Summary of CONAGRA FOODS INC /DE/

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS
This report, including Management's Discussion and Analysis, contains forward-looking statements. These statements are based on management's current views and assumptions of future events and financial performance and are subject to uncertainty and changes in circumstances. Readers of this report should understand that these statements are not guarantees of performance or results. Many factors could affect our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements, including those set forth in this report. These factors include, among other things, availability and prices of raw materials, product pricing, future economic circumstances, industry conditions, our ability to execute our operating plans, the competitive environment and related market conditions, operating efficiencies, the ultimate impact of recalls, access to capital, actions of governments and regulatory factors affecting our businesses, and other risks described in our reports filed with the Securities and Exchange Commission. We caution readers not to place undue reliance on any forward-looking statements included in this report which speak only as of the date of this report.
The following discussion should be read together with our financial statements and related notes contained in this report and with the financial statements, related notes, and Management's Discussion and Analysis in our annual report on Form 10-K for the fiscal year ended May 25, 2008, as updated in the Current Report on Form 8-K filed on November 25, 2008. Results for the thirteen and thirty-nine week periods ended February 22, 2009 are not necessarily indicative of results that may be attained in the future. Fiscal 2009 Third Quarter Executive Overview ConAgra Foods, Inc. (NYSE: CAG) is one of North America's leading food companies, with brands in 97% of America's households. Consumers find Banquet®, Chef Boyardee®, Egg Beaters®, Healthy Choice®, Hebrew National®, Hunt's®, Marie Callender's®, Orville Redenbacher's®, PAM®, Peter Pan®, Reddi-wip®, and many other ConAgra Foods brands in grocery, convenience, mass merchandise and club stores. 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.
Diluted earnings per share were $0.43 in the third quarter of fiscal 2009. Diluted earnings per share were $0.63 in the third quarter of fiscal 2008, including $0.34 per diluted share from continuing operations and $0.29 per diluted share from discontinued operations. Diluted earnings per share were $1.76 for the first three quarters of fiscal 2009, including $1.03 per diluted share from continuing operations and $0.73 per diluted share from discontinued operations. Diluted earnings per share were $1.48 per diluted share for the first three quarters of fiscal 2008, including $0.88 per diluted share from continuing operations and $0.60 from discontinued operations. Several significant items affect the comparability of year-over-year results of continuing operations (see "Items Impacting Comparability" below). Items Impacting Comparability
Items of note impacting comparability for the third quarter of fiscal 2009 included the following:
Reported within Continuing Operations
• charges of $25 million ($15 million after tax) due to a coverage dispute with an insurer in connection with litigation associated with the peanut butter recall in calendar 2007 and

• a benefit of $5 million due to changes in estimates of estimated income tax expense.

Items of note impacting comparability for the first three quarters of fiscal 2009 included the following:
Reported within Continuing Operations
• charges of $25 million ($15 million after tax) due to a coverage dispute with an insurer in connection with litigation associated with the peanut butter recall in calendar 2007,

• a gain of $19 million ($11 million after tax) on the sale of the Pemmican® beef jerky business, and

• charges totaling $10 million ($8 million after tax) for costs under our restructuring plans.

See the discussion of segment presentation of gains and losses from derivatives used for hedging of anticipated commodity input costs and hedging of foreign currency exchange rate risks in the segment review below.

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ConAgra Foods, Inc. and Subsidiaries Part I - Financial Information Reported within Discontinued Operations
• a gain of $490 million ($296 million after tax) on the sale of the trading and merchandising business (described below).

Items of note impacting comparability for the third quarter of fiscal 2008 included the following:
Reported within Continuing Operations
• charges totaling $14 million ($8 million after tax) for costs under our restructuring plans and

• net tax benefits of approximately $10 million related to favorable settlements and changes in estimates of income tax liabilities.

Items of note impacting comparability for the first three quarters of fiscal 2008 included the following:
Reported within Continuing Operations
• charges of $5 million ($3 million after tax) for costs under our restructuring plans,

• net tax benefits of approximately $12 million related to favorable settlements and changes in estimates of income tax liabilities, and

• charges totaling $41 million ($25 million after tax) related to the peanut butter and pot pie recalls.

