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CONAGRA BRANDS INC. 10-Q 2015

Documents found in this filing:

  1. 10-Q
  2. Ex-12
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.1
CAG 10Q3 FY15
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 ______________________________________________________
FORM 10-Q
 ______________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 22, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to 
               
Commission File Number: 1-7275
______________________________________________________
CONAGRA FOODS, INC.
(Exact name of registrant as specified in its charter)
______________________________________________________ 
Delaware
 
47-0248710
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
One ConAgra Drive,
Omaha, Nebraska
 
68102-5001
(Address of principal executive offices)
 
(Zip Code)
(402) 240-4000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
 ______________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x     No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x 
Number of shares outstanding of issuer’s common stock, as of February 22, 2015, was 427,052,296.
 



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





PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ConAgra Foods, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions except per share amounts)
(unaudited)
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
February 22,
2015
 
February 23,
2014
 
February 22,
2015
 
February 23,
2014
Net sales
$
3,876.7

 
$
3,947.3

 
$
11,727.7

 
$
11,884.2

Costs and expenses:
 
 
 
 
 
 
 
Cost of goods sold
3,052.9

 
3,024.2

 
9,311.6

 
9,209.2

Selling, general and administrative expenses
1,726.1

 
534.9

 
2,950.7

 
1,626.1

Interest expense, net
80.3

 
95.0

 
243.3

 
286.3

Income (loss) from continuing operations before income taxes and equity method investment earnings
(982.6
)
 
293.2

 
(777.9
)
 
762.6

Income tax expense
2.5

 
78.2

 
129.0

 
213.1

Equity method investment earnings
33.0

 
11.1

 
92.6

 
20.4

Income (loss) from continuing operations
(952.1
)
 
226.1

 
(814.3
)
 
569.9

Income (loss) from discontinued operations, net of tax
(0.6
)
 
10.8

 
362.0

 
66.6

Net income (loss)
$
(952.7
)
 
$
236.9

 
$
(452.3
)
 
$
636.5

Less: Net income attributable to noncontrolling interests
1.4

 
2.6

 
9.5

 
9.2

Net income (loss) attributable to ConAgra Foods, Inc.
$
(954.1
)
 
$
234.3

 
$
(461.8
)
 
$
627.3

Earnings per share — basic
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to ConAgra Foods, Inc. common stockholders
$
(2.23
)
 
$
0.53

 
$
(1.94
)
 
$
1.33

Income from discontinued operations attributable to ConAgra Foods, Inc. common stockholders

 
0.03

 
0.85

 
0.16

Net income (loss) attributable to ConAgra Foods, Inc. common stockholders
$
(2.23
)
 
$
0.56

 
$
(1.09
)
 
$
1.49

Earnings per share — diluted
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to ConAgra Foods, Inc. common stockholders
$
(2.23
)
 
$
0.52

 
$
(1.94
)
 
$
1.31

Income from discontinued operations attributable to ConAgra Foods, Inc. common stockholders

 
0.03

 
0.85

 
0.15

Net income (loss) attributable to ConAgra Foods, Inc. common stockholders
$
(2.23
)
 
$
0.55

 
$
(1.09
)
 
$
1.46

Cash dividends declared per common share
$
0.25

 
$
0.25

 
$
0.75

 
$
0.75

See notes to the condensed consolidated financial statements.


1




ConAgra Foods, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(in millions)
(unaudited)
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
February 22,
2015
 
February 23,
2014
 
February 22,
2015
 
February 23,
2014
Net income (loss)
$
(952.7
)
 
$
236.9

 
$
(452.3
)
 
$
636.5

Other comprehensive income:
 
 
 
 
 
 
 
Derivative adjustments, net of tax:
 
 
 
 
 
 
 
Unrealized derivative adjustments

 
(8.1
)
 

 
31.2

Reclassification for derivative adjustments included in net income

 
34.4

 
(0.3
)
 
34.5

Unrealized gains (losses) on available-for-sale securities, net of tax
0.2

 
(0.2
)
 
0.4

 
0.2

Unrealized currency translation losses
(82.8
)
 
(29.5
)
 
(135.6
)
 
(50.5
)
Pension and post-employment benefit obligations, net of tax:


 


 


 


Unrealized pension and post-employment benefit obligations

 

 
2.9

 
0.2

Reclassification for pension and post-employment benefit obligations included in net income
(0.1
)
 
0.6

 
(0.4
)
 
1.6

Comprehensive income (loss)
(1,035.4
)
 
234.1

 
(585.3
)
 
653.7

Less: Comprehensive income (loss) attributable to noncontrolling interests
0.7

 
3.2

 
3.9

 
(0.1
)
Comprehensive income (loss) attributable to ConAgra Foods, Inc.
$
(1,036.1
)
 
$
230.9

 
$
(589.2
)
 
$
653.8

See notes to the condensed consolidated financial statements.


2




ConAgra Foods, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions except share data)
(unaudited)
 
 
February 22,
2015
 
May 25,
2014
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
137.3

 
$
141.3

Receivables, less allowance for doubtful accounts of $5.0 and $4.0
1,050.7

 
1,058.4

Inventories
2,379.8

 
2,077.0

Prepaid expenses and other current assets
355.5

 
322.4

Current assets held for sale

 
631.7

Total current assets
3,923.3

 
4,230.8

Property, plant and equipment
7,321.3

 
7,108.8

Less accumulated depreciation
(3,741.4
)
 
(3,472.8
)
Property, plant and equipment, net
3,579.9

 
3,636.0

Goodwill
6,305.0

 
7,828.5

Brands, trademarks and other intangibles, net
3,062.8

 
3,204.9

Other assets
997.9

 
267.3

Noncurrent assets held for sale

 
198.9

 
$
17,868.9

 
$
19,366.4

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities
 
 
 
Notes payable
$
442.0

 
$
141.8

Current installments of long-term debt
1,008.9

 
84.1

Accounts payable
1,334.4

 
1,349.3

Accrued payroll
184.7

 
154.3

Other accrued liabilities
746.9


748.1

Current liabilities held for sale

 
164.8

Total current liabilities
3,716.9

 
2,642.4

Senior long-term debt, excluding current installments
6,723.4

 
8,571.5

Subordinated debt
195.9

 
195.9

Other noncurrent liabilities
2,694.1


2,599.4

Noncurrent liabilities held for sale

 
2.0

Total liabilities
13,330.3

 
14,011.2

Commitments and contingencies (Note 13)

 

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

 
2,839.7

Additional paid-in capital
1,034.5

 
1,036.9

Retained earnings
4,229.2

 
5,010.6

Accumulated other comprehensive loss
(261.6
)
 
(134.3
)
Less treasury stock, at cost, 140,854,876 and 145,992,121 common shares
(3,388.9
)
 
(3,494.4
)
Total ConAgra Foods, Inc. common stockholders' equity
4,452.9

 
5,258.5

Noncontrolling interests
85.7

 
96.7

Total stockholders' equity
4,538.6

 
5,355.2

 
$
17,868.9

 
$
19,366.4

See notes to the condensed consolidated financial statements.


