DERIVATIVE FINANCIAL INSTRUMENTS

9 Months Ended

Feb. 26, 2017

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

14.   DERIVATIVE FINANCIAL INSTRUMENTS

We use derivatives and other financial instruments to hedge exposures to commodity and currency risks. We do not hold or issue derivatives and other financial instruments for trading purposes. Prior to the Separation, Conagra exited all derivative instruments related to our businesses. The effect of exiting the positions was not significant to our financial results. 

Foreign Currency Risk

We manufacture and sell our products and finance operations in different countries throughout the world and, as a result, are exposed to movements in foreign currency exchange rates. To manage this exchange rate risk, we have historically utilized options and currency swaps. 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. 

Commodity Risk

Certain raw materials used in our production processes are subject to price volatility caused by weather, supply conditions, political and economic variables and other unpredictable factors. To manage the volatility in earnings due to price fluctuations, we may utilize swap contracts, or forward purchase contracts.

Derivative instruments are reported in the consolidated balance sheets at their fair values, unless the derivative instruments qualify for the normal purchase normal sale exception (“NPNS”) under GAAP and such exception has been elected. If the NPNS exception is elected, the fair values of such contracts are not recognized on the balance sheet.

We do not designate commodity derivatives to achieve hedge accounting treatment.  The change in the fair value of the instruments used to reduce commodity price volatility is immediately recognized in earnings in cost of sales. All derivative instruments are recognized in our Condensed Combined and Consolidated Balance Sheets at fair value (refer to Note 15, Fair Value Measurements, for additional information related to fair value measurements). The fair value of derivative assets are recognized within “Prepaid expenses and other current assets”, while the fair value of derivative liabilities are recognized within “Accrued liabilities”. In accordance with GAAP, we offset certain derivative asset and liability balances where master netting agreements provide for legal right of setoff. No collateral was received or pledged in connection with these agreements.

Derivative assets and liabilities were reflected in our Consolidated and Combined Balance Sheets as follows (dollars in millions):

	February 26,		May 29,
	2017		2016
Prepaid expenses and other current assets	$	—	$	2.1
Accrued liabilities	$	2.5	$	0.2

The following table presents our derivative assets and liabilities, at February 26, 2017, on a gross basis (dollars in millions):

	Derivative Assets			Derivative Liabilities
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Commodity contracts	Prepaid expenses and other current assets	$	—	Accrued liabilities	$	2.5

The following table presents our derivative assets and liabilities, at May 29, 2016, on a gross basis, prior to the setoff of $0.1 million where legal right of setoff existed (dollars in millions):

	Derivative Assets			Derivative Liabilities
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Commodity contracts	Prepaid expenses and other current assets	$	1.5	Accrued liabilities	$	0.2
Foreign exchange contracts	Prepaid expenses and other current assets		0.6	Accrued liabilities		—
		$	2.1		$	0.2

The location and amount of gains (losses) from derivatives in our Condensed Combined and Consolidated Statements of Earnings were as follows (dollars in millions):

		Amount of Gain (Loss)
		Recognized on Derivatives in
		Combined Statement of Earnings
	Location in Consolidated	for the Thirteen Weeks Ended
Derivatives Not Designated as Hedging	Statement of Earnings of Gain	February 26,		February 28,
Instruments	(Loss) Recognized on Derivatives	2017		2016
Commodity contracts	Cost of sales	$	(1.9)	$	(2.2)
Foreign exchange contracts	Selling, general and administrative expenses		—		0.4
Total loss from derivative instruments not designed as hedging instruments		$	(1.9)	$	(1.8)

		Amount of Gain (Loss)
		Recognized on Derivatives in
		Combined Statement of Earnings
	Location in Consolidated	for the Thirty-Nine Weeks Ended
Derivatives Not Designated as Hedging	Statement of Earnings of Gain	February 26,		February 28,
Instruments	(Loss) Recognized on Derivatives	2017		2016
Commodity contracts	Cost of sales	$	(2.0)	$	(7.4)
Foreign exchange contracts	Selling, general and administrative expenses		(0.1)		0.4
Total loss from derivative instruments not designed as hedging instruments		$	(2.1)	$	(7.0)

As of February 26, 2017, our open commodity contracts had a notional value (defined as notional quantity times market value per notional quantity unit) of $29.3 million and $49.2 million for purchase and sales contracts, respectively. As of May 29, 2016, our open commodity contracts had a notional value of $32.8 million and $13.6 million for purchase and sales contracts, respectively.