Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________________________
FORM 10-Q
______________________________________________________
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended February 26, 2017
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-7275
______________________________________________________
CONAGRA BRANDS, INC.
(Exact name of registrant as specified in its charter)
______________________________________________________
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Delaware | | 47-0248710 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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222 W. Merchandise Mart Plaza, Suite 1300 Chicago, Illinois | | 60654 |
(Address of principal executive offices) | | (Zip Code) |
(312) 549-5000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
______________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | x | | Accelerated filer | ¨ |
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Non-accelerated filer | ¨ | (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Number of shares outstanding of issuer’s common stock, as of February 26, 2017, was 425,501,586.
Table of Contents
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Item 1 | | |
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Item 2 | | |
Item 3 | | |
Item 4 | | |
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Item 1 | | |
Item 1A | | |
Item 2 | | |
Item 6 | | |
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Exhibit 101.1 | |
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Conagra Brands, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in millions except per share amounts)
(unaudited)
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| | | | | | | | | | | | | | | |
| Thirteen weeks ended | | Thirty-nine weeks ended |
| February 26, 2017 | | February 28, 2016 | | February 26, 2017 | | February 28, 2016 |
Net sales | $ | 1,981.2 |
| | $ | 2,199.3 |
| | $ | 5,965.2 |
| | $ | 6,611.1 |
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Costs and expenses: | | | | | | | |
Cost of goods sold | 1,360.2 |
| | 1,579.5 |
| | 4,152.1 |
| | 4,762.0 |
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Selling, general and administrative expenses | 349.7 |
| | 447.0 |
| | 999.3 |
| | 1,293.0 |
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Interest expense, net | 45.7 |
| | 76.4 |
| | 158.0 |
| | 235.7 |
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Income from continuing operations before income taxes and equity method investment earnings | 225.6 |
| | 96.4 |
| | 655.8 |
| | 320.4 |
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Income tax expense | 67.9 |
| | 33.6 |
| | 315.5 |
| | 126.0 |
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Equity method investment earnings | 21.8 |
| | 8.6 |
| | 52.1 |
| | 50.7 |
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Income from continuing operations | 179.5 |
| | 71.4 |
| | 392.4 |
| | 245.1 |
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Income (loss) from discontinued operations, net of tax | 0.7 |
| | 134.9 |
| | 103.7 |
| | (1,031.9 | ) |
Net income (loss) | $ | 180.2 |
| | $ | 206.3 |
| | $ | 496.1 |
| | $ | (786.8 | ) |
Less: Net income attributable to noncontrolling interests | 0.5 |
| | 1.7 |
| | 8.1 |
| | 7.8 |
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Net income (loss) attributable to Conagra Brands, Inc. | $ | 179.7 |
| | $ | 204.6 |
| | $ | 488.0 |
| | $ | (794.6 | ) |
Earnings (loss) per share — basic | | | | | | | |
Income from continuing operations attributable to Conagra Brands, Inc. common stockholders | $ | 0.41 |
| | $ | 0.16 |
| | $ | 0.90 |
| | $ | 0.56 |
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Income (loss) from discontinued operations attributable to Conagra Brands, Inc. common stockholders | 0.01 |
| | 0.30 |
| | 0.22 |
| | (2.40 | ) |
Net income (loss) attributable to Conagra Brands, Inc. common stockholders | $ | 0.42 |
| | $ | 0.46 |
| | $ | 1.12 |
| | $ | (1.84 | ) |
Earnings (loss) per share — diluted | | | | | | | |
Income from continuing operations attributable to Conagra Brands, Inc. common stockholders | $ | 0.41 |
| | $ | 0.16 |
| | $ | 0.89 |
| | $ | 0.56 |
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Income (loss) from discontinued operations attributable to Conagra Brands, Inc. common stockholders | — |
| | 0.30 |
| | 0.22 |
| | (2.39 | ) |
Net income (loss) attributable to Conagra Brands, Inc. common stockholders | $ | 0.41 |
| | $ | 0.46 |
| | $ | 1.11 |
| | $ | (1.83 | ) |
Cash dividends declared per common share | $ | 0.20 |
| | $ | 0.25 |
| | $ | 0.70 |
| | $ | 0.75 |
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See notes to the condensed consolidated financial statements.
Conagra Brands, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in millions)
(unaudited)
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| | | | | | | | | | | | | | | | | | | |
| Thirteen weeks ended |
| February 26, 2017 | | February 28, 2016 |
| Pre-Tax Amount | Tax (Expense) Benefit | After-Tax Amount | | Pre-Tax Amount | Tax (Expense) Benefit | After-Tax Amount |
Net income | $ | 245.5 |
| $ | (65.3 | ) | $ | 180.2 |
| | $ | 318.2 |
| $ | (111.9 | ) | $ | 206.3 |
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Other comprehensive income: |
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Derivative adjustments: |
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Unrealized derivative adjustments | 4.1 |
| (1.6 | ) | 2.5 |
| | — |
| — |
| — |
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Reclassification for derivative adjustments included in net income | (0.2 | ) | 0.1 |
| (0.1 | ) | | (2.1 | ) | 0.8 |
| (1.3 | ) |
Unrealized gains (losses) on available-for-sale securities | 0.2 |
| (0.1 | ) | 0.1 |
| | (0.1 | ) | — |
| (0.1 | ) |
Currency translation gains (losses): | | | | | | | |
Unrealized currency translation gains (losses) | 15.7 |
| — |
| 15.7 |
| | (18.0 | ) | — |
| (18.0 | ) |
Reclassification for currency translation losses included in net income | — |
| — |
| — |
| | 73.4 |
| — |
| 73.4 |
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Pension and post-employment benefit obligations: |
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Unrealized pension and post-employment benefit obligations | 62.2 |
| (23.8 | ) | 38.4 |
| | 0.4 |
| (0.1 | ) | 0.3 |
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Reclassification for pension and post-employment benefit obligations included in net income | 13.0 |
| (5.0 | ) | 8.0 |
| | (10.9 | ) | 3.4 |
| (7.5 | ) |
Comprehensive income | 340.5 |
| (95.7 | ) | 244.8 |
| | 360.9 |
| (107.8 | ) | 253.1 |
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Comprehensive income attributable to noncontrolling interests | 3.0 |
| (0.3 | ) | 2.7 |
| | (0.3 | ) | (0.2 | ) | (0.5 | ) |
Comprehensive income attributable to Conagra Brands, Inc. | $ | 337.5 |
| $ | (95.4 | ) | $ | 242.1 |
| | $ | 361.2 |
| $ | (107.6 | ) | $ | 253.6 |
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| Thirty-nine weeks ended |
| February 26, 2017 | | February 28, 2016 |
| Pre-Tax Amount | Tax (Expense) Benefit | After-Tax Amount | | Pre-Tax Amount | Tax (Expense) Benefit | After-Tax Amount |
Net income (loss) | $ | 896.7 |
| $ | (400.6 | ) | $ | 496.1 |
| | $ | (973.1 | ) | $ | 186.3 |
| $ | (786.8 | ) |
Other comprehensive income (loss): | | | | | | | |
Derivative adjustments: | | | | | | | |
Unrealized derivative adjustments | (1.7 | ) | 0.6 |
| (1.1 | ) | | — |
| — |
| — |
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Reclassification for derivative adjustments included in net income | (0.2 | ) | 0.1 |
| (0.1 | ) | | (2.1 | ) | 0.8 |
| (1.3 | ) |
Unrealized gains on available-for-sale securities | 0.6 |
| (0.2 | ) | 0.4 |
| | — |
| — |
| — |
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Currency translation losses: | | | | | | | |
Unrealized currency translation losses | (10.3 | ) | 0.2 |
| (10.1 | ) | | (74.0 | ) | — |
| (74.0 | ) |
Reclassification for currency translation losses included in net income | — |
| — |
| — |
| | 73.4 |
| — |
| 73.4 |
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Pension and post-employment benefit obligations: | | | | | | | |
Unrealized pension and post-employment benefit obligations | 126.9 |
| (49.3 | ) | 77.6 |
| | 7.1 |
| (1.8 | ) | 5.3 |
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Reclassification for pension and post-employment benefit obligations included in net income | 11.2 |
| (4.3 | ) | 6.9 |
| | (13.5 | ) | 4.4 |
| (9.1 | ) |
Comprehensive income (loss) | 1,023.2 |
| (453.5 | ) | 569.7 |
| | (982.2 | ) | 189.7 |
| (792.5 | ) |
Comprehensive income attributable to noncontrolling interests | 9.0 |
| (0.5 | ) | 8.5 |
| | 2.3 |
| (0.7 | ) | 1.6 |
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Comprehensive income (loss) attributable to Conagra Brands, Inc. | $ | 1,014.2 |
| $ | (453.0 | ) | $ | 561.2 |
| | $ | (984.5 | ) | $ | 190.4 |
| $ | (794.1 | ) |
See notes to the condensed consolidated financial statements.