3




ConAgra Foods, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions)
(unaudited)
 
Thirty-nine weeks ended
 
February 22,
2015
 
February 23,
2014
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(452.3
)
 
$
636.5

Income from discontinued operations
362.0

 
66.6

Income (loss) from continuing operations
(814.3
)
 
569.9

Adjustments to reconcile income (loss) from continuing operations to net cash flows from operating activities:
 
 
 
Depreciation and amortization
442.9

 
427.5

Asset impairment charges
1,555.7

 
34.5

Earnings of affiliates in excess of distributions
(56.7
)
 
(2.7
)
Share-based payments expense
46.4

 
45.5

Contributions to pension plans
(10.0
)
 
(13.7
)
Pension expense
(10.8
)
 
(6.7
)
Terminated forward starting swap payable

 
54.9

Other items
27.8

 
0.6

Change in operating assets and liabilities excluding effects of business acquisitions and dispositions:
 
 
 
Accounts receivable
14.2

 
(8.0
)
Inventory
(299.2
)
 
(168.2
)
Deferred income taxes and income taxes payable, net
(110.7
)
 
45.8

Prepaid expenses and other current assets
(48.8
)
 
(27.5
)
Accounts payable
(7.7
)
 
48.4

Accrued payroll
37.0

 
(114.0
)
Other accrued liabilities
(32.4
)
 
(0.1
)
Net cash flows from operating activities — continuing operations
733.4

 
886.2

Net cash flows from operating activities — discontinued operations
7.1

 
81.8

Net cash flows from operating activities
740.5

 
968.0

Cash flows from investing activities:
 
 
 
Additions to property, plant and equipment
(318.4
)
 
(475.2
)
Sale of property, plant and equipment
19.9

 
15.0

Purchase of business, net of cash acquired
(74.7
)
 
(39.9
)
Return of investment in equity method investee
391.4

 

Net cash flows from investing activities — continuing operations
18.2

 
(500.1
)
Net cash flows from investing activities — discontinued operations
114.0

 
30.6

Net cash flows from investing activities
132.2

 
(469.5
)
Cash flows from financing activities:
 
 
 
Net short-term borrowings
284.1

 
(39.3
)
Issuance of long-term debt
550.0

 

Repayment of long-term debt
(1,492.9
)
 
(71.2
)
Repurchase of ConAgra Foods, Inc. common shares
(35.1
)
 
(100.0
)
Cash dividends paid
(318.2
)
 
(315.5
)
Exercise of stock options and issuance of other stock awards
113.8

 
87.4

Other items
(12.5
)
 

Net cash flows from financing activities:
(910.8
)
 
(438.6
)
Effect of exchange rate changes on cash and cash equivalents
(7.7
)
 
(4.6
)
Net change in cash and cash equivalents
(45.8
)
 
55.3

Discontinued operations cash activity included above:
 
 
 
Add: Cash balance included in assets held for sale at beginning of period
41.8

 
33.0

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

 
33.7

Cash and cash equivalents at beginning of period
141.3

 
150.9

Cash and cash equivalents at end of period
$
137.3

 
$
205.5

See notes to the condensed consolidated financial statements.

4




ConAgra Foods, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Thirty-nine Weeks ended February 22, 2015 and February 23, 2014
(columnar dollars in millions except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial information reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of the results of operations, financial position, and cash flows for the periods presented. The adjustments are of a normal recurring nature, except as otherwise noted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the ConAgra Foods, Inc. (the "Company", "we", "us", or "our") Annual Report on Form 10-K for the fiscal year ended May 25, 2014.
The results of operations for any quarter or a partial fiscal year period are not necessarily indicative of the results to be expected for other periods or the full fiscal year.
Basis of Consolidation — The condensed consolidated financial statements include the accounts of ConAgra Foods, Inc. and all majority-owned subsidiaries. In addition, the accounts of all variable interest entities for which we have been determined to be the primary beneficiary are included in our condensed consolidated financial statements from the date such determination is made. All significant intercompany investments, accounts, and transactions have been eliminated.
Comprehensive Income — Comprehensive income includes net income, currency translation adjustments, certain derivative-related activity, changes in the value of available-for-sale investments, and changes in prior service cost and net actuarial gains (losses) from pension (for amounts not in excess of the 10% corridor) and post-retirement health care plans. We generally deem our foreign investments to be essentially permanent in nature and we do not provide for taxes on currency translation adjustments arising from converting the investment denominated in a foreign currency to U.S. dollars. When we determine that a foreign investment, as well as undistributed earnings, are no longer permanent in nature, estimated taxes are provided for the related deferred tax liability (asset), if any, resulting from currency translation adjustments.
The following details the income tax expense (benefit) on components of other comprehensive income (loss):
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
February 22,
2015
 
February 23,
2014
 
February 22,
2015
 
February 23,
2014
Net derivative adjustment
$

 
$
15.6

 
$
(0.2
)
 
$
38.9

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

 
(0.1
)
 
0.3

 
0.1

Pension and postretirement healthcare liabilities
(0.1
)
 
0.2

 
0.7

 
0.9

     Income tax expense
$
0.1

 
$
15.7

 
$
0.8

 
$
39.9


The following tables summarize the reclassifications from accumulated other comprehensive loss into income:
 
Thirteen weeks ended
 
Affected Line Item in the Condensed Consolidated Statement of Earnings1
 
February 22, 2015
 
February 23, 2014
 
 
Net derivative adjustment:
 
 
 
 
 
     Cash flow hedges2
$

 
$
54.9

 
Selling, general and administrative expenses
 

 
54.9

 
Total before tax
 

 
(20.5
)
 
Income tax benefit
 
$

 
$
34.4

 
Net of tax
Amortization of pension and postretirement healthcare liabilities:

 

 

     Net prior service benefit
$
(1.1
)
 
$
(0.8
)
 
Selling, general and administrative expenses
     Net actuarial losses
0.9

 
1.7

 
Selling, general and administrative expenses
 
(0.2
)
 
0.9

 
Total before tax
 
0.1

 
(0.3
)
 
Income tax expense (benefit)
 
$
(0.1
)
 
$
0.6

 
Net of tax


5


 
Thirty-nine weeks ended
 
Affected Line Item in the Condensed Consolidated Statement of Earnings1
 
February 22, 2015
 
February 23, 2014
 
 
Net derivative adjustment:
 
 
 
 
 
     Cash flow hedges
$
(0.5
)
 
$
0.1

 
Interest expense, net
     Cash flow hedges2

 
54.9

 
Selling, general and administrative expenses
 
(0.5
)
 
55.0

 
Total before tax
 
0.2

 
(20.5
)
 
Income tax expense (benefit)
 
$
(0.3
)
 
$
34.5

 
Net of tax
Amortization of pension and postretirement healthcare liabilities:

 

 

     Net prior service benefit
$
(3.2
)
 
$
(2.5
)
 
Selling, general and administrative expenses
     Net actuarial losses
2.6

 
5.0

 
Selling, general and administrative expenses
 
(0.6
)
 
2.5

 
Total before tax
 
0.2

 
(0.9
)
 
Income tax expense (benefit)
 
$
(0.4
)
 
$
1.6

 
Net of tax
1 Amounts in parentheses indicate income recognized in the Condensed Consolidated Statement of Earnings.
2 Prior year amount includes $41.8 million less deferred tax benefit of $15.6 million previously reported in accumulated other comprehensive loss.

