CONAGRA BRANDS, INC. FORWARD-LOOKING STATEMENTS
The information contained in this report includes forward-looking statements within the meaning of the federal securities laws. Examples of forward-looking statements include statements regarding our expected future financial performance or position, results of operations, business strategy, plans and objectives of management for future operations, and other statements that are not historical facts. You can identify forward-looking statements by their use of forward-looking words, such as "may", "will", "anticipate", "expect", "believe", "estimate", "intend", "plan", "should", "seek", or comparable terms. Readers of this report should understand that these forward-looking statements are not guarantees of performance or results. Forward-looking statements provide our current expectations and beliefs concerning future events and are subject to risks, uncertainties, and factors relating to our business and operations, all of which are difficult to predict and could cause our actual results to differ materially from the expectations expressed in or implied by such forward-looking statements. These risks, uncertainties, and factors include, among other things: the risk that the cost savings and any other synergies from the acquisition ofPinnacle Foods Inc. (the "Pinnacle acquisition") may not be fully realized or may take longer to realize than expected; the risk that the Pinnacle acquisition may not be accretive within the expected timeframe or to the extent anticipated; the risks that the Pinnacle acquisition and related integration will create disruption to the Company and its management and impede the achievement of business plans; the risk that the Pinnacle acquisition will negatively impact the ability to retain and hire key personnel and maintain relationships with customers, suppliers, and other third parties; risks related to our ability to successfully address Pinnacle's business challenges; risks related to our ability to achieve the intended benefits of other recent acquisitions and divestitures; risks associated with general economic and industry conditions; risks associated with our ability to successfully execute our long-term value creation strategies, including those in place for specific brands at Pinnacle before the Pinnacle acquisition; risks related to our ability to deleverage on currently anticipated timelines, and to continue to access capital on acceptable terms or at all; risks related to our ability to execute operating and restructuring plans and achieve targeted operating efficiencies from cost-saving initiatives, related to the Pinnacle acquisition and otherwise, and to benefit from trade optimization programs, related to the Pinnacle acquisition and otherwise; risks related to the effectiveness of our hedging activities and ability to respond to volatility in commodities; risks related to the Company's competitive environment and related market conditions; risks related to our ability to respond to changing consumer preferences and the success of its innovation and marketing investments; risks related to the ultimate impact of any product recalls and litigation, including litigation related to the lead paint and pigment matters, as well as any securities litigation, including securities class action lawsuits; risk associated with actions of governments and regulatory bodies that affect our businesses, including the ultimate impact of new or revised regulations or interpretations; risks related to the impact of the recent coronavirus (COVID-19) outbreak on our business, suppliers, consumers, customers and employees; risks related to the availability and prices of raw materials, including any negative effects caused by inflation, weather conditions, or health pandemics; disruptions or inefficiencies in our supply chain and/or operations, including from the recent COVID-19 outbreak; risks and uncertainties associated with intangible assets, including any future goodwill or intangible assets impairment charges, related to the Pinnacle acquisition or otherwise; the costs, disruption, and diversion of management's attention due to the integration of the Pinnacle acquisition; and other risks described in our reports filed from time to time with theSecurities and Exchange Commission (the "SEC"). We caution readers not to place undue reliance on any forward-looking statements included in this report, which speak only as of the date of this report. We undertake no responsibility to update these statements, except as required by law. The discussion that follows should be read together with the unaudited Condensed Consolidated Financial Statements and related notes contained in this report and with the financial statements, related notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year endedMay 26, 2019 and subsequent filings with theSEC . Results for the third quarter of fiscal 2020 are not necessarily indicative of results that may be attained in the future.
EXECUTIVE OVERVIEW
Conagra Brands, Inc. (the "Company", "Conagra Brands", "we", "us", or "our"), headquartered inChicago , is one ofNorth America's leading branded food companies. Guided by an entrepreneurial spirit, the Company combines a rich heritage of making great food with a sharpened focus on innovation. The Company's portfolio is evolving to satisfy people's changing food preferences. Its iconic brands such as Birds Eye®,Marie Callender's ®, Banquet®, Healthy Choice®, Slim Jim®, Reddi-wip®, and Vlasic®, as well as emerging brands, including Angie's® BOOMCHICKAPOP®, Duke's®, Earth Balance®, Gardein®, and Frontera®, offer choices for every occasion. 34 --------------------------------------------------------------------------------
Fiscal 2019 Pinnacle Acquisition
OnOctober 26, 2018 , we completed our acquisition ofPinnacle Foods Inc ("Pinnacle"), a branded packaged foods company specializing in shelf-stable and frozen foods. The total amount of consideration paid in connection with the acquisition was approximately$8.03 billion , consisting of cash and shares of our stock, as described in more detail in the section entitled "Acquisitions" below. In connection with the Pinnacle acquisition, we issued approximately$8.33 billion of long-term debt and received cash proceeds of$575.0 million ($555.7 million net of related fees) from the issuance of common stock in an underwritten public offering. We used such proceeds for the payment of the cash portion of the Merger Consideration (as defined below), the repayment of Pinnacle debt acquired, the refinancing of certainConagra Brands debt, and the payment of related fees and expenses.
The integration of Pinnacle is continuing and on-track. We expect to achieve
cost synergies of
In the first quarter of fiscal 2020, we reorganized our reporting segments to incorporate the Pinnacle operations into our legacy reporting segments in order to better reflect how the business is now being managed. Prior periods have been reclassified to conform to the revised segment presentation.
Fiscal 2020 Third Quarter Results
In the third quarter of fiscal 2020, results reflected a decrease in net sales,
including the impact of recent acquisitions, with organic (excludes the impacts
of foreign exchange and divested businesses, as well as acquisitions until the
anniversary date of the acquisition) decreases in each of our operating segments
with the exception of a slight increase in our Refrigerated & Frozen segment, in
each case compared to the third quarter of fiscal 2019. Overall gross profit
decreased due to higher input costs, higher brand building investments with
retailers, lower sales volumes, higher inventory write-offs, and lost profits
due to divested businesses, which were partially offset by supply chain realized
productivity and cost synergies. Overall segment operating profit decreased in
each operating segment with the exception of our Refrigerated & Frozen segment.
Corporate expenses were higher primarily due to items impacting comparability,
as discussed below. There were decreased selling, general and administrative
("SG&A") expenses as a result of cost synergies and removal of costs associated
with the divested businesses, offset by increased stock compensation expense. We
recognized lower equity method investment earnings, lower interest expense, and
higher income tax expense, in each case compared to the third quarter of fiscal
2019. Excluding items impacting comparability, our effective tax rate was
slightly higher to the third quarter of fiscal 2019.
Diluted earnings per share in the third quarter of fiscal 2020 were $0.42 .
Diluted earnings per share in the third quarter of fiscal 2019 were $0.50 .
Diluted earnings per share were affected by lower net income, more shares
outstanding in the third quarter of fiscal 2020 compared to the third quarter of
fiscal 2019, as well as several significant items affecting the comparability of
year-over-year results (see "Items Impacting Comparability" below).
