filings.toolsItem 8. Financial Statements and Supplementary Data
231K characters. Original on sec.gov · Markdown
Item 8. Financial Statements and Supplementary Data
REPORT OF MANAGEMENT RESPONSIBILITIES
The management of General Mills, Inc. is responsible for the fairness and accuracy of the consolidated financial statements. The statements have been prepared in accordance with accounting principles that are generally accepted in the United States, using management’s best estimates and judgments where appropriate. The financial information throughout this Annual Report on Form 10-K is consistent with our consolidated financial statements.
Management has established a system of internal controls that provides reasonable assurance that assets are adequately safeguarded and transactions are recorded accurately in all material respects, in accordance with management’s authorization. We maintain a strong audit program that independently evaluates the adequacy and effectiveness of internal controls. Our internal controls provide for appropriate separation of duties and responsibilities, and there are documented policies regarding use of our assets and proper financial reporting. These formally stated and regularly communicated policies demand highly ethical conduct from all employees.
The Audit Committee of the Board of Directors meets regularly with management, internal auditors, and our independent registered public accounting firm to review internal control, auditing, and financial reporting matters. The independent registered public accounting firm, internal auditors, and employees have full and free access to the Audit Committee at any time.
The Audit Committee reviewed and approved the Company’s annual financial statements. The Audit Committee recommended, and the Board of Directors approved, that the consolidated financial statements be included in the Annual Report. The Audit Committee also appointed KPMG LLP to serve as the Company’s independent registered public accounting firm for fiscal 2020.
| /s/ J. L. Harmening | /s/ D. L. Mulligan | |||
| J. L. Harmening | D. L. Mulligan | |||
| Chief Executive Officer | Chief Financial Officer |
June 27, 2019
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
General Mills, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of General Mills, Inc. and subsidiaries (the “Company”) as of May 26, 2019 and May 27, 2018, the related consolidated statements of earnings, comprehensive income, total equity and redeemable interest, and cash flows for each of the fiscal years in the three-year period ended May 26, 2019, and the related notes and financial statement schedule (collectively, the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of May 26, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of May 26, 2019 and May 27, 2018, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended May 26, 2019, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 26, 2019 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9a Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
Table of Contents
accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
We have served as the Company’s auditor since 1928.
Minneapolis, Minnesota
June 27, 2019
Table of Contents
Consolidated Statements of Earnings
GENERAL MILLS, INC. AND SUBSIDIARIES
(In Millions, Except per Share Data)
| Fiscal Year | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Net sales | $ | 16,865.2 | $ | 15,740.4 | $ | 15,619.8 | ||||||
| Cost of sales | 11,108.4 | 10,304.8 | 10,052.0 | |||||||||
| Selling, general, and administrative expenses | 2,935.8 | 2,850.1 | 2,888.8 | |||||||||
| Divestitures loss | 30.0 | - | 6.5 | |||||||||
| Restructuring, impairment, and other exit costs | 275.1 | 165.6 | 180.4 | |||||||||
| Operating profit | 2,515.9 | 2,419.9 | 2,492.1 | |||||||||
| Benefit plan non-service income | (87.9) | (89.4) | (74.3) | |||||||||
| Interest, net | 521.8 | 373.7 | 295.1 | |||||||||
| Earnings before income taxes and after-tax earnings from joint ventures | 2,082.0 | 2,135.6 | 2,271.3 | |||||||||
| Income taxes | 367.8 | 57.3 | 655.2 | |||||||||
| After-tax earnings from joint ventures | 72.0 | 84.7 | 85.0 | |||||||||
| Net earnings, including earnings attributable to redeemable and noncontrolling interests | 1,786.2 | 2,163.0 | 1,701.1 | |||||||||
| Net earnings attributable to redeemable and noncontrolling interests | 33.5 | 32.0 | 43.6 | |||||||||
| Net earnings attributable to General Mills | $ | 1,752.7 | $ | 2,131.0 | $ | 1,657.5 | ||||||
| Earnings per share - basic | $ | 2.92 | $ | 3.69 | $ | 2.82 | ||||||
| Earnings per share - diluted | $ | 2.90 | $ | 3.64 | $ | 2.77 | ||||||
| Dividends per share | $ | 1.96 | $ | 1.96 | $ | 1.92 | ||||||
See accompanying notes to consolidated financial statements.
Table of Contents
Consolidated Statements of Comprehensive Income
GENERAL MILLS, INC. AND SUBSIDIARIES
(In Millions)
| Fiscal Year | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Net earnings, including earnings attributable to redeemable and noncontrolling interests | $ | 1,786.2 | $ | 2,163.0 | $ | 1,701.1 | ||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||
| Foreign currency translation | (82.8) | (37.0) | 6.3 | |||||||||
| Net actuarial (loss) income | (253.4) | 140.1 | 197.9 | |||||||||
| Other fair value changes: | ||||||||||||
| Securities | - | 1.2 | 0.8 | |||||||||
| Hedge derivatives | 12.1 | (50.8) | 53.3 | |||||||||
| Reclassification to earnings: | ||||||||||||
| Securities | (2.0) | (5.1) | - | |||||||||
| Hedge derivatives | 0.9 | 17.4 | (25.7) | |||||||||
| Amortization of losses and prior service costs | 84.6 | 117.6 | 122.5 | |||||||||
| Other comprehensive (loss) income, net of tax | (240.6) | 183.4 | 355.1 | |||||||||
| Total comprehensive income | 1,545.6 | 2,346.4 | 2,056.2 | |||||||||
| Comprehensive (loss) income attributable to redeemable and noncontrolling interests | (10.7) | 70.5 | 31.0 | |||||||||
| Comprehensive income attributable to General Mills | $ | 1,556.3 | $ | 2,275.9 | $ | 2,025.2 | ||||||
See accompanying notes to consolidated financial statements.
Table of Contents
Consolidated Balance Sheets
GENERAL MILLS, INC. AND SUBSIDIARIES
(In Millions, Except Par Value)
| May 26, 2019 | May 27, 2018 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 450.0 | $ | 399.0 | ||||
| Receivables | 1,679.7 | 1,684.2 | ||||||
| Inventories | 1,559.3 | 1,642.2 | ||||||
| Prepaid expenses and other current assets | 497.5 | 398.3 | ||||||
| Total current assets | 4,186.5 | 4,123.7 | ||||||
| Land, buildings, and equipment | 3,787.2 | 4,047.2 | ||||||
| Goodwill | 13,995.8 | 14,065.0 | ||||||
| Other intangible assets | 7,166.8 | 7,445.1 | ||||||
| Other assets | 974.9 | 943.0 | ||||||
| Total assets | $ | 30,111.2 | $ | 30,624.0 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 2,854.1 | $ | 2,746.2 | ||||
| Current portion of long-term debt | 1,396.5 | 1,600.1 | ||||||
| Notes payable | 1,468.7 | 1,549.8 | ||||||
| Other current liabilities | 1,367.8 | 1,445.8 | ||||||
| Total current liabilities | 7,087.1 | 7,341.9 | ||||||
| Long-term debt | 11,624.8 | 12,668.7 | ||||||
| Deferred income taxes | 2,031.0 | 2,003.8 | ||||||
| Other liabilities | 1,448.9 | 1,341.0 | ||||||
| Total liabilities | 22,191.8 | 23,355.4 | ||||||
| Redeemable interest | 551.7 | 776.2 | ||||||
| Stockholders’ equity: | ||||||||
| Common stock, 754.6 shares issued, $0.10 par value | 75.5 | 75.5 | ||||||
| Additional paid-in capital | 1,386.7 | 1,202.5 | ||||||
| Retained earnings | 14,996.7 | 14,459.6 | ||||||
| Common stock in treasury, at cost, shares of 152.7 and 161.5 | (6,779.0) | (7,167.5) | ||||||
| Accumulated other comprehensive loss | (2,625.4) | (2,429.0) | ||||||
| Total stockholders’ equity | 7,054.5 | 6,141.1 | ||||||
| Noncontrolling interests | 313.2 | 351.3 | ||||||
| Total equity | 7,367.7 | 6,492.4 | ||||||
| Total liabilities and equity | $ | 30,111.2 | $ | 30,624.0 | ||||
See accompanying notes to consolidated financial statements.
Table of Contents
Consolidated Statements of Total Equity, and Redeemable Interest
GENERAL MILLS, INC. AND SUBSIDIARIES
(In Millions, Except per Share Data)
| $.10 Par Value Common Stock (One Billion Shares Authorized) | ||||||||||||||||||||||||||||||||||||||||
| Issued | Treasury | |||||||||||||||||||||||||||||||||||||||
| Shares | Par Amount | Additional Paid-In Capital | Shares | Amount | Retained Earnings | Accumulated Other Comprehensive Loss | Non- controlling Interests | Total Equity | Redeemable Interest | |||||||||||||||||||||||||||||||
| Balance as of May 29, 2016 | 754.6 | $ | 75.5 | $ | 1,177.0 | (157.8 | ) | $ | (6,326.6 | ) | $ | 12,616.5 | $ | (2,612.2 | ) | $ | 376.9 | $ | 5,307.1 | $ | 845.6 | |||||||||||||||||||
| Total comprehensive income | 1,657.5 | 367.7 | 13.8 | 2,039.0 | 17.2 | |||||||||||||||||||||||||||||||||||
| Cash dividends declared ($1.92 per share) | (1,135.1 | ) | (1,135.1 | ) | ||||||||||||||||||||||||||||||||||||
| Shares purchased | (25.4 | ) | (1,651.5 | ) | (1,651.5 | ) | ||||||||||||||||||||||||||||||||||
| Stock compensation plans (includes income tax benefits of $64.1) | 3.6 | 5.5 | 215.2 | 218.8 | ||||||||||||||||||||||||||||||||||||
| Unearned compensation related to stock unit awards | (78.5 | ) | (78.5 | ) | ||||||||||||||||||||||||||||||||||||
| Earned compensation | 94.9 | 94.9 | ||||||||||||||||||||||||||||||||||||||
| Increase in redemption value of redeemable interest | (75.9 | ) | (75.9 | ) | 75.9 | |||||||||||||||||||||||||||||||||||
| Acquisition of interest in subsidiary | (0.2 | ) | 0.1 | (0.1 | ) | |||||||||||||||||||||||||||||||||||
| Distributions to redeemable and noncontrolling interest holders | (33.2 | ) | (33.2 | ) | (27.8) | |||||||||||||||||||||||||||||||||||
| Balance as of May 28, 2017 | 754.6 | 75.5 | 1,120.9 | (177.7 | ) | (7,762.9 | ) | 13,138.9 | (2,244.5 | ) | 357.6 | 4,685.5 | 910.9 | |||||||||||||||||||||||||||
| Total comprehensive income | 2,131.0 | 144.9 | 26.9 | 2,302.8 | 43.6 | |||||||||||||||||||||||||||||||||||
| Cash dividends declared ($1.96 per share) | (1,139.7 | ) | (1,139.7 | ) | ||||||||||||||||||||||||||||||||||||
| Shares purchased | (10.9 | ) | (601.6 | ) | (601.6 | ) | ||||||||||||||||||||||||||||||||||
| Shares issued | (39.1 | ) | 22.7 | 1,009.0 | 969.9 | |||||||||||||||||||||||||||||||||||
| Stock compensation plans | (57.9 | ) | 4.4 | 188.0 | 130.1 | |||||||||||||||||||||||||||||||||||
| Unearned compensation related to stock unit awards | (58.1 | ) | (58.1 | ) | ||||||||||||||||||||||||||||||||||||
| Earned compensation | 77.0 | 77.0 | ||||||||||||||||||||||||||||||||||||||
| Decrease in redemption value of redeemable interest | 159.7 | 159.7 | (159.7) | |||||||||||||||||||||||||||||||||||||
| Distributions to redeemable and noncontrolling interest holders | (33.2 | ) | (33.2 | ) | (18.6) | |||||||||||||||||||||||||||||||||||
| Reclassification of certain income tax effects | 329.4 | (329.4 | ) | - | ||||||||||||||||||||||||||||||||||||
| Balance as of May 27, 2018 | 754.6 | 75.5 | 1,202.5 | (161.5 | ) | (7,167.5 | ) | 14,459.6 | (2,429.0 | ) | 351.3 | 6,492.4 | 776.2 | |||||||||||||||||||||||||||
| Total comprehensive income (loss) | 1,752.7 | (196.4 | ) | 0.4 | 1,556.7 | (11.1) | ||||||||||||||||||||||||||||||||||
| Cash dividends declared ($1.96 per share) | (1,181.7 | ) | (1,181.7 | ) | ||||||||||||||||||||||||||||||||||||
| Shares purchased | - | (1.1 | ) | (1.1 | ) | |||||||||||||||||||||||||||||||||||
| Stock compensation plans | (96.4 | ) | 8.8 | 389.6 | 293.2 | |||||||||||||||||||||||||||||||||||
| Unearned compensation related to stock unit awards | (71.3 | ) | (71.3 | ) | ||||||||||||||||||||||||||||||||||||
| Earned compensation | 82.8 | 82.8 | ||||||||||||||||||||||||||||||||||||||
| Increase in investment in redeemable interest | - | 55.7 | ||||||||||||||||||||||||||||||||||||||
| Decrease in redemption value of redeemable interest | 269.1 | 269.1 | (269.1) | |||||||||||||||||||||||||||||||||||||
| Distributions to redeemable and noncontrolling interest holders | (38.5 | ) | (38.5 | ) | ||||||||||||||||||||||||||||||||||||
| Adoption of revenue recognition accounting requirements | (33.9 | ) | (33.9 | ) | ||||||||||||||||||||||||||||||||||||
| Balance as of May 26, 2019 | 754.6 | $ | 75.5 | $ | 1,386.7 | (152.7 | ) | $ | (6,779.0 | ) | $ | 14,996.7 | $ | (2,625.4 | ) | $ | 313.2 | $ | 7,367.7 | $ | 551.7 | |||||||||||||||||||
See accompanying notes to consolidated financial statements.
Table of Contents
Consolidated Statements of Cash Flows
GENERAL MILLS, INC. AND SUBSIDIARIES
(In Millions)
| Fiscal Year | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Cash Flows - Operating Activities | ||||||||||||
| Net earnings, including earnings attributable to redeemable and noncontrolling interests | $ | 1,786.2 | $ | 2,163.0 | $ | 1,701.1 | ||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 620.1 | 618.8 | 603.6 | |||||||||
| After-tax earnings from joint ventures | (72.0) | (84.7) | (85.0) | |||||||||
| Distributions of earnings from joint ventures | 86.7 | 113.2 | 75.6 | |||||||||
| Stock-based compensation | 84.9 | 77.0 | 95.7 | |||||||||
| Deferred income taxes | 93.5 | (504.3) | 183.9 | |||||||||
| Pension and other postretirement benefit plan contributions | (28.8) | (31.8) | (45.4) | |||||||||
| Pension and other postretirement benefit plan costs | 6.1 | 4.6 | 35.7 | |||||||||
| Divestitures loss | 30.0 | - | 13.5 | |||||||||
| Restructuring, impairment, and other exit costs | 235.7 | 126.0 | 117.0 | |||||||||
| Changes in current assets and liabilities, excluding the effects of acquisitions and divestitures | (7.5) | 542.1 | (194.2) | |||||||||
| Other, net | (27.9) | (182.9) | (86.3) | |||||||||
| Net cash provided by operating activities | 2,807.0 | 2,841.0 | 2,415.2 | |||||||||
| Cash Flows - Investing Activities | ||||||||||||
| Purchases of land, buildings, and equipment | (537.6) | (622.7) | (684.4) | |||||||||
| Acquisition, net of cash acquired | - | (8,035.8) | - | |||||||||
| Investments in affiliates, net | 0.1 | (17.3) | 3.3 | |||||||||
| Proceeds from disposal of land, buildings, and equipment | 14.3 | 1.4 | 4.2 | |||||||||
| Proceeds from divestitures | 26.4 | - | 17.5 | |||||||||
| Exchangeable note | - | - | 13.0 | |||||||||
| Other, net | (59.7) | (11.0) | (0.5) | |||||||||
| Net cash used by investing activities | (556.5) | (8,685.4) | (646.9) | |||||||||
| Cash Flows - Financing Activities | ||||||||||||
| Change in notes payable | (66.3) | 327.5 | 962.4 | |||||||||
| Issuance of long-term debt | 339.1 | 6,550.0 | 1,072.1 | |||||||||
| Payment of long-term debt | (1,493.8) | (600.1) | (1,000.0) | |||||||||
| Proceeds from common stock issued on exercised options | 241.4 | 99.3 | 112.6 | |||||||||
| Proceeds from common stock issued | - | 969.9 | - | |||||||||
| Purchases of common stock for treasury | (1.1) | (601.6) | (1,651.5) | |||||||||
| Dividends paid | (1,181.7) | (1,139.7) | (1,135.1) | |||||||||
| Investments in redeemable interest | 55.7 | - | - | |||||||||
| Distributions to noncontrolling and redeemable interest holders | (38.5) | (51.8) | (61.0) | |||||||||
| Other, net | (31.2) | (108.0) | (46.9) | |||||||||
| Net cash provided (used) by financing activities | (2,176.4) | 5,445.5 | (1,747.4) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (23.1) | 31.8 | (18.5) | |||||||||
| Increase (decrease) in cash and cash equivalents | 51.0 | (367.1) | 2.4 | |||||||||
| Cash and cash equivalents - beginning of year | 399.0 | 766.1 | 763.7 | |||||||||
| Cash and cash equivalents - end of year | $ | 450.0 | $ | 399.0 | $ | 766.1 | ||||||
| Cash Flow from Changes in Current Assets and Liabilities, excluding the effects of acquisitions and divestitures: | ||||||||||||
| Receivables | $ | (42.7) | $ | (122.7) | $ | (69.2) | ||||||
| Inventories | 53.7 | 15.6 | (61.5) | |||||||||
| Prepaid expenses and other current assets | (114.3) | (10.7) | 16.6 | |||||||||
| Accounts payable | 162.4 | 575.3 | 99.5 | |||||||||
| Other current liabilities | (66.6) | 84.6 | (179.6) | |||||||||
| Changes in current assets and liabilities | $ | (7.5) | $ | 542.1 | $ | (194.2) | ||||||
See accompanying notes to consolidated financial statements.
Table of Contents
Notes to Consolidated Financial Statements
GENERAL MILLS, INC. AND SUBSIDIARIES
NOTE 1. BASIS OF PRESENTATION AND RECLASSIFICATIONS
Basis of Presentation
Our Consolidated Financial Statements include the accounts of General Mills, Inc. and all subsidiaries in which we have a controlling financial interest. Intercompany transactions and accounts, including any noncontrolling and redeemable interests’ share of those transactions, are eliminated in consolidation.
Our fiscal year ends on the last Sunday in May.
Certain reclassifications to our previously reported financial information have been made to conform to the current period presentation. See Note 2 for additional information.
Change in Reporting Period
As part of a long-term plan to conform the fiscal year ends of all our operations, in fiscal 2017 we changed the reporting period of General Mills Brasil Alimentos Ltda (Yoki) within our Asia & Latin America segment from an April fiscal year-end to a May fiscal year-end to match our fiscal calendar. Accordingly, in fiscal 2017, our results included 13 months of results from the affected operations. The impact of these changes was not material to our consolidated results of operations. Our General Mills India business and Pet operating segment are on an April fiscal year end.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
We consider all investments purchased with an original maturity of three months or less to be cash equivalents.
