Item 8. Financial Statements and Supplementary Data
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Conagra Brands, Inc. and Subsidiaries
Consolidated Statements of Earnings
(in millions, except per share amounts)
For the Fiscal Years Ended May
2021
2020
2019
Net sales
$
11,184.7
$
11,054.4
$
9,538.4
Costs and expenses:
Cost of goods sold
8,005.5
7,984.8
6,885.4
Selling, general and administrative expenses
1,403.0
1,622.5
1,473.4
Pension and postretirement non-service income
( 54.5
)
( 9.9
)
( 35.1
)
Interest expense, net
420.4
487.1
391.4
Income from continuing operations before income taxes and equity method investment earnings
1,410.3
969.9
823.3
Income tax expense
193.8
201.3
218.8
Equity method investment earnings
84.4
73.2
75.8
Income from continuing operations
1,300.9
841.8
680.3
Loss from discontinued operations, net of tax
—
—
( 1.9
)
Net income
$
1,300.9
$
841.8
$
678.4
Less: Net income attributable to noncontrolling interests
2.1
1.7
0.1
Net income attributable to Conagra Brands, Inc.
$
1,298.8
$
840.1
$
678.3
Earnings per share — basic
Income from continuing operations attributable to Conagra Brands, Inc. common stockholders
$
2.67
$
1.72
$
1.53
Income from discontinued operations attributable to Conagra Brands, Inc. common stockholders
—
—
—
Net income attributable to Conagra Brands, Inc. common stockholders
$
2.67
$
1.72
$
1.53
Earnings per share — diluted
Income from continuing operations attributable to Conagra Brands, Inc. common stockholders
$
2.66
$
1.72
$
1.53
Loss from discontinued operations attributable to Conagra Brands, Inc. common stockholders
—
—
( 0.01
)
Net income attributable to Conagra Brands, Inc. common stockholders
$
2.66
$
1.72
$
1.52
The accompanying Notes are an integral part of the consolidated financial statements.
38
Conagra Brands, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(in millions)
For the Fiscal Years Ended May
2021
2020
2019
Pre-Tax
Amount
Tax
(Expense)
Benefit
After
-Tax
Amount
Pre-Tax
Amount
Tax
(Expense)
Benefit
After-Tax
Amount
Pre-Tax
Amount
Tax
(Expense)
Benefit
After-
Tax
Amount
Net income
$
1,494.7
$
( 193.8
)
$
1,300.9
$
1,043.1
$
( 201.3
)
$
841.8
$
900.0
$
( 221.6
)
$
678.4
Other comprehensive income:
Derivative adjustments:
Unrealized derivative adjustments
0.4
( 1.8
)
( 1.4
)
( 7.1
)
1.8
( 5.3
)
45.5
( 11.4
)
34.1
Reclassification for derivative adjustments included in net income
( 1.6
)
1.0
( 0.6
)
( 3.3
)
0.9
( 2.4
)
( 1.9
)
0.5
( 1.4
)
Currency translation adjustments:
Unrealized currency translation gains (losses)
53.3
( 1.5
)
51.8
( 42.7
)
1.4
( 41.3
)
( 10.2
)
—
( 10.2
)
Reclassification for currency translation losses included in net income
—
—
—
—
—
—
10.4
—
10.4
Pension and postretirement benefit obligations:
Unrealized pension and postretirement benefit obligations
95.1
( 23.6
)
71.5
63.2
( 15.9
)
47.3
( 43.8
)
10.9
( 32.9
)
Reclassification for pension and postretirement benefit obligations included in net income
( 3.6
)
0.9
( 2.7
)
( 5.5
)
1.4
( 4.1
)
( 1.5
)
0.4
( 1.1
)
Comprehensive income
1,638.3
( 218.8
)
1,419.5
1,047.7
( 211.7
)
836.0
898.5
( 221.2
)
677.3
Comprehensive income (loss) attributable to noncontrolling interests
6.1
( 0.8
)
5.3
( 3.9
)
( 0.9
)
( 4.8
)
( 1.7
)
( 0.1
)
( 1.8
)
Comprehensive income attributable to Conagra Brands, Inc.
$
1,632.2
$
( 218.0
)
$
1,414.2
$
1,051.6
$
( 210.8
)
$
840.8
$
900.2
$
( 221.1
)
$
679.1
The accompanying Notes are an integral part of the consolidated financial statements.
39
Conagra Brands, Inc. and Subsidiaries
Consolidated Balance Sheets
(in millions, except share data)
May 30, 2021
May 31, 2020
ASSETS
Current assets
Cash and cash equivalents
$
79.2
$
553.3
Receivables, less allowance for doubtful accounts of $ 3.2 and $ 2.6
793.9
860.8
Inventories
1,734.0
1,364.8
Prepaid expenses and other current assets
95.0
93.9
Current assets held for sale
—
13.1
Total current assets
2,702.1
2,885.9
Property, plant and equipment
Land and land improvements
156.5
139.2
Buildings, machinery and equipment
4,492.7
4,088.6
Furniture, fixtures, office equipment and other
674.4
656.2
Construction in progress
301.1
243.8
5,624.7
5,127.8
Less accumulated depreciation
( 3,016.2
)
( 2,762.4
)
Property, plant and equipment, net
2,608.5
2,365.4
Goodwill
11,373.5
11,361.5
Brands, trademarks and other intangibles, net
4,157.6
4,302.4
Other assets
1,349.3
1,273.4
Noncurrent assets held for sale
4.6
115.4
$
22,195.6
$
22,304.0
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable
$
707.4
$
1.1
Current installments of long-term debt
23.1
845.5
Accounts payable
1,655.9
1,507.1
Accrued payroll
175.2
189.4
Other accrued liabilities
744.6
725.8
Current liabilities held for sale
—
18.5
Total current liabilities
3,306.2
3,287.4
Senior long-term debt, excluding current installments
8,275.2
8,900.8
Other noncurrent liabilities
1,982.8
2,165.1
Total liabilities
13,564.2
14,353.3
Commitments and contingencies (Note 16)
Common stockholders' equity
Common stock of $ 5 par value, authorized 1,200,000,000 shares;
issued 584,219,229
2,921.2
2,921.2
Additional paid-in capital
2,342.1
2,323.2
Retained earnings
6,262.6
5,471.2
Accumulated other comprehensive income (loss)
5.8
( 109.6
)
Less treasury stock, at cost, 103,934,839 and 97,057,311 common shares
( 2,979.9
)
( 2,729.9
)
Total Conagra Brands, Inc. common stockholders' equity
8,551.8
7,876.1
Noncontrolling interests
79.6
74.6
Total stockholders' equity
8,631.4
7,950.7
$
22,195.6
$
22,304.0
The accompanying Notes are an integral part of the consolidated financial statements.
40
Conagra Brands, Inc. and Subsidiaries
Consolidated Statements of Common Stockholders' Equity
(in millions)
Conagra Brands, Inc. Stockholders' Equity
Common
Shares
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Noncontrolling
Interests
Total
Equity
Balance at May 27, 2018
567.9
$
2,839.7
$
1,180.0
$
4,744.9
$
( 110.5
)
$
( 4,977.9
)
$
80.4
$
3,756.6
Stock option and incentive plans
( 6.7
)
0.1
39.6
0.1
33.1
Adoption of ASU 2016-01
0.6
( 0.6
)
—
Adoption of ASU 2014-09
0.5
0.5
Currency translation adjustments
2.1
( 1.9
)
0.2
Issuance of treasury shares
638.2
2,178.1
2,816.3
Issuance of common stock
16.3
81.5
474.2
555.7
Derivative adjustments
32.7
32.7
Activities of noncontrolling interests
0.3
0.5
0.8
Pension and postretirement healthcare benefits
( 34.0
)
( 34.0
)
Dividends declared on common stock; $ 0.85 per share
( 376.5
)
( 376.5
)
Net income attributable to Conagra Brands, Inc.
678.3
678.3
Balance at May 26, 2019
584.2
2,921.2
2,286.0
5,047.9
( 110.3
)
( 2,760.2
)
79.1
7,463.7
Stock option and incentive plans
37.2
( 2.9
)
30.3
64.6
Currency translation adjustments
( 34.8
)
( 6.5
)
( 41.3
)
Derivative adjustments
( 7.7
)
( 7.7
)
Activities of noncontrolling interests
2.0
2.0
Pension and postretirement healthcare benefits
43.2
43.2
Dividends declared on common stock; $ 0.85 per share
( 413.9
)
( 413.9
)
Net income attributable to Conagra Brands, Inc.
840.1
840.1
Balance at May 31, 2020
584.2
2,921.2
2,323.2
5,471.2
( 109.6
)
( 2,729.9
)
74.6
7,950.7
Stock option and incentive plans
18.9
( 3.1
)
48.1
0.2
64.1
Adoption of ASU 2016-13
( 1.1
)
( 1.1
)
Currency translation adjustments
48.6
3.2
51.8
Repurchase of common shares
( 298.1
)
( 298.1
)
Derivative adjustments
( 2.0
)
( 2.0
)
Activities of noncontrolling interests
1.6
1.6
Pension and postretirement healthcare benefits
68.8
68.8
Dividends declared on common stock; $ 1.0375 per share
( 503.2
)
( 503.2
)
Net income attributable to Conagra Brands, Inc.
1,298.8
1,298.8
Balance at May 30, 2021
584.2
$
2,921.2
$
2,342.1
$
6,262.6
$
5.8
$
( 2,979.9
)
$
79.6
$
8,631.4
The accompanying Notes are an integral part of the consolidated financial statements.
41
Conagra Brands, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in millions)
For the Fiscal Years Ended May
2021
2020
2019
Cash flows from operating activities:
Net income
$
1,300.9
$
841.8
$
678.4
Loss from discontinued operations
—
—
( 1.9
)
Income from continuing operations
1,300.9
841.8
680.3
Adjustments to reconcile income from continuing operations to net cash flows from operating
activities:
Depreciation and amortization
387.7
388.9
333.0
Asset impairment charges
95.5
259.9
93.8
Loss (gain) on divestitures
( 65.5
)
2.2
( 69.4
)
Loss on extinguishment of debt
68.7
1.0
5.5
Significant litigation accruals
—
—
( 39.3
)
Proceeds from the settlement of interest rate swaps
—
—
47.5
Novation of a legacy guarantee
—
—
( 27.3
)
Equity method investment earnings in excess of distributions
( 27.9
)
( 21.8
)
( 20.8
)
Stock-settled share-based payments expense
63.9
59.2
33.7
Contributions to pension plans
( 27.6
)
( 17.5
)
( 14.7
)
Pension expense (benefit)
( 38.3
)
5.9
( 22.7
)
Other items
9.1
10.3
12.3
Change in operating assets and liabilities excluding effects of business acquisitions and
dispositions:
Receivables
66.1
( 43.8
)
( 69.1
)
Inventories
( 364.3
)
163.5
78.0
Deferred income taxes and income taxes payable, net
( 92.5
)
23.1
83.7
Prepaid expenses and other current assets
( 8.5
)
( 13.6
)
( 19.1
)
Accounts payable
141.4
234.4
38.2
Accrued payroll
( 14.3
)
15.9
0.1
Other accrued liabilities
( 60.2
)
( 66.8
)
( 9.4
)
Deferred employer payroll taxes
33.9
—
—
Net cash flows from operating activities - continuing operations
1,468.1
1,842.6
1,114.3
Net cash flows from operating activities - discontinued operations
—
—
11.2
Net cash flows from operating activities
1,468.1
1,842.6
1,125.5
Cash flows from investing activities:
Additions to property, plant and equipment
( 506.4
)
( 369.5
)
( 353.1
)
Sale of property, plant and equipment
2.5
14.0
22.5
Purchase of business, net of cash acquired
—
—
( 5,119.2
)
Proceeds from divestitures, net of cash divested
160.9
194.6
281.5
Purchase of marketable securities
( 11.8
)
( 46.8
)
( 61.0
)
Sales of marketable securities
14.5
53.8
52.2
Other items
—
0.1
11.1
Net cash flows from investing activities
( 340.3
)
( 153.8
)
( 5,166.0
)
Cash flows from financing activities:
Issuances of commercial paper, maturities greater than 90 days
298.6
—
—
Repayments of commercial paper, maturities greater than 90 days
( 298.6
)
—
—
Net issuances (repayments) of other short-term borrowings
706.3
0.1
( 277.3
)
Issuance of long-term debt
988.2
—
8,310.5
Repayment of long-term debt
( 2,514.5
)
( 947.5
)
( 3,972.7
)
Debt issuance costs and bridge financing fees
( 6.2
)
—
( 95.2
)
Payment of intangible asset financing arrangement
( 12.9
)
( 13.6
)
( 14.0
)
Issuance of Conagra Brands, Inc. common shares, net
—
—
555.7
Repurchase of Conagra Brands, Inc. common shares
( 298.1
)
—
—
Cash dividends paid
( 474.6
)
( 413.6
)
( 356.2
)
Exercise of stock options and issuance of other stock awards, including tax withholdings
( 0.1
)
4.8
( 1.6
)
Other items
2.3
( 0.6
)
0.6
Net cash flows from financing activities
( 1,609.6
)
( 1,370.4
)
4,149.8
Effect of exchange rate changes on cash and cash equivalents and restricted cash
7.7
( 1.7
)
( 0.7
)
Net change in cash and cash equivalents and restricted cash
( 474.1
)
316.7
108.6
Cash and cash equivalents and restricted cash at beginning of year
554.3
237.6
129.0
Cash and cash equivalents and restricted cash at end of year
$
80.2
$
554.3
$
237.6
The accompanying Notes are an integral part of the consolidated financial statements.