Items Impacting Comparability
Segment presentation of gains and losses from derivatives used for economic hedging of anticipated commodity input costs and economic hedging of foreign currency exchange rate risks of anticipated transactions is discussed in the segment review below.
Items of note impacting comparability for the third quarter of fiscal 2020 included the following:
• charges totaling
with our restructuring plans.
Items of note impacting comparability for the third quarter of fiscal 2019 included the following:
• charges totaling
with our restructuring plans,
• incremental cost of goods sold of
due to the fair value adjustment to inventory resulting from acquisition
accounting for Pinnacle,
• a gain of
of a legacy guarantee,
• a gain of
value adjustment of cash settleable equity awards issued in connection
with, and included in the acquisition consideration of the Pinnacle
acquisition, and
• an income tax charge of $2.5 million primarily associated with the
reduction of the deemed repatriation liability.
35
--------------------------------------------------------------------------------
Items of note impacting comparability for the first three quarters of fiscal 2020 included the following:
• charges totaling
with our restructuring plans,
• charges totaling
impairment of businesses held for sale,
• charges totaling
impairment of certain brand intangible assets,
• a gain of
settlement,
• charges totaling
environmental matter, and
• an income tax benefit of
reorganization of various legacy Pinnacle legal entities and state tax
planning strategies.
Items of note impacting comparability for the first three quarters of fiscal 2019 included the following:
• charges totaling
with our restructuring plans,
• charges totaling
costs incurred for acquisitions and planned divestitures,
• incremental cost of goods sold of
due to the fair value adjustment to inventory resulting from acquisition
accounting for Pinnacle,
• charges totaling
costs incurred for integration activities related to the acquisition of
Pinnacle,
• a gain of
of a legacy guarantee,
• a gain of
value adjustment of cash settleable equity awards issued in connection
with, and included in the acquisition consideration of the Pinnacle
acquisition,
• a gain of
the sale of an asset within the Ardent Mills joint venture,
• a gain of
Monte®
• an income tax benefit of
valuation allowance associated with the planned divestiture of the Wesson®
oil business.
Acquisitions
On October 26, 2018 , we completed the Pinnacle acquisition. Pursuant to the
Agreement and Plan of Merger, dated as of June 26, 2018 (the "Merger
Agreement"), among the Company, Pinnacle, and Patriot Merger Sub Inc. , a
wholly-owned subsidiary of the Company that ceased to exist at the effective
time of the merger, each outstanding share of Pinnacle common stock was
converted into the right to receive $43.11 per share in cash and 0.6494 shares
of common stock, par value $5.00 per share, of the Company ("Company Shares")
(together, the "Merger Consideration"), with cash payable in lieu of fractional
shares of Company Shares. The total amount of consideration paid in connection
with the acquisition was approximately $8.03 billion and consisted of: (1) cash
of $5.17 billion ($5.12 billion , net of cash acquired); (2) 77.5 million Company
Shares, with an approximate value of $2.82 billion , issued out of the Company's
treasury to former holders of Pinnacle stock; and (3) replacement awards issued
to former Pinnacle employees representing the fair value attributable to
pre-combination service of $51.1 million . Approximately $7.03 billion of the
purchase price has been allocated to goodwill and approximately $3.52 billion
has been allocated to brands, trademarks and other intangibles. Of the total
goodwill, $236.7 million is deductible for tax purposes. Amortizable brands,
trademarks and other intangibles totaled $668.7 million . Indefinite lived
brands, trademarks and other intangibles totaled $2.85 billion .
Divestitures
During the third quarter of fiscal 2020, we completed the sale of our Lender's® bagel business for net proceeds of$33.2 million , subject to final working capital adjustments. The results of operations of the divested Lender's® bagel business are primarily included in our Refrigerated & Frozen segment, and to a lesser extent within our Foodservice segment, for the periods preceding the completion of the transaction. 36 -------------------------------------------------------------------------------- During the second quarter of fiscal 2020, we completed the sale of our Direct Store Delivery ("DSD") Snacks business for net proceeds of$139.0 million , subject to final working capital adjustments. The results of operations of the divested DSD Snacks business are included in our Grocery & Snacks segment for the periods preceding the completion of the transaction. During the fourth quarter of fiscal 2019, we completed the sale of our Italian-based frozen pasta business, Gelit, for proceeds net of cash divested of$80.1 million , including working capital adjustments. The results of operations of the divested Gelit business are primarily included in our Refrigerated & Frozen segment for the periods preceding the completion of the transaction.
During the fourth quarter of fiscal 2019, we also completed the sale of our
Wesson® oil business for net proceeds of
During the first quarter of fiscal 2019, we completed the sale of our Del Monte® processed fruit and vegetable business inCanada for combined proceeds of$32.2 million . The results of operations of the divested Del Monte® business are included in our International segment for the periods preceding the completion of the transaction. Restructuring Plans InDecember 2018 , our Board of Directors (the "Board") approved a restructuring and integration plan related to the ongoing integration of the recently acquired operations of Pinnacle for the purpose of achieving significant cost synergies between the companies (the "Pinnacle Integration Restructuring Plan"), as a result of which we expect to incur material charges for exit and disposal activities underU.S. generally accepted accounting principles. We have approved the incurrence of up to$360.0 million ($255.0 million of cash charges and$105.0 million of non-cash charges) in connection with operational expenditures under the Pinnacle Integration Restructuring Plan. Although we remain unable to make good faith estimates relating to the entire Pinnacle Integration Restructuring Plan, we are reporting on actions initiated through the end of the third quarter of fiscal 2020, including the estimated amounts or range of amounts for each major type of cost expected to be incurred, and the charges that have resulted or will result in cash outflows. We have incurred or expect to incur approximately$363.8 million of charges ($257.8 million of cash charges and$106.0 million of non-cash charges) for actions identified to date under the Pinnacle Integration Restructuring Plan. In the third quarter and first three quarters of fiscal 2020, we recognized charges of$19.6 million and$63.5 million , respectively, in association with the Pinnacle Integration Restructuring Plan. In the third quarter and first three quarters of fiscal 2019, we recognized charges of$36.9 million and$139.5 million , respectively, in association with the Pinnacle Integration Restructuring Plan. In the third quarter of fiscal 2019, we initiated a new restructuring plan for costs in connection with actions taken to improve SG&A expense effectiveness and efficiencies and to optimize our supply chain network (the "Conagra Restructuring Plan"). Although we remain unable to make good faith estimates relating to the entire Conagra Restructuring Plan, we are reporting on actions initiated through the end of the third quarter of fiscal 2020, 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 ofFebruary 23, 2020 , we have approved the incurrence of$129.8 million ($36.9 million of cash charges and$92.9 million of non-cash charges) for several projects associated with the Conagra Restructuring Plan. We have incurred or expect to incur$126.7 million of charges ($35.2 million of cash charges and$91.5 million of non-cash charges) for actions identified to date under the Conagra Restructuring Plan. In the third quarter and first three quarters of fiscal 2020, we recognized charges of$11.9 million and$52.6 million , respectively, in connection with the Conagra Restructuring Plan. In the third quarter and first three quarters of fiscal 2019, we recognized charges of$1.0 million in connection with the Conagra Restructuring Plan. As ofFebruary 23, 2020 , we have substantially completed our restructuring activities related to the Supply Chain and Administrative Efficiency Plan (the "SCAE Plan"). In the third quarter and first three quarters of fiscal 2020, we recognized charges of$0.3 million and$1.0 million , respectively, in association with the SCAE Plan. In the third quarter and first three quarters of 2019, we recognized charges of$3.5 million and$8.6 million , respectively, in association with the SCAE Plan. Our total pre-tax expenses for the SCAE Plan related to our continuing operations are expected to be$471.2 million ($322.0 million of cash charges and$149.2 million of non-cash charges).
