10-K 1 d564680d10k.htm FORM 10-K Form 10-K
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED May 27, 2018

 

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: 001-01185

 

 

GENERAL MILLS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   41-0274440
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

Number One General Mills Boulevard  
Minneapolis, Minnesota   55426
(Address of principal executive offices)   (Zip Code)

(763) 764-7600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange

on which registered

Common Stock, $.10 par value   New York Stock Exchange
Floating Rate Notes due 2020   New York Stock Exchange
2.100% Notes due 2020   New York Stock Exchange
1.000% Notes due 2023   New York Stock Exchange
1.500% Notes due 2027   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑

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 ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

  Large accelerated filer ☑   Accelerated filer ☐  

Non-accelerated filer ☐

(Do not check if a smaller reporting company)

  Smaller reporting company ☐

 

Emerging growth company ☐

   

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ☐ No ☑

Aggregate market value of Common Stock held by non-affiliates of the registrant, based on the closing price of $53.65 per share as reported on the New York Stock Exchange on November 24, 2017 (the last business day of the registrant’s most recently completed second fiscal quarter): $30,510.6 million.

Number of shares of Common Stock outstanding as of June 7, 2018: 593,367,848 (excluding 161,245,480 shares held in the treasury).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for its 2018 Annual Meeting of Shareholders are incorporated by reference into Part III.


Table of Contents

Table of Contents

 

          Page  

Part I

     

Item 1

   Business      3  

Item 1A

   Risk Factors      8  

Item 1B

   Unresolved Staff Comments      15  

Item 2

   Properties      15  

Item 3

   Legal Proceedings      17  

Item 4

   Mine Safety Disclosures      17  

Part II

     

Item 5

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      17  

Item 6

   Selected Financial Data      18  

Item 7

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      19  

Item 7A

   Quantitative and Qualitative Disclosures About Market Risk      54  

Item 8

   Financial Statements and Supplementary Data      56  

Item 9

   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure      115  

Item 9A

   Controls and Procedures      115  

Item 9B

   Other Information      116  

Part III

     

Item 10

   Directors, Executive Officers and Corporate Governance      117  

Item 11

   Executive Compensation      117  

Item 12

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      117  

Item 13

   Certain Relationships and Related Transactions, and Director Independence      118  

Item 14

   Principal Accounting Fees and Services      118  

Part IV

     

Item 15

   Exhibits, Financial Statement Schedules      118  

Item 16

   Form 10-K Summary      122  

Signatures

        123  

 

2


Table of Contents

PART I

ITEM 1    Business

General Mills, Inc. was incorporated in Delaware in 1928. The terms “General Mills,” “Company,” “registrant,” “we,” “us,” and “our” mean General Mills, Inc. and all subsidiaries included in the Consolidated Financial Statements in Item 8 of this report unless the context indicates otherwise.

Certain terms used throughout this report are defined in a glossary in Item 8 of this report.

COMPANY OVERVIEW

We are a leading global manufacturer and marketer of branded consumer foods sold through retail stores. We also are a leading supplier of branded and unbranded food products to the North American foodservice and commercial baking industries. Following our acquisition of Blue Buffalo Pet Products, Inc. (Blue Buffalo) in fiscal 2018, we are also a leading manufacturer and marketer in the wholesome natural pet food category. We manufacture our products in 13 countries and market them in more than 100 countries. In addition to our consolidated operations, we have 50 percent interests in two strategic joint ventures that manufacture and market food products sold in more than 130 countries worldwide.

On April 24, 2018, we acquired Blue Buffalo for an aggregate purchase price of $8.0 billion. We financed the transaction with a combination of $6.0 billion in debt, $1.0 billion in equity, and cash on hand. The consolidated results of Blue Buffalo will be reported as our Pet operating segment in future periods on a one-month lag. Accordingly, in fiscal 2018, our Consolidated Statements of Earnings do not include Pet operating segment results. For further information on the acquisition of Blue Buffalo, please see Note 3 to the Consolidated Financial Statements in Item 8 of this report.

We manage and review the financial results of our business under five operating segments: North America Retail; Convenience Stores & Foodservice; Europe & Australia; Asia & Latin America; and Pet. See Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) in Item 7 of this report for a description of our segments and certain changes made to our segments in fiscal 2017. For financial information by segment and geographic area, please see Note 16 to the Consolidated Financial Statements in Item 8 of this report.

We offer a variety of food products that provide great taste, nutrition, convenience and value for consumers around the world, with a focus on six large global categories:

 

    snacks, including grain, fruit and savory snacks, nutrition bars, and frozen hot snacks;

 

    ready-to-eat cereal;

 

    convenient meals, including meal kits, ethnic meals, pizza, soup, side dish mixes, frozen breakfast, and frozen entrees;

 

    yogurt;

 

    pet food; and

 

    super-premium ice cream.

Other significant product categories include:

 

    baking mixes and ingredients; and

 

    refrigerated and frozen dough.

 

3


Table of Contents

Our Cereal Partners Worldwide (CPW) joint venture with Nestlé S.A. (Nestlé) competes in the ready-to-eat cereal category in markets outside North America, and our Häagen-Dazs Japan, Inc. (HDJ) joint venture competes in the super-premium ice cream category in Japan. For net sales contributed by each class of similar products, please see Note 16 to the Consolidated Financial Statements in Item 8 of this report.

Customers. Our primary customers are grocery stores, mass merchandisers, membership stores, natural food chains, drug, dollar and discount chains, e-commerce retailers, commercial and noncommercial foodservice distributors and operators, restaurants, convenience stores, and pet specialty stores. We generally sell to these customers through our direct sales force. We use broker and distribution arrangements for certain products and to serve certain types of customers. For further information on our customer credit and product return practices, please refer to Note 2 to the Consolidated Financial Statements in Item 8 of this report. During fiscal 2018, Walmart Inc. and its affiliates (Walmart) accounted for 21 percent of our consolidated net sales and 30 percent of net sales of our North America Retail segment. No other customer accounted for 10 percent or more of our consolidated net sales. For further information on significant customers, please refer to Note 7 to the Consolidated Financial Statements in Item 8 of this report.

Competition. The packaged foods categories are highly competitive, with numerous manufacturers of varying sizes in the United States and throughout the world. The categories in which we participate also are very competitive. Our principal competitors in these categories are manufacturers, as well as retailers with their own branded products. Competitors market and sell their products through brick-and-mortar stores and e-commerce. All of our principal competitors have substantial financial, marketing, and other resources. Competition in our product categories is based on product innovation, product quality, price, brand recognition and loyalty, effectiveness of marketing, promotional activity, convenient ordering and delivery to the consumer, and the ability to identify and satisfy consumer preferences. Our principal strategies for competing in each of our segments include unique consumer insights, effective customer relationships, superior product quality, innovative advertising, product promotion, product innovation aligned with consumers’ needs, an efficient supply chain, and price. In most product categories, we compete not only with other widely advertised, branded products, but also with regional brands and with generic and private label products that are generally sold at lower prices. Internationally, we compete with both multi-national and local manufacturers, and each country includes a unique group of competitors.

Raw materials, ingredients, and packaging. The principal raw materials that we use are grains (wheat, oats, and corn), dairy products, sugar, fruits, vegetable oils, meats, nuts, vegetables, and other agricultural products. We also use substantial quantities of carton board, corrugated, plastic and metal packaging materials, operating supplies, and energy. Most of these inputs for our domestic and Canadian operations are purchased from suppliers in the United States. In our other international operations, inputs that are not locally available in adequate supply may be imported from other countries. The cost of these inputs may fluctuate widely due to external conditions such as weather, product scarcity, limited sources of supply, commodity market fluctuations, currency fluctuations, and changes in governmental agricultural and energy policies and regulations. We have some long-term fixed price contracts, but the majority of our inputs are purchased on the open market. We believe that we will be able to obtain an adequate supply of needed inputs. Occasionally and where possible, we make advance purchases of items significant to our business in order to ensure continuity of operations. Our objective is to procure materials meeting both our quality standards and our production needs at price levels that allow a targeted profit margin. Since these inputs generally represent the largest variable cost in manufacturing our products, to the extent possible, we often manage the risk associated with adverse price movements for some inputs using a variety of risk management strategies. We also have a grain merchandising operation that provides us efficient access to, and more informed knowledge of, various commodity markets, principally wheat and oats. This operation holds physical inventories that are carried at net realizable value and uses derivatives to manage its net inventory position and minimize its market exposures.

 

4


Table of Contents

RESEARCH AND DEVELOPMENT

Our research and development resources are focused on new product development, product improvement, process design and improvement, packaging, and exploratory research in new business and technology areas. Research and development expenditures were $219 million in fiscal 2018, $218 million in fiscal 2017, and $222 million in fiscal 2016.

TRADEMARKS AND PATENTS

Our products are marketed under a variety of valuable trademarks. Some of the more important trademarks used in our global operations (set forth in italics in this report) include Annie’s, Betty Crocker, Bisquick, Blue Buffalo, BLUE Basics, BLUE Freedom, BLUE Wilderness, Bugles, Cascadian Farm, Cheerios, Chex, Cinnamon Toast Crunch, Cocoa Puffs, Cookie Crisp, EPIC, Fiber One, Food Should Taste Good, Fruit by the Foot, Fruit Gushers, Fruit Roll-Ups, Gardetto’s, Go-Gurt, Gold Medal, Golden Grahams, Häagen-Dazs, Helpers, Jeno’s, Jus-Rol, Kitano, Kix, La Salteña, Lärabar, Latina, Liberté, Lucky Charms, Muir Glen, Nature Valley, Oatmeal Crisp, Old El Paso, Pillsbury, Progresso, Raisin Nut Bran, Total, Totino’s, Trix, Wanchai Ferry, Wheaties, Yoki, and Yoplait. We protect these marks as appropriate through registrations in the United States and other jurisdictions. Depending on the jurisdiction, trademarks are generally valid as long as they are in use or their registrations are properly maintained and they have not been found to have become generic. Registrations of trademarks can also generally be renewed indefinitely for as long as the trademarks are in use.

Some of our products are marketed under or in combination with trademarks that have been licensed from others for both long-standing products (e.g., Reese’s Puffs for cereal, Green Giant for vegetables in certain countries, and Cinnabon for refrigerated dough, frozen pastries, and baking products) and shorter term promotional products (e.g., fruit snacks sold under various third party equities).

Our cereal trademarks are licensed to CPW and may be used in association with the Nestlé trademark. Nestlé licenses certain of its trademarks to CPW, including the Nestlé and Uncle Toby’s trademarks. The Häagen-Dazs trademark is licensed royalty-free and exclusively to Nestlé for ice cream and other frozen dessert products in the United States and Canada. The Häagen-Dazs trademark is also licensed to HDJ. The J. M. Smucker Company holds an exclusive royalty-free license to use the Pillsbury brand and the Pillsbury Doughboy character in the dessert mix and baking mix categories in the United States and under limited circumstances in Canada and Mexico.

The Yoplait trademark and other related trademarks are owned by Yoplait Marques SNC, an entity in which we own a 50 percent interest. These marks are licensed exclusively to Yoplait SAS, an entity in which we own a 51 percent interest. Yoplait SAS licenses these trademarks to its franchisees. The Liberté trademark and other related trademarks are owned by Liberté Marques Sàrl, an entity in which we own a 50 percent interest.

We continue our focus on developing and marketing innovative, proprietary products, many of which use proprietary expertise, recipes and formulations. We consider the collective rights under our various patents, which expire from time to time, a valuable asset, but we do not believe that our businesses are materially dependent upon any single patent or group of related patents.

SEASONALITY

In general, demand for our products is evenly balanced throughout the year. However, within our North America Retail segment demand for refrigerated dough, frozen baked goods, and baking products is stronger in the fourth calendar quarter. Demand for Progresso soup is higher during the fall and winter months. Internationally, within our Europe & Australia and Asia & Latin America segments, demand for Häagen-Dazs ice cream is higher during the summer months and demand for baking mix and dough products increases during winter months. Due to the offsetting impact of these demand trends, as well as the different seasons in the northern and southern hemispheres, our international segments’ net sales are generally evenly balanced throughout the year.

 

5


Table of Contents

BACKLOG

Orders are generally filled within a few days of receipt and are subject to cancellation at any time prior to shipment. The backlog of any unfilled orders as of May 27, 2018, was not material.

WORKING CAPITAL

A description of our working capital is included in the Liquidity section of MD&A in Item 7 of this report. Our product return practices are described in Note 2 to the Consolidated Financial Statements in Item 8 of this report.

EMPLOYEES

As of May 27, 2018, we had approximately 40,000 full- and part-time employees.

QUALITY AND SAFETY REGULATION

The manufacture and sale of consumer and pet food products is highly regulated. In the United States, our activities are subject to regulation by various federal government agencies, including the Food and Drug Administration, Department of Agriculture, Federal Trade Commission, Department of Commerce, and Environmental Protection Agency, as well as various state and local agencies. Our business is also regulated by similar agencies outside of the United States.

ENVIRONMENTAL MATTERS

As of May 27, 2018, we were involved with two active cleanup sites associated with the alleged or threatened release of hazardous substances or wastes located in Minneapolis, Minnesota and Moonachie, New Jersey.

Our operations are subject to the Clean Air Act, Clean Water Act, Resource Conservation and Recovery Act, Comprehensive Environmental Response, Compensation, and Liability Act, and the Federal Insecticide, Fungicide, and Rodenticide Act, and all similar state, local, and foreign environmental laws and regulations applicable to the jurisdictions in which we operate.

Based on current facts and circumstances, we believe that neither the results of our environmental proceedings nor our compliance in general with environmental laws or regulations will have a material adverse effect upon our capital expenditures, earnings, or competitive position.

EXECUTIVE OFFICERS

The section below provides information regarding our executive officers as of June 29, 2018:

Richard C. Allendorf, age 57, is Senior Vice President, General Counsel and Secretary. Mr. Allendorf joined General Mills in 2001 from The Pillsbury Company. He was promoted to Vice President, Deputy General Counsel in 2010, first overseeing the legal affairs of the U.S. Retail segment and Consumer Food Sales and then, in 2012, overseeing the legal affairs of the International segment and Global Ethics and Compliance. He was named to his present position in February 2015. Prior to joining General Mills, he practiced law with the Shearman and Sterling and Mackall, Crounse and Moore law firms. He was in finance with General Electric prior to his legal career.

William W. Bishop, Jr., age 47, is Group President, Pet. Mr. Bishop joined General Mills in connection with our acquisition of Blue Buffalo in April 2018. Prior to joining General Mills, Mr. Bishop served as Chief Executive Officer of Blue Buffalo since January 2017. From 2003 until January 2017 Mr. Bishop served as Chief Operating Officer of Blue Buffalo and was named President in 2012. He co-founded Blue Buffalo in 2002. He was named to his present position in April 2018.

 

6


Table of Contents

Kofi A. Bruce, age 48, is Vice President, Controller. Mr. Bruce joined General Mills in 2009 as Vice President, Treasurer after serving in a variety of senior management positions with Ecolab and Ford Motor Company. He served as Treasurer until 2010 when he was named Vice President, Finance for Yoplait. Mr. Bruce reassumed his role as Vice President, Treasurer from 2012 until July 2014 when he was named Vice President, Finance for Convenience Stores & Foodservice. He served in that role until he was named to his present position in August 2017.

John R. Church, age 52, is Executive Vice President; Chief Supply Chain Officer and Global Business Solutions. Mr. Church joined General Mills in 1988 as a Product Developer in the Big G cereals division and held various positions before becoming Vice President, Engineering in 2003. In 2005, his role was expanded to include development of the Company’s strategy for the global sourcing of raw materials and manufacturing capabilities. He was named Vice President, Supply Chain Operations in 2007, Senior Vice President, Supply Chain in 2008, Executive Vice President, Supply Chain in July 2013, and to his present position in June 2017.

Peter C. Erickson, age 57, is Executive Vice President, Innovation, Technology and Quality. Mr. Erickson joined General Mills in 1994 as part of the Colombo yogurt acquisition. He has held various positions in Research & Development and became Vice President, Innovation, Technology and Quality in 2003 and Senior Vice President, Innovation, Technology and Quality in 2006. He was named to his present position in July 2013. Mr. Erickson will be retiring from the Company on August 1, 2018.

Jeffrey L. Harmening, age 51, is Chairman of the Board and Chief Executive Officer. Mr. Harmening joined General Mills in 1994 and served in various marketing roles in the Betty Crocker, Yoplait, and Big G cereal divisions. He was named Vice President, Marketing for CPW in 2003 and a Vice President of the Big G cereal division in 2007. In 2011, he was promoted to Senior Vice President for the Big G cereal division. Mr. Harmening was appointed Senior Vice President, Chief Executive Officer of CPW in 2012. Mr. Harmening returned from CPW in 2014 and was named Executive Vice President, Chief Operating Officer, U.S. Retail. He became President, Chief Operating Officer in July 2016. He was named Chief Executive Officer in June 2017 and Chairman of the Board in January 2018.

Christina Law, age 51, is Senior Vice President; Group President, Asia & Latin America. Ms. Law joined General Mills in 2012 as Vice President; President, Asia, Middle East and Africa. Prior to joining General Mills, Ms. Law held various marketing and general management roles around the globe with Johnson & Johnson and Procter & Gamble. She was named to her current position in January 2017.

Donal L. Mulligan, age 57, is Executive Vice President, Chief Financial Officer. Mr. Mulligan joined General Mills in 2001 from The Pillsbury Company. He served as Vice President, Financial Operations for our International division until 2004, when he was named Vice President, Financial Operations for Operations and Technology. Mr. Mulligan was appointed Treasurer in 2006 and Senior Vice President, Financial Operations in 2007. He was elected to his present position in 2007. From 1987 to 1998, he held several international positions at PepsiCo, Inc. and YUM! Brands, Inc. Mr. Mulligan is a director of Tennant Company.

Jon J. Nudi, age 48, is Group President, North America Retail. Mr. Nudi joined General Mills in 1993 as a Sales Representative and held a variety of roles in Consumer Foods Sales. In 2005, he moved into marketing roles in the Meals division and was elected Vice President in 2007. Mr. Nudi was named Vice President; President, Snacks, in 2010, Senior Vice President, President, Europe/Australasia in June 2014 and Senior Vice President; President, U.S. Retail in September 2016. He was named to his present position in January 2017.

Shawn P. O’Grady, age 54, is Group President, Convenience Stores & Foodservice; Senior Vice President, Global Revenue Development. Mr. O’Grady joined General Mills in 1990 and held several marketing roles in the Snacks, Meals and Big G cereal divisions. He was promoted to Vice President in 1998 and held marketing positions in the Betty Crocker and Pillsbury USA divisions. In 2004, he moved into Consumer Foods Sales, becoming Vice President, President, U.S. Retail Sales in 2007, Senior Vice President, President, Consumer

 

7


Table of Contents

Foods Sales Division in 2010 and Senior Vice President, President, Sales & Channel Development in 2012. He was named to his current position in January 2017.

Ivan Pollard, age 55, is Senior Vice President, Global Chief Marketing Officer. Mr. Pollard assumed his current role in July 2017 when he joined General Mills from The Coca-Cola Company. At Coca-Cola, from 2011 to January 2014, Mr. Pollard served as Vice President, Global Connections until he was promoted to Senior Vice President, Strategic Marketing, a role he held until June 2017. Prior to joining The Coca-Cola Company, Mr. Pollard was a global partner at Naked Communications, a connections planning company. His prior communications planning experience included work at BMP, DDP Needham, and Wieden+Kennedy advertising agencies.

Bethany Quam, age 47, is Group President, Europe & Australia. Ms. Quam joined General Mills in 1993 and held a variety of positions before becoming Vice President, Strategic Planning in 2007. She was promoted to Vice President, Field Sales, Channels in 2012, Vice President; President, Convenience Stores & Foodservice in May 2014 and Senior Vice President; President, Europe & Australia in August 2016. She was named to her current position in January 2017.

Jacqueline Williams-Roll, age 49, is Senior Vice President, Chief Human Resources Officer. Ms. Williams-Roll joined General Mills in 1995. She held human resources leadership roles in Supply Chain, Finance, Marketing and Organization Effectiveness, and she also worked a large part of her career on businesses outside of the United States. She was named Vice President, Human Resources, International in 2010, and then promoted to Senior Vice President, Human Resources Operations in September 2013. She was named to her present position in September 2014. Prior to joining General Mills, she held sales and management roles with Jenny Craig International.

WEBSITE ACCESS

Our website is www.GeneralMills.com. We make available, free of charge in the “Investors” portion of this website, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (1934 Act) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Reports of beneficial ownership filed pursuant to Section 16(a) of the 1934 Act are also available on our website.

ITEM 1A    Risk Factors

Our business is subject to various risks and uncertainties. Any of the risks described below could materially, adversely affect our business, financial condition, and results of operations.

The categories in which we participate are very competitive, and if we are not able to compete effectively, our results of operations could be adversely affected.

The consumer and pet food categories in which we participate are very competitive. Our principal competitors in these categories are manufacturers, as well as retailers with their own branded and private label products. Competitors market and sell their products through brick-and-mortar stores and e-commerce. All of our principal competitors have substantial financial, marketing, and other resources. In most product categories, we compete not only with other widely advertised branded products, but also with regional brands and with generic and private label products that are generally sold at lower prices. Competition in our product categories is based on product innovation, product quality, price, brand recognition and loyalty, effectiveness of marketing, promotional activity, convenient ordering and delivery to the consumer, and the ability to identify and satisfy consumer preferences. If our large competitors were to seek an advantage through pricing or promotional changes, we could choose to do the same, which could adversely affect our margins and profitability. If we did not do the

 

8


Table of Contents

same, our revenues and market share could be adversely affected. Our market share and revenue growth could also be adversely impacted if we are not successful in introducing innovative products in response to changing consumer demands or by new product introductions of our competitors. If we are unable to build and sustain brand equity by offering recognizably superior product quality, we may be unable to maintain premium pricing over generic and private label products.

