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EX-32.1 - EXHIBIT 32.1 - CONAGRA BRANDS INC.cag-10q3ex321.htm
EX-31.2 - EXHIBIT 31.2 - CONAGRA BRANDS INC.cag-10q3ex312.htm
EX-31.1 - EXHIBIT 31.1 - CONAGRA BRANDS INC.cag-10q3ex311.htm
EX-12 - EXHIBIT 12 - CONAGRA BRANDS INC.cag-10q3ex12.htm
EX-10.2 - EXHIBIT 10.2 - CONAGRA BRANDS INC.cag-10q3ex102.htm
EX-10.1 - EXHIBIT 10.1 - CONAGRA BRANDS INC.cag-10q3ex101.htm
EX-2.1 - EXHIBIT 2.1 - CONAGRA BRANDS INC.cag-10q3ex21.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 February 26, 2017
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 BRANDS, 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.)
 
 
 
222 W. Merchandise Mart Plaza, Suite 1300
Chicago, Illinois
 
60654
(Address of principal executive offices)
 
(Zip Code)
(312) 549-5000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
 ______________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x     No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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 February 26, 2017, was 425,501,586.
 



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





PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Conagra Brands, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in millions except per share amounts)
(unaudited)
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
February 26,
2017
 
February 28,
2016
 
February 26,
2017
 
February 28,
2016
Net sales
$
1,981.2

 
$
2,199.3

 
$
5,965.2

 
$
6,611.1

Costs and expenses:
 
 
 
 
 
 
 
Cost of goods sold
1,360.2

 
1,579.5

 
4,152.1

 
4,762.0

Selling, general and administrative expenses
349.7

 
447.0

 
999.3

 
1,293.0

Interest expense, net
45.7

 
76.4

 
158.0

 
235.7

Income from continuing operations before income taxes and equity method investment earnings
225.6

 
96.4

 
655.8

 
320.4

Income tax expense
67.9

 
33.6

 
315.5

 
126.0

Equity method investment earnings
21.8

 
8.6

 
52.1

 
50.7

Income from continuing operations
179.5

 
71.4

 
392.4

 
245.1

Income (loss) from discontinued operations, net of tax
0.7

 
134.9

 
103.7

 
(1,031.9
)
Net income (loss)
$
180.2

 
$
206.3

 
$
496.1

 
$
(786.8
)
Less: Net income attributable to noncontrolling interests
0.5

 
1.7

 
8.1

 
7.8

Net income (loss) attributable to Conagra Brands, Inc.
$
179.7

 
$
204.6

 
$
488.0

 
$
(794.6
)
Earnings (loss) per share — basic
 
 
 
 
 
 
 
Income from continuing operations attributable to Conagra Brands, Inc. common stockholders
$
0.41

 
$
0.16

 
$
0.90

 
$
0.56

Income (loss) from discontinued operations attributable to Conagra Brands, Inc. common stockholders
0.01

 
0.30

 
0.22

 
(2.40
)
Net income (loss) attributable to Conagra Brands, Inc. common stockholders
$
0.42

 
$
0.46

 
$
1.12

 
$
(1.84
)
Earnings (loss) per share — diluted
 
 
 
 
 
 
 
Income from continuing operations attributable to Conagra Brands, Inc. common stockholders
$
0.41

 
$
0.16

 
$
0.89

 
$
0.56

Income (loss) from discontinued operations attributable to Conagra Brands, Inc. common stockholders

 
0.30

 
0.22

 
(2.39
)
Net income (loss) attributable to Conagra Brands, Inc. common stockholders
$
0.41

 
$
0.46

 
$
1.11

 
$
(1.83
)
Cash dividends declared per common share
$
0.20

 
$
0.25

 
$
0.70

 
$
0.75

See notes to the condensed consolidated financial statements.


1




Conagra Brands, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in millions)
(unaudited)
 
 
Thirteen weeks ended
 
February 26, 2017
 
February 28, 2016
 
Pre-Tax Amount
Tax (Expense) Benefit
After-Tax Amount
 
Pre-Tax Amount
Tax (Expense) Benefit
After-Tax Amount
Net income
$
245.5

$
(65.3
)
$
180.2

 
$
318.2

$
(111.9
)
$
206.3

Other comprehensive income:



 



Derivative adjustments:






 






Unrealized derivative adjustments
4.1

(1.6
)
2.5

 



Reclassification for derivative adjustments included in net income
(0.2
)
0.1

(0.1
)
 
(2.1
)
0.8

(1.3
)
Unrealized gains (losses) on available-for-sale securities
0.2

(0.1
)
0.1

 
(0.1
)

(0.1
)
Currency translation gains (losses):
 
 
 
 
 
 
 
Unrealized currency translation gains (losses)
15.7


15.7

 
(18.0
)

(18.0
)
Reclassification for currency translation losses included in net income



 
73.4


73.4

Pension and post-employment benefit obligations:






 






Unrealized pension and post-employment benefit obligations
62.2

(23.8
)
38.4

 
0.4

(0.1
)
0.3

Reclassification for pension and post-employment benefit obligations included in net income
13.0

(5.0
)
8.0

 
(10.9
)
3.4

(7.5
)
Comprehensive income
340.5

(95.7
)
244.8

 
360.9

(107.8
)
253.1

Comprehensive income attributable to noncontrolling interests
3.0

(0.3
)
2.7

 
(0.3
)
(0.2
)
(0.5
)
Comprehensive income attributable to Conagra Brands, Inc.
$
337.5

$
(95.4
)
$
242.1

 
$
361.2

$
(107.6
)
$
253.6


 
Thirty-nine weeks ended
 
February 26, 2017
 
February 28, 2016
 
Pre-Tax Amount
Tax (Expense) Benefit
After-Tax Amount
 
Pre-Tax Amount
Tax (Expense) Benefit
After-Tax Amount
Net income (loss)
$
896.7

$
(400.6
)
$
496.1

 
$
(973.1
)
$
186.3

$
(786.8
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Derivative adjustments:
 
 
 
 
 
 
 
Unrealized derivative adjustments
(1.7
)
0.6

(1.1
)
 



Reclassification for derivative adjustments included in net income
(0.2
)
0.1

(0.1
)
 
(2.1
)
0.8

(1.3
)
Unrealized gains on available-for-sale securities
0.6

(0.2
)
0.4

 



Currency translation losses:
 
 
 
 
 
 
 
Unrealized currency translation losses
(10.3
)
0.2

(10.1
)
 
(74.0
)

(74.0
)
Reclassification for currency translation losses included in net income



 
73.4


73.4

Pension and post-employment benefit obligations:
 
 
 
 
 
 
 
Unrealized pension and post-employment benefit obligations
126.9

(49.3
)
77.6

 
7.1

(1.8
)
5.3

Reclassification for pension and post-employment benefit obligations included in net income
11.2

(4.3
)
6.9

 
(13.5
)
4.4

(9.1
)
Comprehensive income (loss)
1,023.2

(453.5
)
569.7

 
(982.2
)
189.7

(792.5
)
Comprehensive income attributable to noncontrolling interests
9.0

(0.5
)
8.5

 
2.3

(0.7
)
1.6

Comprehensive income (loss) attributable to Conagra Brands, Inc.
$
1,014.2

$
(453.0
)
$
561.2

 
$
(984.5
)
$
190.4

$
(794.1
)


See notes to the condensed consolidated financial statements.