Dispositions of Businesses
Trading and Merchandising Operations
On March 27, 2008, we entered into an agreement with affiliates of Ospraie Special Opportunities Fund to sell our commodity trading and merchandising operations conducted by ConAgra Trade Group (previously principally reported as the Trading and Merchandising segment). The operations included the domestic and international grain merchandising, fertilizer distribution, agricultural and energy commodities trading and services, and grain, animal, and oil seed byproducts merchandising and distribution businesses. In June 2008, the sale of the trading and merchandising operations was completed for before-tax proceeds of 1) approximately $2.2 billion in cash, net of transaction costs (including incentive compensation amounts due to employees due to accelerated vesting), 2) $550 million (face value) of payment-in-kind debt securities issued by the purchaser (the "Notes") which were recorded at an initial estimated fair value of $479 million, 3) a short-term receivable of $37 million due from the purchaser, and 4) a four-year warrant to acquire approximately 5% of the issued common equity of the parent company of the divested operations, which has been recorded at an estimated fair value of $1.8 million. We recognized an estimated after-tax gain on the disposition of approximately $296 million in the first three quarters of fiscal 2009.
The Notes were issued in three tranches: $99,990,000 principal amount of 10.5% notes due June 19, 2010; $200,035,000 principal amount of 10.75% notes due June 19, 2011; and $249,975,000 principal amount of 11.0% notes due June 19, 2012.
The Notes permit payment of interest in cash or additional notes. The Notes may be redeemed in whole or in part prior to maturity at the option of the issuer. Until June 23, 2009, the redemption price is 92.5% of face value, plus accrued interest. Thereafter, redemption is at par plus accrued interest. The Notes contain covenants that, among other things, govern the issuer's ability to make restricted payments and enter into certain affiliate transactions. The Notes also provide for the making of mandatory offers to repurchase upon certain change of control events involving the purchaser, their co-investors, or their affiliates. In December 2008, we received a $30 million cash payment of accrued interest on the Notes. The Notes, which are classified as other assets, had a carrying value of $502 million at February 22, 2009.
During the first three quarters of fiscal 2009, we collected the $37 million short-term receivable due from the purchaser.
We reflect the results of these operations as discontinued operations for all periods presented. The assets and liabilities of the divested trading and merchandising operations have been reclassified as assets and liabilities held for sale within our consolidated balance sheets for all periods prior to the divestiture.
Knott's Berry Farm® Operations
During the fourth quarter of fiscal 2008, we completed our divestiture of the Knott's Berry Farm® ("Knott's") jams and jellies brand and operations for proceeds of approximately $55 million, resulting in no significant gain or loss. We reflect the results of these operations as discontinued operations for all periods presented. The assets and liabilities of the divested Knott's business have been reclassified as assets and liabilities held for sale within our consolidated balance sheets for all periods prior to divestiture.

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ConAgra Foods, Inc. and Subsidiaries Part I - Financial Information Operating Initiatives
We are implementing operational improvement initiatives that are intended to generate profitable sales growth, improve profit margins, and expand returns on capital over time.
Recent developments in our strategies and action plans include:
• Pricing initiatives: We have faced significant increases in input costs during fiscal 2008 and the first three quarters of fiscal 2009. We implemented price increases across a significant portion of our Consumer Foods portfolio in the last half of fiscal 2008 and the first three quarters of fiscal 2009. We also increased prices in fiscal 2008 and the first three quarters of fiscal 2009 in our Commercial Foods segment in order to pass on higher input costs. Although the cost of certain commodity inputs moderated during the third quarter of fiscal 2009, we continue to monitor the challenging input cost environment and will consider implementing additional pricing actions as appropriate.

• Innovation: Our recent innovation investments in the Consumer Foods operations resulted in the development of a variety of new products in fiscal 2009, including Marie Callender's ® Pasta Al Dente, Healthy Choice® All Natural Entrees, Healthy Choice® Asian Steamers, Healthy Choice® Fresh MixersTM, and a renovated Banquet® dinner line. We also introduced Healthy Choice® Café SteamersTM in fiscal 2008. Our Commercial Foods businesses, principally Lamb Weston®, ConAgra Mills®, and Gilroy Foods®, continue to invest in a variety of new products and ingredients for foodservice, food manufacturing, and industrial customers. Additional new products are planned for the remainder of fiscal 2009 and beyond. The Company's new products are expected to contribute to additional sales growth in the future.

• Sales growth initiatives: We continue to implement sales improvement initiatives focused on penetrating the fastest growing channels, improving returns on customer trade arrangements, and optimizing shelf placement for our most profitable products.

• Reducing costs throughout the supply chain and the general and administrative functions:

• We began an intense focus on cost reduction initiatives in February 2006, when we initiated the fiscal 2006-2008 restructuring plan (the "2006-2008 restructuring plan"). Substantially completed by the end of fiscal 2008, the 2006-2008 restructuring plan focused on streamlining the supply chain and reducing selling, general, and administrative costs. During fiscal 2008, we identified additional opportunities to create a more efficient organization, particularly in our Consumer Foods operations and related functional organizations and the international foods operations (the "2008-2009 restructuring plan"). The combined cost of these plans, updated through February 22, 2009, is forecasted at $270 million. We have incurred total charges under these plans, since inception through February 22, 2009, of $269 million.