We may be unable to maintain our profit margins in the face of a consolidating retail environment.

There has been significant consolidation in the grocery industry, resulting in customers with increased purchasing power. In addition, large retail customers may seek to use their position to improve their profitability through improved efficiency, lower pricing, increased reliance on their own brand name products, increased emphasis on generic and other economy brands, and increased promotional programs. If we are unable to use our scale, marketing expertise, product innovation, knowledge of consumers’ needs, and category leadership positions to respond to these demands, our profitability and volume growth could be negatively impacted. In addition, the loss of any large customer could adversely affect our sales and profits. In fiscal 2018, Walmart accounted for 21 percent of our consolidated net sales and 30 percent of net sales of our North America Retail segment. In its fiscal year ended December 31, 2017, PetSmart (including Chewy.com as of June 1, 2017) and Petco accounted for 41 percent and 18 percent, respectively, of Blue Buffalo’s net sales. National pet superstore chains have experienced reduced store traffic. If national pet superstore chains continue to experience reduced store traffic, or experience any operational difficulties, our Pet segment operating results may be adversely affected. For more information on significant customers, please see Note 7 to the Consolidated Financial Statements in Item 8 of this report.

Price changes for the commodities we depend on for raw materials, packaging, and energy may adversely affect our profitability.

The principal raw materials that we use are commodities that experience price volatility caused by external conditions such as weather, product scarcity, limited sources of supply, commodity market fluctuations, currency fluctuations, and changes in governmental agricultural and energy policies and regulations. Commodity price changes may result in unexpected increases in raw material, packaging, and energy costs. If we are unable to increase productivity to offset these increased costs or increase our prices, we may experience reduced margins and profitability. We do not fully hedge against changes in commodity prices, and the risk management procedures that we do use may not always work as we intend.

Volatility in the market value of derivatives we use to manage exposures to fluctuations in commodity prices will cause volatility in our gross margins and net earnings.

We utilize derivatives to manage price risk for some of our principal ingredient and energy costs, including grains (oats, wheat, and corn), oils (principally soybean), dairy products, natural gas, and diesel fuel. Changes in the values of these derivatives are recorded in earnings currently, resulting in volatility in both gross margin and net earnings. These gains and losses are reported in cost of sales in our Consolidated Statements of Earnings and in unallocated corporate items outside our segment operating results until we utilize the underlying input in our manufacturing process, at which time the gains and losses are reclassified to segment operating profit. We also record our grain inventories at net realizable value. We may experience volatile earnings as a result of these accounting treatments.

If we are not efficient in our production, our profitability could suffer as a result of the highly competitive environment in which we operate.

Our future success and earnings growth depend in part on our ability to be efficient in the production and manufacture of our products in highly competitive markets. Gaining additional efficiencies may become more difficult over time. Our failure to reduce costs through productivity gains or by eliminating redundant costs

 

9


Table of Contents

resulting from acquisitions or divestitures could adversely affect our profitability and weaken our competitive position. Many productivity initiatives involve complex reorganization of manufacturing facilities and production lines. Such manufacturing realignment may result in the interruption of production, which may negatively impact product volume and margins. We are currently pursuing several multi-year restructuring and cost savings initiatives designed to increase our efficiency and reduce expenses. If we are unable to execute those initiatives as planned, we may not realize all or any of the anticipated benefits, which could adversely affect our business and results of operations.

Disruption of our supply chain could adversely affect our business.

Our ability to make, move, and sell products is critical to our success. Damage or disruption to raw material supplies or our manufacturing or distribution capabilities due to weather, including any potential effects of climate change, natural disaster, fire, terrorism, cyber-attack, pandemic, strikes, import/export restrictions, or other factors could impair our ability to manufacture or sell our products. Many of our product lines are manufactured at a single location. Our suppliers’ policies and practices can damage our reputation and the quality and safety of our products. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, particularly when a product is sourced from a single supplier or location, could adversely affect our business and results of operations, as well as require additional resources to restore our supply chain.

Concerns with the safety and quality of food products could cause consumers to avoid certain food products or ingredients.

We could be adversely affected if consumers in our principal markets lose confidence in the safety and quality of certain food products or ingredients. Adverse publicity about these types of concerns, whether or not valid, may discourage consumers from buying our products or cause production and delivery disruptions.

If our products become adulterated, misbranded, or mislabeled, we might need to recall those items and may experience product liability claims if consumers or their pets are injured.

We may need to recall some of our products if they become adulterated, misbranded, or mislabeled. A widespread product recall could result in significant losses due to the costs of a recall, the destruction of product inventory, and lost sales due to the unavailability of product for a period of time. We could also suffer losses from a significant product liability judgment against us. A significant product recall or product liability case could also result in adverse publicity, damage to our reputation, and a loss of consumer confidence in our products, which could have an adverse effect on our business results and the value of our brands.

We may be unable to anticipate changes in consumer preferences and trends, which may result in decreased demand for our products.

Our success depends in part on our ability to anticipate the tastes, eating habits and purchasing behaviors of consumers and to offer products that appeal to their preferences in channels where they shop. Consumer preferences and category-level consumption may change from time to time and can be affected by a number of different trends and other factors. If we fail to anticipate, identify or react to these changes and trends, such as adapting to emerging e-commerce channels, or to introduce new and improved products on a timely basis, we may experience reduced demand for our products, which would in turn cause our revenues and profitability to suffer. Similarly, demand for our products could be affected by consumer concerns regarding the health effects of ingredients such as sodium, trans fats, genetically modified organisms, sugar, processed wheat, or other product ingredients or attributes.

 

10


Table of Contents

We may be unable to grow our market share or add products that are in faster growing and more profitable categories.

The food industry’s growth potential is constrained by population growth. Our success depends in part on our ability to grow our business faster than populations are growing in the markets that we serve. One way to achieve that growth is to enhance our portfolio by adding innovative new products in faster growing and more profitable categories. Our future results will also depend on our ability to increase market share in our existing product categories. If we do not succeed in developing innovative products for new and existing categories, our growth may slow, which could adversely affect our profitability.

Economic downturns could limit consumer demand for our products.

The willingness of consumers to purchase our products depends in part on local economic conditions. In periods of economic uncertainty, consumers may purchase more generic, private label, and other economy brands and may forego certain purchases altogether. In those circumstances, we could experience a reduction in sales of higher margin products or a shift in our product mix to lower margin offerings. In addition, as a result of economic conditions or competitive actions, we may be unable to raise our prices sufficiently to protect margins. Consumers may also reduce the amount of food that they consume away from home at customers that purchase products from our Convenience Stores & Foodservice segment. Any of these events could have an adverse effect on our results of operations.

Our results may be negatively impacted if consumers do not maintain their favorable perception of our brands.

Maintaining and continually enhancing the value of our many iconic brands is critical to the success of our business. The value of our brands is based in large part on the degree to which consumers react and respond positively to these brands. Brand value could diminish significantly due to a number of factors, including consumer perception that we have acted in an irresponsible manner, adverse publicity about our products, our failure to maintain the quality of our products, the failure of our products to deliver consistently positive consumer experiences, concerns about food safety, or our products becoming unavailable to consumers. Consumer demand for our products may also be impacted by changes in the level of advertising or promotional support. The use of social and digital media by consumers, us, and third parties increases the speed and extent that information or misinformation and opinions can be shared. Negative posts or comments about us, our brands, or our products on social or digital media could seriously damage our brands and reputation. If we do not maintain the favorable perception of our brands, our business results could be negatively impacted.

Our international operations are subject to political and economic risks.

In fiscal 2018, 29 percent of our consolidated net sales were generated outside of the United States. We are accordingly subject to a number of risks relating to doing business internationally, any of which could significantly harm our business. These risks include:

 

  political and economic instability;
  exchange controls and currency exchange rates;
  tariffs on products and ingredients that we import and export;
  nationalization of operations;
  compliance with anti-corruption regulations;
  foreign tax treaties and policies; and
  restriction on the transfer of funds to and from foreign countries, including potentially negative tax consequences.

Our financial performance on a U.S. dollar denominated basis is subject to fluctuations in currency exchange rates. These fluctuations could cause material variations in our results of operations. Our principal exposures are

 

11


Table of Contents

to the Australian dollar, Brazilian real, British pound sterling, Canadian dollar, Chinese renminbi, euro, Japanese yen, Mexican peso, and Swiss franc. From time to time, we enter into agreements that are intended to reduce the effects of our exposure to currency fluctuations, but these agreements may not be effective in significantly reducing our exposure.

New regulations or regulatory-based claims could adversely affect our business.

Our facilities and products are subject to many laws and regulations administered by the United States Department of Agriculture, the Federal Food and Drug Administration, the Occupational Safety and Health Administration, and other federal, state, local, and foreign governmental agencies relating to the production, packaging, labelling, storage, distribution, quality, and safety of food products and the health and safety of our employees. Our failure to comply with such laws and regulations could subject us to lawsuits, administrative penalties, and civil remedies, including fines, injunctions, and recalls of our products. We advertise our products and could be the target of claims relating to alleged false or deceptive advertising under federal, state, and foreign laws and regulations. We may also be subject to new laws or regulations restricting our right to advertise our products, including restrictions on the audience to whom products are marketed. Changes in laws or regulations that impose additional regulatory requirements on us could increase our cost of doing business or restrict our actions, causing our results of operations to be adversely affected.

We are subject to various federal, state, local, and foreign environmental laws and regulations. Our failure to comply with environmental laws and regulations could subject us to lawsuits, administrative penalties, and civil remedies. We are currently party to a variety of environmental remediation obligations. Due to regulatory complexities, uncertainties inherent in litigation, and the risk of unidentified contaminants on current and former properties of ours, the potential exists for remediation, liability, indemnification, and compliance costs to differ from our estimates. We cannot guarantee that our costs in relation to these matters, or compliance with environmental laws in general, will not exceed our established liabilities or otherwise have an adverse effect on our business and results of operations.

We have a substantial amount of indebtedness, which could limit financing and other options and in some cases adversely affect our ability to pay dividends.

As of May 27, 2018, we had total debt, redeemable interests, and noncontrolling interests of $16.9 billion. The agreements under which we have issued indebtedness do not prevent us from incurring additional unsecured indebtedness in the future. Our level of indebtedness may limit our:

 

  ability to obtain additional financing for working capital, capital expenditures, or general corporate purposes, particularly if the ratings assigned to our debt securities by rating organizations were revised downward; and
  flexibility to adjust to changing business and market conditions and may make us more vulnerable to a downturn in general economic conditions.

There are various financial covenants and other restrictions in our debt instruments and noncontrolling interests. If we fail to comply with any of these requirements, the related indebtedness (and other unrelated indebtedness) could become due and payable prior to its stated maturity and our ability to obtain additional or alternative financing may also be adversely affected.

Our ability to make scheduled payments on or to refinance our debt and other obligations will depend on our operating and financial performance, which in turn is subject to prevailing economic conditions and to financial, business, and other factors beyond our control.

 

12


Table of Contents

Global capital and credit market issues could negatively affect our liquidity, increase our costs of borrowing, and disrupt the operations of our suppliers and customers.

We depend on stable, liquid, and well-functioning capital and credit markets to fund our operations. Although we believe that our operating cash flows, financial assets, access to capital and credit markets, and revolving credit agreements will permit us to meet our financing needs for the foreseeable future, there can be no assurance that future volatility or disruption in the capital and credit markets will not impair our liquidity or increase our costs of borrowing. We also utilize interest rate derivatives to reduce the volatility of our financing costs. If we are not effective in hedging this volatility, we may experience an increase in our costs of borrowing. Our business could also be negatively impacted if our suppliers or customers experience disruptions resulting from tighter capital and credit markets or a slowdown in the general economy.

Volatility in the securities markets, interest rates, and other factors could substantially increase our defined benefit pension, other postretirement benefit, and postemployment benefit costs.

We sponsor a number of defined benefit plans for employees in the United States, Canada, and various foreign locations, including defined benefit pension, retiree health and welfare, severance, and other postemployment plans. Our major defined benefit pension plans are funded with trust assets invested in a globally diversified portfolio of securities and other investments. Changes in interest rates, mortality rates, health care costs, early retirement rates, investment returns, and the market value of plan assets can affect the funded status of our defined benefit plans and cause volatility in the net periodic benefit cost and future funding requirements of the plans. A significant increase in our obligations or future funding requirements could have a negative impact on our results of operations and cash flows from operations.

Our business operations could be disrupted if our information technology systems fail to perform adequately or are breached.

Information technology serves an important role in the efficient and effective operation of our business. We rely on information technology networks and systems, including the internet, to process, transmit, and store electronic information to manage a variety of business processes and to comply with regulatory, legal, and tax requirements. Our information technology systems and infrastructure are critical to effectively manage our key business processes including digital marketing, order entry and fulfillment, supply chain management, finance, administration, and other business processes. These technologies enable internal and external communication among our locations, employees, suppliers, customers, and others and include the receipt and storage of personal information about our employees, consumers, and proprietary business information. Our information technology systems, some of which are dependent on services provided by third parties, may be vulnerable to damage, interruption, or shutdown due to any number of causes such as catastrophic events, natural disasters, fires, power outages, systems failures, telecommunications failures, security breaches, computer viruses, hackers, employee error or malfeasance, and other causes. Increased cyber-security threats pose a potential risk to the security and viability of our information technology systems, as well as the confidentiality, integrity, and availability of the data stored on those systems. The failure of our information technology systems to perform as we anticipate could disrupt our business and result in transaction errors, processing inefficiencies, data loss, legal claims or proceedings, regulatory penalties, and the loss of sales and customers. Any interruption of our information technology systems could have operational, reputational, legal, and financial impacts that may have a material adverse effect on our business.

A change in the assumptions regarding the future performance of our businesses or a different weighted-average cost of capital used to value our reporting units or our indefinite-lived intangible assets could negatively affect our consolidated results of operations and net worth.

As of May 27, 2018, we had $20.9 billion of goodwill and indefinite-lived intangible assets. Goodwill for each of our reporting units is tested for impairment annually and whenever events or changes in circumstances indicate

 

13


Table of Contents

that impairment may have occurred. We compare the carrying value of the reporting unit, including goodwill, to the fair value of the reporting unit. If the fair value of the reporting unit is less than the carrying value of the reporting unit, including goodwill, impairment has occurred. Our estimates of fair value are determined based on a discounted cash flow model. Growth rates for sales and profits are determined using inputs from our long-range planning process. We also make estimates of discount rates, perpetuity growth assumptions, market comparables, and other factors. Our Latin America and U.S. Yogurt reporting units have experienced declining business performance and we continue to monitor these businesses. While we currently believe that our goodwill is not impaired, different assumptions regarding the future performance of our businesses could result in significant impairment losses.

We evaluate the useful lives of our intangible assets, primarily intangible assets associated with the Blue Buffalo, Pillsbury, Totino’s, Progresso, Yoplait, Old El Paso, Yoki, Häagen-Dazs, and Annie’s brands, to determine if they are finite or indefinite-lived. Reaching a determination on useful life requires significant judgments and assumptions regarding the future effects of obsolescence, demand, competition, other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels), the level of required maintenance expenditures, and the expected lives of other related groups of assets.

Our indefinite-lived intangible assets are also tested for impairment annually and whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Our estimate of the fair value of the brands is based on a discounted cash flow model using inputs including projected revenues from our long-range plan, assumed royalty rates which could be payable if we did not own the brands, and a discount rate. Our Yoki, Mountain High, Progresso, Food Should Taste Good, and Green Giant brands have experienced declining business performance, and we will continue to monitor these businesses. For further information on goodwill and intangible assets, please refer to Note 6 to the Consolidated Financial Statements in Item 8 of this report.

We may fail to realize all of the anticipated benefits of the Blue Buffalo acquisition or those benefits may take longer to realize than expected.

Our ability to realize the anticipated benefits of the Blue Buffalo acquisition will depend, to a large extent, on our ability to integrate Blue Buffalo, which is a complex, costly and time-consuming process. We have never operated in the pet food sector and our lack of experience in this sector may hinder our ability to manage Blue Buffalo successfully following the acquisition.

The integration process may disrupt our business and, if implemented ineffectively, could restrict the realization of the full expected benefits. The failure to meet the challenges involved in the integration process and to realize the anticipated benefits of the Blue Buffalo acquisition could cause an interruption of, or a loss of momentum in, our operations and could adversely affect our business, financial condition and results of operations.

In addition, the integration of Blue Buffalo may result in material unanticipated problems, expenses, liabilities, competitive responses, and loss of customers and other business relationships. Additional integration challenges include:

 

    diversion of management’s attention to integration matters;
    difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects from the acquisition;
    difficulties in the integration of operations and systems;
    difficulties in conforming standards, controls, procedures and accounting and other policies, business cultures and compensation structures;
    difficulties in the assimilation of employees;
    challenges in keeping existing customers, including Blue Buffalo’s largest customer that accounted for 41% of its fiscal year ended December 31, 2017 net sales and obtaining new customers;

 

14


Table of Contents
    difficulties in building and operating new and existing manufacturing facilities;
    challenges in attracting and retaining key personnel;
    the impact of potential liabilities we may be inheriting from Blue Buffalo; and
    coordinating a geographically dispersed organization.

Many of these factors will be outside of our control and any one of them could result in increased costs, decreases in the amount of expected revenues, and diversion of management’s time and energy, which could adversely affect our business, financial condition, and results of operations and result in us becoming subject to litigation. In addition, even if Blue Buffalo is integrated successfully, the full anticipated benefits of the acquisition may not be realized, including the synergies, cost savings or sales or growth opportunities that are anticipated. These benefits may not be achieved within the anticipated time frame, or at all. Further, additional unanticipated costs may be incurred in the integration process. All of these factors could cause reductions in our earnings per share and decrease or delay the expected accretive effect of the acquisition. As a result, it cannot be assured that the Blue Buffalo acquisition will result in the realization of the full or any anticipated benefits.

Blue Buffalo may underperform relative to our expectations.

The business and financial performance of Blue Buffalo are subject to certain risks and uncertainties. We may not be able to maintain the growth rate, levels of revenue, earnings, or operating efficiency that we and Blue Buffalo have achieved or might achieve separately. Our failure to do so could have a material adverse effect on our financial condition and results of operations.

Our failure to successfully integrate other acquisitions into our existing operations could adversely affect our financial results.

From time to time, we evaluate potential acquisitions or joint ventures that would further our strategic objectives. Our success depends, in part, upon our ability to integrate acquired and existing operations. If we are unable to successfully integrate acquisitions, our financial results could suffer. Additional potential risks associated with acquisitions include additional debt leverage, the loss of key employees and customers of the acquired business, the assumption of unknown liabilities, the inherent risk associated with entering a geographic area or line of business in which we have no or limited prior experience, failure to achieve anticipated synergies, and the impairment of goodwill or other acquisition-related intangible assets.

 

ITEM 1B    Unresolved Staff Comments

None.

 

ITEM 2    Properties

We own our principal executive offices and main research facilities, which are located in the Minneapolis, Minnesota metropolitan area. We operate numerous manufacturing facilities and maintain many sales and administrative offices, warehouses, and distribution centers around the world.

 

15


Table of Contents

As of May 27, 2018, we operated 52 facilities for the production of a wide variety of food products. Of these facilities, 27 are located in the United States (1 of which is leased), 4 in the Greater China region, 2 in the Asia/Middle East/Africa Region (1 of which is leased), 3 in Canada (2 of which are leased), 9 in Europe/Australia, and 7 in Latin America and Mexico. The following is a list of the locations of our principal production facilities, which primarily support the segment noted:

North America Retail

 

  Carson, California
  St. Hyacinthe, Canada
  Covington, Georgia
  Belvidere, Illinois
  Geneva, Illinois
  Cedar Rapids, Iowa
  Irapuato, Mexico
  Reed City, Michigan
  Fridley, Minnesota
  Hannibal, Missouri
  Albuquerque, New Mexico
  Buffalo, New York
  Cincinnati, Ohio
  Wellston, Ohio
  Murfreesboro, Tennessee
  Milwaukee, Wisconsin

 

 

 

Convenience Stores & Foodservice

 

  Chanhassen, Minnesota
  Joplin, Missouri
 

 

Europe & Australia

 

  Mt. Waverly, Australia
  Rooty Hill, Australia
  Arras, France
  Labatut, France
  Le Mans, France
  Moneteau, France
  Vienne, France
  Inofita, Greece
  San Adrian, Spain
 

 

Asia & Latin America

 

  Cambara, Brazil
  Campo Nova do Pareceis, Brazil
  Nova Prata, Brazil
  Paranavai, Brazil
  Pouso Alegre, Brazil
  Recife, Brazil
  Ribeirao Claro, Brazil
  Sanhe, China
  Shanghai, China
  Guangzhou, China
  Kunshan, China
  Nashik, India
  Anseong-si, Korea

 

 

 

Pet

 

  Joplin, Missouri

We operate numerous grain elevators in the United States in support of our domestic manufacturing activities. We also utilize approximately 13 million square feet of warehouse and distribution space, nearly all of which is leased, that primarily supports our North America Retail segment. We own and lease a number of dedicated sales and administrative offices around the world, totaling approximately 3 million square feet. We have additional warehouse, distribution, and office space in our plant locations.

