Attached files

file filename
EX-10.1 - EXHIBIT 10.1 - CONAGRA BRANDS INC.cag-11x29x15x10q2ex101.htm
EX-12 - EXHIBIT 12 - CONAGRA BRANDS INC.cag-11x29x2015x10q2ex12.htm
EX-31.2 - EXHIBIT 31.2 - CONAGRA BRANDS INC.cag-11x29x2015x10q2ex312.htm
EX-31.1 - EXHIBIT 31.1 - CONAGRA BRANDS INC.cag-11x29x2015x10q2ex311.htm
EX-32.1 - EXHIBIT 32.1 - CONAGRA BRANDS INC.cag-11x29x2015x10q2ex321.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 ______________________________________________________
FORM 10-Q
 ______________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 29, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to 
               
Commission File Number: 1-7275
______________________________________________________
CONAGRA FOODS, INC.
(Exact name of registrant as specified in its charter)
______________________________________________________ 
Delaware
 
47-0248710
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
One ConAgra Drive,
Omaha, Nebraska
 
68102-5001
(Address of principal executive offices)
 
(Zip Code)
(402) 240-4000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
 ______________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x     No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x 
Number of shares outstanding of issuer’s common stock, as of November 29, 2015, was 434,129,515.
 



Table of Contents
 
Item 1
 
 
 
 
 
Item 2
Item 3
Item 4
Item 1
Item 1A
Item 6
 
Exhibit 10.1
 
 
 
 
 
Exhibit 101.1
 





PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ConAgra Foods, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in millions except per share amounts)
(unaudited)
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
November 29,
2015
 
November 23,
2014
 
November 29,
2015
 
November 23,
2014
Net sales
$
3,092.7

 
$
3,136.4

 
$
5,886.5

 
$
5,899.4

Costs and expenses:
 
 
 
 
 
 
 
Cost of goods sold
2,264.7

 
2,379.1

 
4,357.7

 
4,551.3

Selling, general and administrative expenses
524.7

 
392.0

 
930.1

 
785.8

Interest expense, net
79.6

 
78.7

 
159.9

 
162.0

Income from continuing operations before income taxes and equity method investment earnings
223.7

 
286.6

 
438.8

 
400.3

Income tax expense
83.2

 
101.9

 
168.1

 
145.0

Equity method investment earnings
25.3

 
34.0

 
62.3

 
59.6

Income from continuing operations
165.8

 
218.7

 
333.0

 
314.9

Income (loss) from discontinued operations, net of tax
(6.5
)
 
(202.8
)
 
(1,326.1
)
 
185.5

Net income (loss)
$
159.3

 
$
15.9

 
$
(993.1
)
 
$
500.4

Less: Net income attributable to noncontrolling interests
4.4

 
5.9

 
6.1

 
8.1

Net income (loss) attributable to ConAgra Foods, Inc.
$
154.9

 
$
10.0

 
$
(999.2
)
 
$
492.3

Earnings (loss) per share — basic
 
 
 
 
 
 
 
Income from continuing operations attributable to ConAgra Foods, Inc. common stockholders
$
0.37

 
$
0.50

 
$
0.75

 
$
0.72

Income (loss) from discontinued operations attributable to ConAgra Foods, Inc. common stockholders
(0.01
)
 
(0.48
)
 
(3.06
)
 
0.44

Net income (loss) attributable to ConAgra Foods, Inc. common stockholders
$
0.36

 
$
0.02

 
$
(2.31
)
 
$
1.16

Earnings (loss) per share — diluted
 
 
 
 
 
 
 
Income from continuing operations attributable to ConAgra Foods, Inc. common stockholders
$
0.37

 
$
0.49

 
$
0.75

 
$
0.71

Income (loss) from discontinued operations attributable to ConAgra Foods, Inc. common stockholders
(0.02
)
 
(0.47
)
 
(3.04
)
 
0.43

Net income (loss) attributable to ConAgra Foods, Inc. common stockholders
$
0.35

 
$
0.02

 
$
(2.29
)
 
$
1.14

Cash dividends declared per common share
$
0.25

 
$
0.25

 
$
0.50

 
$
0.50

See notes to the condensed consolidated financial statements.


1




ConAgra Foods, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in millions)
(unaudited)
 
 
Thirteen weeks ended
 
Thirteen weeks ended
 
November 29, 2015
 
November 23, 2014
 
Pre-Tax Amount
Tax (Expense) Benefit
After-Tax Amount
 
Pre-Tax Amount
Tax (Expense) Benefit
After-Tax Amount
Net income
$
248.3

$
(89.0
)
$
159.3

 
$
114.0

$
(98.1
)
$
15.9

Other comprehensive income (loss):



 



Unrealized gains on available-for-sale securities



 
0.2

(0.1
)
0.1

Unrealized currency translation losses
(18.4
)

(18.4
)
 
(35.1
)

(35.1
)
Pension and post-employment benefit obligations:






 






Unrealized pension and post-employment benefit obligations



 

0.1

0.1

Reclassification for pension and post-employment benefit obligations included in net income
(1.3
)
0.5

(0.8
)
 
(0.2
)

(0.2
)
Comprehensive income (loss)
228.6

(88.5
)
140.1

 
78.9

(98.1
)
(19.2
)
Comprehensive income attributable to noncontrolling interests
3.7

(0.2
)
3.5

 
4.1


4.1

Comprehensive income (loss) attributable to ConAgra Foods, Inc.
$
224.9

$
(88.3
)
$
136.6

 
$
74.8

$
(98.1
)
$
(23.3
)
 
Twenty-six weeks ended
 
Twenty-six weeks ended
 
November 29, 2015
 
November 23, 2014
 
Pre-Tax Amount
Tax (Expense) Benefit
After-Tax Amount
 
Pre-Tax Amount
Tax (Expense) Benefit
After-Tax Amount
Net income (loss)
$
(1,291.2
)
$
298.1

$
(993.1
)
 
$
881.2

$
(380.8
)
$
500.4

Other comprehensive income (loss):
 
 
 
 
 
 
 
