CONAGRA BRANDS, INC. The following discussion and analysis is intended to provide a summary of significant factors relevant to our financial performance and condition. The discussion and analysis should be read together with our consolidated financial statements and related notes in Item 8, Financial Statements and Supplementary Data. Results for the fiscal year endedMay 31, 2020 are not necessarily indicative of results that may be attained in the future.
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) pandemic 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 pandemic; 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 consolidated financial statements and related notes contained in this report. Results for fiscal 2020 are not necessarily indicative of results that may be attained in the future. EXECUTIVE OVERVIEWConagra 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 22 --------------------------------------------------------------------------------
Vlasic®, as well as emerging brands, including Angie's® BOOMCHICKAPOP®, Duke's®, Earth Balance®, Gardein®, and Frontera®, offer choices for every occasion.
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 Results
Fiscal 2020 performance compared to fiscal 2019 reflected an increase in net sales, including the impact of recent acquisitions, with organic (excludes the impacts of foreign exchange, divested businesses and acquisitions, including the Pinnacle acquisition (until the anniversary date of the acquisitions), as well as the impact of the 53rd week of our fiscal year) increases in all of our operating segments with the exception of our Foodservice segment, in each case compared to fiscal 2019. Organic net sales for our retail segments (inclusive of Grocery & Snacks, Refrigerated & Frozen, and International) were positively impacted by the increase in at-home food consumption as a result of the COVID-19 pandemic, with sales declines in our Foodservice segment due to lower traffic in away-from-home food outlets. Overall gross margin increased with the addition of Pinnacle's gross profit, organic net sales growth, supply chain realized productivity, cost synergies, and the inclusion of the 53rd week of our fiscal year. These benefits were partially offset by higher input and transportation costs, lost profits due to divested businesses, pandemic-related costs, and the impact of foreign exchange rates. Overall segment operating profit increased in all of our operating segments with the exception of our Foodservice segment. Corporate expenses decreased due to items impacting comparability, as discussed below. We experienced a slight decrease in equity method investment earnings, a decrease in income tax expense, and an increase in interest expense, in each case compared to fiscal 2019. Diluted earnings per share in fiscal 2020 were$1.72 . Diluted earnings per share in fiscal 2019 were$1.52 , including earnings of$1.53 per diluted share from continuing operations and a loss of$0.01 per diluted share from discontinued operations. Diluted earnings per share were affected by higher net income, partially offset by an increase in the number of shares as well as several significant items affecting the comparability of year-over-year results of continuing operations (see "Items Impacting Comparability" below).
Items Impacting Comparability
Items of note impacting comparability of results from continuing operations for fiscal 2020 included the following:
• charges totaling
impairment of intangible assets,
23
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• charges totaling
with our restructuring plans,
• charges totaling
impairment of businesses held for sale,
• an income tax benefit of
reorganization of various legacy Pinnacle legal entities and state tax
planning strategies,
• charges totaling $42.9 million ($32.1 million after-tax) related to
pension plan lump-sum settlements and a remeasurement of our hourly and
non-qualified pension plan liability,
• a gain of
settlement,
• charges totaling
and environmental matters, and
• charges totaling
costs incurred for acquisitions and divestitures.
Items of note impacting comparability of results from continuing operations for fiscal 2019 included the following:
• charges totaling
with our restructuring plans,
• charges totaling
costs incurred for acquisitions and divestitures,
• charges totaling $89.6 million ($66.9 million after-tax and net ofnon-controlling interest) related to the impairment of other intangible
assets,
• gains of
Monte®
business,
• incremental cost of goods sold of
due to the fair value adjustment to inventory resulting from acquisition
accounting for the Pinnacle acquisition,
• a gain of$39.1 million ($29.1 million after-tax) related to legal matters, • an income tax benefit of$32.4 million associated with a change in a
valuation allowance on a deferred tax asset due to the divestitures of the
Wesson® oil business and the Gelit pasta business,
• 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
an asset within the Ardent Mills joint venture,
• an income tax charge of
primarily related to legal entity restructuring activity,
• charges totaling $8.9 million ($6.6 million after-tax) associated with
costs incurred for integration activities related to the Pinnacle
acquisition, and
• charges totaling
plan lump-sum settlements and a remeasurement of our salaried and
non-qualified pension plan liability.
In addition, fiscal 2020 earnings per share benefited by approximately
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 are discussed in the segment review below. Acquisitions OnOctober 26, 2018 , we completed the Pinnacle acquisition. Pursuant to the Agreement and Plan of Merger, dated as ofJune 26, 2018 (the "Merger Agreement"), among the Company, Pinnacle, andPatriot 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 24 -------------------------------------------------------------------------------- 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 was allocated to goodwill and approximately$3.52 billion was 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 . InFebruary 2018 , we acquired the Sandwich Bros. of Wisconsin® business, maker of frozen breakfast and entree flatbread pocket sandwiches, for a cash purchase price of$87.3 million , net of cash acquired. Approximately$57.8 million has been classified as goodwill, and$9.7 million and$7.1 million have been classified as non-amortizing and amortizing intangible assets, respectively. The amount of goodwill allocated is deductible for tax purposes. The business is included in the Refrigerated & Frozen segment. InOctober 2017 , we acquiredAngie's Artisan Treats, LLC , maker of Angie's® BOOMCHICKAPOP® ready-to-eat popcorn, for a cash purchase price of$249.8 million , net of cash acquired. Approximately$156.7 million has been classified as goodwill, of which$95.4 million is deductible for income tax purposes. Approximately$73.8 million and$10.3 million of the purchase price have been allocated to non-amortizing and amortizing intangible assets, respectively. The business is primarily included in the Grocery & Snacks segment, and to a lesser extent in the International segment.
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 were 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. The assets and liabilities of this business have been reclassified as assets and liabilities held for sale within our Consolidated Balance Sheets for all periods presented prior to the divestiture. During the second quarter of fiscal 2020, we completed the sale of our Direct Store Delivery ("DSD") snacks business, for net proceeds of$137.5 million , including final working capital adjustments. The results of operations of the divested DSD snacks business were included in our Grocery & Snacks segment for the periods preceding the completion of the transaction. The assets and liabilities of this business have been reclassified as assets and liabilities held for sale within our Consolidated Balance Sheets for all periods presented prior to the divestiture. During the fourth quarter of fiscal 2019, we completed the sale of our Italian-based frozen pasta business, Gelit, for proceeds net of cash divested of$80.1 million , including final working capital adjustments. The results of operations of the divested Gelit business were 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$168.3 million , including final working capital adjustments. The results of operations of the divested Wesson® oil business were primarily included in our Grocery & Snacks segment, and to a lesser extent within the Foodservice and International segments, for the periods preceding the completion of the transaction. 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 were 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 (the "Pinnacle Integration Restructuring Plan") for the purpose of achieving significant cost synergies between the companies, as a result of which we expect to incur material charges for exit and disposal activities underU.S. generally accepted accounting principles ("U.S. GAAP"). 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. 