COVID - 19
The impact that the recent novel coronavirus (COVID-19) pandemic will have on
our consolidated results of operations is uncertain. We expect a decrease in
consumer traffic in away-from-home food outlets as a result of COVID-19 across
all of our major
37
-------------------------------------------------------------------------------- markets which will negatively impact our net sales to customers in our Foodservice segment for at least the remainder of fiscal 2020. We have seen increased orders from retail customers inNorth America subsequent to the end of the third quarter of fiscal 2020 in response to increased consumer demand for food at home. The increased consumer demand may reverse in the coming months as consumer purchasing behavior changes. We are unable to predict the nature and timing of when that impact may occur. We will continue to evaluate the nature and extent of the impact to our business, consolidated results of operations, financial condition, and liquidity.
SEGMENT REVIEW
In the first quarter of fiscal 2020, we reorganized our reporting segments to incorporate the Pinnacle business into our legacy reporting segments in order to better reflect how the business is now being managed. We now reflect our results of operations in four reporting segments: Grocery & Snacks, Refrigerated & Frozen, International, and Foodservice. Prior periods have been reclassified to conform to the revised segment presentation.
Grocery & Snacks
The Grocery & Snacks reporting segment principally includes branded, shelf
stable food products sold in various retail channels in
Refrigerated & Frozen
The Refrigerated & Frozen reporting segment principally includes branded,
temperature-controlled food products sold in various retail channels in
International
The International reporting segment principally includes branded food products, in various temperature states, sold in various retail and foodservice channels outside ofthe United States .
Foodservice
The Foodservice reporting segment includes branded and customized food products, including meals, entrees, sauces and a variety of custom-manufactured culinary products packaged for sale to restaurants and other foodservice establishments inthe United States .
Presentation of Derivative Gains (Losses) from Economic Hedges of Forecasted Cash Flows in Segment Results
Derivatives used to manage commodity price risk and foreign currency risk are not designated for hedge accounting treatment. We believe these derivatives provide economic hedges of certain forecasted transactions. As such, these derivatives are recognized at fair market value with realized and unrealized gains and losses recognized in general corporate expenses. The gains and losses are subsequently recognized in the operating results of the reporting segments in the period in which the underlying transaction being economically hedged is included in earnings. In the event that management determines a particular derivative entered into as an economic hedge of a forecasted commodity purchase has ceased to function as an economic hedge, we cease recognizing further gains and losses on such derivatives in corporate expense and begin recognizing such gains and losses within segment operating results, immediately.
The following table presents the net derivative gains (losses) from economic hedges of forecasted commodity consumption and the foreign currency risk of certain forecasted transactions, under this methodology:
Thirteen weeks ended Thirty-nine weeks ended
February 23, February 24, February 23, February 24,
($ in millions) 2020 2019 2020 2019
Gross derivative gains (losses) incurred $ (5.7 ) $ 0.8 $ (12.5 ) $ (3.4 )
Less: Net derivative gains (losses)
allocated to reporting segments (1.9 ) 1.0 (3.3 ) 0.4
Net derivative losses recognized in
general corporate expenses $ (3.8 ) $ (0.2 ) $ (9.2 ) $ (3.8 )
Net derivative losses allocated to
Grocery & Snacks $ (0.9 ) $ - $ (1.5 ) $ (1.0 )
Net derivative losses allocated to
Refrigerated & Frozen - (0.2 ) (0.7 ) (0.7 )
Net derivative gains (losses) allocated
to International (0.8 ) 1.3 (1.1 ) 2.4
Net derivative losses allocated to
Foodservice (0.2 ) (0.1 ) - (0.3 )
Net derivative gains (losses) included
in segment operating profit $ (1.9 ) $ 1.0 $ (3.3 ) $ 0.4
38
-------------------------------------------------------------------------------- As ofFebruary 23, 2020 , the cumulative amount of net derivative losses from economic hedges that had been recognized in general corporate expenses and not yet allocated to reporting segments was$7.8 million . This amount reflected net losses of$8.0 million incurred during the thirty-nine weeks endedFebruary 23, 2020 and net gains of$0.2 million incurred prior to fiscal 2020. Based on our forecasts of the timing of recognition of the underlying hedged items, we expect to reclassify to segment operating results losses of$3.9 million in fiscal 2020 and losses of$3.9 million in fiscal 2021 and thereafter.Net Sales Net Sales ($ in millions) Thirteen weeks ended Thirty-nine weeks ended February 23, February 24, % Inc February 23, February 24, % Inc Reporting Segment 2020 2019 (Dec) 2020 2019 (Dec) Grocery & Snacks$ 1,022.9 $ 1,129.8 (9 )%$ 3,143.0 $ 2,901.0 8 % Refrigerated & Frozen 1,076.8 1,094.3 (2 )% 3,204.2 2,636.2 22 % International 220.9 228.3 (3 )% 659.6 640.4 3 % Foodservice 234.4 254.7 (8 )% 759.7 747.6 2 % Total$ 2,555.0 $ 2,707.1 (6 )%$ 7,766.5 $ 6,925.2 12 % Net sales for the third quarter of fiscal 2020 were$2.56 billion , a decrease of$152.1 million , or 6%, from the third quarter of fiscal 2019. Net sales for the first three quarters of fiscal 2020 were$7.77 billion , an increase of$841.3 million , or 12%, from the first three quarters of fiscal 2019. The divestiture of certain businesses noted below contributed 4% to the decrease in sales during the third quarter of fiscal 2020 when compared to the prior-year period. The increased net sales during the first three quarters are principally due to the acquisition of Pinnacle onOctober 26, 2018 . Grocery & Snacks net sales for the third quarter of fiscal 2020 were$1.02 billion , a decrease of$106.9 million , or 9%, compared to the third quarter of fiscal 2019. Grocery & Snacks net sales for the first three quarters of fiscal 2020 were$3.14 billion , an increase of$242.0 million , or 8%, compared to the first three quarters of fiscal 2019. Results for the third quarter and first three quarters of fiscal 2020 reflected a decrease in volumes of 2% and 1%, respectively, excluding the impact of acquisitions and divestitures, compared to the prior-year periods. The decrease in volumes reflected lower in market performance in our Hunt's® brand and lower consumption across multiple categories in the current quarter due to a warmer than normal winter compared to higher consumption in the prior-year period due to winter storms. Price/mix decreased by 2% for the third quarter of fiscal 2020 and 1% for the first three quarters of fiscal 2020, excluding the impact of acquisitions and divestitures, when compared to the prior-year period due to incremental trade and strategic investments with certain customers and brands. The acquisition of Pinnacle in the second quarter of fiscal 2019 contributed$406.3 million , or 14%, to Grocery & Snacks net sales during the first three quarters of fiscal 2020, through the one-year