Conagra Brands, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions except share data)
(unaudited)
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| February 26, 2017 | | May 29, 2016 |
ASSETS | | | |
Current assets | | | |
Cash and cash equivalents | $ | 683.6 |
| | $ | 798.1 |
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Receivables, less allowance for doubtful accounts of $3.7 and $3.2 | 601.4 |
| | 650.1 |
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Inventories | 1,046.4 |
| | 1,083.2 |
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Prepaid expenses and other current assets | 207.7 |
| | 148.6 |
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Current assets of discontinued operations | — |
| | 779.7 |
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Current assets held for sale | — |
| | 117.0 |
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Total current assets | 2,539.1 |
| | 3,576.7 |
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Property, plant and equipment | 4,268.1 |
| | 4,213.3 |
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Less accumulated depreciation | (2,612.3 | ) | | (2,511.7 | ) |
Property, plant and equipment, net | 1,655.8 |
| | 1,701.6 |
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Goodwill | 4,251.7 |
| | 4,396.2 |
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Brands, trademarks and other intangibles, net | 1,253.1 |
| | 1,237.2 |
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Other assets | 797.6 |
| | 905.5 |
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Noncurrent assets of discontinued operations | — |
| | 1,339.3 |
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Noncurrent assets held for sale | 1.7 |
| | 234.1 |
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| $ | 10,499.0 |
| | $ | 13,390.6 |
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LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current liabilities | | | |
Notes payable | $ | 3.7 |
| | $ | 13.9 |
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Current installments of long-term debt | 128.8 |
| | 559.4 |
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Accounts payable | 690.1 |
| | 706.7 |
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Accrued payroll | 148.4 |
| | 220.8 |
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Other accrued liabilities | 593.9 |
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| 567.7 |
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Current liabilities of discontinued operations | — |
| | 409.2 |
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Current liabilities held for sale | — |
| | 54.7 |
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Total current liabilities | 1,564.9 |
| | 2,532.4 |
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Senior long-term debt, excluding current installments | 2,645.8 |
| | 4,685.5 |
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Subordinated debt | 195.9 |
| | 195.9 |
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Other noncurrent liabilities | 1,788.2 |
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| 1,875.7 |
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Noncurrent liabilities of discontinued operations | — |
| | 304.8 |
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Noncurrent liabilities held for sale | — |
| | 1.5 |
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Total liabilities | 6,194.8 |
| | 9,595.8 |
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Commitments and contingencies (Note 13) |
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Common stockholders' equity | | | |
Common stock of $5 par value, authorized 1,200,000,000 shares; issued 567,907,172 | 2,839.7 |
| | 2,839.7 |
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Additional paid-in capital | 1,165.3 |
| | 1,136.3 |
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Retained earnings | 4,171.0 |
| | 3,218.3 |
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Accumulated other comprehensive loss | (271.3 | ) | | (344.5 | ) |
Less treasury stock, at cost, 142,405,586 and 129,842,206 common shares | (3,683.4 | ) | | (3,136.2 | ) |
Total Conagra Brands, Inc. common stockholders' equity | 4,221.3 |
| | 3,713.6 |
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Noncontrolling interests | 82.9 |
| | 81.2 |
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Total stockholders' equity | 4,304.2 |
| | 3,794.8 |
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| $ | 10,499.0 |
| | $ | 13,390.6 |
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See notes to the condensed consolidated financial statements.
Conagra Brands, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions)
(unaudited) |
| | | | | | | |
| Thirty-nine weeks ended |
| February 26, 2017 | | February 28, 2016 |
Cash flows from operating activities: | | | |
Net income (loss) | $ | 496.1 |
| | $ | (786.8 | ) |
Income (loss) from discontinued operations | 103.7 |
| | (1,031.9 | ) |
Income from continuing operations | 392.4 |
| | 245.1 |
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Adjustments to reconcile income from continuing operations to net cash flows from operating activities: | | | |
Depreciation and amortization | 199.8 |
| | 210.6 |
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Asset impairment charges | 221.9 |
| | 8.4 |
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Gain on divestitures | (197.4 | ) | | — |
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Loss on extinguishment of debt | 93.3 |
| | 23.9 |
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Lease cancellation expense | — |
| | 55.6 |
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Earnings of affiliates in excess of distributions | (21.6 | ) | | (10.3 | ) |
Share-based payments expense | 28.1 |
| | 29.5 |
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Contributions to pension plans | (9.8 | ) | | (9.3 | ) |
Pension expense (benefit) | (16.2 | ) | | 13.8 |
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Other items | 25.5 |
| | 25.3 |
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Change in operating assets and liabilities excluding effects of business acquisitions and dispositions: | | | |
Accounts receivable | 49.5 |
| | (99.3 | ) |
Inventory | 35.0 |
| | (65.1 | ) |
Deferred income taxes and income taxes payable, net | 135.6 |
| | (160.0 | ) |
Prepaid expenses and other current assets | 8.2 |
| | 8.2 |
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Accounts payable | 13.3 |
| | (104.6 | ) |
Accrued payroll | (71.5 | ) | | 24.2 |
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Other accrued liabilities | (82.6 | ) | | 78.3 |
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Net cash flows from operating activities — continuing operations | 803.5 |
| | 274.3 |
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Net cash flows from operating activities — discontinued operations | 43.0 |
| | 464.3 |
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Net cash flows from operating activities | 846.5 |
| | 738.6 |
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Cash flows from investing activities: | | | |
Additions to property, plant and equipment | (158.5 | ) | | (171.1 | ) |
Sale of property, plant and equipment | 12.5 |
| | 19.4 |
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Proceeds from divestitures | 489.0 |
| | — |
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Purchase of business and intangible assets | (108.1 | ) | | (10.4 | ) |
Other items | — |
| | 0.3 |
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Net cash flows from investing activities — continuing operations | 234.9 |
| | (161.8 | ) |
Net cash flows from investing activities — discontinued operations | (123.7 | ) | | 2,418.2 |
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Net cash flows from investing activities | 111.2 |
| | 2,256.4 |
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Cash flows from financing activities: | | | |
Net short-term borrowings | (10.1 | ) | | 10.5 |
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Repayment of long-term debt | (1,062.3 | ) | | (2,519.9 | ) |
Payment of intangible asset financing arrangement | (14.9 | ) | | — |
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Repurchase of Conagra Brands, Inc. common shares | (594.6 | ) | | — |
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Cash dividends paid | (328.9 | ) | | (323.5 | ) |
Exercise of stock options and issuance of other stock awards | 66.6 |
| | 164.6 |
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Other Items | (1.9 | ) | | — |
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Net cash flows from financing activities — continuing operations | (1,946.1 | ) | | (2,668.3 | ) |
Net cash flows from financing activities — discontinued operations | 839.1 |
| | (4.7 | ) |
Net cash flows from financing activities | (1,107.0 | ) | | (2,673.0 | ) |
Effect of exchange rate changes on cash and cash equivalents | (1.6 | ) | | (2.5 | ) |
Net change in cash and cash equivalents | (150.9 | ) | | 319.5 |
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Discontinued operations cash activity included above: | | | |
Add: Cash balance included in assets held for sale and discontinued operations at beginning of period | 36.4 |
| | 49.0 |
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Less: Cash balance included in assets held for sale and discontinued operations at end of period | — |
| | 36.6 |
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Cash and cash equivalents at beginning of period | 798.1 |
| | 134.1 |
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Cash and cash equivalents at end of period | $ | 683.6 |
| | $ | 466.0 |
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See notes to the condensed consolidated financial statements.
Conagra Brands, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Thirty-nine weeks ended February 26, 2017 and February 28, 2016
(columnar dollars in millions except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial information reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of the results of operations, financial position, and cash flows for the periods presented. The adjustments are of a normal recurring nature, except as otherwise noted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Conagra Brands, Inc. (formerly ConAgra Foods, Inc., the “Company”, “we”, “us”, or “our”) Annual Report on Form 10-K for the fiscal year ended May 29, 2016.
The results of operations for any quarter or a partial fiscal year period are not necessarily indicative of the results to be expected for other periods or the full fiscal year.
Basis of Consolidation — The condensed consolidated financial statements include the accounts of Conagra 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 condensed consolidated financial statements from the date such determination is made. All significant intercompany investments, accounts, and transactions have been eliminated.
On November 9, 2016, the Company completed the previously announced spinoff (the "Spinoff") of Lamb Weston Holdings, Inc. (“Lamb Weston”) through a distribution of 100% of the Company’s interest in Lamb Weston to holders of shares of the Company’s common stock as of November 1, 2016. In accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), the financial position and 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 3 for additional discussion).