25 -------------------------------------------------------------------------------- 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 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$360.2 million of charges ($277.2 million of cash charges and$83.0 million of non-cash charges) for actions identified to date under the Pinnacle Integration Restructuring Plan. We recognized charges of$73.8 million and$168.2 million in connection with the Pinnacle Integration Restructuring Plan in fiscal 2020 and 2019, respectively. We expect to incur costs related to the Pinnacle Integration Restructuring Plan through fiscal 2022. In fiscal 2019, management initiated a restructuring plan (the "Conagra Restructuring Plan") for costs in connection with actions taken to improve selling, general and administrative ("SG&A") expense effectiveness and efficiencies and to optimize our supply chain network. Although we remain unable to make good faith estimates relating to the entire Conagra Restructuring Plan, we are reporting on actions initiated through the end of 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. As ofMay 31, 2020 , we have approved the incurrence of$131.1 million ($38.2 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$129.5 million of charges ($40.1 million of cash charges and$89.4 million of non-cash charges) for actions identified to date under the Conagra Restructuring Plan. We recognized charges of$64.4 million and$2.2 million in connection with the Conagra Restructuring Plan in fiscal 2020 and 2019, respectively. COVID-19 We are closely monitoring the impact of the outbreak of the novel coronavirus (COVID-19) on all aspects of our business. We experienced significantly higher sales during the fourth quarter of fiscal 2020 for our products in both of our Grocery & Snacks and Refrigerated & Frozen segments due to the COVID-19 pandemic, as consumers increased their at-home consumption. We continue to see increased orders from retail customers inNorth America subsequent to the end of fiscal 2020 in response to increased consumer demand for food at home and expect that trend to continue for at least a portion of fiscal 2021 as work-from-home arrangements are extended in response to the continued spread of COVID-19. However, the increased consumer demand may reverse in the coming months as consumer purchasing behavior changes as a result of the economic downturn. During the fourth quarter of fiscal 2020, we experienced reduced demand for our foodservice products across all of our major markets as consumer traffic in away-from-home food outlets decreased as a result of the COVID-19 pandemic. We expect this trend to continue for at least a portion of fiscal 2021, which will continue to negatively impact our net sales to customers in our Foodservice segment. While we generally expect retail and foodservice demand levels to return to historical norms as we progress through fiscal 2021, given the inherent uncertainty of the situation surrounding the COVID-19 pandemic, we are unable to predict the nature and timing of when such normalization may occur. During the fourth quarter of fiscal 2020, our operating margins saw improvement largely due to favorable overhead absorption at our manufacturing facilities, lower advertising and promotion costs, and reduced travel expenses. That benefit was largely offset by several factors including higher transportation and warehousing costs, temporary plant closures, employee safety and sanitation costs, and employee compensation costs, which accounted for an estimated$40 million of incremental costs in the fourth quarter. We created an internal COVID-19 pandemic team in order to review and assess the evolving COVID-19 pandemic, and to recommend risk mitigation actions for the health and safety of our employees. In order to enhance the safety of our employees during the COVID-19 pandemic, we have implemented various measures, including the installation of physical barriers between employees in production facilities, extensive cleaning and sanitation of both production and office spaces, and implementation of broad work-from-home initiatives for office personnel. While all of these measures have been necessary and appropriate, they have resulted in additional costs, which we expect to continue to incur throughout fiscal 2021 to continue to address employee safety. The implementation of such safety measures has not resulted in any meaningful change to our control environment. As mentioned above, we have experienced some challenges in connection with the COVID-19 pandemic, including temporary closings of production facilities and reduced demand for certain of our products. Despite these challenges, there has been minimal disruption to our supply chain network to date, including the supply of our ingredients, packaging, or other sourced materials. However, we are continuing to closely monitor the potential impacts of the COVID-19 pandemic, as we cannot predict its ultimate impact on our suppliers, distributors, and manufacturers. At this time, we have not experienced a net negative impact on our liquidity or results of operations and we believe we have sufficient liquidity to satisfy our cash needs. We will continue to evaluate the nature and extent of the impact to our business, consolidated results of operations, financial condition, and liquidity. 26 --------------------------------------------------------------------------------
SEGMENT REVIEW
During 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, that are packaged for sale to restaurants and other foodservice establishments primarily 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 generally 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:
($ in millions) Fiscal 2020 Fiscal 2019 Fiscal 2018 Net derivative losses incurred$ (12.9 ) $ (3.6 ) $ (0.9 ) Less: Net derivative losses allocated to reporting segments (7.4 ) (1.8 ) (7.1 ) Net derivative gains (losses) recognized in general corporate expenses$ (5.5 ) $ (1.8 ) $ 6.2 Net derivative gains (losses) allocated to Grocery & Snacks$ (4.7 ) $ (2.5 ) $ 0.2 Net derivative losses allocated to Refrigerated & Frozen (2.5 ) (1.5 ) (0.3 ) Net derivative gains (losses) allocated to International 0.1 2.8 (6.9 ) Net derivative losses allocated to Foodservice (0.3 ) (0.6 ) (0.1 ) Net derivative losses included in segment operating profit$ (7.4 ) $
(1.8 )
As ofMay 31, 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$4.1 million . This amount reflected net losses of$4.5 million incurred during the fiscal year endedMay 31, 2020 , as well as net gains of$0.4 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 net losses of$2.1 million in fiscal 2021 and$2.0 million in fiscal 2022 and thereafter. 27 --------------------------------------------------------------------------------
Fiscal 2020 compared to Fiscal 2019
Net Sales
($ in millions) Fiscal 2020 Fiscal 2019 % Inc
Reporting Segment
3,735.4 22 %
International 925.3 864.4 7 %
Foodservice 952.4 1,015.0 (6 )%
Total $ 11,054.4 $ 9,538.4 16 %
Overall, our net sales were
Grocery & Snacks net sales for fiscal 2020 were$4.62 billion , an increase of$693.5 million , or 18%, compared to fiscal 2019. Volume, excluding the impact of acquisitions and divestitures, increased 10% in fiscal 2020 compared to the prior-year period. This result reflected an increase across multiple categories, primarily in the fourth quarter of fiscal 2020, as consumers increased their at-home food consumption in connection with the COVID-19 pandemic. Price/mix decreased 1% compared to the prior year due to incremental trade and strategic investments with certain customers and brands. The inclusion of an additional week of results in fiscal 2020 accounted for 2% of the increase in net sales. The acquisition of Pinnacle in the second quarter of fiscal 2019 contributed$406.3 million , or 10%, to Grocery & Snacks net sales during fiscal 2020, through the one-year anniversary of the acquisition. Fiscal 2020 and 2019 included$23.1 million and$39.5 million , respectively, of net sales related to our private label peanut butter business, which we exited in the third quarter of fiscal 2020. Fiscal 2020 and 2019 included$46.1 million and$59.6 million , respectively, of net sales related to our DSD snacks business, which was sold in the second quarter of fiscal 2020. Fiscal 2019 results included$115.9 million of net sales related to our Wesson® oil business, which was sold in the fourth quarter of fiscal 2019. Refrigerated & Frozen net sales for fiscal 2020 were$4.56 billion , an increase of$824.2 million , or 22%, compared to fiscal 2019. Results for fiscal 2020 reflected a 5% increase in volume compared to fiscal 2019, excluding the impact of acquisitions and divestitures. The increase in sales volumes was a result of consumers increasing their at-home food consumption in the fourth quarter of fiscal 2020 in connection with the COVID-19 pandemic and new innovation during the current fiscal year. Price/mix increased 1% compared to fiscal 2019. The inclusion of an additional week of results in fiscal 2020 accounted for 2% of the increase in net sales. The acquisition of Pinnacle contributed$567.6 million , or 15%, to Refrigerated & Frozen net sales for fiscal 2020, through the one-year anniversary of the acquisition. Fiscal 2020 included$23.2 million of net sales related to our Lender's® bagel business, which was sold in the third quarter of fiscal 2020. Fiscal 2019 included$24.0 million of net sales related to this business. Fiscal 2019 also included$56.7 million 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 fiscal 2020 were$925.3 million , an increase of$60.9 million , or 7%, compared to fiscal 2019. Results for fiscal 2020 reflected a 4% increase in volume, excluding the impact of acquisitions and divestitures, a 2% decrease due to foreign exchange rates, a 2% increase due to the inclusion of an additional week of results, and a 1% increase in price/mix, in each case compared to fiscal 2019. The volume increases for fiscal 2020 were driven by elevated demand related to the impacts of the COVID-19 pandemic, partially offset by lower volumes inIndia due to the country-wide closure of manufacturing plants and stores during the fourth quarter. The acquisition of Pinnacle contributed$46.0 million , or 5%, to International net sales for fiscal 2020, through the one-year anniversary of the acquisition. Fiscal 2019 included$17.1 million of net sales related to our divested Wesson® oil business. 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 fiscal 2020 were$952.4 million , a decrease of$62.6 million , or 6%, compared to fiscal 2019. Results for fiscal 2020 reflected a 13% decrease in volume, excluding the impact of acquisitions and divestitures. The decline in volume reflected lower restaurant traffic as a result of the COVID-19 pandemic and continued execution of the segment's value-over-volume strategy. Price/mix increased 3% in fiscal 2020 compared to fiscal 2019, reflecting inflation-related pricing and the value-over-volume strategy. The decrease in net sales was offset by a 1% increase attributable to an additional week of results in fiscal 2020. The acquisition of Pinnacle contributed$57.7 million , or 6%, for fiscal 2020, through the one-year anniversary of the acquisition. Fiscal 2020 and 2019 included$6.6 million and$6.2 million , respectively, of net sales related to our Lender's® bagel business, which was sold in the third quarter of fiscal 2020. 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. Fiscal 2019 included$8.8 million of net sales related to this business. Fiscal 2019 included$34.2 million of net sales related to our Wesson® oil business, which was sold in the fourth quarter of fiscal 2019. 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. 28
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SG&A Expenses (Includes general corporate expenses)
SG&A expenses totaled
Items impacting comparability of earnings
• expenses of
• expenses of$105.7 million in connection with our restructuring plans, • expense of$59.0 million related to the impairment of businesses held for
sale,
• a benefit of $11.9 million related to a contract settlement,
• charges totaling
• expenses of
and divestitures, and
• a net loss of $1.7 million related to divestitures of businesses.