As part of our Häagen-Dazs business in our Europe & Australia and Asia & Latin America segments, we operate 507 (all leased) and franchise 372 branded ice cream parlors in various countries around the world, all outside of the United States and Canada.

 

16


Table of Contents

ITEM 3    Legal Proceedings

We are the subject of various pending or threatened legal actions in the ordinary course of our business. All such matters are subject to many uncertainties and outcomes that are not predictable with assurance. In our opinion, there were no claims or litigation pending as of May 27, 2018, that were reasonably likely to have a material adverse effect on our consolidated financial position or results of operations. See the information contained under the section entitled “Environmental Matters” in Item 1 of this report for a discussion of environmental matters in which we are involved.

ITEM 4    Mine Safety Disclosures

None.

PART II

 

ITEM 5    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed on the New York Stock Exchange under the symbol “GIS.” On June 7, 2018, there were approximately 30,000 record holders of our common stock. Information regarding the market prices for our common stock and dividend payments for the two most recent fiscal years is set forth in Note 18 to the Consolidated Financial Statements in Item 8 of this report.

The following table sets forth information with respect to shares of our common stock that we purchased during the fiscal quarter ended May 27, 2018:

 

Period  

Total Number

of Shares
Purchased (a)

    Average
Price Paid
Per Share
   

Total Number of

Shares Purchased as
Part of a Publicly
Announced Program (b)

    Maximum Number of
Shares that may yet be
Purchased Under the
Program (b)
 

February 26, 2018-

 

                       

April 1, 2018

    250     $          50.57       250       39,525,004  

April 2, 2018-

                               

April 29, 2018

    9,437       45.06       9,437       39,515,567  

April 30, 2018-

                               

May 27, 2018

    -       -       -       39,515,567  

Total

    9,687     $ 45.20       9,687       39,515,567  
(a) The total number of shares purchased includes shares of common stock withheld for the payment of withholding taxes upon the distribution of deferred option units.
(b) On May 6, 2014, our Board of Directors approved an authorization for the repurchase of up to 100,000,000 shares of our common stock. Purchases can be made in the open market or in privately negotiated transactions, including the use of call options and other derivative instruments, Rule 10b5-1 trading plans, and accelerated repurchase programs. The Board did not specify an expiration date for the authorization.

 

17


Table of Contents

ITEM 6    Selected Financial Data

The following table sets forth selected financial data for each of the fiscal years in the five-year period ended May 27, 2018:

 

In Millions, Except Per Share Data,
Percentages and Ratios
  Fiscal Year  
  2018     2017     2016     2015 (a)     2014  

Operating data:

                                       

Net sales

   $     15,740.4      $     15,619.8      $     16,563.1      $     17,630.3      $     17,909.6  

Gross margin (b)

    5,427.5       5,563.8       5,829.5       5,949.2       6,369.8  

Selling, general, and administrative expenses

    2,752.6       2,801.3       3,118.9       3,328.0       3,474.3  

Operating profit

    2,509.3       2,566.4       2,707.4       2,077.3       2,957.4  

Total segment operating profit (c)

    2,791.7       2,952.6       2,999.5       3,035.0       3,153.9  

Net earnings attributable to General Mills

    2,131.0       1,657.5       1,697.4       1,221.3       1,824.4  

Advertising and media expense

    575.9       623.8       754.4       823.1       869.5  

Research and development expense

    219.1       218.2       222.1       229.4       243.6  

Average shares outstanding:

         

Diluted

    585.7       598.0       611.9       618.8       645.7  

Earnings per share:

         

Diluted

   $ 3.64      $ 2.77      $ 2.77      $ 1.97      $ 2.83  

Diluted, excluding certain items affecting comparability (c)

   $ 3.11      $ 3.08      $ 2.92      $ 2.86      $ 2.82  

Operating ratios:

         

Gross margin as a percentage of net sales

    34.5%       35.6%       35.2%       33.7%       35.6%  

Selling, general, and administrative expenses as a percentage of net sales

    17.5%       17.9%       18.8%       18.9%       19.4%  

Operating profit as a percentage of net sales

    15.9%       16.4%       16.3%       11.8%       16.5%  

Adjusted operating profit as a percentage of net sales (b) (c)

    17.2%       18.1%       16.8%       15.9%       16.2%  

Total segment operating profit as a percentage of net sales (c)

    17.7%       18.9%       18.1%       17.2%       17.6%  

Effective income tax rate

    2.7%       28.8%       31.4%       33.3%       33.3%  

Return on average total capital (b)

    12.7%       12.7%       12.9%       9.1%       12.5%  

Adjusted return on average total capital (b) (c)

    9.7%       11.6%       11.3%       11.2%       11.6%  

Balance sheet data:

         

Land, buildings, and equipment

   $ 4,047.2      $ 3,687.7      $ 3,743.6      $ 3,783.3      $ 3,941.9  

Total assets

    30,624.0       21,812.6       21,712.3       21,832.0       23,044.7  

Long-term debt, excluding current portion

    12,668.7       7,642.9       7,057.7       7,575.3       6,396.6  

Total debt (b)

    15,818.6       9,481.7       8,430.9       9,191.5       8,758.9  

Cash flow data:

         

Net cash provided by operating activities (d)

   $ 2,841.0      $ 2,415.2      $ 2,764.2      $ 2,648.5      $ 2,622.4  

Capital expenditures

    622.7       684.4       729.3       712.4       663.5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow (b) (c)

    2,218.3       1,730.8       2,034.9       1,936.1       1,958.9  

Fixed charge coverage ratio (b)

    5.89       7.26       7.40       5.54       8.04  

Operating cash flow to debt ratio (b)

    18.0%       25.5%       32.8%       28.8%       29.9%  

Share data:

         

Low stock price

   $ 41.21      $ 55.91      $ 54.12      $ 48.86      $ 46.86  

High stock price

    60.20       72.64       65.36       57.14       54.40  

Closing stock price

    42.64       57.32       62.87       56.15       53.81  

Cash dividends per common share

    1.96       1.92       1.78       1.67       1.55  
(a) Fiscal 2015 was a 53-week year; all other fiscal years were 52 weeks.
(b) See “Glossary” in Item 8 of this report for definition.
(c) See “Non-GAAP Measures” in Item 7 of this report for our discussion of this measure not defined by generally accepted accounting principles.
(d) In fiscal 2018, we adopted new requirements for the accounting and presentation of stock-based payments. This resulted in the reclassification of realized windfall tax benefits and employee tax withholdings in our Consolidated Statements of Cash Flows. Please see Note 2 to the Consolidated Financial Statements in Item 8 of this report.

 

18


Table of Contents

ITEM 7    Management’s Discussion and Analysis of Financial Condition and Results of Operations

EXECUTIVE OVERVIEW

We are a global packaged foods company. We develop distinctive value-added food products and market them under unique brand names. We work continuously to improve our core products and to create new products that meet consumers’ evolving needs and preferences. In addition, we build the equity of our brands over time with strong consumer-directed marketing, innovative new products, and effective merchandising. We believe our brand-building strategy is the key to winning and sustaining leading share positions in markets around the globe.

Our fundamental financial goal is to generate superior returns for our shareholders over the long term. We believe that increases in net sales, segment operating profit, earnings per share (EPS), free cash flow, cash return to shareholders, and return on average total capital are key drivers of financial performance for our business.

Our long-term growth objectives are to consistently deliver:

 

  low single-digit annual growth in organic net sales;
  mid single-digit annual growth in total segment operating profit;
  high single-digit annual growth in diluted EPS excluding certain items affecting comparability;
  improvement in adjusted return on average total capital;
  free cash flow conversion averaging above 95 percent of adjusted net earnings after tax; and
  cash return to shareholders averaging above 90 percent of free cash flow, including an attractive dividend yield.

We believe that this financial performance should result in long-term value creation for shareholders.

Fiscal 2018 represented an important step in returning our business to sustainable topline growth. We made significant progress toward competing more effectively, with strong innovation, marketing, and in-store execution driving positive organic sales growth in each of our last three fiscal quarters. We also moved to reshape our portfolio for future growth with the acquisition of Blue Buffalo, a fast-growing, highly profitable pet food business. While our full-year profit results fell short of our initial plans, we finished fiscal 2018, delivering growth in net sales, total segment operating profit, adjusted operating profit margin, and adjusted diluted EPS in the fourth quarter. We maintained a disciplined focus on cash generation, resulting in significant growth in free cash flow this year. We generated substantial Holistic Margin Management (HMM) savings, and we reached our expected annualized savings goal of $700 million in fiscal 2018, compared to the fiscal 2015 base, from recent restructuring actions. However, these results were not enough to offset heightened input cost inflation, increases in other costs impacting cost of sales, and higher merchandising expense. Importantly, we made investments to accelerate our differential growth platforms and expanded our capabilities in e-commerce and Strategic Revenue Management (SRM), which are critical to future growth.

Net sales growth rates for our North American Retail operating segment improved significantly compared to fiscal 2017 as good consumer marketing support, strong innovation, and improved in-store execution helped restore momentum. Our Convenience Stores & Foodservice operating segment’s net sales increased on innovation behind Focus 6 platforms and market-index pricing on flour. Our Europe & Australia segment’s net sales increased on favorable foreign currency exchange and successful innovation and distribution expansion for ice cream and snack bars. In our Asia & Latin America segment, improved in-market execution in Asia was overshadowed by a difficult general ledger implementation and a comparison to fiscal 2017 that included an extra month of results reported for Brazil. All of our segments’ operating profit results were impacted by higher than expected input cost inflation that was not fully offset by our HMM initiatives.

Our consolidated net sales for fiscal 2018 rose 1 percent to $15.7 billion. On an organic basis, net sales essentially matched year-ago levels. Operating profit of $2.5 billion decreased 2 percent. Total segment operating

 

19


Table of Contents

profit of $2.8 billion declined 5 percent and declined 6 percent on a constant-currency basis. Diluted EPS of $3.64 was up 31 percent compared to fiscal 2017. Adjusted diluted EPS, which excludes certain items affecting comparability of results, was up 1 percent to $3.11 per share and was flat on a constant-currency basis. Our return on average total capital was 12.7 percent, and adjusted return on average total capital decreased 190 basis points to 9.7 percent and decreased 200 basis points on a constant-currency basis (See the “Non-GAAP Measures” section below for a description of our use of measures not defined by generally accepted accounting principles (GAAP)).

Net cash provided by operations totaled $2.8 billion in fiscal 2018 representing a conversion rate of 131 percent of net earnings, including earnings attributable to redeemable and noncontrolling interests. This cash generation supported capital investments totaling $623 million, and our resulting free cash flow was $2.2 billion at a conversion rate of 120 percent of adjusted net earnings, including earnings attributable to redeemable and noncontrolling interests. We also returned significant cash to shareholders through dividends totaling $1.1 billion and share repurchases totaling $602 million.

A detailed review of our fiscal 2018 performance appears below in the section titled “Fiscal 2018 Consolidated Results of Operations.”

As we turn to fiscal 2019, we remain focused on our Consumer First strategy and our global growth priorities to further improve our topline momentum. We plan to compete effectively across all our brands and geographies, increase investments to accelerate our differential growth platforms, and maximize the growth opportunities for Blue Buffalo as we integrate the business into the General Mills portfolio. We also plan to maintain our efficiency in this more inflationary cost environment, and we have initiatives underway to help protect our profitability. We expect the operating environment in fiscal 2019 to continue to be dynamic, requiring us to increase our agility while remaining focused on delivering on consumers’ expectations. Our fiscal 2019 targets reflect the investments we are making to enhance our capabilities and accelerate our growth, as well as the impact of adding Blue Buffalo to our portfolio. We believe that these initiatives will drive strong returns over the long term and further advance us toward our goal of consistently delivering profitable growth and top-tier returns for our shareholders.

Our key full-year fiscal 2019 targets include:

 

  Organic net sales are expected to be in a range between flat and up 1 percent. Including the impact of the Blue Buffalo acquisition, net sales are expected to increase 9 to 10 percent.
  Constant-currency adjusted operating profit is expected to increase 6 to 9 percent from the base of $2.7 billion reported in fiscal 2018.
  Constant-currency adjusted diluted EPS are expected to range between flat and down 3 percent from the base of $3.11 earned in fiscal 2018. This estimate includes a 4-cent headwind related to the Blue Buffalo acquisition, driven by the impact of purchase accounting.

We continue to pursue our Consumer First strategy and execute against our three key growth priorities: 1) competing effectively on all brands and across all geographies through strong innovation, effective consumer marketing, and excellent in-store execution; 2) accelerating growth on our four differential growth platforms including Häagen-Dazs ice cream, snack bars, Old El Paso Mexican food, and our portfolio of natural and organic food brands; and 3) reshaping our portfolio through growth-enhancing transactions, including the recent acquisition of Blue Buffalo. We also intend to pursue divestitures of growth-dilutive businesses to further reshape our portfolio. By focusing on these priorities, we expect to generate consistent topline growth, which, when balanced with a disciplined focus on margin expansion, cash conversion, and cash returns, should create significant value for our shareholders.

See the “Non-GAAP Measures” section below for a description of our use of measures not defined by GAAP.

Certain terms used throughout this report are defined in a glossary in Item 8 of this report.

 

20


Table of Contents

FISCAL 2018 CONSOLIDATED RESULTS OF OPERATIONS

On April 24, 2018, we acquired Blue Buffalo, which became our Pet operating segment. We are reporting the Pet operating segment results on a one-month lag and accordingly, in fiscal 2018, our results do not include Pet segment operating results.

In fiscal 2018, net sales increased 1 percent compared to last year. Operating profit margin of 15.9 percent was down 50 basis points from year-ago levels primarily driven by lower segment operating profit results partially offset by a decrease in restructuring, impairment, and other exit costs and favorable mark-to-market valuation of certain commodity positions. Adjusted operating profit margin decreased 90 basis points to 17.2 percent, primarily driven by higher input costs including currency-driven inflation on imported products in certain markets partially offset by lower selling, general and administrative expenses. Diluted earnings per share of $3.64 increased 31 percent compared to fiscal 2017, and adjusted diluted EPS, which excludes certain items affecting comparability, essentially matched year-ago levels on a constant-currency basis (see the “Non-GAAP Measures” section below for a description of our use of measures not defined by GAAP).

A summary of our consolidated financial results for fiscal 2018 follows:

 

Fiscal 2018   In millions, except
per share
    Fiscal 2018 vs.
Fiscal 2017
    Percent of Net
Sales
   

Constant-

Currency
Growth (a)

 

Net sales

  $         15,740.4       1  %      

Operating profit

    2,509.3       (2)  %       15.9 %    

Net earnings attributable to General Mills

    2,131.0       29  %      

Diluted EPS

  $ 3.64       31  %      

Organic net sales growth rate (a)

      Flat            

Total segment operating profit (a)

    2,791.7       (5)  %         (6) %  

Adjusted operating profit margin (a)

        17.2 %    

Diluted EPS, excluding certain items affecting comparability (a)

  $ 3.11       1  %               Flat       
                                 
(a) See the “Non-GAAP Measures” section below for our use of measures not defined by GAAP.

Consolidated net sales were as follows:

 

     Fiscal 2018      Fiscal 2018 vs.
Fiscal 2017
     Fiscal 2017  

Net sales (in millions)

   $   15,740.4        1 %      $   15,619.8  
     

 

 

    

Contributions from volume growth (a)

        (1)pt     

Net price realization and mix

        1 pt     

Foreign currency exchange

        1 pt     

 

 
(a) Measured in tons based on the stated weight of our product shipments.

The 1 percent increase in net sales in fiscal 2018 was primarily driven by favorable net price realization and mix and favorable foreign currency exchange, partially offset by lower contributions from volume growth. The Convenience Stores & Foodservice and Europe & Australia segments contributed to the increase in net sales in fiscal 2018 compared to the same period last year, while the North America Retail and Asia & Latin America segments decreased.

Organic net sales in fiscal 2018 were flat compared to fiscal 2017, with contributions from organic volume growth in the Convenience Stores & Foodservice segment offset by organic volume declines in the Europe & Australia and Asia & Latin America segments.

 

21


Table of Contents

Components of organic net sales growth are shown in the following table:

 

Fiscal 2018 vs. Fiscal 2017       

Contributions from organic volume growth (a)

    (1)pt  

Organic net price realization and mix

    1 pt  
 

 

 

 

Organic net sales growth

    Flat     

Foreign currency exchange

    1 pt  

Acquisitions and divestitures

    Flat     

 

 

Net sales growth

    1 pt  

 

 
(a) Measured in tons based on the stated weight of our product shipments.

Cost of sales increased $257 million in fiscal 2018 to $10,313 million. The increase included a $452 million increase attributable to product rate and mix and a $116 million decrease attributable to lower volume. We recorded a $32 million net decrease in cost of sales related to mark-to-market valuation of certain commodity positions and grain inventories as described in Note 7 to the Consolidated Financial Statements in Item 8 of this report, compared to a net decrease of $14 million in fiscal 2017. In fiscal 2018, we recorded $14 million of restructuring charges in cost of sales compared to $42 million in fiscal 2017. We also recorded $11 million of restructuring initiative project-related costs in cost of sales in fiscal 2018 compared to $44 million in fiscal 2017 (please see Note 4 to the Consolidated Financial Statements in Item 8 of this report).

Gross margin declined 2 percent in fiscal 2018 versus fiscal 2017. Gross margin as a percent of net sales of 34 percent decreased 110 basis points compared to fiscal 2017.

Selling, general and administrative (SG&A) expenses decreased $49 million to $2,753 million in fiscal 2018 compared to fiscal 2017. The decrease in SG&A expenses primarily reflects savings from cost management initiatives and an 8 percentage point decrease in media and advertising expense. In addition, we recorded $34 million of transaction and integration costs related to our acquisition of Blue Buffalo. SG&A expenses as a percent of net sales in fiscal 2018 decreased 40 basis points compared to fiscal 2017.

Restructuring, impairment, and other exit costs totaled $166 million in fiscal 2018 compared to $183 million in fiscal 2017.

During the fourth quarter of fiscal 2018, we executed our fiscal 2019 planning process and preliminary long-range planning process, which resulted in lower future sales and profitability projections in our plans for our businesses supporting the Yoki, Mountain High, and Immaculate Baking brand intangible assets. As a result, we recorded a $97 million impairment charge in the fourth quarter of fiscal 2018.

In fiscal 2018, we approved global cost savings initiatives designed to reduce administrative costs and align resources behind high growth initiatives. We recorded $49 million of restructuring charges relating to this action in fiscal 2018.

 

22


Table of Contents

Other charges associated with our restructuring initiatives recognized in fiscal 2018, 2017 and 2016 consisted of the following:

 

    As Reported     Estimated        
In Millions   Fiscal 2018     Fiscal 2017     Fiscal 2016     Prior to
Fiscal 2016
    Future     Total        
    Charge     Cash     Charge     Cash     Charge     Cash     Charge     Cash     Charge     Cash     Charge     Cash    

Savings

(b)

 

Global reorganization

  $ (2.2   $ 40.3     $ 72.1     $ 20.0     $ -     $ -     $ -     $ -     $ -     $ 8     $ 70     $ 68    

Closure of Melbourne, Australia plant

    15.7       9.2       21.9       1.6       -       -       -       -       2       (4     40       7    

Restructuring of certain international product lines

    (0.1     0.3       45.1       10.3       -       -       -       -       1       (6     46       5    

Closure of Vineland, New Jersey plant

    12.8       2.7       41.4       7.3       -       -       -       -       -       1       54       11    

Project Compass

    0.4       3.4       (0.4     12.8       54.7       36.1       -       -       -       1       55       53    

Project Century

    7.8       (5.2     44.0       49.4       182.6       34.1       181.8       12.0       -       1       416       91    

Project Catalyst

    -       1.4       -       1.3       (7.5     47.8       148.4       45.0       -       -       141       96    

Combination of certain operational facilities

    (1.0     (0.8     -       5.1       -       4.5       13.9       6.5       -       1       13       16    

Other

    -       -       -       -       -       0.1       (0.6     0.1       -       -       (1     -    

 

   

Total restructuring charges (a)

    33.4       51.3       224.1       107.8       229.8       122.6       343.5       63.6       3       2       834       347    

Project-related costs classified in cost of sales

    11.3       10.9       43.9       46.9       57.5       54.5       13.2       9.7       4       8       130       130    
     

Restructuring charges and project-related costs

  $ 44.7     $ 62.2     $ 268.0     $ 154.7     $ 287.3     $ 177.1     $ 356.7     $ 73.3     $ 7     $ 10     $ 964     $ 477    
     

Cumulative annual savings

                          $ 700  
   
(a) Includes restructuring charges recorded in cost of sales of $14.0 million in fiscal 2018, $41.5 million in fiscal 2017, and $78.4 million in fiscal 2016.
(b) Cumulative annual savings, versus fiscal 2015 base, in fiscal 2018. Includes savings from SG&A cost reduction projects. Does not include savings from global cost savings initiatives approved in the fourth quarter of fiscal 2018.

Please refer to Note 4 to the Consolidated Financial Statements in Item 8 of this report for more information regarding our restructuring activities.

Interest, net for fiscal 2018 totaled $374 million, $79 million higher than fiscal 2017, primarily driven by $36 million of charges related to the bridge term loan credit facility that provided backup financing for the Blue Buffalo acquisition, higher average debt balances, and $14 million of charges related to the repurchase of medium term notes, partially offset by changes in the mix of debt.

