UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.   20549

 

FORM 10-Q/A
(AMENDMENT NO. 1)

 

(Mark One)

ý

 

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

 

For the quarterly period ended November 28, 2004

OR

o

 

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

 

 

For the transition period from               to              

 

Commission File Number 1-7275

 

CONAGRA FOODS, INC.

(Exact name of registrant, as specified in charter)

 

Delaware

 

47-0248710

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

One ConAgra Drive, Omaha, Nebraska

 

68102-5001

(Address of Principal Executive Offices)

 

(Zip Code)

 

(402) 595-4000

(Registrant’s telephone number, including area code)

 

 

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

 

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

Yes   ý          No   o

 

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

Yes   ý          No   o

 

Number of shares outstanding of issuer’s common stock, as of December 24, 2004, was 515,500,087.

 

 



 

EXPLANATORY NOTE

 

This Amendment No. 1 to this Quarterly Report on Form 10-Q/A (“Form 10-Q/A”) is being filed in order to correct the previously issued historical consolidated financial statements of ConAgra Foods, Inc. ( the “company”) as of November 28, 2004, May 30, 2004 and November 23, 2003 and for the quarterly periods ended November 28, 2004 and November 23, 2003, initially filed with the Securities and Exchange Commission (the “SEC”) on January 6, 2005, for errors in previously reported amounts related to income tax matters.  The company is filing contemporaneously with this Form 10-Q/A its restated Form 10-K/A for fiscal 2004 and Form 10-Q/A for the first quarter of fiscal 2005.  The correction of the errors results in an aggregate net increase in income tax expense of approximately $105 million (including approximately $2 million reflected in results from discontinued operations) for fiscal years 2004, 2003, and 2002 and the first two quarters of fiscal 2005 and an aggregate net decrease in income tax expense of approximately $46 million for years prior to fiscal 2002. The company estimates additional federal and state cash payments in the range of $70 million to $90 million will be made in the near term in connection with these matters.  The restatement adjustments result in a $48 million reduction of ending stockholders’ equity as of November 28, 2004.

 

During fiscal 2005, the company has systematically conducted reviews of financial controls as a part of its Sarbanes-Oxley 404 pre-certification process and in connection with pending tax audits, as well as part of operational improvement efforts by new financial management.  During the third quarter of fiscal 2005, those reviews resulted in the discovery of errors relating to accounting for income taxes, as described below:

 

      The company made errors in its fiscal 1997 tax return in the calculation of tax basis upon the formation of a pork subsidiary.  Additional less significant tax basis calculation errors also occurred. Upon the sale of the beef and pork businesses in fiscal 2003, as a result of the basis calculation errors, the company incorrectly calculated a capital loss and recognized a deferred tax asset with an offsetting valuation allowance.  The company incorrectly recognized an income tax benefit when it applied the erroneous capital loss carryforward against capital gain transactions in fiscal 2004.

 

      The company made historical errors in accounting for income taxes for foreign operations, which resulted in errors in the amount of foreign tax credit benefits recorded and the calculation of tax expense on foreign source income and gains for tax purposes on foreign dispositions. The company also incorrectly calculated the amount of deferred tax assets and related valuation allowance for the foreign tax credit carryforwards available in fiscal 2003, 2004 and 2005.

 

      The Internal Revenue Service issued a report of its preliminary findings for its audit of the company’s fiscal 2000-2002 tax returns subsequent to the end of the third quarter of fiscal 2005.  In connection with this audit, the company had incorrectly recorded adjustments to the financial statements for the impact of computational errors made by the company related to its fiscal 2000-2002 tax returns.

 

      The company also made errors in 1) recording deferred taxes resulting in net overstatement of income tax expense in years prior to fiscal 2002; 2) the calculation of fiscal 2003 and fiscal 2004 tax expense which resulted in the company recognizing

 

2



 

tax expense or benefits related to certain transactions in the incorrect periods; and 3) calculating the reserve for state tax contingencies, principally related to years prior to fiscal 2003.

 

The reviews of tax matters also resulted in the correction of the gain recognized on the sale of the company’s minority investment in Swift Foods, which is included in selling, general and administrative expenses in the second quarter of fiscal 2005.

 

The principal financial statement impact of such errors noted above is summarized as follows:

 

      For periods prior to fiscal 2002, increased retained earnings by $45.8 million.

 

      For fiscal 2002, increased income tax expense $11.3 million; decreased net income by $11.3 million; decreased diluted earnings per share $0.02.

 

      For fiscal 2003, increased income tax expense $11.0 million; decreased net income by $11.0 million; decreased diluted earnings per share $0.02.

 

      For fiscal 2004, decreased selling, general and administrative expenses $1.4 million; increased income tax expense $72.3 million; increased income from discontinued operations $2.4 million; decreased net income by $68.5 million; decreased diluted earnings per share $0.13.

 

      For the first half of fiscal 2005, decreased selling, general and administrative expenses $10.1 million; increased income tax expense $9.0 million; decreased income from discontinued operations $4.1 million; decreased net income by $3.0 million; decreased diluted earnings per share $0.01.

 

The company has also changed the presentation of cash flows from discontinued operations to separately present cash flows from discontinued operations for operating, investing and financing activities for all periods presented.

 

The company has changed its presentation of equity method investment earnings to present such amounts below income tax expense for all periods presented.  Certain other reclassifications have been made to amounts previously reported in the company’s Form 10-Q for the quarterly period ended November 28, 2004 to conform with amounts reported in the company’s Form 10-Q for the thirty-nine weeks ended February 27, 2005.

 

See Note 13 to the condensed consolidated financial statements for further information.

 

This Form 10-Q/A amends and restates only Items 1, 2, and 4 of Part I and Item 6 of Part II of the original filing to reflect the effects of this restatement of the company’s financial statements for the periods presented.  The remaining Items contained within this Amendment No. 1 on Form 10-Q/A consist of all other Items originally contained on Form 10-Q for the quarterly period ended November 28, 2004.  These remaining Items are not amended hereby.  Except for the forgoing amended information, this Form 10-Q/A continues to describe conditions as of the date of the original filing, and the company has not updated the disclosures contained herein to reflect events that occurred at a later date.  Accordingly, this Form 10-Q/A should be read in conjunction with company filings made with the Securities and Exchange Commission subsequent to the filing of the original Form 10-Q, including any amendments of those filings.