42
Notes to Consolidated Financial Statements
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(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 a 52-week period for fiscal 2021, a 53-week period for fiscal 2020, and a 52-week period for fiscal year 2019.
Basis of Consolidation — The consolidated financial statements include the accounts of Conagra Brands, Inc. and all majority-owned subsidiaries. All significant intercompany investments, accounts, and transactions have been eliminated.
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.
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.
The following table details the balances of our allowance for doubtful accounts and changes therein:
Balance at
Beginning
of Period
Additions
Charged
to Costs and
Expenses
Other 1
Deductions
from
Reserves 2
Balance at
Close of
Period
Year ended May 30, 2021
$
2.6
0.6
0.7
0.7
$
3.2
Year ended May 31, 2020
$
2.2
1.2
0.1
0.9
$
2.6
Year ended May 26, 2019
$
1.7
0.6
0.5
0.6
$
2.2
1 Primarily relates to translation, the adoption of Accounting Standards Update ("ASU") 2016-13, and the acquisition of Pinnacle Foods Inc. ("Pinnacle").
2 Bad debts charged off and adjustments to previous reserves, less recoveries.
43
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 31, 2020, May 26, 2019, and May 27, 2018
(columnar dollars in millions except per share amounts)
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:
Land improvements
1 - 40 years
Buildings
15 - 40 years
Machinery and equipment
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.
During fiscal 2021, 2020, and 2019 our capital expenditures totaled $ 506.4 million, $ 369.5 million, and $ 353.1 million, respectively. Accrued and unpaid capital expenditures as of May 30, 2021, May 31, 2020, May 26, 2019, and May 27, 2018 totaled $ 123.7 million, $ 112.9 million, $ 64.4 million, and $ 40.6 million, respectively.
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 19 for the definition of the levels in the fair value hierarchy. The inputs used to calculate 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.
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
44
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
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 2021, 2020, and 2019 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 8 for discussion of the impairment charges related to goodwill and intangible assets in fiscal 2021, 2020, and 2019.
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. generally accepted accounting principles ("GAAP").
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
45
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
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 $ 258.0 million, $ 230.7 million, and $ 253.4 million in fiscal 2021, 2020, and 2019, respectively, and are included in selling, general and administrative ("SG&A") expenses.
Research and Development — We incurred expenses of $ 51.3 million, $ 56.4 million, and $ 56.1 million for research and development activities in fiscal 2021, 2020, and 2019, 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 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 (loss), net of tax:
2021
2020
2019
Currency translation losses, net of reclassification adjustments
$
( 77.1
)
$
( 125.7
)
$
( 90.9
)
Derivative adjustments, net of reclassification adjustments
24.3
26.3
34.0
Pension and postretirement benefit obligations, net of reclassification adjustments
58.6
( 10.2
)
( 53.4
)
Accumulated other comprehensive income (loss) 1
$
5.8
$
( 109.6
)
$
( 110.3
)
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 in the amount of $ 0.6 million.
46
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
The following table summarizes the reclassifications from accumulated other comprehensive income (loss) into income:
Affected Line Item in the Consolidated Statement of Earnings 1
2021
2020
2019
Net derivative adjustments:
Cash flow hedges
$
( 3.2
)
$
( 3.3
)
$
( 1.9
)
Interest expense, net
Cash flow hedges
( 0.5
)
—
—
Selling, general and administrative expenses
Cash flow hedges
2.1
—
—
Equity method investment earnings
( 1.6
)
( 3.3
)
( 1.9
)
Total before tax
1.0
0.9
0.5
Income tax expense
$
( 0.6
)
$
( 2.4
)
$
( 1.4
)
Net of tax
Amortization of pension and postretirement benefit obligations:
Net prior service cost
$
0.2
$
0.6
$
0.9
Pension and postretirement non-service income
Net actuarial gain
( 3.5
)
( 4.6
)
( 1.4
)
Pension and postretirement non-service income
Pension settlement
—
( 2.1
)
—
Pension and postretirement non-service income
Postretirement healthcare settlement
( 0.5
)
( 0.2
)
( 1.0
)
Pension and postretirement non-service income
Curtailment
0.2
0.8
—
Pension and postretirement non-service income
( 3.6
)
( 5.5
)
( 1.5
)
Total before tax
0.9
1.4
0.4
Income tax expense
$
( 2.7
)
$
( 4.1
)
$
( 1.1
)
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 Earnings.
Foreign Currency Transaction Gains and Losses — We recognized net foreign currency transaction gains of $ 8.2 million in fiscal 2021 and net foreign currency transaction losses of $ 1.7 million and $ 2.3 million in fiscal 2020 and 2019, 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 June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments—Credit Losses ( Topic 326 ): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), to update the methodology used to measure current expected credit losses. This ASU applies to financial assets measured at amortized cost, including loans, net investments in leases, and trade accounts receivable as well as certain off-balance sheet credit exposures, such as loan commitments and guarantees. We adopted this ASU in the first quarter of fiscal 2021 using the modified retrospective transition method through a cumulative-effect adjustment to retained earnings in the period of adoption. The adoption of this ASU did not have a material impact to our consolidated financial statements and related disclosures.
47
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
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. We adopted this ASU in the first quarter of fiscal 2020 using 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 adoption date, with recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We also elected certain practical expedients permitted under the transition guidance, including not reassessing whether existing contracts contain leases and carrying forward the historical classification of leases. The most significant impact of adoption on our Consolidated Financial Statements was the recognition of right-of-use ("ROU") assets and lease liabilities for operating leases. Our accounting for finance leases remained substantially unchanged. Upon adoption, we had total lease assets of $ 238.4 million and total lease liabilities of $ 267.0 million. The difference is primarily due to prepaid and deferred rent balances that were reclassified to the ROU asset value. The adoption of this ASU did not result in a cumulative-effect adjustment to the opening balance of retained earnings and did not impact our Consolidated Statements of Earnings or our Consolidated Statements of Cash Flows. See Note 15 for additional information related to our lease arrangements.
2. ACQUISITIONS
On October 26, 2018, we acquired Pinnacle, a branded packaged foods company specializing in shelf-stable and frozen foods. 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 13) of $ 51.1 million.
In connection with the acquisition, we issued long-term debt of $ 8.33 billion (see Note 4) (which included funding under a 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.
As a result of the Pinnacle acquisition, we recognized a total of $ 7.03 billion of goodwill and $ 3.52 billion of brands, trademarks and other intangibles. 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. Goodwill represents the excess of the consideration transferred over the 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.
The following unaudited pro forma financial information presents the combined results of operations as if the acquisition of Pinnacle had occurred at the beginning of the year acquired, fiscal 2019. 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
Pro forma net sales
$
10,788.1
Pro forma net income from continuing operations attributable to Conagra Brands, Inc.
$
803.8
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 and Pinnacle of $ 62.7 million and $ 66.8 million, respectively, 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 excluded from the pro forma results.
48
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
•
Non-recurring expense of $ 45.7 million for fiscal 2019 related to securing bridge financing for the acquisition were excluded from the pro forma results.
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 operations of Pinnacle, which we acquired in October 2018 (the "Pinnacle Integration Restructuring Plan"), for the purpose of achieving significant cost synergies between the companies, as a result of which we expect to incur material charges for exit and disposal activities under U.S. GAAP. We expect to incur approximately $ 358.0 million ($ 283.5 million of cash charges and $ 74.5 million of non-cash charges) for actions identified to date under the Pinnacle Integration Restructuring Plan. The Board and/or our senior management have authorized incurrence of these charges. We recognized charges of $ 31.7 million, $ 73.8 million, and $ 168.2 million in connection with the Pinnacle Integration Restructuring Plan in fiscal 2021, 2020, and 2019, respectively. We expect to incur costs related to the Pinnacle Integration Restructuring Plan over a multi-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 2021):
Grocery & Snacks
Refrigerated & Frozen
International
Corporate
Total
Accelerated depreciation
$
7.6
$
5.2
$
—
$
—
$
12.8
Other cost of goods sold
3.8
7.4
0.7
—
11.9
Total cost of goods sold
11.4
12.6
0.7
—
24.7
Severance and related costs
—
4.3
1.5
112.4
118.2
Asset impairment (net of gains on disposal)
30.3
4.0
—
2.6
36.9
Accelerated depreciation
—
—
—
7.4
7.4
Contract/lease termination
7.7
8.2
0.8
15.9
32.6
Consulting/professional fees
1.0
—
0.8
104.7
106.5
Other selling, general and administrative expenses
5.8
4.6
0.3
21.0
31.7
Total selling, general and administrative expenses
44.8
21.1
3.4
264.0
333.3
Consolidated total
$
56.2
$
33.7
$
4.1
$
264.0
$
358.0
During fiscal 2021, we recognized the following pre-tax expenses for the Pinnacle Integration Restructuring Plan:
Grocery & Snacks
Refrigerated & Frozen
Corporate
Total
Accelerated depreciation
$
—
$
2.5
$
—
$
2.5
Other cost of goods sold
0.5
1.4
—
1.9
Total cost of goods sold
0.5
3.9
—
4.4
Severance and related costs
—
( 0.9
)
( 2.7
)
( 3.6
)
Asset impairment (net of gains on disposal)
0.1
0.2
( 0.3
)
—
Contract/lease termination
1.8
—
0.8
2.6
Consulting/professional fees
0.5
—
22.2
22.7
Other selling, general and administrative expenses
2.8
1.0
1.8
5.6
Total selling, general and administrative expenses
5.2
0.3
21.8
27.3
Consolidated total
$
5.7
$
4.2
$
21.8
$
31.7
Included in the above results are $ 28.5 million of charges that have resulted or will result in cash outflows and $ 3.2 million in non-cash charges.
49
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
We recognized the following cumulative (plan inception to May 30, 2021) pre-tax expenses for the Pinnacle Integration Restructuring Plan in our Consolidated Statements of Earnings:
Grocery & Snacks
Refrigerated & Frozen
International
Corporate
Total
Accelerated depreciation
$
0.6
$
4.6
$
—
$
—
$
5.2
Other cost of goods sold
2.3
2.9
0.7
—
5.9
Total cost of goods sold
2.9
7.5
0.7
—
11.1
Severance and related costs
—
3.4
1.5
112.4
117.3
Asset impairment (net of gains on disposal)
0.3
4.0
—
2.6
6.9
Accelerated depreciation
—
—
—
7.4
7.4
Contract/lease termination
1.8
—
0.8
15.9
18.5
Consulting/professional fees
0.7
—
0.8
89.5
91.0
Other selling, general and administrative expenses
2.8
1.1
0.3
17.3
21.5
Total selling, general and administrative expenses
5.6
8.5
3.4
245.1
262.6
Consolidated total
$
8.5
$
16.0
$
4.1
$
245.1
$
273.7
Included in the above results are $ 240.9 million of charges that have resulted or will result in cash outflows and $ 32.8 million in non-cash charges.