Other changes in expenses compared to fiscal 2019
• an increase in incentive compensation expense of
exceeding certain performance targets,
• an increase in share-based payment and deferred compensation expense of
performance targets,
• a decrease in advertising and promotion expense of
as spending was reduced in the fourth quarter with elevated sales demand,
• an increase of
• a decrease in self-insured workers' compensation and product liability
expense of
• an increase of
assets, attributable to the Pinnacle acquisition,
• an increase in charitable contributions of
the recent COVID-19 pandemic,
• a decrease in professional fees of $7.2 million ,
• a decrease in royalty expense of $7.2 million , in part due to the
expiration of a royalty agreement,
• a decrease in depreciation expense of $5.8 million ,
• a decrease in travel and entertainment expense of
due to reduced travel from the COVID-19 pandemic,
• a decrease in commission expense of $3.8 million , and
• an increase in transaction services agreement income of $3.4 million .
SG&A expenses for fiscal 2019 included the following items impacting the comparability of earnings:
• expenses of
• expenses of
and divestitures,
• expenses of $89.6 million related to intangible impairments,
• gains of $69.4 million related to the divestitures of businesses,
• a benefit of $39.1 million related to legal matters,
• a benefit of
• a benefit of
settleable equity awards issued in connection with, and included in the
consideration for the Pinnacle acquisition, and
29
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• expenses of
of Pinnacle.
Segment Operating Profit (Earnings before general corporate expenses, pension
and postretirement non-service income, interest expense, net, income taxes, and
equity method investment earnings)
Fiscal 2020 Fiscal 2019
($ in millions) Operating Operating % Inc
Reporting Segment Profit Profit (Dec)
Grocery & Snacks $ 915.2 $ 762.6 20 %
Refrigerated & Frozen 702.2 645.1 9 %
International 100.6 99.8 1 %
Foodservice 97.6 134.3 (27 )%
Grocery & Snacks operating profit for fiscal 2020 was $915.2 million , an
increase of $152.6 million , or 20%, compared to fiscal 2019. Gross profits were
$229.0 million higher in fiscal 2020 than in fiscal 2019. The higher gross
profit was driven by the increase in at-home food consumption in connection with
the COVID-19 pandemic, the addition of Pinnacle, the impact of the 53rd week of
our fiscal year, 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,
the exit of our private label peanut butter business, and pandemic-related
costs. Pandemic-related costs included investments in employee safety protocols,
bonuses paid to supply chain employees, and costs necessary to meet elevated
levels of demand. Operating profit of the Grocery & Snacks segment was impacted
by expense of $58.4 million and $6.1 million related to our restructuring plans
in fiscal 2020 and 2019, respectively. Fiscal 2020 and 2019 included brand
intangible impairment charges of $46.4 million and $76.5 million , respectively.
Fiscal 2020 also included a charge 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, and costs of $3.0 million related to divestitures. Fiscal 2019
included a gain of $33.1 million related to the sale of our Wesson® oil business
and $30.2 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 fiscal 2020 was $702.2 million , an
increase of $57.1 million , or 9%, compared to fiscal 2019. Gross profits were
$227.1 million higher in fiscal 2020 than in fiscal 2019, due to the increase in
at-home food consumption resulting from the COVID-19 pandemic, the addition of
Pinnacle, the impact of the 53rd week of our fiscal year, and supply chain
realized productivity, partially offset by higher input costs, lost profit from
the divestiture of our Lender's® bagel and Italian-based frozen pasta
businesses, and pandemic-related costs. Operating profit of the Refrigerated &
Frozen segment was impacted by charges of $110.8 million related to the
impairment of certain brand intangible assets during fiscal 2020. Fiscal 2020
and 2019 included $15.8 million and $2.9 million , respectively, of charges
related to our restructuring plans. In addition, operating profit of the
Refrigerated & Frozen segment included $27.6 million related to the impairment
of a business held for sale in fiscal 2020. Fiscal 2019 included a gain of $23.1
million related to the sale of our Italian-based frozen pasta business, and
$21.9 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. Advertising and promotion expenses for fiscal
2020 decreased by $13.7 million compared to fiscal 2019.
International operating profit for fiscal 2020 was $100.6 million , an increase
of $0.8 million , or 1%, compared to fiscal 2019. Gross profits were $6.4 million
lower in fiscal 2020 compared to fiscal 2019, due to higher input costs,
increased retailer investments, the sales of our Del Monte® Canadian and Wesson®
oil businesses, and pandemic-related costs, partially offset by the increased
demand related to the COVID-19 pandemic, the addition of Pinnacle, the impact of
the 53rd week of our fiscal year, and realized productivity. International gross
profits also reflected a decrease of $13.7 million due to foreign exchange rates
compared to the prior-year period. Operating profit of the International segment
was impacted by charges of $8.3 million and $13.1 million related to the
impairment of certain brand intangible assets during fiscal 2020 and 2019,
respectively. Fiscal 2020 and 2019 included expense of $1.6 million and $4.9
million , respectively, related to our restructuring plans. In addition, 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
divestitures.
Foodservice operating profit for fiscal 2020 was $97.6 million , a decrease of
$36.7 million , or 27%, compared to fiscal 2019. Gross profits were $29.4 million
lower in fiscal 2020 than in fiscal 2019, reflecting lower restaurant traffic
due to the COVID-19 pandemic, higher inventory write-offs, higher input costs,
the sales of our Wesson® oil and Lender's® bagel businesses, the exit of our
private label peanut butter business, and the sale of our Trenton, Missouri
facility. These were slightly offset by the addition of Pinnacle, the impact of
the 53rd week of our fiscal year, and supply chain realized productivity.
30
--------------------------------------------------------------------------------Pension and Postretirement Non-service Income
In fiscal 2020, pension and postretirement non-service income was$9.9 million , a decrease of$25.2 million compared to fiscal 2019. The decrease was driven by a charge of$44.8 million in fiscal 2020 compared to a charge of$5.1 million in fiscal 2019 related to the year-end write-off of actuarial losses in excess of 10% of our pension liability. The increase in losses outside of the 10% corridor was driven by a reduction of the discount rate used to remeasure the pension obligations to present value and a reduction in asset values for certain plan assets. Excluding our year-end actuarial losses outside the corridor, our pension income increased due to lower interest costs as a result of declining interest rates. Interest Expense, Net In fiscal 2020, net interest expense was$487.1 million , an increase of$95.7 million , or 25%, from fiscal 2019. The increase reflected the issuance of$7.025 billion aggregate principal amount of unsecured senior notes and borrowings of$1.30 billion under our 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 ofMay 31, 2020 , we repaid all of our borrowings under the Term Loan Agreement. In addition, 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 of$33.8 million within SG&A expenses.
Income Taxes
Our income tax expense was$201.3 million and$218.8 million in fiscal 2020 and 2019, respectively. The effective tax rate (calculated as the ratio of income tax expense to pre-tax income from continuing operations, inclusive of equity method investment earnings) was approximately 19% and 24% for fiscal 2020 and 2019, respectively.
The effective tax rate in fiscal 2020 reflects the following:
• the impact of a legal entity reorganization,
• an adjustment of the valuation allowance associated with the Wesson® oil
business,
• additional state income tax expense related to uncertain tax positions,
• a benefit from the settlement of tax issues that were previously reserved,
• additional benefit due to a change in the deferred state tax rates
relating to the integration of Pinnacle activity for income tax purposes,
• an income tax benefit associated with a tax planning strategy that will
allow us to utilize certain state tax attributes,
• additional income tax expense associated with non-deductible goodwill
related to assets held for sale, for which an impairment charge was
recognized,
• a tax benefit resulting from law changes,
• 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.
31
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The effective tax rate in fiscal 2019 reflects the following:
• the impact of legal entity reorganization 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 certain foreign earnings,
• an adjustment of valuation allowance associated with the expected capital
gains from the divestiture of the Wesson® oil and Gelit businesses,
• additional tax expense on non-deductible facilitative costs associated
with the Pinnacle acquisition,
• a benefit recognized due to the non-taxability of the novation of a legacy
guarantee,
• 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,
• an increase to the deemed repatriation tax liability,
• additional tax expense due to foreign and domestic restructuring, and
• a state tax benefit from integration of the Pinnacle business.
