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 FEBRUARY 23, 2020
£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
2.100% Notes due 2020
GIS20
1.000% Notes due 2023
GIS23A
0.450% Notes due 2026
GIS26
1.500% Notes due 2027
GIS27
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 March 10, 2020: 606,138,918 (excluding 148,474,410 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 and nine-month periods ended February 23, 2020 and February 24, 2019
4
Consolidated Statements of Comprehensive Income for the quarters and nine-month periods ended February 23, 2020 and February 24, 2019
5
Consolidated Balance Sheets as of February 23, 2020, and May 26, 2019
6
Consolidated Statements of Total Equity and Redeemable Interest for the quarters and nine-month periods ended February 23, 2020 and February 24, 2019
7
Consolidated Statements of Cash Flows for the nine-month periods ended February 23, 2020 and February 24, 2019
9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
Item 3. Quantitative and Qualitative Disclosures About Market Risk
45
Item 4. Controls and Procedures
PART II – Other Information
Item 6. Exhibits
46
Signatures
47
3
PART I. FINANCIAL INFORMATION
Consolidated Statements of Earnings
GENERAL MILLS, INC. AND SUBSIDIARIES
(Unaudited) (In Millions, Except per Share Data)
Quarter Ended
Nine-Month Period Ended
Feb. 23, 2020
Feb. 24, 2019
Net sales
$
4,180.3
4,198.3
12,603.6
12,703.5
Cost of sales
2,777.1
2,755.3
8,241.8
8,408.0
Selling, general, and administrative expenses
746.6
696.6
2,224.5
2,192.6
Divestiture loss
-
35.4
Restructuring, impairment, and other exit costs
5.8
59.7
12.9
267.7
Operating profit
650.8
651.3
2,124.4
1,799.8
Benefit plan non-service income
(30.3)
(21.4)
(90.7)
(63.3)
Interest, net
109.8
130.8
347.9
397.0
Earnings before income taxes and
after-tax earnings from joint ventures
571.3
541.9
1,867.2
1,466.1
Income taxes
118.2
95.8
340.9
313.1
After-tax earnings from joint ventures
10.8
11.8
57.5
52.0
Net earnings, including earnings attributable to
redeemable and noncontrolling interests
463.9
457.9
1,583.8
1,205.0
Net earnings attributable to redeemable and
noncontrolling interests
9.8
11.1
28.3
22.5
Net earnings attributable to General Mills
454.1
446.8
1,555.5
1,182.5
Earnings per share - basic
0.75
0.74
2.56
1.97
Earnings per share - diluted
2.54
1.96
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
(Unaudited) (In Millions)
Other comprehensive income (loss), net of tax:
Foreign currency translation
(22.0)
48.7
(28.5)
(20.1)
Other fair value changes:
Hedge derivatives
(6.4)
(7.7)
(15.4)
1.5
Reclassification to earnings:
Securities
(2.0)
4.0
(1.2)
3.6
(0.5)
Amortization of losses and prior service costs
19.6
21.0
58.8
63.5
Other comprehensive income (loss), net of tax
(4.8)
60.8
18.5
42.4
Total comprehensive income
459.1
518.7
1,602.3
1,247.4
Comprehensive income (loss) attributable to
(0.3)
13.0
5.9
(3.8)
Comprehensive income attributable to General Mills
459.4
505.7
1,596.4
1,251.2
Consolidated Balance Sheets
(In Millions, Except Par Value)
May 26, 2019
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
606.9
450.0
Receivables
1,731.1
1,679.7
Inventories
1,542.1
1,559.3
Prepaid expenses and other current assets
428.4
497.5
Total current assets
4,308.5
4,186.5
Land, buildings, and equipment
3,535.0
3,787.2
Goodwill
13,950.8
13,995.8
Other intangible assets
7,108.4
7,166.8
Other assets
1,346.0
974.9
Total assets
30,248.7
30,111.2
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
2,931.5
2,854.1
Current portion of long-term debt
863.7
1,396.5
Notes payable
1,174.6
1,468.7
Other current liabilities
1,726.8
1,367.8
Total current liabilities
6,696.6
7,087.1
Long-term debt
11,589.6
11,624.8
Deferred income taxes
2,027.2
2,031.0
Other liabilities
1,536.6
1,448.9
Total liabilities
21,850.0
22,191.8
Redeemable interest
538.6
551.7
Stockholders' equity:
Common stock, 754.6 shares issued, $0.10 par value
75.5
Additional paid-in capital
1,334.9
1,386.7
Retained earnings
15,360.0
14,996.7
Common stock in treasury, at cost, shares of 148.8 and 152.7
(6,610.8)
(6,779.0)
Accumulated other comprehensive loss
(2,584.5)
(2,625.4)
Total stockholders' equity
7,575.1
7,054.5
Noncontrolling interests
285.0
313.2
Total equity
7,860.1
7,367.7
Total liabilities and equity
Consolidated Statements of Total Equity and Redeemable Interest
$.10 Par Value Common Stock
(One Billion Shares Authorized)
Issued
Treasury
Shares
Par Amount
Additional
Paid-In
Capital
Amount
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Non-
controlling
Interests
Total
Equity
Redeemable
Interest
Balance as of
754.6
(152.7)
520.6
24.8
2.1
547.5
0.1
Cash dividends declared
($0.49 per share)
(298.5)
Stock compensation plans
18.0
2.2
97.2
115.2
Unearned compensation
related to restricted
stock unit awards
(66.5)
Earned compensation
28.7
Decrease in redemption
value of redeemable
interest
(4.0)
Distributions to
noncontrolling and
redeemable interest holders
(2.5)
August 25, 2019
1,370.9
(150.5)
(6,681.8)
15,218.8
(2,600.6)
312.8
7,695.6
547.8
580.8
1.6
593.2
2.4
(297.8)
Shares purchased
(0.1)
(4.2)
0.5
19.7
15.5
(3.4)
18.6
5.1
(5.1)
(6.1)
November 24, 2019
1,387.0
(150.0)
(6,662.2)
15,501.8
(2,589.8)
308.3
8,020.6
545.1
Total comprehensive income (loss)
5.3
(1.5)
1.2
($0.98 per share)
(595.9)
(2.7)
(36.2)
54.1
17.9
(1.4)
17.8
Increase in redemption
(32.3)
32.3
(21.8)
(40.0)
February 23, 2020
(148.8)
Par
May 27, 2018
1,202.5
(161.5)
(7,167.5)
14,459.6
(2,429.0)
351.3
6,492.4
776.2
(loss)
392.3
(70.2)
1.8
323.9
(6.6)
(294.2)
(0.2)
3.0
131.8
129.3
related to restricted stock unit
awards
(65.2)
28.1
Increase in redemption value of
redeemable interest
2.0
Distributions to noncontrolling
and redeemable interest
holders
(2.4)
Adoption of revenue
recognition accounting
requirements
(33.9)
August 26, 2018
1,160.9
(158.5)
(7,035.9)
14,523.8
(2,499.2)
350.7
6,575.8
771.6
343.4
80.0
(3.2)
420.2
(8.8)
(295.0)
(13.0)
0.6
26.3
13.3
15.7
Increase in investment
in redeemable interest
55.7
270.9
(270.9)
and redeemable
interest holders
(19.9)
November 25, 2018
1,433.0
(157.9)
(7,009.7)
14,572.2
(2,419.2)
327.6
6,979.4
547.6
58.9
2.6
508.3
10.4
(294.5)
(0.4)
(43.9)
1.9
86.6
42.7
(4.9)
20.9
Decrease in redemption value
of redeemable interest
9.1
(9.1)
(11.2)
February 24, 2019
1,414.2
(156.0)
(6,923.5)
14,724.5
(2,360.3)
319.0
7,249.4
548.9
8
Consolidated Statements of Cash Flows
Cash Flows - Operating Activities
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
456.4
464.6
(57.5)
(52.0)
Distributions of earnings from joint ventures
37.7
46.6
Stock-based compensation
66.0
65.9
1.7
52.5
Pension and other postretirement benefit plan contributions
(21.7)
Pension and other postretirement benefit plan costs
(23.2)
4.7
20.6
227.2
Changes in current assets and liabilities, excluding the effects of divestiture
91.3
36.5
Other, net
(37.0)
Net cash provided by operating activities
2,159.8
2,027.6
Cash Flows - Investing Activities
Purchases of land, buildings, and equipment
(269.4)
(367.9)
Investments in affiliates, net
(40.9)
Proceeds from disposal of land, buildings, and equipment
0.9
10.9
Proceeds from divestiture
0.2
4.8
(49.4)
Net cash used by investing activities
(304.6)
(407.7)
Cash Flows - Financing Activities
Change in notes payable
(282.9)
429.9
Issuance of long-term debt
867.8
Payment of long-term debt
(1,396.5)
(1,153.4)
Proceeds from common stock issued on exercised options
109.4
140.7
Purchases of common stock for treasury
(2.8)
(0.7)
Dividends paid
(895.4)
(883.7)
Investment in redeemable interest
Distributions to noncontrolling and redeemable interest holders
(70.4)
(33.5)
(20.6)
Net cash used by financing activities
(1,691.4)
(1,458.0)
Effect of exchange rate changes on cash and cash equivalents
(6.9)
(13.8)
Increase in cash and cash equivalents
156.9
148.1
Cash and cash equivalents - beginning of year
399.0
Cash and cash equivalents - end of period
547.1
Cash Flow from changes in current assets and liabilities:
(60.3)
(50.9)
2.5
80.7
54.8
16.5
119.9
77.5
(25.6)
(87.3)
Changes in current assets and liabilities
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 February 23, 2020, 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 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 6 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 in Part I, Item 2 of this report.
