SEC Company Response from CONAGRA BRANDS INC. (CAG) (CIK 0000023217) (CAG) — Oct 9, 2015
CONAGRA BRANDS INC. (CAG) (CIK 0000023217)
Date: Oct. 9, 2015 · CIK: 0000023217 · Accession: 0001628280-15-007630
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 001-07275
Referenced dates: September 25, 2015
Letter
VIA EDGAR Division of Corporation Finance Securities and Exchange Commission RE: ConAgra Foods, Inc. Form 10-K for the fiscal year ended May 31, 2015 (“Form 10-K”) Filed July 17, 2015 File No. 001-07275
Dear Ms. Eisen:
This letter sets forth the response of ConAgra Foods, Inc. (“we” or the “Company”) to the Staff's comment letter dated September 25, 2015 on the above referenced Form 10-K. We have also included each comment along with our responses to aid in the review process.
Form 10-K for the fiscal year ended May 31, 2015
Management's Discussion and Analysis of Financial Condition and Results of Operations, page 17
Liquidity and Capital Resources, page 28
Sources of Liquidity and Capital, page 28
1.
Disclosure on page 29 of your filing states that debt reduction is expected to remain a component of capital allocation in the foreseeable future. In this connection, we note that although your total debt balance decreased compared to the prior year, payments due within one year increased from $76.3 million to $1.0 billion and payments due in one to three years increased from $1.0 billion to $2.3 billion. Tell us how you considered providing disclosure specifically explaining how you plan to address this change to your debt profile including with regard to the allocation of cash resources to satisfy your debt obligations. Refer to Item 303(a)(1) of Regulation S-K and section IV.D. of SEC Release No. 33-8350. As part of your response, address the extent to which current year debt repayments are expected to impact your ability to meet your working capital needs, planned capital expenditures, and payment of anticipated quarterly dividends.
In accordance with the requirements of Item 303(a)(1) of Regulation S-K and section IV.D. of SEC Release No. 33-8350, the Liquidity and Capital Resources section of our Form 10-K’s Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), discloses that we have access to multiple sources of liquidity. Specifically, in addition to operating cash flows, we disclose our access to, and ability to use, our $1.5 billion revolving credit facility scheduled to mature September 2018, as well as our commercial paper program. We cited the pending divestiture of the Private Brands business as a significant source of potential liquidity, although we were unable to provide details as to the amount or timing of any related proceeds, as formal negotiations for the sale of that business were not yet underway. We also disclose that we have access to the capital markets.
As of the date of the filing of our Form 10-K, management had not yet committed to any specific plans in regards to repaying the debt instruments that were scheduled to mature during the following fiscal year, or those that were scheduled to mature over the subsequent two fiscal years. Because the Company has access to multiple sources of liquidity, as disclosed in this section of MD&A, and as there exists uncertainty as to: the amount and timing of proceeds from the potential divestiture of the Private Brands business; the interest rates that will be available at the time of any potential refinancing transaction; as well as other strategic changes the company may make in the intervening time period, it was not practicable at the time to more specifically explain how we plan to address the changes to our debt profile.
In order to clarify our disclosures in this regard, we propose to add the following additional verbiage to the Liquidity and Capital Resources section of MD&A in future filings, and we have included such language in our recently filed Form 10-Q for the first quarter of our fiscal 2016:
“Although a significant amount of our senior debt will mature during fiscal 2016, and over the next several years, we expect to maintain or have access to sufficient liquidity to either retire or refinance such debt, as market conditions warrant, from operating cash flows, our commercial paper program, proceeds from any divestitures, access to capital markets and our revolving credit facility.”
In regards to our assessment of the extent to which current year debt repayments are expected to impact our ability to meet our working capital needs, planned capital expenditures, and payment of anticipated quarterly dividends, please consider our disclosure in this section of MD&A that states that “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 working capital needs, planned capital expenditures, and payment of anticipated quarterly dividends for at least the next twelve months.”
Obligations and Commitments, page 30
2.
We note the funded status of your pension plans was $(433.0) million as of May 25, 2014 and $(553.2) million as of May 31, 2015. Please revise to provide information regarding the timing and amount of expected pension contributions as part of your disclosure of contractual obligations, including explanatory language regarding the factors that could affect your estimates of future minimum statutory funding requirements and expected contributions. Refer to Item 303(a)(5) of Regulation S-K and, for further guidance, section II.C. of SEC Release 33-9144.
