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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark One)

RQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2019

 

£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

 

Trading Symbol(s)

 

Name of each exchange

on which registered

Common Stock, $.10 par value

 

GIS

 

New York Stock Exchange

Floating Rate Notes due 2020

 

GIS20A

 

New York Stock Exchange

2.100% Notes due 2020

 

GIS20

 

New York Stock Exchange

1.000% Notes due 2023

 

GIS23A

 

New York Stock Exchange

1.500% Notes due 2027

 

GIS27

 

New York Stock Exchange

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

 

________________

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 RNo £

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes RNo £

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth 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.

Large accelerated filer R

 

Accelerated filer £

Non-accelerated filer ££

 

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 Exchange Act).

Yes £No R

 

Number of shares of Common Stock outstanding as of September 10, 2019: 604,393,769 (excluding 150,219,559 shares held in the treasury).

 


 

General Mills, Inc.

 

Table of Contents

 

 

Page

PART I – Financial Information

 

Item 1. Financial Statements

 

Consolidated Statements of Earnings for the quarters ended August 25, 2019 and August 26, 2018

4

Consolidated Statements of Comprehensive Income for the quarters ended August 25, 2019 and August 26, 2018

5

Consolidated Balance Sheets as of August 25, 2019, and May 26, 2019

6

Consolidated Statements of Total Equity and Redeemable Interest for the quarters ended August 25, 2019 and August 26, 2018

7

Consolidated Statements of Cash Flows for the quarters ended August 25, 2019 and August 26, 2018

8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

Item 3. Quantitative and Qualitative Disclosures About Market Risk

33

Item 4. Controls and Procedures

33

PART II – Other Information

 

Item 6. Exhibits

35

Signatures

36

 

 

3


 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1. Financial Statements

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Earnings

GENERAL MILLS, INC. AND SUBSIDIARIES

(Unaudited) (In Millions, Except per Share Data)

 

 

 

 

 

 

 

Quarter Ended

 

 

Aug. 25, 2019

 

 

Aug. 26, 2018

Net sales

$

4,002.5

 

$

4,094.0

Cost of sales

 

2,613.0

 

 

2,751.2

Selling, general, and administrative expenses

 

718.9

 

 

742.7

Restructuring, impairment, and other exit costs (recoveries)

 

8.2

 

 

(1.4)

Operating profit

 

662.4

 

 

601.5

Benefit plan non-service income

 

(30.2)

 

 

(20.9)

Interest, net

 

118.7

 

 

133.5

Earnings before income taxes and after-tax earnings

 

 

 

 

 

from joint ventures

 

573.9

 

 

488.9

Income taxes

 

67.2

 

 

110.7

After-tax earnings from joint ventures

 

21.8

 

 

17.7

Net earnings, including earnings attributable to

 

 

 

 

 

redeemable and noncontrolling interests

 

528.5

 

 

395.9

Net earnings attributable to redeemable

 

 

 

 

 

and noncontrolling interests

 

7.9

 

 

3.6

Net earnings attributable to General Mills

$

520.6

 

$

392.3

Earnings per share - basic

$

0.86

 

$

0.66

Earnings per share - diluted

$

0.85

 

$

0.65

Dividends per share

$

0.49

 

$

0.49

See accompanying notes to consolidated financial statements.

 

4


 

Consolidated Statements of Comprehensive Income

GENERAL MILLS, INC. AND SUBSIDIARIES

(Unaudited) (In Millions)

 

 

 

 

 

 

 

Quarter Ended

 

 

Aug. 25, 2019

 

 

Aug. 26, 2018

Net earnings, including earnings attributable to

 

 

 

 

 

redeemable and noncontrolling interests

$

528.5

 

$

395.9

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Foreign currency translation

 

(3.7)

 

 

(106.2)

Other fair value changes:

 

 

 

 

 

Hedge derivatives

 

3.8

 

 

7.1

Reclassification to earnings:

 

 

 

 

 

Securities

 

-

 

 

(2.0)

Hedge derivatives

 

(0.6)

 

 

0.6

Amortization of losses and prior service costs

 

19.6

 

 

21.9

Other comprehensive income (loss), net of tax

 

19.1

 

 

(78.6)

Total comprehensive income

 

547.6

 

 

317.3

Comprehensive income (loss) attributable to

 

 

 

 

 

redeemable and noncontrolling interests

 

2.2

 

 

(4.8)

Comprehensive income attributable to General Mills

$

545.4

 

$

322.1

See accompanying notes to consolidated financial statements.