Reclassifications and other changes — Certain prior year amounts have been reclassified to conform with current year presentation. In addition, the prior year condensed Consolidated Statement of Cash Flows reflects a correction to the thirty-nine week period ended February 23, 2014 for non-cash additions to property, plant and equipment resulting in an increase to operating cash flows and an increase in cash used in investing cash flows by $25.7 million, of which $2.2 million is related to discontinued operations.
Use of Estimates — Preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect reported amounts of assets, liabilities, revenues, and expenses as reflected in the condensed consolidated financial statements. Actual results could differ from these estimates.
Accounting Changes — In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which states that entities should present the unrecognized tax benefit as a reduction of the deferred tax asset for a net operating loss ("NOL") or similar tax loss or tax credit carryforward rather than as a liability when the uncertain tax position would reduce the NOL or other carryforward under the tax law. No new disclosures are necessary. We adopted this ASU as of the beginning of fiscal 2015. This did not result in a material change to our financial statements.
In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Components of an Entity, which updates the definition of discontinued operations under U.S. Generally Accepted Accounting Principles ("U.S. GAAP"). Going forward, only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity's operations and financial results will be reported as discontinued operations in the financial statements. Previously, a component of an entity that is a reportable segment, an operating segment, a reporting unit, a subsidiary, or an asset group was eligible for discontinued operations presentation. Additionally, the condition that the entity not have any significant continuing involvement in the operations of the component after the disposal transaction has been removed. The effective date for the revised standard was for applicable transactions that occur within annual periods beginning on or after December 15, 2014. Early adoption was permitted. We adopted this standard in the first quarter of fiscal 2015. This resulted in the presentation of historical results of our milling business, prior to the creation of the Ardent Mills joint venture ("Ardent Mills"), as discontinued operations.
Recently Issued Accounting Standards — In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP. The new standard is effective for the Company in our fiscal year 2018. Early adoption is not permitted. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. The standard permits the use of either the retrospective or cumulative effect transition method.


6




2. ACQUISITIONS
In July 2014, we acquired TaiMei Potato Industry Limited, a potato processor in China, for $91.8 million, consisting of $74.7 million in cash net of cash acquired, plus assumed liabilities. The purchase included property and equipment associated with making frozen potato products. Approximately $20.2 million of the purchase price has been classified as goodwill pending determination of the final purchase price allocation. Approximately $3.3 million of the purchase price has been allocated to other intangible assets. The amount allocated to goodwill is not deductible for income tax purposes. This business is included in the Commercial Foods segment.
In September 2013, we acquired frozen dessert production assets from Harlan Bakeries for $39.9 million in cash. The purchase included machinery, operating systems, warehousing/storage, and other assets associated with making frozen fruit pies, cream pies, pastry shells, and loaf cakes. This business is included in the Consumer Foods segment.
Under the acquisition method of accounting, the assets acquired and liabilities assumed in these acquisitions were recorded at their respective estimated fair values at the date of acquisition.

3. DISCONTINUED OPERATIONS, OTHER ASSETS HELD FOR SALE, AND THE FORMATION OF ARDENT MILLS
Formation of Ardent Mills
On May 29, 2014, the Company, Cargill, Incorporated, and CHS, Inc. completed the formation of Ardent Mills. In connection with the formation, we contributed all of the assets of ConAgra Mills, including $49.0 million of cash, to Ardent Mills, we received a 44% ownership interest in Ardent Mills, and Ardent Mills distributed $391.4 million in cash to us as a return of capital. The contribution of the assets of ConAgra Mills in exchange for a non-controlling interest in the newly formed joint venture is required to be accounted for at fair value, and accordingly, we recognized a gain of $625.6 million ($375.9 million after-tax) in fiscal 2015 in income from discontinued operations, to reflect the excess of the fair value of our interest over its carrying value at the time of the transfer. As part of the formation of Ardent Mills, in the fourth quarter of fiscal 2014, pursuant to an agreement with the U.S. Department of Justice, we sold three flour milling facilities to Miller Milling Company LLC for $163.0 million. We received the cash proceeds from the sale of these flour milling facilities in the first quarter of fiscal 2015. In the first quarter of fiscal 2015, we used the net cash proceeds from the Ardent Mills transaction to repay debt. The operating results of our legacy milling business, including the disposition of three mills aforementioned, are included as discontinued operations within our Condensed Consolidated Statement of Earnings. The related assets and liabilities have been reclassified as assets and liabilities held for sale within our Condensed Consolidated Balance Sheet for the period presented prior to divestiture.
We recognized the 44% ownership interest in Ardent Mills at fair value, as of the date of the formation of the joint venture. We now recognize our proportionate share of the earnings of Ardent Mills under the equity method of accounting within results of continuing operations. Due to differences in fiscal reporting periods, we recognized the equity method earnings on a lag of approximately one month; and as a result, we recognized only eight months of earnings from Ardent Mills in the first three quarters of fiscal 2015. At February 22, 2015, the carrying value of our equity method investment in Ardent Mills was $745.6 million, which is included in Other Assets.
We entered into transition services agreements in connection with this contribution and recognized $3.5 million and $10.8 million of income for the performance of transition services during the third quarter and first three quarters of fiscal 2015, respectively, classified within selling, general and administrative expenses.
Medallion Foods
In the fourth quarter of fiscal 2014, we completed the sale of a small snack business, Medallion Foods, for $32.0 million in cash. The business results were previously reflected in the Private Brands segment. We reflected the results of these operations as discontinued operations for all periods presented. In the third quarter of fiscal 2014, we recognized an impairment charge related to allocated amounts of goodwill and intangible assets, totaling $25.4 million ($15.2 million after-tax), in anticipation of this divestiture.
Lightlife® Operations
In the second quarter of fiscal 2014, we completed the sale of the assets of the Lightlife® business for $54.7 million in cash. This business produced and sold vegetarian-based burgers, hot dogs, and other meatless frozen and refrigerated items. The results of this business were previously reflected in the Consumer Foods segment. We reflected the results of these operations as discontinued operations for all periods presented. We recognized a pre-tax gain of $32.1 million ($19.8 million after-tax) on the sale of this business in the second quarter of fiscal 2014.

7




The summary comparative financial results of discontinued operations were as follows:
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
February 22, 2015
 
February 23, 2014
 
February 22, 2015
 
February 23, 2014
Net sales
$

 
$
459.2

 
$
16.2

 
$
1,443.6

Net gain on sale of businesses
$

 
$

 
$
627.3

 
$
32.1

Long-lived asset impairment charge

 
(25.4
)
 

 
(25.4
)
Income (loss) from operations of discontinued operations before income taxes and equity method investment earnings
0.3

 
38.6

 
(10.1
)
 
94.0

Income before income taxes
0.3

 
13.2

 
617.2

 
100.7

Income tax expense
0.9

 
2.5

 
255.2

 
34.3

Equity method investment earnings

 
0.1

 

 
0.2

Income (loss) from discontinued operations, net of tax
$
(0.6
)
 
$
10.8

 
$
362.0

 
$
66.6

Other Assets Held for Sale
During the third quarter of fiscal 2014, we began actively marketing for sale an onion processing facility previously acquired from an onion products supplier. During the third quarter of fiscal 2015, we sold the processing facility for cash proceeds of $11.0 million, resulting in an immaterial gain. The processing facility assets have been reclassified as assets held for sale within our Condensed Consolidated Balance Sheets for the period presented prior to sale. These assets were held within our Commercial Foods segment.
The assets and liabilities classified as held for sale reflected in our Condensed Consolidated Balance Sheets were as follows:
 