References to our restructuring plans ("the plans") refer to both the 2006-2008 restructuring plan and the 2008-2009 restructuring plan, unless otherwise noted.

• In addition to restructuring activities, we have ongoing initiatives, principally focused on supply chain activities (manufacturing, logistics, and procurement functions), which have resulted in significant cost savings in recent periods.

• Portfolio changes: In recent years, we divested non-core operations that had limited our ability to achieve our efficiency targets. Divesting these operations is helping to simplify our operations and enhance efficiency initiatives going forward. We also made strategic investments in recent years. In the second quarter of fiscal 2009, we entered into a potato processing venture, Lamb Weston BSW, with an initial investment of $46 million. We consolidated this venture, of which we hold a 49.99% equity interest beginning as of the date of its formation. In fiscal 2008, we acquired Alexia Foods, Lincoln Snacks, Watts Brothers, and Twin City Foods for a total of approximately $255 million in cash plus assumed liabilities, enhancing our Consumer Foods and Commercial Foods portfolios.

Capital Allocation
During the first three quarters of fiscal 2009, we have funded the following:
• an accelerated share repurchase program of $900 million (approximately 38.4 million shares of common stock have been repurchased to date),

• repayment of $397 million of short-term debt and approximately $61 million of long-term debt,

• capital expenditures of approximately $322 million, and

• dividend payments of approximately $263 million.

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ConAgra Foods, Inc. and Subsidiaries Part I - Financial Information Opportunities and Challenges
We believe that our operating initiatives will favorably impact future sales, profits, profit margins, and returns on capital. Because of the scope of change underway, there is risk that these broad change initiatives will not be successfully implemented. Input costs, competitive pressures, customer and consumer responsiveness to new products, the ability to execute the operational changes planned, and the ability to successfully implement pricing actions, among other factors, will affect the timing and impact of these initiatives. 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 pricing and productivity initiatives, and through the use of derivative instruments used to economically hedge a portion of forecasted future consumption. Through the third quarter of fiscal 2009, we have taken targeted price increases and placed an intense focus on selling, general, and administrative cost initiatives. The rate of input cost increases has moderated for certain key commodities in the first three quarters of fiscal 2009. However, if early benefits from pricing actions, supply chain productivity improvements, economic hedges, moderating input costs, and selling, general, and administrative cost reduction initiatives cannot be sustained and grown, results of operations, particularly Consumer Foods operating profit, may continue to be negatively impacted. Further, significant declines in the costs for raw materials, packaging, and energy inputs could result in intensified competitive pressures. If not effectively managed, these pressures could negatively impact Consumer Foods sales volumes and profit.
Changing consumer preferences may impact sales of certain of our products. We offer a variety of food products which appeal to a range of consumer preferences and utilize innovation and marketing programs to develop products that fit with changing consumer trends. As part of these programs, we introduce new products and product extensions that we intend to help us increase net sales and gain market share.
Consolidation of many of our customers continues to result in increased buying power, negotiating strength, and complex service requirements for those customers. This trend, which is expected to continue, may negatively impact gross margins, particularly in the Consumer Foods segment. In order to effectively respond to this customer consolidation, we continually evaluate our consumer marketing, sales, and customer service strategies. We are implementing trade promotion programs designed to improve return on investment, and pursuing shelf placement and customer service improvement initiatives. Segment Review
Historically, we reported our results of operations in three segments: the Consumer Foods segment, the Food and Ingredients segment, and the International Foods segment. During the first quarter of fiscal 2009, we completed the assimilation of the international operations primarily into the domestic Consumer Foods business. Accordingly, we have begun to report our operations in two reporting segments: Consumer Foods and Commercial Foods. The majority of the former International Foods segment operations are now managed within the Consumer Foods segment. Beginning in the first quarter of fiscal 2009, we began including the earnings (losses) from equity method investments in segment results below operating profit. Fiscal 2008 financial information has been conformed to reflect these changes.
Consumer 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 segment is comprised of and managed through five subsegments as described below:
Grocery Foods North America - includes branded and customized refrigerated or shelf-stable food products that are sold in various retail and foodservice channels 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 customized 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®.

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ConAgra Foods, Inc. and Subsidiaries Part I - Financial Information 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 primary 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®, and Spicetec®.
Presentation of Derivative Gains (Losses) in Segment Results In fiscal 2009, following the sale of our trading and merchandising operations and related organizational changes, we transferred the management of commodity hedging activities (except for those related to our milling operations) to a centralized procurement group. Beginning in the first quarter of fiscal 2009, we began to reflect realized and unrealized gains and losses from derivatives (except for those related to our milling operations) used to hedge anticipated commodity consumption in earnings immediately within general corporate expenses. The gains and losses are reclassified to segment operating results in the period in which the underlying item being hedged is recognized in cost of goods sold. Prior to the first quarter of fiscal 2009, these derivative gains and losses were recorded immediately in our segment results as a component of cost of goods sold regardless of when the item being hedged impacted earnings. We believe this change results in better segment management focus on key operational initiatives and improved transparency to derivative gains and losses.
In fiscal 2008, we began to centrally manage foreign currency risk for all of our reporting segments. Foreign currency derivatives used to manage foreign currency risk are not designated for hedge accounting treatment. We believe that these derivatives provide economic hedges of the foreign currency risk of certain forecasted transactions. As such, these derivatives are recognized at fair market value with realized and unrealized gains and losses recognized in general corporate expenses. The gains and losses are subsequently recognized in the operating results of the reporting segments in the period in which the underlying transaction being economically hedged is included in earnings. The following table presents the net derivative gains (losses) from economic hedges of forecasted commodity consumption and currency risk of our foreign operations for the third quarter of fiscal 2009, under this new methodology:

     Net derivative losses incurred                                  $ (11.1 )
     Less: Net derivative losses allocated to reporting segments       (46.4 )

     Net derivative gains recognized in general corporate expenses   $  35.3


     Net derivative losses allocated to Consumer Foods               $ (29.4 )
     Net derivative losses allocated to Commercial Foods               (17.0 )

     Net derivative losses included in segment operating profit      $ (46.4 )

The following table presents the net derivative losses from economic hedges of forecasted commodity consumption and currency risk of our foreign operations for the first three quarters of fiscal 2009, under this new methodology:

     Net derivative losses incurred                                   $ (90.3 )
     Less: Net derivative losses allocated to reporting segments        (45.0 )

     Net derivative losses recognized in general corporate expenses   $ (45.3 )


     Net derivative losses allocated to Consumer Foods                $ (29.9 )
     Net derivative losses allocated to Commercial Foods                (15.1 )

     Net derivative losses included in segment operating profit       $ (45.0 )

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ConAgra Foods, Inc. and Subsidiaries Part I - Financial Information Based on our forecasts of the timing of recognition of the underlying hedged items, we expect to reclassify losses of $30.6 million, losses of $14.9 million, and gains of $0.2 million to segment operating results in fiscal 2009, 2010, and 2011, respectively.
In the third quarter of fiscal 2008, net derivative gains from economic hedges of forecasted commodity consumption and currency risk of our foreign operations were $14.5 million in the Consumer Foods segment and $7.0 million in the Commercial Foods segment. In the first three quarters of fiscal 2008, net derivative gains from economic hedges of forecasted commodity consumption and currency risk of our foreign operations were $39.2 million in the Consumer Foods segment and $9.5 million in the Commercial Foods segment.

Net Sales

($ in millions)                                                                      Net Sales
Reporting Segment                                  Thirteen weeks ended                                      Thirty-nine weeks ended
                                  February 22,          February 24,          % Inc /           February 22,          February 24,
                                       2009                  2008               (Dec)                2009                  2008             % Inc
Consumer Foods:
Grocery Foods North America                $749                  $705                6 %               $2,161                $2,034             6 %
Frozen Foods                                479                   463                4 %                1,356                 1,310             4 %
Snacks and Store Brands                     356                   344                3 %                1,094                 1,035             6 %
Enabler Brands                              386                   363                6 %                1,181                 1,074            10 %
Domestic Export                              43                    46               (7 )%                 137                   137             -
Other                                         1                     -              N/A                     (4 )                  (2 )         N/A

Total Consumer Foods                      2,014                 1,921                5 %                5,925                 5,588             6 %
Commercial Foods                          1,121                 1,034                8 %                3,540                 2,940            20 %

Total                                    $3,135                $2,955                6 %               $9,465                $8,528            11 %

Net sales for the third quarter of fiscal 2009 were $3.13 billion, an increase of $180 million, or 6%, from the third quarter of fiscal 2008. Net sales for the first three quarters of fiscal 2009 were $9.46 billion, an increase of $937 million, or 11%, from the first three quarters of fiscal 2008. The increase in net sales for the third quarter and first three quarters of fiscal 2009 was largely due to net pricing increases across all segments and subsegments, including significantly higher net sales in our Commercial Foods' milling operations driven by increases in wheat costs.
Consumer Foods net sales for the third quarter of fiscal 2009 were $2.01 billion, an increase of 5%, compared to the third quarter of fiscal 2008. Results reflected net pricing and mix improvement of 10%, partially offset by a decline in volume of approximately 4%. The strengthening of the U.S. dollar relative to foreign currencies resulted in a reduction of net sales of approximately 1% as compared to the third quarter of fiscal 2008. Consumer Foods . . .