Item 1. Financial Statements
ITEM 1. FINANCIAL STATEMENTS
Conagra Brands, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions except per share amounts)
(unaudited)
Thirteen weeks ended
August 29,
2021
August 30,
2020
Net sales
$
2,653.3
$
2,678.9
Costs and expenses:
Cost of goods sold
1,979.9
1,868.7
Selling, general and administrative expenses
310.1
300.3
Pension and postretirement non-service income
( 16.1
)
( 13.8
)
Interest expense, net
94.2
113.7
Income before income taxes and equity method investment earnings
285.2
410.0
Income tax expense
69.7
86.7
Equity method investment earnings
20.2
6.5
Net income
$
235.7
$
329.8
Less: Net income attributable to noncontrolling interests
0.3
0.8
Net income attributable to Conagra Brands, Inc.
$
235.4
$
329.0
Earnings per share — basic
Net income attributable to Conagra Brands, Inc. common stockholders
$
0.49
$
0.67
Earnings per share — diluted
Net income attributable to Conagra Brands, Inc. common stockholders
$
0.49
$
0.67
See Notes to the Condensed Consolidated Financial Statements.
1
Conagra Brands, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(in millions)
(unaudited)
Thirteen weeks ended
August 29, 2021
August 30, 2020
Pre-Tax
Amount
Tax
(Expense)
Benefit
After-
Tax
Amount
Pre-Tax
Amount
Tax
(Expense)
Benefit
After-
Tax
Amount
Net income
$
305.4
$
( 69.7
)
$
235.7
$
416.5
$
( 86.7
)
$
329.8
Other comprehensive income:
Derivative adjustments:
Unrealized derivative adjustments
( 2.5
)
0.6
( 1.9
)
( 0.6
)
0.1
( 0.5
)
Reclassification for derivative adjustments included in net income
( 0.3
)
0.1
( 0.2
)
( 0.9
)
0.2
( 0.7
)
Unrealized currency translation gains (losses)
( 15.7
)
—
( 15.7
)
18.0
( 0.5
)
17.5
Pension and post-employment benefit obligations:
Unrealized pension and post-employment benefit obligations
2.1
( 0.2
)
1.9
0.4
( 0.1
)
0.3
Reclassification for pension and post-employment benefit obligations included in net income
( 0.8
)
0.2
( 0.6
)
( 0.8
)
0.2
( 0.6
)
Comprehensive income
288.2
( 69.0
)
219.2
432.6
( 86.8
)
345.8
Comprehensive income (loss) attributable to noncontrolling interests
( 0.9
)
( 0.1
)
( 1.0
)
3.3
( 0.3
)
3.0
Comprehensive income attributable to Conagra Brands, Inc.
$
289.1
$
( 68.9
)
$
220.2
$
429.3
$
( 86.5
)
$
342.8
See Notes to the Condensed Consolidated Financial Statements.
2
Conagra Brands, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions except share data)
(unaudited)
August 29,
2021
May 30,
2021
ASSETS
Current assets
Cash and cash equivalents
$
67.0
$
79.2
Receivables, less allowance for doubtful accounts of $ 3.2
834.4
793.9
Inventories
1,954.6
1,734.0
Prepaid expenses and other current assets
116.2
95.0
Total current assets
2,972.2
2,702.1
Property, plant and equipment
5,707.9
5,624.7
Less accumulated depreciation
( 3,061.7
)
( 3,016.2
)
Property, plant and equipment, net
2,646.2
2,608.5
Goodwill
11,369.2
11,373.5
Brands, trademarks and other intangibles, net
4,140.7
4,157.6
Other assets
1,407.0
1,349.3
Noncurrent assets held for sale
4.6
4.6
$
22,539.9
$
22,195.6
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable
$
458.6
$
707.4
Current installments of long-term debt
21.9
23.1
Accounts payable
1,674.4
1,655.9
Accrued payroll
105.6
175.2
Other accrued liabilities
829.8
744.6
Total current liabilities
3,090.3
3,306.2
Senior long-term debt, excluding current installments
8,779.6
8,275.2
Other noncurrent liabilities
2,034.1
1,982.8
Total liabilities
13,904.0
13,564.2
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
2,305.0
2,342.1
Retained earnings
6,348.3
6,262.6
Accumulated other comprehensive income (loss)
( 9.4
)
5.8
Less treasury stock, at cost, 104,529,448 and 103,934,839 common shares
( 3,008.1
)
( 2,979.9
)
Total Conagra Brands, Inc. common stockholders' equity
8,557.0
8,551.8
Noncontrolling interests
78.9
79.6
Total stockholders' equity
8,635.9
8,631.4
$
22,539.9
$
22,195.6
See Notes to the Condensed Consolidated Financial Statements.
