CAG 10Q2 FY14

 
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 24, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to 
               
Commission File Number: 1-7275
______________________________________________________
CONAGRA FOODS, INC.
(Exact name of registrant as specified in its charter)
______________________________________________________ 
Delaware
 
47-0248710
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
One ConAgra Drive,
Omaha, Nebraska
 
68102-5001
(Address of principal executive offices)
 
(Zip Code)
(402) 240-4000
(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  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x     No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x 
Number of shares outstanding of issuer’s common stock, as of November 24, 2013, was 420,406,577.
 



Table of Contents
 
Item 1
 
 
Unaudited Condensed Consolidated Statements of Comprehensive Income for the Thirteen and Twenty-six Weeks ended November 24, 2013 and November 25, 2012
 
 
 
Item 2
Item 3
Item 4
Item 1
Item 1A
Item 2
Item 6
 
Exhibit 10.1
 
Exhibit 12
 
Exhibit 31.1
 
Exhibit 31.2
 
Exhibit 32.1
 
Exhibit 101.1
 


Table of Contents

PART I — FINANCIAL INFORMATION
ITEM 1. 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 24,
2013
 
November 25,
2012
 
November 24,
2013
 
November 25,
2012
Net sales
$
4,713.9

 
$
3,727.2

 
$
8,911.4

 
$
7,029.5

Costs and expenses:
 
 
 
 
 
 
 
Cost of goods sold
3,699.2

 
2,865.6

 
7,065.8

 
5,299.3

Selling, general and administrative expenses
572.7

 
493.8

 
1,132.1

 
944.3

Interest expense, net
95.4

 
53.4

 
191.0

 
102.7

Income from continuing operations before income taxes and equity method investment earnings
346.6

 
314.4

 
522.5

 
683.2

Income tax expense
117.9

 
109.7

 
151.8

 
233.5

Equity method investment earnings
5.3

 
12.8

 
9.4

 
20.4

Income from continuing operations
234.0

 
217.5

 
380.1

 
470.1

Income (loss) from discontinued operations, net of tax
18.4

 
(1.0
)
 
19.5

 
(1.4
)
Net income
$
252.4

 
$
216.5

 
$
399.6

 
$
468.7

Less: Net income attributable to noncontrolling interests
3.7

 
4.9

 
6.6

 
7.0

Net income attributable to ConAgra Foods, Inc.
$
248.7

 
$
211.6

 
$
393.0

 
$
461.7

Earnings per share — basic
 
 
 
 
 
 
 
Income from continuing operations attributable to ConAgra Foods, Inc. common stockholders
$
0.55

 
$
0.52

 
$
0.89

 
$
1.14

Income (loss) from discontinued operations attributable to ConAgra Foods, Inc. common stockholders
0.04

 

 
0.04

 
(0.01
)
Net income attributable to ConAgra Foods, Inc. common stockholders
$
0.59

 
$
0.52

 
$
0.93

 
$
1.13

Earnings per share — diluted
 
 
 
 
 
 
 
Income from continuing operations attributable to ConAgra Foods, Inc. common stockholders
$
0.54

 
$
0.52

 
$
0.87

 
$
1.12

Income (loss) from discontinued operations attributable to ConAgra Foods, Inc. common stockholders
0.04

 
(0.01
)
 
0.05

 

Net income attributable to ConAgra Foods, Inc. common stockholders
$
0.58

 
$
0.51

 
$
0.92

 
$
1.12

Cash dividends declared per common share
$
0.25

 
$
0.25

 
$
0.50

 
$
0.49

See notes to the condensed consolidated financial statements.


1

Table of Contents

ConAgra Foods, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(in millions)
(unaudited)
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
November 24,
2013
 
November 25,
2012
 
November 24,
2013
 
November 25,
2012
Net income
$
252.4

 
$
216.5

 
$
399.6

 
$
468.7

Other comprehensive income (loss):
 
 
 
 
 
 
 
Net derivative adjustment, net of tax
(6.2
)
 
(0.3
)
 
39.4

 
(3.0
)
Unrealized gains on available-for-sale securities, net of tax
0.3

 

 
0.4

 

Unrealized currency translation gains (losses)
10.0

 
3.8

 
(21.0
)
 
18.6

Pension and postretirement healthcare liabilities, net of tax
1.4

 
0.2

 
1.2

 
1.1

Comprehensive income
257.9

 
220.2

 
419.6

 
485.4

Comprehensive income (loss) attributable to noncontrolling interests
5.8

 
4.8

 
(3.3
)
 
6.9

Comprehensive income attributable to ConAgra Foods, Inc.
$
252.1

 
$
215.4

 
$
422.9

 
$
478.5

See notes to the condensed consolidated financial statements.


2

Table of Contents

ConAgra Foods, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions except share data)
(unaudited)
 
 
November 24,
2013
 
May 26,
2013
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
192.7

 
$
183.9

Receivables, less allowance for doubtful accounts of $7.2 and $7.6
1,415.1

 
1,286.2

Inventories
2,776.1

 
2,390.3

Prepaid expenses and other current assets
371.7

 
515.6

Current assets held for sale

 
3.8

Total current assets
4,755.6

 
4,379.8

Property, plant and equipment
7,502.7

 
7,209.3

Less accumulated depreciation
(3,570.4
)
 
(3,358.9
)
Property, plant and equipment, net
3,932.3

 
3,850.4

Goodwill
8,455.9

 
8,444.1

Brands, trademarks and other intangibles, net
3,355.9

 
3,418.1

Other assets
286.7

 
293.5

Noncurrent assets held for sale

 
19.4

 
$
20,786.4

 
$
20,405.3

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Notes payable
$
233.7

 
$
185.0

Current installments of long-term debt
584.9

 
517.9

Accounts payable
1,783.7

 
1,501.6

Accrued payroll
179.2

 
287.2

Other accrued liabilities
948.0

 
909.6

Total current liabilities
3,729.5

 
3,401.3

Senior long-term debt, excluding current installments
8,575.2

 
8,691.0

Subordinated debt
195.9

 
195.9

Other noncurrent liabilities
2,724.1

 
2,754.1

Total liabilities
15,224.7

 
15,042.3

Commitments and contingencies (Note 13)

 

Common stockholders' equity
 
 
 
Common stock of $5 par value, authorized 1,200,000,000 shares; issued 567,907,172
2,839.7

 
2,839.7

Additional paid-in capital
1,017.5

 
1,006.2

Retained earnings
5,311.4

 
5,129.5

Accumulated other comprehensive loss
(166.2
)
 
(196.1
)
Less treasury stock, at cost, 147,500,595 and 148,442,086 common shares
(3,530.2
)
 
(3,514.9
)
Total ConAgra Foods, Inc. common stockholders' equity
5,472.2

 
5,264.4

Noncontrolling interests
89.5

 
98.6

Total stockholders' equity
5,561.7

 
5,363.0

 
$
20,786.4

 
$
20,405.3

See notes to the condensed consolidated financial statements.


3

Table of Contents

ConAgra Foods, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions)
(unaudited)
 
Twenty-six weeks ended
 
November 24,
2013
 
November 25,
2012
Cash flows from operating activities:
 
 
 
Net income
$
399.6

 
$
468.7

Income (loss) from discontinued operations
19.5

 
(1.4
)
Income from continuing operations
380.1

 
470.1

Adjustments to reconcile income from continuing operations to net cash flows from operating activities:
 
 
 
Depreciation and amortization
292.4

 
185.3

Asset impairment charges
14.8

 
4.6

Earnings of affiliates less than (in excess of) distributions
1.3

 
(5.4
)
Share-based payments expense
32.1

 
27.8

Contributions to pension plans
(10.1
)
 
(10.1
)
Pension expense
(4.5
)
 
11.4

Other items
(4.9
)
 
(11.1
)
Change in operating assets and liabilities excluding effects of business acquisitions and dispositions:
 
 
 
Accounts receivable
(133.8
)
 
(109.9
)
Inventory
(385.7
)
 
(333.7
)
Deferred income taxes and income taxes payable, net
106.6

 
(2.8
)
Prepaid expenses and other current assets
65.3

 
19.7

Accounts payable
270.0

 
226.1

Accrued payroll
(107.9
)
 
(13.3
)
Other accrued liabilities
40.1

 
21.8

Net cash flows from operating activities — continuing operations
555.8

 
480.5

Net cash flows from operating activities — discontinued operations
(0.1
)
 
(1.9
)
Net cash flows from operating activities
555.7

 
478.6

Cash flows from investing activities:
 
 
 
Additions to property, plant and equipment
(332.2
)
 
(179.1
)
Sale of property, plant and equipment
12.1

 
3.9

Purchase of businesses, net of cash acquired
(39.6
)
 
(268.6
)
Investment in equity method investee

 
(1.5
)
Net cash flows from investing activities — continuing operations
(359.7
)
 
(445.3
)
Net cash flows from investing activities — discontinued operations
54.7

 
(1.3
)
Net cash flows from investing activities
(305.0
)
 
(446.6
)
Cash flows from financing activities:
 
 
 
Net short-term borrowings
48.7

 
(40.0
)
Issuance of long-term debt

 
743.0

Repayment of long-term debt
(50.7
)
 
(34.2
)
Repurchase of ConAgra Foods, Inc. common shares
(100.0
)
 
(238.6
)
Cash dividends paid
(210.4
)
 
(195.3
)
Exercise of stock options and issuance of other stock awards
70.3

 
102.9

Other items
0.8

 
1.5

Net cash flows from financing activities
(241.3
)
 
339.3

Effect of exchange rate changes on cash and cash equivalents
(0.6
)
 
2.5

Net change in cash and cash equivalents
8.8

 
373.8

Cash and cash equivalents at beginning of period
183.9

 
103.0

Cash and cash equivalents at end of period
$
192.7

 
$
476.8

See notes to the condensed consolidated financial statements.

4

Table of Contents

ConAgra Foods, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Twenty-six Weeks ended November 24, 2013 and November 25, 2012
(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," "we," "us," or "our") annual report on Form 10-K for the fiscal year ended May 26, 2013.
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 for which we have been determined to be the primary beneficiary are included in our condensed consolidated financial statements from the date such determination is made. All significant intercompany investments, accounts, and transactions have been eliminated.
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 in prior service cost and net actuarial gains (losses) from pension (for amounts not in excess of the 10% corridor) and postretirement health care plans. We generally deem our foreign investments to be essentially permanent in nature and we do not provide for taxes on currency translation adjustments arising from converting the investment denominated in a foreign currency to U.S. dollars. When we determine that a foreign investment, as well as undistributed earnings, are no longer permanent in nature, estimated taxes are provided for the related deferred 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 24,
2013
 
November 25,
2012
 
November 24,
2013
 
November 25,
2012
Net derivative adjustment
$
(3.6
)
 
$
(0.1
)
 
$
23.3

 
$
(1.7
)
Unrealized gains on available-for-sale securities
0.1

 

 
0.2

 

Pension and postretirement healthcare liabilities
0.7

 
0.1

 
0.7

 
0.6

 
$
(2.8
)
 
$

 
$
24.2

 
$
(1.1
)

5


The following table summarizes the reclassifications from accumulated other comprehensive loss into income for the thirteen weeks and twenty-six weeks ended November 24, 2013:
 
Amount reclassified from Accumulated Other Comprehensive Loss
 
Affected Line Item in the Condensed Consolidated Statement of Earnings
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
 
Net derivative adjustment
 
 
 
 
 
     Fair value hedges
$
0.1

 
$
0.2

 
Interest expense, net
     Cash flow hedges
(0.1
)
 
(0.1
)
 
Interest expense, net
 

 
0.1

 
Total before tax
 

 

 
Income tax benefit
 
$

 
$
0.1

 
Net of tax
Amortization of pension and other postretirement benefits:

 

 

     Net prior service cost
$
(0.9
)
 
$
(1.7
)
 
Selling, general and administrative expenses
     Net actuarial losses
1.7

 
3.3

 
Selling, general and administrative expenses
 
0.8

 
1.6

 
Total before tax
 
(0.3
)
 
(0.6
)
 
Income tax benefit
 
$
0.5

 
$
1.0

 
Net of tax
Reclassifications — Certain prior year amounts have been reclassified to conform with current year presentation.
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 condensed consolidated financial statements. Actual results could differ from these estimates.
Recently Issued Accounting Standards — In July 2013, the FASB issued Accounting Standards Update ("ASU") 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists", which states that entities should present the unrecognized tax benefit as a reduction of the deferred tax asset for a net operating loss ("NOL") or similar tax loss or tax credit carryforward rather than as a liability when the uncertain tax position would reduce the NOL or other carryforward under the tax law. No new disclosures are necessary. This ASU will be effective for the first interim reporting period in fiscal 2015.

2. ACQUISITIONS
In September 2013, we acquired frozen dessert production assets from Harlan Bakeries for $39.6 million in cash. The purchase included machinery, operating systems, warehousing/storage, and other assets associated with making frozen fruit pies, cream pies, pastry shells, and loaf cakes. This business is included in the Consumer Foods segment.
In January 2013, we acquired Ralcorp Holdings, Inc. ("Ralcorp"). The total amount of consideration paid in connection with the acquisition was approximately $4.75 billion, net of cash acquired, plus assumed liabilities. We funded the merger consideration with existing cash on hand, borrowings under a new $1.5 billion senior unsecured Term Loan Facility (the "Term Loan Facility"), and net proceeds from the issuance of new senior notes and common stock. The results from our Ralcorp acquisition are reflected within our Consumer Foods, Commercial Foods, and Private Brands segments.
The following table summarizes the preliminary estimated fair values of the Ralcorp assets acquired and liabilities assumed at the acquisition date. The fair values of the assets and liabilities related to Ralcorp are subject to refinement as we complete our analyses relative to the fair values at the date of acquisition. Changes that have occurred since initial allocation have not been retrospectively applied, as the impact on reported results would not have been material.

6

Table of Contents

 
January 29,
2013
Assets acquired:
 
Cash and cash equivalents
$
320.7

Other current assets
914.7

Property, plant and equipment
982.0

Goodwill
4,374.8

Brands, trademarks and other intangibles
2,167.3

Other assets
27.7

Total assets acquired
$
8,787.2

Liabilities assumed:
 
Current liabilities
$
619.7

Noncurrent liabilities
3,096.6

Total liabilities assumed
$
3,716.3

Net assets acquired
$
5,070.9

As a result of the Ralcorp acquisition, we recognized a total of $4.37 billion of goodwill and $2.17 billion of brands, trademarks and other intangibles. Amortizable brands, trademarks and other intangibles totaled $2.03 billion. Indefinite lived brands, trademarks and other intangibles totaled $134.1 million. Of the total goodwill, $397.0 million is deductible for tax purposes. We completed our allocation of goodwill to the new operating segments in the second quarter of fiscal 2014. The allocation of goodwill to Private Brands, Consumer Foods, and Commercial Foods was $3.53 billion, $512.0 million, and $334.6 million, respectively.
In August 2012, we acquired the P.F. Chang's® and Bertolli® brands frozen meal business from Unilever for $266.9 million in cash. Products will continue to be produced by Unilever under transactions services and contract manufacturing agreements until the end of calendar year 2013. Approximately $100.1 million of the purchase price was allocated to goodwill and $91.8 million was allocated to brands, trademarks and other intangibles. The amount allocated to goodwill is deductible for tax purposes. This business is included in the Consumer Foods segment.
For each of these acquisitions, the amounts allocated to goodwill were primarily attributable to anticipated synergies, product portfolios, and other intangibles that do not qualify for separate recognition.
Under the acquisition method of accounting, the assets acquired and liabilities assumed in these acquisitions were recorded at their respective estimated fair values at the date of acquisition.
The following unaudited pro forma financial information presents the combined results of operations as if the acquisitions of Ralcorp and the P.F. Chang's and Bertolli brands' frozen meal business (collectively, the "acquirees") had occurred at the beginning of the fiscal year acquired and the preceding year. The acquirees' pre-acquisition results have been added to ConAgra Foods' historical results. The pro forma results contained in the table below include adjustments for amortization of acquired intangibles and depreciation expense, as well as related income taxes.
These pro forma results may not necessarily reflect the actual results of operations that would have been achieved, nor are they necessarily indicative of future results of operations.
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
November 25,
2012
 
November 25,
2012
Pro forma net sales
$
4,834.6

 
$
9,225.7

Pro forma net income from continuing operations
$
186.9

 
$
469.6

Pro forma net income from continuing operations per share—basic
$
0.46

 
$
1.16

Pro forma net income from continuing operations per share—diluted
$
0.45

 
$
1.14



7

Table of Contents

3. DISCONTINUED OPERATIONS
Lightlife® Operations
In the second quarter of fiscal 2014, we completed the sale of the assets of the Lightlife® business for $54.7 million in cash. This business produced and sold vegetarian-based burgers, hot dogs, and other meatless frozen and refrigerated items. The results of this business were previously reflected in the Consumer Foods segment. We reflected the results of these operations as discontinued operations for all periods presented. We recognized a pre-tax gain of $32.1 million ($19.8 million after-tax) on the sale of this business, which is classified as discontinued operations in the second quarter of fiscal 2014. The assets of the discontinued Lightlife business have been reclassified as assets held for sale within our condensed consolidated balance sheets for all periods presented prior to divestiture.
The summary comparative financial results of discontinued operations were as follows:
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
November 24, 2013
 
November 25, 2012
 
November 24, 2013
 
November 25, 2012
Net sales
$
2.0

 
$
8.2

 
$
11.2

 
$
17.8

Income (loss) from operations of discontinued operations before income taxes
32.7

 
(1.6
)
 
34.4

 
(2.3
)
Income tax expense (benefit)
14.3

 
(0.6
)
 
14.9

 
(0.9
)
Income (loss) from discontinued operations, net of tax
$
18.4

 
$
(1.0
)
 
$
19.5

 
$
(1.4
)
The assets classified as held for sale reflected in our condensed consolidated balance sheets were as follows:
 
 
May 26, 2013
Inventories
 
$
3.8

     Current assets held for sale
 
$
3.8

Property, plant and equipment, net
 
$
8.8

Goodwill
 
6.6

Brands, trademarks and other intangibles, net
 
4.0

     Noncurrent assets held for sale
 
$
19.4



4. RESTRUCTURING ACTIVITIES
Supply Chain and Administrative Efficiency Plan
We are continuing to evaluate a plan for the integration of Ralcorp and related restructuring activities and on December 18, 2013, our Board of Directors approved an expansion of the scope of the plan we previously referred to as the Ralcorp Related Restructuring Plan to include steps to optimize the entire organization’s supply chain network and improve selling, general and administrative effectiveness and efficiencies, which we now refer to as the Supply Chain and Administrative Efficiency Plan (the “SCAE Plan”), including an initial phase of the SCAE Plan (the “Initial Phase”) and related expenses for the Initial Phase. Although we remain unable to make good faith estimates relating to the entire SCAE Plan, we are reporting on actions included in the Initial Phase. This reporting addresses the estimated amounts or range of amounts for each major type of costs expected to be incurred, and the charges that have or will result in cash outflows. As a part of the Initial Phase, we expect to take actions to, among other things, continue the ongoing integration and restructuring of the operations of Ralcorp, optimize manufacturing assets in the newly created Private Brands segment, and optimize the Company’s dry distribution and mixing centers. In connection with the Initial Phase, we expect to incur approximately $200.0 million of charges, which includes $155.0 million of cash charges and $45.0 million of non-cash charges.

8

Table of Contents

We anticipate that we will recognize the following pre-tax expenses associated with the Initial Phase of the SCAE Plan (amounts include charges recognized in fiscal year 2013 and the first two quarters of fiscal year 2014):
 
Consumer Foods
 
Corporate
 
Private Brands
 
Total
Multi-employer pension costs
$

 
$
11.2

 
$

 
$
11.2

Other cost of goods sold
3.1

 

 
4.9

 
8.0

   Total cost of goods sold
$
3.1

 
$
11.2

 
$
4.9

 
$
19.2

Severance and related costs
$
3.5

 
$
30.5

 
$
13.8

 
$
47.8

Property relocation
15.8

 

 
29.3

 
45.1

Fixed asset impairment / Loss on disposal

 

 
39.3

 
39.3

Gain on sale of asset

 

 
(0.9
)
 
(0.9
)
Other selling, general and administrative expenses
11.1

 
2.1

 
36.3

 
49.5

    Total selling, general and administrative expenses
$
30.4

 
$
32.6

 
$
117.8

 
$
180.8

        Consolidated total
$
33.5

 
$
43.8

 
$
122.7

 
$
200.0

During the second quarter of fiscal 2014, we recognized the following pre-tax expenses for the SCAE Plan:
 
Consumer Foods
 
Corporate
 
Private Brands
 
Total
Cost of goods sold
$
(0.1
)
 
$

 
$

 
$
(0.1
)
Severance and related costs
$
0.6

 
$
6.3

 
$

 
$
6.9

Consulting

 
0.3

 
0.2

 
0.5

Total selling, general and administrative expenses
$
0.6

 
$
6.6

 
$
0.2

 
$
7.4

Consolidated total
$
0.5

 
$
6.6

 
$
0.2

 
$
7.3

During the first half of fiscal 2014, we recognized the following pre-tax expenses for the SCAE Plan:
 
Consumer Foods
 
Corporate
 
Private Brands
 
Total
Cost of goods sold
$
0.2

 
$

 
$

 
$
0.2

Severance and related costs
$
0.6

 
$
13.3

 
$

 
$
13.9

Consulting

 
0.3

 
0.2

 
0.5

Total selling, general and administrative expenses
$
0.6

 
$
13.6

 
$
0.2

 
$
14.4

Consolidated total
$
0.8

 
$
13.6

 
$
0.2

 
$
14.6

All of these charges have resulted or will result in cash outflows.
We recognized the following cumulative (plan inception to November 24, 2013) pre-tax expenses related to the SCAE Plan in our condensed consolidated statement of earnings:
 
Consumer Foods
 
Corporate
 
Private Brands
 
Total
Multi-employer pension costs
$

 
$
11.2

 
$

 
$
11.2

Other cost of goods sold
0.2

 

 

 
0.2

Total cost of goods sold
$
0.2

 
$
11.2

 
$

 
$
11.4

Severance and related costs
$
0.6

 
$
30.5

 
$

 
$
31.1

Consulting

 
0.3

 
0.2

 
0.5

Total selling, general and administrative expenses
$
0.6

 
$
30.8

 
$
0.2

 
$
31.6

Consolidated total
$
0.8

 
$
42.0

 
$
0.2

 
$
43.0

All of these charges have resulted or will result in cash outflows.

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Liabilities recorded for the SCAE Plan and changes therein for the first half of fiscal 2014 were as follows:
 
Balance at May 26,
2013
 
Costs Incurred
and Charged
to Expense
 
Costs Paid
or  Otherwise Settled
 
Balance at November 24,
2013
Severance
$
17.2

 
$
13.9

 
$
(11.2
)
 
$
19.9

Multi-employer pension and related costs
11.2

 
0.7

 
(0.3
)
 
11.6

Total
$
28.4

 
$
14.6

 
$
(11.5
)
 
$
31.5

Acquisition-related Restructuring Costs
During fiscal 2012, we started incurring costs in connection with actions taken to attain synergies when integrating businesses acquired prior to the third quarter of fiscal 2013. These costs, collectively referred to as "acquisition-related restructuring costs", include severance and other costs associated with consolidating facilities and administrative functions. In connection with the acquisition-related restructuring costs, we incurred pre-tax cash and non-cash charges of $17.3 million ($14.8 million in the Consumer Foods segment and $2.5 million in Corporate expenses) cumulatively since inception. In the second quarter and first half of fiscal 2014, we incurred $2.4 million and $3.3 million, respectively, in the Consumer Foods segment, primarily representing costs related to losses on the sale of buildings. In the second quarter and first half of fiscal 2013, we recognized charges of $2.2 million and $4.0 million, respectively, in relation to the acquisition-related restructuring costs. The acquisition-related restructuring costs are substantially complete.
Administrative Efficiency Plan
In August 2011, we made a decision to reorganize our Consumer Foods sales function and certain other administrative functions within our Commercial Foods and Corporate reporting segments. These actions, collectively referred to as the "Administrative Efficiency Plan", were intended to improve the efficiency and effectiveness of the affected sales and administrative functions. In connection with the Administrative Efficiency Plan, we have incurred pre-tax cash and non-cash charges of $18.7 million ($13.8 million in the Consumer Foods segment, $1.0 million in the Commercial Foods segment, and $3.9 million in Corporate expenses), primarily for severance and costs of employee relocation. In the second quarter and first half of fiscal 2013, we recognized charges of $0.9 million and $1.5 million, respectively, in relation to the Administrative Efficiency Plan. At the end of fiscal 2013, the Administrative Efficiency Plan was substantially complete.
Network Optimization Plan
During the third quarter of fiscal 2011, our Board of Directors approved a plan designed to optimize our manufacturing and distribution networks. We refer to this plan as the "Network Optimization Plan". The Network Optimization Plan consists of projects that involve, among other things, the exit of certain manufacturing facilities, the disposal of underutilized manufacturing assets, and actions designed to optimize our distribution network. In connection with the Network Optimization Plan, we have incurred pre-tax cash and non-cash charges of $76.7 million ($59.9 million in the Consumer Foods segment, $16.0 million in the Commercial Foods segment, and $0.8 million in Corporate expenses), primarily for impairments of property, plant and equipment, accelerated depreciation, severance and related costs, and plan implementation costs (e.g., consulting and employee relocation). In the second quarter and first half of fiscal 2013, we recognized charges of $0.7 million and $4.5 million, respectively, in relation to the Network Optimization Plan. At the end of fiscal 2013, the Network Optimization Plan was substantially complete.
Ralcorp Pre-acquisition Restructuring Plans
At the time of its acquisition, Ralcorp had certain initiatives underway designed to optimize its manufacturing and distribution networks. We refer to these actions and the related costs as "Ralcorp Pre-acquisition Restructuring Plans". These plans consist of projects that involve, among other things, the exit of certain manufacturing facilities. We expect to incur $4.2 million of charges that have resulted or will result in cash outflows of $2.5 million and non-cash charges of $1.7 million associated with the Ralcorp Pre-acquisition Restructure Plans. We have recognized cumulative (plan inception to November 24, 2013) pre-tax expenses of $3.9 million related to the Ralcorp Pre-acquisition Restructuring Plans. In the second quarter and first half of fiscal 2014, we recognized charges of $1.3 million and $2.6 million, respectively.


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5. LONG-TERM DEBT
During the second quarter of fiscal 2014, we repurchased $43.0 million of 4.65% senior notes due in 2043 prior to maturity, resulting in a net gain of $2.4 million.
Net interest expense consists of:
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
November 24,
2013
 
November 25,
2012
 
November 24,
2013
 
November 25,
2012
Long-term debt
$
99.4

 
$
55.3

 
$
199.1

 
$
106.9

Short-term debt
0.5

 
0.1

 
0.8

 
0.3

Interest income
(0.7
)
 
(0.7
)
 
(1.3
)
 
(1.5
)
Interest capitalized
(3.8
)
 
(1.3
)
 
(7.6
)
 
(3.0
)
 
$
95.4

 
$
53.4

 
$
191.0

 
$
102.7

Net interest expense for the second quarter and first half of fiscal 2014 was reduced by $2.4 million and $4.7 million, respectively, due to the impact of interest rate swap contracts entered into in the fourth quarter of fiscal 2010. Our net interest expense for the second quarter and first half of fiscal 2013 was reduced by $2.3 million and $4.5 million, respectively, due to the impact of the interest rate swap contracts. The interest rate swaps effectively changed our interest rates on the senior long-term debt instruments maturing in fiscal 2012 and 2014 from fixed to variable. During the second quarter of fiscal 2011, we terminated the interest rate swap contracts and received proceeds of $31.5 million. The cumulative adjustment to the fair value of the debt instruments that were hedged (the effective portion of the hedge) is being amortized as a reduction of interest expense over the remaining lives of the debt instruments (through fiscal 2014).
As a result of our acquisition of Ralcorp, the senior unsecured notes issued in exchange for senior notes issued by Ralcorp of $716.0 million and the senior notes issued by Ralcorp that remain outstanding of $33.9 million were recorded at fair value. The combined fair value adjustment on these notes was $163.8 million and is being amortized within interest expense over the life of the respective notes. Our net interest expense for the second quarter and first half of fiscal 2014 was reduced by $1.8 million and $3.4 million, respectively, as a result of this amortization.

6. VARIABLE INTEREST ENTITIES
Variable Interest Entities Consolidated
We own a 49.99% interest in Lamb Weston BSW, LLC ("Lamb Weston BSW"), a potato processing venture with Ochoa Ag Unlimited Foods, Inc. ("Ochoa"). We provide all sales and marketing services to Lamb Weston BSW. Under certain circumstances, we could be required to compensate Ochoa for lost profits resulting from significant production shortfalls ("production shortfalls"). Commencing on June 1, 2018, or on an earlier date under certain circumstances, we have a contractual right to purchase the remaining equity interest in Lamb Weston BSW from Ochoa (the "call option"). We are currently subject to a contractual obligation to purchase all of Ochoa's equity investment in Lamb Weston BSW at the option of Ochoa (the "put option"). The purchase prices under the call option and the put option (the "options") are based on the book value of Ochoa's equity interest at the date of exercise, as modified by an agreed-upon rate of return for the holding period of the investment balance. The agreed-upon rate of return varies depending on the circumstances under which any of the options are exercised. As of November 24, 2013, the price at which Ochoa had the right to put its equity interest to us was $41.9 million. This amount is presented within other noncurrent liabilities in our condensed consolidated balance sheets. We have determined that Lamb Weston BSW is a variable interest entity and that we are the primary beneficiary of the entity. Accordingly, we consolidate the financial statements of Lamb Weston BSW.
We hold a promissory note from Lamb Weston BSW, the balance of which was $36.1 million at November 24, 2013. The promissory note is due in December 2015. The promissory note is currently accruing interest at a rate of LIBOR plus 200 basis points with a floor of 3.25%. In addition, as of November 24, 2013, we provided lines of credit of up to $15.0 million to Lamb Weston BSW. Borrowings under the lines of credit bear interest at a rate of LIBOR plus 200 basis points with a floor of 3.25%. The amounts owed by Lamb Weston BSW to the Company are not reflected in our condensed consolidated balance sheets, as they are eliminated in consolidation.
Our variable interests in Lamb Weston BSW include an equity investment in the venture, the options, the promissory note, certain fees paid to us by Lamb Weston BSW for sales and marketing services, the contingent obligation related to production shortfalls, and the lines of credit advanced to Lamb Weston BSW. Our maximum exposure to loss as a result of our involvement with this venture is equal to our equity investment in the venture, the balance of the promissory note extended to the venture, the

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amount, if any, advanced under the lines of credit, and the amount, if any, by which the put option exercise price exceeds the fair value of the noncontrolling interest in Lamb Weston BSW upon its exercise. Also, in the event of a production shortfall, we could be required to compensate Ochoa for lost profits. It is not possible to determine the maximum exposure to losses from the potential exercise of the put option or from potential production shortfalls. However, we do not expect to incur material losses resulting from these potential exposures.
Due to the consolidation of this variable interest entity, we reflected in our condensed consolidated balance sheets:
 
November 24,
2013
 
May 26,
2013
Cash and cash equivalents
$
10.5

 
$
8.9

Receivables, less allowance for doubtful accounts
24.4

 
16.4

Inventories
1.4

 
1.4

Prepaid expenses and other current assets
0.1

 
0.4

Property, plant and equipment, net
53.5

 
54.8

Goodwill
18.8

 
18.8

Brands, trademarks and other intangibles, net
7.1

 
7.5

Total assets
$
115.8

 
$
108.2

Accounts payable
$
9.6

 
$
8.9

Accrued payroll
0.6

 
0.6

Other accrued liabilities
0.7

 
0.7

Other noncurrent liabilities (minority interest)
34.1

 
30.7

Total liabilities
$
45.0

 
$
40.9

The liabilities recognized as a result of consolidating the Lamb Weston BSW entity do not represent additional claims on our general assets. The creditors of Lamb Weston BSW have claims only on the assets of Lamb Weston BSW. The assets recognized as a result of consolidating Lamb Weston BSW are the property of the venture and are not available to us for any other purpose, other than as a secured lender under the promissory note and lines of credit.
Variable Interest Entities Not Consolidated
We also have variable interests in certain other entities that we have determined to be variable interest entities, but for which we are not the primary beneficiary. We do not consolidate the financial statements of these entities.
We hold a 50% interest in Lamb Weston RDO, a potato processing venture. We provide all sales and marketing services to Lamb Weston RDO. We receive a fee for these services based on a percentage of the net sales of the venture. We reflect the value of our ownership interest in this venture in other assets in our condensed consolidated balance sheets, based upon the equity method of accounting. The balance of our investment was $14.6 million and $15.2 million at November 24, 2013 and May 26, 2013, respectively, representing our maximum exposure to loss as a result of our involvement with this venture. The capital structure of Lamb Weston RDO includes owners' equity of $29.1 million and term borrowings from banks of $43.4 million as of November 24, 2013. We have determined that we do not have the power to direct the activities that most significantly impact the economic performance of this venture.
We lease certain office buildings from entities that we have determined to be variable interest entities. The lease agreements with these entities include fixed-price purchase options for the assets being leased, representing our only variable interest in these lessor entities. These leases are accounted for as operating leases, and accordingly, there are no material assets or liabilities associated with these entities included in our condensed consolidated balance sheets. We have no material exposure to loss from our variable interests in these entities. We have determined that we do not have the power to direct the activities that most significantly impact the economic performance of these entities. In making this determination, we have considered, among other items, the terms of the lease agreements, the expected remaining useful lives of the assets leased, and the capital structure of the lessor entities.


12

Table of Contents

7. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
The change in the carrying amount of goodwill for the first half of fiscal 2014 was as follows:
 
Consumer
Foods
 
Commercial
Foods
 
Private Brands
 
Total
Balance as of May 26, 2013
$
3,760.5

 
$
857.4

 
$
3,826.2

 
$
8,444.1

Currency translation and purchase accounting adjustments
(16.2
)
 
0.5

 
27.5

 
11.8

Balance as of November 24, 2013
$
3,744.3

 
$
857.9

 
$
3,853.7

 
$
8,455.9

Other identifiable intangible assets were as follows:
 
November 24, 2013
 
May 26, 2013
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Non-amortizing intangible assets
$
1,134.6

 
$

 
$
1,139.7

 
$

Amortizing intangible assets
2,399.8

 
178.5

 
2,400.4

 
122.0

 
$
3,534.4

 
$
178.5

 
$
3,540.1

 
$
122.0

Non-amortizing intangible assets are comprised of brands and trademarks.
Amortizing intangible assets, carrying a weighted average life of approximately 23 years, are principally composed of customer relationships, licensing arrangements, and intellectual property. Based on amortizing assets recognized in our condensed consolidated balance sheet as of November 24, 2013, amortization expense is estimated to average $110.1 million for each of the next five years.

8. DERIVATIVE FINANCIAL INSTRUMENTS
Our operations are exposed to market risks from adverse changes in commodity prices affecting the cost of raw materials and energy, foreign currency exchange rates, and interest rates. In the normal course of business, these risks are managed through a variety of strategies, including the use of derivatives.
Commodity and commodity index futures and option contracts are used from time to time to economically hedge commodity input prices on items such as natural gas, vegetable oils, proteins, packaging materials, dairy, grains, and electricity. Generally, we economically hedge a portion of our anticipated consumption of commodity inputs for periods of up to 36 months. We may enter into longer-term economic hedges on particular commodities, if deemed appropriate. As of November 24, 2013, we had economically hedged certain portions of our anticipated consumption of commodity inputs using derivative instruments with expiration dates through June 2015.
In order to reduce exposures related to changes in foreign currency exchange rates, we enter into forward exchange, option, or swap contracts from time to time for transactions denominated in a currency other than the applicable functional currency. This includes, but is not limited to, hedging against foreign currency risk in purchasing inventory and capital equipment, sales of finished goods, and future settlement of foreign-denominated assets and liabilities. As of November 24, 2013, we had economically hedged certain portions of our foreign currency risk in anticipated transactions using derivative instruments with expiration dates through July 2017.
From time to time, we may use derivative instruments, including interest rate swaps, to reduce risk related to changes in interest rates. This includes, but is not limited to, hedging against increasing interest rates prior to the issuance of long-term debt and hedging the fair value of our senior long-term debt.
Derivatives Designated as Cash Flow Hedges
We have entered into interest rate swap contracts to hedge the interest rate risk related to our forecasted issuance of long-term debt in 2014 (based on the anticipated refinancing of the senior long-term debt maturing at that time). We designated these interest rate swaps as cash flow hedges of the forecasted interest payments related to this debt issuance. The pre-tax unrealized loss associated with these derivatives, which is deferred in accumulated other comprehensive loss at November 24, 2013 was $41.8 million.

13

Table of Contents

The net notional amount of these interest rate derivatives at November 24, 2013 was $500.0 million. Hedge ineffectiveness for cash flow hedges may impact net earnings when a change in the value of a hedge does not entirely offset the change in the value of the underlying hedged item. We do not exclude any component of the hedging instrument’s gain or loss when assessing ineffectiveness. The ineffectiveness associated with derivatives designated as cash flow hedges from continuing operations was not material to our results of operations in any period presented.
During fiscal 2013, we entered into interest rate swap contracts to hedge a portion of the interest rate risk related to our issuance of long-term debt to help finance the acquisition of Ralcorp. We settled these contracts during the third quarter of fiscal 2013 resulting in a deferred gain of $4.2 million on senior notes maturing in 2043 and a deferred loss of $2.0 million on senior notes maturing in 2023, both recognized in other comprehensive income. These amounts are being amortized as a component of net interest expense over the lives of the related debt instruments. The unamortized amounts of the deferred gain and deferred loss at November 24, 2013 were $4.2 million and $1.9 million, respectively.
Derivatives Designated as Fair Value Hedges
During fiscal 2010, we entered into interest rate swap contracts to hedge the fair value of certain of our senior long-term debt instruments maturing in fiscal 2012 and 2014. We designated these interest rate swap contracts as fair value hedges of the debt instruments.
Changes in fair value of such derivative instruments are immediately recognized in earnings along with changes in the fair value of the items being hedged (based solely on the change in the benchmark interest rate). These gains and losses are classified within selling, general and administrative expenses.
During fiscal 2011, we terminated the interest rate swap contracts and received proceeds of $31.5 million. The cumulative adjustment to the fair value of the debt instruments being hedged is included in long-term debt and is being amortized as a reduction of interest expense over the remaining lives of the debt instruments (through fiscal 2014). At November 24, 2013, the unamortized amount was $3.8 million.
The entire change in fair value of the derivative instruments was included in our assessment of hedge effectiveness.
Economic Hedges of Forecasted Cash Flows
Many of our derivatives do not qualify for, and we do not currently designate certain commodity or foreign currency derivatives to achieve, hedge accounting treatment. We reflect realized and unrealized gains and losses from derivatives used to economically hedge anticipated commodity consumption and to mitigate foreign currency cash flow risk in earnings immediately within general corporate expense (within cost of goods sold). The gains and losses are reclassified to segment operating results in the period in which the underlying item being economically hedged is recognized in cost of goods sold.
Economic Hedges of Fair Values — Foreign Currency Exchange Rate Risk
We may use options and cross currency swaps to economically hedge the fair value of certain monetary assets and liabilities (including intercompany balances) denominated in a currency other than the functional currency. These derivatives are marked-to-market with gains and losses immediately recognized in selling, general and administrative expenses. These substantially offset the foreign currency transaction gains or losses recognized as values of the monetary assets or liabilities being economically hedged change.
Derivative Activity in Our Milling Operations
We also use derivative instruments within our milling operations, which are part of the Commercial Foods segment. Derivative instruments used to economically hedge commodity inventories and forward purchase and sales contracts within the milling operations are marked-to-market such that realized and unrealized gains and losses are immediately included in operating results. The underlying inventory and forward contracts being hedged are also marked-to-market with changes in market value recognized immediately in operating results.
For commodity derivative trading activities within our milling operations that are not intended to mitigate commodity input cost risk, the derivative instrument is marked-to-market each period with gains and losses included in net sales of the Commercial Foods segment. There were no material gains or losses from derivative trading activities in the periods being reported.
All derivative instruments are recognized on the balance sheets at fair value (refer to Note 16 for additional information related to fair value measurements). 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. In accordance with generally accepted accounting principles, we offset certain derivative asset and liability balances, as well as certain amounts representing rights to

14

Table of Contents

reclaim cash collateral and obligations to return cash collateral, where master netting agreements provide for legal right of setoff. At November 24, 2013 and May 26, 2013, amounts representing a right to reclaim cash collateral of $4.6 million and $10.2 million, respectively, were included in prepaid expenses and other current assets in our condensed consolidated balance sheets.
Derivative assets and liabilities and amounts representing a right to reclaim cash collateral or obligation to return cash collateral were reflected in our condensed consolidated balance sheets as follows: 
 
November 24,
2013
 
May 26,
2013
Prepaid expenses and other current assets
$
57.1

 
$
78.6

Other accrued liabilities
84.7

 
137.9

The following table presents our derivative assets and liabilities, at November 24, 2013, on a gross basis, prior to the offsetting of $15.6 million to total derivative assets and $20.2 million to total derivative liabilities where legal right of setoff existed:
 
Derivative Assets
 
Derivative Liabilities
 
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
Interest rate contracts
Prepaid expenses and other current assets
 
$
4.6

 
Other accrued liabilities
 
$
46.4

Total derivatives designated as hedging instruments
 
 
$
4.6

 
 
 
$
46.4

Commodity contracts
Prepaid expenses and other current assets
 
$
48.8

 
Other accrued liabilities
 
$
55.0

Foreign exchange contracts
Prepaid expenses and other current assets
 
18.3

 
Other accrued liabilities
 
3.5

Other
Prepaid expenses and other current assets
 
1.0

 
Other accrued liabilities
 

Total derivatives not designated as hedging instruments
 
 
$
68.1

 
 
 
$
58.5

Total derivatives
 
 
$
72.7

 
 
 
$
104.9

The following table presents our derivative assets and liabilities at May 26, 2013, on a gross basis, prior to the setoff of $12.5 million to total derivative assets and $22.7 million to total derivative liabilities where legal right of setoff existed:
 
Derivative Assets
 
Derivative Liabilities
 
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
Interest rate contracts
Prepaid expenses and other current assets
 
$

 
Other accrued liabilities
 
$
104.5

Total derivatives designated as hedging instruments
 
 
$

 
 
 
$
104.5

Commodity contracts
Prepaid expenses and other current assets
 
$
70.7

 
Other accrued liabilities
 
$
53.7

Foreign exchange contracts
Prepaid expenses and other current assets
 
18.4

 
Other accrued liabilities
 
2.4

Other
Prepaid expenses and other current assets
 
2.0

 
Other accrued liabilities
 

Total derivatives not designated as hedging instruments
 
 
$
91.1

 
 
 
$
56.1

Total derivatives
 
 
$
91.1

 
 
 
$
160.6


15

Table of Contents

The location and amount of gains (losses) from derivatives not designated as hedging instruments in our condensed consolidated statements of earnings were as follows:
Derivatives Not Designated as Hedging Instruments
 
Location in Condensed Consolidated Statement of Earnings of
Gain (Loss) Recognized on Derivatives
 
Amount of Gain (Loss)
Recognized on Derivatives
in Condensed Consolidated
Statement of Earnings for
the Thirteen Weeks Ended
November 24, 2013
 
November 25, 2012
Commodity contracts
 
Net sales
 
$
(1.0
)
 
$

Commodity contracts
 
Cost of goods sold
 
2.7

 
7.1

Foreign exchange contracts
 
Cost of goods sold
 
2.1

 
5.4

Commodity contracts
 
Selling, general and administrative expense
 

 
(0.1
)
Foreign exchange contracts
 
Selling, general and administrative expense
 
0.6

 
(0.5
)
Total gain from derivative instruments not designated as hedging instruments
 
 
 
$
4.4

 
$
11.9

Derivatives Not Designated as Hedging Instruments
 
Location in Condensed Consolidated Statement of Earnings of
Gain (Loss) Recognized on Derivatives
 
Amount of Gain (Loss)
Recognized on Derivatives
in Condensed Consolidated
Statement of Earnings for
the Twenty-six Weeks Ended
November 24, 2013
 
November 25, 2012
Commodity contracts
 
Net sales
 
$
(2.0
)
 
$
(0.7
)
Commodity contracts
 
Cost of goods sold
 
17.4

 
126.3

Foreign exchange contracts
 
Cost of goods sold
 
0.9

 
1.3

Commodity contracts
 
Selling, general and administrative expense
 

 
0.1

Foreign exchange contracts
 
Selling, general and administrative expense
 
1.2

 
(6.5
)
Total gain from derivative instruments not designated as hedging instruments
 
 
 
$
17.5

 
$
120.5

As of November 24, 2013, our open commodity contracts had a notional value (defined as notional quantity times market value per notional quantity unit) of $1.8 billion and $2.0 billion for purchase and sales contracts, respectively. As of May 26, 2013, our open commodity contracts had a notional value of $1.8 billion and $1.5 billion for purchase and sales contracts, respectively. The notional amount of our foreign currency forward and cross currency swap contracts as of November 24, 2013 and May 26, 2013 was $348.6 million and $359.0 million, respectively.
We enter into certain commodity, interest rate, and foreign exchange derivatives with a diversified group of counterparties. We continually monitor our positions and the credit ratings of the counterparties involved and limit the amount of credit exposure to any one party. These transactions may expose us to potential losses due to the risk of nonperformance by these counterparties. We have not incurred a material loss due to nonperformance in any period presented and do not expect to incur any such material loss. We also enter into futures and options transactions through various regulated exchanges.
At November 24, 2013, the maximum amount of loss due to the credit risk of the counterparties, had the counterparties failed to perform according to the terms of the contracts, was $51.9 million.

9. SHARE-BASED PAYMENTS
For the second quarter and first half of fiscal 2014, we recognized total stock-based compensation expense (including stock options, restricted stock units, cash-settled restricted stock units, and performance shares) of $14.9 million and $32.1 million, respectively. For the second quarter and first half of fiscal 2013, we recognized total stock-based compensation expense of $14.7 million and $27.8 million, respectively. For the first half of fiscal 2014, we granted 0.8 million restricted stock units at a weighted average grant date price of $36.53, 0.8 million cash-settled restricted stock units at a weighted average grant date price of $36.89, 3.6 million stock options at a weighted average exercise price of $36.87, and 0.4 million performance shares at a weighted average grant date price of $35.05.

16

Table of Contents

Performance shares are granted to selected executives and other key employees with vesting contingent upon meeting various Company-wide performance goals. The performance goals for the performance periods ending in fiscal 2014 and 2015 are based upon our operating cash flow return on operations, a measure of operating cash flow as a percentage of invested capital and revenue growth measured over a defined performance period, and revenue growth. The performance goals for the performance period ending in fiscal 2016 are based upon our earnings before interest, taxes, depreciation, and amortization ("EBITDA") return on capital measured over the defined performance period and revenue growth. The awards actually earned will range from zero to two hundred twenty percent of the targeted number of performance shares for each of the performance periods. A payout equal to 25% of approved target incentive is required to be paid out if we achieve a threshold level of cash flow return on operations for the performance periods ending in fiscal 2014 and 2015, and a threshold level of EBITDA return on capital for the performance period ending in fiscal 2016. Awards, if earned, will be paid in shares of our common stock. Subject to limited exceptions set forth in the performance share plan, any shares earned will be distributed at the end of the performance period. The value of the performance shares is adjusted based upon the market price of our common stock at the end of each reporting period and amortized as compensation expense over the vesting period.
The weighted average Black-Scholes assumptions for stock options granted during the first half of fiscal 2014 were as follows: 
Expected volatility (%)
21.13
Dividend yield (%)
3.24
Risk-free interest rate (%)
1.37
Expected life of stock option (years)
4.91
The weighted average value of stock options granted during the first half of fiscal 2014 was $4.71 per option based upon a Black-Scholes methodology.

10. 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 unit 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 24,
2013
 
November 25,
2012
 
November 24,
2013
 
November 25,
2012
Net income available to ConAgra Foods, Inc. common stockholders:
 
 
 
 
 
 
 
Income from continuing operations attributable to ConAgra Foods, Inc. common stockholders
$
230.3

 
$
212.6

 
$
373.5

 
$
463.1

Income (loss) from discontinued operations, net of tax, attributable to ConAgra Foods, Inc. common stockholders
18.4

 
(1.0
)
 
19.5

 
(1.4
)
Net income attributable to ConAgra Foods, Inc. common stockholders
$
248.7

 
$
211.6

 
$
393.0

 
$
461.7

Less: Increase in redemption value of noncontrolling interests in excess of earnings allocated
0.4

 
0.4

 
0.8

 
0.8

Net income available to ConAgra Foods, Inc. common stockholders
$
248.3

 
$
211.2

 
$
392.2

 
$
460.9

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic weighted average shares outstanding
421.1

 
405.9

 
421.0

 
406.5

Add: Dilutive effect of stock options, restricted stock unit awards, and other dilutive securities
5.9

 
5.8

 
6.5

 
5.3

Diluted weighted average shares outstanding
427.0

 
411.7

 
427.5

 
411.8

For the second quarter and first half of fiscal 2014, there were 3.6 million and 2.6 million stock options outstanding, respectively, that were excluded from the computation of shares contingently issuable upon the exercise of stock options because exercise prices

17

Table of Contents

exceeded the average market value of our common stock during the period. For the second quarter and first half of fiscal 2013, there were 4.9 million and 12.0 million stock options, respectively, excluded from the calculation.

11. INVENTORIES
The major classes of inventories were as follows: 
 
November 24,
2013
 
May 26,
2013
Raw materials and packaging
$
873.5

 
$
733.2

Work in process
183.9

 
118.0

Finished goods
1,577.8

 
1,398.9

Supplies and other
140.9

 
140.2

Total
$
2,776.1

 
$
2,390.3


12. INCOME TAXES
Our income tax expense from continuing operations for the second quarter of fiscal 2014 and 2013 was $117.9 million and $109.7 million, respectively. Income tax expense from continuing operations for the first half of fiscal 2014 and 2013 was $151.8 million and $233.5 million, respectively. The effective tax rate (calculated as the ratio of income tax expense to pre-tax income from continuing operations, inclusive of equity method investment earnings) from continuing operations was approximately 34% and 29% for the second quarter and first half of fiscal 2014, respectively, and 34% and 33% for the second quarter and first half of 2013, respectively. The decrease in the effective tax rate is primarily due to a change in estimate related to the tax methods used for certain international sales, a change in deferred state tax rates relating to the integration of Ralcorp activity for tax purposes, and settlement of a tax issue in Mexico that was previously reserved.
The amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, was $100.4 million as of November 24, 2013 and $100.0 million as of May 26, 2013. Included in the balance was $8.0 million as of both November 24, 2013 and May 26, 2013, for tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. Any associated interest and penalties imposed would affect the tax rate. The gross unrecognized tax benefits excluded related liabilities for gross interest and penalties of $30.2 million and $30.4 million as of November 24, 2013 and May 26, 2013, respectively.
The net amount of unrecognized tax benefits at November 24, 2013 and May 26, 2013 that, if recognized, would impact the Company's effective tax rate was $65.0 million and $61.8 million, respectively. Recognition of these tax benefits would have a favorable impact on the Company's effective tax rate.
We estimate that it is reasonably possible that the amount of gross unrecognized tax benefits will decrease by up to $8.0 million over the next twelve months due to various federal, state, and foreign audit settlements and the expiration of statutes of limitations.

13. CONTINGENCIES
In fiscal 1991, we acquired Beatrice Company ("Beatrice"). As a result of the acquisition and the significant pre-acquisition contingencies of the Beatrice businesses and its former subsidiaries, our condensed consolidated post-acquisition financial statements reflect liabilities associated with the estimated resolution of these contingencies. These include various litigation and environmental proceedings related to businesses divested by Beatrice prior to its acquisition by us. The litigation includes suits against a number of lead paint and pigment manufacturers, including ConAgra Grocery Products Company (“ConAgra Grocery Products”) and the Company as alleged successors to W. P. Fuller Co., a lead paint and pigment manufacturer owned and operated by Beatrice until 1967. Although decisions favorable to us have been rendered in Rhode Island, New Jersey, Wisconsin, and Ohio, we remain a defendant in active suits in Illinois and California. The Illinois suit seeks class-wide relief in the form of medical monitoring for elevated levels of lead in blood. In California, a number of cities and counties have joined in a consolidated action seeking abatement of the alleged public nuisance. A trial of the California case concluded in the Superior Court of California for the County of Santa Clara on September 23, 2013, and on December 16, 2013, the court issued a proposed statement of decision (the “proposed decision”) against ConAgra Grocery Products, a wholly owned subsidiary of the Company, and two other defendants. The proposed decision orders the creation of a California abatement fund in the amount of $1.1 billion. Proposed liability is joint and several. The Company disagrees with this outcome and believes ConAgra Grocery Products did not inherit any liabilities of

18

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W. P. Fuller Co. The Company will continue to vigorously defend itself in this case and will appeal the decision. The Company expects the appeal process will last several years. The absence of any linkage between ConAgra Grocery Products and W. P. Fuller Co. is a critical issue that the Company will continue to advance throughout the appeals process. It is not possible to estimate exposure in this case or the remaining case in Illinois (which is based on different legal theories). If ultimately necessary, the Company will look to its insurance policies for coverage; its carriers are on notice. However, the Company cannot absolutely assure that the final resolution of this matter will not a have a material adverse effect on its financial condition, results of operations, or liquidity.
The environmental proceedings associated with Beatrice include litigation and administrative proceedings involving Beatrice's status as a potentially responsible party at 36 Superfund, proposed Superfund, or state-equivalent sites. These sites involve locations previously owned or operated by predecessors of Beatrice that used or produced petroleum, pesticides, fertilizers, dyes, inks, solvents, PCBs, acids, lead, sulfur, tannery wastes, and/or other contaminants. Beatrice has paid or is in the process of paying its liability share at 34 of these sites. Reserves for these matters have been established based on our best estimate of the undiscounted remediation liabilities, which estimates include evaluation of investigatory studies, extent of required clean-up, the known volumetric contribution of Beatrice and other potentially responsible parties, and its experience in remediating sites. The reserves for Beatrice-related environmental matters totaled $62.6 million as of November 24, 2013, a majority of which relates to the Superfund and state-equivalent sites referenced above. We expect expenditures for Beatrice-related environmental matters to continue for up to 18 years.
In certain limited situations, we will guarantee an obligation of an unconsolidated entity. At the time in which we initially provide such a guarantee, we assess the risk of financial exposure to us under these agreements. We consider the credit-worthiness of the guaranteed party, the value of any collateral pledged against the related obligation, and any other factors that may mitigate our risk. We actively monitor market and entity-specific conditions that may result in a change of our assessment of the risk of loss under these agreements.

We guarantee certain leases and other commercial obligations resulting from the 2002 divestiture of our fresh beef and pork operations. The remaining terms of these arrangements do not exceed two years and the maximum amount of future payments we have guaranteed was $6.8 million as of November 24, 2013.
We are a party to various potato supply agreements. Under the terms of certain such potato supply agreements, we have guaranteed repayment of short-term bank loans of the potato suppliers, under certain conditions. At November 24, 2013, the amount of supplier loans we have effectively guaranteed was $21.9 million. We have not established a liability for these guarantees, as we have determined that the likelihood of our required performance under the guarantees is remote.
We were a party to a supply agreement with an onion processing company where we had guaranteed, under certain conditions, repayment of a secured loan (the "Secured Loan") of this onion supplier to the onion supplier's lender. The amount of our guarantee was $25.0 million. During the fourth quarter of fiscal 2012, we received notice from the lender that the onion supplier had defaulted on the Secured Loan and we exercised our option to purchase the Secured Loan from the lender for $40.8 million, thereby assuming first-priority secured rights to the underlying collateral for the amount of the Secured Loan, and canceling our guarantee. The onion supplier filed for bankruptcy during the fourth quarter of fiscal 2012. During the second quarter of fiscal 2013, we acquired ownership and all rights to the Secured Loan's collateral, consisting of agricultural land and a processing facility. During the third quarter of fiscal 2013, we recognized an impairment charge of $10.2 million in our Commercial Foods segment to reduce the carrying amount of these assets to their estimated fair value based upon updated appraisals. During the second quarter of fiscal 2014, we recognized an additional impairment charge of $8.9 million in our Commercial Foods segment to reduce the carrying amount of the plant assets to their estimated fair value based upon expected sales proceeds. Based on our estimate of the value of the land and processing facility, we expect to recover the remaining carrying value through our sale of these assets.
Federal income tax credits were generated related to our sweet potato production facility in Delhi, Louisiana. Third parties invested in certain of these income tax credits. We have guaranteed these third parties the face value of these income tax credits over their statutory lives, through fiscal 2017, in the event that the income tax credits are recaptured or reduced. The face value of the income tax credits was $21.2 million as of November 24, 2013. We believe the likelihood of the recapture or reduction of the income tax credits is remote, and therefore we have not established a liability in connection with this guarantee.
We are a party to a number of lawsuits and claims arising out of our ongoing business operations. Among these, there are lawsuits, claims, and matters related to the February 2007 recall of our peanut butter products. Among the matters outstanding during fiscal 2014 related to the peanut butter recall is an ongoing investigation by the U.S. Attorney's office in Georgia and the Consumer Protection Branch of the Department of Justice. In fiscal 2011, we received formal requests from the U.S. Attorney's office in Georgia seeking a variety of records and information related to the operations of our peanut butter manufacturing facility in Sylvester, Georgia. These requests relate to the June 2007 execution of a search warrant at our facility following the February 2007 recall. During fiscal 2013 and 2012, we recognized charges of $7.5 million and $17.5 million, respectively, in connection

19

Table of Contents

with this matter. We have been and continue to be engaged in ongoing discussions with the U.S. Attorney's office and the Department of Justice in regard to the investigation. We are pursuing a negotiated resolution, which we believe will likely involve a misdemeanor criminal disposition under the Food, Drug & Cosmetics Act. We believe that we have adequate reserves to cover potential financial exposure for this matter.
In addition to the investigation noted above, we were previously engaged in litigation against an insurance carrier to recover our settlement expenditures and defense costs associated with the peanut butter recall. During fiscal 2009, we recognized a charge of $24.8 million in connection with the insurance coverage dispute. During the fourth quarter of fiscal 2013, we reached a settlement on the insurance dispute, pursuant to which we were paid $25.0 million, in addition to retaining the defense costs previously reimbursed to us. We recognized the $25.0 million in income as a reduction to selling, general and administrative expenses during the fourth quarter of fiscal 2013.
In June 2009, an accidental explosion occurred at our manufacturing facility in Garner, North Carolina. This facility was the primary production facility for our Slim Jim® branded meat snacks. In June 2009, the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives announced its determination that the explosion was the result of an accidental natural gas release, and not a deliberate act. During the fourth quarter of fiscal 2011, we settled our property and business interruption claims related to the Garner accident with our insurance providers. During the fourth quarter of fiscal 2011, Jacobs Engineering Group Inc., our engineer and project manager at the site, filed a declaratory judgment action against us seeking indemnity for personal injury claims brought against it as a result of the accident. In the first quarter of fiscal 2012, our motion for summary judgment was granted and the suit was dismissed without prejudice on the basis that the suit was filed prematurely. We will continue to defend this action vigorously. Any exposure in this case is expected to be limited to the applicable insurance deductible.

In April 2010, an accidental explosion occurred at our flour milling facility in Chester, Illinois. Two employees of a subcontractor and one employee of the primary contractor, Westside Salvage ("Westside"), on the site at the time of the accident suffered injuries. Suit was initiated against Westside and the Company for personal injury claims. During the first quarter of fiscal 2013, a jury in Federal Court sitting in East St. Louis, Illinois, returned a verdict against the Company and Westside and in favor of the three employees. The verdict was in the amount of $77.5 million in compensatory damages apportioned between the Company and Westside and $100.0 million in punitive damages against the Company. Post-trial motions were filed by the Company and the trial court reduced the punitive award by approximately $7 million. We filed an appeal with the Seventh Federal Circuit Court of Appeals on the verdict and the damages in the third quarter of fiscal 2013 and continue to vigorously defend ourselves. Any exposure in this case is expected to be limited to the applicable insurance deductible, for which an amount of $3 million was accrued in a prior period.
Prior to our ownership of Ralcorp, a lawsuit was brought in the U.S. District Court for the Eastern District of Texas by Frito-Lay North America, Inc. against Ralcorp and Medallion Foods, Inc., a subsidiary of Ralcorp, alleging that certain products manufactured by Medallion infringed Frito-Lays' patents and trademarks and misappropriated trade secrets. After a jury trial during the fourth quarter of fiscal 2013, jurors delivered a verdict in favor of Medallion and Ralcorp on all claims. Frito-Lay has filed a motion for a new trial. We will continue to defend this action vigorously.
After taking into account liabilities recognized for all of the foregoing matters, management believes the ultimate resolution of such matters should not have a material adverse effect on our financial condition, results of operations, or liquidity. It is reasonably possible that a change in one of the estimates of the foregoing matters may occur in the future and, as noted, while unlikely, the lead paint matter could result in a material final judgment. Costs of legal services associated with the foregoing matters are recognized in earnings as services are provided.


20

Table of Contents

14. PENSION AND POSTRETIREMENT BENEFITS
We 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. We also sponsor postretirement plans which provide certain medical and dental benefits ("other postretirement benefits") to qualifying U.S. employees.
Components of pension benefit and other postretirement benefit costs included:
 
Pension Benefits
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
November 24,
2013
 
November 25,
2012
 
November 24,
2013
 
November 25,
2012
Service cost
$
22.2

 
$
20.1

 
$
44.5

 
$
40.3

Interest cost
37.8

 
36.6

 
75.6

 
73.2

Expected return on plan assets
(63.2
)
 
(52.2
)
 
(126.4
)
 
(104.5
)
Amortization of prior service cost
0.9

 
0.8

 
1.8

 
1.6

Curtailment loss

 

 

 
0.8

Benefit cost — Company plans
(2.3
)
 
5.3

 
(4.5
)
 
11.4

Pension benefit cost — multi-employer plans
3.6

 
2.2

 
6.7

 
4.3

Total benefit cost
$
1.3

 
$
7.5

 
$
2.2

 
$
15.7

 
Postretirement Benefits
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
November 24,
2013
 
November 25,
2012
 
November 24,
2013
 
November 25,
2012
Service cost
$
0.2

 
$
0.1

 
$
0.4

 
$
0.2

Interest cost
2.4

 
2.5

 
4.8

 
5.0

Amortization of prior service cost
(1.8
)
 
(2.1
)
 
(3.6
)
 
(4.2
)
Recognized net actuarial loss
1.7

 
1.5

 
3.4

 
3.0

Total cost
$
2.5

 
$
2.0

 
$
5.0

 
$
4.0

During the second quarter and first half of fiscal 2014, we contributed $5.6 million and $10.1 million, respectively, to our pension plans and contributed $5.2 million and $10.5 million, respectively, to our other postretirement plans. Based upon the current funded status of the plans and the current interest rate environment, we anticipate making further contributions of approximately $7.2 million to our pension plans for the remainder of fiscal 2014. We anticipate making further contributions of $15.5 million to our other postretirement plans during the remainder of fiscal 2014. These estimates are based on current tax laws, plan asset performance, and liability assumptions, which are subject to change.


21

Table of Contents

15. STOCKHOLDERS' EQUITY
The following table presents a reconciliation of our stockholders' equity accounts for the twenty-six weeks ended November 24, 2013:
 
ConAgra Foods, Inc. Stockholders' Equity
 
Common
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Noncontrolling
Interests
 
Total
Equity
Balance at May 26, 2013
567.9

 
$
2,839.7

 
$
1,006.2

 
$
5,129.5

 
$
(196.1
)
 
$
(3,514.9
)
 
$
98.6

 
$
5,363.0

Stock option and incentive plans
 
 
 
 
12.1

 
(0.5
)
 
 
 
84.7

 
 
 
96.3

Currency translation adjustment
 
 
 
 
 
 
 
 
(11.1
)
 
 
 
(9.9
)
 
(21.0
)
Issuance of treasury shares
 
 
 
 

 
 
 
 
 


 
 
 

Repurchase of common shares
 
 
 
 
 
 
 
 
 
 
(100.0
)
 
 
 
(100.0
)
Unrealized gain on securities
 
 
 
 
 
 
 
 
0.4

 
 
 
 
 
0.4

Derivative adjustment, net of reclassification adjustment
 
 
 
 
 
 
 
 
39.4

 
 
 
 
 
39.4

Activities of noncontrolling interests
 
 
 
 
(0.8
)
 
 
 
 
 
 
 
0.8

 

Pension and postretirement healthcare benefits
 
 
 
 
 
 
 
 
1.2

 
 
 
 
 
1.2

Dividends declared on common stock; $0.50 per share
 
 
 
 
 
 
(210.6
)
 
 
 
 
 
 
 
(210.6
)
Net income attributable to ConAgra Foods, Inc.
 
 
 
 
 
 
393.0

 
 
 
 
 
 
 
393.0

Balance at November 24, 2013
567.9

 
$
2,839.7

 
$
1,017.5

 
$
5,311.4

 
$
(166.2
)
 
$
(3,530.2
)
 
$
89.5

 
$
5,561.7



16. FAIR VALUE MEASUREMENTS
FASB guidance establishes a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The three levels of inputs used to measure fair value are as follows:
Level 1  — Unadjusted quoted prices in active markets for identical assets or liabilities,
Level 2  — Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets, and
Level 3  — Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing the asset or liability.
The fair values of our Level 2 derivative instruments were determined using valuation models that use market observable inputs including interest rate curves and both forward and spot prices for currencies and commodities. Derivative assets and liabilities included in Level 2 primarily represent commodity and foreign currency option and forward contacts, interest rate swaps, and cross-currency swaps.

22

Table of Contents

The following table presents our financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of November 24, 2013:
 
Level 1
 
Level 2
 
Level 3
 
Net Value
Assets:
 
 
 
 
 
 
 
Derivative assets
$
5.2

 
$
51.9

 
$

 
$
57.1

Available-for-sale securities
2.5

 

 

 
2.5

Deferred compensation assets
6.8

 

 

 
6.8

Total assets
$
14.5

 
$
51.9

 
$

 
$
66.4

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
84.7

 
$

 
$
84.7

Deferred compensation liabilities
41.3

 

 

 
41.3

Total liabilities
$
41.3

 
$
84.7

 
$

 
$
126.0

The following table presents our financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of May 26, 2013: 
 
Level 1
 
Level 2
 
Level 3
 
Net Value
Assets:
 
 
 
 
 
 
 
Derivative assets
$
13.9

 
$
64.7

 
$

 
$
78.6

Available-for-sale securities
6.1

 

 

 
6.1

Deferred compensation assets
6.9

 

 

 
6.9

Total assets
$
26.9

 
$
64.7

 
$

 
$
91.6

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
137.9

 
$

 
$
137.9

Deferred compensation liabilities
35.9

 

 

 
35.9

Total liabilities
$
35.9

 
$
137.9

 
$

 
$
173.8

Certain assets and liabilities, including long-lived assets, goodwill, asset retirement obligations, and cost and equity investments are measured at fair value on a nonrecurring basis.
During the second quarter of fiscal 2014, the $19.7 million carrying amount of the processing facility (level 3 asset) acquired from an onion supplier was written-down to its fair value of $10.8 million, resulting in an impairment charge of $8.9 million, which is included in selling, general and administrative expenses in the Commercial Foods segment (see Note 13). The fair value measurement used to determine the impairment was based upon expected sales price.
The carrying amount of long-term debt (including current installments) was $9.4 billion as of November 24, 2013 and May 26, 2013. Based on current market rates, the fair value of this debt (level 2 liabilities) at November 24, 2013 and May 26, 2013, was estimated at $9.8 billion and $10.2 billion, respectively.

17. BUSINESS SEGMENTS AND RELATED INFORMATION
As a result of the Ralcorp acquisition, we implemented organizational changes during the second quarter of fiscal 2014 that resulted in new reporting segments. We now report our operations in three reporting segments: Consumer Foods, Commercial Foods, and Private Brands. We believe that this new operating structure will enhance our focus on profitability, coordinated business execution, and resource allocation across our products. Prior periods have been reclassified to conform to the new segment presentation. Prior to this change in organizational structure, we had four operating and reportable segments.
The Consumer Foods reporting segment includes branded food products, which are sold in various retail channels, principally in North America. The products include a variety of categories (meals, entrees, condiments, sides, snacks, and desserts) across frozen, refrigerated, and shelf-stable temperature classes. The Consumer Foods reporting segment no longer includes results for store brands (store brands are now part of the recently created Private Brands segment) or foodservice (the foodservice business

23

Table of Contents

is now part of the Commercial Foods segment). The Consumer Foods reporting segment now includes international sales which were previously part of the Ralcorp Food Group segment.
The Commercial Foods reporting segment principally includes commercially branded and private brand foods and ingredients, which are sold primarily to foodservice, food manufacturing, and industrial customers. The segment's primary products include: specialty potato products, milled grain ingredients, and a variety of vegetable products, seasonings, blends, and flavors, which are sold under brands such as ConAgra Mills®, Lamb Weston®, and Spicetec Flavors & Seasonings®, as well as frozen bakery and ingredient products. The Commercial Foods reporting segment now includes foodservice results which were previously part of the Consumer Foods segment and frozen bakery foodservice results which were previously part of the Ralcorp Frozen Bakery Products segment.
The Private Brands reporting segment principally includes private brand and customized food products that are sold in various retail channels, primarily in North America. The products include a variety of categories including: cereal products; snacks, sauces, and spreads; pasta; and frozen bakery products. The Private Brands reporting segment is newly created and includes a significant portion of the results of the former Ralcorp businesses and the store brands results which were previously part of the Consumer Foods segment.
We do not aggregate operating segments when determining our reporting segments.
Intersegment sales have been recorded at amounts approximating market. Operating profit for each of the segments is based on net sales less all identifiable operating expenses. General corporate expense, net interest expense, and income taxes have been excluded from segment operations.
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
November 24,
2013
 
November 25,
2012
 
November 24,
2013
 
November 25,
2012
Net sales
 
 
 
 
 
 
 
Consumer Foods
$
2,016.1

 
$
2,023.5

 
$
3,665.5

 
$
3,690.3

Commercial Foods
1,574.0

 
1,526.3

 
3,107.9

 
2,988.9

Private Brands
1,123.8

 
177.4

 
2,138.0

 
350.3

Total net sales
$
4,713.9

 
$
3,727.2

 
$
8,911.4

 
$
7,029.5

Operating profit
 
 
 
 
 
 
 
Consumer Foods
$
288.9

 
$
256.7

 
$
456.0

 
$
465.4

Commercial Foods
169.2

 
194.7

 
330.3

 
355.7

Private Brands
89.4

 
7.0

 
156.4

 
13.9

Total operating profit
$
547.5

 
$
458.4

 
$
942.7

 
$
835.0

Equity method investment earnings
 
 
 
 
 
 
 
Consumer Foods
$
0.5

 
$
0.5

 
$
0.9

 
$
0.6

Commercial Foods
4.8

 
12.3

 
8.5

 
19.8

Total equity method investment earnings
$
5.3

 
$
12.8

 
$
9.4

 
$
20.4

Operating profit plus equity method investment earnings
 
 
 
 
 
 
 
Consumer Foods
$
289.4

 
$
257.2

 
$
456.9

 
$
466.0

Commercial Foods
174.0

 
207.0

 
338.8

 
375.5

Private Brands
89.4

 
$
7.0

 
156.4

 
13.9

Total operating profit plus equity method investment earnings
$
552.8

 
$
471.2

 
$
952.1

 
$
855.4

General corporate expense
$
105.5

 
$
90.6

 
$
229.2

 
$
49.1

Interest expense, net
95.4

 
53.4

 
191.0

 
102.7

Income tax expense
117.9

 
109.7

 
151.8

 
233.5

Income from continuing operations
$
234.0

 
$
217.5

 
$
380.1

 
$
470.1

Less: Net income attributable to noncontrolling interests
3.7

 
4.9

 
6.6

 
7.0

Income from continuing operations attributable to ConAgra Foods, Inc.
$
230.3

 
$
212.6

 
$
373.5