 

 

 

5


 

Consolidated Balance Sheets

 

GENERAL MILLS, INC. AND SUBSIDIARIES

 

(In Millions, Except Par Value)

 

 

 

 

Aug. 25, 2019

 

 

May 26, 2019

 

 

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

504.8

 

$

450.0

 

Receivables

 

 

1,710.5

 

 

1,679.7

 

Inventories

 

 

1,700.1

 

 

1,559.3

 

Prepaid expenses and other current assets

 

 

346.0

 

 

497.5

 

Total current assets

 

 

4,261.4

 

 

4,186.5

 

Land, buildings, and equipment

 

 

3,668.3

 

 

3,787.2

 

Goodwill

 

 

13,983.6

 

 

13,995.8

 

Other intangible assets

 

 

7,151.4

 

 

7,166.8

 

Other assets

 

 

1,248.5

 

 

974.9

 

Total assets

 

$

30,313.2

 

$

30,111.2

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

2,786.7

 

$

2,854.1

 

Current portion of long-term debt

 

 

1,391.8

 

 

1,396.5

 

Notes payable

 

 

1,296.1

 

 

1,468.7

 

Other current liabilities

 

 

1,428.8

 

 

1,367.8

 

Total current liabilities

 

 

6,903.4

 

 

7,087.1

 

Long-term debt

 

 

11,619.8

 

 

11,624.8

 

Deferred income taxes

 

 

1,991.7

 

 

2,031.0

 

Other liabilities

 

 

1,554.9

 

 

1,448.9

 

Total liabilities

 

 

22,069.8

 

 

22,191.8

 

Redeemable interest

 

 

547.8

 

 

551.7

 

Stockholders' equity:

 

 

 

 

 

 

 

Common stock, 754.6 shares issued, $0.10 par value

 

75.5

 

 

75.5

 

Additional paid-in capital

 

 

1,370.9

 

 

1,386.7

 

Retained earnings

 

 

15,218.8

 

 

14,996.7

 

Common stock in treasury, at cost, shares of 150.5 and 152.7

 

(6,681.8)

 

 

(6,779.0)

 

Accumulated other comprehensive loss

 

 

(2,600.6)

 

 

(2,625.4)

 

Total stockholders' equity

 

 

7,382.8

 

 

7,054.5

 

Noncontrolling interests

 

 

312.8

 

 

313.2

 

Total equity

 

 

7,695.6

 

 

7,367.7

 

Total liabilities and equity

 

$

30,313.2

 

$

30,111.2

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

 

6


 

Consolidated Statements of Total Equity and Redeemable Interest

GENERAL MILLS, INC. AND SUBSIDIARIES

(Unaudited) (In Millions, Except per Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$.10 Par Value Common Stock

 

 

 

 

 

 

 

 

 

 

 

(One Billion Shares Authorized)

 

 

 

 

 

 

 

 

 

 

 

Issued

 

Treasury

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Other

 

Non-

 

 

 

 

 

 

 

 

 

Paid-In

 

 

 

 

 

Retained

 

Comprehensive

 

controlling

 

Total

 

Redeemable

 

Shares

 

Par Amount

 

Capital

 

Shares

 

Amount

 

Earnings

 

Loss

 

Interests

 

Equity

 

Interest

Balance as of May 26, 2019

754.6

$

75.5

$

1,386.7

 

(152.7)

$

(6,779.0)

$

14,996.7

$

(2,625.4)

$

313.2

$

7,367.7

$

551.7

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

520.6

 

24.8

 

2.1

 

547.5

 

0.1

Cash dividends declared ($0.49 per share)

 

 

 

 

 

 

 

 

 

 

(298.5)

 

 

 

 

 

(298.5)

 

 

Stock compensation plans

 

 

 

 

18.0

 

2.2

 

97.2

 

 

 

 

 

 

 

115.2

 

 

Unearned compensation related to restricted stock unit awards

 

 

 

 

(66.5)

 

 

 

 

 

 

 

 

 

 

 

(66.5)

 

 

Earned compensation

 

 

 

 

28.7

 

 

 

 

 

 

 

 

 

 

 

28.7

 

 

Decrease in redemption value of redeemable interest

 

 

 

 

4.0

 

 

 

 

 

 

 

 

 

 

 

4.0

 

(4.0)

Distributions to noncontrolling and redeemable interest holders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2.5)

 

(2.5)

 

 

Balance as of August 25, 2019

754.6

$

75.5

$

1,370.9

 

(150.5)

$

(6,681.8)

$

15,218.8

$

(2,600.6)

$

312.8

$

7,695.6

$

547.8

 

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

Total comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

392.3

 

(70.2)

 

1.8

 

323.9

 

(6.6)

Cash dividends declared ($0.49 per share)

 

 

 

 

 

 

 

 

 

 

(294.2)

 

 

 

 

 

(294.2)

 

 

Shares purchased

 

 

 

 

 

 

 

 

(0.2)

 

 

 

 

 

 

 

(0.2)

 

 

Stock compensation plans

 

 

 

 

(2.5)

 

3.0

 

131.8

 

 

 

 

 

 

 

129.3

 

 

Unearned compensation related to restricted stock unit awards

 

 

 

 

(65.2)

 

 

 

 

 

 

 

 

 

 

 

(65.2)

 

 

Earned compensation

 

 

 

 

28.1

 

 

 

 

 

 

 

 

 

 

 

28.1

 

 

Increase in redemption value of redeemable interest

 

 

 

 

(2.0)

 

 

 

 

 

 

 

 

 

 

 

(2.0)

 

2.0

Distributions to noncontrolling and redeemable interest holders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2.4)

 

(2.4)

 

 

Adoption of revenue recognition accounting requirements

 

 

 

 

 

 

 

 

 

 

(33.9)

 

 

 

 

 

(33.9)

 

 

Balance as of August 26, 2018

754.6

$

75.5

$

1,160.9

 

(158.5)

$

(7,035.9)

$

14,523.8

$

(2,499.2)

$

350.7

$

6,575.8

$

771.6

See accompanying notes to consolidated financial statements.

 

 

 

7


 

Consolidated Statements of Cash Flows

GENERAL MILLS, INC. AND SUBSIDIARIES

(Unaudited) (In Millions)

 

 

 

 

 

 

 

Quarter Ended

 

 

Aug. 25, 2019

 

 

Aug. 26, 2018

Cash Flows - Operating Activities

 

 

 

 

 

Net earnings, including earnings attributable to redeemable

 

 

 

 

 

and noncontrolling interests

$

528.5

 

$

395.9

Adjustments to reconcile net earnings to net cash

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

154.1

 

 

155.2

After-tax earnings from joint ventures

 

(21.8)

 

 

(17.7)

Distributions of earnings from joint ventures

 

20.7

 

 

29.2

Stock-based compensation

 

28.8

 

 

26.1

Deferred income taxes

 

(37.2)

 

 

28.9

Pension and other postretirement benefit plan contributions

 

(6.9)

 

 

(7.4)

Pension and other postretirement benefit plan costs

 

(7.8)

 

 

1.5

Restructuring, impairment, and other exit costs

 

4.9

 

 

(18.9)

Changes in current assets and liabilities

 

(84.6)

 

 

14.8

Other, net

 

(6.6)

 

 

(0.2)

Net cash provided by operating activities

 

572.1

 

 

607.4

Cash Flows - Investing Activities

 

 

 

 

 

Purchases of land, buildings, and equipment

 

(69.8)

 

 

(112.7)

Investments in affiliates, net

 

(12.5)

 

 

0.1

Proceeds from disposal of land, buildings, and equipment

 

0.3

 

 

0.1

Other, net

 

(1.7)

 

 

(27.1)

Net cash used by investing activities

 

(83.7)

 

 

(139.6)

Cash Flows - Financing Activities

 

 

 

 

 

Change in notes payable

 

(170.0)

 

 

(189.8)

Payment of long-term debt

 

(0.1)

 

 

(0.2)

Proceeds from common stock issued on exercised options

 

55.8

 

 

73.4

Purchases of common stock for treasury

 

-

 

 

(0.2)

Dividends paid

 

(298.5)

 

 

(294.2)

Distributions to noncontrolling and redeemable interest holders

 

(2.5)

 

 

(2.4)

Other, net

 

(13.3)

 

 

(9.6)

Net cash used by financing activities

 

(428.6)

 

 

(423.0)

Effect of exchange rate changes on cash and cash equivalents

 

(5.0)

 

 

(10.9)

Increase in cash and cash equivalents

 

54.8

 

 

33.9

Cash and cash equivalents - beginning of year

 

450.0

 

 

399.0

Cash and cash equivalents - end of period

$

504.8

 

$

432.9

Cash Flow from changes in current assets and liabilities:

 

 

 

 

 

Receivables

$

(37.4)

 

$

(48.7)

Inventories

 

(145.3)

 

 

(58.2)

Prepaid expenses and other current assets

 

148.0

 

 

35.4

Accounts payable

 

(35.8)

 

 

17.7

Other current liabilities

 

(14.1)

 

 

68.6

Changes in current assets and liabilities

$

(84.6)

 

$

14.8

See accompanying notes to consolidated financial statements.

 

 

 

 

8


 

GENERAL MILLS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(1) Background

 

The accompanying Consolidated Financial Statements of General Mills, Inc. (we, us, our, General Mills, or the Company) have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not include certain information and disclosures required for comprehensive financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature, including the elimination of all intercompany transactions and any noncontrolling and redeemable interests’ share of those transactions. Operating results for the quarter ended August 25, 2019, are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 2020.

 

These statements should be read in conjunction with the Consolidated Financial Statements and footnotes included in our Annual Report on Form 10-K for the fiscal year ended May 26, 2019. The accounting policies used in preparing these Consolidated Financial Statements are the same as those described in Note 2 to the Consolidated Financial Statements in that Form 10-K with the exception of new requirements adopted in the first quarter of fiscal 2020.

 

In the first quarter of fiscal 2020, we adopted new accounting requirements for hedge accounting. 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 adoption did not have a material impact on our results of operations or financial position.

 

In the first quarter of fiscal 2020, we adopted new requirements for the accounting, presentation and classification of leases. This results in certain leases being capitalized as a right of use asset with a related liability on our Consolidated Balance Sheet. We have performed a review of our lease portfolio, implemented lease accounting software, and developed a centralized business process with corresponding controls. We adopted this guidance utilizing the cumulative effect adjustment approach, which required application of the guidance at the adoption date and elected certain practical expedients permitted under the transition guidance, including not reassessing whether existing contracts contain leases and carrying forward the historical classification of those leases. In addition, we elected not to recognize leases with an initial term of 12 months or less on our Consolidated Balance Sheet and to continue our historical treatment of land easements, under permitted elections. This guidance did not have a material impact on retained earnings, our Consolidated Statements of Earnings, or our Consolidated Statements of Cash Flows. See Note 5 to the Consolidated Financial Statements for additional information on the impact to our Consolidated Balance Sheets.

 

Certain terms used throughout this report are defined in the “Glossary” section below.

 

 

 

(2) Restructuring, Impairment, and Other Exit Costs

 

Restructuring charges were as follows:

 

 

 

Quarter Ended

In Millions

 

Aug. 25, 2019

 

Aug. 26, 2018

Charges (recoveries) associated with restructuring actions previously announced

$

14.3

$

(1.2)

Total

$

14.3

$

(1.2)

 

 

During the first quarter of fiscal 2020, we did not undertake any new restructuring actions. We recorded $14.3 million of restructuring charges for previously announced restructuring actions, compared to a $1.2 million net recovery of restructuring charges in the first quarter of fiscal 2019. The restructuring charges primarily relate to actions to drive efficiencies in targeted areas of our global supply chain. Certain global supply chain actions are subject to union negotiations and works counsel consultations, where required. We expect these actions to be completed by the end of fiscal 2022.

 

We spent $9.4 million of cash related to restructuring actions previously announced in the first quarter of fiscal 2020 compared to $17.7 million in the same period of fiscal 2019.

 

Restructuring and impairment charges and project-related costs are recorded in our Consolidated Statements of Earnings as follows:

 

9


 

 

 

Quarter Ended

In Millions

 

Aug. 25, 2019

 

Aug. 26, 2018

Restructuring, impairment, and other exit costs (recoveries)

$

8.2

$

(1.4)

Cost of sales

 

6.1

 

0.2

Total restructuring charges (recoveries)

 

14.3

 

(1.2)

Project-related costs classified in cost of sales

$

-

$

1.2

 

The roll forward of our restructuring and other exit cost reserves, included in other current liabilities, is as follows:

 

In Millions

 

 

Reserve balance as of May 26, 2019

$

36.5

Fiscal 2020 charges, including foreign currency translation

 

2.7

Utilized in fiscal 2020

 

(5.8)

Reserve balance as of Aug. 25, 2019

$

33.4

 

The reserve balance primarily consists of expected severance payments associated with restructuring actions.

 

The charges recognized in the roll forward of our reserves for restructuring and other exit costs do not include items charged directly to expense (e.g., asset impairment charges, accelerated depreciation, the gain or loss on the sale of restructured assets, and the write-off of spare parts) and other periodic exit costs are recognized as incurred, as those items are not reflected in our restructuring and other exit cost reserves on our Consolidated Balance Sheets.

 

(3) Goodwill and Other Intangible Assets

The components of goodwill and other intangible assets are as follows:

 

In Millions

 

Aug. 25, 2019

 

May 26, 2019

Goodwill

$

13,983.6

$

13,995.8

Other intangible assets:

 

 

 

 

Intangible assets not subject to amortization:

 

 

 

 

Brands and other indefinite-lived intangibles

 

6,586.5

 

6,590.8

Intangible assets subject to amortization:

 

 

 

 

Franchise agreements, customer relationships,

and other finite-lived intangibles

 

782.4

 

786.1

Less accumulated amortization

 

(217.5)

 

(210.1)

Intangible assets subject to amortization, net

 

564.9

 

576.0

Other intangible assets

 

7,151.4

 

7,166.8

Total

$

21,135.0

$

21,162.6

 

Based on the carrying value of finite-lived intangible assets as of August 25, 2019, annual amortization expense for each of the next five fiscal years is estimated to be approximately $40 million.

 

The changes in the carrying amount of goodwill during the first quarter of fiscal 2020 were as follows:

 

In Millions

 

 

North America Retail

 

 

Pet

 

 

Convenience Stores & Foodservice

 

 

Europe & Australia

 

 

Asia & Latin America

 

 

Joint Ventures

 

 

Total

Balance as of May 26, 2019

 

$

6,406.5

 

$

5,300.5

 

$

918.8

 

$

700.4

 

$

260.2

 

$

409.4

 

$

13,995.8

Other activity, primarily foreign

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

currency translation

 

 

1.3

 

 

-

 

 

-

 

 

(7.7)

 

 

(3.7)

 

 

(2.1)

 

 

(12.2)

Balance as of Aug. 25, 2019

 

$

6,407.8

 

$

5,300.5

 

$

918.8

 

$

692.7

 

$

256.5

 

$

407.3

 

$

13,983.6

 

The changes in the carrying amount of other intangible assets during the first quarter of fiscal 2020 were as follows:

 

10


 

In Millions

 

 

Total

Balance as of May 26, 2019

 

$

7,166.8

Other activity, primarily foreign currency translation

 

 

(15.4)

Balance as of Aug. 25, 2019

 

$

7,151.4

 

Our annual goodwill and indefinite-lived intangible assets test was performed as of the first day of the second quarter of fiscal 2019. As a result of lower sales projections in our long-range plans for the businesses supporting the Progresso, Food Should Taste Good, and Mountain High brand intangible assets, we recorded the following impairment charges:

 

In Millions

 

Impairment Charge

 

 

Fair Value as of Nov. 25, 2018 (a)

Progresso

$

132.1

 

$

330.0

Food Should Taste Good

 

45.1

 

 

-

Mountain High

 

15.4

 

 

-

Total

$

192.6

 

$

330.0

(a) Level 3 assets in the fair value hierarchy.

 

 

 

 

 

 

Significant assumptions used in that assessment included our long-range cash flow projections for the businesses, royalty rates, weighted average cost of capital rates, and tax rates.

 

Our Latin America reporting unit and the Yoki brand intangible asset had fair values that were not substantially in excess of the carrying values. The excess fair value as of the fiscal 2019 test date of the Latin America reporting unit and the Yoki brand intangible asset were as follows:

 

In Millions

 

Carrying Value of Intangible Asset

 

 

Excess Fair Value as of Fiscal 2019 Test Date

Latin America

$

209.0

 

 

7%

Yoki

$

49.1

 

 

10%

 

While having significant coverage as of our fiscal 2019 assessment date, the Pillsbury brand intangible asset and U.S. Yogurt reporting unit had risk of decreasing coverage. We will continue to monitor these businesses for potential impairment.

 

(4) Inventories

 

The components of inventories were as follows:

In Millions

 

Aug. 25, 2019

 

 

May 26, 2019

Raw materials and packaging

$

423.5

 

$

434.9

Finished goods

 

1,419.3

 

 

1,245.9

Grain

 

74.0

 

 

92.0

Excess of FIFO over LIFO cost

 

(216.7)

 

 

(213.5)

Total

$

1,700.1

 

$

1,559.3

 

(5) Leases

We determine whether an arrangement is a lease at inception. Our lease portfolio primarily consists of operating lease arrangements for certain warehouse and distribution space, office space, retail shops, production facilitates, rail cars, production and distribution equipment, automobiles, and office equipment. When our lease arrangements include lease and non-lease components, we account for lease components and non-lease components (e.g. common area maintenance) separately based on their relative standalone prices.

 

Any lease arrangements with an initial term of 12 months or less are not recorded on our Consolidated Balance Sheet, and we recognize lease cost for these lease arrangements on a straight-line basis over the lease term. Many of our lease arrangements provide us with the options to exercise one or more renewal terms or to terminate the lease arrangement. We include these options when we are reasonably certain to exercise them in the lease term used to establish our right of use assets and lease liabilities. Generally, our lease agreements do not include an option to purchase the leased asset, residual value guarantees or material restrictive covenants.

 

We have certain lease arrangements with variable rental payments. Our lease arrangements for our Häagen-Dazs retail shops often include rental payments that are based on a percentage of retail sales. We have other lease arrangements that are adjusted periodically

11


 

based on an inflation index or rate. The future variability of these payments and adjustments are unknown and therefore they are not included as minimum lease payments used to determine our right of use assets and lease liabilities. Variable rental payments are recognized in the period in which the obligation is incurred.

 

As most of our lease arrangements do not provide an implicit interest rate, we apply an incremental borrowing rate based on the information available at the commencement date of the lease arrangement to determine the present value of lease payments.

 

Our lease costs associated with finance leases and sale-leaseback transactions and our lease income associated with lessor and sublease arrangements are not material to our Consolidated Financial Statements.

 

Our operating leases are reported in our Consolidated Balance Sheet as follows:

In Millions

Classification

Aug. 25, 2019

Right of use assets (a)

Other assets

$

409.3

Current lease liabilities

Other current liabilities

 

103.3

Non-current lease liabilities

Other liabilities

 

318.1

(a) Net of accumulated amortization

Components of our lease cost are as follows:

 

Quarter Ended

In Millions

Aug. 25, 2019

Operating lease cost

$

32.9

Variable lease cost

 

5.2

Short-term lease cost

 

6.4

 

Rent expense under all operating leases from continuing operations was $184.9 million in fiscal 2019.

 

Maturities of our operating lease obligations by fiscal year are as follows:

In Millions

 

 

Fiscal 2020 (a)

$

92.4

Fiscal 2021

 

106.2

Fiscal 2022

 

88.4

Fiscal 2023

 

65.2

Fiscal 2024

 

49.9

After fiscal 2024

 

62.6

Total noncancelable future lease obligations

$

464.7

Less: Interest

 

(43.3)

Present value of lease obligations

$

421.4

(a) Excludes the quarter ended August 25, 2019.

 

The lease payments presented in the table above exclude an immaterial amount of minimum lease payments for operating leases we have committed to but have not yet commenced as of August 25, 2019.

 

Noncancelable future operating lease commitments as of May 26, 2019 were as follows:

12


 

In Millions

 

 

Fiscal 2020

$

120.0

Fiscal 2021

 

101.7

Fiscal 2022

 

85.0

Fiscal 2023

 

63.8

Fiscal 2024

 

49.1

After fiscal 2024

 

63.0

Total noncancelable future lease commitments

$

482.6

 

The weighted-average remaining lease term and weighted-average discount rate for our operating leases are as follows:

 

 

 

 

 

 

Aug. 25, 2019

Weighted-average remaining lease term

4.9

 

years

Weighted-average discount rate

4.2

 

%

 

Operating cash flow information and non-cash activity related to our operating leases are as follows:

 

Quarter Ended

In Millions

Aug. 25, 2019

Cash paid for amounts included in the measurement of lease liabilities

$

31.8

Right of use assets obtained in exchange for new lease liabilities

 

3.5

 

(6) Risk Management Activities

Many commodities we use in the production and distribution of our products are exposed to market price risks. We utilize derivatives to manage price risk for our principal ingredients and energy costs, including grains (oats, wheat, and corn), oils (principally soybean), dairy products, natural gas, and diesel fuel. Our primary objective when entering into these derivative contracts is to achieve certainty with regard to the future price of commodities purchased for use in our supply chain. We manage our exposures through a combination of purchase orders, long-term contracts with suppliers, exchange-traded futures and options, and over-the-counter options and swaps. We offset our exposures based on current and projected market conditions and generally seek to acquire the inputs at as close to our planned cost as possible.

 

We use derivatives to manage our exposure to changes in commodity prices. We do not perform the assessments required to achieve hedge accounting for commodity derivative positions. Accordingly, the changes in the values of these derivatives are recorded currently in cost of sales in our Consolidated Statements of Earnings.

 

Although we do not meet the criteria for cash flow hedge accounting, we believe that these instruments are effective in achieving our objective of providing certainty in the future price of commodities purchased for use in our supply chain. Accordingly, for purposes of measuring segment operating performance, these gains and losses are reported in unallocated corporate items outside of segment operating results until such time that the exposure we are managing affects earnings. At that time we reclassify the gain or loss from unallocated corporate items to segment operating profit, allowing our operating segments to realize the economic effects of the derivative without experiencing any resulting mark-to-market volatility, which remains in unallocated corporate items.

 

Unallocated corporate items for the quarters ended August 25, 2019 and August 26, 2018 included:

 

Quarter Ended

In Millions

 

Aug. 25, 2019

 

 

Aug. 26, 2018

Net loss on mark-to-market valuation of certain commodity positions

$

(20.7)

 

$

(19.5)

Net loss (gain) on commodity positions reclassified from unallocated corporate items to segment operating profit

 

11.3

 

 

(3.7)

Net mark-to-market revaluation of certain grain inventories

 

(5.6)

 

 

(7.9)

Net mark-to-market valuation of certain commodity positions recognized in unallocated corporate items

$

(15.0)

 

$

(31.1)

 

 

As of August 25, 2019, the net notional value of commodity derivatives was $199.3 million, of which $61.2 million related to energy inputs and $138.1 million related to agricultural inputs. These contracts relate to inputs that generally will be utilized within the next 12 months.

 

13


 

The fair values of the derivative positions used in our risk management activities and other assets recorded at fair value were not material as of August 25, 2019, and were Level 1 or Level 2 assets and liabilities in the fair value hierarchy. We did not significantly change our valuation techniques from prior periods.

 

We offer certain suppliers access to third party services that allow them to view our scheduled payments online. The third party services also allow suppliers to finance advances on our scheduled payments at the sole discretion of the supplier and the third party. We have no economic interest in these financing arrangements and no direct relationship with the suppliers, the third parties, or any financial institutions concerning these services. All of our accounts payable remain as obligations to our suppliers as stated in our supplier agreements. As of August 25, 2019, $1,095.8 million of our total accounts payable were payable to suppliers who utilize these third party services.

 

(7) Debt

 

The components of notes payable were as follows:

 

In Millions

 

Aug. 25, 2019

 

 

May 26, 2019

U.S. commercial paper

$

1,117.3

 

$

1,298.5

Financial institutions

 

178.8

 

 

170.2

Total

$

1,296.1

 

$

1,468.7

 

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 committed, uncommitted, and asset-backed credit lines that support our foreign operations.

 

The following table details the fee-paid committed and uncommitted credit lines we had available as of August 25, 2019:

 

 

In Billions

 

Facility Amount

 

 

Borrowed Amount

Credit facility expiring:

 

 

 

 

 

May 2022

$

2.7

 

$

-

September 2019

 

0.2

 

 

-

Total committed credit facilities

 

2.9

 

 

-

Uncommitted credit facilities

 

0.7

 

 

0.2

Total committed and uncommitted credit facilities

$

3.6

 

$

0.2

 

 

The credit facilities contain covenants, including a requirement to maintain a fixed charge coverage ratio of at least 2.5 times. We were in compliance with all credit facility covenants as of August 25, 2019.

 

Long-Term Debt

 

The fair values and carrying amounts of long-term debt, including the current portion, were $13,868.2 million and $13,011.6 million, respectively, as of August 25, 2019. The fair value of long-term debt was estimated using market quotations and discounted cash flows based on our current incremental borrowing rates for similar types of instruments. Long-term debt is a Level 2 liability in the fair value hierarchy.

 

 

In the fourth quarter of 2019, we issued €300.0 million principal amount of 0.0 percent fixed-rate notes due January 15, 2020. We may redeem the notes if certain tax laws change and we would be obligated to pay additional amounts on the notes. These notes are senior unsecured obligations that include a change of control repurchase provision. We used the net proceeds, together with cash on hand, to repay our €300.0 million floating rate notes.

 

In the third quarter of 2019, we repaid $1,150.0 million of 5.65 percent fixed-rate notes with proceeds from commercial paper.

 

 

 

 

Certain of our long-term debt agreements contain restrictive covenants. As of August 25, 2019, we were in compliance with all of these covenants.

 

 

14


 

 

(8) Redeemable and Noncontrolling Interests

 

We have a 51 percent controlling interest in Yoplait SAS and a 50 percent interest in Yoplait Marques SNC and Liberté Marques Sàrl. Sodiaal International (Sodiaal) holds the remaining interests in each of the entities. On the acquisition date, we recorded the $904.4 million fair value of Sodiaal’s 49 percent euro-denominated interest in Yoplait SAS as a redeemable interest 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. We adjust the value of the redeemable interest through additional paid-in capital on our Consolidated Balance Sheets quarterly to the redeemable interest’s redemption value, which approximates its fair value. Yoplait SAS pays dividends annually if it meets certain financial metrics set forth in its shareholders’ agreement. As of August 25, 2019, the redemption value of the euro-denominated redeemable interest was $547.8 million.