2




Conagra Brands, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions except share data)
(unaudited)
 
 
February 26,
2017
 
May 29,
2016
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
683.6

 
$
798.1

Receivables, less allowance for doubtful accounts of $3.7 and $3.2
601.4

 
650.1

Inventories
1,046.4

 
1,083.2

Prepaid expenses and other current assets
207.7

 
148.6

Current assets of discontinued operations

 
779.7

Current assets held for sale

 
117.0

Total current assets
2,539.1

 
3,576.7

Property, plant and equipment
4,268.1

 
4,213.3

Less accumulated depreciation
(2,612.3
)
 
(2,511.7
)
Property, plant and equipment, net
1,655.8

 
1,701.6

Goodwill
4,251.7

 
4,396.2

Brands, trademarks and other intangibles, net
1,253.1

 
1,237.2

Other assets
797.6

 
905.5

Noncurrent assets of discontinued operations

 
1,339.3

Noncurrent assets held for sale
1.7

 
234.1

 
$
10,499.0

 
$
13,390.6

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities
 
 
 
Notes payable
$
3.7

 
$
13.9

Current installments of long-term debt
128.8

 
559.4

Accounts payable
690.1

 
706.7

Accrued payroll
148.4

 
220.8

Other accrued liabilities
593.9


567.7

Current liabilities of discontinued operations

 
409.2

Current liabilities held for sale

 
54.7

Total current liabilities
1,564.9

 
2,532.4

Senior long-term debt, excluding current installments
2,645.8

 
4,685.5

Subordinated debt
195.9

 
195.9

Other noncurrent liabilities
1,788.2


1,875.7

Noncurrent liabilities of discontinued operations

 
304.8

Noncurrent liabilities held for sale

 
1.5

Total liabilities
6,194.8

 
9,595.8

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
1,165.3

 
1,136.3

Retained earnings
4,171.0

 
3,218.3

Accumulated other comprehensive loss
(271.3
)
 
(344.5
)
Less treasury stock, at cost, 142,405,586 and 129,842,206 common shares
(3,683.4
)
 
(3,136.2
)
Total Conagra Brands, Inc. common stockholders' equity
4,221.3

 
3,713.6

Noncontrolling interests
82.9

 
81.2

Total stockholders' equity
4,304.2

 
3,794.8

 
$
10,499.0

 
$
13,390.6

See notes to the condensed consolidated financial statements.


3




Conagra Brands, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions)
(unaudited)
 
Thirty-nine weeks ended
 
February 26,
2017
 
February 28,
2016
Cash flows from operating activities:
 
 
 
Net income (loss)
$
496.1

 
$
(786.8
)
Income (loss) from discontinued operations
103.7

 
(1,031.9
)
Income from continuing operations
392.4

 
245.1

Adjustments to reconcile income from continuing operations to net cash flows from operating activities:
 
 
 
Depreciation and amortization
199.8

 
210.6

Asset impairment charges
221.9

 
8.4

Gain on divestitures
(197.4
)
 

Loss on extinguishment of debt
93.3

 
23.9

Lease cancellation expense

 
55.6

Earnings of affiliates in excess of distributions
(21.6
)
 
(10.3
)
Share-based payments expense
28.1

 
29.5

Contributions to pension plans
(9.8
)
 
(9.3
)
Pension expense (benefit)
(16.2
)
 
13.8

Other items
25.5

 
25.3

Change in operating assets and liabilities excluding effects of business acquisitions and dispositions:
 
 
 
Accounts receivable
49.5

 
(99.3
)
Inventory
35.0

 
(65.1
)
Deferred income taxes and income taxes payable, net
135.6

 
(160.0
)
Prepaid expenses and other current assets
8.2

 
8.2

Accounts payable
13.3

 
(104.6
)
Accrued payroll
(71.5
)
 
24.2

Other accrued liabilities
(82.6
)
 
78.3

Net cash flows from operating activities — continuing operations
803.5

 
274.3

Net cash flows from operating activities — discontinued operations
43.0

 
464.3

Net cash flows from operating activities
846.5

 
738.6

Cash flows from investing activities:
 
 
 
Additions to property, plant and equipment
(158.5
)
 
(171.1
)
Sale of property, plant and equipment
12.5

 
19.4

Proceeds from divestitures
489.0

 

Purchase of business and intangible assets
(108.1
)
 
(10.4
)
Other items

 
0.3

Net cash flows from investing activities — continuing operations
234.9

 
(161.8
)
Net cash flows from investing activities — discontinued operations
(123.7
)
 
2,418.2

Net cash flows from investing activities
111.2

 
2,256.4

Cash flows from financing activities:
 
 
 
Net short-term borrowings
(10.1
)
 
10.5

Repayment of long-term debt
(1,062.3
)
 
(2,519.9
)
Payment of intangible asset financing arrangement
(14.9
)
 

Repurchase of Conagra Brands, Inc. common shares
(594.6
)
 

Cash dividends paid
(328.9
)
 
(323.5
)
Exercise of stock options and issuance of other stock awards
66.6

 
164.6

Other Items
(1.9
)
 

Net cash flows from financing activities — continuing operations
(1,946.1
)
 
(2,668.3
)
Net cash flows from financing activities — discontinued operations
839.1

 
(4.7
)
Net cash flows from financing activities
(1,107.0
)
 
(2,673.0
)
Effect of exchange rate changes on cash and cash equivalents
(1.6
)
 
(2.5
)
Net change in cash and cash equivalents
(150.9
)
 
319.5

Discontinued operations cash activity included above:
 
 
 
Add: Cash balance included in assets held for sale and discontinued operations at beginning of period
36.4

 
49.0

Less: Cash balance included in assets held for sale and discontinued operations at end of period

 
36.6

Cash and cash equivalents at beginning of period
798.1

 
134.1

Cash and cash equivalents at end of period
$
683.6

 
$
466.0

See notes to the condensed consolidated financial statements.

4




Conagra Brands, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Thirty-nine weeks ended February 26, 2017 and February 28, 2016
(columnar dollars in millions except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial information reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of the results of operations, financial position, and cash flows for the periods presented. The adjustments are of a normal recurring nature, except as otherwise noted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Conagra Brands, Inc. (formerly ConAgra Foods, Inc., the “Company”, “we”, “us”, or “our”) Annual Report on Form 10-K for the fiscal year ended May 29, 2016.
The results of operations for any quarter or a partial fiscal year period are not necessarily indicative of the results to be expected for other periods or the full fiscal year.
Basis of Consolidation — The condensed consolidated financial statements include the accounts of Conagra Brands, Inc. and all majority-owned subsidiaries. In addition, the accounts of all variable interest entities for which we have been determined to be the primary beneficiary are included in our condensed consolidated financial statements from the date such determination is made. All significant intercompany investments, accounts, and transactions have been eliminated.

On November 9, 2016, the Company completed the previously announced spinoff (the "Spinoff") of Lamb Weston Holdings, Inc. (“Lamb Weston”) through a distribution of 100% of the Company’s interest in Lamb Weston to holders of shares of the Company’s common stock as of November 1, 2016. In accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), the financial position and results of operations of the Lamb Weston operations are presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented (see Note 3 for additional discussion).
Comprehensive Income — Comprehensive income includes net income, currency translation adjustments, certain derivative-related activity, changes in the value of available-for-sale investments, and changes in prior service cost and net actuarial gains (losses) from pension (for amounts not in excess of the 10% corridor) and post-retirement health care plans. We generally deem our foreign investments to be essentially permanent in nature, and we do not provide for taxes on currency translation adjustments arising from converting the investment denominated in a foreign currency to U.S. dollars. When we determine that a foreign investment, as well as undistributed earnings, are no longer permanent in nature, estimated taxes will be provided for the related deferred tax liability (asset), if any, resulting from currency translation adjustments.