anniversary of the acquisition. The third quarter and first three quarters of fiscal 2020 included$4.4 million and$22.8 million , respectively, of net sales related to our private label peanut butter business, which we exited in the third quarter of fiscal 2020. The third quarter and first three quarters of fiscal 2019 included$9.5 million and$28.4 million , respectively, of net sales related to this business. The first three quarters of fiscal 2020 included$46.1 million of net sales related to our DSD Snacks business, which was sold in the second quarter of fiscal 2020. The third quarter and first three quarters of fiscal 2019 included$26.2 million and$32.8 million , respectively, of net sales related to this business. The third quarter and first three quarters of fiscal 2019 also included$37.9 million and$115.9 million , respectively, of net sales related to our divested Wesson® oil business. Refrigerated & Frozen net sales for the third quarter of fiscal 2020 were$1.08 billion , a decrease of$17.5 million , or 2%, compared to the third quarter of fiscal 2019. Refrigerated & Frozen net sales for the first three quarters of fiscal 2020 were$3.20 billion , an increase of$568.0 million , or 22%, compared to the first three quarters of fiscal 2019. Volume and price/mix, excluding the impacts of acquisitions and divestitures, was flat and increased by 1%, respectively, in both the third quarter and first three quarters of fiscal 2020 compared to the prior-year periods, due to improved performance across multiple brands and new innovation during the current fiscal year. The acquisition of Pinnacle contributed$567.6 million , or 22%, to Refrigerated & Frozen net sales for the first three quarters of fiscal 2020, through the one-year anniversary of the acquisition. The third quarter and first three quarters of fiscal 2020 included$3.8 million and$23.2 million , respectively, of net sales related to our Lender's® bagel business, which was sold in the third quarter of fiscal 2020. The third quarter and first three quarters of fiscal 2019 included$10.6 million and$14.3 million , respectively, of net sales related to this business. The third quarter and first three quarters of fiscal 2019 also included$14.3 million and$43.0 million , respectively, of net sales related to our Italian-based frozen pasta business, Gelit, which was sold in the fourth quarter of fiscal 2019. International net sales for the third quarter of fiscal 2020 were$220.9 million , a decrease of$7.4 million , or 3%, compared to the third quarter of fiscal 2019. International net sales for the first three quarters of fiscal 2020 were$659.6 million , an increase of 39 --------------------------------------------------------------------------------$19.2 million , or 3%, compared to the first three quarters of fiscal 2019. Results for the third quarter of fiscal 2020, excluding the impact of divestitures, reflected a 1% decrease in volume, a 1% increase due to favorable foreign exchange rates, and a 1% decrease in price/mix, in each case compared to the prior-year period. The decrease in volumes and price/mix was driven by economic challenges primarily in ourMexico operations, increased retailer investments, and planned value-over-volume action, which more than offset strong consumption in the Canadian snacks and frozen businesses and improvement in our Indian operations. Results for the first three quarters of fiscal 2020, excluding the impact of acquisitions and divestitures, reflected a 1% decrease in volume and flat price/mix, both compared to the prior-year period. The acquisition of Pinnacle contributed$46.0 million , or 7%, to International net sales for the first three quarters of fiscal 2020, through the one-year anniversary of the acquisition. The third quarter and first three quarters of fiscal 2019 included$6.3 million and$17.1 million , respectively, of net sales related to our divested Wesson® oil business. The first three quarters of fiscal 2019 also included$4.1 million of net sales related to our Del Monte® processed fruit and vegetable business inCanada , which was sold in the first quarter of fiscal 2019. Foodservice net sales for the third quarter of fiscal 2020 were$234.4 million , a decrease of$20.3 million , or 8%, compared to the third quarter of fiscal 2019. Foodservice net sales for the first three quarters of fiscal 2020 were$759.7 million , an increase of$12.1 million , or 2%, compared to the first three quarters of fiscal 2019. Results for both the third quarter and first three quarters of fiscal 2020 reflected a 5% decrease in volume, excluding the impact of acquisitions and divestitures, compared to the prior-year periods. The decline in volume reflected soft restaurant industry trends early in the current quarter and continued execution of the segment's value-over-volume strategy. Price/mix, excluding the impact of acquisitions and divestitures, increased by 2% and 3% in the third quarter and first three quarters of fiscal 2020, respectively, compared to the prior-year periods, reflecting inflation-related pricing and the value-over-volume strategy. The acquisition of Pinnacle contributed$57.7 million , or 8%, for the first three quarters of fiscal 2020, through the one-year anniversary of the acquisition. The third quarter and first three quarters of fiscal 2020 included$0.9 million and$6.6 million , respectively, of net sales related to our Lender's® bagel business, which was sold in the third quarter of fiscal 2020. The third quarter and first three quarters of fiscal 2019 included$2.7 million and$3.6 million , respectively, of net sales related to this business. The first three quarters of fiscal 2020 included$4.6 million of net sales related to our private label peanut butter business, which we exited in the third quarter of fiscal 2020. The third quarter and first three quarters of fiscal 2019 included$2.0 million and$6.3 million , respectively, of net sales related to this business. The third quarter and first three quarters of fiscal 2019 included$11.2 million and$34.2 million , respectively, of net sales related to our divested Wesson® oil business. The first three quarters of fiscal 2019 also included net sales of$2.0 million related to ourTrenton, Missouri production facility, which was sold in the second quarter of fiscal 2019.
SG&A Expenses (includes general corporate expenses)
SG&A expenses totaled$319.9 million for the third quarter of fiscal 2020, a decrease of$14.2 million , as compared to the third quarter of fiscal 2019. SG&A expenses for the third quarter of fiscal 2020 reflected the following:
Items impacting comparability of earnings
• expenses of
Other changes in expenses compared to the third quarter of fiscal 2019
• a decrease in salary, wage, and fringe benefit expense of
largely due to achieved synergies from the Pinnacle acquisition,
• a decrease of $6.5 million related to commission expense,
• an increase in share-based payment and deferred compensation expense of
$5.6 million due to higher share price, • a decrease of$4.8 million related to short-term incentives, • a decrease in royalty expense of$3.8 million , • a decrease in depreciation expense of$2.6 million , • a decrease in franchise tax expense of$2.0 , • a decrease of$2.0 related to travel and entertainment expenses, and • a decrease in advertising and promotion spending of$1.9 million .