Reclassification for derivative adjustments included in net income



 
(0.5
)
0.2

(0.3
)
Unrealized gains on available-for-sale securities



 
0.3

(0.1
)
0.2

Unrealized currency translation losses
(56.0
)

(56.0
)
 
(52.8
)

(52.8
)
Pension and post-employment benefit obligations:
 
 
 
 
 
 
 
Unrealized pension and post-employment benefit obligations
6.6

(1.6
)
5.0

 
3.8

(0.9
)
2.9

Reclassification for pension and post-employment benefit obligations included in net income
(2.6
)
1.0

(1.6
)
 
(0.4
)
0.1

(0.3
)
Comprehensive income (loss)
(1,343.2
)
297.5

(1,045.7
)
 
831.6

(381.5
)
450.1

Comprehensive income attributable to noncontrolling interests
2.6

(0.5
)
2.1

 
3.3


3.3

Comprehensive income (loss) attributable to ConAgra Foods, Inc.
$
(1,345.8
)
$
298.0

$
(1,047.8
)
 
$
828.3

$
(381.5
)
$
446.8


See notes to the condensed consolidated financial statements.


2




ConAgra Foods, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions except share data)
(unaudited)
 
 
November 29,
2015
 
May 31,
2015
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
95.9

 
$
164.7

Receivables, less allowance for doubtful accounts of $4.9 and $4.1
894.4

 
773.7

Inventories
1,975.6

 
1,721.1

Prepaid expenses and other current assets
168.8

 
268.8

Current assets held for sale
777.8

 
739.4

Total current assets
3,912.5

 
3,667.7

Property, plant and equipment
6,207.4

 
6,191.0

Less accumulated depreciation
(3,561.5
)
 
(3,503.3
)
Property, plant and equipment, net
2,645.9

 
2,687.7

Goodwill
4,685.5

 
4,699.5

Brands, trademarks and other intangibles, net
1,383.9

 
1,313.4

Other assets
987.6

 
933.5

Noncurrent assets held for sale
2,379.2

 
4,240.4

 
$
15,994.6

 
$
17,542.2

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities
 
 
 
Notes payable
$
195.0

 
$
7.9

Current installments of long-term debt
1,309.8

 
1,008.0

Accounts payable
1,195.5

 
1,138.8

Accrued payroll
211.9

 
218.2

Other accrued liabilities
727.0


642.8

Current liabilities held for sale
314.4

 
294.5

Total current liabilities
3,953.6

 
3,310.2

Senior long-term debt, excluding current installments
6,204.5

 
6,693.0

Subordinated debt
195.9

 
195.9

Other noncurrent liabilities
1,891.2


2,023.8

Noncurrent liabilities held for sale
234.7

 
709.3

Total liabilities
12,479.9

 
12,932.2

Commitments and contingencies (Note 13)

 

Common stockholders' equity
 
 
 
Common stock of $5 par value, authorized 1,200,000,000 shares; issued 567,907,172
2,839.7

 
2,839.7

Additional paid-in capital
1,086.1

 
1,049.4

Retained earnings
3,115.3

 
4,331.1

Accumulated other comprehensive loss
(378.1
)
 
(329.5
)
Less treasury stock, at cost, 133,777,657 and 139,702,605 common shares
(3,229.2
)
 
(3,364.7
)
Total ConAgra Foods, Inc. common stockholders' equity
3,433.8

 
4,526.0

Noncontrolling interests
80.9

 
84.0

Total stockholders' equity
3,514.7

 
4,610.0

 
$
15,994.6

 
$
17,542.2

See notes to the condensed consolidated financial statements.


3




ConAgra Foods, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions)
(unaudited)
 
Twenty-six weeks ended
 
November 29,
2015
 
November 23,
2014
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(993.1
)
 
$
500.4

Income (loss) from discontinued operations
(1,326.1
)
 
185.5

Income from continuing operations
333.0

 
314.9

Adjustments to reconcile income (loss) from continuing operations to net cash flows from operating activities:
 
 
 
Depreciation and amortization
188.8

 
191.4

Asset impairment charges
1.7

 
7.4

Lease cancellation expense
48.5

 

Earnings of affiliates in excess of distributions
(54.1
)
 
(52.4
)
Share-based payments expense
34.6

 
32.6

Contributions to pension plans
(6.0
)
 
(6.0
)
Pension benefit

 
(4.6
)
Other items
(23.6
)
 
14.7

Change in operating assets and liabilities excluding effects of business acquisitions and dispositions:
 
 
 
Accounts receivable
(126.0
)
 
(108.8
)
Inventory
(253.9
)
 
(391.1
)
Deferred income taxes and income taxes payable, net
(124.7
)
 
19.5

Prepaid expenses and other current assets
23.2

 
30.0

Accounts payable
83.1

 
219.8

Accrued payroll
(0.1
)
 
47.3

Other accrued liabilities
68.8

 
(28.3
)
Net cash flows from operating activities — continuing operations
193.3

 
286.4

Net cash flows from operating activities — discontinued operations
124.7

 
131.3

Net cash flows from operating activities
318.0

 
417.7

Cash flows from investing activities:
 
 
 
Additions to property, plant and equipment
(176.7
)
 
(157.6
)
Sale of property, plant and equipment
18.9

 
2.3

Purchase of business, net of cash acquired

 
(75.4
)
Purchase of intangible assets
(10.4
)
 

Return of investment in equity method investee

 
391.4

Other
0.3

 

Net cash flows from investing activities — continuing operations
(167.9
)
 
160.7

Net cash flows from investing activities — discontinued operations
(69.1
)
 
71.9

Net cash flows from investing activities
(237.0
)
 
232.6

Cash flows from financing activities:
 
 
 
Net short-term borrowings
187.1

 
392.8

Issuance of long-term debt

 
550.0

Repayment of long-term debt
(255.3
)
 
(1,489.2
)
Cash dividends paid
(215.0
)
 
(211.7
)
Exercise of stock options and issuance of other stock awards
153.3

 
55.2

Other items
(2.8
)
 
(6.9
)
Net cash flows from financing activities — continuing operations
(132.7
)
 
(709.8
)
Net cash flows from financing activities — discontinued operations

 
(0.2
)
Net cash flows from financing activities
(132.7
)
 
(710.0
)
Effect of exchange rate changes on cash and cash equivalents
(3.0
)
 
(1.5
)
Net change in cash and cash equivalents
(54.7
)
 
(61.2
)
Discontinued operations cash activity included above:
 
 
 
Add: Cash balance included in assets held for sale at beginning of period
18.4

 
64.9

Less: Cash balance included in assets held for sale at end of period
32.5

 
22.0

Cash and cash equivalents at beginning of period
164.7

 
118.2

Cash and cash equivalents at end of period
$
95.9

 
$
99.9

See notes to the condensed consolidated financial statements.