Our consolidated effective tax rate for fiscal 2018 was 2.7 percent compared to 28.8 percent in fiscal 2017. The 26.1 percentage point decrease was primarily due to the provisional net benefit of $524 million recorded in fiscal 2018 related to the Tax Cuts and Jobs Act (TCJA). Our effective tax rate excluding certain items affecting comparability was 25.7 percent in fiscal 2018 compared to 29.2 percent in fiscal 2017 (see the “Non-GAAP Measures” section below for a description of our use of measures not defined by GAAP). The 3.5 percentage point decrease in the effective tax rate excluding certain items affecting comparability was primarily due to the lower U.S. federal blended statutory rate for fiscal 2018 as a result of the TCJA, partially offset by certain discrete events recorded during fiscal 2017.

On December 22, 2017, the TCJA was signed into law. The TCJA significantly revised the U.S. corporate income tax system, including a reduction in the U.S. corporate income tax rate, implementation of a territorial system, and a one-time deemed repatriation tax on untaxed foreign earnings. The TCJA also resulted in a U.S. federal blended statutory rate of 29.4 percent for us in fiscal 2018. Generally, the impacts of the new legislation would be required to be recorded in the period of enactment, which for us was the third quarter of fiscal 2018. However, Accounting Standards Update 2018-05: Income Taxes (Topic 740) (ASU 2018-05) was issued with guidance allowing for the recognition of provisional amounts in the event that the accounting is not complete and

 

23


Table of Contents

a reasonable estimate can be made. The guidance allows for a measurement period of up to one year from the enactment date to finalize the accounting related to the TCJA. Please see Note 14 to the Consolidated Financial Statements in Item 8 of this report for additional information.

After-tax earnings from joint ventures of $85 million in fiscal 2018 was flat compared to fiscal 2017, as favorable foreign currency exchange for CPW was offset by unfavorable foreign currency exchange and lower net sales for HDJ and our $2 million after-tax share of a restructuring charge at CPW. On a constant-currency basis, after-tax earnings from joint ventures decreased 3 percent, including the CPW restructuring charge (see the “Non-GAAP Measures” section below for a description of our use of measures not defined by GAAP). The components of our joint ventures’ net sales growth are shown in the following table:

 

Fiscal 2018 vs. Fiscal 2017    CPW            HDJ  

Contributions from volume growth (a)

     Flat              2   pts  

Net price realization and mix

     Flat              (1)   pt  

Foreign currency exchange

     5  pts          (2) pts  
   

Net sales growth

     5  pts          (1)   pt  
   
(a) Measured in tons based on the stated weight of our product shipments.

The change in net sales for each joint venture on a constant-currency basis is set forth in the following table:

 

     Fiscal 2018 vs. Fiscal 2017  
      Percentage Change in Joint
Venture Net Sales as
Reported
     Impact of Foreign
Currency Exchange
     Percentage Change in Joint
Venture Net Sales on
Constant-Currency Basis
 

CPW

     5 %        5 pts        Flat      

HDJ

     (1)%        (2)pts        1 %  
   

Joint Ventures

     4 %        4 pts        Flat      
   

Average diluted shares outstanding decreased by 12 million in fiscal 2018 from fiscal 2017 due to share repurchases, partially offset by the issuance of 22.7 million shares of stock to finance a portion of the Blue Buffalo acquisition and option exercises.

FISCAL 2017 CONSOLIDATED RESULTS OF OPERATIONS

Fiscal 2017 includes an additional month of results from General Mills Brasil Alimentos Ltda (Yoki) (please refer to Note 1 to the Consolidated Financial Statements in Item 8 of this report).

In fiscal 2017, operating results reflected challenging net sales performance. However, we continued to make progress against our cost savings and margin expansion initiatives. The net sales decline of 6 percent was driven by declining contributions from volume in the North America Retail and Europe & Australia segments including the impact of the divestiture of the North American Green Giant product lines in fiscal 2016, which were partially offset by favorable net price realization and mix. Operating profit margin of 16.4 percent was up 10 basis points from fiscal 2016 levels primarily driven by benefits from cost savings and spending optimization initiatives and favorable net price realization, partially offset by the gain from the Green Giant divestiture. Adjusted operating profit margin increased 130 basis points to 18.1 percent, driven by benefits from cost savings and spending optimization initiatives and favorable net price realization. Diluted EPS of $2.77 was flat to fiscal 2016 and adjusted diluted EPS, which excludes certain items affecting comparability, on a constant-currency basis increased 6 percent compared to fiscal 2016 (see the “Non-GAAP Measures” section below for a description of our use of measures not defined by GAAP).

 

24


Table of Contents

A summary of our consolidated financial results for fiscal 2017 follows:

 

Fiscal 2017    In millions, except
per share
     Fiscal 2017 vs.
Fiscal 2016
     Percent of Net
Sales
     Constant-
Currency
Growth (a)
 

Net sales

   $         15,619.8        (6) %        

Operating profit

     2,566.4        (5) %        16.4    %     

Net earnings attributable to General Mills

     1,657.5        (2) %        

Diluted earnings per share

   $ 2.77        Flat            

Organic net sales growth rate (a)

        (4) %        

Total segment operating profit (a)

     2,952.6        (2) %           (1) %  

Adjusted operating profit margin (a)

           18.1    %     

Diluted earnings per share, excluding certain items affecting comparability (a)

   $ 3.08        5 %                 6  %  
   
(a) See the “Non-GAAP Measures” section below for our use of measures not defined by GAAP.

Consolidated net sales were as follows:

 

      Fiscal 2017      Fiscal 2017 vs.
    Fiscal 2016        
             Fiscal 2016  

Net sales (in millions)

   $ 15,619.8        (6)%          $     16,563.1  
     

 

 

    

Contributions from volume growth (a)

        (8)pts        

Net price realization and mix

        3 pts        

Foreign currency exchange

        (1)pt        

 

 
(a) Measured in tons based on the stated weight of our product shipments.

The 6 percent decline in net sales primarily reflected lower organic net sales, unfavorable foreign currency exchange, and the Green Giant divestiture in fiscal 2016 (please refer to Note 3 to the Consolidated Financial Statements in Item 8 of this report).

Organic net sales declined 4 percent driven by volume declines in the North America Retail and Europe & Australia segments which were partially offset by positive net price realization and mix.

Components of organic net sales growth are shown in the following table:

 

Fiscal 2017 vs. Fiscal 2016        

Contributions from organic volume growth (a)

             (7)pts  

Organic net price realization and mix

     3 pts  
  

 

 

 

Organic net sales growth

     (4)pts  

Foreign currency exchange

     (1)pt  

Acquisitions and divestitures (b)

     (1)pt  

 

 

Net sales growth

     (6)pts  

 

 
(a) Measured in tons based on the stated weight of our product shipments.

(b) Primarily the Green Giant divestiture in fiscal 2016.

Cost of sales decreased $678 million in fiscal 2017 to $10,056 million. The decrease included an $814 million decrease attributable to lower volume and a $137 million increase attributable to product rate and mix. We

 

25


Table of Contents

recorded a $14 million net decrease in cost of sales related to mark-to-market valuation of certain commodity positions and grain inventories as described in Note 7 to the Consolidated Financial Statements in Item 8 of this report, compared to a net decrease of $63 million in fiscal 2016. In fiscal 2017, we recorded $42 million of restructuring charges in cost of sales compared to $78 million in fiscal 2016. We also recorded $44 million of restructuring initiative project-related costs in cost of sales in fiscal 2017 compared to $58 million in fiscal 2016 (please see Note 4 to the Consolidated Financial Statements in Item 8 of this report).

Gross margin declined 5 percent in fiscal 2017 versus fiscal 2016. Gross margin as a percent of net sales of 36 percent increased 40 basis points compared to fiscal 2016.

SG&A expenses decreased $318 million to $2,801 million in fiscal 2017 versus fiscal 2016 primarily due to a 17 percentage point decrease in media and advertising expense and cost savings initiatives. SG&A expenses as a percent of net sales decreased 90 basis points compared to fiscal 2016.

During fiscal 2017, we recorded a $14 million divestiture loss from the sale of our Martel, Ohio manufacturing facility. Divestiture net gain totaled $148 million in fiscal 2016 primarily from the sale of Green Giant (please refer to Note 3 of the Consolidated Financial Statements in Item 8 of this report).

Restructuring, impairment, and other exit costs totaled $183 million in fiscal 2017 compared to $151 million in fiscal 2016.

Total charges associated with our restructuring initiatives recognized in fiscal 2017 and 2016 consisted of the following:

 

     As Reported  
In Millions    Fiscal 2017      Fiscal 2016  
     Charge     Cash      Charge     Cash  

Global reorganization

     $72.1       $20.0        $-       $-  

Closure of Melbourne, Australia plant

     21.9       1.6        -       -  

Restructuring of certain international product lines

     45.1       10.3        -       -  

Closure of Vineland, New Jersey plant

     41.4       7.3        -       -  

Project Compass

     (0.4     12.8        54.7       36.1  

Total Century (a)

     44.0       49.4        182.6       34.1  

Project Catalyst

     -       1.3        (7.5     47.8  

Combination of certain operational facilities

     -       5.1        -       4.5  

Other

     -       -        -       0.1  
   

Total restructuring charges (a)

     224.1       107.8        229.8       122.6  

Project-related costs recorded in costs of sales

     43.9       46.9        57.5       54.5  
   

Restructuring charges and project-related costs

     $268.0       $154.7        $287.3       $177.1  
   
(a) Includes $41.5 million of restructuring charges recorded in cost of sales in fiscal 2017 and $78.4 million in fiscal 2016.

Please refer to Note 4 to the Consolidated Financial Statements in Item 8 of this report for more information regarding our restructuring activities.

Interest, net for fiscal 2017 totaled $295 million, $9 million lower than fiscal 2016, primarily driven by lower rates and changes in the mix of debt, partially offset by higher average debt balances.

 

26


Table of Contents

Our consolidated effective tax rate for fiscal 2017 was 28.8 percent compared to 31.4 percent in fiscal 2016. The 2.6 percentage point decrease was primarily due to non-deductible expenses related to the Green Giant divestiture in fiscal 2016. Our effective tax rate excluding certain items affecting comparability was 29.2 percent in fiscal 2017 compared to 29.8 percent in fiscal 2016 (see the “Non-GAAP Measures” section below for a description of our use of measures not defined by GAAP).

After-tax earnings from joint ventures for fiscal 2017 decreased to $85 million compared to $88 million in fiscal 2016 primarily driven by unfavorable foreign currency exchange and an asset write-off for CPW, partially offset by contributions from volume growth and favorable foreign currency exchange for HDJ. On a constant-currency basis, after-tax earnings from joint ventures decreased 6 percent (see the “Non-GAAP Measures” section below for a description of our use of these measures not defined by GAAP). The components of our joint ventures’ net sales growth are shown in the following table:

 

Fiscal 2017 vs. Fiscal 2016    CPW      HDJ      

Contributions from volume growth (a)

     3 pts        6 pts  

Net price realization and mix

     Flat            2 pts  

Foreign currency exchange

     (5) pts        10 pts  

 

 

Net sales growth

     (2) pts        18 pts  

 

 
(a) Measured in tons based on the stated weight of our product shipments.

The change in net sales for each joint venture on a constant-currency basis is set forth in the following table:

 

     Fiscal 2017 vs. Fiscal 2016  
      Percentage Change in Joint
Venture Net Sales as
Reported
     Impact of Foreign
Currency Exchange
     Percentage Change in Joint
Venture Net Sales on
Constant-Currency Basis
 

CPW

     (2)%        (5)pts        3 %      

HDJ

     18 %        10 pts        8 %      
   

Joint Ventures

     2 %        (2)pts        4 %      
   

Average diluted shares outstanding decreased by 14 million in fiscal 2017 from fiscal 2016 due to share repurchases, partially offset by option exercises.

RESULTS OF SEGMENT OPERATIONS

On April 24, 2018, we acquired Blue Buffalo, which became our Pet operating segment. Our businesses are now organized into five operating segments: North America Retail; Convenience Stores & Foodservice; Europe & Australia; Asia & Latin America; and Pet. We are reporting the Pet operating segment results on a one-month lag and accordingly, in fiscal 2018, our results do not include Pet segment operating results.

In the third quarter of fiscal 2017, we announced a new global organization structure to streamline our leadership, enhance global scale, and drive improved operational agility to maximize our growth capabilities. We restated our fiscal 2016 net sales by segment and segment operating profit amounts to reflect our new operating segments. These segment changes had no effect on previously reported consolidated net sales, operating profit, net earnings attributable to General Mills, or earnings per share.

 

27


Table of Contents

The following tables provide the dollar amount and percentage of net sales and operating profit from each segment for fiscal 2018, 2017, and 2016:

 

    Fiscal Year  
    2018     2017     2016  
In Millions   Dollars     Percent of
Total
    Dollars     Percent of
Total
    Dollars     Percent of
Total
 

 

   

 

 

   

 

 

 

Net Sales

           

North America Retail

  $ 10,115.4       64%     $ 10,196.9       65%     $ 10,936.6       66%  

Convenience Stores & Foodservice

    1,930.2       12          1,870.0       12            1,923.8       12       

Europe & Australia

    1,984.6       13          1,824.5       12            1,998.0       12       

Asia & Latin America

    1,710.2       11          1,728.4       11            1,704.7       10       

 

 

Total

  $     15,740.4       100%     $     15,619.8       100%     $     16,563.1       100%  

 

 

Segment Operating Profit

           

North America Retail

  $ 2,217.4       80%     $ 2,303.6       78%     $ 2,351.2       78%  

Convenience Stores & Foodservice

    392.6       14          401.2       14            378.9       13       

Europe & Australia

    142.1       5          164.2       5            200.3       7       

Asia & Latin America

    39.6       1          83.6       3            69.1       2       

 

 

Total

  $ 2,791.7       100%     $ 2,952.6       100%     $ 2,999.5       100%  

 

 

Segment operating profit excludes unallocated corporate items, net gain/loss on divestitures, and restructuring, impairment, and other exit costs because these items affecting operating profit are centrally managed at the corporate level and are excluded from the measure of segment profitability reviewed by our executive management.

NORTH AMERICA RETAIL SEGMENT

Our North America Retail operating segment reflects business with a wide variety of grocery stores, mass merchandisers, membership stores, natural food chains, drug, dollar and discount chains, and e-commerce grocery providers. Our product categories in this business segment are ready-to-eat cereals, refrigerated yogurt, soup, meal kits, refrigerated and frozen dough products, dessert and baking mixes, frozen pizza and pizza snacks, grain, fruit and savory snacks, and a wide variety of organic products including refrigerated yogurt, nutrition bars, meal kits, salty snacks, ready-to-eat cereal, and grain snacks.

North America Retail net sales were as follows:

 

   

Fiscal

2018

    Fiscal
2018 vs. 2017
Percentage Change
    Fiscal
2017
    Fiscal
2017 vs. 2016
Percentage Change
    Fiscal
2016
 

Net sales (in millions)

  $     10,115.4       (1)%     $ 10,196.9       (7)%     $ 10,936.6  

Contributions from volume growth (a)

      Flat            (11)pts    

Net price realization and mix

      (1)pt         4 pts    

Foreign currency exchange

            Flat                  Flat             
(a) Measured in tons based on the stated weight of our product shipments.

The 1 percent decrease in North America Retail net sales for fiscal 2018 was driven by declines in the U.S. Yogurt operating unit partially offset by growth in the U.S. Snacks and Canada operating units.

 

28


Table of Contents

The 7 percent decrease in North America Retail net sales for fiscal 2017 was driven by declines in the U.S. Meals & Baking, U.S. Yogurt, U.S. Cereal, and Canada operating units. The decline in net sales also includes the impact of the Green Giant divestiture from the U.S. Meals & Baking and Canada operating units in fiscal 2016.

The components of North America Retail organic net sales growth are shown in the following table:

 

     Fiscal
2018 vs. 2017
Percentage Change
       Fiscal
2017 vs. 2016
Percentage Change
 

Contributions from organic volume growth (a)

     Flat             (9)pts  

Organic net price realization and mix

     (1)pt          4 pts  

Organic net sales growth

     (1)pt          (5)pts  

Foreign currency exchange

     Flat             Flat     

Acquisitions and divestitures (b)

     Flat             (2)pts  

Net sales growth

     (1)pt          (7)pts  

 

 
(a) Measured in tons based on the stated weight of our product shipments.
(b) Primarily the Green Giant divestiture in fiscal 2016.

North America Retail organic net sales decreased 1 percentage point in fiscal 2018, compared to fiscal 2017, driven by unfavorable organic net price realization and mix. North America Retail organic net sales decreased 5 percentage points in fiscal 2017 which reflects the impact of reduced marketing and higher pricing as a result of lower promotional spending.

Net sales for our North America Retail operating units are shown in the following table:

 

     Fiscal Year  
In Millions    2018      2017      2016  

U.S. Meals & Baking (a)

   $ 3,865.7      $ 3,876.6      $ 4,297.3  

U.S. Cereal

     2,251.8        2,251.8        2,312.8  

U.S. Snacks (a)

     2,140.5        2,098.2        2,094.3  

Canada

     930.0        906.0        929.5  

U.S. Yogurt and Other

     927.4        1,064.3        1,302.7  

Total (a)

   $     10,115.4      $     10,196.9      $     10,936.6  
(a) Fiscal 2016 net sales for the U.S. Meals & Baking and U.S. Snacks operating units include an additional month of results from Annie’s.

North America Retail net sales percentage change by operating unit are shown in the following table:

 

    

Fiscal 2018

vs. 2017

 

 

    
Fiscal 2017    
vs. 2016    
 
 

U.S. Yogurt

     (12)%        (18)%      

U.S. Meals & Baking (a)

     Flat             (10)          

U.S. Cereal

     Flat             (3)          

Canada (b)

     3             (2)          

U.S. Snacks (a)

     2             Flat           

Total (a)

     (1)%        (7)%      
(a) Fiscal 2016 net sales for the U.S. Meals & Baking and U.S. Snacks operating units include an additional month of results from Annie’s.
(b) On a constant currency basis, Canada operating unit net sales decreased 1 percent in fiscal 2018 and decreased 2 percent in fiscal 2017. See the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP.

 

29


Table of Contents

Segment operating profit decreased 4 percent to $2,217 million in fiscal 2018, compared to $2,304 million in fiscal 2017, driven primarily by higher input costs and increased merchandising, partially offset by lower SG&A expenses, including a 10 percent decline in media and advertising expense. Segment operating profit decreased 4 percent on a constant-currency basis in fiscal 2018 compared to fiscal 2017 (see the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP).

Segment operating profit of $2,304 million in fiscal 2017 decreased $48 million, or 2 percent, from fiscal 2016. The decrease was primarily driven by declining contributions from volume growth, currency-driven inflation on products imported into Canada, and the impact of the Green Giant divestiture, partially offset by benefits from cost savings initiatives, favorable net price realization, and a decrease in SG&A expenses, including a 16 percentage point decline in media and advertising expense. Segment operating profit decreased 2 percent on a constant-currency basis in fiscal 2017 compared to fiscal 2016 (see the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP).

CONVENIENCE STORES & FOODSERVICE SEGMENT

Our major product categories in our Convenience Stores & Foodservice operating segment are ready-to-eat cereals, snacks, refrigerated yogurt, frozen meals, unbaked and fully baked frozen dough products, and baking mixes. Many products we sell are branded to the consumer and nearly all are branded to our customers. We sell to distributors and operators in many customer channels including foodservice, convenience stores, vending, and supermarket bakeries in the United States.

Convenience Stores & Foodservice net sales were as follows:

 

    Fiscal
2018
   

Fiscal

2018 vs. 2017
Percentage Change

    Fiscal
2017
   

Fiscal

2017 vs. 2016
Percentage Change

    Fiscal
2016
 

Net sales (in millions)

  $   1,930.2       3 %     $   1,870.0       (3)%     $   1,923.8  

Contributions from volume growth (a)

      1 pt         Flat        

Net price realization and mix

            2 pts               (3)pts          
(a) Measured in tons based on the stated weight of our product shipments.

Convenience Stores & Foodservice net sales increased 3 percent in fiscal 2018, reflecting higher net sales across the portfolio driven by favorable net price realization and mix and increased contributions from volume growth.

The 3 percent decline in fiscal 2017 Convenience Stores & Foodservice net sales was driven primarily by market index pricing on bakery flour and volume declines in non-Focus 6 platforms, partially offset by an increase in the Focus 6 platforms.

The components of Convenience Stores & Foodservice organic net sales growth are shown in the following table:

 

     Fiscal
2018 vs. 2017
Percentage
Change
    

Fiscal    

2017 vs. 2016    

Percentage    

Change    

 

Contributions from organic volume growth (a)

     1 pt          Flat          

Organic net price realization and mix

     2 pts        (3)pts      

Organic net sales growth

     3 pts        (3)pts      

Net sales growth

     3 pts        (3)pts      

 

 
(a) Measured in tons based on the stated weight of our product shipments.

 

30


Table of Contents

Segment operating profit decreased 2 percent to $393 million in fiscal 2018, compared to $401 million in fiscal 2017, primarily driven by higher input costs, partially offset by higher net sales. In fiscal 2017, segment operating profit was $401 million, an increase of 6 percent from $379 million in fiscal 2016 primarily driven by lower input costs and benefits from cost savings initiatives.

EUROPE & AUSTRALIA SEGMENT

Our Europe & Australia operating segment reflects retail and foodservice businesses in the greater Europe and Australia regions. Our product categories include refrigerated yogurt, meal kits, super-premium ice cream, refrigerated and frozen dough products, shelf stable vegetables, grain snacks, and dessert and baking mixes. We also sell super-premium ice cream directly to consumers through owned retail shops. Revenues from franchise fees are reported in the region or country where the franchisee is located.

Europe & Australia net sales were as follows:

 

    Fiscal
2018
   

Fiscal

2018 vs. 2017
Percentage Change

    Fiscal
2017
   

Fiscal

2017 vs. 2016
Percentage Change

    Fiscal
2016
 

Net sales (in millions) (a)

  $ 1,984.6       9%     $ 1,824.5       (9)%     $ 1,998.0  

Contributions from volume growth (b)

      (1)pt         (7)pts    

Net price realization and mix

      3 pts         3 pts    

Foreign currency exchange

            7 pts               (5)pts          
(a) The 9 percent decline in fiscal 2017 net sales for the Europe & Australia segment includes approximately 3 percentage points of decline due to an additional month of results from Yoplait SAS in fiscal 2016.
(b) Measured in tons based on the stated weight of our product shipments.

The 9 percent increase in Europe & Australia net sales in fiscal 2018 was driven primarily by favorable foreign currency exchange and net price realization and mix, partially offset by lower contributions from volume growth.

The 9 percent decline in Europe & Australia fiscal 2017 net sales was driven by lower contributions from volume growth, including the impact of an additional month of results from Yoplait SAS in fiscal 2016, and unfavorable foreign currency exchange, partially offset by favorable net price realization and mix.

The components of Europe & Australia organic net sales growth are shown in the following table:

 

    

Fiscal

2018 vs. 2017
Percentage Change

      

Fiscal

2017 vs. 2016
Percentage Change

 

Contributions from organic volume growth (a)

     (1)pt          (7)pts  

Organic net price realization and mix

     3 pts          3 pts  

Organic net sales growth

     2 pts          (4)pts  

Foreign currency exchange

     7 pts          (5)pts  

Acquisitions and divestitures

     Flat              Flat      

Net sales growth

     9 pts          (9)pts  

 

 
(a) Measured in tons based on the stated weight of our product shipments.

The 2 percent increase in Europe & Australia organic net sales growth in fiscal 2018 was driven by favorable organic net price realization and mix partially offset by a decrease in contributions from organic volume growth.

The 4 percent decrease in Europe & Australia organic net sales growth in fiscal 2017 was primarily driven by a 7 percentage point decline from contributions from organic volume growth, which primarily reflects increased competition in key categories and the impact of an additional month of results from Yoplait SAS in fiscal 2016.

 

31


Table of Contents

Segment operating profit decreased 14 percent to $142 million in fiscal 2018, compared to $164 million in the same period of fiscal 2017 primarily driven by input cost inflation, including currency-driven inflation on imported products in certain markets. Segment operating profit decreased 22 percent on a constant-currency basis in fiscal 2018 compared to fiscal 2017 (see the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP).

Segment operating profit for fiscal 2017 decreased 18 percent to $164 million from $200 million in fiscal 2016, primarily driven by unfavorable foreign currency exchange, including currency-driven inflation on imported products in certain markets, and the impact of the additional month of results from Yoplait SAS in fiscal 2016, partially offset by a decrease in SG&A expense, including a 24 percentage point decline in media and advertising expense. Europe & Australia segment operating profit decreased 9 percent on a constant-currency basis in fiscal 2017 compared to fiscal 2016 (see the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP).

ASIA & LATIN AMERICA SEGMENT

Our Asia & Latin America operating segment consists of retail and foodservice businesses in the greater Asia and South America regions. Our product categories include super-premium ice cream and frozen desserts, refrigerated and frozen dough products, dessert and baking mixes, meal kits, salty and grain snacks, wellness beverages, and refrigerated yogurt. We also sell super-premium ice cream and frozen desserts directly to consumers through owned retail shops. Our Asia & Latin America segment also includes products manufactured in the United States for export, mainly to Caribbean and Latin American markets, as well as products we manufacture for sale to our international joint ventures. Revenues from export activities and franchise fees are reported in the region or country where the end customer or franchisee is located. Fiscal 2017 includes an additional month of results from Yoki (please refer to note 1 to the Consolidated Financial Statements in Item 8 of this report).

Asia & Latin America net sales were as follows:

 

    Fiscal
2018
    Fiscal
2018 vs. 2017
Percentage Change
    Fiscal
2017
    Fiscal
2017 vs. 2016
Percentage Change
    Fiscal
2016
 

Net sales (in millions) (a)

  $     1,710.2       (1)%     $     1,728.4       1%     $     1,704.7  

Contributions from volume growth (b)

      (10)pts         Flat        

Net price realization and mix

      8 pts         1 pt    

Foreign currency exchange

            1 pt               Flat              
(a) Net sales includes approximately 3 percentage points of growth in fiscal 2017 and 3 percentage points of decline in fiscal 2018 due to an additional month of results from Yoki in fiscal 2017.
(b) Measured in tons based on the stated weight of our product shipments.

Asia & Latin America net sales decreased 1 percent in fiscal 2018 compared to fiscal 2017, which reflects lower net sales in Latin America markets due to the shift in reporting period in fiscal 2017 and challenges related to an enterprise reporting system implementation at Yoki, partially offset by higher net sales in Asia markets.

Asia & Latin America net sales increased 1 percent in fiscal 2017 primarily driven by favorable net price realization in Latin America and China. Contributions from volume growth in fiscal 2017 were flat, including the impact of an additional month of results for Yoki in fiscal 2017.

 

32


Table of Contents

The components of Asia & Latin America organic net sales growth are shown in the following table:

 

     

Fiscal

2018 vs. 2017
Percentage Change    

 

    

Fiscal

2017 vs. 2016
Percentage Change    

 

 

Contributions from organic volume growth (a)

     (10)pts        (2)pts    

Organic net price realization and mix

     8 pts        5 pts    
  

 

 

 

Organic net sales growth

     (2)pts        3 pts    

Foreign currency exchange

     1 pt          Flat        

Acquisitions and divestitures (b)

 

    

 

Flat    

 

 

 

    

 

(2)pts  

 

 

 

Net sales growth

     (1)pt          1 pt    

 

 
(a) Measured in tons based on the stated weight of our product shipments.
(b) Primarily our Venezuela subsidiary divestiture, Argentina foodservice divestiture, and Laticinios Carolina Ltda acquisition in fiscal 2016.

The 2 percent decrease in Asia & Latin America organic net sales in fiscal 2018 was driven by a 10 percent decrease in contributions from organic volume growth partially offset by an 8 percent increase in organic net price realization and mix. The 10 percent decrease in contributions from organic volume growth reflects lower contributions in Latin America markets due to the shift in reporting period in fiscal 2017 and challenges related to an enterprise reporting system implementation at Yoki, partially offset by higher contributions in Asia markets.

The 3 percent increase in Asia & Latin America organic net sales in fiscal 2017 was primarily driven by a 5 percentage point increase from organic net price realization and mix resulting from pricing actions in the Latin America and China markets, partially offset by a 2 percentage point decline in contributions from organic volume which reflects the impact of macroeconomic challenges in Latin America and the restructuring of our snacks business in China. The 2 percentage point decline in contributions from organic volume included the impact of an additional month of results from Yoki in fiscal 2017.

Segment operating profit decreased 53 percent to $40 million in fiscal 2018, compared to $84 million in fiscal 2017, primarily driven by lower net sales and higher input cost inflation, including currency driven inflation on imported products in certain markets. Segment operating profit decreased 56 percent on a constant-currency basis in fiscal 2018 compared to fiscal 2017 (see the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP).

Segment operating profit for fiscal 2017 increased 21 percent to $84 million from $69 million in fiscal 2016, primarily driven by growth in the Häagen-Dazs business in China and the impact of an additional month of results from Yoki in fiscal 2017. Asia & Latin America segment operating profit increased 20 percent on a constant-currency basis in fiscal 2017 compared to fiscal 2016 (see the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP).

PET SEGMENT

Our Pet operating segment includes pet food products sold primarily in the United States in specialty channels, including national pet superstore chains, regional pet store chains, neighborhood pet stores, and farm and feed stores; e-commerce retailers; military outlets; hardware stores; veterinary clinics and hospitals; and grocery and mass merchandisers. Our product categories include dog and cat food (dry foods, wet foods, and treats) made with whole meats, fruits and vegetables, and other high-quality natural ingredients. Our tailored pet product offerings address specific dietary, lifestyle, and life-stage needs and spans different product types, diet types, breed sizes for dogs, lifestages, flavors, product functions and textures, and cuts for wet foods. We are reporting the Pet operating segment results on a one-month lag and accordingly, in fiscal 2018, our results do not include Pet segment operating results.

 

33


Table of Contents

UNALLOCATED CORPORATE ITEMS

Unallocated corporate items include corporate overhead expenses, variances to planned domestic employee benefits and incentives, contributions to the General Mills Foundation, asset and liability remeasurement impact of hyperinflationary economies, restructuring initiative project-related costs, and other items that are not part of our measurement of segment operating performance. This includes gains and losses from the mark-to-market valuation of certain commodity positions until passed back to our operating segments in accordance with our policy as discussed in Note 7 to the Consolidated Financial Statements in Item 8 of this report.

For fiscal 2018, unallocated corporate expense totaled $117 million compared to $190 million last year. In fiscal 2018, we recorded a $32 million net decrease in expense related to mark-to-market valuation of certain commodity positions and grain inventories compared to a $14 million net decrease in expense in the prior year. In addition, we recorded $14 million of restructuring charges, and $11 million of restructuring initiative project-related costs in cost of sales in fiscal 2018, compared to $42 million of restructuring charges and $44 million of restructuring initiative project-related costs in cost of sales in fiscal 2017. We also recorded $34 million of transaction and integration costs related to our acquisition of Blue Buffalo.

For fiscal 2017, unallocated corporate expense totaled $190 million compared to $289 million in fiscal 2016. In fiscal 2017, we recorded a $14 million net decrease in expense related to mark-to-market valuation of certain commodity positions and grain inventories compared to a $63 million net decrease in expense in the prior year. In addition, we recorded $42 million of restructuring charges, and $44 million of restructuring initiative project-related costs in cost of sales in fiscal 2017, compared to $78 million of restructuring charges and $58 million of restructuring initiative project-related costs in cost of sales in fiscal 2016. The decrease in unallocated corporate expense also reflects lower incentive expense in fiscal 2017 compared to fiscal 2016.

IMPACT OF INFLATION

We experienced input cost inflation of 4 percent in fiscal 2018, 1 percent in fiscal 2017, and 2 percent in fiscal 2016, primarily on commodity inputs. We expect input cost inflation of approximately 5 percent in fiscal 2019. We attempt to minimize the effects of inflation through HMM, planning, and operating practices. Our risk management practices are discussed in Item 7A of this report.

LIQUIDITY

The primary source of our liquidity is cash flow from operations. Over the most recent three-year period, our operations have generated $8.0 billion in cash. A substantial portion of this operating cash flow has been returned to shareholders through share repurchases and dividends. We also use cash from operations to fund our capital expenditures and acquisitions. We typically use a combination of cash, notes payable, and long-term debt and occasionally issue shares of stock to finance significant acquisitions and major capital expansions.

As of May 27, 2018, we had $383 million of cash and cash equivalents held in foreign jurisdictions. As a result of the TCJA, the historic undistributed earnings of our foreign subsidiaries will be taxed in the U.S. via the one-time repatriation tax in fiscal 2018. We are re-evaluating our indefinite reinvestment assertions in connection with the TCJA. As of the end of fiscal 2018, we have recorded a provisional estimate for local country withholding taxes related to certain entities from which we expect to begin repatriating undistributed earnings. As a result of the transition tax, we may repatriate our cash and cash equivalents held by our foreign subsidiaries without such funds being subject to further U.S. income tax liability. In fiscal 2018, we repatriated a portion of our foreign cash holdings to finance part of the Blue Buffalo acquisition, to reduce commercial paper, and for general corporate purposes. Please see Note 14 to the Consolidated Financial Statements in Part II, Item 8 of this report for further information on our indefinite reinvestment assertion.

 

34


Table of Contents

Cash Flows from Operations

 

     Fiscal Year  
In Millions    2018      2017     2016   

 

 

Net earnings, including earnings attributable to redeemable and noncontrolling interests

   $     2,163.0       $     1,701.1     $     1,736.8   

Depreciation and amortization

     618.8         603.6       608.1   

After-tax earnings from joint ventures

     (84.7)        (85.0     (88.4)  

Distributions of earnings from joint ventures

     113.2         75.6       75.1   

Stock-based compensation

     77.0         95.7       89.8   

Deferred income taxes

     (504.3)        183.9       120.6   

Pension and other postretirement benefit plan contributions

     (31.8)        (45.4     (47.8)  

Pension and other postretirement benefit plan costs

     4.6         35.7       118.1   

Divestitures loss (gain)

            13.5       (148.2)  

Restructuring, impairment, and other exit costs

     126.0         117.0       107.2   

Changes in current assets and liabilities, excluding the effects of acquisitions and divestitures

     542.1         (194.2     298.5   

Other, net

     (182.9)        (86.3     (105.6)  

 

 

Net cash provided by operating activities

   $ 2,841.0       $ 2,415.2     $ 2,764.2   

 

 

In fiscal 2018, cash provided by operations was $2.8 billion compared to $2.4 billion in fiscal 2017. The $426 million increase was primarily driven by the $462 million increase in net earnings and the $736 million change in current assets and liabilities, partially offset by a $688 million change in deferred income taxes. The change in deferred income taxes was primarily related to the $638 million provisional benefit from revaluing our net U.S. deferred tax liabilities to reflect the new U.S. corporate tax rate as a result of the TCJA. The $736 million change in current assets and liabilities was primarily due to changes in accounts payable of $476 million related to the extension of payment terms and timing of payments, and $264 million of changes in other current liabilities primarily driven by changes in income taxes payable, trade and advertising accruals, and incentive accruals.

We strive to grow core working capital at or below the rate of growth in our net sales. For fiscal 2018, core working capital decreased 27 percent, compared to a net sales increase of 1 percent. In fiscal 2017, core working capital increased 9 percent, compared to a net sales decline of 6 percent, and in fiscal 2016, core working capital decreased 41 percent, compared to net sales decline of 6 percent.

In fiscal 2017, our operations generated $2.4 billion of cash, compared to $2.8 billion in fiscal 2016. The $349 million decrease was primarily driven by a $493 million change in current assets and liabilities. The $493 million change in current assets and liabilities was primarily due to changes in other current liabilities driven by changes in income taxes payable, a decrease in incentive accruals, and changes in trade and advertising accruals due to reduced spending. The change in current assets and liabilities was also impacted by the timing of accounts payable. Additionally, we recorded a $14 million loss on a divestiture during fiscal 2017, compared to a $148 million net gain on divestitures during fiscal 2016, and classified the related cash flows as investing activities.

 

35


Table of Contents

Cash Flows from Investing Activities

 

     Fiscal Year  
In Millions    2018        2017        2016    

 

 

Purchases of land, buildings, and equipment

   $ (622.7)      $ (684.4)      $ (729.3)  

Acquisitions, net of cash acquired

     (8,035.8)        -          (84.0)  

Investments in affiliates, net

     (17.3)        3.3          63.9    

Proceeds from disposal of land, buildings, and equipment

     1.4          4.2          4.4    

Proceeds from divestitures

     -          17.5          828.5    

Exchangeable note

     -          13.0          21.1    

Other, net

     (11.0)        (0.5)        (11.2)  

 

 

Net cash provided (used) by investing activities

   $     (8,685.4)      $     (646.9)      $ 93.4    

 

 

In fiscal 2018, we used $8.7 billion of cash through investing activities compared to $647 million in fiscal 2017. In the fourth quarter of fiscal 2018, we acquired Blue Buffalo for an aggregate purchase price of $8.0 billion, including $103 million of consideration for net debt repaid. We invested $623 million in land, buildings, and equipment in fiscal 2018, $62 million less than last year.

In fiscal 2017, we used $647 million of cash through investing activities compared to generating $93 million in fiscal 2016. We invested $684 million in land, buildings, and equipment in fiscal 2017, $45 million less than fiscal 2016. In fiscal 2016, we received proceeds of $828 million from the divestitures of certain businesses, primarily Green Giant.

We expect capital expenditures to be approximately $745 million in fiscal 2019. These expenditures will fund initiatives that are expected to fuel international growth, support innovative products, and continue HMM initiatives throughout the supply chain.

Cash Flows from Financing Activities

 

     Fiscal Year  
In Millions    2018        2017        2016    

 

 

Change in notes payable

   $ 327.5        $ 962.4        $ (323.8)  

Issuance of long-term debt

     6,550.0          1,072.1          542.5    

Payment of long-term debt

     (600.1)        (1,000.0)        (1,000.4)  

Proceeds from common stock issued on exercised options

     99.3          112.6          171.9    

Proceeds from common stock issued

     969.9          -          -    

Purchases of common stock for treasury

     (601.6)        (1,651.5)        (606.7)  

Dividends paid

     (1,139.7)        (1,135.1)        (1,071.7)  

Distributions to noncontrolling and redeemable interest holders

     (51.8)        (61.0)        (84.3)  

Other, net

     (108.0)        (46.9)        (47.5)  

 

 

Net cash provided (used) by financing activities

   $     5,445.5        $     (1,747.4)      $     (2,420.0)  

 

 

Financing activities provided $5.4 billion of cash in fiscal 2018 compared to a use of $1.7 billion in fiscal 2017. Financing activities used $2.4 billion of cash in fiscal 2016. We had $5.2 billion more net debt issuances in fiscal 2018 than the prior year, primarily related to bonds issued to fund a portion of the Blue Buffalo acquisition. In fiscal 2017 we had $1.8 billion more net debt issuances than in fiscal 2016. For more information on our debt issuances and payments, please refer to Note 8 to the Consolidated Financial Statements in Item 8 of this report.

During fiscal 2018, we received $970 million of net proceeds from common stock issued to fund a portion of the Blue Buffalo acquisition. In addition, we received $99 million in proceeds from common stock issued on exercised options compared to $113 million in fiscal 2017. During fiscal 2016, we received $172 million in proceeds from common stock issued on exercised options.

 

36


Table of Contents

During fiscal 2018, we repurchased 11 million shares of our common stock for $602 million. During fiscal 2017, we repurchased 25 million shares of our common stock for $1,652 million. During fiscal 2016, we repurchased 11 million shares of our common stock for $607 million.

Dividends paid in fiscal 2018 totaled $1,140 million, or $1.96 per share, a 2 percent per share increase from fiscal 2017. Dividends paid in fiscal 2017 totaled $1,135 million, or $1.92 per share, an 8 percent per share increase from fiscal 2016 dividends of $1.78 per share.

Selected Cash Flows from Joint Ventures

Selected cash flows from our joint ventures are set forth in the following table:

 

     Fiscal Year  
Inflow (Outflow), in Millions    2018      2017      2016  

 

 

Investments in affiliates, net

   $     (17.3)      $     3.3        $     63.9    

Dividends received

         113.2              75.6              75.1    

 

 

CAPITAL RESOURCES

Total capital consisted of the following:

 

In Millions    May 27,
2018
     May 28,
2017
 

 

 

Notes payable

   $ 1,549.8      $ 1,234.1  

Current portion of long-term debt

     1,600.1        604.7  

Long-term debt

     12,668.7        7,642.9  

 

 

Total debt

     15,818.6        9,481.7  

Redeemable interest

     776.2        910.9  

Noncontrolling interests

     351.3        357.6  

Stockholders’ equity

     6,141.1        4,327.9  

 

 

Total capital

   $   23,087.2      $   15,078.1  

 

 

The following table details the fee-paid committed and uncommitted credit lines we had available as of May 27, 2018:

 

In Billions    Facility
Amount
     Borrowed
Amount
 

 

 

Credit facility expiring:

     

 May 2022

   $ 2.7      $ -  

 June 2019

     0.2        0.1  

 September 2018

     0.1        -  

 

 

Total committed credit facilities

     3.0        0.1  

Uncommitted credit facilities

     0.5        0.2  

 

 

Total committed and uncommitted credit facilities

   $             3.5      $             0.3  

 

 

In February 2018, we entered into a fee-paid commitment letter with certain lenders, pursuant to which such lenders committed to provide a 364-day senior unsecured bridge term loan credit facility (the “Bridge Facility”) in an aggregate principal amount of up to $8.5 billion to provide the financing for the acquisition of Blue Buffalo. The Bridge Facility expired in the fourth quarter of fiscal 2018.

 

37


Table of Contents

To ensure availability of funds, we maintain bank credit lines sufficient to cover our outstanding notes payable. Commercial paper is a continuing source of short-term financing. We have commercial paper programs available to us in the United States and Europe. We also have uncommitted and asset-backed credit lines that support our foreign operations. The credit facilities contain several covenants, including a requirement to maintain a fixed charge coverage ratio of at least 2.5 times.

Certain of our long-term debt agreements, our credit facilities, and our noncontrolling interests contain restrictive covenants. As of May 27, 2018, we were in compliance with all of these covenants.

We have $1,600 million of long-term debt maturing in the next 12 months that is classified as current, including $1,150 million of 5.65 percent notes due February 2019, €300.0 million euro-denominated floating-rate notes due March 20, 2019, and $100 million of 6.59 percent fixed rate medium term notes due for remarketing in October 2018. We believe that cash flows from operations, together with available short- and long-term debt financing, will be adequate to meet our liquidity and capital needs for at least the next 12 months.

As of May 27, 2018, our total debt, including the impact of derivative instruments designated as hedges, was 73 percent in fixed-rate and 27 percent in floating-rate instruments, compared to 67 percent in fixed-rate and 33 percent in floating-rate instruments on May 28, 2017.

We believe that our fixed charge coverage ratio and the ratio of operating cash flow to debt are important measures of our financial strength. Our fixed charge coverage ratio in fiscal 2018 was 5.89 compared to 7.26 in fiscal 2017. The measure decreased from fiscal 2017 as earnings before income taxes and after-tax earnings from joint ventures decreased by $136 million and interest expense increased by $83 million in fiscal 2018. Our operating cash flow to debt ratio decreased 7.5 percentage points to 18.0 percent in fiscal 2018, primarily driven by an increase in long-term debt.

We have a 51 percent controlling interest in Yoplait SAS and a 50 percent interest in Yoplait Marques SNC and Liberté Marques Sàrl. Sodiaal holds the remaining interests in each of these entities. We consolidate these entities into our consolidated financial statements. We record Sodiaal’s 50 percent interest in Yoplait Marques SNC and Liberté Marques Sàrl as noncontrolling interests, and its 49 percent interest in Yoplait SAS as a redeemable interest on our Consolidated Balance Sheets. These euro- and Canadian dollar-denominated interests are reported in U.S. dollars on our Consolidated Balance Sheets. Sodiaal has the ability to put all or a portion of its redeemable interest to us at fair value once per year, up to three times before December 2024. As of May 27, 2018, the redemption value of the redeemable interest was $776 million which approximates its fair value.

The third-party holder of the General Mills Cereals, LLC (GMC) Class A Interests receives quarterly preferred distributions from available net income based on the application of a floating preferred return rate to the holder’s capital account balance established in the most recent mark-to-market valuation (currently $252 million). For fiscal 2018, the floating preferred return rate on GMC’s Class A Interests was equal to the sum of three-month LIBOR plus 125 basis points. The preferred return rate is adjusted every three years through a negotiated agreement with the Class A Interest holder or through a remarketing auction. On June 1, 2018, subsequent to our fiscal year-end, the floating preferred return rate on the Class A Interests was reset to the sum of three-month LIBOR plus 142.5 basis points.

We have an option to purchase the Class A Interests for consideration equal to the then current capital account value, plus any unpaid preferred return and the prescribed make-whole amount. If we purchase these interests, any change in the third-party holder’s capital account from its original value will be charged directly to retained earnings and will increase or decrease the net earnings used to calculate EPS in that period.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

As of May 27, 2018, we have issued guarantees and comfort letters of $541 million for the debt and other obligations of consolidated subsidiaries, and guarantees and comfort letters of $167 million for the debt and other

 

38


Table of Contents

obligations of non-consolidated affiliates, mainly CPW. In addition, off-balance sheet arrangements are generally limited to the future payments under non-cancelable operating leases, which totaled $559 million as of May 27, 2018.

As of May 27, 2018, we had invested in five variable interest entities (VIEs). None of our VIEs are material to our results of operations, financial condition, or liquidity as of and for the fiscal year ended May 27, 2018.

Our defined benefit plans in the United States are subject to the requirements of the Pension Protection Act (PPA). In the future, the PPA may require us to make additional contributions to our domestic plans. We do not expect to be required to make any contributions in fiscal 2019.

The following table summarizes our future estimated cash payments under existing contractual obligations, including payments due by period:

 

     Payments Due by Fiscal Year  
In Millions    Total      2019      2020 -21      2022 -23      2024 and
Thereafter
 

 

 

Long-term debt (a)

   $   14,354.0      $     1,599.8      $     3,122.6      $     2,315.5      $     7,316.1  

Accrued interest

     107.7        107.7        -        -        -  

Operating leases (b)

     559.3        137.4        208.0        122.7        91.2  

Capital leases

     0.5        0.3        0.2        -        -  

Purchase obligations (c)

     3,417.0        2,646.9        728.8        39.8        1.5  

 

 

Total contractual obligations

     18,438.5        4,492.1        4,059.6        2,478.0        7,408.8  

Other long-term obligations (d)

     1,199.0        -        -        -        -  

 

 

Total long-term obligations

   $ 19,637.5      $     4,492.1      $     4,059.6      $     2,478.0      $     7,408.8  

 

 
(a) Amounts represent the expected cash payments of our long-term debt and do not include $0.5 million for capital leases or $85.7 million for net unamortized debt issuance costs, premiums and discounts, and fair value adjustments.
(b) Operating leases represents the minimum rental commitments under non-cancelable operating leases.
(c) The majority of the purchase obligations represent commitments for raw material and packaging to be utilized in the normal course of business and for consumer marketing spending commitments that support our brands. For purposes of this table, arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure, and approximate timing of the transaction. Most arrangements are cancelable without a significant penalty and with short notice (usually 30 days). Any amounts reflected on the Consolidated Balance Sheets as accounts payable and accrued liabilities are excluded from the table above.
(d) The fair value of our foreign exchange, equity, commodity, and grain derivative contracts with a payable position to the counterparty was $16 million as of May 27, 2018, based on fair market values as of that date. Future changes in market values will impact the amount of cash ultimately paid or received to settle those instruments in the future. Other long-term obligations mainly consist of liabilities for accrued compensation and benefits, including the underfunded status of certain of our defined benefit pension, other postretirement benefit, and postemployment benefit plans, and miscellaneous liabilities. We expect to pay $20 million of benefits from our unfunded postemployment benefit plans and $18 million of deferred compensation in fiscal 2019. We are unable to reliably estimate the amount of these payments beyond fiscal 2019. As of May 27, 2018, our total liability for uncertain tax positions and accrued interest and penalties was $223.6 million.

SIGNIFICANT ACCOUNTING ESTIMATES

For a complete description of our significant accounting policies, please see Note 2 to the Consolidated Financial Statements in Item 8 of this report. Our significant accounting estimates are those that have a meaningful impact

 

39


Table of Contents

on the reporting of our financial condition and results of operations. These estimates include our accounting for promotional expenditures, valuation of long-lived assets, intangible assets, redeemable interest, stock-based compensation, income taxes, and defined benefit pension, other postretirement benefit, and postemployment benefit plans.

Promotional Expenditures

Our promotional activities are conducted through our customers and directly or indirectly with end consumers. These activities include: payments to customers to perform merchandising activities on our behalf, such as advertising or in-store displays; discounts to our list prices to lower retail shelf prices; payments to gain distribution of new products; coupons, contests, and other incentives; and media and advertising expenditures. The recognition of these costs requires estimation of customer participation and performance levels. These estimates are based on the forecasted customer sales, the timing and forecasted costs of promotional activities, and other factors. Differences between estimated expenses and actual costs are recognized as a change in management estimate in a subsequent period. Our accrued trade, coupon, and consumer marketing liabilities were $500 million as of May 27, 2018, and $483 million as of May 28, 2017. Because our total promotional expenditures (including amounts classified as a reduction of revenues) are significant, if our estimates are inaccurate we would have to make adjustments in subsequent periods that could have a significant effect on our results of operations.

Valuation of Long-Lived Assets

We estimate the useful lives of long-lived assets and make estimates concerning undiscounted cash flows to review for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. Fair value is measured using discounted cash flows or independent appraisals, as appropriate.

Intangible Assets

Goodwill and other indefinite-lived intangible assets are not subject to amortization and are tested for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred. Our estimates of fair value for goodwill impairment testing are determined based on a discounted cash flow model. We use inputs from our long-range planning process to determine growth rates for sales and profits. We also make estimates of discount rates, perpetuity growth assumptions, market comparables, and other factors.

We evaluate the useful lives of our other intangible assets, mainly brands, to determine if they are finite or indefinite-lived. Reaching a determination on useful life requires significant judgments and assumptions regarding the future effects of obsolescence, demand, competition, other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels), the level of required maintenance expenditures, and the expected lives of other related groups of assets. Intangible assets that are deemed to have definite lives are amortized on a straight-line basis, over their useful lives, generally ranging from 4 to 30 years. Our estimate of the fair value of our brand assets is based on a discounted cash flow model using inputs which include projected revenues from our long-range plan, assumed royalty rates that could be payable if we did not own the brands, and a discount rate.

As of May 27, 2018, we had $20.9 billion of goodwill and indefinite-lived intangible assets. While we currently believe that the fair value of each intangible exceeds its carrying value and that those intangibles so classified will contribute indefinitely to our cash flows, materially different assumptions regarding future performance of our businesses or a different weighted-average cost of capital could result in material impairment losses and amortization expense. We performed our fiscal 2018 assessment of our intangible assets as of August 28, 2017. As of our annual assessment date, there was no impairment of any of our intangible assets as their related fair values were substantially in excess of the carrying values except for the Yoki and Progresso brand intangible

 

40


Table of Contents

assets and the Latin America reporting unit. The excess fair value as of the fiscal 2018 test date of the Yoki and Progresso brand intangible assets and the Latin America reporting unit was as follows:

 

In Millions    Carrying Value
of Intangible
Asset
     Excess Fair Value
as of Fiscal 2018
Test Date
 

 

 

Yoki

   $ 138.2        1%  

Progresso

     462.1        6%  

Latin America

   $ 272.0        21%  

 

 

In addition, while having significant coverage as of our fiscal 2018 assessment date, the Food Should Taste Good and Green Giant brand intangible assets and U.S. Yogurt reporting unit had risk of decreasing coverage. We will continue to monitor these businesses, as well as the businesses supporting the Yoki and Progresso brand intangible assets and the Latin America reporting unit for potential impairment.

During the fourth quarter of fiscal 2018, we executed our fiscal 2019 planning process and preliminary long-range planning process, which resulted in lower future sales and profitability projections in our plans for our businesses supporting the Yoki, Mountain High, and Immaculate Baking brand intangible assets. As a result of this triggering event, we performed an interim impairment assessment of these assets as of May 27, 2018, and determined that the fair value of these brand assets no longer exceeded the carrying values of the respective assets. Significant assumptions used in that assessment included our updated long-range cash flow projections for the businesses, royalty rates, weighted average cost of capital rates, and tax rates. We recorded a $97 million impairment charge in the fourth quarter of fiscal 2018 related to these assets.

Redeemable Interest

In fiscal 2018, we adjusted the redemption value of Sodiaal’s redeemable interest in Yoplait SAS based on a discounted cash flow model. The significant assumptions used to estimate the redemption value include projected revenue growth and profitability from our long-range plan, capital spending, depreciation and taxes, foreign currency exchange rates, and a discount rate. As of May 27, 2018, the redemption value of the redeemable interest was $776 million.

Stock-based Compensation

The valuation of stock options is a significant accounting estimate that requires us to use judgments and assumptions that are likely to have a material impact on our financial statements. Annually, we make predictive assumptions regarding future stock price volatility, employee exercise behavior, dividend yield, and the forfeiture rate. For more information on these assumptions, please see Note 11 to the Consolidated Financial Statements in Item 8 of this report.

The estimated fair values of stock options granted and the assumptions used for the Black-Scholes option-pricing model were as follows:

 

     Fiscal Year  
     2018      2017      2016  

 

 

Estimated fair values of stock options granted

   $ 6.18        $ 8.80        $ 7.24    

Assumptions:

        

 Risk-free interest rate

     2.2 %        1.7 %        2.4 %  

 Expected term

     8.2 years          8.5 years          8.5 years    

 Expected volatility

     15.8 %        17.8 %        17.6 %  

 Dividend yield

     3.6 %        2.9 %        3.2 %  

 

 

 

41


Table of Contents

The risk-free interest rate for periods during the expected term of the options is based on the U.S. Treasury zero-coupon yield curve in effect at the time of grant. An increase in the expected term by 1 year, leaving all other assumptions constant, would increase the grant date fair value by 20 percent. If all other assumptions are held constant, a one percentage point increase in our fiscal 2018 volatility assumption would increase the grant date fair value of our fiscal 2018 option awards by 8 percent.

To the extent that actual outcomes differ from our assumptions, we are not required to true up grant-date fair value-based expense to final intrinsic values. Historical data has a significant bearing on our forward-looking assumptions. Significant variances between actual and predicted experience could lead to prospective revisions in our assumptions, which could then significantly impact the year-over-year comparability of stock-based compensation expense.

Any corporate income tax benefit realized upon exercise or vesting of an award in excess of that previously recognized in earnings (referred to as a windfall tax benefit) is presented in the Consolidated Statements of Cash Flows as an operating cash flow. The actual impact on future years’ cash flows will depend, in part, on the volume of employee stock option exercises during a particular year and the relationship between the exercise-date market value of the underlying stock and the original grant-date fair value previously determined for financial reporting purposes.

Realized windfall tax benefits and shortfall tax deficiencies related to the exercise or vesting of stock-based awards are recognized in the Consolidated Statement of Earnings. Because employee stock option exercise behavior is not within our control, it is possible that significantly different reported results could occur if different assumptions or conditions were to prevail.

Income Taxes

We apply a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions. Accordingly, we recognize the amount of tax benefit that has a greater than 50 percent likelihood of being ultimately realized upon settlement. Future changes in judgment related to the expected ultimate resolution of uncertain tax positions will affect earnings in the quarter of such change. For more information on income taxes, please see Note 14 to the Consolidated Financial Statements in Item 8 of this report.

Defined Benefit Pension, Other Postretirement Benefit, and Postemployment Benefit Plans

We have defined benefit pension plans covering many employees in the United States, Canada, Switzerland, France, and the United Kingdom. We also sponsor plans that provide health care benefits to many of our retirees in the United States, Canada, and Brazil. Under certain circumstances, we also provide accruable benefits, primarily severance, to former and inactive employees in the United States, Canada, and Mexico. Please see Note 13 to the Consolidated Financial Statements in Item 8 of this report for a description of our defined benefit pension, other postretirement benefit, and postemployment benefit plans.

We recognize benefits provided during retirement or following employment over the plan participants’ active working lives. Accordingly, we make various assumptions to predict and measure costs and obligations many years prior to the settlement of our obligations. Assumptions that require significant management judgment and have a material impact on the measurement of our net periodic benefit expense or income and accumulated benefit obligations include the long-term rates of return on plan assets, the interest rates used to discount the obligations for our benefit plans, and health care cost trend rates.

Expected Rate of Return on Plan Assets

Our expected rate of return on plan assets is determined by our asset allocation, our historical long-term investment performance, our estimate of future long-term returns by asset class (using input from our actuaries, investment services, and investment managers), and long-term inflation assumptions. We review this assumption annually for each plan; however, our annual investment performance for one particular year does not, by itself, significantly influence our evaluation.

 

42


Table of Contents

Our historical investment returns (compound annual growth rates) for our United States defined benefit pension and other postretirement benefit plan assets were 8.5 percent, 8.5 percent, 6.5 percent, 9.1 percent, and 8.0 percent for the 1, 5, 10, 15, and 20 year periods ended May 27, 2018.

On a weighted-average basis, the expected rate of return for all defined benefit plans was 7.88 percent for fiscal 2018, 8.17 percent for fiscal 2017, and 8.53 percent for fiscal 2016. For fiscal 2019, we lowered our weighted-average expected rate of return on plan assets for our principal defined benefit pension and other postretirement plans in the United States to 7.35 percent due to asset changes that decreased investment risk in the portfolio.

Lowering the expected long-term rate of return on assets by 100 basis points would increase our net pension and postretirement expense by $67 million for fiscal 2019. A market-related valuation basis is used to reduce year-to-year expense volatility. The market-related valuation recognizes certain investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the market-related value of assets. Our outside actuaries perform these calculations as part of our determination of annual expense or income.

Discount Rates

Beginning in fiscal 2017, we changed the method used to estimate the service and interest cost components of the net periodic benefit expense for our United States and most of our international defined benefit pension, other postretirement benefit, and postemployment benefit plans. We adopted a full yield curve approach to estimate service cost and interest cost by applying the specific spot rates along the yield curve used to determine the benefit obligation to the relevant projected cash flows. This method provides a more precise measurement of service and interest costs by correlating the timing of the plans’ liability cash flows to the corresponding rate on the yield curve. Previously, we estimated service cost and interest cost using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. This change does not affect the measurement of our benefit obligations related to these plans. We have accounted for this change prospectively as a change in accounting estimate beginning in the first quarter of fiscal 2017.

Our discount rate assumptions are determined annually as of May 31 for our defined benefit pension, other postretirement benefit, and postemployment benefit plan obligations. We work with our outside actuaries to determine the timing and amount of expected future cash outflows to plan participants and, using the Aa Above Median corporate bond yield, to develop a forward interest rate curve, including a margin to that index based on our credit risk. This forward interest rate curve is applied to our expected future cash outflows to determine our discount rate assumptions.

Our weighted-average discount rates were as follows:

 

    

Defined Benefit

Pension Plans

    

Other
Postretirement

Benefit Plans

    

Postemployment

Benefit Plans

 

 

 

Effective rate for fiscal 2019 service costs

     4.34%        4.27%        3.99%  

Effective rate for fiscal 2019 interest costs

     3.92%        3.80%        3.37%  

Obligations as of May 31, 2018

     4.20%        4.17%        3.60%  

Effective rate for fiscal 2018 service costs

     4.37%        4.27%        3.54%  

Effective rate for fiscal 2018 interest costs

     3.45%        3.24%        2.67%  

Obligations as of May 28, 2017

     4.08%        3.92%        2.87%  

Effective rate for fiscal 2017 service costs

     4.57%        4.42%        3.55%  

Effective rate for fiscal 2017 interest costs

     3.44%        3.17%        2.67%  

Obligations as of May 29, 2016

     4.19%        3.97%        2.94%  

 

 

 

43


Table of Contents

Lowering the discount rates by 100 basis points would increase our net defined benefit pension, other postretirement benefit, and postemployment benefit plan expense for fiscal 2019 by approximately $55 million. All obligation-related experience gains and losses are amortized using a straight-line method over the average remaining service period of active plan participants or over the average remaining lifetime of the remaining plan participants if the plan is viewed as “all or almost all” inactive participants.

Health Care Cost Trend Rates

We review our health care cost trend rates annually. Our review is based on data we collect about our health care claims experience and information provided by our actuaries. This information includes recent plan experience, plan design, overall industry experience and projections, and assumptions used by other similar organizations. Our initial health care cost trend rate is adjusted as necessary to remain consistent with this review, recent experiences, and short-term expectations. Our initial health care cost trend rate assumption is 7.0 percent for retirees age 65 and over and 6.7 percent for retirees under age 65 at the end of fiscal 2018. Rates are graded down annually until the ultimate trend rate of 4.5 percent is reached in 2029 for all retirees. The trend rates are applicable for calculations only if the retirees’ benefits increase as a result of health care inflation. The ultimate trend rate is adjusted annually, as necessary, to approximate the current economic view on the rate of long-term inflation plus an appropriate health care cost premium. Assumed trend rates for health care costs have an important effect on the amounts reported for the other postretirement benefit plans.

A one percentage point change in the health care cost trend rate would have the following effects:

 

In Millions  

One

Percentage

Point

Increase

   

One

Percentage

Point

Decrease

 

 

 

Effect on the aggregate of the service and interest cost components in fiscal 2019

  $ 1.9     $ (1.8)  

Effect on the other post retirement accumulated benefit obligation as of May 27, 2018

            47.8               (44.5)  

 

 

Any arising health care claims cost-related experience gain or loss is recognized in the calculation of expected future claims. Once recognized, experience gains and losses are amortized using a straight-line method over the average remaining service period of active plan participants or over the average remaining lifetime of the remaining plan participants if the plan is viewed as “all or almost all” inactive participants.

Financial Statement Impact

In fiscal 2018, we recorded net defined benefit pension, other postretirement benefit, and postemployment benefit plan expense of $23 million compared to $56 million of expense in fiscal 2017 and $163 million of expense in fiscal 2016. As of May 27, 2018, we had cumulative unrecognized actuarial net losses of $1.8 billion on our defined benefit pension plans and cumulative unrecognized actuarial net gains of $40 million on our postretirement and postemployment benefit plans, mainly as the result of liability increases from lower interest rates, partially offset by recent increases in the values of plan assets. These unrecognized actuarial net losses will result in increases in our future pension and postretirement benefit expenses because they currently exceed the corridors defined by GAAP.

Actual future net defined benefit pension, other postretirement benefit, and postemployment benefit plan income or expense will depend on investment performance, changes in future discount rates, changes in health care cost trend rates, and other factors related to the populations participating in these plans.

 

44


Table of Contents

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In August 2017, the Financial Accounting Standards Board (FASB) issued new hedge accounting requirements. The new standard amends the hedge accounting recognition and presentation requirements to better align an entity’s risk management activities and financial reporting. The new standard also simplifies the application of hedge accounting guidance. The requirements of the new standard are effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods, which for us is the first quarter of fiscal 2020. Early adoption is permitted. We are in the process of analyzing the impact of this standard on our results of operations and financial position.

In March 2017, the FASB issued new accounting requirements related to the presentation of net periodic defined benefit pension expense, net periodic postretirement benefit expense, and net periodic postemployment benefit expense. The new standard requires the service cost component of net periodic benefit expense to be recorded in the same line items as other employee compensation costs within our Consolidated Statements of Earnings. Other components of net periodic benefit expense must be presented separately outside of operating profit in our Consolidated Statements of Earnings. In addition, the new standard requires that only the service cost component of net periodic benefit expense is eligible for capitalization. We recognized net periodic benefit expense of $23 million in fiscal 2018, $56 million in fiscal 2017, and $163 million in fiscal 2016 of which $123 million, $141 million, and $161 million, respectively, related to service cost. These amounts may not necessarily be indicative of future amounts that may be recognized subsequent to the adoption of this new standard. The new standard requires retrospective adoption of the presentation of net periodic benefit expense and prospective application of the capitalization of the service cost component. The requirements of the new standard are effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods, which for us is the first quarter of fiscal 2019.

In February 2016, the FASB issued new accounting requirements for accounting, presentation and classification of leases. This will result in most leases being capitalized as a right of use asset with a related liability on our Consolidated Balance Sheets. The requirements of the new standard are effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods, which for us is the first quarter of fiscal 2020. We are in the process of implementing lease accounting software and analyzing the impact of this standard on our results of operations and financial position. Based on our assessment to date, we expect this guidance will have a material impact on our Consolidated Balance Sheets due to the amount of our lease commitments but we are unable to quantify the impact at this time.

In May 2014, the FASB issued new accounting requirements for the recognition of revenue from contracts with customers. Under the new guidance, companies will apply a principles-based five step model to recognize revenue upon the transfer of promised goods or services to customers and in an amount that reflects the consideration for which the company expects to be entitled to in exchange for those goods and services. The requirements of the new standard and its subsequent amendments are effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods, which for us is the first quarter of fiscal 2019. We will adopt these requirements using the cumulative effect approach. We have evaluated and documented the impact of the guidance on our current accounting policies and practices and have not identified any material differences resulting from applying the new requirements to our revenue contracts. Additionally, we did not identify any significant changes to our business processes, systems, and controls to support recognition and disclosure requirements under the new guidance. This guidance will not have a material impact on our results of operations or financial position.

NON-GAAP MEASURES

We have included in this report measures of financial performance that are not defined by GAAP. We believe that these measures provide useful information to investors, and include these measures in other communications to investors.

 

45


Table of Contents

For each of these non-GAAP financial measures, we are providing below a reconciliation of the differences between the non-GAAP measure and the most directly comparable GAAP measure, an explanation of why our management or the Board of Directors believes the non-GAAP measure provides useful information to investors and any additional purposes for which our management or Board of Directors uses the non-GAAP measure. These non-GAAP measures should be viewed in addition to, and not in lieu of, the comparable GAAP measure.

Organic Net Sales Growth Rates

This measure is used in reporting to our executive management and as a component of the Board of Directors’ measurement of our performance for incentive compensation purposes. We provide organic net sales growth rates for our consolidated net sales and segment net sales. We believe that organic net sales growth rates provide useful information to investors because they provide transparency to underlying performance in our net sales by excluding the effect that foreign currency exchange rate fluctuations, as well as acquisitions, divestitures, and a 53rd week, when applicable, have on year-to-year comparability. A reconciliation of these measures to reported net sales growth rates, the relevant GAAP measures, are included in our Consolidated Results of Operations and Results of Segment Operations discussions in the MD&A above.

Total Segment Operating Profit and Total Segment Operating Profit as a Percent of Net Sales

Total segment operating profit is used in reporting to our executive management and as a component of the Board of Directors’ measurement of our performance for incentive compensation purposes. Management and the Board of Directors believe that this measure provides useful information to investors because it is the profitability measure we use to evaluate segment performance.

 

    Fiscal Year  

 

Percent of Net Sales

 

 

 

2018

 

    

 

2017

 

    

 

2016

 

    

 

2015

 

    

 

2014

 

 

 

 

Operating profit as reported

  $ 2,509.3       15.9 %      $ 2,566.4       16.4 %      $ 2,707.4       16.3 %      $ 2,077.3       11.8 %      $ 2,957.4        16.5 %  

Unallocated corporate items

    116.8       0.7 %        190.1       1.2 %        288.9       1.8 %        413.8       2.3 %        258.4        1.5 %  

Divestitures loss (gain)

    -       - %        13.5       0.1 %        (148.2     (0.9)%        -       - %        (65.5)       (0.4)%  

Restructuring, impairment, and other exit costs

 

   

 

165.6

 

 

 

   

 

1.1 %

 

 

 

    

 

182.6

 

 

 

   

 

1.2 %

 

 

 

    

 

151.4

 

 

 

   

 

0.9 %

 

 

 

    

 

543.9

 

 

 

   

 

3.1 %

 

 

 

    

 

3.6 

 

 

 

   

 

- %

 

 

 

 

 

Total segment operating profit

 

  $

 

2,791.7

 

 

 

   

 

17.7 %

 

 

 

   $

 

  2,952.6

 

 

 

   

 

18.9 %

 

 

 

   $

 

2,999.5

 

 

 

   

 

18.1 %

 

 

 

   $

 

  3,035.0

 

 

 

   

 

17.2 %

 

 

 

   $

 

3,153.9 

 

 

 

   

 

17.6 %

 

 

 

 

 

Diluted EPS Excluding Certain Items Affecting Comparability (Adjusted Diluted EPS) and Related Constant-currency Growth Rates

This measure is used in reporting to our executive management and as a component of the Board of Directors’ measurement of our performance for incentive compensation purposes. We believe that this measure provides useful information to investors because it is the profitability measure we use to evaluate earnings performance on a comparable year-over-year basis. The adjustments are either items resulting from infrequently occurring events or items that, in management’s judgment, significantly affect the year-over-year assessment of operating results.

 

46


Table of Contents

The reconciliation of our GAAP measure, diluted EPS, to diluted EPS excluding certain items affecting comparability and the related constant-currency growth rates follows:

 

    Fiscal Year  
Per Share Data   2018     2017       

2018 vs.    

2017    
Change    

       2016        

2017 vs.

2016
Change

     2015     2014   

 

 

Diluted earnings per share, as reported

  $ 3.64     $ 2.77           31  %        $ 2.77           Flat        $ 1.97      $ 2.83    

Provisional net tax benefit (a)

    (0.89     -                -                    -    

Mark-to-market effects (b)

    (0.04     (0.01)              (0.07)            0.09        (0.05)  

Divestitures loss (gain), net (c)

    -       0.01                (0.10)                  (0.06)  

Tax items (a)

    0.07       -                -              0.13        -    

Acquisition transaction and integration costs (c)

    0.10       -                -              0.02        -    

Restructuring costs (d)

    0.11       0.26                0.26              0.35        0.01    

Project-related costs (d)

    0.01       0.05                0.06              0.01        -    

Intangible asset impairments (e)

    0.11       -                -              0.28        -    

Venezuela currency devaluation

    -       -                -              0.01        0.09    

 

      

 

 

      

 

 

 

Diluted earnings per share, excluding certain items affecting comparability

  $     3.11     $     3.08           1  %        $ 2.92        

 

5  %  

 

   $   2.86      $   2.82    

 

      

 

 

      

 

 

 

Foreign currency exchange impact

        1  pt          (1) pt         

 

      

Diluted earnings per share growth, excluding certain items affecting comparability, on a constant-currency basis

        Flat           

 

6  %  

 

    

 

      
(a) See Note 14 to the Consolidated Financial Statements in Item 8 of this report. The fiscal 2015 tax item is related to the one-time repatriation of historical foreign earnings.
(b) See Note 7 to the Consolidated Financial Statements in Item 8 of this report.
(c) See Note 3 to the Consolidated Financial Statements in Item 8 of this report.
(d) See Note 4 to the Consolidated Financial Statements in Item 8 of this report.
(e) See Note 6 to the Consolidated Financial Statements in Item 8 of this report.

See our reconciliation below of the effective income tax rate as reported to the effective income tax rate excluding certain items affecting comparability for the tax impact of each item affecting comparability.

 

47


Table of Contents

Adjusted Return on Average Total Capital

We believe that this measure provides useful information to investors because it is important for assessing the utilization of capital and it eliminates certain items that affect year-to-year comparability. The calculation of adjusted return on average total capital and return on average total capital, its GAAP equivalent follows:

 

    Fiscal Year  
In Millions   2018             2017               2016               2015               2014               2013   

 

 

Net earnings, including earnings attributable to redeemable and noncontrolling interests

  $ 2,163.0         $           1,701.1           $               1,736.8           $       1,259.4           $       1,861.3          

Interest, net, after-tax

    259.5             187.9             193.1             199.8             190.9          

 

   

Earnings before interest, after-tax

    2,422.5             1,889.0             1,929.9             1,459.2             2,052.2          

Adjustments, after-tax (a):

                     

Provisional net tax benefit

    (523.5)            -             -             -             -          

Mark-to-market effects

    (22.1)            (8.8)           (39.6)           56.5             (30.5)         

Divestitures loss (gain), net

    -             9.2             (66.0)           -             (36.0)         

Tax items

    40.9             -             -             78.6             -          

Acquisition transaction and integration costs

    58.5             -             -             10.4             -          

Restructuring costs

    61.4             153.9             160.8             217.7             3.6          

Project-related costs

    8.0             28.2             36.8             8.3             -          

Intangible asset impairments

    64.9             -             -             176.9             -          

CPW restructuring costs

    1.8             -           -       -             -             -          

Venezuela currency devaluation

    -             -             -             8.0             57.8          

 

   

Adjusted earnings before interest, after-tax for adjusted return on capital calculation

  $ 2,112.4         $     2,071.5           $       2,021.9           $       2,015.6           $       2,047.1          

 

   

Current portion of long-term debt

  $ 1,600.1         $     604.7           $       1,103.4           $       1,000.4           $       1,250.6           $       1,443.3   

Notes payable

    1,549.8             1,234.1             269.8             615.8             1,111.7             599.7   

Long-term debt

    12,668.7             7,642.9             7,057.7             7,575.3             6,396.6             5,901.8   

 

 

Total debt

    15,818.6             9,481.7             8,430.9             9,191.5             8,758.9             7,944.8   

Redeemable interest

    776.2             910.9             845.6             778.9             984.1             967.5   

Noncontrolling interests

    351.3             357.6             376.9             396.0             470.6             456.3   

Stockholders’ equity

    6,141.1             4,327.9             4,930.2             4,996.7             6,534.8             6,672.2   

 

 

Total capital

    23,087.2             15,078.1             14,583.6             15,363.1             16,748.4             16,040.8   

 

 

Accumulated other comprehensive loss

    2,429.0             2,244.5             2,612.2             2,310.7             1,340.3             1,585.3   

After-tax earnings adjustments (b)

    311.5             621.6             439.1             347.1             (209.3)            (204.2)  

 

 

Adjusted total capital

  $ 25,827.7         $     17,944.2           $       17,634.9           $       18,020.9           $       17,879.4           $         17,421.9   

 

 
                     

 

   

Average total capital (c)

  $ 19,082.7         $     14,830.9           $       14,973.4           $       16,055.8           $         16,394.6          

 

   

Return on average total capital (c)

    12.7         %     12.7           %       12.9           %       9.1           %       12.5           %    

 

   
                     

 

   

Adjusted average total capital (c)

  $     21,886.0         $     17,789.6           $       17,827.9           $       17,950.1           $       17,650.6          

 

   

Adjusted return on average total capital (c)

    9.7         %     11.6           %       11.3           %       11.2           %       11.6           %    

 

   

Change in adjusted return on average total capital

    (190)        bps                  

Foreign currency exchange impact

    10         bps                  

 

                 

Change in adjusted return on average total capital on a constant-currency basis

    (200)        bps                  

 

                 
(a) See our reconciliation below of the effective income tax rate as reported to the effective income tax rate excluding certain items affecting comparability for the tax impact of each item affecting comparability.
(b) Sum of current year and previous year after-tax adjustments.
(c) See “Glossary” in Item 8 of this report for definition.

 

48


Table of Contents

Free Cash Flow Conversion Rate and Total Cash Returned to Shareholders as a Percentage of Free Cash Flow

We believe these measures provide useful information to investors because they are important for assessing our efficiency in converting earnings to cash and returning cash to shareholders. The calculation of free cash flow conversion rate and net cash provided by operating activities conversion rate, its equivalent GAAP measure, follows:

 

In Millions    Fiscal 2018      

 

 

Net earnings, including earnings attributable to redeemable
and noncontrolling interests, as reported

     $2,163.0    

 

 

Provisional net tax benefit (a)

     $(523.5)   

Mark-to-market effects, net of tax (b)

     (22.1)   

Acquisition transaction and integration costs, net of tax (c)

     58.5    

Restructuring costs, net of tax (d)

     61.4    

Project-related costs, net of tax (d)

     8.0    

Intangible asset impairments, net of tax (e)

     64.9    

Tax adjustment (a)

     40.9    

CPW restructuring costs, net of tax

     1.8    

 

 

Adjusted net earnings, including earnings attributable to redeemable and noncontrolling interests

     1,852.9    

 

 
  

 

 

Net cash provided by operating activities

     2,841.0    

Purchases of land, buildings, and equipment

     (622.7)   

 

 

Free cash flow

     $2,218.3    

 

 
  

 

 

Net cash provided by operating activities conversion rate

     131%  

 

 

Free cash flow conversion rate

     120%  

 

 
(a) See Note 14 to the Consolidated Financial Statements in Item 8 of this report.
(b) See Note 7 to the Consolidated Financial Statements in Item 8 of this report.
(c) See Note 3 to the Consolidated Financial Statements in Item 8 of this report.
(d) See Note 4 to the Consolidated Financial Statements in Item 8 of this report.
(e) See Note 6 to the Consolidated Financial Statements in Item 8 of this report.

See our reconciliation below of the effective income tax rate as reported to the effective income tax rate excluding certain items affecting comparability for the tax impact of each item affecting comparability.

 

49


Table of Contents

Total Segment Operating Profit Constant-currency Growth Rates

We believe that this measure provides useful information to investors because it provides transparency to underlying performance of our segments by excluding the effect that foreign currency exchange rate fluctuations have on year-to-year comparability given volatility in foreign currency exchange markets.

Total segment operating profit growth rates on a constant-currency basis are calculated as follows:

 

         Fiscal      
         2018              2017      

 

 

 Percentage change in total segment operating profit as reported

     (5)  %          (2)  %      

 

 Impact of foreign currency exchange

 

  

 

 

 

 

1    pt

 

 

 

 

    

 

 

 

 

(1)  pt    

 

 

 

 

 

 

 Percentage change in total segment operating profit on a constant-currency basis

 

    

 

(6)  %

 

 

 

      

 

(1)  %    

 

 

 

 

 

See our reconciliation of total segment operating profit to operating profit, its GAAP-equivalent, above.

Constant-currency After-Tax Earnings from Joint Ventures Growth Rates

We believe that this measure provides useful information to investors because it provides transparency to underlying performance of our joint ventures by excluding the effect that foreign currency exchange rate fluctuations have on year-to-year comparability given volatility in foreign currency exchange markets.

After-tax earnings from joint ventures growth rates on a constant-currency basis are calculated as follows:

 

         Fiscal      
         2018             2017      

 

 

Percentage change in after-tax earnings from joint ventures as reported

     Flat             (4)  %      

Impact of foreign currency exchange

 

    

 

3  pts

 

 

 

    

 

2  pts    

 

 

 

 

 

Percentage change in after-tax earnings from joint ventures on a constant-currency basis

 

    

 

(3)  %

 

 

 

    

 

(6)  %    

 

 

 

 

 

Net Sales Growth Rates for Canada Operating Unit on a Constant-currency Basis

We believe this measure of our Canada operating unit net sales provides useful information to investors because it provides transparency to the underlying performance for the Canada operating unit within our North America Retail segment by excluding the effect that foreign currency exchange rate fluctuations have on year-to-year comparability given volatility in foreign currency exchange markets.

Net sales growth rates for our Canada operating unit on a constant-currency basis are calculated as follows:

 

         Fiscal      
         2018             2017      

 

 

Percentage change in net sales as reported

     3   %        (2)  %      

Impact of foreign currency exchange

 

    

 

4  pts

 

 

 

    

 

Flat         

 

 

 

 

 

Percentage change in net sales on a constant-currency basis

 

    

 

(1)  %

 

 

 

    

 

(2)  %    

 

 

 

 

 

 

50


Table of Contents

Constant-currency Segment Operating Profit Growth Rates

We believe that this measure provides useful information to investors because it provides transparency to underlying performance of our segments by excluding the effect that foreign currency exchange rate fluctuations have on year-to-year comparability given volatility in foreign currency exchange markets.

Our segments’ operating profit growth rates on a constant-currency basis are calculated as follows:

 

    Fiscal 2018  
   

Percentage Change in

Operating Profit

as Reported

   

Impact of Foreign

Currency Exchange

   

Percentage Change in

Operating Profit on

Constant-Currency

Basis

 

 

 

North America Retail

    (4)  %       Flat               (4)  %  

Europe & Australia

    (14)            8  pts       (22)       

Asia & Latin America

    (53)  %       3  pts       (56)  %  

 

 
   

 

Fiscal 2017

 
   

Percentage Change in

Operating Profit

as Reported

   

Impact of Foreign

Currency Exchange

   

Percentage Change in

Operating Profit on

Constant-Currency

Basis

 

North America Retail

    (2)  %       Flat             (2)  %  

Europe & Australia

    (18)            (9)  pts       (9)       

Asia & Latin America

    21  %       1    pt       20  %  

 

 

Effective Income Tax Rates Excluding Certain Items Affecting Comparability

We believe this measure provides useful information to investors because it is important for assessing the effective tax rate excluding certain items affecting comparability and presents the income tax effects of certain items affecting year-to-year comparability.

 

51


Table of Contents

Effective income tax rates excluding certain items affecting comparability are calculated as follows:

 

    Fiscal Year Ended  
    May 27, 2018     May 28, 2017     May 29, 2016     May 31, 2015     May 25, 2014  
In Millions  

Pretax

Earnings

(a)

   

Income

Taxes

   

Pretax

Earnings

(a)

   

Income

Taxes

   

Pretax

Earnings

(a)

   

Income

Taxes

   

Pretax

Earnings

(a)

   

Income

Taxes

   

Pretax

Earnings

(a)

   

Income

Taxes

 

 

 

As reported

  $ 2,135.6     $ 57.3     $ 2,271.3     $ 655.2     $ 2,403.6     $ 755.2     $ 1,761.9     $ 586.8     $ 2,655.0     $ 883.3  

Provisional net tax benefit (b)

    -       523.5       -       -       -       -       -       -       -       -  

Mark-to-market effects (c)

    (32.1     (10.0     (13.9     (5.1     (62.8     (23.2     89.7       33.2       (48.5     (18.0

Divestitures loss (gain) (d)

    -       -       13.5       4.3       (148.2     (82.2     -       -       (65.5     (29.5

Acquisition transaction and integration costs (d)

    83.9       25.4       -       -       -       -       16.0       5.6       -       -  

Tax items (b)

    -       (40.9     -       -       -       -       -       (78.6     -       -  

Restructuring costs (e)

    82.7       21.4       224.1       70.2       229.8       69.0       343.5       125.8       3.6       -  

Project-related costs (e)

    11.3       3.3       43.9       15.7       57.5       20.7       13.2       4.9       -       -  

Intangible asset impairments (f)

    96.9       32.0       -       -       -       -       260.0       83.1       -       -  

Venezuela currency devaluation

    -       -       -       -       -       -       8.0       -       62.2       4.4  

 

 

As adjusted

  $ 2,378.3     $ 612.0     $ 2,538.9     $ 740.3     $ 2,479.9     $ 739.5     $ 2,492.3     $ 760.8     $ 2,606.8     $ 840.2  

 

 

Effective tax rate:

                   

As reported

      2.7%         28.8%         31.4%         33.3%         33.3%  

As adjusted

      25.7%         29.2%         29.8%         30.5%         32.2%  

 

 

Sum of adjustments to income taxes

    $ 554.7       $ 85.1       $ (15.7     $ 174.0       $ (43.1

 

 

Average number of common shares - diluted EPS

      585.7         598.0         611.9         618.8         645.7  

 

 

Impact of income tax adjustments on diluted EPS excluding certain items affecting comparability

    $ (0.95     $ (0.14     $ 0.03       $ (0.28     $ 0.07  

 

 
  (a) Earnings before income taxes and after-tax earnings from joint ventures.
  (b) See Note 14 to the Consolidated Financial Statements in Item 8 of this report. The fiscal 2015 tax item is related to the one- time repatriation of historical foreign earnings.
  (c) See Note 7 to the Consolidated Financial Statements in Item 8 of this report.
  (d) See Note 3 to the Consolidated Financial Statements in Item 8 of this report.
  (e) See Note 4 to the Consolidated Financial Statements in Item 8 of this report.
  (f) See Note 6 to the Consolidated Financial Statements in Item 8 of this report.

 

52


Table of Contents

Adjusted Operating Profit as a Percent of Net Sales Excluding Certain Items Affecting Comparability

We believe this measure provides useful information to investors because it is important for assessing our operating profit margin on a comparable basis. Adjusted operating profit excludes certain items affecting comparability.

 

    Fiscal Year  

Percent of Net Sales

 

 

2018

 

   

2017

 

   

2016

 

   

2015

 

   

2014

 

 

 

 

Operating profit as reported

  $ 2,509.3       15.9   $ 2,566.4       16.4   $ 2,707.4       16.3  %    $ 2,077.3       11.8   $ 2,957.4       16.5 %  

Mark-to-market effects (a)

    (32.1     (0.2 )%      (13.9     (0.1 )%      (62.8     (0.4 )%      89.7       0.5     (48.5     (0.3)%  

Divestitures loss (gain) (b)

    -       -     13.5       0.1     (148.2     (0.9 )%      -       -     (65.5     (0.4)%  

Acquisition transaction and integration costs (b)

    34.0       0.3     -       -     -       - %      16.0       0.1     -       -  %  

Venezuela currency devaluation

    -       -     -       -     -       - %      8.0       -     62.2       0.4 %  

Restructuring costs (c)

    82.7       0.6     224.1       1.4     229.8       1.4 %      343.5       1.9     3.6       -  %  

Project-related costs (c)

    11.3       -     43.9       0.3     57.5       0.4 %      13.2       0.1     -       -  %  

Intangible asset impairments (d)

    96.9       0.6     -       -     -       - %      260.0       1.5     -       -  %  

 

 

Adjusted operating profit

  $ 2,702.1       17.2   $ 2,834.0       18.1   $ 2,783.7       16.8 %    $ 2,807.7       15.9   $ 2,909.2       16.2 %  

 

 
(a) See Note 7 to the Consolidated Financial Statements in Item 8 of this report.
(b) See Note 3 to the Consolidated Financial Statements in Item 8 of this report.
(c) See Note 4 to the Consolidated Financial Statements in Item 8 of this report.
(d) See Note 6 to the Consolidated Financial Statements in Item 8 of this report.

Forward-Looking Financial Measures

Our fiscal 2019 outlook for organic net sales growth and constant-currency total segment operating profit and adjusted diluted EPS are non-GAAP financial measures that exclude, or have otherwise been adjusted for, items impacting comparability, including the effect of foreign currency exchange rate fluctuations, restructuring charges and project-related costs, acquisition integration costs, and commodity mark-to-market effects. Our fiscal 2019 outlook for organic net sales growth also excludes the effect of acquisitions and divestitures. We are not able to reconcile these forward-looking non-GAAP financial measures to their most directly comparable forward-looking GAAP financial measures without unreasonable efforts because we are unable to predict with a reasonable degree of certainty the actual impact of changes in foreign currency exchange rates and commodity prices or the timing of acquisitions, divestitures and restructuring actions throughout fiscal 2019. The unavailable information could have a significant impact on our fiscal 2019 GAAP financial results.

For fiscal 2019, we currently expect: foreign currency exchange rates (based on blend of forward and forecasted rates and hedge positions), acquisitions, and divestitures to increase net sales growth by high single digits; foreign currency exchange rates to have an immaterial impact on adjusted operating profit and adjusted diluted EPS growth; and restructuring charges and project-related costs related to actions previously announced to total approximately $13 million.

 

53


Table of Contents

CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report contains or incorporates by reference forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our current expectations and assumptions. We also may make written or oral forward-looking statements, including statements contained in our filings with the SEC and in our reports to shareholders.

The words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “plan,” “project,” or similar expressions identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those currently anticipated or projected. We wish to caution you not to place undue reliance on any such forward-looking statements.

In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that could affect our financial performance and could cause our actual results in future periods to differ materially from any current opinions or statements.

Our future results could be affected by a variety of factors, such as: competitive dynamics in the consumer foods industry and the markets for our products, including new product introductions, advertising activities, pricing actions, and promotional activities of our competitors; economic conditions, including changes in inflation rates, interest rates, tax rates, or the availability of capital; product development and innovation; consumer acceptance of new products and product improvements; consumer reaction to pricing actions and changes in promotion levels; acquisitions or dispositions of businesses or assets, including our acquisition of Blue Buffalo and issues in the integration of Blue Buffalo and retention of key management and employees; unfavorable reaction to our acquisition of Blue Buffalo by customers, competitors, suppliers, and employees; changes in capital structure; changes in the legal and regulatory environment, including tax legislation, labeling and advertising regulations, and litigation; impairments in the carrying value of goodwill, other intangible assets, or other long-lived assets, or changes in the useful lives of other intangible assets; changes in accounting standards and the impact of significant accounting estimates; product quality and safety issues, including recalls and product liability; changes in consumer demand for our products; effectiveness of advertising, marketing, and promotional programs; changes in consumer behavior, trends, and preferences, including weight loss trends; consumer perception of health-related issues, including obesity; consolidation in the retail environment; changes in purchasing and inventory levels of significant customers; fluctuations in the cost and availability of supply chain resources, including raw materials, packaging, and energy; disruptions or inefficiencies in the supply chain; effectiveness of restructuring and cost saving initiatives; volatility in the market value of derivatives used to manage price risk for certain commodities; benefit plan expenses due to changes in plan asset values and discount rates used to determine plan liabilities; failure or breach of our information technology systems; foreign economic conditions, including currency rate fluctuations; and political unrest in foreign markets and economic uncertainty due to terrorism or war.

You should also consider the risk factors that we identify in Item 1A of this report, which could also affect our future results.

We undertake no obligation to publicly revise any forward-looking statements to reflect events or circumstances after the date of those statements or to reflect the occurrence of anticipated or unanticipated events.

Item 7A Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk stemming from changes in interest and foreign exchange rates and commodity and equity prices. Changes in these factors could cause fluctuations in our earnings and cash flows. In the normal

 

54


Table of Contents

course of business, we actively manage our exposure to these market risks by entering into various hedging transactions, authorized under established policies that place clear controls on these activities. The counterparties in these transactions are generally highly rated institutions. We establish credit limits for each counterparty. Our hedging transactions include but are not limited to a variety of derivative financial instruments. For information on interest rate, foreign exchange, commodity price, and equity instrument risk, please see Note 7 to the Consolidated Financial Statements in Item 8 of this report.

VALUE AT RISK

The estimates in the table below are intended to measure the maximum potential fair value we could lose in one day from adverse changes in market interest rates, foreign exchange rates, commodity prices, and equity prices under normal market conditions. A Monte Carlo value-at-risk (VAR) methodology was used to quantify the market risk for our exposures. The models assumed normal market conditions and used a 95 percent confidence level.

The VAR calculation used historical interest and foreign exchange rates, and commodity and equity prices from the past year to estimate the potential volatility and correlation of these rates in the future. The market data were drawn from the RiskMetrics™ data set. The calculations are not intended to represent actual losses in fair value that we expect to incur. Further, since the hedging instrument (the derivative) inversely correlates with the underlying exposure, we would expect that any loss or gain in the fair value of our derivatives would be generally offset by an increase or decrease in the fair value of the underlying exposure. The positions included in the calculations were: debt; investments; interest rate swaps; foreign exchange forwards; commodity swaps, futures, and options; and equity instruments. The calculations do not include the underlying foreign exchange and commodities or equity-related positions that are offset by these market-risk-sensitive instruments.

The table below presents the estimated maximum potential VAR arising from a one-day loss in fair value for our interest rate, foreign currency, commodity, and equity market-risk-sensitive instruments outstanding as of May 27, 2018 and May 28, 2017, and the average fair value impact during the year ended May 27, 2018.

 

     Fair Value Impact  
In Millions   

May 27,

2018

    

Average

during

fiscal 2018

    

May 28,

2017

 

Interest rate instruments

   $         33.2      $         27.5      $         25.1  

Foreign currency instruments

     21.3        23.1        24.6  

Commodity instruments

     1.9        2.1        3.2  

Equity instruments

     2.0        1.4        1.3  

 

 

 

55


Table of Contents

ITEM 8 Financial Statements and Supplementary Data

REPORT OF MANAGEMENT RESPONSIBILITIES

The management of General Mills, Inc. is responsible for the fairness and accuracy of the consolidated financial statements. The statements have been prepared in accordance with accounting principles that are generally accepted in the United States, using management’s best estimates and judgments where appropriate. The financial information throughout this Annual Report on Form 10-K is consistent with our consolidated financial statements.

Management has established a system of internal controls that provides reasonable assurance that assets are adequately safeguarded and transactions are recorded accurately in all material respects, in accordance with management’s authorization. We maintain a strong audit program that independently evaluates the adequacy and effectiveness of internal controls. Our internal controls provide for appropriate separation of duties and responsibilities, and there are documented policies regarding use of our assets and proper financial reporting. These formally stated and regularly communicated policies demand highly ethical conduct from all employees.

The Audit Committee of the Board of Directors meets regularly with management, internal auditors, and our independent registered public accounting firm to review internal control, auditing, and financial reporting matters. The independent registered public accounting firm, internal auditors, and employees have full and free access to the Audit Committee at any time.

The Audit Committee reviewed and approved the Company’s annual financial statements. The Audit Committee recommended, and the Board of Directors approved, that the consolidated financial statements be included in the Annual Report. The Audit Committee also appointed KPMG LLP to serve as the Company’s independent registered public accounting firm for fiscal 2019.

 

/s/ J. L. Harmening    /s/ D. L. Mulligan   
J. L. Harmening    D. L. Mulligan   
Chief Executive Officer    Executive Vice President   
   and Chief Financial Officer   

June 29, 2018

 

56


Table of Contents

Report of Independent Registered Public Accounting Firm

To the stockholders and board of directors

General Mills, Inc.:

Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of General Mills, Inc. and subsidiaries (the “Company”) as of May 27, 2018 and May 28, 2017, the related consolidated statements of earnings, comprehensive income, total equity and redeemable interest, and cash flows for each of the fiscal years in the three-year period ended May 27, 2018, and the related notes (collectively, the “consolidated financial statements”). In connection with our audits of the consolidated financial statements, we have audited the accompanying financial statement schedule. We also have audited the Company’s internal control over financial reporting as of May 27, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of May 27, 2018 and May 28, 2017, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended May 27, 2018, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the accompanying financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 27, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

The Company acquired Blue Buffalo Pet Products, Inc. (“Blue Buffalo”) during fiscal 2018, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of May 27, 2018, Blue Buffalo internal control over financial reporting associated with 29% of total assets and 0% of net sales included in the consolidated financial statements of the Company as of and for the fiscal year ended May 27, 2018. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Blue Buffalo.

Basis for Opinion

The Company’s management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9a Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts

 

57


Table of Contents

and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

We have served as the Company’s auditor since 1928.

Minneapolis, MN

June 29, 2018

 

58


Table of Contents

Consolidated Statements of Earnings

GENERAL MILLS, INC. AND SUBSIDIARIES

(In Millions, Except per Share Data)

 

    Fiscal Year  
    2018     2017     2016  

Net sales

   $     15,740.4        $     15,619.8        $     16,563.1    

Cost of sales

    10,312.9         10,056.0         10,733.6    

Selling, general, and administrative expenses

    2,752.6         2,801.3         3,118.9    

Divestitures loss (gain)

    -         13.5         (148.2)   

Restructuring, impairment, and other exit costs

    165.6         182.6         151.4    
 

 

 

   

 

 

   

 

 

 

Operating profit

    2,509.3         2,566.4         2,707.4    

Interest, net

    373.7         295.1         303.8    
 

 

 

   

 

 

   

 

 

 

Earnings before income taxes and after-tax earnings from joint ventures

    2,135.6         2,271.3         2,403.6    

Income taxes

    57.3         655.2         755.2    

After-tax earnings from joint ventures

    84.7         85.0         88.4    
 

 

 

   

 

 

   

 

 

 

Net earnings, including earnings attributable to redeemable and noncontrolling interests

    2,163.0         1,701.1         1,736.8    

Net earnings attributable to redeemable and noncontrolling interests

    32.0         43.6         39.4    
 

 

 

   

 

 

   

 

 

 

Net earnings attributable to General Mills

   $ 2,131.0        $ 1,657.5        $ 1,697.4    
 

 

 

   

 

 

   

 

 

 

Earnings per share - basic

   $ 3.69        $ 2.82        $ 2.83    
 

 

 

   

 

 

   

 

 

 

Earnings per share - diluted

   $ 3.64        $ 2.77        $ 2.77    
 

 

 

   

 

 

   

 

 

 

Dividends per share

   $ 1.96        $ 1.92        $ 1.78    
 

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

59


Table of Contents

Consolidated Statements of Comprehensive Income

GENERAL MILLS, INC. AND SUBSIDIARIES

(In Millions)

 

    Fiscal Year  
    2018     2017     2016  

Net earnings, including earnings attributable to redeemable and noncontrolling interests

   $     2,163.0        $     1,701.1        $     1,736.8    

Other comprehensive income (loss), net of tax:

     

Foreign currency translation

    (37.0)        6.3         (108.7)   

Net actuarial income (loss)

    140.1         197.9         (325.9)   

Other fair value changes:

     

Securities

    1.2         0.8         0.1    

Hedge derivatives

    (50.8)        53.3         16.0    

Reclassification to earnings:

     

Securities

    (5.1)        -         -    

Hedge derivatives

    17.4         (25.7)        (9.5)   

Amortization of losses and prior service costs

          117.6               122.5                 128.6    
 

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

          183.4               355.1               (299.4)   
 

 

 

   

 

 

   

 

 

 

Total comprehensive income

    2,346.4         2,056.2         1,437.4    

Comprehensive income attributable to redeemable and noncontrolling interests

            70.5                 31.0                   41.5    
 

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to General Mills

   $     2,275.9        $     2,025.2        $     1,395.9    
 

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

60


Table of Contents

Consolidated Balance Sheets

GENERAL MILLS, INC. AND SUBSIDIARIES

(In Millions, Except Par Value)

 

    

May 27,

      2018       

    

May 28,

      2017       

 

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $ 399.0       $ 766.1   

Receivables

     1,684.2         1,430.1   

Inventories

     1,642.2         1,483.6   

Prepaid expenses and other current assets

     398.3         381.6   
  

 

 

    

 

 

 

Total current assets

     4,123.7         4,061.4   

Land, buildings, and equipment

     4,047.2         3,687.7   

Goodwill

     14,065.0         8,747.2   

Other intangible assets

     7,445.1         4,530.4   

Other assets

     943.0         785.9   
  

 

 

    

 

 

 

Total assets

   $        30,624.0       $        21,812.6   
  

 

 

    

 

 

 

LIABILITIES AND EQUITY

     

Current liabilities:

     

Accounts payable

   $ 2,746.2       $ 2,119.8   

Current portion of long-term debt

     1,600.1         604.7   

Notes payable

     1,549.8         1,234.1   

Other current liabilities

     1,445.8         1,372.2   
  

 

 

    

 

 

 

Total current liabilities

     7,341.9         5,330.8   

Long-term debt

     12,668.7         7,642.9   

Deferred income taxes

     2,003.8         1,719.4   

Other liabilities

     1,341.0         1,523.1   
  

 

 

    

 

 

 

Total liabilities

     23,355.4         16,216.2   
  

 

 

    

 

 

 

Redeemable interest

     776.2         910.9   

 

Stockholders’ equity:

     

Common stock, 754.6 shares issued, $0.10 par value

     75.5         75.5   

Additional paid-in capital

     1,202.5         1,120.9   

Retained earnings

     14,459.6         13,138.9   

Common stock in treasury, at cost, shares of 161.5 and 177.7

     (7,167.5)        (7,762.9)  

Accumulated other comprehensive loss

     (2,429.0)        (2,244.5)  
  

 

 

    

 

 

 

Total stockholders’ equity

     6,141.1         4,327.9   

Noncontrolling interests

     351.3         357.6   
  

 

 

    

 

 

 

Total equity

     6,492.4         4,685.5   
  

 

 

    

 

 

 

Total liabilities and equity

   $        30,624.0       $        21,812.6   
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

61


Table of Contents

Consolidated Statements of Total Equity, and Redeemable Interest

GENERAL MILLS, INC. AND SUBSIDIARIES

(In Millions, Except per Share Data)

 

     $.10 Par Value Common Stock

 

(One Billion Shares Authorized)

                               
     Issued     Treasury                                
      Shares     Par
Amount
    Additional Paid-In
Capital
    Shares     Amount     Retained
Earnings
   

Accumulated

Other
Comprehensive Loss

   

Non-

controlling
Interests

   

Total

Equity

   

Redeemable

Interest

 

 

  Balance as of May 31, 2015

  

 

 

 

754.6

 

 

 

 

 

 

75.5

 

 

 

 

 

 

1,296.7

 

 

 

 

 

 

(155.9

 

 

 

 

 

(6,055.6

 

 

 

 

 

11,990.8

 

 

 

 

 

 

(2,310.7

 

 

 

 

 

396.0

 

 

 

 

 

 

5,392.7

 

 

 

 

 

 

778.9     

 

 

  Total comprehensive income (loss)

               1,697.4       (301.5     11.2       1,407.1       30.3       

  Cash dividends declared ($1.78 per share)

               (1,071.7         (1,071.7  

  Shares purchased

           (10.7     (606.7           (606.7  

  Stock compensation plans (includes income tax benefits of $94.1)

         (46.3     8.8       335.7             289.4    

  Unearned compensation related to stock unit awards

         (63.3               (63.3  

  Earned compensation

         84.8                 84.8    

  Increase in redemption value of redeemable interest

         (91.5               (91.5     91.5       

  Acquisition of interest in subsidiary

         (3.4             (1.1     (4.5  

  Distributions to redeemable and noncontrolling interest holders

                   (29.2     (29.2     (55.1)      
                                                                                  

 

  Balance as of May 29, 2016

  

 

 

 

754.6

 

 

 

 

 

 

75.5

 

 

 

 

 

 

1,177.0

 

 

 

 

 

 

(157.8

 

 

 

 

 

(6,326.6

 

 

 

 

 

12,616.5

 

 

 

 

 

 

(2,612.2

 

 

 

 

 

376.9

 

 

 

 

 

 

5,307.1

 

 

 

 

 

 

845.6     

 

 

  Total comprehensive income

               1,657.5       367.7       13.8       2,039.0       17.2       

  Cash dividends declared ($1.92 per share)

               (1,135.1         (1,135.1  

  Shares purchased

           (25.4     (1,651.5           (1,651.5  

  Stock compensation plans (includes income tax benefits of $64.1)

         3.6       5.5       215.2             218.8    

  Unearned compensation related to stock unit awards

         (78.5               (78.5  

  Earned compensation

         94.9                 94.9    

  Increase in redemption value of redeemable interest

         (75.9               (75.9     75.9       

  Acquisition of interest in subsidiary

         (0.2             0.1       (0.1  

  Distributions to redeemable and noncontrolling interest holders

                   (33.2     (33.2     (27.8)      
                                                                                  

 

  Balance as of May 28, 2017

  

 

 

 

754.6

 

 

 

 

 

 

75.5

 

 

 

 

 

 

1,120.9

 

 

 

 

 

 

(177.7

 

 

 

 

 

(7,762.9

 

 

 

 

 

13,138.9

 

 

 

 

 

 

(2,244.5

 

 

 

 

 

357.6

 

 

 

 

 

 

4,685.5

 

 

 

 

 

 

910.9     

 

 

  Total comprehensive income

               2,131.0       144.9       26.9       2,302.8       43.6       

  Cash dividends declared ($1.96 per share)

               (1,139.7         (1,139.7  

  Shares purchased

           (10.9     (601.6           (601.6  

  Shares issued

         (39.1     22.7       1,009.0             969.9    

  Stock compensation plans (includes income tax benefits of $25.2)

         (57.9     4.4       188.0             130.1    

  Unearned compensation related to stock unit awards

         (58.1               (58.1  

  Earned compensation

         77.0                 77.0    

  Decrease in redemption value of redeemable interest

         159.7                 159.7       (159.7)      

  Distributions to redeemable and noncontrolling interest holders

                   (33.2     (33.2     (18.6)      

  Reclassification of certain income tax effects

               329.4       (329.4       -      
                                                                                  

 

  Balance as of May 27, 2018

  

 

 

 

754.6

 

 

 

 

  $

 

    75.5

 

 

 

 

 $

 

                1,202.5

 

 

 

 

 

 

(161.5

 

 

 

 $

 

        (7,167.5

 

 

 

  $

 

    14,459.6

 

 

 

 

  $

 

        (2,429.0

 

 

 

  $

 

        351.3

 

 

 

 

  $

 

        6,492.4

 

 

 

 

  $

 

        776.2     

 

 

                                                                                  

See accompanying notes to consolidated financial statements.

 

62


Table of Contents

Consolidated Statements of Cash Flows

GENERAL MILLS, INC. AND SUBSIDIARIES

(In Millions)

 

     Fiscal Year  
     2018      2017       2016   

Cash Flows - Operating Activities

        

Net earnings, including earnings attributable to redeemable and noncontrolling interests

   $           2,163.0       $           1,701.1      $           1,736.8   

Adjustments to reconcile net earnings to net cash provided by operating activities:

        

Depreciation and amortization

     618.8         603.6         608.1   

After-tax earnings from joint ventures

     (84.7)        (85.0)        (88.4)  

Distributions of earnings from joint ventures

     113.2         75.6         75.1   

Stock-based compensation

     77.0         95.7         89.8   

Deferred income taxes

     (504.3)        183.9         120.6   

Pension and other postretirement benefit plan contributions

     (31.8)        (45.4)        (47.8)  

Pension and other postretirement benefit plan costs

     4.6         35.7         118.1   

Divestitures loss (gain)

            13.5         (148.2)  

Restructuring, impairment, and other exit costs

     126.0         117.0         107.2   

Changes in current assets and liabilities, excluding the effects of acquisitions and divestitures

     542.1         (194.2)        298.5   

Other, net

     (182.9)        (86.3)        (105.6)  
  

 

 

    

 

 

    

 

 

 

Net cash provided by operating activities

     2,841.0         2,415.2         2,764.2   
  

 

 

    

 

 

    

 

 

 

Cash Flows - Investing Activities

        

Purchases of land, buildings, and equipment

     (622.7)        (684.4)        (729.3)  

Acquisitions, net of cash acquired

     (8,035.8)               (84.0)  

Investments in affiliates, net

     (17.3)        3.3         63.9   

Proceeds from disposal of land, buildings, and equipment

     1.4         4.2         4.4   

Proceeds from divestitures

            17.5         828.5   

Exchangeable note

            13.0         21.1   

Other, net

     (11.0)        (0.5)        (11.2)  
  

 

 

    

 

 

    

 

 

 

Net cash provided (used) by investing activities

     (8,685.4)        (646.9)        93.4   
  

 

 

    

 

 

    

 

 

 

Cash Flows - Financing Activities

        

Change in notes payable

     327.5         962.4         (323.8)  

Issuance of long-term debt

     6,550.0         1,072.1