We expect our effective tax rate in fiscal 2021, exclusive of any unusual transactions or tax events, to be approximately 23%-24%.
Equity Method Investment Earnings
We include our share of the earnings of certain affiliates based on our economic ownership interest in the affiliates. Our most significant affiliate is the Ardent Mills joint venture. Our share of earnings from our equity method investment earnings were$73.2 million and$75.8 million for fiscal 2020 and 2019, respectively. Results for fiscal 2020 and 2019 included a gain of$4.1 million and$15.1 million , respectively, from the sale of assets by the Ardent Mills joint venture. Ardent Mills earnings for fiscal 2020 reflected increased retail demand in the fourth quarter, which more than offset reduced foodservice demand and unfavorable market conditions during the first three quarters of the year after adjusting for the items mentioned above.
Earnings Per Share
Diluted earnings per share in fiscal 2020 were$1.72 . Diluted earnings per share in fiscal 2019 were$1.52 , including earnings of$1.53 per diluted share from continuing operations and a loss of$0.01 per diluted share from discontinued operations. The increase in diluted earnings per share reflected higher net income, partially offset by an increase in the number of shares. In addition, see "Items Impacting Comparability" above as several significant items affected the comparability of year-over-year results of operations.
Fiscal 2019 compared to Fiscal 2018
Net Sales
($ in millions) Fiscal 2019 Fiscal 2018 % Inc
Reporting Segment
2,753.0 36 %
International 864.4 843.5 3 %
Foodservice 1,015.0 1,060.8 (4 )%
Total $ 9,538.4 $ 7,938.3 20 %
Overall, our net sales were
Grocery & Snacks net sales for fiscal 2019 were$3.92 billion , an increase of$642.6 million , or 20%, compared to fiscal 2018. Volume, excluding the impact of acquisitions and divestitures, was flat in fiscal 2019 compared to the prior-year period. This result reflected merchandising changes and price elasticity-related declines in certain brands, as well as isolated production 32 -------------------------------------------------------------------------------- challenges, partially offset by the continued benefit from momentum and innovation successes in the snacks businesses. Price/mix was flat compared to the prior year as unfavorable mix, coupled with increases in brand building investments with retailers were offset by the impact of higher pricing. The acquisition of Pinnacle in the second quarter of fiscal 2019 contributed$646.7 million , or 20%, to Grocery & Snacks net sales during fiscal 2019. The acquisition ofAngie's Artisan Treats, LLC , which was completed inOctober 2017 , contributed$41.3 million to Grocery & Snacks net sales during fiscal 2019, through the one-year anniversary of the acquisition. Fiscal 2019 results included$115.9 million of net sales related to our Wesson® oil business, which was sold in the fourth quarter of fiscal 2019. Fiscal 2018 results included$156.4 million of net sales related to this divested business. Refrigerated & Frozen net sales for fiscal 2019 were$3.74 billion , an increase of$982.4 million , or 36%, compared to fiscal 2018. Results for fiscal 2019 reflected a 1% increase in volume compared to fiscal 2018, excluding the impact of acquisitions and divestitures. The increase in sales volumes was a result of innovation across multiple brands, which was partially offset by the effects of reduced merchandising spend and the impact of a recall during the fourth quarter. Price/mix was flat compared to fiscal 2018, as continued delivery of top-line accretive innovation in several brands was partially offset by brand building investments with retailers. The acquisition of Pinnacle in the second quarter of fiscal 2019 contributed$931.4 million , or 34%, to Refrigerated & Frozen net sales during fiscal 2019. The acquisition of the Sandwich Bros. of Wisconsin® business, which was completed inFebruary 2018 , contributed$25.7 million to Refrigerated & Frozen's net sales during fiscal 2019, through the one-year anniversary of the acquisition. International net sales for fiscal 2019 were$864.4 million , an increase of$20.9 million , or 3%, compared to fiscal 2018. Results for fiscal 2019 reflected a 2% increase in volume, excluding the impact of acquisitions and divestitures, a 4% decrease due to foreign exchange rates, and a 2% increase in price/mix, in each case compared to fiscal 2018. The volume and price/mix increases for fiscal 2019 were driven by growth in the Canadian snacks and frozen businesses. The acquisition of Pinnacle in the second quarter of fiscal 2019 contributed$70.9 million , or 8%, to International net sales during fiscal 2019. The acquisition ofAngie's Artisan Treats, LLC contributed$3.7 million to International net sales for fiscal 2019, through the one-year anniversary of the acquisition. Fiscal 2019 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. Fiscal 2018 results included$48.9 million of net sales related to this divested business. In addition, fiscal 2019 and 2018 results included$17.1 million and$24.5 million , respectively, related to our divested Wesson® oil business. Foodservice net sales for fiscal 2019 were$1.02 billion , a decrease of$45.8 million , or 4%, compared to fiscal 2018. Results for fiscal 2019 reflected a 7% decrease in volume, excluding divestitures. The decline in volume reflected the continued execution of the segment's value-over-volume strategy and the sale of ourTrenton, Missouri production facility in the first quarter of fiscal 2019. Price/mix increased 4% in fiscal 2019 compared to fiscal 2018. The increase in price/mix for fiscal 2019 reflected favorable product and customer mix, the impact of inflation-driven increases in pricing, and the execution of the segment's value-over-volume strategy. The acquisition of Pinnacle in the second quarter of fiscal 2019 contributed$78.6 million , or 7%, to Foodservice net sales during fiscal 2019. Fiscal 2019 included$34.2 million of net sales related to our Wesson® oil business, which was sold in the fourth quarter of fiscal 2019. Fiscal 2018 results included$53.4 million of net sales related to this divested business. Net sales declined by approximately 7% in fiscal 2019 due to the sale of ourTrenton, Missouri production facility.
SG&A Expenses (Includes general corporate expenses)
SG&A expenses totaled
Items impacting comparability of earnings
• expenses of
• expenses of
and divestitures,
• expenses of $89.6 million related to intangible impairments,
• gains of $69.4 million related to the divestitures of businesses,
• a benefit of $39.1 million related to legal matters,
• a benefit of
33
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• a benefit of
settleable equity awards issued in connection with, and included in the
consideration for the Pinnacle acquisition, and
• expenses of
of Pinnacle.
Other changes in expenses compared to fiscal 2018
• an increase of
included in other items noted herein, representing such costs incurred
from October 26, 2018 through May 26, 2019 ,
• a decrease in advertising and promotion expense of $25.2 million ,
including $34.0 million of expense attributable to Pinnacle,
• an increase in salary and wage expense of
million attributable to Pinnacle,
• a decrease in share-based payment and deferred compensation expense of
million of expense attributable to Pinnacle,
• a decrease in pension and postretirement service expense of
• an increase in defined contribution plan expense of $6.9 million ,
including $2.4 million attributable to Pinnacle,
• a decrease in charitable contributions of $5.4 million ,
• a decrease in incentive compensation expense of
• an increase in self-insured workers' compensation and product liability
expense of $3.3 million , and
• a decrease in transaction services agreement income of $2.9 million .
SG&A expenses for fiscal 2018 included the following items impacting the comparability of earnings:
• charges totaling
• a charge of $34.9 million related to the early termination of an
unfavorable lease contract,
• expenses of $30.2 million in connection with our SCAE Plan,
• expenses of
and divestitures, and
• charges totaling $4.8 million related to the impairment of other
intangible assets.
Segment Operating Profit (Earnings before general corporate expenses, pension
and postretirement non-service income, interest expense, net, income taxes, and
equity method investment earnings)
Fiscal 2019 Fiscal 2018
($ in millions) Operating Operating % Inc
Reporting Segment Profit Profit (Dec)
Grocery & Snacks $ 762.6 $ 722.5 6 %
Refrigerated & Frozen 645.1 479.4 35 %
International 99.8 86.5 15 %
Foodservice 134.3 124.1 8 %
Grocery & Snacks operating profit for fiscal 2019 was $762.6 million , an
increase of $40.1 million , or 6%, compared to fiscal 2018. Gross profits were
$70.6 million higher in fiscal 2019 than in fiscal 2018. The higher gross profit
was driven by profit contribution of acquisitions and supply chain realized
productivity, partially offset by higher input costs, transportation inflation,
and a reduction in profit associated with the divestiture of the Wesson® oil
business. The acquisition of Pinnacle contributed $125.1 million to Grocery &
Snacks gross profit in fiscal 2019. The acquisition of Angie's Artisan Treats,
LLC contributed $12.6 million to Grocery & Snacks gross profit in fiscal 2019,
through the one-year anniversary of the acquisition. Advertising and promotion
expenses for fiscal 2019 decreased by $18.4 million compared to fiscal 2018.