3
Conagra Brands, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions)
(unaudited)
Thirteen weeks ended
August 29,
2021
August 30,
2020
Cash flows from operating activities:
Net income
$
235.7
$
329.8
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization
96.5
95.2
Asset impairment charges
0.7
3.4
Equity method investment earnings less than (in excess of) distributions
( 7.4
)
4.0
Stock-settled share-based payments expense
2.6
16.5
Contributions to pension plans
( 2.9
)
( 5.9
)
Pension benefit
( 12.4
)
( 9.6
)
Other items
1.4
24.3
Change in operating assets and liabilities excluding effects of business acquisitions and dispositions:
Receivables
( 40.5
)
52.4
Inventories
( 220.7
)
( 202.8
)
Deferred income taxes and income taxes payable, net
57.6
15.6
Prepaid expenses and other current assets
( 19.8
)
( 16.7
)
Accounts payable
64.8
20.8
Accrued payroll
( 69.5
)
( 79.1
)
Other accrued liabilities
53.7
36.6
Net cash flows from operating activities
139.8
284.5
Cash flows from investing activities:
Additions to property, plant and equipment
( 154.9
)
( 145.5
)
Sale of property, plant and equipment
1.9
0.6
Purchase of marketable securities
( 1.9
)
( 1.5
)
Sale of marketable securities
—
3.4
Other items
—
0.1
Net cash flows from investing activities
( 154.9
)
( 142.9
)
Cash flows from financing activities:
Issuances of commercial paper, maturities greater than 90 days
249.8
—
Net repayments of other short-term borrowings
( 498.6
)
( 0.5
)
Issuance of long-term debt
499.1
—
Repayment of long-term debt
( 23.7
)
( 133.4
)
Debt issuance costs
( 1.9
)
—
Repurchase of Conagra Brands, Inc. common shares
( 50.0
)
—
Payment of intangible asset financing arrangement
( 12.6
)
( 12.9
)
Cash dividends paid
( 132.1
)
( 103.5
)
Exercise of stock options and issuance of other stock awards, including tax withholdings
( 17.6
)
( 9.3
)
Other items
( 6.9
)
—
Net cash flows from financing activities
5.5
( 259.6
)
Effect of exchange rate changes on cash and cash equivalents and restricted cash
( 2.6
)
2.9
Net change in cash and cash equivalents and restricted cash
( 12.2
)
( 115.1
)
Cash and cash equivalents and restricted cash at beginning of period
80.2
554.3
Cash and cash equivalents and restricted cash at end of period
$
68.0
$
439.2
See Notes to the Condensed Consolidated Financial Statements.
4
Conagra Brands, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(columnar dollars in millions except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial information reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of the results of operations, financial position, and cash flows for the periods presented. The adjustments are of a normal recurring nature, except as otherwise noted. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes included in the Conagra Brands, Inc. (the "Company", "Conagra Brands", "we", "us", or "our") Annual Report on Form 10-K for the fiscal year ended May 30, 2021.
The results of operations for any quarter or a partial fiscal year period are not necessarily indicative of the results to be expected for other periods or the full fiscal year.
Basis of Consolidation — The Condensed Consolidated Financial Statements include the accounts of Conagra Brands and all majority-owned subsidiaries. All significant intercompany investments, accounts, and transactions have been eliminated.
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 consideration payable to our customers, including applicable discounts, returns, allowances, trade promotion, consumer coupon redemption, unsaleable product, and other costs. Amounts billed and due from our customers are classified as receivables and require payment on a short-term basis and, therefore, we do not have any significant financing components.
We recognize revenue when (or as) performance obligations are satisfied by transferring control of the goods to customers. Control is transferred upon delivery of the goods to the customer. Shipping and/or handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs. We assess the goods and services promised in our customers' purchase orders and identify a performance obligation for each promise to transfer a good or service (or bundle of goods or services) that is distinct.
We offer various forms of trade promotions and the methodologies for determining these provisions are dependent on local customer pricing and promotional practices, which range from contractually fixed percentage price reductions to provisions based on actual occurrence or performance. Our promotional activities are conducted either through the retail trade or directly with consumers and include activities such as in-store displays and events, feature price discounts, consumer coupons, and loyalty programs. The costs of these activities are recognized at the time the related revenue is recorded, which normally precedes the actual cash expenditure. The recognition of these costs therefore requires management judgment regarding the volume of promotional offers that will be redeemed by either the retail trade or consumer. These estimates are made using various techniques including historical data on performance of similar promotional programs. Differences between estimated expense and actual redemptions are recognized as a change in management estimate in a subsequent period.
