—			—			—			—			—			—
Severance		—			1.1			—			—			—			1.1
Other (including plant shutdown costs)		—			—			—			—			—			—
Total cost of goods sold		17.0			1.1			—			—			—			18.1
Accelerated depreciation		(2.5		)	—			—			—			—			(2.5		)
Asset impairments		2.7			—			—			—			—			2.7
Severance (and related costs)		1.8			(0.5		)	—			0.1			0.6			2.0
Contract termination		13.6			—			—			—			—			13.6
Pension/Postretirement		—			0.1			—			—			—			0.1
Plan implementation costs		3.8			—			—			—			3.8			7.6
Goodwill/Brand impairment		—			0.4			—			—			—			0.4
Other		1.7			—			—			—			—			1.7
Total selling, general and administrative expenses		21.1			—			—			0.1			4.4			25.6
Other Expense/(Income)		0.2			(0.3		)	—			—			—			(0.1		)
Consolidated total		$	38.3		$	0.8		$	—		$	0.1		$	4.4		$	43.6

 

Included in the above are $24.8 million of charges anticipated to result in cash outflows and $18.8 million of non-cash charges.

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ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-Six Weeks ended November 26, 2006 and November 27, 2005

(columnar dollars in millions except per share amounts)

During the first half of fiscal 2007, the Company recognized the following pre-tax charges in its consolidated statements of earnings:

		Consumer Foods			Food and Ingredients			Trading and Merchandising			International Foods			Corporate			Total
Accelerated depreciation		$	26.5		$	—		$	—		$	—		$	—		$	26.5
Inventory write-downs		0.5			—			—			—			—			0.5
Pension/Postretirement		—			—			—			—			—			—
Severance		—			1.1			—			—			—			1.1
Other (including plant shutdown costs)		—			—			—			—			—			—
Total cost of goods sold		27.0			1.1			—			—			—			28.1
Accelerated depreciation		2.6			—			—			—			0.2			2.8
Asset impairments		3.2			—			—			—			—			3.2
Severance (and related costs)		1.5			(0.3		)	—			0.4			4.8			6.4
Contract termination		19.8			—			—			—			1.1			20.9
Pension/Postretirement		—			0.1			—			—			0.1			0.2
Plan implementation costs		7.8			—			—			—			11.1			18.9
Goodwill/Brand impairment		—			0.4			—			—			—			0.4
Other		1.7			—			—			—			—			1.7
Total selling, general and administrative expenses		36.6			0.2			—			0.4			17.3			54.5
Other Expense/(Income)		0.2			(0.3		)	—			—			—			(0.1		)
Consolidated total		$	63.8		$	1.0		$	—		$	0.4		$	17.3		$	82.5

 

Included in the above are $48.2 million of charges anticipated to result in cash outflows and $34.3 million of non-cash charges.

Liabilities recorded for the various initiatives and changes therein were as follows:

		Balance at			Costs Paid			Costs Incurred						Balance at
		August 27,			or Otherwise			and Charged to			Changes in			November 26,
		2006			Settled			Expense			Estimates			2006
Severance (and related costs)		$	52.1		$	(8.6	)	$	5.9		$	(3.9	)	$	45.5
Contract termination		7.2			(2.9		)	19.3			—			23.6
Plan implementation costs		10.4			(4.1		)	3.7			—			10.0
Total		$	69.7		$	(15.6	)	$	28.9		$	(3.9	)	$	79.1

 

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