 
May 25, 2014
Cash and cash equivalents
 
$
41.8

Receivables, less allowance for doubtful accounts of $1.2
 
172.4

Receivable on sale of flour milling assets
 
162.4

Inventories
 
215.6

Prepaid expenses and other current assets
 
39.5

     Current assets held for sale
 
$
631.7

Property, plant and equipment, net
 
$
186.8

Goodwill
 
8.0

Brands, trademarks and other intangibles, net
 
0.9

Other assets
 
3.2

     Noncurrent assets held for sale
 
$
198.9

Current installments of long-term debt
 
$
0.1

Accounts payable
 
143.1

Accrued payroll
 
2.3

Other accrued liabilities
 
19.3

     Current liabilities held for sale
 
$
164.8

Senior long-term debt, excluding current installments
 
$
0.1

Other noncurrent liabilities
 
1.9

     Noncurrent liabilities held for sale
 
$
2.0




8




4. RESTRUCTURING ACTIVITIES
Supply Chain and Administrative Efficiency Plan
We continue to execute a plan for the integration and restructuring of the operations of Ralcorp Holdings, Inc. ("Ralcorp"), optimization of the entire Company's supply chain network, manufacturing assets, and dry distribution and mixing centers, and improvement of selling, general and administrative effectiveness and efficiencies, which we refer to as the Supply Chain and Administrative Efficiency Plan (the "SCAE Plan").
Although we remain unable to make good faith estimates relating to the entire SCAE Plan, we are reporting on actions initiated through the end of the third quarter of fiscal 2015, including the estimated amounts or range of amounts for each major type of costs expected to be incurred, and the charges that have resulted or will result in cash outflows. As of the date of this report, our Board of Directors has approved the incurrence of up to $343.0 million of expenses in connection with the SCAE Plan. We have incurred or expect to incur approximately $232.0 million of charges ($160.1 million of cash charges and $71.9 million of non-cash charges) for actions identified to date under the SCAE plan. In the third quarter and first three quarters of fiscal 2015, we recognized charges of $18.3 million and $56.8 million, respectively, in relation to the SCAE Plan. In the third quarter and first three quarters of fiscal 2014, we recognized charges of $23.5 million and $38.1 million, respectively, in relation to the SCAE Plan. We expect to incur costs related to the SCAE Plan over a multi-year period.
We anticipate that we will recognize the following pre-tax expenses in association with the SCAE Plan (amounts include charges recognized in fiscal 2013, 2014, and the first three quarters of fiscal 2015):
 
Consumer Foods
 
Commercial Foods
 
Private Brands
 
Corporate
 
Total
Multi-employer pension costs
$

 
$

 
$

 
$
11.4

 
$
11.4

Other cost of goods sold
4.0

 

 
3.8

 

 
7.8

    Total cost of goods sold
4.0

 

 
3.8

 
11.4

 
19.2

Severance and related costs (recoveries)
22.2

 
8.3

 
10.2

 
44.0

 
84.7

Fixed asset impairment / Net loss on disposal
2.6

 

 
11.4

 
0.4

 
14.4

Accelerated depreciation
28.6

 

 
23.0

 
2.9

 
54.5

Other selling, general and administrative expenses
10.6

 

 
14.6

 
34.0

 
59.2

    Total selling, general and administrative expenses
64.0

 
8.3

 
59.2

 
81.3

 
212.8

        Consolidated total
$
68.0

 
$
8.3

 
$
63.0

 
$
92.7

 
$
232.0

During the third quarter of fiscal 2015, we recognized the following pre-tax expenses for the SCAE Plan:
 
Consumer Foods
 
Commercial Foods
 
Private Brands
 
Corporate
 
Total
Other cost of goods sold
$

 
$

 
$
0.9

 
$

 
$
0.9

Total cost of goods sold

 

 
0.9

 

 
0.9

Severance and related costs (recoveries)
5.1

 
(0.3
)
 
0.1

 
0.3

 
5.2

Fixed asset impairment
0.6

 

 
5.6

 

 
6.2

Accelerated depreciation
1.8

 

 
2.1

 
0.3

 
4.2

Other selling, general and administrative expenses
0.7

 

 
0.5

 
0.6

 
1.8

Total selling, general and administrative expenses
8.2

 
(0.3
)
 
8.3

 
1.2

 
17.4

Consolidated total
$
8.2

 
$
(0.3
)
 
$
9.2

 
$
1.2

 
$
18.3

Included in the above results are $11.0 million of charges that have resulted or will result in cash outflows and $7.3 million in non-cash charges.

9




During the first three quarters of fiscal 2015, we recognized the following pre-tax expenses for the SCAE Plan:
 
Consumer Foods
 
Commercial Foods
 
Private Brands
 
Corporate
 
Total
Multi-employer pension costs
$

 
$

 
$

 
$
0.2

 
$
0.2

Other cost of goods sold

 

 
1.5

 

 
1.5

Total cost of goods sold

 

 
1.5

 
0.2

 
1.7

Severance and related costs (recoveries)
6.5

 
3.5

 
0.6

 
0.3

 
10.9

Fixed asset impairment / Net loss on disposal
0.6

 

 
7.5

 
0.4

 
8.5

Accelerated depreciation
15.7

 

 
4.7

 
1.6

 
22.0

Other selling, general and administrative expenses
2.4

 

 
5.6

 
5.7

 
13.7

Total selling, general and administrative expenses
25.2

 
3.5

 
18.4

 
8.0

 
55.1

Consolidated total
$
25.2

 
$
3.5

 
$
19.9

 
$
8.2

 
$
56.8

Included in the above results are $28.4 million of charges that have resulted or will result in cash outflows and $28.4 million in non-cash charges.
We recognized the following cumulative (plan inception to February 22, 2015) pre-tax expenses related to the SCAE Plan in our Condensed Consolidated Statement of Earnings:
 
Consumer Foods
 
Commercial Foods
 
Private Brands
 
Corporate
 
Total
Multi-employer pension costs
$

 
$

 
$

 
$
11.4

 
$
11.4

Other cost of goods sold
0.8

 

 
2.1

 

 
2.9

Total cost of goods sold
0.8

 

 
2.1

 
11.4

 
14.3

Severance and related costs (recoveries)
19.2

 
8.3

 
9.5

 
42.9

 
79.9

Fixed asset impairment / Net loss on disposal
0.9

 

 
11.4

 
0.4

 
12.7

Accelerated depreciation
18.1

 

 
19.8

 
2.2

 
40.1

Other selling, general and administrative expenses
2.4

 

 
10.6

 
8.9

 
21.9

Total selling, general and administrative expenses
40.6

 
8.3

 
51.3

 
54.4

 
154.6

Consolidated total
$
41.4

 
$
8.3

 
$
53.4

 
$
65.8

 
$
168.9

Included in the above results are $117.5 million of charges that have resulted or will result in cash outflows and $51.4 million in non-cash charges.
Liabilities recorded for the SCAE Plan and changes therein for the first three quarters of fiscal 2015 were as follows:
 
Balance at May 25,
2014
 
Costs Incurred
and Charged
to Expense
 
Costs Paid
or  Otherwise Settled
 
Changes in Estimates
 
Balance at February 22,
2015
Severance
$
46.9

 
$
14.7

 
$
(40.5
)
 
$
(3.8
)
 
$
17.3

Multi-employer pension costs
11.2

 

 

 
0.2

 
11.4

Other costs
6.0

 
20.2

 
(13.0
)
 
(2.9
)
 
10.3

Total
$
64.1

 
$
34.9

 
$
(53.5
)
 
$
(6.5
)
 
$
39.0

Acquisition-related Restructuring Costs
During fiscal 2012, we started incurring costs in connection with actions taken to attain synergies when integrating businesses acquired prior to the third quarter of fiscal 2013. These costs, collectively referred to as "acquisition-related restructuring costs", include severance and other costs associated with consolidating facilities and administrative functions. In connection with the acquisition-related restructuring costs, we incurred pre-tax cash and non-cash charges of $23.7 million ($21.2 million in the Consumer Foods segment and $2.5 million in Corporate expenses) cumulatively since inception. In the first three quarters of fiscal 2015, we incurred $0.3 million in the Consumer Foods segment. In the third quarter and first three quarters of fiscal 2014, we incurred $2.4 million and $5.7 million, respectively, in the Consumer Foods segment. The acquisition-related restructuring costs are substantially complete.