(2) Divestiture
During the third quarter of fiscal 2019, we sold our La Salteña fresh pasta and refrigerated dough business in Argentina, and recorded a pre-tax loss of $35.4 million.
(3) Restructuring, Impairment, and Other Exit Costs
Restructuring and impairment charges were as follows:
Nine-Month
Period Ended
In Millions
Charges associated with restructuring actions previously announced
12.4
58.6
37.2
61.0
Asset impairments
207.0
59.8
268.0
In the nine-month period ended February 23, 2020, we did not undertake any new restructuring actions. We recorded $12.4 million of restructuring charges for previously announced restructuring actions in the third quarter of fiscal 2020 and $37.2 million in the nine-month period ended February 23, 2020. We recorded $58.6 million of restructuring charges in the third quarter of fiscal 2019 and $61.0 million in the nine-month period ended February 24, 2019. In the third quarter of fiscal 2020, we increased the estimate of
10
expected severance charges related to previously announced targeted actions in our global supply chain by $6 million. In addition, we expect to incur an additional $1 million of project-related costs. We now expect to spend a total of approximately $31 million of cash related to these actions. Certain 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. The remaining expense to be incurred is approximately $30 million, including $2 million of severance expense and $28 million of other costs.
In the second quarter of fiscal 2019, we recorded $192.6 million of charges related to the impairment of certain brand intangible assets in restructuring, impairment, and other exit costs. During the second quarter of fiscal 2019, we recorded a $13.2 million charge in restructuring, impairment, and other exit costs related to the impairment of certain manufacturing assets within our North America Retail segment.
We paid $16.6 million of cash related to restructuring actions previously announced in the nine-month period ended February 23, 2020. We paid $40.8 million of cash 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:
6.6
24.3
0.3
Total restructuring and impairment charges
Project-related costs classified in cost of sales
0.4
1.1
1.3
The roll forward of our restructuring and other exit cost reserves, included in other current liabilities, is as follows:
Reserve balance as of May 26, 2019
Fiscal 2020 charges, including foreign
currency translation
(1.3)
Utilized in fiscal 2020
(12.0)
Reserve balance as of Feb. 23, 2020
23.2
The reserve balance primarily consists of expected severance payments associated with previously announced 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.
(4) Goodwill and Other Intangible Assets
The components of goodwill and other intangible assets are as follows:
Other intangible assets:
Intangible assets not subject to amortization:
Brands and other indefinite-lived intangibles
6,568.8
6,590.8
Intangible assets subject to amortization:
Franchise agreements, customer relationships, and other finite-lived intangibles
772.2
786.1
Less accumulated amortization
(232.6)
(210.1)
Intangible assets subject to amortization, net
539.6
576.0
21,059.2
21,162.6
11
Based on the carrying value of finite-lived intangible assets as of February 23, 2020, 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 in fiscal 2020 were as follows:
North America Retail
Pet
Convenience Stores & Foodservice
Europe & Australia
Asia & Latin America
Joint Ventures
Balance as of May 26, 2019
6,406.5
5,300.5
918.8
700.4
260.2
409.4
Other activity, primarily
foreign currency translation
(18.5)
(45.0)
Balance as of Feb. 23, 2020
6,408.4
685.0
241.7
396.4
The changes in the carrying amount of other intangible assets for the nine-month period ended February 23, 2020, were as follows:
Other activity, primarily foreign currency translation
(58.4)
Our annual goodwill and indefinite-lived intangible assets impairment test was performed on the first day of the second quarter of fiscal 2020, and we determined there was no impairment of our intangible assets as their related fair values were substantially in excess of the carrying values, except for the Europe & Australia reporting unit and the Progresso brand intangible asset.
The excess fair value as of the fiscal 2020 test date of the Europe & Australia reporting unit and the Progresso brand intangible asset is as follows:
Carrying Value of Intangible Asset
Excess Fair Value as of Fiscal 2020 Test Date
672.6
14%
Progresso
330.0
5%
In addition, while having significant coverage as of our fiscal 2020 assessment date, the Pillsbury brand intangible asset had risk of decreasing coverage. We will continue to monitor these businesses for potential impairment.
(5) Inventories
The components of inventories were as follows:
Raw materials and packaging
387.1
434.9
Finished goods
1,273.7
1,245.9
Grain
90.8
92.0
Excess of FIFO over LIFO cost
(209.5)
(213.5)
(6) 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 costs 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
12
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 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:
Classification
Right of use assets (a)
395.8
Current lease liabilities
Non-current lease liabilities
300.8
(a) Net of accumulated amortization
Components of our lease cost are as follows:
Operating lease cost
31.8
99.8
Variable lease cost
13.9
Short-term lease cost
4.9
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:
Fiscal 2020 (a)
35.5
Fiscal 2021
117.4
Fiscal 2022
99.0
Fiscal 2023
74.0
Fiscal 2024
56.2
After fiscal 2024
67.9
Total noncancelable future lease obligations
Less: Interest
(39.4)
Present value of lease obligations
410.6
(a) Excludes the nine-month period ended February 23, 2020.
The lease payments presented in the table above exclude $20.8 million of minimum lease payments for operating leases we have committed to but have not yet commenced as of February 23, 2020.
13
Noncancelable future operating lease commitments as of May 26, 2019, were as follows:
Fiscal 2020
120.0
101.7
85.0
63.8
49.1
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:
Weighted-average remaining lease term
4.5
years
Weighted-average discount rate
%
Supplemental operating cash flow information and non-cash activity related to our operating leases are as follows:
Cash paid for amounts included in the measurement of lease liabilities
96.0
Right of use assets obtained in exchange for new lease liabilities
48.1
14
(7) 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 and nine-month periods ended February 23, 2020, and February 24, 2019, included:
Net (loss) gain on mark-to-market valuation of certain commodity positions
(8.7)
10.2
(19.7)
(26.8)
Net loss (gain) on commodity positions reclassified from unallocated
corporate items to segment operating profit
0.8
19.8
Net mark-to-market revaluation of certain grain inventories
(4.4)
(4.5)
(1.1)
(8.9)
Net mark-to-market valuation of certain commodity positions recognized
in unallocated corporate items
(8.6)
6.5
(1.0)
(36.4)
As of February 23, 2020, the net notional value of commodity derivatives was $321.7 million, of which $101.7 million related to energy inputs and $220.0 million related to agricultural inputs. These contracts relate to inputs that generally will be utilized within the next 12 months.
In advance of planned debt financing, subsequent to the end of the third quarter of fiscal 2020, we entered into $300 million of treasury locks due January 13, 2022 with an average fixed rate of 0.85 percent.
During the third quarter of fiscal 2020, we entered into a €600 million interest rate swap to convert our €600 million fixed rate notes due January 15, 2026, to a floating rate.