Operating profit of the Grocery & Snacks segment was impacted by charges
totaling $76.5 million in fiscal 2019 for the impairment of our Chef Boyardee®
and Red Fork® brand assets and $4.0 million in fiscal 2018 for the impairment of
our HK Anderson®, Red Fork®, and Salpica® brand
34
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assets. Grocery & Snacks also recognized a $33.1 million gain on the sale of our
Wesson® oil business in fiscal 2019. Operating profit of the Grocery & Snacks
segment included $1.0 million and $11.4 million of expenses in fiscal 2019 and
2018, respectively, related to acquisitions and divestitures and charges of $6.1
million and $14.1 million in connection with our restructuring plans in fiscal
2019 and 2018, respectively. Grocery & Snacks operating profit also included
incremental cost of goods sold of $30.2 million due to the impact of writing
inventory to fair value as part of our acquisition accounting for Pinnacle and
the subsequent sale of that inventory.
Refrigerated & Frozen operating profit for fiscal 2019 was $645.1 million , an
increase of $165.7 million , or 35%, compared to fiscal 2018. Gross profits were
$216.4 million higher in fiscal 2019 than in fiscal 2018, driven by the addition
of Pinnacle and supply chain realized productivity, partially offset by
increased input costs and transportation inflation. Advertising and promotion
expenses for fiscal 2019 decreased by $5.5 million compared to fiscal 2018.
Operating profit of the Refrigerated & Frozen segment included a gain of $23.1
million in fiscal 2019 related to the sale of our Italian-based frozen pasta
business, Gelit, and incremental cost of goods sold of $21.9 million due to the
impact of writing inventory to fair value as part of our acquisition accounting
for Pinnacle and the subsequent sale of that inventory.
International operating profit for fiscal 2019 was $99.8 million , an increase of
$13.3 million , or 15%, compared to fiscal 2018. Gross profits were $13.9 million
higher in fiscal 2019 than in fiscal 2018, driven by the addition of Pinnacle.
Included in the International segment fiscal 2019 operating profit was a gain of
$13.2 million related to the sale of our Del Monte® processed fruit and
vegetable business in Canada , charges of $13.1 million for the impairment of our
Aylmer® and Sundrop® brand assets, and charges of $2.9 million related to
divestitures. In addition, operating profit was impacted by charges of $4.9
million and $1.5 million in connection with our restructuring plans, in fiscal
2019 and 2018, respectively.
Foodservice operating profit for fiscal 2019 was $134.3 million , an increase of
$10.2 million , or 8%, compared to fiscal 2018. Gross profits were $8.6 million
higher in fiscal 2019 than in fiscal 2018, driven by the addition of Pinnacle
and supply chain realized productivity, partially offset by lower volume
(including the sale of our Trenton, Missouri production facility) and higher
input costs.
Pension and Postretirement Non-service Income
In fiscal 2019, pension and postretirement non-service income was$35.1 million , a decrease of$45.3 million compared to fiscal 2018. The decrease was primarily related to lower expected return on plan assets as we changed our investment strategy to more fixed income securities.
Interest Expense, Net
In fiscal 2019, net interest expense was
• the issuance of
senior notes and borrowings of
agreement with a syndicate of financial institutions providing for a
tranche of five-year term loans to the Company (the "Term Loan
Agreement"), in each case in connection with the Pinnacle acquisition,
• the repayment of a total of
Term Loan Agreement in the third and fourth quarters of fiscal 2019,
• the borrowing of
the fourth quarter of fiscal 2018, which borrowing was subsequently repaid
in connection with the Pinnacle acquisition,
• the issuance of
notes due 2020 during the second quarter of fiscal 2018,
• the repayment of
senior notes in the fourth quarter of fiscal 2018, and
• the repayment of
notes in the third quarter of fiscal 2018.
In addition, fiscal 2019 included$11.9 million 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 35 --------------------------------------------------------------------------------
connection with our incurrence of permanent financing to fund the Pinnacle
acquisition, and we recognized the remaining unamortized financing costs of
Income Taxes
Our income tax expense was$218.8 million and$174.6 million in fiscal 2019 and 2018, respectively. The effective tax rate (calculated as the ratio of income tax expense to pre-tax income from continuing operations, inclusive of equity method investment earnings) was approximately 24% and 18% for fiscal 2019 and 2018, respectively.
As a result of our off-calendar fiscal year end, the lower
The effective tax rate in fiscal 2019 reflects the following:
• the impact of legal entity reorganization 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 certain foreign earnings,
• an adjustment of valuation allowance associated with the expected capital
gains from the divestiture of the Wesson® oil and Gelit businesses,
• additional tax expense on non-deductible facilitative costs associated
with the Pinnacle acquisition,
• a benefit recognized due to the non-taxability of the novation of a legacy
guarantee,
• 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,
• an increase to the deemed repatriation tax liability,
• additional tax expense due to foreign and domestic restructuring, and
• a state tax benefit from integration of the Pinnacle business.
The effective tax rate in fiscal 2018 reflects the following:
• the impact of the Tax Act,
• an adjustment of valuation allowance associated with the termination of
the agreement for the proposed divestiture of our Wesson® oil business,
• an indirect cost of the pension contribution made on
• additional expense related to the settlement of an audit of the impact of
a law change in
• an income tax benefit allowed upon the vesting/exercise of employee stock
compensation awards by our employees, beyond that which is attributable to
the original fair value of the awards upon the date of grant, and
• additional expense related to undistributed foreign earnings for which the
indefinite reinvestment assertion is no longer made.
Equity Method Investment Earnings
We include our share of the earnings of certain affiliates based on our economic ownership interest in the affiliates. Our most significant affiliate is the Ardent Mills joint venture. Our share of earnings from our equity method investment earnings were$75.8 million and$97.3 million for fiscal 2019 and 2018, respectively. Results for fiscal 2019 included a gain of$15.1 million from the sale of an asset by the Ardent Mills joint venture. In addition, Ardent Mills earnings for fiscal 2019 reflected lower commodity margins and the timing of certain customer contracts that negatively impacted performance. A benefit of$4.3 million was included in the earnings of fiscal 2018 in connection with a gain on the substantial liquidation of an international joint venture. 36 --------------------------------------------------------------------------------
Results of Discontinued Operations
Our discontinued operations generated an after-tax loss of$1.9 million and a gain of$14.3 million in fiscal 2019 and 2018, respectively. During fiscal 2018, a$14.5 million income tax benefit was recorded due to an adjustment of the estimated deductibility of the costs incurred associated with effecting the Spinoff of Lamb Weston.
Earnings Per Share
Diluted earnings per share in fiscal 2019 were$1.52 , including earnings of$1.53 per diluted share from continuing operations and a loss of$0.01 per diluted share from discontinued operations. Diluted earnings per share in fiscal 2018 were$1.98 , including earnings of$1.95 per diluted share from continuing operations and$0.03 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
The primary objective of our financing strategy 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 a solid investment grade credit rating. AtMay 31, 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 ofMay 31, 2020 , there were no outstanding borrowings under the Revolving Credit Facility. We had no amounts outstanding under our commercial paper program as ofMay 31, 2020 andMay 26, 2019 . The highest level of borrowings during fiscal 2020 was$145.0 million . During the fourth quarter of fiscal 2020, we entered into an unsecured term loan agreement (the "Credit Agreement") with a financial institution. The Credit Agreement provides for delayed draw term loans to the Company in an aggregate principal amount not in excess of$600 million (subject to increase to a maximum aggregate principal amount of$750 million ). The Credit Agreement matures onMay 21, 2023 . As ofMay 31, 2020 , there were no outstanding borrowings under the Credit Agreement. Borrowings under the Credit Agreement will bear interest at, at the Company's election, either (a) LIBOR plus a percentage spread (ranging from 1.125% to 1.75%) based on the Company's senior unsecured long-term indebtedness ratings or (b) the alternate base rate, described in the Credit Agreement as the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50% and (iii) one-month LIBOR plus 1.00%, plus a percentage spread (ranging from 0% to 0.625%) based on the Company's senior unsecured long-term indebtedness ratings and may be voluntarily prepaid, in whole or in part, without penalty, subject to certain conditions. During fiscal 2020 we repaid 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 on our three-year tranche loans and our five-year tranche loans, respectively. The Term Loan Agreement was terminated after these repayments. During fiscal 2020 we also redeemed the entire outstanding$525.0 million aggregate principal amount of our floating rate notes dueOctober 22, 2020 in two separate redemptions totaling$250.0 million and$275.0 million in the third and fourth quarter of fiscal 2020, respectively. We have$844.8 million of long-term debt maturing in the next 12 months. We expect to maintain or have access to sufficient liquidity to retire or refinance long-term debt upon maturity, as market conditions warrant, from operating cash flows, our undrawn Credit Agreement, our commercial paper program, access to the capital markets, and our Revolving Credit Facility. 37 -------------------------------------------------------------------------------- However, the disruption in the capital markets caused by the COVID-19 pandemic could make any refinancing more challenging and there can be no assurance that we will be able to successfully refinance any debt on commercially reasonable terms or at all. As of the end 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. Our most restrictive covenants (the Revolving Credit Facility) generally require our ratio of EBITDA (earnings before interest, taxes, depreciation, and amortization) to interest expense not be less than 3.0 to 1.0 and our ratio of funded debt to EBITDA not 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 ofMay 31, 2020 , we were in compliance with all financial covenants. 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. Our total remaining share repurchase authorization as ofMay 31, 2020 , was$1.41 billion . OnApril 16, 2020 , we announced that our Board had authorized a quarterly dividend payment of $0.2125 per share, which was paid onJune 3, 2020 , to shareholders of record as of the close of business onApril 30, 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 2021.