In order to address the Staff’s comment, we propose to add the following disclosure to the Obligations and Commitments section of MD&A in future filings, and we have included this language in our recently filed Form 10-Q for the first quarter of our fiscal 2016:
As of May 31, 2015, we had aggregate unfunded pension obligations totaling $553.2 million. This amount is not included in the table above, as the unfunded pension obligation is marked-to-market each fiscal year, and we do not expect to be required to make payments to fund these amounts in the foreseeable future. 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 $10.2 million over the next twelve months to fund current benefits of nonqualified pension plans. See Note 14, Pensions and Postretirement Benefits, to the Condensed Consolidated Financial Statements, and the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2015, Critical
Accounting Estimates - Employment Related Benefits, for further discussion of our pension obligations and factors that could affect estimates of this liability.
Critical Accounting Estimates, page 32
Business Combinations, Impairment of Long-Lived Assets (including property, plant and equipment), Identifiable Intangible Assets, and Goodwill, page 35
3.
During the fiscal year ended May 31, 2015, you recognized charges totaling $1.53 billion for the impairment of goodwill in your Private Brands segment. Disclosure in your filing states that additional, material impairment charges may be recognized in future periods if the future performance of one or more of the reporting units within the Private Brands segment falls short of your expectations or if there are significant changes in risk-adjusted discount rates. Please provide expanded disclosure to:
•
Describe the methods and key assumptions used in determining fair value and how the key assumptions were determined;
•
Discuss the degree of uncertainty associated with the key assumptions; and
•
Address potential events and/or changes in circumstances that could reasonably be expected to negatively affect the key assumptions.
We propose to include the language below to update the Critical Accounting Estimates section of the MD&A in future periods, and we have included such language in our recently filed Form 10-Q for the first quarter of our fiscal 2016. The below language is intended to clarify our disclosures regarding key assumptions used in measuring goodwill impairment charges related to our Private Brands business. Starting with our recently filed Form 10-Q for the first quarter of our fiscal 2016, we have added disclosure of the methodology used under ASC 360 to measure the subsequent impairment that occurred in our first quarter of fiscal 2016 when the Private Brands business met the requirements to be treated as assets held for sale (underscored text represents proposed additional wording).
Because forecasted sales and profits for the Private Brands segment continued to fall below our expectations relative to our previous projections throughout fiscal 2015, we performed quantitative analyses of goodwill on certain of our Private Brands segment reporting units in the second, third, and fourth quarters 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 reporting unit 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. For this purpose, in our most recent analysis we used the sales growth rates, ranging from -1% in our cereal reporting unit to +5% in our Snacks reporting unit, and gross margin percentages used internally for our operating plans for fiscal 2016. We estimated the rates of sales and cash flow growth for the subsequent three years based upon known trends for each applicable product category, customer-specific facts, expected rates of material and labor inflation, and planned capital expenditures for each reporting unit. We used a discount rate and terminal growth rate of cash flows of 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 six of our reporting units within the Private Brands segment throughout fiscal 2015. 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. We recognized impairment charges for the difference between the implied fair value of goodwill and
the carrying value of goodwill within each reporting unit at the respective measurement dates. Accordingly, during fiscal 2015, we recorded charges totaling $1.53 billion for the impairment of goodwill in the Private Brands segment. The following reporting units within Private Brands were impacted: $328.7 million in Bars and Coordinated, $195.1 million in Cereal, $157.1 million in Pasta, $536.5 million in Snacks, $174.4 million in Retail Bakery, and $136.1 million in Condiments.
Following the impairment charges recorded in fiscal 2015, the carrying value of goodwill in our Private Brands reporting units included $269.3 million for Cereal, $588.2 million for Pasta, $276.5 million for Snacks, and $535.5 million for Retail Bakery. All of the goodwill for the Bars and Coordinated and Condiments reporting units was impaired as of the end of fiscal 2015. If the future performance of one or more of the reporting units within the Private Brands segment falls short of our 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. 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. Due to the intense competitive environment in private label foods and the severity of recent declines in operating performance, the degree of uncertainty of future cash flows is high. Among other factors, the loss of significant customers, unplanned rates of materials inflation, loss of key personnel, and the entrance of new competitors could result in further reductions in forecasted future cash flows, and accordingly, further impairment charges.
On June 30, 2015, we announced plans to divest our Private Brands operations. On August 7, 2015, we determined that certain assets related to the Private Brands segment were required to be classified as assets held for sale. As a result of this determination and preliminary indications of interest from potential buyers, we concluded that the assets held for sale were further impaired. We recognized a pre-tax impairment charge of $1.95 billion ($1.42 billion after-tax) in the first quarter of fiscal 2016 to write down the long-lived assets of the Private Brands business to the estimated sales price, less costs to sell.
