GENERAL MILLS INC - Quarter Report: 2018 August (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED August 26, 2018

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                                 TO

Commission file number: 001-01185

 

 

GENERAL MILLS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		41-0274440
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
Number One General Mills Boulevard
Minneapolis, Minnesota		55426
(Address of principal executive offices)		(Zip Code)

(763) 764-7600

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑ No ☐

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ☑		Accelerated filer  ☐		Non-accelerated filer ☐      ☐		Smaller reporting company    ☐
				(Do not check if a smaller     reporting company)

Emerging growth company ☐

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

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

Yes ☐ No ☑

Number of shares of Common Stock outstanding as of September 10, 2018: 596,229,932 (excluding 158,383,396 shares held in the treasury).

General Mills, Inc.

Table of Contents

 

				Page
PART I – Financial Information
Item 1.		Financial Statements
		Consolidated Statements of Earnings for the quarters ended August 26, 2018 and August 27, 2017		3
		Consolidated Statements of Comprehensive Income for the quarters ended August 26, 2018 and August 27, 2017		4
		Consolidated Balance Sheets as of August 26, 2018, and May 27, 2018		5
		Consolidated Statements of Total Equity and Redeemable Interest for the quarter ended August 26, 2018 and fiscal year ended May 27, 2018		6
		Consolidated Statements of Cash Flows for the quarters ended August 26, 2018 and August 27, 2017		7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		37
Item 4.		Controls and Procedures		37
PART II – Other Information
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 6.		Exhibits		38
Signatures				39

 

2

PART I.   FINANCIAL INFORMATION

Item 1.            Financial Statements

Consolidated Statements of Earnings

GENERAL MILLS, INC. AND SUBSIDIARIES

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

 

		Quarter Ended
		Aug. 26, 2018				Aug. 27, 2017
Net sales		$	4,094.0			$	3,769.2
Cost of sales			2,751.2				2,455.9
Selling, general, and administrative expenses			742.7				702.8
Restructuring, impairment, and other exit costs (recoveries)			(1.4)				5.2
Operating profit			601.5				605.3
Benefit plan non-service income			(20.9)				(20.5)
Interest, net			133.5				72.4
Earnings before income taxes and after-tax earnings from joint ventures			488.9				553.4
Income taxes			110.7				168.5
After-tax earnings from joint ventures			17.7				23.7
Net earnings, including earnings attributable to redeemable and noncontrolling interests			395.9				408.6
Net earnings attributable to redeemable and noncontrolling interests			3.6				3.9
Net earnings attributable to General Mills		$	392.3			$	404.7
Earnings per share - basic		$	0.66			$	0.70
Earnings per share - diluted		$	0.65			$	0.69
Dividends per share		$	0.49			$	0.49

See accompanying notes to consolidated financial statements.

 

3

Consolidated Statements of Comprehensive Income

GENERAL MILLS, INC. AND SUBSIDIARIES

(Unaudited) (In Millions)

 

		Quarter Ended
		Aug. 26, 2018				Aug. 27, 2017
Net earnings, including earnings attributable to redeemable and noncontrolling interests		$	395.9			$	408.6
Other comprehensive income (loss), net of tax:
Foreign currency translation			(106.2)				61.5
Other fair value changes:
Securities			-				0.3
Hedge derivatives			7.1				(8.8)
Reclassification to earnings:
Securities			(2.0)				-
Hedge derivatives			0.6				(0.2)
Amortization of losses and prior service costs			21.9				27.8
Other comprehensive income (loss), net of tax			(78.6)				80.6
Total comprehensive income			317.3				489.2
Comprehensive income (loss) attributable to redeemable and noncontrolling interests			(4.8)				72.0
Comprehensive income attributable to General Mills		$	322.1			$	417.2

See accompanying notes to consolidated financial statements.     