Inventories
All inventories in the United States other than grain are valued at the lower of cost, using the last-in, first-out (LIFO) method, or market. Grain inventories are valued at net realizable value, and all related cash contracts and derivatives are valued at fair value, with all net changes in value recorded in earnings currently.
Inventories outside of the United States are generally valued at the lower of cost, using the first-in, first-out (FIFO) method, or net realizable value.
Shipping costs associated with the distribution of finished product to our customers are recorded as cost of sales, and are recognized when the related finished product is shipped to and accepted by the customer.
Land, Buildings, Equipment, and Depreciation
Land is recorded at historical cost. Buildings and equipment, including capitalized interest and internal engineering costs, are recorded at cost and depreciated over estimated useful lives, primarily using the straight-line method. Ordinary maintenance and repairs are charged to cost of sales. Buildings are usually depreciated over 40 years, and equipment, furniture, and software are usually depreciated over 3 to 10 years. Fully depreciated assets are retained in buildings and equipment until disposal. When an item is sold or retired, the accounts are relieved of its cost and related accumulated depreciation and the resulting gains and losses, if any, are recognized in earnings. As of May 26, 2019, assets held for sale were insignificant.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows from the operation and disposition of the asset group are less than the carrying amount of the asset group. Asset groups have identifiable cash flows and are largely
Table of Contents
independent of other asset groups. Measurement of an impairment loss would be based on the excess of the carrying amount of the asset group over its fair value. Fair value is measured using a discounted cash flow model or independent appraisals, as appropriate.
Goodwill and Other Intangible Assets
Goodwill is not subject to amortization and is tested for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred. We perform our annual goodwill and indefinite-lived intangible assets impairment test as of the first day of the second quarter of the fiscal year. Impairment testing is performed for each of our reporting units. We compare the carrying value of a reporting unit, including goodwill, to the fair value of the unit. Carrying value is based on the assets and liabilities associated with the operations of that reporting unit, which often requires allocation of shared or corporate items among reporting units. If the carrying amount of a reporting unit exceeds its fair value, impairment has occurred. We recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value up to the total amount of goodwill allocated to the reporting unit. Our estimates of fair value are determined based on a discounted cash flow model. Growth rates for sales and profits are determined using inputs from our long-range planning process. We also make estimates of discount rates, perpetuity growth assumptions, market comparables, and other factors.
We evaluate the useful lives of our other intangible assets, mainly brands, to determine if they are finite or indefinite-lived. Reaching a determination on useful life requires significant judgments and assumptions regarding the future effects of obsolescence, demand, competition, other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels), the level of required maintenance expenditures, and the expected lives of other related groups of assets. Intangible assets that are deemed to have definite lives are amortized on a straight-line basis, over their useful lives, generally ranging from 4 to 30 years.
Our indefinite-lived intangible assets, mainly intangible assets primarily associated with the Blue Buffalo, Pillsbury, Totino’s, Yoplait, Old El Paso, Progresso, Annie’s, Häagen-Dazs, and Yoki brands, are also tested for impairment annually and whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Our estimate of the fair value of the brands is based on a discounted cash flow model using inputs which included projected revenues from our long-range plan, assumed royalty rates that could be payable if we did not own the brands, and a discount rate.
Our finite-lived intangible assets, primarily acquired franchise agreements and customer relationships, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows from the operation and disposition of the asset are less than the carrying amount of the asset. Assets generally have identifiable cash flows and are largely independent of other assets. Measurement of an impairment loss would be based on the excess of the carrying amount of the asset over its fair value. Fair value is measured using a discounted cash flow model or other similar valuation model, as appropriate.
Investments in Unconsolidated Joint Ventures
Our investments in companies over which we have the ability to exercise significant influence are stated at cost plus our share of undistributed earnings or losses. We receive royalty income from certain joint ventures, incur various expenses (primarily research and development), and record the tax impact of certain joint venture operations that are structured as partnerships. In addition, we make advances to our joint ventures in the form of loans or capital investments. We also sell certain raw materials, semi-finished goods, and finished goods to the joint ventures, generally at market prices.
In addition, we assess our investments in our joint ventures if we have reason to believe an impairment may have occurred including, but not limited to, as a result of ongoing operating losses, projected decreases in earnings, increases in the weighted-average cost of capital, or significant business disruptions. The significant assumptions
Table of Contents
used to estimate fair value include revenue growth and profitability, royalty rates, capital spending, depreciation and taxes, foreign currency exchange rates, and a discount rate. By their nature, these projections and assumptions are uncertain. If we were to determine the current fair value of our investment was less than the carrying value of the investment, then we would assess if the shortfall was of a temporary or permanent nature and write down the investment to its fair value if we concluded the impairment is other than temporary.
Redeemable Interest
We have a 51 percent controlling interest in Yoplait SAS, a consolidated entity. Sodiaal International (Sodiaal) holds the remaining 49 percent interest in Yoplait SAS. 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. This put option requires us to classify Sodiaal’s interest as a redeemable interest outside of equity on our Consolidated Balance Sheets for as long as the put is exercisable by Sodiaal. When the put is no longer exercisable, the redeemable interest will be reclassified to noncontrolling interests on our Consolidated Balance Sheets. 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. During the second and fourth quarters of fiscal 2019, we adjusted the redeemable interest’s redemption value based on a discounted cash flow model. The significant assumptions used to estimate the redemption value include projected revenue growth and profitability from our long-range plan, capital spending, depreciation, taxes, foreign currency exchange rates, and a discount rate.
Revenue Recognition
Our revenues primarily result from contracts with customers, which are generally short-term and have a single performance obligation – the delivery of product. We recognize revenue for the sale of packaged foods at the point in time when our performance obligation has been satisfied and control of the product has transferred to our customer, which generally occurs when the shipment is accepted by our customer. Sales include shipping and handling charges billed to the customer and are reported net of variable consideration and consideration payable to our customers, including trade promotion, consumer coupon redemption and other costs, including estimated allowances for returns, unsalable product, and prompt pay discounts. Sales, use, value-added, and other excise taxes are not included in revenue. Trade promotions are recorded using significant judgment of estimated participation and performance levels for offered programs at the time of sale. Differences between estimated expenses and actual costs are recognized as a change in management estimate in a subsequent period. We generally do not allow a right of return. However, on a limited case-by-case basis with prior approval, we may allow customers to return product. In limited circumstances, product returned in saleable condition is resold to other customers or outlets. Receivables from customers generally do not bear interest. Payment terms and collection patterns are short-term, and vary around the world and by channel, and as such, we do not have any significant financing components. Our allowance for doubtful accounts represents our estimate of probable non-payments and credit losses in our existing receivables, as determined based on a review of past due balances and other specific account data. Account balances are written off against the allowance when we deem the amount is uncollectible. Please see Note 16 for a disaggregation of our revenue into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. We do not have material contract assets or liabilities arising from our contracts with customers.
Environmental Costs
Environmental costs relating to existing conditions caused by past operations that do not contribute to current or future revenues are expensed. Liabilities for anticipated remediation costs are recorded on an undiscounted basis when they are probable and reasonably estimable, generally no later than the completion of feasibility studies or our commitment to a plan of action.
Advertising Production Costs
We expense the production costs of advertising the first time that the advertising takes place.
Table of Contents
Research and Development
All expenditures for research and development (R&D) are charged against earnings in the period incurred. R&D includes expenditures for new product and manufacturing process innovation, and the annual expenditures are comprised primarily of internal salaries, wages, consulting, and supplies attributable to R&D activities. Other costs include depreciation and maintenance of research facilities, including assets at facilities that are engaged in pilot plant activities.
Foreign Currency Translation
For all significant foreign operations, the functional currency is the local currency. Assets and liabilities of these operations are translated at the period-end exchange rates. Income statement accounts are translated using the average exchange rates prevailing during the period. Translation adjustments are reflected within accumulated other comprehensive loss (AOCI) in stockholders’ equity. Gains and losses from foreign currency transactions are included in net earnings for the period, except for gains and losses on investments in subsidiaries for which settlement is not planned for the foreseeable future and foreign exchange gains and losses on instruments designated as net investment hedges. These gains and losses are recorded in AOCI.
Derivative Instruments
All derivatives are recognized on our Consolidated Balance Sheets at fair value based on quoted market prices or our estimate of their fair value, and are recorded in either current or noncurrent assets or liabilities based on their maturity. Changes in the fair values of derivatives are recorded in net earnings or other comprehensive income, based on whether the instrument is designated and effective as a hedge transaction and, if so, the type of hedge transaction. Gains or losses on derivative instruments reported in AOCI are reclassified to earnings in the period the hedged item affects earnings. If the underlying hedged transaction ceases to exist, any associated amounts reported in AOCI are reclassified to earnings at that time. Any ineffectiveness is recognized in earnings in the current period.
Stock-based Compensation
We generally measure compensation expense for grants of restricted stock units and performance share units using the value of a share of our stock on the date of grant. We estimate the value of stock option grants using a Black-Scholes valuation model. Generally, stock-based compensation is recognized straight line over the vesting period. Our stock-based compensation expense is recorded in selling, general and administrative (SG&A) expenses and cost of sales in our Consolidated Statements of Earnings and allocated to each reportable segment in our segment results.
Certain equity-based compensation plans contain provisions that accelerate vesting of awards upon retirement, termination, or death of eligible employees and directors. We consider a stock-based award to be vested when the employee’s retention of the award is no longer contingent on providing subsequent service. Accordingly, the related compensation cost is generally recognized immediately for awards granted to retirement-eligible individuals or over the period from the grant date to the date retirement eligibility is achieved, if less than the stated vesting period.
We report the benefits of tax deductions in excess of recognized compensation cost as an operating cash flow.
Defined Benefit Pension, Other Postretirement Benefit, and Postemployment Benefit Plans
We sponsor several domestic and foreign defined benefit plans to provide pension, health care, and other welfare benefits to retired employees. Under certain circumstances, we also provide accruable benefits, primarily severance, to former or inactive employees in the United States, Canada, and Mexico. We recognize an obligation for any of these benefits that vest or accumulate with service. Postemployment benefits that do not vest or accumulate with service (such as severance based solely on annual pay rather than years of service) are charged to expense when incurred. Our postemployment benefit plans are unfunded.
Table of Contents
We recognize the underfunded or overfunded status of a defined benefit pension plan as an asset or liability and recognize changes in the funded status in the year in which the changes occur through AOCI.
In fiscal 2018, we approved an amendment to reorganize the U.S. qualified defined benefit pension plans and the supplemental pension plans that resulted in the spinoff of a portion of the General Mills Pension Plan (the Plan) and the 2005 Supplemental Retirement Plan and the Supplemental Retirement Plan (Grandfathered) (together, the Supplemental Plans) into new plans effective May 31, 2018. The benefits offered to the plans’ participants were unchanged. The result of the reorganization was the creation of the General Mills Pension Plan I (Plan I) and the 2005 Supplemental Retirement Plan I and the Supplemental Retirement Plan I (Grandfathered) (together, the Supplemental Plans I). The reorganization was made to facilitate a targeted investment strategy over time and to provide additional flexibility in evaluating opportunities to reduce risk and volatility. Actuarial gains and losses associated with the Plan and the Supplemental Plans are amortized over the average remaining service period of the active participants. Actuarial gains and losses associated with the Plan I and the Supplemental Plans I are amortized over the average remaining life of the participants. Please refer to Note 13 for a description of our defined benefit pension, other postretirement benefit, and postemployment benefit plans.
Use of Estimates
Preparing our Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. 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. Actual results could differ from our estimates.
New Accounting Standards
In the first quarter of fiscal 2019, we adopted new accounting requirements related to the presentation of net periodic defined benefit pension expense, net periodic postretirement benefit expense, and net periodic postemployment benefit expense (collectively “net periodic benefit expense”). The new standard requires the service cost component of net periodic benefit expense to be recorded in the same line items as other employee compensation costs within our Consolidated Statements of Earnings. Other components of net periodic benefit expense must be presented separately outside of operating profit in our Consolidated Statements of Earnings. In addition, the new standard requires that only the service cost component of net periodic benefit expense is eligible for capitalization. The new standard requires retrospective adoption of the presentation of net periodic benefit expense and prospective application of the capitalization of the service cost component. The impact of the adoption of this standard on our results of operations was a decrease to our operating profit of $87.9 million, $89.4 million and $74.3 million and a corresponding increase to benefit plan non-service income of $87.9 million, $89.4 million and $74.3 million for fiscal 2019, fiscal 2018 and fiscal 2017, respectively. There were no changes to our reported segment operating profit.
In the first quarter of fiscal 2019, we adopted new accounting requirements for the recognition of revenue from contracts with customers. Under the new standard, we apply a principles-based five step model to recognize revenue upon the transfer of control of promised goods to customers and in an amount that reflects the consideration for which we expect to be entitled to in exchange for those goods. The principles-based five step model includes: 1) identifying the contract(s) with a customer; 2) identifying the performance obligations in the contract; 3) determining the transaction price; 4) allocating the transaction price to the performance obligations in the contract; and 5) recognizing revenue when (or as) we satisfy a performance obligation. We utilized a comprehensive approach to evaluate and document the impact of the guidance on our current accounting policies and practices. We did not identify any material differences resulting from applying the new requirements to our revenue contracts. Additionally, we did not identify any significant changes to our business processes, systems, and controls to support recognition and disclosure requirements under the new guidance. We adopted the requirements of the new standard and subsequent amendments to all contracts in the first quarter of fiscal 2019 using the cumulative effect approach.
Table of Contents
We recorded a $33.9 million cumulative effect adjustment net of income tax effects to the opening balance of fiscal 2019 retained earnings, a decrease to deferred income taxes of $11.4 million, and an increase to other current liabilities of $45.3 million related to the timing of recognition of certain promotional expenditures.
In the third quarter of fiscal 2018, we adopted new accounting requirements that codify Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 118, as it relates to allowing for recognition of provisional amounts related to the U.S. Tax Cuts and Jobs Act (TCJA) in the event that the accounting is not complete and a reasonable estimate can be made. Where necessary information is not available, prepared, or analyzed to determine a reasonable estimate, no provisional amount should be recorded. The guidance allows for a measurement period of up to one year from the enactment date to finalize the accounting related to the TCJA. In fiscal 2019, we completed our accounting for the tax effects of the TCJA.
In the third quarter of fiscal 2018, we adopted new accounting requirements that provide the option to reclassify stranded income tax effects resulting from the TCJA from AOCI to retained earnings. We elected to reclassify the stranded income tax effects of the TCJA of $329.4 million from AOCI to retained earnings. This reclassification consisted of deferred taxes originally recorded in AOCI that exceeded the newly enacted federal corporate tax rate. The new accounting requirements allowed for adjustments to reclassification amounts in subsequent periods as a result of changes to the provisional amounts recorded.
In the first quarter of fiscal 2018, we adopted new requirements for the accounting and presentation of stock-based payments. The adoption of this guidance resulted in the prospective recognition of realized windfall and shortfall tax benefits related to the exercise or vesting of stock-based awards in our Consolidated Statements of Earnings instead of additional paid-in capital within our Consolidated Balance Sheets. We retrospectively adopted the guidance related to reclassification of realized windfall tax benefits, which resulted in reclassifications of cash provided by financing activities to operating activities in our Consolidated Statements of Cash Flows. Additionally, we retrospectively adopted the guidance related to reclassification of employee tax withholdings, which resulted in reclassifications of cash used by operating activities to financing activities in our Consolidated Statements of Cash Flows. Stock-based compensation expense continues to reflect estimated forfeitures.
In the first quarter of fiscal 2018, we adopted new accounting requirements which permit reporting entities to measure a goodwill impairment loss by the amount by which a reporting unit’s carrying value exceeds the reporting unit’s fair value. Previously, goodwill impairment losses were required to be measured by determining the implied fair value of goodwill. Our annual goodwill impairment test was performed as of the first day of the second quarter of fiscal 2018, and the adoption of this guidance did not impact our results of operations or financial position.
In the first quarter of fiscal 2017, we adopted new accounting requirements for the presentation of certain investments using the net asset value, providing a practical expedient to exclude such investments from categorization within the fair value hierarchy and separate disclosure. We adopted the guidance retrospectively and restated the fiscal 2016 fair value of plan asset tables in Note 13. The adoption of this guidance did not impact our results of operations or financial position.
In the first quarter of fiscal 2017, we adopted new accounting requirements which permit reporting entities with a fiscal year-end that does not coincide with a month-end to apply a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply such practical expedient consistently to all plans. The adoption of this guidance did not have a material impact on our results of operations or financial position.
NOTE 3. ACQUISITION AND DIVESTITURES
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. During the fourth quarter of fiscal 2019, we sold our
Table of Contents
yogurt business in China and simultaneously entered into a new Yoplait license agreement with the purchaser for their use of the Yoplait brand. We recorded a pre-tax gain of $5.4 million.
During the fourth quarter of fiscal 2018, we acquired Blue Buffalo Pet Products, Inc. (“Blue Buffalo”) for an aggregate purchase price of $8.0 billion, including $103.0 million of consideration for net debt repaid at the time of the acquisition. In accordance with the definitive agreement and plan of merger, a subsidiary of General Mills merged into Blue Buffalo, with Blue Buffalo surviving the merger as a wholly owned subsidiary of General Mills. In accordance with the merger agreement, equity holders of Blue Buffalo received $40.00 per share in cash. We financed the transaction with a combination of $6.0 billion in debt, $1.0 billion in equity, and cash on hand. In fiscal 2019, we recorded acquisition integration costs of $25.6 million in SG&A expenses. In fiscal 2018, we recorded acquisition transaction and integration costs of $34.0 million in SG&A expenses and $49.9 million in interest, net related to the debt issued to finance the acquisition.
We consolidated Blue Buffalo into our Consolidated Balance Sheets and recorded goodwill of $5.3 billion, an indefinite-lived intangible asset for the Blue Buffalo brand of $2.7 billion, and a finite-lived customer relationship asset of $269.0 million. The goodwill was primarily attributable to future growth opportunities and any intangible assets that did not qualify for separate recognition. The goodwill is included in the Pet reporting unit and is not deductible for tax purposes. In the fourth quarter of fiscal 2019, we recorded adjustments to certain purchase accounting liabilities that resulted in a $5.6 million increase to goodwill.
The consolidated results of Blue Buffalo are reported as our Pet operating segment on a one-month lag.
The following unaudited supplemental pro forma information is presented as if we had acquired Blue Buffalo at the beginning of fiscal 2017:
| Unaudited | ||||||||
| Fiscal Year | ||||||||
| In Millions | 2018 | 2017 | ||||||
| Net sales | $ | 17,057.4 | $ | 16,772.9 | ||||
| Net earnings attributable to General Mills | 2,252.4 | 1,540.2 |
The fiscal 2017 pro forma amounts include transaction and integration costs of $83.9 million and the purchase accounting adjustment to record inventory at fair value of $52.7 million. The fiscal 2017 and fiscal 2018 pro forma amounts include interest expense of $238.7 million on the debt issued to finance the transaction and amortization expense of $13.5 million based on the estimated fair value and useful life of the customer relationships intangible asset. Additionally, the pro forma amounts include an increase to cost of sales by $1.6 million in fiscal 2017 and $5.1 million in fiscal 2018 to reflect the impact of using the LIFO method of inventory valuation on Blue Buffalo’s historical operating results. Pro forma amounts include related tax effects of $125.1 million in fiscal 2017 and $14.5 million in fiscal 2018. Unaudited pro forma amounts are not necessarily indicative of results had the acquisition occurred at the beginning of fiscal 2017 or of future results.
