Note 16 - Derivative Financial Instruments

12 Months Ended

May 28, 2023

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

16. 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 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, diesel fuel 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 May 28, 2023, we had economically hedged certain portions of our anticipated consumption of commodity inputs using derivative instruments with expiration dates through May 2024.

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 May 28, 2023, we had economically hedged certain portions of our foreign currency risk in anticipated transactions using derivative instruments with expiration dates through February 2024.

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.

Derivatives Designated as Cash Flow Hedges

During the first quarter of fiscal 2019, we entered into deal-contingent forward starting interest rate swap contracts to hedge a portion of the interest rate risk related to our issuance of long-term debt to help finance the acquisition of Pinnacle. We settled these contracts during the second quarter of fiscal 2019 and deferred a $47.5 million gain in accumulated other comprehensive income that is being amortized as a reduction of interest expense over the lives of the related debt instruments. In the second quarter of fiscal 2021, $0.5 million was written off in connection with the early extinguishment of debt (see Note 3). The unamortized amount at May 28, 2023 was $31.5 million.

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 SG&A 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 the Consolidated Balance Sheets at fair value (refer to Note 18 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 May 28, 2023 and May 29, 2022, amounts representing right to reclaim cash collateral and an obligation to return cash collateral of $21.3 and $4.0 million, respectively, were included in prepaid expenses and other current assets in our Consolidated Balance Sheets.

Derivative assets and liabilities and amounts representing a right to reclaim cash collateral or obligation to return cash collateral were reflected in our Consolidated Balance Sheets as follows:

	May 28, 2023		May 29, 2022
Prepaid expenses and other current assets	$	10.0	$	7.0
Other accrued liabilities		3.6		2.2

The following table presents our derivative assets and liabilities at May 28, 2023, on a gross basis, prior to the setoff of $8.3 million to total derivative assets and $13.0 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	$	1.1	Other accrued liabilities	$	14.4
Foreign exchange contracts	Prepaid expenses and other current assets		0.6	Other accrued liabilities		2.2
Total derivatives not designated as hedging instruments		$	1.7		$	16.6

The following table presents our derivative assets and liabilities, at May 29, 2022, on a gross basis, prior to the setoff of $20.1 million to total derivative assets and $16.1 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	$	26.8	Other accrued liabilities	$	16.1
Foreign exchange contracts	Prepaid expenses and other current assets		0.3	Other accrued liabilities		2.2
Total derivatives not designated as hedging instruments		$	27.1		$	18.3

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

	For the Fiscal Year Ended May 28, 2023
Derivatives Not Designated as Hedging Instruments	Location in Consolidated Statement of Earnings of Gains (Losses) Recognized on Derivatives	Amount of Gains (Losses) Recognized on Derivatives in Consolidated Statement of Earnings
Commodity contracts	Cost of goods sold	$	(19.7	)
Foreign exchange contracts	Cost of goods sold		2.1
Total losses from derivative instruments not designated as hedging instruments		$	(17.6	)

	For the Fiscal Year Ended May 29, 2022
Derivatives Not Designated as Hedging Instruments	Location in Consolidated Statement of Earnings of Gains (Losses) Recognized on Derivatives	Amount of Gains (Losses) Recognized on Derivatives in Consolidated Statement of Earnings
Commodity contracts	Cost of goods sold	$	33.4
Foreign exchange contracts	Cost of goods sold		3.7
Total gains from derivative instruments not designated as hedging instruments		$	37.1

	For the Fiscal Year Ended May 30, 2021
Derivatives Not Designated as Hedging Instruments	Location in Consolidated Statement of Earnings of Gains (Losses) Recognized on Derivatives	Amount of Gains (Losses) Recognized on Derivatives in Consolidated Statement of Earnings
Commodity contracts	Cost of goods sold	$	26.6
Foreign exchange contracts	Cost of goods sold		(17.1	)
Total gains from derivative instruments not designated as hedging instruments		$	9.5

As of May 28, 2023, our open commodity contracts had a notional value (defined as notional quantity times market value per notional quantity unit) of $134.6 million for purchase contracts. As of May 29, 2022, our open commodity contracts had a notional value of $115.3 million and $96.7 million for purchase and sales contracts, respectively. The notional amount of our foreign currency forward and cross currency swap contracts as of  May 28, 2023 and May 29, 2022 was $87.3 million and $106.6 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 May 28, 2023, 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 $0.6 million.