5


The following table summarizes the reclassifications from accumulated other comprehensive income (loss) into operations:

 
 
Thirteen weeks ended
 
Affected Line Item in the Condensed Consolidated Statement of Operations
 
 
February 26, 2017
 
February 28, 2016
 
 
Net derivative adjustment, net of tax:
 
 
 
 
 
 
     Cash flow hedges
 
$
(0.2
)
 
$
(2.1
)
 
Interest expense, net
 
 
(0.2
)
 
(2.1
)
 
Total before tax
 
 
0.1

 
0.8

 
Income tax expense
 
 
$
(0.1
)
 
$
(1.3
)
 
Net of tax
Pension and postretirement liabilities:
 

 

 

     Net prior service benefit
 
$
(0.9
)
 
$
(1.2
)
 
Selling, general and administrative expenses
     Divestiture of Private Brands
 

 
(4.3
)
 
Income (loss) from discontinued operations, net of tax
     Pension settlement of equity method investment
 

 
(5.4
)
 
Equity method investment earnings
     Pension settlement
 
13.8

 

 
Selling, general and administrative expenses
     Net actuarial loss
 
0.1

 

 
Selling, general and administrative expenses
 
 
13.0

 
(10.9
)
 
Total before tax
 
 
(5.0
)
 
3.4

 
Income tax expense
 
 
$
8.0

 
$
(7.5
)
 
Net of tax
Currency translation losses
 
$

 
$
73.4

 
Income (loss) from discontinued operations, net of tax
 
 

 
73.4

 
Total before tax
 
 

 

 
Income tax expense
 
 
$

 
$
73.4

 
Net of tax

 
 
Thirty-nine weeks ended
 
Affected Line Item in the Condensed Consolidated Statement of Operations
 
 
February 26, 2017
 
February 28, 2016
 
 
Net derivative adjustment, net of tax:
 
 
 
 
 
 
     Cash flow hedges
 
$
(0.2
)
 
$
(2.1
)
 
Interest expense, net
 
 
(0.2
)
 
(2.1
)
 
Total before tax
 
 
0.1

 
0.8

 
Income tax expense
 
 
$
(0.1
)
 
$
(1.3
)
 
Net of tax
Pension and postretirement liabilities:
 
 
 
 
 
 
     Net prior service benefit
 
$
(2.9
)
 
$
(3.8
)
 
Selling, general and administrative expenses
     Divestiture of Private Brands
 

 
(4.3
)
 
Income (loss) from discontinued operations, net of tax
     Pension settlement of equity method investment
 

 
(5.4
)
 
Equity method investment earnings
     Pension settlement
 
13.8

 

 
Selling, general and administrative expenses
     Net actuarial loss
 
0.3

 

 
Selling, general and administrative expenses
 
 
11.2

 
(13.5
)
 
Total before tax
 
 
(4.3
)
 
4.4

 
Income tax expense
 
 
$
6.9

 
$
(9.1
)
 
Net of tax
Currency translation losses
 
$

 
$
73.4

 
Income (loss) from discontinued operations, net of tax
 
 

 
73.4

 
Total before tax
 
 

 

 
Income tax expense
 
 
$

 
$
73.4

 
Net of tax

6


Cash and cash equivalents — Cash and all highly liquid investments with an original maturity of three months or less at the date of acquisition, including short-term time deposits and government agency and corporate obligations, are classified as cash and cash equivalents.
As part of the consideration for the Spinoff, we received a cash payment from Lamb Weston in the amount of $823.5 million. In order to maintain the tax-free nature of the Spinoff, we were required to use the cash within twelve months of receiving the payment and to only use it in one or more of the following ways: to pay dividends on shares of our common stock, to repay debt incurred prior to July 8, 2016, and to repurchase shares of our common stock. As of February 26, 2017, all such cash proceeds had been deployed to repay debt and repurchase shares of our common stock.
Reclassifications and other changes — Certain prior year amounts have been reclassified to conform with current year presentation.
Use of Estimates — Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions affect reported amounts of assets, liabilities, revenues, and expenses as reflected in the condensed consolidated financial statements. Actual results could differ from these estimates.
Accounting Changes — In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies the accounting for income taxes, among other changes, related to stock-based compensation. We elected to early adopt this ASU as of the beginning of fiscal 2017. Starting in the first quarter of fiscal 2017, we recognized all excess tax benefits and tax deficiencies as income tax expense or benefit as a discrete event. An income tax benefit of approximately $3.5 million and $17.5 million was recognized in the third quarter and first three quarters of fiscal 2017, respectively, as a result of the adoption of ASU 2016-09. The treatment of forfeitures has changed as we have elected to discontinue our past process of estimating the number of forfeitures and now account for forfeitures as they occur. As such, this had a cumulative effect on retained earnings of $3.9 million, net of tax. We have elected to present the cash flow statement on a retrospective transition method and prior periods have been adjusted to present the excess tax benefits as part of cash flows from operating activities. This resulted in an increase in cash flows from operating activities and a decrease in cash flows from financing activities of $43.5 million in the first three quarters of fiscal 2016.
Recently Issued Accounting Standards — In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP. On July 9, 2015, the FASB deferred the effective date of the new revenue recognition standard by one year. Based on the FASB’s ASU, we will apply the new revenue standard in our fiscal year 2019. Early adoption in our fiscal year 2018 is permitted. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. The standard permits the use of either the retrospective or cumulative effect transition method.
In July 2015, the FASB issued ASU 2015-11, Inventory, which requires an entity to measure inventory within the scope at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The effective date for the standard is for fiscal years beginning after December 15, 2016. Early adoption is permitted. The standard is to be applied prospectively. We do not expect ASU 2015-11 to have a material impact to our consolidated financial statements.
In January 2016, the FASB issued 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The effective date for this standard is for fiscal years beginning after December 31, 2017. Early adoption is not permitted except for certain provisions. We do not expect ASU 2016-01 to have a material impact to our consolidated financial statements.
In February 2016, the FASB issued its final lease accounting standard, FASB Accounting Standard Codification (“ASC”) Topic 842, Leases, which requires lessees to reflect most leases on their balance sheet as assets and obligations. The effective date for the standard is for fiscal years beginning after December 15, 2018. Early adoption is permitted. We are evaluating the effect that ASC 842 will have on our consolidated financial statements and related disclosures. The standard is to be applied under the modified retrospective method, with elective reliefs, which requires application of the new guidance for all periods presented.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The effective date for the standard is for fiscal years beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of our pending adoption of this standard on our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash, which provides amendments to current guidance to address the classifications and presentation of changes in restricted cash in the statement of cash flows. The effective date for the standard is for fiscal years beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of our pending adoption of this standard on our consolidated financial statements.

7


In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The updated guidance required a prospective adoption. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of our pending adoption of this standard on our consolidated financial statements.

2. ACQUISITIONS
In September 2016, we acquired the operating assets of Frontera Foods, Inc. and Red Fork LLC, including the Frontera®, Red Fork®, and Salpica® brands. These businesses make authentic, gourmet Mexican food products and contemporary American cooking sauces. We acquired the businesses for $108.1 million in cash, net of cash acquired. Approximately $38.7 million has been classified as goodwill and $66.7 million has been classified as other intangible assets pending determination of the final purchase price allocation. The amount allocated to goodwill is deductible for tax purposes. These businesses are included in the Grocery & Snacks segment.
In March 2017, subsequent to the end of the third quarter of fiscal 2017, we entered into a definitive agreement to acquire protein-based snacking businesses Thanasi Foods LLC, maker of Duke’s® meat snacks, and BIGS LLC, maker of BIGS® seeds. The transaction is subject to customary closing conditions, including the receipt of any applicable regulatory approvals, and is expected to close in the next few months.