10




Ralcorp Pre-acquisition Restructuring Plans
At the time of its acquisition, Ralcorp had certain initiatives underway designed to optimize its manufacturing and distribution networks. We refer to these actions and the related costs as "Ralcorp Pre-acquisition Restructuring Plans". These plans consisted of projects that involved, among other things, the exit of certain manufacturing facilities. In connection with the Ralcorp Pre-acquisition Restructuring Plans, we have incurred $3.7 million ($3.5 million in the Private Brands segment and $0.2 million in Corporate expenses) that have resulted or will result in cash outflows of $1.9 million and non-cash charges of $1.8 million. In the third quarter and first three quarters of fiscal 2014, we recognized charges of $0.5 million and $3.1 million, respectively. At the end of fiscal 2014, the Ralcorp Pre-acquisition Restructuring Plans were substantially complete.

5. LONG-TERM DEBT
On March 23, 2015, the Company entered into an amendment to its $1.5 billion revolving credit facility to exclude certain goodwill and other intangible asset impairments from the calculation of the fixed charge coverage ratio. As of February 22, 2015, we were in compliance with all financial covenants in the facility.
During the first quarter of fiscal 2015, we repurchased $225.0 million aggregate principal amount of senior notes due 2023, $200.0 million aggregate principal amount of senior notes due 2043, $25.0 million aggregate principal amount of senior notes due 2019, $25.0 million aggregate principal amount of senior notes due 2018, and $25.0 million aggregate principal amount of senior notes due 2017, in each case prior to maturity in a tender offer, resulting in a net loss of $16.3 million as a cost of early retirement of debt, including a $9.5 million tender premium.
During the first quarter of fiscal 2015, we repaid the remaining borrowings of our unsecured term loan facility (the "Term Loan Facility") of $900.0 million (with an interest rate at LIBOR plus 1.75% per annum), prior to maturity, resulting in a loss of $8.3 million as a cost of early retirement of debt. The Term Loan Facility was terminated after repayment.
During the first quarter of fiscal 2015, we issued $550.0 million aggregate principal amount of floating rate notes due July 21, 2016. The notes bear interest at a rate equal to three-month LIBOR plus 0.37% per annum.
During the second and third quarter of fiscal 2014, we repurchased $43.0 million and $20.0 million, respectively, of 4.65% senior notes due 2043 prior to maturity, resulting in net gains of $2.4 million and $1.3 million in the second and third quarters of fiscal 2014, respectively.
Net interest expense consists of:
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
February 22,
2015
 
February 23,
2014
 
February 22,
2015
 
February 23,
2014
Long-term debt
$
81.0

 
$
98.2

 
$
246.6

 
$
297.3

Short-term debt
1.0

 
0.3

 
2.3

 
1.1

Interest income
(0.1
)
 
(0.3
)
 
(0.9
)
 
(1.6
)
Interest capitalized
(1.6
)
 
(3.2
)
 
(4.7
)
 
(10.5
)
 
$
80.3

 
$
95.0

 
$
243.3

 
$
286.3

Our net interest expense for the third quarter and first three quarters of fiscal 2015 was reduced by $1.9 million and $7.1 million, respectively, due to the impact of the interest rate swap contracts designated as fair value hedges entered into in the third quarter of fiscal 2014. Net interest expense was reduced by $0.7 million for the third quarter and first three quarters of fiscal 2014. The interest rate swaps effectively converted the interest on our senior long-term debt instruments maturing in fiscal 2019 and 2020 from fixed rate to floating rate (see Note 8). These interest rate swap contracts were terminated during the third quarter of fiscal 2015. The cumulative adjustments to the fair value of the debt instruments that were hedged (the effective portion of the hedges), totaling $12.6 million, will be amortized as a reduction of interest expense over the remaining lives of the debt instruments (through fiscal 2020). Our net interest expense was reduced by $0.2 million for the third quarter of fiscal 2015 as a result of this amortization.
We entered into interest rate swaps during fiscal 2010 that effectively changed our interest rate on the senior long-term debt instrument that matured in fiscal 2014 from fixed to variable. During the second quarter of fiscal 2011, we terminated these interest rate swap contracts and received proceeds of $28.2 million. The cumulative adjustment to the fair value of the debt instrument that was hedged (the effective portion of the hedge) was amortized as a reduction of interest expense over the remaining life of the debt instrument (through fiscal 2014). Net interest expense for the third quarter and first three quarters of fiscal 2014 was reduced by $2.4 million and $7.1 million, respectively.


11




6. VARIABLE INTEREST ENTITIES
Variable Interest Entities Consolidated
We own a 49.99% interest in Lamb Weston BSW, LLC ("Lamb Weston BSW"), a potato processing venture with Ochoa Ag Unlimited Foods, Inc. ("Ochoa"). We provide all sales and marketing services to Lamb Weston BSW. Under certain circumstances, we could be required to compensate Ochoa for lost profits resulting from significant production shortfalls ("production shortfalls"). Commencing on June 1, 2018, or on an earlier date under certain circumstances, we have a contractual right to purchase the remaining equity interest in Lamb Weston BSW from Ochoa (the "call option"). We are currently subject to a contractual obligation to purchase all of Ochoa's equity investment in Lamb Weston BSW at the option of Ochoa (the "put option"). The purchase prices under the call option and the put option (the "options") are based on the book value of Ochoa's equity interest at the date of exercise, as modified by an agreed-upon rate of return for the holding period of the investment balance. The agreed-upon rate of return varies depending on the circumstances under which any of the options are exercised. As of February 22, 2015, the price at which Ochoa had the right to put its equity interest to us was $40.4 million. This amount is presented within other noncurrent liabilities in our Condensed Consolidated Balance Sheets. We have determined that Lamb Weston BSW is a variable interest entity and that we are the primary beneficiary of the entity. Accordingly, we consolidate the financial statements of Lamb Weston BSW.
We hold a promissory note from Lamb Weston BSW, the balance of which was $36.1 million at February 22, 2015. The promissory note is due in December 2015. The promissory note is currently accruing interest at a rate of LIBOR plus 200 basis points with a floor of 3.25%. In addition, as of February 22, 2015, we provided lines of credit of up to $15.0 million to Lamb Weston BSW. Borrowings under the lines of credit bear interest at a rate of LIBOR plus 200 basis points with a floor of 3.25%. The amounts owed by Lamb Weston BSW to the Company are not reflected in our Condensed Consolidated Balance Sheets, as they are eliminated in consolidation.
Our variable interests in Lamb Weston BSW include an equity investment in the venture, the options, the promissory note, certain fees paid to us by Lamb Weston BSW for sales and marketing services, the contingent obligation related to production shortfalls, and the lines of credit advanced to Lamb Weston BSW. Our maximum exposure to loss as a result of our involvement with this venture is equal to our equity investment in the venture, the balance of the promissory note extended to the venture, the amount, if any, advanced under the lines of credit, and the amount, if any, by which the put option exercise price exceeds the fair value of the noncontrolling interest in Lamb Weston BSW upon its exercise. Also, in the event of a production shortfall, we could be required to compensate Ochoa for lost profits. It is not possible to determine the maximum exposure to losses from the potential exercise of the put option or from potential production shortfalls. However, we do not expect to incur material losses resulting from these potential exposures.
Due to the consolidation of this variable interest entity, we reflected in our Condensed Consolidated Balance Sheets:
 