4.
We note that you assessed the recoverability of amortizing intangible assets related to certain reporting units within your Private Brands segment, but that no impairments were recognized as you expect to recover the carrying value. However, you recognized impairment charges of $43.7 million in your Private Brands segment to write-down indefinite lived intangible assets. Please tell us about the conclusions reached as of May 31, 2015 with regard to the impairment of intangible assets and describe the changes that occurred subsequently that led to the statement in your August 13, 2015 filing on Form 8-K that the assets in your Private Brands segment are impaired. Refer to the guidance regarding the recognition and measurement of an impairment loss per FASB ASC 350-20-35 and 360-10-35, as applicable.
At May 31, 2015, the various assets of our Private Brands business did not qualify as assets held for sale, and accordingly were tested for impairments under a held and used classification. Our conclusion that the assets of the Private Brands business did not qualify as assets held for sale, as of May 31, 2015, is due to the following facts:
1.
The board of directors of the Company is required to approve a transaction of this size. At May 31, 3015, the board of directors of the Company had not approved the active marketing of the business.
2.
The Company had not begun actively seeking a buyer of the assets as of May 31, 2015.
3.
Management of the Company had not yet determined at what price it might reasonably be able to sell the Private Brands business until August 7, 2015, at which time the Company received preliminary bids from prospective buyers of this business.
4.
Management of the Company was not able, as of May 31, 2015, to determine that it was probable that a sale of the Private Brands business would be completed within twelve months. Based on preliminary bids from potential buyers of the Private Brands business, on August 7, 2015, management determined that completion of a sale of the business, at a reasonable price, within twelve months, was probable.
Based on these facts, we determined that these assets were held and used at May 31, 2015, and were held for sale at August 7, 2015, in accordance with ASC 360-10-45-9.
At May 31, 2015, the amortizing intangible assets, principally customer relationship assets, were assessed for impairment under ASC 360-10-35-17, as assets held and used. The estimated future cash flows expected to be generated from the asset group, over the life of the principal asset, on an undiscounted basis, exceeded the book value of the assets. Accordingly, impairment was not indicated at the time.
The fair value of our indefinite-lived assets, prin
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CORRESP
October 9, 2015
VIA EDGAR
Mr. Ethan Horowitz, Branch Chief, Office of Natural Resources
Ms. Sandy Eisen
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
RE: ConAgra Foods, Inc.
Form 10-K for the fiscal year ended May 31, 2015 (“Form 10-K”)
Filed July 17, 2015
File No. 001-07275
Dear Ms. Eisen:
This letter sets forth the response of ConAgra Foods, Inc. (“we” or the “Company”) to the Staff's comment letter dated September 25, 2015 on the above referenced Form 10-K. We have also included each comment along with our responses to aid in the review process.
Form 10-K for the fiscal year ended May 31, 2015
Management's Discussion and Analysis of Financial Condition and Results of Operations, page 17
Liquidity and Capital Resources, page 28
Sources of Liquidity and Capital, page 28
1.
Disclosure on page 29 of your filing states that debt reduction is expected to remain a component of capital allocation in the foreseeable future. In this connection, we note that although your total debt balance decreased compared to the prior year, payments due within one year increased from $76.3 million to $1.0 billion and payments due in one to three years increased from $1.0 billion to $2.3 billion. Tell us how you considered providing disclosure specifically explaining how you plan to address this change to your debt profile including with regard to the allocation of cash resources to satisfy your debt obligations. Refer to Item 303(a)(1) of Regulation S-K and section IV.D. of SEC Release No. 33-8350. As part of your response, address the extent to which current year debt repayments are expected to impact your ability to meet your working capital needs, planned capital expenditures, and payment of anticipated quarterly dividends.
In accordance with the requirements of Item 303(a)(1) of Regulation S-K and section IV.D. of SEC Release No. 33-8350, the Liquidity and Capital Resources section of our Form 10-K’s Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), discloses that we have access to multiple sources of liquidity. Specifically, in addition to operating cash flows, we disclose our access to, and ability to use, our $1.5 billion revolving credit facility scheduled to mature September 2018, as well as our commercial paper program. We cited the pending divestiture of the Private Brands business as a significant source of potential liquidity, although we were unable to provide details as to the amount or timing of any related proceeds, as formal negotiations for the sale of that business were not yet underway. We also disclose that we have access to the capital markets.