Comprehensive Income — Comprehensive income includes net income, currency translation adjustments, certain derivative-related activity, changes in the value of available-for-sale investments, and changes in prior service cost and net actuarial gains (losses) from pension (for amounts not in excess of the 10% corridor) and post-retirement health care plans. We generally deem our foreign investments to be essentially permanent in nature, and we do not provide for taxes on currency translation adjustments arising from converting the investment denominated in a foreign currency to U.S. dollars. When we determine that a foreign investment, as well as undistributed earnings, are no longer permanent in nature, estimated taxes will be provided for the related deferred tax liability (asset), if any, resulting from currency translation adjustments.
The following table summarizes the reclassifications from accumulated other comprehensive income (loss) into operations:
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| | Thirteen weeks ended | | Affected Line Item in the Condensed Consolidated Statement of Operations |
| | February 26, 2017 | | February 28, 2016 | | |
Net derivative adjustment, net of tax: | | | | | | |
Cash flow hedges | | $ | (0.2 | ) | | $ | (2.1 | ) | | Interest expense, net |
| | (0.2 | ) | | (2.1 | ) | | Total before tax |
| | 0.1 |
| | 0.8 |
| | Income tax expense |
| | $ | (0.1 | ) | | $ | (1.3 | ) | | Net of tax |
Pension and postretirement liabilities: | |
| |
| |
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Net prior service benefit | | $ | (0.9 | ) | | $ | (1.2 | ) | | Selling, general and administrative expenses |
Divestiture of Private Brands | | — |
| | (4.3 | ) | | Income (loss) from discontinued operations, net of tax |
Pension settlement of equity method investment | | — |
| | (5.4 | ) | | Equity method investment earnings |
Pension settlement | | 13.8 |
| | — |
| | Selling, general and administrative expenses |
Net actuarial loss | | 0.1 |
| | — |
| | Selling, general and administrative expenses |
| | 13.0 |
| | (10.9 | ) | | Total before tax |
| | (5.0 | ) | | 3.4 |
| | Income tax expense |
| | $ | 8.0 |
| | $ | (7.5 | ) | | Net of tax |
Currency translation losses | | $ | — |
| | $ | 73.4 |
| | Income (loss) from discontinued operations, net of tax |
| | — |
| | 73.4 |
| | Total before tax |
| | — |
| | — |
| | Income tax expense |
| | $ | — |
| | $ | 73.4 |
| | Net of tax |
|
| | | | | | | | | | |
| | Thirty-nine weeks ended | | Affected Line Item in the Condensed Consolidated Statement of Operations |
| | February 26, 2017 | | February 28, 2016 | | |
Net derivative adjustment, net of tax: | | | | | | |
Cash flow hedges | | $ | (0.2 | ) | | $ | (2.1 | ) | | Interest expense, net |
| | (0.2 | ) | | (2.1 | ) | | Total before tax |
| | 0.1 |
| | 0.8 |
| | Income tax expense |
| | $ | (0.1 | ) | | $ | (1.3 | ) | | Net of tax |
Pension and postretirement liabilities: | | | | | | |
Net prior service benefit | | $ | (2.9 | ) | | $ | (3.8 | ) | | Selling, general and administrative expenses |
Divestiture of Private Brands | | — |
| | (4.3 | ) | | Income (loss) from discontinued operations, net of tax |
Pension settlement of equity method investment | | — |
| | (5.4 | ) | | Equity method investment earnings |
Pension settlement | | 13.8 |
| | — |
| | Selling, general and administrative expenses |
Net actuarial loss | | 0.3 |
| | — |
| | Selling, general and administrative expenses |
| | 11.2 |
| | (13.5 | ) | | Total before tax |
| | (4.3 | ) | | 4.4 |
| | Income tax expense |
| | $ | 6.9 |
| | $ | (9.1 | ) | | Net of tax |
Currency translation losses | | $ | — |
| | $ | 73.4 |
| | Income (loss) from discontinued operations, net of tax |
| | — |
| | 73.4 |
| | Total before tax |
| | — |
| | — |
| | Income tax expense |
| | $ | — |
| | $ | 73.4 |
| | Net of tax |
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.
As part of the consideration for the Spinoff, we received a cash payment from Lamb Weston in the amount of $823.5 million. In order to maintain the tax-free nature of the Spinoff, we were required to use the cash within twelve months of receiving the payment and to only use it in one or more of the following ways: to pay dividends on shares of our common stock, to repay debt incurred prior to July 8, 2016, and to repurchase shares of our common stock. As of February 26, 2017, all such cash proceeds had been deployed to repay debt and repurchase shares of our common stock.
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 condensed consolidated financial statements. Actual results could differ from these estimates.
Accounting Changes — In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies the accounting for income taxes, among other changes, related to stock-based compensation. We elected to early adopt this ASU as of the beginning of fiscal 2017. Starting in the first quarter of fiscal 2017, we recognized all excess tax benefits and tax deficiencies as income tax expense or benefit as a discrete event. An income tax benefit of approximately $3.5 million and $17.5 million was recognized in the third quarter and first three quarters of fiscal 2017, respectively, as a result of the adoption of ASU 2016-09. The treatment of forfeitures has changed as we have elected to discontinue our past process of estimating the number of forfeitures and now account for forfeitures as they occur. As such, this had a cumulative effect on retained earnings of $3.9 million, net of tax. We have elected to present the cash flow statement on a retrospective transition method and prior periods have been adjusted to present the excess tax benefits as part of cash flows from operating activities. This resulted in an increase in cash flows from operating activities and a decrease in cash flows from financing activities of $43.5 million in the first three quarters of fiscal 2016.
Recently Issued Accounting Standards — In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires 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. The ASU will replace most existing revenue recognition guidance in U.S. GAAP. On July 9, 2015, the FASB deferred the effective date of the new revenue recognition standard by one year. Based on the FASB’s ASU, we will apply the new revenue standard in our fiscal year 2019. Early adoption in our fiscal year 2018 is permitted. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. The standard permits the use of either the retrospective or cumulative effect transition method.
In July 2015, the FASB issued ASU 2015-11, Inventory, which requires an entity to measure inventory within the scope at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The effective date for the standard is for fiscal years beginning after December 15, 2016. Early adoption is permitted. The standard is to be applied prospectively. We do not expect ASU 2015-11 to have a material impact to our consolidated financial statements.
In January 2016, the FASB issued 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. Early adoption is not permitted except for certain provisions. We do not expect ASU 2016-01 to have a material impact to our consolidated financial statements.
In February 2016, the FASB issued its final lease accounting standard, FASB Accounting Standard Codification (“ASC”) Topic 842, Leases, 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 ASC 842 will have on our consolidated financial statements and related disclosures. The standard is to be applied under the modified retrospective method, with elective reliefs, which requires application of the new guidance for all periods presented.
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. The effective date for the standard is for fiscal years beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of our pending adoption of this standard on 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. The effective date for the standard is for fiscal years beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of our pending adoption of this standard on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The updated guidance required a prospective adoption. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of our pending adoption of this standard on our consolidated financial statements.
2. ACQUISITIONS
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 businesses for $108.1 million in cash, net of cash acquired. Approximately $38.7 million has been classified as goodwill and $66.7 million has been classified as other intangible assets pending determination of the final purchase price allocation. The amount allocated to goodwill is deductible for tax purposes. These businesses are included in the Grocery & Snacks segment.
In March 2017, subsequent to the end of the third quarter of fiscal 2017, we entered into a definitive agreement to acquire protein-based snacking businesses Thanasi Foods LLC, maker of Duke’s® meat snacks, and BIGS LLC, maker of BIGS® seeds. The transaction is subject to customary closing conditions, including the receipt of any applicable regulatory approvals, and is expected to close in the next few months.
3. 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. We reflected the results of this business as discontinued operations for all periods presented. The assets and liabilities of the Lamb Weston business have been reclassified as assets and liabilities of discontinued operations within our Condensed Consolidated Balance Sheets for the period presented prior to the Spinoff.