4




ConAgra Foods, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Thirteen and Twenty-six Weeks ended November 29, 2015 and November 23, 2014
(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 Foods, Inc. (the "Company", "we", "us", or "our") Annual Report on Form 10-K for the fiscal year ended May 31, 2015.
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 Foods, Inc. and all majority-owned subsidiaries. In addition, the accounts of all variable interest entities for which we have been determined to be the primary beneficiary are included in our condensed consolidated financial statements from the date such determination is made. All significant intercompany investments, accounts, and transactions have been eliminated.
Comprehensive Income — Comprehensive income includes net income, currency translation adjustments, certain derivative-related activity, changes in the value of available-for-sale investments, and changes in prior service cost and net actuarial gains (losses) from pension (for amounts not in excess of the 10% corridor) and post-retirement health care plans. We generally deem our foreign investments to be essentially permanent in nature and we do not provide for taxes on currency translation adjustments arising from converting the investment denominated in a foreign currency to U.S. dollars. When we determine that a foreign investment, as well as undistributed earnings, are no longer permanent in nature, estimated taxes are provided for the related deferred tax liability (asset), if any, resulting from currency translation adjustments.

The following tables summarize the reclassifications from accumulated other comprehensive loss into operations:
 
 
Thirteen weeks ended
 
Affected Line Item in the Condensed Consolidated Statement of Operations1
 
 
November 29, 2015
 
November 23, 2014
 
 
Net derivative adjustment, net of tax:
 
 
 
 
 
 
     Cash flow hedges
 
$

 
$

 
Interest expense, net
 
 

 

 
Total before tax
 
 

 

 
Income tax benefit
 
 
$

 
$

 
Net of tax
Amortization of pension and other postretirement benefits:
 
 
 

 
 
     Net prior service cost
 
$
(1.3
)
 
$
(1.0
)
 
Selling, general and administrative expenses
     Net actuarial losses
 

 
0.8

 
Selling, general and administrative expenses
 
 
(1.3
)
 
(0.2
)
 
Total before tax
 
 
0.5

 

 
Income tax expense
 
 
$
(0.8
)
 
$
(0.2
)
 
Net of tax


5


 
 
Twenty-six weeks ended
 
Affected Line Item in the Condensed Consolidated Statement of Operations1
 
 
November 29, 2015
 
November 23, 2014
 
 
Net derivative adjustment, net of tax:
 
 
 
 
 
 
     Cash flow hedges
 
$

 
$
(0.5
)
 
Interest expense, net
 
 

 
(0.5
)
 
Total before tax
 
 

 
0.2

 
Income tax expense
 
 
$

 
$
(0.3
)
 
Net of tax
Amortization of pension and postretirement healthcare liabilities:
 

 

 

     Net prior service benefit
 
$
(2.6
)
 
$
(2.1
)
 
Selling, general and administrative expenses
     Net actuarial loss
 

 
1.7

 
Selling, general and administrative expenses
 
 
(2.6
)
 
(0.4
)
 
Total before tax
 
 
1.0

 
0.1

 
Income tax expense
 
 
$
(1.6
)
 
$
(0.3
)
 
Net of tax
1 Amounts in parentheses indicate income recognized in the Condensed Consolidated Statement of Operations.
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.
Recently Issued Accounting Standards — In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP. On July 9, 2015, the FASB deferred the effective date of the new revenue recognition standard by one year. Based on the FASB’s ASU, we will apply the new revenue standard in our fiscal year 2019. Early adoption in our fiscal year 2018 is permitted. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. The standard permits the use of either the retrospective or cumulative effect transition method.
In July 2015, the FASB issued ASU 2015-11, Inventory, which requires an entity to measure inventory within the scope at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The effective date for the standard is for fiscal years beginning after December 15, 2016. Early adoption is permitted. We do not expect ASU 2015-11 to have a material impact to our financial statements. The standard is to be applied prospectively.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which will require entities to present deferred tax assets ("DTAs") and deferred tax liabilities ("DTLs") as noncurrent in a classified balance sheet. The ASU simplifies the current guidance, which requires entities to separately present DTAs and DTLs as current and noncurrent in a classified balance sheet. The effective date for the standard is for fiscal years beginning after December 15, 2016. Early adoption is permitted. The standard is to be applied prospectively or retrospectively.

2. ACQUISITIONS
In May 2015, we acquired Blake's All Natural Foods, a family-owned company specializing in all natural and organic frozen meals, including pot pies, casseroles, pasta dishes, and other entrees, for $20.7 million in cash, net of cash acquired. Approximately $20.0 million of the purchase price has been classified as goodwill pending determination of the final purchase price allocation. The goodwill is deductible for income tax purposes. This business is included in the Consumer Foods segment.
In July 2014, we acquired TaiMei Potato Industry Limited, a potato processor in China, for $92.2 million, consisting of $74.9 million in cash, net of cash acquired, plus assumed liabilities. The purchase included property and equipment associated with making frozen potato products. Approximately $23.8 million of the purchase price has been allocated to goodwill and $3.5 million to other intangible assets. The amount allocated to goodwill is not deductible for income tax purposes. This business is included in the Commercial Foods segment.

6




Under the acquisition method of accounting, the assets acquired and liabilities assumed in these acquisitions were recorded at their respective estimated fair values at the date of acquisition.

3. DISCONTINUED OPERATIONS AND THE FORMATION OF ARDENT MILLS
Private Brands Operations
In the first quarter of fiscal 2016, we announced our intent to divest our Private Brands operations. On November 1, 2015, we entered into a stock purchase agreement with TreeHouse Foods, Inc. ("Treehouse") pursuant to which TreeHouse agreed to purchase our Private Brands operations for $2.7 billion in cash on a cash-free, debt-free basis, subject to working capital and other adjustments. The obligation of the parties to close the transaction is subject to customary closing conditions, including, among others, (i) the receipt of antitrust clearance in the United States and Canada; and (ii) the absence of legal restraints or prohibitions. The obligation of each party to close the transaction is also conditioned upon the other party’s representations and warranties being true and correct (subject to certain materiality exceptions) and the other party having performed in all material respects its obligations under the stock purchase agreement.
We expect the sale to be complete in the first quarter of calendar year 2016. As a result of the expected purchase price, we concluded that the net assets held for sale were further impaired. We recognized a pre-tax impairment charge of $86.3 million ($79.0 million after-tax) and $1.90 billion ($1.42 billion after-tax) in the second quarter and first half of fiscal 2016, respectively, to write-down the goodwill and long-lived assets of the Private Brands business to the estimated sales price, less costs to sell. These amounts reflect management's current estimates. The consummation of the sale of these assets could result in further adjustments to this impairment. We reflected the results of these operations as discontinued operations for all periods presented. The assets and liabilities of the discontinued business have been reclassified as assets and liabilities held for sale within our Condensed Consolidated Balance Sheets for all periods presented.
In connection with classifying the Private Brands operations as assets held for sale, we recognized, in the first half of fiscal 2016, a deferred tax asset of $1.65 billion on the outside basis difference of our investment in this business. A valuation allowance was created, as we have not met the accounting requirements for recognition of a benefit at this time.  In the second quarter of fiscal 2016, we recognized an income tax benefit of $17 million due to a reduction of the valuation allowance, resulting from prior period capital gains. 
In the second quarter of fiscal 2015, we recorded a $210.9 million impairment of goodwill and $30.0 million of impairment charges to write-down three small brands, which are reflected in discontinued operations.
Milling Operations
On May 29, 2014, the Company, Cargill, Incorporated, and CHS, Inc. completed the formation of the Ardent Mills joint venture ("Ardent Mills"). In connection with the formation, we contributed all of the assets of ConAgra Mills, our milling operations, including $49.0 million of cash, to Ardent Mills, we received a 44% ownership interest in Ardent Mills, and Ardent Mills distributed $391.4 million in cash to us as a return of capital. The contribution of the assets of ConAgra Mills in exchange for a non-controlling interest in the joint venture was required to be accounted for at fair value, and accordingly, we recognized a gain of $625.6 million ($375.9 million after-tax) in the first half of fiscal 2015 in income from discontinued operations to reflect the excess of the fair value of our interest over its carrying value at the time of the transfer. As part of the formation of Ardent Mills, in the fourth quarter of fiscal 2014, pursuant to an agreement with the U.S. Department of Justice, we sold three flour milling facilities to Miller Milling Company LLC for $163.0 million. We received the cash proceeds from the sale of these flour milling facilities in the first quarter of fiscal 2015. In the first quarter of fiscal 2015, we used the net cash proceeds from the Ardent Mills transaction to repay debt. The operating results of our legacy milling business, including the disposition of three mills aforementioned, are included as discontinued operations within our Condensed Consolidated Statements of Operations.
We recognized the 44% ownership interest in Ardent Mills at fair value, as of the date of the formation of the joint venture. We now recognize our proportionate share of the earnings of Ardent Mills under the equity method of accounting within results of continuing operations. Due to differences in fiscal reporting periods, we recognized the equity method earnings on a lag of approximately one month; and as a result, we recognized only five months of earnings from Ardent Mills during the first half of fiscal 2015. At November 29, 2015, the carrying value of our equity method investment in Ardent Mills was $749.7 million, which is included in Other Assets.
We entered into transition services agreements in connection with our contribution to Ardent Mills and recognized $2.8 million and $5.7 million, respectively, of income for the performance of transition services during the second quarter and first half of fiscal 2016 and 3.5 million and 7.3 million, respectively, during the second quarter and first half of fiscal 2015, classified within selling, general and administrative expenses.

7




The summary comparative financial results of discontinued operations were as follows:
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
November 29, 2015
 
November 23, 2014
 
November 29, 2015
 
November 23, 2014
Net sales
$
961.4

 
$
1,013.6

 
$
1,855.6

 
$
1,967.8

Net gain on sale of businesses
$

 
$
0.8

 
$

 
$
627.3

Goodwill and long-lived asset impairment charges
(86.3
)
 
(240.9
)
 
(1,898.6
)
 
(240.9
)
Income from operations of discontinued operations before income taxes and equity method investment earnings
85.6

 
33.5

 
106.3

 
34.9

Income (loss) before income taxes
(0.7
)
 
(206.6
)
 
(1,792.3
)
 
421.3

Income tax expense (benefit)
5.8

 
(3.8
)
 
(466.2
)
 
235.8

Income (loss) from discontinued operations, net of tax
$
(6.5
)
 
$
(202.8
)
 
$
(1,326.1
)
 
$
185.5

Assets and Liabilities Held for Sale
The assets and liabilities classified as held for sale reflected in our Condensed Consolidated Balance Sheets were as follows:
 
 
November 29, 2015
 
May 31, 2015
Cash and cash equivalents
 
$
32.5

 
$
18.4

Receivables, less allowance for doubtful accounts of $0.5 and $0.5
 
227.0

 
199.2

Inventories
 
501.4

 
480.1

Prepaid expenses and other current assets
 
16.9

 
41.7

     Current assets held for sale
 
$
777.8

 
$
739.4

Property, plant and equipment, net
 
$
940.4

 
$
920.4

Goodwill
 
913.2

 
1,600.8

Brands, trademarks and other intangibles, net
 
522.6

 
1,716.6

Other assets
 
3.0

 
2.6

     Noncurrent assets held for sale
 
$
2,379.2

 
$
4,240.4

Accounts payable
 
$
241.1

 
$
219.5

Accrued payroll
 
4.7

 

Other accrued liabilities
 
68.6

 
75.0

     Current liabilities held for sale
 
$
314.4

 
$
294.5

Other noncurrent liabilities
 
$
234.7

 
$
709.3

     Noncurrent liabilities held for sale
 
$
234.7

 
$
709.3



4. RESTRUCTURING ACTIVITIES
Supply Chain and Administrative Efficiency Plan
We previously announced a plan for the integration and restructuring of the operations of Ralcorp Holdings, Inc. ("Ralcorp"), optimization of the entire Company's supply chain network, manufacturing assets, and dry distribution and mixing centers, and improvement of selling, general and administrative effectiveness and efficiencies, which we refer to as the Supply Chain and Administrative Efficiency Plan (the "SCAE Plan"). Although we expect the divestiture of the Private Brands business to be completed in the third quarter of fiscal 2016, we will continue to implement portions of the SCAE Plan, including work related to optimizing our supply chain network and pursue cost reductions through our selling, general and administrative functions and productivity improvements. The SCAE Plan also includes plans announced in the second quarter of fiscal 2016 to realize efficiency benefits through a combination of reductions in selling, general and administrative expenses and enhancements to trade spend processes and tools.

8




Although we remain unable to make good faith estimates relating to the entire SCAE Plan, we are reporting on actions initiated through the end of the second quarter of fiscal 2016, 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 November 29, 2015, our Board of Directors has approved the incurrence of up to $739.0 million of expenses in connection with the SCAE Plan, including expenses allocated for the Private Brands operations. We have incurred or expect to incur approximately $472.9 million of charges ($376.5 million of cash charges and $96.4 million of non-cash charges) for actions identified to date under the SCAE Plan related to our continuing operations. In the second quarter and first half of fiscal 2016, we recognized charges of $133.0 million and $150.4 million, respectively, in relation to the SCAE Plan. In the second quarter and first half of fiscal 2015, we recognized charges of $10.3 million and $26.0 million, respectively, in relation to the SCAE Plan. We expect to incur costs related to the SCAE Plan over a multi-year period.
We anticipate that we will recognize the following pre-tax expenses in association with the SCAE Plan (amounts include charges recognized from plan inception through the first half of fiscal 2016):
 
Consumer Foods
 
Commercial Foods
 
Corporate
 
Total
Multi-employer pension costs
$
1.5

 
$

 
$

 
$
1.5

Accelerated depreciation
38.3

 


 
1.2

 
39.5

Other cost of goods sold
6.1

 

 

 
6.1

    Total cost of goods sold
45.9

 

 
1.2

 
47.1

Severance and related costs (recoveries)
30.3

 
8.1

 
184.5

 
222.9

Fixed asset impairment/Net gain on disposal
1.0

 

 

 
1.0

Accelerated depreciation

 

 
1.5

 
1.5

Contract/Lease cancellation expenses
1.5

 

 
59.1

 
60.6

Consulting/Professional fees
1.0

 

 
65.9

 
66.9

Other selling, general and administrative expenses
15.6

 

 
57.3

 
72.9

    Total selling, general and administrative expenses
49.4

 
8.1

 
368.3

 
425.8

        Consolidated total
$
95.3

 
$
8.1

 
$
369.5

 
$
472.9

During the second quarter of fiscal 2016, we recognized the following pre-tax expenses for the SCAE Plan:
 
Consumer Foods
 
Commercial Foods
 
Corporate
 
Total
Accelerated depreciation
$
5.3

 
$

 
$
0.1

 
$
5.4

Other cost of goods sold
0.3

 

 

 
0.3

Total cost of goods sold
5.6

 

 
0.1

 
5.7

Severance and related costs (recoveries)
4.3

 

 
51.8

 
56.1

Contract/Lease cancellation expenses
(0.9
)
 

 
51.8

 
50.9

Consulting/Professional fees

 

 
18.9

 
18.9

Accelerated depreciation

 

 
0.1

 
0.1

Other selling, general and administrative expenses
0.5

 

 
0.8

 
1.3

Total selling, general and administrative expenses
3.9

 

 
123.4

 
127.3

Consolidated total
$
9.5

 
$

 
$
123.5

 
$
133.0

Included in the above table are $78.7 million of charges that have resulted or will result in cash outflows and $54.3 million in non-cash charges. Not included in the above amounts are $6.2 million of pre-tax expenses related to the Private Brands operations we have agreed to sell.
During the second quarter of fiscal 2016, we entered into a series of related transactions in which we exchanged a warehouse we owned in Indiana for two buildings and parcels of land that we leased as part of our Omaha corporate offices. Concurrent with the asset exchange, leases on the two Omaha corporate buildings were cancelled and we recognized a charge of $48.5 million for the early termination of these leases. We entered into a new capital lease for the warehouse in Indiana and we recorded a financing lease obligation of $62.2 million in the second quarter of fiscal 2016.

9




During the first half of fiscal 2016, we recognized the following pre-tax expenses for the SCAE Plan:
 
Consumer Foods
 
Commercial Foods
 
Corporate
 
Total
Accelerated depreciation
$
8.9

 
$

 
$
0.2

 
$
9.1

Other cost of goods sold
0.4

 

 

 
0.4

Total cost of goods sold
9.3

 

 
0.2

 
9.5

Severance and related costs (recoveries)
5.1

 
0.1

 
55.4

 
60.6

Fixed asset impairment/Net gain on disposal
(0.1
)
 

 

 
(0.1
)
Contract/Lease cancellation expenses
(0.7
)
 

 
51.8

 
51.1

Consulting/Professional fees

 

 
25.2

 
25.2

Accelerated depreciation

 

 
0.1

 
0.1

Other selling, general and administrative expenses
2.5

 

 
1.5

 
4.0

Total selling, general and administrative expenses
6.8

 
0.1

 
134.0

 
140.9

Consolidated total
$
16.1

 
$
0.1

 
$
134.2

 
$
150.4

Included in the above table are $92.0 million of charges that have resulted or will result in cash outflows and $58.4 million in non-cash charges. Not included in the above table are $10.2 million of pre-tax expenses related to the Private Brands operations we have agreed to sell.
We recognized the following cumulative (plan inception to November 29, 2015) pre-tax expenses related to the SCAE Plan in our Condensed Consolidated Statements of Operations:
 
Consumer Foods
 
Commercial Foods
 
Corporate
 
Total
Multi-employer pension costs
$
1.5

 
$

 
$

 
$
1.5

Accelerated depreciation
30.4

 

 
1.2

 
31.6

Other cost of goods sold
2.5

 

 

 
2.5

Total cost of goods sold
34.4

 

 
1.2

 
35.6

Severance and related costs (recoveries)
26.7

 
8.1

 
63.2

 
98.0

Contract/Lease cancellation expenses
0.7

 

 
52.1

 
52.8

Consulting/Professional fees
1.0

 

 
28.0

 
29.0

Fixed asset impairment / Net gain on disposal
1.0

 

 

 
1.0

Accelerated depreciation

 

 
0.9

 
0.9

Other selling, general and administrative expenses
5.7

 

 
6.4

 
12.1

Total selling, general and administrative expenses
35.1

 
8.1

 
150.6

 
193.8

Consolidated total
$
69.5

 
$
8.1

 
$
151.8

 
$
229.4

Included in the above table are $145.1 million of charges that have resulted or will result in cash outflows and $84.3 million in non-cash charges. Not included in the above table are $128.7 million of pre-tax expenses ($83.3 million of cash charges and $45.4 million of non-cash charges) related to the Private Brands operations we have agreed to sell.
Liabilities recorded for the SCAE Plan and changes therein for the second quarter of fiscal 2016 were as follows:
 
Balance at May 31,
2015
 
Costs Incurred
and Charged
to Expense
 
Costs Paid
or  Otherwise Settled
 
Changes in Estimates
 
Balance at November 29,
2015
Multi-employer pension costs
$
11.4

 
$
0.2

 
$
(0.4
)
 
$

 
$
11.2

Severance
16.4

 
63.3

 
(11.6
)
 
(0.6
)
 
67.5

Consulting
0.2

 
25.3

 
(6.6
)
 

 
18.9

Contract cancellation
3.1

 
3.3

 
(1.0
)
 
(0.6
)
 
4.8

Other costs
1.2

 
3.9

 
(3.7
)
 
(0.1
)
 
1.3

Total
$
32.3

 
$
96.0

 
$
(23.3
)
 
$
(1.3
)
 
$
103.7


10





5. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
On September 21, 2015, the Company entered into an amendment to its $1.5 billion revolving credit facility to exclude certain non-cash impairments from the calculation of the fixed charge ratio covenant. As of November 29, 2015, we were in compliance with all financial covenants in the facility.
During the second quarter of fiscal 2016, we repaid the entire principal balance of $250.0 million of our 1.35% senior notes on the maturity date of September 10, 2015.
During the first quarter of fiscal 2015, we repurchased $225.0 million aggregate principal amount of senior notes due 2023, $200.0 million aggregate principal amount of senior notes due 2043, $25.0 million aggregate principal amount of senior notes due 2019, $25.0 million aggregate principal amount of senior notes due 2018, and $25.0 million aggregate principal amount of senior notes due 2017, in each case prior to maturity in a tender offer, resulting in a net loss of $16.3 million as a cost of early retirement of debt, including a $9.5 million tender premium.
During the first quarter of fiscal 2015, we repaid the remaining borrowings of our unsecured term loan facility (the "Term Loan Facility") of $900.0 million (with an interest rate at LIBOR plus 1.75% per annum), prior to maturity, resulting in a loss of $8.3 million as a cost of early retirement of debt. The Term Loan Facility was terminated after repayment.
During the first quarter of fiscal 2015, we issued $550.0 million aggregate principal amount of floating rate notes due July 21, 2016. The notes bear interest at a rate equal to three-month LIBOR plus 0.37% per annum.
Net interest expense from continuing operations consists of:
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
November 29,
2015
 
November 23,
2014
 
November 29,
2015
 
November 23,
2014
Long-term debt
$
80.7

 
$
79.5

 
$
163.0

 
$
164.6

Short-term debt
0.6

 
0.8

 
0.8

 
1.3

Interest income
(0.1
)
 
(0.3
)
 
(0.3
)
 
(0.8
)
Interest capitalized
(1.6
)
 
(1.3
)
 
(3.6
)
 
(3.1
)
 
$
79.6

 
$
78.7

 
$
159.9

 
$
162.0

During fiscal 2014, we entered into interest rate swap contracts to hedge the fair value of certain of our senior long-term debt instruments maturing in fiscal 2019 and 2020, effectively converting interest on this debt from fixed rate to floating rate (See Note 8). These swaps, which were designated as fair value hedges, reduced our interest expense by $2.6 million and $5.2 million in the second quarter and first half of fiscal 2015, respectively. The interest rate swaps were terminated during the third quarter of fiscal 2015. The cumulative adjustments to the fair value of the debt instruments that were hedged (the effective portion of the hedges), totaling $12.6 million, will be amortized as a reduction of interest expense over the remaining lives of the debt instruments (through fiscal 2020). Our net interest expense was reduced by $0.6 million and $1.2 million for the second quarter and first half of fiscal 2016, respectively, as a result of this amortization.

6. VARIABLE INTEREST ENTITIES
Variable Interest Entities Consolidated
We own a 49.99% interest in Lamb Weston BSW, LLC ("Lamb Weston BSW"), a potato processing venture with Ochoa Ag Unlimited Foods, Inc. ("Ochoa"). We provide all sales and marketing services to Lamb Weston BSW. Under certain circumstances, we could be required to compensate Ochoa for lost profits resulting from significant production shortfalls ("production shortfalls"). Commencing on June 1, 2018, or on an earlier date under certain circumstances, we have a contractual right to purchase the remaining equity interest in Lamb Weston BSW from Ochoa (the "call option"). We are currently subject to a contractual obligation to purchase all of Ochoa's equity investment in Lamb Weston BSW at the option of Ochoa (the "put option"). The purchase prices under the call option and the put option (the "options") are based on the book value of Ochoa's equity interest at the date of exercise, as modified by an agreed-upon rate of return for the holding period of the investment balance. The agreed-upon rate of return varies depending on the circumstances under which any of the options are exercised. As of November 29, 2015, the price at which Ochoa had the right to put its equity interest to us was $45.0 million. This amount is presented within other noncurrent liabilities in our Condensed Consolidated Balance Sheets. We have determined that Lamb Weston BSW is a variable interest entity and that we are the primary beneficiary of the entity. Accordingly, we consolidate the financial statements of Lamb Weston BSW.

11




We hold a promissory note from Lamb Weston BSW, the balance of which was $36.1 million at November 29, 2015. The promissory note is due in March 2016. The promissory note is currently accruing interest at a rate of LIBOR plus 200 basis points with a floor of 3.25%. In addition, as of November 29, 2015, we provided lines of credit of up to $15.0 million to Lamb Weston BSW. Borrowings under the lines of credit bear interest at a rate of LIBOR plus 200 basis points with a floor of 3.25%. The amounts owed by Lamb Weston BSW to the Company are not reflected in our Condensed Consolidated Balance Sheets, as they are eliminated in consolidation.
Our variable interests in Lamb Weston BSW include an equity investment in the venture, the options, the promissory note, certain fees paid to us by Lamb Weston BSW for sales and marketing services, the contingent obligation related to production shortfalls, and the lines of credit advanced to Lamb Weston BSW. Our maximum exposure to loss as a result of our involvement with this venture is equal to our equity investment in the venture, the balance of the promissory note extended to the venture, the amount, if any, advanced under the lines of credit, and the amount, if any, by which the put option exercise price exceeds the fair value of the noncontrolling interest in Lamb Weston BSW upon its exercise. Also, in the event of a production shortfall, we could be required to compensate Ochoa for lost profits. It is not possible to determine the maximum exposure to losses from the potential exercise of the put option or from potential production shortfalls. However, we do not expect to incur material losses resulting from these potential exposures.
Due to the consolidation of this variable interest entity, we reflected the following in our Condensed Consolidated Balance Sheets:
 
November 29,
2015
 
May 31,
2015
Cash and cash equivalents
$
15.2

 
$
13.7

Receivables, less allowance for doubtful accounts
0.3

 
0.2

Inventories
1.6

 
1.3

Prepaid expenses and other current assets
0.1

 
0.3

Property, plant and equipment, net
52.4

 
53.2

Goodwill
18.8

 
18.8

Brands, trademarks and other intangibles, net
5.6

 
6.0

Total assets
$
94.0

 
$
93.5

Accounts payable
$
12.0

 
$
16.9

Accrued payroll
0.9

 
0.7

Other accrued liabilities
0.5

 
0.6

Other noncurrent liabilities (noncontrolling interest)
33.7

 
31.3

Total liabilities
$
47.1

 
$
49.5

The liabilities recognized as a result of consolidating the Lamb Weston BSW entity do not represent additional claims on our general assets. The creditors of Lamb Weston BSW have claims only on the assets of Lamb Weston BSW. The assets recognized as a result of consolidating Lamb Weston BSW are the property of the venture and are not available to us for any other purpose, other than as a secured lender under the promissory note and lines of credit.
Variable Interest Entities Not Consolidated
We also have variable interests in certain other entities that we have determined to be variable interest entities, but for which we are not the primary beneficiary. We do not consolidate the financial statements of these entities.
We hold a 50% interest in Lamb Weston RDO, a potato processing venture. We provide all sales and marketing services to Lamb Weston RDO. We receive a fee for these services based on a percentage of the net sales of the venture. We reflect the value of our ownership interest in this venture in other assets in our Condensed Consolidated Balance Sheets, based upon the equity method of accounting. The balance of our investment was $14.3 million and $14.6 million at November 29, 2015 and May 31, 2015, respectively, representing our maximum exposure to loss as a result of our involvement with this venture. The capital structure of Lamb Weston RDO includes owners' equity of $28.6 million and term borrowings from banks of $41.1 million as of November 29, 2015. We have determined that we do not have the power to direct the activities that most significantly impact the economic performance of this venture.
We lease certain office buildings from entities that we have determined to be variable interest entities. The lease agreements with these entities include fixed-price purchase options for the assets being leased. The lease agreements also contain contingent put options (the “lease put options”) that allow the lessors to require us to purchase the buildings at the greater of original construction cost, or fair market value, without a lease agreement in place (the “put price”) in certain limited circumstances. As a result of substantial impairment charges related to our Private Brands operations, these lease put options are exercisable at November 29, 2015 and remain exercisable until generally 30 days after the end of the respective lease agreements. We are amortizing the difference between the estimated put price

12




and the estimated fair value (without a lease agreement in place) of each respective property over the remaining respective lease term within selling, general and administrative expenses. As of November 29, 2015, the estimated amount by which the put prices exceeded the fair values of the related properties was $58.5 million, of which we have accrued $5.6 million. As these buildings are worth considerably more when under lease agreements than when vacant, we may be able to mitigate some, or all of the financial exposure created by the put options by maintaining active lease agreements and/or by subleasing the buildings to credit worthy tenants. We do not expect to ultimately incur material financial losses as a result of the potential exercise of the lease put options by the lessors. These leases are accounted for as operating leases, and accordingly, there are no material assets or liabilities, other than the accrued portion of the put price, associated with these entities included in our Condensed Consolidated Balance Sheets. We have determined that we do not have the power to direct the activities that most significantly impact the economic performance of these entities. In making this determination, we have considered, among other items, the terms of the lease agreements, the expected remaining useful lives of the assets leased, and the capital structure of the lessor entities.

7. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
The change in the carrying amount of goodwill for the first half of fiscal 2016 was as follows:
 
Consumer
Foods
 
Commercial
Foods
 
Total
Balance as of May 31, 2015
$
3,824.6

 
$
874.9

 
$
4,699.5

Currency translation and purchase accounting adjustments
(13.1
)
 
(0.9
)
 
(14.0
)
Balance as of November 29, 2015
$
3,811.5

 
$
874.0

 
$
4,685.5

Other identifiable intangible assets were as follows:
 
November 29, 2015
 
May 31, 2015
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Non-amortizing intangible assets
$
912.0

 
$

 
$
916.9

 
$

Amortizing intangible assets
628.0

 
156.1

 
536.6

 
140.1

 
$
1,540.0

 
$
156.1

 
$
1,453.5

 
$
140.1

Non-amortizing intangible assets are comprised of brands and trademarks.
Amortizing intangible assets, carrying a remaining weighted average life of approximately 16 years, are principally composed of customer relationships, licensing arrangements, and intellectual property. Based on amortizing assets recognized in our Condensed Consolidated Balance Sheet as of November 29, 2015, amortization expense is estimated to average $36.0 million for each of the next five years.
In the first quarter of fiscal 2016, we recorded an amortizing intangible asset of $92.8 million, of which only $10.4 million was a cash payment made in the first quarter of fiscal 2016. Remaining payments will be made over a six year period.

8. DERIVATIVE FINANCIAL INSTRUMENTS
Our operations are exposed to market risks from adverse changes in commodity prices affecting the cost of raw materials and energy, foreign currency exchange rates, and interest rates. In the normal course of business, these risks are managed through a variety of strategies, including the use of derivatives.
Commodity and commodity index futures and option contracts are used from time to time to economically hedge commodity input prices on items such as natural gas, vegetable oils, proteins, packaging materials, dairy, grains, and electricity. Generally, we economically hedge a portion of our anticipated consumption of commodity inputs for periods of up to 36 months. We may enter into longer-term economic hedges on particular commodities, if deemed appropriate. As of November 29, 2015, we had economically hedged certain portions of our anticipated consumption of commodity inputs using derivative instruments with expiration dates through September 2016.
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 November 29, 2015, we had economically hedged certain portions of our foreign currency risk in anticipated transactions using derivative instruments with expiration dates through May 2017.

13




From time to time, we may use derivative instruments, including interest rate swaps, to reduce risk related to changes in interest rates. This includes, but is not limited to, hedging against increasing interest rates prior to the issuance of long-term debt and hedging the fair value of our senior long-term debt.
Derivatives Designated as Cash Flow Hedges
During fiscal 2013, we entered into interest rate swap contracts to hedge a portion of the interest rate risk related to our issuance of long-term debt to partially finance the acquisition of Ralcorp. We settled these contracts during the third quarter of fiscal 2013 resulting in a deferred gain of $4.2 million on senior notes maturing in 2043 and a deferred loss of $2.0 million on senior notes maturing in 2023, both recognized in accumulated other comprehensive loss. These amounts are being amortized as a component of net interest expense over the lives of the related debt instruments. The unamortized amounts of the deferred gain and deferred loss at November 29, 2015 were $3.0 million and $1.3 million, respectively.
Derivatives Designated as Fair Value Hedges
During fiscal 2014, we entered into interest rate swap contracts to hedge the fair value of certain of our senior long-term debt instruments maturing in fiscal 2019 and 2020, effectively converting interest on this debt from fixed rate to floating rate. We designated these interest rate swap contracts as fair value hedges of the debt instruments (See Note 5).
Changes in fair value of such derivative instruments were immediately recognized in earnings along with changes in the fair value of the items being hedged (based solely on the change in the benchmark interest rate). In the second quarter and first half of fiscal 2015, we recognized gains of $2.9 million and $0.7 million, respectively, representing the change in fair value of the interest rate swap contracts and losses of $2.6 million and $0.1 million, respectively, representing the change in fair value of the related senior long-term debt. The net gains of $0.3 million for the second quarter and $0.6 million for the first half of fiscal 2015 are classified within selling, general and administrative expenses.
The entire change in fair value of the derivative instruments was included in our assessment of hedge effectiveness.
We settled these contracts during the third quarter of fiscal 2015. The cumulative adjustment to the fair value of the debt instruments that were hedged, totaling $12.6 million, is being amortized as a reduction to interest expense over the remaining life of the debt instruments (through fiscal 2020). The unamortized amount of the deferred gain was $10.6 million at November 29, 2015.
Economic Hedges of Forecasted Cash Flows
Many of our derivatives do not qualify for, and we do not currently designate certain commodity or foreign currency derivatives to achieve, hedge accounting treatment. We reflect realized and unrealized gains and losses from derivatives used to economically hedge anticipated commodity consumption and to mitigate foreign currency cash flow risk in earnings immediately within general corporate expense (within cost of goods sold). The gains and losses are reclassified to segment operating results in the period in which the underlying item being economically hedged is recognized in cost of goods sold. In the event that management determines a particular derivative entered into as an economic hedge of a forecasted commodity purchase has ceased to function as an economic hedge, we cease recognizing further gains and losses on such derivatives in corporate expense and begin recognizing such gains and losses within segment operating results, immediately.
Economic Hedges of Fair Values — Foreign Currency Exchange Rate Risk
We may use options and cross currency swaps to economically hedge the fair value of certain monetary assets and liabilities (including intercompany balances) denominated in a currency other than the functional currency. These derivatives are marked-to-market with gains and losses immediately recognized in selling, general and administrative expenses. These substantially offset the foreign currency transaction gains or losses recognized as values of the monetary assets or liabilities being economically hedged change.
All derivative instruments are recognized on our balance sheets at fair value (refer to Note 16 for additional information related to fair value measurements). The fair value of derivative assets is recognized within prepaid expenses and other current assets, while the fair value of derivative liabilities is recognized within other accrued liabilities. In accordance with U.S. GAAP, we offset certain derivative asset and liability balances, as well as certain amounts representing rights to reclaim cash collateral and obligations to return cash collateral, where master netting agreements provide for legal right of setoff. At November 29, 2015 and May 31, 2015, amounts representing a right to reclaim cash collateral of $7.5 million and $5.9 million, respectively, were included in prepaid expenses and other current assets in our Condensed Consolidated Balance Sheets.

14




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