SG&A expenses for the third quarter of fiscal 2019 included the following items impacting the comparability of earnings:
• expenses of$36.5 million in connection with our restructuring plans, 40
--------------------------------------------------------------------------------
• a benefit of
• a benefit of
settleable equity awards issued in connection with, and included in the
acquisition consideration of the Pinnacle acquisition, and
• expenses of
and planned divestitures.
SG&A expenses totaled$1.09 billion for the first three quarters of fiscal 2020, an increase of$11.8 million , as compared to the first three quarters of fiscal 2019. SG&A expenses for the first three quarters of fiscal 2020 reflected the following:
Items impacting comparability of earnings
• expenses of
• expense of
sale,
• charges totaling
intangible assets,
• a benefit of $11.9 million related to a contract settlement gain,
• charges totaling
• expenses of
and planned divestitures,
• a net loss of $1.7 million related to divestitures of businesses, and
• a benefit of $1.5 million related to a legacy legal matter.
Other changes in expenses compared to the first three quarters of fiscal 2019
The increases in SG&A expenses below include the addition of expenses attributable to the Pinnacle business, partially offset by integration synergies:
• an increase in salary, wage, and fringe benefit expense of
• an increase in share-based payment and deferred compensation expense of
• an increase of
assets,
• a decrease in advertising and promotion spending of $8.0 million ,
• a decrease in self-insured workers' compensation and product liability
expense of $7.9 million ,
• an increase of $7.8 million in computer-related expenses,
• a decrease in royalty expense of $5.5 million ,
• an increase of
income, and
• a decrease of $3.3 million related to professional fees.
SG&A expenses for the first three quarters of fiscal 2019 included the following items impacting the comparability of earnings:
• expenses of
• expenses of
and planned divestitures,
• a benefit of
• a benefit of
settleable equity awards issued in connection with, and included in the
acquisition consideration of the Pinnacle acquisition,
• a gain of
business, and
• expenses of
of Pinnacle.
41
--------------------------------------------------------------------------------
Operating Profit (Earnings before general corporate expenses, pension and postretirement non-service income, interest expense, net, income taxes, and equity method investment earnings)
Operating Profit
($ in millions) Thirteen weeks ended Thirty-nine weeks ended
February 23, February 24, % Inc February 23, February 24, % Inc
Reporting Segment 2020 2019 (Dec) 2020 2019 (Dec)
Grocery & Snacks $ 199.4 $ 225.0 (11 )% $ 614.8 $ 623.2 (1 )%
Refrigerated & Frozen 190.7 189.1 1 % 533.7 441.4 21 %
International 22.3 29.9 (25 )% 73.5 89.7 (18 )%
Foodservice 27.2 36.8 (26 )% 96.6 98.8 (2 )%
Grocery & Snacks operating profit for the third quarter of fiscal 2020 was
$199.4 million , a decrease of $25.6 million , or 11%, compared to the third
quarter of fiscal 2019. Gross profits were $36.1 million lower in the third
quarter of fiscal 2020 than in the third quarter of fiscal 2019. The lower gross
profit was driven by input cost inflation, a reduction in profit associated with
the divestiture of our DSD Snacks and Wesson® oil businesses, the exit of our
private label peanut butter business, and lower volume, excluding the impact of
divestitures, partially offset by the benefits of supply chain realized
productivity. Operating profit of the Grocery & Snacks segment was impacted by
expense of $10.9 million and $3.0 million related to our restructuring plans in
the third quarter of fiscal 2020 and 2019, respectively. The third quarter of
fiscal 2019 included $17.8 million of incremental cost of goods sold due to the
impact of writing Pinnacle inventory to fair value as part of our acquisition
accounting and the subsequent sale of that inventory.
Grocery & Snacks operating profit for the first three quarters of fiscal 2020
was $614.8 million , a decrease of $8.4 million , or 1%, compared to the first
three quarters of fiscal 2019. Gross profits were $62.8 million higher in the
first three quarters of fiscal 2020 than in the first three quarters of fiscal
2019. The higher gross profit was driven by the addition of Pinnacle and the
benefits of supply chain realized productivity, partially offset by the impacts
of higher input costs, a reduction in profit associated with the divestiture of
our DSD Snacks and Wesson® oil businesses, and the exit of our private label
peanut butter business. Operating profit of the Grocery & Snacks segment was
impacted by expense of $49.2 million and $5.2 million related to our
restructuring plans in the first three quarters of fiscal 2020 and 2019,
respectively. In addition, the first three quarters of fiscal 2020 included
charges of $31.4 million related to the impairment of a business held for sale,
a benefit of $11.9 million related to a contract settlement, charges of $3.5
million related to the impairment of certain brand intangible assets, and costs
of $3.0 million related to acquisitions and planned divestitures. The first
three quarters of fiscal 2019 included $29.7 million of incremental cost of
goods sold due to the impact of writing Pinnacle inventory to fair value as part
of our acquisition accounting and the subsequent sale of that inventory.
Refrigerated & Frozen operating profit for the third quarter of fiscal 2020 was
$190.7 million , an increase of $1.6 million , or 1%, compared to the third
quarter of fiscal 2019. Gross profits were $6.1 million lower in the third
quarter of fiscal 2020 than in the third quarter of fiscal 2019, driven by
increased input costs and lost profit associated with the divestitures of our
Gelit and Lender's® bagel business, partially offset by supply chain realized
productivity. Operating profit of the Refrigerated & Frozen segment was impacted
by expense of $10.5 million related to our restructuring plans in the third
quarter of fiscal 2020. The third quarter of fiscal 2019 included $10.8 million
of incremental cost of goods sold due to the impact of writing Pinnacle
inventory to fair value as part of our acquisition accounting and the subsequent
sale of that inventory and expense of $2.1 million related to our restructuring
plans.
Refrigerated & Frozen operating profit for the first three quarters of fiscal
2020 was $533.7 million , an increase of $92.3 million , or 21%, compared to the
first three quarters of fiscal 2019. Gross profits were $152.2 million higher in
the first three quarters of fiscal 2020 than in the first three quarters of
fiscal 2019, due to the addition of Pinnacle and the drivers mentioned above.
Operating profit of the Refrigerated & Frozen segment was impacted by charges of
$27.6 million related to the impairment of a business held for sale in the first
three quarters of fiscal 2020. In addition, operating profit of the Refrigerated
& Frozen segment in the first three quarters of fiscal 2020 was impacted by
charges of $15.8 million related to the impairment of certain brand intangible
assets and expense of $12.3 million related to our restructuring plans. The
first three quarters of fiscal 2019 included $20.7 million of incremental cost
of goods sold due to the impact of writing Pinnacle inventory to fair value as
part of our acquisition accounting and the subsequent sale of that inventory and
expense of $2.2 million related to our restructuring plans.
International operating profit for the third quarter of fiscal 2020 was $22.3
million , a decrease of $7.6 million , or 25%, compared to the third quarter of
fiscal 2019. Gross profits were $13.8 million lower in the third quarter of
fiscal 2020 when compared to the third quarter of fiscal 2019, due to higher
input costs, increased retailer investments, and the sale of our Wesson® oil
business, partially offset by realized productivity.
International operating profit for the first three quarters of fiscal 2020 was
$73.5 million , a decrease of $16.2 million , or 18%, compared to the first three
quarters of fiscal 2019. Gross profits were $12.3 million lower in the first
three quarters of fiscal 2020
42
--------------------------------------------------------------------------------
when compared to the first three quarters of fiscal 2019, due to higher input
costs, increased retailer investments, and the sales of our Del Monte® Canadian
and Wesson® oil businesses, partially offset by the addition of Pinnacle and
realized productivity. International gross profits also reflected a decrease of
$4.5 million due to foreign exchange rates compared to the prior-year period.
Operating profit of the International segment was impacted by expense of $1.4
million and $3.9 million related to our restructuring plans in the first three
quarters of fiscal 2020 and 2019, respectively. In addition, the first three
quarters of fiscal 2019 included a gain of $13.2 million related to the sale of
our Del Monte® Canadian business and expense of $2.9 million related to costs
incurred for acquisitions and planned divestitures.
Foodservice operating profit for the third quarter of fiscal 2020 was $27.2
million , a decrease of $9.6 million , or 26%, compared to the third quarter of
fiscal 2019. Gross profits were $8.3 million lower in the third quarter of
fiscal 2020 than in the third quarter of fiscal 2019. The lower gross profit
primarily reflected higher input costs, the sale of our Wesson® oil and
Lender's® bagel businesses, the exit of our private label peanut butter
business, and lower volume, excluding the impact of divestitures, partially
offset by supply chain realized productivity.
Foodservice operating profit for the first three quarters of fiscal 2020 was
$96.6 million , a decrease of $2.2 million , or 2%, compared to the first three
quarters of fiscal 2019. Gross profits were $4.5 million higher in the first
three quarters of fiscal 2020 than in the first three quarters of fiscal 2019.
The higher gross profit primarily reflected the addition of Pinnacle, improved
price/mix, and supply chain realized productivity, partially offset by higher
input costs and the sales of our Wesson® oil and Lender's® bagel businesses, the
exit of our private label peanut butter business, and the sale or our and
Trenton facility.
Interest Expense, Net
Net interest expense was$117.7 million and$130.9 million for the third quarter of fiscal 2020 and 2019, respectively. Net interest expense was$361.8 million and$260.5 million for the first three quarters of fiscal 2020 and 2019, respectively. The increase reflected the issuance of$7.025 billion aggregate principal amount of unsecured senior notes and borrowings of$1.30 billion under our new unsecured term loan agreement with a syndicate of financial institutions providing for a$650.0 million tranche of three-year term loans and a$650.0 million tranche of five-year term loans to the Company (the "Term Loan Agreement"), in each case in connection with the acquisition of Pinnacle in the second quarter of fiscal 2019. As ofFebruary 23, 2020 , we have repaid all of our borrowings under the Term Loan Agreement. In addition, the first three quarters of fiscal 2019 included$11.9 million of interest expense related to the amortization of costs incurred to secure fully committed bridge financing in connection with the then-pending Pinnacle acquisition. The bridge financing was subsequently terminated in connection with our incurrence of permanent financing to fund the Pinnacle acquisition, and we recognized the remaining unamortized financing costs within SG&A expenses.
Income Taxes
In the third quarter of fiscal 2020 and 2019, we recognized income tax expense of$68.9 million and$67.2 million , respectively. Income tax expense for the first three quarters of fiscal 2020 and 2019 was$141.5 million and$147.0 million , respectively. The effective tax rate (calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings) was approximately 25.2% and 21.7% for the third quarter of fiscal 2020 and 2019, respectively. The effective tax rate was approximately 18.1% and 20.9% for the first three quarters of fiscal 2020 and 2019, respectively.
The effective tax rate in the third quarter of fiscal 2020 reflected the following:
• additional state income tax expense related to uncertain tax positions and
• an adjustment of valuation allowance associated with the Wesson® oil
business.
The effective tax rate for the first three quarters of fiscal 2020 reflected the above-cited items, as well as the impact of benefits from the settlement of tax issues that were previously reserved, a change in deferred state tax rates due to the integration of Pinnacle activity for tax purposes, a tax planning strategy that will allow utilization of certain state attributes, state tax law changes, additional tax expense associated with non-deductible goodwill related to assets for which an impairment charge was recognized, a benefit from statute lapses on tax issues that were previously reserved, and an income tax benefit associated with a deduction of a prior year federal income tax matter.
The effective tax rate in the third quarter of fiscal 2019 reflected the following:
• a benefit recognized due to the non-taxability of the novation of a legacy
guarantee,
43
--------------------------------------------------------------------------------
• a benefit recognized due to a reduction in the fair value of equity awards
subject to limitations on deductibility that were issued to Pinnacle
executives as replacement awards at the time of the acquisition, and
• an increase to the deemed repatriation tax liability.
The effective tax rate for the first three quarters of fiscal 2019 reflected the above-cited items, as well as the impact of foreign restructuring resulting in a benefit related to undistributed foreign earnings for which the indefinite reinvestment assertion is no longer made, additional tax expense on the repatriation of foreign earnings, an adjustment of valuation allowance associated with the expected capital gains from the planned divestiture of the Wesson® oil business, additional tax expense on non-deductible facilitative costs associated with the acquisition of Pinnacle, and additional income tax expense related to state taxes.
Equity Method Investment Earnings
Equity method investment earnings were$10.4 million and$12.7 million for the third quarter of fiscal 2020 and 2019, respectively. Equity method investment earnings were$50.3 million and$66.6 million for the first three quarters of fiscal 2020 and 2019, respectively. Results for the third quarter and first three quarters of fiscal 2020 included a charge of$0.6 million and a gain of$4.2 million , respectively, related to the sale of an asset by the Ardent Mills joint venture. Results for the first three quarters of fiscal 2019 included a gain of$15.1 million from the sale of an asset by the Ardent Mills joint venture. Ardent Mills earnings for the third quarter of fiscal 2020 reflected unfavorable market conditions after adjusting for the items mentioned above.