Liabilities recorded for the Pinnacle Integration Restructuring Plan and changes therein for fiscal 2021 were as follows:
Balance at
May 31,
2020
Costs
Incurred
and Charged
to Expense
Costs Paid
or Otherwise
Settled
Changes in
Estimates
Balance at
May 30,
2021
Severance and related costs
$
23.6
$
0.1
$
( 14.9
)
$
( 3.7
)
$
5.1
Contract/lease termination
0.5
2.6
( 3.1
)
—
—
Consulting/professional fees
7.5
22.7
( 26.3
)
—
3.9
Other costs
—
6.8
( 6.8
)
—
—
Total
$
31.6
$
32.2
$
( 51.1
)
$
( 3.7
)
$
9.0
Conagra Restructuring Plan
In fiscal 2019, senior management initiated a restructuring plan (the "Conagra Restructuring Plan") for costs incurred in connection with actions taken to improve SG&A expense effectiveness and efficiencies and to optimize our supply chain network. Although we remain unable to make good faith estimates relating to the entire Conagra Restructuring Plan, we are reporting on actions initiated through the end of fiscal 2021, 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 May 30, 2021, we had approved the incurrence of $ 172.2 million ($ 45.4 million of cash charges and $ 126.8 million of non-cash charges) for several projects associated with the Conagra Restructuring Plan. We have incurred or expect to incur $ 157.3 million of charges ($ 36.9 million of cash charges and $ 120.4 million of non-cash charges) for actions identified to date under the Conagra Restructuring Plan. We recognized charges of $ 46.2 million, $ 64.4 million, and $ 2.2 million in connection with the Conagra Restructuring Plan in fiscal 2021, 2020, and 2019, respectively. We expect to incur costs related to the Conagra Restructuring Plan over a multi-year period.
50
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
We anticipate that we will recognize the following pre-tax expenses in association with the Conagra Restructuring Plan (amounts include charges recognized from plan inception through the end of fiscal 2021):
Grocery & Snacks
Refrigerated & Frozen
International
Corporate
Total
Accelerated depreciation
$
34.7
$
49.7
$
—
$
—
$
84.4
Other cost of goods sold
8.9
2.1
—
—
11.0
Total cost of goods sold
43.6
51.8
—
—
95.4
Severance and related costs
12.0
2.2
1.1
2.1
17.4
Asset impairment (net of gains on disposal)
27.1
0.3
0.1
—
27.5
Contract/lease termination
0.1
—
—
0.1
0.2
Consulting/professional fees
—
—
—
0.7
0.7
Other selling, general and administrative expenses
10.7
4.6
—
0.2
15.5
Total selling, general and administrative expenses
49.9
7.1
1.2
3.1
61.3
Total
$
93.5
$
58.9
$
1.2
$
3.1
$
156.7
Pension and postretirement non-service income
0.6
Consolidated total
$
157.3
During fiscal 2021, we recognized the following pre-tax expenses for the Conagra Restructuring Plan:
Grocery & Snacks
Refrigerated & Frozen
International
Corporate
Total
Accelerated depreciation
$
7.9
$
22.5
$
—
$
—
$
30.4
Other cost of goods sold
2.3
—
—
—
2.3
Total cost of goods sold
10.2
22.5
—
—
32.7
Severance and related costs
5.7
—
( 0.1
)
1.4
7.0
Asset impairment (net of gains on disposal)
2.1
0.1
—
—
2.2
Other selling, general and administrative expenses
4.1
—
—
0.2
4.3
Total selling, general and administrative expenses
11.9
0.1
( 0.1
)
1.6
13.5
Total
$
22.1
$
22.6
$
( 0.1
)
$
1.6
$
46.2
Included in the above results are $ 11.3 million of charges that have resulted or will result in cash outflows and $ 34.9 million in non-cash charges.
We recognized the following cumulative (plan inception to May 30, 2021) pre-tax expenses for the Conagra Restructuring Plan in our Consolidated Statements of Earnings:
Grocery & Snacks
Refrigerated & Frozen
International
Corporate
Total
Accelerated depreciation
$
32.0
$
26.7
$
—
$
—
$
58.7
Other cost of goods sold
4.8
0.2
—
—
5.0
Total cost of goods sold
36.8
26.9
—
—
63.7
Severance and related costs
10.4
1.8
1.1
2.1
15.4
Asset impairment (net of gains on disposal)
27.1
0.3
0.1
—
27.5
Contract/lease termination
—
—
—
0.1
0.1
Other selling, general and administrative expenses
5.0
0.3
—
0.2
5.5
Total selling, general and administrative expenses
42.5
2.4
1.2
2.4
48.5
Total
$
79.3
$
29.3
$
1.2
$
2.4
$
112.2
Pension and postretirement non-service income
0.6
Consolidated total
$
112.8
51
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
Included in the above results are $ 24.1 million of charges that have resulted or will result in cash outflows and $ 88.7 million in non-cash charges.
Liabilities recorded for the Conagra Restructuring Plan and changes therein for fiscal 2021 were as follows:
Balance at
May 31,
2020
Costs
Incurred
and Charged
to Expense
Costs Paid
or Otherwise
Settled
Changes in
Estimates
Balance at
May 30,
2021
Severance and related costs
$
6.5
$
7.4
$
( 3.8
)
$
( 0.4
)
$
9.7
Other costs
—
4.3
( 4.3
)
—
—
Total
$
6.5
$
11.7
$
( 8.1
)
$
( 0.4
)
$
9.7
4. LONG-TERM DEBT
May 30, 2021
May 31, 2020
5.4 % senior debt due November 2048
$
1,000.0
$
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
1,000.0
8.25 % senior debt due September 2030
300.0
300.0
4.85 % senior debt due November 2028
1,300.0
1,300.0
7.0 % senior debt due October 2028
382.2
382.2
1.375 % senior debt due November 2027
1,000.0
—
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
1,000.0
4.3 % senior debt due May 2024
1,000.0
1,000.0
3.2 % senior debt due January 2023
437.0
837.0
3.25 % senior debt due September 2022
250.0
250.0
3.8 % senior debt due October 2021
—
1,200.0
9.75 % subordinated debt due March 2021
—
195.9
LIBOR plus 0.50 % senior debt due October 2020
—
500.0
4.95 % senior debt due August 2020
—
126.6
0.45 % to 9.59 % lease financing obligations due on various dates through 2035
139.1
155.1
Other indebtedness
0.1
0.1
Total face value of debt
8,348.2
9,786.7
Unamortized fair value adjustment
19.9
21.2
Unamortized discounts
( 25.8
)
( 17.2
)
Unamortized debt issuance costs
( 44.0
)
( 44.6
)
Adjustment due to hedging activity
—
0.2
Less current installments
( 23.1
)
( 845.5
)
Total long-term debt
$
8,275.2
$
8,900.8
52
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
The aggregate minimum principal maturities of the long-term debt for each of the five fiscal years following May 30, 2021, are as follows:
2022
$
23.1
2023
706.8
2024
1,015.8
2025
14.3
2026
1,020.8
Pinnacle Acquisition Financing
In the first quarter of fiscal 2019, in connection with the announcement of the acquisition of Pinnacle, we secured $ 9.0 billion in fully committed bridge financing. Prior to the acquisition, we capitalized financing costs related to the bridge 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 in fiscal 2019 for the remaining unamortized financing costs.
During the second quarter of fiscal 2019, to finance a portion of our acquisition of Pinnacle, we issued senior unsecured notes in an aggregate principal amount of $ 7.025 billion.
During the second quarter of fiscal 2019, to finance a portion of our acquisition of Pinnacle, we also 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. Our borrowings under the Term Loan Agreement consisted of a $ 650.0 million tranche of three-year term loans maturing on October 26, 2021 and a $ 650.0 million tranche of five-year term loans maturing on October 26, 2023. During fiscal 2019, we repaid $ 900.0 million under the Term Loan Agreement and we repaid the remaining $ 400.0 million outstanding under the Term Loan Agreement during fiscal 2020. The Term Loan Agreement was terminated following these repayments.
In connection with our acquisition of Pinnacle, 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 in fiscal 2019 as a cost of early retirement of debt.
In the first quarter of fiscal 2019, we entered into deal-contingent forward starting interest rate swap contracts (see Note 17) to hedge a portion of the interest rate risk related to our anticipated issuance of long-term debt to help finance the Pinnacle acquisition. During the second quarter of fiscal 2019, we terminated the interest rate swap contracts 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. Our net interest expense was reduced by $ 3.3 million, $ 3.5 million and $ 2.0 million in fiscal 2021, fiscal 2020, and fiscal 2019, respectively, due to the impact of these interest rate swap contracts.
General
During the fourth quarter of fiscal 2021, we repaid the remaining outstanding $ 195.9 million aggregate principal amount of our 9.75 % subordinated notes on the maturity date of March 1, 2021.
During the third quarter of fiscal 2021, we redeemed $ 400.0 million aggregate principal amount of our 3.20 % senior notes due January 25, 2023, prior to maturity, resulting in a loss of $ 24.4 million within SG&A expenses as a cost of early extinguishment of debt.
During the second quarter of fiscal 2021, we issued $ 1.0 billion aggregate principal amount of 1.375 % senior notes due November 1, 2027 (the "2027 Senior Notes"). We also redeemed the entire outstanding $ 1.20 billion aggregate principal amount of our 3.80 % senior notes prior to their maturity date of October 22, 2021, resulting in a net loss of $ 44.3 million within SG&A expenses as a cost of early extinguishment of debt. This redemption was primarily funded using the net proceeds from the issuance of the 2027 Senior Notes.
53
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
During the second quarter of fiscal 2021, we also repaid the entire outstanding $ 500.0 million aggregate principal amount of our floating rate notes on the maturity date of October 9, 2020.
During the first quarter of fiscal 2021, we repaid the remaining outstanding $ 126.6 million aggregate principal amount of our 4.95 % senior notes on their maturity date of August 15, 2020.
In fiscal 2020, we redeemed the entire outstanding $ 525.0 million aggregate principal amount of our floating rate notes due October 22, 2020 in two separate redemptions totaling $ 250.0 million and $ 275.0 million in the third and fourth quarters of fiscal 2020, respectively.
In the fourth quarter of fiscal 2020, we entered into an unsecured term loan agreement (the "Credit Agreement") with a financial institution. The Credit Agreement provided for delayed draw term loans to the Company in an aggregate principal amount not to exceed $ 600.0 million (subject to increase to a maximum aggregate principal amount of $ 750.0 million) through October 9, 2020. We did not borrow under the Credit Agreement, and it was terminated in the second quarter of fiscal 2021 .
Net interest expense consists of:
2021
2020
2019
Long-term debt
$
430.0
$
495.9
$
385.9
Short-term debt
2.5
0.9
15.0
Interest income
( 1.9
)
( 3.1
)
( 6.8
)
Interest capitalized
( 10.2
)
( 6.6
)
( 2.7
)
$
420.4
$
487.1
$
391.4
Interest paid from continuing operations was $ 445.6 million, $ 494.6 million, and $ 375.6 million in fiscal 2021, 2020, and 2019, respectively.
5. CREDIT FACILITIES AND BORROWINGS
At May 30, 2021, 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 one-year or two-year periods from the then-applicable maturity date on an annual basis. As of May 30, 2021, 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 4.75 through the first quarter of fiscal 2022 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 30, 2021, we were in compliance with all financial covenants under the Revolving Credit Facility.
On July 13, 2021, subsequent to our fiscal year end, we entered into an amendment to the Revolving Credit Facility. The amendment modifies the ratio of funded debt to EBITDA financial covenant to require a ratio of not greater than 4.50 on a rolling four-quarter basis.
We finance our short-term liquidity needs with existing cash balances, cash flows from operations, and commercial paper borrowings. As of May 30, 2021, we had $ 705.7 million outstanding under our commercial paper program at an average weighted interest rate of 0.36 %. There were no outstanding borrowings under our commercial paper program as of May 31, 2020.
54
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
6. DIVESTITURES AND ASSETS HELD FOR SALE
Divestitures
During the fourth quarter of fiscal 2021, we completed the sale of our Egg Beaters ® business for net proceeds of $ 50.6 million , subject to final working capital adjustments. The business results were previously reported primarily within our Refrigerated & Frozen segment, and to a lesser extent within our International and Foodservice segments . We recognized a gain on the sale of $ 10.4 million, included within SG&A expenses . In connection with the sale of our Egg Beaters ® business, we also recognized a loss of $ 7.1 million within SG&A expenses related to the early exit of an unfavorable contract.
The assets and liabilities classified as held for sale reflected in our Consolidated Balance Sheets related to the Egg Beaters ® business were as follows:
May 31, 2020
Current assets
$
3.0
Noncurrent assets (including goodwill of $ 27.5 million)
48.1
Current liabilities
13.1
During the third quarter of fiscal 2021, we completed the sale of our Peter Pan ® peanut butter business for net proceeds of $ 101.5 million , including working capital adjustments but subject to final adjustments for certain tax benefits. The business results were previously reported primarily within our Grocery & Snacks segment, and to a lesser extent within our International and Foodservice segments . We recognized a gain on the sale of $ 49.8 million, included within SG&A expenses .
The assets and liabilities classified as held for sale reflected in our Consolidated Balance Sheets related to the Peter Pan ® peanut butter business were as follows:
May 31, 2020
Current assets
$
8.8
Noncurrent assets (including goodwill of $ 44.9 million)
55.3
Current liabilities
5.4
During the second quarter of fiscal 2021, we completed the sale of our H.K. Anderson ® business for net proceeds of $ 8.7 million , including working capital adjustments. The business results were previously reported in our Grocery & Snacks segment, and to a lesser extent within our Foodservice segment . We recognized a gain on the sale of $ 5.3 million, included within SG&A expenses .