Comprehensive Income — Comprehensive income includes net income, currency translation adjustments, certain derivative-related activity, 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:
August 29,
2021
May 30,
2021
Currency translation losses, net of reclassification adjustments
$
( 91.5
)
$
( 77.1
)
Derivative adjustments, net of reclassification adjustments
22.2
24.3
Pension and postretirement benefit obligations, net of reclassification adjustments
59.9
58.6
Accumulated other comprehensive income (loss)
$
( 9.4
)
$
5.8
5
The following table summarizes the reclassifications from accumulated other comprehensive income (loss) into income:
Thirteen weeks ended
Affected Line Item in the Condensed Consolidated
Statement of Earnings 1
August 29, 2021
August 30, 2020
Net derivative adjustments:
Cash flow hedges
$
( 0.8
)
$
( 0.9
)
Interest expense, net
Cash flow hedges
0.5
—
Equity method investment earnings
( 0.3
)
( 0.9
)
Total before tax
0.1
0.2
Income tax expense
$
( 0.2
)
$
( 0.7
)
Net of tax
Pension and postretirement liabilities:
Net prior service cost
$
—
$
0.1
Pension and postretirement non-service income
Net actuarial gain
( 0.8
)
( 0.9
)
Pension and postretirement non-service income
( 0.8
)
( 0.8
)
Total before tax
0.2
0.2
Income tax expense
$
( 0.6
)
$
( 0.6
)
Net of tax
1 Amounts in parentheses indicate income recognized in the Condensed Consolidated Statements of Earnings.
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.
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. generally accepted accounting principles ("U.S. GAAP") requires management to make estimates and assumptions. These estimates and assumptions affect reported amounts of assets, liabilities, revenues, and expenses as reflected in the Condensed Consolidated Financial Statements. Actual results could differ from these estimates.
2. 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 .
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 .
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 primarily within our Grocery & Snacks segment, and to a lesser extent within our Foodservice segment .
Other Assets Held for Sale
From time to time, we actively market certain other assets. Balances totaling $ 4.6 million at both August 29, 2021 and May 30, 2021 have been reclassified as noncurrent assets held for sale within our Condensed Consolidated Balance Sheets.
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 Foods, Inc. ("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
6
incur material charges for exit and disposal activities under U.S. GAAP. We expect to incur approximately $ 357.0 million of charges ($ 283.2 million of cash charges and $ 73.8 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. In the first quarter of fiscal 2022 and 2021 , we recognized charges of $ 7.3 million and $ 8.6 million, respectively, in connection with the Pinnacle Integration Restructuring Plan. 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 first quarter of fiscal 2022):
Grocery & Snacks
Refrigerated & Frozen
International
Corporate
Total
Accelerated depreciation
$
7.6
$
4.6
$
—
$
—
$
12.2
Other cost of goods sold
3.8
7.1
0.7
—
11.6
Total cost of goods sold
11.4
11.7
0.7
—
23.8
Severance and related costs
—
3.5
1.5
112.2
117.2
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
16.1
32.8
Consulting/professional fees
1.0
—
0.8
105.7
107.5
Other selling, general and administrative expenses
5.9
4.5
0.3
20.7
31.4
Total selling, general and administrative expenses
44.9
20.2
3.4
264.7
333.2
Consolidated total
$
56.3
$
31.9
$
4.1
$
264.7
$
357.0
During the first quarter of fiscal 2022, we recognized the following pre-tax expenses for the Pinnacle Integration Restructuring Plan:
Grocery & Snacks
Refrigerated & Frozen
Corporate
Total
Other cost of goods sold
$
—
$
0.1
$
—
$
0.1
Total cost of goods sold
—
0.1
—
0.1
Severance and related costs
—
—
( 0.2
)
( 0.2
)
Contract/lease termination
—
—
0.2
0.2
Consulting/professional fees
0.1
—
5.7
5.8
Other selling, general and administrative expenses
0.1
0.8
0.5
1.4
Total selling, general and administrative expenses
0.2
0.8
6.2
7.2
Consolidated total
$
0.2
$
0.9
$
6.2
$
7.3
All of these charges have resulted or will result in cash outflows.
We recognized the following cumulative (plan inception to August 29, 2021) pre-tax expenses for the Pinnacle Integration Restructuring Plan in our Condensed Consolidated Statement of Earnings:
Grocery & Snacks
Refrigerated & Frozen
International
Corporate
Total
Accelerated depreciation
$
0.6
$
4.6
$
—
$
—
$
5.2
Other cost of goods sold
2.3
3.0
0.7
—
6.0
Total cost of goods sold
2.9
7.6
0.7
—
11.2
Severance and related costs
—
3.4
1.5
112.2
117.1
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
16.1
18.7
Consulting/professional fees
0.8
—
0.8
95.2
96.8
Other selling, general and administrative expenses
2.9
1.9
0.3
17.8
22.9
Total selling, general and administrative expenses
5.8
9.3
3.4
251.3
269.8
Consolidated total
$
8.7
$
16.9
$
4.1
$
251.3
$
281.0
7
Included in the above results are $ 248.2 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 the first quarter of fiscal 2022 were as follows:
Balance at
May 30,
2021
Costs Incurred
and Charged
to Expense
Costs Paid
or Otherwise
Settled
Changes in
Estimates
Balance at
August 29,
2021
Severance and related costs
$
5.1
$
—
$
( 0.9
)
$
( 0.2
)
$
4.0
Contract/lease termination
—
0.2
( 0.2
)
—
—
Consulting/professional fees
3.9
5.8
( 5.3
)
—
4.4
Other costs
—
1.5
( 1.5
)
—
—
Total
$
9.0
$
7.5
$
( 7.9
)
$
( 0.2
)
$
8.4
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 selling, general and administrative ("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 the first quarter of fiscal 2022, 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 August 29, 2021, we have approved the incurrence of $ 172.6 million ($ 45.8 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 $ 144.7 million of charges ($ 36.0 million of cash charges and $ 108.7 million of non-cash charges) for actions identified to date under the Conagra Restructuring Plan. In the first quarter of fiscal 2022 and 2021, we recognized charges of $ 8.5 million and $ 17.3 million, respectively, in connection with the Conagra Restructuring Plan. We expect to incur costs related to the Conagra Restructuring Plan over a multi-year period.