3. DISCONTINUED OPERATIONS AND OTHER DIVESTITURES
Lamb Weston Spinoff
On November 9, 2016, we completed the Spinoff of our Lamb Weston business. As of such date, we did not beneficially own any equity interest in Lamb Weston and no longer consolidated Lamb Weston into our financial results. We reflected the results of this business as discontinued operations for all periods presented. The assets and liabilities of the Lamb Weston business have been reclassified as assets and liabilities of discontinued operations within our Condensed Consolidated Balance Sheets for the period presented prior to the Spinoff.
The summary comparative financial results of the Lamb Weston business through the date of the Spinoff, included within discontinued operations, were as follows:
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
February 26, 2017
 
February 28, 2016
 
February 26, 2017
 
February 28, 2016
Net sales
$

 
$
723.8

 
$
1,407.9

 
$
2,200.9

Income (loss) from discontinued operations before income taxes and equity method investment earnings
$
(0.8
)
 
$
137.5

 
$
174.3

 
$
353.0

Income (loss) before income taxes and equity method investment earnings
(0.8
)
 
137.5

 
174.3

 
353.0

Income tax expense (benefit)
(0.6
)
 
57.3

 
88.0

 
133.3

Equity method investment earnings

 
36.1

 
15.9

 
56.3

Income (loss) from discontinued operations, net of tax
(0.2
)
 
116.3

 
102.2

 
276.0

Less: Net income attributable to noncontrolling interests

 
1.3

 
6.8

 
6.5

Net income (loss) from discontinued operations attributable to Conagra Brands, Inc.
$
(0.2
)
 
$
115.0

 
$
95.4

 
$
269.5

For the third quarter and first three quarters of fiscal 2017, we incurred $0.8 million and $72.8 million, respectively, of expenses in connection with the Spinoff primarily related to professional fees and contract services associated with preparation of regulatory filings and separation activities. These expenses are reflected in income from discontinued operations.

8




The assets and liabilities classified as assets and liabilities of discontinued operations in our Condensed Consolidated Balance Sheets related to the Lamb Weston business were as follows:
 
May 29, 2016
Cash and cash equivalents
$
36.4

Receivables, less allowance for doubtful accounts of $0.5
186.5

Inventories
498.9

Prepaid expenses and other current assets
57.9

Total current assets of discontinued operations
$
779.7

Property, plant and equipment, net
$
1,004.1

Goodwill
133.9

Brands, trademarks and other intangibles, net
39.6

Other assets
161.7

Total noncurrent assets of discontinued operations
$
1,339.3

Notes payable
$
24.9

Current installments of long-term debt
12.0

Accounts payable
238.7

Accrued payroll
50.3

Other accrued liabilities
83.3

Total current liabilities of discontinued operations
$
409.2

Senior long-term debt, excluding current installments
$
36.4

Other noncurrent liabilities
268.4

Total noncurrent liabilities of discontinued operations
$
304.8

In connection with the Spinoff, total assets of $2.28 billion and total liabilities of $2.98 billion (including debt of $2.46 billion) were transferred to Lamb Weston. As part of the consideration for the Spinoff, the Company received a cash payment from Lamb Weston in the amount of $823.5 million. See Note 5 for discussion of the debt-for-debt exchange related to the Spinoff.
Private Brands Operations
On February 1, 2016, pursuant to the Stock Purchase Agreement, dated as of November 1, 2015, we completed the disposition of our Private Brands operations to TreeHouse Foods, Inc. for $2.6 billion in cash on a debt-free basis.
As a result of the disposition, we recognized a pre-tax charge of $22.5 million ($22.1 million after-tax) and $1.92 billion ($1.44 billion after-tax) in the third quarter and first three quarters of fiscal 2016, respectively, to write-down the goodwill and long-lived assets to the estimated sales price, less costs to sell. We reflected the results of this business as discontinued operations for all periods presented.
The summary comparative financial results of the Private Brands business, included within discontinued operations, were as follows:
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
February 26, 2017
 
February 28, 2016
 
February 26, 2017
 
February 28, 2016
Net sales
$

 
$
634.0

 
$
(0.9
)
 
$
2,484.7

Loss on sale of businesses
$
(4.1
)
 
$

 
$
(3.1
)
 
$

Goodwill and long-lived asset impairment charges

 
(22.5
)
 

 
(1,921.1
)
Income from operations of discontinued operations before income taxes and equity method investment earnings
3.0

 
61.9

 
1.7

 
167.6

Income (loss) before income taxes
(1.1
)
 
39.4

 
(1.4
)
 
(1,753.5
)
Income tax expense (benefit)
(2.0
)
 
20.8

 
(2.9
)
 
(445.6
)
Income (loss) from discontinued operations, net of tax
$
0.9

 
$
18.6

 
$
1.5

 
$
(1,307.9
)


9




Other Divestitures
During the first quarter of fiscal 2017, we completed the sales of our Spicetec Flavors & Seasonings business (“Spicetec”) and our JM Swank business, each of which was part of our Commercial segment, for $329.7 million and $159.3 million, respectively, in cash, net of cash included in the dispositions. We recognized pre-tax gains from the sales of $144.8 million and $52.6 million, respectively. The assets and liabilities of these businesses have been reclassified as assets and liabilities held for sale within our Condensed Consolidated Balance Sheets for the period presented prior to the divestiture.
The assets and liabilities classified as held for sale reflected in our Condensed Consolidated Balance Sheets related to the Spicetec and JM Swank businesses were as follows:
 
May 29, 2016
Spicetec:
 
Current assets
$
43.3

Noncurrent assets (including goodwill of $104.7 million)
148.3

Current liabilities
10.3

Noncurrent liabilities
1.2

JM Swank:
 
Current assets
$
73.7

Noncurrent assets (including goodwill of $53.8 million)
74.3

Current liabilities
44.3

Noncurrent liabilities
0.4

In addition, we are actively marketing certain other long-lived assets. These assets have been reclassified as assets held for sale within our Condensed Consolidated Balance Sheets for all periods presented. The balance of these noncurrent assets classified as held for sale was $1.7 million in our Corporate segment at February 26, 2017 and $6.8 million and $4.7 million in our Corporate and Grocery & Snacks segments at May 29, 2016, respectively.

4. RESTRUCTURING ACTIVITIES
Supply Chain and Administrative Efficiency Plan
We previously announced a plan for the integration and restructuring of the operations of Ralcorp Holdings, Inc. (“Ralcorp”), optimization of the entire Company’s supply chain network, manufacturing assets, and dry distribution and mixing centers, and improvement of selling, general and administrative effectiveness and efficiencies, which we refer to as the Supply Chain and Administrative Efficiency Plan (the “SCAE Plan”). The SCAE Plan also includes plans announced in the second quarter of fiscal 2016 to realize efficiency benefits through a combination of reductions in selling, general and administrative expenses and enhancements to trade spend processes and tools. Although the divestiture of the Private Brands business was completed in the third quarter of fiscal 2016, resulting in the sale of substantially all the Ralcorp operations, we will continue to implement the SCAE Plan, including work related to optimizing our supply chain network, the pursuit of cost reductions through our selling, general and administrative functions, enhancements to trade spend processes and tools, and productivity improvements.
Although we remain unable to make good faith estimates relating to the entire SCAE Plan, we are reporting on actions initiated through the end of the third quarter of fiscal 2017, including the estimated amounts or range of amounts for each major type of costs expected to be incurred, and the charges that have resulted or will result in cash outflows. As of February 26, 2017, our Board of Directors has approved the incurrence of up to $880.5 million of expenses in connection with the SCAE Plan, including expenses allocated for the Private Brands and Lamb Weston operations. We have incurred or expect to incur approximately $442.6 million of charges ($299.9 million of cash charges and $142.7 million of non-cash charges) for actions identified to date under the SCAE Plan related to our continuing operations. In the third quarter and first three quarters of fiscal 2017, we recognized charges of $13.7 million and $47.6 million, respectively, in relation to the SCAE Plan related to our continuing operations. In the third quarter and first three quarters of fiscal 2016 we recognized charges of $109.1 million and $259.5 million, respectively, in relation to the SCAE Plan related to our continuing operations. We expect to incur costs related to the SCAE Plan over a multi-year period.