NOTE 4. RESTRUCTURING, IMPAIRMENT, AND OTHER EXIT COSTS
ASSET IMPAIRMENTS
In fiscal 2019, we recorded a $192.6 million charge related to the impairment of our Progresso, Food Should Taste Good, and Mountain High brand intangible assets in restructuring, impairment, and other exit costs. Please see Note 6 for additional information.
In fiscal 2019, we recorded a $14.8 million charge in restructuring, impairment, and other exit costs related to the impairment of certain manufacturing assets in our North America Retail and Asia & Latin America segments.
Table of Contents
In fiscal 2018, we recorded a $96.9 million charge related to the impairment of our Yoki, Mountain High, and Immaculate Baking brand intangible assets in restructuring, impairment, and other exit costs.
RESTRUCTURING INITIATIVES
We view our restructuring activities as actions that help us meet our long-term growth targets. Activities we undertake must meet internal rate of return and net present value targets. Each restructuring action normally takes one to two years to complete. At completion (or as each major stage is completed in the case of multi-year programs), the project begins to deliver cash savings and/or reduced depreciation. These activities result in various restructuring costs, including asset write-offs, exit charges including severance, contract termination fees, and decommissioning and other costs. Accelerated depreciation associated with restructured assets, as used in the context of our disclosures regarding restructuring activity, refers to the increase in depreciation expense caused by shortening the useful life or updating the salvage value of depreciable fixed assets to coincide with the end of production under an approved restructuring plan. Any impairment of the asset is recognized immediately in the period the plan is approved.
Charges recorded in fiscal 2019 were as follows:
| Expense, in Millions | ||||
| Targeted actions in global supply chain | $ | 80.2 | ||
| Charges associated with restructuring actions previously announced | (2.6) | |||
| Total | $ | 77.6 |
In fiscal 2019, we approved restructuring actions to drive efficiencies in targeted areas of our global supply chain. In our North America Retail segment, we approved actions at certain facilities to consolidate production and optimize our labor and manufacturing platforms. In connection with these actions we will exit our Carson, California yogurt manufacturing facility. We expect to incur approximately $101 million of restructuring charges related to these actions, including $10 million of severance expense and $91 million of other costs, primarily asset write-offs. We also expect to incur approximately $2 million of project-related costs. We recorded $9.9 million of severance and $44.5 million of other costs in fiscal 2019. In fiscal 2019, we approved targeted systems and process optimization actions in our Europe & Australia segment and expect to incur approximately $15 million of restructuring charges, including $11 million of severance expense and $4 million of other costs. We recorded $11.3 million of severance and $0.7 million of other costs in fiscal 2019. In fiscal 2019, we decided to exit underperforming product lines in our Asia & Latin America segment and expect to incur approximately $14 million of restructuring charges, including $1 million of severance expense and $13 million of other costs, primarily asset write-offs. We recorded $1.0 million of severance and $11.5 million of other costs in fiscal 2019. In fiscal 2019, we decided to exit underperforming markets in our Pet segment and expect to incur approximately $8 million of restructuring charges, including $2 million of severance expense and $6 million of other costs, primarily asset write-offs. We recorded $0.8 million of severance and $0.5 million of other costs in fiscal 2019.
Certain of these global supply chain actions are subject to union negotiations and works counsel consultations, where required. We expect to spend approximately $35 million of cash related to these actions and spent $1.7 million in fiscal 2019. We expect these actions to be completed by the end of fiscal 2022.
In fiscal 2019, we paid $49.3 million in cash related to restructuring initiatives in fiscal 2019.
Table of Contents
Charges recorded in fiscal 2018 were as follows:
| Expense, in Millions | ||||
| Global cost savings initiatives | $ | 49.3 | ||
| Charges associated with restructuring actions previously announced | 33.4 | |||
| Total | $ | 82.7 |
Charges recorded in fiscal 2017 were as follows:
| Expense, in Millions | ||||
| Global reorganization | $ | 72.1 | ||
| Restructuring of certain international product lines | 45.1 | |||
| Closure of Vineland, New Jersey plant | 41.4 | |||
| Closure of Melbourne, Australia plant | 21.9 | |||
| Charges associated with restructuring actions previously announced | 43.6 | |||
| Total | $ | 224.1 |
Restructuring and impairment charges and project-related costs are classified in our Consolidated Statements of Earnings as follows:
| Fiscal | ||||||||||||
| In Millions | 2019 | 2018 | 2017 | |||||||||
| Restructuring, impairment, and other exit costs | $ | 275.1 | $ | 165.6 | $ | 180.4 | ||||||
| Cost of sales | 9.9 | 14.0 | 41.5 | |||||||||
| Total restructuring charges | 285.0 | 179.6 | 221.9 | |||||||||
| Project-related costs classified in cost of sales | $ | 1.3 | $ | 11.3 | $ | 43.9 |
The roll forward of our restructuring and other exit cost reserves, included in other current liabilities, is as follows:
| In Millions | Severance | Contract Termination | Other Exit Costs | Total | ||||||||||||
| Reserve balance as of May 29, 2016 | $ | 73.6 | $ | 1.5 | $ | 1.5 | $ | 76.6 | ||||||||
| Fiscal 2017 charges, including foreign currency translation | 95.0 | 0.9 | 8.1 | 104.0 | ||||||||||||
| Utilized in fiscal 2017 | (86.8 | ) | (1.7 | ) | (7.1 | ) | (95.6 | ) | ||||||||
| Reserve balance as of May 28, 2017 | 81.8 | 0.7 | 2.5 | 85.0 | ||||||||||||
| Fiscal 2018 charges, including foreign currency translation | 40.8 | 0.2 | (0.7 | ) | 40.3 | |||||||||||
| Utilized in fiscal 2018 | (56.6 | ) | (0.8 | ) | (1.1 | ) | (58.5 | ) | ||||||||
| Reserve balance as of May 27, 2018 | 66.0 | 0.1 | 0.7 | 66.8 | ||||||||||||
| Fiscal 2019 charges, including foreign currency translation | 7.7 | 2.5 | 1.4 | 11.6 | ||||||||||||
| Utilized in fiscal 2019 | (37.2 | ) | (2.6 | ) | (2.1 | ) | (41.9 | ) | ||||||||
| Reserve balance as of May 26, 2019 | $ | 36.5 | $ | - | $ | - | $ | 36.5 |
Table of Contents
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, the gain or loss on the sale of restructured assets, and the write-off of spare parts) and other periodic exit costs recognized as incurred, as those items are not reflected in our restructuring and other exit cost reserves on our Consolidated Balance Sheets.
NOTE 5. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
We have a 50 percent equity interest in Cereal Partners Worldwide (CPW), which manufactures and markets ready-to-eat cereal products in more than 130 countries outside the United States and Canada. CPW also markets cereal bars in several European countries and manufactures private label cereals for customers in the United Kingdom. We have guaranteed a portion of CPW’s debt and its pension obligation in the United Kingdom.
We also have a 50 percent equity interest in Häagen-Dazs Japan, Inc. (HDJ). This joint venture manufactures and markets H__ä__agen-Dazs ice cream products and frozen novelties.
Results from our CPW and HDJ joint ventures are reported for the 12 months ended March 31.
Joint venture related balance sheet activity is as follows:
| In Millions | May 26, 2019 | May 27, 2018 | ||||||
| Cumulative investments | $ | 452.9 | $ | 499.6 | ||||
| Goodwill and other intangibles | 472.1 | 488.7 | ||||||
| Aggregate advances included in cumulative investments | 249.0 | 295.3 |
Joint venture earnings and cash flow activity is as follows:
| Fiscal Year | ||||||||||||
| In Millions | 2019 | 2018 | 2017 | |||||||||
| Sales to joint ventures | $ | 4.2 | $ | 7.4 | $ | 7.0 | ||||||
| Net (repayments) advances | (0.1 | ) | 17.3 | (3.3 | ) | |||||||
| Dividends received | 86.7 | 113.2 | 75.6 |
Summary combined financial information for the joint ventures on a 100 percent basis is as follows:
| Fiscal Year | ||||||||||||
| In Millions | 2019 | 2018 | 2017 | |||||||||
| Net sales: | ||||||||||||
| CPW | $ | 1,647.7 | $ | 1,734.0 | $ | 1,648.4 | ||||||
| HDJ | 396.2 | 430.4 | 435.1 | |||||||||
| Total net sales | 2,043.9 | 2,164.4 | 2,083.5 | |||||||||
| Gross margin | 744.4 | 853.6 | 865.9 | |||||||||
| Earnings before income taxes | 155.4 | 216.2 | 243.3 | |||||||||
| Earnings after income taxes | 111.9 | 176.7 | 190.3 |
| In Millions | May 26, 2019 | May 27, 2018 | ||||||
| Current assets | $ | 895.6 | $ | 938.5 | ||||
| Noncurrent assets | 839.2 | 902.5 | ||||||
| Current liabilities | 1,517.3 | 1,579.3 | ||||||
| Noncurrent liabilities | 77.1 | 72.6 |
Table of Contents
NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS
The components of goodwill and other intangible assets are as follows:
| In Millions | May 26, 2019 | May 27, 2018 | ||||||
| Goodwill | $ | 13,995.8 | $ | 14,065.0 | ||||
| Other intangible assets: | ||||||||
| Intangible assets not subject to amortization: | ||||||||
| Brands and other indefinite-lived intangibles | 6,590.8 | 6,818.7 | ||||||
| Intangible assets subject to amortization: | ||||||||
| Franchise agreements, customer relationships, and other finite-lived intangibles | 786.1 | 811.7 | ||||||
| Less accumulated amortization | (210.1 | ) | (185.3 | ) | ||||
| Intangible assets subject to amortization | 576.0 | 626.4 | ||||||
| Other intangible assets | 7,166.8 | 7,445.1 | ||||||
| Total | $ | 21,162.6 | $ | 21,510.1 |
Based on the carrying value of finite-lived intangible assets as of May 26, 2019, amortization expense for each of the next five fiscal years is estimated to be approximately $40 million.
In fiscal 2018, we acquired Blue Buffalo, which became our Pet operating segment and we recorded $5.3 billion of goodwill, $2.7 billion related to an indefinite-lived brand intangible asset, and $269.0 million related to a customer relationships intangible asset. In the fourth quarter of fiscal 2019, we recorded adjustments to certain purchase accounting liabilities that resulted in a $5.6 million increase to goodwill.
The changes in the carrying amount of goodwill for fiscal 2017, 2018, and 2019 are as follows:
| In Millions | North America Retail | Pet | Convenience Stores & Foodservice | Europe & Australia | Asia & Latin America | Joint Ventures | Total | |||||||||||||||||||||
| Balance as of May 29, 2016 | $ | 6,410.3 | $ | - | $ | 921.1 | $ | 716.5 | $ | 287.1 | $ | 406.2 | $ | 8,741.2 | ||||||||||||||
| Divestiture | - | - | (2.3 | ) | - | - | - | (2.3 | ) | |||||||||||||||||||
| Other activity, primarily foreign currency translation | (3.8 | ) | - | - | (15.7 | ) | 25.3 | 2.5 | 8.3 | |||||||||||||||||||
| Balance as of May 28, 2017 | 6,406.5 | - | 918.8 | 700.8 | 312.4 | 408.7 | 8,747.2 | |||||||||||||||||||||
| Acquisition | - | 5,294.9 | - | - | - | - | 5,294.9 | |||||||||||||||||||||
| Other activity, primarily foreign currency translation | 4.1 | - | - | 29.1 | (27.4 | ) | 17.1 | 22.9 | ||||||||||||||||||||
| Balance as of May 27, 2018 | 6,410.6 | 5,294.9 | 918.8 | 729.9 | 285.0 | 425.8 | 14,065.0 | |||||||||||||||||||||
| Divestitures | - | - | - | - | (0.5 | ) | - | (0.5 | ) | |||||||||||||||||||
| Purchase accounting adjustment | - | 5.6 | - | - | - | - | 5.6 | |||||||||||||||||||||
| Other activity, primarily foreign currency translation | (4.1 | ) | - | - | (29.5 | ) | (24.3 | ) | (16.4 | ) | (74.3 | ) | ||||||||||||||||
| Balance as of May 26, 2019 | $ | 6,406.5 | $ | 5,300.5 | $ | 918.8 | $ | 700.4 | $ | 260.2 | $ | 409.4 | $ | 13,995.8 |
Table of Contents
The changes in the carrying amount of other intangible assets for fiscal 2017, 2018, and 2019 are as follows:
| In Millions | Total | |||
| Balance as of May 29, 2016 | $ | 4,538.6 | ||
| Other activity, primarily amortization and foreign currency translation | (8.2 | ) | ||
| Balance as of May 28, 2017 | 4,530.4 | |||
| Acquisition | 3,015.0 | |||
| Impairment charge | (96.9 | ) | ||
| Other activity, primarily amortization and foreign currency translation | (3.4 | ) | ||
| Balance as of May 27, 2018 | 7,445.1 | |||
| Impairment charges | (192.6 | ) | ||
| Other activity, primarily amortization and foreign currency translation | (85.7 | ) | ||
| Balance as of May 26, 2019 | $ | 7,166.8 |
Our annual goodwill and indefinite-lived intangible assets test was performed on the first day of the second quarter of fiscal 2019. As a result of lower sales projections in our long-range plans for the businesses supporting the Progresso, Food Should Taste Good, and Mountain High brand intangible assets, we recorded the following impairment charges:
| In Millions | Impairment Charge | Fair Value as of Nov. 25, 2018 (a) | ||||||
| Progresso | $ | 132.1 | $ | 330.0 | ||||
| Food Should Taste Good | 45.1 | - | ||||||
| Mountain High | 15.4 | - | ||||||
| Total | $ | 192.6 | $ | 330.0 | ||||
| (a) Level 3 assets in the fair value hierarchy. |
In fiscal 2018, we recorded a $96.9 million charge related to the impairment of our Yoki, Mountain High, and Immaculate Baking brand intangible assets in restructuring, impairment, and other exit costs.
Significant assumptions used in that assessment included our long-range cash flow projections for the businesses, royalty rates, weighted-average cost of capital rates, and tax rates.
Our Latin America reporting unit and the Yoki brand intangible asset had fair values that were not substantially in excess of the carrying values. The excess fair value as of the fiscal 2019 test date of the Latin America reporting unit and the Yoki brand intangible asset were as follows:
| In Millions | Carrying Value of Intangible Asset | Excess Fair Value as of Fiscal 2019 Test Date | ||||||
| Latin America | $ | 209.0 | 7% | |||||
| Yoki | $ | 49.1 | 10% |
While having significant coverage as of our fiscal 2019 assessment date, the Pillsbury brand intangible asset and U.S. Yogurt reporting unit had risk of decreasing coverage. We will continue to monitor these businesses for potential impairment.
Table of Contents
NOTE 7. FINANCIAL INSTRUMENTS, RISK MANAGEMENT ACTIVITIES, AND FAIR VALUES
FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, receivables, accounts payable, other current liabilities, and notes payable approximate fair value. Marketable securities are carried at fair value. As of May 26, 2019 and May 27, 2018, a comparison of cost and market values of our marketable debt and equity securities is as follows:
| Cost | Fair Value | Gross Gains | Gross Losses | |||||||||||||||||||||||||||||||||||
| Fiscal Year | Fiscal Year | Fiscal Year | Fiscal Year | |||||||||||||||||||||||||||||||||||
| In Millions | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||||||||
| Available for sale debt securities | $ | 34.3 | $ | 25.4 | $ | 34.3 | $ | 25.4 | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||
| Equity securities | 0.6 | 0.3 | 18.5 | 3.5 | 17.9 | 3.2 | - | - | ||||||||||||||||||||||||||||||
| Total | $ | 34.9 | $ | 25.7 | $ | 52.8 | $ | 28.9 | $ | 17.9 | $ | 3.2 | $ | - | $ | - |
There were no realized gains or losses from sales of marketable securities in fiscal 2019. In fiscal 2018, we realized $6.8 million of gains from the sale of available-for-sale marketable securities. Gains and losses are determined by specific identification. Classification of marketable securities as current or noncurrent is dependent upon our intended holding period and the security’s maturity date. The aggregate unrealized gains and losses on available-for-sale debt securities, net of tax effects, are classified in AOCI within stockholders’ equity.
Scheduled maturities of our marketable securities are as follows:
| Marketable Securities | ||||||||
| In Millions | Cost | Fair Value | ||||||
| Under 1 year (current) | $ | 34.3 | $ | 34.3 | ||||
| Equity securities | 0.6 | 18.5 | ||||||
| Total | $ | 34.9 | $ | 52.8 |
As of May 26, 2019, we had $2.3 million of certain marketable debt securities pledged as collateral for derivative contracts. As of May 26, 2019, $34.8 million of certain accounts receivable were pledged as collateral against a foreign uncommitted line of credit.
The fair value and carrying amounts of long-term debt, including the current portion, were $13,272.8 million and $13,021.3 million, respectively, as of May 26, 2019. The fair value of long-term debt was estimated using market quotations and discounted cash flows based on our current incremental borrowing rates for similar types of instruments. Long-term debt is a Level 2 liability in the fair value hierarchy.
RISK MANAGEMENT ACTIVITIES
As a part of our ongoing operations, we are exposed to market risks such as changes in interest and foreign currency exchange rates and commodity and equity prices. To manage these risks, we may enter into various derivative transactions (e.g., futures, options, and swaps) pursuant to our established policies.
COMMODITY PRICE RISK
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
Table of Contents
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 fiscal 2019, 2018 and 2017 included:
| Fiscal Year | ||||||||||||
| In Millions | 2019 | 2018 | 2017 | |||||||||
| Net gain (loss) on mark-to-market valuation of commodity positions | $ | (39.0 | ) | $ | 14.3 | $ | (22.0 | ) | ||||
| Net loss on commodity positions reclassified from unallocated corporate items to segment operating profit | 10.0 | 11.3 | 32.0 | |||||||||
| Net mark-to-market revaluation of certain grain inventories | (7.0 | ) | 6.5 | 3.9 | ||||||||
| Net mark-to-market valuation of certain commodity positions recognized in unallocated corporate items | $ | (36.0 | ) | $ | 32.1 | $ | 13.9 |
As of May 26, 2019, the net notional value of commodity derivatives was $312.5 million, of which $242.9 million related to agricultural inputs and $69.6 million related to energy inputs. These contracts relate to inputs that generally will be utilized within the next 12 months.
INTEREST RATE RISK
We are exposed to interest rate volatility with regard to future issuances of fixed-rate debt, and existing and future issuances of floating-rate debt. Primary exposures include U.S. Treasury rates, LIBOR, Euribor, and commercial paper rates in the United States and Europe. We use interest rate swaps, forward-starting interest rate swaps, and treasury locks to hedge our exposure to interest rate changes, to reduce the volatility of our financing costs, and to achieve a desired proportion of fixed rate versus floating-rate debt, based on current and projected market conditions. Generally under these swaps, we agree with a counterparty to exchange the difference between fixed-rate and floating-rate interest amounts based on an agreed upon notional principal amount.