 

3



 

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 28,
2004

 

November 23,
2003

 

November 28,
2004

 

November 23,
2003

 

 

 

(As Restated, see Note 13)

 

(As Restated, see Note 13)

 

Net sales

 

$

4,116.2

 

$

3,804.8

 

$

7,611.8

 

$

7,034.2

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

3,215.9

 

2,905.0

 

6,026.8

 

5,450.2

 

Selling, general and administrative expenses

 

429.4

 

481.2

 

840.4

 

943.8

 

Interest expense, net

 

85.8

 

68.2

 

159.2

 

133.6

 

Income from continuing operations before income taxes, equity method investment earnings and cumulative effect of change in accounting

 

385.1

 

350.4

 

585.4

 

506.6

 

Income tax expense

 

155.5

 

130.1

 

236.9

 

167.2

 

Equity method investment earnings

 

15.1

 

16.3

 

29.2

 

27.5

 

Income from continuing operations before cumulative effect of change in accounting

 

244.7

 

236.6

 

377.7

 

366.9

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net of tax

 

(5.1

)

32.2

 

(3.4

)

71.5

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of change in accounting

 

 

 

 

(11.7

)

 

 

 

 

 

 

 

 

 

 

Net income

 

$

239.6

 

$

268.8

 

$

374.3

 

$

426.7

 

 

 

 

 

 

 

 

 

 

 

Earnings per share – basic

 

 

 

 

 

 

 

 

 

Income from continuing operations before cumulative effect of change in accounting

 

$

0.48

 

$

0.45

 

$

0.74

 

$

0.69

 

Income (loss) from discontinued operations

 

(0.01

)

0.06

 

(0.01

)

0.13

 

Cumulative effect of change in accounting

 

 

 

 

(0.02

)

Net income

 

$

0.47

 

$

0.51

 

$

0.73

 

$

0.80

 

 

 

 

 

 

 

 

 

 

 

Earnings per share – diluted

 

 

 

 

 

 

 

 

 

Income from continuing operations before cumulative effect of change in accounting

 

$

0.47

 

$

0.45

 

$

0.73

 

$

0.69

 

Income (loss) from discontinued operations

 

(0.01

)

0.06

 

(0.01

)

0.13

 

Cumulative effect of change in accounting

 

 

 

 

(0.02

)

Net income

 

$

0.46

 

$

0.51

 

$

0.72

 

$

0.80

 

 

See notes to the condensed consolidated financial statements.

 

4



 

ConAgra Foods, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(in millions)

(unaudited)

 

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 

November 28,
2004

 

November 23,
2003

 

November 28,
2004

 

November 23,
2003

 

 

 

(As Restated, see Note 13)

 

(As Restated, see Note 13)

 

Net income

 

$

239.6

 

$

268.8

 

$

374.3

 

$

426.7

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Net derivative adjustment, net of tax

 

8.9

 

6.2

 

(15.5

)

22.6

 

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

 

42.2

 

 

42.4

 

 

Currency translation adjustment

 

19.9

 

20.2

 

29.3

 

38.8

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

310.6

 

$

295.2

 

$

430.5

 

$

488.1

 

 

See notes to the condensed consolidated financial statements.

 

5



 

ConAgra Foods, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(dollars in millions)

(unaudited)

 

 

 

November 28,
2004

 

May 30,
2004

 

November 23,
2003

 

 

 

(As Restated, see Note 13)

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

353.2

 

$

608.6

 

$

51.9

 

Divestiture proceeds receivable

 

 

60.3

 

865.5

 

Receivables, less allowance for doubtful accounts of $30.9, $26.5 and $31.8

 

1,536.6

 

1,324.1

 

1,115.4

 

Inventories

 

2,961.6

 

2,580.9

 

3,178.8

 

Prepaid expenses and other current assets

 

332.0

 

439.8

 

412.2

 

Current assets of discontinued operations

 

309.6

 

135.6

 

198.2

 

Total current assets

 

5,493.0

 

5,149.3

 

5,822.0

 

Property, plant and equipment

 

5,862.7

 

5,632.7

 

5,300.7

 

Less accumulated depreciation

 

(2,895.2

)

(2,752.7

)

(2,664.5

)

Property, plant and equipment, net

 

2,967.5

 

2,880.0

 

2,636.2

 

Goodwill

 

3,812.8

 

3,796.6

 

3,804.9

 

Brands, trademarks and other intangibles, net

 

826.2

 

826.9

 

825.6

 

Other assets

 

1,101.2

 

1,559.4

 

1,441.3

 

Noncurrent assets of discontinued operations

 

5.1

 

10.0

 

39.9

 

 

 

$

14,205.8

 

$

14,222.2

 

$

14,569.9

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Notes payable

 

$

4.4

 

$

30.6

 

$

100.6

 

Current installments of long-term debt

 

766.4

 

382.4

 

324.1

 

Accounts payable

 

1,161.1

 

940.8

 

1,194.5

 

Advances on sales

 

131.8

 

178.4

 

225.6

 

Accrued payroll

 

232.8

 

272.0

 

230.6

 

Other accrued liabilities

 

1,240.0

 

1,079.8

 

1,323.9

 

Current liabilities of discontinued operations

 

127.1

 

120.5

 

161.1

 

Total current liabilities

 

3,663.6

 

3,004.5

 

3,560.4

 

Senior long-term debt, excluding current installments

 

4,189.3

 

4,878.4

 

4,209.0

 

Subordinated debt

 

400.0

 

402.3

 

756.9

 

Preferred securities of subsidiary company

 

 

 

175.0

 

Other noncurrent liabilities

 

1,140.7

 

1,143.1

 

985.4

 

Noncurrent liabilities of discontinued operations

 

 

 

0.3

 

Total liabilities

 

9,393.6

 

9,428.3

 

9,687.0

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

Common stockholders’ equity

 

 

 

 

 

 

 

Common stock of $5 par value, authorized 1,200,000,000 shares; issued 565,906,261, 565,842,299 and 565,721,475

 

2,829.5

 

2,829.2

 

2,828.6

 

Additional paid-in capital

 

754.5

 

755.7

 

750.3

 

Retained earnings

 

2,450.3

 

2,349.2

 

2,239.7

 

Accumulated other comprehensive income (loss)

 

76.1

 

19.9

 

(98.0

)

Less treasury stock, at cost, common shares 50,907,350, 44,647,495 and 29,106,997

 

(1,293.7

)

(1,123.8

)

(690.8

)

 

 

4,816.7

 

4,830.2

 

5,029.8

 

Less unearned restricted stock and value of 0, 1,062,793 and 5,700,217 common shares held in Employee Equity Fund

 

(4.5

)

(36.3

)

(146.9

)

Total common stockholders’ equity

 

4,812.2

 

4,793.9

 

4,882.9

 

 

 

$

14,205.8

 

$

14,222.2

 

$

14,569.9

 

 

See notes to the condensed consolidated financial statements.

 

6



 

ConAgra Foods, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in millions)

(unaudited)

 

 

 

Twenty-six weeks ended

 

 

 

November 28,
2004

 

November 23,
2003

 

 

 

(As Restated, see Note 13)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

374.3

 

$

426.7

 

Income (loss) from discontinued operations

 

(3.4

)

71.5

 

Income from continuing operations

 

377.7

 

355.2

 

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

 

 

 

 

 

Depreciation and amortization

 

174.0

 

171.4

 

Gain on sale of fixed assets

 

(5.3

)

(1.4

)

Changes in amounts sold under the accounts receivable securitization, net

 

-

 

(6.1

)

Cumulative effect of changes in accounting

 

-

 

11.7

 

Undistributed earnings of affiliates

 

(19.8

)

(10.7

)

Other items (includes pension and other postretirement benefits)

 

49.7

 

63.0

 

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

 

 

 

 

 

Accounts receivable

 

(216.9

)

(315.2

)

Inventory

 

(380.7

)

(780.2

)

Prepaid expenses and other current assets

 

78.6

 

218.4

 

Accounts payable and advances on sales

 

173.6

 

527.7

 

Other accrued liabilities

 

156.3

 

53.4

 

Net cash flows from operating activities – continuing operations

 

387.2

 

287.2

 

Net cash flows from operating activities – discontinued operations

 

74.6

 

(98.5

)

Net cash flows from operating activities

 

461.8

 

188.7

 

Cash flows from investing activities:

 

 

 

 

 

Additions to property, plant and equipment

 

(255.4

)

(152.3

)