During the second quarter of fiscal 2020, we entered into a $500 million interest rate swap to convert a portion of our $850 million floating-rate notes due April 16, 2021, to a fixed rate.
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 February 23, 2020, 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 February 23, 2020, $1,269.6 million of our total accounts payable were payable to suppliers who utilize these third party services.
15
(8) Debt
The components of notes payable were as follows:
U.S. commercial paper
923.4
1,298.5
Financial institutions
251.2
170.2
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 February 23, 2020:
In Billions
Facility
Borrowed
Credit facility expiring:
May 2022
2.7
September 2022
Total committed credit facilities
2.9
Uncommitted credit facilities
0.7
Total committed and uncommitted credit facilities
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 February 23, 2020.
Long-Term Debt
The fair values and carrying amounts of long-term debt, including the current portion, were $13,462.6 million and $12,453.3 million, respectively, as of February 23, 2020. 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 third quarter of fiscal 2020, we issued €600.0 million of 0.45 percent fixed-rate notes due January 15, 2026 and €200.0 million of 0.0 percent fixed-rate notes due November 16, 2020. We used the net proceeds, together with cash on hand, to repay €500.0 million of floating rate notes and €300.0 million of 0.0 percent fixed-rate notes.
In the second quarter of fiscal 2020, we repaid $500.0 million of 2.20 percent fixed-rate notes with proceeds from commercial paper.
In the third quarter of fiscal 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 February 23, 2020, we were in compliance with all of these covenants.
(9) 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 February 23, 2020, the redemption value of the euro-denominated redeemable interest was $538.6 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 $141.4 million for the nine-month period ended February 23, 2020, and $150.1 million for the nine-month period ended February 24, 2019.
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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 February 23, 2020, we were in compliance with all of these covenants.
(10) Stockholders’ Equity
The following tables provide details of total comprehensive income:
General Mills
Noncontrolling
Pretax
Tax
Net
Net earnings, including earnings
attributable to redeemable
and noncontrolling interests
3.2
8.6
Other comprehensive income (loss):
(11.7)
(4.7)
(5.6)
46.1
(5.9)
(0.8)
Hedge derivatives (a)
Amortization of losses and
prior service costs (b)
25.4
(5.8)
27.3
(6.3)
Other comprehensive income (loss)
10.7
(5.4)
65.5
(a)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.
(b)Loss reclassified from AOCI into earnings is reported in benefit plan non-service income.
17
attributable to redeemable and
11.7
16.6
(7.3)
(9.5)
(16.4)
(16.9)
(14.2)
3.3
Securities (a)
(2.6)
Hedge derivatives (b)
(0.9)
(0.6)
Amortization of losses and prior
service costs (c)
76.4
(17.6)
81.0
(17.5)
56.7
(15.8)
40.9
(12.9)
86.5
(17.8)
68.7
(16.8)
3.7
(5.0)
(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.
Accumulated other comprehensive loss balances, net of tax effects, were as follows:
Foreign currency translation adjustments
(747.2)
(739.9)
Unrealized loss from:
(30.0)
(19.4)
Pension, other postretirement, and postemployment benefits:
Net actuarial loss
(1,820.1)
(1,880.5)
Prior service credits
12.8
14.4
(11) Stock Plans
We have various stock-based compensation programs under which awards, including stock options, restricted stock, restricted stock units, and performance awards, may be granted to employees and non-employee directors. These programs and related accounting are described in Note 11 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 26, 2019.
Compensation expense related to stock-based payments recognized in the Consolidated Statements of Earnings was as follows:
Compensation expense related to stock-based payments
18.2
21.4
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Compensation expense related to stock-based payments recognized in the Consolidated Statements of Earnings includes amounts recognized in restructuring, impairment, and other exit costs in fiscal 2019.
We recognized windfall tax benefits from stock-based payments in income tax expense in our Consolidated Statements of Earnings of $4.1 million for the third quarter of fiscal 2020 and $12.3 million for the nine-month period ended February 23, 2020. We recognized $5.3 million in the third quarter of fiscal 2019 and $12.0 million for the nine-month period ended February 24, 2019.
As of February 23, 2020, unrecognized compensation expense related to non-vested stock options, restricted stock units, and performance share units was $117.7 million. This expense will be recognized over 23 months, on average.
Net cash proceeds from the exercise of stock options less shares used for withholding taxes and the intrinsic value of options exercised were as follows:
Net cash proceeds
Intrinsic value of options exercised
54.0
66.5
We estimate the fair value of each stock option on the grant date using a Black-Scholes option-pricing model. Black-Scholes option-pricing models require us to make predictive assumptions regarding future stock price volatility, employee exercise behavior, and dividend yield. We estimate our future stock price volatility using the historical volatility over the expected term of the option, excluding time periods of volatility we believe a marketplace participant would exclude in estimating our stock price volatility. We also have considered, but did not use, implied volatility in our estimate, because trading activity in options on our stock, especially those with tenors of greater than 6 months, is insufficient to provide a reliable measure of expected volatility. Our method of selecting the other valuation assumptions is explained in Note 11 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 26, 2019.
The estimated fair values of stock options granted and the assumptions used for the Black-Scholes option-pricing model were as follows:
Estimated fair values of stock options granted
7.10
5.35
Assumptions:
Risk-free interest rate
Expected term
8.5
Expected volatility
17.4
16.3
Dividend yield
4.3
The total grant date fair value of restricted stock unit awards that vested during the period follows:
Total grant date fair value
57.1
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(12) Earnings Per Share
Basic and diluted earnings per share (EPS) were calculated using the following:
In Millions, Except per Share Data
Average number of common shares - basic EPS
607.9
600.4
607.1
599.3
Incremental share effect from: (a)
Stock options
2.8
Restricted stock, restricted stock units, and other
2.3
Average number of common shares - diluted EPS
612.8
604.5
612.1
604.0
(a) Incremental shares from stock options, restricted stock units, and performance share units are computed by the treasury stock method.
Stock options, restricted stock units, and performance share units excluded from our computation of diluted EPS because they were not dilutive were as follows:
Anti-dilutive stock options, restricted stock units, and
performance share units
10.5
14.1
(13) Statements of Cash Flows
Our Consolidated Statements of Cash Flows include the following:
Net cash interest payments
291.2
367.8
Net income tax payments
334.5
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(14) Retirement and Postemployment Benefits
Components of net periodic benefit (income) expense are as follows:
Defined Benefit Pension Plans
Other Postretirement
Benefit Plans
Postemployment Benefit Plans
Service cost
23.3
23.7
Interest cost
57.7
62.0
6.8
8.3
Expected return on plan assets
(112.5)
(111.4)
(10.6)
(10.2)
Amortization of losses (gains)
26.5
27.6
Amortization of prior service costs (credits)
Other adjustments
Settlement or curtailment losses
Net (income) expense
(4.6)
(3.3)
69.7
71.1
7.1
7.5
6.3
5.7
173.0
186.0
20.4
(337.5)
(334.4)
(31.6)
(30.4)
79.9
82.6
(1.6)
(4.1)
(13.7)
6.7
(9.8)
(1.7)
15.9
16.0
(15) Income Taxes
During the first quarter of fiscal 2020, we reorganized certain wholly owned subsidiaries, including the movement of certain assets between legal entities. As a result of these actions, we recorded a $53.1 million decrease to our deferred income tax liabilities, with a corresponding discrete, non-cash reduction to income taxes in the first quarter of fiscal 2020.
In the third quarter of fiscal 2019, we completed our accounting for the tax effects of the Tax Cuts and Jobs Act (TCJA) and recorded a benefit of $7.2 million which included adjustments to the transition tax and the measurement of our net U.S. deferred tax liability.
(16) Contingencies
During the second quarter of fiscal 2020, we received notice from the tax authorities of the State of São Paulo, Brazil regarding our compliance with its state sales tax requirements. As a result, we have been assessed additional state sales taxes, interest, and penalties. We believe that we have meritorious defenses against this claim and will vigorously defend our position. As of February 23, 2020, we are unable to estimate any possible loss and have not recorded a loss contingency for this matter.
(17) Business Segment and Geographic Information
We operate in the packaged foods industry. Our operating segments are as follows: North America Retail; Convenience Stores & Foodservice; Europe & Australia; Asia & Latin America; and Pet.
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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.
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.
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.
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.
Our Pet operating segment includes pet food products sold primarily in the United States in national pet superstore chains, e-commerce retailers, grocery stores, regional pet store chains, mass merchandisers, and veterinary clinics and hospitals. 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 span 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.
Operating profit for these segments excludes unallocated corporate items, gain or loss on divestitures, and restructuring, impairment, and other exit costs. 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. These include gains and losses arising from the revaluation of certain grain inventories and gains and losses from mark-to-market valuation of certain commodity positions until passed back to our operating segments. These items affecting operating profit are centrally managed at the corporate level and are excluded from the measure of segment profitability reviewed by executive management. Under our supply chain organization, our manufacturing, warehouse, and distribution activities are substantially integrated across our operations in order to maximize efficiency and productivity. As a result, fixed assets and depreciation and amortization expenses are neither maintained nor available for all operating segments.
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Our operating segment results were as follows:
Net sales:
2,501.9
2,518.6
7,554.1
7,583.5
464.8
472.5
1,423.3
1,450.1
421.9
432.7
1,308.9
1,387.2
408.2
427.7
1,177.3
1,257.4
383.5
346.8
1,140.0
1,025.3
Operating profit:
532.0
581.6
1,734.4
1,749.5
92.1
96.7
298.4
303.4
22.1
24.4
81.1
81.4
8.1
19.5
42.6
49.6
94.0
73.0
255.7
158.3
Total segment operating profit
748.3
795.2
2,412.2
2,342.2
Unallocated corporate items
91.7
48.8
274.9
239.3
Net sales for our North America Retail operating units were as follows:
U.S. Meals & Baking
1,010.6
1,027.8
3,005.5
3,039.9
U.S. Cereal
563.9
566.9
1,725.6
1,695.2
U.S. Snacks
491.0
497.6
1,513.0
1,535.4
U.S. Yogurt and Other
219.1
221.3
657.3
668.5
Canada
217.3
205.0
652.7
644.5
23
Net sales by class of similar products were as follows:
Snacks
840.4
849.0
2,547.7
2,594.4
Cereal
674.5
668.7
2,048.1
2,000.9
Convenient meals
706.0
695.4
1,961.2
1,953.2
Yogurt
499.8
515.9
1,510.1
1,568.4
Dough
440.6
435.4
1,309.6
1,289.1
Baking mixes and ingredients
394.6
416.3
1,211.6
1,298.2
Super-premium ice cream
131.5
551.3
607.0
113.9
324.0
367.0
During the first quarter of fiscal 2020, we made certain changes in the classification of products and updated fiscal 2019 net sales figures to match the current-year presentation.
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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
INTRODUCTION
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the fiscal year ended May 26, 2019 for important background regarding, among other things, our key business drivers. Significant trademarks and service marks used in our business are set forth in italics herein. Certain terms used throughout this report are defined in the “Glossary” section below.
The impact that the recent COVID-19 outbreak will have on our consolidated results of operations is uncertain. We expect a COVID-19-related decrease in consumer traffic in away-from-home food outlets across all our major markets to negatively impact our net sales to customers in those channels for at least the remainder of fiscal 2020. We have also seen increased orders from retail customers in North America and Europe subsequent to the end of the third quarter of fiscal 2020 in response to increased consumer demand for food at home. Near-term elevated retail customer orders may unwind in the coming months, and we are unable to predict the nature and timing of when that impact may occur, if at all. We will continue to evaluate the nature and extent of the impact to our business and consolidated results of operations.
CONSOLIDATED RESULTS OF OPERATIONS
Third Quarter Results
In the third quarter of fiscal 2020, net sales and organic net sales essentially matched the same period last year. Operating profit margin of 15.6 percent increased 10 basis points, primarily driven by a decrease in restructuring expense in the third quarter of fiscal 2020 and the divestiture loss recorded in the third quarter of fiscal 2019, partially offset by higher selling, general, and administrative (SG&A) expenses in the third quarter of fiscal 2020. Adjusted operating profit margin decreased 130 basis points to 16.1 percent compared to the same period last year, primarily driven by higher SG&A expenses. Diluted earnings per share of $0.74 essentially matched the third quarter of fiscal 2019. Adjusted diluted earnings per share of $0.77 decreased 6 percent on a constant-currency basis compared to the third quarter last year. 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 the third quarter of fiscal 2020 follows:
Quarter Ended Feb. 23, 2020
In millions, except per share
Feb. 23, 2020 vs. Feb. 24, 2019
Percent
of Net
Sales
Constant-Currency Growth (a)
Flat
15.6
2
Diluted earnings per share
Organic net sales growth rate (a)
Adjusted operating profit (a)
675.1
(7)
16.1
(8)
Adjusted diluted earnings per share (a)
0.77
(6)
(a) See the "Non-GAAP Measures" section below for our use of measures not defined by GAAP.
Consolidated net sales were as follows:
Feb. 23, 2020 vs Feb. 24, 2019
Net sales (in millions)
Contributions from volume growth (a)
(1)
pt
Net price realization and mix
1
Foreign currency exchange
Note: Table may not foot due to rounding.
(a) Measured in tons based on the stated weight of our product shipments.
Net sales in the third quarter of fiscal 2020 essentially matched the same period in fiscal 2019.
Components of organic net sales growth are shown in the following table:
Quarter Ended Feb. 23, 2020 vs.
Quarter Ended Feb. 24, 2019
Contributions from organic volume growth (a)
Organic net price realization and mix
1 pt
Organic net sales growth
Divestitures
Net sales growth
Organic net sales in the third quarter of fiscal 2020 essentially matched the same period in fiscal 2019.
Cost of sales increased $22 million from the third quarter of fiscal 2019 to $2,777 million. The increase included a $19 million increase attributable to product rate and mix and a $19 million decrease due to lower volume. We recorded a $9 million net increase in cost of sales related to the mark-to-market valuation of certain commodity positions and grain inventories in the third quarter of fiscal 2020 compared to a net decrease of $6 million in the third quarter of fiscal 2019. In addition, we recorded $7 million of restructuring charges in cost of sales in the third quarter of fiscal 2020 (please refer to Note 3 to the Consolidated Financial Statements in Part I, Item 1 of this report).
SG&A expenses increased $50 million to $747 million in the third quarter of fiscal 2020 compared to the same period in fiscal 2019, primarily reflecting increased media and advertising expenses and increased administrative expenses. SG&A expenses as a percent of net sales in the third quarter of fiscal 2020 increased 130 basis points compared to the third quarter of fiscal 2019.
Divestiture loss totaled $35 million in the third quarter of fiscal 2019 from the sale of our La Salteña fresh pasta and refrigerated dough business in Argentina.
Restructuring, impairment, and other exit costs totaled $6 million in the third quarter of fiscal 2020 related to actions previously announced. In the third quarter of fiscal 2019, we recorded $60 million of restructuring charges primarily related to actions to drive efficiencies in targeted areas of our global supply chain.
Benefit plan non-service income totaled $30 million in the third quarter of fiscal 2020 compared to $21 million in the same period last year, primarily reflecting lower interest costs.
Interest, net for the third quarter of fiscal 2020 totaled $110 million, down $21 million from the third quarter of fiscal 2019, primarily driven by lower average debt balances and lower rates.
The effective tax rate for the third quarter of fiscal 2020 was 20.7 percent compared to 17.7 percent for the third quarter of fiscal 2019. The 3.0 percentage point increase was primarily due to certain discrete tax benefits in fiscal 2019, partially offset by changes in earnings mix by jurisdiction in fiscal 2020. Our adjusted effective tax rate was 21.0 percent in the third quarter of fiscal 2020 compared to 19.9 percent in the third quarter of fiscal 2019 (see the “Non-GAAP Measures” section below for a description of our use of measures not defined by GAAP).
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After-tax earnings from joint ventures for the third quarter of fiscal 2020 decreased to $11 million compared to $12 million in the same period in fiscal 2019. On a constant-currency basis, after-tax earnings from joint ventures decreased 5 percent (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:
CPW (a)
HDJ (b)
Contributions from volume growth (c)
(10)
pts
Net sales growth in constant currency
(5)
(4)
(a) Cereal Partners Worldwide (CPW)
(b) Häagen-Dazs Japan, Inc. (HDJ)
(c) Measured in tons based on the stated weight of our product shipments.
Average diluted shares outstanding increased by 8 million in the third quarter of fiscal 2020 from the same period a year ago due to option exercises.
Nine-Month Results
In the nine-month period ended February 23, 2020, net sales decreased 1 percent compared to the same period last year. Organic net sales in the nine-month period ended February 23, 2020, essentially matched the same period last year. Operating profit margin of 16.9 percent increased 270 basis points from year-ago levels, primarily driven by restructuring charges and impairment charges recorded for certain intangible and manufacturing assets in the nine-month period ended February 24, 2019, favorable net price realization and mix, and the purchase accounting inventory adjustment in the first quarter of fiscal 2019 related to our acquisition of Blue Buffalo Products, Inc. (Blue Buffalo), partially offset by higher input costs and higher SG&A expenses. Adjusted operating profit margin increased 40 basis points to 17.2 percent, primarily driven by favorable net price realization and mix and the purchase accounting inventory adjustment in the first quarter of fiscal 2019 related to our acquisition of Blue Buffalo, partially offset by higher input costs and higher SG&A expenses. Diluted earnings per share of $2.54 increased 30 percent in the nine-month period ended February 23, 2020, and adjusted diluted earnings per share of $2.51 increased 5 percent on a constant-currency basis compared to the same period last year (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 the nine-month period ended February 23, 2020, follows:
Nine-Month Period Ended Feb. 23, 2020
Nine-Month Period Ended Feb. 23, 2020 vs. Feb. 24, 2019
Percent of Net Sales
16.9
32
30
2,170.3
17.2
2.51
Note: Table may not foot due to rounding
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The 1 percent decrease in net sales for the nine-month period ended February 23, 2020, reflects lower contributions from volume growth and unfavorable foreign currency exchange, partially offset by favorable net price realization and mix.
Nine-Month Period Ended Feb. 23, 2020 vs.
Nine-Month Period Ended Feb. 24, 2019
(1)pt
Organic net sales in the nine-month period ended February 23, 2020, essentially matched the same period last year as favorable organic net price realization and mix was offset by lower contributions from organic volume growth.
Cost of sales decreased $166 million from the nine-month period ended February 24, 2019, to $8,242 million. The decrease was driven by a $122 million decrease due to lower volume, partially offset by a $20 million increase attributable to product rate and mix. We recorded a $53 million charge in the nine-month period ended February 24, 2019, related to the fair value adjustment of inventory acquired in the Blue Buffalo acquisition. We recorded a $1 million net increase in cost of sales related to the mark-to-market valuation of certain commodity positions and grain inventories in the nine-month period ended February 23, 2020, compared to a net increase of $36 million in the nine-month period ended February 24, 2019. In addition, we recorded $24 million of restructuring charges in cost of sales in the nine-month period ended February 23, 2020 (please refer to Note 3 to the Consolidated Financial Statements in Part I, Item 1 of this report).
SG&A expenses totaled $2,224 million in the nine-month period ended February 23, 2020, compared to $2,193 million in the same period in fiscal 2019. The increase in SG&A expenses primarily reflects higher media and advertising expenses and increased administrative expenses, partially offset by lower other consumer-related expenses. SG&A expenses as a percent of net sales in the nine-month period ended February 23, 2020, increased 30 basis points compared with the same period of fiscal 2019.
Divestiture loss totaled $35 million in the nine-month period ended February 24, 2019, from the sale of our La Salteña fresh pasta and refrigerated dough business in Argentina.
Restructuring, impairment, and other exit costs totaled $13 million in the nine-month period ended February 23, 2020, compared to $268 million in the same period last year. In the nine-month period ended February 24, 2019, we recorded impairment charges of $193 million related to certain brand intangible assets. In addition, we recorded restructuring charges of $59 million related to actions to drive efficiencies in targeted areas of our global supply chain and a $14 million charge related to the impairment of certain manufacturing assets within the North America Retail segment in the nine-month period ended February 24, 2019.
Benefit plan non-service income totaled $91 million in the nine-month period ended February 23, 2020, compared to $63 million in the same period last year, primarily reflecting lower interest costs.
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Interest, net for the nine-month period ended February 23, 2020, decreased $49 million to $348 million compared to the same period of fiscal 2019, primarily driven by lower average debt balances and lower rates.
The effective tax rate for the nine-month period ended February 23, 2020, was 18.3 percent compared to 21.4 percent for the same period last year. The 3.1 percentage point decrease was primarily due to the net benefit related to the reorganization of certain wholly owned subsidiaries in fiscal 2020 and changes in earnings mix by jurisdiction, partially offset by certain discrete tax benefits in fiscal 2019. Our adjusted effective tax rate was 21.3 percent in the nine-month period ended February 23, 2020, compared to 22.2 percent in the same period of fiscal 2019 (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 increased to $58 million for the nine-month period ended February 23, 2020 compared to $52 million in the same period in fiscal 2019, primarily driven by our share of lower after-tax restructuring charges at CPW compared to the same period in fiscal 2019. On a constant-currency basis, after-tax earnings from joint ventures increased 11 percent (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:
CPW
HDJ
(2)
Average diluted shares outstanding increased by 8 million in the nine-month period ended February 23, 2020, from the same period a year ago due to option exercises.
SEGMENT OPERATING RESULTS
Our businesses are 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. Please refer to Note 17 of the Consolidated Financial Statements in Part I, Item 1 of this report for a description of our operating segments.
North America Retail Segment Results
North America Retail net sales were as follows:
(a)Measured in tons based on the stated weight of our product shipments.
North America Retail net sales decreased 1 percent in the third quarter of fiscal 2020 compared to the same period in fiscal 2019, driven by unfavorable net price realization and mix.
North America Retail net sales in the nine-month period ended February 23, 2020, essentially matched the same period in fiscal 2019.
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The components of North America Retail organic net sales growth are shown in the following table:
North America Retail organic net sales decreased 1 percent in the third quarter of fiscal 2020 compared to the same period in fiscal 2019, driven by unfavorable organic net price realization and mix.
North America Retail organic net sales in the nine-month period ended February 23, 2020, essentially matched the same period in fiscal 2019.
North America Retail net sales percentage change by operating unit are shown in the following table:
Canada (a)
(a)On a constant-currency basis, Canada net sales increased 5 percent for the third quarter of fiscal 2020 and increased 2 percent for the nine-month period ended February 23, 2020, compared to the same periods in fiscal 2019. See the "Non-GAAP Measures" section below for our use of this measure not defined by GAAP.
Segment operating profit decreased 9 percent to $532 million in the third quarter of fiscal 2020 compared to $582 million in the same period in fiscal 2019, primarily driven by higher media expense, unfavorable net price realization and mix, and higher input costs. Segment operating profit decreased 9 percent on a constant-currency basis in the third quarter of fiscal 2020 compared to the same period in fiscal 2019 (see the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP).
Segment operating profit decreased 1 percent to $1,734 million in the nine-month period ended February 23, 2020, compared to $1,750 million in the same period in fiscal 2019, primarily driven by higher SG&A expenses. Segment operating profit decreased 1 percent on a constant-currency basis in the nine-month period ended February 23, 2020, compared to the same period in fiscal 2019 (see the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP).
Convenience Stores & Foodservice Segment Results
Convenience Stores & Foodservice net sales were as follows:
Convenience Stores & Foodservice net sales decreased 2 percent in the third quarter of fiscal 2020 compared to the same period in fiscal 2019, driven by a decrease in contributions from volume growth, partially offset by favorable net price realization and mix.
Convenience Stores & Foodservice net sales decreased 2 percent in the nine-month period ended February 23, 2020, compared to the same period in fiscal 2019, driven by a decrease in contributions from volume growth.
The components of Convenience Stores & Foodservice organic net sales growth are shown in the following table:
(2)pts
Segment operating profit decreased 5 percent to $92 million in the third quarter of fiscal 2020 compared to $97 million in the same period in fiscal 2019, primarily driven by higher input costs.
Segment operating profit decreased 2 percent to $298 million in the nine-month period ended February 23, 2020, compared to $303 million in the same period of fiscal 2019, primarily driven by a decrease in contributions from volume growth.
Europe & Australia Segment Results
Europe & Australia net sales were as follows:
(3)
Europe & Australia net sales decreased 2 percent in the third quarter of fiscal 2020 compared to the same period in fiscal 2019, driven by a decrease in contributions from volume growth and unfavorable foreign currency exchange.
Europe & Australia net sales decreased 6 percent in the nine-month period ended February 23, 2020, compared to the same period in fiscal 2019, driven by a decrease in contributions from volume growth 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:
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Europe & Australia organic net sales decreased 1 percent in the third quarter of fiscal 2020 compared to the same period in fiscal 2019, driven by a decrease in contributions from organic volume growth.
Europe & Australia organic net sales decreased 3 percent in the nine-month period ended February 23, 2020, compared to the same period in fiscal 2019, driven by a decrease in contributions from organic volume growth partially offset by favorable organic net price realization and mix.
Segment operating profit decreased to $22 million in the third quarter of fiscal 2020 from $24 million in the same period in fiscal 2019, driven by higher input costs, partially offset by lower SG&A expenses. Segment operating profit decreased 11 percent on a constant-currency basis in the third quarter of fiscal 2020 compared to the same period in fiscal 2019 (see the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP).
Segment operating profit of $81 million in the nine-month period ended February 23, 2020, essentially matched the same period in fiscal 2019, as lower SG&A expenses and favorable net price realization and mix were offset by a decrease in contributions from volume growth and higher input costs. Segment operating profit increased 3 percent on a constant-currency basis in the nine-month period ended February 23, 2020, compared to the same period in fiscal 2019 (see the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP).
Asia & Latin America Segment Results
Asia & Latin America net sales were as follows:
Asia & Latin America net sales decreased 5 percent in the third quarter of fiscal 2020 compared to the same period in fiscal 2019, driven by unfavorable foreign currency exchange and a decrease in contributions from volume growth. The decrease in net sales included declines in ice cream net sales resulting from lower consumer traffic at Häagen-Dazs shops and foodservice outlets due to the impact of COVID-19 in Asia.
Asia & Latin America net sales decreased 6 percent in the nine-month period ended February 23, 2020, compared to the same period in fiscal 2019, driven by a decrease in contributions from volume growth and unfavorable foreign currency exchange, partially offset by favorable net price realization and mix.
The components of Asia & Latin America organic net sales growth are shown in the following table:
Divestitures (b)
(b)Impact of the divestiture of our La Salteña business in Argentina and our Yoplait business in China.
Asia & Latin America organic net sales were flat in the third quarter of fiscal 2020 compared to the same period in fiscal 2019, as an increase in contributions from organic volume growth was offset by unfavorable net price realization and mix.
Asia & Latin America organic net sales decreased 1 percent in the nine-month period ended February 23, 2020, compared to the same period in fiscal 2019, driven by a decrease in contributions from organic volume growth, partially offset by favorable organic net price realization and mix.
Segment operating profit decreased to $8 million in the third quarter of fiscal 2020 from $20 million in the same period in fiscal 2019, including declines in ice cream net sales resulting from lower consumer traffic at Häagen-Dazs shops and foodservice outlets due to the impact of COVID-19 in Asia and higher SG&A expenses. Segment operating profit decreased 64 percent on a constant-currency basis in the third quarter of fiscal 2020 compared to the same period in fiscal 2019 (see the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP).
Segment operating profit decreased to $43 million in the nine-month period ended February 23, 2020, from $50 million in the same period in fiscal 2019, primarily driven by higher input costs and a decrease in contributions from volume growth, partially offset by favorable net price realization and mix and lower SG&A expenses. Segment operating profit decreased 13 percent on a constant-currency basis in the nine-month period ended February 23, 2020, compared to the same period in fiscal 2019 (see the “Non-GAAP Measures” section below for our use of this measure not defined by GAAP).
We expect the COVID-19 outbreak to continue to result in reduced consumer traffic at Häagen-Dazs shops and foodservice outlets during the fourth quarter of fiscal 2020.
Pet Segment Results
Pet net sales were as follows:
Nov. 24, 2019 vs Nov. 25, 2018
Pet net sales increased 11 percent in the quarter and nine-month periods ended February 23, 2020, compared to the same periods in fiscal 2019, driven by increased contributions from volume growth and favorable net price realization and mix.
The components of Pet organic net sales growth are shown in the following table:
6 pts
5 pts
11 pts
Segment operating profit increased 29 percent to $94 million in the third quarter of fiscal 2020 compared to $73 million in the same period in fiscal 2019, primarily driven by favorable net price realization and mix and an increase in contributions from volume growth.
Segment operating profit increased 62 percent to $256 million in the nine-month period ended February 23, 2020, compared to $158 million in the same period of fiscal 2019, primarily driven by a $53 million purchase accounting adjustment related to inventory acquired in the first quarter of fiscal 2019, favorable net price realization and mix, and an increase in contributions from volume growth, partially offset by higher media and advertising expenses.
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UNALLOCATED CORPORATE ITEMS
Unallocated corporate expense totaled $92 million in the third quarter of fiscal 2020 compared to $49 million in the same period in fiscal 2019. We recorded $7 million of restructuring charges in cost of sales in the third quarter of fiscal 2020. We recorded a $9 million net increase in expense related to the mark-to-market valuation of certain commodity positions and grain inventories in the third quarter of fiscal 2020 compared to a $6 million net decrease in expense in the same period last year. We recorded $3 million of losses related to certain investment valuation adjustments in the third quarter of fiscal 2020. During the third quarter of fiscal 2019, we recorded a $16 million legal recovery related to our Yoplait SAS subsidiary. We also recorded $6 million of integration costs in the third quarter of fiscal 2019 related to the acquisition of Blue Buffalo.
Unallocated corporate expense totaled $275 million in the nine-month period ended February 23, 2020, compared to $239 million in the same period last year. In the nine-month period ended February 23, 2020, we recorded $24 million of restructuring charges in cost of sales. We recorded a $1 million net increase in expense related to the mark-to-market valuation of certain commodity positions and grain inventories in the nine-month period ended February 23, 2020, compared to a $36 million net increase in expense in the same period last year. We recorded $7 million of net losses related to certain investment valuation adjustments and the loss on sale of certain corporate investments in the nine-month period ended February 23, 2020, compared to $13 million of gains in the same period last year. In addition, we recorded $21 million of integration costs related to the acquisition of Blue Buffalo, a $3 million loss related to the impact of hyperinflationary accounting for our Argentina subsidiary, and a $16 million legal recovery related to our Yoplait SAS subsidiary in the nine-month period ended February 24, 2019.
LIQUIDITY
During the nine-month period ended February 23, 2020, cash provided by operations was $2,160 million compared to $2,028 million in the same period last year. The $132 million increase was primarily driven by a $379 million increase in net earnings and a $55 million change in current assets and liabilities, partially offset by a $207 million change in non-cash restructuring, impairment, and other exit costs primarily driven by impairment charges recorded for certain intangible and manufacturing assets in the nine-month period ended February 24, 2019. The $55 million change in current assets and liabilities included a $62 million change in other current liabilities and a $42 million change in the timing of accounts payable, partially offset by a $78 million change in inventories.
Cash used by investing activities during the nine-month period ended February 23, 2020, was $305 million compared to $408 million for the same period in fiscal 2019. Investments of $269 million in land, buildings, and equipment in the nine-month period ended February 23, 2020, decreased by $98 million compared to the same period a year ago.
Cash used by financing activities during the nine-month period ended February 23, 2020, was $1,691 million compared to $1,458 million in the same period in fiscal 2019. We had $812 million of net debt repayments in the nine-month period ended February 23, 2020, compared to $724 million of net debt repayments in the same period a year ago. Sodiaal International (Sodiaal) made an additional investment of $56 million in our Yoplait SAS subsidiary during the nine-month period ended February 24, 2019. We paid $895 million of dividends in the nine-month period ended February 23, 2020, compared to $884 million in the same period last year. Additionally, we paid $70 million in distributions to noncontrolling and redeemable interest holders in the nine-month period ended February 23, 2020, compared to $34 million in the same period last year.
As of February 23, 2020, we had $572 million of cash and cash equivalents held in foreign jurisdictions. As a result of the Tax Cuts and Jobs Act (TCJA), the historic undistributed earnings of our foreign subsidiaries were taxed in the U.S. via the one-time repatriation tax in fiscal 2018. We have re-evaluated our permanent reinvestment assertion and have concluded that although earnings prior to fiscal 2018 will remain permanently reinvested, we will no longer make a permanent reinvestment assertion beginning with our fiscal 2018 earnings. We record local country withholding taxes on our international earnings, as applicable. 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.
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CAPITAL RESOURCES
Our capital structure was as follows:
Total debt
13,627.9
14,490.0
Stockholders' equity
Total capital
22,026.6
22,409.4
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 interests 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. 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 February 23, 2020, the redemption value of the redeemable interest was $539 million, which approximates its fair value.
During the second quarter of fiscal 2019, Sodiaal made an additional investment of $56 million in Yoplait SAS.
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). 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.
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.
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.
Certain of our long-term debt agreements, our credit facilities, and our noncontrolling interests contain restrictive covenants. As of February 23, 2020, we were in compliance with all of these covenants.
In the third quarter of fiscal 2020, we issued €600 million of 0.45 percent fixed-rate notes due January 15, 2026 and €200 million of 0.0 fixed-rate notes due November 16, 2020. We used the net proceeds, together with cash on hand, to repay €500 million of floating rate notes and €300 million of 0.0 percent fixed-rate notes.
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We have $864 million of long-term debt maturing in the next 12 months that is classified as current, including $100 million of 6.61 percent fixed-rate medium-term notes due for remarketing in October 2020, €500 million of 2.1 percent notes due November 2020, €200 million of 0.0 percent notes due November 2020 and $4 million of floating-rate medium term notes due for remarketing in November 2020. 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.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
There were no material changes outside the ordinary course of our business in our contractual obligations or off-balance sheet arrangements during the third quarter of fiscal 2020.
SIGNIFICANT ACCOUNTING ESTIMATES
Our significant accounting policies are described in Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 26, 2019. The accounting policies used in preparing our interim fiscal 2020 Consolidated Financial Statements are the same as those described in our Form 10-K with the exception of new accounting requirements adopted in the first quarter of fiscal 2020 related to hedge accounting and the accounting, presentation, and classification of leases. Please see Note 1 to the Consolidated Financial Statements in Part I, Item 1 of this report for additional information.
Our significant accounting estimates are those that have meaningful impact 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. The assumptions and methodologies used in the determination of those estimates as of February 23, 2020, are the same as those described in our Annual Report on Form 10-K for the fiscal year ended May 26, 2019.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2019, the Financial Accounting Standards Board (FASB) issued new accounting requirements related to income taxes. The new standard simplifies the accounting for income taxes by removing certain exceptions related to the approach for intraperiod tax allocation, the recognition of deferred tax liabilities for outside basis differences, and the methodology for calculating income taxes in interim periods. The new standard also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates and clarifies accounting for transactions that result in a step-up in the tax basis of goodwill. The requirements of the new standard are effective for annual reporting periods beginning after December 15, 2020, and interim periods within those annual periods, which for us is the first quarter of fiscal 2022. Early adoption is permitted. We are in the process of analyzing the impact of this standard on our results of operations and financial position.
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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.
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 we believe the non-GAAP measure provides useful information to investors, and any additional material 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.
Several measures below are presented on an adjusted basis. The adjustments are either items resulting from infrequently occurring events or items that, in management’s judgment, significantly affect the year-to-year assessment of operating results.
Organic Net Sales Growth Rates
We provide organic net sales growth rates for our consolidated net sales and segment net sales. This measure is used in reporting to our Board of Directors and executive management and as a component of the measurement of our performance for incentive compensation purposes. 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.
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Adjusted Operating Profit as a Percent of Net Sales (Adjusted Operating Profit Margin)
We believe this measure provides useful information to investors because it is important for assessing our operating profit margin on a comparable basis.
Our adjusted operating profit margins are calculated as follows:
Value
Percent of
Net Sales
Operating profit as reported
Mark-to-market effects (a)
(6.5)
Restructuring charges (b)
1.4
Project-related costs (b)
Asset impairments (b)
Investment activity, net (c)
Acquisition integration costs (d)
Divestiture loss (e)
Legal recovery (f)
(16.2)
Adjusted operating profit
729.7
14.2
1.0
36.4
21.3
Hyperinflationary accounting (g)
2,136.2
16.8
Note: Tables may not foot due to rounding.
(a)See Note 7 to the Consolidated Financial Statements in Part I, Item 1 of this report.
(b)See Note 3 to the Consolidated Financial Statements in Part I, Item 1 of this report.
(c)Valuation adjustments and the loss on sale of certain corporate investments.
(d)Integration costs resulting from the acquisition of Blue Buffalo in fiscal 2018.
(e)See Note 2 to the Consolidated Financial Statements in Part I, Item 1 of this report.
(f)Represents a legal recovery related to our Yoplait SAS subsidiary.
(g)Represents the impact of hyperinflationary accounting for our Argentina subsidiary, which was sold in the third quarter of fiscal 2019.
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Adjusted Operating Profit Growth on a Constant-currency Basis
We believe that this measure provides useful information to investors because it is the operating profit measure we use to evaluate operating profit performance on a comparable year-to-year basis. Additionally, the measure is evaluated on a constant-currency basis by excluding the effect that foreign currency exchange rate fluctuations have on year-to year comparability given the volatility in foreign currency exchange rates.
Our adjusted operating profit growth on a constant-currency basis is calculated as follows:
Feb. 23,
2020
Feb. 24,
2019
Change
Foreign currency exchange impact
Adjusted operating profit growth,
on a constant-currency basis
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Adjusted Diluted EPS and Related Constant-currency Growth Rate
This measure is used in reporting to our Board of Directors and executive management and as a component of the 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-to-year basis.
The reconciliation of our GAAP measure, diluted EPS, to adjusted diluted EPS and the related constant-currency growth rate follows:
Per Share Data
Diluted earnings per share, as reported
Tax items (a)
(0.01)
(0.09)
Mark-to-market effects (b)
0.01
0.05
Restructuring charges (c)
0.02
0.08
Asset impairments (c)
0.26
Investment activity, net (d)
CPW restructuring charges (e)
Acquisition integration costs (f)
0.03
Divestiture loss (g)
Legal recovery (h)
Adjusted diluted earnings per share
0.83
2.39
Adjusted diluted earnings per share growth,
(a)See Note 15 to the Consolidated Financial Statement in Part I, Item 1 of this report.
(b)See Note 7 to the Consolidated Financial Statements in Part I, Item 1 of this report.
(c)See Note 3 to the Consolidated Financial Statements in Part I, Item 1 of this report.
(d)Valuation adjustments and the loss on sale of certain corporate investments.
(e)The CPW restructuring charges are related to initiatives designed to improve profitability and growth that were approved in fiscal 2018 and 2019.
(f)Integration costs resulting from the acquisition of Blue Buffalo in fiscal 2018.
(g)See Note 2 to the Consolidated Financial Statements in Part I, Item 1 of this report.
(h)Represents a legal recovery related to our Yoplait SAS subsidiary.
See our reconciliation below of the effective income tax rate as reported to the adjusted effective income tax rate for the tax impact of each item affecting comparability.
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 rate on a constant-currency basis is calculated as follows:
Percentage Change in
After-Tax Earnings from Joint
Ventures as Reported
Impact of Foreign
Currency
Exchange
Percentage Change in After-Tax
Earnings from Joint Ventures
on Constant-Currency Basis
Net Sales Growth Rates for Our Canada Operating Unit on Constant-currency Basis
We believe that 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
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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:
as Reported
Net Sales on Constant-
Currency Basis
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:
Operating Profit
Percentage Change in Operating
Profit on Constant-Currency
Basis
(9)
(11)
(58)
(64)
(14)
(13)
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Adjusted Effective Income Tax Rate
We believe this measure provides useful information to investors because it presents the adjusted effective income tax rate on a comparable year-to-year basis.
Adjusted effective income tax rates are calculated as follows:
(Except Per Share Data)
(a)
Income
Taxes
As reported
Tax items (b)
7.2
53.1
Mark-to-market effects (c)
8.4
Restructuring charges (d)
12.3
8.0
12.5
Project-related costs (d)
Asset impairments (d)
47.7
Investment activity, net (e)
(3.0)
13.6
Hyperinflationary accounting (i)
As adjusted
595.6
124.8
620.3
123.6
1,913.1
407.6
1,802.5
399.3
Effective tax rate:
20.7%
17.7%
18.3%
21.4%
21.0%
19.9%
21.3%
22.2%
Sum of adjustment to income taxes
6.4
27.8
66.6
86.2
Average number of
common shares - diluted EPS
Impact of income tax adjustments
on adjusted diluted EPS
0.04
0.11
0.14
(a)Earnings before income taxes and after-tax earnings from joint ventures.
(b)See Note 15 to the Consolidated Financial Statements in Part I, Item 1 of this report.
(c)See Note 7 to the Consolidated Financial Statements in Part I, Item 1 of this report.
(d)See Note 3 to the Consolidated Financial Statements in Part I, Item 1 of this report.
(e)Valuation adjustments and the loss on sale of certain corporate investments.
(i)Represents the impact of hyperinflationary accounting for our Argentina subsidiary, which was sold in the third quarter of fiscal 2019.
Glossary
Accelerated depreciation associated with restructured assets. The increase in depreciation expense caused by updating the salvage value and shortening the useful life of depreciable fixed assets to coincide with the end of production under an approved restructuring plan, but only if impairment is not present.
AOCI. Accumulated other comprehensive income (loss).
Adjusted diluted EPS. Diluted EPS adjusted for certain items affecting year-to-year comparability.
Adjusted operating profit. Operating profit adjusted for certain items affecting year-to-year comparability.
Adjusted operating profit margin. Operating profit adjusted for certain items affecting year-over-year comparability, divided by net sales.
Constant currency. Financial results translated to United States dollars using constant foreign currency exchange rates based on the rates in effect for the comparable prior-year period. To present this information, current period results for entities reporting in currencies other than United States dollars are translated into United States dollars at the average exchange rates in effect during the corresponding period of the prior fiscal year, rather than the actual average exchange rates in effect during the current fiscal year. Therefore, the foreign currency impact is equal to current year results in local currencies multiplied by the change in the average foreign currency exchange rate between the current fiscal period and the corresponding period of the prior fiscal year.
Core working capital. Accounts receivable plus inventories less accounts payable.
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Derivatives. Financial instruments such as futures, swaps, options, and forward contracts that we use to manage our risk arising from changes in commodity prices, interest rates, foreign exchange rates, and stock prices.
Euribor. Euro Interbank Offered Rate.
Fair value hierarchy. For purposes of fair value measurement, we categorize assets and liabilities into one of three levels based on the assumptions (inputs) used in valuing the asset or liability. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are defined as follows:
Level 1:Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
Level 3:Unobservable inputs reflecting management’s assumptions about the inputs used in pricing the asset or liability.
Focus 6 platforms. The Focus 6 platforms for the Convenience Stores & Foodservice segment consist of cereal, yogurt, snacks, frozen meals, frozen biscuits, and frozen baked goods.
Free cash flow. Net cash provided by operating activities less purchases of land, buildings, and equipment.
Free cash flow conversion rate. Free cash flow divided by our net earnings, including earnings attributable to redeemable and noncontrolling interests adjusted for certain items affecting year-to-year comparability.
Generally Accepted Accounting Principles (GAAP). Guidelines, procedures, and practices that we are required to use in recording and reporting accounting information in our financial statements.
Goodwill. The difference between the purchase price of acquired companies plus the fair value of any noncontrolling and redeemable interests and the related fair values of net assets acquired.
Gross margin. Net sales less cost of sales.
Hedge accounting. Accounting for qualifying hedges that allows changes in a hedging instrument’s fair value to offset corresponding changes in the hedged item in the same reporting period. Hedge accounting is permitted for certain hedging instruments and hedged items only if the hedging relationship is highly effective, and only prospectively from the date a hedging relationship is formally documented.
Holistic Margin Management (HMM). Company-wide initiative to use productivity savings, mix management, and price realization to offset input cost inflation, protect margins, and generate funds to reinvest in sales-generating activities.
Interest bearing instruments. Notes payable, long-term debt, including current portion, cash and cash equivalents, and certain interest bearing investments classified within prepaid expenses and other current assets and other assets.
LIBOR. London Interbank Offered Rate.
Mark-to-market. The act of determining a value for financial instruments, commodity contracts, and related assets or liabilities based on the current market price for that item.
Net mark-to-market valuation of certain commodity positions. Realized and unrealized gains and losses on derivative contracts that will be allocated to segment operating profit when the exposure we are hedging affects earnings.
Net price realization. The impact of list and promoted price changes, net of trade and other price promotion costs.
Net realizable value. The estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
Noncontrolling interests. Interests of subsidiaries held by third parties.
Notional amount. The amount of a position or an agreed upon amount in a derivative contract on which the value of financial instruments are calculated.
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OCI. Other Comprehensive Income.
Organic net sales growth. Net sales growth adjusted for foreign currency translation, as well as acquisitions, divestitures and a 53rd week impact, when applicable.
Project-related costs. Costs incurred related to our restructuring initiatives not included in restructuring charges.
Redeemable interest. Interest of subsidiaries held by a third party that can be redeemed outside of our control and therefore cannot be classified as a noncontrolling interest in equity.
Reporting unit. An operating segment or a business one level below an operating segment.
Strategic Revenue Management (SRM). A company-wide capability focused on generating sustainable benefits from net price realization and mix by identifying and executing against specific opportunities to apply tools including pricing, sizing, mix management, and promotion optimization across each of our businesses.
Supply chain input costs. Costs incurred to produce and deliver product, including costs for ingredients and conversion, inventory management, logistics, and warehousing.
TCJA. U.S. Tax Cuts and Jobs Act which was signed into law on December 22, 2017.
Translation adjustments. The impact of the conversion of our foreign affiliates’ financial statements to United States dollars for the purpose of consolidating our financial statements.
Variable interest entities (VIEs). A legal structure that is used for business purposes that either (1) does not have equity investors that have voting rights and share in all the entity’s profits and losses or (2) has equity investors that do not provide sufficient financial resources to support the entity’s activities.
Working capital. Current assets and current liabilities, all as of the last day of our fiscal year.
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 Securities and Exchange Commission and in our reports to stockholders.
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: the impact of the COVID-19 outbreak on our business, suppliers, consumers, customers, and employees; disruptions or inefficiencies in the supply chain, including any impact of the COVID-19 outbreak; 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,
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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; 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 Part I of our Annual Report on Form 10-K for the fiscal year ended May 26, 2019, 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 3. Quantitative and Qualitative Disclosures About Market Risk.
The estimated maximum potential value-at-risk arising from a one-day loss in fair value for our interest rate, foreign exchange, commodity, and equity market-risk-sensitive instruments outstanding as of February 23, 2020 was $42 million, $13 million, $3 million, and $2 million, respectively. During the quarter ended February 23, 2020, the interest rate value-at-risk decreased by $33 million, the foreign exchange value-at-risk decreased by $4 million, and commodity value-at-risk decreased by $1 million, while equity value-at-risk was flat compared to these measures as of May 26, 2019. The value-at-risk for interest rate positions decreased due to lower market volatility. The value-at-risk for foreign exchange positions decreased due to a smaller portfolio and lower market volatility. The value-at-risk for commodity positions decreased due to a smaller portfolio. For additional information, see Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended May 26, 2019.
Item 4. Controls and Procedures.
We, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of February 23, 2020, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is (1) recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the quarter ended February 23, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 6.
Exhibits.
10.1
Separation Pay and Benefits Program for Officers.
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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Financial Statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended February 23, 2020, formatted in Inline Extensible Business Reporting Language: (i) Consolidated Statements of Earnings; (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets; (iv) Consolidated Statements of Total Equity and Redeemable Interest; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements.
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Cover Page, formatted in Inline Extensible Business Reporting Language and contained in Exhibit 101.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date: March 18, 2020
/s/ Mark A. Pallot
Mark A. Pallot
Vice President, Chief Accounting Officer
(Principal Accounting Officer and Duly Authorized Officer)