The summary comparative financial results of the Lamb Weston business through the date of the Spinoff, included within discontinued operations, were as follows:
|
| | | | | | | | | | | | | | | |
| Thirteen weeks ended | | Thirty-nine weeks ended |
| February 26, 2017 | | February 28, 2016 | | February 26, 2017 | | February 28, 2016 |
Net sales | $ | — |
| | $ | 723.8 |
| | $ | 1,407.9 |
| | $ | 2,200.9 |
|
Income (loss) from discontinued operations before income taxes and equity method investment earnings | $ | (0.8 | ) | | $ | 137.5 |
| | $ | 174.3 |
| | $ | 353.0 |
|
Income (loss) before income taxes and equity method investment earnings | (0.8 | ) | | 137.5 |
| | 174.3 |
| | 353.0 |
|
Income tax expense (benefit) | (0.6 | ) | | 57.3 |
| | 88.0 |
| | 133.3 |
|
Equity method investment earnings | — |
| | 36.1 |
| | 15.9 |
| | 56.3 |
|
Income (loss) from discontinued operations, net of tax | (0.2 | ) | | 116.3 |
| | 102.2 |
| | 276.0 |
|
Less: Net income attributable to noncontrolling interests | — |
| | 1.3 |
| | 6.8 |
| | 6.5 |
|
Net income (loss) from discontinued operations attributable to Conagra Brands, Inc. | $ | (0.2 | ) | | $ | 115.0 |
| | $ | 95.4 |
| | $ | 269.5 |
|
For the third quarter and first three quarters of fiscal 2017, we incurred $0.8 million and $72.8 million, respectively, 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.
The assets and liabilities classified as assets and liabilities of discontinued operations in our Condensed Consolidated Balance Sheets related to the Lamb Weston business were as follows:
|
| | | |
| May 29, 2016 |
Cash and cash equivalents | $ | 36.4 |
|
Receivables, less allowance for doubtful accounts of $0.5 | 186.5 |
|
Inventories | 498.9 |
|
Prepaid expenses and other current assets | 57.9 |
|
Total current assets of discontinued operations | $ | 779.7 |
|
Property, plant and equipment, net | $ | 1,004.1 |
|
Goodwill | 133.9 |
|
Brands, trademarks and other intangibles, net | 39.6 |
|
Other assets | 161.7 |
|
Total noncurrent assets of discontinued operations | $ | 1,339.3 |
|
Notes payable | $ | 24.9 |
|
Current installments of long-term debt | 12.0 |
|
Accounts payable | 238.7 |
|
Accrued payroll | 50.3 |
|
Other accrued liabilities | 83.3 |
|
Total current liabilities of discontinued operations | $ | 409.2 |
|
Senior long-term debt, excluding current installments | $ | 36.4 |
|
Other noncurrent liabilities | 268.4 |
|
Total noncurrent liabilities of discontinued operations | $ | 304.8 |
|
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 5 for discussion of the debt-for-debt exchange related to the Spinoff.
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. for $2.6 billion in cash on a debt-free basis.
As a result of the disposition, we recognized a pre-tax charge of $22.5 million ($22.1 million after-tax) and $1.92 billion ($1.44 billion after-tax) in the third quarter and first three quarters of fiscal 2016, respectively, to write-down the goodwill and long-lived assets to the estimated sales price, less costs to sell. We reflected the results of this business as discontinued operations for all periods presented.
The summary comparative financial results of the Private Brands business, included within discontinued operations, were as follows:
|
| | | | | | | | | | | | | | | |
| Thirteen weeks ended | | Thirty-nine weeks ended |
| February 26, 2017 | | February 28, 2016 | | February 26, 2017 | | February 28, 2016 |
Net sales | $ | — |
| | $ | 634.0 |
| | $ | (0.9 | ) | | $ | 2,484.7 |
|
Loss on sale of businesses | $ | (4.1 | ) | | $ | — |
| | $ | (3.1 | ) | | $ | — |
|
Goodwill and long-lived asset impairment charges | — |
| | (22.5 | ) | | — |
| | (1,921.1 | ) |
Income from operations of discontinued operations before income taxes and equity method investment earnings | 3.0 |
| | 61.9 |
| | 1.7 |
| | 167.6 |
|
Income (loss) before income taxes | (1.1 | ) | | 39.4 |
| | (1.4 | ) | | (1,753.5 | ) |
Income tax expense (benefit) | (2.0 | ) | | 20.8 |
| | (2.9 | ) | | (445.6 | ) |
Income (loss) from discontinued operations, net of tax | $ | 0.9 |
| | $ | 18.6 |
| | $ | 1.5 |
| | $ | (1,307.9 | ) |
Other Divestitures
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. The assets and liabilities of these businesses have been reclassified as assets and liabilities held for sale within our Condensed Consolidated Balance Sheets for the period presented prior to the divestiture.
The assets and liabilities classified as held for sale reflected in our Condensed Consolidated Balance Sheets related to the Spicetec and JM Swank businesses were as follows:
|
| | | |
| May 29, 2016 |
Spicetec: | |
Current assets | $ | 43.3 |
|
Noncurrent assets (including goodwill of $104.7 million) | 148.3 |
|
Current liabilities | 10.3 |
|
Noncurrent liabilities | 1.2 |
|
JM Swank: | |
Current assets | $ | 73.7 |
|
Noncurrent assets (including goodwill of $53.8 million) | 74.3 |
|
Current liabilities | 44.3 |
|
Noncurrent liabilities | 0.4 |
|
In addition, we are actively marketing certain other long-lived assets. These assets have been reclassified as assets held for sale within our Condensed Consolidated Balance Sheets for all periods presented. The balance of these noncurrent assets classified as held for sale was $1.7 million in our Corporate segment at February 26, 2017 and $6.8 million and $4.7 million in our Corporate and Grocery & Snacks segments at May 29, 2016, respectively.
4. RESTRUCTURING ACTIVITIES
Supply Chain and Administrative Efficiency Plan
We previously announced a plan for the integration and restructuring of the operations of Ralcorp Holdings, Inc. (“Ralcorp”), optimization of the entire Company’s supply chain network, manufacturing assets, and dry distribution and mixing centers, and improvement of selling, general and administrative effectiveness and efficiencies, which we refer to as the Supply Chain and Administrative Efficiency Plan (the “SCAE Plan”). The SCAE Plan also includes plans announced in the second quarter of fiscal 2016 to realize efficiency benefits through a combination of reductions in selling, general and administrative expenses and enhancements to trade spend processes and tools. Although the divestiture of the Private Brands business was completed in the third quarter of fiscal 2016, resulting in the sale of substantially all the Ralcorp operations, we will continue to implement the SCAE Plan, including work related to optimizing our supply chain network, the pursuit of cost reductions through our selling, general and administrative functions, enhancements to trade spend processes and tools, and productivity improvements.
Although we remain unable to make good faith estimates relating to the entire SCAE Plan, we are reporting on actions initiated through the end of the third quarter of fiscal 2017, 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. As of February 26, 2017, our Board of Directors has approved the incurrence of up to $880.5 million of expenses in connection with the SCAE Plan, including expenses allocated for the Private Brands and Lamb Weston operations. We have incurred or expect to incur approximately $442.6 million of charges ($299.9 million of cash charges and $142.7 million of non-cash charges) for actions identified to date under the SCAE Plan related to our continuing operations. In the third quarter and first three quarters of fiscal 2017, we recognized charges of $13.7 million and $47.6 million, respectively, in relation to the SCAE Plan related to our continuing operations. In the third quarter and first three quarters of fiscal 2016 we recognized charges of $109.1 million and $259.5 million, respectively, in relation to the SCAE Plan related to our continuing operations. We expect to incur costs related to the SCAE Plan over a multi-year period.