Floating Interest Rate Exposures — Floating-to-fixed interest rate swaps are accounted for as cash flow hedges, as are all hedges of forecasted issuances of debt. Effectiveness is assessed based on either the perfectly effective hypothetical derivative method or changes in the present value of interest payments on the underlying debt. Effective gains and losses deferred to AOCI are reclassified into earnings over the life of the associated debt. Ineffective gains and losses are recorded as net interest. The amount of hedge ineffectiveness was less than $1 million in fiscal 2019, a $2.6 million loss in fiscal 2018, and less than $1 million in fiscal 2017.
Fixed Interest Rate Exposures — Fixed-to-floating interest rate swaps are accounted for as fair value hedges with effectiveness assessed based on changes in the fair value of the underlying debt and derivatives, using
Table of Contents
incremental borrowing rates currently available on loans with similar terms and maturities. Ineffective gains and losses on these derivatives and the underlying hedged items are recorded as net interest. The amount of hedge ineffectiveness was a $2.4 million gain in fiscal 2019, a $3.4 million loss in fiscal 2018, and a $4.3 million gain in fiscal 2017.
In advance of planned debt financing related to the acquisition of Blue Buffalo, we entered into $3,800.0 million of treasury locks due April 19, 2018, with an average fixed rate of 2.9 percent. All of these treasury locks were cash settled for $43.9 million during the fourth quarter of fiscal 2018, concurrent with the issuance of our $850.0 million 5.5-year fixed-rate notes, $800.0 million 7-year fixed-rate notes, $1,400.0 million 10-year fixed-rate notes, $500.0 million 20-year fixed-rate notes, and $650.0 million 30-year fixed-rate notes.
In advance of planned debt financing, in fiscal 2018, we entered into $500.0 million of treasury locks due October 15, 2017 with an average fixed rate of 1.8 percent. All of these treasury locks were cash settled for $3.7 million during the second quarter of fiscal 2018, concurrent with the issuance of our $500.0 million 5-year fixed-rate notes.
As of May 26, 2019, the pre-tax amount of cash-settled interest rate hedge gain or loss remaining in AOCI, which will be reclassified to earnings over the remaining term of the related underlying debt, follows:
| In Millions | Gain/(Loss) | |||
| 3.15% notes due December 15, 2021 | $ | (25.3 | ) | |
| 2.6% notes due October 12, 2022 | 2.5 | |||
| 1.0% notes due April 27, 2023 | (0.9 | ) | ||
| 3.7% notes due October 17, 2023 | (1.5 | ) | ||
| 3.65% notes due February 15, 2024 | 8.4 | |||
| 4.0% notes due April 17, 2025 | (3.4 | ) | ||
| 3.2% notes due February 10, 2027 | 13.2 | |||
| 1.5% notes due April 27, 2027 | (2.6 | ) | ||
| 4.2% notes due April 17, 2028 | (9.1 | ) | ||
| 4.55% notes due April 17, 2038 | (10.3 | ) | ||
| 5.4% notes due June 15, 2040 | (11.8 | ) | ||
| 4.15% notes due February 15, 2043 | 9.3 | |||
| 4.7% notes due April 17, 2048 | (13.7 | ) | ||
| Net pre-tax hedge loss in AOCI | $ | (45.2 | ) |
The following table summarizes the notional amounts and weighted-average interest rates of our interest rate derivatives. Average floating rates are based on rates as of the end of the reporting period.
| In Millions | May 26, 2019 | May 27, 2018 | ||||||
| Pay-floating swaps - notional amount | $ | 500.0 | $ | 500.0 | ||||
| Average receive rate | 2.2% | 2.2% | ||||||
| Average pay rate | 3.1% | 2.9% |
The swap contracts outstanding as of May 26, 2019 mature in fiscal 2020.
FOREIGN EXCHANGE RISK
Foreign currency fluctuations affect our net investments in foreign subsidiaries and foreign currency cash flows related to third party purchases, intercompany loans, product shipments, and foreign-denominated debt. We are also exposed to the translation of foreign currency earnings to the U.S. dollar. Our principal exposures are to the Australian dollar, Brazilian real, British pound sterling, Canadian dollar, Chinese renminbi, euro, Japanese yen,
Table of Contents
Mexican peso, and Swiss franc. We primarily use foreign currency forward contracts to selectively hedge our foreign currency cash flow exposures. We also generally swap our foreign-denominated commercial paper borrowings and nonfunctional currency intercompany loans back to U.S. dollars or the functional currency of the entity with foreign exchange exposure. The gains or losses on these derivatives offset the foreign currency revaluation gains or losses recorded in earnings on the associated borrowings. We generally do not hedge more than 18 months in advance.
As of May 26, 2019, the net notional value of foreign exchange derivatives was $1,008.5 million. The amount of hedge ineffectiveness was less than $1 million in fiscal 2019, 2018, and 2017.
We also have net investments in foreign subsidiaries that are denominated in euros. We previously hedged a portion of these net investments by issuing euro-denominated commercial paper and foreign exchange forward contracts. As of May 26, 2019, we hedged a portion of these net investments with €2,200.0 million of euro denominated bonds. As of May 26, 2019, we had deferred net foreign currency transaction losses of $51.5 million in AOCI associated with net investment hedging activity.
EQUITY INSTRUMENTS
Equity price movements affect our compensation expense as certain investments made by our employees in our deferred compensation plan are revalued. We use equity swaps to manage this risk. As of May 26, 2019, the net notional amount of our equity swaps was $169.1 million. These swap contracts mature in fiscal 2020.
Table of Contents
FAIR VALUE MEASUREMENTS AND FINANCIAL STATEMENT PRESENTATION
The fair values of our assets, liabilities, and derivative positions recorded at fair value and their respective levels in the fair value hierarchy as of May 26, 2019 and May 27, 2018, were as follows:
| May 26, 2019 | May 26, 2019 | |||||||||||||||||||||||||||||||
| Fair Values of Assets | Fair Values of Liabilities | |||||||||||||||||||||||||||||||
| In Millions | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||||||||||||||||||||||
| Interest rate contracts (a) (b) | $ | - | $ | - | $ | - | $ | - | $ | - | $ | (1.9) | $ | - | $ | (1.9) | ||||||||||||||||
| Foreign exchange contracts (c) (d) | - | 12.9 | - | 12.9 | - | (3.3) | - | (3.3) | ||||||||||||||||||||||||
| Total | - | 12.9 | - | 12.9 | - | (5.2) | - | (5.2) | ||||||||||||||||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||||||||
| Foreign exchange contracts (c) (d) | - | 2.4 | - | 2.4 | - | (1.9) | - | (1.9) | ||||||||||||||||||||||||
| Commodity contracts (c) (e) | 1.4 | 5.2 | - | 6.6 | (4.4) | (3.5) | - | (7.9) | ||||||||||||||||||||||||
| Grain contracts (c) (e) | - | 6.7 | - | 6.7 | - | (2.3) | - | (2.3) | ||||||||||||||||||||||||
| Total | 1.4 | 14.3 | - | 15.7 | (4.4) | (7.7) | - | (12.1) | ||||||||||||||||||||||||
| Other assets and liabilities reported at fair value: | ||||||||||||||||||||||||||||||||
| Marketable investments (a) (f) | 18.5 | 34.3 | - | 52.8 | - | - | - | - | ||||||||||||||||||||||||
| Long-lived assets (g) | - | 19.0 | - | 19.0 | - | - | - | - | ||||||||||||||||||||||||
| Indefinite-lived intangible assets (h) | - | - | 330.0 | 330.0 | - | - | - | - | ||||||||||||||||||||||||
| Total | 18.5 | 53.3 | 330.0 | 401.8 | - | - | - | - | ||||||||||||||||||||||||
| Total assets, liabilities, and derivative positions recorded at fair value | $ | 19.9 | $ | 80.5 | $ | 330.0 | $ | 430.4 | $ | (4.4) | $ | (12.9) | $ | - | $ | (17.3) |
| (a) | These contracts and investments are recorded as prepaid expenses and other current assets, other assets, other current liabilities or other liabilities, as appropriate, based on whether in a gain or loss position. Certain marketable investments are recorded as cash and cash equivalents. |
|---|
| (b) | Based on LIBOR and swap rates. |
|---|
| (c) | These contracts are recorded as prepaid expenses and other current assets, other assets, other current liabilities or other liabilities, as appropriate, based on whether in a gain or loss position. |
|---|
| (d) | Based on observable market transactions of spot currency rates and forward currency prices. |
|---|
| (e) | Based on prices of futures exchanges and recently reported transactions in the marketplace. |
|---|
| (f) | Based on prices of common stock and bond matrix pricing. |
|---|
| (g) | We recorded $61.2 million in non-cash impairment charges in fiscal 2019 to write down certain long-lived assets to their fair value. Fair value was based on recently reported transactions for similar assets in the marketplace. These assets had a carrying value of $80.2 million and were associated with the restructuring actions described in Note 4. |
|---|
| (h) | See Note 6. |
|---|
Table of Contents
| May 27, 2018 | May 27, 2018 | |||||||||||||||||||||||||||||||
| Fair Values of Assets | Fair Values of Liabilities | |||||||||||||||||||||||||||||||
| In Millions | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||||||||||||||||||||||
| Interest rate contracts (a) (b) | $ | - | $ | - | $ | - | $ | - | $ | - | $ | (6.6) | $ | - | $ | (6.6) | ||||||||||||||||
| Foreign exchange contracts (c) (d) | - | 9.4 | - | 9.4 | - | (6.4) | - | (6.4) | ||||||||||||||||||||||||
| Total | - | 9.4 | - | 9.4 | - | (13.0) | - | (13.0) | ||||||||||||||||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||||||||
| Foreign exchange contracts (c) (d) | - | 2.5 | - | 2.5 | - | (0.8) | - | (0.8) | ||||||||||||||||||||||||
| Commodity contracts (c) (e) | 14.7 | 13.0 | - | 27.7 | (0.5) | (0.6) | - | (1.1) | ||||||||||||||||||||||||
| Grain contracts (c) (e) | - | 7.1 | - | 7.1 | - | (1.2) | - | (1.2) | ||||||||||||||||||||||||
| Total | 14.7 | 22.6 | - | 37.3 | (0.5) | (2.6) | - | (3.1) | ||||||||||||||||||||||||
| Other assets and liabilities reported at fair value: | ||||||||||||||||||||||||||||||||
| Marketable investments (a) (f) | 3.5 | 25.4 | - | 28.9 | - | - | - | - | ||||||||||||||||||||||||
| Long-lived assets (g) | - | 10.0 | - | 10.0 | - | - | - | - | ||||||||||||||||||||||||
| Indefinite-lived intangible assets (h) | - | - | 79.0 | 79.0 | - | - | - | - | ||||||||||||||||||||||||
| Total | 3.5 | 35.4 | 79.0 | 117.9 | - | - | - | - | ||||||||||||||||||||||||
| Total assets, liabilities, and derivative positions recorded at fair value | $ | 18.2 | $ | 67.4 | $ | 79.0 | $ | 164.6 | $ | (0.5) | $ | (15.6) | $ | - | $ | (16.1) |
| (a) | These contracts and investments are recorded as prepaid expenses and other current assets, other assets, other current liabilities or other liabilities, as appropriate, based on whether in a gain or loss position. Certain marketable investments are recorded as cash and cash equivalents. |
|---|
| (b) | Based on LIBOR and swap rates. |
|---|
| (c) | These contracts are recorded as prepaid expenses and other current assets, other assets, other current liabilities or other liabilities, as appropriate, based on whether in a gain or loss position. |
|---|
| (d) | Based on observable market transactions of spot currency rates and forward currency prices. |
|---|
| (e) | Based on prices of futures exchanges and recently reported transactions in the marketplace. |
|---|
| (f) | Based on prices of common stock and bond matrix pricing. |
|---|
| (g) | We recorded $9.0 million in non-cash impairment charges in fiscal 2018 to write down certain long-lived assets to their fair value. Fair value was based on recently reported transactions for similar assets in the marketplace. These assets had a carrying value of $19.0 million and were associated with the restructuring actions described in Note 4. |
|---|
| (h) | See Note 6. |
|---|
We did not significantly change our valuation techniques from prior periods.
Table of Contents
Information related to our cash flow hedges, fair value hedges, and other derivatives not designated as hedging instruments for the fiscal years ended May 26, 2019 and May 27, 2018, follows:
| Interest Rate Contracts | Foreign Exchange Contracts | Equity Contracts | Commodity Contracts | Total | ||||||||||||||||||||||||||||||||||||
| Fiscal Year | Fiscal Year | Fiscal Year | Fiscal Year | Fiscal Year | ||||||||||||||||||||||||||||||||||||
| In Millions | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||||||||
| Derivatives in Cash Flow Hedging Relationships: | ||||||||||||||||||||||||||||||||||||||||
| Amount of gain (loss) recognized in other comprehensive income (OCI) (a) | $ | - | $ | (50.5) | $ | 15.7 | $ | (14.6) | $ | - | $ | - | $ | - | $ | - | $ | 15.7 | $ | (65.1) | ||||||||||||||||||||
| Amount of net gain (loss) reclassified from AOCI into earnings (a) (b) | (9.0) | 19.3 | 8.4 | (4.2) | - | - | - | - | (0.6) | 15.1 | ||||||||||||||||||||||||||||||
| Amount of net gain (loss) recognized in earnings (c) | - | (2.6) | 0.5 | (0.3) | - | - | - | - | 0.5 | (2.9) | ||||||||||||||||||||||||||||||
| Derivatives in Fair Value Hedging Relationships: | ||||||||||||||||||||||||||||||||||||||||
| Amount of net gain (loss) recognized in earnings (d) | 2.4 | (3.4) | - | - | - | - | - | - | 2.4 | (3.4) | ||||||||||||||||||||||||||||||
| Derivatives Not Designated as Hedging Instruments: | ||||||||||||||||||||||||||||||||||||||||
| Amount of net gain (loss) recognized in earnings (d) | - | - | 7.5 | (2.8) | 0.7 | 14.3 | (33.6) | 26.9 | (25.4) | 38.4 |
| (a) | Effective portion. |
|---|
| (b) | Gain (loss) 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) | Gain (loss) recognized in earnings is related to the ineffective portion of the hedging relationship, including SG&A expenses for foreign exchange contracts and interest, net for interest rate contracts. No amounts were reported as a result of being excluded from the assessment of hedge effectiveness. |
|---|
| (d) | Gain (loss) recognized in earnings is reported in interest, net for interest rate contracts, in cost of sales for commodity contracts, and in SG&A expenses for equity contracts and foreign exchange contracts. |
|---|
Table of Contents
The following tables reconcile the net fair values of assets and liabilities subject to offsetting arrangements that are recorded in our Consolidated Balance Sheets to the net fair values that could be reported in our Consolidated Balance Sheets:
| May 26, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||
| Gross Amounts Not Offset in the Balance Sheet (e) | Gross Amounts Not Offset in the Balance Sheet (e) | |||||||||||||||||||||||||||||||||||||||||||||||
| In Millions | Gross Amounts of Recognized Assets | Gross Liabilities Offset in the Balance Sheet (a) | Net Amounts of Assets (b) | Financial Instruments | Cash Collateral Received | Net Amount (c) | Gross Amounts of Recognized Liabilities | Gross Assets Offset in the Balance Sheet (a) | Net Amounts of Liabilities (b) | Financial Instruments | Cash Collateral Pledged | Net Amount (d) | ||||||||||||||||||||||||||||||||||||
| Commodity contracts | $ | 6.6 | $ | - | $ | 6.6 | $ | (4.9 | ) | $ | - | $ | 1.7 | $ | (7.9 | ) | $ | - | $ | (7.9 | ) | $ | 4.9 | $ | - | $ | (3.0) | |||||||||||||||||||||
| Interest rate contracts | - | - | - | - | - | - | (2.2 | ) | - | (2.2 | ) | - | - | (2.2) | ||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | 15.3 | - | 15.3 | (5.1 | ) | - | 10.2 | (5.2 | ) | - | (5.2 | ) | 5.1 | - | (0.1) | |||||||||||||||||||||||||||||||||
| Equity contracts | 0.7 | - | 0.7 | (0.7 | ) | - | - | (5.8 | ) | - | (5.8 | ) | 0.7 | - | (5.1) | |||||||||||||||||||||||||||||||||
| Total | $ | 22.6 | $ | - | $ | 22.6 | $ | (10.7 | ) | $ | - | $ | 11.9 | $ | (21.1 | ) | $ | - | $ | (21.1 | ) | $ | 10.7 | $ | - | $ | (10.4) |
| May 27, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||
| Gross Amounts Not Offset in the Balance Sheet (e) | Gross Amounts Not Offset in the Balance Sheet (e) | |||||||||||||||||||||||||||||||||||||||||||||||
| In Millions | Gross Amounts of Recognized Assets | Gross Liabilities Offset in the Balance Sheet (a) | Net Amounts of Assets (b) | Financial Instruments | Cash Collateral Received | Net Amount (c) | Gross Amounts of Recognized Liabilities | Gross Assets Offset in the Balance Sheet (a) | Net Amounts of Liabilities (b) | Financial Instruments | Cash Collateral Pledged | Net Amount (d) | ||||||||||||||||||||||||||||||||||||
| Commodity contracts | $ | 27.7 | $ | - | $ | 27.7 | $ | (1.1 | ) | $ | - | $ | 26.6 | $ | (1.1 | ) | $ | - | $ | (1.1 | ) | $ | 1.1 | $ | - | $ | - | |||||||||||||||||||||
| Interest rate contracts | - | - | - | - | - | - | (6.9 | ) | - | (6.9 | ) | - | - | (6.9) | ||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | 11.8 | - | 11.8 | (5.7 | ) | - | 6.1 | (7.2 | ) | - | (7.2 | ) | 5.7 | - | (1.5) | |||||||||||||||||||||||||||||||||
| Equity contracts | 3.9 | - | 3.9 | (0.4 | ) | - | 3.5 | (0.4 | ) | - | (0.4 | ) | 0.4 | - | - | |||||||||||||||||||||||||||||||||
| Total | $ | 43.4 | $ | - | $ | 43.4 | $ | (7.2 | ) | $ | - | $ | 36.2 | $ | (15.6 | ) | $ | - | $ | (15.6 | ) | $ | 7.2 | $ | - | $ | (8.4) |
(a) Includes related collateral offset in our Consolidated Balance Sheets.
(b) Net fair value as recorded in our Consolidated Balance Sheets.
(c) Fair value of assets that could be reported net in our Consolidated Balance Sheets.
(d) Fair value of liabilities that could be reported net in our Consolidated Balance Sheets.
(e) Fair value of assets and liabilities reported on a gross basis in our Consolidated Balance Sheets.
Table of Contents
AMOUNTS RECORDED IN ACCUMULATED OTHER COMPREHENSIVE LOSS
As of May 26, 2019, the after-tax amounts of unrealized gains and losses in AOCI related to hedge derivatives follows:
| In Millions | After-Tax Gain/(Loss) | |||
| Unrealized losses from interest rate cash flow hedges | $ | (32.6) | ||
| Unrealized gains from foreign currency cash flow hedges | 13.2 | |||
| After-tax loss in AOCI related to hedge derivatives | $ | (19.4) |
The net amount of pre-tax gains and losses in AOCI as of May 26, 2019 that we expect to be reclassified into net earnings within the next 12 months is a $7.2 million net gain.