Sale of investment in Swift Foods and UAP preferred securities

 

214.1

 

-

 

Sale of businesses and property, plant and equipment

 

25.7

 

11.5

 

Notes receivable and other items

 

(32.8

)

7.0

 

Net cash flows from investing activities – continuing operations

 

(48.4

)

(133.8

)

Net cash flows from investing activities – discontinued operations

 

99.9

 

(30.3

)

Net cash flows from investing activities

 

51.5

 

(164.1

)

Cash flows from financing activities:

 

 

 

 

 

Net short-term borrowings

 

(26.1

)

99.0

 

Repayment of long-term debt

 

(321.8

)

(502.4

)

Repurchase of ConAgra Foods common shares

 

(181.4

)

-

 

Cash dividends paid

 

(269.3

)

(262.1

)

Proceeds from exercise of employee stock options

 

31.0

 

25.1

 

Other items

 

(1.4

)

(7.5

)

Net cash flows from financing activities – continuing operations

 

(769.0

)

(647.9

)

Net cash flows from financing activities – discontinued operations

 

0.3

 

(12.9

)

Net cash flows from financing activities

 

(768.7

)

(660.8

)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(255.4

)

(636.2

)

Cash and cash equivalents at beginning of period

 

608.6

 

688.1

 

Cash and cash equivalents at end of period

 

$

353.2

 

$

51.9

 

 

See notes to the condensed consolidated financial statements.

 

7



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-six Weeks ended November 28, 2004 and November 23, 2003

(columnar dollars in millions except per share amounts)

 

1.              Accounting Policies

 

The company has restated certain historical results in the accompanying condensed consolidated financial statements to correct errors in previously reported amounts related to income tax matters, see Note 13.

 

The unaudited financial information reflects all adjustments (consisting of normal and recurring 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.  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 2004 annual report on Form 10-K/A.

 

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

 

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

 

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

 

8



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-six Weeks ended November 28, 2004 and November 23, 2003

(columnar dollars in millions except per share amounts)

 

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

 

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 

November 28,
2004

 

November 23,
2003

 

November 28,
2004

 

November 23,
2003

 

Net income, as reported

 

$

239.6

 

$

268.8

 

$

374.3

 

$

426.7

 

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

 

3.9

 

3.2

 

7.4

 

7.7

 

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

 

(8.2

)

(7.4

)

(15.9

)

(16.5

)

Pro forma net income

 

$

235.3

 

$

264.6

 

$

365.8

 

$

417.9

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic earnings per share – as reported

 

$

0.47

 

$

0.51

 

$

0.73

 

$

0.80

 

Basic earnings per share – pro forma

 

$

0.46

 

$

0.50

 

$

0.71

 

$

0.79

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share – as reported

 

$

0.46

 

$

0.51

 

$

0.72

 

$

0.80

 

Diluted earnings per share – pro forma

 

$

0.45

 

$

0.50

 

$

0.71

 

$

0.79

 

 

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 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.

 

The derivative adjustment is net of income tax expense of $5.4 million for the thirteen weeks ended November 28, 2004 and an income tax benefit of $9.5 million for the twenty-six weeks ended November 28, 2004, and income tax expense of $3.8 million and $13.9 million, respectively, for the thirteen and twenty-six weeks ended November 23, 2003.  The unrealized gain on available-for-sale securities is net of income tax expense of $25.9 million and $26.0 million, respectively, for the thirteen and twenty-six weeks ended November 28, 2004.

 

Reclassifications – Certain reclassifications have been made to prior year amounts to conform to current year classifications.

 

Accounting Changes – Effective February 22, 2004, the company adopted Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Entities, as revised December 2003 (“FIN No. 46R”).  As a result of adopting FIN No. 46R, the company has consolidated the assets and liabilities of several entities from which it leases property, plant and equipment.  Certain of the entities from which the company leases various buildings are partnerships (the “partnerships”), the beneficial owners of which are Opus Corporation or its affiliates (“Opus”).  A member of the company’s board of directors is a beneficial owner, officer and director of Opus.

 

9



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-six Weeks ended November 28, 2004 and November 23, 2003

(columnar dollars in millions except per share amounts)

 

The company has also deconsolidated ConAgra Capital, L.C., an indirectly controlled subsidiary of the company.  Due to the adoption of FIN No. 46R, the company reflects in its balance sheet as of November 28, 2004:  property, plant and equipment of $219 million, long-term debt of $449 million, other assets of $57 million and other noncurrent liabilities of $6 million, and as of May 30, 2004:  property, plant and equipment of $221 million, long-term debt of $419 million, other assets of $46 million and other noncurrent liabilities of $25 million.  None of these balances were reflected in the company’s balance sheet as of November 23, 2003.  Financing costs related to these leases were previously included in selling, general and administrative expenses.  Effective with the adoption of FIN No. 46R, these financing costs are included in interest expense, net.  The company also removed the preferred securities of a subsidiary company of $175 million upon the deconsolidation of ConAgra Capital, L.C., which securities are now included in the long-term debt balance noted above.  As discussed further in Note 12, in December 2004, the company approved the redemption of these securities.  The company has no other material obligations arising out of variable interests with unconsolidated entities.

 

If FIN No. 46R would have been in effect during the first half of fiscal 2004, net income for that period would not have been materially different from that which was previously reported.

 

Effective May 26, 2003, the company adopted SFAS No. 143, Accounting for Asset Retirement Obligations, which requires the company to recognize the fair value of a liability associated with the cost the company is legally obligated to incur in order to retire an asset at some point in the future.  The associated asset retirement costs are capitalized as part of the carrying amount of the associated long-lived asset.  Over time, the liability will increase, reflecting the accretion of the obligation from its present value to the amount the company estimates it will pay to extinguish the liability, and the capitalized asset retirement costs will be depreciated over the useful life of the related asset.  Application of this accounting standard resulted in a cumulative effect of a change in accounting that decreased net income by $11.7 million (net of taxes of $7.2 million), or $0.02 per diluted share in the first quarter of fiscal 2004.  Asset retirement obligations of $17.9 million, $18.5 million, and $22.4 million are reflected in the company’s balance sheets at November 28, 2004, May 30, 2004, and November 23, 2003, respectively.  The majority of the company’s asset retirement obligations relate to various contractual obligations for restoration of leased assets at the end of lease terms.

 

Recently Issued Accounting Pronouncement – On December 16, 2004, the FASB issued Statement No. 123 (revised 2004) (“SFAS No. 123R”), Share-Based Payment. SFAS No. 123R will require the company to measure the cost of all employee stock-based compensation awards based on the grant date fair value of those awards and to record that cost as compensation expense over the period during which the employee is required to perform service in exchange for the award (generally over the vesting period of the award). Excess tax benefits, as defined by this Statement, will be recognized as an addition to paid-in capital.  SFAS No. 123R is effective beginning in the company’s second quarter of fiscal 2006. The company is currently evaluating the expected impact that the adoption of SFAS No. 123R will have on its results of operations and cash flows.

 

10



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-six Weeks ended November 28, 2004 and November 23, 2003

(columnar dollars in millions except per share amounts)

 

2.   Discontinued Operations and Divestitures

 

Chicken Business Divestiture

 

On November 23, 2003, the company completed the sale of its chicken business to Pilgrim’s Pride Corporation (the “chicken business divestiture”).  The company has reflected the results of operations, cash flows, assets and liabilities of the chicken business as discontinued operations for all periods presented.