Earnings Per Share
Diluted earnings per share in the third quarter of fiscal 2020 and 2019 were$0.42 and$0.50 , respectively. Diluted earnings per share in the first three quarters of fiscal 2020 were$1.31 . Diluted earnings per share in the first three quarters of fiscal 2019 were$1.27 , including earnings of$1.28 per diluted share from continuing operations and a loss of$0.01 per diluted share from discontinued operations. See "Items Impacting Comparability" above as several significant items affected the comparability of year-over-year results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity and Capital
Our primary financing objective is to maintain a prudent capital structure that provides us flexibility to pursue our growth objectives. If necessary, we use short-term debt principally to finance ongoing operations, including our seasonal requirements for working capital (accounts receivable, prepaid expenses and other current assets, and inventories, less accounts payable, accrued payroll, and other accrued liabilities), and a combination of equity and long-term debt to finance both our base working capital needs and our non-current assets. We are committed to maintaining an investment grade credit rating. AtFebruary 23, 2020 , we had a revolving credit facility (the "Revolving Credit Facility") with a syndicate of financial institutions providing for a maximum aggregate principal amount outstanding at any one time of$1.6 billion (subject to increase to a maximum aggregate principal amount of$2.1 billion with the consent of the lenders). We have historically used a credit facility principally as a back-up for our commercial paper program. As ofFebruary 23, 2020 , there were no outstanding borrowings under the Revolving Credit Facility. The Revolving Credit Facility generally requires that our ratio of earnings before interest, taxes, depreciation, and amortization ("EBITDA") to interest expense be not less than 3.0 to 1.0 and our ratio of funded debt to EBITDA not to exceed certain decreasing specified levels, ranging from 5.25 through the first quarter of fiscal 2021 to 3.75 from the second quarter of fiscal 2023 and thereafter. Each ratio is to be calculated on a rolling four-quarter basis. As ofFebruary 23, 2020 , we were in compliance with these financial covenants.
We had no amounts outstanding under our commercial paper program as of
During fiscal 2020 we prepaid the remaining$400.0 million outstanding principal balance of our borrowings under our$1.30 billion Term Loan Agreement. Payments totaling$200.0 million each were made in the first and third quarters of fiscal 2020. The Term Loan Agreement was terminated after these repayments.
During the third quarter of fiscal 2020, we also redeemed
44
--------------------------------------------------------------------------------
As of the end of the third quarter of fiscal 2020, our senior long-term debt
ratings were all investment grade. A significant downgrade in our credit ratings
would not affect our ability to borrow amounts under the Revolving Credit
Facility, although borrowing costs would increase. A downgrade of our short-term
credit ratings would impact our ability to borrow under our commercial paper
program by negatively impacting borrowing costs and causing shorter durations,
as well as making access to commercial paper more difficult, or impossible.
We repurchase shares of our common stock from time to time after considering
market conditions and in accordance with repurchase limits authorized by our
Board. Under the share repurchase authorization, we may repurchase our shares
periodically over several years, depending on market conditions and other
factors, and may do so in open market purchases or privately negotiated
transactions. The share repurchase authorization has no expiration date. We plan
to repurchase shares under our authorized program only at times and in amounts
as are consistent with the prioritization of achieving our leverage targets. The
Company's total remaining share repurchase authorization as of February 23, 2020
was $1.41 billion .
On December 10, 2019 , the Board announced a quarterly dividend payment of
$0.2125 per share, to be paid on March 3, 2020 , to stockholders of record as of
the close of business on January 31, 2020 . Subject to market and other
conditions and the approval of our Board, we intend to maintain our quarterly
dividend at the current annual rate of $0.85 per share during fiscal 2020.
During the third quarter of fiscal 2020, we completed the sale of our Lender's®
bagel business for net proceeds of
During the second quarter of fiscal 2020, we completed the sale of our DSD
Snacks business for net proceeds of
In addition to our cash flow from operations, which have been sufficient to fund our short-term liquidity needs thus far in the fourth quarter of fiscal 2020, we have access to our undrawn Revolving Credit Facility, our commercial paper program, and the capital markets. Although we have not attempted or needed to access the commercial paper market in recent weeks, we are aware that the impacts of the COVID-19 outbreak have reduced the availability and attractiveness of commercial paper borrowings. We expect that until commercial paper market conditions improve, accessing this source of short-term financing could be challenging or at elevated costs. We have approximately$900 million of debt maturing in the next 12 months. We expect to pay this debt, in part, from operating cash flows, and to maintain or have access to sufficient liquidity to retire or refinance the remainder of the debt upon maturity, as market conditions warrant, from our commercial paper program, proceeds from any divestitures and other disposition transactions, access to capital markets, and our Revolving Credit Facility.
Cash Flows
During the first three quarters of fiscal 2020, we used$137.6 million of cash, which was the net result of$906.5 million generated from operating activities,$59.9 million used in investing activities,$984.6 million used in financing activities, and an increase of$0.4 million due to the effects of changes in foreign currency exchange rates. Cash generated from operating activities of continuing operations totaled$906.5 million in the first three quarters of fiscal 2020, as compared to$745.1 million generated in the first three quarters of fiscal 2019. The increase in operating cash flows for the first three quarters of fiscal 2020 compared to the first three quarters of fiscal 2019 was largely due to the inclusion of the additional operating results from the acquisition of Pinnacle. This was partially offset by increased interest and tax payments and the comparative impact of cash proceeds of$47.5 million received upon the settlement of interest rate swaps in the first three quarters of fiscal 2019. Increased seasonal inventory builds in the first three quarters of fiscal 2020 reflect incremental amounts resulting from the Pinnacle acquisition and the launch of new innovation items. This was more than offset by a corresponding increase in accounts payable, including the effects of extended payment terms with certain large suppliers, and the timing of accounts receivable cash collections. Cash used in investing activities totaled$59.9 million and$5.30 billion in the first three quarters of fiscal 2020 and 2019, respectively. Investing activities in the first three quarters of fiscal 2020 consisted primarily of capital expenditures totaling$265.3 million and the net proceeds from divestitures totaling$191.4 million , including the sales of our DSD Snacks and Lender's® bagel businesses. Investing activities in the first three quarters of fiscal 2019 consisted mainly of the purchase of Pinnacle for$5.12 billion , net of cash acquired, capital expenditures totaling$236.1 million , and the proceeds from the sale of our Del Monte® processed fruit and vegetable business inCanada totaling$32.2 million . 45
-------------------------------------------------------------------------------- Cash used in financing activities totaled$984.6 million in the first three quarters of fiscal 2020, compared to cash provided by financing activities of$4.71 billion in the first three quarters of fiscal 2019. Financing activities in the first three quarters of fiscal 2020 consisted principally of the repayment of long-term debt totaling$665.9 million and cash dividends paid of$310.1 million . In the first three quarters of fiscal 2019, in connection with the Pinnacle acquisition, we issued long-term debt that generated$8.31 billion in gross proceeds and issued common stock for net proceeds of$555.7 million . This was reduced by debt issuance costs and bridge financing fees totaling$95.2 million . We repaid$3.52 billion of long-term debt, reduced our short-term borrowings under our commercial paper program by$278.3 million , and paid cash dividends of$253.0 million . The Company had cash and cash equivalents of$99.0 million atFebruary 23, 2020 and$236.6 million atMay 26, 2019 , of which$47.3 million atFebruary 23, 2020 and$144.8 million atMay 26, 2019 was held in foreign countries. We believe that our foreign subsidiaries have invested or will invest any undistributed earnings indefinitely, or that any undistributed earnings will be remitted in a tax-neutral transaction, and, therefore, do not provide deferred taxes on the cumulative undistributed earnings of our foreign subsidiaries.