As of the date of the filing of our Form 10-K, management had not yet committed to any specific plans in regards to repaying the debt instruments that were scheduled to mature during the following fiscal year, or those that were scheduled to mature over the subsequent two fiscal years. Because the Company has access to multiple sources of liquidity, as disclosed in this section of MD&A, and as there exists uncertainty as to: the amount and timing of proceeds from the potential divestiture of the Private Brands business; the interest rates that will be available at the time of any potential refinancing transaction; as well as other strategic changes the company may make in the intervening time period, it was not practicable at the time to more specifically explain how we plan to address the changes to our debt profile.
In order to clarify our disclosures in this regard, we propose to add the following additional verbiage to the Liquidity and Capital Resources section of MD&A in future filings, and we have included such language in our recently filed Form 10-Q for the first quarter of our fiscal 2016:
“Although a significant amount of our senior debt will mature during fiscal 2016, and over the next several years, we expect to maintain or have access to sufficient liquidity to either retire or refinance such debt, as market conditions warrant, from operating cash flows, our commercial paper program, proceeds from any divestitures, access to capital markets and our revolving credit facility.”
In regards to our assessment of the extent to which current year debt repayments are expected to impact our ability to meet our working capital needs, planned capital expenditures, and payment of anticipated quarterly dividends, please consider our disclosure in this section of MD&A that states that “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 working capital needs, planned capital expenditures, and payment of anticipated quarterly dividends for at least the next twelve months.”
Obligations and Commitments, page 30
2.
We note the funded status of your pension plans was $(433.0) million as of May 25, 2014 and $(553.2) million as of May 31, 2015. Please revise to provide information regarding the timing and amount of expected pension contributions as part of your disclosure of contractual obligations, including explanatory language regarding the factors that could affect your estimates of future minimum statutory funding requirements and expected contributions. Refer to Item 303(a)(5) of Regulation S-K and, for further guidance, section II.C. of SEC Release 33-9144.
In order to address the Staff’s comment, we propose to add the following disclosure to the Obligations and Commitments section of MD&A in future filings, and we have included this language in our recently filed Form 10-Q for the first quarter of our fiscal 2016:
As of May 31, 2015, we had aggregate unfunded pension obligations totaling $553.2 million. This amount is not included in the table above, as the unfunded pension obligation is marked-to-market each fiscal year, and we do not expect to be required to make payments to fund these amounts in the foreseeable future. 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 $10.2 million over the next twelve months to fund current benefits of nonqualified pension plans. See Note 14, Pensions and Postretirement Benefits, to the Condensed Consolidated Financial Statements, and the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2015, Critical
Accounting Estimates - Employment Related Benefits, for further discussion of our pension obligations and factors that could affect estimates of this liability.
Critical Accounting Estimates, page 32
Business Combinations, Impairment of Long-Lived Assets (including property, plant and equipment), Identifiable Intangible Assets, and Goodwill, page 35
3.
During the fiscal year ended May 31, 2015, you recognized charges totaling $1.53 billion for the impairment of goodwill in your Private Brands segment. Disclosure in your filing states that additional, material impairment charges may be recognized in future periods if the future performance of one or more of the reporting units within the Private Brands segment falls short of your expectations or if there are significant changes in risk-adjusted discount rates. Please provide expanded disclosure to:
•
Describe the methods and key assumptions used in determining fair value and how the key assumptions were determined;
•
Discuss the degree of uncertainty associated with the key assumptions; and
•
Address potential events and/or changes in circumstances that could reasonably be expected to negatively affect the key assumptions.
We propose to include the language below to update the Critical Accounting Estimates section of the MD&A in future periods, and we have included such language in our recently filed Form 10-Q for the first quarter of our fiscal 2016. The below language is intended to clarify our disclosures regarding key assumptions used in measuring goodwill impairment charges related to our Private Brands business. Starting with our recently filed Form 10-Q for the first quarter of our fiscal 2016, we have added disclosure of the methodology used under ASC 360 to measure the subsequent impairment that occurred in our first quarter of fiscal 2016 when the Private Brands business met the requirements to be treated as assets held for sale (underscored text represents proposed additional wording).
Because forecasted sales and profits for the Private Brands segment continued to fall below our expectations relative to our previous projections throughout fiscal 2015, we performed quantitative analyses of goodwill on certain of our Private Brands segment reporting units in the second, third, and fourth quarters 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 reporting unit 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. For this purpose, in our most recent analysis we used the sales growth rates, ranging from -1% in our cereal reporting unit to +5% in our Snacks reporting unit, and gross margin percentages used internally for our operating plans for fiscal 2016. We estimated the rates of sales and cash flow growth for the subsequent three years based upon known trends for each applicable product category, customer-specific facts, expected rates of material and labor inflation, and planned capital expenditures for each reporting unit. We used a discount rate and terminal growth rate of cash flows of 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 six of our reporting units within the Private Brands segment throughout fiscal 2015. 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. We recognized impairment charges for the difference between the implied fair value of goodwill and
the carrying value of goodwill within each reporting unit at the respective measurement dates. Accordingly, during fiscal 2015, we recorded charges totaling $1.53 billion for the impairment of goodwill in the Private Brands segment. The following reporting units within Private Brands were impacted: $328.7 million in Bars and Coordinated, $195.1 million in Cereal, $157.1 million in Pasta, $536.5 million in Snacks, $174.4 million in Retail Bakery, and $136.1 million in Condiments.
Following the impairment charges recorded in fiscal 2015, the carrying value of goodwill in our Private Brands reporting units included $269.3 million for Cereal, $588.2 million for Pasta, $276.5 million for Snacks, and $535.5 million for Retail Bakery. All of the goodwill for the Bars and Coordinated and Condiments reporting units was impaired as of the end of fiscal 2015. If the future performance of one or more of the reporting units within the Private Brands segment falls short of our 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. 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. Due to the intense competitive environment in private label foods and the severity of recent declines in operating performance, the degree of uncertainty of future cash flows is high. Among other factors, the loss of significant customers, unplanned rates of materials inflation, loss of key personnel, and the entrance of new competitors could result in further reductions in forecasted future cash flows, and accordingly, further impairment charges.
On June 30, 2015, we announced plans to divest our Private Brands operations. On August 7, 2015, we determined that certain assets related to the Private Brands segment were required to be classified as assets held for sale. As a result of this determination and preliminary indications of interest from potential buyers, we concluded that the assets held for sale were further impaired. We recognized a pre-tax impairment charge of $1.95 billion ($1.42 billion after-tax) in the first quarter of fiscal 2016 to write down the long-lived assets of the Private Brands business to the estimated sales price, less costs to sell.
4.
We note that you assessed the recoverability of amortizing intangible assets related to certain reporting units within your Private Brands segment, but that no impairments were recognized as you expect to recover the carrying value. However, you recognized impairment charges of $43.7 million in your Private Brands segment to write-down indefinite lived intangible assets. Please tell us about the conclusions reached as of May 31, 2015 with regard to the impairment of intangible assets and describe the changes that occurred subsequently that led to the statement in your August 13, 2015 filing on Form 8-K that the assets in your Private Brands segment are impaired. Refer to the guidance regarding the recognition and measurement of an impairment loss per FASB ASC 350-20-35 and 360-10-35, as applicable.
At May 31, 2015, the various assets of our Private Brands business did not qualify as assets held for sale, and accordingly were tested for impairments under a held and used classification. Our conclusion that the assets of the Private Brands business did not qualify as assets held for sale, as of May 31, 2015, is due to the following facts:
1.
The board of directors of the Company is required to approve a transaction of this size. At May 31, 3015, the board of directors of the Company had not approved the active marketing of the business.
2.
The Company had not begun actively seeking a buyer of the assets as of May 31, 2015.
3.
Management of the Company had not yet determined at what price it might reasonably be able to sell the Private Brands business until August 7, 2015, at which time the Company received preliminary bids from prospective buyers of this business.
4.
Management of the Company was not able, as of May 31, 2015, to determine that it was probable that a sale of the Private Brands business would be completed within twelve months. Based on preliminary bids from potential buyers of the Private Brands business, on August 7, 2015, management determined that completion of a sale of the business, at a reasonable price, within twelve months, was probable.
Based on these facts, we determined that these assets were held and used at May 31, 2015, and were held for sale at August 7, 2015, in accordance with ASC 360-10-45-9.
At May 31, 2015, the amortizing intangible assets, principally customer relationship assets, were assessed for impairment under ASC 360-10-35-17, as assets held and used. The estimated future cash flows expected to be generated from the asset group, over the life of the principal asset, on an undiscounted basis, exceeded the book value of the assets. Accordingly, impairment was not indicated at the time.
The fair value of our indefinite-lived assets, prin