Cash Flows
In fiscal 2020, we generated$316.7 million of cash, which was the net result of$1.84 billion generated from operating activities,$153.8 million used in investing activities,$1.37 billion used in financing activities, and a decrease of$1.7 million due to the effects of changes in foreign currency exchange rates. Cash generated from operating activities of continuing operations totaled$1.84 billion in fiscal 2020, as compared to$1.11 billion generated in fiscal 2019. Operating cash flows for fiscal 2020 reflected additional operating results from the acquisition of Pinnacle and the impact of increased sales from COVID-19 pandemic-related demand. The timing of the increased demand in the fourth quarter also created working capital favorability for fiscal 2020 driven primarily by the combination of decreased inventory levels and increased accounts payable balances resulting from longer supplier payment terms. We expect that a significant portion of this working capital favorability will reverse in fiscal 2021 as demand returns to more historic levels. In the fourth quarter of fiscal 2020, we also improved working capital due to approximately$47 million in tax payments that were deferred until the first quarter of fiscal 2021 as a result of recent tax legislation. Despite the deferral of such tax payments, we still had$44.2 million of additional tax payments in the current year. The above working capital favorability was further offset by a$119.0 million increase in interest payments and the comparative impact of cash proceeds from the settlement of interest rate swaps in fiscal 2019 totaling$47.5 million . Lastly, we extended payment terms with certain Foodservice customers (ranging from 15-30 days) as a result of the COVID-19 pandemic which partly gave rise to an increase in our accounts receivable at year-end. Cash used in investing activities totaled$153.8 million in fiscal 2020 compared to$5.17 billion in fiscal 2019. Investing activities in fiscal 2020 consisted primarily of capital expenditures totaling$369.5 million and the net proceeds from divestitures totaling$194.6 million , including the sales of our DSD snacks and Lender's® bagel businesses. Investing activities in fiscal 2019 consisted primarily of the purchase of Pinnacle for$5.12 billion , net of cash acquired, capital expenditures of$353.1 million , and proceeds from the divestiture of our Del Monte® processed fruit and vegetable business, our Wesson® oil business, and our Italian-based frozen pasta business, Gelit, for combined proceeds of$281.5 million , net of cash divested. Cash used in financing activities totaled$1.37 billion in fiscal 2020, compared to cash provided by financing activities of$4.15 billion in fiscal 2019. Financing activities in fiscal 2020 consisted principally of the repayment of long-term debt totaling$947.5 million and cash dividends paid of$413.6 million . During 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 . 38 -------------------------------------------------------------------------------- This was reduced by debt issuance costs and bridge financing fees totaling$95.2 million . During fiscal 2019, we also repaid$3.97 billion of long-term debt, reduced our short-term borrowings mainly related to our commercial paper program by$277.3 million , and paid cash dividends of$356.2 million . The Company had cash and cash equivalents of$553.3 million atMay 31, 2020 , and$236.6 million atMay 26, 2019 , of which$80.5 million atMay 31, 2020 , and$144.8 million atMay 26, 2019 , was held in foreign countries. We believe that our foreign subsidiaries have invested or will invest any undistributed earnings indefinitely, or that any undistributed earnings will be remitted in a tax-neutral transaction, and, therefore, do not provide deferred taxes on the cumulative undistributed earnings of our foreign subsidiaries.
Our preliminary estimate of capital expenditures for fiscal 2021 is
approximately
Management believes that existing cash balances, cash flows from operations, existing credit facilities, and access to capital markets will provide sufficient liquidity to meet our repayment of debt, including any repayment of debt or refinancing of debt, working capital needs, planned capital expenditures, and payment of anticipated quarterly dividends for at least the next twelve months. OBLIGATIONS AND COMMITMENTS As part of our ongoing operations, we enter into arrangements that obligate us to make future payments under contracts such as lease agreements, debt agreements, and unconditional purchase obligations (i.e., obligations to transfer funds in the future for fixed or minimum quantities of goods or services at fixed or minimum prices, such as "take-or-pay" contracts). The unconditional purchase obligation arrangements are entered into in our normal course of business in order to ensure adequate levels of sourced product are available. Of these items, debt, notes payable, finance lease obligations, and operating lease obligations were recognized as liabilities in our Consolidated Balance Sheets contained in this report as ofMay 31, 2020 . A summary of our contractual obligations as ofMay 31, 2020 , was as follows: Payments Due by Period (in millions) Less than More Than Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years Long-term debt$ 9,631.6 $ 822.5 $ 2,287.0 $ 1,000.1 $ 5,522.0 Finance lease obligations 155.1 22.2 39.4 28.7 64.8 Operating lease obligations 297.9 53.0 78.6 47.7 118.6 Purchase obligations1 and other contracts 1,406.7 1,122.8 183.3 63.5 37.1 Notes payable 1.1 1.1 - - - Total$ 11,492.4 $ 2,021.6 $ 2,588.3 $ 1,140.0 $ 5,742.5 1Amount includes 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$1.38 billion as ofMay 31, 2020 , were not recognized as liabilities in the Consolidated Balance Sheets contained in this report, in accordance withU.S. GAAP.
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 of
The operating lease obligations noted in the table above have not been reduced
by non-cancellable sublease rentals of
As ofMay 31, 2020 , we had aggregate unfunded pension and postretirement benefit obligations totaling$52.1 million and$86.4 million , respectively. Our unfunded pension obligation decreased by$79.6 million in fiscal 2020 primarily due to lump-sum payments to plan participants and actual return on plan assets exceeding expected returns, principally on fixed income securities. 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$32.2 million and$10.0 million over the next twelve months to fund our pension and postretirement plans, respectively. See Note 18 "Pension and Postretirement Benefits" to the consolidated financial statements and "Critical Accounting Estimates - Employment-Related Benefits" contained in this report for further discussion of our pension obligations and factors that could affect estimates of this liability. 39 -------------------------------------------------------------------------------- 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. As ofMay 31, 2020 , we had$52.2 million of standby letters of credit issued on our behalf. These standby letters of credit are primarily related to our self-insured workers compensation programs and are not reflected in our Consolidated Balance Sheets. 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 ofMay 31, 2020 , the remaining terms of these arrangements did not exceed three years and the maximum amount of future payments we have guaranteed was$0.6 million . In addition, we guarantee a lease resulting from an exited facility. As ofMay 31, 2020 , the remaining term of this arrangement did not exceed seven years and the maximum amount of future payments we have guaranteed was$16.5 million . We also guarantee an obligation of the Lamb Weston business pursuant to a guarantee arrangement that existed prior to 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 this guarantee arrangement, Lamb Weston is obligated to indemnify us for any such liability, reduced by any insurance proceeds received by us, in accordance with the terms of the indemnification provisions under the Separation Agreement. Lamb Weston is a party to an agricultural sublease agreement with a third party for certain farmland through 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 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 guaranty, would be largely mitigated. The obligations and commitments tables 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 atMay 31, 2020 was$35.8 million . The net amount of unrecognized tax benefits atMay 31, 2020 , that, if recognized, would favorably impact our effective tax rate was$30.3 million . Recognition of these tax benefits would have a favorable impact on our effective tax rate. CRITICAL ACCOUNTING ESTIMATES The process of preparing financial statements requires the use of estimates on the part of management. The estimates used by management are based on our historical experiences combined with management's understanding of current facts and circumstances. Certain of our accounting estimates are considered critical as they are both important to the portrayal of our financial condition and results and require significant or complex judgment on the part of management. The following is a summary of certain accounting estimates considered critical by management.