 

As part of the divestiture, the company received $301.0 million of cash and 25.4 million shares of Pilgrim’s Pride Corporation common stock valued at $246.1 million.  The fair value of the Pilgrim’s Pride common stock was based on an independent valuation as of the date of the transaction and was reflective of the common stock’s trading restrictions.  The common stock investment is included in the company’s balance sheet within other assets.  As of November 28, 2004, 8.47 million shares are classified as available-for-sale, as the company at that date was contractually allowed to sell only those shares within twelve months.  Subsequent to that date, an agreement was reached with Pilgrim’s Pride Corporation, allowing the company to sell up to ten million shares.  The available-for-sale shares are stated at fair value based on quoted market prices with unrealized pre-tax gains of approximately $215 million ($133 million after tax) included in accumulated other comprehensive income.  The remaining shares are accounted for at cost (based on the valuation performed on the transaction date).

 

In December 2004, the company sold 10 million shares of Pilgrim’s Pride Corporation common stock for $282.5 million.  The company will recognize a pre-tax gain of approximately $186 million in its third quarter of fiscal 2005.  This gain includes the following:

 

($ in millions)

 

Amounts included in accumulated other comprehensive income at November 28, 2004 for 8.47 million shares classified as available-for-sale

 

$

215

 

Reduction in value (including sales commission) associated with shares classified as available-for-sale from November 28, 2004 to December 8, 2004

 

(57

)

Gain realized on sale of additional 1.53 million shares not classified as available-for-sale

 

28

 

Total pre-tax gain

 

$

186

 

 

The remaining 15.4 million shares are contractually restricted, such that the company cannot sell any portion of the shares until December 2005, at which time up to 6.94 million shares may be sold.  The remaining shares can be sold in future periods beginning after December 13, 2006, but no more than 8.47 million shares may be sold in any twelve-month period.  With the consent of Pilgrim’s Pride Corporation, these trading restrictions may be waived.  The final sales price of the chicken business was subject to a purchase price adjustment based on determination of the final net assets sold, which occurred in the first quarter of fiscal 2005.  As part of the final purchase price adjustment, the company paid $34 million to Pilgrim’s Pride.  The company recognized a loss of $11.7 million for this final settlement in the fourth quarter of fiscal 2004.

 

11



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-six Weeks ended November 28, 2004 and November 23, 2003

(columnar dollars in millions except per share amounts)

 

UAP North America Divestiture

 

On November 23, 2003, the company completed the sale of UAP North America to Apollo Management, L.P. (“Apollo”).  The company has been actively marketing the remaining businesses of its former Agricultural Products segment (“UAP International”) and believes such businesses will be disposed of during fiscal 2005.  Accordingly, the company reflects the results of the entire Agricultural Products segment as discontinued operations for all periods presented.

 

The company initially received $503 million of cash, $60 million of Series A redeemable preferred stock of UAP Holdings (the “UAP Preferred Securities”) and $61 million in the form of a receivable from Apollo.  The company collected the receivable balance in the first quarter of fiscal 2005.

 

Based on an independent valuation, the fair value of the UAP Preferred Securities was estimated to approximate their face value.  The UAP Preferred Securities investment is included in the company’s balance sheet within other assets.  UAP Holdings previously repurchased $45 million of preferred securities and accrued dividends for cash, and on November 29, 2004, repurchased the remaining $15 million of preferred securities and accrued dividends for cash.

 

In the second quarter of fiscal 2005, the company reached agreements in principle with various parties to sell substantially all of the remaining assets of UAP International.  As a result, management determined that the ultimate proceeds from such sales would be lower than originally estimated.  The company therefore recorded an impairment charge of $24.4 million in order to reflect the assets at the revised estimated fair value, less cost to sell.

 

Spanish Feed and Portuguese Poultry Divestiture

 

On May 26, 2004, the company completed the sale of its Spanish feed business to the Carlyle Group.  The company completed the sale of its Portuguese poultry business in the first quarter of fiscal 2005.  Accordingly, the company removed the results of these businesses from the Food Ingredients reporting segment and reflects the results of these businesses as discontinued operations for all periods presented.

 

Fresh Beef and Pork Divestitures

 

In September 2002, the company sold a controlling interest in its fresh beef and pork operations to a joint venture led by Hicks, Muse, Tate & Furst Incorporated (“Hicks Muse”).  Outside investors purchased 55% of the joint venture and the company continued to own the remaining 45%.  The fresh beef operations sold to the joint venture included a beef processing business as well as a cattle feeding business.  The purchase price associated with the cattle feeding business was financed entirely by the company with cattle feeding-related notes receivable maturing in September 2004.  These notes were collateralized by the cattle, feedlots and other assets of the cattle feeding business.  Due to the purchase price of the cattle feeding business being entirely financed by the company, the legal divestiture of the cattle feeding operation was not recognized as a divestiture for accounting purposes, and the assets, liabilities and results of operations of the cattle feeding business have continued to be reflected in the company’s financial statements.  In August 2004, Hicks Muse exercised its option to acquire the company’s minority interest investment in the fresh beef and pork business (“Swift Foods”), and as a consequence, on September 24, 2004, the company sold its minority interest investment in Swift Foods to Hicks Muse for $194.1 million, resulting in a gain of approximately $9 million.

 

12



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-six Weeks ended November 28, 2004 and November 23, 2003

(columnar dollars in millions except per share amounts)

 

The company continues to hold subordinated notes in the original principal amount of $150 million from Swift Foods.

 

On September 24, 2004, the company reached an agreement with affiliates of Swift Foods by which the company took control and ownership of approximately $300 million of the net assets of the cattle feeding business, including feedlots and live cattle.  On October 15, 2004, the company sold the feedlots to Smithfield Foods for approximately $70 million.  These transactions resulted in a gain of approximately $19.0 million (net of taxes of $11.6 million).  The company retained live cattle inventory and related derivative instruments and is liquidating those assets in an orderly manner.  As of November 28, 2004, the company had reduced the live cattle inventory to $189 million.  The company expects the sale of the live cattle inventory to be substantially completed by April 2005.  Beginning September 24, 2004, the assets, liabilities and results of operations, including the gain on sale, of the cattle feeding business are classified as discontinued operations.

 

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

 

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 

November 28,
2004

 

November 23,
2003

 

November 28,
2004

 

November 23,
2003

 

Net sales

 

$

143.1

 

$

1,647.7

 

$

259.6

 

$

3,375.6

 

Long-lived asset impairment charge

 

$

(24.4

)

$

(9.7

)

$

(25.6

)

$

(9.7

)

Income from operations of discontinued operations before income taxes

 

3.2

 

73.0

 

7.9

 

136.3

 

Net gain from disposal of businesses

 

31.3

 

 

31.3

 

 

Income before income taxes

 

10.1

 

63.3

 

13.6

 

126.6

 

Income tax expense

 

(15.2

)

(31.1

)

(17.0

)

(55.1

)

Income (loss) from discontinued operations, net of tax

 

$

(5.1

)

$

32.2

 

$

(3.4

)

$

71.5

 

 

13



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-six Weeks ended November 28, 2004 and November 23, 2003

(columnar dollars in millions except per share amounts)

 

The assets and liabilities of the Agricultural Products segment, the chicken business, the Spanish feed and Portuguese poultry businesses, and the cattle feeding business as of November 28, 2004, May 30, 2004 and November 23, 2003 are as follows:

 

 

 

November 28,
2004

 

May 30,
2004

 

November 23,
2003

 

 

 

 

 

 

 

 

 

Receivables, less allowances for doubtful accounts

 

$

92.4

 

$

81.6

 

$

113.4

 

Inventories

 

213.6

 

48.4

 

75.7

 

Prepaid expenses and other current assets

 

3.6

 

5.6

 

9.1

 

Current assets of discontinued operations

 

$

309.6

 

$

135.6

 

$

198.2

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

$

4.2

 

$

8.7

 

$

33.1

 

Goodwill and other intangibles

 

 

 

3.9

 

Other assets

 

0.9

 

1.3

 

2.9

 

Noncurrent assets of discontinued operations

 

$

5.1

 

$

10.0

 

$

39.9

 

 

 

 

 

 

 

 

 

Notes payable

 

$

23.5

 

$

23.2

 

$

29.4

 

Accounts payable

 

85.3

 

82.2

 

111.3

 

Other accrued liabilities and advances on sales

 

18.3

 

15.1

 

20.4

 

Current liabilities of discontinued operations

 

$

127.1

 

$

120.5

 

$

161.1

 

 

 

 

 

 

 

 

 

Other noncurrent liabilities

 

$

 

$

 

$

0.3

 

Noncurrent liabilities of discontinued operations

 

$

 

$

 

$

0.3

 

 

14



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-six Weeks ended November 28, 2004 and November 23, 2003

(columnar dollars in millions except per share amounts)

 

3.              Goodwill and Other Identifiable Intangible Assets

 

Goodwill by reporting segment was as follows:

 

 

 

November 28,
2004

 

May 30,
2004

 

November 23,
2003

 

Retail Products

 

$

3,484.9

 

$

3,476.9

 

$

3,479.2

 

Foodservice Products

 

291.1

 

285.1

 

288.9

 

Food Ingredients

 

36.8

 

34.6

 

36.8

 

Total

 

$

3,812.8

 

$

3,796.6

 

$

3,804.9

 

 

Other identifiable intangible assets were as follows:

 

 

 

November 28, 2004

 

May 30, 2004

 

November 23, 2003

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Non-amortizing intangible assets

 

$

798.2

 

$

 

$

798.1

 

$

 

$

794.2

 

$

 

Amortizing intangible assets

 

39.7

 

11.7

 

38.7

 

9.9

 

40.5

 

9.1

 

 

 

$

837.9

 

$

11.7

 

$

836.8

 

$

9.9

 

$

834.7

 

$

9.1

 

 

Non-amortizing intangible assets are primarily composed of the company’s brands/trademarks.  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 28, 2004, amortization expense is estimated to be approximately $2.5 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 28, 2004, May 30, 2004 and November 23, 2003, the fair value of derivatives recognized within prepaid expenses and other current assets was $8.2 million, $128.1 million and $60.8 million, respectively, while the amount recognized within other accrued liabilities was $23.6 million, $10.3 million and $16.7 million, respectively.

 

Generally the company hedges a portion of its anticipated consumption of commodity inputs for periods up to 12 months.  The company may enter into longer-term hedges on particular commodities if deemed appropriate.  As of November 28, 2004, the company had hedged certain portions of its anticipated consumption of commodity inputs through November 2005.

 

As of November 28, 2004, May 30, 2004 and November 23, 2003, the net deferred gain or loss recognized in accumulated other comprehensive income was a $7.0 million loss, an $8.0 million gain and a $0.9 million loss, net of tax, respectively.  The company anticipates a loss of $9.1 million, net of

 

15



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-six Weeks ended November 28, 2004 and November 23, 2003

(columnar dollars in millions except per share amounts)

 

tax, will be transferred out of accumulated other comprehensive income and recognized within earnings over the next 12 months.  The company anticipates a gain of $2.1 million, net of tax, will be transferred out of accumulated other comprehensive income and recognized within earnings subsequent to the next 12 months.

 

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

 

Of the $2.5 billion interest rate swaps closed out in fiscal 2004, $2 billion of the interest rate swaps had been used to effectively convert certain of the company’s fixed rate debt into floating rate debt.   These interest rate swaps were accounted for as fair value hedges and resulted in no recognition of ineffectiveness in the statement of earnings as the interest rate swaps’ provisions matched the applicable provisions of the hedged debt.  The remaining $500 million portion of the company’s interest rate swaps was used to hedge certain of the company’s forecasted interest payments on floating rate debt for the period from 2005 through 2011.  These interest rate swaps were accounted for as cash flow hedges with gains and losses deferred in accumulated other comprehensive income.  During the second quarter of fiscal 2005, the company determined it was no longer probable that the related floating rate debt would be issued and therefore the company recognized approximately $13.6 million of additional interest expense associated with this interest rate swap.  The company’s net interest expense was reduced by $10.6 million due to the net impact of interest rate swap agreements in the first half of fiscal 2005 and by $40.5 million in the comparable period of fiscal 2004.

 

16



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-six Weeks ended November 28, 2004 and November 23, 2003

(columnar dollars in millions except per share amounts)

 

5.              Earnings Per Share

 

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

 

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

 

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 

November 28,
2004

 

November 23,
2003

 

November 28,
2004

 

November 23,
2003

 

Net income:

 

 

 

 

 

 

 

 

 

Income from continuing operations before cumulative effect of change in accounting

 

$

244.7

 

$

236.6

 

$

377.7

 

$

366.9

 

Income (loss) from discontinued operations, net of tax

 

(5.1

)

32.2

 

(3.4

)

71.5

 

Cumulative effect of change in accounting

 

 

 

 

(11.7

)

Net income

 

$

239.6

 

$

268.8

 

$

374.3

 

$

426.7

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Shares Outstanding:

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

513.7

 

530.7

 

515.7

 

530.4

 

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

 

3.8

 

1.1

 

4.0

 

1.3

 

Diluted weighted average shares outstanding

 

517.5

 

531.8

 

519.7

 

531.7

 

 

At the end of the second quarter of fiscal 2005 and 2004, there were 7.6 million and 14.6 million stock options outstanding, respectively, 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.

 

6.              Inventories

 

The major classes of inventories are as follows:

 

 

 

November 28,
2004

 

May 30,
2004

 

November 23,
2003

 

Raw materials and packaging

 

$

1,306.1

 

$

1,132.2

 

$

1,361.6

 

Work in progress

 

131.0

 

75.0

 

117.7

 

Finished goods

 

1,312.1

 

1,201.5

 

1,285.6

 

Supplies and other

 

212.4

 

172.2

 

413.9

 

 

 

$

2,961.6

 

$

2,580.9

 

$

3,178.8

 

 

17



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-six Weeks ended November 28, 2004 and November 23, 2003

(columnar dollars in millions except per share amounts)

 

7.              Operational Efficiency Initiatives

 

As part of efforts to improve the company’s cost structure, margins and competitive position, the company has implemented a series of initiatives to better align and utilize the company’s collective resources beginning in the second quarter of fiscal 2004 and continuing in fiscal 2005.  The specific initiatives include:

 

                  elimination of duplicative costs and overhead,

 

                  consolidation of selected manufacturing plants and support functions,

 

                  efforts to streamline and improve the company’s ability to do business with company customers, distributors and brokers, and

 

                  realignment of business organizations.

 

As a result of the above initiatives, the company is recognizing expenses associated with employee termination, accelerated depreciation on fixed assets, equipment/employee relocation, asset impairment and other related activities.  During the first half of fiscal 2005 and 2004, the company recognized charges associated with its operational efficiency initiatives as follows: 

 

(in millions)

 

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 

November 28,
2004

 

November 23,
2003

 

November 28,
2004

 

November 23,
2003

 

Retail Products

 

$

4.0

 

$

4.0

 

$

12.5

 

$

7.0

 

Foodservice Products

 

(0.7

)

 

4.3

 

 

Food Ingredients

 

0.2

 

6.8

 

0.3

 

6.8

 

Total

 

$

3.5

 

$

10.8

 

$

17.1

 

$

13.8

 

 

The company has accrued expenses of $9.0 million for employee termination costs on its balance sheet as of November 28, 2004.

 

During the remainder of fiscal 2005, the company anticipates it will incur additional expenses associated with its cost saving initiatives of approximately $5.5 million.

 

8.              Income Taxes

 

In September 2003, the company reached an agreement with the Internal Revenue Service (“IRS”) with respect to the IRS’s examination of the company’s tax returns for fiscal years 1996 through 1999.  As a result of the favorable resolution of these matters, the company reduced income tax expense by $27.0 million during the first quarter of fiscal 2004.  Certain tax authorities have proposed adjustments for later years, some of which are being contested by the company.  The company believes that it has made adequate provisions for income taxes payable.

 

18



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-six Weeks ended November 28, 2004 and November 23, 2003

(columnar dollars in millions except per share amounts)

 

9.              Contingencies

 

In fiscal 1991, the company acquired Beatrice Company (“Beatrice”).  As a result of the acquisition and the significant pre-acquisition contingencies of the Beatrice businesses and its former subsidiaries, the consolidated post-acquisition financial statements of the company reflect significant liabilities associated with the estimated resolution of these contingencies.  These include various litigation and environmental proceedings related to businesses divested by Beatrice prior to its acquisition by the company.  The environmental proceedings include litigation and administrative proceedings involving Beatrice’s status as a potentially responsible party at 39 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 27 of these sites.  Reserves for these matters have been established based on the company’s best estimate of its undiscounted remediation liabilities, which estimates include evaluation of investigatory studies, extent of required cleanup, the known volumetric contribution of Beatrice and other potentially responsible parties and its experience in remediating sites.  The reserves for Beatrice environmental matters totaled $112.2 million as of November 28, 2004, a majority of which relates to the Superfund and state equivalent sites referenced above.  Expenditures for these matters are expected to occur over a period of 5 to 20 years.

 

The results for the twenty-six weeks ended November 23, 2003 include litigation expense related to a choline chloride joint venture with E.I. du Pont Nemours and Co. (“DuPont”) that was sold in 1997.  Subsequent to the sale, civil antitrust lawsuits against DuPont, the company and the venture were filed in various federal and state courts.  In connection with the settlement of certain of these cases and the remaining civil actions, the company recorded a $25 million pre-tax charge against earnings in the first half of fiscal 2004 as an additional reserve for these matters.  The litigation expenses are considered general corporate expenses.

 

19



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-six Weeks ended November 28, 2004 and November 23, 2003

(columnar dollars in millions except per share amounts)

 

In certain limited situations, the company will guarantee an obligation of an unconsolidated entity.  Currently, the company guarantees certain obligations primarily associated with leases entered into by certain of its equity method investees and the fresh beef and pork business.  Under these arrangements, the company is obligated to perform under these leases (i.e., make the lease payments) should the primary obligor be unable to perform.  Most of these guarantees resulted from the company’s fresh beef and pork divestiture.  The leases have terms not exceeding 11 years and the maximum amount of future payments the company has guaranteed is approximately $48.9 million as of November 28, 2004.  The company has also assigned a hog purchase contract to the beef and pork business which has indemnified the company for all liabilities under the contract.  The company has guaranteed the performance of the fresh beef and pork business with respect to the hog purchase contract.  The hog purchase contract requires the fresh beef and pork business to purchase a minimum of approximately 1.2 million hogs annually through 2014.  The contract stipulates minimum price commitments, based in part on market prices and, in certain circumstances, also includes price adjustments based on certain inputs.

 

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

 

The company is currently conducting discussions with the SEC Staff regarding a possible settlement of these matters.  Based on discussions to date, the company estimates the amount of such settlement payments to be in the range of $25 million to $45 million.  As of November 28, 2004, the company has a $25 million reserve, established in the fourth quarter of fiscal 2004, in connection with these matters.  Due to the nature of the ongoing discussions, the company cannot predict whether the discussions will result in a settlement and is unable to determine the ultimate cost the company may incur in order to resolve this matter.  Any final resolution could result in charges greater than the amount currently estimated and recognized in the company’s financial statements.

 

20



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-six Weeks ended November 28, 2004 and November 23, 2003

(columnar dollars in millions except per share amounts)

 

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

 

10.       Pension and Postretirement Benefits

 

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

 

21



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-six Weeks ended November 28, 2004 and November 23, 2003

(columnar dollars in millions except per share amounts)

 

Components of pension benefit and other postretirement benefit costs are:

 

 

 

Pension Costs

 

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 

November 28,
2004

 

November 23,
2003

 

November 28,
2004

 

November 23,
2003

 

Service cost

 

$

14.7

 

$

15.4

 

$

29.4

 

$

30.8

 

Interest cost

 

30.8

 

29.9

 

61.6

 

59.8

 

Expected return on plan assets

 

(32.8

)

(31.8

)

(65.6

)

(63.6

)

Amortization of prior service cost

 

0.6

 

0.6

 

1.2

 

1.2

 

Amortization of transition amount

 

 

 

(0.1

)

(0.1

)

Recognized net actuarial loss

 

2.5

 

1.3

 

5.1

 

2.7

 

Curtailment (gain) loss

 

 

1.2

 

 

2.5

 

Benefit cost – company plans

 

15.8

 

16.6

 

31.6

 

33.3

 

Pension benefit cost – multi-employer plans

 

2.2

 

2.2

 

4.5

 

4.5

 

Total benefit cost

 

$

18.0

 

$

18.8

 

$

36.1

 

$

37.8

 

 

 

 

Postretirement Costs

 

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 

November 28,
2004

 

November 23,
2003

 

November 28,
2004

 

November 23,
2003

 

Service cost

 

$

0.8

 

$

1.0

 

$

1.8

 

$

2.0

 

Interest cost

 

7.0

 

8.0

 

14.4

 

16.0

 

Expected return on plan assets

 

(0.1

)

(0.2

)

(0.2

)

(0.4

)

Amortization of prior service cost

 

(1.9

)

(0.2

)

(2.1

)

(0.4

)

Recognized net actuarial loss

 

2.5

 

0.6

 

4.4

 

1.2

 

Curtailment (gain) loss

 

 

(0.7

)

 

(1.4

)

Benefit cost – company plans

 

$

8.3

 

$

8.5

 

$

18.3

 

$

17.0

 

 

During the twenty-six weeks ended November 28, 2004, the company contributed $4.1 million to the pension plans and contributed $23.9 million to the company’s other postretirement plans.  The company anticipates making further contributions of $4.4 million to its pension plans for the remainder of fiscal 2005.  The company anticipates making further contributions of $23.9 million to its postretirement plans during the remainder of fiscal 2005.  These estimates are based on current tax laws, plan asset performance and liability assumptions, which are subject to change.