 

A subsidiary of Yoplait SAS has an exclusive milk supply agreement for its European operations with Sodiaal through July 1, 2021. Net purchases totaled $67.2 million for the quarter ended August 25, 2019, and $53.0 million for the quarter ended August 26, 2018.

 

During the second quarter of fiscal 2019, Sodiaal made an additional investment of $55.7 million in Yoplait SAS.

 

On the acquisition dates, we recorded the $281.4 million fair value of Sodiaal’s 50 percent euro-denominated interest in Yoplait Marques SNC and 50 percent Canadian dollar-denominated interest in Liberté Marques Sàrl as noncontrolling interests on our Consolidated Balance Sheets. Yoplait Marques SNC earns a royalty stream through a licensing agreement with Yoplait SAS for the rights to Yoplait and related trademarks. Liberté Marques Sàrl earns a royalty stream through licensing agreements with certain Yoplait group companies for the rights to Liberté and related trademarks. These entities pay dividends annually based on their available cash as of their fiscal year end.

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 $251.5 million). On June 1, 2018, the floating preferred return rate on GMC’s Class A Interests was reset to the sum of three-month LIBOR plus 142.5 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.

 

Our noncontrolling interests contain restrictive covenants. As of August 25, 2019, we were in compliance with all of these covenants.

 

 

 

 

 

 

 

(9) Stockholders’ Equity

 

The following tables provide details of total comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

Quarter Ended

 

 

Aug. 25, 2019

 

 

Aug. 26, 2018

 

 

 

 

 

 

 

 

Noncontrolling

 

Redeemable

 

 

 

 

 

 

 

 

Noncontrolling

 

Redeemable

 

 

General Mills

 

Interests

 

Interest

 

 

General Mills

 

Interests

 

Interest

In Millions

 

Pretax

 

Tax

 

Net

 

Net

 

Net

 

 

Pretax

 

Tax

 

Net

 

Net

 

Net

Net earnings, including earnings attributable to redeemable and noncontrolling interests

 

 

 

 

$

520.6

$

3.6

$

4.3

 

 

 

 

 

$

392.3

$

3.1

$

0.5

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

$

2.7

$

-

 

2.7

 

(1.5)

 

(4.9)

 

$

(96.8)

$

-

 

(96.8)

 

(1.3)

 

(8.1)

Other fair value changes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedge derivatives

 

2.4

 

0.7

 

3.1

 

-

 

0.7

 

 

7.2

 

(1.0)

 

6.2

 

-

 

0.9

Reclassification to earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities (a)

 

-

 

-

 

-

 

-

 

-

 

 

(2.6)

 

0.6

 

(2.0)

 

-

 

-

Hedge derivatives (b)

 

(0.6)

 

-

 

(0.6)

 

-

 

-

 

 

0.5

 

-

 

0.5

 

-

 

0.1

Amortization of losses and prior service costs ( c)

 

25.5

 

(5.9)

 

19.6

 

-

 

-

 

 

26.9

 

(5.0)

 

21.9

 

-

 

-

Other comprehensive income (loss)

$

30.0

$

(5.2)

 

24.8

 

(1.5)

 

(4.2)

 

$

(64.8)

$

(5.4)

 

(70.2)

 

(1.3)

 

(7.1)

Total comprehensive income (loss)

 

 

 

 

$

545.4

$

2.1

$

0.1

 

 

 

 

 

$

322.1

$

1.8

$

(6.6)

 

 

(a)Gain reclassified from AOCI into earnings is reported in interest, net for securities.(b)Loss (gain) reclassified from AOCI into earnings is reported in interest, net for interest rate swaps and in cost of sales and SG&A expenses for foreign exchange contracts.(c)Loss reclassified from AOCI into earnings is reported in benefit plan non-service income.

 

 

 

 

 

15


 

Accumulated other comprehensive loss balances, net of tax effects, were as follows:

 

In Millions

 

 

Aug. 25, 2019

 

 

May 26, 2019

Foreign currency translation adjustments

 

$

(737.2)

 

$

(739.9)

Unrealized gain (loss) from:

 

 

 

 

 

 

Hedge derivatives

 

 

(16.9)

 

 

(19.4)

Pension, other postretirement, and postemployment benefits: