UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended August 28, 2011

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.

Delaware (State or other jurisdiction of incorporation or organization)		47-0248710 (I.R.S. Employer Identification No.)

One ConAgra Drive, Omaha, Nebraska (Address of principal executive offices)		68102-5001 (Zip Code)

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

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 þ No o

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 þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a 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 o No þ

Number of shares outstanding of issuer’s common stock, as of September 25, 2011, was 414,497,096.

 

 

Table of Contents

Part I. FINANCIAL INFORMATION
Item 1 Financial Statements			3
Unaudited Condensed Consolidated Statements of Earnings for the Thirteen Weeks ended August 28, 2011 and August 29, 2010			3
Unaudited Condensed Consolidated Statements of Comprehensive Income for the Thirteen Weeks ended August 28, 2011 and August 29, 2010			4
Unaudited Condensed Consolidated Balance Sheets as of August 28, 2011 and May 29, 2011			5
Unaudited Condensed Consolidated Statements of Cash Flows for the Thirteen Weeks ended August 28, 2011 and August 29, 2010			6
Notes to Unaudited Condensed Consolidated Financial Statements			7
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3 Quantitative and Qualitative Disclosures About Market Risk			34
Item 4 Controls and Procedures			35
Part II. OTHER INFORMATION
Item 1 Legal Proceedings			37
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 6 Exhibits			37
Signatures			38
Exhibit Index			39
EX-10.1
EX-10.2
EX-12
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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
		August 28,				August 29,
		2011				2010
Net sales		$	3,072.0			$	2,804.3
Costs and expenses:
Cost of goods sold			2,473.3				2,153.0
Selling, general and administrative expenses			422.9				410.0
Interest expense, net			52.9				37.3
Income from continuing operations before income taxes and equity method investment earnings			122.9				204.0
Income tax expense			43.6				66.9
Equity method investment earnings			6.2				6.2
Income from continuing operations			85.5				143.3
Income from discontinued operations, net of tax			0.1				3.0
Net income		$	85.6			$	146.3
Less: Net income (loss) attributable to noncontrolling interests			0.3				(0.1	)
Net income attributable to ConAgra Foods, Inc.		$	85.3			$	146.4
Earnings per share — basic
Income from continuing operations attributable to ConAgra Foods, Inc. common stockholders		$	0.21			$	0.32
Income from discontinued operations attributable to ConAgra Foods, Inc. common stockholders			—				0.01
Net income attributable to ConAgra Foods, Inc. common stockholders		$	0.21			$	0.33
Earnings per share — diluted
Income from continuing operations attributable to ConAgra Foods, Inc. common stockholders		$	0.20			$	0.32
Income from discontinued operations attributable to ConAgra Foods, Inc. common stockholders			—				0.01
Net income attributable to ConAgra Foods, Inc. common stockholders		$	0.20			$	0.33
Cash dividends declared per common share		$	0.23			$	0.20

     See notes to the condensed consolidated financial statements.

ConAgra Foods, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income
(in millions)
(unaudited)

		Thirteen weeks ended
		August 28,				August 29,
		2011				2010
Net income		$	85.6			$	146.3
Other comprehensive income (loss):
Derivative adjustments, net of tax			(31.9	)			0.1
Unrealized gains and losses on available-for-sale securities, net of tax:
Unrealized net holding losses			(0.1	)			(0.2	)
Currency translation adjustment:
Unrealized translation gains (losses)			(9.9	)			4.9
Pension and postretirement healthcare liabilities, net of tax			6.1				2.3
Comprehensive income			49.8				153.4
Comprehensive income (loss) attributable to noncontrolling interests			0.3				(0.1	)
Comprehensive income attributable to ConAgra Foods, Inc.		$	49.5			$	153.5

     See notes to the condensed consolidated financial statements.

ConAgra Foods, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets
(in millions except share data)
(unaudited)

		August 28,				May 29,
		2011				2011
ASSETS
Current assets
Cash and cash equivalents		$	1,095.2			$	972.4
Receivables, less allowance for doubtful accounts of $7.7 and $7.8			922.0				849.4
Inventories			1,815.3				1,803.4
Prepaid expenses and other current assets			261.1				274.1
Total current assets			4,093.6				3,899.3
Property, plant and equipment			5,708.0				5,698.1
Less accumulated depreciation			(3,070.0	)			(3,028.0	)
Property, plant and equipment, net			2,638.0				2,670.1
Goodwill			3,609.0				3,609.4
Brands, trademarks and other intangibles, net			989.3				936.3
Other assets			280.8				293.6
		$	11,610.7			$	11,408.7
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current installments of long-term debt		$	376.8			$	363.5
Accounts payable			1,165.5				1,083.7
Accrued payroll			125.7				124.1
Other accrued liabilities			666.2				554.3
Total current liabilities			2,334.2				2,125.6
Senior long-term debt, excluding current installments			2,659.8				2,674.4
Subordinated debt			195.9				195.9
Other noncurrent liabilities			1,690.5				1,704.3
Total liabilities			6,880.4				6,700.2
Commitments and contingencies (Note 12)
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			880.4				899.1
Retained earnings			4,842.3				4,853.6
Accumulated other comprehensive loss			(258.5	)			(222.7	)
Less treasury stock, at cost, 153,586,405 and 157,412,899 common shares			(3,580.5	)			(3,668.2	)
Total ConAgra Foods, Inc. common stockholders’ equity			4,723.4				4,701.5
Noncontrolling interests			6.9				7.0
Total stockholders’ equity			4,730.3				4,708.5
		$	11,610.7			$	11,408.7

     See notes to the condensed consolidated financial statements.

ConAgra Foods, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows
(in millions)
(unaudited)

		Thirteen weeks ended
		August 28,				August 29,
		2011				2010
Cash flows from operating activities:
Net income		$	85.6			$	146.3
Income from discontinued operations			0.1				3.0
Income from continuing operations			85.5				143.3
Adjustments to reconcile income from continuing operations to net cash flows from operating activities:
Depreciation and amortization			91.5				85.8
Asset impairment charges			7.1				0.2
Insurance recoveries recognized related to Garner accident			—				(1.3	)
Advances from insurance carriers related to Garner accident			—				3.0
Distributions from affiliates less than current earnings			(2.2	)			(2.6	)
Contributions to pension plans			(3.0	)			(110.1	)
Share-based payments expense			12.3				8.4
Non-cash interest income on payment-in-kind notes			—				(18.5	)
Other items			(6.7	)			24.0
Change in operating assets and liabilities before effects of business acquisitions and dispositions:
Accounts receivable			(63.1	)			(2.2	)
Inventory			(12.1	)			(148.3	)
Prepaid expenses and other current assets			12.9				37.8
Accounts payable			108.9				81.1
Accrued payroll			1.6				(131.9	)
Other accrued liabilities			79.3				135.5
Net cash flows from operating activities — continuing operations			312.0				104.2
Net cash flows from operating activities — discontinued operations			3.1				4.6
Net cash flows from operating activities			315.1				108.8
Cash flows from investing activities:
Additions to property, plant and equipment			(95.6	)			(129.1	)
Sale of property, plant and equipment			3.8				1.0
Advances from insurance carriers related to Garner accident			—				2.5
Purchase of businesses and intangible assets			(57.5	)			(129.7	)
Net cash flows from investing activities — continuing operations			(149.3	)			(255.3	)
Net cash flows from investing activities — discontinued operations			—				248.9
Net cash flows from investing activities			(149.3	)			(6.4	)
Cash flows from financing activities:
Repayment of long-term debt			(2.5	)			(38.4	)
Repurchase of ConAgra Foods common shares			—				(100.0	)
Cash dividends paid			(94.3	)			(88.5	)
Exercise of stock options and issuance of other stock awards			55.7				10.9
Other items			—				(0.3	)
Net cash flows from financing activities — continuing operations			(41.1	)			(216.3	)
Net cash flows from financing activities — discontinued operations			—				(0.1	)
Net cash flows from financing activities			(41.1	)			(216.4	)
Effect of exchange rate changes on cash and cash equivalents			(1.9	)			1.7
Net change in cash and cash equivalents			122.8				(112.3	)
Cash and cash equivalents at beginning of period			972.4				953.2
Cash and cash equivalents at end of period		$	1,095.2			$	840.9

     See notes to the condensed consolidated financial statements.

ConAgra Foods, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements
For the Thirteen Weeks ended August 28, 2011 and August 29, 2010
(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 29, 2011.

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 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. We reclassified $0.1 million of foreign currency translation net losses to net income due to the disposal or substantial liquidation of foreign subsidiaries in the first quarter of fiscal 2011.

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

		Thirteen weeks ended
		August 28,				August 29,
		2011				2010
Net derivative adjustment		$	(18.8	)		$	—
Unrealized losses on available-for-sale securities			(0.1	)			(0.1	)
Pension and postretirement healthcare liabilities			3.7				1.5
		$	(15.2	)		$	1.4

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.

2. DISCONTINUED OPERATIONS AND DIVESTITURES

Discontinued Operations

Frozen Handhelds Operations

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

Gilroy Foods & Flavors^TM Operations

During the first quarter of fiscal 2011, we completed the sale of substantially all of the assets of Gilroy Foods & Flavors™ dehydrated garlic, onion, capsicum and Controlled Moisture™, GardenFrost^®, Redi-Made™, and fresh vegetable operations for $245.7 million in cash. We reflected the results of these operations as discontinued operations for all periods presented.

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

Summary of Operational Results

The summary comparative financial results of discontinued operations were as follows:

		Thirteen weeks ended
		August 28,				August 29,
		2011				2010
Net sales		$	0.5			$	54.0
Income from operations of discontinued operations before income taxes		$	0.1			$	5.2
Net gain from disposal of businesses			—				0.9
Income before income taxes			0.1				6.1
Income tax expense			—				(3.1	)
Income from discontinued operations, net of tax		$	0.1			$	3.0

Operating results from discontinued operations for the thirteen weeks ended August 29, 2010 reflected the reversal of an accrual of $3.0 million related to certain legal matters of divested businesses.

There were no assets and liabilities classified as held for sale as of August 28, 2011 and May 29, 2011.

3. ACQUISITIONS

In the first quarter of fiscal 2011, we acquired the assets of American Pie, LLC (“American Pie”) for $131.0 million in cash plus assumed liabilities. American Pie is a manufacturer of frozen fruit pies, thaw and serve pies, fruit cobblers, and pie crusts under the Marie Callender’s^® and Claim Jumper^® trade names, as well as frozen dinners, pot pies, and appetizers under the Claim Jumper^® trade name. Approximately $51.5 million of the purchase price was allocated to goodwill and $61.3 million was allocated to brands, trademarks and other intangibles. The amount allocated to goodwill is deductible for income tax purposes and is primarily attributable to American Pie’s product portfolio, as well as anticipated synergies and other intangibles that do not qualify for separate recognition. This business is included in the Consumer Foods segment.

4. 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 the other equity owner of Lamb Weston BSW 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 August 28, 2011, the price at which Ochoa had the right to put its equity interest to us was $31.3 million. This amount is presented within other 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.

As of August 28, 2011, 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%. In the first quarter of fiscal 2011, we repaid $35.4 million of bank borrowings of Lamb Weston BSW and took assignment of a promissory note from the joint venture, the balance of which was $36.1 million at August 28, 2011. 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%. The amounts owed by Lamb Weston BSW to the Company are not reflected in our 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 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 on, or after, the put option exercise date. Also, in the event of a production shortfall, we could be required to compensate the other equity owner of Lamb Weston BSW 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 exposures.

We also consolidate the assets and liabilities of several entities from which we lease corporate aircraft. Each of these entities has been determined to be a variable interest entity and we have been determined to be the primary beneficiary of each of these entities. Under the terms of the aircraft leases, we provide guarantees to the owners of these entities of a minimum residual value of the aircraft at the end of the lease term. We also have fixed price purchase options on the aircraft leased from these entities. Our maximum exposure to loss from our involvement with these entities is limited to the difference between the fair value of the leased aircraft and the amount of the residual value guarantees at the time we terminate the leases (the leases expire between December 2011 and October 2012). The total amount of the residual value guarantees for these aircraft at the end of the respective lease terms is $38.4 million.

Due to the consolidation of these variable interest entities, we reflected in our condensed consolidated balance sheets:

		August 28,				May 29,
		2011				2011
Cash and cash equivalents		$	13.6			$	5.3
Receivables, less allowance for doubtful accounts			13.5				18.9
Inventories			1.6				1.5
Prepaid expenses and other current assets			—				0.3
Property, plant and equipment, net			90.6				91.8
Goodwill			18.8				18.8
Brands, trademarks and other intangibles, net			8.9				9.0
Total assets		$	147.0			$	145.6
Current installments of long-term debt		$	27.8			$	13.4
Accounts payable			14.4				13.1
Accrued payroll			0.6				0.4
Other accrued liabilities			1.0				0.7
Senior long-term debt, excluding current installments			14.8				30.1
Other noncurrent liabilities (minority interest)			26.7				26.7
Total liabilities		$	85.3			$	84.4

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 $13.0 million and $13.6 million at August 28, 2011 and May 29, 2011, respectively, representing our maximum exposure to loss as a result of our involvement with this venture. The capital structure of Lamb Weston RDO includes owners’ equity of $25.9 million and term borrowings from banks of $43.5 million as of August 28, 2011. 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.

5. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS

The change in the carrying amount of goodwill for the first quarter of fiscal 2012 was as follows:

		Consumer				Commercial
		Foods				Foods				Total
Balance as of May 29, 2011		$	3,479.7			$	129.7			$	3,609.4
Currency Translation			(0.5	)			0.1				(0.4	)
Balance as of August 28, 2011		$	3,479.2			$	129.8			$	3,609.0

Other identifiable intangible assets were as follows:

		August 28, 2011								May 29, 2011
		Gross								Gross
		Carrying				Accumulated				Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
Non-amortizing intangible assets		$	828.7			$	—			$	771.2			$	—
Amortizing intangible assets			214.0				53.4				213.9				48.8
		$	1,042.7			$	53.4			$	985.1			$	48.8

Non-amortizing intangible assets are comprised of brands and trademarks.

Amortizing intangible assets, carrying a weighted average life of approximately 13 years, are principally composed of licensing arrangements, customer relationships, and intellectual property. Based on amortizing assets recognized in our condensed consolidated balance sheet as of August 28, 2011, amortization expense is estimated to average approximately $16.3 million for each of the next five years.

In the first quarter of fiscal 2012, we acquired the Marie Callender’s^® brand trademarks for $57.5 million. This intangible asset is presented in the Consumer Foods segment.

6. 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, 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 August 28, 2011, we had economically hedged certain portions of our anticipated consumption of commodity inputs using derivative instruments with expiration dates through December 2012.

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 August 28, 2011, we had economically hedged certain portions of our foreign currency risk in anticipated transactions using derivative instruments with expiration dates through May 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 unrealized loss associated with these derivatives, which is deferred in accumulated other comprehensive loss at August 28, 2011, was $62.5 million.

The net notional amount of these interest rate derivatives at August 28, 2011 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. Depending on the nature of the hedge, ineffectiveness is recognized within cost of goods sold or selling, general and administrative expenses. 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.

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 the 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 the first quarter of fiscal 2011, we recognized a net gain of $21.9 million on the interest rate swap contracts and a loss of $19.3 million on the senior long-term debt.

We terminated the interest rate swap contracts during the second quarter of fiscal 2011. As a result of this termination, we received proceeds of $31.5 million. The cumulative adjustment to the fair value of the debt instruments being hedged, $34.8 million, 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 August 28, 2011, the unamortized amount was $24.5 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 on the monetary assets or liabilities being economically hedged.

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 sheet at fair value. 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 the Financial Accounting Standards Board (“FASB”) guidance, we offset certain derivative asset and liability balances, as well as certain amounts representing rights to reclaim cash collateral and obligations to return cash collateral, where legal right of setoff exists. At August 28, 2011 and May 29, 2011, amounts representing a right to reclaim cash collateral of $20.9 million and $7.8 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:

		August 28,				May 29,
		2011				2011
Prepaid expenses and other current assets		$	77.0			$	71.5
Other accrued liabilities			121.5				92.2

The following table presents our derivative assets and liabilities, on a gross basis, prior to the offsetting of amounts where legal right of setoff exists at August 28, 2011:

		Derivative Assets						Derivative Liabilities
		Balance Sheet						Balance Sheet
		Location		Fair Value				Location		Fair Value
Interest rate contracts		Prepaid expenses and other current assets		$	—			Other accrued liabilities		$	62.5
Total derivatives designated as hedging instruments				$	—					$	62.5
Commodity contracts		Prepaid expenses and other current assets		$	79.3			Other accrued liabilities		$	60.8
Foreign exchange contracts		Prepaid expenses and other current assets			2.4			Other accrued liabilities			25.3
Other		Prepaid expenses and other current assets			1.7			Other accrued liabilities			0.2
Total derivatives not designated as hedging instruments				$	83.4					$	86.3
Total derivatives				$	83.4					$	148.8

The following table presents our derivative assets and liabilities, on a gross basis, prior to the offsetting of amounts where legal right of setoff exists at May 29, 2011:

		Derivative Assets						Derivative Liabilities
		Balance Sheet						Balance Sheet
		Location		Fair Value				Location		Fair Value
Interest rate contracts		Prepaid expenses and other current assets		$	—			Other accrued liabilities		$	11.8
Total derivatives designated as hedging instruments				$	—					$	11.8
Commodity contracts		Prepaid expenses and other current assets		$	85.4			Other accrued liabilities		$	84.4
Foreign exchange contracts		Prepaid expenses and other current assets			1.0			Other accrued liabilities			19.2
Other		Prepaid expenses and other current assets			0.7			Other accrued liabilities			0.2
Total derivatives not designated as hedging instruments				$	87.1					$	103.8
Total derivatives				$	87.1					$	115.6

The location and amount of gains (losses) from derivatives not designated as hedging instruments in our condensed consolidated statements of earnings were as follows:

		Location in
		Condensed Consolidated
		Statement
		of Earnings of Gain		Amount of Gain (Loss) Recognized on Derivatives in Condensed
Derivatives Not Designated as Hedging		(Loss) Recognized		Consolidated Statement of Earnings for the Thirteen Weeks Ended
Instruments		on Derivatives		August 28, 2011				August 29, 2010
Commodity contracts		Cost of goods sold		$	42.5			$	(25.7	)
Foreign exchange contracts		Cost of goods sold			(7.0	)			(9.7	)
Foreign exchange contracts		Selling, general and administrative expenses			0.3				(0.3	)
Total gain (loss) from derivative instruments not designated as hedging instruments				$	35.8			$	(35.7	)

As of August 28, 2011, our open commodity contracts had a notional value (defined as notional quantity times market value per notional quantity unit) of $981.4 million and $973.6 million for purchase and sales contracts, respectively. As of May 29, 2011, our open commodity contracts had a notional value of $1.0 billion and $1.2 billion for purchase and sales contracts, respectively. The notional amount of our foreign currency forward and cross currency swap contracts as of both August 28, 2011 and May 29, 2011 was $328.8 million and $292.7 million, respectively. In addition, we held foreign currency option collar contracts with notional amounts of $52.2 million and $86.4 million as of August 28, 2011 and May 29, 2011, 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 August 28, 2011, 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 $59.8 million.

7. SHARE-BASED PAYMENTS

For the thirteen weeks ended August 28, 2011, we recognized total stock-based compensation expense (including stock options, restricted stock units, and performance shares) of $12.3 million. For the thirteen weeks ended August 29, 2010, we recognized total stock-based compensation expense of $8.4 million. During the first quarter of fiscal 2012, we granted 1.7 million restricted stock units at a weighted average grant date price of $26.11, 4.1 million stock options at a weighted average exercise price of $26.15, and 0.5 million performance shares at a weighted average grant date price of $26.15.

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 2012 and fiscal 2013 are based upon

our earnings before interest and taxes and our return on average invested capital measured over a defined performance period. The performance goals for the performance period ending in fiscal 2014 are based upon our operating cash flow return on operations, a measure of operating cash flow as a percentage of invested capital measured over a defined performance period, and revenue growth. The awards actually earned will range from zero to three hundred percent of the targeted number of performance shares for the performance period ending in fiscal 2012; from zero to two hundred percent of the targeted number of performance shares for the performance period ending in fiscal 2013; and from zero to two hundred twenty percent of the targeted number of performance shares for the performance period ending in fiscal 2014. For the performance period ending in fiscal 2014, 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. 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 quarter of fiscal 2012 were as follows:

Expected volatility (%)			22.89
Dividend yield (%)			3.97
Risk-free interest rate (%)			1.38
Expected life of stock option (years)			4.75

The weighted average value of stock options granted during the first quarter of fiscal 2012 was $3.26 per option, based upon a Black-Scholes methodology.

8. EARNINGS PER SHARE

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

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

		Thirteen weeks ended
		August 28,				August 29,
		2011				2010
Net income attributable to ConAgra Foods, Inc. common stockholders:
Income from continuing operations attributable to ConAgra Foods, Inc. common stockholders		$	85.2			$	143.4
Income from discontinued operations, net of tax, attributable to ConAgra Foods, Inc. common stockholders			0.1				3.0
Net income attributable to ConAgra Foods, Inc. common stockholders			85.3				146.4
Less: Increase in redemption value of noncontrolling interests in excess of earnings allocated			0.3				1.4
Net income attributable to ConAgra Foods, Inc. common stockholders		$	85.0			$	145.0
Weighted average shares outstanding:
Basic weighted average shares outstanding			412.7				441.5
Add: Dilutive effect of stock options, restricted stock awards, and other dilutive securities			5.4				4.5
Diluted weighted average shares outstanding			418.1				446.0

For the thirteen weeks ended August 28, 2011, there were 13.5 million stock options outstanding that were excluded from the computation of shares contingently issuable upon exercise of the stock options because exercise prices exceeded the average market value of our common stock during the period. For the thirteen weeks ended August 29, 2010, there were 35.7 million stock options excluded from the calculation.

The decline in the diluted weighted average shares outstanding from the first quarter of fiscal 2011 resulted principally from our repurchase of 36.1 million shares during fiscal 2011 under our share repurchase plan.

9. INVENTORIES

The major classes of inventories were as follows:

		August 28,				May 29,
		2011				2011
Raw materials and packaging		$	575.8			$	639.5
Work in process			106.8				83.1
Finished goods			1,047.1				992.9
Supplies and other			85.6				87.9
Total		$	1,815.3			$	1,803.4

10. RESTRUCTURING

Administrative Efficiency Restructuring Plan

In August 2011, we made a decision to reorganize our Consumer Foods sales function and certain other administrative functions within our Commercial Foods and Corporate reporting segments. These actions, collectively referred to as the Administrative Efficiency Restructuring Plan (the “Administrative Efficiency Plan”), are intended to improve the efficiency and effectiveness of the affected sales and administrative functions. In connection with the Administrative Efficiency Plan, we expect to incur approximately $21.6 million of charges, primarily for severance and costs of employee relocation. In the first quarter of fiscal 2012, we recognized charges of approximately $11.3 million in relation to the Administrative Efficiency Plan.

We anticipate that we will recognize the following pre-tax expenses associated with the Administrative Efficiency Plan in the fiscal 2012 to 2013 timeframe (amounts include charges recognized in the first quarter of fiscal 2012):

		Consumer				Commercial
		Foods				Foods				Corporate				Total
Accelerated depreciation		$	—			$	—			$	1.4			$	1.4
Severance and related costs			5.3				—				3.3				8.6
Other, net			10.3				1.1				0.2				11.6
Total selling, general and administrative expenses			15.6				1.1				4.9				21.6
Consolidated total		$	15.6			$	1.1			$	4.9			$	21.6

Included in the above estimates are $20.2 million of charges that have resulted or will result in cash outflows and $1.4 million of non-cash charges.

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

		Consumer				Commercial
		Foods				Foods				Corporate				Total
Accelerated depreciation		$	—			$	—			$	0.4			$	0.4
Severance and related costs			5.3				—				3.0				8.3
Other, net			2.2				0.4				—				2.6
Total selling, general and administrative expenses			7.5				0.4				3.4				11.3
Consolidated total		$	7.5			$	0.4			$	3.4			$	11.3

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

		Balance at				Costs Incurred												Balance at
		May 29,				and Charged				Costs Paid				Changes in				August 28,
		2011				to Expense				or Otherwise Settled				Estimates				2011
Severance and related costs		$	—			$	8.3			$	(0.1	)		$	—			$	8.2
Plan implementation costs			—				2.6				(0.2	)			—				2.4
Total		$	—			$	10.9			$	(0.3	)		$	—			$	10.6

Network Optimization Plan

During the third quarter of fiscal 2011, our Board of Directors approved a plan recommended by executive management designed to optimize our manufacturing and distribution networks. 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. The Network Optimization Plan is expected to be implemented by the end of fiscal 2013 and is intended to improve the efficiency of our manufacturing operations and reduce costs.

In connection with the Network Optimization Plan, we expect to incur pre-tax cash and non-cash charges for asset impairments, accelerated depreciation, severance, relocation, and site closure costs of $68.3 million. We have recognized, and/or expect to recognize, expenses associated with the Network Optimization Plan, including but not limited to, impairments of property, plant and equipment, accelerated depreciation, severance and related costs, and plan implementation costs (e.g., consulting, employee relocation, etc.). We anticipate that we will recognize the following pre-tax expenses associated with the Network Optimization Plan in the fiscal 2011 to fiscal 2013 timeframe (amounts include charges recognized in fiscal 2011 and in the first quarter of fiscal 2012):

		Consumer				Commercial
		Foods				Foods				Total
Accelerated depreciation		$	17.4			$	—			$	17.4
Inventory write-offs and related costs			3.1				0.3				3.4
Total cost of goods sold			20.5				0.3				20.8
Asset impairment			10.6				13.8				24.4
Severance and related costs			8.0				0.1				8.1
Other, net			12.3				2.7				15.0
Total selling, general and administrative expenses			30.9				16.6				47.5
Consolidated total		$	51.4			$	16.9			$	68.3

Included in the above estimates are $25.4 million of charges that have resulted or will result in cash outflows and $42.9 million of non-cash charges.

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

		Consumer				Commercial
		Foods				Foods				Total
Accelerated depreciation		$	2.7			$	—			$	2.7
Inventory write-offs and related costs			0.4				—				0.4
Total cost of goods sold			3.1				—				3.1
Asset impairment			2.1				3.4				5.5
Severance and related costs			0.6				—				0.6
Other, net			1.2				0.4				1.6
Total selling, general and administrative expenses			3.9				3.8				7.7
Consolidated total		$	7.0			$	3.8			$	10.8

We recognized the following cumulative (plan inception to August 28, 2011) pre-tax charges related to the Network Optimization Plan in our condensed consolidated statement of earnings:

		Consumer				Commercial
		Foods				Foods				Total
Accelerated depreciation		$	7.8			$	—			$	7.8
Inventory write-offs and related costs			0.6				0.3				0.9
Total cost of goods sold			8.4				0.3				8.7
Asset impairment			10.6				13.8				24.4
Severance and related costs			5.7				0.1				5.8
Other, net			1.9				0.4				2.3
Total selling, general and administrative expenses			18.2				14.3				32.5
Consolidated total		$	26.6			$	14.6			$	41.2

Liabilities recorded for the various initiatives and changes therein for the first quarter of fiscal 2012 under the Network Optimization Plan were as follows:

		Balance at				Costs Incurred												Balance at
		May 29,				and Charged				Costs Paid				Changes in				August 28,
		2011				to Expense				or Otherwise Settled				Estimates				2011
Severance and related costs		$	4.8			$	0.7			$	(0.3	)		$	—			$	5.2
Plan implementation costs			—				1.6				(1.5	)			—				0.1
Total		$	4.8			$	2.3			$	(1.8	)		$	—			$	5.3

2010 Restructuring Plan

During the fourth quarter of fiscal 2010, our Board of Directors approved a plan recommended by executive management related to the long-term production of our meat snack products. The plan provides for the closure of our meat snacks production facility in Garner, North Carolina, and the movement of production to our existing facility in Troy, Ohio. Since the Garner accident, the Troy facility has been producing a portion of our meat snack products. By the end of fiscal 2011, the plan was substantially implemented.

Also in the fourth quarter of fiscal 2010, we made a decision to consolidate certain administrative functions from Edina, Minnesota, to Naperville, Illinois. We completed the transition of these functions in fiscal 2011. This plan, together with the plan to move production of our meat snacks from Garner, North Carolina to Troy, Ohio, is collectively referred to as the 2010 restructuring plan (“2010 plan”).

In connection with the 2010 plan, we expect to incur pre-tax cash and non-cash charges for asset impairments, accelerated depreciation, severance, relocation, and site closure costs of $66.8 million, of which $25.7 million was recognized in fiscal 2011 and $39.2 million was recognized in fiscal 2010. We have recognized expenses associated with the 2010 plan, including but not limited to, impairments of property, plant and equipment, accelerated depreciation, severance and related costs, and plan implementation costs (e.g., consulting, employee relocation, etc.). We anticipate that we will recognize the following pre-tax expenses associated with the 2010 plan in the fiscal 2010 to 2012 timeframe (amounts include charges recognized in fiscal 2010, 2011, and the first quarter of fiscal 2012):

		Consumer
		Foods				Corporate				Total
Accelerated depreciation		$	19.1			$	—			$	19.1
Inventory write-offs and related costs			0.7				—				0.7
Total cost of goods sold			19.8				—				19.8
Asset impairment			16.9				—				16.9
Severance and related costs			17.0				—				17.0
Other, net			9.5				3.6				13.1
Total selling, general and administrative expenses			43.4				3.6				47.0
Consolidated total		$	63.2			$	3.6			$	66.8

Included in the above estimates are $28.2 million of charges which have resulted or will result in cash outflows and $38.6 million of non-cash charges.

During the first quarter of fiscal 2012, we recognized $1.5 million of pre-tax charges in our condensed consolidated statement of earnings for the 2010 plan.

We recognized the following cumulative (plan inception to August 28, 2011) pre-tax charges related to the 2010 plan in our consolidated statement of earnings:

		Consumer
		Foods				Corporate				Total
Accelerated depreciation		$	19.1			$	—			$	19.1
Inventory write-offs and related costs			0.7				—				0.7
Total cost of goods sold			19.8				—				19.8
Asset impairment			16.8				—				16.8
Severance and related costs			17.0				—				17.0
Other, net			9.2				3.6				12.8
Total selling, general and administrative expenses			43.0				3.6				46.6
Consolidated total		$	62.8			$	3.6			$	66.4

Liabilities recorded for the various initiatives and changes therein for the first quarter of fiscal 2012 under the 2010 plan were as follows:

		Balance at				Costs Incurred												Balance at
		May 29,				and Charged				Costs Paid				Changes in				August 28,
		2011				to Expense				or Otherwise Settled				Estimates				2011
Severance and related costs		$	5.2			$	0.2			$	(3.7	)		$	(0.5	)		$	1.2
Plan implementation costs			1.0				1.0				(1.9	)			—				0.1
Other costs			2.7				—				(2.7	)			—				—
Total		$	8.9			$	1.2			$	(8.3	)		$	(0.5	)		$	1.3

11. INCOME TAXES

Our income tax expense from continuing operations for the first quarter of fiscal 2012 and 2011 was $43.6 million and $66.9 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 32% for the first quarter of fiscal 2012 and 2011, respectively.

The amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, was $53.4 million as of August 28, 2011 and $56.5 million as of May 29, 2011. Included in the balance at August 28, 2011 and May 29, 2011 was $3.4 million and $3.3 million, respectively, of 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 $15.2 million and $14.7 million as of August 28, 2011 and May 29, 2011, respectively.

The net amount of unrecognized tax benefits at August 28, 2011 and May 29, 2011 that, if recognized, would impact the Company’s effective tax rate was $33.8 million and $35.7 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 $2 million to $7 million over the next twelve months due to various federal, state, and foreign audit settlements and the expiration of statutes of limitations.

12. 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 consolidated post-acquisition financial statements reflect liabilities associated with the estimated resolution of these contingencies. These include various litigation and environmental proceedings related to businesses divested by Beatrice prior to its acquisition by us.

The litigation includes suits against a number of lead paint and pigment manufacturers, including ConAgra Grocery Products and the Company as alleged successors to W. P. Fuller Co., a lead paint and pigment manufacturer owned and operated by Beatrice until 1967. Although decisions favorable to us have been rendered in Rhode Island, New Jersey, Wisconsin, and Ohio, we remain a

defendant in active suits in 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. We have had successful outcomes in every case decided to date and although exposure in the remaining cases is unlikely, it is reasonably possible. However, given the range of potential remedies, it is not possible to estimate this exposure.

The environmental proceedings include litigation and administrative proceedings involving Beatrice’s status as a potentially responsible party at 37 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 $70.9 million as of August 28, 2011, 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 19 years.

In 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 five years and the maximum amount of future payments we have guaranteed was approximately $12.9 million as of August 28, 2011.

We have also guaranteed the performance of the divested fresh beef and pork business with respect to a hog purchase contract. The hog purchase contract requires the divested fresh beef and pork business to purchase a minimum of approximately 1.2 million hogs annually through 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. We have not established a liability for any of the fresh beef and pork divestiture-related guarantees, as we have determined that the likelihood of our required performance under the guarantees is remote.

We are a party to various potato supply agreements. Under the terms of certain such potato supply agreements, we have guaranteed repayment of short-term bank loans of the potato suppliers, under certain conditions. At August 28, 2011, the amount of supplier loans we have effectively guaranteed was approximately $71.9 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 are a party to a supply agreement with an onion processing company. We have guaranteed, under certain conditions, repayment of a loan of this supplier. At August 28, 2011, the term of the loan was 14 years, and the amount of our guarantee was $25.0 million. In the event of default on this loan by the supplier, we have the contractual right to purchase the loan from the lender, thereby giving us secured rights to the underlying collateral. Based on a recent review of the supplier’s liquidity, we believe that a deterioration in business environment may lead to a notice of default under the loan. However, based on our estimate of the value of the collateral, we have not established a liability in connection with this guarantee, as we believe the likelihood of financial exposure to us under this agreement is remote.

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, a period of seven years, 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 August 28, 2011. 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 the operation of our business, including lawsuits and claims related to the February 2007 recall of our peanut butter products and litigation we initiated against an insurance carrier to recover our settlement expenditures and defense costs. We recognized a charge of $24.8 million during the third quarter of fiscal 2009 in connection with the disputed coverage with this insurance carrier. During the second quarter of fiscal 2010, a Delaware state court rendered a decision on certain matters in our claim for the disputed coverage favorable to the insurance carrier. We appealed this decision and, during the fourth quarter of fiscal 2011, we received a favorable opinion related to our defense costs and the claim for disputed coverage was remanded to the state court. We continue to vigorously pursue our claim for the disputed coverage. 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. We believe these requests are related to the previously disclosed June 2007 execution of a search warrant at our facility following the February 2007 recall of our peanut butter products. The Company is cooperating with officials in regard to the requests.

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

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

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. Costs of legal services associated with the foregoing matters are recognized in earnings as services are provided.

13. 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								Postretirement Benefits
		Thirteen weeks ended								Thirteen weeks ended
		August 28,				August 29,				August 28,				August 29,
		2011				2010				2011				2010
Service cost		$	17.1			$	14.9			$	0.2			$	0.1
Interest cost			37.2				36.9				3.7				4.1
Expected return on plan assets			(44.9	)			(43.3	)			—				(0.1	)
Amortization of prior service cost (gain)			0.8				0.8				(2.2	)			(2.4	)
Recognized net actuarial loss			9.6				4.1				1.5				1.2
Curtailment loss			—				1.3				—				—
Benefit cost — Company plans			19.8				14.7				3.2				2.9
Pension benefit cost — multi-employer plans			2.1				2.5				—				—
Total benefit cost		$	21.9			$	17.2			$	3.2			$	2.9

During the first quarter of fiscal 2012, we contributed $3.0 million to our pension plans and contributed $7.5 million 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 $79.2 million to our pension plans for the remainder of fiscal 2012. We anticipate making further contributions of $21.0 million to our other postretirement plans during the remainder of fiscal 2012. These estimates are based on current tax laws, plan asset performance, and liability assumptions, which are subject to change.

14. LONG-TERM DEBT

On September 15, 2011, subsequent to the end of the first quarter of fiscal 2012, we repaid the entire principal balance of $342.7 million of our 6.75% senior notes, due on that date.

We consolidate the financial statements of Lamb Weston BSW. In the first quarter of fiscal 2011, we repaid $35.4 million of bank borrowings by our Lamb Weston BSW potato processing venture.

Net interest expense consists of:

		Thirteen weeks ended
		August 28,				August 29,
		2011				2010
Long-term debt		$	56.1			$	60.3
Short-term debt			0.1				0.1
Interest income			(1.3	)			(19.4	)
Interest capitalized			(2.0	)			(3.7	)
		$	52.9			$	37.3

Included in net interest expense was $18.5 million of interest income in the first quarter of fiscal 2011, from the payment-in-kind notes received in connection with the disposition of the trading and merchandising business in June 2008.

Our net interest expense for the first quarter of fiscal 2012 and 2011 was reduced by $3.1 million and $4.4 million, respectively, due to the impact of interest rate swap contracts entered into in the fourth quarter of fiscal 2010. 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 being 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).

15. STOCKHOLDERS’ EQUITY

The following table presents a reconciliation of our stockholders’ equity accounts for the three months ended August 28, 2011:

		ConAgra Foods, Inc. Stockholders’ Equity
																		Accumulated
										Additional								Other
		Common				Common				Paid-in				Retained				Comprehensive				Treasury				Noncontrolling				Total
		Shares				Stock				Capital				Earnings				Income (Loss)				Stock				Interests				Equity
Balance at May 29, 2011			567.9			$	2,839.7			$	899.1			$	4,853.6			$	(222.7	)		$	(3,668.2	)		$	7.0			$	4,708.5
Stock option and incentive plans											(18.3	)			(1.3	)							87.7								68.1
Currency translation adjustment																			(9.9	)											(9.9	)
Unrealized loss on securities																			(0.1	)											(0.1	)
Derivative adjustment, net of reclassification adjustment																			(31.9	)											(31.9	)
Activities of noncontrolling interests											(0.4	)															(0.1	)			(0.5	)
Pension and postretirement healthcare benefits																			6.1												6.1
Dividends declared on common stock; $0.23 per share															(95.3	)															(95.3	)
Net income attributable to ConAgra Foods, Inc.															85.3																85.3
Balance at August 28, 2011			567.9			$	2,839.7			$	880.4			$	4,842.3			$	(258.5	)		$	(3,580.5	)		$	6.9			$	4,730.3

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 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 August 28, 2011:

		Level 1				Level 2				Level 3				Total
Assets:
Derivative assets		$	17.2			$	59.8			$	—			$	77.0
Available-for-sale securities			1.5				—				—				1.5
Deferred compensation assets			7.1				—				—				7.1
Total assets		$	25.8			$	59.8			$	—			$	85.6
Liabilities:
Derivative liabilities		$	—			$	121.5			$	—			$	121.5
Deferred compensation liabilities			28.0				—				—				28.0
Total liabilities		$	28.0			$	121.5			$	—			$	149.5

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 29, 2011:

		Level 1				Level 2				Level 3				Total
Assets:
Derivative assets		$	16.3			$	55.2			$	—			$	71.5
Available-for-sale securities			1.7				—				—				1.7
Deferred compensation assets			7.4				—				—				7.4
Total assets		$	25.4			$	55.2			$	—			$	80.6
Liabilities:
Derivative liabilities		$	—			$	92.2			$	—			$	92.2
Deferred compensation liabilities			29.1				—				—				29.1
Total liabilities		$	29.1			$	92.2			$	—			$	121.3

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. There were no significant fair value measurement losses recognized for such assets and liabilities in the periods reported.

The carrying amount of long-term debt (including current installments) was $3.2 billion as of August 28, 2011 and May 29, 2011. Based on current market rates provided primarily by outside investment bankers, the fair value of this debt at August 28, 2011 and May 29, 2011 was estimated at $3.7 billion and $3.6 billion, respectively.

17. BUSINESS SEGMENTS AND RELATED INFORMATION

We report our operations in two reporting segments: Consumer Foods and Commercial Foods. The Consumer Foods reporting segment includes branded, private label, and customized food products, which are sold in various retail and foodservice channels, principally in North America. The products include a variety of categories (meals, entrees, condiments, sides, snacks, and desserts) across frozen, refrigerated, and shelf-stable temperature classes. The Commercial Foods reporting segment includes commercially branded foods and ingredients, which are sold principally to foodservice, food manufacturing, and industrial customers. The Commercial Foods segment’s primary products include: specialty potato products, milled grain ingredients, a variety of vegetable products, seasonings, blends, and flavors which are sold under brands such as Lamb Weston^®, ConAgra Mills^®, and Spicetec Flavors & Seasonings^TM. We do not aggregate operating segments when determining our reporting segments.

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, and income taxes have been excluded from segment operations. In the first quarter of fiscal 2012, we changed the manner in which the expenses associated with certain administrative functions are recognized in segment results. Accordingly, segment results of the prior period have been reclassified to reflect these changes.

		Thirteen weeks ended
		August 28,				August 29,
		2011				2010
Net sales
Consumer Foods		$	1,891.7			$	1,811.5
Commercial Foods			1,180.3				992.8
Total net sales		$	3,072.0			$	2,804.3
Operating profit
Consumer Foods		$	196.2			$	207.7
Commercial Foods			97.5				113.1
Total operating profit		$	293.7			$	320.8
Equity method investment earnings
Consumer Foods		$	1.0			$	1.1
Commercial Foods			5.2				5.1
Total equity method investment earnings		$	6.2			$	6.2
Operating profit plus equity method investment earnings
Consumer Foods		$	197.2			$	208.8
Commercial Foods			102.7				118.2
Total operating profit plus equity method investment earnings		$	299.9			$	327.0
General corporate expenses		$	117.9			$	79.5
Interest expense, net			52.9				37.3
Income tax expense			43.6				66.9
Income from continuing operations			85.5				143.3
Less: Net income (loss) attributable to noncontrolling interests			0.3				(0.1	)
Income from continuing operations attributable to ConAgra Foods, Inc.		$	85.2			$	143.4