 

4

Consolidated Balance Sheets

GENERAL MILLS, INC. AND SUBSIDIARIES

(In Millions, Except Par Value)

 

		Aug. 26, 2018				May 27, 2018
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	432.9			$	399.0
Receivables			1,709.1				1,684.2
Inventories			1,685.5				1,642.2
Prepaid expenses and other current assets			358.0				398.3
Total current assets			4,185.5				4,123.7
Land, buildings, and equipment			3,955.1				4,047.2
Goodwill			14,030.4				14,065.0
Other intangible assets			7,420.8				7,445.1
Other assets			963.0				943.0
Total assets		$	30,554.8			$	30,624.0
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	2,723.8			$	2,746.2
Current portion of long-term debt			1,599.2				1,600.1
Notes payable			1,349.4				1,549.8
Other current liabilities			1,515.4				1,445.8
Total current liabilities			7,187.8				7,341.9
Long-term debt			12,665.1				12,668.7
Deferred income taxes			2,028.7				2,003.8
Other liabilities			1,325.8				1,341.0
Total liabilities			23,207.4				23,355.4
Redeemable interest			771.6				776.2
Stockholders’ equity:
Common stock, 754.6 shares issued, $0.10 par value			75.5				75.5
Additional paid-in capital			1,160.9				1,202.5
Retained earnings			14,523.8				14,459.6
Common stock in treasury, at cost, shares of 158.5 and 161.5			(7,035.9)				(7,167.5)
Accumulated other comprehensive loss			(2,499.2)				(2,429.0)
Total stockholders’ equity			6,225.1				6,141.1
Noncontrolling interests			350.7				351.3
Total equity			6,575.8				6,492.4
Total liabilities and equity		$	30,554.8			$	30,624.0

See accompanying notes to consolidated financial statements.

 

5

Consolidated Statements of Total Equity and Redeemable Interest

GENERAL MILLS, INC. AND SUBSIDIARIES

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

 

		$.10 Par Value Common Stock (One Billion Shares Authorized)
		Issued												Treasury
		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 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 restricted 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 noncontrolling and redeemable 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)																							392.3				(70.2	)			1.8				323.9				(6.6	)
Cash dividends declared ($0.49 per share)																							(294.2	)											(294.2	)
Shares purchased															-				(0.2	)															(0.2	)
Stock compensation plans											(2.5	)			3.0				131.8																129.3
Unearned compensation related to restricted stock unit awards											(65.2	)																							(65.2	)
Earned compensation											28.1																								28.1
Increase in redemption value of redeemable interest											(2.0	)																							(2.0	)			2.0
Distributions to noncontrolling and redeemable interest holders																															(2.4	)			(2.4	)
Adoption of revenue recognition accounting requirements																							(33.9	)											(33.9	)
Balance as of Aug. 26, 2018			754.6			$	75.5			$	1,160.9				(158.5	)		$	(7,035.9	)		$	14,523.8			$	(2,499.2	)		$	350.7			$	6,575.8			$	771.6

See accompanying notes to consolidated financial statements.

 

6

Consolidated Statements of Cash Flows

GENERAL MILLS, INC. AND SUBSIDIARIES

(Unaudited) (In Millions)

 

		Quarter Ended
		Aug. 26, 2018				Aug. 27, 2017
Cash Flows - Operating Activities
Net earnings, including earnings attributable to redeemable and noncontrolling interests		$	395.9			$	408.6
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization			155.2				145.1
After-tax earnings from joint ventures			(17.7)				(23.7)
Distributions of earnings from joint ventures			29.2				29.0
Stock-based compensation			26.1				29.6
Deferred income taxes			28.9				38.2
Pension and other postretirement benefit plan contributions			(7.4)				(5.9)
Pension and other postretirement benefit plan costs			1.5				1.1
Restructuring, impairment, and other exit costs			(18.9)				(9.2)
Changes in current assets and liabilities			14.8				(17.8)
Other, net			(0.2)				(4.5)
Net cash provided by operating activities			607.4				590.5
Cash Flows - Investing Activities
Purchases of land, buildings, and equipment			(112.7)				(116.3)
Investments in affiliates, net			0.1				(6.6)
Proceeds from disposal of land, buildings, and equipment			0.1				0.4
Other, net			(27.1)				(0.3)
Net cash used by investing activities			(139.6)				(122.8)
Cash Flows - Financing Activities
Change in notes payable			(189.8)				413.8
Payment of long-term debt			(0.2)				-
Proceeds from common stock issued on exercised options			73.4				41.0
Purchases of common stock for treasury			(0.2)				(600.3)
Dividends paid			(294.2)				(284.3)
Distributions to noncontrolling and redeemable interest holders			(2.4)				(1.5)
Other, net			(9.6)				(20.0)
Net cash used by financing activities			(423.0)				(451.3)
Effect of exchange rate changes on cash and cash equivalents			(10.9)				38.3
Increase in cash and cash equivalents			33.9				54.7
Cash and cash equivalents - beginning of year			399.0				766.1
Cash and cash equivalents - end of period		$	432.9			$	820.8
Cash Flow from changes in current assets and liabilities:
Receivables		$	(48.7)			$	(88.1)
Inventories			(58.2)				(89.9)
Prepaid expenses and other current assets			35.4				12.1
Accounts payable			17.7				78.6
Other current liabilities			68.6				69.5
Changes in current assets and liabilities		$	14.8			$	(17.8)

See accompanying notes to consolidated financial statements.

 

7

GENERAL MILLS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Background

The accompanying Consolidated Financial Statements of General Mills, Inc. (we, us, our, General Mills, or the Company) have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not include certain information and disclosures required for comprehensive financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature, including the elimination of all intercompany transactions and any noncontrolling and redeemable interests’ share of those transactions. Operating results for the quarter ended August 26, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending May 26, 2019.

These statements should be read in conjunction with the Consolidated Financial Statements and footnotes included in our Annual Report on Form 10-K for the fiscal year ended May 27, 2018. The accounting policies used in preparing these Consolidated Financial Statements are the same as those described in Note 2 to the Consolidated Financial Statements in that Form 10-K with the exception of the new accounting requirements adopted in the first quarter of fiscal 2019 related to the presentation of net periodic defined benefit pension expense, net periodic postretirement benefit expense, and net periodic postemployment benefit expense and to revenue recognition. Please see Note 17 for additional information. Certain terms used throughout this report are defined in the “Glossary” section below.

(2) Acquisition

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 the first quarter of fiscal 2019, we recorded acquisition integration costs of $8.7 million in selling, general, and administrative (SG&A) expenses.

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. We have conducted a preliminary assessment of certain assets and liabilities related to the acquisition of Blue Buffalo, and we are continuing our review of these items during the measurement period. If new information is obtained about facts and circumstances that existed at the acquisition date, the acquisition accounting will be revised to reflect the resulting adjustments to current estimates of these items.

The results of Blue Buffalo are reported in our Pet operating segment on a one-month lag.

(3) Restructuring Initiatives

Restructuring, impairment, and other exit costs were as follows:

 

		Quarter Ended
In Millions		Aug. 26, 2018				Aug. 27, 2017
Charges (recoveries) associated with restructuring actions previously announced		$	(1.2	)		$	17.5
Total		$	(1.2	)		$	17.5

During the first quarter of fiscal 2019, we did not undertake any new restructuring actions. We recorded a $1.2 million net recovery of restructuring charges for previously announced restructuring actions, which included $2.8 million of restructuring charges offset by a $4.0 million recovery, compared to $17.5 million of restructuring charges in the first quarter of fiscal 2018. The restructuring charges relate to cost savings initiatives across all operating segments with the exception of Pet. We paid $17.7 million in cash relating to these actions in the first quarter of fiscal 2019 and $26.7 million in the same period of fiscal 2018. These restructuring actions are expected to be completed by the end of fiscal 2019.

 

8

In addition to restructuring charges, we recorded $1.2 million of project-related costs in cost of sales in the first quarter of fiscal 2019 and $1.2 million in the first quarter of fiscal 2018. We paid $0.3 million in cash in the first quarter of fiscal 2019 and $2.7 million in the same period of fiscal 2018 for project-related costs.

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

 

		Quarter Ended
In Millions		Aug. 26, 2018				Aug. 27, 2017
Cost of sales		$	0.2			$	12.3
Restructuring, impairment, and other exit costs (recoveries)			(1.4	)			5.2
Total restructuring charges (recoveries)			(1.2	)			17.5
Project-related costs classified in cost of sales		$	1.2			$	1.2

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 27, 2018		$	66.0			$	0.1			$	0.7			$	66.8
Fiscal 2019 recoveries, including foreign currency translation			(4.8	)			-				-				(4.8	)
Utilized in fiscal 2019			(14.7	)			(0.1	)			-				(14.8	)
Reserve balance as of Aug. 26, 2018		$	46.5			$	-			$	0.7			$	47.2

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

(4) Goodwill and Other Intangible Assets

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

 

In Millions		Aug. 26, 2018				May 27, 2018
Goodwill		$	14,030.4			$	14,065.0
Other intangible assets:
Intangible assets not subject to amortization:
Brands and other indefinite-lived intangibles			6,805.9				6,818.7
Intangible assets subject to amortization:
Franchise agreements, customer relationships, and other finite-lived intangibles			802.8				811.7
Less accumulated amortization			(187.9	)			(185.3	)
Intangible assets subject to amortization, net			614.9				626.4
Other intangible assets			7,420.8				7,445.1
Total		$	21,451.2			$	21,510.1

Based on the carrying value of finite-lived intangible assets as of August 26, 2018, annual amortization expense for each of the next five fiscal years is estimated to be approximately $40 million.

During the fourth quarter of 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.

 

9

The changes in the carrying amount of goodwill during fiscal 2019 were as follows:

 

In Millions		North America Retail				Pet				Convenience Stores & Foodservice				Europe & Australia				Asia & Latin America				Joint Ventures				Total
Balance as of May 27, 2018		$	6,410.6			$	5,294.9			$	918.8			$	729.9			$	285.0			$	425.8			$	14,065.0
Other activity, primarily foreign currency translation			(0.5	)			-				-				(6.6	)			(26.4	)			(1.1	)			(34.6	)
Balance as of Aug. 26, 2018		$	6,410.1			$	5,294.9			$	918.8			$	723.3			$	258.6			$	424.7			$	14,030.4

The changes in the carrying amount of other intangible assets during fiscal 2019 were as follows:

 

In Millions		Total
Balance as of May 27, 2018		$	7,445.1
Other activity, primarily foreign currency translation			(24.3	)
Balance as of Aug. 26, 2018		$	7,420.8

Our annual goodwill and indefinite-lived intangible assets impairment test was performed on the first day of the second quarter of fiscal 2018, and we determined there was no impairment of our intangible assets as their related fair values were substantially in excess of the carrying values, except for the Yoki and Progresso brand intangible assets and the Latin America reporting unit.

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

 

In Millions		Carrying Value of Intangible Asset				Excess Fair Value as of Fiscal 2018 Test Date
Yoki		$	138.2				1	%
Progresso			462.1				6	%
Latin America		$	272.0				21	%

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

During the fourth quarter of fiscal 2018, we executed our fiscal 2019 planning process and preliminary long-range planning process, which resulted in lower future sales and profitability projections in our plans for the businesses supporting our Yoki, Mountain High, and Immaculate Baking brand intangible assets. As a result of this triggering event, we performed an interim impairment assessment of these assets as of May 27, 2018, and determined that the fair value of these brand assets no longer exceeded the carrying values of the respective assets. Significant assumptions used in that assessment included our updated long-range cash flow projections for the businesses, royalty rates, weighted average cost of capital rates, and tax rates. We recorded a $96.9 million impairment charge in the fourth quarter of fiscal 2018 related to these assets as follows:

 

In Millions		Impairment Charge				Carrying Value as of May 27, 2018
Yoki		$	65.0				$63.6
Mountain High			20.0				15.4
Immaculate Baking			11.9				-
Total		$	96.9				$79.0

 

10

(5) Inventories

The components of inventories were as follows:

 

In Millions		Aug. 26, 2018				May 28, 2017
Raw materials and packaging		$	396.9			$	400.0
Finished goods			1,416.0				1,364.2
Grain			92.2				91.2
Excess of FIFO over LIFO cost			(219.6	)			(213.2	)
Total		$	1,685.5			$	1,642.2

(6) Risk Management Activities

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

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

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

Unallocated corporate items for the quarters ended August 26, 2018 and August 27, 2017 included:

 

		Quarter Ended
In Millions		Aug. 26, 2018				Aug. 27, 2017
Net loss on mark-to-market valuation of certain commodity positions		$	(19.5	)		$	(7.8	)
Net loss (gain) on commodity positions reclassified from unallocated corporate items to segment operating profit			(3.7	)			3.6
Net mark-to-market revaluation of certain grain inventories			(7.9	)			6.0
Net mark-to-market valuation of certain commodity positions recognized in unallocated corporate items		$	(31.1	)		$	1.8

As of August 26, 2018, the net notional value of commodity derivatives was $160.4 million, of which $71.7 million related to energy inputs and $88.7 million related to agricultural inputs. These contracts relate to inputs that generally will be utilized within the next 12 months.

The fair values of the derivative positions used in our risk management activities and other assets recorded at fair value were not material as of August 26, 2018, and were Level 1 or Level 2 assets and liabilities in the fair value hierarchy. We did not significantly change our valuation techniques from prior periods.

We offer certain suppliers access to third party services that allow them to view our scheduled payments online. The third party services also allow suppliers to finance advances on our scheduled payments at the sole discretion of the supplier and the third party. We have no economic interest in these financing arrangements and no direct relationship with the suppliers, the third parties, or any financial institutions concerning these services. All of our accounts payable remain as obligations to our suppliers as stated in our supplier agreements. As of August 26, 2018, $1,010.1 million of our total accounts payable were payable to suppliers who utilize these third party services.

 

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(7) Debt

The components of notes payable were as follows:

 

In Millions		Aug. 26, 2018				May 27, 2018
U.S. commercial paper		$	1,114.3			$	1,213.5
Financial institutions			235.1				336.3
Total		$	1,349.4			$	1,549.8

To ensure availability of funds, we maintain bank credit lines sufficient to cover our outstanding notes payable. Commercial paper is a continuing source of short-term financing. We have commercial paper programs available to us in the United States and Europe. We also have committed, uncommitted, and asset-backed credit lines that support our foreign operations.

The following table details the fee-paid committed and uncommitted credit lines we had available as of August 26, 2018:

 

In Billions		Facility Amount				Borrowed Amount
Credit facility expiring:
May 2022		$	2.7			$	-
June 2019			0.2				0.1
September 2018			0.1				-
Total committed credit facilities			3.0				0.1
Uncommitted credit facilities			0.6				0.1
Total committed and uncommitted credit facilities		$	3.6			$	0.2

The credit facilities contain covenants, including a requirement to maintain a fixed charge coverage ratio of at least 2.5 times. We were in compliance with all credit facility covenants as of August 26, 2018.

Long-Term Debt

The fair values and carrying amounts of long-term debt, including the current portion, were $14,261.0 million and $14,264.3 million, respectively, as of August 26, 2018. The fair value of long-term debt was estimated using market quotations and discounted cash flows based on our current incremental borrowing rates for similar types of instruments. Long-term debt is a Level 2 liability in the fair value hierarchy.

In 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.

 

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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 the third quarter of fiscal 2018, we paid $113.8 million to repurchase $100.0 million of our previously issued 6.39% medium term notes due 2023. We recorded the $13.8 million premium paid in the repurchase as 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 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, together with cash on hand, were used to repay $500.0 million of 1.4 percent fixed-rate notes.

Certain of our long-term debt agreements contain restrictive covenants. As of August 26, 2018, we were in compliance with all of these covenants.

(8) Redeemable and Noncontrolling Interests

We have a 51 percent controlling interest in Yoplait SAS and a 50 percent interest in Yoplait Marques SNC and Liberté Marques Sàrl. Sodiaal International (Sodiaal) holds the remaining interests in each of the entities. On the acquisition date, we recorded the $904.4 million fair value of Sodiaal’s 49 percent euro-denominated interest in Yoplait SAS as a redeemable interest on our Consolidated Balance Sheets. Sodiaal has the ability to put all or a portion of its redeemable interest to us at fair value once per year, up to three times before December 2024. We adjust the value of the redeemable interest through additional paid-in capital on our Consolidated Balance Sheets quarterly to the redeemable interest’s redemption value, which approximates its fair value. Yoplait SAS pays dividends annually if it meets certain financial metrics set forth in its shareholders’ agreement. As of August 26, 2018, the redemption value of the euro-denominated redeemable interest was $771.6 million.    

A subsidiary of Yoplait SAS has an exclusive milk supply agreement for its European operations with Sodiaal through July 1, 2021. Net purchases totaled $53.0 million for the quarter ended August 26, 2018 and $52.5 million for the quarter ended August 27, 2017.

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

The third-party holder of the General Mills Cereals, LLC (GMC) Class A Interests receives quarterly preferred distributions from available net income based on the application of a floating preferred return rate to the holder’s capital account balance established in the most recent mark-to-market valuation (currently $251.5 million). On June 1, 2018, the floating preferred return rate on GMC’s Class A Interests was reset to the sum of three-month LIBOR plus 142.5 basis points. The preferred return rate is adjusted every three years through a negotiated agreement with the Class A Interest holder or through a remarketing auction.

Our noncontrolling interests contain restrictive covenants. As of August 26, 2018, we were in compliance with all of these covenants.

 

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(9) Stockholders’ Equity

The following tables provide details of total comprehensive income:

 

		Quarter Ended																				Quarter Ended
		Aug. 26, 2018																				Aug. 27, 2017
		General Mills												Noncontrolling Interests				Redeemable Interest				General Mills												Noncontrolling Interests				Redeemable     Interest
In Millions		Pretax				Tax				Net				Net				Net				Pretax				Tax				Net				Net				Net
Net earnings, including earnings attributable to redeemable and noncontrolling interests										$	392.3			$	3.1			$	0.5											$	404.7			$	1.5			$	2.4
Other comprehensive income (loss):
Foreign currency translation		$	(96.8	)		$	-				(96.8	)			(1.3	)			(8.1	)		$	(5.3	)		$	-				(5.3	)			21.5				45.3
Other fair value changes:
Securities			-				-				-				-				-				0.4				(0.1	)			0.3				-				-
Hedge derivatives			7.2				(1.0	)			6.2				-				0.9				(15.7	)			5.2				(10.5	)			-				1.7
Reclassification to earnings:
Securities (a)			(2.6	)			0.6				(2.0	)			-				-				-				-				-				-				-
Hedge derivatives (b)			0.5				-				0.5				-				0.1				0.8				(0.6	)			0.2				-				(0.4	)
Amortization of losses and prior service costs (c)			26.9				(5.0	)			21.9				-				-				43.8				(16.0	)			27.8				-				-
Other comprehensive income (loss)		$	(64.8	)		$	(5.4	)			(70.2	)			(1.3	)			(7.1	)		$	24.0			$	(11.5	)			12.5				21.5				46.6
Total comprehensive income (loss)										$	322.1			$	1.8			$	(6.6	)										$	417.2			$	23.0			$	49.0

(a)	Gain reclassified from AOCI into earnings is reported in interest, net for securities.

(b)	Loss (gain) reclassified from AOCI into earnings is reported in interest, net for interest rate swaps and in cost of sales and SG&A expenses for foreign exchange contracts.

(c)	Loss reclassified from AOCI into earnings is reported in benefit plan non-service income. Please refer to Note 17.

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

 

In Millions		Aug. 26, 2018				May 27, 2018
Foreign currency translation adjustments		$	(798.4)			$	(701.6)
Unrealized gain (loss) from:
Securities			-				2.0
Hedge derivatives			(25.4)				(32.1)
Pension, other postretirement, and postemployment benefits:
Net actuarial loss			(1,701.1)				(1,723.6)
Prior service costs			25.7				26.3
Accumulated other comprehensive loss		$	(2,499.2)			$	(2,429.0)

 

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(10) Stock Plans

We have various stock-based compensation programs under which awards, including stock options, restricted stock, restricted stock units, and performance awards, may be granted to employees and non-employee directors. These programs and related accounting are described in Note 11 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 27, 2018.

Compensation expense related to stock-based payments recognized in the Consolidated Statements of Earnings was as follows:

 

		Quarter Ended
In Millions		Aug. 26, 2018				Aug. 27, 2017
Compensation expense related to stock-based payments		$	26.2			$	29.6

Compensation expense related to stock-based payments recognized in the Consolidated Statements of Earnings includes amounts recognized in restructuring, impairment, and other exit costs in the first quarter of fiscal 2019.

As of August 26, 2018, unrecognized compensation expense related to non-vested stock options, restricted stock units, and performance share units was $148.6 million. This expense will be recognized over 28 months, on average.

Net cash proceeds from the exercise of stock options less shares used for withholding taxes and the intrinsic value of options exercised were as follows:

 

		Quarter Ended
In Millions		Aug. 26, 2018				Aug. 27, 2017
Net cash proceeds		$	73.4			$	41.0
Intrinsic value of options exercised		$	31.9			$	40.3

We estimate the fair value of each stock option on the grant date using a Black-Scholes option-pricing model. Black-Scholes option-pricing models require us to make predictive assumptions regarding future stock price volatility, employee exercise behavior, and dividend yield. We estimate our future stock price volatility using the historical volatility over the expected term of the option, excluding time periods of volatility we believe a marketplace participant would exclude in estimating our stock price volatility. We also have considered, but did not use, implied volatility in our estimate, because trading activity in options on our stock, especially those with tenors of greater than 6 months, is insufficient to provide a reliable measure of expected volatility. Our method of selecting the other valuation assumptions is explained in Note 11 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 27, 2018.

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

 

		Quarter Ended
		Aug. 26, 2018				Aug. 27, 2017
Estimated fair values of stock options granted			$5.35				$6.18
Assumptions:
Risk-free interest rate			2.9	%			2.2	%
Expected term			8.5 years				8.2 years
Expected volatility			16.3	%			15.8	%
Dividend yield			4.3	%			3.6	%

 

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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			3,107.4				46.06
Exercised			(2,455.9	)			31.70
Forfeited or expired			(290.4	)			54.02
Outstanding as of Aug. 26, 2018			29,324.9			$	44.07				4.79			$	168.8
Exercisable as of Aug. 26, 2018			19,645.9			$	38.58				2.91			$	168.8

Information on restricted stock 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			1,608.2				45.87				33.8				46.12
Vested			(548.5	)			51.60				(33.3	)			54.38
Forfeited			(227.0	)			64.47				(9.2	)			57.98
Non-vested as of Aug. 26, 2018			4,564.5			$	53.77				112.6			$	55.53

The total grant date fair value of restricted stock unit awards that vested during the period follows:

 

		Quarter Ended
In Millions		Aug. 26, 2018				Aug. 27, 2017
Total grant date fair value		$	30.1			$	67.7

 

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(11) Earnings Per Share

Basic and diluted earnings per share (EPS) were calculated using the following:

 

		Quarter Ended
In Millions, Except per Share Data		Aug. 26, 2018				Aug. 27, 2017
Net earnings attributable to General Mills		$	392.3			$	404.7
Average number of common shares - basic EPS			598.0				576.5
Incremental share effect from: (a)
Stock options			3.6				8.3
Restricted stock, restricted stock units, and other			1.7				2.1
Average number of common shares - diluted EPS			603.3				586.9
Earnings per share - basic		$	0.66			$	0.70
Earnings per share - diluted		$	0.65			$	0.69

(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:

 

		Quarter Ended
In Millions		Aug. 26, 2018				Aug. 27, 2017
Anti-dilutive stock options, restricted stock units, and performance share units			14.3				5.4

(12) Share Repurchases

Share repurchases were as follows:

 

		Quarter Ended
In Millions		Aug. 26, 2018				Aug. 27, 2017
Shares of common stock			-				10.9
Aggregate purchase price		$	0.2			$	600.3

(13) Statements of Cash Flows

Our Consolidated Statements of Cash Flows include the following:

 

		Quarter Ended
In Millions		Aug. 26, 2018				Aug. 27, 2017
Net cash interest payments		$	115.5			$	109.7
Net income tax payments		$	60.5			$	21.8

 

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(14) Retirement and Postemployment Benefits

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 Plan I and the Supplemental Plans I are amortized over the average remaining life of the participants.

Components of net periodic benefit expense are as follows:

 

		Defined Benefit Pension Plans								Other Postretirement Benefit Plans								Postemployment Benefit Plans
		Quarter Ended								Quarter Ended								Quarter Ended
In Millions		Aug. 26, 2018				Aug. 27, 2017				Aug. 26, 2018				Aug. 27, 2017				Aug. 26, 2018				Aug. 27, 2017
Service cost		$	23.7			$	23.9			$	2.4			$	2.8			$	1.9			$	2.1
Interest cost			62.0				55.4				8.3				7.7				0.7				0.6
Expected return on plan assets			(111.5	)			(119.1	)			(10.1	)			(13.0	)			-				-
Amortization of losses			27.5				44.1				0.2				0.2				0.1				0.2
Amortization of prior service costs (credits)			0.4				0.5				(1.4	)			(1.4	)			0.1				0.2
Other adjustments			-				-				-				-				2.8				3.4
Net expense (income)		$	2.1			$	4.8			$	(0.6	)		$	(3.7	)		$	5.6			$	6.5

(15) Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (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. The TCJA includes provisions affecting our fiscal 2019 tax rate, including, but not limited to: a reduction in the U.S. corporate tax rate on domestic operations to 21 percent; a new provision that taxes U.S. allocated expenses and 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 a limitation on the deductibility of certain executive compensation.

Generally, the impacts of new legislation would be required to be recorded in the period of enactment which for us was the third quarter of fiscal 2018. However, Accounting Standards Update 2018-05: Income Taxes (Topic 740) (ASU 2018-05) was issued with guidance allowing for the recognition of provisional amounts in the event that the accounting is not complete and a reasonable estimate can be made. The guidance allows for a measurement period of up to one year from the enactment date to finalize the accounting related to the TCJA.

As of August 26, 2018, we have not completed our accounting for the tax effects of the TCJA. During fiscal 2018, we recorded a provisional net benefit of $523.5 million which included the estimated impact of revaluing our net U.S. deferred tax liabilities to reflect the new U.S. corporate tax rate, partially offset by a provisional charge for the estimated transition tax and a provisional deferred tax liability related to changes in our permanent reinvestment assertion. This provisional net benefit was determined using reasonable estimates for those tax effects based on analysis and information available to date. The provisional net benefit is subject to revisions as we complete our analysis of the TCJA, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service, Financial Accounting Standards Board, and other standard setting and regulatory bodies. Adjustments may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made. Our accounting for the tax effects of the TCJA will be completed during the measurement period of up to one year from the enactment date. During the first quarter of fiscal 2019, we continued our analysis of the impacts of the TCJA and there were no adjustments to the previously recorded provisional amounts.

 

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