Our Audit/
Marketing Costs-We offer various forms of trade promotions which are mostly recorded as a reduction in revenue. The methodologies for determining these provisions are dependent on local customer pricing and promotional practices, which range from contractually fixed percentage price reductions to provisions based on actual occurrence or performance. Our promotional activities are conducted either through the retail trade or directly with consumers and included activities such as in-store displays and events, feature price discounts, consumer coupons, and loyalty programs. The costs of these activities are recognized as a reduction of revenue at the time the related revenue is recorded, which normally precedes the actual cash expenditure. The recognition of these costs therefore requires management judgment regarding the volume of promotional offers that will be redeemed by either the retail trade or consumer. These estimates are made using various techniques including historical data on performance of similar promotional programs. Differences between estimated expense and actual redemptions are recognized as a change in management estimate in a subsequent period. We have recognized trade promotion liabilities of$165.6 million as ofMay 31, 2020 . Changes in the assumptions used in estimating the cost of any individual customer marketing program would not result in a material change in our results of operations or cash flows. Income Taxes-Our income tax expense is based on our income, statutory tax rates, and tax planning opportunities available in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the 40 -------------------------------------------------------------------------------- taxpayer and respective governmental taxing authorities. Significant judgment is required in determining our income tax expense and in evaluating our tax positions, including evaluating uncertainties. Management reviews tax positions at least quarterly and adjusts the balances as new information becomes available. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the tax bases of assets and liabilities and their carrying amounts in our consolidated balance sheets, as well as from net operating loss and tax credit carryforwards. Management evaluates the recoverability of these future tax deductions by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings, and available tax planning strategies. These estimates of future taxable income inherently require significant judgment. Management uses historical experience and short and long-range business forecasts to develop such estimates. Further, we employ various prudent and feasible tax planning strategies to facilitate the recoverability of future deductions. To the extent management does not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established.
Further information on income taxes is provided in Note 14 "Pre-tax Income and Income Taxes" to the consolidated financial statements contained in this report.
Environmental Liabilities-Environmental liabilities are accrued when it is probable that obligations have been incurred and the associated amounts can be reasonably estimated. Management works with independent third-party specialists in order to effectively assess our environmental liabilities. Management estimates our environmental liabilities based on evaluation of investigatory studies, extent of required clean-up, our known volumetric contribution, other potentially responsible parties, and our experience in remediating sites. Environmental liability estimates may be affected by changing governmental or other external determinations of what constitutes an environmental liability or an acceptable level of clean-up. Management's estimate as to our potential liability is independent of any potential recovery of insurance proceeds or indemnification arrangements. Insurance companies and other indemnitors are notified of any potential claims and periodically updated as to the general status of known claims. We do not discount our environmental liabilities as the timing of the anticipated cash payments is not fixed or readily determinable. To the extent that there are changes in the evaluation factors identified above, management's estimate of environmental liabilities may also change. We have recognized a reserve of approximately$63.7 million for environmental liabilities as ofMay 31, 2020 . The reserve for each site is determined based on an assessment of the most likely required remedy and a related estimate of the costs required to effect such remedy. Employment-Related Benefits-We incur certain employment-related expenses associated with pensions, postretirement health care benefits, and workers' compensation. In order to measure the annual expense associated with these employment-related benefits, management must make a variety of estimates including, but not limited to, discount rates used to measure the present value of certain liabilities, assumed rates of return on assets set aside to fund these expenses, compensation increases, employee turnover rates, anticipated mortality rates, anticipated health care costs, and employee accidents incurred but not yet reported to us. The estimates used by management are based on our historical experience as well as current facts and circumstances. We use third-party specialists to assist management in appropriately measuring the expense associated with these employment-related benefits. Different estimates used by management could result in us recognizing different amounts of expense over different periods of time. The Company uses a split discount rate (the "spot-rate approach") for theU.S. plans and certain foreign plans. The spot-rate approach applies separate discount rates for each projected benefit payment in the calculation of pension service and interest cost. We have recognized a pension liability of$254.5 million and$192.9 million , a postretirement liability of$89.3 million and$90.6 million , and a workers' compensation liability of$55.5 million and$61.1 million , as of the end of fiscal 2020 and 2019, respectively. We also have recognized a pension asset of$202.4 million and$61.2 million as of the end of fiscal 2020 and 2019, respectively, as certain individual plans of the Company had a positive funded status. We recognize cumulative changes in the fair value of pension plan assets and net actuarial gains or losses in excess of 10% of the greater of the fair value of plan assets or the plan's projected benefit obligation ("the corridor") in current period expense annually as of our measurement date, which is our fiscal year-end, or when measurement is required otherwise underU.S. generally accepted accounting principles ("U.S. GAAP"). We recognized pension expense (benefit) from Company plans of$5.9 million ,$(22.7) million , and$(56.1) million in fiscal 2020, 2019, and 2018, respectively. Such amounts reflect the year-end write-off of actuarial losses in excess of 10% of our pension liability of$44.8 million ,$5.1 million , and$3.4 million in fiscal 2020, 2019, and 2018, respectively. This also reflected 41 --------------------------------------------------------------------------------
expected returns on plan assets of
One significant assumption for pension plan accounting is the discount rate. We use a spot-rate approach, discussed above. This approach focuses on measuring the service cost and interest cost components of net periodic benefit cost by using individual spot rates derived from a high-quality corporate bond yield curve and matched with separate cash flows for each future year instead of a single weighted-average discount rate approach. Based on this information, the discount rate selected by us for determination of pension expense was 3.88% for fiscal 2020, 4.15% for fiscal 2019, and 3.90% for fiscal 2018. We selected a weighted-average discount rate of 3.35% and 2.30% for determination of service and interest expense, respectively, for fiscal 2021. A 25 basis point increase in our discount rate assumption as of the end of fiscal 2020 would have resulted in an increase of$5.1 million in our pension expense for fiscal 2020. A 25 basis point decrease in our discount rate assumption as of the end of fiscal 2020 would have resulted in a decrease of$5.5 million in our pension expense for fiscal 2020. For our year-end pension obligation determination, we selected discount rates of 2.98% and 3.88% for fiscal years 2020 and 2019, respectively. Another significant assumption used to account for our pension plans is the expected long-term rate of return on plan assets. In developing the assumed long-term rate of return on plan assets for determining pension expense, we consider long-term historical returns (arithmetic average) of the plan's investments, the asset allocation among types of investments, estimated long-term returns by investment type from external sources, and the current economic environment. Based on this information, we selected 4.77% for the weighted-average expected long-term rate of return on plan assets for determining our fiscal 2020 pension expense. A 25 basis point increase/decrease in our weighted-average expected long-term rate of return assumption as of the beginning of fiscal 2020 would decrease/increase annual pension expense for our pension plans by$8.8 million . We selected a weighted-average expected rate of return on plan assets of 3.74% to be used to determine our pension expense for fiscal 2021. A 25 basis point increase/decrease in our expected long-term rate of return assumption as of the beginning of fiscal 2021 would decrease/increase annual pension expense for our pension plans by$9.3 million . During fiscal 2018, we approved an amendment of our salaried and non-qualified pension plans. The amendment froze the compensation and service periods used to calculate pension benefits for active employees who participate in those plans. As a result of this amendment, we changed our salaried and non-qualified pension asset investment strategy to align our related pension plan assets with our projected benefit obligation to reduce volatility. During 2018, we conducted a mortality experience study and, with the assistance of our third-party actuary, adopted new company-specific mortality tables used in measuring our pension obligations as ofMay 27, 2018 . In addition, we incorporated a revised mortality improvement scale to be used with the new company-specific mortality tables that reflects the mortality improvement inherent in these tables. We also provide certain postretirement health care benefits. We recognized postretirement benefit expense (benefit) of$(4.2) million ,$(1.3) million , and$0.7 million in fiscal 2020, 2019, and 2018, respectively. We anticipate contributing approximately$10.0 million to our postretirement health care plans in fiscal 2021. The postretirement benefit expense and obligation are also dependent on our assumptions used for the actuarially determined amounts. These assumptions include discount rates (discussed above), health care cost trend rates, inflation rates, retirement rates, mortality rates (also discussed above), and other factors. The health care cost trend assumptions are developed based on historical cost data, the near-term outlook, and an assessment of likely long-term trends. Assumed inflation rates are based on an evaluation of external market indicators. Retirement and mortality rates are based primarily on actual plan experience. The discount rate we selected for determination of postretirement expense was 3.48% for fiscal 2020, 3.81% for fiscal 2019, and 3.33% for fiscal 2018. We have selected a weighted-average discount rate of 2.39% for determination of postretirement expense for fiscal 2021. A 25 basis point increase/decrease in our discount rate assumption would not have resulted in a material change to postretirement expense for our plans. We have assumed the initial year increase in cost of health care to be 6.22%, with the trend rate decreasing to 4.43% by 2024. A one percentage point change in the assumed health care cost trend rate would have the following effects: One Percent One Percent ($ in millions) Increase Decrease