February 22,
2015
 
May 25,
2014
Cash and cash equivalents
$
14.3

 
$
17.7

Receivables, less allowance for doubtful accounts
0.1

 

Inventories
1.8

 
1.4

Prepaid expenses and other current assets
0.5

 
0.3

Property, plant and equipment, net
51.3

 
51.8

Goodwill
18.8

 
18.8

Brands, trademarks and other intangibles, net
6.2

 
6.7

Total assets
$
93.0

 
$
96.7

Accounts payable
$
11.4

 
$
12.2

Accrued payroll
1.0

 
0.5

Other accrued liabilities
0.6

 
0.6

Other noncurrent liabilities (noncontrolling interest)
30.5

 
33.3

Total liabilities
$
43.5

 
$
46.6

The liabilities recognized as a result of consolidating the Lamb Weston BSW entity do not represent additional claims on our general assets. The creditors of Lamb Weston BSW have claims only on the assets of Lamb Weston BSW. The assets recognized as a result of consolidating Lamb Weston BSW are the property of the venture and are not available to us for any other purpose, other than as a secured lender under the promissory note and lines of credit.

12




Variable Interest Entities Not Consolidated
We also have variable interests in certain other entities that we have determined to be variable interest entities, but for which we are not the primary beneficiary. We do not consolidate the financial statements of these entities.
We hold a 50% interest in Lamb Weston RDO, a potato processing venture. We provide all sales and marketing services to Lamb Weston RDO. We receive a fee for these services based on a percentage of the net sales of the venture. We reflect the value of our ownership interest in this venture in other assets in our Condensed Consolidated Balance Sheets, based upon the equity method of accounting. The balance of our investment was $14.6 million and $12.6 million at February 22, 2015 and May 25, 2014, respectively, representing our maximum exposure to loss as a result of our involvement with this venture. The capital structure of Lamb Weston RDO includes owners' equity of $29.3 million and term borrowings from banks of $42.2 million as of February 22, 2015. We have determined that we do not have the power to direct the activities that most significantly impact the economic performance of this venture.
We lease certain office buildings from entities that we have determined to be variable interest entities. The lease agreements with these entities include fixed-price purchase options for the assets being leased, representing our only variable interest in these lessor entities. These leases are accounted for as operating leases, and accordingly, there are no material assets or liabilities associated with these entities included in our Condensed Consolidated Balance Sheets. We have no material exposure to loss from our variable interests in these entities. We have determined that we do not have the power to direct the activities that most significantly impact the economic performance of these entities. In making this determination, we have considered, among other items, the terms of the lease agreements, the expected remaining useful lives of the assets leased, and the capital structure of the lessor entities.

7. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
The change in the carrying amount of goodwill for the first three quarters of fiscal 2015 was as follows:
 
Consumer
Foods
 
Commercial
Foods
 
Private Brands
 
Total
Balance as of May 25, 2014
$
3,748.5

 
$
865.4

 
$
3,214.6

 
$
7,828.5

Impairment

 

 
(1,502.1
)
 
(1,502.1
)
Acquisitions

 
20.3

 

 
20.3

Currency translation adjustments
(23.5
)
 
(1.5
)
 
(16.7
)
 
(41.7
)
Balance as of February 22, 2015
$
3,725.0

 
$
884.2

 
$
1,695.8

 
$
6,305.0

Other identifiable intangible assets were as follows:
 
February 22, 2015
 
May 25, 2014
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Non-amortizing intangible assets
$
1,006.1

 
$

 
$
1,059.5

 
$

Amortizing intangible assets
2,367.6

 
310.9

 
2,376.1

 
230.7

 
$
3,373.7

 
$
310.9

 
$
3,435.6

 
$
230.7

Non-amortizing intangible assets are comprised of brands and trademarks.
Amortizing intangible assets, carrying a remaining weighted average life of approximately 21 years, are principally composed of customer relationships, licensing arrangements, and intellectual property. Based on amortizing assets recognized in our Condensed Consolidated Balance Sheet as of February 22, 2015, amortization expense is estimated to average $108.2 million for each of the next five years.
Because forecasted sales and profits for the Private Brands segment for fiscal 2015 continue to fall below our expectations relative to our previous projections, we performed a quantitative analysis of goodwill of our Private Brands reporting units in the third quarter of fiscal 2015. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our future plans and future industry and economic conditions. We estimated the future cash flows of each of the reporting units within the Private Brands segment and calculated the net present value of those estimated cash flows using a risk adjusted discount rate, in order to estimate the fair value of each reporting unit from the perspective of a market participant. We used discount rates and terminal growth rates of approximately 8% and 3%, respectively, to calculate the present value of estimated future cash flows. We then compared the estimated fair value of each reporting unit to the respective historical carrying value (including allocated assets and liabilities of certain shared and Corporate functions), and determined that the fair value of the reporting unit was less than the carrying value for all of our reporting units

13




within the Private Brands segment. With the assistance of a third-party valuation specialist, we estimated the fair value of the assets and liabilities of each of these reporting units in order to determine the implied fair value of goodwill of each reporting unit. The estimated fair values of each of the reporting units determined in the third quarter of fiscal 2015 were substantially lower than the fair values previously estimated. These reductions reflect the continued deterioration in the recent operating results and the reduced expectations relating to the long term operating performance of the reporting units. We recognized impairment charges for the difference between the implied fair value of goodwill and the historical carrying value of goodwill within each reporting unit. Accordingly, during the third quarter of fiscal 2015, we recorded a $1.29 billion charge for the impairment of goodwill. The impacts on the reporting units within the Private Brands segment during the third quarter of fiscal 2015 were: $294.7 million in Bars and Coordinated; $157.1 million in Cereal; $157.1 million in Pasta; $389.9 million in Snacks; $154.4 million in Retail Bakery; and $132.2 million in Condiments. During the first three quarters of fiscal 2015, we recorded charges totaling $1.50 billion for the impairment of goodwill. The impacts on the reporting units within the Private Brands segment during the first three quarters of fiscal 2015 were: $326.6 million in Bars and Coordinated; $175.3 million in Cereal; $157.1 million in Pasta; $536.5 million in Snacks; $174.4 million in Retail Bakery; and $132.2 million in Condiments.
In the case of four reporting units within the Private Brands segment: Cereal, Pasta, Snacks, and Retail Bakery, the estimated fair value of certain amortizing intangible assets (customer relationships) used in step two of our impairment analysis was substantially less than the carrying value of those assets and, as a result, the carrying value of the Cereal, Pasta, Snacks, and Retail Bakery reporting units exceeded the estimated fair value of those reporting units, even after the previously described goodwill impairment charges were recorded. The carrying value of the Private Brands amortizing intangible assets are expected to be recovered over their remaining lives (on an undiscounted basis) and, accordingly, no impairments were required to be recognized.
Following the impairment charges recorded in the third quarter of fiscal 2015, the carrying value of goodwill in our Private Brands reporting units included $2.0 million for Bars and Coordinated, $289.1 million for Cereal, $589.0 million for Pasta, $276.6 million for Snacks, $535.2 million for Retail Bakery, and $3.9 million for Condiments. If the future performance of one or more of the reporting units within the Private Brands segment falls short of our revised expectations or if there are significant changes in risk-adjusted discount rates due to changes in market conditions, we could be required to recognize additional, material impairment charges in future periods.
In the third quarter of fiscal 2015, we also performed a quantitative impairment test for non-amortizing intangible assets within the Private Brands segment, which comprise brands and trademarks. We recognized impairment charges of $13.7 million in our Private Brands segment to write-down five small brands. During the first three quarters of fiscal 2015, we recognized impairment charges of $43.7 million in our Private Brands segment to write-down various brands.

