Notes to Consolidated Financial Statements
Fiscal Years Ended
May 26, 2019
,
May 27, 2018
, and
May 28, 2017
(columnar dollars in millions, except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
— The fiscal year of Conagra Brands, Inc. ("Conagra Brands", "Company", "we", "us", or "our") ends the last Sunday in May. The fiscal years for the consolidated financial statements presented consist of
52-week
periods for fiscal years 2019, 2018, and 2017.
Basis of Consolidation
— The consolidated financial statements include the accounts of Conagra Brands, 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 consolidated financial statements from the date such determination is made. All significant intercompany investments, accounts, and transactions have been eliminated.
On November 9, 2016, we completed the spinoff of Lamb Weston Holdings, Inc. ("Lamb Weston") through a distribution of
100%
of our interest in Lamb Weston to holders of shares of our common stock as of November 1, 2016 (the "Spinoff"). In accordance with U.S. generally accepted accounting principles ("U.S. GAAP"), the results of operations of the Lamb Weston operations are presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented (see Note 6 for additional discussion).
Investments in Unconsolidated Affiliates
— The investments in, and the operating results of, 50%-or-less-owned entities not required to be consolidated are included in the consolidated financial statements on the basis of the equity method of accounting or the cost method of accounting, depending on specific facts and circumstances.
We review our investments in unconsolidated affiliates for impairment whenever events or changes in business circumstances indicate that the carrying amount of the investments may not be fully recoverable. Evidence of a loss in value that is other than temporary includes, but is not limited to, the absence of an ability to recover the carrying amount of the investment, the inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment, or, where applicable, estimated sales proceeds which are insufficient to recover the carrying amount of the investment. Management's assessment as to whether any decline in value is other than temporary is based on our ability and intent to hold the investment and whether evidence indicating the carrying value of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. Management generally considers our investments in equity method investees to be strategic long-term investments. Therefore, management completes its assessments with a long-term viewpoint. If the fair value of the investment is determined to be less than the carrying value and the decline in value is considered to be other than temporary, an appropriate write-down is recorded based on the excess of the carrying value over the best estimate of fair value of the investment.
Cash and Cash Equivalents
— Cash and all highly liquid investments with an original maturity of three months or less at the date of acquisition, including short-term time deposits and government agency and corporate obligations, are classified as cash and cash equivalents.
Receivables
— Receivables from customers generally do not bear interest. Terms and collection vary by location and channel. The allowance for doubtful accounts represents our estimate of probable non-payments and credit losses in our existing receivables, as determined based on a review of past due balances and other specific account data. Account balances are written off against the allowance when we deem them uncollectible.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
The following table details the balances of our allowance for doubtful accounts and changes therein:
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Balance at
Beginning
of Period
|
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Additions
Charged
to Costs and
Expenses
|
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Other
|
|
Deductions
from
Reserves
|
|
Balance at
Close of
Period
|
Year ended May 26, 2019
|
|
$
|
1.7
|
|
|
0.6
|
|
|
1.6
|
|
(1)
|
0.6
|
|
(2)
|
$
|
3.3
|
|
Year ended May 27, 2018
|
|
$
|
2.9
|
|
|
0.8
|
|
|
—
|
|
|
2.0
|
|
(2)
|
$
|
1.7
|
|
Year ended May 28, 2017
|
|
$
|
3.0
|
|
|
1.0
|
|
|
—
|
|
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1.1
|
|
(2)
|
$
|
2.9
|
|
|
|
(1)
|
Primarily relates to the acquisition of Pinnacle.
|
|
|
(2)
|
Bad debts charged off and adjustments to previous reserves, less recoveries.
|
Inventories
— We use the lower of cost (determined using the first-in, first-out method) or market for valuing inventories.
Property, Plant and Equipment
— Property, plant and equipment are carried at cost. Depreciation has been calculated using the straight-line method over the estimated useful lives of the respective classes of assets as follows:
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Land improvements
|
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1 - 40 years
|
Buildings
|
|
15 - 40 years
|
Machinery and equipment
|
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3 - 20 years
|
Furniture, fixtures, office equipment and other
|
|
5 - 15 years
|
We review property, plant and equipment for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Recoverability of an asset considered "held-and-used" is determined by comparing the carrying amount of the asset to the undiscounted net cash flows expected to be generated from the use of the asset. If the carrying amount is greater than the undiscounted net cash flows expected to be generated by the asset, the asset's carrying amount is reduced to its estimated fair value. An asset considered "held-for-sale" is reported at the lower of the asset's carrying amount or fair value.
Goodwill and Other Identifiable Intangible Assets
— Goodwill and other identifiable intangible assets with indefinite lives (e.g., brands or trademarks) are not amortized and are tested annually for impairment of value and whenever events or changes in circumstances indicate the carrying amount of the asset may be impaired. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include deterioration in general economic conditions, adverse changes in the markets in which an entity operates, increases in input costs that have negative effects on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods, among others. The fair value that could be realized in an actual transaction may differ from that used to evaluate the impairment of goodwill and other intangible assets.
In testing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than
50%
) that the estimated fair value of a reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an impairment is more likely than not, we are then required to perform a quantitative impairment test, otherwise no further analysis is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test.
Under the goodwill qualitative assessment, various events and circumstances that would affect the estimated fair value of a reporting unit are identified (similar to impairment indicators above). Furthermore, management considers the results of the most recent quantitative impairment test completed for a reporting unit and compares the weighted average cost of capital between the current and prior years for each reporting unit.
Under the goodwill quantitative impairment test, the evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. We estimate the fair value using level 3 inputs as defined by the fair value hierarchy. Refer to Note 20 for the definition of the levels in the fair value hierarchy. The inputs used to calculate
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
the fair value include a number of subjective factors, such as estimates of future cash flows, estimates of our future cost structure, discount rates for our estimated cash flows, required level of working capital, assumed terminal value, and time horizon of cash flow forecasts. Prior to the fourth quarter of fiscal 2017, if the carrying value of a reporting unit exceeded its fair value, we completed a second step of the test to determine the amount of goodwill impairment loss, if any, to be recognized. In the second step, we estimated an implied fair value of the reporting unit's goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill (including any unrecognized intangible assets). The impairment loss was equal to the excess of the carrying value of the goodwill over the implied fair value of that goodwill. Beginning in the fourth quarter of fiscal 2017, if the carrying value of a reporting unit exceeds its fair value, we recognize an impairment loss equal to the difference between the carrying value and estimated fair value of the reporting unit.
In assessing other intangible assets not subject to amortization for impairment, we have the option to perform a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of such an intangible asset is less than its carrying amount. If we determine that it is not more likely than not that the fair value of such an intangible asset is less than its carrying amount, then we are not required to perform any additional tests for assessing intangible assets for impairment. However, if we conclude otherwise or elect not to perform the qualitative assessment, then we are required to perform a quantitative impairment test that involves a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
In fiscal 2019, 2018, and 2017 we elected to perform a quantitative impairment test for other intangible assets not subject to amortization. The estimates of fair value of intangible assets not subject to amortization are determined using a "relief from royalty" methodology, which is used in estimating the fair value of our brands/trademarks. Discount rate assumptions are based on an assessment of the risk inherent in the projected future cash flows generated by the respective intangible assets. Also subject to judgment are assumptions about royalty rates.
Identifiable intangible assets with definite lives (e.g., licensing arrangements with contractual lives or customer relationships) are amortized over their estimated useful lives and tested for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may be impaired. Identifiable intangible assets with definite lives are evaluated for impairment using a process similar to that used in evaluating elements of property, plant and equipment. If impaired, the asset is written down to its fair value.
Refer to Note 9 for discussion of the impairment charges related to goodwill and intangible assets in fiscal 2019, 2018, and 2017.
Fair Values of Financial Instruments
— Unless otherwise specified, we believe the carrying value of financial instruments approximates their fair value.
Environmental Liabilities
— Environmental liabilities are accrued when it is probable that obligations have been incurred and the associated amounts can be reasonably estimated. We use third-party specialists to assist management in appropriately measuring the obligations associated with environmental liabilities. Such liabilities are adjusted as new information develops or circumstances change. We do not discount our environmental liabilities as the timing of the anticipated cash payments is not fixed or readily determinable. Management's estimate of our potential liability is independent of any potential recovery of insurance proceeds or indemnification arrangements. We do not reduce our environmental liabilities for potential insurance recoveries.
Employment-Related Benefits
— Employment-related benefits associated with pensions, postretirement health care benefits, and workers' compensation are expensed as such obligations are incurred. The recognition of expense is impacted by estimates made by management, such as discount rates used to value these liabilities, future health care costs, and employee accidents incurred but not yet reported. We use third-party specialists to assist management in appropriately measuring the obligations associated with employment-related benefits.
We recognize changes in the fair value of pension plan assets and net actuarial gains or losses in excess of 10% of the greater of the market-related value of plan assets or the plan's projected benefit obligation (the "corridor") in current period expense annually as of our measurement date, which is our fiscal year-end, or when measurement is required otherwise under U.S. GAAP.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
Revenue Recognition
— Our revenues primarily consist of the sale of food products that are sold to retailers and foodservice customers through direct sales forces, broker, and distributor arrangements. These revenue contracts generally have single performance obligations. Revenue, which includes shipping and handling charges billed to the customer, is reported net of variable consideration and consideration payable to our customers, including applicable discounts, returns, allowances, trade promotion, consumer coupon redemption, unsaleable product, and other costs. Amounts billed and due from our customers are classified as receivables and require payment on a short-term basis and, therefore, we do not have any significant financing components.
We recognize revenue when (or as) performance obligations are satisfied by transferring control of the goods to customers. Control is transferred upon delivery of the goods to the customer. Shipping and/or handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs. We assess the goods and services promised in our customers' purchase orders and identify a performance obligation for each promise to transfer a good or service (or bundle of goods or services) that is distinct.
We offer various forms of trade promotions and the methodologies for determining these provisions are dependent on local customer pricing and promotional practices, which range from contractually fixed percentage price reductions to provisions based on actual occurrence or performance. Our promotional activities are conducted either through the retail trade or directly with consumers and include activities such as in-store displays and events, feature price discounts, consumer coupons, and loyalty programs. The costs of these activities are recognized at the time the related revenue is recorded, which normally precedes the actual cash expenditure. The recognition of these costs therefore requires management judgment regarding the volume of promotional offers that will be redeemed by either the retail trade or consumer. These estimates are made using various techniques including historical data on performance of similar promotional programs. Differences between estimated expense and actual redemptions are recognized as a change in management estimate in a subsequent period.
Advertising Costs
— Advertising costs are expensed as incurred. Advertising and promotion expenses totaled
$253.4 million
,
$278.6 million
, and
$328.3 million
in fiscal
2019
,
2018
, and
2017
, respectively, and are included in selling, general and administrative ("SG&A") expenses.
Research and Development
— We incurred expenses of
$56.1 million
,
$47.3 million
, and
$44.6 million
for research and development activities in fiscal
2019
,
2018
, and
2017
, respectively.
Comprehensive Income
— Comprehensive income includes net income, currency translation adjustments, certain derivative-related activity, changes in the value of available-for-sale investments (prior to the adoption of Accounting Standards Update ("ASU") 2016-01), and changes in prior service cost and net actuarial gains (losses) from pension (for amounts not in excess of the 10% "corridor") and postretirement health care plans. On foreign investments we deem to be essentially permanent in nature, we do not provide for taxes on currency translation adjustments arising from converting an 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 will be provided for the related deferred tax liability (asset), if any, resulting from currency translation adjustments.
The following table details the accumulated balances for each component of other comprehensive income, net of tax:
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2019
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2018
|
|
2017
|
Currency translation losses, net of reclassification adjustments
|
$
|
(90.9
|
)
|
|
$
|
(94.7
|
)
|
|
$
|
(98.6
|
)
|
Derivative adjustments, net of reclassification adjustments
|
34.0
|
|
|
1.0
|
|
|
(1.1
|
)
|
Unrealized gains (losses) on available-for-sale securities
|
—
|
|
|
0.6
|
|
|
(0.3
|
)
|
Pension and post-employment benefit obligations, net of reclassification adjustments
|
(53.4
|
)
|
|
(17.4
|
)
|
|
(112.9
|
)
|
Accumulated other comprehensive loss
1
|
$
|
(110.3
|
)
|
|
$
|
(110.5
|
)
|
|
$
|
(212.9
|
)
|
1
Net of unrealized gains on available-for-sale securities reclassified to retained earnings as a result of the adoption of ASU 2016-01 in fiscal 2019 and net of stranded tax effects from change in tax rate as a result of the early adoption of ASU 2018-02 in fiscal 2018 in the amount of
$0.6 million
and
$17.4 million
, respectively.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
The following table summarizes the reclassifications from accumulated other comprehensive loss into income:
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Affected Line Item in the Consolidated Statement of Operations
1
|
|
2019
|
|
2018
|
|
2017
|
|
|
Net derivative adjustment, net of tax:
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|
|
|
|
|
|
Cash flow hedges
|
$
|
(1.9
|
)
|
|
$
|
0.1
|
|
|
$
|
(0.2
|
)
|
|
Interest expense, net
|
|
(1.9
|
)
|
|
0.1
|
|
|
(0.2
|
)
|
|
Total before tax
|
|
0.5
|
|
|
—
|
|
|
0.1
|
|
|
Income tax expense
|
|
$
|
(1.4
|
)
|
|
$
|
0.1
|
|
|
$
|
(0.1
|
)
|
|
Net of tax
|
Amortization of pension and postretirement healthcare liabilities:
|
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|
|
|
|
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|
Net prior service cost (benefit)
|
$
|
0.9
|
|
|
$
|
(0.4
|
)
|
|
$
|
(3.9
|
)
|
|
Pension and postretirement non-service income
|
Pension settlement
|
—
|
|
|
1.3
|
|
|
13.8
|
|
|
Pension and postretirement non-service income
|
Postretirement healthcare settlement
|
(1.0
|
)
|
|
—
|
|
|
—
|
|
|
Pension and postretirement non-service income
|
Net actuarial loss (gain)
|
(1.4
|
)
|
|
—
|
|
|
0.5
|
|
|
Pension and postretirement non-service income
|
|
(1.5
|
)
|
|
0.9
|
|
|
10.4
|
|
|
Total before tax
|
|
0.4
|
|
|
(0.2
|
)
|
|
(4.0
|
)
|
|
Income tax expense
|
|
$
|
(1.1
|
)
|
|
$
|
0.7
|
|
|
$
|
6.4
|
|
|
Net of tax
|
Currency translation losses
|
$
|
10.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Selling, general and administrative expenses
|
|
10.4
|
|
|
—
|
|
|
—
|
|
|
Total before tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Income tax expense
|
|
$
|
10.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Net of tax
|
1
Amounts in parentheses indicate income recognized in the Consolidated Statements of Operations.
Foreign Currency Transaction Gains and Losses
— We recognized net foreign currency transaction losses from continuing operations of
$2.3 million
,
$1.4 million
, and
$1.5 million
in fiscal
2019
,
2018
, and
2017
, respectively, in SG&A expenses.
Business Combinations
— We use the acquisition method in accounting for acquired businesses. Under the acquisition method, our financial statements reflect the operations of an acquired business starting from the completion of the acquisition. The assets acquired and liabilities assumed are recorded at their respective estimated fair values at the date of the acquisition. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill.
Reclassifications and other changes
— Certain prior year amounts have been reclassified to conform with current year presentation.
Use of Estimates
— Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions affect reported amounts of assets, liabilities, revenues, and expenses as reflected in the consolidated financial statements. Actual results could differ from these estimates.
Accounting Changes
— In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09,
Revenue from Contracts with Customers
("Topic 606"), which replaces most existing revenue recognition guidance in U.S. GAAP, including industry-specific requirements. Topic 606 provides companies with a single revenue recognition model for recognizing revenue with customers; specifically requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
We utilized a comprehensive approach to evaluate and document the impact of the guidance on our current accounting policies and practices in order to identify material differences, if any, that would result from applying the new requirements
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
to our revenue contracts. We did not identify any material differences resulting from applying the new requirements to our revenue contracts. In addition, we did not identify any significant changes to our business processes, systems, and controls to support recognition and disclosure requirements under the new guidance. We adopted the provisions of Topic 606 in fiscal 2019 utilizing the modified retrospective method. We recorded a
$0.5 million
cumulative effect adjustment, net of tax, to the opening balance of fiscal 2019 retained earnings, a decrease to receivables of
$7.6 million
, an increase to inventories of
$2.8 million
, an increase to prepaid expenses and other current assets of
$6.9 million
, an increase to other accrued liabilities of
$1.4 million
, and an increase to other noncurrent liabilities of
$0.2 million
. The adjustments primarily related to the timing of recognition of certain customer charges, trade promotional expenditures, and volume discounts.
The effect of the changes made to our Consolidated Balance Sheet as of May 26, 2019 for the adoption of Topic 606 was as follows:
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|
|
|
|
|
|
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|
|
|
|
|
|
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|
As Reported
|
|
Adjustments
|
|
Balances without Adoption of Topic 606
|
Current assets
|
|
|
|
|
|
Receivables, less allowance for doubtful accounts
|
$
|
831.7
|
|
|
$
|
8.7
|
|
|
$
|
840.4
|
|
Inventories
|
1,571.7
|
|
|
(3.1
|
)
|
|
1,568.6
|
|
Prepaid expenses and other current assets
|
93.8
|
|
|
(16.6
|
)
|
|
77.2
|
|
Current liabilities
|
|
|
|
|
|
Other accrued liabilities
|
691.6
|
|
|
(1.1
|
)
|
|
690.5
|
|
Other noncurrent liabilities
|
1,951.8
|
|
|
(2.5
|
)
|
|
1,949.3
|
|
The effect of the changes made to our Consolidated Statement of Earnings for the adoption of Topic 606 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2019
|
|
As Reported
|
|
Adjustments
|
|
Balances without Adoption of Topic 606
|
Net sales
|
$
|
9,538.4
|
|
|
$
|
15.5
|
|
|
$
|
9,553.9
|
|
Cost of goods sold
|
6,885.4
|
|
|
24.5
|
|
|
6,909.9
|
|
Income from continuing operations before income taxes and equity method investment earnings
|
823.3
|
|
|
(9.0
|
)
|
|
814.3
|
|
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The effective date for this standard is for fiscal years beginning after December 31, 2017. We adopted this ASU in fiscal 2019. The adoption of this guidance did not have a material impact to our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
, which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. We adopted this ASU retrospectively in fiscal 2019. The adoption of this guidance did not have a material impact to our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows: Restricted Cash
, which provides amendments to current guidance to address the classifications and presentation of changes in restricted cash in the statement of cash flows. We adopted this ASU retrospectively in fiscal 2019. The adoption of this guidance did not have a material impact to our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations: Clarifying the Definition of a Business
, which provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. We adopted this ASU prospectively in fiscal 2019. The adoption of this guidance did not have a material impact to our consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07,
Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, which requires companies to present the service cost component of net
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
benefit cost in the same line items in which they report compensation cost. Companies are required to present all other components of net benefit cost outside operating income, if this subtotal is presented. In addition, the new standard requires that only the service cost component of net periodic benefit expense is eligible for capitalization. The new standard requires retrospective adoption of the presentation of net periodic benefit expense and prospective application of the capitalization of the service cost component. We adopted this ASU in fiscal 2019. As a result, the following amounts were reclassified in fiscal 2018 and 2017 to correspond to the current year presentation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Reclassified from Cost of goods sold
|
$
|
—
|
|
|
$
|
1.7
|
|
Reclassified from Selling, general and administrative expense
|
80.4
|
|
|
53.5
|
|
Reclassified to Pension and postretirement non-service income
|
$
|
80.4
|
|
|
$
|
55.2
|
|
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities
, which improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements and make certain targeted improvements to simplify the application of the hedge accounting guidance in current U.S. GAAP. The amendments in this update better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and presentation of hedge results. The effective date for the standard is for fiscal years beginning after December 15, 2018. We elected to early adopt this ASU in fiscal 2019. The adoption of this guidance did not have a material impact to our consolidated financial statements. See Note 18 for a discussion of our derivatives.