 

22



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-six Weeks ended November 28, 2004 and November 23, 2003

(columnar dollars in millions except per share amounts)

 

11.       Business Segments

 

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

 

Intersegment sales have been recorded at amounts approximating market.  Operating profit for each segment is based on net sales less all identifiable operating expenses.  General corporate expense, net interest expense, equity method investment earnings and income taxes have been excluded from segment operations.

 

23



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-six Weeks ended November 28, 2004 and November 23, 2003

(columnar dollars in millions except per share amounts)

 

 

 

Thirteen weeks ended

 

 

 

November 28,
2004

 

November 23,
2003

 

Sales to unaffiliated customers

 

 

 

 

 

Retail Products

 

$

2,485.4

 

$

2,271.6

 

Foodservice Products

 

939.5

 

956.2

 

Food Ingredients

 

691.3

 

577.0

 

Total

 

$

4,116.2

 

$

3,804.8

 

 

 

 

 

 

 

Intersegment sales

 

 

 

 

 

Retail Products

 

$

5.3

 

$

8.8

 

Foodservice Products

 

26.2

 

18.2

 

Food Ingredients

 

56.0

 

118.0

 

 

 

87.5

 

145.0

 

Intersegment elimination

 

(87.5

)

(145.0

)

Total

 

$

 

$

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

Retail Products

 

$

2,490.7

 

$

2,280.4

 

Foodservice Products

 

965.7

 

974.4

 

Food Ingredients

 

747.3

 

695.0

 

Intersegment elimination

 

(87.5

)

(145.0

)

Total

 

$

4,116.2

 

$

3,804.8

 

 

 

 

 

 

 

Operating profit

 

 

 

 

 

Retail Products

 

$

373.0

 

$

361.3

 

Foodservice Products

 

91.0

 

85.8

 

Food Ingredients

 

79.2

 

54.1

 

Total operating profit

 

543.2

 

501.2

 

 

 

 

 

 

 

General corporate expenses

 

72.3

 

82.6

 

Interest expense, net

 

85.8

 

68.2

 

Income tax expense

 

155.5

 

130.1

 

Equity method investment earnings

 

15.1

 

16.3

 

 

 

 

 

 

 

Income from continuing operations before cumulative effect of change in accounting

 

$

244.7

 

$

236.6

 

 

24



 

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Twenty-six Weeks ended November 28, 2004 and November 23, 2003

(columnar dollars in millions except per share amounts)

 

 

 

Twenty-six weeks ended

 

 

 

November 28,
2004

 

November 23,
2003

 

Sales to unaffiliated customers

 

 

 

 

 

Retail Products

 

$

4,499.6

 

$

4,112.6

 

Foodservice Products

 

1,844.1

 

1,836.5

 

Food Ingredients

 

1,268.1

 

1,085.1

 

Total

 

$

7,611.8

 

$

7,034.2

 

 

 

 

 

 

 

Intersegment sales

 

 

 

 

 

Retail Products

 

$

10.8

 

$

16.9

 

Foodservice Products

 

49.8

 

40.2

 

Food Ingredients

 

107.1

 

235.3

 

 

 

167.7

 

292.4

 

Intersegment elimination

 

(167.7

)

(292.4

)

Total

 

$

 

$

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

Retail Products

 

$

4,510.4

 

$

4,129.5

 

Foodservice Products

 

1,893.9

 

1,876.7

 

Food Ingredients

 

1,375.2

 

1,320.4

 

Intersegment elimination

 

(167.7

)

(292.4

)

Total

 

$

7,611.8

 

$

7,034.2

 

 

 

 

 

 

 

Operating profit

 

 

 

 

 

Retail Products

 

$

582.8

 

$

569.3

 

Foodservice Products

 

158.4

 

161.8

 

Food Ingredients

 

139.3

 

82.0

 

Total operating profit

 

880.5

 

813.1

 

 

 

 

 

 

 

General corporate expenses

 

135.9

 

172.9

 

Interest expense, net

 

159.2

 

133.6

 

Income tax expense

 

236.9

 

167.2

 

Equity method investment earnings

 

29.2

 

27.5

 

 

 

 

 

 

 

Income from continuing operations before cumulative effect of change in accounting

 

$

377.7

 

$

366.9

 

 

12.       Subsequent Events – Retirement of Certain Long-Term Debt

 

In December 2004, the company retired $600 million of 7.5% senior debt that was due September 2005.  This early retirement of debt resulted in a pre-tax loss of $22 million, which will be reflected in the company’s statement of earnings in the third quarter of this fiscal year.  Also in December 2004, the company approved the redemption of the remaining $175 million of preferred securities of

 

25



 

ConAgra Foods, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Twenty-six Weeks ended November 28, 2004 and November 23, 2003

(columnar dollars in millions except per share amounts)

 

ConAgra Capital, L.C., an indirectly controlled subsidiary of the company.  The company expects to complete the redemption of these securities in the third quarter of fiscal 2005.  Due to the adoption of FIN No. 46R, ConAgra Capital, L.C. was deconsolidated, and therefore these securities are reflected in the company’s balance sheets as $221 million of long-term debt and $46 million of other assets as of November 28, 2004 and May 30, 2004 and in preferred securities of subsidiary company as of November 23, 2003.

 

13.       Restatement of Previously Issued Financial Statements

 

On March 24, 2005, the company announced that it would restate certain historical results to correct errors in previously reported amounts related to income tax matters.  This Form 10-Q/A includes restated financial information.  The correction of the errors results in an aggregate net increase in income tax expense of approximately $13 million (including approximately $4 million reflected in results from discontinued operations) during the first half of fiscal 2005 and approximately $40 million during the first half of fiscal 2004.  The restatement adjustments result in a $48 million reduction of ending stockholders’ equity as of November 28, 2004.

 

During fiscal 2005, the company has systematically conducted reviews of financial controls as a part of its Sarbanes-Oxley 404 pre-certification process and in connection with pending tax audits, as well as part of operational improvement efforts by new financial management.  During the third quarter of fiscal 2005, those reviews resulted in the discovery of errors relating to accounting for income taxes, as described below:

 

                  The company made errors in its fiscal 1997 tax return in the calculation of tax basis upon the formation of a pork subsidiary.  Additional less significant tax basis calculation errors also occurred. Upon the sale of the beef and pork businesses in fiscal 2003, as a result of the basis calculation errors, the company incorrectly calculated a capital loss and recognized a deferred tax asset with an offsetting valuation allowance.  The company incorrectly recognized an income tax benefit when it applied the erroneous capital loss carryforward against capital gain transactions in fiscal 2004.

 

                  The company made historical errors in accounting for income taxes for foreign operations, which resulted in errors in the amount of foreign tax credit benefits recorded and the calculation of tax expense on foreign source income and gains for tax purposes on foreign dispositions. The company also incorrectly calculated the amount of deferred tax assets and related valuation allowance for the foreign tax credit carryforwards available in fiscal 2003, 2004 and 2005.

 

                  The Internal Revenue Service issued a report of its preliminary findings for its audit of the company’s fiscal 2000-2002 tax returns subsequent to the end of the third quarter of fiscal 2005.  In connection with this audit, the company had incorrectly recorded adjustments to the financial statements for the impact of computational errors made by the company related to its fiscal 2000-2002 tax returns.