8. DERIVATIVE FINANCIAL INSTRUMENTS
Our operations are exposed to market risks from adverse changes in commodity prices affecting the cost of raw materials and energy, foreign currency exchange rates, and interest rates. In the normal course of business, these risks are managed through a variety of strategies, including the use of derivatives.
Commodity and commodity index futures and option contracts are used from time to time to economically hedge commodity input prices on items such as natural gas, vegetable oils, proteins, packaging materials, dairy, grains, and electricity. Generally, we economically hedge a portion of our anticipated consumption of commodity inputs for periods of up to 36 months. We may enter into longer-term economic hedges on particular commodities, if deemed appropriate. As of February 22, 2015, we had economically hedged certain portions of our anticipated consumption of commodity inputs using derivative instruments with expiration dates through June 2016.
In order to reduce exposures related to changes in foreign currency exchange rates, we enter into forward exchange, option, or swap contracts from time to time for transactions denominated in a currency other than the applicable functional currency. This includes, but is not limited to, hedging against foreign currency risk in purchasing inventory and capital equipment, sales of finished goods, and future settlement of foreign-denominated assets and liabilities. As of February 22, 2015, we had economically hedged certain portions of our foreign currency risk in anticipated transactions using derivative instruments with expiration dates through May 2017.
From time to time, we may use derivative instruments, including interest rate swaps, to reduce risk related to changes in interest rates. This includes, but is not limited to, hedging against increasing interest rates prior to the issuance of long-term debt and hedging the fair value of our senior long-term debt.

14




Derivatives Designated as Cash Flow Hedges
During fiscal 2013, we entered into interest rate swap contracts to hedge a portion of the interest rate risk related to our issuance of long-term debt to partially finance the acquisition of Ralcorp. We settled these contracts during the third quarter of fiscal 2013 resulting in a deferred gain of $4.2 million on senior notes maturing in 2043 and a deferred loss of $2.0 million on senior notes maturing in 2023, both recognized in accumulated other comprehensive loss. These amounts are being amortized as a component of net interest expense over the lives of the related debt instruments. The unamortized amounts of the deferred gain and deferred loss at February 22, 2015 were $3.0 million and $1.4 million, respectively.
During fiscal 2011, we entered into interest rate swap contracts to hedge the interest rate risk related to our forecasted issuance of long-term debt in April 2014 (based on the anticipated refinancing of the senior long-term debt maturing at that time). We designated these interest rate swaps as cash flow hedges of the forecasted interest payments related to this anticipated debt issuance and recorded the unrealized loss in accumulated other comprehensive loss. In the third quarter of fiscal 2014, we determined that we would not issue long-term debt to refinance the debt maturing in April 2014. Accordingly, we recognized a charge to earnings, within selling, general and administrative expenses, of $54.9 million in the third quarter of fiscal 2014.
Derivatives Designated as Fair Value Hedges
During the third quarter of fiscal 2014, we entered into interest rate swap contracts to hedge the fair value of certain of our senior long-term debt instruments maturing in fiscal 2019 and 2020, effectively converting interest on this debt from fixed rate to floating rate. We designated these interest rate swap contracts as fair value hedges of the debt instruments.
Changes in fair value of such derivative instruments are immediately recognized in earnings along with changes in the fair value of the items being hedged (based solely on the change in the benchmark interest rate). In the third quarter and first three quarters of fiscal 2015, we recognized gains of $8.2 million and $8.9 million, respectively, representing the change in fair value of the interest rate swap contracts and losses of $5.7 million and $5.8 million, respectively, representing the change in fair value of the related senior long-term debt. The net gains of $2.5 million for the third quarter and $3.1 million for the first three quarters of fiscal 2015 are classified within selling, general and administrative expenses.
During the third quarter of fiscal 2015, we terminated the interest rate swap contracts and received proceeds of $21.9 million. The proceeds include $3.9 million of accrued interest from the interest rate swap contract, gains of $5.4 million representing the change in fair value of the interest rate swap contracts (the ineffective portion of the hedge) recognized within selling, general and administrative expenses and $12.6 million of cumulative adjustment to the fair value of the debt instruments that were hedged (the effective portion of the hedge), that will be amortized as a reduction to interest expense over the remaining life of the debt instruments (through fiscal 2020).
The entire change in fair value of the derivative instruments was included in our assessment of hedge effectiveness.
Economic Hedges of Forecasted Cash Flows
Many of our derivatives do not qualify for, and we do not currently designate certain commodity or foreign currency derivatives to achieve, hedge accounting treatment. We reflect realized and unrealized gains and losses from derivatives used to economically hedge anticipated commodity consumption and to mitigate foreign currency cash flow risk in earnings immediately within general corporate expense (within cost of goods sold). The gains and losses are reclassified to segment operating results in the period in which the underlying item being economically hedged is recognized in cost of goods sold. In the event that management determines a particular derivative entered into as an economic hedge of a forecasted commodity purchase has ceased to function as an economic hedge, we cease recognizing further gains and losses on such derivatives in corporate expense and begin recognizing such gains and losses within segment operating results, immediately.
Economic Hedges of Fair Values — Foreign Currency Exchange Rate Risk
We may use options and cross currency swaps to economically hedge the fair value of certain monetary assets and liabilities (including intercompany balances) denominated in a currency other than the functional currency. These derivatives are marked-to-market with gains and losses immediately recognized in selling, general and administrative expenses. These substantially offset the foreign currency transaction gains or losses recognized as values of the monetary assets or liabilities being economically hedged change.
All derivative instruments are recognized on our balance sheets at fair value (refer to Note 16 for additional information related to fair value measurements). The fair value of derivative assets is recognized within prepaid expenses and other current assets, while the fair value of derivative liabilities is recognized within other accrued liabilities. In accordance with U.S. GAAP, we offset certain derivative asset and liability balances, as well as certain amounts representing rights to reclaim cash collateral and obligations to return cash collateral, where master netting agreements provide for legal right of setoff. At February 22, 2015, $12.5 million, representing a right to reclaim cash collateral, was included in prepaid expenses and other current assets, and at May 25, 2014, $6.2 million, representing an obligation to return cash collateral, was included in other accrued liabilities in our Condensed Consolidated Balance Sheets.

15




Derivative assets and liabilities and amounts representing a right to reclaim cash collateral or obligation to return cash collateral were reflected in our Condensed Consolidated Balance Sheets as follows:
 
February 22,
2015
 
May 25,
2014
Prepaid expenses and other current assets
$
47.0

 
$
38.8

Other accrued liabilities
45.0

 
10.4

The following table presents our derivative assets and liabilities, at February 22, 2015, on a gross basis, prior to the setoff of $51.2 million to total derivative assets and $63.7 million to total derivative liabilities where legal right of setoff existed:
 
Derivative Assets
 
Derivative Liabilities
 
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
Commodity contracts
Prepaid expenses and other current assets
 
$
81.4

 
Other accrued liabilities
 
$
107.3

Foreign exchange contracts
Prepaid expenses and other current assets
 
16.8

 
Other accrued liabilities
 
0.9

Other
Prepaid expenses and other current assets
 

 
Other accrued liabilities
 
0.5

Total derivatives not designated as hedging instruments
 
 
$
98.2

 
 
 
$
108.7

Total derivatives
 
 
$
98.2

 
 
 
$
108.7

The following table presents our derivative assets and liabilities at May 25, 2014, on a gross basis, prior to the setoff of $13.0 million to total derivative assets and $6.8 million to total derivative liabilities where legal right of setoff existed:
 
Derivative Assets
 
Derivative Liabilities
 
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
Interest rate swap contracts
Prepaid expenses and other current assets
 
$
9.1

 
Other accrued liabilities
 
$

Total derivatives designated as hedging instruments
 
 
$
9.1

 
 
 
$

Commodity contracts
Prepaid expenses and other current assets
 
$
28.6

 
Other accrued liabilities
 
$
13.9

Foreign exchange contracts
Prepaid expenses and other current assets
 
13.4

 
Other accrued liabilities
 
3.3

Other
Prepaid expenses and other current assets
 
0.7

 
Other accrued liabilities
 

Total derivatives not designated as hedging instruments
 
 
$
42.7

 
 
 
$
17.2

Total derivatives
 
 
$
51.8

 
 
 
$
17.2

The location and amount of gains (losses) from derivatives not designated as hedging instruments in our Condensed Consolidated Statements of Earnings were as follows:

16




Derivatives Not Designated as Hedging Instruments
 
Location in Condensed Consolidated Statement of Earnings of
Gain (Loss) Recognized on Derivatives
 
Amount of Gain (Loss)
Recognized on Derivatives
in Condensed Consolidated
Statement of Earnings for
the Thirteen Weeks Ended
February 22, 2015
 
February 23, 2014
Commodity contracts
 
Cost of goods sold
 
$
(40.1
)
 
$
42.3

Foreign exchange contracts
 
Cost of goods sold
 

 
1.6

Foreign exchange contracts
 
Selling, general and administrative expense
 
7.6

 
6.7

Interest rate contracts
 
Selling, general and administrative expense
 

 
(54.9
)
Total loss from derivative instruments not designated as hedging instruments
 
 
 
$
(32.5
)
 
$
(4.3
)

Derivatives Not Designated as Hedging Instruments
 
Location in Condensed Consolidated Statement of Earnings of
Gain (Loss) Recognized on Derivatives
 
Amount of Gain (Loss)
Recognized on Derivatives
in Condensed Consolidated
Statement of Earnings for
the Thirty-nine Weeks Ended
February 22, 2015
 
February 23, 2014
Commodity contracts
 
Cost of goods sold
 
$
(102.5
)
 
$
13.3

Foreign exchange contracts
 
Cost of goods sold
 
1.2

 
2.5

Foreign exchange contracts
 
Selling, general and administrative expense
 
10.2

 
7.9

Interest rate contracts
 
Selling, general and administrative expense
 
(1.4
)
 
(54.9
)
Total loss from derivative instruments not designated as hedging instruments
 
 
 
$
(92.5
)
 
$
(31.2
)
As of February 22, 2015, our open commodity contracts had a notional value (defined as notional quantity times market value per notional quantity unit) of $1.5 billion and $1.0 billion for purchase and sales contracts, respectively. As of May 25, 2014, our open commodity contracts had a notional value of $1.4 billion for both purchase and sales contracts. The notional amount of our foreign currency forward and cross currency swap contracts as of February 22, 2015 and May 25, 2014 was $103.6 million and $170.1 million, respectively.
We enter into certain commodity, interest rate, and foreign exchange derivatives with a diversified group of counterparties. We continually monitor our positions and the credit ratings of the counterparties involved and limit the amount of credit exposure to any one party. These transactions may expose us to potential losses due to the risk of nonperformance by these counterparties. We have not incurred a material loss due to nonperformance in any period presented and do not expect to incur any such material loss. We also enter into futures and options transactions through various regulated exchanges.
At February 22, 2015, the maximum amount of loss due to the credit risk of the counterparties, had the counterparties failed to perform according to the terms of the contracts, was $33.7 million.

9. SHARE-BASED PAYMENTS
For the third quarter and first three quarters of fiscal 2015, we recognized total stock-based compensation expense (including stock options, restricted stock units, cash-settled restricted stock units, and performance shares) of $11.4 million and $46.4 million, respectively. For the third quarter and first three quarters of fiscal 2014, we recognized total stock-based compensation expense of continuing and discontinued operations of $11.7 million and $45.9 million, respectively. Included in the total stock-based compensation expense for the third quarter and first three quarters of fiscal 2015 was $0.3 million and $0.9 million, respectively, related to stock options granted by a subsidiary in the subsidiary's shares to the subsidiary's employees. The expense for these stock options was $0.2 million and $2.3 million, respectively, for the third quarter and first three quarters of fiscal 2014. For the first three quarters of fiscal 2015, we granted 0.9 million restricted stock units at a weighted average grant date price of $31.36, 0.9 million cash-settled restricted stock units at a weighted average grant date price of $30.89, 3.8 million stock options at a weighted average exercise price of $30.89, and 0.4 million performance shares at a weighted average grant date price of $30.89.
Performance shares are granted to selected executives and other key employees with vesting contingent upon meeting various Company-wide performance goals. The performance goals for the performance period ending in fiscal 2015 are based upon our operating cash flow return on operations, a measure of operating cash flow as a percentage of invested capital, and revenue growth, each measured

17




over a defined performance period. The performance goals for the performance periods ending in fiscal 2016 and 2017 are based upon our earnings before interest, taxes, depreciation, and amortization ("EBITDA") return on capital, and revenue growth, each measured over the defined performance period. The awards actually earned will range from zero to two hundred twenty percent of the targeted number of performance shares for each of the performance periods. A payout equal to 25% of approved target incentive is required to be paid out for each performance period, as applicable, if we achieve a threshold level of cash flow return on operations for the performance period ending in fiscal 2015, and a threshold level of EBITDA return on capital for the performance periods ending in fiscal 2016 and 2017. Awards, if earned, will be paid in shares of our common stock. Subject to limited exceptions set forth in the performance share plan, any shares earned will be distributed at the end of the performance period. The value of the performance shares is adjusted based upon the market price of our common stock at the end of each reporting period and amortized as compensation expense over the vesting period.
The weighted average Black-Scholes assumptions for stock options granted during the first three quarters of fiscal 2015 were as follows: 
Expected volatility (%)
17.44
Dividend yield (%)
3.12
Risk-free interest rate (%)
1.62
Expected life of stock option (years)
4.92
The weighted average value of stock options granted during the first three quarters of fiscal 2015 was $3.28 per option based upon a Black-Scholes methodology.

10. EARNINGS PER SHARE
Basic earnings per share is calculated on the basis of weighted average outstanding common shares. Diluted earnings per share is computed on the basis of basic weighted average outstanding common shares adjusted for the dilutive effect of stock options, restricted stock unit awards, and other dilutive securities. In periods when we recognize a net loss, we exclude the impact of outstanding stock awards from the diluted loss per share calculation, as their inclusion would have an anti-dilutive effect.
The following table reconciles the income and average share amounts used to compute both basic and diluted earnings per share:
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
February 22,
2015
 
February 23,
2014
 
February 22,
2015