filings.toolsItem 7. Management’s Discussion and Analysis of
79K characters. Original on sec.gov · Markdown
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
EXECUTIVE OVERVIEW
We
are
a
global packaged
foods company.
We
develop
distinctive
value-added
food
products
and
market
them under
unique
brand
names.
We
work
continuously
to
improve
our
core
products
and
to
create
new
products
that
meet
consumers’
evolving
needs
and
preferences.
In
addition,
we
build
the
equity
of
our
brands
over
time
with
strong
consumer-directed
marketing,
innovative
new
products,
and
effective
merchandising.
We
believe
our
brand-building
approach
is
the
key
to
winning
and
sustaining
leading
share
positions in markets around the globe.
Our fundamental
financial goal is
to generate competitively
differentiated returns
for our shareholders
over the long
term. We
believe
achieving
that
goal
requires
us
to
generate
a
consistent
balance
of
net
sales
growth,
margin
expansion,
cash
conversion,
and
cash
return to shareholders over time.
Our long-term growth objectives are to deliver the following performance
on average over time:
●
2 to 3 percent annual growth in organic net sales;
●
mid-single-digit annual growth in adjusted operating profit;
●
mid- to high-single-digit annual growth in adjusted diluted earnings per share
(EPS);
●
free cash flow conversion of at least 95 percent of adjusted net earnings after
tax; and
●
cash return to shareholders of 80 to 90 percent of free cash flow,
including an attractive dividend yield.
We
are executing
our Accelerate
strategy to
drive sustainable,
profitable growth
and top-tier
shareholder returns
over the
long term.
The
strategy
focuses
on
four
pillars
to
create
competitive
advantages
and
win:
boldly
building
brands,
relentlessly
innovating,
unleashing
our scale,
and
being a
force for
good. We
are prioritizing
our core
markets, global
platforms,
and
local gem
brands
that
have
the
best
prospects
for
profitable
growth,
and
we
are
committed
to
reshaping
our
portfolio
with
strategic
acquisitions
and
divestitures to further enhance our growth profile.
In
fiscal
2023,
we
continued
to
successfully
adapt
to
the
dynamic
operating
environment
and
deliver
strong
performance.
This
included
growth
in
organic
net
sales,
adjusted
operating
profit,
and
adjusted
diluted
EPS
that
was
ahead
of
our
initial
targets.
We
achieved each of the three priorities we established at the beginning of the year:
We
continued
to
compete
effectively,
including
holding
or
growing
market
share
in
more
than
percent
of
our
global
priority businesses for
the fifth consecutive
year, when
adjusting for an
unusual competitive
dynamic in cereal
in fiscal 2022
and
assessing
that
platform
on
a
2-year
basis.
We
generated
organic
net
sales
growth
across
each
of
our
four
operating
segments, fueled by
compelling brand building
and innovation across our
leading brands, and supported
with strong levels of
net price realization in response to 13 percent input cost inflation.
We
continued
to
invest
for
the
future,
including
a
percent
increase
in
media
and
advertising
expense,
a
double-digit
increase
in
investment
in
our
digital
and
technology
capability,
and
a
strong
increase
in
capital
investment
related
to
new
growth capacity.
We
continued
to reshape
our portfolio,
including
closing
on one
acquisition and
two divestitures
that further
improved our
portfolio’s ability to generate profitable
growth over the long term.
Our
consolidated
net
sales
for
fiscal
2023
rose
percent
to
$20,094 million.
On
an
organic
basis,
net
sales
increased
percent
compared
to
year-ago
levels.
Operating
profit
of
$3,434 million
was
down
percent.
Adjusted
operating
profit
of
$3,457 million
increased 8 percent on
a constant-currency basis.
Diluted EPS of $4.31 was
down 2 percent compared
to fiscal 2022
results. Adjusted
diluted
EPS
of
$4.30
increased
percent
on
a
constant-currency
basis
(See
the
“Non-GAAP
Measures”
section
below
for
a
description of our use of measures not defined by generally accepted
accounting
principles (GAAP)).
Net cash
provided by
operations totaled
$2,779 million in
fiscal 2023,
representing a
conversion rate
of 106
percent of
net earnings,
including earnings attributable
to redeemable and noncontrolling
interests. This cash generation
supported capital investments
totaling
$690 million, and our resulting free cash flow was $2,089
million at a conversion rate of 80 percent of adjusted
net earnings, including
earnings attributable
to redeemable
and noncontrolling
interests. We
returned cash
to shareholders
through dividends
totaling $1,288
million and net
share repurchases totaling
$1,171 million. (See
the “Non-GAAP Measures”
section below for
a description of
our use
of measures not defined by GAAP).
A
detailed
review
of
our
fiscal
2023
performance
compared
to
fiscal
2022
appears
below
in
the
section
titled
“Fiscal
2023
Consolidated Results of Operations.” A detailed review of
our fiscal 2022
performance compared to our fiscal 2021
performance is set
forth
in Part
II, Item
7 of
our Form
10-K for
the fiscal
year
ended
May 30, 2022
under the
caption
“Management’s
Discussion and
Analysis of
Financial Condition
and Results
of Operations
– Fiscal
2022
Results of
Consolidated Operations,”
which is incorporated
herein by reference.
In fiscal 202
4, we expect
to build on
our positive momentum
and continue
to advance our
Accelerate strategy.
Our key priorities
are
to
continue
to
compete
effectively,
to
improve
our
supply
chain
efficiency,
and
to
maintain
our
disciplined
approach
to
capital
allocation.
We
expect
the
largest
factors
impacting
our
performance
in
fiscal
2024
will
be
the
economic
health
of
consumers,
the
moderating
rate of
input cost
inflation,
and the
increasing stability
of the
supply chain
environment. We
expect to
drive organic
net
sales
growth
in
fiscal
2024
through
strong
marketing,
innovation,
in-store
support,
and
net
price
realization
generated
through
our
Strategic Revenue
Management (SRM) capability,
most of which
will be carried
over from SRM
actions taken in
fiscal 2023. For
the
full year,
input cost inflation
is expected to
be approximately
5 percent of
total cost of
goods sold, driven
primarily by labor
inflation
that
continues
to
impact
sourcing,
manufacturing,
and
logistics
costs.
We
expect
to
generate
higher
levels
of
Holistic
Margin
Management (HMM) cost savings compared to fiscal 2023.
Based on these assumptions, our key full-year fiscal 2024 targets
are summarized below:
●
Organic net sales are expected to increase 3 to 4 percent.
●
Adjusted operating profit
is expected to increase
4 to 6 percent in
constant-currency from the
base of $3,457 million
reported
in fiscal 2023.
●
Adjusted
diluted
EPS
are
expected
to
range
between
to 6
percent
in
constant-currency
from
the
base
of
$4.30
earned
in
fiscal 2023.
●
Free cash flow conversion is expected to be at least 95 percent of adjusted after-tax
earnings.
See the “Non-GAAP Measures” section below for a description of our use
of measures not defined by GAAP.
Certain terms used throughout this report are defined in a glossary in Item 8 of
this report.
FISCAL 2023 CONSOLIDATED
RESULTS
OF OPERATIONS
In fiscal 2023,
net sales increased
6 percent compared
to fiscal 2022
and organic net
sales increased 10
percent compared to
last year.
Operating profit decreased 1 percent
to $3,434 million primarily driven
by higher input costs, a decrease
in contributions from volume
growth,
an
unfavorable
change
to
the
mark-to-market
valuation
of
certain
commodities
positions
and
grain
inventories,
and
an
increase in selling, general,
and administrative (SG&A) expenses,
including increased media
and advertising expenses,
partially offset
by
favorable
net
price
realization
and
mix.
Operating
profit
margin
of
17.1
percent
decreased
basis
points.
Adjusted
operating
profit of $3,
457 million increased
8 percent
on a constant-currency
basis, primarily
driven by
favorable net price
realization and
mix,
partially offset
by higher
input costs,
a decrease
in contributions
from volume
growth and
an increase
in SG&A
expenses, including
increased media and advertising expenses. Adjusted operating profit
margin increased 30 basis points to 17.2 percent.
Diluted earnings
per share of $4.31 decreased 2 percent compared
to fiscal 2022. Adjusted diluted earnings per share
of $4.30 increased 10 percent on a
constant-currency
basis
(see
the
“Non-GAAP
Measures”
section
below
for
a
description
of
our
use
of
measures
not
defined
by
GAAP).
A summary of our consolidated financial results for fiscal 2023 follows:
Fiscal 2023
In millions,
except per
share
Fiscal 2023 vs.
Fiscal 2022
Percent of Net
Sales
Constant-
Currency
Growth (a)
Net sales
$
20,094.2
%
Operating profit
3,433.8
(1)
%
17.1
%
Net earnings attributable to General Mills
2,593.9
(4)
%
Diluted earnings per share
$
4.31
(2)
%
Organic net sales growth rate (a)
%
Adjusted operating profit (a)
3,457.3
%
17.2
%
%
Adjusted diluted earnings per share (a)
$
4.30
%
%
(a)
See the "Non-GAAP Measures" section below for our use of measures not defined by
GAAP.
Consolidated
net sales
were as follows:
Fiscal 2023
Fiscal 2023 vs.
Fiscal 2022
Fiscal 2022
Net sales (in millions)
$
20,094.2
%
$
18,992.8
Contributions from volume growth (a)
(8)
pts
Net price realization and mix
pts
Foreign currency exchange
(1)
pt
Note: Table may
not foot due to rounding
(a) Measured in tons based on the stated weight of our product shipments.
Net sales in fiscal
2023 increased 6
percent compared to fiscal
2022, driven by favorable
net price realization
and mix, partially offset
by a decrease in contributions from volume growth and unfavorable
foreign currency exchange.
Components of organic net sales growth are shown in the following
table:
Fiscal 2023 vs. Fiscal 2022
Contributions from organic volume growth (a)
(4)
pts
Organic net price realization and mix
pts
Organic net sales growth
pts
Foreign currency exchange
(1)
pt
Acquisitions and divestitures
(4)
pts
Net sales growth
pts
Note: Table may
not foot due to rounding
(a) Measured in tons based on the stated weight of our product shipments.
Organic
net sales
in fiscal
2023 increased
10 percent
compared to
fiscal 2022,
driven by
favorable organic
net price
realization and
mix, partially offset by a decrease in contributions from organic
volume growth.
Cost of sales
increased $958 million in fiscal 2023
to $13,548 million. The increase was
primarily driven by a $1,454 million
increase
attributable to
product rate and
mix, partially offset
by a $950
million decrease due
to lower volume.
We
recorded a
$292 million net
increase
in
cost
of
sales
related
to
mark-to-market
valuation
of
certain
commodity
positions
and
grain
inventories
in
fiscal
2023,
compared to a net decrease of $133
million in fiscal 2022
(please see Note 8 to the Consolidated
Financial Statements in Item 8 of this
report
for
additional
information).
In
fiscal
2023,
we
recorded
a
$25
million
charge
related
to
a
voluntary
recall
on
certain
international
Häagen-Dazs
ice cream
products.
We
also recorded
$5 million
of restructuring
charges and
$2 million
of restructuring
initiative project-related
costs in
cost of
sales in
fiscal 2023
compared to
$3 million
of restructuring
charges in
cost of
sales in
fiscal
2022 (please see Note 4 to the Consolidated Financial Statements in Item 8 of this
report for additional information).
Gross margin
increased 2 percent
in fiscal 2023
compared to fiscal
- Gross margin
as a percent
of net sales
decreased 110
basis
points to 32.6 percent compared to fiscal 2022.
SG&A expenses
increased $353 million to $3,500
million in fiscal 2023 compared
to fiscal 2022 primarily driven
by increased media
and
advertising
expenses,
unfavorable
valuation
adjustments
and
the
loss
on
sale
of
certain
corporate
investments,
an
increase
in
certain compensation and benefits
expenses,
and an increase in charitable
contributions in fiscal 2023. SG&A
expenses as a percent of
net sales in fiscal 2023 increased 80 basis points compared to fiscal 2022.
Divestitures
gain, net
totaled $445
million in
fiscal 2023
primarily related
to the
sale of our
Helper main
meals and
Suddenly Salad
side dishes
business.
In fiscal
2022,
we recorded
a $194
million divestitures
gain
related
to the
sale of
our
interest in
Yoplait
SAS,
Yoplait
marques
SNC
and
Liberté
Marques
Sàrl
and
our
European
dough
businesses
(please
refer
to
Note
to
the
Consolidated
Financial Statements in Part I, Item 1 of this report).
Restructuring,
impairment,
and
other
exit
costs
(recoveries)
totaled
$56
million
in
fiscal
2023
compared
to
$26
million
of
net
recoveries
in
fiscal
In
fiscal
2023,
we
approved
restructuring
actions
to
enhance
the
efficiency
of
our
global
supply
chain
structure and to optimize
our Häagen-Dazs shops network,
and as a result,
we recorded $41 million
of charges in
fiscal 2023. In fiscal
2022,
we
approved
restructuring
actions
in the
International
segment
to drive
efficiencies
in
manufacturing
and
logistics operations
and recorded $12 million
of charges.
Please see Note 4
to the Consolidated Financial
Statements in Item 8
of this report for
additional
information.
Benefit plan
non-service income
totaled $89
million in
fiscal 2023
compared to
$113 million
in fiscal
2022, primarily
reflecting an
increase in interest costs, partially
offset by lower amortization
of losses and higher expected
return on plan assets (please
see Note 14
to the Consolidated Financial Statements in Item 8 of this report
for additional information).
Interest, net
for fiscal 2023 totaled $382 million, $2 million higher than fiscal
Our
effective tax rate
for fiscal
2023 was 19.5 percent compared to 18.3
percent in fiscal 2022. The 1.2 percentage
point increase was
primarily
driven
by
a
change in
the
valuation
allowance
on our
capital
loss carryforward
s
in
fiscal
2022,
partially
offset
by
certain
favorable discrete tax
items in fiscal 2023
.
Our adjusted effective
tax rate was 20.4
percent in fiscal 2023
compared to 20.9
percent in
fiscal 2022
(see the
“Non-GAAP Measures”
section below
for a
description of
our use
of measures
not defined
by GAAP).
The 0.5
percentage point decrease was primarily due to certain favorable discrete tax
items in fiscal 2023.
After-tax earnings
from
joint ventures
decreased to
$81 million in
fiscal 2023
compared to
$112
million in
fiscal 2022,
primarily
driven by higher input
costs at CPW and
HDJ and lower net sales
at HDJ,
partially offset by
favorable net price realization
and mix at
CPW.
On
a
constant-currency
basis,
after-tax
earnings
from
joint
ventures
decreased
percent
(see
the
“Non-GAAP
Measures”
section below for a
description of our use
of measures not defined
by GAAP). The components
of our joint ventures’
net sales growth
are shown in the following table:
Fiscal 2023 vs. Fiscal 2022
CPW
HDJ
Total
Contributions from volume growth (a)
(10)
pts
(5)
pts
Net price realization and mix
pts
Flat
Net sales growth in constant currency
pts
(5)
pts
pts
Foreign currency exchange
(8)
pts
(15)
pts
(10)
pts
Net sales growth
(5)
pts
(21)
pts
(8)
pts
Note: Table may
not foot due to rounding
(a) Measured in tons based on the stated weight of our product shipments.
Net
earnings
attributable
to
redeemable
and
noncontrolling
interests
decreased
to
$16
million
in
fiscal
2023
compared
to
$28
million in fiscal 2022, primarily driven by the sale of
our interests in Yoplait
SAS, Yoplait
Marques SNC, and Liberté Marques Sàrl in
fiscal 2022.
Average
diluted
shares
outstanding
decreased
by
11 million
in
fiscal
2023
from
fiscal
2022
primarily
due
to
share
repurchases,
partially offset by option exercises.
RESULTS
OF SEGMENT OPERATIONS
Our businesses are organized into four operating segments: North
America Retail, International, Pet, and North America Foodservice
.
In fiscal
2022, we
completed a
new organization
structure to
streamline our
global operations.
We
restated our
net sales
by segment
and
segment
operating
profit
to
reflect
our
new
operating
segments.
These
segment
changes
had
no
effect
on
previously
reported
consolidated net sales, operating profit, net earnings attributable to General
Mills, or earnings per share.
The following tables provide
the dollar amount and percentage
of net sales and operating
profit from each segment for
fiscal 2023 and
fiscal 2022:
Fiscal Year
2023
2022
In Millions
Dollars
Percent of Total
Dollars
Percent of Total
Net Sales
North America Retail
$
12,659.9
%
$
11,572.0
%
International
2,769.5
3,315.7
Pet
2,473.3
2,259.4
North America Foodservice
2,191.5
1,845.7
Total
$
20,094.2
%
$
18,992.8
%
Segment Operating Profit
North America Retail
$
3,181.3
%
$
2,699.7
%
International
161.8
232.0
Pet
445.5
470.6
North America Foodservice
290.0
255.5
Total
$
4,078.6
%
$
3,657.8
%
Segment
operating
profit
as
reviewed
by
our
executive
management
excludes
unallocated
corporate
items,
net
gain
or
loss
on
divestitures, and restructuring, impairment, and other exit costs that are centrally
managed.
NORTH AMERICA RETAIL
SEGMENT
Our North America Retail
operating segment reflects business
with a wide variety of
grocery stores, mass merchandisers,
membership
stores,
natural
food
chains,
drug,
dollar
and
discount
chains,
convenience
stores,
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,
snack
bars,
fruit
snacks,
savory
snacks,
and
a
wide
variety
of
organic products including ready-to-eat cereal, frozen
and shelf-stable vegetables, meal kits, fruit snacks and snack bars.
North America Retail net sales were as follows:
Fiscal 2023
Fiscal 2023 vs. 2022
Percentage Change
Fiscal 2022
Net sales (in millions)
$
12,659.9
%
$
11,572.0
Contributions from volume growth (a)
(6)
pts
Net price realization and mix
pts
Foreign currency exchange
(1)
pt
Note: Table may
not foot due to rounding.
(a)
Measured in tons based on the stated weight of our product shipments.
The
percent
increase
in
North
America
Retail
net
sales
for
fiscal
2023
was
driven
by
favorable
net
price
realization
and
mix,
partially offset by a decrease in contributions from volume growth
and unfavorable foreign currency exchange.
The components of North America Retail organic net
sales growth are shown in the following table:
Fiscal 2023 vs. 2022
Percentage Change
Contributions from organic volume growth (a)
(4)
pts
Organic net price realization and mix
pts
Organic net sales growth
pts
Foreign currency exchange
(1)
pt
Divestitures (b)
(2)
pts
Net sales growth
pts
Note: Table may
not foot due to rounding.
(a)
Measured in tons based on the stated weight of our product shipments.
(b)
Divestitures primarily include the impact
of the sale of our Helper main
meals and Suddenly Salad side
dishes businesses in fiscal
Please see Note 3 to the Consolidated Financial Statements in Part II, Item 8 of this report.
North America
Retail organic
net sales
increased 12
percent in
fiscal 2023
compared to
fiscal 2022,
driven by
favorable organic
net
price realization and mix, partially offset by a decrease in
contributions from organic volume growth.
Net sales for our North America Retail operating units are shown in the following table:
In Millions
Fiscal 2023
Fiscal 2023 vs. 2022
Percentage Change
Fiscal 2022
U.S. Meals & Baking Solutions
$
4,426.3
%
$
4,023.8
U.S. Morning Foods
3,620.1
%
3,370.9
U.S. Snacks
3,611.0
%
3,191.4
Canada (a)
1,002.5
%
985.9
Total
$
12,659.9
%
$
11,572.0
(a)
On a constant
currency basis, Canada
operating unit net
sales increased 8
percent in fiscal
See the “Non-GAAP
Measures”
section below for our use of this measure not defined by GAAP.
Segment operati
ng profit
increased 18
percent to
$3,181 million in
fiscal 2023
compared to
$2,700 million
in fiscal
2022,
primarily
driven
by
favorable
net
price
realization
and
mix,
partially
offset
by
higher
input
costs,
a
decrease
in
contributions
from
volume
growth,
and an
increase in
SG&A expenses,
including increased
media and
advertising expenses.
Segment operating
profit increased
18 percent on
a constant-currency basis
in fiscal 2023
compared to fiscal 2022
(see the “Non-GAAP
Measures” section below
for our
use of this measure not defined by GAAP).
INTERNATIONAL SEGMENT
Our International
operating segment
reflects retail
and foodservice
businesses outside
of the
United States
and Canada.
Our product
categories
include
super-premium
ice
cream
and frozen
desserts, meal
kits,
salty
snacks,
snack
bars,
dessert
and
baking
mixes,
and
shelf stable vegetables.
International net sales were as follows:
Fiscal 2023
Fiscal 2023 vs. 2022
Percentage Change
Fiscal 2022
Net sales (in millions)
$
2,769.5
(16)
%
$
3,315.7
Contributions from volume growth (a)
(28)
pts
Net price realization and mix
pts
Foreign currency exchange
(5)
pts
Note: Table may
not foot due to rounding.
(a)
Measured in tons based on the stated weight of our product shipments.
The
percent
decrease
in
International
net
sales
in
fiscal
2023
was
driven
by
a
decrease
in
contributions
from
volume
growth,
including
the
impact
of volume
declines
from
divestitures
and
the
voluntary
recall
on certain
international
Häagen-Dazs
ice
cream
products, and unfavorable foreign currency exchange, partially offset
by favorable net price realization and mix.
The components of International organic net sales growth
are shown in the following table:
Fiscal 2023 vs. 2022
Percentage Change
Contributions from organic volume growth (a)
(8)
pts
Organic net price realization and mix
pts
Organic net sales growth
pts
Foreign currency exchange
(5)
pts
Divestitures (b)
(16)
pts
Net sales growth
(16)
pts
Note: Table may
not foot due to rounding
(a)
Measured in tons based on the stated weight of our product shipments.
(b)
Divestitures primarily include
the impact of
the sale of our
interests in Yoplait
SAS, Yoplait
Marques SNC, and
Liberté Marques
Sàrl and our European dough businesses in fiscal 2022.
Please see Note 3 to the Consolidated Financial Statements in Part II, Item
8 of this report.
The 4
percent increase
in International
organic
net sales
growth in
fiscal 2023
was driven
by favorable
organic
net price
realization
and mix, partially offset by a decrease in contributions
from organic volume growth.
Segment operating
profit decreased
30 percent
to $162 million
in fiscal
2023 compared
to $232
million in
2022, primarily
driven by
higher input costs and
a decrease in contributions
from volume growth,
including the impact of
volume declines from
divestitures and
the
voluntary
recall on
certain
international
Häagen-Dazs
ice
cream
products,
partially
offset
by
favorable
net
price realization
and
mix and a decrease in
SG&A expenses, including an
insurance recovery from the voluntary
recall. Segment operating profit
decreased
25 percent on
a constant-currency basis
in fiscal 2023
compared to fiscal 2022
(see the “Non-GAAP
Measures” section below
for our
use of this measure not defined by GAAP).
PET SEGMENT
Our Pet operating segment includes
pet food products sold primarily in the
United States and Canada 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.
Pet net sales were as follows:
Fiscal 2023
Fiscal 2023 vs. 2022
Percentage Change
Fiscal 2022
Net sales (in millions)
$
2,473.3
%
$
2,259.4
Contributions from volume growth (a)
(2)
pts
Net price realization and mix
pts
Foreign currency exchange
Flat
Note: Table may
not foot due to rounding.
(a)
Measured in tons based on the stated weight of our product shipments.
Pet net
sales increased
9 percent
in fiscal
2023 compared
to fiscal
2022, driven
by favorable
net price
realization and
mix,
partially
offset by a decrease in contributions from volume growth.
The components of Pet organic net sales growth are shown in the following
table:
Fiscal 2023 vs. 2022
Percentage Change
Contributions from organic volume growth (a)
(3)
pts
Organic net price realization and mix
pts
Organic net sales growth
pts
Foreign currency exchange
Flat
Acquisition (b)
pt
Net sales growth
pts
Note: Table may
not foot due to rounding.
(a)
Measured in tons based on the stated weight of our product shipments.
(b)
Acquisition of Tyson
Foods’ pet treats business
in fiscal 2022. Please
see Note 3 to
the Consolidated Financial
Statements in Part
II, Item 8 of this report.
The 9
percent increase
in Pet
organic
net sales
growth in
fiscal 2023
was driven
by favorable
organic
net price
realization and
mix,
partially offset by a decrease in contributions from organic
volume growth.
Pet operating
profit decreased
5 percent
to $446 million
in fiscal
2023, compared
to $471 million
in fiscal
2022, primarily
driven by
higher
input
costs,
an
increase
in
SG&A
expenses,
including
an
increase
in
media
and
advertising
expenses,
and
a
decrease
in
contributions
from volume
growth,
partially
offset
by favorable
net price
realization
and mix.
Segment operating
profit decreas
ed 5
percent on a constant-currency basis
in fiscal 2023 compared to fiscal
2022 (see the “Non-GAAP Measures”
section below for our use
of this measure not defined by GAAP).
NORTH AMERICA FOODSERVICE SEGMENT
Our
major
product
categories
in
our
North
America
Foodservice
operating
segment
are
ready-to-eat
cereals,
snacks,
refrigerated
yogurt,
frozen
meals,
unbaked
and
fully
baked
frozen
dough
products,
baking
mixes,
and
bakery
flour.
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, vending, and supermarket bakeries.
North America Foodservice net sales were as follows:
Fiscal 2023
Fiscal 2023 vs. 2022
Percentage Change
Fiscal 2022
Net sales (in millions)
$
2,191.5
%
$
1,845.7
Contributions from volume growth (a)
pts
Net price realization and mix
pts
Foreign currency exchange
Flat
Note: Table may
not foot due to rounding.
(a)
Measured in tons based on the stated weight of our product shipments.
North America
Foodservice net sales
increased 19
percent in fiscal
2023,
driven by favorable
net price realization
and mix, including
market index pricing on bakery flour, and an
increase in contributions from volume growth.
The components of North America Foodservice organic
net sales growth are shown in the following table:
Fiscal 2023 vs. 2022
Percentage Change
Contributions from organic volume growth (a)
(2)
pts
Organic net price realization and mix
pts
Organic net sales growth
pts
Foreign currency exchange
Flat
Acquisition (b)
pts
Net sales growth
pts
Note: Table may
not foot due to rounding
(a)
Measured in tons based on the standard weight of our product shipments.
(b)
Acquisition
of
TNT
Crust
in
fiscal
Please
see
Note
to
the
Consolidated
Financial
Statements
in
Part
II,
Item
of
this
report.
The 13
percent increase
in North
America
Foodservice
organic
net sales
growth
in fiscal
2023
was driven
by
favorable organic
net
price realization
and mix,
including market
index pricing
on bakery
flour, partially
offset by
a decrease in
contributions from
organic
volume growth.
Segment
operating
profit
increased
percent
to
$290 million
in
fiscal
2023,
compared
to
$256 million
in
fiscal
2022,
primarily
driven by
favorable net
price realization
and mix,
partially offset
by higher
input costs
and an
increase in
SG&A expenses.
Segment
operating
profit
increased
percent
on
a
constant-currency
basis
in
fiscal
2023
compared
to
fiscal
2022
(see
the
“Non-GAAP
Measures” section below for our use of this measure not defined by GAAP).
UNALLOCATED CORPORATE
ITEMS
Unallocated
corporate
items
include
corporate
overhead
expenses,
variances
to
planned
domestic
employee
benefits
and
incentives,
certain
charitable
contributions,
restructuring
initiative
project-related
costs,
gains
and
losses
on
corporate
investments,
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.
Unallocated corporate
expense totaled $1,033
million in fiscal
2023, compared
to $403 million
last year.
We
recorded a $292
million
net increase
in expense
related to
the mark-to-market
valuation
of certain
commodity positions
and
grain inventories
in fiscal
2023,
compared to
a $133 million
net decrease
in expense
last year.
We
recorded $84
million of
net losses
related to
valuation adjustments
and the sale of corporate investments in fiscal 2023,
compared to $15 million of net losses in fiscal 2022.
In fiscal 2023, we recorded a
$22 million net charge
related to a voluntary
recall on certain international
Häagen-Dazs
ice cream products.
In addition, we recorded
$6 million of integration
costs primarily related to
our acquisition of TNT Crust
in fiscal 2023, compared
to $22 million of integration
costs
related
to
our
acquisition
of
Tyson
Foods’
pet
treats
business
in
fiscal
In
fiscal
2022,
we
recorded
$73
million
of
transaction costs primarily related to the sale of our
interests in Yoplait
SAS, Yoplait
Marques SNC, Liberté Marques Sàrl and the sale
of
our
European
dough
businesses.
In
addition,
we
recorded
a
$22
million
recovery
related
to
a
Brazil
indirect
tax
item
and
a
$13
million
insurance
recovery
in
fiscal
In
addition,
certain
compensation
and
benefits
expenses
and
charitable
contributions
increased in fiscal 2023 compared to fiscal 2022.
IMPACT OF INFLATION
We
experienced
broad
based
global
input
cost
inflation
of
percent
in
fiscal
2023
and
percent
in
fiscal
We
expect
approximately
percent
input
cost
inflation
in
fiscal
We
attempt
to
minimize
the
effects
of
inflation
through
HMM,
SRM,
planning, and operating practices. Our market risk management
practices are discussed in Item 7A of this report.
LIQUIDITY AND CAPITAL
RESOURCES
The primary source of our
liquidity is cash flow from
operations. Over the most recent
two-year period, our operations have
generated
$6.1 billion
in cash.
A substantial
portion of
this operating
cash flow
has been
returned to
shareholders through
dividends and
share
repurchases.
We
also
use
cash
from
operations
to
fund
our
capital
expenditures,
acquisitions,
and
debt
service.
We
typically
use
a
combination
of
cash,
notes
payable,
and
long-term
debt,
and
occasionally
issue
shares
of
common
stock,
to
finance
significant
acquisitions.
As of
May
28,
2023,
we had
$381
million
of cash
and
cash equivalents
held
in foreign
jurisdictions.
In
anticipation
of
repatriating
funds
from
foreign
jurisdictions,
we
record
local
country
withholding
taxes
on
our
international
earnings,
as
applicable.
We
may
repatriate our
cash and
cash equivalents
held by
our foreign
subsidiaries without
such funds
being subject
to further
U.S. income
tax
liability. Earnings
prior to fiscal 2018 from our foreign subsidiaries remain permanently reinvested in
those jurisdictions.
Cash Flows from Operations
Fiscal Year
In Millions
2023
2022
Net earnings, including earnings attributable to redeemable and noncontrolling
interests
$
2,609.6
$
2,735.0
Depreciation and amortization
546.6
570.3
After-tax earnings from joint ventures
(81.3)
(111.7)
Distributions of earnings from joint ventures
69.9
107.5
Stock-based compensation
111.7
98.7
Deferred income taxes
(22.2)
62.2
Pension and other postretirement benefit plan contributions
(30.1)
(31.3)
Pension and other postretirement benefit plan costs
(27.6)
(30.1)
Divestitures gain, net
(444.6)
(194.1)
Restructuring, impairment, and other exit costs (recoveries)
24.4
(117.1)
Changes in current assets and liabilities, excluding the effects of
acquisitions and divestitures
(48.9)
277.4
Other, net
71.1
(50.7)
Net cash provided by operating activities
$
2,778.6
$
3,316.1
During
fiscal
2023,
cash
provided
by
operations
was
$2,779
million
compared
to
$3,316 million
in
the
same
period
last
year.
The
$538 million decrease
was primarily driven by
a $326 million change in
current assets and liabilities
and a $250 million
change in net
divestitures
gain.
The
$326
million
change
in
current
assets
and
liabilities
was
primarily
driven
by
a
$233
million
change
in
inventories
and
a
$257
million
change
in
accounts
payable,
partially
offset
by
a
$125
million
change
in
the
timing
of
accounts
receivable.
We
strive
to
grow
core
working
capital
at
or
below
the
rate
of
growth
in
our
net
sales.
For
fiscal
2023,
core
working
capital
net
liability
decreased
percent,
compared
to
a
net
sales
increase
of
percent.
The
core
working
capital
net
liability
decreased
$84
million from a
net liability of
$423 million in
fiscal 2022 to
a net liability of
$339 million in
fiscal 2023. The
$84 million net
liability
decrease was primarily due to an increase in inventories, partially offset
by an increase in accounts payable in fiscal 2023.
Cash Flows from Investing Activities
Fiscal Year
In Millions
2023
2022
Purchases of land, buildings, and equipment
$
(689.5)
$
(568.7)
Acquisitions, net of cash acquired
(251.5)
(1,201.3)
Investments in affiliates, net
(32.2)
15.4
Proceeds from disposal of land, buildings, and equipment
1.3
3.3
Proceeds from divestitures, net of cash divested
633.1
74.1
Other, net
(7.6)
(13.5)
Net cash used by investing activities
$
(346.4)
$
(1,690.7)
In
fiscal
2023,
we
used
$346 million
of
cash
through
investing
activities
compared
to
$1,691 million
in
fiscal
We
invested
$690 million in land, buildings, and equipment in fiscal 2023,
an increase of $121 million from fiscal 2022.
During fiscal 2023, we acquired TNT Crust for $252 million cash, net of cash acquired.
During fiscal 2023, we completed the sale of
our Helper main meals and Suddenly Salad side dishes businesses for cash proceeds
of $607 million.
During fiscal 2022, we acquired Tyson
Foods’ pet treats business for an aggregate purchase price of $1.2 billion. During fiscal
2022,
we sold our interests in Yoplait
SAS, Yoplait
Marques SNC, and Liberté Marques Sàrl for cash proceeds
of $32 million, net of cash
divested,
as part of the sale. We also completed
the sale of our European dough businesses in fiscal 2022 for cash proceeds of $42
million.
We
expect
capital
expenditures
to
be
approximately
percent
of
reported
net
sales
in
fiscal
These
expenditures
will
fund
initiatives that are expected to fuel growth, support innovative products,
and continue HMM initiatives throughout the supply chain.
Cash Flows from Financing Activities
Fiscal Year
In Millions
2023
2022
Change in notes payable
$
(769.3)
$
551.4
Issuance of long-term debt
2,324.4
2,203.7
Payment of long-term debt
(1,421.7)
(3,140.9)
Proceeds from common stock issued on exercised options
232.3
161.7
Purchases of common stock for treasury
(1,403.6)
(876.8)
Dividends paid
(1,287.9)
(1,244.5)
Distributions to redeemable and noncontrolling interest holders
(15.7)
(129.8)
Other, net
(62.6)
(28.0)
Net cash used by financing activities
$
(2,404.1)
$
(2,503.2)
Financing activities
used $2.4 billion
of cash
in fiscal
2023 compared
to $2.5 billion
in fiscal
- We
had $133 million
of net
debt
issuances in
fiscal 2023
compared to
$386 million of
net debt repayments
in fiscal 2022.
For more
information on
our debt
issuances
and payments, please refer to Note 9 to the Consolidated Financial Statements in
Item 8 of this report.
During
fiscal
2023,
we
received
$232 million
of
net
proceeds
from
common
stock
issued
on
exercised
options
compared
to
$162 million in fiscal 2022.
During fiscal 2023, we
repurchased 18 million shares
of our common stock for
$1,404 million. During fiscal 2022,
we repurchased 14
million shares of our common stock for $877 million.
Dividends paid in fiscal 2023 totaled
$1,288 million, or $2.16 per share. Dividends
paid in fiscal 2022
totaled $1,244 million, or $2.04
per share.
Selected Cash Flows from Joint Ventures
Selected cash flows from our joint ventures are set forth in the following table:
Fiscal Year
Inflow (Outflow), in Millions
2023
2022
Investments in affiliates, net
$
(32.2)
$
15.4
Dividends received
69.9
107.5
The following table details the fee-paid committed and uncommitted credit
lines we had available as of May 28, 2023:
In Billions
Facility Amount
Borrowed Amount
Committed credit facility expiring April 2026
$
2.7
$
-
Uncommitted credit facilities
0.6
-
Total committed
and uncommitted credit facilities
$
3.3
$
-
To ensure availability
of funds, we maintain bank credit lines and have commercial paper programs
available to us in the United States
and Europe.
We
have material
contractual obligations
that arise
in the
normal course
of business
and we
believe that
cash flows
from operations
will be adequate to meet our liquidity and capital needs for at least the next 12
months.
Certain
of
our
long-term
debt
agreements,
our
credit
facilities,
and
our
noncontrolling
interests
contain
restrictive
covenants.
As
of
May 28, 2023, we were in compliance with all of these covenants.
We
have $1,709 million
of long-term debt
maturing in the
next 12 months
that is classified
as current, including
$500 million of
3.65
percent fixed-rate notes due February
15, 2024, $400 million of floating-rate
notes due October 17, 2023, €500
million of floating-rate
notes due July
27, 2023, and €250
million of floating-rate
notes due November
10, 2023. We
believe that cash
flows from operations,
together
with available
short- and
long-term
debt financing,
will be
adequate
to meet
our liquidity
and capital
needs for
at least
the
next 12 months.
As of May
28, 2023,
our total debt,
including the
impact of derivative
instruments designated
as hedges, was
80 percent
in fixed-rate
and 20
percent in
floating-rate instruments,
compared to
77 percent
in fixed-rate
and 23
percent in
floating-rate instruments
on May
29, 2022.
The
third-party
holder
of
the
General
Mills
Cereals,
LLC
(GMC)
Class
A
Interests
receives
quarterly
preferred
distributions
from
available net
income based
on the application
of a
floating preferred
return rate
to the
holder’s capital
account balance
established in
the most
recent mark
-to-market valuation
(currently $252
million). The
floating preferred
return rate
on GMC’s
Class A
Interests is
the sum of three
-month Term
SOFR plus 186
basis points. The preferred
return rate is adjusted
every three years
through a negotiated
agreement with the Class A Interest holder or through a remarketing auction.
We
have an option
to purchase the
Class A Interests for
consideration equal to
the then current
capital account value,
plus any unpaid
preferred return
and the
prescribed make-whole
amount. If
we purchase
these interests,
any change
in the
third-party holder’s
capital
account
from
its
original
value
will
be
charged
directly
to
retained
earnings
and
will
increase
or
decrease
the
net
earnings
used
to
calculate EPS in that period.
CRITICAL ACCOUNTING ESTIMATES
For a complete description of our
significant accounting policies, please see Note
2 to the Consolidated Financial
Statements in Item 8
of this report. Our critical accounting
estimates are those that have
a meaningful impact on the reporting of our
financial condition and
results of operations.
These estimates include
our accounting for
revenue recognition, valuation
of long-lived assets,
intangible assets,
stock-based compensation, income taxes, and defined benefit pension,
other postretirement benefit, and postemployment benefit plans
.
Revenue Recognition
Our
revenues
are
reported
net
of
variable
consideration
and
consideration
payable
to
our
customers,
including
trade
promotion,
consumer
coupon
redemption,
and
other
reductions
to
the
transaction
price,
including
estimated
allowances
for
returns,
unsalable
product,
and
prompt
pay
discounts.
Trade
promotions
are
recorded
using
significant
judgment
of
estimated
participation
and
performance levels
for offered
programs at the
time of sale.
Differences between
the estimated and
actual reduction to
the transaction
price
are
recognized
as
a
change
in
estimate
in
a
subsequent
period.
Our
accrued
trade
and
coupon
promotion
liabilities
were
$394 million
as of
May 28,
2023, and
$420 million
as of
May 29,
- Because
these amounts
are significant,
if our
estimates are
inaccurate we would have to make adjustments in subsequent periods that could have
a significant effect on our results of operations.
Valuation
of Long-Lived Assets
We
estimate
the useful
lives
of long
-lived
assets and
make
estimates concerning
undiscounted
cash flows
to review
for impairment
whenever
events or
changes in
circumstances indicate
that the
carrying
amount of
an asset
(or asset
group)
may not
be recoverable.
Fair value is measured using discounted cash flows or independent appraisals,
as appropriate.
Intangible Assets
Goodwill
and
other
indefinite-lived
intangible
assets
are
not
subject
to
amortization
and
are
tested
for
impairment
annually
and
whenever
events or
changes in
circumstances
indicate
that impairment
may have
occurred. Our
estimates of
fair value
for
goodwill
impairment
testing
are determined
based on
a
discounted
cash
flow
model.
We
use
inputs from
our
long-range
planning
process to
determine
growth
rates
for
sales
and
profits.
We
also
make
estimates
of
discount
rates,
perpetuity
growth
assumptions,
market
comparables, and other factors.
We evaluate the
useful lives of our other intangible assets, mainly brands, to
determine if they are finite or indefinite-lived.
Reaching a
determination
on
useful
life
requires
significant
judgments
and
assumptions
regarding
the
future
effects
of
obsolescence,
demand,
competition, other economic
factors (such as the
stability of the industry,
known technological advances,
legislative action that
results
in an uncertain or
changing regulatory environment,
and expected changes in
distribution channels), the level
of required maintenance
expenditures,
and
the
expected
lives
of
other
related
groups
of
assets.
Intangible
assets
that
are
deemed
to
have
finite
lives
are
amortized
on a
straight-line basis
over their
useful lives,
generally
ranging from
4 to
30 years.
Our estimate
of the
fair value
of our
brand
assets
is
based
on
a
discounted
cash
flow
model
using
inputs
which
include
projected
revenues
from
our
long-range
plan,
assumed royalty rates that could be payable if we did not own the brands, and
a discount rate.
As of
May
28,
2023,
we
had
$21 billion
of
goodwill
and
indefinite-lived
intangible
assets. While
we
currently
believe
that
the
fair
value of each
intangible exceeds its carrying
value,
and that those intangibles
will contribute indefinitely
to our cash flows,
materially
different
assumptions
regarding
future performance
of our
businesses
or
a different
weighted-average
cost
of capital
could
result
in
material impairment losses
and amortization expense.
We
performed our fiscal
2023
assessment of our
intangible assets as of
the first
day
of
the
second
quarter
of
fiscal
2023,
and
we
determined
there
was
no
impairment
of
our
intangible
assets
as
their
related
fair
values
were
substantially
in
excess
of
the
carrying
value,
except
for
Uncle
Toby’s
band
intangible
asset.
In
addition,
while
having
significant
coverage
as
of
our
fiscal
2023
assessment
date,
the
Progresso
and
EPIC
brand
intangible
assets
had
risk
of
decreasing
coverage. We will continue
to monitor these businesses for potential impairment.
Stock-based Compensation
The valuation of
stock options is a
significant accounting estimate
that requires us to
use judgments and
assumptions that are
likely to
have a material
impact on
our financial statements.
Annually,
we make predictive
assumptions regarding
future stock price
volatility,
employee exercise behavior,
dividend yield, and
the forfeiture rate. For
more information on
these assumptions, please
see Note 12
to
the Consolidated Financial Statements in Item 8 of this report.
The
estimated
fair
values
of
stock
options
granted
and
the
assumptions
used
for
the
Black-Scholes
option-pricing
model
were
as
follows:
Fiscal Year
2023
2022
2021
Estimated fair values of stock options granted
$
14.16
$
8.77
$
8.03
Assumptions:
Risk-free interest rate
3.3
%
1.5
%
0.7
%
Expected term
8.5
years
8.5
years
8.5
years
Expected volatility
20.9
%
20.2
%
19.5
%
Dividend yield
3.1
%
3.4
%
3.3
%
The risk-free interest rate
for periods during the
expected term of the options
is based on the U.S. Treasury
zero-coupon yield curve in
effect at the time of grant. An increase in the expected term by
1 year, leaving all other assumptions constant, would
decrease the grant
date
fair value
by less
than
1 percent
.
If all
other
assumptions
are held
constant,
a one
percentage
point
increase
in our
fiscal
2023
volatility assumption would increase the grant date fair value of our fiscal 2023
option awards by 5 percent.
To
the extent
that actual
outcomes differ
from our
assumptions, we
are not
required to
true up
grant-date fair
value-based expense
to
final
intrinsic
values.
Historical
data
has
a
significant
bearing
on
our
forward-looking
assumptions.
Significant
variances
between
actual and predicted experience could lead to prospective
revisions in our assumptions, which could then significantly
impact the year-
over-year comparability of stock-based compensation expense.
Any corporate
income tax
benefit realized
upon exercise
or vesting
of an
award in
excess of
that previously
recognized in
earnings
(referred to as
a windfall tax benefit)
is presented in the
Consolidated Statements of
Cash Flows as an
operating cash flow.
The actual
impact on future years’
cash flows will depend,
in part, on the volume
of employee stock option
exercises during a particular
year and
the
relationship
between
the
exercise-date
market
value
of
the
underlying
stock
and
the
original
grant-date
fair
value
previously
determined for financial reporting purposes.
Realized windfall
tax benefits
and shortfall
tax deficiencies
related to the
exercise or
vesting of
stock-based awards
are recognized
in
the Consolidated Statement
of Earnings. Because
employee stock option
exercise behavior is not
within our control,
it is possible that
significantly different reported results could occur if different
assumptions or conditions were to prevail.
Income Taxes
We
apply a more-likely-than-not
threshold to the
recognition and derecognition
of uncertain tax
positions. Accordingly,
we recognize
the amount of
tax benefit that
has a greater
than 50 percent
likelihood of being
ultimately realized upon
settlement. Future
changes in
judgment related
to the
expected ultimate
resolution of
uncertain tax
positions will
affect earnings
in the
period of
such change.
For
more information on income taxes, please see Note 15 to the Consolidated Financial
Statements in Item 8 of this report.
Defined Benefit Pension, Other Postretirement Benefit, and Postemployment
Benefit Plans
We have
defined benefit pension plans
covering many employees in the United
States, Canada, Switzerland, and the
United Kingdom.
We also
sponsor plans that provide
health care benefits to
many of our retirees
in the United States, Canada,
and Brazil. Under certain
circumstances,
we
also
provide
accruable
benefits,
primarily
severance,
to
former
and
inactive
employees
in
the
United
States,
Canada,
and
Mexico.
Please see
Note
to
the
Consolidated
Financial
Statements
in
Item
of
this
report
for
a
description
of
our
defined benefit pension, other postretirement benefit, and postemployment
benefit plans.
We
recognize
benefits
provided
during
retirement
or
following
employment
over
the
plan
participants’
active
working
lives.
Accordingly,
we
make
various
assumptions
to
predict
and
measure
costs
and
obligations
many
years
prior
to
the
settlement
of
our
obligations.
Assumptions
that
require
significant
management
judgment
and
have
a material
impact
on
the
measurement
of
our
net
periodic
benefit
expense
or
income
and
accumulated
benefit
obligations
include
the
long-term
rates
of
return
on
plan
assets,
the
interest rates used to discount the obligations for our benefit plans, and health
care cost trend rates.
Expected Rate of Return on Plan Assets
Our expected
rate of return
on plan assets
is determined
by our asset
allocation, our
historical long-term
investment performance,
our
estimate of future long-term returns
by asset class (using input from our
actuaries, investment services, and investment
managers), and
long-term inflation
assumptions. We
review this assumption
annually for
each plan; however,
our annual
investment performance
for
one particular year does not, by itself, significantly influence our evaluation.
Our
historical
investment
returns
(compound
annual
growth
rates)
for
our
United
States
defined
benefit
pension
and
other
postretirement
benefit
plan
assets
were
a
5.7
percent
loss
in
the
1-year
period
ended
May
28,
2023
and
returns
of
3.4
percent,
5.9
percent, 5.5 percent, and 7.7 percent for the 5, 10, 15, and 20-year periods
ended May 28, 2023.
On a weighted-average basis, the
expected rate of return for all
defined benefit plans was 6.70
percent for fiscal 2023, 5.85
percent for
fiscal 2022, and 5.72 percent for fiscal 2021.
For fiscal 2024, we increased our weighted-average expected
rate of return on plan assets
for our principal
defined benefit pension
and other postretirement
plans in the
United States to
7.20 percent due
to higher prospective
long-term asset returns primarily on fixed income investments.
Lowering
the
expected
long-term
rate
of
return
on
assets
by
basis
points
would
increase
our
net
pension
and
postretirement
expense by $62 million for
fiscal 2024. A market-related
valuation basis is used to reduce
year-to-year expense volatility.
The market-
related valuation
recognizes certain
investment gains
or losses
over a
five-year period
from the
year in
which they
occur.
Investment
gains or
losses for
this purpose
are the difference
between the
expected return
calculated using
the market-related
value of
assets and
the
actual
return
based
on
the
market-related
value
of
assets.
Our
outside
actuaries
perform
these
calculations
as
part
of
our
determination of annual expense or income.
Discount Rates
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
work
with
our
outside
actuaries
to
determine
the
timing
and
amount
of
expected future cash outflows to plan
participants and, using the Aa Above
Median corporate bond yield, to develop a
forward interest
rate curve, including
a margin to
that index based
on our credit
risk. This forward
interest rate curve
is applied to
our expected
future
cash outflows to determine our discount rate assumptions.
Our weighted-average discount rates were as follows:
Defined Benefit
Pension Plans
Other
Postretirement
Benefit Plans
Postemployment
Benefit Plans
Effective rate for fiscal 2024 service costs
5.27
%
5.15
%
5.00
%
Effective rate for fiscal 2024 interest costs
5.06
%
4.96
%
4.61
%
Obligations as of May 31, 2023
5.18
%
5.19
%
4.55
%
Effective rate for fiscal 2023 service costs
4.57
%
4.41
%
3.69
%
Effective rate for fiscal 2023 interest costs
4.03
%
3.80
%
3.35
%
Obligations as of May 31, 2022
4.39
%
4.36
%
3.62
%
Effective rate for fiscal 2022 service costs
3.53
%
3.34
%
2.46
%
Effective rate for fiscal 2022 interest costs
2.42
%
2.08
%
1.48
%
Lowering
the
discount
rates
by
basis
points
would
increase
our
net
defined
benefit
pension,
other
postretirement
benefit,
and
postemployment benefit plan expense
for fiscal 2024 by approximately
$30 million. All obligation-related
experience gains and losses
are amortized
using
a straight-line
method over
the average
remaining
service period
of active
plan participants
or over
the average
remaining lifetime of the remaining plan participants if the plan is viewed as “all or
almost all” inactive participants.
Health Care Cost Trend
Rates
We
review our
health care
cost trend
rates annually.
Our review
is based
on data
we collect
about our
health care
claims experience
and information
provided by our
actuaries. This information
includes recent
plan experience,
plan design, overall
industry experience
and projections, and
assumptions used by other
similar organizations.
Our initial health
care cost trend
rate is adjusted
as necessary to
remain consistent
with this
review,
recent experiences,
and short-term
expectations. Our
initial health
care cost
trend rate
assumption
is 6.6
percent for
retirees age
65 and
over and
6.6 percent
for retirees
under age
65 at
the end
of fiscal
- Rates
are graded
down
annually until
the ultimate
trend rate
of 4.5
percent is
reached in
2032 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.
Any
arising
health
care
claims cost-related
experience
gain
or
loss is
recognized
in the
calculation
of expected
future claims.
Once
recognized, experience gains and
losses are amortized using a straight
-line method over the average remaining
service period of active
plan participants
or over
the average
remaining lifetime
of the
remaining plan
participants if
the plan
is viewed
as “all
or almost
all”
inactive participants.
Financial Statement Impact
In
fiscal
2023,
we
recorded
net
defined
benefit
pension,
other
postretirement
benefit,
and
postemployment
benefit
plan
income
of
$6 million
compared to
$26 million of
income in
fiscal 2022
and $4 million
of expense
in fiscal
- As
of May
28, 2023,
we had
cumulative unrecognized
actuarial net losses of
$2 billion on our
defined benefit pension plans
and cumulative unrecognized
actuarial
net
gains
of
$189 million
on
our
postretirement
and
postemployment
benefit
plans,
mainly
as
the
result
of
liability
increases
from
lower historical
interest rates. These
unrecognized actuarial net
losses will result
in increases in
our future pension
and postretirement
benefit expenses because they currently exceed the corridors defined by
GAAP.
Actual
future
net
defined
benefit
pension,
other
postretirement
benefit,
and
postemployment
benefit
plan
income
or
expense
will
depend on
investment performance,
changes in
future discount
rates, changes
in health care
cost trend
rates, and
other factors
related
to the populations participating in these plans.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In
December
2022,
the
Financial
Accounting
Standards
Board
(FASB)
issued
optional
accounting
guidance
for
a
limited
period
of
time
to
ease
the
potential
burden
in
accounting
for
reference
rate
reform.
The
new
standard
provides
expedients
and
exceptions
to
existing accounting requirements
for contract modifications and
hedge accounting related to
transitioning from discontinued
reference
rates,
such
as
LIBOR,
to
alternative
reference
rates,
if
certain
criteria
are
met.
The
new
accounting
requirements
can
be
applied
through
December 31,
We
have
reviewed
and
modified
certain
contracts,
where
necessary,
to
apply
a
new
reference
rate,
primarily the SOFR. The guidance
has not had and
is not expected to have
a material impact on
our results of operations
and financial
position. We
will continue
to review
our contracts
and arrangements
that will
be affected
by a
discontinued reference
rate during
the
transition period.
In September 2022,
the FASB
issued Accounting Standards
Update (ASU) 2022-04
requiring enhanced disclosures
related to supplier
financing programs.
The ASU
requires disclosure
of the
key terms
of the
program and
a rollforward
of the
related obligation
during
the annual period,
including the amount of
obligations confirmed and
obligations subsequently paid.
The new disclosure requirements
are effective
for fiscal years beginning
after December 15, 2022,
with the exception
of the rollforward requirement,
which is effective
for fiscal years beginning
after December 15, 2023,
which for us is
the first quarter of
fiscal 2024 for the
primary requirement and
the
first quarter
of fiscal
2025 for
the rollforward
requirement. Early
adoption is
permitted. We
have historically
presented the
key terms
of these
programs
and the
associated obligation
outstanding. We
do not
expect this
ASU to
have a
material
impact on
our financial
statements and related disclosures.
NON-GAAP MEASURES
We
have
included
in
this
report
measures
of
financial
performance
that
are not
defined
by
GAAP.
We
believe
that
these
measures
provide useful information to investors and include these measures in other
communications to investors.
For each
of these
non-GAAP financial
measures, we
are providing
below a
reconciliation of
the differences
between the
non-GAAP
measure and the most
directly comparable GAAP measure,
an explanation of why
we believe the non-GAAP
measure provides useful
information to
investors, and
any additional
material purposes
for which
our management
or Board
of Directors
uses the
non-GAAP
measure. These non-GAAP measures should be viewed in addition to, and not
in lieu of, the comparable GAAP measure.
Significant Items Impacting Comparability
Several
measures
below
are
presented
on
an
adjusted
basis.
The
adjustments
are
either
items
resulting
from
infrequently
occurring
events or items that, in management’s
judgment, significantly affect the year-to-year
assessment of operating results.
The following are descriptions of significant items impacting comparability
of our results.
Divestitures gain, net
Net divestitures
gain primarily
related to
the sale
of our
Helper main
meals and
Suddenly Salad
side dishes
business in
fiscal 2023.
Divestitures gain
related to
the sale
of our
interests in
Yoplait
SAS, Yoplait
Marques SNC,
and Liberté
Marques Sàrl
and the
sale of
our European dough businesses in fiscal 2022.
Please see Note 3 to the Consolidated Financial Statements in Item 8 of this report.
Mark-to-market effects
Net
mark-to-market
valuation
of
certain
commodity
positions
recognized
in
unallocated
corporate
items.
Please
see
Note
to
the
Consolidated Financial Statements in Item 8 of this report.
Investment activity, net
Valuation
adjustments and the
loss on sale of
certain corporate investments
in fiscal 2023.
Valuation
adjustments and the
gain on sale
of certain corporate investments in fiscal 2022.
Restructuring charges (recoveries) and project-related
costs
Restructuring
charges
and
project-related
costs
for
global
supply
chain
actions,
network
optimization
actions,
and
previously
announced
restructuring
actions
in
fiscal
Restructuring
charges
for
International
restructuring
actions
and
net
restructuring
recoveries for previously announced restructuring
actions in fiscal 2022. Please see Note 4 to the
Consolidated Financial Statements in
Item 8 of this report.
Product recall, net
Voluntary
recall costs recorded in fiscal 2023 related to certain international
Häagen-Dazs
ice cream products, net of insurance
recovery.
Acquisition integration costs
Integration costs
primarily resulting
from the acquisition
of TNT Crust
in fiscal 2023.
Integration costs
resulting from
the acquisition
of Tyson Foods’ pet
treats business in fiscal 2022. Please see Note 3 to the Consolidated Financial Statements
in Item 8 of this report.
Transaction costs
Transaction
costs primarily
related to
the sale
of our
Helper main
meals and
Suddenly Salad
side dish
business in
fiscal 2023.
Fiscal
2022 transaction
costs related
primarily to
the sale of
our interests in
Yoplait
SAS, Yoplait
Marques SNC,
and Liberté Marques
Sàrl,
the
sale
of
our
European
dough
businesses,
the
sale
of
our
Helper
main
meals
and
Suddenly
Salad
side
dishes
business,
and
the
acquisition of TNT Crust. Please see Note 3 to the Consolidated Financial Statements
in Item 8 of this report.
Non-income tax recovery
Recovery related to a Brazil indirect tax item recorded in fiscal 2022.
Tax item
Discrete
tax
benefit
recognized
in
fiscal
2022
related
to
a
release
of
a
valuation
allowance
associated
with
our
capital
loss
carryforwards expected to be used against future divestiture gains.
CPW restructuring charges
CPW restructuring charges related to previously announced
restructuring actions.
Organic Net Sales Growth Rates
We
provide organic
net sales
growth rates
for our
consolidated net
sales and
segment net
sales. This
measure is
used in
reporting to
our
Board
of
Directors
and
executive
management
and
as
a
component
of
the
measurement
of
our
performance
for
incentive
compensation purposes.
We
believe that
organic net
sales growth
rates provide
useful information
to investors
because they
provide
transparency
to underlying
performance
in our
net sales
by excluding
the effect
that foreign
currency
exchange rate
fluctuations,
as
well
as
acquisitions,
divestitures,
and
a
rd
week,
when
applicable,
have
on
year-to-year
comparability.
A
reconciliation
of
these
measures to reported
net sales growth
rates, the relevant
GAAP measures, are
included in our
Consolidated Results of
Operations and
Results of Segment Operations discussions in the MD&A above.
Adjusted Operating Profit and Related Constant-currency Growth Rate
This measure is used in reporting
to our Board of Directors and
executive management and as a
component of the measurement of
our
performance for
incentive compensation purposes.
We
believe that
this measure provides
useful information
to investors because
it is
the
operating
profit
measure
we
use
to
evaluate
operating
profit
performance
on
a
comparable
year-to-year
basis.
Additionally,
the
measure
is
evaluated
on
a
constant-currency
basis
by
excluding
the
effect
that
foreign
currency
exchange
rate
fluctuations
have
on
year-to-year comparability given the volatility in foreign
currency exchange rates.
Our adjusted operating profit growth on a constant-currency basis is calculated as follows:
Fiscal Year
2023
2022
Change
Operating profit as reported
$
3,433.8
$
3,475.8
(1)
%
Divestitures gain, net
(444.6)
(194.1)
Mark-to-market effects
291.9
(133.1)
Investment activity, net
84.0
14.7
Restructuring charges (recoveries)
61.0
(23.2)
Product recall, net
22.5
-
Acquisition integration costs
5.9
22.4
Project related costs
2.4
-
Transaction costs
0.4
72.8
Non-income tax recovery
-
(22.0)
Adjusted operating profit
$
3,457.3
$
3,213.3
%
Foreign currency exchange impact
Flat
Adjusted operating profit growth, on a constant-currency basis
%
Note: Table may not foot due to rounding.
For more information on the reconciling items, please refer to the Significant Items Impacting Comparability section above.
Adjusted Diluted EPS and Related Constant-currency Growth Rate
This measure
is used in
reporting to
our Board of
Directors and executive
management.
We
believe that
this measure provides
useful
information to
investors because it
is the profitability
measure we use
to evaluate earnings
performance on
a comparable year-to-year
basis.
The reconciliation of our GAAP measure, diluted EPS, to adjusted diluted
EPS and the related constant-currency growth rate follows:
Fiscal Year
Per Share Data
2023
2022
2023 vs.
2022 Change
Diluted earnings per share, as reported
$
4.31
$
4.42
(2)
%
Divestitures gain, net
(0.62)
(0.31)
Mark-to-market effects
0.37
(0.17)
Investment activity, net
0.11
0.01
Restructuring charges (recoveries)
0.08
(0.03)
Product recall, net
0.03
-
Acquisition integration costs
0.01
0.03
Transaction costs
-
0.09
Non-income tax recovery
-
(0.02)
Tax item
-
(0.08)
Adjusted diluted earnings per share
$
4.30
$
3.94
%
Foreign currency exchange impact
(1)
pt
Adjusted diluted earnings per share growth, on a constant-currency basis
%
Note: Table may not foot due to rounding.
For more information on the reconciling items, please refer to the Significant Items Impacting Comparability section above.
See our reconciliation
below of the effective
income tax rate as
reported to the adjusted
effective income tax
rate for the tax
impact of
each item affecting comparability.
Free Cash Flow Conversion Rate
We
believe
this
measure
provides
useful
information
to
investors
because
it
is
important
for
assessing
our
efficiency
in
converting
earnings
to
cash
and
returning
cash
to
shareholders.
The
calculation
of
free
cash
flow
conversion
rate
and
net
cash
provided
by
operating activities conversion rate, its equivalent GAAP measure, follows:
In Millions
Fiscal 2023
Net earnings, including earnings attributable to redeemable and noncontrolling
interests, as reported
$
2,609.6
Divestitures gain, net of tax
(371.4)
Mark-to-market effects, net of tax
224.8
Investment activity, net,
net of tax
66.0
Restructuring charges, net of tax
48.4
Product recall, net, net of tax
17.3
Acquisition integration costs, net of tax
4.6
Project related costs, net of tax
1.6
CPW restructuring charges, net of tax
1.0
Transaction costs, net of tax
0.2
Adjusted net earnings, including earnings attributable to redeemable and
noncontrolling interests
$
2,602.2
Net cash provided by operating activities
2,778.6
Purchases of land, buildings, and equipment
(689.5)
Free cash flow
$
2,089.1
Net cash provided by operating activities conversion rate
106%
Free cash flow conversion rate
80%
Note: Table may not foot due rounding.
For more information on the reconciling items, please refer to the Significant Items Impacting Comparability section above.
See our reconciliation
below of the effective
income tax rate as
reported to the
adjusted effective income
tax rate for the
tax impact of
each item affecting comparability.
Adjusted Operating Profit as a Percent of Net Sales (Adjusted Operating Profit
Margin)
We believe
this measure provides useful information
to investors because it is important
for assessing our operating profit margin
on a
comparable year-to-year basis.
Our adjusted operating profit margins are calculated as follows:
Fiscal Year
Percent of Net Sales
2023
2022
Operating profit as reported
$
3,433.8
17.1
%
$
3,475.8
18.3
%
Divestitures gain, net
(444.6)
(2.2)
%
(194.1)
(1.0)
%
Mark-to-market effects
291.9
1.5
%
(133.1)
(0.7)
%
Investment activity, net
84.0
0.4
%
14.7
0.1
%
Restructuring charges (recoveries)
61.0
0.3
%
(23.2)
(0.1)
%
Product recall, net
22.5
0.1
%
-
-
%
Acquisition integration costs
5.9
-
%
22.4
0.1
%
Project-related costs
2.4
-
%
-
-
%
Transaction costs
0.4
-
%
72.8
0.4
%
Non-income tax recovery
-
-
%
(22.0)
(0.1)
%
Adjusted operating profit
$
3,457.3
17.2
%
$
3,213.3
16.9
%
Note: Table may not foot due to rounding.
For more information on the reconciling items, please refer to the Significant Items Impacting Comparability section above.
Adjusted Effective Income Tax
Rates
We
believe
this
measure
provides
useful
information
to
investors
because
it
presents
the
adjusted
effective
income
tax
rate
on
a
comparable year-to-year basis.
Adjusted effective income tax rates are calculated as follows:
Fiscal Year
Ended
2023
2022
In Millions
(Except Per Share Data)
Pretax
Earnings (a)
Income
Taxes
Pretax
Earnings (a)
Income
Taxes
As reported
$3,140.5
$612.2
$3,209.6
$586.3
Divestitures gain, net
(444.6)
(73.2)
(194.1)
(5.1)
Mark-to-market effects
291.9
67.1
(133.1)
(30.6)
Investment activity, net
84.0
18.0
14.7
8.5
Restructuring charges (recoveries)
61.0
12.6
(23.2)
(6.4)
Product recall, net
22.5
5.2
-
-
Acquisition integration costs
5.9
1.3
22.4
5.1
Project related costs
2.4
0.8
-
-
Transaction costs
0.4
0.2
72.8
16.4
Tax item
-
-
-
50.7
Non-income tax recovery
-
-
(22.0)
(7.5)
As adjusted
$3,164.0
$644.1
$2,947.1
$617.4
Effective tax rate:
As reported
19.5%
18.3%
As adjusted
20.4%
20.9%
Sum of adjustments to income taxes
$32.0
$31.1
Average number
of common shares - diluted EPS
601.2
612.6
Impact of income tax adjustments on adjusted diluted EPS
$(0.05)
$(0.05)
Note: Table may not foot due to rounding.
(a)
Earnings before income taxes and after-tax earnings from joint ventures.
For more information on the reconciling items, please refer to the Significant Items Impacting Comparability section above.
Constant-currency After-Tax
Earnings from Joint Ventures
Growth Rate
We
believe that
this measure
provides useful
information to
investors because
it provides
transparency to
underlying performance
of
our joint
ventures by
excluding the
effect
that foreign
currency exchange
rate fluctuations
have on
year-to-year
comparability given
volatility in foreign currency exchange markets.
After-tax earnings from joint ventures growth rate on
a constant-currency basis are calculated as follows:
Fiscal 2023
Percentage change in after-tax earnings from joint ventures as reported
(27)
%
Impact of foreign currency exchange
(10)
pts
Percentage change in after-tax earnings from joint ventures
on a constant-currency basis
(18)
%
Note: Table may not foot due to rounding.
Net Sales Growth Rate for Canada Operating Unit on a Constant-currency
Basis
We
believe
this
measure
of
our
Canada
operating
unit
net
sales
provides
useful
information
to
investors
because
it
provides
transparency to
the underlying
performance for
the Canada operating
unit within our
North America Retail
segment by
excluding the
effect
that
foreign
currency
exchange
rate
fluctuations
have
on
year-to-year
comparability
given
volatility
in
foreign
currency
exchange markets.
Net sales growth rate for our Canada operating unit on a constant-currency
basis is calculated as follows:
Fiscal 2023
Percentage change in net sales as reported
%
Impact of foreign currency exchange
(6)
pts
Percentage change in net sales on a constant-currency basis
%
Note: Table may not foot due to rounding.
Constant-currency Segment Operating Profit Growth Rates
We
believe that
this measure
provides useful
information to
investors because
it provides
transparency to
underlying performance
of
our
segments
by
excluding
the
effect
that
foreign
currency
exchange
rate
fluctuations
have
on
year-to-year
comparability
given
volatility in foreign currency exchange markets.
Our segments’ operating profit growth rates on a constant-currency
basis are calculated as follows:
Fiscal 2023
Percentage Change
in Operating Profit
as Reported
Impact of Foreign
Currency Exchange
Percentage Change
in Operating Profit
on Constant-
Currency Basis
North America Retail
%
Flat
%
International
(30)
%
(5)
pts
(25)
%
Pet
(5)
%
Flat
(5)
%
North America Foodservice
%
Flat
%
Note: Table may not foot due to rounding.
Forward-Looking Financial Measures
Our fiscal 202
outlook for organic
net sales growth,
constant-currency adjusted
operating profit,
adjusted diluted
EPS, and free
cash
flow conversion
are non-GAAP financial
measures that
exclude, or
have otherwise
been adjusted
for, items
impacting comparability,
including
the
effect
of
foreign
currency
exchange
rate
fluctuations,
restructuring
charges
and
project-related
costs,
acquisition
transaction
and
integration
costs, acquisitions,
divestitures,
and
mark-to-market
effects.
We
are
not
able
to reconcile
these
forward-
looking
non-GAAP
financial
measures
to
their
most
directly
comparable
forward-looking
GAAP
financial
measures
without
unreasonable
efforts
because we
are unable
to predict
with a
reasonable
degree of
certainty
the actual
impact
of
changes in
foreign
currency
exchange
rates
and
commodity
prices
or
the
timing
or
impact
of
acquisitions,
divestitures,
and
restructuring
actions
throughout fiscal 2024. The unavailable information could have a significant
impact on our fiscal 2024
GAAP financial results.
For
fiscal
2024,
we
currently expect:
foreign
currency
exchange
rates
(based
on
a blend
of
forward
and
forecasted
rates and
hedge
positions) and acquisitions and
divestitures completed prior to fiscal
2024 to reduce net sales growth
by approximately one half of
one
percent; and restructuring charges to total approximately $15
million to $20 million.
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