The assets classified as held for sale reflected in our Consolidated Balance Sheets related to the H.K. Anderson ® business were as follows:
May 31, 2020
Current assets
$
1.3
Noncurrent assets (including goodwill of $ 2.4 million)
2.6
During the third quarter of fiscal 2020, we completed the sale of our Lender's ® bagel business for net proceeds of $ 33.3 million, including working capital adjustments. The business results were previously reported primarily in our Refrigerated & Frozen segment, and to a lesser extent within our Foodservice segment. In connection with the sale of our Lender's ® bagel business, we recognized an impairment charge of $ 27.6 million within SG&A expenses in the second quarter of fiscal 2020.
During the second quarter of fiscal 2020, we completed the sale of our Direct Store Delivery ("DSD") snacks business for net proceeds of $ 137.5 million, including final working capital adjustments. The business results were previously reported in our Grocery & Snacks segment. In connection with the sale of our DSD snacks business, we recognized an impairment charge of $ 31.4 million within SG&A expenses in the first quarter of fiscal 2020.
55
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
During the third quarter of fiscal 2020, we completed the sale of our peanut butter manufacturing facility in Streator, Illinois. The sale was part of a broader initiative to optimize the Company's peanut butter business, which also included the decision to exit the manufacture and sale of private label peanut butter. The business results were previously reported primarily in our Grocery & Snacks segment, and to a lesser extent within our Foodservice segment. We received net proceeds of $ 24.8 million, including working capital adjustments . In connection with this divestiture, we recognized impairment charges of $ 23.0 million within SG&A expenses in the first half of fiscal 2020. These charges have been included in restructuring activities .
During the fourth quarter of fiscal 2019, we completed the sale of our Italian-based frozen pasta business, Gelit, for proceeds net of cash divested of $ 80.1 million, including final working capital adjustments. The business results were previously reported primarily in our Refrigerated & Frozen segment. We recognized a gain on the sale of $ 23.1 million, included within SG&A expenses.
During the fourth quarter of fiscal 2019, we completed the sale of our Wesson ® oil business for net proceeds of $ 168.3 million, including 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.
During the first quarter of fiscal 2019, we completed the sale of our Del Monte ® processed fruit and vegetable business in Canada, which was previously reported in our International segment, for combined proceeds of $ 32.2 million. We recognized a gain on the sale of $ 13.2 million, included within SG&A expenses.
Lamb Weston Spinoff
On November 9, 2016, we completed the spinoff of Lamb Weston Holdings, Inc. ("Lamb Weston"). 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. Included within discontinued operations during fiscal 2019 was an after-tax loss of $ 2.8 million due primarily to an income tax adjustment.
Private Brands Operations
On February 1, 2016, we completed the disposition of our Private Brands operations to TreeHouse Foods, Inc. Included within discontinued operations during fiscal 2019 was after-tax income of $ 0.9 million related to the Private Brands operations.
Other Assets Held for Sale
From time to time, we actively market certain other assets. Balances totaling $ 4.6 million and $ 9.4 million at May 30, 2021 and May 31, 2020, respectively, have been reclassified as noncurrent 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 2021 and 2020 was $ 841.8 million and $ 798.7 million, respectively. These amounts are included in other assets and reflect our 44 % ownership interest in Ardent Mills and a 50 % ownership interest in one other joint venture. Due to differences in fiscal reporting periods, we recognized the equity method investment earnings on a lag of approximately one month.
In fiscal 2021, we had purchases from our equity method invest ees of $ 28.7 million. Total dividends received from equity method investments in fiscal 2021 were $ 56.5 million.
In fiscal 2020, we had purchases from our equity method investees of $ 32.5 million . Total dividends received from equity method investments in fiscal 2020 were $ 51.4 million.
In fiscal 2019, we had purchases from our equity method investees of $ 39.4 million. Total dividends received from equity method investments in fiscal 2019 were $ 55.0 million.
56
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
Summarized combined financial information for our equity method investments on a 100% basis is as follows:
2021
2020
2019
Net sales:
Ardent Mills
$
3,407.6
$
3,393.9
$
3,476.0
Other
238.8
225.0
195.4
Total net sales
$
3,646.4
$
3,618.9
$
3,671.4
Gross margin:
Ardent Mills
$
360.6
$
313.1
$
281.9
Other
47.3
49.4
45.5
Total gross margin
$
407.9
$
362.5
$
327.4
Earnings after income taxes:
Ardent Mills
$
169.6
$
144.5
$
151.9
Other
19.5
19.3
18.1
Total earnings after income taxes
$
189.1
$
163.8
$
170.0
May 30,
2021
May 31,
2020
Ardent Mills:
Current assets
$
1,101.5
$
1,010.6
Noncurrent assets
1,848.2
1,720.2
Current liabilities
524.1
454.8
Noncurrent liabilities
563.0
503.4
Other:
Current assets
$
95.0
$
87.1
Noncurrent assets
36.8
24.5
Current liabilities
39.9
44.1
Noncurrent liabilities
10.6
8.3
8. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
The change in the carrying amount of goodwill for fiscal 2021 and 2020, excluding amounts classified as held for sale (see Note 6), was as follows:
Grocery & Snacks
Refrigerated & Frozen
International
Foodservice
Total
Balance as of May 26, 2019
$
4,694.7
$
5,619.2
$
299.0
$
747.7
$
11,360.6
Purchase accounting adjustments
3.5
5.9
0.7
—
10.1
Currency translation
—
—
( 9.2
)
—
( 9.2
)
Balance as of May 31, 2020
$
4,698.2
$
5,625.1
$
290.5
$
747.7
$
11,361.5
Currency translation
—
—
12.0
—
12.0
Balance as of May 30, 2021
$
4,698.2
$
5,625.1
$
302.5
$
747.7
$
11,373.5
57
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
Other identifiable intangible assets, excluding amounts classified as held for sale, were as follows:
2021
2020
Gross Carrying Amount
Accumulated Amortization
Gross Carrying Amount
Accumulated Amortization
Non-amortizing intangible assets
$
3,301.2
$
—
$
3,388.7
$
—
Amortizing intangible assets
1,235.3
378.9
1,232.1
318.4
$
4,536.5
$
378.9
$
4,620.8
$
318.4
In the first quarter of fiscal 2021, management changed its reporting of certain brands within two reporting units in our Refrigerated & Frozen segment. The total goodwill in our Refrigerated & Frozen segment remains unchanged, but we reassigned goodwill between the two reporting units. We evaluated goodwill for impairment both prior to and subsequent to the change, and there were no impairments. For the Sides, Components, Enhancers reporting unit that was impacted by the management change, based upon a quantitative impairment test, the excess fair value over the carrying value was approximately 20 %, which remained relatively consistent with our prior year quantitative impairment test.
Fair value is typically estimated using a discounted cash flow analysis which requires us to estimate the future cash flows as well as to select a risk-adjusted discount rate to measure the present value of the anticipated cash flows. When determining future cash flow estimates, we consider historical results adjusted to reflect current and anticipated operating conditions. We estimate cash flows for a reporting unit over a discrete period (typically five years ) and a terminal period (considering expected long-term growth rates and trends). We used a discount rate for our Sides, Components, Enhancers reporting unit of 6.25 % and a terminal growth rate slightly in excess of 1 %. Estimating the fair value of individual reporting units requires us to make assumptions and estimates in such areas as future economic conditions, industry-specific conditions, product pricing, and necessary capital expenditures. The use of different assumptions or estimates for future cash flows, discount rates, or terminal growth rates could produce substantially different estimates of the fair value of the reporting units.
In the fourth quarter of fiscal 2021, we performed our annual goodwill impairment assessment on all of our reporting units and found no indicators of impairment. We completed a qualitative assessment which considered, among other things, an increase in our market capitalization from our previous testing date, the current interest rate environment, and recent events which have had a positive impact on our financial results for most of our reporting units. However, we will continue to evaluate the impact of any significant changes in consumer purchasing behaviors, government restrictions, input cost inflation, or other macroeconomic conditions which could change certain assumptions that result in future impairments. While retail sales have increased due to higher than anticipated consumer demand for our products throughout the COVID-19 pandemic, our Foodservice segment has experienced a negative impact with decreased away-from-home eating occasions. We continue to believe this is a temporary decline as seen with improving trends in our Foodservice segment in the fourth quarter of fiscal 2021. As such, we have determined that there was no impairment triggering event as it was not more likely than not that the fair value of this reporting unit is less than its carrying amount.
Amortizing intangible assets, carrying a remaining weighted-average life of approximately 19 years, are principally composed of customer relationships and acquired intellectual property. For fiscal 2021, 2020, and 2019, we recognized amortization expense of $ 59.7 million, $ 59.8 million, and $ 49.1 million, respectively. Based on amortizing assets recognized in our Consolidated Balance Sheet as of May 30, 2021, amortization expense for the next five years is estimated to be as follows:
2022
$
59.5
2023
57.2
2024
53.9
2025
53.9
2026
43.8
For our non-amortizing intangible assets, which are comprised of brands and trademarks, we use a "relief from royalty" methodology in estimating fair value. During fiscal 2021, as a result of our annual impairment test for indefinite lived intangibles, we recognized impairment charges in SG&A expenses of $ 90.9 million, primarily within our Grocery & Snacks and Refrigerated
58
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
& Frozen segments. Udi’s ® was the most notable brand with impairment in fiscal 2021 largely due to lower than expected sales and profit margins which resulted in a reduction to our assumed royalty rate.
During the first quarter of fiscal 2020, we recorded impairment charges totaling $ 19.3 million within our Refrigerated & Frozen segment and Grocery & Snacks segment for certain brands for which management changed its business strategy and that continued to have lower than expected sales and profit margins. This impairment was included within SG&A expenses.
During fiscal 2020, as a result of our annual impairment test for indefinite lived intangibles, we recognized impairment charges in SG&A expenses of $ 146.2 million, primarily within our Grocery & Snacks and Refrigerated & Frozen segments, largely associated with brands that were recorded at fair value in recent acquisitions. The more notable brands with impairments included Frontera ® , Gardein ® , Glutino ® , Hungry Man ® , and Udi’s ® . While most of our recently acquired brands continue to remain on track with previous assumptions, these brands have had lower than expected sales or profit margins which have led to some revisions in our original assumptions (most notably declines in our assumed royalty rates).
During fiscal 2019, as a result of our annual impairment test for indefinite lived intangibles, we recognized impairment charges in SG&A expenses 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.
9. 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 stockholders 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:
2021
2020
2019
Net income attributable to Conagra Brands, Inc. common stockholders:
Income from continuing operations attributable to Conagra Brands, Inc. common stockholders
$
1,298.8
$
840.1
$
680.2
Loss from discontinued operations, net of tax, attributable to Conagra Brands, Inc. common stockholders
—
—
( 1.9
)
Net income attributable to Conagra Brands, Inc. common stockholders
$
1,298.8
$
840.1
$
678.3
Weighted average shares outstanding:
Basic weighted average shares outstanding
485.8
487.3
444.0
Add: Dilutive effect of stock options, restricted stock unit awards, and other dilutive securities
2.0
1.3
1.6
Diluted weighted average shares outstanding
487.8
488.6
445.6
For fiscal 2021, 2020, and 2019, there were 0.4 million, 1.9 million, and 2.0 million stock options outstanding, respectively, that were excluded from the computation of diluted weighted average shares because the effect was antidilutive.
59
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
10. INVENTORIES
The major classes of inventories were as follows:
May 30, 2021
May 31, 2020
Raw materials and packaging
$
290.7
$
291.6
Work in process
125.1
125.2
Finished goods
1,238.1
874.7
Supplies and other
80.1
73.3
Total
$
1,734.0
$
1,364.8
11. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities consisted of:
May 30, 2021
May 31, 2020
Postretirement health care and pension obligations
$
197.3
$
324.9
Noncurrent income tax liabilities
1,271.4
1,330.1
Noncurrent lease liabilities (see Note 15)
188.3
206.1
Self-insurance liabilities
30.5
37.5
Asset retirement obligations
42.4
13.4
Environmental liabilities (see Note 16)
59.0
61.5
Legal settlement costs (see Note 16)
52.0
63.1
Technology agreement liability
—
14.6
Other
141.9
113.9
$
1,982.8
$
2,165.1
12. 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 30, 2021.
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. During fiscal 2021, we repurchased 8.8 million shares of our common stock for $ 298.1 million.
13. 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. In addition to the shares under the 2014 Stock Plan, 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 are available for issuance. At May 30, 2021, approximately 39.5 million shares were reserved for granting new share-based awards.
60
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
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 were marked-to-market and presented within other current and noncurrent liabilities in our Consolidated Balance Sheets prior to final payout in fiscal 2021. The compensation expense for our stock-settled share unit awards totaled $ 28.1 million, $ 24.5 million, and $ 23.9 million for fiscal 2021, 2020, and 2019, respectively. The tax benefit related to the stock-settled share unit award compensation expense for fiscal 2021, 2020, and 2019 was $ 6.1 million, $ 5.3 million, and $ 6.0 million, respectively. The compensation expense for our cash-settled share unit awards totaled $ 1.0 million, $ 4.2 million, and $ 17.5 million for fiscal 2021, 2020, and 2019, respectively. The tax benefit related to the cash-settled share unit award compensation expense for fiscal 2021, 2020, and 2019 was $ 0.3 million, $ 1.1 million, and $ 4.4 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 2020 and 2019 is expense of $ 1.0 million and $ 18.9 million, respectively, 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 fiscal 2020 and 2019 expense for cash-settled share unit awards above is expense of $ 0.2 million and income of $ 6.7 million, respectively, related to the mark-to-market of this liability. As of May 30, 2021, there were no remaining cash-settled share unit awards.
The following table summarizes the nonvested share units as of May 30, 2021 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 31, 2020
2.38
$
31.76
0.12
$
36.37
Granted
0.93
$
36.72
—
$
—
Vested/Issued
( 0.68
)
$
33.77
( 0.12
)
$
36.37
Forfeited
( 0.14
)
$
32.69
—
$
—
Nonvested share units at May 30, 2021
2.49
$
33.00
—
$
—
During fiscal 2021, 2020, and 2019, we granted 0.9 million, 1.3 million, and 0.9 million stock-settled share units, respectively, with a weighted average grant date fair value of $ 36.72 , $ 28.32 , and $ 35.43 per share unit, respectively. No cash-settled share unit awards were granted in fiscal 2021 or 2020.
The total intrinsic value of stock-settled share units vested was $ 24.6 million, $ 14.2 million, and $ 24.6 million during fiscal 2021, 2020, and 2019, respectively. The total intrinsic value of cash-settled share units vested was $ 4.3 million, $ 24.3 million, and $ 50.5 million during fiscal 2021, 2020, and 2019, respectively.
At May 30, 2021, we had $ 28.2 million of total unrecognized compensation expense that will be recognized over a weighted average period of 1.7 years related to stock-settled share unit awards.
61
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
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 goals for the three-year performance periods ending in fiscal 2021 (the "2021 performance period") and fiscal 2022 ("2022 performance period") are based on our diluted earnings per share ("EPS") compound annual growth rate ("CAGR"), subject to certain adjustments, measured over the defined performance periods. The performance goal for one-third of the target number of performance shares for the three-year performance period ending in fiscal 2023 (the "2023 performance period") is based on our fiscal 2021 diluted EPS CAGR, subject to certain adjustments. The performance goal for the final two-thirds of the target number of performance shares granted for the 2023 performance period is based on our diluted EPS CAGR, subject to certain adjustments, measured over the two-year period ending in fiscal 2023. For each of the 2021 performance period, 2022 performance period, and 2023 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. Dividend equivalents are paid on the portion of performance shares actually earned at our regular dividend rate in additional shares of common stock.
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 generally 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 30, 2021 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 31, 2020
1.49
$
32.27
Granted
0.48
$
36.82
Adjustments for performance results attained and dividend equivalents
0.48
$
33.82
Vested/Issued
( 0.93
)
$
33.82
Forfeited
( 0.01
)
$
33.43
Nonvested performance shares at May 30, 2021
1.51
$
33.25
The compensation expense for our performance share awards totaled $ 34.9 million, $ 31.8 million, and $ 8.2 million for fiscal 2021, 2020, and 2019, respectively. The tax benefit related to the compensation expense for fiscal 2021, 2020, and 2019 was $ 3.6 million, $ 2.9 million, and $ 2.1 million, respectively.
The total intrinsic value of performance shares vested (including shares paid in lieu of dividends) during fiscal 2021, 2020, and 2019 was $ 33.9 million, $ 8.4 million, and $ 15.7 million, respectively.
Based on estimates at May 30, 2021, we had $ 19.8 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
62
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
predetermined rate, they become eligible for an upward adjustment of 25 % based on our relative TSR for the PBRSU 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 $ 2.4 million, $ 2.7 million, and $ 0.3 million for fiscal 2021, 2020, and 2019 respectively. The tax benefit related to the compensation expense for fiscal 2021, 2020, and 2019 was $ 0.2 million, $ 0.2 million, and $ 0.1 million, respectively. Based on estimates at May 30, 2021, we had $ 2.3 million of total unrecognized compensation expense related to the PBRSU awards that will be recognized over a period of one year .
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 2021, 2020, or 2019.
A summary of the option activity as of May 30, 2021 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 31, 2020
3.8
$
30.07
Exercised
( 0.8
)
$
27.47
$
7.0
Outstanding at May 30, 2021
3.0
$
30.70
4.16
$
22.5
Exercisable at May 30, 2021
3.0
$
30.70
4.16
$
22.5
We recognize compensation expense using the straight-line method over the requisite service period, accounting for forfeitures as they occur. The total intrinsic value of stock options exercised was $ 7.0 million, $ 3.8 million, and $ 7.9 million for fiscal 2021, 2020, and 2019, respectively. The closing market price of our common stock on the last trading day of fiscal 2021 was $ 38.10 per share.
Compensation expense for stock option awards totaled $ 0.2 million and $ 2.2 million for fiscal 2020 and 2019, respectively. Included in the compensation expense for stock option awards for fiscal 2019 was $ 0.2 million 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 2020 and 2019 was $ 0.1 million and $ 0.5 million, respectively.
At May 30, 2021, we had no unrecognized compensation expense related to stock options.
Cash received from stock option exercises for fiscal 2021, 2020, and 2019 was $ 20.5 million, $ 11.0 million, and $ 12.4 million, respectively. The actual tax benefit realized for the tax deductions from option exercises totaled $ 1.7 million, $ 1.4 million, and $ 2.3 million for fiscal 2021, 2020, and 2019, respectively.
63
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
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 30, 2021, there were no remaining stock appreciation rights.
The compensation income for our cash-settled stock appreciation rights totaled $ 0.3 million and $ 13.7 million for fiscal 2020 and fiscal 2019, respectively. Included in this amount for fiscal 2019 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 2020 and fiscal 2019 was $ 0.1 million and $ 3.4 million, respectively
14. PRE-TAX INCOME AND INCOME TAXES
Pre-tax income from continuing operations (including equity method investment earnings) consisted of the following:
2021
2020
2019
United States
$
1,426.5
$
978.3
$
826.6
Foreign
68.2
64.8
72.5
$
1,494.7
$
1,043.1
$
899.1
The provision for income taxes included the following:
2021
2020
2019
Current
Federal
$
232.6
$
188.2
$
125.4
State
31.8
25.5
22.6
Foreign
15.3
9.5
21.6
279.7
223.2
169.6
Deferred
Federal
( 63.5
)
37.6
40.1
State
( 26.1
)
( 62.3
)
19.0
Foreign
3.7
2.8
( 9.9
)
( 85.9
)
( 21.9
)
49.2
$
193.8
$
201.3
$
218.8
64
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
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 Earnings as follows:
2021
2020
2019
Computed U.S. Federal income taxes
$
313.9
$
219.0
$
188.8
State income taxes, net of U.S. Federal tax impact
37.4
29.6
34.1
Goodwill and intangible impairments
13.6
11.2
12.5
Remeasurement of deferred taxes due to legal entity reorganization
35.8
( 40.9
)
16.9
State tax impact of combining Pinnacle business
—
—
( 12.0
)
Change of valuation allowance on capital loss carryforward
( 188.5
)
—
( 32.2
)
Other
( 18.4
)
( 17.6
)
10.7
$
193.8
$
201.3
$
218.8
Income taxes paid, net of refunds, were $ 286.3 million, $ 178.0 million, and $ 133.8 million in fiscal 2021, 2020, and 2019, respectively.
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 30, 2021
May 31, 2020
Assets
Liabilities
Assets
Liabilities
Property, plant and equipment
$
—
$
281.7
$
—
$
258.4
Inventory
19.5
—
19.5
—
Goodwill, trademarks and other intangible assets
—
1,118.4
—
1,108.4
Right-of-use assets
—
45.5
—
51.0
Accrued expenses
12.0
—
13.4
—
Compensation related liabilities
36.5
—
36.3
—
Pension and other postretirement benefits
—
9.8
35.2
—
Investment in unconsolidated subsidiaries
—
2.6
—
196.2
Lease liabilities
54.4
—
61.3
—
Other liabilities that will give rise to future tax deductions
96.2
—
88.1
—
Net capital and operating loss carryforwards
53.8
—
753.4
—
Federal credits
16.1
—
17.5
—
Other
33.9
33.1
52.7
31.8
322.4
1,491.1
1,077.4
1,645.8
Less: Valuation allowance
( 67.5
)
—
( 728.3
)
—
Net deferred taxes
$
254.9
$
1,491.1
$
349.1
$
1,645.8
The liability for gross unrecognized tax benefits at May 30, 2021 was $ 33.0 million, excluding a related liability of $ 8.8 million for gross interest and penalties. Included in the balance at May 30, 2021 are $ 0.8 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 31, 2020, our gross liability for unrecognized tax benefits was $ 35.8 million, excluding a related liability of $ 7.4 million for gross interest and penalties. Interest and penalties recognized in the Consolidated Statements of Earnings was an expense of $ 1.4 million in fiscal 2021, a benefit of $ 4.3 million in fiscal 2020, and an expense of $ 1.2 million in fiscal 2019.
The net amount of unrecognized tax benefits at May 30, 2021 and May 31, 2020 that, if recognized, would favorably impact our effective tax rate was $ 28.2 million and $ 30.3 million, respectively.
65
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
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 2020. All resulting significant items for fiscal 2020 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 2003 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 $ 13.2 million over the next twelve months due to various federal, state, and foreign audit settlements and the expiration of statutes of limitations.
The change in the unrecognized tax benefits for the year ended May 30, 2021 was:
Beginning balance on May 31, 2020
$
35.8
Increases from positions established during prior periods
0.8
Decreases from positions established during prior periods
( 2.6
)
Increases from positions established during the current period
2.6
Reductions resulting from lapse of applicable statute of limitation
( 4.3
)
Other adjustments to liability
0.7
Ending balance on May 30, 2021
$
33.0
We have approximately $ 13.3 million of foreign net operating loss carryforwards ($ 9.8 million will expire between fiscal 2022 and 2042 and $ 3.5 million have no expiration dates) and $ 106.8 million of federal net operating loss carryforwards which expire between fiscal 2022 and 2027. Included in net deferred tax liabilities are $ 30.7 million of tax effected state net operating loss carryforwards which expire in various years ranging from fiscal 2022 to 2040 and $ 3.8 million of tax effected state capital loss balances that expire in fiscal year 2031. Foreign tax credits of $ 14.3 million will expire between fiscal 2025 and 2031. State tax credits of approximately $ 5.2 million will expire in various years ranging from fiscal 2023 to 2028.
Federal capital loss carryforwards related to the Private Brands divestiture of approximately $ 1.9 billion expired at the end of fiscal 2021. Accordingly, we have removed the deferred tax asset and the related valuation allowance from our balance sheet. Tax effected state capital loss carryforwards related to the Private Brands divestiture of approximately $ 91.9 million also expired at the end of fiscal 2021 and were removed from the balance sheet, including the related valuation allowance.
In fiscal 2021, we completed a restructuring of our ownership interest in Ardent Mills that utilized a portion of our capital loss carryforward prior to its expiration. Also in fiscal 2021, we completed several other transactions related to retained assets in conjunction with the divestiture of the Peter Pan ® peanut butter and Egg Beaters ® businesses that we believe will utilize a portion of the remaining capital loss carryforward. These transactions are subject to certain elections and are currently under review by the Internal Revenue Service. We believe they may result in increases to the tax basis in those assets and if successful would result in tax benefits being realized in future periods.
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 2021 was a decrease of $ 653.9 million. For fiscal 2020 and 2019, changes in the valuation allowance were a decrease of $ 9.8 million and $ 1.5 million, respectively. The current year change principally relates to decreases in the valuation allowances on the capital loss carryforward generated from the sale of our Private Brands operations. Valuation allowances were released on capital losses that were utilized against capital gains generated on the divestures of the Peter Pan ® peanut butter and Egg Beaters ® businesses and the restructuring of our ownership interest in Ardent Mills. Valuation allowances were also removed on the Federal and state capital losses that expired at the end of fiscal 2021.
66
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
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.
15. LEASES
We have operating and finance leases of certain warehouses, plants, land, office space, production and distribution equipment, automobiles, and office equipment. We determine whether an agreement is or contains a lease at lease inception. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.
As most of our leases do not provide an implicit interest rate, we calculate the lease liability at lease commencement as the present value of unpaid lease payments using our estimated incremental borrowing rate. The incremental borrowing rate represents the rate of interest that we would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term and is determined using a portfolio approach based on information available at the commencement date of the lease.
We have elected not to separate lease and non-lease components of an agreement for all underlying asset classes prospectively from the ASU 2016-02, Leases, Topic 842 adoption date.
Any lease arrangements with an initial term of twelve months or less are not recorded on our Consolidated Balance Sheet. We recognize lease cost for these lease arrangements on a straight-line basis over the lease term.
Our lease terms may include options to extend or terminate the lease. We consider these options in determining the lease term used to establish our ROU asset and lease liabilities. A limited number of our lease agreements include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Leases reported in our Consolidated Balance Sheet were as follows:
Operating Leases
Balance Sheet Location
May 30, 2021
May 31, 2020
ROU assets, net
Other assets
$
188.5
$
209.3
Lease liabilities (current)
Other accrued liabilities
36.6
44.4
Lease liabilities (noncurrent)
Other noncurrent liabilities
188.3
206.1
Finance Leases
Balance Sheet Location
May 30, 2021
May 31, 2020
ROU assets, at cost
Property, plant and equipment
$
217.6
$
220.4
Less accumulated depreciation
Less accumulated depreciation
( 60.2
)
( 53.6
)
ROU assets, net
Property, plant and equipment, net
157.4
166.8
Lease liabilities (current)
Current installments of long-term debt
23.1
22.2
Lease liabilities (noncurrent)
Senior long-term debt, excluding current installments
116.0
132.9
The components of total lease cost were as follows:
67
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
2021
2020
Operating lease cost
$
51.0
$
63.7
Finance lease cost
Depreciation of leased assets
19.0
15.4
Interest on lease liabilities
8.2
9.1
Short-term lease cost
5.1
3.8
Total lease cost
$
83.3
$
92.0
We recognized accelerated operating lease cost of $ 9.9 million and impairments of ROU assets of $ 2.9 million within SG&A expenses in fiscal 2020. These charges are included in the Pinnacle Integration Restructuring Plan.
Rent expense under all operating leases was $ 83.5 million in fiscal 2019.
The weighted-average remaining lease terms and weighted-average discount rate for our leases as of May 30, 2021 and May 31, 2020 were as follows:
Operating Leases
Finance Leases
2021
2020
2021
2020
Weighted-average remaining lease term (in years)
8.1
8.5
7.7
8.0
Weighted-average discount rate
3.51
%
3.61
%
4.95
%
5.29
%
Cash flows arising from lease transactions were as follows:
2021
2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases
$
56.0
$
59.5
Operating cash outflows from finance leases
8.3
9.2
Financing cash outflows from finance leases
24.3
22.5
ROU assets obtained in exchange for new lease liabilities:
Operating leases
21.1
41.6
Finance leases
26.1
12.2
Non-cash issuances of capital lease obligations totaling $ 23.5 million are excluded from cash flows from investing and financing activities on the Consolidated Statements of Cash Flows for fiscal 2019.
Maturities of lease liabilities by fiscal year as of May 30, 2021 were as follows:
Operating Leases
Finance Leases
Total
2022
$
46.5
$
28.5
$
75.0
2023
41.2
25.3
66.5
2024
32.4
20.4
52.8
2025
24.4
18.3
42.7
2026
20.9
15.0
35.9
Later years
102.8
63.9
166.7
Total lease payments
268.2
171.4
439.6
Less: Imputed interest
( 43.3
)
( 32.3
)
( 75.6
)
Total lease liabilities
$
224.9
$
139.1
$
364.0
68
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
We have entered into contracts that are or contain a lease that have not yet commenced with aggregate payments totaling $ 272.2 million as of May 30, 2021. This amount primarily relates to a warehouse facility with a future minimum lease commitment of $ 257.7 million. We expect to take control of this leased asset in fiscal 2023.
16. 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 have included 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. When such lawsuits have been brought, ConAgra Grocery Products has denied liability, 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. Decisions favorable to us were rendered in Rhode Island, New Jersey, Wisconsin, and Ohio. ConAgra Grocery Products was held liable for the abatement of a public nuisance in California, and the case was dismissed pursuant to settlement in July 2019 as discussed in the following paragraph. We remain a defendant in one active suit in Illinois. 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 was 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 was approved by the trial court on July 24, 2019, and the action against ConAgra Grocery Products was 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. As part of the settlement, ConAgra Grocery Products has provided a guarantee of up to $ 15.0 million in the event co-defendant, NL Industries, Inc., defaults on its payment obligations.
We have accrued $ 11.6 million and $ 52.0 million, within other accrued liabilities and other noncurrent liabilities, respectively, for this matter as of May 30, 2021. 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 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 was remanded to the trial court for further proceedings. On April 4, 2019, the trial court granted preliminary approval of a settlement in this matter. In the second
69
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
quarter of fiscal 2020, a single objecting class member appealed the court's decision approving the settlement to the United States Court of Appeals for the Ninth Circuit. On June 1, 2021, the appellate court rejected the settlement and remanded to the trial court for further proceedings. While we cannot predict with certainty the results of this or any other legal proceeding challenging our product claims, we do not expect these matters to have a material adverse effect on our financial condition, results of operations, or business.
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. On June 21, 2021, the trial court granted preliminary approval of a settlement in this matter. If final approval is obtained, the settlement will require a payment by the Company of $ 9.0 million, which we have accrued within other accrued liabilities. 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 year 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 on February 22, 2019 in the U.S. District Court for the Northern District of Illinois. That consolidated lawsuit was dismissed with prejudice on December 23, 2020 for failure to state a claim. On January 22, 2021, the plaintiff filed a notice of appeal of the trial court’s decision to the U.S. Court of Appeals for the Seventh Circuit. In addition, on May 9, 2019, a stockholder 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 asserting harm to the Company due to alleged breaches of fiduciary duty and mismanagement in connection with the Pinnacle acquisition. On July 9, 2019, September 20, 2019, and March 10, 2020, the Company received three separate demands from stockholders 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. On July 22, 2019 and August 6, 2019, respectively, two additional stockholder derivative lawsuits captioned Opperman v. Connolly, et al. and Dahl v. Connolly, et al. were filed in the U.S. District Court for the Northern District of Illinois asserting similar facts and claims as the Klein v. Arora, et al. matter. On October 21, 2019, the Company received an additional demand from a stockholder under Delaware law to appoint a special committee to investigate the conduct of certain officers and directors in connection with the Pinnacle acquisition and the Company's public statements. All remaining stockholder lawsuits and demands are currently stayed by agreement pending the final outcome of the West Palm Beach Firefighters' Pension Fund matter. We have put the Company's insurance carriers on notice of each of these securities and stockholder matters. 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
Securities and Exchange Commission (the "SEC") regulations require us to disclose certain information about environmental proceedings if a governmental authority is a party to such proceedings and such proceedings involve potential monetary sanctions that we reasonably believe will exceed a stated threshold. Pursuant to the SEC regulations, the Company uses a threshold of $ 1.0 million for purposes of determining whether disclosure of any such proceedings is required.
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
70
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
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, polycholorinated biphenyls, acids, lead, sulfur, tannery wastes, and/or other contaminants. 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 $ 55.6 million ($ 2.4 million within other accrued liabilities and $ 53.2 million within other noncurrent liabilities) as of May 30, 2021 , 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 ("Operating Unit 4") of the Wells G&H Superfund site, which is one of the Beatrice sites. The U.S. Environmental Protection Agency ("EPA") issued a Record of Decision ("ROD") for the Southwest Properties portion of the site on September 29, 2017 and entered into negotiations with potentially responsible parties to determine final responsibility for implementing the ROD. On September 14, 2020, the district court entered a consent decree among EPA and the settling defendants, including the Company.
Guarantees and Other Contingencies
We guarantee an obligation of the Lamb Weston business pursuant to a guarantee arrangement that existed prior to the spinoff of the Lamb Weston business (the "Spinoff"). The guarantee remained in place following completion of the Spinoff and it will remain in place until such guarantee obligation 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 2025 (subject, at Lamb Weston's option, to extension for one additional five-year period). 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 also guarantee a lease resulting from an exited facility. As of May 30, 2021, the remaining term of this arrangement did not exceed six years and the maximum amount of future payments we have guaranteed was $ 13.9 million.
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 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.
17. 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.
71
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
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 30, 2021, we had economically hedged certain portions of our anticipated consumption of commodity inputs using derivative instruments with expiration dates through October 2022.
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 30, 2021, we had economically hedged certain portions of our foreign currency risk in anticipated transactions using derivative instruments with expiration dates through February 2022.
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 the first quarter of 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. In the second quarter of fiscal 2021, $ 0.5 million was written off in connection with the early extinguishment of debt (see Note 4). The unamortized amount at May 30, 2021 was $ 38.2 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.
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 19 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 30, 2021 and May 31, 2020, $ 2.0 million, representing an obligation to return cash collateral, and $ 1.1 million, representing a right to reclaim cash collateral, respectively, were included in prepaid expenses and other current assets in our Consolidated Balance Sheets.
72
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
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 30, 2021
May 31, 2020
Prepaid expenses and other current assets
$
15.5
$
8.0
Other accrued liabilities
6.9
0.4
The following table presents our derivative assets and liabilities at May 30, 2021, on a gross basis, prior to the setoff of $ 7.4 million to total derivative assets and $ 5.4 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
$
22.9
Other accrued liabilities
$
5.4
Foreign exchange contracts
Prepaid expenses and other current assets
—
Other accrued liabilities
6.9
Total derivatives not designated as
hedging instruments
$
22.9
$
12.3
The following table presents our derivative assets and liabilities, at May 31, 2020, on a gross basis, prior to the setoff of $ 0.4 million to total derivative assets and $ 1.5 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
$
1.9
Foreign exchange contracts
Prepaid expenses and other current assets
5.1
Other accrued liabilities
—
Total derivatives not designated as
hedging instruments
$
8.4
$
1.9
The location and amount of gains (losses) from derivatives not designated as hedging instruments in our Consolidated Statements of Earnings were as follows:
For the Fiscal Year Ended May 30, 2021
Derivatives Not Designated as Hedging Instruments
Location in Consolidated
Statement of Earnings of Gains (Losses)
Recognized on Derivatives
Amount of Gains (Losses)
Recognized on Derivatives
in Consolidated Statement
of Earnings
Commodity contracts
Cost of goods sold
$
26.6
Foreign exchange contracts
Cost of goods sold
( 17.1
)
Total gains from derivative instruments not
designated as hedging instruments
$
9.5
73
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
For the Fiscal Year Ended May 31, 2020
Derivatives Not Designated as Hedging Instruments
Location in Consolidated
Statement of Earnings of Gains (Losses)
Recognized on Derivatives
Amount of Gains (Losses)
Recognized on Derivatives
in Consolidated Statement
of Earnings
Commodity contracts
Cost of goods sold
$
( 18.4
)
Foreign exchange contracts
Cost of goods sold
5.5
Total losses from derivative instruments not
designated as hedging instruments
$
( 12.9
)
For the Fiscal Year Ended May 26, 2019
Derivatives Not Designated as Hedging Instruments
Location in Consolidated
Statement of Earnings of Gains (Losses)
Recognized on Derivatives
Amount of Gains
(Losses) Recognized
on Derivatives
in Consolidated
Statement
of Earnings
Commodity contracts
Cost of goods sold
$
( 5.3
)
Foreign exchange contracts
Cost of goods sold
1.7
Total losses from derivative instruments not
designated as hedging instruments
$
( 3.6
)
As of May 30, 2021, our open commodity contracts had a notional value (defined as notional quantity times market value per notional quantity unit) of $ 148.8 million and $ 159.4 million for purchase and sales contracts, respectively. As of May 31, 2020, our open commodity contracts had a notional value of $ 102.0 million and $ 3.4 million for purchase and sales contracts, respectively. The notional amount of our foreign currency forward and cross currency swap contracts as of May 30, 2021 and May 31, 2020 was $ 111.4 million and $ 107.6 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 30, 2021, 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 $ 2.5 million.
18. PENSION AND POSTRETIREMENT BENEFITS
We have defined benefit retirement plans ("pension 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 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.
During the third quarter of fiscal 2020, we amended a certain hourly pension plan that froze future compensation and service periods. As a result, we remeasured the Company's hourly pension plan liability as of January 31, 2020 and recorded a pension curtailment loss of $ 0.2 million previously within other comprehensive income (loss). In connection with the remeasurement, we updated the effective discount rate assumption for the impacted pension plan from 3.86 % to 2.96 %. The remeasurement increased the underfunded status of the pension plan by $ 4.3 million with a corresponding loss within other comprehensive income (loss).
74
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
During the second quarter of fiscal 2020, the Company provided a voluntary lump-sum settlement offer to certain terminated vested participants in the salaried pension plan in order to reduce a portion of the pension obligation. During the third quarter of fiscal 2020, lump-sum settlement payments totaling $ 154.6 million were distributed from pension plan assets to such participants. As a result of the settlement, we were required to remeasure our pension plan liability. In connection with the remeasurement, we updated the effective discount rate assumption for the impacted pension plan obligation from 3.89 % to 3.37 %, as of December 31, 2019. The settlement and related remeasurement resulted in the recognition of a settlement gain of $ 2.1 million, reflected in pension and postretirement non-service income, as well as a benefit to other comprehensive income (loss) totaling $ 79.8 million in the third quarter of fiscal 2020.
As a result of the anticipated exit of certain facilities, during the first quarter of fiscal 2020, we remeasured the Company's hourly pension plan as of August 25, 2019 and recorded a pension curtailment loss of $ 0.6 million previously within other comprehensive income (loss). In connection with the remeasurement, we updated the effective discount rate assumption for the impacted pension plan obligation from 3.90 % to 3.13 %. The curtailment loss and related remeasurement increased the underfunded status of the pension plan by $ 12.3 million with a corresponding loss within other comprehensive income (loss).
We recognize the funded status of our pension and postretirement plans in the Consolidated Balance Sheets. For our pension plans, we also recognize as a component of accumulated other comprehensive income (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 postretirement plans, 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 and postretirement plan costs, below, as recognized net actuarial loss.
The changes in benefit obligations and plan assets at May 30, 2021 and May 31, 2020 are presented in the following table.
Pension Plans
Postretirement Plans
2021
2020
2021
2020
Change in Benefit Obligation
Benefit obligation at beginning of year
$
3,872.5
$
3,733.2
$
89.8
$
91.2
Service cost
11.6
11.5
0.2
0.1
Interest cost
86.8
118.4
1.5
2.6
Actuarial loss (gain)
( 37.4
)
411.6
( 2.3
)
3.0
Plan settlements
—
( 201.7
)
( 0.3
)
( 0.1
)
Curtailments
—
( 0.8
)
—
—
Benefits paid
( 196.8
)
( 199.3
)
( 8.5
)
( 6.9
)
Currency
2.5
( 0.4
)
1.1
( 0.1
)
Benefit obligation at end of year
$
3,739.2
$
3,872.5
$
81.5
$
89.8
Change in Plan Assets
Fair value of plan assets at beginning of year
$
3,820.4
$
3,601.5
$
3.4
$
3.4
Actual return on plan assets
194.6
557.5
0.2
0.1
Employer contributions
27.6
17.5
8.5
6.9
Plan settlements
—
( 156.3
)
( 0.3
)
( 0.1
)
Benefits paid
( 196.8
)
( 199.3
)
( 8.5
)
( 6.9
)
Currency
3.0
( 0.5
)
—
—
Fair value of plan assets at end of year
$
3,848.8
$
3,820.4
$
3.3
$
3.4
75
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
The funded status and amounts recognized in our Consolidated Balance Sheets at May 30, 2021 and May 31, 2020 were:
Pension Plans
Postretirement Plans
2021
2020
2021
2020
Funded Status
$
109.6
$
( 52.1
)
$
( 78.2
)
$
( 86.4
)
Amounts Recognized in Consolidated Balance Sheets
Other assets
$
245.0
$
202.4
$
3.0
$
2.9
Other accrued liabilities
( 10.3
)
( 8.9
)
( 9.0
)
( 10.0
)
Other noncurrent liabilities
( 125.1
)
( 245.6
)
( 72.2
)
( 79.3
)
Net Amount Recognized
$
109.6
$
( 52.1
)
$
( 78.2
)
$
( 86.4
)
Amounts Recognized in Accumulated Other Comprehensive (Income) Loss (Pre-tax)
Actuarial net loss (gain)
$
( 41.5
)
$
51.2
$
( 12.9
)
$
( 15.0
)
Net prior service cost (benefit)
6.2
8.6
( 38.4
)
( 40.1
)
Total
$
( 35.3
)
$
59.8
$
( 51.3
)
$
( 55.1
)
Weighted-Average Actuarial Assumptions Used to Determine Benefit Obligations at May 30, 2021 and May 31, 2020
Discount rate
3.04
%
2.98
%
2.51
%
2.39
%
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 $ 3.74 billion and $ 3.87 billion at May 30, 2021 and May 31, 2020, 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 30, 2021 and May 31, 2020 were:
2021
2020
Projected benefit obligation
$
135.4
$
1,062.8
Accumulated benefit obligation
135.4
1,062.8
Fair value of plan assets
—
808.2
Components of pension and postretirement plan costs included:
Pension Plans
Postretirement Plans
2021
2020
2019
2021
2020
2019
Service cost
$
11.6
$
11.5
$
10.9
$
0.2
$
0.1
$
0.1
Interest cost
86.8
118.4
132.6
1.5
2.6
3.8
Expected return on plan assets
( 140.0
)
( 170.2
)
( 174.4
)
—
—
—
Amortization of prior service cost (benefit)
2.3
2.7
3.1
( 2.1
)
( 2.1
)
( 2.2
)
Recognized net actuarial loss (gain)
0.8
44.8
5.1
( 3.5
)
( 4.6
)
( 1.4
)
Settlement gain
—
( 2.1
)
—
( 0.5
)
( 0.2
)
( 1.0
)
Curtailment loss (gain)
0.2
0.8
—
—
—
( 0.6
)
Pension and postretirement cost (benefit) — Company plans
( 38.3
)
5.9
( 22.7
)
( 4.4
)
( 4.2
)
( 1.3
)
Pension cost (benefit) — multi-employer plans
7.4
6.5
6.3
—
—
—
Total pension and postretirement cost (benefit)
$
( 30.9
)
$
12.4
$
( 16.4
)
$
( 4.4
)
$
( 4.2
)
$
( 1.3
)
76
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
In fiscal 2021, 2020, and 2019, the Company recorded charges of $ 0.8 million, $ 44.8 million, and $ 5.1 million, respectively, reflecting the year-end write-off of actuarial losses in excess of 10 % of our pension liability. In fiscal 2020, the higher actuarial losses outside of the 10% corridor were principally related to a reduction in the discount rate used to recognize at present value our pension obligations and a decline in market value of certain plan assets associated with our non-qualified and hourly plans.
Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss) were:
Pension Plans
Postretirement Plans
2021
2020
2021
2020
Net actuarial gain (loss)
$
92.0
$
21.9
$
2.5
$
( 2.9
)
Amortization of prior service cost (benefit)
2.3
2.7
( 2.1
)
( 2.1
)
Settlement and curtailment loss (gain)
0.2
( 1.3
)
( 0.5
)
( 0.2
)
Recognized net actuarial loss (gain)
0.8
44.8
( 3.5
)
( 4.6
)
Currency
( 0.2
)
—
( 0.2
)
—
Net amount recognized
$
95.1
$
68.1
$
( 3.8
)
$
( 9.8
)
Weighted-Average Actuarial Assumptions Used to Determine Net Expense
Pension Plans
Postretirement Plans
2021
2020
2019
2021
2020
2019
Discount rate
2.98
%
3.88
%
4.15
%
2.39
%
3.48
%
3.81
%
Long-term rate of return on plan assets
3.74
%
4.77
%
5.17
%
N/A
N/A
N/A
Long-term rate of compensation increase
N/A
N/A
3.63
%
N/A
N/A
N/A
The Company uses a split discount rate (spot-rate approach) for the U.S. plans and certain foreign plans. The spot-rate approach applies separate discount rates for each projected benefit payment in the calculation of pension service and interest cost.
We amortize prior service cost for our pension 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.
Plan Assets
The fair value of plan assets, summarized by level within the fair value hierarchy described in Note 19, as of May 30, 2021, was as follows:
Level 1
Level 2
Level 3
Total
Cash and cash equivalents
$
7.5
$
85.0
$
—
$
92.5
Equity securities:
U.S. equity securities
78.0
94.6
—
172.6
International equity securities
121.9
0.5
—
122.4
Fixed income securities:
Government bonds
—
772.6
—
772.6
Corporate bonds
—
2,407.2
—
2,407.2
Mortgage-backed bonds
—
12.4
—
12.4
Real estate funds
—
—
—
—
Net receivables for unsettled transactions
5.7
—
—
5.7
Fair value measurement of pension plan assets in the
fair value hierarchy
$
213.1
$
3,372.3
$
—
$
3,585.4
Investments measured at net asset value
263.4
Total pension plan assets
$
3,848.8
77
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
The fair value of plan assets, summarized by level within the fair value hierarchy described in Note 19, as of May 31, 2020, was as follows:
Level 1
Level 2
Level 3
Total
Cash and cash equivalents
$
10.1
$
71.9
$
—
$
82.0
Equity securities:
U.S. equity securities
63.9
82.2
—
146.1
International equity securities
92.4
0.7
—
93.1
Fixed income securities:
Government bonds
—
743.9
—
743.9
Corporate bonds
—
2,461.7
—
2,461.7
Mortgage-backed bonds
—
22.4
—
22.4
Real estate funds
—
—
—
—
Net receivables for unsettled transactions
30.2
—
—
30.2
Fair value measurement of pension plan assets in the
fair value hierarchy
$
196.6
$
3,382.8
$
—
$
3,579.4
Investments measured at net asset value
241.0
Total pension plan assets
$
3,820.4
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.
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 $ 52.2 million as of May 30, 2021, 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 30, 2021, no such gates were imposed.
As of May 30, 2021, we have unfunded commitments for additional investments of $ 32.6 million in private equity funds and $ 10.9 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.
78
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
Our pension plan weighted-average asset allocations by asset category were as follows:
May 30, 2021
May 31, 2020
Equity securities
8
%
6
%
Debt securities
83
%
85
%
Real estate funds
1
%
1
%
Private equity
3
%
3
%
Other
5
%
5
%
Total
100
%
100
%
Due to the salaried pension plan freeze that occurred in fiscal 2018, 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.
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 30, 2021
May 31, 2020
Initial health care cost trend rate
6.53
%
6.22
%
Ultimate health care cost trend rate
4.44
%
4.43
%
Year that the rate reaches the ultimate trend rate
2029
2024
We currently anticipate making contributions of approximately $ 12.3 million to our pension plans in fiscal 2022. We anticipate making contributions of $ 9.0 million to our other postretirement plans in fiscal 2022. These estimates are based on ERISA guidelines, current tax laws, plan asset performance, and liability assumptions, which are subject to change.
The following table presents estimated future gross benefit payments for our plans:
Pension
Plans
Postretirement
Plans
2022
$
201.6
$
9.1
2023
203.0
8.4
2024
204.7
7.7
2025
206.1
7.1
2026
207.3
6.5
Succeeding 5 years
1,031.1
25.2
79
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
Multiemployer Pension Plans
The Company contributes to several multiemployer defined benefit pension plans under collective bargaining agreements that cover certain units 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 30, 2021 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 2020 and 2019 is for plan years that ended in calendar years 2020 and 2019, 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 2020.
•
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 30, 2021 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.
•
The last column lists the expiration dates of the collective bargaining agreements pursuant to which the Company contributes to the plans.
80
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
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
Contributions by the
Company (millions)
Expiration
Dates of
Collective
Pension Fund
EIN / PN
2020
2019
Pending /
Implemented
FY21
FY20
FY19
Surcharge
Imposed
Bargaining
Agreements
Bakery and Confectionary
Union and Industry
International
Pension Plan
52-6118572
/ 001
Red,
Critical and
Declining
Red,
Critical and
Declining
RP
Implemented
$
0.0
$
0.0
$
0.1
No
N/A
Central States,
Southeast and
Southwest Areas
Pension Fund
36-6044243
/ 001
Red,
Critical and
Declining
Red,
Critical and
Declining
RP
Implemented
2.2
2.0
1.8
No
5/31/2021
Western Conference of
Teamsters Pension Plan
91-6145047
/ 001
Green
Green
N/A
3.8
3.2
3.2
No
6/30/2022
Other Plans
1.4
1.3
0.9
Total Contributions
$
7.4
$
6.5
$
6.0
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 2020.
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 in fiscal 2019 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 $ 47.6 million, $ 49.9 million, and $ 39.9 million in fiscal 2021, 2020, and 2019, respectively.
19. 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 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.
81
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(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 30, 2021:
Level 1
Level 2
Level 3
Total
Assets:
Derivative assets
$
13.0
$
2.5
$
—
$
15.5
Marketable securities
6.6
—
—
6.6
Deferred compensation assets
8.8
—
—
8.8
Total assets
$
28.4
$
2.5
$
—
$
30.9
Liabilities:
Derivative liabilities
$
—
$
6.9
$
—
$
6.9
Deferred compensation liabilities
81.0
—
—
81.0
Total liabilities
$
81.0
$
6.9
$
—
$
87.9
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 31, 2020:
Level 1
Level 2
Level 3
Total
Assets:
Derivative assets
$
2.8
$
5.2
$
—
$
8.0
Marketable securities
8.1
—
—
8.1
Deferred compensation assets
8.6
—
—
8.6
Total assets
$
19.5
$
5.2
$
—
$
24.7
Liabilities:
Derivative liabilities
$
—
$
0.4
$
—
$
0.4
Deferred compensation liabilities
68.0
—
—
68.0
Total liabilities
$
68.0
$
0.4
$
—
$
68.4
Certain assets and liabilities, including long-lived assets, goodwill, asset retirement obligations, and equity investments are measured at fair value on a nonrecurring basis using Level 3 inputs.
During fiscal 2021, we updated our cost estimates associated with certain asset retirement obligations at several manufacturing facilities largely due to recent experience of physically closing a wastewater lagoon. This change in estimate resulted in a non-cash increase to our long-lived assets in the amount of $ 27.4 million and will result in additional depreciation in future periods generally ranging from 15 - 25 years . The fair value of our asset retirement obligations was measured using cost estimates to settle our future obligations (including an estimate of inflation) and discounted to present value using a credit-adjusted risk-free rate.
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 8). Impairments in our Grocery & Snacks segment totaled $ 13.0 million, $ 46.4 million, and $ 76.5 million for fiscal 2021, 2020, and 2019, respectively. Impairments in our Refrigerated & Frozen segment totaled $ 76.9 million and $ 110.8 million for fiscal 2021 and 2020, respectively. Impairments in our International segment totaled $ 1.0 million, $ 8.3 million, and $ 13.1 million for fiscal 2021, 2020, and 2019, respectively.
During fiscal 2020, we recognized impairment charges totaling $ 54.4 million in our Grocery & Snacks segment and $ 27.6 million in our Refrigerated & Frozen segment. The impairments were measured based upon the estimated sales price of the disposal group (see Note 6).
We recognized charges for the impairment of certain long-lived assets measured based upon the estimated sales price of the assets. Impairments totaled $ 3.0 million in our Grocery & Snacks segment in fiscal 2021, $ 3.8 million in our Refrigerated & Frozen segment in fiscal 2020, and $ 2.7 million within general corporate expenses in fiscal 2019.
82
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
During fiscal 2020, we recognized charges of $ 2.9 million in general corporate expenses related to the impairments of ROU assets. The impairments were measured based upon a discounted cash flow approach.
The carrying amount of long-term debt (including current installments) was $ 8.30 billion as of May 30, 2021 and $ 9.75 billion as of May 31, 2020. Based on current market rates, the fair value of this debt (level 2 liabilities) at May 30, 2021 and May 31, 2020 was estimated at $ 9.76 billion and $ 11.35 billion, respectively.
20. BUSINESS SEGMENTS AND RELATED INFORMATION
We reflect our results of operations in four reporting segments: Grocery & Snacks, Refrigerated & Frozen, International, and Foodservice.
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.
We do not aggregate operating segments when determining our reporting segments.
Operating profit for each of the segments is based on net sales less all identifiable operating expenses. General corporate expense, pension and postretirement non-service income, interest expense, net, income taxes, and equity method investment earnings have been excluded from segment operations.
2021
2020
2019
Net sales
Grocery & Snacks
$
4,637.5
$
4,617.1
$
3,923.6
Refrigerated & Frozen
4,774.6
4,559.6
3,735.4
International
938.6
925.3
864.4
Foodservice
834.0
952.4
1,015.0
Total net sales
$
11,184.7
$
11,054.4
$
9,538.4
Operating profit
Grocery & Snacks
$
1,093.8
$
915.2
$
762.6
Refrigerated & Frozen
836.5
702.2
645.1
International
131.8
100.6
99.8
Foodservice
78.9
97.6
134.3
Total operating profit
$
2,141.0
$
1,815.6
$
1,641.8
Equity method investment earnings
84.4
73.2
75.8
General corporate expenses
364.8
368.5
462.2
Pension and postretirement non-service income
54.5
9.9
35.1
Interest expense, net
420.4
487.1
391.4
Income tax expense
193.8
201.3
218.8
Income from continuing operations
$
1,300.9
$
841.8
$
680.3
Less: Net income attributable to noncontrolling interests
2.1
1.7
0.1
Income from continuing operations attributable to Conagra Brands, Inc.
$
1,298.8
$
840.1
$
680.2
83
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
The following table presents further disaggregation of our net sales:
2021
2020
2019
Frozen
$
3,948.0
$
3,735.5
$
2,994.8
Staples
Other shelf-stable
2,838.0
2,902.8
2,426.7
Refrigerated
826.6
824.1
740.6
Snacks
1,799.5
1,714.3
1,496.9
International
938.6
925.3
864.4
Foodservice
834.0
952.4
1,015.0
Total net sales
$
11,184.7
$
11,054.4
$
9,538.4
To be consistent with how we present certain disaggregated net sales information to investors, we have categorized certain net sales of our segments as "Staples", which includes all of our U.S. domestic retail refrigerated products and other shelf-stable grocery products. Management continues to regularly review financial results and make decisions about allocating resources based upon the four reporting segments outlined above.
Presentation of Derivative Gains (Losses) from 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:
2021
2020
2019
Net derivative gains (losses) incurred
$
9.5
$
( 12.9
)
$
( 3.6
)
Less: Net derivative losses allocated to reporting segments
( 6.1
)
( 7.4
)
( 1.8
)
Net derivative gains (losses) recognized in general corporate expenses
$
15.6
$
( 5.5
)
$
( 1.8
)
Net derivative losses allocated to Grocery & Snacks
$
( 2.3
)
$
( 4.7
)
$
( 2.5
)
Net derivative losses allocated to Refrigerated & Frozen
( 1.7
)
( 2.5
)
( 1.5
)
Net derivative gains (losses) allocated to International
( 1.7
)
0.1
2.8
Net derivative losses allocated to Foodservice
( 0.4
)
( 0.3
)
( 0.6
)
Net derivative losses included in segment operating profit
$
( 6.1
)
$
( 7.4
)
$
( 1.8
)
As of May 30, 2021, 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 $ 11.5 million. This amount reflected net gains of $ 13.5 million incurred during the fiscal year ended May 30, 2021, as well as net losses of $ 2.0 million incurred prior to fiscal 2021. Based on our forecasts of the timing of recognition of the underlying hedged items, we expect to reclassify to segment operating results net gains of $ 11.2 million in fiscal 2022 and $ 0.3 million in fiscal 2023 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,
84
Notes to Consolidated Financial Statements – (Continued)
Fiscal Years Ended May 30, 2021, May 31, 2020, and May 26, 2019
(columnar dollars in millions except per share amounts)
it is impracticable to allocate those assets to the reporting segments, as well as disclose total assets by segment. Total depreciation expense for fiscal 2021 , 2020 , and 2019 was $ 328.0 million, $ 329.1 million, and $ 283.9 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 2021, 2020, and 2019. Foreign net sales, including sales by domestic segments to customers located outside of the United States, were approximately $ 960.5 million, $ 946.8 million, and $ 919.5 million in fiscal 2021, 2020, and 2019, 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 26 % of consolidated net sales for each of fiscal 2021 and 2020 and 24 % of consolidated net sales for fiscal 2019, significantly impacting the Grocery & Snacks and Refrigerated & Frozen segments.
Walmart, Inc. and its affiliates accounted for approximately 31 % and 30 % of consolidated net receivables as of May 30, 2021 and May 31, 2020, respectively. The Kroger Co. and its affiliates accounted for approximately 11 % and 10 % of consolidated net receivables as of May 30, 2021 and May 31, 2020, respectively.
85
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Conagra Brands, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Conagra Brands, Inc. and subsidiaries (the Company) as of May 30, 2021 and May 31, 2020, the related consolidated statements of earnings, comprehensive income, stockholders’ equity, and cash flows for each of the fiscal years in the three-year period ended May 30, 2021, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of May 30, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of May 30, 2021 and May 31, 2020, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended May 30, 2021, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 30, 2021 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
86
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of the recoverability of the carrying value of goodwill
As described in Notes 1 and 8 to the consolidated financial statements, the Company’s goodwill was $11.37 billion as of May 30, 2021. Annually, or whenever events or changes in circumstances indicate potential asset impairment has occurred, the Company evaluates the recoverability of the carrying value of goodwill. The Company performed a quantitative impairment test of goodwill for its Sides, Components & Enhancers reporting unit in its first fiscal quarter of 2021, as a result of a reporting unit change.
We identified the evaluation of the recoverability of the carrying value of the Sides, Components & Enhancers reporting unit goodwill subsequent to the reporting unit change as a critical audit matter. Subjective and challenging auditor judgment was required to evaluate certain assumptions used to determine the fair value of the reporting unit in the Company’s first fiscal quarter quantitative impairment test. These assumptions included forecasted revenue growth rates including the terminal growth rates, margin growth rates used in determining the forecasted cash flows, and selection of the discount rate.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s evaluation of the assumptions used to determine the fair value of the reporting unit. We evaluated the Company’s ability to forecast cash flows by comparing historical forecasts to actual results and forecasted cash flows with the Company’s most recent plans. We also considered current industry, macroeconomic and market conditions, and the Company’s historical results in evaluating the assumptions described above. We involved our valuation professionals with specialized skills and knowledge who assisted in:
•
evaluating the terminal growth rates by comparing them with publicly available market data;
•
evaluating the discount rate used by the Company by comparing the Company’s inputs to the discount rate to publicly available data for comparable entities and assessing the resulting discount rate; and
•
testing the estimate of the fair value of the reporting unit using the Company’s cash flow assumptions and discount rate and comparing the results to the Company’s fair value estimate.
Evaluation of the recoverability of the carrying value of certain indefinite-lived intangible assets
As described in Notes 1 and 8 to the consolidated financial statements, the Company’s indefinite-lived intangible assets (consisting primarily of brand names and trademarks) were $4.16 billion as of May 30, 2021. For the fiscal year ended May 30, 2021, the Company recorded impairment charges totaling $90.9 million on indefinite-lived intangible assets. In assessing indefinite-lived intangible assets for impairment, the Company performs either a qualitative or quantitative assessment at least annually or whenever circumstances indicate a potential impairment exists. When a quantitative assessment is performed, the Company estimates the fair value of the intangibles by utilizing a discounted cash flow model that incorporates an estimated royalty rate that would be charged to a third party for the use of the brand. Impairment charges are recorded for any intangibles with carrying values in excess of the estimated fair values.
We identified the evaluation of the recoverability of the carrying value of certain indefinite-lived intangible assets for which a quantitative impairment assessment is performed as a critical audit matter. Subjective and challenging auditor judgment was required to evaluate certain assumptions used in determining the fair value of these assets. These assumptions included the forecasted revenue growth rates including the terminal growth rates and forecasted margins, royalty rates, and discount rates.
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The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the quantitative impairment assessments, including controls over the development of the assumptions described above. To assess the Company’s ability to forecast, we compared historical forecasts to actual results. We evaluated the forecasted revenue growth rates including terminal growth rates and forecasted margins used to support the royalty rates by considering current and past performance of the brand names, as well as external market and industry outlook data. We also involved valuation professionals with specialized skills and knowledge, who assisted for certain brand names intangibles in:
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evaluating the terminal growth rates by comparing them to publicly available market data;
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evaluating the royalty rates by determining that the selected royalty rates are supported by the associated brand name’s margin;
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evaluating the discount rates used by the Company by comparing the Company’s inputs to the discount rates to publicly available data for comparable entities and assessing the resulting discount rate; and
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testing the estimated brand names fair values using the Company’s assumptions and comparing the results to the Company’s fair value estimate.
/s/ KPMG LLP
We have served as the Company’s auditor since 2005.
Omaha, Nebraska
July 23, 2021
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.