Our estimate of capital expenditures for fiscal 2020 is approximately
Management believes that existing cash balances, cash flows from operations, existing credit facilities, and access to capital markets will provide sufficient liquidity to meet our repayment of debt, including any repayment of debt or refinancing of debt, working capital needs, planned capital expenditures, and payment of anticipated quarterly dividends for at least the next twelve months. OBLIGATIONS AND COMMITMENTS As part of our ongoing operations, we enter into arrangements that obligate us to make future payments under contracts such as lease agreements, debt agreements, and unconditional purchase obligations (i.e., obligations to transfer funds in the future for fixed or minimum quantities of goods or services at fixed or minimum prices, such as "take-or-pay" contracts). The unconditional purchase obligation arrangements are entered into in our normal course of business in order to ensure adequate levels of sourced product are available. Of these items, debt, notes payable, finance lease obligations, and operating lease obligations were recognized as liabilities in the Condensed Consolidated Balance Sheets contained in this report as ofFebruary 23, 2020 . A summary of our contractual obligations as ofFebruary 23, 2020 was as follows: Payments Due by Period (in millions) Contractual Obligations Total Less than 1 Year 1-3 Years 3-5 Years After 5 Years Long-term debt$ 9,906.6 $ 901.7$ 2,482.9 $ 1,000.1 $ 5,521.9 Finance lease obligations 152.4 20.7 39.0 26.0 66.7 Operating lease obligations 314.1 56.3 83.2 52.4 122.2 Purchase obligations1 and other contracts 1,393.5 1,143.9 130.8 59.6 59.2 Notes payable 0.8 0.8 - - - Total$ 11,767.4 $ 2,123.4$ 2,735.9 $ 1,138.1 $ 5,770.0 1Amounts include open purchase orders and agreements, some of which are not legally binding and/or may be cancellable. Such agreements are generally settleable in the ordinary course of business in less than one year. Purchase obligations and other contracts, which totaled$1.36 billion as ofFebruary 23, 2020 , were not recognized as liabilities in the Condensed Consolidated Balance Sheets contained in this report, in accordance with generally accepted accounting principles. We are also contractually obligated to pay interest on our long-term debt and finance lease obligations. The weighted average coupon interest rate of the long-term debt obligations outstanding as ofFebruary 23, 2020 was approximately 4.7%.
The operating lease obligations noted in the table above have not been reduced
by non-cancellable sublease rentals of
As ofMay 26, 2019 , we had aggregate unfunded pension and postretirement obligations totaling$131.7 million and$87.8 million , respectively. As ofFebruary 23, 2020 , primarily as a result of several interim pension remeasurements, we had aggregate unfunded pension and postretirement obligations totaling$31.1 million and$85.7 million , respectively. These amounts are not included in the table above as the unfunded obligations are remeasured each fiscal year, thereby resulting in our inability to accurately predict the ultimate amount and timing of any future required contributions to such plans. Based on current statutory requirements, we are not obligated to fund any amount to our qualified pension plans during the next twelve months. We estimate that we will make payments of approximately$14.2 million and$10.8 million over the next twelve months to fund our pension and postretirement plans, respectively. See Note 14, Pension and Postretirement Benefits, to the Condensed Consolidated Financial Statements contained in this 46 -------------------------------------------------------------------------------- report and Note 19, Pension and Postretirement Benefits, to the Consolidated Financial Statements and Critical Accounting Estimates - Employment-Related Benefits contained in the Company's Annual Report on Form 10-K for the year endedMay 26, 2019 for further discussion of our pension obligations and factors that could affect estimates of this liability. As part of our ongoing operations, we also enter into arrangements that obligate us to make future cash payments only upon the occurrence of a future event (e.g., guarantees of debt or lease payments of a third party should the third party be unable to perform). In accordance with generally accepted accounting principles, such commercial commitments are not recognized as liabilities in our Condensed Consolidated Balance Sheets. As ofFebruary 23, 2020 , we had other commercial commitments totaling$1.7 million , which will expire in less than one year.
In addition to the other commercial commitments mentioned above, as of
In certain limited situations, we will guarantee an obligation of an unconsolidated entity. We guarantee certain leases resulting from the divestiture of theJM Swank business completed in the first quarter of fiscal 2017. As ofFebruary 23, 2020 , the remaining terms of these arrangements did not exceed three years and the maximum amount of future payments we have guaranteed was$0.7 million . In addition, we guarantee a certain lease resulting from an exited facility. As ofFebruary 23, 2020 , the remaining term of this arrangement did not exceed seven years and the maximum amount of future payments we have guaranteed was$17.1 million . We also guarantee an obligation of the Lamb Weston business pursuant to a guarantee arrangement that existed prior to the spinoff of the Lamb Weston business (the "Spinoff") and remained in place following completion of the Spinoff until such guarantee obligation is substituted for guarantees issued by Lamb Weston. Pursuant to the Separation and Distribution Agreement, dated as ofNovember 8, 2016 (the "Separation Agreement"), between us and Lamb Weston, this guarantee arrangement is deemed a liability of Lamb Weston that was transferred to Lamb Weston as part of the Spinoff. Accordingly, in the event that we are required to make any payments as a result of these guarantee arrangement, Lamb Weston is obligated to indemnify us for any such liability, reduced by any insurance proceeds received by us, in accordance with the terms of the indemnification provisions under the Separation Agreement. Lamb Weston is a party to an agricultural sublease agreement with a third party for certain farmland through 2020 (subject, at Lamb Weston's option, to extension for two additional five-year periods). Under the terms of the sublease agreement, Lamb Weston is required to make certain rental payments to the sublessor. We have guaranteed the sublessor Lamb Weston's performance and the payment of all amounts (including indemnification obligations) owed by Lamb Weston under the sublease agreement, up to a maximum of$75.0 million . We believe the farmland associated with this sublease agreement is readily marketable for lease to other area farming operators. As such, we believe that any financial exposure to the Company, in the event that we were required to perform under the guarantee, would be largely mitigated. The obligations and commitments disclosed above do not include any reserves for uncertainties in income taxes, as we are unable to reasonably estimate the ultimate amount or timing of settlement of our reserves for income taxes. The liability for gross unrecognized tax benefits atFebruary 23, 2020 was$46.2 million . The net amount of unrecognized tax benefits atFebruary 23, 2020 , that, if recognized, would impact our effective tax rate was$32.4 million . Recognition of these tax benefits would have a favorable impact on our effective tax rate. CRITICAL ACCOUNTING ESTIMATES
A discussion of our critical accounting estimates can be found in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section in Part II, Item 7, of our Annual Report on Form 10-K for
the fiscal year ended
© Edgar Online, source