In August 2018, the FASB issued ASU No. 2018-14,
Compensation-Retirement Benefits-Defined Benefit Plans-General (Topic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans
, which modifies the disclosure requirements for defined benefit pension plans and other post-retirement plans. The effective date for this standard is for fiscal years beginning after December 15, 2020, with early adoption permitted. We elected to early adopt this ASU in fiscal 2019. The adoption of this guidance did not have a material impact to our consolidated financial statements and related disclosures.
Recently Issued Accounting Standards
— In February 2016, the FASB issued ASU 2016-02,
Leases
,
Topic 842
, which requires lessees to reflect most leases on their balance sheet as assets and obligations. The effective date for the standard is for fiscal years beginning after December 15, 2018. Early adoption is permitted. We are evaluating the effect that this standard will have on our consolidated financial statements and related disclosures. We have identified an accounting system to support the future state lease accounting process and continue to develop the future state process design as part of the overall system implementation. We have populated the accounting system with lease data and have validated the completeness and accuracy of such data. We expect the adoption of this standard to result in an increase in total assets and liabilities related to operating leases that are currently not recorded on our consolidated balance sheet, however, we do not expect there to be a material impact to our earnings or cash flows. See Note 16 for the total amount of our noncancelable operating lease commitments. The standard can be applied using the modified retrospective method or entities may also elect the optional transition method provided under ASU 2018-11,
Leases, Topic 842: Targeted Improvement,
issued in July 2018, allowing for application of the standard at the adoption date, with recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We will adopt this ASU on the first day of our fiscal year 2020 using the optional transition method and will elect certain practical expedients permitted under the transition guidance, including not reassessing whether existing contracts contain leases and carrying forward the historical classification of leases.
In August 2018, the FASB issued ASU No. 2018-15,
Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40)
:
Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The effective date for the standard is for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We do not expect ASU 2018-15 to have a material impact to our consolidated financial statements and related disclosures.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
2. ACQUISITIONS
On October 26, 2018, we acquired Pinnacle Foods Inc. ("Pinnacle"), a branded packaged foods company specializing in shelf-stable and frozen foods, which is now a wholly-owned subsidiary of the Company. Pursuant to the Agreement and Plan of Merger, dated as of June 26, 2018 (the "Merger Agreement"), among the Company, Pinnacle, and Patriot Merger Sub Inc., a wholly-owned subsidiary of the Company that ceased to exist at the effective time of the merger, each outstanding share of Pinnacle common stock was converted into the right to receive
$43.11
per share in cash and
0.6494
shares of common stock, par value
$5.00
per share, of the Company ("Company Shares") (together, the "Merger Consideration"), with cash payable in lieu of fractional shares of Company Shares. The total amount of consideration paid in connection with the acquisition was approximately
$8.03 billion
and consisted of: (1) cash of
$5.17 billion
(
$5.12 billion
net of cash acquired); (2)
77.5 million
Company Shares, with an approximate value of
$2.82 billion
, issued out of the Company's treasury; and (3) replacement awards issued to former Pinnacle employees representing the fair value attributable to pre-combination service (see Note 14) of
$51.1 million
.
In connection with the acquisition, we issued long-term debt of
$8.33 billion
(see Note 4) (which includes funding under the new term loan agreement) and received cash proceeds of
$575.0 million
(
$555.7 million
net of related fees) from the issuance of common stock in an underwritten public offering. We used such proceeds for the payment of the cash portion of the Merger Consideration, the repayment of Pinnacle debt acquired, the refinancing of certain Conagra Brands debt, and the payment of related fees and expenses.
The following table summarizes our current allocation of the total purchase consideration to the estimated fair values of the assets acquired and liabilities assumed at the acquisition date.
|
|
|
|
|
|
October 26,
2018
|
Cash and cash equivalents
|
$
|
47.2
|
|
Receivables
|
202.8
|
|
Inventories
|
653.7
|
|
Prepaid expenses and other current assets
|
14.9
|
|
Property, plant and equipment
|
721.2
|
|
Goodwill
|
7,015.9
|
|
Brands, trademarks and other intangibles
|
3,519.5
|
|
Other assets
|
24.3
|
|
Current liabilities
|
(605.5
|
)
|
Senior long-term debt, excluding current installments
|
(2,671.3
|
)
|
Noncurrent deferred tax liabilities
|
(814.1
|
)
|
Other noncurrent liabilities
|
(74.6
|
)
|
Total assets acquired and liabilities assumed
|
$
|
8,034.0
|
|
During fiscal 2019, we made adjustments to our initial allocations, which resulted in an increase to goodwill of
$353.9 million
. This goodwill increase resulted primarily from reductions in values of brands, trademarks and other intangibles of
$355.6 million
, property, plant and equipment of
$20.8 million
, and deferred tax liabilities of
$32.3 million
as we refine our fair value estimates. These changes did not have a significant impact on our net income for the fiscal year ended
May 26, 2019
.
Goodwill represents the excess of the consideration transferred over the preliminary estimate of fair values of the assets acquired and liabilities assumed and is primarily attributable to synergies and intangible assets such as assembled workforce which are not separately recognizable. Of the total goodwill,
$236.7 million
is deductible for tax purposes. Amortizable brands, trademarks and other intangibles totaled
$668.7 million
and have a weighted average estimated useful life of
25 years
. We are currently completing our fair value assessment of the acquired assets and liabilities with the assistance of third-party valuation specialists and any adjustments identified in the measurement period, which will not exceed one year from the acquisition date, will be accounted for prospectively. Until we complete our fair value assessments and further integration activities and organizational structural changes occur, our Pinnacle business is considered a separate reportable segment and
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
all goodwill was preliminarily allocated to reporting units within this segment.
The results of operations of Pinnacle are reported in the Company's consolidated financial statements from the date of acquisition and include
$1.73 billion
of total net sales and
$238.2 million
of operating profit for fiscal
2019
, which are included in the Pinnacle Foods segment's financial results.
The following unaudited pro forma financial information presents the combined results of operations as if the acquisition of Pinnacle had occurred on May 29, 2017, the beginning of fiscal year 2018. These unaudited pro forma results may not necessarily reflect the actual results of operations that would have been achieved, nor are they necessarily indicative of future results of operations.
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Pro forma net sales
|
$
|
10,788.1
|
|
|
$
|
11,034.2
|
|
Pro forma net income from continuing operations attributable to Conagra Brands, Inc.
|
$
|
803.8
|
|
|
$
|
1,089.7
|
|
The pro forma results include adjustments for amortization of acquired intangible assets, depreciation, and interest expense on debt issued to finance the acquisition as well as the related income taxes. The pro forma results also include the following material nonrecurring adjustments, along with the related income tax effect of the adjustments:
|
|
•
|
Acquisition related costs incurred by the Company of
$62.7 million
during fiscal 2019 were excluded and assumed to have been incurred at the beginning of fiscal 2018. Acquisition related costs incurred by Pinnacle of
$66.8 million
during fiscal 2019 were excluded from the pro forma results.
|
|
|
•
|
Non-recurring expense of
$53.0 million
for fiscal 2019 related to the fair value adjustment to acquisition-date inventory estimated to have been sold was removed and
$54.1 million
of expense was included in the results for fiscal 2018.
|
|
|
•
|
Non-recurring expense of
$45.7 million
for fiscal 2019 related to securing bridge financing for the acquisition were excluded and assumed to have been incurred at the beginning of fiscal 2018.
|
In February 2018, we acquired the
Sandwich Bros. of Wisconsin
®
business, maker of frozen breakfast and entree flatbread pocket sandwiches, for a cash purchase price of
$87.3 million
, net of cash acquired, including working capital adjustments. Approximately
$57.8 million
has been classified as goodwill and
$9.7 million
and
$7.1 million
have been classified as non-amortizing and amortizing intangible assets, respectively. The amount allocated to goodwill is deductible for tax purposes. The business is included in the Refrigerated & Frozen segment.
In October 2017, we acquired Angie's Artisan Treats, LLC, maker of
Angie's
®
BOOMCHICKAPOP
®
ready-to-eat popcorn, for a cash purchase price of
$249.8 million
, net of cash acquired, including working capital adjustments. Approximately
$156.7 million
has been classified as goodwill, of which
$95.4 million
is deductible for income tax purposes. Approximately
$73.8 million
and
$10.3 million
of the purchase price have been allocated to non-amortizing and amortizing intangible assets, respectively. The business is primarily included in the Grocery & Snacks segment, and to a lesser extent within the International segment.
In April 2017, we acquired protein-based snacking businesses Thanasi Foods LLC, maker of
Duke’s
®
meat snacks, and BIGS LLC, maker of
BIGS
®
seeds, for
$217.6 million
, net of cash acquired, including working capital adjustments. Approximately
$133.3 million
has been classified as goodwill, of which
$70.5 million
is deductible for income tax purposes. Approximately
$65.1 million
and
$16.1 million
of the purchase price have been allocated to non-amortizing and amortizing intangible assets, respectively. These businesses are primarily included in the Grocery & Snacks segment.
In September 2016, we acquired the operating assets of Frontera Foods, Inc. and Red Fork LLC, including the
Frontera
®
,
Red Fork
®
, and
Salpica
®
brands. These businesses make authentic, gourmet Mexican food products and contemporary American cooking sauces. We acquired the business for
$108.1 million
, net of cash acquired, including working capital adjustments. Approximately
$39.5 million
has been classified as goodwill and
$59.5 million
and
$7.2 million
have been classified as non-amortizing and amortizing intangible assets, respectively. The amount allocated to goodwill is deductible for tax purposes. These businesses are reflected principally within the Grocery & Snacks and Refrigerated & Frozen segments, and to a lesser extent within the International segment.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
These acquisitions collectively contributed
$319.1 million
,
$214.3 million
, and
$36.5 million
to net sales during fiscal
2019
,
2018
, and
2017
, respectively.
For each of these acquisitions, the amounts allocated to goodwill were primarily attributable to anticipated synergies, product portfolios, and other intangibles that do not qualify for separate recognition.
3. RESTRUCTURING ACTIVITIES
Pinnacle Integration Restructuring Plan
In December
2018, our Board of Directors (the "Board") approved a restructuring and integration plan related to the ongoing integration of the recently acquired operations of Pinnacle (the "Pinnacle Integration Restructuring Plan") for the purpose of achieving significant cost synergies between the companies. We expect to incur material charges for exit and disposal activities under U.S. GAAP. Although we remain unable to make good faith estimates relating to the entire Pinnacle Integration Restructuring Plan, we are reporting on actions initiated through the end of fiscal 2019, including the estimated amounts or range of amounts for each major type of costs expected to be incurred, and the charges that have resulted or will result in cash outflows. We expect to incur up to $
360.0 million
of operational expenditures ($
285.0 million
of cash charges and $
75.0 million
of non-cash charges) as well as $
85.0 million
of capital expenditures under the Pinnacle Integration Restructuring Plan. We have incurred or expect to incur approximately $
260.1 million
of charges ($
254.0 million
of cash charges and $
6.1 million
of non-cash charges) for actions identified to date under the Pinnacle Integration Restructuring Plan. We expect to incur costs related to the Pinnacle Integration Restructuring Plan over a
three
-year period.
We anticipate that we will recognize the following pre-tax expenses in association with the Pinnacle Integration Restructuring Plan (amounts include charges recognized from plan inception through the end of fiscal 2019):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
Pinnacle Foods
|
|
Corporate
|
|
Total
|
Other cost of goods sold
|
$
|
—
|
|
|
$
|
5.7
|
|
|
$
|
—
|
|
|
$
|
5.7
|
|
Total cost of goods sold
|
—
|
|
|
5.7
|
|
|
—
|
|
|
5.7
|
|
Severance and related costs
|
0.7
|
|
|
0.6
|
|
|
116.8
|
|
|
118.1
|
|
Accelerated depreciation
|
—
|
|
|
—
|
|
|
6.1
|
|
|
6.1
|
|
Contract/lease termination
|
—
|
|
|
0.8
|
|
|
19.8
|
|
|
20.6
|
|
Consulting/professional fees
|
0.2
|
|
|
—
|
|
|
96.1
|
|
|
96.3
|
|
Other selling, general and administrative expenses
|
0.1
|
|
|
—
|
|
|
13.2
|
|
|
13.3
|
|
Total selling, general and administrative expenses
|
1.0
|
|
|
1.4
|
|
|
252.0
|
|
|
254.4
|
|
Consolidated total
|
$
|
1.0
|
|
|
$
|
7.1
|
|
|
$
|
252.0
|
|
|
$
|
260.1
|
|
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
During fiscal 2019, we recognized the following pre-tax expenses for the Pinnacle Integration Restructuring Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
Pinnacle Foods
|
|
Corporate
|
|
Total
|
Other cost of goods sold
|
$
|
—
|
|
|
$
|
3.7
|
|
|
$
|
—
|
|
|
$
|
3.7
|
|
Total cost of goods sold
|
—
|
|
|
3.7
|
|
|
—
|
|
|
3.7
|
|
Severance and related costs
|
0.7
|
|
|
0.6
|
|
|
110.8
|
|
|
112.1
|
|
Accelerated depreciation
|
—
|
|
|
—
|
|
|
4.7
|
|
|
4.7
|
|
Contract/lease termination
|
—
|
|
|
0.8
|
|
|
0.3
|
|
|
1.1
|
|
Consulting/professional fees
|
0.2
|
|
|
—
|
|
|
38.1
|
|
|
38.3
|
|
Other selling, general and administrative expenses
|
0.1
|
|
|
—
|
|
|
8.2
|
|
|
8.3
|
|
Total selling, general and administrative expenses
|
1.0
|
|
|
1.4
|
|
|
162.1
|
|
|
164.5
|
|
Consolidated total
|
$
|
1.0
|
|
|
$
|
5.1
|
|
|
$
|
162.1
|
|
|
$
|
168.2
|
|
Included in the above results are $
163.5 million
of charges that have resulted or will result in cash outflows and $
4.7 million
in non-cash charges.
Liabilities recorded for the Pinnacle Integration Restructuring Plan and changes therein for fiscal 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
May 27,
2018
|
|
Costs Incurred
and Charged
to Expense
|
|
Costs Paid
or Otherwise Settled
|
|
Changes in
Estimates
|
|
Balance at
May 26,
2019
|
Severance and related costs
|
$
|
—
|
|
|
$
|
121.2
|
|
|
$
|
(35.2
|
)
|
|
$
|
(9.1
|
)
|
|
$
|
76.9
|
|
Contract/lease termination
|
—
|
|
|
1.1
|
|
|
(0.1
|
)
|
|
—
|
|
|
1.0
|
|
Consulting/professional fees
|
—
|
|
|
38.3
|
|
|
(19.9
|
)
|
|
—
|
|
|
18.4
|
|
Other costs
|
—
|
|
|
12.0
|
|
|
(10.8
|
)
|
|
—
|
|
|
1.2
|
|
Total
|
$
|
—
|
|
|
$
|
172.6
|
|
|
$
|
(66.0
|
)
|
|
$
|
(9.1
|
)
|
|
$
|
97.5
|
|
Conagra Restructuring Plan
During fiscal 2019, management initiated a new restructuring plan (the "Conagra Restructuring Plan") for costs in connection with actions taken to improve SG&A effectiveness and efficiencies and to optimize our supply chain network. We have incurred or expect to incur $
4.3 million
of charges ($
2.4 million
of cash charges and $
1.9 million
of non-cash charges) for actions identified to date under the Conagra Restructuring Plan. We are unable to quantify the scope of the entire Conagra Restructuring Plan at this time. During fiscal 2019, we recognized charges of $
2.2 million
($
1.4 million
of cash charges and $
0.8 million
in non-cash charges) in connection with the Conagra Restructuring Plan.
Supply Chain and Administrative Efficiency Plan
As of May 26, 2019, we had substantially completed our restructuring activities related to our Supply Chain and Administrative Efficiency Plan (the "SCAE Plan"). We recognized charges of $
9.6 million
, $
38.0 million
, and $
63.6 million
in connection with the SCAE Plan related to our continuing operations in fiscal 2019, 2018, and 2017, respectively. We have recognized $
469.9 million
in pre-tax expenses ($
103.3 million
in cost of goods sold, $
364.3 million
in SG&A expenses, and $
2.3 million
in pension and postretirement non-service income) from the inception of the SCAE Plan through May 26, 2019, related to our continuing operations. Included in these results were $
319.9 million
of cash charges and $
150.0 million
of non-cash charges. Our total pre-tax expenses for the SCAE Plan related to our continuing operations are expected to be $
471.0 million
($
321.0 million
of cash charges and $
150.0 million
of non-cash charges).
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
4. LONG-TERM DEBT
|
|
|
|
|
|
|
|
|
|
May 26, 2019
|
|
May 27, 2018
|
5.4% senior debt due November 2048
|
$
|
1,000.0
|
|
|
$
|
—
|
|
4.65% senior debt due January 2043
|
176.7
|
|
|
176.7
|
|
6.625% senior debt due August 2039
|
91.4
|
|
|
91.4
|
|
5.3% senior debt due November 2038
|
1,000.0
|
|
|
—
|
|
8.25% senior debt due September 2030
|
300.0
|
|
|
300.0
|
|
4.85% senior debt due November 2028
|
1,300.0
|
|
|
—
|
|
7.0% senior debt due October 2028
|
382.2
|
|
|
382.2
|
|
6.7% senior debt due August 2027
|
9.2
|
|
|
9.2
|
|
7.125% senior debt due October 2026
|
262.5
|
|
|
262.5
|
|
4.6% senior debt due November 2025
|
1,000.0
|
|
|
—
|
|
4.3% senior debt due May 2024
|
1,000.0
|
|
|
—
|
|
LIBOR plus 1.50% term loan due October 2023
|
200.0
|
|
|
—
|
|
3.2% senior debt due January 2023
|
837.0
|
|
|
837.0
|
|
3.25% senior debt due September 2022
|
250.0
|
|
|
250.0
|
|
LIBOR plus 1.375% term loan due October 2021
|
200.0
|
|
|
—
|
|
3.8% senior debt due October 2021
|
1,200.0
|
|
|
—
|
|
9.75% subordinated debt due March 2021
|
195.9
|
|
|
195.9
|
|
LIBOR plus 0.75% senior debt due October 2020
|
525.0
|
|
|
—
|
|
LIBOR plus 0.50% senior debt due October 2020
|
500.0
|
|
|
500.0
|
|
4.95% senior debt due August 2020
|
126.6
|
|
|
126.6
|
|
LIBOR plus 0.75% term loan due February 2019
|
—
|
|
|
300.0
|
|
2.00% to 9.59% lease financing obligations due on various dates through 2033
|
165.4
|
|
|
94.7
|
|
Other indebtedness
|
0.1
|
|
|
0.2
|
|
Total face value of debt
|
10,722.0
|
|
|
3,526.4
|
|
Unamortized fair value adjustment
|
24.5
|
|
|
27.6
|
|
Unamortized discounts
|
(19.0
|
)
|
|
(5.8
|
)
|
Unamortized debt issuance costs
|
(52.1
|
)
|
|
(11.3
|
)
|
Adjustment due to hedging activity
|
0.9
|
|
|
1.6
|
|
Less current installments
|
(20.6
|
)
|
|
(307.0
|
)
|
Total long-term debt
|
$
|
10,655.7
|
|
|
$
|
3,231.5
|
|
The aggregate minimum principal maturities of the long-term debt for each of the five fiscal years following
May 26, 2019
, are as follows:
|
|
|
|
|
2020
|
$
|
20.6
|
|
2021
|
1,368.2
|
|
2022
|
1,420.4
|
|
2023
|
1,103.4
|
|
2024
|
1,213.0
|
|
Pinnacle Acquisition Financing
In the first quarter of fiscal 2019, in connection with the announcement of the Pinnacle acquisition, we secured
$9.0 billion
in fully committed bridge financing. Prior to the acquisition, we capitalized financing costs related to the bridge
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
financing of
$45.7 million
to be amortized over the commitment period. Our net interest expense included
$11.9 million
for fiscal 2019 as a result of this amortization. The bridge facility was terminated in connection with the acquisition, and we recognized
$33.8 million
of expense within SG&A expenses for the remaining unamortized financing costs.