We anticipate that we will recognize the following pre-tax expenses in association with the SCAE Plan related to our continuing operations (amounts include charges recognized from plan inception through the first three quarters of fiscal 2017):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Grocery & Snacks | | Refrigerated & Frozen | | International | | Foodservice | | Corporate | | Total |
Multi-employer pension costs | $ | 31.7 |
| | $ | 1.5 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 33.2 |
|
Accelerated depreciation | 36.6 |
| | 18.6 |
| | — |
| | — |
| | 1.2 |
| | 56.4 |
|
Other cost of goods sold | 5.5 |
| | 2.1 |
| | — |
| | — |
| | — |
| | 7.6 |
|
Total cost of goods sold | 73.8 |
| | 22.2 |
| | — |
| | — |
| | 1.2 |
| | 97.2 |
|
Severance and related costs, net | 22.3 |
| | 10.3 |
| | 2.4 |
| | 7.9 |
| | 103.8 |
| | 146.7 |
|
Fixed asset impairment (net of gains on disposal) | 8.7 |
| | 6.8 |
| | — |
| | — |
| | 4.1 |
| | 19.6 |
|
Accelerated depreciation | — |
| | — |
| | — |
| | — |
| | 4.1 |
| | 4.1 |
|
Contract/lease cancellation expenses | 0.9 |
| | 0.6 |
| | — |
| | — |
| | 72.3 |
| | 73.8 |
|
Consulting/professional fees | 0.6 |
| | 0.4 |
| | 0.1 |
| | — |
| | 53.0 |
| | 54.1 |
|
Other selling, general and administrative expenses | 13.6 |
| | 3.5 |
| | — |
| | — |
| | 30.0 |
| | 47.1 |
|
Total selling, general and administrative expenses | 46.1 |
| | 21.6 |
| | 2.5 |
| | 7.9 |
| | 267.3 |
| | 345.4 |
|
Consolidated total | $ | 119.9 |
| | $ | 43.8 |
| | $ | 2.5 |
| | $ | 7.9 |
| | $ | 268.5 |
| | $ | 442.6 |
|
During the third quarter of fiscal 2017, we recognized the following pre-tax expenses for the SCAE Plan related to our continuing operations:
|
| | | | | | | | | | | | | | | | | | | | |
| Grocery & Snacks | | Refrigerated & Frozen | | International | | | Corporate | | Total |
Multi-employer pension costs | $ | 2.0 |
| | $ | — |
| | $ | — |
| | | $ | — |
| | $ | 2.0 |
|
Accelerated depreciation | 2.3 |
| | — |
| | — |
| | | — |
| | 2.3 |
|
Other cost of goods sold | 0.4 |
| | — |
| | — |
| | | — |
| | 0.4 |
|
Total cost of goods sold | 4.7 |
| | — |
| | — |
| | | — |
| | 4.7 |
|
Severance and related costs, net | 0.6 |
| | — |
| | (0.3 | ) | | | 3.7 |
| | 4.0 |
|
Fixed asset impairment (net of gains on disposal) | 1.8 |
| | (1.4 | ) | | — |
| | | 0.2 |
| | 0.6 |
|
Accelerated depreciation | — |
| | — |
| | — |
| | | 0.3 |
| | 0.3 |
|
Contract/lease cancellation expenses | — |
| | 0.1 |
| | — |
| | | 1.1 |
| | 1.2 |
|
Other selling, general and administrative expenses | 2.0 |
| | 0.2 |
| | — |
| | | 0.7 |
| | 2.9 |
|
Total selling, general and administrative expenses | 4.4 |
| | (1.1 | ) | | (0.3 | ) | | | 6.0 |
| | 9.0 |
|
Consolidated total | $ | 9.1 |
| | $ | (1.1 | ) | | $ | (0.3 | ) | | | $ | 6.0 |
| | $ | 13.7 |
|
Included in the above table are $10.3 million of charges that have resulted or will result in cash outflows and $3.4 million in non-cash charges.
During the first three quarters of fiscal 2017, we recognized the following pre-tax expenses for the SCAE Plan related to our continuing operations:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Grocery & Snacks | | Refrigerated & Frozen | | International | | Foodservice | | Corporate | | Total |
Multi-employer pension costs | $ | 2.0 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2.0 |
|
Accelerated depreciation | 6.0 |
| | 1.2 |
| | — |
| | — |
| | — |
| | 7.2 |
|
Other cost of goods sold | 2.3 |
| | 0.2 |
| | — |
| | — |
| | — |
| | 2.5 |
|
Total cost of goods sold | 10.3 |
| | 1.4 |
| | — |
| | — |
| | — |
| | 11.7 |
|
Severance and related costs, net | 1.2 |
| | (0.2 | ) | | 0.2 |
| | 1.8 |
| | 5.8 |
| | 8.8 |
|
Fixed asset impairment (net of gains on disposal) | (0.3 | ) | | 3.2 |
| | — |
| | — |
| | 3.1 |
| | 6.0 |
|
Accelerated depreciation | — |
| | — |
| | — |
| | — |
| | 0.8 |
| | 0.8 |
|
Contract/lease cancellation expenses | — |
| | 0.1 |
| | 0.1 |
| | — |
| | 8.5 |
| | 8.7 |
|
Consulting/professional fees | — |
| | — |
| | — |
| | — |
| | 0.3 |
| | 0.3 |
|
Other selling, general and administrative expenses | 4.2 |
| | 1.6 |
| | — |
| | — |
| | 5.5 |
| | 11.3 |
|
Total selling, general and administrative expenses | 5.1 |
| | 4.7 |
| | 0.3 |
| | 1.8 |
| | 24.0 |
| | 35.9 |
|
Consolidated total | $ | 15.4 |
| | $ | 6.1 |
| | $ | 0.3 |
| | $ | 1.8 |
| | $ | 24.0 |
| | $ | 47.6 |
|
Included in the above table are $31.2 million of charges that have resulted or will result in cash outflows and $16.4 million in non-cash charges.
We recognized the following cumulative (plan inception to February 26, 2017) pre-tax expenses related to the SCAE Plan related to our continuing operations in our Condensed Consolidated Statements of Operations:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Grocery & Snacks | | Refrigerated & Frozen | | International | | Foodservice | | Corporate | | Total |
Multi-employer pension costs | $ | 31.8 |
| | $ | 1.5 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 33.3 |
|
Accelerated depreciation | 27.4 |
| | 18.6 |
| | — |
| | — |
| | 1.2 |
| | 47.2 |
|
Other cost of goods sold | 4.2 |
| | 2.1 |
| | — |
| | — |
| | — |
| | 6.3 |
|
Total cost of goods sold | 63.4 |
| | 22.2 |
| | — |
| | — |
| | 1.2 |
| | 86.8 |
|
Severance and related costs, net | 21.8 |
| | 10.3 |
| | 2.4 |
| | 7.9 |
| | 102.2 |
| | 144.6 |
|
Fixed asset impairment (net of gains on disposal) | 6.9 |
| | 6.8 |
| | — |
| | — |
| | 3.9 |
| | 17.6 |
|
Accelerated depreciation | — |
| | — |
| | — |
| | — |
| | 2.1 |
| | 2.1 |
|
Contract/lease cancellation expenses | 0.8 |
| | 0.6 |
| | 0.1 |
| | — |
| | 70.2 |
| | 71.7 |
|
Consulting/professional fees | 0.6 |
| | 0.4 |
| | 0.1 |
| | — |
| | 51.1 |
| | 52.2 |
|
Other selling, general and administrative expenses | 9.6 |
| | 3.2 |
| | — |
| | — |
| | 18.5 |
| | 31.3 |
|
Total selling, general and administrative expenses | 39.7 |
| | 21.3 |
| | 2.6 |
| | 7.9 |
| | 248.0 |
| | 319.5 |
|
Consolidated total | $ | 103.1 |
| | $ | 43.5 |
| | $ | 2.6 |
| | $ | 7.9 |
| | $ | 249.2 |
| | $ | 406.3 |
|
Included in the above table are $277.9 million of charges that have resulted or will result in cash outflows and $128.4 million in non-cash charges. Not included in the above table are $130.2 million of pre-tax expenses ($84.5 million of cash charges and $45.7 million of non-cash charges) related to the Private Brands operations, which we sold in the third quarter of fiscal 2016, and $2.1 million of pre-tax expenses (all resulting in cash charges) related to Lamb Weston.
Liabilities recorded for the SCAE Plan related to our continuing operations and changes therein for the first three quarters of fiscal 2017 were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Balance at May 29, 2016 | | Costs Incurred and Charged to Expense | | Costs Paid or Otherwise Settled | | Changes in Estimates | | Balance at February 26, 2017 |
Multi-employer pension costs | $ | 40.7 |
| | $ | — |
| | $ | (10.9 | ) | | $ | 2.0 |
| | $ | 31.8 |
|
Severance | 47.2 |
| | 10.6 |
| | (38.2 | ) | | (1.8 | ) | | 17.8 |
|
Consulting | 4.7 |
| | 0.3 |
| | (4.6 | ) | | (0.2 | ) | | 0.2 |
|
Contract termination | 6.3 |
| | 11.4 |
| | (4.9 | ) | | (0.2 | ) | | 12.6 |
|
Other costs | 0.5 |
| | 12.0 |
| | (10.6 | ) | | — |
| | 1.9 |
|
Total | $ | 99.4 |
| | $ | 34.3 |
| | $ | (69.2 | ) | | $ | (0.2 | ) | | $ | 64.3 |
|
5. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
On February 16, 2017, we entered into a revolving credit agreement (the “Credit Agreement”) with a syndicate of financial institutions that provides for an unsecured revolving credit facility in a maximum aggregate principal amount outstanding at any one time of $1.25 billion (subject to increase to a maximum aggregate principal amount of $1.75 billion). This revolving credit facility matures on February 16, 2022. As of February 26, 2017, there were no outstanding borrowings under the revolving credit facility.
The Credit Agreement contains events of default customary for unsecured investment grade credit facilities with corresponding grace periods. The Credit Agreement contains customary affirmative and negative covenants for unsecured investment grade credit facilities of this type and financial covenants requiring a maximum leverage ratio and a minimum interest coverage ratio. As of February 26, 2017, we were in compliance with all financial covenants under the Credit Agreement.
The revolving credit facility provided for under the Credit Agreement replaced our existing revolving credit facility under that certain prior revolving credit agreement, dated as of September 14, 2011, with a syndicate of financial institutions.
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 (see Note 3), 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.
During the third quarter of fiscal 2016, we repurchased $560.3 million aggregate principal amount of senior notes due 2043, $341.8 million aggregate principal amount of senior notes due 2039, $139.9 million aggregate principal amount of senior notes due 2019, $110.0 million aggregate principal amount of senior notes due 2026, $85.0 million aggregate principal amount of senior notes due 2020, and $163.0 million of aggregate principal amount of senior notes due 2023, in each case prior to maturity in a tender offer including a $109.5 million tender premium, resulting in a net loss on early retirement of debt of $23.9 million.
During the third quarter of fiscal 2016, we repaid the entire principal balance of $750.0 million of our 1.30% senior notes on the maturity date of January 25, 2016. The repayment was primarily funded through the issuance of term loans totaling $600.0 million, which were repaid in the third quarter of fiscal 2016 with the proceeds from the divestiture of our Private Brands business.
During the second quarter of fiscal 2016, we repaid the entire principal balance of $250.0 million of our 1.35% senior notes on the maturity date of September 10, 2015.
Net interest expense from continuing operations consists of:
|
| | | | | | | | | | | | | | | |
| Thirteen weeks ended | | Thirty-nine weeks ended |
| February 26, 2017 | | February 28, 2016 | | February 26, 2017 | | February 28, 2016 |
Long-term debt | $ | 46.5 |
| | $ | 77.3 |
| | $ | 164.0 |
| | $ | 239.5 |
|
Short-term debt | 0.2 |
| | 0.8 |
| | 0.6 |
| | 1.6 |
|
Interest income | (1.3 | ) | | (0.5 | ) | | (2.8 | ) | | (0.6 | ) |
Interest capitalized | 0.3 |
| | (1.2 | ) | | (3.8 | ) | | (4.8 | ) |
| $ | 45.7 |
| | $ | 76.4 |
| | $ | 158.0 |
| | $ | 235.7 |
|
6. VARIABLE INTEREST ENTITIES
Variable Interest Entities Not Consolidated
We have variable interests in certain other entities that we have determined to be variable interest entities, but for which we are not the primary beneficiary. We do not consolidate the financial statements of these entities.
We lease certain office buildings from entities that we have determined to be variable interest entities. The lease agreements with these entities include fixed-price purchase options for the assets being leased. The lease agreements also contain contingent put options (the “lease put options”) that allow 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 are exercisable now and remain exercisable until generally 30 days after the end of the respective lease agreements. We are amortizing the difference between the estimated put price and the estimated fair value (without a lease agreement in place) of each respective property over the remaining respective lease term within selling, general and administrative expenses. As of February 26, 2017, the estimated amount by which the put prices exceeded the fair values of the related properties was $51.8 million, of which we have accrued $7.4 million. As these buildings are worth considerably more when under lease agreements than when vacant, we may be able to mitigate some, or all, of the financial exposure created by the put options by maintaining active lease agreements and/or by subleasing the buildings to credit worthy tenants. We do not expect to ultimately incur material financial losses as a result of the potential exercise of the lease put options by the lessors. During the third quarter of fiscal 2017, one of these lease agreements expired. As a result of this expiration, we reversed the applicable accrual and recognized a benefit of $6.7 million in selling, general and administrative expenses. These leases are accounted for as operating leases, and accordingly, there are no material assets or liabilities, other than the accrued portion of the put price, associated with these entities included in the Condensed 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 these entities. In making this determination, we have considered, among other items, the terms of the lease agreements, the expected remaining useful lives of the assets leased, and the capital structure of the lessor entities.
7. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
The change in the carrying amount of goodwill for the first three quarters of fiscal 2017 was as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Grocery & Snacks | | Refrigerated & Frozen | | International | | Foodservice | | Total |
Balance as of May 29, 2016 | $ | 2,337.4 |
| | $ | 1,028.9 |
| | $ | 448.6 |
| | $ | 581.3 |
| | $ | 4,396.2 |
|
Impairment | — |
| | — |
| | (183.1 | ) | | — |
| | (183.1 | ) |
Acquisitions | 38.7 |
| | — |
| | — |
| | — |
| | 38.7 |
|
Currency translation | — |
| | (0.6 | ) | | 0.5 |
| | — |
| | (0.1 | ) |
Balance as of February 26, 2017 | $ | 2,376.1 |
| | $ | 1,028.3 |
| | $ | 266.0 |
| | $ | 581.3 |
| | $ | 4,251.7 |
|
Other identifiable intangible assets were as follows:
|
| | | | | | | | | | | | | | | |
| February 26, 2017 | | May 29, 2016 |
| Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Non-amortizing intangible assets | $ | 862.1 |
| | $ | — |
| | $ | 839.2 |
| | $ | — |
|
Amortizing intangible assets | 563.6 |
| | 172.6 |
| | 543.9 |
| | 145.9 |
|
| $ | 1,425.7 |
| | $ | 172.6 |
| | $ | 1,383.1 |
| | $ | 145.9 |
|
During the first three quarters of fiscal 2017, we recognized goodwill impairment charges in the International segment of $183.1 million. Also in the first three quarters of fiscal 2017, we recognized impairments of non-amortizing intangible assets of $24.4 million in the International segment and $1.1 million in the Grocery & Snacks segment. See further discussion in “Critical Accounting Estimates” in Management’s Discussion and Analysis.
Non-amortizing intangible assets are comprised of brands and trademarks.
Amortizing intangible assets, carrying a remaining weighted average life of approximately 15 years, are principally composed of customer relationships, licensing arrangements, and intellectual property. Based on amortizing assets recognized in our Condensed Consolidated Balance Sheet as of February 26, 2017, amortization expense is estimated to average $32.7 million for each of the next five years.
In the first quarter of fiscal 2016, we recorded an amortizing intangible asset of $92.8 million, for which cash payments of $14.9 million and $10.4 million were made in the first quarter of fiscal 2017 and fiscal 2016, respectively. Remaining payments will be made over a five-year period.
8. DERIVATIVE FINANCIAL INSTRUMENTS
Our operations are exposed to market risks from adverse changes in commodity prices affecting the cost of raw materials and energy, foreign currency exchange rates, and interest rates. In the normal course of business, these risks are managed through a variety of strategies, including the use of derivatives.
Commodity and commodity index futures and option contracts are used from time to time to economically hedge commodity input prices on items such as natural gas, vegetable oils, proteins, packaging materials, dairy, grains, and electricity. Generally, we economically hedge a portion of our anticipated consumption of commodity inputs for periods of up to 36 months. We may enter into longer-term economic hedges on particular commodities, if deemed appropriate. As of February 26, 2017, we had economically hedged certain portions of our anticipated consumption of commodity inputs using derivative instruments with expiration dates through March 2018.
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 February 26, 2017, we had economically hedged certain portions of our foreign currency risk in anticipated transactions using derivative instruments with expiration dates through May 2017.
From time to time, we may use derivative instruments, including interest rate swaps, to reduce risk related to changes in interest rates. This includes, but is not limited to, hedging against increasing interest rates prior to the issuance of long-term debt and hedging the fair value of our senior long-term debt.
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.
Economic Hedges of Fair Values — Foreign Currency Exchange Rate Risk
We may use options and cross currency swaps to economically hedge the fair value of certain monetary assets and liabilities (including intercompany balances) denominated in a currency other than the functional currency. These derivatives are marked-to-market with gains and losses immediately recognized in selling, general and administrative expenses. These substantially offset the foreign currency transaction gains or losses recognized as values of the monetary assets or liabilities being economically hedged change.
All derivative instruments are recognized on our balance sheets at fair value (refer to Note 16 for additional information related to fair value measurements). The fair value of derivative assets is recognized within prepaid expenses and other current assets, while the fair value of derivative liabilities is recognized within other accrued liabilities. In accordance with 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 February 26, 2017 and May 29, 2016, amounts representing a right to reclaim cash collateral of $0.2 million and $0.3 million, respectively, were included in prepaid expenses and other current assets in our Condensed Consolidated Balance Sheets.
Derivative assets and liabilities and amounts representing a right to reclaim cash collateral or an obligation to return cash collateral were reflected in our Condensed Consolidated Balance Sheets as follows:
|
| | | | | | | |
| February 26, 2017 | | May 29, 2016 |
Prepaid expenses and other current assets | $ | 2.1 |
| | $ | 24.1 |
|
Other accrued liabilities | 0.7 |
| | 0.6 |
|
The following table presents our derivative assets and liabilities, at February 26, 2017, on a gross basis, prior to the setoff of $1.6 million to total derivative assets and $1.4 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 | | $ | 3.3 |
| | Other accrued liabilities | | $ | 1.4 |
|
Foreign exchange contracts | Prepaid expenses and other current assets | | 0.4 |
| | Other accrued liabilities | | 0.4 |
|
Other | Prepaid expenses and other current assets | | — |
| | Other accrued liabilities | | 0.3 |
|
Total derivatives not designated as hedging instruments | | | $ | 3.7 |
| | | | $ | 2.1 |
|
The following table presents our derivative assets and liabilities at May 29, 2016, on a gross basis, prior to the setoff of $1.7 million to total derivative assets and $2.0 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 | | $ | 5.0 |
| | Other accrued liabilities | | $ | 2.1 |
|
Foreign exchange contracts | Prepaid expenses and other current assets | | 20.8 |
| | Other accrued liabilities | | 0.2 |
|
Other | Prepaid expenses and other current assets | | — |
| | Other accrued liabilities | | 0.3 |
|
Total derivatives not designated as hedging instruments | | | $ | 25.8 |
| | | | $ | 2.6 |
|
The location and amount of gain (loss) from derivatives not designated as hedging instruments in our Condensed Consolidated Statements of Operations were as follows:
|
| | | | | | | | | | |
Derivatives Not Designated as Hedging Instruments | | Location in Condensed Consolidated Statement of Operations of Gain (Loss) Recognized on Derivatives | | Amount of Gain (Loss) Recognized on Derivatives in Condensed Consolidated Statement of Operations for the Thirteen Weeks Ended |
February 26, 2017 | | February 28, 2016 |
Commodity contracts | | Cost of goods sold | | $ | 0.5 |
| | $ | (3.3 | ) |
Foreign exchange contracts | | Cost of goods sold | | (0.2 | ) | | — |
|
Foreign exchange contracts | | Selling, general and administrative expense | | (1.4 | ) | | 0.7 |
|
Total loss from derivative instruments not designated as hedging instruments | | | | $ | (1.1 | ) | | $ | (2.6 | ) |
|
| | | | | | | | | | |
Derivatives Not Designated as Hedging Instruments | | Location in Condensed Consolidated Statement of Operations of Gain (Loss) Recognized on Derivatives | | Amount of Gain (Loss) Recognized on Derivatives in Condensed Consolidated Statement of Operations for the Thirty-nine Weeks Ended |
February 26, 2017 | | February 28, 2016 |
Commodity contracts | | Cost of goods sold | | $ | 1.7 |
| | $ | (13.0 | ) |
Foreign exchange contracts | | Cost of goods sold | | 1.3 |
| | — |
|
Foreign exchange contracts | | Selling, general and administrative expense | | (0.1 | ) | | 5.4 |
|
Total gain (loss) from derivative instruments not designated as hedging instruments | | | | $ | 2.9 |
| | $ | (7.6 | ) |
As of February 26, 2017, our open commodity contracts had a notional value (defined as notional quantity times market value per notional quantity unit) of $68.0 million and $75.5 million for purchase and sales contracts, respectively. As of May 29, 2016, our open commodity contracts had a notional value of $74.7 million and $41.5 million for purchase and sales contracts, respectively. The notional amount of our foreign currency forward and cross currency swap contracts as of February 26, 2017 and May 29, 2016 was $16.3 million and $112.9 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 February 26, 2017, 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 $0.6 million.
9. SHARE-BASED PAYMENTS
For the third quarter and first three quarters of fiscal 2017, we recognized total stock-based compensation expense (including stock options, restricted stock units, cash-settled restricted stock units, and performance shares) of $15.8 million and $48.5 million, respectively. For the third quarter and first three quarters of fiscal 2016, we recognized total stock-based compensation expense of $23.1 million and $60.5 million, respectively. These amounts are inclusive of discontinued operations. Included in the total stock-based compensation expense for the third quarter and first three quarters of fiscal 2017 was $0.3 million and $0.6 million, respectively, related to stock options granted by a subsidiary in the subsidiary's shares to the subsidiary's employees. The expense for these stock options was $0.5 million and $0.7 million for the third quarter and first three quarters of fiscal 2016, respectively. For the first three quarters of fiscal 2017, we granted 0.5 million restricted stock units at a weighted average grant date price of $47.18, 0.4 million cash-settled restricted stock units at a weighted average grant date price of $48.07, 1.1 million stock options at a weighted average exercise price of $48.01, and 0.2 million performance shares at a weighted average grant date price of $46.94. For the awards granted prior to the Spinoff of Lamb Weston on November 9, 2016, the number of awards and the weighted average prices disclosed above do not reflect the adjustments to the number and prices of such awards made in connection with the Spinoff, as further described below.
Performance shares are granted to selected executives and other key employees with vesting contingent upon meeting various Company-wide performance goals. The performance goals for the performance period that began in fiscal 2015 and ends in fiscal 2017
were originally based upon an overarching earnings per share goal (for certain participants) and, for all participants, (a) our earnings before interest, taxes, depreciation, and amortization (“EBITDA”) return on capital, and (b) revenue growth, each measured over the defined performance period, and including the expected results of Lamb Weston. In connection with the Spinoff, the Human Resources Committee of the Board of Directors certified the EBITDA return on capital performance of the Company through the fiscal period that ended immediately prior to the Spinoff. Awards to participants originally subject to the overarching earnings per share goal remain subject to achievement of such goal. All other performance shares granted for the fiscal 2015 through 2017 performance period are subject only to continuing employment of the participant through the date of payout.
The performance goal for one-third of the target number of performance shares for the performance period ending in fiscal 2018 (the “2018 performance period”) is based upon an overarching earnings per share goal (for certain participants) and, for all participants, our fiscal 2016 EBITDA return on capital. Another one-third of the target number of performance shares granted for the 2018 performance period is based on an overarching earnings per share goal (for certain participants) and our fiscal 2017 EBITDA return on capital. The fiscal 2017 EBITDA return on capital target, when set, excluded the results of Lamb Weston. The performance goal for the last one-third of the target number of performance shares granted for the 2018 performance period is expected to be set at the start of fiscal 2018.
The performance goal for one-third of the target number of performance shares for the performance period ending in fiscal 2019 (the “2019 performance period”) is based upon an overarching earnings per share goal (for certain participants) and our fiscal 2017 EBITDA return on capital. The fiscal 2017 EBITDA return on capital target, when set, excluded the results of Lamb Weston. The performance goal for the final two-thirds of the target number of performance shares granted for the 2019 performance period is expected to be set at the start of fiscal 2018.
Awards, if earned, will be paid in shares of our common stock. Subject to limited exceptions set forth in the performance share plan, any shares earned will be distributed 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.
In connection with the completion of the Spinoff, the provisions of our existing stock-based compensation arrangements required adjustments to the number and terms of outstanding stock options, restricted stock units, cash-settled restricted stock units, performance shares, and other share-based awards to preserve the intrinsic value of the awards immediately before and after the completion of the Spinoff. The outstanding awards continue to vest over the original vesting periods (typically three years). Outstanding awards at the time of the Spinoff were converted into awards of the holder’s employer following completion of the Spinoff. The stock awards held as of November 9, 2016 were adjusted as follows:
| |
• | The number of shares of common stock subject to each outstanding stock option was increased and the corresponding exercise price was decreased to maintain the intrinsic value of each outstanding stock option immediately before and after the Spinoff. A comparison of the fair value of the outstanding stock option awards immediately before and after the Spinoff resulted in no incremental expense. |
| |
• | The number of shares of common stock underlying each outstanding restricted stock unit and performance share, and the value of each outstanding cash-settled restricted stock was increased to preserve the intrinsic value of such award immediately prior to the Spinoff. The Company did not record any incremental compensation expense related to the adjustment of these awards. |
The weighted average Black-Scholes assumptions for stock options granted during the first three quarters of fiscal 2017 were as follows:
|
| |
Expected volatility (%) | 19.15 |
Dividend yield (%) | 2.33 |
Risk-free interest rate (%) | 1.03 |
Expected life of stock option (years) | 4.94 |
The weighted average value of stock options granted during the first three quarters of fiscal 2017 was $6.12 per option based upon a Black-Scholes methodology.
10. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is calculated on the basis of weighted average outstanding common shares. Diluted earnings (loss) per share is computed on the basis of basic weighted average outstanding common shares adjusted for the dilutive effect of stock options, restricted stock unit awards, and other dilutive securities.
The following table reconciles the income and average share amounts used to compute both basic and diluted earnings (loss) per share:
|
| | | | | | | | | | | | | | | |
| Thirteen weeks ended | | Thirty-nine weeks ended |
| February 26, 2017 | | February 28, 2016 | | February 26, 2017 | | February 28, 2016 |
Net income (loss) available to Conagra Brands, Inc. common stockholders: | | | | | | | |
Income from continuing operations attributable to Conagra Brands, Inc. common stockholders | $ | 179.0 |
| | $ | 71.0 |
| | $ | 391.1 |
| | $ | 243.8 |
|
Income (loss) from discontinued operations, net of tax, attributable to Conagra Brands, Inc. common stockholders | 0.7 |
| | 133.6 |
| | 96.9 |
| | (1,038.4 | ) |
Net income (loss) attributable to Conagra Brands, Inc. common stockholders | $ | 179.7 |
| | $ | 204.6 |
| | $ | 488.0 |
| | $ | (794.6 | ) |
Less: Increase in redemption value of noncontrolling interests in excess of earnings allocated | — |
| | 3.5 |
| | 0.8 |
| | 4.4 |
|
Net income (loss) available to Conagra Brands, Inc. common stockholders | $ | 179.7 |
| | $ | 201.1 |
| | $ | 487.2 |
| | $ | (799.0 | ) |
Weighted average shares outstanding: | | | | | | | |
Basic weighted average shares outstanding | 431.7 |
| | 435.7 |
| | 436.0 |
| | 433.3 |
|
Add: Dilutive effect of stock options, restricted stock unit awards, and other dilutive securities | 4.7 |
| | 3.9 |
| | 4.0 |
| | 4.3 |
|
Diluted weighted average shares outstanding | 436.4 |
| | 439.6 |
| | 440.0 |
| | 437.6 |
|
For the third quarter and first three quarters of fiscal 2017, there were 0.9 million and 1.0 million stock options outstanding, respectively, that were excluded from the computation of diluted weighted average shares because the effect was antidilutive. For the third quarter and first three quarters of fiscal 2016, there were 1.2 million and 0.9 million stock options outstanding, respectively, that were excluded from the calculation.
11. INVENTORIES
The major classes of inventories were as follows:
|
| | | | | | | |
| February 26, 2017 | | May 29, 2016 |
Raw materials and packaging | $ | 189.7 |
| | $ | 214.3 |
|
Work in process | 120.1 |
| | 119.4 |
|
Finished goods | 687.2 |
| | 698.6 |
|
Supplies and other | 49.4 |
| | 50.9 |
|
Total | $ | 1,046.4 |
| | $ | 1,083.2 |
|
12. INCOME TAXES
Income tax expense from continuing operations for the third quarter of fiscal 2017 and 2016 was $67.9 million and $33.6 million, respectively. Income tax expense from continuing operations for the first three quarters of fiscal 2017 and 2016 was $315.5 million and $126.0 million, respectively. The effective tax rate (calculated as the ratio of income tax expense to pre-tax income from continuing operations, inclusive of equity method investment earnings) from continuing operations was 27.4% and 32.0% for the third quarter of fiscal 2017 and 2016, respectively. The effective tax rate from continuing operations was 44.6% and 34.0% for the first three quarters of 2017 and 2016, respectively.
The lower effective tax rate in the third quarter of fiscal 2017 reflects the following:
| |
• | an income tax benefit related to the receipt of foreign tax incentives, and |
| |
• | an income tax benefit allowed upon the vesting/exercise of employee stock compensation awards by our employees, beyond that which is attributable to the original fair value of the awards upon the date of grant. |
The effective tax rate for the first three quarters of fiscal 2017 reflects the above-cited items, as well as the following:
| |
• | additional tax expense associated with non-deductible goodwill sold in connection with the dispositions of the Spicetec and JM Swank businesses, |
| |
• | additional tax expense associated with non-deductible goodwill in our Canadian and Mexican businesses, for which an impairment charge was recognized, and |
| |
• | an income tax benefit associated with a tax planning strategy that allowed us to utilize certain state tax attributes. |
The amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, was $30.9 million as of February 26, 2017 and $33.0 million as of May 29, 2016. There were no balances included as of either February 26, 2017 or May 29, 2016, for tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. The gross unrecognized tax benefits excluded related liabilities for gross interest and penalties of $5.5 million and $6.6 million as of February 26, 2017 and May 29, 2016, respectively.
The net amount of unrecognized tax benefits at February 26, 2017 and May 29, 2016 that, if recognized, would impact the Company's effective tax rate was $22.7 million and $24.5 million, respectively. Recognition of these tax benefits would have a favorable impact on the Company's effective tax rate.
We estimate that it is reasonably possible that the amount of gross unrecognized tax benefits will decrease by up to $8.7 million over the next twelve months due to various federal, state, and foreign audit settlements and the expiration of statutes of limitations.
As of February 26, 2017 and May 29, 2016, we had a deferred tax asset of $1.09 billion and $1.54 billion, respectively, that was generated from the capital loss realized on the sale of the Private Brands operations with corresponding valuation allowances of $1.09 billion and $1.40 billion, respectively, to reflect the uncertainty regarding the ultimate realization of the tax asset. During the first three quarters of fiscal 2017, the balance of the deferred tax asset was adjusted for the revised estimates of the capital gains realized on the sales of the Spicetec and JM Swank businesses, the realization of certain tax attributes and the settlement of certain tax indemnity claims under the contract terms of the Private Brands sale, and utilization of the estimated tax asset to offset capital gains on previously deferred intercompany transactions triggered by the Spinoff. During the second quarter of fiscal 2017, $150.4 million of the reduction in the valuation allowance was recorded in stockholders' equity as part of the Spinoff.
13. CONTINGENCIES
In fiscal 1991, we acquired Beatrice Company (“Beatrice”). As a result of the acquisition of Beatrice and the significant pre-acquisition contingencies of the Beatrice businesses and its former subsidiaries, our condensed consolidated post-acquisition financial statements reflect liabilities associated with the estimated resolution of these contingencies. Such liabilities include various litigation and environmental proceedings related to businesses divested by Beatrice prior to our acquisition of Beatrice. The litigation 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”), and the Company as alleged successors to W. P. Fuller Co., a lead paint and pigment manufacturer owned and operated by Beatrice until 1967. Although decisions favorable to us have been rendered in Rhode Island, New Jersey, Wisconsin, and Ohio, we remain a defendant in active suits in Illinois and California. The Illinois suit seeks class-wide relief for reimbursement of costs associated with the testing of lead levels in blood. In California, a number of cities and counties joined in a consolidated action seeking abatement of the alleged public nuisance. 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 believes ConAgra Grocery Products did not inherit any liabilities of W. P. Fuller Co. The Company will continue to vigorously defend itself in this case and has appealed the Judgment to the Court of Appeal of the State of California Sixth Appellate District. The Company expects the appeal process to last several years. The absence of any linkage between ConAgra Grocery Products and W. P. Fuller Co. is a critical issue (among others) that the Company will continue to advance throughout the appeals process. It is not possible to estimate exposure in this case or the remaining case in Illinois, which is based on different legal theories. If ultimately necessary, the Company will look to its insurance policies for coverage; its carriers are on notice. However, the extent of insurance coverage is uncertain, and the Company cannot absolutely assure that the final resolution of these matters will not have a material adverse effect on its financial condition, results of operations, or liquidity.
The environmental proceedings associated with Beatrice include litigation and administrative proceedings involving Beatrice's status as a potentially responsible party at 37 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. Beatrice has paid or is in the process of paying its liability share at 33 of these sites. Reserves for 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 February 26, 2017, 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 Wells G&H-Southwest Properties Superfund site, which is one of the Beatrice sites. The U.S. Environmental Protection Agency (the “EPA”) has indicated that it will issue a Record of Decision for this site shortly and subsequently enter into negotiations with potentially responsible parties to determine a final Remedial Design/Remedial Action plan for the site. While we believe that it is unlikely, it is reasonably possible that the EPA’s decision and negotiations may result in material liability, but we are, at this time, unable to estimate a range of potential outcomes.
We are a party to a number of lawsuits and claims arising out of our ongoing business operations. These previously included lawsuits, claims, and other proceedings related to the February 2007 recall of our peanut butter products, including an investigation by the U.S. Attorney's office in Georgia and the Consumer Protection Branch of the Department of Justice. In May 2015, we negotiated a resolution of this matter, which resulted in an executed plea agreement. On December 13, 2016, ConAgra Grocery Products pleaded guilty to a single misdemeanor violation of the Food, Drug & Cosmetics Act. The U.S. District Court for the Middle District of Georgia accepted the plea and imposed the agreed sentence pursuant to the terms of the plea agreement. ConAgra Grocery Products has now made payments totaling $11.2 million to the federal government, and the matter has been concluded. Expenses related to this payment were accrued in previous periods.
In June 2009, an accidental explosion occurred at our manufacturing facility in Garner, North Carolina. This facility was the primary production facility for our Slim Jim® branded meat snacks. In June 2009, the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives announced its determination that the explosion was the result of an accidental natural gas release, and not a deliberate act. During the fourth quarter of fiscal 2011, we settled our property and business interruption claims related to the Garner accident with our insurance providers. Duri