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 first quarter of fiscal 2022):
Grocery & Snacks
Refrigerated & Frozen
International
Foodservice
Corporate
Total
Accelerated depreciation
$
34.7
$
39.1
$
—
$
—
$
—
$
73.8
Other cost of goods sold
8.9
1.3
—
—
—
10.2
Total cost of goods sold
43.6
40.4
—
—
—
84.0
Severance and related costs
12.6
1.1
1.1
0.3
2.6
17.7
Asset impairment (net of gains on disposal)
26.9
0.3
0.1
—
—
27.3
Contract/lease termination
0.1
—
—
—
0.2
0.3
Consulting/professional fees
—
—
—
—
0.9
0.9
Other selling, general and administrative expenses
11.1
2.6
—
—
0.2
13.9
Total selling, general and administrative expenses
50.7
4.0
1.2
0.3
3.9
60.1
Total
$
94.3
$
44.4
$
1.2
$
0.3
$
3.9
$
144.1
Pension and postretirement non-service income
0.6
Consolidated total
$
144.7
During the first quarter of fiscal 2022, we recognized the following pre-tax expenses for the Conagra Restructuring Plan:
Grocery & Snacks
Refrigerated & Frozen
Foodservice
Corporate
Total
Accelerated depreciation
$
1.0
$
5.3
$
—
$
—
$
6.3
Total cost of goods sold
1.0
5.3
—
—
6.3
Severance and related costs
1.7
( 1.2
)
0.3
0.2
1.0
Asset impairment (net of gains on disposal)
( 0.2
)
—
—
—
( 0.2
)
Other selling, general and administrative expenses
1.4
—
—
—
1.4
Total selling, general and administrative expenses
2.9
( 1.2
)
0.3
0.2
2.2
Total
$
3.9
$
4.1
$
0.3
$
0.2
$
8.5
8
Included in the above results are $ 2.4 million in charges that have resulted or will result in cash outflows and $ 6.1 million in non-cash charges.
We recognized the following cumulative (plan inception to August 29, 2021) pre-tax expenses for the Conagra Restructuring Plan in our Condensed Consolidated Statement of Earnings:
Grocery & Snacks
Refrigerated & Frozen
International
Foodservice
Corporate
Total
Accelerated depreciation
$
33.0
$
32.0
$
—
$
—
$
—
$
65.0
Other cost of goods sold
4.8
0.2
—
—
—
5.0
Total cost of goods sold
37.8
32.2
—
—
—
70.0
Severance and related costs
12.1
0.6
1.1
0.3
2.3
16.4
Asset impairment (net of gains on disposal)
26.9
0.3
0.1
—
—
27.3
Contract/lease termination
—
—
—
—
0.1
0.1
Other selling, general and administrative expenses
6.4
0.3
—
—
0.2
6.9
Total selling, general and administrative expenses
45.4
1.2
1.2
0.3
2.6
50.7
Total
$
83.2
$
33.4
$
1.2
$
0.3
$
2.6
$
120.7
Pension and postretirement non-service income
0.6
Consolidated total
$
121.3
Included in the above results are $ 26.5 million of charges that have resulted or will result in cash outflows and $ 94.8 million in non-cash charges.
Liabilities recorded for the Conagra Restructuring Plan and changes therein for the first quarter of fiscal 2022 were as follows:
Balance at
May 30,
2021
Costs Incurred
and Charged
to Expense
Costs Paid
or Otherwise
Settled
Changes in
Estimates
Balance at
August 29,
2021
Severance and related costs
$
9.7
$
2.3
$
( 0.7
)
$
( 1.3
)
$
10.0
Other costs
—
1.4
( 1.4
)
—
—
Total
$
9.7
$
3.7
$
( 2.1
)
$
( 1.3
)
$
10.0
4. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
During the first quarter of fiscal 2022, we issued $ 500.0 million aggregate principal amount of 0.500 % senior notes due August 11, 2023.
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 their 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 prior to their maturity date of January 25, 2023.
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. This redemption was primarily funded using the net proceeds from the issuance of the 2027 Senior Notes.
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 their 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.
At August 29, 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
9
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 August 29, 2021 , there were no outstanding borrowings under the Revolving Credit Facility.
In the first quarter of fiscal 2022, we entered into an amendment to the Revolving Credit Facility (the "Amended Revolving Credit Facility"). The Amended Revolving Credit Facility generally requires our ratio of earnings before interest, taxes, depreciation and amortization ("EBITDA") to interest expense not to be less than 3.0 to 1.0 and our ratio of funded debt to EBITDA not to exceed 4.5 to 1.0, with each ratio to be calculated on a rolling four-quarter basis. As of August 29, 2021, we were in compliance with all financial covenants under the Amended Revolving Credit Facility.
Net interest expense consists of:
Thirteen weeks ended
August 29,
2021
August 30,
2020
Long-term debt
$
96.9
$
117.0
Short-term debt
0.6
—
Interest income
( 0.3
)
( 0.8
)
Interest capitalized
( 3.0
)
( 2.5
)
$
94.2
$
113.7
5. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
The change in the carrying amount of goodwill for the first quarter of fiscal 2022 was as follows:
Grocery &
Snacks
Refrigerated
& Frozen
International
Foodservice
Total
Balance as of May 30, 2021
$
4,698.2
$
5,625.1
$
302.5
$
747.7
$
11,373.5
Currency translation
—
—
( 4.3
)
—
( 4.3
)
Balance as of August 29, 2021
$
4,698.2
$
5,625.1
$
298.2
$
747.7
$
11,369.2
Other identifiable intangible assets were as follows:
August 29, 2021
May 30, 2021
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
Non-amortizing intangible assets
$
3,300.0
$
—
$
3,301.2
$
—
Amortizing intangible assets
1,234.1
393.4
1,235.3
378.9
$
4,534.1
$
393.4
$
4,536.5
$
378.9
Non-amortizing intangible assets are composed of brands and trademarks.
Amortizing intangible assets, carrying a remaining weighted average life of approximately 19 years, are principally composed of customer relationships and acquired intellectual property. Amortization expense was $ 14.9 million for the first quarter of both fiscal 2022 and 2021. Based on amortizing assets recognized in our Condensed Consolidated Balance Sheet as of August 29, 2021, amortization expense is estimated to average $ 52.8 million for each of the next five years.
6. DERIVATIVE FINANCIAL INSTRUMENTS
Our operations are exposed to market risks from adverse changes in commodity prices affecting the cost of raw materials and energy, foreign currency exchange rates, and interest rates. In the normal course of business, these risks are managed through a variety of strategies, including the use of derivatives.
Commodity and commodity index futures and option contracts are used from time to time to economically hedge commodity input prices on items such as natural gas, vegetable oils, proteins, packaging materials, dairy, grains, and electricity. Generally, we economically hedge a portion of our anticipated consumption of commodity inputs for periods of up to 36 months. We may enter into longer-term economic hedges on particular commodities, if deemed appropriate. As of August 29, 2021, we had economically hedged certain portions of our anticipated consumption of commodity inputs using derivative instruments with expiration dates through October 2022.
10
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 August 29, 2021, we had economically hedged certain portions of our foreign currency risk in anticipated transactions using derivative instruments with expiration dates through May 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 that is being amortized as a reduction of interest expense over the lives of the related debt instruments. The unamortized amount at August 29, 2021, was $ 37.4 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 our balance sheets at fair value (refer to Note 14 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 August 29, 2021 and May 30, 2021, amounts representing an obligation to return cash collateral of $ 1.6 million and $ 2.0 million, respectively, were included in prepaid expenses and other current assets in our Condensed Consolidated Balance Sheets.
Derivative assets and liabilities and amounts representing a right to reclaim cash collateral or an obligation to return cash collateral were reflected in our Condensed Consolidated Balance Sheets as follows:
August 29,
2021
May 30,
2021
Prepaid expenses and other current assets
$
12.3
$
15.5
Other accrued liabilities
0.7
6.9
11
The following table presents our derivative assets and liabilities, at August 29, 2021, on a gross basis, prior to the setoff of $ 4.0 million to total derivative assets and $ 2.4 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
$
14.9
Other accrued liabilities
$
2.4
Foreign exchange contracts
Prepaid expenses and other
current assets
1.4
Other accrued liabilities
0.7
Total derivatives not designated as hedging instruments
$
16.3
$
3.1
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 location and amount of gains (losses) from derivatives not designated as hedging instruments in our Condensed Consolidated Statements of Earnings were as follows:
Location in Condensed Consolidated
Gains (Losses) Recognized on Derivatives in Condensed Consolidated Statements of Earnings for the
Thirteen Weeks Ended
Derivatives Not Designated as Hedging Instruments
Statements of Earnings of Gains (Losses)
Recognized on Derivatives
August 29,
2021
August 30,
2020
Commodity contracts
Cost of goods sold
$
4.2
$
1.2
Foreign exchange contracts
Cost of goods sold
6.0
( 5.2
)
Total gains (losses) from derivative instruments not designated as hedging instruments
$
10.2
$
( 4.0
)
As of August 29, 2021, our open commodity contracts had a notional value (defined as notional quantity times market value per notional quantity unit) of $ 117.8 million and $ 127.2 million for purchase and sales contracts, respectively. As of May 30, 2021, our open commodity contracts had a notional value of $ 148.8 million and $ 159.4 million for purchase and sales contracts, respectively. The notional amount of our foreign currency forward contracts as of August 29, 2021 and May 30, 2021 was $ 102.1 million and $ 111.4 million, respectively.
We enter into certain commodity, interest rate, and foreign exchange derivatives with a diversified group of counterparties. We continually monitor our positions and the credit ratings of the counterparties involved and limit the amount of credit exposure to any one party. These transactions may expose us to potential losses due to the risk of nonperformance by these counterparties. We have not incurred a material loss due to nonperformance in any period presented and do not expect to incur any such material loss. We also enter into futures and options transactions through various regulated exchanges.
At August 29, 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 contract, was $ 2.8 million.
7. SHARE-BASED PAYMENTS
For the first quarter of fiscal 2022 and 2021, we recognized total stock-based compensation expense (including restricted stock units, cash-settled restricted stock units, performance shares, and performance-based restricted stock units) of $ 2.6 million and $ 17.4 million, respectively. In the first quarter of fiscal 2022, we granted 1.0 million restricted stock units at a weighted average grant date price of $ 34.34 and 0.5 million performance shares at a weighted average grant date price of $ 34.13 .
12
Performance shares are granted to selected executives and other key employees with vesting contingent upon meeting various Company-wide performance goals. The performance goals for the three-year performance periods ending in fiscal 2022 (the "2022 performance period") and fiscal 2024 (the "2024 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 2022 performance period, 2023 performance period, and 2024 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.
8. 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.
The following table reconciles the income and average share amounts used to compute both basic and diluted earnings per share:
Thirteen weeks ended
August 29,
2021
August 30,
2020
Net income attributable to Conagra Brands, Inc. common stockholders:
$
235.4
$
329.0
Weighted average shares outstanding:
Basic weighted average shares outstanding
480.4
488.2
Add: Dilutive effect of stock options, restricted stock unit awards, and other dilutive securities
1.9
1.7
Diluted weighted average shares outstanding
482.3
489.9
For the first quarter of fiscal 2022 and 2021, there were 0.5 million and 1.0 million stock options outstanding, respectively, that were excluded from the computation of diluted weighted average shares because the effect was antidilutive.
9. INVENTORIES
The major classes of inventories were as follows:
August 29,
2021
May 30,
2021
Raw materials and packaging
$
307.8
$
290.7
Work in process
169.0
125.1
Finished goods
1,395.1
1,238.1
Supplies and other
82.7
80.1
Total
$
1,954.6
$
1,734.0
10. INCOME TAXES
In the first quarter of fiscal 2022 and 2021, we recognized income tax expense of $ 69.7 million and $ 86.7 million, respectively. The effective tax rate (calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings) was 22.8 % and 20.8 % for the first quarter of fiscal 2022 and 2021, respectively.
13
The effective tax rate in the first quarter of fiscal 2022 reflected a benefit of $ 3.6 million from the settlement of tax issues that were previously reserved.
The effective tax rate for the first quarter of fiscal 2021 reflected a benefit of $ 7.6 million resulting from the regulations issued by the U.S. Treasury and Internal Revenue Service on certain provisions of the 2017 Tax Cuts and Jobs Act.
The amount of gross unrecognized tax benefits for uncertain tax positions was $ 26.0 million as of August 29, 2021 and $ 33.0 million as of May 30, 2021. Included in both amounts was $ 0.8 million for tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. The gross unrecognized tax benefits excluded related liabilities for gross interest and penalties of $ 7.8 million and $ 8.8 million as of August 29, 2021 and May 30, 2021, respectively.
The net amount of unrecognized tax benefits at August 29, 2021 and May 30, 2021 that, if recognized, would impact the Company's effective tax rate was $ 21.3 million and $ 28.2 million, respectively.
We estimate that it is reasonably possible that the amount of gross unrecognized tax benefits will decrease by up to $ 7.9 million over the next twelve months due to various state audit settlements and the expiration of statutes of limitations.
In fiscal 2021, we completed a restructuring of our ownership interest in the Ardent Mills joint venture, a milling business, 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 divestitures 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 not provided any deferred taxes on undistributed earnings of our foreign subsidiaries. Deferred taxes will be provided for earnings of non-U.S. affiliates and associated companies when we determine that such earnings are no longer indefinitely reinvested and will result in a tax liability upon distribution.
11. 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
14
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 provide d a guarantee of up to $ 15.0 million in the event co-defendant, NL Industries, Inc., defaults on its payment obligations.
We have accrued $ 11.9 million and $ 51.9 million, within other accrued liabilities and other noncurrent liabilities, respectively, for this matter as of August 29, 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 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
15
and stock holder 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.