Also in the first quarter of fiscal 2019, we entered into a term loan agreement (the “Term Loan Agreement”) with a syndicate of financial institutions providing for term loans to the Company in an aggregate principal amount of up to
$1.30 billion
, as well as deal-contingent forward starting interest rate swap contracts (see Note 18) to hedge a portion of the interest rate risk related to our anticipated issuance of long-term debt to help finance the acquisition of Pinnacle.
During the second quarter of fiscal 2019, to finance a portion of our acquisition of Pinnacle, we (i) issued new senior unsecured notes in an aggregate principal amount of
$7.025 billion
and (ii) borrowed
$1.30 billion
under the Term Loan Agreement.
We issued the new senior unsecured notes in
seven
tranches: floating rate senior notes due October 22, 2020 in an aggregate principal amount of
$525.0 million
with interest equal to three-month LIBOR plus
0.75%
,
3.8%
senior notes due October 22, 2021 in an aggregate principal amount of
$1.20 billion
;
4.3%
senior notes due May 1, 2024 in an aggregate principal amount of
$1.0 billion
;
4.6%
senior notes due November 1, 2025 in an aggregate principal amount of
$1.0 billion
;
4.85%
senior notes due November 1, 2028 in an aggregate principal amount of
$1.30 billion
;
5.3%
senior notes due November 1, 2038 in an aggregate principal amount of
$1.0 billion
; and
5.4%
senior notes due November 1, 2048 in an aggregate principal amount of
$1.0 billion
.
Our
$1.30 billion
of borrowings under the Term Loan Agreement consisted of a
$650.0 million
tranche of
three
-year term loans and a
$650.0 million
tranche of
five
-year term loans. The
three
-year tranche loans mature on October 26, 2021, and the
five
-year tranche loans mature on October 26, 2023.
These term loans bear interest at, at the Company's election, either (a) LIBOR plus a percentage spread (ranging from
1%
to
1.625%
for
three
-year tranche loans and
1.125%
to
1.75%
for
five
-year tranche loans) based on the Company's senior unsecured long-term indebtedness ratings or (b) the alternate base rate, described in the Term Loan Agreement as the greatest of (i) Bank of America's prime rate, (ii) the federal funds rate plus
0.50%
, and (iii) one-month LIBOR plus
1.00%
, plus a percentage spread (ranging from
0%
to
0.625%
for
three
-year tranche loans and
0.125%
to
0.75%
for
five
-year tranche loans) based on the Company's senior unsecured long-term indebtedness ratings. The Company may voluntarily prepay term loans under the Term Loan Agreement, in whole or in part, without penalty, subject to certain conditions.
During fiscal 2019, we repaid
$900.0 million
of our borrowings under the Term Loan Agreement, which repayment consisted of
$450.0 million
of the
three
-year tranche loans and
$450.0 million
of the
five
-year tranche loans. Subsequent to fiscal 2019, we repaid an additional
$100.0 million
of the
three
-year tranche loans and
$100.0 million
of the
five
-year tranche loans.
In the second quarter of fiscal 2019, in connection with the Pinnacle acquisition, we prepaid in full
$2.40 billion
of obligations and liabilities of Pinnacle under or in respect of Pinnacle's credit agreement and other debt agreements. We also redeemed
$350.0 million
in aggregate principal amount of Pinnacle's outstanding
5.875%
senior notes due January 15, 2024 and recognized a charge of
$3.9 million
as a cost of early retirement of debt.
Also, in connection with the financing for the Pinnacle acquisition, we capitalized
$49.6 million
of debt issuance costs.
Our net interest expense in fiscal 2019 was reduced by
$2.0 million
due to the impact of the interest rate swap contracts entered into in the first quarter of fiscal 2019. During the second quarter of fiscal 2019, we terminated the interest rate swap contacts and received proceeds of
$47.5 million
. This gain was deferred in accumulated other comprehensive income and is being amortized as a reduction of interest expense over the lives of the related debt instruments.
Other Long-Term Debt
During the third quarter of fiscal 2018, we entered into a term loan agreement (the "Prior Term Loan Agreement") with a financial institution. The Prior Term Loan Agreement provided for term loans to the Company in an aggregate principal amount not to exceed
$300.0 million
, maturing on February 26, 2019. During the fourth quarter of fiscal 2018, we borrowed the full amount of the
$300.0 million
provided for under the Prior Term Loan Agreement. During the second quarter of fiscal 2019, we repaid in full the principal balance of all term loans outstanding under the Prior Term Loan Agreement. This did not result in a significant gain or loss.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
During the fourth quarter of fiscal 2018, we repaid the remaining principal balance of
$70.0 million
of our
2.1%
senior notes on the maturity date of March 15, 2018.
During the third quarter of fiscal 2018, we repaid the remaining principal balance of
$119.6 million
of our
1.9%
senior notes on the maturity date of January 25, 2018.
During the third quarter of fiscal 2018, we repaid the remaining capital lease liability balance of
$28.5 million
in connection with the early exit of an unfavorable lease contract.
During the second quarter of fiscal 2018, we issued
$500.0 million
aggregate principal amount of floating rate notes due October 9, 2020. The notes bear interest at a rate equal to three-month LIBOR plus
0.50%
per annum.
During the third quarter of fiscal 2017, we repaid the remaining principal balance of
$224.8 million
of our
5.819%
senior notes due 2017 and
$248.2 million
principal amount of our
7.0%
senior notes due 2019, in each case prior to maturity, resulting in a net loss on early retirement of debt of
$32.7 million
.
In connection with the Spinoff of Lamb Weston (see Note 6), Lamb Weston issued to us
$1.54 billion
aggregate principal amount of senior notes (the "Lamb Weston notes"). On November 9, 2016, we exchanged the Lamb Weston notes for
$250.2 million
aggregate principal amount of our
5.819%
senior notes due 2017,
$880.4 million
aggregate principal amount of our
1.9%
senior notes due 2018,
$154.9 million
aggregate principal amount of our
2.1%
senior notes due 2018,
$86.9 million
aggregate principal amount of our
7.0%
senior notes due 2019, and
$71.1 million
aggregate principal amount of our
4.95%
senior notes due 2020 (collectively, the "Conagra notes"), which had been purchased in the open market by certain investment banks prior to the Spinoff. Following the exchange, we cancelled the Conagra notes. These actions resulted in a net loss of
$60.6 million
as a cost of early retirement of debt.
During the first quarter of fiscal 2017, we repaid the entire principal balance of
$550.0 million
of our floating rate notes on the maturity date of July 21, 2016.
General
The Revolving Credit Facility (as defined in Note 5) and the Term Loan Agreement generally require our ratio of earnings before interest, taxes, depreciation and amortization ("EBITDA") to interest expense not to be less than
3.0
to 1.0 and our ratio of funded debt to EBITDA not to exceed certain decreasing specified levels, ranging from
5.875
through the first quarter of fiscal 2020 to
3.75
from the second quarter of fiscal 2023 and thereafter, with each ratio to be calculated on a rolling four-quarter basis. As of
May 26, 2019
, we were in compliance with all financial covenants under the Revolving Credit Facility and the Term Loan Agreement.
Net interest expense consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Long-term debt
|
$
|
385.9
|
|
|
$
|
161.2
|
|
|
$
|
203.6
|
|
Short-term debt
|
15.0
|
|
|
4.8
|
|
|
0.6
|
|
Interest income
|
(6.8
|
)
|
|
(3.8
|
)
|
|
(3.7
|
)
|
Interest capitalized
|
(2.7
|
)
|
|
(3.5
|
)
|
|
(5.0
|
)
|
|
$
|
391.4
|
|
|
$
|
158.7
|
|
|
$
|
195.5
|
|
Interest paid from continuing operations was
$375.6 million
,
$164.5 million
, and
$223.7 million
in fiscal
2019
,
2018
, and
2017
, respectively.
5. CREDIT FACILITIES AND BORROWINGS
At
May 26, 2019
, we had a revolving credit facility (the "Revolving Credit Facility") with a syndicate of financial institutions providing for a maximum aggregate principal amount outstanding at any one time of
$1.6 billion
(subject to increase to a maximum aggregate principal amount of
$2.1 billion
with the consent of the lenders). The Revolving Credit Facility matures on July 11, 2024 and is unsecured. The term of the Revolving Credit Facility may be extended for additional
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
one
-year or
two
-year periods from the then-applicable maturity date on an annual basis. In the fourth quarter of fiscal 2019, the Company entered into an amendment to extend the existing termination date under the Revolving Credit Facility for
one
additional year, effective July 11, 2019. As of
May 26, 2019
, there were
no
outstanding borrowings under the Revolving Credit Facility.
The Revolving Credit Facility contains events of default customary for unsecured investment grade credit facilities with corresponding grace periods. The Revolving Credit Facility contains customary affirmative and negative covenants for unsecured investment grade credit facilities of this type. It generally requires our ratio of EBITDA to interest expense not to be less than
3.0
to 1.0 and our ratio of funded debt to EBITDA not to exceed certain decreasing specified levels, ranging from
5.875
through the first quarter of fiscal 2020 to
3.75
from the second quarter of fiscal 2023 and thereafter, with each ratio to be calculated on a rolling four-quarter basis. As of
May 26, 2019
, we were in compliance with all financial covenants under the Revolving Credit Facility.
We finance our short-term liquidity needs with bank borrowings, commercial paper borrowings, and bankers' acceptances. As of
May 26, 2019
, there were
no
outstanding borrowings under our commercial paper program. As of
May 27, 2018
, we had
$277.0 million
outstanding under our commercial paper program at an average weighted interest rate of
2.08%
.
6. DISCONTINUED OPERATIONS AND OTHER DIVESTITURES
Lamb Weston Spinoff
On November 9, 2016, we completed the Spinoff of our Lamb Weston business. As of such date, we did not beneficially own any equity interest in Lamb Weston and no longer consolidated Lamb Weston into our financial results. The business results were previously reported in the Commercial segment. We reflected the results of this business as discontinued operations for all periods presented.
The summary comparative financial results of the Lamb Weston business through the date of the Spinoff, included within discontinued operations, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net sales
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,407.9
|
|
Income (loss) from discontinued operations before income taxes and equity method investment earnings
|
$
|
—
|
|
|
$
|
(0.3
|
)
|
|
$
|
172.3
|
|
Income (loss) before income taxes and equity method investment earnings
|
—
|
|
|
(0.3
|
)
|
|
172.3
|
|
Income tax expense (benefit)
|
2.8
|
|
|
(14.6
|
)
|
|
87.5
|
|
Equity method investment earnings
|
—
|
|
|
—
|
|
|
15.9
|
|
Income (loss) from discontinued operations, net of tax
|
(2.8
|
)
|
|
14.3
|
|
|
100.7
|
|
Less: Net income attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
6.8
|
|
Net income (loss) from discontinued operations attributable to Conagra Brands, Inc.
|
$
|
(2.8
|
)
|
|
$
|
14.3
|
|
|
$
|
93.9
|
|
During fiscal
2017
, we incurred
$74.8 million
of expenses in connection with the Spinoff primarily related to professional fees and contract services associated with preparation of regulatory filings and separation activities. These expenses are reflected in income from discontinued operations. During fiscal 2019 and 2018, we recognized income tax expense of
$2.8 million
and an income tax benefit of
$14.5 million
, respectively, due to adjustments of the estimated deductibility of these costs.
In connection with the Spinoff, total assets of
$2.28 billion
and total liabilities of
$2.98 billion
(including debt of
$2.46 billion
) were transferred to Lamb Weston. As part of the consideration for the Spinoff, the Company received a cash payment from Lamb Weston in the amount of
$823.5 million
. See Note 4 for discussion of the debt-for-debt exchange related to the Spinoff.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
We entered into a transition services agreement in connection with the Lamb Weston Spinoff and recognized
$2.2 million
and
$4.2 million
of income for the performance of services during fiscal
2018
and
2017
, respectively, classified within SG&A expenses.
Private Brands Operations
On February 1, 2016, pursuant to the Stock Purchase Agreement, dated as of November 1, 2015, we completed the disposition of our Private Brands operations to TreeHouse Foods, Inc. ("TreeHouse\").
The summary comparative financial results of the Private Brands business, included within discontinued operations, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Loss on sale of business
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1.6
|
)
|
Income from discontinued operations before income taxes and equity method investment earnings
|
0.9
|
|
|
0.4
|
|
|
3.9
|
|
Income before income taxes and equity method investment earnings
|
0.9
|
|
|
0.4
|
|
|
2.3
|
|
Income tax expense (benefit)
|
—
|
|
|
0.5
|
|
|
(0.3
|
)
|
Income (loss) from discontinued operations, net of tax
|
$
|
0.9
|
|
|
$
|
(0.1
|
)
|
|
$
|
2.6
|
|
We entered into a transition services agreement with TreeHouse and recognized
$2.2 million
and
$16.9 million
of income for the performance of services during fiscal
2018
and
2017
, respectively, classified within SG&A expenses.
ConAgra Mills Operations
On May 29, 2014, the Company, Cargill, Incorporated ("Cargill"), and CHS, Inc. ("CHS") completed the formation of the Ardent Mills joint venture. In connection with the formation, we contributed to Ardent Mills all of the assets of ConAgra Mills, our milling operations. Our equity in the earnings of Ardent Mills is reflected in our continuing operations.
In fiscal 2017, we adjusted a multi-employer pension withdrawal liability related to our former milling operations by
$2.0 million
(
$1.3 million
after-tax). This expense was recognized within discontinued operations.
Other Divestitures
During the first quarter of fiscal 2019, we completed the sale of our
Del Monte
®
processed fruit and vegetable business in Canada, which was included in our International segment, to Bonduelle Group for combined proceeds of
$32.2 million
. We recognized a gain on the sale of
$13.2 million
, included within SG&A expenses. The assets of this business have been reclassified as assets held for sale within our Consolidated Balance Sheets for all periods presented prior to the divestiture.
The assets classified as held for sale reflected in our Consolidated Balance Sheets related to the
Del Monte
®
processed fruit and vegetable business in Canada were as follows:
|
|
|
|
|
|
May 27, 2018
|
Current assets
|
$
|
6.1
|
|
Noncurrent assets (including goodwill of $5.8 million)
|
11.5
|
|
During the fourth quarter of fiscal 2019, we completed the sale of our
Wesson
®
oil business for net proceeds of
$171.8 million
, subject to final working capital adjustments. The business results were previously reported primarily in our Grocery & Snacks segment, and to a lesser extent within the Foodservice and International segments. We recognized a gain on the sale of
$33.1 million
included within SG&A expenses. The assets of this business have been reclassified as assets held for sale within our Consolidated Balance Sheets for all periods presented prior to the divestiture.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
We recognized an impairment charge of
$27.6 million
within SG&A expenses in fiscal 2017, as a production facility was not initially included in the assets to be sold, and we did not expect to recover the carrying value of this facility through future associated cash flows. This production facility was included in the assets transferred in the final
Wesson
®
oil business divestiture transaction.
The assets classified as held for sale reflected in our Consolidated Balance Sheets related to the
Wesson
®
oil business were as follows:
|
|
|
|
|
|
May 27, 2018
|
Current assets
|
$
|
37.7
|
|
Noncurrent assets (including goodwill of $74.5 million)
|
101.0
|
|
On May 24, 2019, we completed the sale of our Italian-based frozen pasta business, Gelit, for proceeds net of cash divested of
$77.5 million
, subject to final working capital adjustments. The business results were previously reported in our Refrigerated & Frozen segment. We recognized a gain on the sale of
$23.1 million
included within SG&A expenses. The assets and liabilities of this business have been reclassified as assets and liabilities held for sale within our Consolidated Balance Sheets for all periods presented prior to the divestiture.
The assets and liabilities classified as held for sale reflected in our Consolidated Balance Sheets related to Gelit were as follows:
|
|
|
|
|
|
May 27, 2018
|
Current assets
|
$
|
23.5
|
|
Noncurrent assets (including goodwill of $15.1 million)
|
43.3
|
|
Current liabilities
|
13.9
|
|
Noncurrent liabilities
|
4.4
|
|
During the first quarter of fiscal 2017, we completed the sales of our Spicetec Flavors & Seasonings business ("Spicetec") and our JM Swank business, each of which was part of our Commercial segment, for
$329.7 million
and
$159.3 million
, respectively, in cash, net of cash included in the dispositions. We recognized pre-tax gains from the sales of
$144.8 million
and
$52.6 million
, respectively. We entered into transition services agreements in connection with the sales of these businesses and recognized
$0.2 million
and
$1.9 million
of income during fiscal
2018
and fiscal
2017
, respectively, classified within SG&A expenses.
From time to time we actively market certain other assets. Balances totaling
$8.2 million
and
$29.4 million
at
May 26, 2019
and
May 27, 2018
, respectively, have been reclassified as assets held for sale within our Consolidated Balance Sheets for periods prior to the disposal of these individual asset groups.
7. INVESTMENTS IN JOINT VENTURES
The total carrying value of our equity method investments at the end of fiscal
2019
and
2018
was
$796.3 million
and
$776.2 million
, respectively. These amounts are included in other assets and reflect our
44%
ownership interest in Ardent Mills and
50%
ownership interests in other joint ventures. Due to differences in fiscal reporting periods, we recognized the equity method investment earnings on a lag of approximately one month.
In fiscal
2019
, we had purchases from our equity method invest
ees of
$39.4 million
. Total dividends received from equity method investments in fiscal
2019
were
$55.0 million
.
In fiscal
2018
, we had purchases from our equity method investees
of
$34.9 million
. Total dividends received from equity method investments in fiscal
2018
were $
62.5 million
.
In fiscal
2017
, we had purchases from our equity method investees of
$41.8 million
. Total dividends received from equity method investments in fiscal
2017
were
$68.2 million
.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
Summarized combined financial information for our equity method investments on a 100% basis is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net Sales:
|
|
|
|
|
|
Ardent Mills
|
$
|
3,476.0
|
|
|
$
|
3,344.1
|
|
|
$
|
3,180.0
|
|
Others
|
195.4
|
|
|
198.8
|
|
|
177.7
|
|
Total net sales
|
$
|
3,671.4
|
|
|
$
|
3,542.9
|
|
|
$
|
3,357.7
|
|
Gross margin:
|
|
|
|
|
|
|
Ardent Mills
|
$
|
281.9
|
|
|
$
|
386.5
|
|
|
$
|
340.3
|
|
Others
|
45.5
|
|
|
34.8
|
|
|
34.6
|
|
Total gross margin
|
$
|
327.4
|
|
|
$
|
421.3
|
|
|
$
|
374.9
|
|
Earnings after income taxes:
|
|
|
|
|
|
|
Ardent Mills
|
$
|
151.9
|
|
|
$
|
197.0
|
|
|
$
|
152.0
|
|
Others
|
18.1
|
|
|
10.1
|
|
|
10.1
|
|
Total earnings after income taxes
|
$
|
170.0
|
|
|
$
|
207.1
|
|
|
$
|
162.1
|
|
|
|
|
|
|
|
|
|
|
|
May 26, 2019
|
|
May 27, 2018
|
Ardent Mills:
|
|
|
|
Current assets
|
$
|
952.6
|
|
|
$
|
974.6
|
|
Noncurrent assets
|
1,669.8
|
|
|
1,675.7
|
|
Current liabilities
|
361.2
|
|
|
355.6
|
|
Noncurrent liabilities
|
496.9
|
|
|
510.9
|
|
Others:
|
|
|
|
Current assets
|
$
|
89.2
|
|
|
$
|
76.4
|
|
Noncurrent assets
|
19.0
|
|
|
15.5
|
|
Current liabilities
|
43.4
|
|
|
37.5
|
|
Noncurrent liabilities
|
0.7
|
|
|
0.1
|
|
8. VARIABLE INTEREST ENTITIES
Variable Interest Entities Not Consolidated
We lease or leased 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. The lease agreements also contain contingent put options (the "lease put options") that allow or allowed the lessors to require us to purchase the buildings at the greater of original construction cost, or fair market value, without a lease agreement in place (the "put price") in certain limited circumstances. As a result of substantial impairment charges related to our divested Private Brands operations, these lease put options became exercisable. We are amortizing the difference between the put price and the estimated fair value (without a lease agreement in place) of the property over the remaining lease term within SG&A expenses. During fiscal 2018, we purchased
two
buildings that were subject to lease put options and recognized net losses totaling
$48.2 million
for the early exit of unfavorable lease contracts. During fiscal 2017,
one
of these lease agreements expired, and we reversed the applicable accrual and recognized a benefit of $
6.7 million
in SG&A expenses.
As of
May 26, 2019
and
May 27, 2018
, there was
one
remaining leased building subject to a lease put option for which the put option price exceeded the estimated fair value of the property by
$8.2 million
, of which we had accrued
$1.6 million
and
$1.2 million
, respectively. This lease is accounted for as an operating lease, and accordingly, there are no material assets and liabilities, other than the accrued portion of the put price, associated with this entity included in the Consolidated Balance Sheets. We have determined that we do not have the power to direct the activities that most significantly impact the economic performance of this entity. In making this determination, we have considered, among other items, the terms of the lease agreement, the expected remaining useful life of the asset leased, and the capital structure of the lessor entity.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
9. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
The change in the carrying amount of goodwill for fiscal
2019
and
2018
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grocery & Snacks
|
|
Refrigerated & Frozen
|
|
International
|
|
Foodservice
|
|
Pinnacle Foods
|
|
Total
|
Balance as of May 28, 2017
|
$
|
2,439.1
|
|
|
$
|
1,022.8
|
|
|
$
|
247.8
|
|
|
$
|
571.1
|
|
|
$
|
—
|
|
|
$
|
4,280.8
|
|
Acquisitions
|
155.2
|
|
|
57.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
213.0
|
|
Purchase accounting adjustments
|
(1.5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.5
|
)
|
Currency translation
|
—
|
|
|
—
|
|
|
(4.9
|
)
|
|
—
|
|
|
—
|
|
|
(4.9
|
)
|
Balance as of May 27, 2018
|
$
|
2,592.8
|
|
|
$
|
1,080.6
|
|
|
$
|
242.9
|
|
|
$
|
571.1
|
|
|
$
|
—
|
|
|
$
|
4,487.4
|
|
Acquisitions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,015.9
|
|
|
7,015.9
|
|
Purchase accounting adjustments
|
1.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.5
|
|
Currency translation
|
—
|
|
|
—
|
|
|
(2.4
|
)
|
|
—
|
|
|
(2.8
|
)
|
|
(5.2
|
)
|
Balance as of May 26, 2019
|
$
|
2,594.3
|
|
|
$
|
1,080.6
|
|
|
$
|
240.5
|
|
|
$
|
571.1
|
|
|
$
|
7,013.1
|
|
|
$
|
11,499.6
|
|
Other identifiable intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Non-amortizing intangible assets
|
$
|
3,678.0
|
|
|
$
|
—
|
|
|
$
|
918.3
|
|
|
$
|
—
|
|
Amortizing intangible assets
|
1,244.2
|
|
|
260.8
|
|
|
576.6
|
|
|
212.1
|
|
|
$
|
4,922.2
|
|
|
$
|
260.8
|
|
|
$
|
1,494.9
|
|
|
$
|
212.1
|
|
Non-amortizing intangible assets are comprised of brands and trademarks.
Amortizing intangible assets, carrying a remaining weighted-average life of approximately
20 years
, are principally composed of customer relationships, and acquired intellectual property. For fiscal
2019
,
2018
, and
2017
, we recognized amortization expense of
$49.1 million
,
$34.9 million
, and
$33.6 million
, respectively. Based on amortizing assets recognized in our Consolidated Balance Sheet as of
May 26, 2019
, amortization expense is estimated to average
$58.3 million
for each of the next five years, with a high expense of
$59.9 million
in fiscal 2020 and decreasing to a low expense of
$54.2 million
in fiscal 2024.
During fiscal 2019, in conjunction with the divestiture of our Italian-based frozen pasta business, Gelit, we reclassified
$15.1 million
and
$1.7 million
of goodwill and other identifiable intangible assets, respectively, to noncurrent assets held for sale for periods prior to the divestiture.
During fiscal 2019, as a result of our annual impairment test for indefinite lived intangibles, we recognized impairment charges of
$76.5 million
for our
Chef Boyardee
®
and
Red Fork
®
brands in our Grocery & Snacks segment. We also recognized impairment charges of
$13.1 million
for our
Aylmer
®
and
Sundrop
®
brands in our International segment.
During fiscal 2018, as a result of our annual impairment test for indefinite lived intangibles, we recognized impairment charges of
$4.0 million
for our
HK Anderson
®
,
Red Fork
®
, and
Salpica
®
brands in our Grocery & Snacks segment. We also recognized an impairment charge of
$0.8 million
for our
Aylmer
®
brand in our International segment.
During fiscal 2017, we recorded goodwill impairment charges in our International reporting segment totaling
$198.9 million
, of which
$139.2 million
related to our Canadian reporting unit and
$59.7 million
related to our Mexican reporting unit. These impairment charges resulted from a change in reporting segments, which occurred in the first quarter of fiscal 2017 when we were required to determine new reporting units at a lower level, and from further deterioration in forecasted sales and profits during fiscal 2017, which were caused primarily by changes in foreign exchange rates.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
In fiscal 2017, due to declining sales of certain brands, we elected to perform a quantitative impairment test for indefinite lived intangibles of those brands. During fiscal 2017, we recognized impairment charges of
$31.5 million
for our
Del Monte
®
brand and
$5.5 million
for our
Aylmer
®
brand in our International segment. We also recognized impairment charges of
$67.1 million
for our
Chef Boyardee
®
brand and
$1.1 million
for our
Fiddle Faddle
®
brand in our Grocery & Snacks segment.
10. EARNINGS PER SHARE
Basic earnings per share is calculated on the basis of weighted average outstanding shares of common stock. Diluted earnings per share is computed on the basis of basic weighted average outstanding shares of common stock adjusted for the dilutive effect of stock options, restricted stock unit awards, and other dilutive securities. During the
second quarter
of fiscal
2019
, we issued
77.5 million
shares of our common stock out of treasury to the former shareholders of Pinnacle pursuant to the terms of the Merger Agreement. In addition, we issued
16.3 million
shares of our common stock, par value
$5.00
per share, in an underwritten public offering in connection with the financing of the Pinnacle acquisition, with net proceeds of
$555.7 million
(see Note 2).
The following table reconciles the income and average share amounts used to compute both basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net income available to Conagra Brands, Inc. common stockholders:
|
|
|
|
|
|
Income from continuing operations attributable to Conagra Brands, Inc. common stockholders
|
$
|
680.2
|
|
|
$
|
794.1
|
|
|
$
|
544.1
|
|
Income (loss) from discontinued operations, net of tax, attributable to Conagra Brands, Inc. common stockholders
|
(1.9
|
)
|
|
14.3
|
|
|
95.2
|
|
Net income attributable to Conagra Brands, Inc. common stockholders
|
$
|
678.3
|
|
|
$
|
808.4
|
|
|
$
|
639.3
|
|
Less: Increase in redemption value of noncontrolling interests in excess of earnings allocated
|
—
|
|
|
—
|
|
|
0.8
|
|
Net income available to Conagra Brands, Inc. common stockholders
|
$
|
678.3
|
|
|
$
|
808.4
|
|
|
$
|
638.5
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
Basic weighted average shares outstanding
|
444.0
|
|
|
403.9
|
|
|
431.9
|
|
Add: Dilutive effect of stock options, restricted stock unit awards, and other dilutive securities
|
1.6
|
|
|
3.5
|
|
|
4.1
|
|
Diluted weighted average shares outstanding
|
445.6
|
|
|
407.4
|
|
|
436.0
|
|
For fiscal 2019, 2018, and 2017, there were
2.0 million
,
1.3 million
, and
0.8 million
stock options outstanding, respectively, that were excluded from the computation of diluted weighted average shares because the effect was antidilutive.
11. INVENTORIES
The major classes of inventories were as follows:
|
|
|
|
|
|
|
|
|
|
May 26, 2019
|
|
May 27, 2018
|
Raw materials and packaging
|
$
|
276.5
|
|
|
$
|
202.9
|
|
Work in process
|
126.9
|
|
|
91.8
|
|
Finished goods
|
1,099.1
|
|
|
647.8
|
|
Supplies and other
|
69.2
|
|
|
46.2
|
|
Total
|
$
|
1,571.7
|
|
|
$
|
988.7
|
|
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
12. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities consisted of:
|
|
|
|
|
|
|
|
|
|
May 26, 2019
|
|
May 27, 2018
|
Postretirement health care and pension obligations
|
$
|
262.5
|
|
|
$
|
261.7
|
|
Noncurrent income tax liabilities
|
1,349.0
|
|
|
487.3
|
|
Self-insurance liabilities
|
42.9
|
|
|
27.1
|
|
Environmental liabilities (see Note 17)
|
56.8
|
|
|
56.0
|
|
Technology agreement liability
|
28.7
|
|
|
42.7
|
|
Other
|
211.9
|
|
|
186.0
|
|
|
$
|
1,951.8
|
|
|
$
|
1,060.8
|
|
13. CAPITAL STOCK
The total number of shares we are authorized to issue is
1,218,050,000
shares, which shares may be issued as follows:
1,200,000,000
shares of common stock, par value
$5.00
per share;
150,000
shares of Class B Preferred Stock, par value
$50.00
per share;
250,000
shares of Class C Preferred Stock, par value
$100.00
per share;
1,100,000
shares of Class D Preferred Stock, no par value per share; and
16,550,000
shares of Class E Preferred Stock, no par value per share. There were
no
preferred shares issued or outstanding as of
May 26, 2019
.
We have repurchased our shares of common stock from time to time after considering market conditions and in accordance with repurchase limits authorized by our Board. In May 2017 and May 2018, our Board approved increases to our share repurchase authorization of
$1.0 billion
each. We repurchased
27.4 million
shares of our common stock for approximately
$967.3 million
in fiscal 2018 and
25.1 million
shares of our common stock for approximately
$1.0 billion
in fiscal 2017 under this program.
14. SHARE-BASED PAYMENTS
In accordance with stockholder-approved equity incentive plans, we grant stock-based compensation awards, including restricted stock units, cash-settled restricted stock units, performance shares, performance-based restricted stock units, stock options, and stock appreciation rights. The shares delivered upon vesting or lapse of restriction under any such arrangement may consist, in whole or part, of treasury stock or authorized but unissued stock, not reserved for any other purpose.
On September 19, 2014, our stockholders approved the Conagra Brands, Inc. 2014 Stock Plan (as amended effective December 11, 2017, the "Plan"). The Plan authorizes the issuance of up to
40.3 million
shares of Conagra Brands common stock as well as certain shares of Conagra Brands common stock subject to outstanding awards under predecessor stock plans that expire, lapse, are cancelled, terminated, forfeited, otherwise become unexercisable, or are settled for cash. At
May 26, 2019
, approximately
40.9 million
shares were reserved for granting new share-based awards.
All amounts below are of continuing and discontinued operations.
Share Unit Awards
In accordance with stockholder-approved equity incentive plans, we grant awards of restricted stock units and cash-settled restricted stock units ("share units") to employees and directors. These awards generally have requisite service periods of
three years
. Under each such award, stock or cash (as applicable) is issued without direct cost to the employee. We estimate the fair value of the share units based upon the market price of our stock at the date of grant. Certain share unit grants do not provide for the payment of dividend equivalents to the participant during the requisite service period (the "vesting period"). For those grants, the value of the grants is reduced by the net present value of the foregone dividend equivalent payments.
We recognize compensation expense for share unit awards on a straight-line basis over the requisite service period, accounting for forfeitures as they occur. All cash-settled restricted stock units are marked-to-market and presented within other current and noncurrent liabilities in our Consolidated Balance Sheets. The compensation expense for our stock-settled
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
share unit awards totaled
$23.9 million
,
$21.8 million
, and
$18.2 million
for fiscal
2019
,
2018
, and
2017
, respectively, including discontinued operations of
$1.4 million
for fiscal 2017. The tax benefit related to the stock-settled share unit award compensation expense for fiscal
2019
,
2018
, and
2017
was
$6.0 million
,
$7.2 million
, and
$7.0 million
, respectively.
The compensation expense for our cash-settled share unit awards totaled
$17.5 million
,
$5.8 million
, and
$20.9 million
for fiscal
2019
,
2018
, and
2017
, respectively, including discontinued operations of
$2.6 million
for fiscal 2017. The tax benefit related to the cash-settled share unit award compensation expense for fiscal
2019
,
2018
, and
2017
was
$4.4 million
,
$1.9 million
, and
$8.0 million
, respectively.
During the
second quarter
of fiscal
2019
, in connection with the completion of the Pinnacle acquisition, we granted
2.0 million
cash-settled share unit awards at a grant date fair value of
$36.37
per share unit to Pinnacle employees in replacement of their unvested restricted share unit awards that were outstanding as of the closing date. Included in the compensation expense described above for fiscal
2019
is expense of
$18.9 million
for accelerated vesting of awards related to Pinnacle integration restructuring activities, net of the impact of marking-to-market these awards based on a lower market price of shares of Conagra Brands common stock. Approximately
$36.3 million
of the fair value of the replacement share unit awards granted to Pinnacle employees was attributable to pre-combination service and was included in the purchase price and established as a liability. Included in the expense for cash-settled share unit awards above is income of
$6.7 million
related to the mark-to-market of this liability. As of
May 26, 2019
, our liability for the replacement awards was
$15.9 million
, which includes post-combination service expense, the mark-to-market of the liability, and the impact of payouts since completing the Pinnacle acquisition. Post-combination expense of approximately
$3.9 million
, based on the market price of shares of Conagra Brands common stock as of
May 26, 2019
, is expected to be recognized related to the replacement awards over the remaining post-combination service period of approximately
two years
.
The following table summarizes the nonvested share units as of
May 26, 2019
and changes during the fiscal year then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Settled
|
|
Cash-Settled
|
Share Units
|
Share Units
(in Millions)
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Share Units
(in Millions)
|
|
Weighted
Average
Grant-Date
Fair Value
|
Nonvested share units at May 27, 2018
|
1.78
|
|
|
$
|
34.20
|
|
|
0.71
|
|
|
$
|
34.58
|
|
Granted
|
0.89
|
|
|
$
|
35.43
|
|
|
1.95
|
|
|
$
|
36.37
|
|
Vested/Issued
|
(0.72
|
)
|
|
$
|
33.29
|
|
|
(1.64
|
)
|
|
$
|
35.55
|
|
Forfeited
|
(0.14
|
)
|
|
$
|
35.08
|
|
|
(0.05
|
)
|
|
$
|
36.07
|
|
Nonvested share units at May 26, 2019
|
1.81
|
|
|
$
|
34.89
|
|
|
0.97
|
|
|
$
|
36.20
|
|
During fiscal
2019
,
2018
, and
2017
, we granted
0.9 million
,
0.9 million
, and
0.6 million
stock-settled share units, respectively, with a weighted average grant date fair value of
$35.43
,
$34.16
, and
$46.79
per share unit, respectively. During fiscal
2017
, we granted
0.4 million
cash-settled share units with a weighted average grant date fair value of
$48.07
per share unit.
No
cash-settled share unit awards were granted in fiscal 2018.
The total intrinsic value of stock-settled share units vested was
$24.6 million
,
$18.5 million
, and
$27.0 million
during fiscal
2019
,
2018
, and
2017
, respectively. The total intrinsic value of cash-settled share units vested was
$50.5 million
,
$14.2 million
, and
$24.0 million
during fiscal
2019
,
2018
, and
2017
, respectively.
At
May 26, 2019
, we had
$25.2 million
and
$4.2 million
of total unrecognized compensation expense that will be recognized over a weighted average period of
1.9 years
and
1.5 years
, related to stock-settled share unit awards and cash-settled share unit awards, respectively.
Performance Share Awards
In accordance with stockholder-approved equity incentive plans, we grant performance shares to selected executives and other key employees with vesting contingent upon meeting various Company-wide performance goals. The performance goal for
one-third
of the target number of performance shares for the
three
-year performance period ending in fiscal 2019 (the "2019 performance period") is based on our fiscal 2017 EBITDA return on capital, subject to certain adjustments. The fiscal 2017 EBITDA return on capital target, when set, excluded the results of Lamb Weston. The performance goal for the final
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
two-thirds
of the target number of performance shares granted for the 2019 performance period is based on our diluted EPS compound annual growth rate ("CAGR"), subject to certain adjustments, measured over the
two
-year period ending in fiscal 2019. In addition, for certain participants, all performance shares for the 2019 performance period are subject to an overarching EPS goal that must be met in each fiscal year of the 2019 performance period before any payout on the performance shares can be made to such participants. The awards actually earned for the 2019 performance period will range from
zero
to
two hundred percent
of the targeted number of performance shares for that period.
The performance goal for each of the
three
-year performance period ending in fiscal 2020 (the "2020 performance period") and the
three
-year performance period ending in 2021 ("2021 performance period") is based on our diluted EPS CAGR, subject to certain adjustments, measured over the defined performance period. In addition, for certain participants, all performance shares for the 2020 performance period are subject to an overarching EPS goal that must be met in each fiscal year of the 2020 performance period before any payout on the performance shares can be made to such participants. For each of the 2020 performance period and the 2021 performance period, the awards actually earned will range from
zero
to
two hundred percent
of the targeted number of performance shares for such performance period.
Awards, if earned, will be paid in shares of our common stock. Subject to limited exceptions set forth in our performance share plan, any shares earned will be distributed after the end of the performance period, and only if the participant continues to be employed with the Company through the date of distribution. For awards where performance against the performance target has not been certified, the value of the performance shares is adjusted based upon the market price of our common stock and current forecasted performance against the performance targets at the end of each reporting period and amortized as compensation expense over the vesting period. Forfeitures are accounted for as they occur.
A summary of the activity for performance share awards as of
May 26, 2019
and changes during the fiscal year then ended is presented below:
|
|
|
|
|
|
|
|
Performance Shares
|
Share Units
(in Millions)
|
|
Weighted
Average
Grant-Date
Fair Value
|
Nonvested performance shares at May 27, 2018
|
1.00
|
|
|
$
|
33.40
|
|
Granted
|
0.45
|
|
|
$
|
35.96
|
|
Adjustments for performance results attained and dividend equivalents
|
0.18
|
|
|
$
|
31.03
|
|
Vested/Issued
|
(0.43
|
)
|
|
$
|
31.03
|
|
Forfeited
|
(0.05
|
)
|
|
$
|
34.54
|
|
Nonvested performance shares at May 26, 2019
|
1.15
|
|
|
$
|
34.89
|
|
The compensation expense for our performance share awards totaled
$8.2 million
,
$11.8 million
, and
$13.3 million
for fiscal
2019
,
2018
, and
2017
, respectively. The tax benefit related to the compensation expense for fiscal
2019
,
2018
, and
2017
was
$2.1 million
,
$3.9 million
, and
$5.1 million
, respectively.
The total intrinsic value of performance shares vested (including shares paid in lieu of dividends) during fiscal
2019
,
2018
, and
2017
was
$15.7 million
,
$11.2 million
, and
$2.8 million
, respectively.
Based on estimates at
May 26, 2019
, we had
$13.2 million
of total unrecognized compensation expense related to performance shares that will be recognized over a weighted average period of
1.7 years
.
Performance-Based Restricted Stock Unit Awards
On April 15, 2019 (the "grant date"), we made grants of performance-based restricted stock unit ("PBRSU") awards to the Company's named executive officers and a limited group of other senior officers of the Company. A total of
0.2 million
PBRSU awards were granted with a grant date fair value of
$41.82
per PBRSU.
The PBRSU awards are awards of share units with vesting contingent on our achievement of certain absolute total shareholder return performance ("TSR") goals over a performance period beginning on the grant date and ending May 27, 2022 (the "PBRSU performance period"). If PBRSUs are earned based on absolute TSR and absolute TSR meets or exceeds a predetermined rate, they become eligible for an upward adjustment of
25%
based on our relative TSR for the PBRSU
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
performance period versus the median TSR of the S&P 500 Index ("RTSR"). Each PBRSU award payout can range from
0%
to
500%
of the initial target grant and will not exceed
8.6
times the grant value of each grantee's PBRSU award (including earned dividend equivalents).
Compensation expense for the awards is recognized over the PBRSU performance period based upon the grant date fair value. The grant date fair value was estimated using a Monte-Carlo simulation model with a risk-free rate of
2.35%
and an expected volatility of
24.92%
. The model includes no expected dividend yield as the PBRSUs earn dividend equivalents.
We recognize compensation expense using the straight-line method over the requisite service period, accounting for forfeitures as they occur. The compensation expense for our PBRSU awards totaled
$0.3 million
for fiscal
2019
. The tax benefit related to the compensation expense for fiscal
2019
was
$0.1 million
. Based on estimates at
May 26, 2019
, we had
$7.4 million
of total unrecognized compensation expense related to the PBRSU awards that will be recognized over a period of
3 years
.
Stock Option Awards
In accordance with stockholder-approved equity incentive plans, we granted stock options to employees and directors for the purchase of common stock at prices equal to its fair value at the date of grant. Stock options become exercisable under various vesting schedules (typically
three years
) and generally expire
seven
to
ten years
after the date of grant.
No
stock options were granted in fiscal 2019 or 2018.
The fair value of each option is estimated on the date of grant using a Black-Scholes option-pricing model with the following weighted average assumptions for stock options granted:
|
|
|
|
2017
|
Expected volatility (%)
|
19.15
|
Dividend yield (%)
|
2.33
|
Risk-free interest rates (%)
|
1.03
|
Expected life of stock option (years)
|
4.94
|
The expected volatility is based on the historical market volatility of our stock over the expected life of the stock options granted. The expected life represents the period of time that the awards are expected to be outstanding and is based on the contractual term of each instrument, taking into account employees' historical exercise and termination behavior.
A summary of the option activity as of
May 26, 2019
and changes during the fiscal year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
Number
of Options
(in Millions)
|
|
Weighted
Average
Exercise
Price
|
|
Average
Remaining
Contractual
Term
(Years)
|
|
Aggregate
Intrinsic
Value (in
Millions)
|
Outstanding at May 27, 2018
|
5.1
|
|
|
$
|
28.11
|
|
|
|
|
|
Exercised
|
(0.6
|
)
|
|
$
|
20.75
|
|
|
|
|
$
|
7.9
|
|
Expired
|
(0.1
|
)
|
|
$
|
29.84
|
|
|
|
|
|
Outstanding at May 26, 2019
|
4.4
|
|
|
$
|
29.00
|
|
|
5.47
|
|
$
|
9.9
|
|
Exercisable at May 26, 2019
|
4.1
|
|
|
$
|
28.38
|
|
|
5.32
|
|
$
|
9.9
|
|
We recognize compensation expense using the straight-line method over the requisite service period, accounting for forfeitures as they occur. During fiscal
2017
, we granted
1.1 million
stock options with a weighted average grant date fair value of
$6.12
per share. The total intrinsic value of stock options exercised was
$7.9 million
,
$15.8 million
, and
$29.8 million
for fiscal
2019
,
2018
, and
2017
, respectively. The closing market price of our common stock on the last trading day of fiscal
2019
was
$28.83
per share.
Compensation expense for stock option awards totaled
$2.2 million
,
$4.2 million
, and
$6.2 million
for fiscal
2019
,
2018
, and
2017
, respectively, including discontinued operations of
$0.2 million
for fiscal 2017. Included in the compensation expense
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
for stock option awards for fiscal
2019
,
2018
, and
2017
was
$0.2 million
,
$0.4 million
, and
$0.9 million
, respectively, related to stock options granted by a subsidiary in the subsidiary's shares to the subsidiary's employees. The tax benefit related to the stock option expense for fiscal
2019
,
2018
, and
2017
was
$0.5 million
,
$1.4 million
, and
$2.4 million
, respectively.
At
May 26, 2019
, we had
$0.2 million
of total unrecognized compensation expense related to stock options that will be recognized over a weighted average period of
0.1 years
.
Cash received from stock option exercises for fiscal
2019
,
2018
, and
2017
was
$12.4 million
,
$25.1 million
, and
$84.4 million
, respectively. The actual tax benefit realized for the tax deductions from option exercises totaled
$2.3 million
,
$5.3 million
, and
$19.5 million
for fiscal
2019
,
2018
, and
2017
, respectively.
Stock Appreciation Rights Awards
During the
second quarter
of fiscal
2019
, in connection with the completion of the Pinnacle acquisition, we granted
2.3 million
cash-settled stock appreciation rights with a fair value estimated at closing date using a Black-Scholes option-pricing model and a grant date price of
$36.37
per share to Pinnacle employees in replacement of their unvested stock option awards that were outstanding as of the closing date. Approximately
$14.8 million
of the fair value of the replacement awards granted to Pinnacle employees was attributable to pre-combination service and was included in the purchase price and established as a liability. As of
May 26, 2019
, the liability of the replacement stock appreciation rights was
$0.9 million
, which includes post-combination service expense, the mark-to-market of the liability, and the impact of payouts since acquisition.
The compensation income for our cash-settled stock appreciation rights totaled
$13.7 million
for fiscal
2019
. Included in this amount is income of
$14.0 million
related to the mark-to-market of the liability established in connection with the Pinnacle acquisition and expense of
$0.2 million
for accelerated vesting of awards related to Pinnacle integration restructuring activities, net of the impact of marking-to-market these awards based on a lower market price of Conagra common shares. The related tax expense for fiscal
2019
was
$3.4 million
.
A summary of the stock appreciation rights activity as of
May 26, 2019
and changes during the fiscal year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Appreciation Rights
|
Number
of Options
(in Millions)
|
|
Weighted
Average
Exercise
Price
|
|
Average
Remaining
Contractual
Term
(Years)
|
|
Aggregate
Intrinsic
Value (in
Millions)
|
Granted
|
2.3
|
|
|
$
|
27.09
|
|
|
|
|
|
Exercised
|
(0.1
|
)
|
|
$
|
24.79
|
|
|
|
|
$
|
0.1
|
|
Expired
|
(1.8
|
)
|
|
$
|
26.92
|
|
|
|
|
|
Outstanding at May 26, 2019
|
0.4
|
|
|
$
|
28.13
|
|
|
0.16
|
|
$
|
0.6
|
|
Exercisable at May 26, 2019
|
0.4
|
|
|
$
|
28.13
|
|
|
0.16
|
|
$
|
0.6
|
|
15. PRE-TAX INCOME AND INCOME TAXES
The U.S. Tax Cuts and Jobs Act ("Tax Act") was signed into law on December 22, 2017. The changes to U.S. tax law include, but are not limited to, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, and changing how foreign earnings are subject to U.S. tax.
Beginning in fiscal 2019, the Tax Act created a provision known as global intangible low-tax income ("GILTI") that imposes a tax on certain earnings of foreign subsidiaries. We have made an accounting policy election to treat GILTI taxes as a current period expense.
Pre-tax income from continuing operations (including equity method investment earnings) consisted of the following:
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
United States
|
$
|
826.6
|
|
|
$
|
902.5
|
|
|
$
|
883.5
|
|
Foreign
|
72.5
|
|
|
69.6
|
|
|
(82.8
|
)
|
|
$
|
899.1
|
|
|
$
|
972.1
|
|
|
$
|
800.7
|
|
The provision for income taxes included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Current
|
|
|
|
|
|
Federal
|
$
|
125.4
|
|
|
$
|
153.1
|
|
|
$
|
201.5
|
|
State
|
22.6
|
|
|
17.8
|
|
|
6.7
|
|
Foreign
|
21.6
|
|
|
32.5
|
|
|
6.5
|
|
|
169.6
|
|
|
203.4
|
|
|
214.7
|
|
Deferred
|
|
|
|
|
|
Federal
|
40.1
|
|
|
(43.7
|
)
|
|
62.1
|
|
State
|
19.0
|
|
|
17.4
|
|
|
(5.3
|
)
|
Foreign
|
(9.9
|
)
|
|
(2.5
|
)
|
|
(16.8
|
)
|
|
49.2
|
|
|
(28.8
|
)
|
|
40.0
|
|
|
$
|
218.8
|
|
|
$
|
174.6
|
|
|
$
|
254.7
|
|
Income taxes computed by applying the U.S. Federal statutory rates to income from continuing operations before income taxes are reconciled to the provision for income taxes set forth in the Consolidated Statements of Operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Computed U.S. Federal income taxes
|
$
|
188.8
|
|
|
$
|
285.3
|
|
|
$
|
280.2
|
|
State income taxes, net of U.S. Federal tax impact
|
34.1
|
|
|
18.0
|
|
|
22.4
|
|
Remeasurement of U.S. deferred taxes
|
—
|
|
|
(241.6
|
)
|
|
—
|
|
Transition tax on foreign earnings
|
(4.6
|
)
|
|
19.8
|
|
|
—
|
|
Tax credits and domestic manufacturing deduction
|
(5.6
|
)
|
|
(20.6
|
)
|
|
(19.8
|
)
|
Federal rate differential on legal reserve
|
—
|
|
|
12.6
|
|
|
—
|
|
Goodwill and intangible impairments
|
12.5
|
|
|
—
|
|
|
104.7
|
|
Stock compensation
|
(2.1
|
)
|
|
(5.7
|
)
|
|
(18.8
|
)
|
Legal entity reorganization
|
16.9
|
|
|
—
|
|
|
—
|
|
State tax impact of combining Pinnacle business
|
(12.0
|
)
|
|
—
|
|
|
—
|
|
Change of valuation allowance on capital loss carryforward
|
(32.2
|
)
|
|
78.6
|
|
|
(84.1
|
)
|
Change in estimate related to tax methods used for certain international sales, federal credits, and state credits
|
—
|
|
|
—
|
|
|
(8.0
|
)
|
Other
|
23.0
|
|
|
28.2
|
|
|
(21.9
|
)
|
|
$
|
218.8
|
|
|
$
|
174.6
|
|
|
$
|
254.7
|
|
Income taxes paid, net of refunds, were
$133.8 million
,
$164.1 million
, and
$213.0 million
in fiscal
2019
,
2018
, and
2017
, respectively.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
The tax effect of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 26, 2019
|
|
May 27, 2018
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
Property, plant and equipment
|
$
|
—
|
|
|
$
|
240.7
|
|
|
$
|
—
|
|
|
$
|
141.0
|
|
Inventory
|
15.2
|
|
|
—
|
|
|
2.6
|
|
|
—
|
|
Goodwill, trademarks and other intangible assets
|
—
|
|
|
1,187.0
|
|
|
—
|
|
|
406.2
|
|
Accrued expenses
|
11.8
|
|
|
—
|
|
|
15.5
|
|
|
—
|
|
Compensation related liabilities
|
35.9
|
|
|
—
|
|
|
34.1
|
|
|
—
|
|
Pension and other postretirement benefits
|
54.6
|
|
|
—
|
|
|
45.8
|
|
|
—
|
|
Investment in unconsolidated subsidiaries
|
—
|
|
|
185.4
|
|
|
—
|
|
|
165.8
|
|
Other liabilities that will give rise to future tax deductions
|
123.5
|
|
|
—
|
|
|
109.7
|
|
|
—
|
|
Net capital and operating loss carryforwards
|
766.5
|
|
|
—
|
|
|
762.5
|
|
|
—
|
|
Federal credits
|
18.0
|
|
|
—
|
|
|
3.5
|
|
|
—
|
|
Other
|
37.6
|
|
|
24.0
|
|
|
23.6
|
|
|
9.5
|
|
|
1,063.1
|
|
|
1,637.1
|
|
|
997.3
|
|
|
722.5
|
|
Less: Valuation allowance
|
(738.1
|
)
|
|
—
|
|
|
(739.6
|
)
|
|
—
|
|
Net deferred taxes
|
$
|
325.0
|
|
|
$
|
1,637.1
|
|
|
$
|
257.7
|
|
|
$
|
722.5
|
|
The liability for gross unrecognized tax benefits at
May 26, 2019
was
$44.1 million
, excluding a related liability of
$11.7
million for gross interest and penalties. Included in the balance at
May 26, 2019
are
$1.0 million
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. As of
May 27, 2018
, our gross liability for unrecognized tax benefits was
$32.5 million
, excluding a related liability of
$7.7 million
for gross interest and penalties. Interest and penalties recognized in the Consolidated Statements of Operations was an expense of
$1.2 million
in fiscal 2019, an expense of
$1.6 million
in fiscal 2018, and a benefit of
$0.3 million
in fiscal 2017.
The net amount of unrecognized tax benefits at
May 26, 2019
and
May 27, 2018
that, if recognized, would favorably impact our effective tax rate was
$37.3 million
and
$27.8 million
, respectively.
We accrue interest and penalties associated with uncertain tax positions as part of income tax expense.
We conduct business and file tax returns in numerous countries, states, and local jurisdictions. The U.S. Internal Revenue Service ("IRS") has completed its audit of the Company for tax years through fiscal 2017. All resulting significant items for fiscal 2017 and prior years have been settled with the IRS, with the exception of fiscal 2016. Statutes of limitation for pre-acquisition tax years of Pinnacle generally remain open for calendar year 2002 and subsequent years principally related to net operating losses. Other major jurisdictions where we conduct business generally have statutes of limitations ranging from
three
to
five
years.
We estimate that it is reasonably possible that the amount of gross unrecognized tax benefits will decrease by up to
$20.7 million
over the next twelve months due to various federal, state, and foreign audit settlements and the expiration of statutes of limitations. Of this amount, approximately
$6.7 million
would reverse through results of discontinued operations.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
The change in the unrecognized tax benefits for the year ended
May 26, 2019
was:
|
|
|
|
|
Beginning balance on May 27, 2018
|
$
|
32.5
|
|
Acquired business positions
|
10.6
|
|
Increases from positions established during prior periods
|
7.7
|
|
Decreases from positions established during prior periods
|
(3.4
|
)
|
Increases from positions established during the current period
|
4.2
|
|
Decreases relating to settlements with taxing authorities
|
(5.2
|
)
|
Reductions resulting from lapse of applicable statute of limitation
|
(3.3
|
)
|
Other adjustments to liability
|
1.0
|
|
Ending balance on May 26, 2019
|
$
|
44.1
|
|
We have approximately
$30.1 million
of foreign net operating loss carryforwards (
$15.0 million
will expire between fiscal
2020
and 2040 and
$15.1 million
have no expiration dates) and
$146.2 million
of Federal net operating loss carryforwards which expire between fiscal 2022 and 2027. Federal capital loss carryforwards related to the Private Brands divestiture of approximately
$2.6 billion
will expire in fiscal 2021. Included in net deferred tax liabilities are
$49.0 million
of tax effected state net operating loss carryforwards which expire in various years ranging from fiscal 2020 to 2038 and
$169.0 million
of tax effected state capital loss carryforwards related to the divestiture of Private Brands, the vast majority of which expire in fiscal 2021. Foreign tax credits of
$7.6 million
will expire between fiscal 2025 and 2029. State tax credits of approximately
$11.5 million
will expire in various years ranging from fiscal
2020
to 2029.
We have recognized a valuation allowance for the portion of the net operating loss carryforwards, capital loss carryforwards, tax credit carryforwards, and other deferred tax assets we believe are not more likely than not to be realized. The net change in the valuation allowance for fiscal 2019 was a decrease of
$1.5 million
. For fiscal
2018
and
2017
, changes in the valuation allowance were a decrease of
$273.8 million
and a decrease of
$420.1 million
, respectively. The current year change principally relates to increases in the valuation allowances for state and foreign net operating losses and credits offset by the release of valuation allowances on capital loss due to capital gains from the divestiture of the
Wesson
®
oil and Gelit businesses.
We believe that our foreign subsidiaries have invested or will invest any undistributed earnings indefinitely, or the earnings will be remitted in a tax-neutral transaction, and, therefore, do not provide deferred taxes on the cumulative undistributed earnings of our foreign subsidiaries. Historically, we had determined that previously undistributed earnings of certain foreign subsidiaries no longer met the requirement for indefinite reinvestment and therefore recorded certain tax liabilities in our current tax expense. The net change in deferred taxes on cumulative undistributed earnings of our foreign subsidiaries for fiscal 2019 was a decrease of
$5.9 million
.
16. LEASES
We lease certain facilities, land, and transportation equipment under agreements that expire at various dates. Rent expense under all operating leases from continuing operations was
$83.5 million
,
$62.5 million
, and
$71.2 million
in fiscal
2019
,
2018
, and
2017
, respectively. These amounts are inclusive of certain charges recognized at the cease-use date for remaining lease payments associated with exited properties.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
A summary of non-cancellable operating lease commitments for fiscal years following
May 26, 2019
, was as follows:
|
|
|
|
|
2020
|
$
|
52.1
|
|
2021
|
48.4
|
|
2022
|
38.0
|
|
2023
|
34.1
|
|
2024
|
25.6
|
|
Later years
|
114.4
|
|
|
$
|
312.6
|
|
At
May 26, 2019
and May 27, 2018, assets under capital and financing leases totaling
$157.1 million
, net of accumulated depreciation of
$37.6 million
, and
$82.9 million
, net of
$32.1 million
of accumulated depreciation, respectively, were included in Property, plant and equipment. Charges resulting from the depreciation of assets held under capital and financing leases are recognized within depreciation expense in the Consolidated Statements of Operations.
Non-cash issuances of capital and financing lease obligations totaling
$23.5 million
,
$1.3 million
, and
$0.5 million
, are excluded from cash flows from investing and financing activities on the Consolidated Statements of Cash Flows for fiscal 2019, 2018, and 2017, respectively.
17. CONTINGENCIES
Litigation Matters
We are a party to certain litigation matters relating to our acquisition of Beatrice Company ("Beatrice") in fiscal 1991, including litigation proceedings related to businesses divested by Beatrice prior to our acquisition of the company. These proceedings include suits against a number of lead paint and pigment manufacturers, including ConAgra Grocery Products Company, LLC, a wholly owned subsidiary of the Company ("ConAgra Grocery Products") as alleged successor to W. P. Fuller & Co., a lead paint and pigment manufacturer owned and operated by a predecessor to Beatrice from 1962 until 1967. These lawsuits generally seek damages for personal injury, property damage, economic loss, and governmental expenditures allegedly caused by the use of lead-based paint, and/or injunctive relief for inspection and abatement. 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. ConAgra Grocery Products has denied liability in both suits, both on the merits of the claims and on the basis that we do not believe it to be the successor to any liability attributable to W. P. Fuller & Co. The California suit is discussed in the following paragraph. The Illinois suit seeks class-wide relief for reimbursement of costs associated with the testing of lead levels in blood. We do not believe it is probable that we have incurred any liability with respect to the Illinois case, nor is it possible to estimate any potential exposure.
In California, a number of cities and counties joined in a consolidated action seeking abatement of an alleged public nuisance in the form of lead-based paint potentially present on the interior of residences, regardless of its condition. On September 23, 2013, a trial of the California case concluded in the Superior Court of California for the County of Santa Clara, and on January 27, 2014, the court entered a judgment (the "Judgment") against ConAgra Grocery Products and
two
other defendants ordering the creation of a California abatement fund in the amount of
$1.15 billion
. Liability is joint and several. The Company appealed the Judgment, and, on November 14, 2017 the California Court of Appeal for the Sixth Appellate District reversed in part, holding that the defendants were not liable to pay for abatement of homes built after 1950, but affirmed the Judgment as to homes built before 1951. The Court of Appeal remanded the case to the trial court with directions to recalculate the amount of the abatement fund estimated to be necessary to cover the cost of remediating pre-1951 homes, and to hold an evidentiary hearing regarding appointment of a suitable receiver. ConAgra Grocery Products and the other defendants petitioned the California Supreme Court for review of the decision, which we believe to be an unprecedented expansion of current California law. On February 14, 2018, the California Supreme Court denied the petition and declined to review the merits of the case, and the case was remanded to the trial court for further proceedings. ConAgra Grocery Products and the other defendants sought further review of certain issues from the Supreme Court of the United States, but on October 15, 2018, the Supreme Court declined to review the case. On September 4, 2018, the trial court recalculated its estimate of the amount needed to remediate pre-1951 homes in the plaintiff jurisdictions to be
$409.0 million
. As of July 10, 2019, the parties reached an agreement in principle to resolve this matter, which agreement remains subject to approval by the trial court. Once
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
approved, the action against ConAgra Grocery Products will be dismissed with prejudice. Pursuant to the settlement, ConAgra Grocery Products will pay a total of
$101.7 million
in
seven
installments to be paid annually from fiscal 2020 through fiscal 2026. ConAgra Grocery Products will further provide a guarantee of up to
$15.0 million
in the event co-defendant, NL Industries, Inc., defaults on its payment obligations.
We have accrued
$25.3 million
and
$74.1 million
, within other accrued liabilities and other noncurrent liabilities, respectively, for this matter as of
May 26, 2019
. The extent of insurance coverage is uncertain and the Company's carriers are on notice; however, any possible insurance recovery has not been considered for purposes of determining our liability. We cannot assure that the final resolution of these matters will not have a material adverse effect on our financial condition, results of operations, or liquidity.
We are party to a number of putative class action lawsuits challenging various product claims made in the Company's product labeling. These matters include
Briseno v. ConAgra Foods, Inc.
, in which it is alleged that the labeling for
Wesson
®
oils as 100% natural is false and misleading because the oils contain genetically modified plants and organisms. In February 2015, the U.S. District Court for the Central District of California granted class certification to permit plaintiffs to pursue state law claims. The Company appealed to the United States Court of Appeals for the Ninth Circuit, which affirmed class certification in January 2017. The Supreme Court of the United States declined to review the decision and the case has been remanded to the trial court for further proceedings. On April 4, 2019, the trial court granted preliminary approval of a settlement in this matter.
We are party to matters challenging the Company's wage and hour practices. These matters include a number of class actions consolidated under the caption
Negrete v. ConAgra Foods, Inc.
, et al, pending in the U.S. District Court for the Central District of California, in which the plaintiffs allege a pattern of violations of California and/or federal law at several current and former Company manufacturing facilities across the State of California. While we cannot predict with certainty the results of this or any other legal proceeding, we do not expect this matter to have a material adverse effect on our financial condition, results of operations, or business.
We are party to a number of matters asserting product liability claims against the Company related to certain
Pam
®
and other cooking spray products. These lawsuits generally seek damages for personal injuries allegedly caused by defects in the design, manufacture, or safety warnings of the cooking spray products. We have put the Company's insurance carriers on notice. While we cannot predict with certainty the results of these or any other legal proceedings, we do not expect these matters to have a material adverse effect on our financial condition, results of operations, or business.
The Company, its directors, and several of its executive officers are defendants in several class actions alleging violations of federal securities laws. The lawsuits assert that the Company's officers made material misstatements and omissions that caused the market to have an unrealistically positive assessment of the Company's financial prospects in light of the acquisition of Pinnacle, thus causing the Company's securities to be overvalued prior to the release of the Company's consolidated financial results on December 20, 2018 for the second quarter of fiscal 2019. The first of these lawsuits, captioned
West Palm Beach Firefighters' Pension Fund v. Conagra Brands, Inc., et al.
, with which subsequent lawsuits alleging similar facts have been consolidated, was filed February 22, 2019 in the U.S. District Court for the Northern District of Illinois. In addition, on May 9, 2019, a shareholder filed a derivative action on behalf of the Company against the Company's directors captioned
Klein v. Arora, et al.
in the U.S. District Court for the Northern District of Illinois. The shareholder derivative lawsuit asserts harm to the Company due to alleged breaches of fiduciary duty and mismanagement in connection with the Pinnacle acquisition. On July 9, 2019, the Company received a stockholder demand under Delaware law to inspect the Company's books and records related to the Board of Directors' review of the Pinnacle business, acquisition, and the Company's public statements related to them. While we cannot predict with certainty the results of these or any other legal proceedings, we do not expect these matters to have a material adverse effect on our financial condition, results of operations, or business.
Environmental Matters
We are a party to certain environmental proceedings relating to our acquisition of Beatrice in fiscal 1991. Such proceedings include proceedings related to businesses divested by Beatrice prior to our acquisition of Beatrice. The current environmental proceedings associated with Beatrice include litigation and administrative proceedings involving Beatrice's possible status as a potentially responsible party at approximately
40
Superfund, proposed Superfund, or state-equivalent sites (the "Beatrice 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. Reserves for
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
these Beatrice environmental proceedings 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 accrual for Beatrice-related environmental matters totaled
$52.8 million
as of
May 26, 2019
, a majority of which relates to the Superfund and state-equivalent sites referenced above. During the third quarter of fiscal 2017, a final Remedial Investigation/Feasibility Study was submitted for the Southwest Properties portion of the Wells G&H Superfund site, which is one of the Beatrice sites. The U.S. Environmental Protection Agency (the "EPA") issued a Record of Decision (the "ROD") for the Southwest Properties portion of the site on September 29, 2017 and has entered into negotiations with potentially responsible parties to determine final responsibility for implementing the ROD.
Guarantees and Other Contingencies
We guarantee an obligation of the Lamb Weston business pursuant to a guarantee arrangement that existed prior to the Spinoff and remained in place following completion of the Spinoff until such guarantee obligations is substituted for guarantees issued by Lamb Weston. Pursuant to the separation and distribution agreement, dated as of November 8, 2016 (the "Separation Agreement"), between us and Lamb Weston, this guarantee arrangement is deemed a liability of Lamb Weston that was transferred to Lamb Weston as part of the Spinoff. Accordingly, in the event that we are required to make any payments as a result of this guarantee arrangement, Lamb Weston is obligated to indemnify us for any such liability, reduced by any insurance proceeds received by us, in accordance with the terms of the indemnification provisions under the Separation Agreement.
Lamb Weston is a party to an agricultural sublease agreement with a third party for certain farmland through 2020 (subject, at Lamb Weston's option, to extension for
two
additional
five
-year periods). Under the terms of the sublease agreement, Lamb Weston is required to make certain rental payments to the sublessor. We have guaranteed the sublessor Lamb Weston's performance and the payment of all amounts (including indemnification obligations) owed by Lamb Weston under the sublease agreement, up to a maximum of
$75.0 million
. We believe the farmland associated with this sublease agreement is readily marketable for lease to other area farming operators. As such, we believe that any financial exposure to the Company, in the event that we were required to perform under the guarantee, would be largely mitigated.
We lease or leased 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. The lease agreements also contain contingent put options (the "lease put options") that allow or allowed the lessors to require us to purchase the buildings at the greater of original construction cost, or fair market value, without a lease agreement in place (the "put price") in certain limited circumstances. As a result of substantial impairment charges related to our divested Private Brands operations, these lease put options became exercisable. We are amortizing the difference between the put price and the estimated fair value (without a lease agreement in place) of the property over the remaining lease term within SG&A expenses. During fiscal 2018, we purchased
two
buildings that were subject to lease put options and recognized net losses totaling
$48.2 million
for the early exit of unfavorable lease contracts. During fiscal 2017,
one
of these lease agreements expired, and we reversed the applicable accrual and recognized a benefit of
$6.7 million
in SG&A expenses.
As of
May 26, 2019
and
May 27, 2018
, there was one remaining leased building subject to a lease put option for which the put option price exceeded the estimated fair value of the property by
$8.2 million
, of which we had accrued
$1.6 million
and
$1.2 million
, respectively. This lease is accounted for as an operating lease, and accordingly, there are no material assets and liabilities, other than the accrued portion of the put price, associated with this entity included in the Consolidated Balance Sheets. We have determined that we do not have the power to direct the activities that most significantly impact the economic performance of this entity. In making this determination, we have considered, among other items, the terms of the lease agreement, the expected remaining useful life of the asset leased, and the capital structure of the lessor entity.
In certain limited situations, we will guarantee an obligation of an unconsolidated entity. We guarantee certain leases resulting from the divestiture of the JM Swank business completed in the first quarter of fiscal 2017. As of
May 26, 2019
, the remaining terms of these arrangements did not exceed
four years
and the maximum amount of future payments we have guaranteed was
$1.2 million
. In addition, we guarantee a lease resulting from an exited facility. As of
May 26, 2019
, the remaining term of this arrangement did not exceed
eight years
and the maximum amount of future payments we have guaranteed was
$19.1 million
.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
General
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; however, it is reasonably possible that a change of the estimates of any of the foregoing matters may occur in the future and, as noted, the lead paint matter could result in a material final judgment which could have a material adverse effect on our financial condition, results of operations, or liquidity.
Costs of legal services associated with the foregoing matters are recognized in earnings as services are provided.
18. DERIVATIVE FINANCIAL INSTRUMENTS
Our operations are exposed to market risks from adverse changes in commodity prices affecting the cost of raw materials and energy, foreign currency exchange rates, and interest rates. In the normal course of business, these risks are managed through a variety of strategies, including the use of derivatives.
Commodity and commodity index futures and option contracts are used from time to time to economically hedge commodity input prices on items such as natural gas, vegetable oils, proteins, packaging materials, dairy, grains, and electricity. Generally, we economically hedge a portion of our anticipated consumption of commodity inputs for periods of up to
36
months. We may enter into longer-term economic hedges on particular commodities, if deemed appropriate. As of
May 26, 2019
, we had economically hedged certain portions of our anticipated consumption of commodity inputs using derivative instruments with expiration dates through February 2020.
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
May 26, 2019
, we had economically hedged certain portions of our foreign currency risk in anticipated transactions using derivative instruments with expiration dates through February 2020.
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
During fiscal 2019, we entered into deal-contingent forward starting interest rate swap contracts to hedge a portion of the interest rate risk related to our issuance of long-term debt to help finance the acquisition of Pinnacle. We settled these contracts during the second quarter of fiscal 2019 and deferred a $
47.5 million
gain in accumulated other comprehensive income. This gain will be amortized as a reduction of net interest expense over the lives of the related debt instruments. The unamortized amount at
May 26, 2019
, was $
45.5 million
.
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. In the event that management determines a particular derivative entered into as an economic hedge of a forecasted commodity purchase has ceased to function as an economic hedge, we cease recognizing further gains and losses on such derivatives in corporate expense and begin recognizing such gains and losses within segment operating results immediately.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
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 SG&A expenses. These substantially offset the foreign currency transaction gains or losses recognized as values of the monetary assets or liabilities being economically hedged change.
All derivative instruments are recognized on the Consolidated Balance Sheets at fair value (refer to Note 20 for additional information related to fair value measurements). The fair value of derivative assets is recognized within prepaid expenses and other current assets, while the fair value of derivative liabilities is recognized within other accrued liabilities. In accordance with U.S. GAAP, 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 master netting agreements provide for legal right of setoff. At
May 26, 2019
and
May 27, 2018
, amounts representing an obligation to return cash collateral of
$0.1 million
and
$1.0 million
, respectively, were included in prepaid expenses and other current assets in our 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 Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
May 26, 2019
|
|
May 27, 2018
|
Prepaid expenses and other current assets
|
$
|
5.9
|
|
|
$
|
4.4
|
|
Other accrued liabilities
|
1.4
|
|
|
0.1
|
|
The following table presents our derivative assets and liabilities at
May 26, 2019
, on a gross basis, prior to the setoff of
$0.5 million
to total derivative assets and
$0.4 million
to total derivative liabilities where legal right of setoff existed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
Balance Sheet
Location
|
|
Fair Value
|
|
Balance Sheet
Location
|
|
Fair Value
|
Commodity contracts
|
Prepaid expenses and other current assets
|
|
$
|
4.9
|
|
|
Other accrued liabilities
|
|
$
|
0.9
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
1.4
|
|
|
Other accrued liabilities
|
|
0.9
|
|
Other
|
Prepaid expenses and other current assets
|
|
0.1
|
|
|
Other accrued liabilities
|
|
—
|
|
Total derivatives not designated as hedging instruments
|
|
|
$
|
6.4
|
|
|
|
|
$
|
1.8
|
|
The following table presents our derivative assets and liabilities, at
May 27, 2018
, on a gross basis, prior to the setoff of
$1.4 million
to total derivative assets and
$0.4 million
to total derivative liabilities where legal right of setoff existed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
Balance Sheet
Location
|
|
Fair Value
|
|
Balance Sheet
Location
|
|
Fair Value
|
Commodity contracts
|
Prepaid expenses and other current assets
|
|
$
|
3.7
|
|
|
Other accrued liabilities
|
|
$
|
0.4
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
2.1
|
|
|
Other accrued liabilities
|
|
—
|
|
Other
|
Prepaid expenses and other current assets
|
|
—
|
|
|
Other accrued liabilities
|
|
0.1
|
|
Total derivatives not designated as hedging instruments
|
|
|
$
|
5.8
|
|
|
|
|
$
|
0.5
|
|
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
The location and amount of gains (losses) from derivatives not designated as hedging instruments in our Consolidated Statements of Operations were as follows:
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended May 26, 2019
|
Derivatives Not Designated as Hedging Instruments
|
|
Location in Consolidated Statement of Operations of
Gain (Loss) Recognized on Derivatives
|
|
Amount of Gain (Loss)
Recognized on Derivatives
in Consolidated
Statement of Operations
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
(5.3
|
)
|
Foreign exchange contracts
|
|
Cost of goods sold
|
|
1.7
|
|
Total loss from derivative instruments not designated as hedging instruments
|
|
|
|
$
|
(3.6
|
)
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended May 27, 2018
|
Derivatives Not Designated as Hedging Instruments
|
|
Location in Consolidated Statement of Operations of
Gain (Loss) Recognized on Derivatives
|
|
Amount of Gain (Loss)
Recognized on Derivatives
in Consolidated
Statement of Operations
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
3.0
|
|
Foreign exchange contracts
|
|
Cost of goods sold
|
|
(3.9
|
)
|
Foreign exchange contracts
|
|
Selling, general and administrative expense
|
|
0.3
|
|
Total loss from derivative instruments not designated as hedging instruments
|
|
|
|
$
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended May 28, 2017
|
Derivatives Not Designated as Hedging Instruments
|
|
Location in Consolidated Statement of Operations of
Gain (Loss) Recognized on Derivatives
|
|
Amount of Gain (Loss)
Recognized on Derivatives
in Consolidated
Statement of Operations
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
0.9
|
|
Foreign exchange contracts
|
|
Cost of goods sold
|
|
(0.3
|
)
|
Foreign exchange contracts
|
|
Selling, general and administrative expense
|
|
0.2
|
|
Total gain from derivative instruments not designated as hedging instruments
|
|
|
|
$
|
0.8
|
|
As of
May 26, 2019
, our open commodity contracts had a notional value (defined as notional quantity times market value per notional quantity unit) of
$140.1 million
and
$18.5 million
for purchase and sales contracts, respectively. As of
May 27, 2018
, our open commodity contracts had a notional value of
$100.0 million
and
$34.2 million
for purchase and sales contracts, respectively. The notional amount of our foreign currency forward and cross currency swap contracts as of
May 26, 2019
and
May 27, 2018
was
$88.2 million
and
$82.4 million
, respectively.
We enter into certain commodity, interest rate, and foreign exchange derivatives with a diversified group of counterparties. We continually monitor our positions and the credit ratings of the counterparties involved and limit the amount of credit exposure to any one party. These transactions may expose us to potential losses due to the risk of nonperformance by these counterparties. We have not incurred a material loss due to nonperformance in any period presented and do not expect to incur any such material loss. We also enter into futures and options transactions through various regulated exchanges.
At
May 26, 2019
, 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
$2.9 million
.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
19. 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. Effective August 1, 2013, our defined benefit pension plan for eligible salaried employees was closed to new hire salaried employees. New hire salaried employees will generally be eligible to participate in our defined contribution plan.
In connection with the acquisition of Pinnacle, we now include the components of pension and postretirement expense associated with the Pinnacle pension plans and a post-employment benefit plan in our Consolidated Statements of Earnings from the date of the completion of the acquisition. These plans are frozen for future benefits. The tabular disclosures presented below are inclusive of the Pinnacle plans.
During the second quarter of fiscal 2018, we approved the amendment of our salaried and non-qualified pension plans effective as of December 31, 2017. The amendment froze the compensation and service periods used to calculate pension benefits for active employees who participate in the plans. Beginning January 1, 2018, impacted employees do not accrue additional benefit for future service and eligible compensation received under these plans.
As a result of the amendment, we remeasured our pension plan liability as of September 30, 2017. In connection with the remeasurement, we updated the effective discount rate assumption from
3.90%
to
3.78%
. The curtailment and related remeasurement resulted in a net decrease to the underfunded status of the pension plans by
$43.5 million
with a corresponding benefit within other comprehensive income (loss) for the second quarter of fiscal 2018. In addition, we recorded charges of
$3.4 million
and
$0.7 million
reflecting the write-off of actuarial losses in excess of 10% of our pension liability and a curtailment charge, respectively.
We recognize the funded status of our plans and other benefits in the Consolidated Balance Sheets. For our plans, we also recognize as a component of accumulated other comprehensive loss, the net of tax results of the actuarial gains or losses within the corridor and prior service costs or credits that arise during the period but are not recognized in net periodic benefit cost. For our other benefits, we also recognize as a component of accumulated other comprehensive income (loss), the net of tax results of the gains or losses and prior service costs or credits that arise during the period but are not recognized in net periodic benefit cost. These amounts will be adjusted out of accumulated other comprehensive income (loss) as they are subsequently recognized as components of net periodic benefit cost. For our pension plans, we have elected to immediately recognize actuarial gains and losses in our operating results in the year in which they occur, to the extent they exceed the corridor, eliminating amortization. Amounts are included in the components of pension benefit and other postretirement benefit costs, below, as recognized net actuarial loss.
The information below includes the activities of our continuing and discontinued operations.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
The changes in benefit obligations and plan assets at
May 26, 2019
and
May 27, 2018
are presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Change in Benefit Obligation
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
3,423.6
|
|
|
$
|
3,548.7
|
|
|
$
|
119.3
|
|
|
$
|
156.9
|
|
Service cost
|
10.9
|
|
|
42.8
|
|
|
0.1
|
|
|
0.2
|
|
Interest cost
|
132.6
|
|
|
111.1
|
|
|
3.8
|
|
|
3.9
|
|
Plan participants' contributions
|
—
|
|
|
—
|
|
|
2.5
|
|
|
4.7
|
|
Amendments
|
1.4
|
|
|
0.6
|
|
|
(0.8
|
)
|
|
(17.2
|
)
|
Actuarial loss (gain)
|
150.1
|
|
|
(9.4
|
)
|
|
(24.3
|
)
|
|
(13.2
|
)
|
Plan settlements
|
—
|
|
|
(10.2
|
)
|
|
(0.5
|
)
|
|
—
|
|
Curtailments
|
—
|
|
|
(79.5
|
)
|
|
(0.6
|
)
|
|
—
|
|
Benefits paid
|
(191.2
|
)
|
|
(181.3
|
)
|
|
(9.8
|
)
|
|
(16.2
|
)
|
Currency
|
(0.6
|
)
|
|
0.8
|
|
|
(0.2
|
)
|
|
0.2
|
|
Business acquisitions and divestitures
|
206.4
|
|
|
—
|
|
|
1.7
|
|
|
—
|
|
Benefit obligation at end of year
|
$
|
3,733.2
|
|
|
$
|
3,423.6
|
|
|
$
|
91.2
|
|
|
$
|
119.3
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
3,355.1
|
|
|
$
|
2,983.6
|
|
|
$
|
3.7
|
|
|
$
|
—
|
|
Actual return on plan assets
|
252.2
|
|
|
249.6
|
|
|
0.2
|
|
|
3.7
|
|
Employer contributions
|
14.7
|
|
|
312.6
|
|
|
7.3
|
|
|
11.5
|
|
Plan participants' contributions
|
—
|
|
|
—
|
|
|
2.5
|
|
|
4.7
|
|
Plan settlements
|
—
|
|
|
(10.2
|
)
|
|
(0.5
|
)
|
|
—
|
|
Benefits paid
|
(191.2
|
)
|
|
(181.3
|
)
|
|
(9.8
|
)
|
|
(16.2
|
)
|
Currency
|
(0.6
|
)
|
|
0.8
|
|
|
—
|
|
|
—
|
|
Business acquisitions and divestitures
|
171.3
|
|
|
—
|
|
|
|
|
—
|
|
Fair value of plan assets at end of year
|
$
|
3,601.5
|
|
|
$
|
3,355.1
|
|
|
$
|
3.4
|
|
|
$
|
3.7
|
|
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
The funded status and amounts recognized in our Consolidated Balance Sheets at
May 26, 2019
and
May 27, 2018
were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Funded Status
|
|
$
|
(131.7
|
)
|
|
$
|
(68.5
|
)
|
|
$
|
(87.8
|
)
|
|
$
|
(115.6
|
)
|
Amounts Recognized in Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
61.2
|
|
|
$
|
103.0
|
|
|
$
|
2.8
|
|
|
$
|
2.6
|
|
Other accrued liabilities
|
|
(10.2
|
)
|
|
(11.8
|
)
|
|
(10.8
|
)
|
|
(16.2
|
)
|
Other noncurrent liabilities
|
|
(182.7
|
)
|
|
(159.7
|
)
|
|
(79.8
|
)
|
|
(102.0
|
)
|
Net Amount Recognized
|
|
$
|
(131.7
|
)
|
|
$
|
(68.5
|
)
|
|
$
|
(87.8
|
)
|
|
$
|
(115.6
|
)
|
Amounts Recognized in Accumulated Other Comprehensive (Income) Loss (Pre-tax)
|
|
|
|
|
|
|
|
|
Actuarial net loss (gain)
|
|
$
|
115.8
|
|
|
$
|
48.8
|
|
|
$
|
(47.8
|
)
|
|
$
|
(25.8
|
)
|
Net prior service cost (benefit)
|
|
12.1
|
|
|
13.8
|
|
|
(17.1
|
)
|
|
(18.4
|
)
|
Total
|
|
$
|
127.9
|
|
|
$
|
62.6
|
|
|
$
|
(64.9
|
)
|
|
$
|
(44.2
|
)
|
Weighted-Average Actuarial Assumptions Used to Determine Benefit Obligations at May 26, 2019 and May 27, 2018
|
|
|
|
|
|
|
|
|
Discount rate
|
|
3.88
|
%
|
|
4.14
|
%
|
|
3.48
|
%
|
|
3.81
|
%
|
Long-term rate of compensation increase
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
The accumulated benefit obligation for all defined benefit pension plans was
$3.7 billion
and
$3.4 billion
at
May 26, 2019
and
May 27, 2018
, respectively.
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets at
May 26, 2019
and
May 27, 2018
were:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Projected benefit obligation
|
|
$
|
964.3
|
|
|
$
|
951.1
|
|
Accumulated benefit obligation
|
|
963.7
|
|
|
950.1
|
|
Fair value of plan assets
|
|
771.4
|
|
|
779.5
|
|
Components of pension benefit and other postretirement benefit costs included:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Service cost
|
$
|
10.9
|
|
|
$
|
42.8
|
|
|
$
|
56.9
|
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
|
$
|
0.3
|
|
Interest cost
|
132.6
|
|
|
111.1
|
|
|
116.8
|
|
|
3.8
|
|
|
3.9
|
|
|
4.6
|
|
Expected return on plan assets
|
(174.4
|
)
|
|
(218.3
|
)
|
|
(207.4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service cost (benefit)
|
3.1
|
|
|
2.9
|
|
|
2.6
|
|
|
(2.2
|
)
|
|
(3.4
|
)
|
|
(6.6
|
)
|
Special termination benefits
|
—
|
|
|
—
|
|
|
1.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Recognized net actuarial loss (gain)
|
5.1
|
|
|
3.4
|
|
|
1.2
|
|
|
(1.4
|
)
|
|
—
|
|
|
0.5
|
|
Settlement loss (gain)
|
—
|
|
|
1.3
|
|
|
13.8
|
|
|
(1.0
|
)
|
|
—
|
|
|
—
|
|
Curtailment loss (gain)
|
—
|
|
|
0.7
|
|
|
1.7
|
|
|
(0.6
|
)
|
|
—
|
|
|
—
|
|
Benefit cost — Company plans
|
(22.7
|
)
|
|
(56.1
|
)
|
|
(12.9
|
)
|
|
(1.3
|
)
|
|
0.7
|
|
|
(1.2
|
)
|
Pension benefit cost — multi-employer plans
|
6.3
|
|
|
7.1
|
|
|
12.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total benefit (income) cost
|
$
|
(16.4
|
)
|
|
$
|
(49.0
|
)
|
|
$
|
(0.9
|
)
|
|
$
|
(1.3
|
)
|
|
$
|
0.7
|
|
|
$
|
(1.2
|
)
|
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
As a result of the Spinoff, during fiscal 2017, we recorded a pension curtailment gain of
$19.5 million
within other comprehensive income (loss) and remeasured a significant qualified pension plan as of November 9, 2016. In connection with the remeasurement, we updated the effective discount rate assumption from
3.86%
to
4.04%
. The remeasurement and the curtailment gain decreased the underfunded status of the pension plans by
$66.0 million
with a corresponding benefit within other comprehensive income (loss).
During fiscal 2017, we provided a voluntary lump-sum settlement offer to certain terminated vested participants in our salaried pension plan. Lump-sum settlement payments totaling
$287.5 million
were distributed from pension plan assets to such participants. Due to the pension settlement, we were required to remeasure our pension plan liability. In connection with the remeasurement, we updated the effective discount rate assumption to
4.11%
, as of
December 31, 2016
. The settlement and related remeasurement resulted in the recognition of a settlement charge of
$13.8 million
, reflected in pension and postretirement non-service income, as well as a benefit to accumulated other comprehensive income (loss) totaling
$62.2 million
.
In fiscal 2019, 2018, and 2017, the Company recorded charges of
$5.1 million
,
$3.4 million
, and
$1.2 million
, respectively, reflecting the year-end write-off of actuarial losses in excess of 10% of our pension liability.
The Company recorded an expense of
$0.3 million
(primarily within restructuring activities),
$0.6 million
(primarily within restructuring activities), and
$4.0 million
(
$2.1 million
was recorded in discontinued operations and
$1.9 million
was recorded in restructuring activities) during fiscal 2019, 2018, and 2017, respectively, related to our expected incurrence of certain multi-employer plan withdrawal costs.
Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss) were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net actuarial gain (loss)
|
|
$
|
(72.1
|
)
|
|
$
|
120.0
|
|
|
$
|
25.1
|
|
|
$
|
16.8
|
|
Amendments
|
|
(1.4
|
)
|
|
(0.6
|
)
|
|
0.8
|
|
|
17.2
|
|
Amortization of prior service cost (benefit)
|
|
3.1
|
|
|
2.9
|
|
|
(2.2
|
)
|
|
(3.4
|
)
|
Settlement and curtailment loss (gain)
|
|
—
|
|
|
2.0
|
|
|
(1.6
|
)
|
|
—
|
|
Recognized net actuarial loss (gain)
|
|
5.1
|
|
|
3.4
|
|
|
(1.4
|
)
|
|
—
|
|
Net amount recognized
|
|
$
|
(65.3
|
)
|
|
$
|
127.7
|
|
|
$
|
20.7
|
|
|
$
|
30.6
|
|
Weighted-Average Actuarial Assumptions Used to Determine Net Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Discount rate
|
|
4.15
|
%
|
|
3.90
|
%
|
|
3.83
|
%
|
|
3.81
|
%
|
|
3.33
|
%
|
|
3.18
|
%
|
Long-term rate of return on plan assets
|
|
5.17
|
%
|
|
7.50
|
%
|
|
7.50
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Long-term rate of compensation increase
|
|
3.63
|
%
|
|
3.63
|
%
|
|
3.66
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Beginning in fiscal 2017, the Company has elected to use a split discount rate (spot-rate approach) for the U.S. plans and certain foreign plans. Historically, a single weighted-average discount rate was used in the calculation of service and interest costs, both of which are components of pension benefit costs. The spot-rate approach applies separate discount rates for each projected benefit payment in the calculation of pension service and interest cost. This change is considered a change in accounting estimate and has been applied prospectively. The pre-tax reduction in total pension benefit cost associated with this change in fiscal 2017 was approximately
$27.0 million
.
We amortize prior service cost for our pension plans and postretirement plans, as well as amortizable gains and losses for our postretirement plans, in equal annual amounts over the average expected future period of vested service. For plans with no active participants, average life expectancy is used instead of average expected useful service.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
Plan Assets
The fair value of plan assets, summarized by level within the fair value hierarchy described in Note 20, as of
May 26, 2019
, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Cash and cash equivalents
|
|
$
|
0.7
|
|
|
$
|
77.7
|
|
|
$
|
—
|
|
|
$
|
78.4
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
U.S. equity securities
|
|
56.3
|
|
|
91.8
|
|
|
—
|
|
|
148.1
|
|
International equity securities
|
|
87.8
|
|
|
0.4
|
|
|
—
|
|
|
88.2
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
Government bonds
|
|
—
|
|
|
748.3
|
|
|
—
|
|
|
748.3
|
|
Corporate bonds
|
|
—
|
|
|
2,255.5
|
|
|
—
|
|
|
2,255.5
|
|
Mortgage-backed bonds
|
|
—
|
|
|
31.1
|
|
|
—
|
|
|
31.1
|
|
Real estate funds
|
|
0.4
|
|
|
—
|
|
|
—
|
|
|
0.4
|
|
Net receivables for unsettled transactions
|
|
5.6
|
|
|
—
|
|
|
—
|
|
|
5.6
|
|
Fair value measurement of pension plan assets in the fair value hierarchy
|
|
$
|
150.8
|
|
|
$
|
3,204.8
|
|
|
$
|
—
|
|
|
$
|
3,355.6
|
|
Investments measured at net asset value
|
|
|
|
|
|
|
|
245.9
|
|
Total pension plan assets
|
|
|
|
|
|
|
|
|
|
|
$
|
3,601.5
|
|
The fair value of plan assets, summarized by level within the fair value hierarchy described in Note 20, as of
May 27, 2018
, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Cash and cash equivalents
|
|
$
|
1.0
|
|
|
$
|
65.0
|
|
|
$
|
—
|
|
|
$
|
66.0
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
U.S. equity securities
|
|
319.8
|
|
|
124.0
|
|
|
—
|
|
|
443.8
|
|
International equity securities
|
|
256.5
|
|
|
1.0
|
|
|
—
|
|
|
257.5
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
Government bonds
|
|
—
|
|
|
1,854.8
|
|
|
—
|
|
|
1,854.8
|
|
Corporate bonds
|
|
—
|
|
|
4.7
|
|
|
—
|
|
|
4.7
|
|
Mortgage-backed bonds
|
|
—
|
|
|
9.3
|
|
|
—
|
|
|
9.3
|
|
Real estate funds
|
|
7.7
|
|
|
—
|
|
|
—
|
|
|
7.7
|
|
Master limited partnerships
|
|
0.4
|
|
|
—
|
|
|
—
|
|
|
0.4
|
|
Net receivables for unsettled transactions
|
|
10.9
|
|
|
—
|
|
|
—
|
|
|
10.9
|
|
Fair value measurement of pension plan assets in the fair value hierarchy
|
|
$
|
596.3
|
|
|
$
|
2,058.8
|
|
|
$
|
—
|
|
|
$
|
2,655.1
|
|
Investments measured at net asset value
|
|
|
|
|
|
|
|
700.0
|
|
Total pension plan assets
|
|
|
|
|
|
|
|
$
|
3,355.1
|
|
Level 1 assets are valued based on quoted prices in active markets for identical securities. The majority of the Level 1 assets listed above include the common stock of both U.S. and international companies, mutual funds, master limited partnership units, and real estate investment trusts, all of which are actively traded and priced in the market.
Level 2 assets are valued based on other significant observable inputs including quoted prices for similar securities, yield curves, indices, etc. Level 2 assets consist primarily of individual fixed income securities where values are based on quoted prices of similar securities and observable market data.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
Level 3 assets consist of investments where active market pricing is not readily available and, as such, fair value is estimated using significant unobservable inputs.
Certain assets that are measured at fair value using the NAV (net asset value) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. Such investments are generally considered long-term in nature with varying redemption availability. For certain of these investments, with a fair value of approximately
$51.0 million
as of
May 26, 2019
, the asset managers have the ability to impose customary redemption gates which may further restrict or limit the redemption of invested funds therein. As of
May 26, 2019
, funds with a fair value of
$4.2 million
have imposed such gates.
As of
May 26, 2019
, we have unfunded commitments for additional investments of
$48.3 million
in private equity funds and
$17.0 million
in natural resources funds. We expect unfunded commitments to be funded from plan assets rather than the general assets of the Company.
To develop the expected long-term rate of return on plan assets assumption for the pension plans, we consider the current asset allocation strategy, the historical investment performance, and the expectations for future returns of each asset class.
Our pension plan weighted-average asset allocations by asset category were as follows:
|
|
|
|
|
|
|
|
|
|
May 26, 2019
|
|
May 27, 2018
|
Equity securities
|
|
7
|
%
|
|
21
|
%
|
Debt securities
|
|
85
|
%
|
|
58
|
%
|
Real estate funds
|
|
1
|
%
|
|
10
|
%
|
Multi-strategy hedge funds
|
|
—
|
%
|
|
4
|
%
|
Private equity
|
|
3
|
%
|
|
4
|
%
|
Other
|
|
4
|
%
|
|
3
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
Due to the salaried pension plan freeze, the Company's pension asset strategy is now designed to align our pension plan assets with our projected benefit obligation to reduce volatility by targeting an investment strategy of approximately
90%
in fixed-income securities and approximately
10%
in return seeking assets, primarily equity securities, real estate, and private assets.
Other investments are primarily made up of cash and master limited partnerships.