10




We anticipate that we will recognize the following pre-tax expenses in association with the SCAE Plan related to our continuing operations (amounts include charges recognized from plan inception through the first three quarters of fiscal 2017):
 
Grocery & Snacks
 
Refrigerated & Frozen
 
International
 
Foodservice
 
Corporate
 
Total
Multi-employer pension costs
$
31.7

 
$
1.5

 
$

 
$

 
$

 
$
33.2

Accelerated depreciation
36.6

 
18.6

 

 

 
1.2

 
56.4

Other cost of goods sold
5.5

 
2.1

 

 

 

 
7.6

    Total cost of goods sold
73.8

 
22.2

 

 

 
1.2

 
97.2

Severance and related costs, net
22.3

 
10.3

 
2.4

 
7.9

 
103.8

 
146.7

Fixed asset impairment (net of gains on disposal)
8.7

 
6.8

 

 

 
4.1

 
19.6

Accelerated depreciation

 

 

 

 
4.1

 
4.1

Contract/lease cancellation expenses
0.9

 
0.6

 

 

 
72.3

 
73.8

Consulting/professional fees
0.6

 
0.4

 
0.1

 

 
53.0

 
54.1

Other selling, general and administrative expenses
13.6

 
3.5

 

 

 
30.0

 
47.1

    Total selling, general and administrative expenses
46.1

 
21.6

 
2.5

 
7.9

 
267.3

 
345.4

        Consolidated total
$
119.9

 
$
43.8

 
$
2.5

 
$
7.9

 
$
268.5

 
$
442.6

During the third quarter of fiscal 2017, we recognized the following pre-tax expenses for the SCAE Plan related to our continuing operations:
 
Grocery & Snacks
 
Refrigerated & Frozen
 
International
 
 
Corporate
 
Total
Multi-employer pension costs
$
2.0

 
$

 
$

 
 
$

 
$
2.0

Accelerated depreciation
2.3

 

 

 
 

 
2.3

Other cost of goods sold
0.4

 

 

 
 

 
0.4

    Total cost of goods sold
4.7

 

 

 
 

 
4.7

Severance and related costs, net
0.6

 

 
(0.3
)
 
 
3.7

 
4.0

Fixed asset impairment (net of gains on disposal)
1.8

 
(1.4
)
 

 
 
0.2

 
0.6

Accelerated depreciation

 

 

 
 
0.3

 
0.3

Contract/lease cancellation expenses

 
0.1

 

 
 
1.1

 
1.2

Other selling, general and administrative expenses
2.0

 
0.2

 

 
 
0.7

 
2.9

    Total selling, general and administrative expenses
4.4

 
(1.1
)
 
(0.3
)
 
 
6.0

 
9.0

        Consolidated total
$
9.1

 
$
(1.1
)
 
$
(0.3
)
 
 
$
6.0

 
$
13.7

Included in the above table are $10.3 million of charges that have resulted or will result in cash outflows and $3.4 million in non-cash charges.

11




During the first three quarters of fiscal 2017, we recognized the following pre-tax expenses for the SCAE Plan related to our continuing operations:
 
Grocery & Snacks
 
Refrigerated & Frozen
 
International
 
Foodservice
 
Corporate
 
Total
Multi-employer pension costs
$
2.0

 
$

 
$

 
$

 
$

 
$
2.0

Accelerated depreciation
6.0

 
1.2

 

 

 

 
7.2

Other cost of goods sold
2.3

 
0.2

 

 

 

 
2.5

    Total cost of goods sold
10.3

 
1.4

 

 

 

 
11.7

Severance and related costs, net
1.2

 
(0.2
)
 
0.2

 
1.8

 
5.8

 
8.8

Fixed asset impairment (net of gains on disposal)
(0.3
)
 
3.2

 

 

 
3.1

 
6.0

Accelerated depreciation

 

 

 

 
0.8

 
0.8

Contract/lease cancellation expenses

 
0.1

 
0.1

 

 
8.5

 
8.7

Consulting/professional fees

 

 

 

 
0.3

 
0.3

Other selling, general and administrative expenses
4.2

 
1.6

 

 

 
5.5

 
11.3

    Total selling, general and administrative expenses
5.1

 
4.7

 
0.3

 
1.8

 
24.0

 
35.9

        Consolidated total
$
15.4

 
$
6.1

 
$
0.3

 
$
1.8

 
$
24.0

 
$
47.6

Included in the above table are $31.2 million of charges that have resulted or will result in cash outflows and $16.4 million in non-cash charges.
We recognized the following cumulative (plan inception to February 26, 2017) pre-tax expenses related to the SCAE Plan related to our continuing operations in our Condensed Consolidated Statements of Operations:
 
Grocery & Snacks
 
Refrigerated & Frozen
 
International
 
Foodservice
 
Corporate
 
Total
Multi-employer pension costs
$
31.8

 
$
1.5

 
$

 
$

 
$

 
$
33.3

Accelerated depreciation
27.4

 
18.6

 

 

 
1.2

 
47.2

Other cost of goods sold
4.2

 
2.1

 

 

 

 
6.3

    Total cost of goods sold
63.4

 
22.2

 

 

 
1.2

 
86.8

Severance and related costs, net
21.8

 
10.3

 
2.4

 
7.9

 
102.2

 
144.6

Fixed asset impairment (net of gains on disposal)
6.9

 
6.8

 

 

 
3.9

 
17.6

Accelerated depreciation

 

 

 

 
2.1

 
2.1

Contract/lease cancellation expenses
0.8

 
0.6

 
0.1

 

 
70.2

 
71.7

Consulting/professional fees
0.6

 
0.4

 
0.1

 

 
51.1

 
52.2

Other selling, general and administrative expenses
9.6

 
3.2

 

 

 
18.5

 
31.3

    Total selling, general and administrative expenses
39.7

 
21.3

 
2.6

 
7.9

 
248.0

 
319.5

        Consolidated total
$
103.1

 
$
43.5

 
$
2.6

 
$
7.9

 
$
249.2

 
$
406.3

Included in the above table are $277.9 million of charges that have resulted or will result in cash outflows and $128.4 million in non-cash charges. Not included in the above table are $130.2 million of pre-tax expenses ($84.5 million of cash charges and $45.7 million of non-cash charges) related to the Private Brands operations, which we sold in the third quarter of fiscal 2016, and $2.1 million of pre-tax expenses (all resulting in cash charges) related to Lamb Weston.

12




Liabilities recorded for the SCAE Plan related to our continuing operations and changes therein for the first three quarters of fiscal 2017 were as follows:
 
Balance at May 29, 2016
 
Costs Incurred
and Charged
to Expense
 
Costs Paid
or  Otherwise Settled
 
Changes in Estimates
 
Balance at February 26,
2017
Multi-employer pension costs
$
40.7

 
$

 
$
(10.9
)
 
$
2.0

 
$
31.8

Severance
47.2

 
10.6

 
(38.2
)
 
(1.8
)
 
17.8

Consulting
4.7

 
0.3

 
(4.6
)
 
(0.2
)
 
0.2

Contract termination
6.3

 
11.4

 
(4.9
)
 
(0.2
)
 
12.6

Other costs
0.5

 
12.0

 
(10.6
)
 

 
1.9

Total
$
99.4

 
$
34.3

 
$
(69.2
)
 
$
(0.2
)
 
$
64.3


5. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY

On February 16, 2017, we entered into a revolving credit agreement (the “Credit Agreement”) with a syndicate of financial institutions that provides for an unsecured revolving credit facility in a maximum aggregate principal amount outstanding at any one time of $1.25 billion (subject to increase to a maximum aggregate principal amount of $1.75 billion). This revolving credit facility matures on February 16, 2022. As of February 26, 2017, there were no outstanding borrowings under the revolving credit facility. 

The Credit Agreement contains events of default customary for unsecured investment grade credit facilities with corresponding grace periods. The Credit Agreement contains customary affirmative and negative covenants for unsecured investment grade credit facilities of this type and financial covenants requiring a maximum leverage ratio and a minimum interest coverage ratio. As of February 26, 2017, we were in compliance with all financial covenants under the Credit Agreement.

The revolving credit facility provided for under the Credit Agreement replaced our existing revolving credit facility under that certain prior revolving credit agreement, dated as of September 14, 2011, with a syndicate of financial institutions.
During the third quarter of fiscal 2017, we repaid the remaining principal balance of $224.8 million of our 5.819% senior notes due 2017 and $248.2 million principal amount of our 7.0% senior notes due 2019, in each case prior to maturity, resulting in a net loss on early retirement of debt of $32.7 million.
In connection with the Spinoff (see Note 3), Lamb Weston issued to us $1.54 billion aggregate principal amount of senior notes (the “Lamb Weston notes”). On November 9, 2016, we exchanged the Lamb Weston notes for $250.2 million aggregate principal amount of our 5.819% senior notes due 2017, $880.4 million aggregate principal amount of our 1.9% senior notes due 2018, $154.9 million aggregate principal amount of our 2.1% senior notes due 2018, $86.9 million aggregate principal amount of our 7.0% senior notes due 2019, and $71.1 million aggregate principal amount of our 4.95% senior notes due 2020 (collectively, the “Conagra notes”), which had been purchased in the open market by certain investment banks prior to the Spinoff. Following the exchange, we cancelled the Conagra notes. These actions resulted in a net loss of $60.6 million as a cost of early retirement of debt.
During the first quarter of fiscal 2017, we repaid the entire principal balance of $550.0 million of our floating rate notes on the maturity date of July 21, 2016.
During the third quarter of fiscal 2016, we repurchased $560.3 million aggregate principal amount of senior notes due 2043, $341.8 million aggregate principal amount of senior notes due 2039, $139.9 million aggregate principal amount of senior notes due 2019, $110.0 million aggregate principal amount of senior notes due 2026, $85.0 million aggregate principal amount of senior notes due 2020, and $163.0 million of aggregate principal amount of senior notes due 2023, in each case prior to maturity in a tender offer including a $109.5 million tender premium, resulting in a net loss on early retirement of debt of $23.9 million.
During the third quarter of fiscal 2016, we repaid the entire principal balance of $750.0 million of our 1.30% senior notes on the maturity date of January 25, 2016. The repayment was primarily funded through the issuance of term loans totaling $600.0 million, which were repaid in the third quarter of fiscal 2016 with the proceeds from the divestiture of our Private Brands business.
During the second quarter of fiscal 2016, we repaid the entire principal balance of $250.0 million of our 1.35% senior notes on the maturity date of September 10, 2015.

13




Net interest expense from continuing operations consists of:
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
February 26,
2017
 
February 28,
2016
 
February 26,
2017
 
February 28,
2016
Long-term debt
$
46.5

 
$
77.3

 
$
164.0

 
$
239.5

Short-term debt
0.2

 
0.8

 
0.6

 
1.6

Interest income
(1.3
)
 
(0.5
)
 
(2.8
)
 
(0.6
)
Interest capitalized
0.3

 
(1.2
)
 
(3.8
)
 
(4.8
)
 
$
45.7

 
$
76.4

 
$
158.0

 
$
235.7


6. VARIABLE INTEREST ENTITIES
Variable Interest Entities Not Consolidated
We have variable interests in certain other entities that we have determined to be variable interest entities, but for which we are not the primary beneficiary. We do not consolidate the financial statements of these entities.
We lease certain office buildings from entities that we have determined to be variable interest entities. The lease agreements with these entities include fixed-price purchase options for the assets being leased. The lease agreements also contain contingent put options (the “lease put options”) that allow the lessors to require us to purchase the buildings at the greater of original construction cost, or fair market value, without a lease agreement in place (the “put price”) in certain limited circumstances. As a result of substantial impairment charges related to our divested Private Brands operations, these lease put options are exercisable now and remain exercisable until generally 30 days after the end of the respective lease agreements. We are amortizing the difference between the estimated put price and the estimated fair value (without a lease agreement in place) of each respective property over the remaining respective lease term within selling, general and administrative expenses. As of February 26, 2017, the estimated amount by which the put prices exceeded the fair values of the related properties was $51.8 million, of which we have accrued $7.4 million. As these buildings are worth considerably more when under lease agreements than when vacant, we may be able to mitigate some, or all, of the financial exposure created by the put options by maintaining active lease agreements and/or by subleasing the buildings to credit worthy tenants. We do not expect to ultimately incur material financial losses as a result of the potential exercise of the lease put options by the lessors. During the third quarter of fiscal 2017, one of these lease agreements expired. As a result of this expiration, we reversed the applicable accrual and recognized a benefit of $6.7 million in selling, general and administrative expenses. These leases are accounted for as operating leases, and accordingly, there are no material assets or liabilities, other than the accrued portion of the put price, associated with these entities included in the Condensed Consolidated Balance Sheets. We have determined that we do not have the power to direct the activities that most significantly impact the economic performance of these entities. In making this determination, we have considered, among other items, the terms of the lease agreements, the expected remaining useful lives of the assets leased, and the capital structure of the lessor entities.

7. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
The change in the carrying amount of goodwill for the first three quarters of fiscal 2017 was as follows:
 
Grocery & Snacks
 
Refrigerated & Frozen
 
International
 
Foodservice
 
Total
Balance as of May 29, 2016
$
2,337.4

 
$
1,028.9

 
$
448.6

 
$
581.3

 
$
4,396.2

Impairment

 

 
(183.1
)
 

 
(183.1
)
Acquisitions
38.7

 

 

 

 
38.7

Currency translation

 
(0.6
)
 
0.5

 

 
(0.1
)
Balance as of February 26, 2017
$
2,376.1

 
$
1,028.3

 
$
266.0

 
$
581.3

 
$
4,251.7


14




Other identifiable intangible assets were as follows:
 
February 26, 2017
 
May 29, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Non-amortizing intangible assets
$
862.1

 
$

 
$
839.2

 
$

Amortizing intangible assets
563.6

 
172.6

 
543.9

 
145.9

 
$
1,425.7

 
$
172.6

 
$
1,383.1

 
$
145.9

During the first three quarters of fiscal 2017, we recognized goodwill impairment charges in the International segment of $183.1 million. Also in the first three quarters of fiscal 2017, we recognized impairments of non-amortizing intangible assets of $24.4 million in the International segment and $1.1 million in the Grocery & Snacks segment. See further discussion in “Critical Accounting Estimates” in Management’s Discussion and Analysis.
Non-amortizing intangible assets are comprised of brands and trademarks.
Amortizing intangible assets, carrying a remaining weighted average life of approximately 15 years, are principally composed of customer relationships, licensing arrangements, and intellectual property. Based on amortizing assets recognized in our Condensed Consolidated Balance Sheet as of February 26, 2017, amortization expense is estimated to average $32.7 million for each of the next five years.
In the first quarter of fiscal 2016, we recorded an amortizing intangible asset of $92.8 million, for which cash payments of $14.9 million and $10.4 million were made in the first quarter of fiscal 2017 and fiscal 2016, respectively. Remaining payments will be made over a five-year period.

8. DERIVATIVE FINANCIAL INSTRUMENTS
Our operations are exposed to market risks from adverse changes in commodity prices affecting the cost of raw materials and energy, foreign currency exchange rates, and interest rates. In the normal course of business, these risks are managed through a variety of strategies, including the use of derivatives.
Commodity and commodity index futures and option contracts are used from time to time to economically hedge commodity input prices on items such as natural gas, vegetable oils, proteins, packaging materials, dairy, grains, and electricity. Generally, we economically hedge a portion of our anticipated consumption of commodity inputs for periods of up to 36 months. We may enter into longer-term economic hedges on particular commodities, if deemed appropriate. As of February 26, 2017, we had economically hedged certain portions of our anticipated consumption of commodity inputs using derivative instruments with expiration dates through March 2018.
In order to reduce exposures related to changes in foreign currency exchange rates, we enter into forward exchange, option, or swap contracts from time to time for transactions denominated in a currency other than the applicable functional currency. This includes, but is not limited to, hedging against foreign currency risk in purchasing inventory and capital equipment, sales of finished goods, and future settlement of foreign-denominated assets and liabilities. As of February 26, 2017, we had economically hedged certain portions of our foreign currency risk in anticipated transactions using derivative instruments with expiration dates through May 2017.
From time to time, we may use derivative instruments, including interest rate swaps, to reduce risk related to changes in interest rates. This includes, but is not limited to, hedging against increasing interest rates prior to the issuance of long-term debt and hedging the fair value of our senior long-term debt.
Economic Hedges of Forecasted Cash Flows
Many of our derivatives do not qualify for, and we do not currently designate certain commodity or foreign currency derivatives to achieve, hedge accounting treatment. We reflect realized and unrealized gains and losses from derivatives used to economically hedge anticipated commodity consumption and to mitigate foreign currency cash flow risk in earnings immediately within general corporate expense (within cost of goods sold). The gains and losses are reclassified to segment operating results in the period in which the underlying item being economically hedged is recognized in cost of goods sold. In the event that management determines a particular derivative entered into as an economic hedge of a forecasted commodity purchase has ceased to function as an economic hedge, we cease recognizing further gains and losses on such derivatives in corporate expense and begin recognizing such gains and losses within segment operating results, immediately.

15




Economic Hedges of Fair Values — Foreign Currency Exchange Rate Risk
We may use options and cross currency swaps to economically hedge the fair value of certain monetary assets and liabilities (including intercompany balances) denominated in a currency other than the functional currency. These derivatives are marked-to-market with gains and losses immediately recognized in selling, general and administrative expenses. These substantially offset the foreign currency transaction gains or losses recognized as values of the monetary assets or liabilities being economically hedged change.
All derivative instruments are recognized on our balance sheets at fair value (refer to Note 16 for additional information related to fair value measurements). The fair value of derivative assets is recognized within prepaid expenses and other current assets, while the fair value of derivative liabilities is recognized within other accrued liabilities. In accordance with U.S. GAAP, we offset certain derivative asset and liability balances, as well as certain amounts representing rights to reclaim cash collateral and obligations to return cash collateral, where master netting agreements provide for legal right of setoff. At February 26, 2017 and May 29, 2016, amounts representing a right to reclaim cash collateral of $0.2 million and $0.3 million, respectively, were included in prepaid expenses and other current assets in our Condensed Consolidated Balance Sheets.
Derivative assets and liabilities and amounts representing a right to reclaim cash collateral or an obligation to return cash collateral were reflected in our Condensed Consolidated Balance Sheets as follows:
 
February 26,
2017
 
May 29,
2016
Prepaid expenses and other current assets
$
2.1

 
$
24.1

Other accrued liabilities
0.7

 
0.6

The following table presents our derivative assets and liabilities, at February 26, 2017, on a gross basis, prior to the setoff of $1.6 million to total derivative assets and $1.4 million to total derivative liabilities where legal right of setoff existed:
 
Derivative Assets
 
Derivative Liabilities
 
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
Commodity contracts
Prepaid expenses and other current assets
 
$
3.3

 
Other accrued liabilities
 
$
1.4

Foreign exchange contracts
Prepaid expenses and other current assets
 
0.4

 
Other accrued liabilities
 
0.4

Other
Prepaid expenses and other current assets
 

 
Other accrued liabilities
 
0.3

Total derivatives not designated as hedging instruments
 
 
$
3.7

 
 
 
$
2.1

The following table presents our derivative assets and liabilities at May 29, 2016, on a gross basis, prior to the setoff of $1.7 million to total derivative assets and $2.0 million to total derivative liabilities where legal right of setoff existed:
 
Derivative Assets
 
Derivative Liabilities
 
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
Commodity contracts
Prepaid expenses and other current assets
 
$
5.0

 
Other accrued liabilities
 
$
2.1

Foreign exchange contracts
Prepaid expenses and other current assets
 
20.8

 
Other accrued liabilities
 
0.2

Other
Prepaid expenses and other current assets
 

 
Other accrued liabilities
 
0.3

Total derivatives not designated as hedging instruments
 
 
$
25.8

 
 
 
$
2.6


16




The location and amount of gain (loss) from derivatives not designated as hedging instruments in our Condensed Consolidated Statements of Operations were as follows:
Derivatives Not Designated as Hedging Instruments
 
Location in Condensed Consolidated Statement of Operations of
Gain (Loss) Recognized on Derivatives
 
Amount of Gain (Loss)
Recognized on Derivatives
in Condensed Consolidated
Statement of Operations for
the Thirteen Weeks Ended
February 26, 2017
 
February 28, 2016
Commodity contracts
 
Cost of goods sold
 
$
0.5

 
$
(3.3
)
Foreign exchange contracts
 
Cost of goods sold
 
(0.2
)
 

Foreign exchange contracts
 
Selling, general and administrative expense
 
(1.4
)
 
0.7

Total loss from derivative instruments not designated as hedging instruments
 
 
 
$
(1.1
)
 
$
(2.6
)
Derivatives Not Designated as Hedging Instruments
 
Location in Condensed Consolidated Statement of Operations of
Gain (Loss) Recognized on Derivatives
 
Amount of Gain (Loss)
Recognized on Derivatives
in Condensed Consolidated
Statement of Operations for
the Thirty-nine Weeks Ended
February 26, 2017
 
February 28, 2016
Commodity contracts
 
Cost of goods sold
 
$
1.7

 
$
(13.0
)
Foreign exchange contracts
 
Cost of goods sold
 
1.3

 

Foreign exchange contracts
 
Selling, general and administrative expense
 
(0.1
)
 
5.4

Total gain (loss) from derivative instruments not designated as hedging instruments
 
 
 
$
2.9

 
$
(7.6
)
As of February 26, 2017, our open commodity contracts had a notional value (defined as notional quantity times market value per notional quantity unit) of $68.0 million and $75.5 million for purchase and sales contracts, respectively. As of May 29, 2016, our open commodity contracts had a notional value of $74.7 million and $41.5 million for purchase and sales contracts, respectively. The notional amount of our foreign currency forward and cross currency swap contracts as of February 26, 2017 and May 29, 2016 was $16.3 million and $112.9 million, respectively.
We enter into certain commodity, interest rate, and foreign exchange derivatives with a diversified group of counterparties. We continually monitor our positions and the credit ratings of the counterparties involved and limit the amount of credit exposure to any one party. These transactions may expose us to potential losses due to the risk of nonperformance by these counterparties. We have not incurred a material loss due to nonperformance in any period presented and do not expect to incur any such material loss. We also enter into futures and options transactions through various regulated exchanges.
At February 26, 2017, the maximum amount of loss due to the credit risk of the counterparties, had the counterparties failed to perform according to the terms of the contracts, was $0.6 million.

9. SHARE-BASED PAYMENTS
For the third quarter and first three quarters of fiscal 2017, we recognized total stock-based compensation expense (including stock options, restricted stock units, cash-settled restricted stock units, and performance shares) of $15.8 million and $48.5 million, respectively. For the third quarter and first three quarters of fiscal 2016, we recognized total stock-based compensation expense of $23.1 million and $60.5 million, respectively. These amounts are inclusive of discontinued operations. Included in the total stock-based compensation expense for the third quarter and first three quarters of fiscal 2017 was $0.3 million and $0.6 million, respectively, related to stock options granted by a subsidiary in the subsidiary's shares to the subsidiary's employees. The expense for these stock options was $0.5 million and $0.7 million for the third quarter and first three quarters of fiscal 2016, respectively. For the first three quarters of fiscal 2017, we granted 0.5 million restricted stock units at a weighted average grant date price of $47.18, 0.4 million cash-settled restricted stock units at a weighted average grant date price of $48.07, 1.1 million stock options at a weighted average exercise price of $48.01, and 0.2 million performance shares at a weighted average grant date price of $46.94. For the awards granted prior to the Spinoff of Lamb Weston on November 9, 2016, the number of awards and the weighted average prices disclosed above do not reflect the adjustments to the number and prices of such awards made in connection with the Spinoff, as further described below.
Performance shares are granted to selected executives and other key employees with vesting contingent upon meeting various Company-wide performance goals. The performance goals for the performance period that began in fiscal 2015 and ends in fiscal 2017

17




were originally based upon an overarching earnings per share goal (for certain participants) and, for all participants, (a) our earnings before interest, taxes, depreciation, and amortization (“EBITDA”) return on capital, and (b) revenue growth, each measured over the defined performance period, and including the expected results of Lamb Weston. In connection with the Spinoff, the Human Resources Committee of the Board of Directors certified the EBITDA return on capital performance of the Company through the fiscal period that ended immediately prior to the Spinoff. Awards to participants originally subject to the overarching earnings per share goal remain subject to achievement of such goal. All other performance shares granted for the fiscal 2015 through 2017 performance period are subject only to continuing employment of the participant through the date of payout.
The performance goal for one-third of the target number of performance shares for the performance period ending in fiscal 2018 (the “2018 performance period”) is based upon an overarching earnings per share goal (for certain participants) and, for all participants, our fiscal 2016 EBITDA return on capital. Another one-third of the target number of performance shares granted for the 2018 performance period is based on an overarching earnings per share goal (for certain participants) and our fiscal 2017 EBITDA return on capital. The fiscal 2017 EBITDA return on capital target, when set, excluded the results of Lamb Weston. The performance goal for the last one-third of the target number of performance shares granted for the 2018 performance period is expected to be set at the start of fiscal 2018.
The performance goal for one-third of the target number of performance shares for the performance period ending in fiscal 2019 (the “2019 performance period”) is based upon an overarching earnings per share goal (for certain participants) and our fiscal 2017 EBITDA return on capital. The fiscal 2017 EBITDA return on capital target, when set, excluded the results of Lamb Weston. The performance goal for the final two-thirds of the target number of performance shares granted for the 2019 performance period is expected to be set at the start of fiscal 2018.
Awards, if earned, will be paid in shares of our common stock. Subject to limited exceptions set forth in the performance share plan, any shares earned will be distributed after the end of the performance period, and only if the participant continues to be employed with the Company through the date of distribution. For awards where performance against the performance target has not been certified, the value of the performance shares is adjusted based upon the market price of our common stock and current forecasted performance against the performance targets at the end of each reporting period and amortized as compensation expense over the vesting period.
In connection with the completion of the Spinoff, the provisions of our existing stock-based compensation arrangements required adjustments to the number and terms of outstanding stock options, restricted stock units, cash-settled restricted stock units, performance shares, and other share-based awards to preserve the intrinsic value of the awards immediately before and after the completion of the Spinoff. The outstanding awards continue to vest over the original vesting periods (typically three years). Outstanding awards at the time of the Spinoff were converted into awards of the holder’s employer following completion of the Spinoff. The stock awards held as of November 9, 2016 were adjusted as follows:
The number of shares of common stock subject to each outstanding stock option was increased and the corresponding exercise price was decreased to maintain the intrinsic value of each outstanding stock option immediately before and after the Spinoff. A comparison of the fair value of the outstanding stock option awards immediately before and after the Spinoff resulted in no incremental expense.
The number of shares of common stock underlying each outstanding restricted stock unit and performance share, and the value of each outstanding cash-settled restricted stock was increased to preserve the intrinsic value of such award immediately prior to the Spinoff. The Company did not record any incremental compensation expense related to the adjustment of these awards.
The weighted average Black-Scholes assumptions for stock options granted during the first three quarters of fiscal 2017 were as follows: 
Expected volatility (%)
19.15
Dividend yield (%)
2.33
Risk-free interest rate (%)
1.03
Expected life of stock option (years)
4.94
The weighted average value of stock options granted during the first three quarters of fiscal 2017 was $6.12 per option based upon a Black-Scholes methodology.

10. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is calculated on the basis of weighted average outstanding common shares. Diluted earnings (loss) per share is computed on the basis of basic weighted average outstanding common shares adjusted for the dilutive effect of stock options, restricted stock unit awards, and other dilutive securities.

18




The following table reconciles the income and average share amounts used to compute both basic and diluted earnings (loss) per share:
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
February 26,
2017
 
February 28,
2016
 
February 26,
2017
 
February 28,
2016
Net income (loss) available to Conagra Brands, Inc. common stockholders:
 
 
 
 
 
 
 
Income from continuing operations attributable to Conagra Brands, Inc. common stockholders
$
179.0

 
$
71.0

 
$
391.1

 
$
243.8

Income (loss) from discontinued operations, net of tax, attributable to Conagra Brands, Inc. common stockholders
0.7

 
133.6

 
96.9

 
(1,038.4
)
Net income (loss) attributable to Conagra Brands, Inc. common stockholders
$
179.7

 
$
204.6

 
$
488.0

 
$
(794.6
)
Less: Increase in redemption value of noncontrolling interests in excess of earnings allocated

 
3.5

 
0.8

 
4.4

Net income (loss) available to Conagra Brands, Inc. common stockholders
$
179.7

 
$
201.1

 
$
487.2

 
$
(799.0
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic weighted average shares outstanding
431.7

 
435.7

 
436.0

 
433.3

Add: Dilutive effect of stock options, restricted stock unit awards, and other dilutive securities
4.7

 
3.9

 
4.0

 
4.3

Diluted weighted average shares outstanding
436.4

 
439.6

 
440.0

 
437.6

For the third quarter and first three quarters of fiscal 2017, there were 0.9 million and 1.0 million stock options outstanding, respectively, that were excluded from the computation of diluted weighted average shares because the effect was antidilutive. For the third quarter and