 

                  The company also made errors in 1) recording deferred taxes resulting in net overstatement of income tax expense in years prior to fiscal 2002; 2) the calculation of fiscal 2003 and fiscal 2004 tax expense which resulted in the company recognizing tax expense or benefits related to certain transactions in the incorrect periods; and 3) calculating the reserve for state tax contingencies, principally related to years prior to fiscal 2003.

 

The reviews of tax matters also resulted in the correction of the gain recognized on the sale of the company’s minority investment in Swift Foods, which is included in selling, general and administrative expenses in the second quarter of fiscal 2005.

 

26



 

ConAgra Foods, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Twenty-six Weeks ended November 28, 2004 and November 23, 2003

(columnar dollars in millions except per share amounts)

 

The company has also changed the presentation of cash flows from discontinued operations to separately present cash flows from discontinued operations for operating, investing and financing activities for all periods presented.

 

The company has changed its presentation of equity method investment earnings to present such amounts below income tax expense for all periods presented.  Certain other reclassifications have been made to amounts previously reported in the company’s Form 10-Q for the quarterly period ended November 28, 2004 to conform with amounts reported in the company’s Form 10-Q for the thirty-nine weeks ended February 27, 2005.

 

The impact of this restatement on the condensed consolidated financial statements is summarized below:

 

 

 

As of November 28, 2004

 

 

 

As Previously
Reported
(1)

 

Restatement

 

As Restated

 

Prepaid expenses and other current assets

 

$

326.1

 

5.9

 

$

332.0

 

Total current assets

 

5,487.1

 

5.9

 

5,493.0

 

Goodwill

 

3,815.0

 

(2.2

)

3,812.8

 

Total assets

 

14,202.1

 

3.7

 

14,205.8

 

Other accrued liabilities

 

1,227.5

 

12.5

 

1,240.0

 

Total current liabilities

 

3,651.1

 

12.5

 

3,663.6

 

Other noncurrent liabilities

 

1,101.0

 

39.7

 

1,140.7

 

Total liabilities

 

9,341.4

 

52.2

 

9,393.6

 

Additional paid-in capital

 

754.9

 

(0.4

)

754.5

 

Retained earnings

 

2,498.4

 

(48.1

)

2,450.3

 

Total common stockholders’ equity

 

4,860.7

 

(48.5

)

4,812.2

 

Total liabilities and stockholders’ equity

 

14,202.1

 

3.7

 

14,205.8

 

 


(1)   As previously reported in the company’s Form 10-Q for the quarterly period ended November 28, 2004 filed on January 6, 2005.

 

27



 

ConAgra Foods, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Twenty-six Weeks ended November 28, 2004 and November 23, 2003

(columnar dollars in millions except per share amounts)

 

 

 

For the 13 weeks ended
November 28, 2004

 

For the 26 weeks ended
November 28, 2004

 

 

 

As
Previously
Reported
(1)

 

Reclass-
ifications

 

Restate-
ment

 

As Restated
and
Reclassified

 

As
Previously
Reported
(1)

 

Reclass-
ifications

 

Restate-
ment

 

As Restated
and
Reclassified

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

$

3,213.7

 

2.2

 

 

$

3,215.9

 

$

6,021.1

 

5.7

 

 

$

6,026.8

 

Selling, general and administrative expenses

 

441.7

 

(2.2

)

(10.1

)

429.4

 

856.2

 

(5.7

)

(10.1

)

840.4

 

Income tax expense

 

146.8

 

 

8.7

 

155.5

 

227.9

 

 

9.0

 

236.9

 

Income from continuing operations before cumulative effect of changes in accounting

 

243.3

 

 

1.4

 

244.7

 

376.6

 

 

1.1

 

377.7

 

Income (loss) from discontinued operations, net of tax

 

(1.0

)

 

(4.1

)

(5.1

)

0.7

 

 

(4.1

)

(3.4

)

Net income

 

242.3

 

 

(2.7

)

239.6

 

377.3

 

 

(3.0

)

374.3

 

Comprehensive income

 

313.3

 

 

(2.7

)

310.6

 

433.5

 

 

(3.0

)

430.5

 

Earnings per share - basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before cumulative effect of changes in accounting

 

$

0.47

 

 

0.01

 

$

0.48

 

$

0.73

 

 

0.01

 

$

0.74

 

Income (loss) from discontinued operations, net of tax

 

$

 

 

(0.01

)

$

(0.01

)

$

 

 

(0.01

)

$

(0.01

)

Net income

 

$

0.47

 

 

 

$

0.47

 

$

0.73

 

 

 

$

0.73

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share- diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before cumulative effect of changes in accounting

 

$

0.47

 

 

 

$

0.47

 

$

0.73

 

 

 

$

0.73

 

Income (loss) from discontinued operations, net of tax

 

$

 

 

(0.01

)

$

(0.01

)

$

 

 

(0.01

)

$

(0.01

)

Net income

 

$

0.47

 

 

(0.01

)

$

0.46

 

$

0.73

 

 

(0.01

)

$

0.72

 

 


(1)  As previously reported in the company’s Form 10-Q for the quarterly period ended November 28, 2004 filed on January 6, 2005.

 

 

 

As of November 23, 2003

 

 

 

As Previously
Reported
(1)

 

Restatement

 

As Restated

 

Prepaid expenses and other current assets

 

$

362.6

 

49.6

 

$

412.2

 

Total current assets

 

5,772.4

 

49.6

 

5,822.0

 

Goodwill

 

3,807.1

 

(2.2

)

3,804.9

 

Other assets

 

1,451.5

 

(10.2

)

1,441.3

 

Total assets

 

14,532.7

 

37.2

 

14,569.9

 

Other accrued liabilities

 

1,295.7

 

28.2

 

1,323.9

 

Total current liabilities

 

3,532.2

 

28.2

 

3,560.4

 

Other noncurrent liabilities

 

961.0

 

24.4

 

985.4

 

Total liabilities

 

9,634.4

 

52.6

 

9,687.0

 

Additional paid-in capital

 

750.7

 

(0.4

)

750.3

 

Retained earnings

 

2,254.7

 

(15.0

)

2,239.7

 

Total common stockholders’ equity

 

4,898.3

 

(15.4

)

4,882.9

 

Total liabilities and stockholders’ equity

 

14,532.7

 

37.2

 

14,569.9

 

 


(1)  As previously reported in the company’s Form 10-Q for the quarterly period ended November 28, 2004 filed on January 6, 2005.

 

28



 

ConAgra Foods, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Twenty-six Weeks ended November 28, 2004 and November 23, 2003

(columnar dollars in millions except per share amounts)

 

 

 

For the 13 weeks ended
November 23, 2003

 

For the 26 weeks ended
November 23, 2003

 

 

 

As
Previously
Reported
(1)

 

Reclass-
ifications

 

Restate-
ment

 

As Restated
and
Reclassified

 

As
Previously
Reported
(1)

 

Reclass-
ifications

 

Restate-
ment

 

As Restated
and
Reclassified

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

$

2,908.5

 

(3.5

)

 

$

2,905.0

 

$

5,453.7

 

(3.5

)

 

$

5,450.2

 

Selling, general and administrative expenses

 

477.7

 

3.5

 

 

481.2

 

941.7

 

3.5

 

(1.4

)

943.8

 

Income tax expense

 

128.8

 

 

1.3

 

130.1

 

127.5

 

 

39.7

 

167.2

 

Income from continuing operations before cumulative effect of changes in accounting

 

237.9