Assumed health care cost trend rates have a significant effect on the benefit obligation of the postretirement plans.
|
|
|
|
|
|
|
|
Assumed Health Care Cost Trend Rates at:
|
|
May 26, 2019
|
|
May 27, 2018
|
Initial health care cost trend rate
|
|
7.20
|
%
|
|
7.87
|
%
|
Ultimate health care cost trend rate
|
|
4.5
|
%
|
|
4.5
|
%
|
Year that the rate reaches the ultimate trend rate
|
|
2024
|
|
|
2024
|
|
We currently anticipate making contributions of approximately
$14.2 million
to our pension plans in fiscal
2020
. We anticipate making contributions of
$10.8 million
to our other postretirement plans in fiscal
2020
. These estimates are based on ERISA guidelines, current tax laws, plan asset performance, and liability assumptions, which are subject to change.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
The following table presents estimated future gross benefit payments for our plans:
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Health Care and Life Insurance
Benefits
|
2020
|
|
$
|
200.7
|
|
|
$
|
10.9
|
|
2021
|
|
201.3
|
|
|
10.1
|
|
2022
|
|
203.9
|
|
|
9.3
|
|
2023
|
|
207.1
|
|
|
8.5
|
|
2024
|
|
210.0
|
|
|
7.8
|
|
Succeeding 5 years
|
|
1,074.8
|
|
|
30.2
|
|
Multiemployer Pension Plans
The Company contributes to several multiemployer defined benefit pension plans under collective bargaining agreements that cover certain of its union-represented employees. The risks of participating in such plans are different from the risks of single-employer plans, in the following respects:
|
|
a.
|
Assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers.
|
|
|
b.
|
If a participating employer ceases to contribute to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
|
|
|
c.
|
If the Company ceases to have an obligation to contribute to a multiemployer plan in which it had been a contributing employer, it may be required to pay to the plan an amount based on the underfunded status of the plan and on the history of the Company's participation in the plan prior to the cessation of its obligation to contribute. The amount that an employer that has ceased to have an obligation to contribute to a multiemployer plan is required to pay to the plan is referred to as a withdrawal liability.
|
The Company's participation in multiemployer plans for the fiscal year ended
May 26, 2019
is outlined in the table below. For each plan that is individually significant to the Company the following information is provided:
|
|
•
|
The "EIN / PN" column provides the Employer Identification Number and the three-digit plan number assigned to a plan by the Internal Revenue Service.
|
|
|
•
|
The most recent Pension Protection Act Zone Status available for 2018 and 2017 is for plan years that ended in calendar years 2018 and 2017, respectively. The zone status is based on information provided to the Company by each plan. A plan in the "red" zone has been determined to be in "critical status", based on criteria established under the Internal Revenue Code ("Code"), and is generally less than
65%
funded. A plan in the "yellow" zone has been determined to be in "endangered status", based on criteria established under the Code, and is generally less than
80%
funded. A plan in the "green" zone has been determined to be neither in "critical status" nor in "endangered status", and is generally at least
80%
funded.
|
|
|
•
|
The "FIP/RP Status Pending/Implemented" column indicates whether a Funding Improvement Plan, as required under the Code to be adopted by plans in the "yellow" zone, or a Rehabilitation Plan, as required under the Code to be adopted by plans in the "red" zone, is pending or has been implemented by the plan as of the end of the plan year that ended in calendar year 2018.
|
|
|
•
|
Contributions by the Company are the amounts contributed in the Company's fiscal periods ending in the specified year.
|
|
|
•
|
The "Surcharge Imposed" column indicates whether the Company contribution rate for its fiscal year that ended on
May 26, 2019
included an amount in addition to the contribution rate specified in the applicable collective bargaining agreement, as imposed by a plan in "critical status", in accordance with the requirements of the Code.
|
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
|
|
•
|
The last column lists the expiration dates of the collective bargaining agreements pursuant to which the Company contributes to the plans.
|
For plans that are not individually significant to Conagra Brands the total amount of contributions is presented in the aggregate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Protection Act
Zone Status
|
FIP /
RP Status
Pending /
Implemented
|
Contributions by
the Company
(millions)
|
|
Expiration
Dates of
Collective
Bargaining
Agreements
|
Pension Fund
|
EIN / PN
|
2018
|
2017
|
FY19
|
FY18
|
FY17
|
Surcharge
Imposed
|
Bakery and Confectionary Union and Industry International Pension Plan
|
52-6118572
/ 001
|
Red, Critical and Declining
|
Red, Critical and Declining
|
RP Implemented
|
$
|
0.1
|
|
$
|
1.5
|
|
$1.8
|
No
|
2/29/2020
|
Central States, Southeast and Southwest Areas Pension Fund
|
36-6044243
/ 001
|
Red, Critical and Declining
|
Red
|
RP Implemented
|
1.8
|
|
1.8
|
|
1.8
|
No
|
5/31/2020
|
Western Conference of Teamsters Pension Plan
|
91-6145047
/ 001
|
Green
|
Green
|
N/A
|
3.2
|
|
2.8
|
|
4.0
|
No
|
06/30/2021
|
Other Plans
|
0.9
|
|
0.4
|
|
0.4
|
|
|
Total Contributions
|
$
|
6.0
|
|
$6.5
|
$8.0
|
|
|
The Company was not listed in the Forms 5500 filed by any of the other plans or for any of the other years as providing more than
5%
of the plan's total contributions. At the date our financial statements were issued, Forms 5500 were not available for plan years ending in calendar year
2018
.
During fiscal
2019
, we ceased to participate in the Bakery and Confectionary Union and Industry International Fund in conjunction with our sale of the Trenton, Missouri plant.
In addition to the contributions listed in the table above, we recorded an additional expense of
$0.3 million
,
$0.6 million
and
$4.0 million
in fiscal
2019
,
2018
, and
2017
, respectively, related to our expected incurrence of certain withdrawal costs.
Certain of our employees are covered under defined contribution plans. The expense related to these plans was
$39.9 million
,
$24.5 million
, and
$18.0 million
in fiscal
2019
,
2018
, and
2017
, respectively.
20. FAIR VALUE MEASUREMENTS
FASB guidance establishes a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The three levels of inputs used to measure fair value are as follows:
Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities,
Level 2 — Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets, and
Level 3 — Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing the asset or liability.
The fair values of our Level 2 derivative instruments were determined using valuation models that use market observable inputs including interest rate curves and both forward and spot prices for currencies and commodities. Derivative assets and liabilities included in Level 2 primarily represent commodity and foreign currency option and forward contracts and cross-currency swaps.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
The following table presents our financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of
May 26, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Derivative assets
|
$
|
3.0
|
|
|
$
|
2.9
|
|
|
$
|
—
|
|
|
$
|
5.9
|
|
Marketable securities
|
15.7
|
|
|
—
|
|
|
—
|
|
|
15.7
|
|
Deferred compensation assets
|
10.7
|
|
|
—
|
|
|
—
|
|
|
10.7
|
|
Total assets
|
$
|
29.4
|
|
|
$
|
2.9
|
|
|
$
|
—
|
|
|
$
|
32.3
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
—
|
|
|
$
|
1.4
|
|
|
$
|
—
|
|
|
$
|
1.4
|
|
Deferred compensation liabilities
|
70.4
|
|
|
—
|
|
|
—
|
|
|
70.4
|
|
Total liabilities
|
$
|
70.4
|
|
|
$
|
1.4
|
|
|
$
|
—
|
|
|
$
|
71.8
|
|
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 27, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Derivative assets
|
$
|
1.7
|
|
|
$
|
2.7
|
|
|
$
|
—
|
|
|
$
|
4.4
|
|
Marketable securities
|
4.8
|
|
|
—
|
|
|
—
|
|
|
4.8
|
|
Total assets
|
$
|
6.5
|
|
|
$
|
2.7
|
|
|
$
|
—
|
|
|
$
|
9.2
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
Deferred compensation liabilities
|
51.6
|
|
|
—
|
|
|
—
|
|
|
51.6
|
|
Total liabilities
|
$
|
51.6
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
51.7
|
|
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 using Level 3 inputs.
We recognized charges for the impairment of certain indefinite-lived brands. The fair values of these brands were estimated using the "relief from royalty" method (See Note 9). Impairments in our Grocery & Snacks segment totaled
$76.5 million
,
$4.0 million
, and
$68.2 million
for fiscal
2019
,
2018
, and
2017
, respectively. Impairments in our International segment totaled
$13.1 million
,
$0.8 million
, and
$37.0 million
for fiscal
2019
,
2018
, and
2017
, respectively.
We recognized charges of
$2.7 million
and
$4.7 million
in the Corporate segment for the impairment of certain long-lived assets in fiscal
2019
and
2018
, respectively. The impairment was measured based upon the estimated sales price of the assets.
During fiscal 2017, a charge of
$27.6 million
was recognized in the Grocery & Snacks segment for the impairment of our
Wesson
®
oil production facility. The impairment was measured based upon the estimated sales price of the facility (See Note 6).
During fiscal 2017, goodwill impairment charges totaling
$198.9 million
were recognized within our International segment.
The carrying amount of long-term debt (including current installments) was
$10.68 billion
as of
May 26, 2019
and
$3.54 billion
as of
May 27, 2018
. Based on current market rates, the fair value of this debt (level 2 liabilities) at
May 26, 2019
and
May 27, 2018
was estimated at
$11.24 billion
and
$3.76 billion
, respectively.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
21. BUSINESS SEGMENTS AND RELATED INFORMATION
As a result of the Pinnacle acquisition, we currently reflect our results of operations in
six
reporting segments: Grocery & Snacks, Refrigerated & Frozen, International, Foodservice, Pinnacle Foods, and Commercial.
In the second quarter of fiscal 2017, we completed the Spinoff of Lamb Weston. The Lamb Weston business had previously been included in the Commercial segment. The results of operations of the Lamb Weston business have been classified as discontinued operations for all periods presented.
The Grocery & Snacks reporting segment principally includes branded, shelf-stable food products sold in various retail channels in the United States.
The Refrigerated & Frozen reporting segment includes branded, temperature-controlled food products sold in various retail channels in the United States.
The International reporting segment principally includes branded food products, in various temperature states, sold in various retail and foodservice channels outside of the United States.
The Foodservice reporting segment includes branded and customized food products, including meals, entrees, sauces and a variety of custom-manufactured culinary products packaged for sale to restaurants and other foodservice establishments primarily in the United States.
The Pinnacle Foods reporting segment includes branded and private-labeled food products, in various temperature states, sold in various retail and foodservice channels in the United States and Canada. Results of the Pinnacle Foods segment reflect activity beginning on October 26, 2018, the date of the acquisition of Pinnacle.
The Commercial reporting segment included commercially branded and private label food and ingredients, which were sold primarily to commercial, restaurant, foodservice, food manufacturing, and industrial customers. The segment's primary food items included a variety of vegetable, spice, and frozen bakery goods, which were sold under brands such as
Spicetec Flavors & Seasonings
®
. The Spicetec and JM Swank businesses were sold in the first quarter of fiscal 2017. These businesses comprised the entire Commercial segment following the presentation of Lamb Weston as discontinued operation.
We do not aggregate operating segments when determining our reporting segments.
Intersegment sales have been recorded at amounts approximating market. Operating profit for each of the segments is based on net sales less all identifiable operating expenses. General corporate expense, net interest expense, and income taxes have been excluded from segment operations.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net sales
|
|
|
|
|
|
Grocery & Snacks
|
$
|
3,279.2
|
|
|
$
|
3,287.0
|
|
|
$
|
3,208.8
|
|
Refrigerated & Frozen
|
2,804.0
|
|
|
2,753.0
|
|
|
2,652.7
|
|
International
|
793.4
|
|
|
843.5
|
|
|
816.0
|
|
Foodservice
|
934.2
|
|
|
1,054.8
|
|
|
1,078.3
|
|
Pinnacle Foods
|
1,727.6
|
|
|
—
|
|
|
—
|
|
Commercial
|
—
|
|
|
—
|
|
|
71.1
|
|
Total net sales
|
$
|
9,538.4
|
|
|
$
|
7,938.3
|
|
|
$
|
7,826.9
|
|
Operating profit
|
|
|
|
|
|
Grocery & Snacks
|
$
|
689.2
|
|
|
$
|
724.8
|
|
|
$
|
655.4
|
|
Refrigerated & Frozen
|
502.2
|
|
|
479.4
|
|
|
445.8
|
|
International
|
94.5
|
|
|
86.5
|
|
|
(168.9
|
)
|
Foodservice
|
117.7
|
|
|
121.8
|
|
|
105.1
|
|
Pinnacle Foods
|
238.2
|
|
|
—
|
|
|
—
|
|
Commercial
|
—
|
|
|
—
|
|
|
202.6
|
|
Total operating profit
|
$
|
1,641.8
|
|
|
$
|
1,412.5
|
|
|
$
|
1,240.0
|
|
Equity method investment earnings
|
75.8
|
|
|
97.3
|
|
|
71.2
|
|
General corporate expenses
|
462.2
|
|
|
459.4
|
|
|
370.2
|
|
Pension and postretirement non-service income
|
35.1
|
|
|
80.4
|
|
|
55.2
|
|
Interest expense, net
|
391.4
|
|
|
158.7
|
|
|
195.5
|
|
Income tax expense
|
218.8
|
|
|
174.6
|
|
|
254.7
|
|
Income from continuing operations
|
$
|
680.3
|
|
|
$
|
797.5
|
|
|
$
|
546.0
|
|
Less: Net income attributable to noncontrolling interests of continuing operations
|
0.1
|
|
|
3.4
|
|
|
1.9
|
|
Income from continuing operations attributable to Conagra Brands, Inc.
|
$
|
680.2
|
|
|
$
|
794.1
|
|
|
$
|
544.1
|
|
The following table presents further disaggregation of our net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Snacks
|
$
|
1,363.4
|
|
|
$
|
1,199.0
|
|
|
$
|
1,046.7
|
|
Other shelf-stable
|
2,567.1
|
|
|
2,088.0
|
|
|
2,162.1
|
|
Frozen
|
2,968.4
|
|
|
2,014.8
|
|
|
1,886.1
|
|
Refrigerated
|
788.0
|
|
|
738.2
|
|
|
766.5
|
|
International
|
846.2
|
|
|
843.5
|
|
|
816.0
|
|
Foodservice
|
1,005.3
|
|
|
1,054.8
|
|
|
1,078.4
|
|
Commercial
|
—
|
|
|
—
|
|
|
71.1
|
|
Total net sales
|
$
|
9,538.4
|
|
|
$
|
7,938.3
|
|
|
$
|
7,826.9
|
|
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
Presentation of Derivative Gains (Losses) for Economic Hedges of Forecasted Cash Flows in Segment Results
Derivatives used to manage commodity price risk and foreign currency risk are not designated for hedge accounting treatment. We believe these derivatives provide economic hedges 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. In the event that management determines a particular derivative entered into as an economic hedge of a forecasted commodity purchase has ceased to function as an economic hedge, we cease recognizing further gains and losses on such derivatives in corporate expense and begin recognizing such gains and losses within segment operating results, immediately.
The following table presents the net derivative gains (losses) from economic hedges of forecasted commodity consumption and the foreign currency risk of certain forecasted transactions, under this methodology:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net derivative gains (losses) incurred
|
$
|
(3.6
|
)
|
|
$
|
(0.9
|
)
|
|
$
|
0.6
|
|
Less: Net derivative gains (losses) allocated to reporting segments
|
(1.8
|
)
|
|
(7.1
|
)
|
|
5.7
|
|
Net derivative gains (losses) recognized in general corporate expenses
|
$
|
(1.8
|
)
|
|
$
|
6.2
|
|
|
$
|
(5.1
|
)
|
Net derivative gains (losses) allocated to Grocery & Snacks
|
$
|
(2.1
|
)
|
|
$
|
0.2
|
|
|
$
|
3.4
|
|
Net derivative gains (losses) allocated to Refrigerated & Frozen
|
(1.1
|
)
|
|
(0.3
|
)
|
|
0.8
|
|
Net derivative gains (losses) allocated to International
|
2.8
|
|
|
(6.9
|
)
|
|
1.6
|
|
Net derivative losses allocated to Foodservice
|
(0.6
|
)
|
|
(0.1
|
)
|
|
—
|
|
Net derivative losses allocated to Pinnacle Foods
|
(0.8
|
)
|
|
—
|
|
|
—
|
|
Net derivative losses allocated to Commercial
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
Net derivative gains (losses) included in segment operating profit
|
$
|
(1.8
|
)
|
|
$
|
(7.1
|
)
|
|
$
|
5.7
|
|
As of
May 26, 2019
, the cumulative amount of net derivative gains from economic hedges that had been recognized in general corporate expenses and not yet allocated to reporting segments was
$1.4 million
. This amount reflected net gains of $
1.0 million
incurred during the fiscal year ended
May 26, 2019
, as well as net gains of $
0.4 million
incurred prior to fiscal 2019. Based on our forecasts of the timing of recognition of the underlying hedged items, we expect to reclassify to segment operating results gains of
$0.9 million
in fiscal
2020
and
$0.5 million
in fiscal
2021
and thereafter.
Assets by Segment
The majority of our manufacturing assets are shared across multiple reporting segments. Output from these facilities used by each reporting segment can change over time. Also, working capital balances are not tracked by reporting segment. Therefore, it is impracticable to allocate those assets to the reporting segments, as well as disclose total assets by segment. Total depreciation expense for fiscal
2019
,
2018
, and
2017
was
$283.9 million
,
$222.1 million
, and
$234.4 million
, respectively.
Other Information
Our operations are principally in the United States. With respect to operations outside of the United States, no single foreign country or geographic region was significant with respect to consolidated operations for fiscal
2019
,
2018
, and
2017
. Foreign net sales, including sales by domestic segments to customers located outside of the United States, were approximately
$919.5 million
,
$918.4 million
, and
$887.2 million
in fiscal
2019
,
2018
, and
2017
, respectively. Our long-lived assets located outside of the United States are not significant.
Our largest customer, Walmart, Inc. and its affiliates, accounted for approximately
24%
of consolidated net sales for each of fiscal
2019
,
2018
, and
2017
, significantly impacting the Grocery & Snacks, Refrigerated & Frozen, and Pinnacle Foods segments.
Walmart, Inc. and its affiliates accounted for approximately
30%
and
25%
of consolidated net receivables as of
May 26, 2019
and
May 27, 2018
, respectively.
Notes to Consolidated Financial Statements - (Continued)
Fiscal Years Ended May 26, 2019, May 27, 2018, and May 28, 2017
(columnar dollars in millions except per share amounts)
We offer certain suppliers access to a third-party service that allows them to view our scheduled payments online. The third-party service also allows suppliers to finance advances on our scheduled payments at the sole discretion of the supplier and the third-party. We have no economic interest in these financing arrangements and no direct relationship with the suppliers, the third-party, or any financial institutions concerning this service. All of our accounts payable remain as obligations to our suppliers as stated in our supplier agreements. As of
May 26, 2019
,
$189.3 million
of our total accounts payable is payable to suppliers who utilize this third-party service.
22. QUARTERLY FINANCIAL DATA (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
Net sales
|
$
|
1,834.4
|
|
|
$
|
2,383.7
|
|
|
$
|
2,707.1
|
|
|
$
|
2,613.2
|
|
|
$
|
1,804.2
|
|
|
$
|
2,173.4
|
|
|
$
|
1,994.5
|
|
|
$
|
1,966.2
|
|
Gross profit
|
515.5
|
|
|
677.2
|
|
|
752.3
|
|
|
708.0
|
|
|
519.0
|
|
|
658.3
|
|
|
598.8
|
|
|
575.4
|
|
Income from continuing operations, net of tax
|
178.2
|
|
|
134.3
|
|
|
242.6
|
|
|
125.2
|
|
|
153.6
|
|
|
224.1
|
|
|
349.2
|
|
|
70.6
|
|
Income (loss) from discontinued operations, net of tax
|
—
|
|
|
(1.9
|
)
|
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
|
0.4
|
|
|
14.5
|
|
|
(0.3
|
)
|
Net income attributable to Conagra Brands, Inc.
|
178.2
|
|
|
131.6
|
|
|
242.0
|
|
|
126.5
|
|
|
152.5
|
|
|
223.5
|
|
|
362.8
|
|
|
69.6
|
|
Earnings per share
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Conagra Brands, Inc. common stockholders
|
$
|
0.45
|
|
|
$
|
0.31
|
|
|
$
|
0.50
|
|
|
$
|
0.26
|
|
|
$
|
0.37
|
|
|
$
|
0.55
|
|
|
$
|
0.91
|
|
|
$
|
0.18
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Conagra Brands, Inc. common stockholders
|
$
|
0.45
|
|
|
$
|
0.31
|
|
|
$
|
0.50
|
|
|
$
|
0.26
|
|
|
$
|
0.36
|
|
|
$
|
0.54
|
|
|
$
|
0.90
|
|
|
$
|
0.18
|
|
Dividends declared per common share
|
$
|
0.2125
|
|
|
$
|
0.2125
|
|
|
$
|
0.2125
|
|
|
$
|
0.2125
|
|
|
$
|
0.2125
|
|
|
$
|
0.2125
|
|
|
$
|
0.2125
|
|
|
$
|
0.2125
|
|
Share price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
$
|
38.94
|
|
|
$
|
38.25
|
|
|
$
|
32.60
|
|
|
$
|
31.28
|
|
|
$
|
39.95
|
|
|
$
|
35.87
|
|
|
$
|
38.50
|
|
|
$
|
38.29
|
|
Low
|
34.64
|
|
|
32.42
|
|
|
20.85
|
|
|
22.37
|
|
|
33.07
|
|
|
32.43
|
|
|
35.47
|
|
|
35.34
|
|
|
|
(1)
|
Basic and diluted earnings per share are calculated independently for each of the quarters presented. Accordingly, the sum of the quarterly earnings per share amounts may not agree with the total year.
|