Effect on total service and interest cost $ 0.1
1.6 (1.4 )
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-------------------------------------------------------------------------------- We provide workers' compensation benefits to our employees. The measurement of the liability for our cost of providing these benefits is largely based upon actuarial analysis of costs. One significant assumption we make is the discount rate used to calculate the present value of our obligation. The weighted-average discount rate used atMay 31, 2020 was 2.11%. A 25 basis point increase/decrease in the discount rate assumption would not have a material impact on workers' compensation expense or the liability. Business Combinations, Impairment of Long-Lived Assets (including property, plant and equipment), Identifiable Intangible Assets, and Goodwill-We use the acquisition method in accounting for acquired businesses. Under the acquisition method, our financial statements reflect the operations of an acquired business starting from the closing of the acquisition. The assets acquired and liabilities assumed are recorded at their respective estimated fair values at the date of the acquisition. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. Significant judgment is often required in estimating the fair value of assets acquired, particularly intangible assets. As a result, in the case of significant acquisitions we normally obtain the assistance of a third-party valuation specialist in estimating fair values of tangible and intangible assets. The fair value estimates are based on available historical information and on expectations and assumptions about the future, considering the perspective of marketplace participants. While management believes those expectations and assumptions are reasonable, they are inherently uncertain. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions. We reduce the carrying amounts of long-lived assets (including property, plant and equipment) to their fair values when their carrying amount is determined to not be recoverable. We generally compare undiscounted estimated future cash flows of an asset or asset group to the carrying values of the asset or asset group. If the undiscounted estimated future cash flows exceed the carrying values of the asset or asset group, no impairment is recognized. If the undiscounted estimated future cash flows are less than the carrying values of the asset or asset group, we write-down the asset or assets to their estimated fair values. The estimates of fair value are generally in the form of appraisal, or by discounting estimated future cash flows of the asset or asset group. Determining the useful lives of intangible assets also requires management judgment. Certain brand intangibles are expected to have indefinite lives based on their history and our plans to continue to support and build the acquired brands, while other acquired intangible assets (e.g., customer relationships) are expected to have determinable useful lives. Our estimates of the useful lives of definite-lived intangible assets are primarily based upon historical experience, the competitive and macroeconomic environment, and our operating plans. The costs of definite-lived intangibles are amortized to expense over their estimated life. We reduce the carrying amounts of indefinite-lived intangible assets, and goodwill to their fair values when the fair value of such assets is determined to be less than their carrying amounts (i.e., assets are deemed to be impaired). Fair value is typically estimated using a discounted cash flow analysis, which requires us to estimate the future cash flows anticipated to be generated by the particular asset being tested for impairment as well as to select a discount rate to measure the present value of the anticipated cash flows. When determining future cash flow estimates, we consider historical results adjusted to reflect current and anticipated operating conditions. Estimating future cash flows requires significant judgment by management in such areas as future economic conditions, industry-specific conditions, product pricing, and necessary capital expenditures. The use of different assumptions or estimates for future cash flows could produce different impairment amounts (or none at all) for long-lived assets and identifiable intangible assets. In assessing other intangible assets not subject to amortization for impairment, we have the option to perform a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of such an intangible asset is less than its carrying amount. If we determine that it is not more likely than not that the fair value of such an intangible asset is less than its carrying amount, then we are not required to perform any additional tests for assessing intangible assets for impairment. However, if we conclude otherwise or elect not to perform the qualitative assessment, then we are required to perform a quantitative impairment test that involves a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. If we perform a quantitative impairment test in evaluating impairment of our indefinite lived brands/trademarks, we utilize a "relief from royalty" methodology. The methodology determines the fair value of each brand through use of a discounted cash flow model that incorporates an estimated "royalty rate" we would be able to charge a third party for the use of the particular brand. When determining the future cash flow estimates, we estimate future net sales and a fair market royalty rate for each applicable brand and an appropriate discount rate to measure the present value of the anticipated cash flows. Estimating future net sales requires significant judgment by management in such areas as future economic conditions, product pricing, and consumer trends. In determining an appropriate discount rate to apply to the estimated future cash flows, we consider the current interest rate environment and our estimated cost of capital.
43
--------------------------------------------------------------------------------has occurred. Such indicators may include deterioration in general economic conditions, adverse changes in the markets in which an entity operates, increases in input costs that have negative effects on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods, among others. The fair value that could be realized in an actual transaction may differ from that used to evaluate the impairment of goodwill.
In testing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an impairment is more likely than not, we are then required to perform a quantitative impairment test, otherwise no further analysis is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test. Under the qualitative assessment, various events and circumstances that would affect the estimated fair value of a reporting unit are identified (similar to impairment indicators above). Furthermore, management considers the results of the most recent quantitative impairment test completed for a reporting unit and compares the weighted average cost of capital between the current and prior years for each reporting unit. Under the quantitative impairment test, the evaluation involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. Fair value is typically estimated using a discounted cash flow analysis, which requires us to estimate the future cash flows anticipated to be generated by the reporting unit being tested for impairment as well as to select a risk-adjusted discount rate to measure the present value of the anticipated cash flows. When determining future cash flow estimates, we consider historical results adjusted to reflect current and anticipated operating conditions. We estimate cash flows for the reporting unit over a discrete period (typically five years) and the terminal period (considering expected long term growth rates and trends). Estimating future cash flows requires significant judgment by management in such areas as future economic conditions, industry-specific conditions, product pricing, and necessary capital expenditures. The use of different assumptions or estimates for future cash flows or significant changes in risk-adjusted discount rates due to changes in market conditions could produce substantially different estimates of the fair value of the reporting unit. As ofMay 31, 2020 , we have goodwill of$11.44 billion , indefinite-lived intangibles of$3.40 billion and definite-lived intangibles of$919.6 million . The amount of goodwill and intangibles increased significantly during fiscal 2019 as a result of the Pinnacle acquisition. In the first quarter of fiscal 2020, we reorganized our reporting segments to incorporate the Pinnacle business into our legacy reporting segments, to reflect how the business is now being managed. We tested goodwill for impairment both prior to and subsequent to the reallocation of Pinnacle goodwill and there were no impairments of goodwill. Historically, we have experienced impairments in brand intangibles and goodwill as a result of declining sales and other economic conditions. For instance, in fiscal 2020, we recorded total intangibles impairments of$165.5 million , primarily related to our recently acquired Pinnacle brands. In fiscal 2019, we recorded total intangibles impairments of$89.6 million , primarily related to our Chef Boyardee® brand intangible. With the addition of Pinnacle intangibles that were recorded at fair value in the prior year, we continue to be more susceptible to impairment charges in the future if our long-term sales forecasts, royalty rates, and other assumptions change as a result of lower than expected performance or other economic conditions. We will monitor these assumptions as management continues to achieve expected synergies, gross margin improvement, and long-term sales growth on certain key brands acquired in the acquisition including, but not limited to, Birds Eye®, Duncan Hines®, and Gardein®.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
InJune 2016 , theFinancial Accounting Standards Board issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), to update the methodology used to measure current expected credit losses ("CECL"). This ASU applies to financial assets measured at amortized cost, including loans, held-to-maturity debt securities, net investments in leases, and trade accounts receivable as well as certain off-balance sheet credit exposures, such as loan commitments. This ASU replaces the current incurred loss impairment methodology with a methodology to reflect CECL and requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates. The guidance must be adopted using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings in the period of adoption. This ASU will be effective beginning in the first quarter of our fiscal year 2021. We do not expect ASU 2016-13 to have a material impact to our consolidated financial statements and related disclosures. 44
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