In October 2019, the Minnesota Pollution Control Agency ("MPCA") initiated an odor complaint investigation at our Waseca, Minnesota vegetable processing facility. As a result of the investigation, the MPCA required implementation of a continuous monitoring system running from May 1 – October 31 to monitor hydrogen sulfide emissions at the wastewater treatment facility. As a result of the monitoring data findings, the MPCA has alleged violations of Minnesota Ambient Air Quality Standards based on our hydrogen sulfide emissions during calendar years 2020 and 2021. The MPCA proposed a penalty of $ 2.2 million for 2020, and we are awaiting a proposed additional penalty for 2021 until after the monitoring season is complete. We are currently in settlement negotiations with the MPCA related to these allegations.
We are a party to certain environmental proceedings relating to our acquisition of Beatrice in fiscal 1991. Such proceedings include proceedings related to businesses divested by Beatrice prior to our acquisition of Beatrice. The current environmental proceedings associated with Beatrice include litigation and administrative proceedings involving Beatrice's possible status as a potentially responsible party at approximately 40 Superfund, proposed Superfund, or state-equivalent sites (the "Beatrice sites"). These sites involve locations previously owned or operated by predecessors of Beatrice that used or produced petroleum, pesticides, fertilizers, dyes, inks, solvents, polychlorinated 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 $ 55.0 million ($ 2.4 million within other accrued liabilities and $ 52.6 million within other noncurrent liabilities) as of August 29, 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
In certain limited situations, we will guarantee an obligation of an unconsolidated entity. 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 August 29, 2021, the remaining term of this arrangement did not exceed six years and the maximum amount of future payments we have guaranteed was $ 13.2 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.
16
Costs of legal services associated with the foregoing matters are recognized in earnings as services are provided.
12. 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.
Components of pension and postretirement plan costs (benefits) are:
Pension Plans
Thirteen weeks ended
August 29,
2021
August 30,
2020
Service cost
$
2.7
$
3.1
Interest cost
20.8
21.7
Expected return on plan assets
( 36.4
)
( 35.0
)
Amortization of prior service cost
0.5
0.6
Pension cost (benefit) — Company plans
( 12.4
)
( 9.6
)
Pension cost (benefit) — multi-employer plans
1.9
1.8
Total pension cost (benefit)
$
( 10.5
)
$
( 7.8
)
Postretirement Plans
Thirteen weeks ended
August 29,
2021
August 30,
2020
Service cost
$
—
$
0.1
Interest cost
0.3
0.3
Amortization of prior service cost (benefit)
( 0.5
)
( 0.5
)
Recognized net actuarial gain
( 0.8
)
( 0.9
)
Total postretirement cost (benefit)
$
( 1.0
)
$
( 1.0
)
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.
The weighted-average discount rates for service and interest costs under the spot-rate approach used for pension cost in fiscal 2022 were 3.50 % and 2.29 %, respectively.
During the first quarter of fiscal 2022, we contributed $ 2.9 million to our pension plans and $ 2.1 million to our postretirement plans. Based upon the current funded status of the plans and the current interest rate environment, we anticipate making further contributions of approximately $ 9.4 million to our pension plans during the remainder of fiscal 2022. We anticipate making further contributions of approximately $ 6.9 million to our postretirement plans during the remainder of fiscal 2022. These estimates are based on ERISA guidelines, current tax laws, plan asset performance, and liability assumptions, which are subject to change.
17
13. STOCKHOLDERS' EQUITY
The following table presents a reconciliation of our stockholders' equity accounts for the thirteen weeks ended August 29, 2021:
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 30, 2021
584.2
$
2,921.2
$
2,342.1
$
6,262.6
$
5.8
$
( 2,979.9
)
$
79.6
$
8,631.4
Stock option and incentive plans
( 37.1
)
0.2
21.8
0.3
( 14.8
)
Currency translation adjustments
( 14.4
)
( 1.3
)
( 15.7
)
Repurchase of common shares
( 50.0
)
( 50.0
)
Derivative adjustments
( 2.1
)
( 2.1
)
Activities of noncontrolling interests
0.3
0.3
Pension and postretirement healthcare benefits
1.3
1.3
Dividends declared on common stock; $ 0.3125 per share
( 149.9
)
( 149.9
)
Net income attributable to Conagra Brands, Inc.
235.4
235.4
Balance at August 29, 2021
584.2
$
2,921.2
$
2,305.0
$
6,348.3
$
( 9.4
)
$
( 3,008.1
)
$
78.9
$
8,635.9
The following table presents a reconciliation of our stockholders' equity accounts for the thirteen weeks ended August 30, 2020:
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 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
( 25.4
)
( 0.7
)
33.5
7.4
Adoption of ASU 2016-13
( 1.1
)
( 1.1
)
Currency translation adjustments
15.3
2.2
17.5
Derivative adjustments
( 1.2
)
( 1.2
)
Activities of noncontrolling interests
0.8
0.8
Pension and postretirement healthcare benefits
( 0.3
)
( 0.3
)
Dividends declared on common stock; $ 0.2125 per share
( 103.8
)
( 103.8
)
Net income attributable to Conagra Brands, Inc.
329.0
329.0
Balance at August 30, 2020
584.2
$
2,921.2
$
2,297.8
$
5,694.6
$
( 95.8
)
$
( 2,696.4
)
$
77.6
$
8,199.0
14. FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board 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.
18
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 August 29, 2021:
Level 1
Level 2
Level 3
Net Value
Assets:
Derivative assets
$
9.5
$
2.8
$
—
$
12.3
Marketable securities
7.9
—
—
7.9
Deferred compensation assets
8.9
—
—
8.9
Total assets
$
26.3
$
2.8
$
—
$
29.1
Liabilities:
Derivative liabilities
$
—
$
0.7
$
—
$
0.7
Deferred compensation liabilities
86.1
—
—
86.1
Total liabilities
$
86.1
$
0.7
$
—
$
86.8
The following table presents our financial assets and liabilities measured at fair value on a recurring basis, based upon the level within the fair value hierarchy in which the fair value measurements fall, as of May 30, 2021:
Level 1
Level 2
Level 3
Net Value
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
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.
In the first quarter of fiscal 2021, we recognized charges totaling $ 3.0 million in our Grocery & Snacks segment for the impairment of certain long-lived assets. The impairment was measured based upon the estimated sales price of the assets and has been included in restructuring activities.
The carrying amount of long-term debt (including current installments) was $ 8.80 billion and $ 8.30 billion as of August 29, 2021 and May 30, 2021, respectively. Based on current market rates, the fair value of this debt (level 2 liabilities) at August 29, 2021 and May 30, 2021, was estimated at $ 10.32 billion and $ 9.76 billion, respectively.
15. 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 principally 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.
19
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.
Thirteen weeks ended
August 29, 2021
August 30, 2020
Net sales
Grocery & Snacks
$
1,075.1
$
1,131.0
Refrigerated & Frozen
1,101.8
1,130.6
International
236.6
219.0
Foodservice
239.8
198.3
Total net sales
$
2,653.3
$
2,678.9
Operating profit
Grocery & Snacks
$
215.9
$
283.1
Refrigerated & Frozen
157.6
240.1
International
34.1
38.5
Foodservice
20.3
25.4
Total operating profit
$
427.9
$
587.1
Equity method investment earnings
20.2
6.5
General corporate expense
64.6
77.2
Pension and postretirement non-service income
( 16.1
)
( 13.8
)
Interest expense, net
94.2
113.7
Income tax expense
69.7
86.7
Net income
$
235.7
$
329.8
Less: Net income attributable to noncontrolling interests
0.3
0.8
Net income attributable to Conagra Brands, Inc.
$
235.4
$
329.0
The following table presents further disaggregation of our net sales:
Thirteen weeks ended
August 29, 2021
August 30, 2020
Frozen
$
920.4
$
918.4
Staples
Other shelf-stable
641.6
713.9
Refrigerated
181.4
212.2
Snacks
433.5
417.1
Foodservice
239.8
198.3
International
236.6
219.0
Total net sales
$
2,653.3
$
2,678.9
To be consistent with the manner in which 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.
20
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:
Thirteen weeks ended
August 29, 2021
August 30, 2020
Gross derivative gains (losses) incurred
$
10.2
$
( 4.0
)
Less: Net derivative gains (losses) allocated to reporting segments
5.0
( 1.5
)
Net derivative gains (losses) recognized in general corporate expenses
$
5.2
$
( 2.5
)
Net derivative gains (losses) allocated to Grocery & Snacks
$
3.2
$
( 1.8
)
Net derivative gains (losses) allocated to Refrigerated & Frozen
4.7
( 1.1
)
Net derivative gains (losses) allocated to International
( 3.2
)
1.6
Net derivative gains (losses) allocated to Foodservice
0.3
( 0.2
)
Net derivative gains (losses) included in segment operating profit
$
5.0
$
( 1.5
)
As of August 29, 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 $ 16.7 million. This amount reflected net gains of $ 10.2 million incurred during the thirteen weeks ended August 29, 2021 and net gains of $ 6.5 million incurred prior to fiscal 2022. Based on our forecasts of the timing of recognition of the underlying hedged items, we expect to reclassify to segment operating results gains of $ 15.1 million in fiscal 2022 and gains of $ 1.6 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, it is impracticable to allocate those assets to the reporting segments, as well as disclose total assets by segment. Total depreciation expense was $ 81.6 million and $ 80.3 million for the first quarter of fiscal 2022 and 2021, 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 the first quarter of fiscal 2022 and 2021. Foreign net sales, including sales by domestic segments to customers located outside of the United States, were approximately $ 243.3 million and $ 224.7 million in the first quarter of fiscal 2022 and 2021, 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 % and 25 % of consolidated net sales in the first quarter of fiscal 2022 and 2021, respectively, primarily in the Grocery & Snacks and Refrigerated & Frozen segments.
Walmart, Inc. and its affiliates accounted for approximately 32 % and 31 % of consolidated net receivables as of August 29, 2021 and May 30, 2021, respectively. The Kroger Co. and its affiliates accounted for approximately 10 % and 11 % of consolidated net receivables as of August 29, 2021 and May 30, 2021, respectively.
21
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.