CREDIT-RISK-RELATED CONTINGENT FEATURES
Certain of our derivative instruments contain provisions that require us to maintain an investment grade credit rating on our debt from each of the major credit rating agencies. If our debt were to fall below investment grade, the counterparties to the derivative instruments could request full collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position on May 26, 2019, was $7.4 million. We have posted no collateral under these contracts. If the credit-risk-related contingent features underlying these agreements had been triggered on May 26, 2019, we would have been required to post $7.4 million of collateral to counterparties.
CONCENTRATIONS OF CREDIT AND COUNTERPARTY CREDIT RISK
During fiscal 2019, customer concentration was as follows:
| Percent of total | Consolidated | North America Retail | Convenience Stores & Foodservice | Europe & Australia | Asia & Latin America | Pet | ||||||||||||||||||
| Walmart (a): | ||||||||||||||||||||||||
| Net sales | 20% | 31% | 7% | 1% | 4% | 3% | ||||||||||||||||||
| Accounts receivable | 22% | 3% | 1% | 6% | 9% | |||||||||||||||||||
| Five largest customers: | ||||||||||||||||||||||||
| Net sales | 55% | 45% | 24% | 12% | 69% |
| (a) | Includes Walmart Inc. and its affiliates. |
|---|
No customer other than Walmart accounted for 10 percent or more of our consolidated net sales.
We enter into interest rate, foreign exchange, and certain commodity and equity derivatives, primarily with a diversified group of highly rated counterparties. We continually monitor our positions and the credit ratings of the counterparties involved and, by policy, limit the amount of credit exposure to any one party. These transactions may expose us to potential losses due to the risk of nonperformance by these counterparties; however, we have not incurred a material loss. We also enter into commodity futures transactions through various regulated exchanges.
The amount of loss due to the credit risk of the counterparties, should the counterparties fail to perform according to the terms of the contracts, is $2.4 million against which we do not hold collateral. Under the terms of our swap agreements, some of our transactions require collateral or other security to support financial instruments subject to threshold levels of exposure and counterparty credit risk. Collateral assets are either cash or U.S. Treasury instruments and are held in a trust account that we may access if the counterparty defaults.
Table of Contents
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 this service. All of our accounts payable remain as obligations to our suppliers as stated in our supplier agreements. As of May 26, 2019, $1,049.8 million of our accounts payable is payable to suppliers who utilize these third party services.
NOTE 8. DEBT
NOTES PAYABLE
The components of notes payable and their respective weighted-average interest rates at the end of the periods were as follows:
| May 26, 2019 | May 27, 2018 | |||||||||||||||
| In Millions | Notes Payable | Weighted- Average Interest Rate | Notes Payable | Weighted- Average Interest Rate | ||||||||||||
| U.S. commercial paper | $ | 1,298.5 | 2.7 | % | $ | 1,213.5 | 2.2% | |||||||||
| Financial institutions | 170.2 | 9.0 | 336.3 | 6.2 | ||||||||||||
| Total | $ | 1,468.7 | 3.4 | % | $ | 1,549.8 | 3.1% |
To ensure availability of funds, we maintain bank credit lines sufficient to cover our outstanding notes payable. Commercial paper is a continuing source of short-term financing. We have commercial paper programs available to us in the United States and Europe. We also have uncommitted and asset-backed credit lines that support our foreign operations.
The following table details the fee-paid committed and uncommitted credit lines we had available as of May 26, 2019:
| In Billions | Facility Amount | Borrowed Amount | ||||||
| Credit facility expiring: | ||||||||
| May 2022 | $ | 2.7 | $ | - | ||||
| June 2019 | 0.2 | - | ||||||
| Total committed credit facilities | 2.9 | - | ||||||
| Uncommitted credit facilities | 0.7 | 0.2 | ||||||
| Total committed and uncommitted credit facilities | $ | 3.6 | $ | 0.2 |
The credit facilities contain covenants, including a requirement to maintain a fixed charge coverage ratio of at least 2.5 times. We were in compliance with all credit facility covenants as of May 26, 2019.
LONG-TERM DEBT
In March 2019, we issued €300.0 million principal amount of 0.0 percent fixed-rate notes due January 15, 2020. We may redeem the notes if certain tax laws change and we would be obligated to pay additional amounts on the notes. These notes are senior unsecured obligations that include a change of control repurchase provision. We used the net proceeds, together with cash on hand, to repay our €300.0 million floating rate notes.
In February 2019, we repaid $1,150.0 million of 5.65 percent fixed-rate notes with proceeds from commercial paper.
Table of Contents
In April 2018, we issued $4,800.0 million principal amount of fixed-rate notes. Interest on the notes is payable semi-annually in arrears. We may redeem the notes in whole, or in part, at any time at the applicable redemption price. The notes are senior unsecured obligations that include a change of control repurchase provision. The net proceeds were used to finance a portion of the Blue Buffalo acquisition. The principal amounts of these fixed-rate notes were as follows:
| In Millions | Principal | |||
| 4.2% notes due April 17, 2028 | $ | 1,400.0 | ||
| 3.7% notes due October 17, 2023 | 850.0 | |||
| 4.0% notes due April 17, 2025 | 800.0 | |||
| 4.7% notes due April 17, 2048 | 650.0 | |||
| 3.2% notes due April 16, 2021 | 600.0 | |||
| 4.55% notes due April 17, 2038 | 500.0 | |||
| Total | $ | 4,800.0 |
In April 2018, we issued $1,250.0 million principal amount of floating-rate notes. Interest on the notes is payable quarterly in arrears. The notes are not generally redeemable prior to maturity. These notes are senior unsecured obligations that include a change of control repurchase provision. The net proceeds were used to finance a portion of the Blue Buffalo acquisition. The principal amounts of these floating-rate notes were as follows:
| In Millions | Principal | |||
| Floating-rate notes due April 16, 2021 | $ | 850.0 | ||
| Floating-rate notes due October 17, 2023 | 400.0 | |||
| Total | $ | 1,250.0 |
In February 2018, we paid $113.8 million to repurchase $100.0 million of our previously issued 6.39 percent medium term notes due 2023. We recorded the $13.8 million premium paid in the repurchase as net interest expense.
In October 2017, we issued $500.0 million principal amount of 2.6 percent fixed-rate notes due October 12, 2022. Interest on the notes is payable semiannually in arrears. We may redeem the notes in whole, or in part, at any time at the applicable redemption price. The notes are senior unsecured obligations that include a change of control repurchase provision. The net proceeds, together with cash on hand, were used to repay $500.0 million of 1.4 percent fixed-rate notes.
Table of Contents
A summary of our long-term debt is as follows:
| In Millions | May 26, 2019 | May 27, 2018 | ||||||
| 4.2% notes due April 17, 2028 | $ | 1,400.0 | $ | 1,400.0 | ||||
| 5.65% notes due February 15, 2019 | - | 1,150.0 | ||||||
| 3.15% notes due December 15, 2021 | 1,000.0 | 1,000.0 | ||||||
| 3.7% notes due October 17, 2023 | 850.0 | 850.0 | ||||||
| Floating-rate notes due April 16, 2021 | 850.0 | 850.0 | ||||||
| 4.0% notes due April 17, 2025 | 800.0 | 800.0 | ||||||
| 3.2% notes due February 10, 2027 | 750.0 | 750.0 | ||||||
| 4.7% notes due April 17, 2048 | 650.0 | 650.0 | ||||||
| 3.2% notes due April 16, 2021 | 600.0 | 600.0 | ||||||
| Euro-denominated 2.1% notes due November 16, 2020 | 560.1 | 582.6 | ||||||
| Euro-denominated 1.0% notes due April 27, 2023 | 560.1 | 582.6 | ||||||
| Euro-denominated floating-rate notes due January 15, 2020 | 560.1 | 582.6 | ||||||
| 4.55% notes due April 17, 2038 | 500.0 | 500.0 | ||||||
| 2.6% notes due October 12, 2022 | 500.0 | 500.0 | ||||||
| 5.4% notes due June 15, 2040 | 500.0 | 500.0 | ||||||
| 4.15% notes due February 15, 2043 | 500.0 | 500.0 | ||||||
| 3.65% notes due February 15, 2024 | 500.0 | 500.0 | ||||||
| 2.2% notes due October 21, 2019 | 500.0 | 500.0 | ||||||
| Euro-denominated 1.5% notes due April 27, 2027 | 448.1 | 466.1 | ||||||
| Floating-rate notes due October 17, 2023 | 400.0 | 400.0 | ||||||
| Euro-denominated 0.0% notes due January 15, 2020 | 336.1 | - | ||||||
| Euro-denominated floating-rate notes due March 20, 2019 | - | 349.6 | ||||||
| Euro-denominated 2.2% notes due June 24, 2021 | 224.0 | 232.8 | ||||||
| Medium-term notes, 2.36% to 6.59%, due fiscal 2022 or later | 104.2 | 104.2 | ||||||
| Other, including debt issuance costs and capital leases | (71.4) | (81.7) | ||||||
| 13,021.3 | 14,268.8 | |||||||
| Less amount due within one year | (1,396.5) | (1,600.1) | ||||||
| Total long-term debt | $ | 11,624.8 | $ | 12,668.7 |
Principal payments due on long-term debt and capital leases in the next five years based on stated contractual maturities, our intent to redeem, or put rights of certain note holders are as follows:
| In Millions | ||||
| 2020 | $ | 1,396.5 | ||
| 2021 | 2,114.4 | |||
| 2022 | 1,224.1 | |||
| 2023 | 1,060.2 | |||
| 2024 | 1,750.0 |
Certain of our long-term debt agreements contain restrictive covenants. As of May 26, 2019, we were in compliance with all of these covenants.
Table of Contents
As of May 26, 2019, the $45.2 million pre-tax loss recorded in AOCI associated with our previously designated interest rate swaps will be reclassified to net interest over the remaining lives of the hedged transactions. The amount expected to be reclassified from AOCI to net interest in fiscal 2020 is a $9.4 million pre-tax loss.
NOTE 9. REDEEMABLE AND NONCONTROLLING INTERESTS
Our principal redeemable and noncontrolling interests relate to our Yoplait SAS, Yoplait Marques SNC, Liberté Marques Sàrl, and General Mills Cereals, LLC (GMC) subsidiaries. In addition, we have 4 foreign subsidiaries that have noncontrolling interests totaling $4.9 million as of May 26, 2019.
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 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 May 26, 2019, the redemption value of the euro-denominated redeemable interest was $551.7 million.
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.
We paid dividends of $22.0 million in fiscal 2019 and $37.7 million in fiscal 2018 to Sodiaal under the terms of the Yoplait SAS, Yoplait Marques SNC, and Liberté Marques Sàrl shareholder agreements.
A subsidiary of Yoplait SAS has entered into an exclusive milk supply agreement for its European operations with Sodiaal at market-determined prices through July 1, 2021. Net purchases totaled $210.8 million for fiscal 2019 and $230.8 million for fiscal 2018.
During the second quarter of fiscal 2019, Sodiaal invested $55.7 million in Yoplait SAS.
The holder of the 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.
For financial reporting purposes, the assets, liabilities, results of operations, and cash flows of our non-wholly owned consolidated subsidiaries are included in our Consolidated Financial Statements. The third-party investor’s share of the net earnings of these subsidiaries is reflected in net earnings attributable to redeemable and noncontrolling interests in our Consolidated Statements of Earnings.
Our noncontrolling interests contain restrictive covenants. As of May 26, 2019, we were in compliance with all of these covenants.
Table of Contents
NOTE 10. STOCKHOLDERS’ EQUITY
Cumulative preference stock of 5.0 million shares, without par value, is authorized but unissued.
On May 6, 2014, our Board of Directors authorized the repurchase of up to 100 million shares of our common stock. Purchases under the authorization can be made in the open market or in privately negotiated transactions, including the use of call options and other derivative instruments, Rule 10b5-1 trading plans, and accelerated repurchase programs. The authorization has no specified termination date.
On March 27, 2018, we issued 22.7 million shares of the Company’s common stock, par value $0.10 per share, at a public offering price of $44.00 per share for total proceeds of $1.0 billion. We paid $30.1 million in issuance costs, that were recorded in additional paid-in capital. The net proceeds of $969.9 million were used to finance a portion of the acquisition of Blue Buffalo.
Share repurchases were as follows:
| Fiscal Year | ||||||||||||
| In Millions | 2019 | 2018 | 2017 | |||||||||
| Shares of common stock | - | 10.9 | 25.4 | |||||||||
| Aggregate purchase price | $ | 1.1 | $ | 601.6 | $ | 1,651.5 | ||||||
The following table provides details of total comprehensive income:
| Fiscal 2019 | ||||||||||||||||||||
| General Mills | Noncontrolling Interests | Redeemable Interest | ||||||||||||||||||
| In Millions | Pretax | Tax | Net | Net | Net | |||||||||||||||
| Net earnings, including earnings attributable to redeemable and noncontrolling interests | $ | 1,752.7 | $ | 13.9 | $ | 19.6 | ||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||
| Foreign currency translation | $ | (38.3) | $ | - | (38.3) | (13.5) | (31.0) | |||||||||||||
| Net actuarial loss | (325.6) | 72.2 | (253.4) | - | - | |||||||||||||||
| Other fair value changes: | ||||||||||||||||||||
| Hedge derivatives | 15.9 | (3.7) | 12.2 | - | (0.1) | |||||||||||||||
| Reclassification to earnings: | ||||||||||||||||||||
| Securities (a) | (2.6) | 0.6 | (2.0) | - | - | |||||||||||||||
| Hedge derivatives (b) | 0.1 | 0.4 | 0.5 | - | 0.4 | |||||||||||||||
| Amortization of losses and prior service costs (c) | 107.5 | (22.9) | 84.6 | - | - | |||||||||||||||
| Other comprehensive loss | (243.0) | 46.6 | (196.4) | (13.5) | (30.7) | |||||||||||||||
| Total comprehensive income (loss) | $ | 1,556.3 | $ | 0.4 | $ | (11.1) | ||||||||||||||
| (a) | Gain reclassified from AOCI into earnings is reported in interest, net for securities. |
|---|
| (b) | Loss 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. Please refer to Note 2. |
|---|
Table of Contents
| Fiscal 2018 | ||||||||||||||||||||
| General Mills | Noncontrolling Interests | Redeemable Interest | ||||||||||||||||||
| In Millions | Pretax | Tax | Net | Net | Net | |||||||||||||||
| Net earnings, including earnings attributable to redeemable and noncontrolling interests | $ | 2,131.0 | $ | 13.4 | $ | 18.6 | ||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||
| Foreign currency translation | $ | (76.9 | ) | $ | - | (76.9 | ) | 13.5 | 26.4 | |||||||||||
| Net actuarial income | 185.5 | (45.4) | 140.1 | - | - | |||||||||||||||
| Other fair value changes: | ||||||||||||||||||||
| Securities | 1.8 | (0.6) | 1.2 | - | - | |||||||||||||||
| Hedge derivatives | (64.7 | ) | 14.2 | (50.5 | ) | - | (0.3 | ) | ||||||||||||
| Reclassification to earnings: | ||||||||||||||||||||
| Securities (a) | (6.6 | ) | 1.5 | (5.1 | ) | - | - | |||||||||||||
| Hedge derivatives (b) | 24.9 | (6.4) | 18.5 | - | (1.1 | ) | ||||||||||||||
| Amortization of losses and prior service costs (c) | 176.8 | (59.2) | 117.6 | - | - | |||||||||||||||
| Other comprehensive income | 240.8 | (95.9) | 144.9 | 13.5 | 25.0 | |||||||||||||||
| Total comprehensive income | $ | 2,275.9 | $ | 26.9 | $ | 43.6 | ||||||||||||||
| (a) | Gain reclassified from AOCI into earnings is reported in interest, net for securities. |
|---|
| (b) | Loss (gain) reclassified from AOCI into earnings is reported in interest, net for interest rate swaps and in cost of sales and SG&A expenses for foreign exchange contracts. |
|---|
| (c) | Loss reclassified from AOCI into earnings is reported in benefit plan non-service income. Please refer to Note 2. |
|---|
| Fiscal 2017 | ||||||||||||||||||||
| General Mills | Noncontrolling Interests | Redeemable Interest | ||||||||||||||||||
| In Millions | Pretax | Tax | Net | Net | Net | |||||||||||||||
| Net earnings, including earnings attributable to redeemable and noncontrolling interests | $ | 1,657.5 | $ | 11.3 | $ | 32.3 | ||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||
| Foreign currency translation | $ | 19.5 | $ | - | 19.5 | 2.5 | (15.7 | ) | ||||||||||||
| Net actuarial income | 307.3 | (109.4) | 197.9 | - | - | |||||||||||||||
| Other fair value changes: | ||||||||||||||||||||
| Securities | 1.3 | (0.5) | 0.8 | - | - | |||||||||||||||
| Hedge derivatives | 65.9 | (16.1) | 49.8 | - | 3.5 | |||||||||||||||
| Reclassification to earnings: | ||||||||||||||||||||
| Hedge derivatives (a) | (25.2) | 2.4 | (22.8 | ) | - | (2.9 | ) | |||||||||||||
| Amortization of losses and prior service costs (b) | 197.2 | (74.7) | 122.5 | - | - | |||||||||||||||
| Other comprehensive income (loss) | 566.0 | (198.3) | 367.7 | 2.5 | (15.1 | ) | ||||||||||||||
| Total comprehensive income | $ | 2,025.2 | $ | 13.8 | $ | 17.2 | ||||||||||||||
| (a) | 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. Please refer to Note 2. |
|---|
In fiscal 2019, 2018, and 2017, except for reclassifications to earnings, changes in other comprehensive income (loss) were primarily non-cash items.
Table of Contents
Accumulated other comprehensive loss balances, net of tax effects, were as follows:
| In Millions | May 26, 2019 | May 27, 2018 | ||||||
| Foreign currency translation adjustments | $ | (739.9) | $ | (701.6) | ||||
| Unrealized gain (loss) from: | ||||||||
| Securities | - | 2.0 | ||||||
| Hedge derivatives | (19.4) | (32.1) | ||||||
| Pension, other postretirement, and postemployment benefits: | ||||||||
| Net actuarial loss | (1,880.5) | (1,723.6) | ||||||
| Prior service credits | 14.4 | 26.3 | ||||||
| Accumulated other comprehensive loss | $ | (2,625.4) | $ | (2,429.0) | ||||
In the third quarter of fiscal 2018, we adopted new accounting requirements that provide the option to reclassify stranded income tax effects resulting from the TCJA from AOCI to retained earnings. We elected to reclassify the stranded income tax effects of the TCJA of $329.4 million from AOCI to retained earnings. Please see Note 14 for additional information.
NOTE 11. STOCK PLANS
We use broad-based stock plans to help ensure that management’s interests are aligned with those of our shareholders. As of May 26, 2019, a total of 30.3 million shares were available for grant in the form of stock options, restricted stock, restricted stock units, and shares of unrestricted stock under the 2017 Stock Compensation Plan (2017 Plan). The 2017 Plan also provides for the issuance of cash-settled share-based units, stock appreciation rights, and performance-based stock awards. Stock-based awards now outstanding include some granted under the 2007, 2009, and 2011 stock plans and the 2006 and 2011 compensation plans for non-employee directors, under which no further awards may be granted. The stock plans provide for potential accelerated vesting of awards upon retirement, termination, or death of eligible employees and directors.
Stock Options
The estimated fair values of stock options granted and the assumptions used for the Black-Scholes option-pricing model were as follows:
| Fiscal Year | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Estimated fair values of stock options granted | $ | 5.35 | $ | 6.18 | $ | 8.80 | ||||||
| Assumptions: | ||||||||||||
| Risk-free interest rate | 2.9 % | 2.2% | 1.7 % | |||||||||
| Expected term | 8.5 years | 8.2 years | 8.5 years | |||||||||
| Expected volatility | 16.3 % | 15.8% | 17.8 % | |||||||||
| Dividend yield | 4.3 % | 3.6% | 2.9 % | |||||||||
We estimate the fair value of each option on the grant date using a Black-Scholes option-pricing model, which requires us to make predictive assumptions regarding future stock price volatility, employee exercise behavior, dividend yield, and the forfeiture rate. 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.
Table of Contents
Our expected term represents the period of time that options granted are expected to be outstanding based on historical data to estimate option exercises and employee terminations within the valuation model. Separate groups of employees have similar historical exercise behavior and therefore were aggregated into a single pool for valuation purposes. The weighted-average expected term for all employee groups is presented in the table above. The risk-free interest rate for periods during the expected term of the options is based on the U.S. Treasury zero-coupon yield curve in effect at the time of grant.
Any corporate income tax benefit realized upon exercise or vesting of an award in excess of that previously recognized in earnings (referred to as a windfall tax benefit) is presented in our Consolidated Statements of Cash Flows as an operating cash flow. Realized windfall tax benefits and shortfall tax deficiencies related to the exercise or vesting of stock-based awards are recognized in the Consolidated Statement of Earnings. We recognized windfall tax benefits from stock-based payments in income tax expense in our Consolidated Statements of Earnings of $24.5 million in fiscal 2019 and $25.5 million in fiscal 2018.
Options may be priced at 100 percent or more of the fair market value on the date of grant, and generally vest four years after the date of grant. Options generally expire within 10 years and one month after the date of grant.
Information on stock option activity follows:
| Options Outstanding (Thousands) | Weighted- Average Exercise Price Per Share | Weighted- Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value (Millions) | |||||||||||||
| Balance as of May 27, 2018 | 28,963.8 | $ | 42.90 | |||||||||||||
| Granted | 3,149.8 | 46.09 | ||||||||||||||
| Exercised | (7,968.1 | ) | 30.96 | |||||||||||||
| Forfeited or expired | (492.5 | ) | 53.73 | |||||||||||||
| Outstanding as of May 26, 2019 | 23,653.0 | $ | 47.12 | 4.82 | $ | 180.0 | ||||||||||
| Exercisable as of May 26, 2019 | 14,219.0 | 41.80 | 2.79 | $ | 159.8 | |||||||||||
Stock-based compensation expense related to stock option awards was $14.7 million in fiscal 2019, $15.5 million in fiscal 2018, and $18.0 million in fiscal 2017. Compensation expense related to stock-based payments recognized in our Consolidated Statements of Earnings includes amounts recognized in restructuring, impairment, and other exit costs for fiscal 2018 and 2017.
Net cash proceeds from the exercise of stock options less shares used for minimum withholding taxes and the intrinsic value of options exercised were as follows:
| Fiscal Year | ||||||||||||
| In Millions | 2019 | 2018 | 2017 | |||||||||
| Net cash proceeds | $ | 241.4 | $ | 99.3 | $ | 112.6 | ||||||
| Intrinsic value of options exercised | $ | 126.7 | $ | 83.6 | $ | 176.5 | ||||||
Restricted Stock, Restricted Stock Units, and Performance Share Units
Stock and units settled in stock subject to a restricted period and a purchase price, if any (as determined by the Compensation Committee of the Board of Directors), may be granted to key employees under the 2017 Plan. Restricted stock and restricted stock units generally vest and become unrestricted four years after the date of grant. Performance share units are earned primarily based on our future achievement of three-year goals for average organic net sales growth and cumulative free cash flow. Performance share units are settled in common stock and are generally subject to a three year performance and vesting period. The sale or transfer of these
Table of Contents
awards is restricted during the vesting period. Participants holding restricted stock, but not restricted stock units or performance share units, are entitled to vote on matters submitted to holders of common stock for a vote. These awards accumulate dividends from the date of grant, but participants only receive payment if the awards vest.
Information on restricted stock unit and performance share unit activity follows:
| Equity Classified | Liability Classified | |||||||||||||||
| Share- Settled Units (Thousands) | Weighted- Average Grant-Date Fair Value | Share- Settled Units (Thousands) | Weighted- Average Grant-Date Fair Value | |||||||||||||
| Non-vested as of May 27, 2018 | 3,731.8 | $ | 57.50 | 121.3 | $ | 58.26 | ||||||||||
| Granted | 1,814.5 | 46.14 | 33.8 | 46.16 | ||||||||||||
| Vested | (880.6 | ) | 51.30 | (35.2 | ) | 55.48 | ||||||||||
| Forfeited or expired | (393.4 | ) | 58.44 | (11.8 | ) | 57.64 | ||||||||||
| Non-vested as of May 26, 2019 | 4,272.3 | $ | 53.87 | 108.1 | $ | 55.45 | ||||||||||
| Fiscal Year | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Number of units granted (thousands) | 1,848.2 | 1,551.3 | 1,462.3 | |||||||||
| Weighted-average price per unit | $ | 46.14 | $ | 55.12 | $ | 67.01 | ||||||
The total grant-date fair value of restricted stock unit awards that vested was $47.1 million in fiscal 2019 and $93.0 million in fiscal 2018.
As of May 26, 2019, unrecognized compensation expense related to non-vested stock options, restricted stock units, and performance share units was $98.4 million. This expense will be recognized over 21 months, on average.
Stock-based compensation expense related to restricted stock units and performance share units was $70.2 million for fiscal 2019, $62.4 million for fiscal 2018, and $77.9 million for fiscal 2017. Compensation expense related to stock-based payments recognized in our Consolidated Statements of Earnings includes amounts recognized in restructuring, impairment, and other exit costs for fiscal 2019, 2018, and 2017.
Table of Contents
NOTE 12. EARNINGS PER SHARE
Basic and diluted EPS were calculated using the following:
| Fiscal Year | ||||||||||||
| In Millions, Except per Share Data | 2019 | 2018 | 2017 | |||||||||
| Net earnings attributable to General Mills | $ | 1,752.7 | $ | 2,131.0 | $ | 1,657.5 | ||||||
| Average number of common shares—basic EPS | 600.4 | 576.8 | 587.1 | |||||||||
| Incremental share effect from: (a) | ||||||||||||
| Stock options | 3.1 | 6.9 | 8.1 | |||||||||
| Restricted stock units, performance share units, and other | 1.9 | 2.0 | 2.8 | |||||||||
| Average number of common shares—diluted EPS | 605.4 | 585.7 | 598.0 | |||||||||
| Earnings per share—basic | $ | 2.92 | $ | 3.69 | $ | 2.82 | ||||||
| Earnings per share —diluted | $ | 2.90 | $ | 3.64 | $ | 2.77 | ||||||
| (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: |
|---|
| Fiscal Year | ||||||||||||
| In Millions | 2019 | 2018 | 2017 | |||||||||
| Anti-dilutive stock options, restricted stock units, and performance share units | 14.1 | 8.9 | 2.3 | |||||||||
NOTE 13. RETIREMENT BENEFITS AND POSTEMPLOYMENT BENEFITS
Defined Benefit Pension Plans
We have defined benefit pension plans covering many employees in the United States, Canada, Switzerland, France, and the United Kingdom. Benefits for salaried employees are based on length of service and final average compensation. Benefits for hourly employees include various monthly amounts for each year of credited service. Our funding policy is consistent with the requirements of applicable laws. We made no voluntary contributions to our principal U.S. plans in fiscal 2019 or 2018. We do not expect to be required to make any contributions in fiscal 2020. Our principal domestic retirement plan covering salaried employees has a provision that any excess pension assets would be allocated to active participants if the plan is terminated within five years of a change in control. All salaried employees hired on or after June 1, 2013, are eligible for a retirement program that does not include a defined benefit pension plan.
In fiscal 2018, we approved an amendment to reorganize the U.S. qualified defined benefit pension plans and the supplemental pension plans that resulted in the spinoff of a portion of the General Mills Pension Plan (the Plan) and the 2005 Supplemental Retirement Plan and the Supplemental Retirement Plan (Grandfathered) (together, the Supplemental Plans) into new plans effective May 31, 2018. The benefits offered to the plans’ participants were unchanged. The result of the reorganization was the creation of the General Mills Pension Plan I (Plan I) and the 2005 Supplemental Retirement Plan I and the Supplemental Retirement Plan I (Grandfathered) (together, the Supplemental Plans I). The reorganization was made to facilitate a targeted investment strategy over time and to provide additional flexibility in evaluating opportunities to reduce risk and volatility. Actuarial gains and losses associated with the Plan and the Supplemental Plans are amortized over the average remaining service life of the active participants. Actuarial gains and losses associated with the Plan I and the Supplemental Plans I are amortized over the average remaining life of the participants.
Table of Contents
Other Postretirement Benefit Plans
We also sponsor plans that provide health care benefits to many of our retirees in the United States, Canada, and Brazil. The United States salaried health care benefit plan is contributory, with retiree contributions based on years of service. We make decisions to fund related trusts for certain employees and retirees on an annual basis. We made no voluntary contributions to these plans in fiscal 2019 or fiscal 2018.
Health Care Cost Trend Rates
Assumed health care cost trends are as follows:
| Fiscal Year | ||||||||
| 2019 | 2018 | |||||||
| Health care cost trend rate for next year | 6.4% and 6.7% | 6.7% and 7.0% | ||||||
| Rate to which the cost trend rate is assumed to decline (ultimate rate) | 4.5% | 4.5% | ||||||
| Year that the rate reaches the ultimate trend rate | 2029 | 2029 | ||||||
We review our health care cost trend rates annually. Our review is based on data we collect about our health care claims experience and information provided by our actuaries. This information includes recent plan experience, plan design, overall industry experience and projections, and assumptions used by other similar organizations. Our initial health care cost trend rate is adjusted as necessary to remain consistent with this review, recent experiences, and short-term expectations. Our initial health care cost trend rate assumption is 6.7 percent for retirees age 65 and over and 6.4 percent for retirees under age 65 at the end of fiscal 2019. Rates are graded down annually until the ultimate trend rate of 4.5 percent is reached in 2029 for all retirees. The trend rates are applicable for calculations only if the retirees’ benefits increase as a result of health care inflation. The ultimate trend rate is adjusted annually, as necessary, to approximate the current economic view on the rate of long-term inflation plus an appropriate health care cost premium. Assumed trend rates for health care costs have an important effect on the amounts reported for the other postretirement benefit plans.
A one percentage point change in the health care cost trend rate would have the following effects:
| In Millions | One Percentage Point Increase | One Percentage Point Decrease | ||||||
| Effect on the aggregate of the service and interest cost components in fiscal 2020 | $ | 1.4 | $ | (1.3) | ||||
| Effect on the other postretirement accumulated benefit obligation as of May 26, 2019 | $ | 43.5 | $ | (40.3) | ||||
Postemployment Benefit Plans
Under certain circumstances, we also provide accruable benefits, primarily severance, to former or inactive employees in the United States, Canada, and Mexico. We recognize an obligation for any of these benefits that vest or accumulate with service. Postemployment benefits that do not vest or accumulate with service (such as severance based solely on annual pay rather than years of service) are charged to expense when incurred. Our postemployment benefit plans are unfunded.
Table of Contents
Summarized financial information about defined benefit pension, other postretirement benefit, and postemployment benefit plans is presented below:
| Defined Benefit Pension Plans | Other Postretirement Benefit Plans | Postemployment Benefit Plans | ||||||||||||||||||||||
| Fiscal Year | Fiscal Year | Fiscal Year | ||||||||||||||||||||||
| In Millions | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||
| Change in Plan Assets: | ||||||||||||||||||||||||
| Fair value at beginning of year | $ | 6,177.4 | $ | 5,925.2 | $ | 726.1 | $ | 694.8 | ||||||||||||||||
| Actual return on assets | 391.9 | 496.5 | 41.3 | 50.5 | ||||||||||||||||||||
| Employer contributions | 30.4 | 41.8 | 0.1 | 0.1 | ||||||||||||||||||||
| Plan participant contributions | 3.9 | 6.1 | 15.0 | 15.7 | ||||||||||||||||||||
| Benefits payments | (305.2) | (298.0) | (28.7) | (35.0) | ||||||||||||||||||||
| Foreign currency | (6.8) | 5.8 | - | - | ||||||||||||||||||||
| Fair value at end of year (a) | $ | 6,291.6 | $ | 6,177.4 | $ | 753.8 | $ | 726.1 | ||||||||||||||||
| Change in Projected Benefit Obligation: | ||||||||||||||||||||||||
| Benefit obligation at beginning of year | $ | 6,416.0 | $ | 6,458.6 | $ | 871.8 | $ | 951.4 | $ | 126.7 | $ | 134.5 | ||||||||||||
| Service cost | 94.6 | 102.9 | 9.9 | 11.6 | 7.6 | 8.6 | ||||||||||||||||||
| Interest cost | 248.0 | 217.9 | 33.1 | 30.1 | 3.0 | 2.3 | ||||||||||||||||||
| Plan amendment | - | 25.4 | - | (0.7) | 1.7 | 1.2 | ||||||||||||||||||
| Curtailment/other | (0.7) | - | - | - | - | - | ||||||||||||||||||
| Plan participant contributions | 3.9 | 6.1 | 15.0 | 15.7 | - | - | ||||||||||||||||||
| Medicare Part D reimbursements | - | - | 2.5 | 3.0 | - | - | ||||||||||||||||||
| Actuarial loss (gain) | 301.8 | (102.0) | (45.4) | (73.9) | 2.6 | (7.0) | ||||||||||||||||||
| Benefits payments | (305.8) | (298.6) | (62.2) | (64.9) | (13.2) | (13.1) | ||||||||||||||||||
| Foreign currency | (7.1) | 5.7 | (0.6) | (0.5) | (0.4) | 0.2 | ||||||||||||||||||
| Projected benefit obligation at end of year (a) | $ | 6,750.7 | $ | 6,416.0 | $ | 824.1 | $ | 871.8 | $ | 128.0 | $ | 126.7 | ||||||||||||
| Plan assets less than benefit obligation as of fiscal year end | $ | (459.1) | $ | (238.6) | $ | (70.3) | $ | (145.7) | $ | (128.0) | $ | (126.7) | ||||||||||||
(a) Plan assets and obligations are measured as of May 31, 2019, and May 31, 2018.
As of May 26, 2019, other postretirement benefit plans had benefit obligations of $498.4 million that exceeded plan assets of $233.7 million. As of May 27, 2018, other postretirement benefit plans had benefit obligations of $507.3 million that exceeded plan assets of $223.1 million. Postemployment benefit plans are not funded and had benefit obligations of $128.0 million and $126.7 million as of May 26, 2019 and May 27, 2018, respectively.
The accumulated benefit obligation for all defined benefit pension plans was $6,436.9 million as of May 26, 2019, and $6,076.6 million as of May 27, 2018.
Table of Contents
Amounts recognized in AOCI as of May 26, 2019 and May 27, 2018, are as follows:
| Defined Benefit Pension Plans | Other Postretirement Benefit Plans | Postemployment Benefit Plans | Total | |||||||||||||||||||||||||||||
| Fiscal Year | Fiscal Year | Fiscal Year | Fiscal Year | |||||||||||||||||||||||||||||
| In Millions | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||
| Net actuarial (loss) gain | $ | (1,961.6) | $ | (1,764.1) | $ | 81.0 | $ | 44.4 | $ | 0.1 | $ | (3.9) | $ | (1,880.5) | $ | (1,723.6) | ||||||||||||||||
| Prior service (costs) credits | (5.9) | (7.1) | 26.3 | 33.1 | (6.0) | 0.3 | 14.4 | 26.3 | ||||||||||||||||||||||||
| Amounts recorded in accumulated other comprehensive loss | $ | (1,967.5) | $ | (1,771.2) | $ | 107.3 | $ | 77.5 | $ | (5.9) | $ | (3.6) | $ | (1,866.1) | $ | (1,697.3) | ||||||||||||||||
Plans with accumulated benefit obligations in excess of plan assets as of May 26, 2019 and May 27, 2018 are as follows:
| Defined Benefit Pension Plans | ||||||||
| Fiscal Year | ||||||||
| In Millions | 2019 | 2018 | ||||||
| Projected benefit obligation | $ | 589.7 | $ | 551.6 | ||||
| Accumulated benefit obligation | 552.2 | 498.8 | ||||||
| Plan assets at fair value | 14.4 | 10.2 | ||||||
Components of net periodic benefit expense are as follows:
| Defined Benefit Pension Plans | Other Postretirement Benefit Plans | Postemployment Benefit Plans | ||||||||||||||||||||||||||||||||||
| Fiscal Year | Fiscal Year | Fiscal Year | ||||||||||||||||||||||||||||||||||
| In Millions | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||
| Service cost | $ | 94.6 | $ | 102.9 | $ | 119.7 | $ | 9.9 | $ | 11.6 | $ | 12.5 | $ | 7.6 | $ | 8.6 | $ | 8.8 | ||||||||||||||||||
| Interest cost | 248.0 | 217.9 | 216.5 | 33.1 | 30.1 | 32.2 | 3.0 | 2.3 | 2.6 | |||||||||||||||||||||||||||
| Expected return on plan assets | (445.8) | (480.2) | (486.7) | (40.4) | (52.2) | (48.5) | - | - | - | |||||||||||||||||||||||||||
| Amortization of losses | 109.8 | 177.0 | 190.2 | 0.6 | 0.8 | 2.5 | 0.1 | 0.8 | 1.7 | |||||||||||||||||||||||||||
| Amortization of prior service costs (credits) | 1.5 | 1.9 | 2.5 | (5.5) | (5.4) | (5.4) | 0.7 | 0.6 | 0.6 | |||||||||||||||||||||||||||
| Other adjustments | - | - | 3.1 | - | - | 1.3 | 6.7 | 6.7 | 1.3 | |||||||||||||||||||||||||||
| Settlement or curtailment losses | 0.3 | - | 3.8 | - | - | (0.9) | - | - | (1.4) | |||||||||||||||||||||||||||
| Net expense | $ | 8.4 | $ | 19.5 | $ | 49.1 | $ | (2.3) | $ | (15.1) | $ | (6.3) | $ | 18.1 | $ | 19.0 | $ | 13.6 | ||||||||||||||||||
Table of Contents
We expect to recognize the following amounts in net periodic benefit expense in fiscal 2020:
| In Millions | Defined Benefit Pension Plans | Other Postretirement Benefit Plans | Postemployment Benefit Plans | |||||||||
| Amortization of losses | $ | 106.9 | $ | (2.1 | ) | $ | 0.4 | |||||
| Amortization of prior service costs (credits) | 1.5 | (5.5 | ) | 0.9 | ||||||||
Assumptions
Weighted-average assumptions used to determine fiscal year-end benefit obligations are as follows:
| Defined Benefit Pension Plans | Other Postretirement Benefit Plans | Postemployment Benefit Plans | ||||||||||||||||||||||
| Fiscal Year | Fiscal Year | Fiscal Year | ||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
| Discount rate | 3.91 % | 4.20 % | 3.79 % | 4.17 % | 3.10 % | 3.60 % | ||||||||||||||||||
| Rate of salary increases | 4.17 | 4.27 | - | - | 4.47 | 4.44 | ||||||||||||||||||
Weighted-average assumptions used to determine fiscal year net periodic benefit expense are as follows:
| Defined Benefit Pension Plans | Other Postretirement Benefit Plans | Postemployment Benefit Plans | ||||||||||||||||||||||||||||||||||
| Fiscal Year | Fiscal Year | Fiscal Year | ||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||
| Discount rate (a) | 4.20 % | 4.08 % | 4.19 % | 4.17 % | 3.92 % | 3.97 % | 3.60 % | 2.87 % | 2.94 % | |||||||||||||||||||||||||||
| Service cost effective rate | 4.34 | 4.37 | 4.57 | 4.27 | 4.27 | 4.42 | 3.99 | 3.54 | 3.55 | |||||||||||||||||||||||||||
| Interest cost effective rate | 3.92 | 3.45 | 3.44 | 3.80 | 3.24 | 3.17 | 3.37 | 2.67 | 2.67 | |||||||||||||||||||||||||||
| Rate of salary increases | 4.27 | 4.25 | 4.28 | - | - | - | 4.44 | 4.46 | 4.35 | |||||||||||||||||||||||||||
| Expected long-term rate of return on plan assets | 7.25 | 7.88 | 8.17 | 5.67 | 7.59 | 7.85 | - | - | - | |||||||||||||||||||||||||||
| (a) | Determined utilizing the full yield curve method. |
|---|
Discount Rates
We estimate the service and interest cost components of the net periodic benefit expense for our United States and most of our international defined benefit pension, other postretirement benefit, and postemployment benefit plans utilizing a full yield curve approach by applying the specific spot rates along the yield curve used to determine the benefit obligation to the relevant projected cash flows. Our discount rate assumptions are determined annually as of May 31 for our defined benefit pension, other postretirement benefit, and postemployment benefit plan obligations. We also use discount rates as of May 31 to determine defined benefit pension, other postretirement benefit, and postemployment benefit plan income and expense for the following fiscal year. We work with our outside actuaries to determine the timing and amount of expected future cash outflows to plan participants and, using the Aa Above Median corporate bond yield, to develop a forward interest rate curve, including a margin to that index based on our credit risk. This forward interest rate curve is applied to our expected future cash outflows to determine our discount rate assumptions.
Table of Contents
Fair Value of Plan Assets
The fair values of our pension and postretirement benefit plans’ assets and their respective levels in the fair value hierarchy by asset category were as follows:
| Fiscal Year 2019 | Fiscal Year 2018 | |||||||||||||||||||||||||||||||
| In Millions | Level 1 | Level 2 | Level 3 | Total Assets | Level 1 | Level 2 | Level 3 | Total Assets | ||||||||||||||||||||||||
| Fair value measurement of pension plan assets: | ||||||||||||||||||||||||||||||||
| Equity (a) | $ | 1,226.2 | $ | 664.6 | $ | - | $ | 1,890.8 | $ | 1,722.5 | $ | 782.1 | $ | - | $ | 2,504.6 | ||||||||||||||||
| Fixed income (b) | 1,635.5 | 1,144.9 | - | 2,780.4 | 1,264.5 | 714.5 | - | 1,979.0 | ||||||||||||||||||||||||
| Real asset investments (c) | 179.4 | 59.9 | - | 239.3 | 229.1 | 115.2 | - | 344.3 | ||||||||||||||||||||||||
| Other investments (d) | - | - | 0.3 | 0.3 | - | - | 0.3 | 0.3 | ||||||||||||||||||||||||
| Cash and accruals | 186.5 | - | - | 186.5 | 124.4 | - | - | 124.4 | ||||||||||||||||||||||||
| Fair value measurement of pension plan assets | $ | 3,227.6 | $ | 1,869.4 | $ | 0.3 | $ | 5,097.3 | $ | 3,340.5 | $ | 1,611.8 | $ | 0.3 | $ | 4,952.6 | ||||||||||||||||
| Assets measured at net asset value (e) | 1,194.3 | 1,224.8 | ||||||||||||||||||||||||||||||
| Total pension plan assets (f) | $ | 6,291.6 | $ | 6,177.4 | ||||||||||||||||||||||||||||
| Fair value measurement of postretirement benefit plan assets: | ||||||||||||||||||||||||||||||||
| Equity (a) | $ | - | $ | 66.8 | $ | - | $ | 66.8 | $ | - | $ | 35.8 | $ | - | $ | 35.8 | ||||||||||||||||
| Fixed income (b) | 139.7 | 241.4 | - | 381.1 | 241.0 | 123.6 | - | 364.6 | ||||||||||||||||||||||||
| Real asset investments (c) | 0.3 | - | - | 0.3 | 8.0 | - | - | 8.0 | ||||||||||||||||||||||||
| Cash and accruals | 11.1 | - | - | 11.1 | 19.1 | - | - | 19.1 | ||||||||||||||||||||||||
| Fair value measurement of Postretirement benefit plan assets | $ | 151.1 | $ | 308.2 | $ | - | $ | 459.3 | $ | 268.1 | $ | 159.4 | $ | - | $ | 427.5 | ||||||||||||||||
| Assets measured at net asset value (e) | 294.5 | 298.6 | ||||||||||||||||||||||||||||||
| Total postretirement benefit plan assets (f) | $ | 753.8 | $ | 726.1 | ||||||||||||||||||||||||||||
| (a) | Primarily publicly traded common stock for purposes of total return and to maintain equity exposure consistent with policy allocations. Investments include: United States and international equity securities, mutual funds, and equity futures valued at closing prices from national exchanges, and commingled funds valued at unit values provided by the investment managers, which are based on the fair value of the underlying investments. |
|---|
| (b) | Primarily government and corporate debt securities and futures for purposes of total return, managing fixed income exposure to policy allocations, and duration targets. Investments include: fixed income securities and bond futures generally valued at closing prices from national exchanges, fixed income pricing models, and independent financial analysts; and fixed income commingled funds valued at unit values provided by the investment managers, which are based on the fair value of the underlying investments. |
|---|
| (c) | Publicly traded common stock and limited partnerships in the energy and real estate sectors for purposes of total return. Investments include: energy and real estate securities generally valued at closing prices from national exchanges, and commingled funds valued at unit values provided by the investment managers, which are based on the fair value of the underlying investments. |
|---|
| (d) | Insurance and annuity contracts to provide a stable stream of income for pension retirees. Fair values are based on the fair value of the underlying investments and contract fair values established by the providers. |
|---|
| (e) | Primarily private investments, insurance contracts, and common collective trusts that are measured at fair value using the net asset value per share (or its equivalent) practical expedient and have not been classified in the fair value hierarchy. |
|---|
| (f) | Plan assets and obligations are measured as of May 31, 2019, and May 31, 2018. |
|---|
Table of Contents
There were no material changes in our level 3 investments in fiscal 2019 and fiscal 2018.
Expected Rate of Return on Plan Assets
Our expected rate of return on plan assets is determined by our asset allocation, our historical long-term investment performance, our estimate of future long-term returns by asset class (using input from our actuaries, investment services, and investment managers), and long-term inflation assumptions. We review this assumption annually for each plan; however, our annual investment performance for one particular year does not, by itself, significantly influence our evaluation.
Weighted-average asset allocations for the past two fiscal years for our defined benefit pension and other postretirement benefit plans are as follows:
| Defined Benefit Pension Plans | Other Postretirement Benefit Plans | |||||||||||||||
| Fiscal Year | Fiscal Year | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Asset category: | ||||||||||||||||
| United States equities | 20.3 % | 25.8 % | 19.1 % | 20.6 % | ||||||||||||
| International equities | 12.5 | 16.1 | 11.2 | 10.7 | ||||||||||||
| Private equities | 8.1 | 7.7 | 4.9 | 4.2 | ||||||||||||
| Fixed income | 46.7 | 36.1 | 61.3 | 59.6 | ||||||||||||
| Real assets | 12.4 | 14.3 | 3.5 | 4.9 | ||||||||||||
| Total | 100.0 % | 100.0 % | 100.0 % | 100.0 % |
The investment objective for our defined benefit pension and other postretirement benefit plans is to secure the benefit obligations to participants at a reasonable cost to us. Our goal is to optimize the long-term return on plan assets at a moderate level of risk. The defined benefit pension plan and other postretirement benefit plan portfolios are broadly diversified across asset classes. Within asset classes, the portfolios are further diversified across investment styles and investment organizations. For the U.S. defined benefit pension plans, the long-term investment policy allocation is: 18 percent to equities in the United States; 11 percent to international equities; 9 percent to private equities; 48 percent to fixed income; and 14 percent to real assets (real estate, energy, and infrastructure). For other U.S. postretirement benefit plans, the long-term investment policy allocations are: 18 percent to equities in the United States; 10 percent to international equities; 4 percent to private equities; 65 percent to fixed income; and 3 percent to real assets (real estate, energy, and timber). The actual allocations to these asset classes may vary tactically around the long-term policy allocations based on relative market valuations.
Table of Contents
Contributions and Future Benefit Payments
We do not expect to be required to make contributions to our defined benefit pension, other postretirement benefit, and postemployment benefit plans in fiscal 2020. Actual fiscal 2020 contributions could exceed our current projections, as influenced by our decision to undertake discretionary funding of our benefit trusts and future changes in regulatory requirements. Estimated benefit payments, which reflect expected future service, as appropriate, are expected to be paid from fiscal 2020 to 2029 as follows:
| In Millions | Defined Benefit Pension Plans | Other Postretirement Benefit Plans Gross Payments | Medicare Subsidy Receipts | Postemployment Benefit Plans | ||||||||||||
| 2020 | $ | 319.0 | $ | 52.4 | $ | 3.2 | $ | 20.1 | ||||||||
| 2021 | 324.9 | 53.9 | 3.1 | 18.0 | ||||||||||||
| 2022 | 331.8 | 55.7 | 2.9 | 16.6 | ||||||||||||
| 2023 | 338.8 | 57.2 | 3.0 | 15.3 | ||||||||||||
| 2024 | 346.3 | 56.9 | 3.1 | 14.3 | ||||||||||||
| 2025-2029 | 1,856.4 | 282.4 | 15.7 | 59.6 |
Defined Contribution Plans
The General Mills Savings Plan is a defined contribution plan that covers domestic salaried, hourly, nonunion, and certain union employees. This plan is a 401(k) savings plan that includes a number of investment funds, including a Company stock fund and an Employee Stock Ownership Plan (ESOP). We sponsor another money purchase plan for certain domestic hourly employees with net assets of $22.3 million as of May 26, 2019, and $23.9 million as of May 27, 2018. We also sponsor defined contribution plans in many of our foreign locations. Our total recognized expense related to defined contribution plans was $52.7 million in fiscal 2019, $49.2 million in fiscal 2018, and $54.1 million in fiscal 2017.
We match a percentage of employee contributions to the General Mills Savings Plan. The Company match is directed to investment options of the participant’s choosing. The number of shares of our common stock allocated to participants in the ESOP was 5.1 million as of May 26, 2019, and 5.6 million as of May 27, 2018. The ESOP’s only assets are our common stock and temporary cash balances.
The Company stock fund and the ESOP collectively held $410.1 million and $392.1 million of Company common stock as of May 26, 2019 and May 27, 2018, respectively.
Table of Contents
NOTE 14. INCOME TAXES
The components of earnings before income taxes and after-tax earnings from joint ventures and the corresponding income taxes thereon are as follows:
| Fiscal Year | ||||||||||||
| In Millions | 2019 | 2018 | 2017 | |||||||||
| Earnings before income taxes and after-tax earnings from joint ventures: | ||||||||||||
| United States | $ | 1,788.2 | $ | 1,884.0 | $ | 1,941.6 | ||||||
| Foreign | 293.8 | 251.6 | 329.7 | |||||||||
| Total earnings before income taxes and after-tax earnings from joint ventures | $ | 2,082.0 | $ | 2,135.6 | $ | 2,271.3 | ||||||
| Income taxes: | ||||||||||||
| Currently payable: | ||||||||||||
| Federal | $ | 151.9 | $ | 441.2 | $ | 368.5 | ||||||
| State and local | 35.3 | 35.2 | 21.1 | |||||||||
| Foreign | 84.6 | 85.2 | 81.7 | |||||||||
| Total current | 271.8 | 561.6 | 471.3 | |||||||||
| Deferred: | ||||||||||||
| Federal | 86.7 | (478.5 | ) | 201.3 | ||||||||
| State and local | 21.6 | 15.7 | 10.2 | |||||||||
| Foreign | (12.3 | ) | (41.5 | ) | (27.6 | ) | ||||||
| Total deferred | 96.0 | (504.3 | ) | 183.9 | ||||||||
| Total income taxes | $ | 367.8 | $ | 57.3 | $ | 655.2 |
The following table reconciles the United States statutory income tax rate with our effective income tax rate:
| Fiscal Year | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| United States statutory rate | 21.0 | % | 29.4 | % | 35.0% | |||||||
| State and local income taxes, net of federal tax benefits | 2.5 | 1.7 | 0.8 | |||||||||
| Foreign rate differences | - | (2.0 | ) | (3.5) | ||||||||
| Provisional net tax benefit | (0.4 | ) | (24.5 | ) | - | |||||||
| Stock based compensation | (1.2 | ) | (1.2 | ) | - | |||||||
| Capital loss (a) | (3.7 | ) | - | - | ||||||||
| Prior period tax adjustment | - | 1.9 | - | |||||||||
| Domestic manufacturing deduction | - | (1.9 | ) | (2.8) | ||||||||
| Other, net | (0.5 | ) | (0.7 | ) | (0.7) | |||||||
| Effective income tax rate | 17.7 | % | 2.7 | % | 28.8% |
| (a) | During the fourth quarter of fiscal 2019 we recorded a discrete benefit related to a capital loss carryback of $72.9 million. |
|---|
Table of Contents
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows:
| In Millions | May 26, 2019 | May 27, 2018 | ||||||
| Accrued liabilities | $ | 50.9 | $ | 47.2 | ||||
| Compensation and employee benefits | 196.6 | 210.2 | ||||||
| Pension | 103.2 | 57.1 | ||||||
| Tax credit carryforwards | 7.3 | 7.4 | ||||||
| Stock, partnership, and miscellaneous investments | 104.2 | 147.9 | ||||||
| Capital losses | 73.1 | 12.9 | ||||||
| Net operating losses | 141.7 | 161.2 | ||||||
| Other | 71.3 | 52.9 | ||||||
| Gross deferred tax assets | 748.3 | 696.8 | ||||||
| Valuation allowance | 213.7 | 176.0 | ||||||
| Net deferred tax assets | 534.6 | 520.8 | ||||||
| Brands | 1,472.6 | 1,498.7 | ||||||
| Fixed assets | 377.8 | 329.5 | ||||||
| Intangible assets | 259.7 | 255.1 | ||||||
| Tax lease transactions | 23.9 | 26.0 | ||||||
| Inventories | 39.0 | 38.8 | ||||||
| Stock, partnership, and miscellaneous investments | 330.0 | 317.1 | ||||||
| Unrealized hedges | 27.9 | 28.5 | ||||||
| Other | 34.7 | 30.9 | ||||||
| Gross deferred tax liabilities | 2,565.6 | 2,524.6 | ||||||
| Net deferred tax liability | $ | 2,031.0 | $ | 2,003.8 |
We have established a valuation allowance against certain of the categories of deferred tax assets described above as current evidence does not suggest we will realize sufficient taxable income of the appropriate character (e.g., ordinary income versus capital gain income) within the carryforward period to allow us to realize these deferred tax benefits.
Information about our valuation allowance follows:
| In Millions | May 26, 2019 | |||
| Pillsbury acquisition losses | $ | 108.2 | ||
| State and foreign loss carryforwards | 27.0 | |||
| Capital loss carryforwards | 73.0 | |||
| Other | 5.5 | |||
| Total | $ | 213.7 | ||
As of May 26, 2019, we believe it is more-likely-than-not that the remainder of our deferred tax assets are realizable.
Table of Contents
Information about our tax loss carryforwards follows:
| In Millions | May 26, 2019 | |||
| Foreign loss carryforwards | $ | 138.1 | ||
| State operating loss carryforwards | 12.5 | |||
| Total tax loss carryforwards | $ | 150.6 | ||
Our foreign loss carryforwards expire as follows:
| In Millions | May 26, 2019 | |||
| Expire in fiscal 2020 and 2021 | $ | 3.4 | ||
| Expire in fiscal 2022 and beyond | 14.2 | |||
| Do not expire | 120.5 | |||
| Total foreign loss carryforwards | $ | 138.1 | ||
On December 22, 2017, the TCJA was signed into law. The TCJA results in significant revisions to the U.S. corporate income tax system, including a reduction in the U.S. corporate income tax rate, implementation of a territorial system, and a one-time deemed repatriation tax on untaxed foreign earnings. As a result of the TCJA, we recorded a provisional benefit of $523.5 million during fiscal 2018. During fiscal 2019, we completed our accounting for the tax effects of the 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. While our accounting for the recorded impact of the TCJA is deemed to be complete, these amounts were based on prevailing regulations and currently available information, and any additional guidance issued by the Internal Revenue Service (IRS) could impact the aforementioned amounts in future periods.
The legislation also includes provisions that affected our fiscal 2019 results, including but not limited to, a reduction in the U.S. corporate tax rate on domestic operations; the creation of a new minimum tax called the base erosion anti-abuse tax; a new provision that taxes U.S. allocated expenses as well as currently taxes certain income from foreign operations (Global Intangible Low Tax Income or GILTI); a new limitation on deductible interest expense; the repeal of the domestic manufacturing deduction; and limitations on the deductibility of certain executive compensation.
While the new legislation generally eliminates U.S. federal income tax on dividends from foreign subsidiaries going forward, certain income earned by foreign subsidiaries must be included currently in our U.S. taxable income under the new GILTI inclusion rules. Under U.S. GAAP, we are allowed to make an accounting policy election and record the taxes as a period cost as incurred or factor such amounts into the measurement of deferred taxes. In fiscal 2018, we made an accounting policy election to record these taxes as a period cost.
As of May 26, 2019, we have not recognized a deferred tax liability for unremitted earnings of approximately $2.3 billion from our foreign operations because we currently believe our subsidiaries have invested the undistributed earnings indefinitely, or the earnings will be remitted in a tax-neutral transaction. It is not practicable for us to determine the amount of unrecognized tax expense on these reinvested earnings. Deferred taxes are recorded for earnings of our foreign operations when we determine that such earnings are no longer indefinitely reinvested. As a result of the TCJA, we re-evaluated our 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. As part of the accounting for the TCJA, we recorded local country withholding taxes related to certain entities from which we began repatriating undistributed earnings and will continue to record local country withholding taxes on all future earnings.
In addition, in fiscal 2018, we adopted Accounting Standards Update 2018-02: Income Statement – Reporting Comprehensive Income (Topic 220) (ASU 2018-02), which provides the option to reclassify stranded income tax
Table of Contents
effects resulting from the TCJA from AOCI to retained earnings. We elected to reclassify the stranded income tax effects of the TCJA of $329.4 million from AOCI to retained earnings. This reclassification consists of deferred taxes originally recorded in AOCI that exceed the newly enacted federal corporate tax rate.
We are subject to federal income taxes in the United States as well as various state, local, and foreign jurisdictions. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our liabilities for income taxes reflect the most likely outcome. We adjust these liabilities, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular position would usually require the use of cash.
The number of years with open tax audits varies depending on the tax jurisdiction. Our major taxing jurisdictions include the United States (federal and state) and Canada. Various tax examinations by United States state taxing authorities could be conducted for any open tax year, which vary by jurisdiction, but are generally from 3 to 5 years.
Several state and foreign examinations are currently in progress. We do not expect these examinations to result in a material impact on our results of operations or financial position. During fiscal 2018, we recorded an adjustment related to a prior year which increased income tax expense by $40.9 million. We determined the adjustment to be immaterial to our Consolidated Statements of Earnings for the fiscal year ended May 27, 2018. We have effectively settled all issues with the IRS for fiscal years 2015 and prior.
During fiscal 2017, the Brazilian tax authority, Secretaria da Receita Federal do Brasil (RFB), concluded audits of our 2012 and 2013 tax return years. These audits included a review of our determinations of amortization of certain goodwill arising from the acquisition of Yoki Alimentos S.A. The RFB has proposed adjustments that effectively eliminate the goodwill amortization benefits related to this transaction. We believe we have meritorious defenses and intend to contest the disallowance.
We apply a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions. Accordingly, we recognize the amount of tax benefit that has a greater than 50 percent likelihood of being ultimately realized upon settlement. Future changes in judgment related to the expected ultimate resolution of uncertain tax positions will affect earnings in the period of such change.
The following table sets forth changes in our total gross unrecognized tax benefit liabilities, excluding accrued interest, for fiscal 2019 and fiscal 2018. Approximately $81.2 million of this total in fiscal 2019 represents the amount that, if recognized, would affect our effective income tax rate in future periods. This amount differs from the gross unrecognized tax benefits presented in the table because certain of the liabilities below would impact deferred taxes if recognized. We also would record a decrease in U.S. federal income taxes upon recognition of the state tax benefits included therein.
| Fiscal Year | ||||||||
| In Millions | 2019 | 2018 | ||||||
| Balance, beginning of year | $ | 196.3 | $ | 135.5 | ||||
| Tax positions related to current year: | ||||||||
| Additions | 19.5 | 24.1 | ||||||
| Reductions | (0.1) | - | ||||||
| Tax positions related to prior years: | ||||||||
| Additions | 3.8 | 54.8 | ||||||
| Reductions | (13.2) | (7.9) | ||||||
| Settlements | (41.0) | (3.9) | ||||||
| Lapses in statutes of limitations | (26.2) | (6.3) | ||||||
| Balance, end of year | $ | 139.1 | $ | 196.3 |
Table of Contents
As of May 26, 2019, we expect to pay approximately $2.0 million of unrecognized tax benefit liabilities and accrued interest within the next 12 months. We are not able to reasonably estimate the timing of future cash flows beyond 12 months due to uncertainties in the timing of tax audit outcomes. The remaining amount of our unrecognized tax liability was classified in other liabilities.
We report accrued interest and penalties related to unrecognized tax benefit liabilities in income tax expense. For fiscal 2019, we recognized $0.5 million of tax-related net interest and penalties, and had $26.0 million of accrued interest and penalties as of May 26, 2019. For fiscal 2018, we recognized a net benefit of $3.1 million of tax-related net interest and penalties, and had $27.3 million of accrued interest and penalties as of May 27, 2018.
NOTE 15. LEASES, OTHER COMMITMENTS, AND CONTINGENCIES
Our leases are generally for warehouse space and equipment. Rent expense under all operating leases from continuing operations was $184.9 million in fiscal 2019, $189.4 million in fiscal 2018, and $188.1 million in fiscal 2017.
Some operating leases require payment of property taxes, insurance, and maintenance costs in addition to the rent payments. Contingent and escalation rent in excess of minimum rent payments and sublease income netted in rent expense were insignificant.
Noncancelable future lease commitments are:
| In Millions | Operating Leases | Capital Leases | ||||||
| Fiscal 2020 | $ | 120.0 | $ | 0.2 | ||||
| Fiscal 2021 | 101.7 | 0.1 | ||||||
| Fiscal 2022 | 85.0 | - | ||||||
| Fiscal 2023 | 63.8 | - | ||||||
| Fiscal 2024 | 49.1 | - | ||||||
| After fiscal 2024 | 63.0 | - | ||||||
| Total noncancelable future lease commitments | $ | 482.6 | $ | 0.3 | ||||
| Less: interest | - | |||||||
| Present value of obligations under capital leases | $ | 0.3 |
Depreciation on capital leases is recorded as depreciation expense in our results of operations.
As of May 26, 2019, we have issued guarantees and comfort letters of $681.6 million for the debt and other obligations of consolidated subsidiaries, and guarantees and comfort letters of $133.9 million for the debt and other obligations of non-consolidated affiliates, mainly CPW. In addition, off-balance sheet arrangements are generally limited to the future payments under non-cancelable operating leases, which totaled $482.6 million as of May 26, 2019.
NOTE 16. 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.
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.
Table of Contents
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 and accordingly, our fiscal 2018 results did not include Pet segment operating results.
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 by operating segment.
Table of Contents
Our operating segment results were as follows:
| Fiscal Year | ||||||||||||
| In Millions | 2019 | 2018 | 2017 | |||||||||
| Net sales: | ||||||||||||
| North America Retail | $ | 9,925.2 | $ | 10,115.4 | $ | 10,196.9 | ||||||
| Convenience Stores & Foodservice | 1,969.1 | 1,930.2 | 1,870.0 | |||||||||
| Europe & Australia | 1,886.7 | 1,984.6 | 1,824.5 | |||||||||
| Asia & Latin America | 1,653.3 | 1,710.2 | 1,728.4 | |||||||||
| Pet | 1,430.9 | - | - | |||||||||
| Total | $ | 16,865.2 | $ | 15,740.4 | $ | 15,619.8 | ||||||
| Operating profit: | ||||||||||||
| North America Retail | $ | 2,277.2 | $ | 2,217.4 | $ | 2,303.6 | ||||||
| Convenience Stores & Foodservice | 419.5 | 392.6 | 401.2 | |||||||||
| Europe & Australia | 123.3 | 142.1 | 164.2 | |||||||||
| Asia & Latin America | 72.4 | 39.6 | 83.6 | |||||||||
| Pet | 268.4 | - | - | |||||||||
| Total segment operating profit | $ | 3,160.8 | $ | 2,791.7 | $ | 2,952.6 | ||||||
| Unallocated corporate items | 339.8 | 206.2 | 273.6 | |||||||||
| Divestitures loss | 30.0 | - | 6.5 | |||||||||
| Restructuring, impairment, and other exit costs | 275.1 | 165.6 | 180.4 | |||||||||
| Operating profit | $ | 2,515.9 | $ | 2,419.9 | $ | 2,492.1 |
Net sales for our North America Retail operating units were as follows:
| Fiscal Year | ||||||||||||
| In Millions | 2019 | 2018 | 2017 | |||||||||
| U.S. Meals & Baking | $ | 3,839.8 | $ | 3,865.7 | $ | 3,876.6 | ||||||
| U.S. Cereal | 2,255.4 | 2,251.8 | 2,251.8 | |||||||||
| U.S. Snacks | 2,060.9 | 2,140.5 | 2,098.2 | |||||||||
| U.S. Yogurt and Other | 906.7 | 927.4 | 1,064.3 | |||||||||
| Canada | 862.4 | 930.0 | 906.0 | |||||||||
| Total | $ | 9,925.2 | $ | 10,115.4 | $ | 10,196.9 |
Net sales by class of similar products were as follows:
| Fiscal Year | ||||||||||||
| In Millions | 2019 | 2018 | 2017 | |||||||||
| Snacks | $ | 3,359.3 | $ | 3,419.0 | $ | 3,302.2 | ||||||
| Cereal | 2,672.2 | 2,679.2 | 2,673.2 | |||||||||
| Convenient meals | 2,641.8 | 2,677.4 | 2,653.6 | |||||||||
| Yogurt | 2,193.6 | 2,320.1 | 2,403.5 | |||||||||
| Dough | 1,692.8 | 1,684.1 | 1,690.6 | |||||||||
| Baking mixes and ingredients | 1,608.9 | 1,653.4 | 1,654.1 | |||||||||
| Pet | 1,430.9 | - | - | |||||||||
| Super-premium ice cream | 813.2 | 803.7 | 738.4 | |||||||||
| Other | 452.5 | 503.5 | 504.2 | |||||||||
| Total | $ | 16,865.2 | $ | 15,740.4 | $ | 15,619.8 |
Table of Contents
The following table provides financial information by geographic area:
| Fiscal Year | ||||||||||||
| In Millions | 2019 | 2018 | 2017 | |||||||||
| Net sales: | ||||||||||||
| United States | $ | 12,462.8 | $ | 11,115.6 | $ | 11,160.9 | ||||||
| Non-United States | 4,402.4 | 4,624.8 | 4,458.9 | |||||||||
| Total | $ | 16,865.2 | $ | 15,740.4 | $ | 15,619.8 |
| In Millions | May 26, 2019 | May 27, 2018 | ||||||
| Cash and cash equivalents: | ||||||||
| United States | $ | 51.0 | $ | 15.7 | ||||
| Non-United States | 399.0 | 383.3 | ||||||
| Total | $ | 450.0 | $ | 399.0 |
| In Millions | May 26, 2019 | May 27, 2018 | ||||||
| Land, buildings, and equipment: | ||||||||
| United States | $ | 2,872.8 | $ | 3,031.7 | ||||
| Non-United States | 914.4 | 1,015.5 | ||||||
| Total | $ | 3,787.2 | $ | 4,047.2 |
NOTE 17. SUPPLEMENTAL INFORMATION
The components of certain Consolidated Balance Sheet accounts are as follows:
| In Millions | May 26, 2019 | May 27, 2018 | ||||||
| Receivables: | ||||||||
| Customers | $ 1,708.5 | $ 1,712.6 | ||||||
| Less allowance for doubtful accounts | (28.8) | (28.4) | ||||||
| Total | $ 1,679.7 | $ 1,684.2 |
| In Millions | May 26, 2019 | May 27, 2018 | ||||||
| Inventories: | ||||||||
| Raw materials and packaging | $ | 434.9 | $ | 400.0 | ||||
| Finished goods | 1,245.9 | 1,364.2 | ||||||
| Grain | 92.0 | 91.2 | ||||||
| Excess of FIFO over LIFO cost (a) | (213.5) | (213.2) | ||||||
| Total | $ | 1,559.3 | $ | 1,642.2 |
| (a) | Inventories of $974.8 million as of May 26, 2019, and $832.2 million as of May 27, 2018, were valued at LIFO. The difference between replacement cost and the stated LIFO inventory value is not materially different from the reserve for the LIFO valuation method. |
|---|
Table of Contents
| In Millions | May 26, 2019 | May 27, 2018 | ||||||
| Prepaid expenses and other current assets: | ||||||||
| Other receivables | $ | 250.2 | $ | 174.4 | ||||
| Prepaid expenses | 189.0 | 165.6 | ||||||
| Derivative receivables, primarily commodity-related | 42.2 | 40.5 | ||||||
| Grain contracts | 6.7 | 7.1 | ||||||
| Miscellaneous | 9.4 | 10.7 | ||||||
| Total | $ | 497.5 | $ | 398.3 | ||||
| In Millions | May 26, 2019 | May 27, 2018 | ||||||
| Land, buildings, and equipment: | ||||||||
| Land | $ | 73.6 | $ | 77.7 | ||||
| Buildings | 2,477.2 | 2,396.3 | ||||||
| Buildings under capital lease | 0.3 | 0.3 | ||||||
| Equipment | 6,548.3 | 6,236.6 | ||||||
| Equipment under capital lease | 5.7 | 5.8 | ||||||
| Capitalized software | 631.6 | 593.6 | ||||||
| Construction in progress | 343.8 | 692.9 | ||||||
| Total land, buildings, and equipment | 10,080.5 | 10,003.2 | ||||||
| Less accumulated depreciation | (6,293.3) | (5,956.0) | ||||||
| Total | $ | 3,787.2 | $ | 4,047.2 | ||||
| In Millions | May 26, 2019 | May 27, 2018 | ||||||
| Other assets: | ||||||||
| Investments in and advances to joint ventures | $ | 452.9 | $ | 499.6 | ||||
| Pension assets | 323.5 | 309.9 | ||||||
| Life insurance | 22.7 | 26.9 | ||||||
| Miscellaneous | 175.8 | 106.6 | ||||||
| Total | $ | 974.9 | $ | 943.0 | ||||
| In Millions | May 26, 2019 | May 27, 2018 | ||||||
| Other current liabilities: | ||||||||
| Accrued trade and consumer promotions | $ | 484.4 | $ | 499.6 | ||||
| Accrued payroll | 345.5 | 347.0 | ||||||
| Dividends payable | 19.2 | 17.5 | ||||||
| Accrued taxes | 37.5 | 94.8 | ||||||
| Accrued interest, including interest rate swaps | 92.6 | 107.7 | ||||||
| Grain contracts | 2.3 | 1.2 | ||||||
| Restructuring and other exit costs reserve | 36.5 | 66.8 | ||||||
| Derivative payable | 13.2 | 8.3 | ||||||
| Miscellaneous | 336.6 | 302.9 | ||||||
| Total | $ | 1,367.8 | $ | 1,445.8 |
Table of Contents
| In Millions | May 26, 2019 | May 27, 2018 | ||||||
| Other noncurrent liabilities: | ||||||||
| Accrued compensation and benefits, including obligations for underfunded other postretirement benefit and postemployment benefit plans | $ | 1,153.3 | $ | 999.4 | ||||
| Accrued taxes | 227.1 | 265.3 | ||||||
| Miscellaneous | 68.5 | 76.3 | ||||||
| Total | $ | 1,448.9 | $ | 1,341.0 |
Certain Consolidated Statements of Earnings amounts are as follows:
| Fiscal Year | ||||||||||||
| In Millions | 2019 | 2018 | 2017 | |||||||||
| Depreciation and amortization | $ | 620.1 | $ | 618.8 | $ | 603.6 | ||||||
| Research and development expense | 221.9 | 219.1 | 218.2 | |||||||||
| Advertising and media expense (including production and communication costs) | 601.6 | 575.9 | 623.8 |
The components of interest, net are as follows:
| Fiscal Year | ||||||||||||
| Expense (Income), in Millions | 2019 | 2018 | 2017 | |||||||||
| Interest expense | $ | 530.2 | $ | 389.5 | $ | 306.7 | ||||||
| Capitalized interest | (2.8) | (4.1) | (4.6) | |||||||||
| Interest income | (5.6) | (11.7) | (7.0) | |||||||||
| Interest, net | $ | 521.8 | $ | 373.7 | $ | 295.1 |
Certain Consolidated Statements of Cash Flows amounts are as follows:
| Fiscal Year | ||||||||||||
| In Millions | 2019 | 2018 | 2017 | |||||||||
| Cash interest payments | $ | 500.1 | $ | 269.5 | $ | 285.8 | ||||||
| Cash paid for income taxes | 440.8 | 489.4 | 551.1 |
Table of Contents
NOTE 18. QUARTERLY DATA (UNAUDITED)
Summarized quarterly data for fiscal 2019 and fiscal 2018 follows:
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||||||||||||||||||
| In Millions, Except Per Share Amounts | Fiscal Year | Fiscal Year | Fiscal Year | Fiscal Year | ||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
| Net sales | $ | 4,094.0 | $ | 3,769.2 | $ | 4,411.2 | $ | 4,198.7 | $ | 4,198.3 | $ | 3,882.3 | $ | 4,161.7 | $ | 3,890.2 | ||||||||||||||||
| Gross margin | 1,342.8 | 1,313.3 | 1,509.7 | 1,446.2 | 1,443.0 | 1,256.5 | 1,461.3 | 1,419.6 | ||||||||||||||||||||||||
| Net earnings attributable to General Mills | 392.3 | 404.7 | 343.4 | 430.5 | 446.8 | 941.4 | 570.2 | 354.4 | ||||||||||||||||||||||||
| EPS: | ||||||||||||||||||||||||||||||||
| Basic | $ | 0.66 | $ | 0.70 | $ | 0.57 | $ | 0.75 | $ | 0.74 | $ | 1.64 | $ | 0.95 | $ | 0.60 | ||||||||||||||||
| Diluted | $ | 0.65 | $ | 0.69 | $ | 0.57 | $ | 0.74 | $ | 0.74 | $ | 1.62 | $ | 0.94 | $ | 0.59 |
During the fourth quarter of fiscal 2019, we sold our yogurt business in China and simultaneously entered into a new Yoplait license agreement with the purchaser for their use of the Yoplait brand. We recorded a gain of $5.4 million. In the fourth quarter of fiscal 2019, we recorded restructuring and impairment charges of $7.4 million. Please see Note 4 for more information. We recorded $4.3 million of integration costs related to the acquisition of Blue Buffalo and $9.8 million of gains related to an investment valuation adjustment in the fourth quarter of fiscal 2019. We also recorded a tax benefit of $72.9 million in the fourth quarter of fiscal 2019. Please see Note 14 for more information.
We recorded brand intangible asset impairment charges of $96.9 million in the fourth quarter of fiscal 2018. Please see Note 6 for more information. We also recorded $64.5 million of transaction and integration costs related to the acquisition of Blue Buffalo in the fourth quarter of fiscal 2018.
Table of Contents
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 EBITDA. The calculation of earnings before income taxes and after-tax earnings from joint ventures, net interest, and depreciation and amortization 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-to-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, all as of the last day of our fiscal year.
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 equity prices.
Earnings before interest, taxes, depreciation and amortization (EBITDA). The calculation of earnings before income taxes and after-tax earnings from joint ventures, net interest, depreciation and amortization.
Euribor. European 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, biscuits, and baking mixes.
Table of Contents
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 debt. Long-term debt, current portion of long-term debt, and notes payable, less cash and cash equivalents.
Net debt-to-adjusted EBITDA ratio. Net debt divided by Adjusted EBITDA.
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 consolidated subsidiaries held by third parties.
Notional principal amount. The principal amount on which fixed-rate or floating-rate interest payments are calculated.
OCI. Other comprehensive income (loss).
Table of Contents
Operating cash flow conversion rate. Net cash provided by operating activities, divided by net earnings, including earnings attributable to redeemable and noncontrolling interests.
Operating cash flow to net debt ratio. Net Debt divided by cash provided by operating activities.
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 consolidated 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.
Total debt. Notes payable and long-term debt, including current portion.
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.
Previous: Item 7A. Quantitative and Qualitative Disclosures About Market Risk · Next: Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure