ConAgra Foods, Inc. (“ConAgra Foods”, “Company”, “we”, “us”, or “our”) is one of North America’s leading food companies, with brands in 97% of America’s households. ConAgra Foods also has a strong business-to-business presence, supplying potato, other vegetable, spice, and grain products to a variety of well-known restaurants, foodservice operators, and commercial customers.
ConAgra Foods is focused on expanding profit margins and improving returns on capital over time. To that end, we have significantly changed our portfolio of businesses over a number of years, focusing on branded, value-added opportunities, while divesting commodity-based and lower-margin businesses. Executing this strategy has involved the acquisition over time of a number of brands such as Banquet®, Chef Boyardee®, PAM®, and Alexia®, and more recently, has focused on product innovations such as Healthy Choice® Café Steamerstm, Healthy Choice® Fresh Mixerstm, Healthy Choice® All Natural Entrées, Marie Callender’s® Pasta Al Dente, Alexia® Natural Crunchy Snacks, and others. More notable divestitures have included a trading and merchandising business, packaged meat operations, a poultry business, beef and pork businesses, and various other businesses. For more information about our more recent acquisitions and divestitures, see “Acquisitions” and “Divestitures” below.
As part of this strategy, we have also prioritized improving our overall operational effectiveness, focusing on better innovation and marketing programs, reducing manufacturing and selling, general and administrative costs, and enhancing our business processes, which are intended to drive profitable sales growth, expand profit margins, and improve returns on capital.
Currently we are focusing our efforts in the following areas, with our initiatives aligned with five strategic priorities: convenient meals, potatoes, snacks, meal enhancers, and specialty businesses:
• Increased investments in marketing and innovation focused on “fewer, bigger, and better” initiatives;
• Sales growth initiatives focused on penetrating the fastest growing channels, achieving better returns on customer trade arrangements, optimizing shelf placement for our most profitable brands, and aligning with customers to leverage consumer insights;
• Reducing costs throughout the supply chain and the general and administrative functions;
• Delivering consistent customer service and high standards of food safety and quality; and
• Navigating the challenging input cost environment. We increased prices across a significant portion of our product portfolio in the latter portion of fiscal 2008 and early fiscal 2009 in response to significant increases in input costs. We continue to monitor input cost trends and our pricing strategies and intend to take appropriate actions to maintain and increase market-share and sales volume at acceptable profit margins.
We were initially incorporated as a Nebraska corporation in 1919 and were reincorporated as a Delaware corporation in December 1975.
Description of Business
We compete throughout the food industry and focus on adding value for customers who operate in the retail food, foodservice, and ingredients channels.
Our operations, including our reporting segments, are described below.
Consumer Foods
The Consumer Foods reporting segment includes branded and private label food products which are sold in various retail and foodservice channels, principally in North America. The products include a variety of categories (meals, entrées, condiments, sides, snacks, and desserts) across frozen, refrigerated, and shelf-stable temperature classes. The segment is comprised of and managed through five subsegments as described below:
Grocery Foods North America—includes branded and private label refrigerated or shelf-stable food products that are sold in various retail and foodservice channels primarily across the United States. Major brands include: Angela Mia®, Chef Boyardee®, Egg Beaters®, Healthy Choice® Fresh Mixerstm, Hebrew National®, Hunt’s®, Manwich®, PAM®, Peter Pan®, Snack Pack®, Reddi-wip®, Rosarita®, Ro*Tel®, Swiss Miss®, and Van Camp’s ®. The segment also includes the consumer foods businesses in Mexico and Canada, which distribute packaged foods that are both locally manufactured and imported from the United States.
Frozen Foods—includes branded and private label frozen food products that are sold in various retail and foodservice channels across the United States. Major brands include: Alexia®, Banquet®, Healthy Choice®, Kid Cuisine®, and Marie Callender’s®.
Snacks and Store Brands—includes branded popcorn, meats, seeds, and specialty snacks, as well as private label food products that are sold in various retail and foodservice channels across the United States. Major brands include: ACT II®, DAVID®, Orville Redenbacher’s®, and Slim Jim®.
Enabler Brands—includes national and regional branded food products across shelf-stable, refrigerated, and frozen temperature classes. Products are sold in various retail and foodservice channels across the United States. Major brands include: Blue Bonnet®, La Choy®, Libby’s®, The Max®, Parkay®, and Wesson®.
Domestic Export—includes branded shelf-stable food products sold through distributors in various markets throughout the world.
The Consumer Foods’ supply chain and order-to-cash functions are centrally managed and largely integrated. Accordingly, we do not maintain balance sheets at the subsegment level. Selling, general and administrative expenses, other than advertising and promotion, are managed at the Consumer Foods reporting segment level, and as such, we do not separately allocate selling, general and administrative expenses other than advertising and promotion expenses to the Consumer Foods subsegments.
Commercial Foods
The Commercial Foods reporting segment includes commercially branded foods and ingredients, which are sold principally to foodservice, food manufacturing, and industrial customers. The segment’s primary products include: specialty potato products, milled grain ingredients, a variety of vegetable products, seasonings, blends, and flavors which are sold under brands such as ConAgra Mills®, Lamb Weston®, Gilroy Foods & Flavorstm, and Spicetec®.
Unconsolidated Equity Investments
We have a number of unconsolidated equity investments. Significant affiliates produce and market potato products for retail and foodservice customers.
Acquisitions
During the first quarter of fiscal 2009, we acquired Saroni Sugar & Rice, Inc., a distribution company included in the Commercial Foods segment.
During the second quarter of fiscal 2009, we acquired a 49.99% interest in Lamb Weston BSW, LLC (“Lamb Weston BSW” or the “venture”), a potato processing joint venture with Ochoa Ag Unlimited Foods, Inc. (“Ochoa”). This venture is considered a variable interest entity for which we are the primary beneficiary and is consolidated in our financial statements. This business is included in the Commercial Foods segment.
During the first quarter of fiscal 2008, we acquired Alexia Foods, Inc. (“Alexia Foods”) a privately held natural food company, headquartered in Long Island City, New York. Alexia Foods offers premium natural and organic food items including potato products, appetizers, and artisan breads.
During the second quarter of fiscal 2008, we acquired Lincoln Snacks Holding Company, Inc. (“Lincoln Snacks”), a privately held company located in Lincoln, Nebraska. Lincoln Snacks offers a variety of snack food brands and private label products.
Also during the second quarter of fiscal 2008, we acquired the manufacturing assets of Twin City Foods, Inc. (“Twin City Foods”), a potato processing business.
During the fourth quarter of fiscal 2008, we acquired Watts Brothers, a privately held group which owns and operates agricultural and farming businesses.
Divestitures
In June 2009, subsequent to our fiscal 2009 year end, we completed the divestiture of the Fernando’s® foodservice brand for proceeds of $6 million. We reflected the results of these operations as discontinued operations for all periods presented. The assets and liabilities of the divested Fernando’s® business have been reclassified as assets and liabilities held for sale within our consolidated balance sheets for all periods presented.
In July 2008, we completed the sale of our Pemmican® beef jerky business for proceeds of approximately $29 million. Due to our continuing involvement with the business through providing sales and distribution support to the buyer for a period of up to five years, the results of operations of the Pemmican® business have not been reclassified as discontinued operations.
In June 2008, we completed the sale of our trading and merchandising operations (previously principally reported as the Trading and Merchandising segment). We reflected the results of these operations as discontinued operations for all periods presented. The assets and liabilities of the divested trading and merchandising operations are classified as assets and liabilities held for sale within our consolidated balance sheets for all periods prior to divestiture.
During the fourth quarter of fiscal 2008, we completed our divestiture of the Knott’s Berry Farm® (“Knott’s”) operations. We reflected the results of these operations as discontinued operations for all periods presented. The assets and liabilities of the divested Knott’s business are classified as assets and liabilities held for sale within our consolidated balance sheets for all periods prior to divestiture.
We finalized the dispositions of our packaged meats and cheese operations during the first half of fiscal 2007. We reflect the results of these businesses as discontinued operations for all periods presented.
We disposed of a refrigerated pizza business with annual revenues of less than $70 million during the second quarter of fiscal 2007. Due to our expected significant continuing cash flows associated with this business, we continue to include the results of operations of this business in continuing operations.
During the first quarter of fiscal 2007, we completed the divestiture of our nutritional supplement business. We reflected the gain within discontinued operations.
General
The following comments pertain to both of our reporting segments.
ConAgra Foods is a food company that operates in many sectors of the food industry, with a significant focus on the sale of branded, private label, and value-added consumer products. We use many different raw materials, the bulk of which are commodities. The prices paid for raw materials used in our products generally reflect factors such as weather, commodity market fluctuations, currency fluctuations, tariffs, and the effects of governmental agricultural programs. Although the prices of raw materials can be expected to fluctuate as a result of these factors, we believe such raw materials to be in adequate supply and generally available from numerous sources. We have faced increased costs for many of our significant raw materials, packaging, and energy inputs. We seek to mitigate the higher input costs through productivity and pricing initiatives, and through the use of derivative instruments used to economically hedge a portion of forecasted future consumption.
We experience intense competition for sales of our principal products in our major markets. Our products compete with widely advertised, well-known, branded products, as well as private label and customized products. Some of our competitors are larger and have greater resources than we have. We have major competitors in each of our reporting segments. We compete primarily on the basis of quality, value, customer service, brand recognition, and brand loyalty.
We employ processes at our principal manufacturing locations that emphasize applied research and technical services directed at product improvement and quality control. In addition, we conduct research activities related to the development of new products. Research and development expense was $81 million, $69 million, and $68 million in fiscal 2009, 2008, and 2007, respectively.
Demand for certain of our products may be influenced by holidays, changes in seasons, or other annual events.
We manufacture primarily for stock and fill customer orders from finished goods inventories. While at any given time there may be some backlog of orders, such backlog is not material in respect to annual net sales, and the changes from time to time are not significant.
Our trademarks are of material importance to our business and are protected by registration or other means in the United States and most other markets where the related products are sold. Some of our products are sold under brands that have been licensed from others. We also actively develop and maintain a portfolio of patents, although no single patent is considered material to the business as a whole. We have proprietary trade secrets, technology, know-how, processes, and other intellectual property rights that are not registered.
Many of our facilities and products are subject to various laws and regulations administered by the United States Department of Agriculture, the Federal Food and Drug Administration, the Occupational Safety and Health Administration, and other federal, state, local, and foreign governmental agencies relating to the quality and safety of products, sanitation, safety and health matters, and environmental control. We believe that we comply with such laws and regulations in all material respects, and that continued compliance with such regulations will not have a material effect upon capital expenditures, earnings, or our competitive position.
Our largest customer, Wal-Mart Stores, Inc. and its affiliates, accounted for approximately 16%, 15%, and 16% of consolidated net sales for fiscal 2009, 2008, and 2007, respectively. This reflects all Consumer Foods businesses, including those which are classified as discontinued operations.
At May 31, 2009, ConAgra Foods and its subsidiaries had approximately 25,600 employees, primarily in the United States. Approximately 53% of our employees are parties to collective bargaining agreements. Of the employees subject to collective bargaining agreements, approximately 37% are parties to collective bargaining agreements that are scheduled to expire during fiscal 2010. We believe that our relationships with employees and their representative organizations are good.